UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-K
(Mark One)
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
| EXCHANGE ACT OF 1934 | |
| For the Fiscal Year Ended December 31, 2000 | |
| OR | |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from ________ to __________ | |
| Commission File No. 1-12714 | |
| OSMONICS, INC. | |
| (Exact name of registrant as specified in its charter) | |
| Minnesota | 41-0955959 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 5951 Clearwater Drive, Minnetonka, Minnesota | 55343 |
| (Address of principal executive offices) | (Zip Code) |
| (952) 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 21, 2001, 14,432,026 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 21, 2001) was $112,136,842.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 2000 (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, 2001 (the "Proxy Statement"), and to be filed within 120 days after the Registrant's fiscal year ended December 31, 2000, are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
The following discussion contains certain information and other forward-looking statements that involve a number of risks and uncertainties. The actual results of Osmonics could differ materially from the Company's historical results of operations and those discussed in the forward-looking statements. See "Certain Factors" and other portions of this Form 10-K for discussion of some of these risks and uncertainties.
Osmonics, Inc., founded in 1969, and its wholly-owned subsidiaries (the "Company") design, manufacture and market a wide range of products used in the filtration, separation and processing of fluids ranging from complete fluid processing systems to replaceable components used in purification, filtration, and separation equipment. The Company classifies its products into three segments, namely Filtration and Separations, Process Water and Household Water.
Development of Business
In addition to developing the Company's product line through internal research and development, the Company has expanded its business through a series of acquisitions. Recent major acquisitions in the last five years include:
| • | Desalination Systems - In July 1996, the Company acquired Desalination Systems, Inc. ("Desal"), a manufacturer of crossflow filtration membrane and membrane elements that are marketed worldwide. Desal, which has facilities in Vista, California has products that extend the range of membranes and membrane elements previously offered by the Company. The acquisition extended the Company's distribution network for such products. |
| • | AquaMatic - In February 1997, the Company acquired AquaMatic, Inc., a Rockford, Illinois-based company offering a line of specialty valves and controllers for the water conditioning market, which are sold through the Company's existing distribution channels. |
| • | Micron Separations, Inc. - In February 1998, the Company acquired Micron Separations, Inc. ("MSI"), a Westborough, Massachusetts-based developer and manufacturer of microfilter membrane and membrane products for diagnostic, laboratory and industrial use. These products expand the Company's range of nylon and cellulosic membrane applications. The products are sold through the Company's existing distribution channels. |
| • | Membrex Corp. - In April 1998, the Company acquired Membrex Corp. of Fairfield, New Jersey. The acquisition gives the Company the most hydrophilic UF membrane in the market. This patented membrane is primarily used to separate oil from water and is also used in a variety of applications in biotechnology, laboratory and petrochemical processes. Membrex also has a patented machine using its UF membrane, which separates oil from aqueous chemical cleaners, used in parts cleaning and other industrial and commercial applications. Some Membrex products are sold through an exclusive agreement with Safety-Kleen Corp. and the remainder through the Company's existing distribution channels. |
| • | ZyzaTech Water Systems, Inc. – In July 1999, the Company acquired ZyzaTech Water Systems, Inc. (ZyzaTech), a Seattle, Washington-based manufacturer of medical and pharmaceutical water purification and fluid handling products. ZyzaTech products are being sold through their existing distribution channels, offering a broadened line of hemodialysis products. |
Business Segments
The Company's products are divided into three primary business segments, namely, Filtration and Separations, Process Water and Household Water.
Filtration and Separations:
The Company's Filtration and Separations group consist primarily of membranes, filter media, membrane elements and filter cartridges. The filtration media and membrane are produced primarily from polymers or polymer-based compounds.
Membranes are generally sheets of material that, due to their unique characteristics, can separate various materials from a fluid. Membrane elements are the combination of membrane, support materials and connections, which allows the membrane to be broadly utilized.
Membrane elements are typically replaced every 6 to 60 months, depending upon the severity of the application. The Company manufactures most of the membrane material and membrane elements used in its own systems, and also manufactures membrane and membrane elements for other original equipment manufacturers (OEM's) who include them as component parts in their products.
The Company's crossflow membranes are used in many bioengineering processes such as the production of high fructose corn sugar, enzyme purification, and purification of pharmaceuticals produced by biological processes. Other uses include water purification applications in hemodialysis, semiconductor manufacturing, production of pure water for beverages, production of ultrapure pharmaceutical and boiler feed water, industrial water purification, oil/water separation and waste removal for pollution control compliance.
The Company is registered with the United States Food and Drug Administration for the manufacture and sale of certain membrane elements used in biological preparations.
The Company markets its microfiltration normal flow membrane for use in a variety of laboratory and medical diagnostic applications. Numerous applications exist for the Company's microfilters because of unique features, including use in diagnostics, air monitoring and in laboratory procedures for cancer and other research.
The Company markets several types of replaceable cartridge filters. Cartridge filters consist of the various membranes and filtration media manufactured by the Company and third parties together with various end caps and other parts that allow them to be used and replaced in filtration equipment and systems. These cartridge filters include depth cartridge filters, pleated cartridge filters, and rolled cartridge filters.
Cartridge filters are manufactured in a range of pore sizes and particulate retention ratings. Cartridge filters are designed to retain particles in the filters. As a result, cartridge filters are typically replaced at intervals of eight hours to four weeks, depending on the particular application.
Process Water:
The Company’s Process Water group manufactures and sells a broad range of equipment products ranging from large independent fluid treatment systems custom designed for a particular customer and its related filtration requirements to instruments used to determine the amount of a particular substance in a fluid. The Company's filtration equipment utilizes a wide range of filtration techniques including: crossflow filtration (which includes reverse osmosis, nanofiltration, ultrafiltration and microfiltration), normal filtration (which includes microfiltration and particle filtration), coalescing filtration, ion exchange, clarification, chromatography, ozonation and distillation. As a result, the Company's Equipment is used in a broad range of applications from complete fluid processing systems used in beverage production to water for high performance boilers used in power generation. The Company's Equipment products are manufactured in multiple locations throughout the United States.
The Company manufacturers and sells crossflow and normal filtration machines. Such machines are comprised of one or more membrane elements, cartridge filters, pumps, valves, controls, transformers, heat exchangers, pipes and a steel frame on which the components are mounted. The size and number of membrane elements and filters can vary greatly. Pumps, pipes and frames of various sizes can be combined and configured to accommodate the membrane elements or filters required for various fluid handling or separation tasks.
The systems sold by the Company are comprised of one or more machines or pieces of equipment designed and manufactured by the Company as well as ancillary equipment, such as additional pumps, heat exchangers and holding tanks. The type, size and number of machines and the ancillary equipment included in a system will vary with the nature and size of the fluid separation task.
The Company is a major manufacturer and marketer of machines and systems used for the production of pure for water for artificial kidney dialysis and is registered with the U.S. FDA for the manufacture of Class II medical devices used to purify and process water for hemodialysis.
The Company manufactures and sells a line of multi-stage centrifugal pumps. These pumps were developed by the Company to meet the need for dependable high pressure pumps and are available in 60 standard sizes with flows ranging from 3 gallons per minute to 500 gallons per minute and pressure capabilities from 25 pounds per square inch (psi) to 500 psi. The pumps are capable of operating in series to obtain 1000 psi for seawater desalting and other high pressure applications. The Company recently developed an energy recovery turbine that complements its centrifugal pumps primarily for use in desalting seawater with reverse osmosis.
The Company manufactures and markets equipment to generate ozone from electricity using corona discharge. Ozone is becoming increasingly important as a bactericide and water purifier because it kills bacteria, virus and giardia cysts 10 to 300 times faster than chlorine. Ozone is also effective in oxidizing trace organic materials in water which are precursors of the carcinogenic trihalomethanes. Ozone can also be used to purify solvent-contaminated groundwater and is often used to de-color water and wastewater.
The Company also manufactures and markets electronic controllers to operate precision valves for water conditioning; flow control and measuring devices and instrumentation;housings and specialty holders and devices for containing and retaining various membranes and filters; analog and digital products for chemical water treatment and monitoring; and instruments used to measure and control conductivity, pH, ORP, chlorine and specific ions. The instruments are capable of being used in local operating network (LON) communications and data acquisition.
Household Water:
The Company is a leader in the manufacture of the controllers and valves used to effect ion exchange technology. The most commonly used ion exchange process is for water softening where the ions of calcium and magnesium are replaced with sodium to reduce soap usage, improve boiler operation and improve cleaning. Another ion exchange application is to polish ultrapure water for electronics manufacture and high-pressure boiler feed.
The Company also manufactures and sells automated chlorination units for residential and farm water system disinfection.
In addition, the Company manufactures and sells home reverse osmosis (HRO) membrane elements and cartridge filters to OEM’s who package them into systems for use in homes, offices and retail vending establishments to produce purified drinking water.
Segment Sales
For the twelve months of 2000, Filtration and Separations was 40% of total sales, Process Water was 40% of total sales and Household Water made up 20% of total sales. For the twelve months of 1999, Filtration and Separations was 42% of total sales, Process Water was 38% of total sales and Household Water made up 20% of total sales.
As a result of a Company-wide reorganization on January 1, 2000, this sales comparison is only available for the 24 months detailed above. Restatement of prior periods' results under this method of reporting was deemed impracticable due to the anticipated costs and unavailability of such financial information.
Sales and Marketing
The Company’s broad range of products are used in the purification of water and industrial solutions, dewatering and recycling of commercial and industrial fluids, pollution control and seawater desalting. The Company's principal domestic and international markets, from which it derives more than 50% of its sales, include the potable water, health care, biotechnology, food and beverage, electronics, chemical processing and power generation industries.
The Company focuses the marketing of its products through targeted selling efforts in four main regions of the world:
1. USA and Canada
2. Mexico, Central and South America
3. Euro/Africa
4. Asia/Pacific
These sales efforts are supported by application engineers and customer service personnel.
The Company markets its engineered systems and equipment through its direct sales force and third-party integrators. The Company's other equipment products in the Process Water and Household Water products are marketed to a network of independent distributors and value-added resellers with the help of Company district managers. These value-added resellers provide worldwide installation service and stocking of a wide range of the Company's equipment. Filtration and Separations products are sold through a worldwide network of independent distributors. Some sales are made directly to certain of the Company's largest customers and to other manufacturers of filtration equipment and systems.
The Company's marketing activities include appearances at trade shows, direct marketing campaigns, advertisements in professional and trade journals and appearances before professional organizations. The Company participates with its customers in planning the systems in which its products are to be used, particularly if new applications are involved. In some cases, the sale of a system designed for a particular customer may result from an engineering and service relationship which has extended over several years.
Research and Development
Research and development activities emphasize product development and applied research, with the goal of developing proprietary products. Such expenditures totaled $7,886,000 in 2000, $7,694,000 in 1999, and $9,913,000 in 1998.
Patents and Trademarks
The Company has been granted domestic and certain foreign trademarks on numerous product names, and on its logotypes. The Company holds domestic and foreign patents on certain of its filter media, membranes, filters, controlling valves, machine designs and other products. The Company has also from time to time acquired businesses that own patents and trademarks. Although the Company believes that its patents have value, the Company's business as a whole is not dependent on any patent or group of related patents because the Company considers its technological position to be based primarily on its proprietary manufacturing methods, innovative engineering and marketing expertise. However, the loss of patents relating to certain specialized membranes and related products could have a significant effect on the Company's future revenues.
Employees
As of December 31, 2000, the Company employed 1,399 persons, including 224 holding engineering or technical degrees.
Competition
The Company experiences competition from a variety of sources with respect to virtually all of its products, although the Company knows of no single entity that competes with it across the full range of its products and systems. Competition in the markets served by the Company is based on a number of factors, which may include price, technology, applications experience, know-how, availability of financing, reputation, product warranties, reliability, service and distribution.
With respect to the Company's membrane and related water treatment equipment business activity, there are a number of companies, including several sizable chemical companies that manufacture membranes, but not equipment. There are numerous smaller companies, primarily fabricators, that build water treatment and desalination equipment, but which generally do not have their own proprietary membrane technology. A limited number of companies manufacture both membranes and equipment. In ozone equipment, there are both large and small competitors with no single dominant competitor. In water softener controls and valves, the Company has three primary and numerous secondary competitors. Some competitors sell only controller valves and some sell complete softeners. The Company has numerous competitors in its conventional water treatment and filtration product business activities.
With respect to the Company's disposable filter and lab products, two companies dominate the industry with several smaller companies competing in selected product lines.
With respect to the Company's pump and fluid handling products, there are numerous competitors of larger size and with greater resources than the Company. Some competitors have significantly broader product lines than the Company.
The Company is unable to state with certainty its relative market position in all aspects of its business. Many of its competitors have financial and other resources greater than those of the Company.
Raw Materials
The principal raw materials used by the Company are various plastic materials including polyvinyl chloride, polypropylene, Noryl PPO, Nylon, cellulose acetate, polycarbonate, polyester, polysulfone, polyacrylonitrile; stainless steel, steel, brass, copper, and various other synthetic materials, all of which are normally available from sources within the continental United States. Most raw materials used by the Company are available from multiple sources of supply. A limited number of materials are proprietary products of major companies which, if not available, would have a material effect on the Company's sales and profits. The Company believes it could find substitutes for these materials if they should become unavailable, but has no assurance that the substitute would perform as well or be priced as favorably.
In 2000, the Company experienced no difficulty in securing any of its needed raw materials and components. However, during 1999, the Company experienced difficulty in securing a certain needed raw material in its membrane manufacturing. Financial results in 1999 were negatively impacted as the Company missed shipment dates and incurred increased scrap rates while adjusting manufacturing processes to accept other substituted products. The Companyexperienced no other difficulty in securing any of its needed raw materials and components in 1999.
Customers
No one customer accounted for 10 percent or more of the Company's consolidated revenue in 2000, 1999, or 1998.
Backlog
The dollar amount of the Company's backlog of orders considered to be firm at December 31, 2000, was $26.6 million. The comparable backlog at December 31, 1999, was $25.4 million. The Company expects that nearly all orders included in the backlog at December 31, 2000 will be filled during the 2001 fiscal year. The Company does not believe that its backlog at any time is necessarily indicative of annual sales. The business of the Company is not subject to significant seasonal variations.
Governmental Regulation
Certain applications of the Company's reverse osmosis and ultrafiltration products and fluid handling equipment are subject to governmental regulation. Products used for fractionation of cheese whey for human consumption are subject to regulation by the United States Department of Agriculture. Reverse osmosis, ultrafiltration and fluid handling systems used in medical applications, particularly the systems used in artificial kidney dialysis equipment and pharmaceutical water for injection, are subject to regulation by the United States Food and Drug Administration. Ultrafiltration and microfiltration products used for biological separations are subject to regulation by the United States Food and Drug Administration.
The Company received a warning letter issued on June 7, 2000 by the Food and Drug Administration (FDA) related to the Companys’ Millenium Portable Reverse Osmosis System manufactured in its Kent, Washington facility. The letter addressed the procedures for reporting quality errors. In response, the Company took corrective actions and received a letter from the FDA dated August 8, 2000, which stated that the corrective efforts appeared acceptable and that the FDA planned to review them during future scheduled inspections of Osmonics’ Kent, Washington, facility. The Millenium units produce pure water for kidney dialysis. The Company believes that the pure water aspects of the medical systems were not compromised and no patients were put at risk.
The sanitation district in which one of the Company's operating plants is located revised its discharge regulations in 1999. As a result, the district adjusted the Company's discharge permit by reducing the amount of discharge at one of the Company's locations. This adjustment has and will result in additional operating and capital expenditures.
Foreign Operations
Substantially all of the Company's operations and assets are located in the United States. The Company has sales offices and distribution facilities in France, Thailand, Switzerland, Germany, Hong Kong, Japan, Singapore and China. Limited assembly is conducted in Europe and Asia. The profitability of domestic and foreign sales is substantially equal. Sales to Canada are made on the same trade terms as are available to U.S. customers.
The Company transacts business with certain international customers under defined credit terms and in U.S. dollars. Large export equipment and system sales are primarily made on the basis of confirmed irrevocable letters of credit or time drafts to selected customers in U.S. dollars. The Company believes that currency fluctuation related to these sales do not constitute substantial risks.
The Company’s French operation sells to foreign customers primarily in euros. The Company also has certain raw material sourcing arrangements transacted in foreign currencies. Currently, the Company does not hedge for either type transaction; however, it may in the future. The Company believes these transactions do constitute some level of risk and adverse currency fluctuations may occur. See Note 12 of Notes to Consolidated Financial Statements for a breakdown of the Company's foreign operations and export sales by geographic area.
Certain Factors
In addition to the factors discussed elsewhere in the Company's Annual Report to Shareholders or this Form 10-K, such as intellectual property and other technological risks, regulatory risks, environmental risks and Year 2000 risks, the following are some important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company.
EARNINGS VARIATIONS
The sale of capital equipment within the water purification and fluid filtration industry is cyclical and influenced by various economic factors including interest rates and general fluctuations of the business cycle. A significant portion of the Company's revenues is derived from capital equipment sales. While the Company sells capital equipment to customers in diverse industries and in global markets, cyclicality of capital equipment sales and instability of general economic conditions, including those in the United States, Europe, Asia, Latin America and certain other markets, could have a material adverse effect on the Company's revenues and profitability.
Operating results from the sale of water purification and fluid filtration systems also can be expected to fluctuate significantly as a result of the limited pool of existing and potential customers for these systems, the timing of new contracts, possible deferrals or cancellations of existing contracts and the evolving and unpredictable nature of the markets for water purification systems. As a result of these and other factors, the Company's operating results may be subject to quarterly or annual fluctuations. There can be no assurance that at any given time the Company's operating results will meet or exceed stock market analysts' expectations.
COMPETITION
All of the markets in which the Company competes are highly competitive, and most are fragmented, with numerous regional and local participants. There are competitors of the Company in certain markets that are divisions or subsidiaries of companies that have significantly greater resources than the Company. Competitive factors include price, technical expertise, product quality and responsiveness to customer needs, including service and technical support. The Company competes not only with a large number of independent wholesalers and with other distribution chains similar to the Company, but also with manufacturers who sell directly to customers. The Company's HRO business also competes with companies with national distribution networks, businesses with regional scope, and local product assemblers or service companies, as well as retail outlets. The Company believes that there are thousands of participants in the residential water business. The HRO business competes principally on the basis of price, product quality and "taste," service, distribution capabilities, geographic presence and reputation. Competitive pressures, including those described above, and other factors could cause the Company to lose market share or could result in significant price erosion, either of which could have a material adverse effect upon the Company's financial position, results of operations and cash flows.
RISKS RELATED TO ACQUISITIONS
The Company has acquired a number of United States-based companies and product lines. The Company plans to continue to consider and potentially pursue acquisitions that expand the segments of the water, wastewater treatment and water-related industries in which it participates; complement its technologies, products or services; broaden its customer base and geographic areas served; expand its global distribution network; and provide opportunities. The Company's acquisition strategy entails the potential risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities and potential profitability of acquisition candidates and in integrating the operations of acquired companies. Although the Company believes that it has generally been successful in pursuing acquisitions, there can be no assurance that acquisition opportunities will continue to be available, that the Company will have access to the capital required to finance potential acquisitions, that the Company will continue to acquire businesses or that any business acquired will be integrated successfully or prove profitable.
PROFIT UNCERTAINTY IN FIXED-PRICE CONTRACTS
A significant portion of the Company's revenues is generated under fixed price contracts. To the extent that original cost estimates are inaccurate, scheduled deliveries are delayed or progress under a contract is otherwise impeded, revenue recognition and profitability from a particular contract may be adversely affected.
RISKS OF DOING BUSINESS IN OTHER COUNTRIES
The Company sells a significant amount of its product in markets outside the United States. While these activities may provide important opportunities for the Company to offer its products and services internationally, they also entail the risks associated with conducting business internationally, including the risk of currency fluctuations, slower payment of invoices, the lack in some jurisdictions of well-developed legal systems, nationalization and possible social, political and economic instability.
ITEM 2. PROPERTIES
The executive offices and principal manufacturing facilities of the Company are located in Minnetonka, Minnesota, a suburb of Minneapolis.
A summary of the Company's main operating facilities is as follows:
| Location | Status | Size | Function | |
| Minnetonka, MN | Owned | 309,600 | sq ft | Sales, Manufacturing, Warehouse |
| Vista, CA | Owned | 110,000 | sq ft | Sales, Manufacturing, Warehouse |
| Milwaukee, WI | Owned | 103,700 | sq ft | Sales, Manufacturing, Warehouse |
| Rockford, IL | Owned | 58,400 | sq ft | Sales, Manufacturing, Warehouse |
| Westborough, MA | Leased | 51,200 | sq ft | Sales, Manufacturing, Warehouse |
| Kent, WA | Leased | 50,000 | sq ft | Sales, Manufacturing, Warehouse |
| Syracuse, NY | Owned | 48,500 | sq ft | Sales, Manufacturing, Warehouse |
| Le Mée, France | Owned | 36,900 | sq ft | Sales, Manufacturing, Warehouse |
| Cedar Grove, NJ | Leased | 4,000 | sq ft | Research & Development |
| Escondido, CA | Leased | 12,700 | sq ft | Manufacturing |
| Emmetsburg, IA | Leased | 8,800 | sq ft | Manufacturing, Warehouse |
| Bryan, TX | Owned | 2,500 | sq ft | Manufacturing, Warehouse |
| Total Owned | 669,600 | sq ft | ||
| Total Leased | 126,700 | sq ft | ||
| Total Owned and Leased | 796,300 | sq ft |
Certain borrowings of the Company are collateralized by real property of the Company.
The current manufacturing facilities are adequate for intermediate-term operations. In addition, the Company leases space in Thailand, China, Germany, Japan, Hong Kong, Switzerland and Singapore that is used primarily for sales activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in several lawsuits incidental to its business. Management does not believe that any of the lawsuits will have a material adverse effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year that ended December 31, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
| Name and Age | Position with Company | Officer Since |
| D. Dean Spatz (56) | Chief Executive Officer and Chairman of the Board | 1969 |
| Ruth Carol Spatz (56) | Secretary | 1969 |
| Phillip M. Rolchigo (39) | Chief Technology Officer | 1998 |
| Edward J. Fierko (59) | President and Chief Operating Officer | 1999 |
| Keith B. Robinson (46) | Chief Financial Officer and Sr. Vice President Administration | 1999 |
All of the executive officers have been officers of the Company for more than five years except the following:
Dr. Rolchigo came to Osmonics from Membrex Corp., which Osmonics acquired in 1998. Dr. Rolchigo is the principal inventor of advanced vortex flow filtration technology. His technical expertise spans diverse industries from environmental waste to pharmaceutical processing. He has served as a research affiliate in chemical engineering for MIT, and belongs to numerous industry organizations.
Mr. Fierko joined Osmonics in 1998 as a Vice President and General Manager of two Global Business Units. Previously, Mr. Fierko served as President and CEO of EcoWater International, Inc. Before that, he served as President of EcoWater Systems and was with General Electric Company for 23 years prior to joining EcoWater in 1987.
Mr. Robinson joined Osmonics in 1999 as Chief Financial Officer and Senior Vice President Administration. Previously, Mr. Robinson served as Senior Director of Planning and Finance at West Group. Before that, he served as Chief Financial Officer of The Thompson Corporation.
All executive officers are elected annually by, and serve at the direction of, the Board of Directors. D. Dean Spatz and Ruth Carol Spatz are husband and wife.
PART II
| ITEM 5. | MARKET FOR THE REGISTRANT'S COMMON EQUITY AND |
| RELATED SHAREHOLDER MATTERS |
"Common Stock Data," and "Notes to Consolidated Financial Statements," pages 20-27of the Annual Report to Shareholders, are incorporated herein by reference. As of March 21, 2001 there were 1,961 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 that contain a covenant limiting the payment of dividends to shareholders. At December 31, 2000, approximately $9,000,000 of retained earnings was eligible for dividend distribution under this covenant.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data," page 32 of the Annual Report to Shareholders, is incorporated herein by reference.
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL |
| CONDITION AND RESULTS OF OPERATIONS |
"Management's Discussion and Analysis of Financial Condition and Results of Operations," pages 28-31 of the Annual Report to Shareholders, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial information of the Registrant and its subsidiaries, included in the Annual Report to Shareholders, is incorporated herein by reference:
PART III
ITEM 10. DIRECTORS
The information required by this item is incorporated herein by reference to the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year ended December 31, 2000 and forwarded to shareholders prior to the Company's 2001 Annual Meeting of Shareholders (the "2001 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the 2001 Proxy Statement.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND |
| MANAGEMENT |
The information required by this Item is incorporated herein by reference to the 2001 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the 2001 Proxy Statement.
PART IV
| ITEM 14. | EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS | |||
| ON FORM 8-K | ||||
| (a) (1) | Financial Statements | |||
| The consolidated financial statements of the Registrant and its subsidiaries, included in the Annual Report to Shareholders, are incorporated by reference in Item 8, and are also incorporated herein by reference. | ||||
| (a) (2) | Financial Statement Schedule | |||
| Reports of Independent Public Accountants on Supplemental Schedule to the Consolidated Financial Statements. | ||||
| Valuation and qualifying accounts. | ||||
| Schedules not listed above have been omitted because they are either not applicable, not material or the required information has been given in the financial statements or in the notes to the financial statements. | ||||
| (2) | Agreement and Plan of Merger among Desalination Systems, Inc., Osmonics, Inc. and DSI Acquisition Corp. dated May 17, 1996. (Incorporated herein by reference to Exhibit 2 to Registration Statement on Form S-3, File No. 33-05029.) | |||
| (3)A. | Certificate of Incorporation of the Registrant, as amended. (Incorporated herein by reference to Exhibit 3.1 to Registration Statement on Form S-2, File No. 33-336.) Certificate of Amendment. (Incorporated herein by reference to Exhibit (3)A on Form 10-K for fiscal year ended December 31, 1987, File No. 0–8282.) | |||
| B. | By-Laws of the Registrant. (Incorporated herein by reference to Exhibit 3.2 to Registration Statement on Form S-2, File No. 33-336.) | |||
| (4)A. | Note Purchase Agreement dated July 12, 1991. (Incorporated herein by reference to Annual Report on Form 10-K for fiscal year ended December 31, 1991.) | |||
| (10)A.* | 1993 Stock Option Plan and related form of stock option agreement. (Incorporated herein by reference to Annex C of the Registrant's Joint Proxy Statement/Prospectus dated September 10, 1993.) | |
| B. | Stock Option Agreement with Michael L. Snow, Director. (Incorporated herein by reference to Annual Report on Form 10-K for fiscal year ended December 31, 1993.) | |
| D. | 1995 Employee Stock Purchase Plan. (Incorporated herein by reference to the Registrant's Proxy Statement dated March 27, 1995.) | |
| E.* | 1995 Director Stock Option Plan. (Incorporated herein by reference to the Registrant's Proxy Statement dated March 27, 1995.) | |
| * Denotes Executive Compensation Plan. | ||
| (13) | 2000 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, 2000. | ||
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, CEO | |
| Dated: March 27, 2001 |
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/ | Keith B. Robinson | Chief Financial Officer (Principal Finance and Accounting Officer) | March 27, 2001 |
| Keith B. Robinson | |||
| /s/ | Ruth Carol Spatz | Director | March 29, 2001 |
| Ruth Carol Spatz | |||
| /s/ | Michael L. Snow | Director | March 30, 2001 |
| Michael L. Snow | |||
| /s/ | Ralph E. Crump | Director | March 28, 2001 |
| Ralph E. Crump | |||
| /s/ | Verity C. Smith | Director | March 28, 2001 |
| Verity C. Smith | |||
| /s/ | Charles W. Palmer | Director | March 28, 2001 |
| Charles W. Palmer | |||
| /s/ | William Eykamp | Director | March 28, 2001 |
| William Eykamp | |||
| /s/ | D. Dean Spatz | CEO, Chairman of the Board and Director (Principal Executive Officer) | March 27, 2001 |
| D. Dean Spatz | |||
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
| Year Ended December 31, | |||
| 2000 | 1999 | 1998 | |
| Sales | $200,139 | $187,028 | $179,742 |
| Cost of sales | 139,733 | 128,608 | 116,641 |
| Gross profit | 60,406 | 58,420 | 63,101 |
| Operating expenses: | |||
| Selling, general and administrative | 44,195 | 43,720 | 43,487 |
| Research, development and engineering | 7,886 | 7,694 | 9,913 |
| Special charges | 250 | 2,575 | 7,988 |
| 52,331 | 53,989 | 61,388 | |
| Income from operations | 8,075 | 4,431 | 1,713 |
| Other income (expense), net: | |||
| Interest income | 397 | 612 | 668 |
| Interest expense | (4,337) | (4,053) | (4,288) |
| Other | 3,947 | 2,058 | 829 |
| 7 | (1,383) | (2,791) | |
| Income (loss) before income taxes | 8,082 | 3,048 | (1,078) |
| Income taxes (benefit) (Note 10) | 2,663 | 2,084 | (25) |
| Net income (loss) | $5,419 | $964 | $(1,053) |
| Earnings (loss) per share – basic (Note 15) | |||
| Net income (loss) | $0.38 | $0.07 | $(0.08) |
| Earnings (loss) per share – assuming dilution | |||
| (Note 15) | |||
| Net income (loss) | $0.38 | $0.07 | $(0.08) |
The accompanying notes are an integral part of the consolidated financial statements.
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| December 31, | ||
| 2000 | 1999 | |
| ASSETS | ||
| Current assets: | ||
| Cash and cash equivalents | $21 | $1,807 |
| Marketable securities (Note 3) | 1,889 | 14,007 |
| Trade accounts receivable, net of allowance for doubtful accounts of $1,008 in 2000 and $1,315 in 1999 | 37,092 | 35,804 |
| Inventories (Note 4) | 32,758 | 24,350 |
| Deferred tax assets (Note 11) | 4,314 | 4,773 |
| Other current assets | 2,487 | 2,771 |
| Total current assets | 78,561 | 83,512 |
| Property and equipment, at cost: | ||
| Land and land improvements | 5,056 | 5,358 |
| Buildings | 30,283 | 31,785 |
| Machinery and equipment | 76,943 | 73,148 |
| 112,282 | 110,291 | |
| Accumulated depreciation | (55,381) | (51,961) |
| 56,901 | 58,330 | |
| Cash restricted for purchase and construction of equipment (Note 5) | 325 | 325 |
| Goodwill, net of accumulated amortization of $6,478 in 2000 and $4,101 in 1999 | 46,310 | 48,826 |
| Long-term investments | 2,688 | 1,008 |
| Other assets, net of accumulated amortization of intangible assets of $1,495 in 2000 and $1,031 in 1999 | 3,907 | 2,365 |
| Total assets | $188,692 | $194,366 |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||
| Current liabilities: | ||
| Accounts payable | $15,262 | $15,121 |
| Line of credit advances (Note 6) | 15,000 | 18,500 |
| Notes payable and current portion of long-term debt (Note 8) | 4,759 | 2,812 |
| Accrued compensation and employee benefits | 3,391 | 3,633 |
| Other accrued liabilities (Note 7) | 10,393 | 11,285 |
| Total current liabilities | 48,805 | 51,351 |
| Long-term debt (Note 8) | 24,603 | 32,201 |
| Deferred income taxes (Note 11) | 6,335 | 6,256 |
| Other liabilities | 4 | 16 |
| Commitments and contingencies (Note 13) | ||
| Shareholders’ equity (Note 9): | ||
| Common stock, $0.01 par value Authorized – 50,000,000 shares Issued – 2000: 14,408,634 and 1999: 14,262,130 shares | 144 | 143 |
| Preferred stock: Authorized - 500,000 shares; outstanding – none | - | - |
| Capital in excess of par value | 23,818 | 22,612 |
| Retained earnings | 85,458 | 80,039 |
| Total other comprehensive income (loss) | (475) | 1,748 |
| Total shareholders’ equity | 108,945 | 104,542 |
| Total liabilities and shareholders’ equity | $188,692 | $194,366 |
The accompanying notes are an integral part of the consolidated financial statements.
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year Ended December 31, | |||
| 2000 | 1999 | 1998 | |
| Cash flows from operations: | |||
| Net income (loss) | $5,419 | $964 | $(1,053) |
| Non-cash items included in net income: | |||
| Depreciation and amortization | 10,139 | 8,772 | 7,964 |
| Deferred income taxes | 1,609 | 3,227 | (2,059) |
| Gain on sale of land and investments | (3,788) | (2,625) | (1,285) |
| Special charges | - | 3,610 | 9,988 |
| Changes in assets and liabilities (net of business acquisitions): | |||
| Accounts receivable | (1,205) | (357) | (3,774) |
| Inventories | (8,158) | 5,372 | 7,367 |
| Other current assets | (366) | 2,464 | (3,052) |
| Accounts payable and accrued liabilities | (1,255) | (1,338) | (5,994) |
| Net cash provided by operations | 2,395 | 20,089 | 8,102 |
| Cash flows from investing activities: | |||
| Business acquisitions (net of cash acquired) | - | (6,846) | (39,880) |
| Purchase of investments | (1,178) | (3,603) | (808) |
| Maturities and sales of investments | 14,029 | 6,409 | 4,480 |
| Purchase of property and equipment | (7,058) | (8,323) | (7,808) |
| Sales of property and equipment | 367 | 747 | 110 |
| Other | (1,322) | (728) | 424 |
| Net cash provided by (used in) investing activities | 4,838 | (12,344) | (43,482) |
| Cash flows from financing activities: | |||
| (Payments) proceeds from notes payable and current debt | (1,553) | 9,000 | 32,000 |
| Reduction of long-term debt | (8,434) | (17,061) | (2,264) |
| Cash restricted for purchase and construction of equipment | - | 235 | 570 |
| Issuance of common stock | 1,207 | 1,882 | 472 |
| Net cash (used in) provided by financing activities | (8,780) | (5,944) | 30,778 |
| Effect of exchange rate changes on cash | (239) | (570) | 306 |
| (Decrease) increase in cash and cash equivalents | (1,786) | 1,231 | (4,296) |
| Cash and cash equivalents - beginning of year | 1,807 | 576 | 4,872 |
| Cash and cash equivalents - end of year | $21 | $1,807 | $576 |
The accompanying notes are integral part of the consolidated financial statements.
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share data)
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income(2) | Total Shareholders’ Equity | ||
| Shares | Amount | |||||
| Balance – January 1, 1998 | 13,943,544 | $140 | $20,261 | $80,128 | $1,846 | $102,375 |
| Comprehensive income (loss) | ||||||
| Net loss | - | - | - | (1,053) | - | (1,053) |
| Other comprehensive income(1) | ||||||
| Translation adjustment | - | - | - | - | 306 | 306 |
| Marketable securities adjustment(3) | - | - | - | - | 55 | 55 |
| Other comprehensive income | - | - | - | - | 361 | 361 |
| Total comprehensive income (loss) | - | - | - | - | - | (692) |
| Employee stock purchase plans | 64,819 | - | 664 | - | - | 664 |
| 401(k) stock match | 23,468 | - | 234 | - | - | 234 |
| Recovery of common stock | (40,540) | - | (426) | - | - | (426) |
| Balance - December 31, 1998 | 13,991,291 | 140 | 20,733 | 79,075 | 2,207 | 102,155 |
| Comprehensive income | ||||||
| Net income | - | - | - | 964 | - | 964 |
| Other comprehensive income (loss) (1) | ||||||
| Translation adjustment | - | - | - | - | (570) | (570) |
| Marketable securities adjustment(3) | - | - | - | - | 111 | 111 |
| Other comprehensive income (loss) | - | - | - | - | (459) | (459) |
| Total comprehensive income | - | - | - | - | - | 505 |
| Employee stock purchase plans | 69,209 | 1 | 555 | - | - | 556 |
| 401(k) stock match | 51,078 | 1 | 483 | - | - | 484 |
| Stock options exercised | 150,552 | 1 | 841 | - | - | 842 |
| Balance - December 31, 1999 | 14,262,130 | 143 | 22,612 | 80,039 | 1,748 | 104,542 |
| Comprehensive income | ||||||
| Net income | - | - | - | 5,419 | - | 5,419 |
| Other comprehensive income (loss) (1) | ||||||
| Translation adjustment | - | - | - | - | (239) | (239) |
| Marketable securities adjustment(3) | - | - | - | - | (1,984) | (1,984) |
| Other comprehensive income (loss) | - | - | - | - | (2,223) | (2,223) |
| Total comprehensive income | - | - | - | - | - | 3,196 |
| Employee stock purchase plans | 74,017 | 1 | 522 | - | 523 | |
| 401(k) stock match | 59,748 | - | 498 | - | - | 498 |
| Minority contribution | - | - | 136 | - | - | 136 |
| Stock options exercised | 12,739 | - | 50 | - | - | 50 |
| Balance - December 31, 2000 | 14,408,634 | $144 | $23,818 | $85,458 | $(475) | $108,945 |
| (1) | All items included in other comprehensive income (loss) are shown net of taxes. The tax effect for the marketable securities adjustment was $(1,051), $43 and $22 for 2000, 1999 and 1998, respectively. |
| (2) | Accumulated other comprehensive income is comprised of accumulated currency translation of $(837), $(598) and $(28) and marketable securities adjustment of $362, $2,346 and $2,235 at December 31, 2000, 1999 and 1998, respectively. |
| (3) | Marketable securities reclassification adjustment for gains realized in net income (net of tax) was $1,256, $1,617 and $584 for 2000, 1999 and 1998, respectively. |
The accompanying notes are integral part of the consolidated financial statements.
FIVE-YEAR RESULTS
(In thousands, except per share amounts)
INCOME DATA:
| Year Ended December 31, | |||||
| 2000 | 1999 | 1998 | 1997 | 1996 | |
| Sales | $200,139 | $187,028 | $179,742 | $164,905(a) | $155,946(a) |
| Income (loss) from continuing operations | 5,419 | 964 | (1,053) | 8,643 | 13,467 |
| Net income (loss) | 5,419 | 964 | (1,053) | 9,793 | 13,467 |
| Earnings (loss) per share – basic (Note 15) | |||||
| Income (loss) from continuing operations | $0.38 | $0.07 | $(0.08) | $0.60 | $0.95 |
| Net income (loss) | $0.38 | $0.07 | $(0.08) | $0.70 | $0.95 |
| Earnings (loss) per share – assuming dilution (Note 15) | |||||
| Income (loss) from continuing operations | $0.38 | $0.07 | $(0.08) | $0.59 | $0.93 |
| Net income (loss) | $0.38 | $0.07 | $(0.08) | $0.68 | $0.93 |
| Average shares outstanding | |||||
| Basic | 14,329 | 14,162 | 13,976 | 14,031 | 14,145 |
| Assuming dilution | 14,404 | 14,252 | 13,976 | 14,313 | 14,458 |
| BALANCE SHEET DATA | |||||
| Total assets | $188,692 | $194,366 | $194,049 | $164,483 | $152,176 |
| Long-term debt | 24,603 | 32,201 | 31,665 | 13,792 | 15,900 |
(a) Excludes impact of EITF 00-10 discussed in Note 1.
________________________________________________________________________________________________________________
TWELVE-YEAR RESULTS
(In thousands, except per share amounts)
SUPPLEMENTARY DATA
These schedules present the prior twelve-year results of the Company as originally reported, before restatement of prior period data for those acquisitions accounted for as poolings-of-interests, to show the effect of the Company’s strategic acquisition activity.
INCOME DATA: (As originally reported)
| Year Ended December 31, | |||||||||||||
| 2000 | 1999 | 1998 | 1997 | 1996 | 1995 | 1994 | 1993 | 1992 | 1991 | 1990 | 1989 | ||
| Sales | $200,139 | $187,028 | $179,742 | $164,905(e) | $155,946(e) | $111,610(e) | $96,180(e) | $89,043(e) | $50,541(e) | $46,738(e) | $43,553(e) | $36,223(e) | |
| Net income | 5,419 | 4,533(d) | 6,516(c) | 9,452(b) | 13,467 | 11,212 | 9,955 | 7,895 | 4,528(a) | 3,902 | 3,714 | 4,047 | |
| BALANCE SHEET DATA: (As originally reported) | |||||||||||||
| Total assets | $188,692 | $194,366 | $194,049 | $164,483 | $152,176 | $125,058 | $102,035 | $88,826 | $60,300 | $54,931 | $54,370 | $45,884 | |
| Working capital | 29,756 | 32,161 | 33,976 | 45,273 | 54,006 | 54,224 | 55,995 | 45,281 | 29,471 | 25,955 | 21,692 | 21,117 | |
| Long-term debt | 24,603 | 32,201 | 31,665 | 13,792 | 15,900 | 12,441 | 14,050 | 13,913 | 13,221 | 13,697 | 13,761 | 3,788 | |
| Shareholders’ equity | 108,945 | 104,542 | 102,155 | 102,375 | 97,943 | 78,471 | 63,751 | 52,070 | 33,793 | 28,891 | 24,720 | 33,067 | |
| (a) | 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.” | ||||||||||||
| (b) | Excludes impact of December 1997 special charge of $1,448 and 1997 recovery on discontinued operations of $1,330 net of taxes. | ||||||||||||
| (c) | Excludes impact of June 1998 special charge of $9,988. | ||||||||||||
| (d) | Excludes impact of September and December 1999 special charge of $3,610. | ||||||||||||
| (e) | Excludes impact of EITF 00-10 discussed in Note 1. | ||||||||||||
QUARTERLY FINANCIAL DATA
(In thousands, except per share amounts)
Quarterly Financial Data - 2000
| Quarter Ended | ||||
| March 31 | June 30 | September 30 | December 31 | |
| Sales | $51,095 | $50,110 | $48,463 | $50,471 |
| Gross profit | 16,284 | 15,888 | 14,100 | 14,134 |
| Net income | 1,592 | 1,848 | 1,019 | 960 |
| Net income per share – basic | 0.11 | 0.13 | 0.07 | 0.07 |
| Net income per share – assuming dilution | $0.11 | $0.13 | $0.07 | $0.07 |
Quarterly Financial Data - 1999
| Quarter Ended | ||||
| March 31 | June 30 | September 30 | December 31(a) | |
| Sales | $45,021 | $46,957 | $47,573 | $47,477 |
| Gross profit | 15,369 | 16,174 | 14,840 | 12,037 |
| Net income (loss) | 1,582 | 2,139 | 1,458 | (4,215) |
| Net income (loss) per share – basic | 0.11 | 0.15 | 0.10 | (0.29) |
| Net income (loss) per share – assuming dilution | $0.11 | $0.15 | $0.10 | $(0.29) |
| (a) | Special charges of $3,880 ($0.26 per share after taxes assuming dilution) were recorded during the fourth quarter of 1999. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
1. Summary of Significant Accounting Policies
Osmonics, Inc. is a manufacturer and marketer of high technology water purification, fluid filtration, fluid separation, and fluid transfer equipment and instruments, as well as the replaceable components used in purification, filtration and separation equipment. These products are used by a broad range of industrial, commercial, consumer and institutional customers.
The consolidated financial statements include the accounts of Osmonics, Inc. and its wholly and majority owned subsidiaries (the Company). Significant intercompany accounts and transactions have been eliminated.
In December 1999, Staff Accounting Bulletin (SAB) No. 101 “Revenue Recognition in Financial Statements” was issued. The Company applied this bulletin in 2000. In accordance with SAB No. 101, sales are recorded when the product is shipped or the service is provided as the earnings process is substantially complete, collectibility is probable and pricing is fixed and determinable. The estimated cost of warranty obligations is accrued at the time revenue is recognized. The Company’s adoption of the bulletin had no effect on the financial position or results from operations.
The estimated fair value for notes payable and long-term debt approximates carrying value due to the relatively short-term nature of the instruments and/or due to the short-term floating interest rates on the borrowing. The estimated fair value of notes receivable approximates the net carrying value, as management believes the respective interest rates are commensurate with the credit, interest rate and repayment risks involved.
The Company considers highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Inventories are stated at lower of cost (first-in, first-out method) or market for all operations except for two plants which are valued using the last-in, first-out method.
Depreciation and amortization of property and equipment are provided on the straight-line method over estimated lives of 3 to 40 years.
Deferred income taxes have been provided for income and expenses which are recognized in different accounting periods for financial reporting purposes rather than for income tax purposes.
Foreign currency assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates throughout the period.
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. Other intangibles are carried at cost and amortized using the straight-line method over their estimated lives of 5 to 20 years. In 1999, the estimated life of 40 years for the recorded AquaMatic goodwill was reduced to 10 years based on the maturity of the product line and continued softness of the Asia/Pacific market. In accordance with Statement of Financial Accounting Standards (SFAS) No. 121 on impairment of long-lived assets, the carrying values of these intangibles are reviewed quarterly for impairment using discounted cash flows when events or circumstances warrant such a review (see Note 16).
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives, including those embedded in other contracts, be recognized as either assets or liabilities and that those financial instruments be measured at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and designation. Management has reviewed the requirements of SFAS No. 133 and has determined that they have no embedded derivatives. All contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Company’s policy is to not enter into contracts containing derivatives with terms that cannot be designated as normal purchases or sales.
In May 2000, the Emerging Issues Task Force in EITF 00-10 reached a consensus on the issue of “How a seller of goods should classify in the income statement amounts billed to a customer for shipping and handling.” The consensus was that all amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided and should be classified as revenue. The Company adopted EITF 00-10 in the fourth quarter 2000. Comparative financial statements for prior periods have been reclassified to comply with the classification guidelines of this issue. Freight revenue added to sales and cost of goods sold were $3,104, $2,357 and $1,923 in 2000, 1999 and 1998, respectively.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform with current year presentations.
2. Business Acquisitions
On July 1, 1999, the Company acquired all of the equity interest of ZyzaTech Water Systems, Inc. (ZyzaTech) of Seattle, Washington. The purchase price was approximately $10,000 and included $8,600 of goodwill which is being amortized on the straight-line method over 20 years. ZyzaTech products are being sold through their existing distribution channels, offering a broadened line of hemodialysis products. The acquisition, included in the Process Water segment, was recorded under the purchase method of accounting.
The results of operations of ZyzaTech are included in the consolidated statements of operations from the date of acquisition.
Pro forma 1999 and 1998 combined financial results of Osmonics, Inc. and ZyzaTech would be as follows:
| 1999 | Osmonics | ZyzaTech | Combined | |||
| Sales | $187,028 | $5,826 | $192,854 | |||
| Income from operations | 4,431 | 397 | 4,828 | |||
| Acquisition interest expense | 320 | 320 | 640 | |||
| Net income | 964 | 57 | 1,021 | |||
| Net income per share - assuming dilution | $0.07 | $0.07 | ||||
| 1998 | Osmonics | ZyzaTech | Combined | |||
| Sales | $179,742 | $11,241 | $190,983 | |||
| Income from operations | 1,713 | 714 | 2,427 | |||
| Acquisition interest expense | 640 | 640 | ||||
| Net income (loss) | (1,053) | 88 | (965) | |||
| Net loss per share - assuming dilution | $(0.08) | $(0.07) | ||||
On February 17, 1998, the Company acquired all of the equity interest of Micron Separations, Inc. (MSI) of Westborough, Massachusetts. The purchase price was approximately $25,000 which included $1,902 of in-process research and development (R&D), $1,900 of cash, $4,500 of tax loss carryforwards and carrybacks and $13,600 of goodwill, which is being amortized on the straight-line method over 30 years. MSI products are being sold through existing Osmonics distribution channels, complementing the Company’s existing cartridge filter products and providing a broader portfolio of diagnostic and laboratory membrane products to the laboratory and analytical testing markets. The acquisition, included in the Filtration and Separations segment, was recorded under the purchase method of accounting.
The results of operations of MSI are included in the consolidated statements of operations from the date of acquisition.
On April 29, 1998, the Company acquired all of the equity interest of Membrex Corp. (Membrex) of Fairfield, New Jersey. The purchase price was approximately $16,000 plus assumed net liabilities of approximately $3,000. The price included $4,320 of in-process R&D and $15,700 of goodwill, which is being amortized on the straight-line method over 30 years. Membrex products are primarily related to membrane products and oil/water separating systems for commercial and industrial customers. The acquisition, included in the Filtration and Separations segment, was recorded under the purchase method of accounting.
Safety-Kleen (SK), the principal customer for the Membrex products, filed for Chapter 11 bankruptcy in June of 2000. As a result, second, third and fourth quarter 2000 sales to SK of $700, $750 and $264, respectively, were substantially below first quarter 2000 sales of $2,100. SK has continued to order product and parts at reduced levels to support its installed base. Future sales levels are uncertain and could be minimal.
The Company has a contract with SK that provides some exclusivity to SK for certain Membrex products. This contract is contingent on both companies meeting certain service, production and sales levels. The exclusivity provisions are conditioned on certain minimum purchase requirements by SK. The Company anticipates that the exclusivity provisions of the contract will expire in the third quarter of 2001 due to the anticipated failure of SK to buy the required minimum amount of products and has begun discussions with SK to renegotiate the contract based on the current situation.
The Company has determined that two-thirds ($9,500) of the Membrex goodwill is associated with these products. The Company has concluded there was no impairment of goodwill at December 31, 2000. In its analysis, Management used a discounted cash flow model in accordance with current accounting guidelines, a detailed five-year sales plan and anticipated an ongoing business relationship with SK while it proceeds through and comes out of bankruptcy. The ongoing business relationship assumes that SK will continue to purchase replacement membrane for existing product installations at the rate of two or three replacements per year per installation.
In the event that SK does not survive bankruptcy, Management believes it will be capable of selling and marketing these products through other sales channels in a manner that will support the goodwill value. The Company is investigating alternative approaches to market as allowed by the contract for these products. Additionally, the Company is continuing to investigate new applications for the technology acquired from Membrex. The Company believes the patented technology associated with Membrex brings a cost-effective solution to hazardous waste disposal, which could become a required environmental standard.
The results of operations of Membrex are included in the consolidated statements of operations from the date of acquisition.
The pro forma combined impact of MSI and Membrex on financial results for 1998 was not material.
3. Marketable Securities
The Company considers all of its marketable securities available-for-sale.
Marketable securities at December 31, 2000 consisted of the following:
| Amortized | Unrealized | Unrealized | Fair | |
| Cost | Gains | (Losses) | Value | |
| Municipal bonds 0-5 year maturity | 100 | - | - | 100 |
| Corporate debt securities and other 0-5 year maturity | 100 | - | (1) | 99 |
| Equity securities | 919 | 815 | (44) | 1,690 |
| Total before-tax effect | $1,119 | 815 | (45) | $1,889 |
| Deferred tax effect of unrealized (gains) losses | (432) | 24 | ||
| Net unrealized gains (losses) on marketable securities | $383 | $(21) | ||
Marketable securities at December 31, 1999 consisted of the following:
| Amortized | Unrealized | Unrealized | Fair | |
| Cost | Gains | (Losses) | Value | |
| U.S. government securities | ||||
| 0-5 year maturity | $1,649 | $6 | $(37) | $1,618 |
| Municipal bonds | ||||
| 0-5 year maturity | 3,831 | 104 | - | 3,935 |
| 6 year or greater maturity | 1,193 | 14 | (57) | 1,150 |
| Corporate debt securities and other | ||||
| 0-5 year maturity | 499 | - | (7) | 492 |
| Equity securities | 3,012 | 3,885 | (85) | 6,812 |
| Total before-tax effect | $10,184 | 4,009 | (186) | $14,007 |
| Deferred tax effect of unrealized (gains) losses | (1,549) | 72 | ||
| Net unrealized gains (losses) on | ||||
| marketable securities | $2,460 | $(114) |
Proceeds from sales of available-for-sale securities for the years ended December 31, 2000, 1999 and 1998 were $13,740, $6,409 and $2,253, respectively. The gains and losses on these sales, determined on the specific identification method, were $4,102 and $314 in 2000, $2,813 and $442 in 1999, and $949 and $90 in 1998 and are included in Other Income.
Market values are based on quoted market prices.
4. Inventories
Inventories consist of the following:
| December 31, | ||
| 2000 | 1999 | |
| Finished goods | $8,013 | $8,640 |
| Work in process | 8,775 | 6,457 |
| Raw materials | 17,695 | 10,820 |
| 34,483 | 25,917 | |
| Adjustment to reduce inventories of $11,643 and $8,329 to the last-in, first-out method (see Note 1) | (1,725) | (1,567) |
| $32,758 | $24,350 | |
5. Restricted Cash
Cash restricted for purchase and construction of equipment at December 31, 2000 and 1999 represents proceeds received from the issuer of Industrial Development Revenue Bonds (see Note 8) restricted to the purchase and construction of property and equipment used in one of the Company’s operations.
6. Line of Credit
The Company, at December 31, 2000, had an unsecured revolving line of credit of $24,000 for working capital needs. The revolving line of credit matures on March 31, 2003, and borrowings bear a variable interest rate related to LIBOR. The terms of the credit agreement contain certain restrictions related to financial ratios, indebtedness, tangible net worth and capital expenditures. As of December 31, 2000, the Company was in compliance with all debt covenants. As of December 31, 2000, the Company had borrowings outstanding under the line of $15,000 and the interest rate was 8.33%. At December 31, 1999, the Company had borrowings outstanding under the line of $18,500 and the interest rate was 7.56%.
7. Other Accrued Liabilities
Other accrued liabilities consist of the following:
| December 31, | ||
| 2000 | 1999 | |
| Warranty and start-up | $2,222 | $1,936 |
| Professional fees and other accruals | 3,249 | 3,040 |
| Taxes | 1,428 | 282 |
| Deferred acquisition-related payments | 53 | 2,074 |
| Corporate restructuring | 160 | 1,233 |
| Customer deposits | 3,281 | 2,720 |
| $10,393 | $11,285 | |
8. Debt
Long-term debt is as follows:
| December 31, | ||
| 2000 | 1999 | |
| Promissory notes; interest payable quarterly at the three-month LIBOR plus 125 b.p.; due through 2001. The interest rate on December 31, 2000 was 7.91%. | $2,875 | $4,300 |
| Industrial development revenue bonds (IDRBs), principal due in varying annual payments through 2007; interest payable monthly at a variable rate determined periodically by the bond remarketing agent (4.35% at December 31, 2000). | 6,300 | 6,950 |
| Promissory notes; interest payable quarterly at fixed rate of 6.72%; due through 2008. | 4,000 | 5,000 |
| Promissory notes; interest payable quarterly at the three-month LIBOR plus 125 b.p.; due through 2008. The interest rate on December 31, 2000 was 7.91%. | 12,000 | 15,000 |
| Mortgage notes payable to two French banks; interest payable monthly at PIBOR plus 40 b.p. The interest rate on December 31, 2000 was 5.34%. | 108 | 232 |
| Mortgage notes payable to two French banks; interest payable monthly at fixed rate of 4.45%; due through 2006. | 1,373 | 1,712 |
| Promissory notes; interest payable annually at fixed rate of 8.00%; due through 2003. | 1,583 | 1,483 |
| Other notes | 1,123 | 336 |
| 29,362 | 35,013 | |
| Current portion | (4,759) | (2,812) |
| $24,603 | $32,201 | |
The IDRB debt and the mortgage notes payable to French banks are collateralized by real and personal property of the Company.
Aggregate maturities of long-term debt outstanding at December 31, 2000 are:
2001 - $4,466; 2002 - $3,725; 2003 - $3,368; 2004 - $3,199; 2005 - $3,212; beyond 2005 - $10,647.
Capital Leases – The Company leases its vehicles under noncancelable capital leases expiring in 2004. The total leased assets were $1,388, and related accumulated amortization was $552 as of December 31, 2000. Minimum future lease obligations under the capital lease for the Company’s vehicles as of December 31, 2000 are as follows:
| Year ending December 31: | |
| 2001 | $377 |
| 2002 | 340 |
| 2003 | 153 |
| 2004 | 10 |
| Total minimum lease payments | 880 |
| Less amount representing interest | 135 |
| Present value of minimum lease payments | 745 |
| Less current portion | 293 |
| Long-term portion | $452 |
The Company’s promissory notes contain a covenant which limits the payment of dividends to shareholders. At December 31, 2000, approximately $9,000 of retained earnings was eligible for dividend distribution under this covenant. The Company’s various debt agreements contain certain restrictions related to financial ratios, indebtedness, tangible net worth and capital expenditures. As of December 31, 2000, the Company was in compliance with all debt covenants.
The Company also has an unsecured standby letter of credit of $5 million with a large financial institution. As of December 31, 2000, no amount was outstanding.
Cash payments for interest related to all debts of the Company were $4,169, $4,086 and $4,037 for the years ended December 31, 2000, 1999 and 1998, respectively.
9. Stock Options
The Company’s 1993 Stock Option Plan, with 800,000 reserved common shares, is intended to facilitate ownership and increase the interest of key employees in the growth and performance of the Company, thus enhancing the value of the Company for the benefit of the shareholders. Options are granted at a price not less than market value on the date of the grant and become exercisable over a period of up to ten years, after which they expire. The 1993 Stock Option Plan terminates on September 1, 2003.
The Company’s 1995 Director Stock Option Plan provides that each director of the Company shall automatically receive, as of the date of each Annual Meeting of Shareholders, a non-qualified option to purchase 3,000 shares of the Company’s common stock. The options have a ten-year term and are exercisable one year after the grant date at an exercise price equal to the fair market value of the shares on the grant date. The 1995 Director Stock Option Plan terminates on May 17, 2005.
Shares reserved for future issuance under all of the Company’s plans totaled approximately 1.484 million at December 31, 2000.
| The Company applies Accounting Principles Board (APB) Opinion No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for its plans. No compensation cost has been recognized for its stock-based compensation plans as the exercise price of the stock option grants was equal to the fair market value of the shares on the grant date. Had compensation costs been determined based on the fair value of the 2000, 1999 and 1998 stock option grants consistent with the requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” net income and earnings per share would have been reported as the following pro forma amounts: |
| 2000 | 1999 | 1998 | |
| Net income (loss) | |||
| As reported | $5,419 | $964 | $(1,053) |
| Pro forma | 5,200 | 738 | $(1,468) |
| Earnings (loss) per share – | |||
| assuming dilution | |||
| As reported | $0.38 | $0.07 | $(0.08) |
| Pro forma | $0.36 | $0.05 | $(0.11) |
| The fair value of the stock options used to calculate the pro forma net income and earnings per share amounts above is estimated using the Black-Scholes options pricing model with the following weighted average assumptions: |
| 2000 | 1999 | 1998 | ||||
| Dividend yield | 0 | % | 0 | % | 0 | % |
| Expected volatility | 30.0 | % | 46.9 | % | 42.5 | % |
| Risk-free interest rate | 7.0 | % | 6.5 | % | 6.0 | % |
| Expected life | 5.0 | 5.0 | 5.0 |
Information related to stock options at December 31 under the aforementioned stock option plans is as follows:
| 2000 | 1999 | 1998 | ||||
| Weighted | Weighted | Weighted | ||||
| Average | Average | Average | ||||
| Shares | Exercise | Shares | Exercise | Shares | Exercise | |
| Stock Options | (000) | Price | (000) | Price | (000) | Price |
| Outstanding at beginning of year | 1,025 | $10.76 | 947 | $10.21 | 653 | $9.94 |
| Granted | 353 | 7.77 | 255 | 8.93 | 379 | 11.85 |
| Exercised | 13 | 3.92 | 151 | 3.76 | - | - |
| Forfeited | 153 | 11.66 | 26 | 12.71 | 85 | 15.55 |
| Outstanding at end of year | 1,212 | 9.85 | 1,025 | 10.76 | 947 | 10.21 |
| Options exercisable at year-end | 592 | 10.75 | 487 | 10.64 | 486 | 7.37 |
| Weighted average fair value of options granted during the year | $3.11 | $4.44 | $5.48 | |||
The following table summarizes information about stock options outstanding at December 31, 2000:
| Options Outstanding | Options Exercisable | ||||
| Shares | Weighted | Shares | Weighted | ||
| Range of | Outstanding | Remaining | Average | Exercisable | Average |
| Exercise | at 12/31/00 | Contractual | Exercise | at 12/31/00 | Exercise |
| Prices | (000) | Life | Price | (000) | Price |
| $ 2.23-6.72 | 217 | 3.0 yrs | $5.99 | 217 | $5.99 |
| 6.73-13.42 | 759 | 8.4 yrs | 8.81 | 194 | 10.34 |
| 13.43-17.90 | 204 | 6.5 yrs | 16.26 | 149 | 16.28 |
| 17.91-22.38 | 32 | 5.3 yrs | 19.66 | 32 | 19.66 |
In 1998, the Company adopted a Stock Match Plan under which the Company matches, in the form of company common stock, certain eligible U.S. employee savings plan contributions. Employees are vested in the shares immediately. Shares issued under the Stock Match Plan were 59,748, 51,078 and 23,468 shares at a cost of approximately $498,000, $483,000 and $234,000 in 2000, 1999 and 1998, respectively. At December 31, 2000, there were approximately 66,000 shares reserved for future issuance.
The Company has an Employee Stock Purchase Plan which allows eligible employees to purchase common shares of the Company at 85% of market price. During 2000, 74,017 shares were issued at prices ranging from $5.84 to $7.86 per share. During 1999, 69,209 shares were issued at prices ranging from $6.80 to $9.99 per share. During 1998, 64,819 shares were issued at prices ranging from $7.18 to $14.08 per share. At December 31, 2000, there were approximately 70,000 shares reserved for future issuance.
The Company had 500,000 authorized and unissued shares of preferred stock at December 31, 2000 and 1999.
10. Income Taxes
Income tax expense (benefit) consists of:
| Year ended December 31, | |||
| 2000 | 1999 | 1998 | |
| Current: | |||
| Federal | $1,339 | $300 | $213 |
| State | 133 | (213) | 261 |
| Foreign | 61 | 162 | 395 |
| Deferred: | |||
| Losses and credits not usable in current year, carried forward to future years | (29) | (1,319) | |
| Depreciation | 89 | (26) | 298 |
| Amortization of intangibles | 298 | 1,635 | (1,387) |
| Net operating loss usage | 712 | 512 | 508 |
| Allowance for doubtful accounts, start-up, warranty, inventory and other accruals | 520 | 424 | (347) |
| Deduction for unqualified option exercise | - | 251 | |
| Other | (460) | 358 | 34 |
| Total provision | $2,663 | $2,084 | $(25) |
Cash payments for income taxes were $1,344, $1,155 and $3,624 for the years ended December 31, 2000, 1999 and 1998, respectively.
When Osmonics, Inc. acquired MSI, on February 17, 1998, MSI had incurred $11,827 of tax losses, which had not yet been offset against previous or subsequent years’ taxable income of MSI. In 1999, MSI filed a refund request that offset $8,684 of these losses against income of MSI for the years from 1988 to 1995, under the “Claim of Right” rule. All of the taxes claimed in this refund request were received in 1999. The remaining losses of $3,143 were carried forward, for offset against MSI income in years after the acquisition. $1,989, $0 and $1,154 of these losses were offset against MSI income for the years of 2000, 1999 and 1998, respectively. After the 2000 offset, there were no more remaining losses available for carryforward.
Osmonics generated a net operating loss (NOL) of $1,639 in 1999. The entire loss was used as an offset against income generated in 1997, which resulted in a refund of $556 received in 2000. Osmonics also generated credits in 1998 and 1999, totaling $1,224, that can be carried back and offset against taxes paid in the years 1996 through 1997. Remaining credits can then be carried forward, and offset against taxes owed in future years. $292 of these credits were offset against taxes paid in 2000. The credit carryforwards that have expiration dates will expire in years ranging from the year 2003 to the year 2019.
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, | |||
| 2000 | 1999 | 1998 | |
| Taxes at federal rate (35% in 2000, 1999 and 1998) | $2,829 | $1,067 | $(377) |
| Increase (decrease) resulting from: | |||
| State taxes, net of federal tax benefit | 217 | 6 | 216 |
| Foreign Sales Corp. benefit | (571) | (615) | (503) |
| Tax credits | (109) | (227) | (307) |
| Tax-exempt interest/dividend deduction | (55) | (100) | (123) |
| Effect of foreign affiliates with different tax rates or net losses | 119 | 15 | 91 |
| Nondeductibility of intangible write-offs and amortization | 469 | 1,547 | 851 |
| Other | (236) | 391 | 127 |
| Total provision | $2,663 | $2,084 | $(25) |
11. Deferred Tax Assets and Liabilities
Temporary differences which give rise to deferred tax assets and liabilities are as follows as of December 31:
| 2000 | 1999 | |
| Current assets: | ||
| Allowance for doubtful accounts, start-up, warranty and other accruals | $3,192 | $3,592 |
| Unrealized gain on marketable securities | (408) | (1,477) |
| Inventory costs capitalized for tax | 66 | 33 |
| Net operating losses available for carryback or carryforward | 1,400 | 2,638 |
| Other | 64 | (13) |
| Total current deferred assets | $4,314 | $4,773 |
| Noncurrent liabilities: | ||
| Depreciation | $3,932 | $3,889 |
| Amortization of intangibles | 2,165 | 1,981 |
| Other | 238 | 386 |
| Total noncurrent deferred tax liabilities | $6,335 | $6,256 |
12. Sales and Segment Information
The Company designs, manufactures and markets equipment, systems and components used in the processing and handling of fluids. In 2000, the Company changed the focus of its reporting structure from a two-segment, product-focused structure to a three-segment, market-focused structure.
The three-market-segment structure was established to provide strategic leadership within the three major market segments in which the Company conducts business. The new structure was implemented on January 1, 2000. Restatement of 1999 financial results under this method of reporting has been completed and is disclosed comparatively in financial reports. Restatement of results prior to 1999 under this method of reporting has been deemed impracticable due to the costs and unavailability of certain financial information.
The Filtration and Separations segment includes products such as filter cartridges, membrane elements, membranes, instruments and laboratory products. The Process Water segment includes products such as pumps, housings, valves, controls, reverse osmosis/ultrafiltration (RO/UF) machines, ozonators and water treatment systems used for industrial, commercial and municipal applications. The Household Water segment includes products such as valves, controls and home reverse osmosis membranes used for the residential water purification and water softening market segments. Each segment is currently supported by several manufacturing facilities, a sales force and various corporate functions. The segments do not have separate accounting, administration or manufacturing functions.
The reportable segment information for 2000 and 1999 is as follows (all segment information excludes the impact of special charges in both years):
| Year Ended December 31, | ||
| 2000 | 1999 | |
| Sales: | ||
| Filtration and Separations | $79,977 | $78,640 |
| Process Water | 80,647 | 71,306 |
| Household Water | 39,515 | 37,082 |
| Net Sales | 200,139 | 187,028 |
| Gross Profit: | ||
| Filtration and Separations | 27,526 | 30,315 |
| Process Water | 20,141 | 17,078 |
| Household Water | 12,489 | 12,062 |
| Gross Profit | 60,156 | 59,455 |
| Operating Income: | ||
| Filtration and Separations | 4,986 | 7,159 |
| Process Water | (191) | (1,299) |
| Household Water | 3,280 | 2,181 |
| Operating Income | $8,075 | $8,041 |
Currently, management does not report the balance sheet or any cash-generating measurements by such segments.
All operations for which geographic data is presented below are in one principal industry (design, manufacture and marketing of machines, systems, instruments and components used in the processing of fluids).
| 2000 | 1999 | 1998 | |
| Sales to unaffiliated customers from: | |||
| United States | $182,324 | $172,194 | $165,831 |
| Foreign operations | 17,815 | 14,834 | 13,911 |
| Transfers from (to) geographic areas: | |||
| United States | 15,253 | 10,142 | 8,780 |
| Foreign operations | (15,253) | (10,142) | (8,780) |
| $200,139 | $187,028 | $179,742 | |
| Income (loss) from operations | |||
| before income taxes: | |||
| United States | $7,952 | $2,681 | $(1,926) |
| Foreign operations | 130 | 367 | 848 |
| $8,082 | $3,048 | $(1,078) | |
| Identifiable assets: | |||
| United States | $178,820 | $185,338 | $185,814 |
| Foreign operations | 9,872 | 9,028 | 8,235 |
| $188,692 | $194,366 | $194,049 |
NOTE: Transfers are made at fair market value.
| Sales by United States operations to unaffiliated customers in foreign geographic areas are as follows: |
| Year Ended December 31, | |||
| 2000 | 1999 | 1998 | |
| Asia/Pacific | $22,653 | $17,953 | $15,967 |
| Euro/Africa | 14,771 | 18,437 | 17,710 |
| Americas | 15,297 | 10,491 | 11,227 |
| $52,721 | $46,881 | $44,904 | |
Total international sales for the Company were as follows:
| Year Ended December 31, | |||
| 2000 | 1999 | 1998 | |
| International sales | $70,536 | $61,715 | $58,815 |
| % of sales | 35.2% | 33.0% | 32.7% |
13. Commitments and Contingencies
Operating Leases - The Company leases facilities for sales, service, or manufacturing purposes in Iowa, Massachusetts, New Jersey, Washington and Wisconsin in the United States, as well as in China, Germany, Hong Kong, Japan, Singapore, Switzerland and Thailand.
Future minimum lease payments on all operating leases of $4,710 are payable as follows: 2001 - $1,475; 2002 - $1,322; 2003 - $1,021; 2004 - $507; 2005 - $243 and beyond 2005 - $142. Rent expense for the three years ended December 31 was: 2000 - $1,942; 1999 - $2,316; and 1998 - $1,794.
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.
14. Employee Benefit Plan
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 this plan amounted to $300, $284 and $687 in 2000, 1999 and 1998, respectively.
15. Earnings Per Share
The following table reflects the calculation of basic and diluted earnings per share from operations.
| 2000 | 1999 | 1998 | |
| Earnings (loss) per share - basic | |||
| Income (loss) from operations available to common stockholders | $5,419 | $964 | $(1,053) |
| Weighted average shares outstanding | 14,329 | 14,162 | 13,976 |
| Income (loss) from operations per share – basic | $0.38 | $0.07 | $(0.08) |
| Earnings (loss) per share – assuming dilution | |||
| Income (loss) from operations available to common stockholders | $5,419 | $964 | $(1,053) |
| Weighted average shares outstanding | 14,329 | 14,162 | 13,976 |
| Dilutive impact of stock options outstanding | 75 | 90 | - |
| Weighted average shares and potential dilutive shares outstanding | 14,404 | 14,252 | 13,976 |
| Income (loss) from operations per share – assuming dilution | $0.38 | $0.07 | $(0.08) |
| Additionally, options to purchase 625,000 shares of common stock at a range of $8.56 to $22.38 were outstanding during 2000 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common share.Sales by United States operations to unaffiliated customers in foreign geographic areas are as follows: |
16. Special Charges
Special charges included a $250 recovery of 1999 special charge inventory accruals primarily due to gains recognized on the sale of inventory at the Company’s Rockland, Massachusetts manufacturing facility, which reduced cost of goods sold. The special charge of $250 related to workforce reduction severance costs. Workforce reductions of 75 employees with expected severance/outplacement costs of $250 related to the first quarter 2000 restructuring of several corporate functions and the planned third quarter 2000 closure of the Company’s Phoenix, Arizona facility.
Special charge expenditures in 2000 were $329 for workforce reductions. The remaining negative accrual balance of $79 was offset by a like amount of overage in the 1999 special charge accruals.
In 1999, the Company recorded net special charges of $3,610 ($3,569 net-of-tax or $0.25 per share assuming dilution). Charges included a $3,500 asset impairment charge for non-deductible goodwill associated with the acquisition of AquaMatic, Inc. in 1997, a $1,035 charge to cost of sales for inventory related to plant closings and a $1,233 charge to operating expense for corporate restructuring and consolidation of operations. Operating expense recoveries included a $1,943 gain on the sale of operations and $215 recovery on second quarter 1998 special charges.
Asset impairment charges of $3,500 relate to the AquaMatic products purchased in 1997 by the Company (see Note 2). The impairment charge was based on the 1999 operating results and the estimated discounted future cash flows of the products.
Inventory charges of $1,035 represent the net book value of inventory at two manufacturing locations that will not be utilized in ongoing production of the Company’s products or be recovered through other methods of disposal.
Corporate restructuring and consolidation of operations costs of $1,233 primarily include facility closing/consolidation, asset write-downs and workforce reduction severance costs. Facility-related costs relate to closing two manufacturing facilities and relocating certain manufacturing-related activities to other existing locations. Certain manufacturing efforts will be exited as a result of the facility closures. Discontinuance and relocation of such manufacturing has risks associated with potential production interruptions; however, management’s current assessment is that these risks can be effectively managed to minimize impact to sales.
Workforce reductions of 30 employees with expected severance/outplacement costs of $75 related to the December 31, 1999 closure of the Company’s Rockland, Massachusetts facility were included in the 1999 special charge. Workforce reductions of 50 employees with expected severance/outplacement costs of $200 related to the planned third quarter 2000 closure of the Company’s Phoenix, Arizona facility were not included in the 1999 special charge since the plan was not announced to the employees at December 31, 1999.
Special charge expenditures in 1999 were $850 for inventory costs, $164 for workforce reductions and $830 for facility closing/consolidation costs in 2000. In 2000, $79 of the 1999 special charge accrual was used to offset the 2000 special charges accrual shortfall. The remaining accrual balance of $160 relates to the anticipated January 2001 costs to exit the Company’s Rockland, Massachusetts manufacturing facility.
In 1998, the Company recorded special charges of $9,988 ($7,569 net-of-tax or $0.54 per share assuming dilution). Charges include a $6,222 charge to operating expense for in-process research and development (Note 2) related to the acquisitions of Micron Separations, Inc. ($1,902) and Membrex Corp. ($4,320) and a $2,000 charge to cost of sales for slow moving inventory. The special charges also included operating expense charges of $875 for corporate restructuring and consolidation of operations, and $891 for re-engineering costs and write-downs of assets in connection with the Company’s implementation of a new information system.
Corporate restructuring and consolidation of operations costs of $875 primarily include workforce reduction severance and facility closing/consolidation costs. Employment of 1,559 at June 30, 1998 was reduced to 1,360 at December 31, 1998. Facility-related costs relate to closing three manufacturing facilities and relocating manufacturing-related activities to other existing locations. Expenditures were $300 for workforce reductions and $110 for facility closing/consolidation costs in 1999. In 1999, the remaining balance of $215 related to the 1998 corporate restructuring special charge was recovered into operating expense.
Osmonics, Inc. Board of Directors and Shareholders
Minnetonka, Minnesota
We have audited the accompanying consolidated balance sheets
of Osmonicis, Inc. and Subsidiaries (the Company) as of
December 31, 2000 and 1999 and the related consolidated
statements of operations, changes in shareholders' equity,
and cash flows for each of the three years in the period
ended December 31, 2000. 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 auditing standards
Generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance that 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 the Company at
December 31, 2000 and 1999 and the results of its
operations and its cash flows for each of the three years
in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United
States of America.
Deloitte and Touche LLP
Minneapolis, Minnesota
February 23, 2001
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in this report.
Results of Operations
The following table sets forth certain statements of operations data as a percentage of net sales for the periods indicated.
| Years Ended December 31, | Increase (Decrease) | ||||
| 2000 vs | 1999 vs | ||||
| 2000 | 1999 | 1998 | 1999 | 1998 | |
| Net sales | 100.0% | 100.0% | 100.0% | 7.0% | 4.1% |
| Cost of goods sold | 69.8 | 68.8 | 64.9 | 8.7 | 10.3 |
| Gross profit | 30.2 | 31.2 | 35.1 | 3.4 | (5.8) |
| Selling, general and administrative | 22.2 | 23.3 | 24.3 | 1.1 | 0.5 |
| Research, development and engineering | 3.9 | 4.1 | 5.5 | 2.5 | (22.4) |
| Special charges | 0.1 | 1.4 | 4.4 | (90.3) | (67.8) |
| Operating profit | 4.0 | 2.4 | 0.9 | 82.2 | 219.1 |
| Other income (expense) | - | (0.7) | (1.5) | 100.5 | 50.4 |
| Income taxes | 1.3 | 1.2 | - | 27.8 | N/A |
| Net income (loss) | 2.7 | 0.5 | (0.6) | 462.1 | 289.8 |
Comparison of Years Ended December 31, 2000 and December 31, 1999
Net Sales for 2000 increased $13,111 or 7.0% to $200,139 as compared to net sales of $187,028 for 1999. The 2000 sales increase was primarily the result of renewed organic sales growth of 6%. Sales in 2000 benefited from the full year impact of ZyzaTech ($6,500), acquired in third quarter 1999, and were negatively impacted by product lines that were exited as a result of closing certain manufacturing facilities ($4,900). Sales in 2000 increased in all segments of the Company. Internationally, 2000 sales improved $4,700 (26%) to customers in Asia/Pacific and $4,806 (46%) to customers in the Americas. The deterioration of the euro in comparison to the U.S. dollar negatively impacted Year 2000 sales by approximately $580K or 0.3%.
Gross Profit for 2000 increased $1,986 or 3.4% to $60,406 as compared to $58,420 in 1999. As a percentage of net sales, gross profit decreased to 30.2% from 31.2% in 1999. 2000 gross profit includes $250 (0.1% of net sales) of a special inventory recovery related to a plant closing recorded in the first quarter 2000. 1999 gross profit includes $1,035 (0.6% of net sales) of special inventory charges related to plant closings. The decrease in gross profit percentage is primarily due to lower utilization and production issues at certain manufacturing facilities. To reduce excess manufacturing capacity and costs in order to improve gross margins, one facility (Rockland, Massachusetts) was closed on December 31, 1999, another (Denver, Colorado) was closed in September 2000 and another facility (Phoenix, Arizona) was closed in October 2000.
The Company relocated certain production capabilities throughout the year as it continues in its efforts to focus its factories and eliminate duplicate capabilities and the associated cost and overhead structures. Five such relocations were completed during 2000. One-time costs of physically moving the manufacturing efforts and near-term inefficiencies inherent with such changes negatively impacted margins of the Company during the year.
In the process of relocating production capabilities, the Company was unable to achieve its expected scrap reduction targets. The Company experienced increasing raw material and energy costs in 2000 and was unable to offset with price increases. Specifically, surcharges on stainless steel and increased polypropylene costs were the largest raw material impacts. While energy costs increased throughout the Company, the increases were more substantial at the Company’s Vista, California facility. Should the energy costs in 2001 remain at levels experienced in California during the second half of 2000, the Company anticipates approximately $600 of additional costs that it may not be able to pass on to its customers. The reduction of manufacturing scrap and the improvement in raw material sourcing remain continuing priorities in Year 2001.
The deterioration of the euro in comparison to the U.S. dollar negatively impacted Year 2000 gross margin by approximately $580K or 0.3%.
Selling, General and Administrative Expenses increased $475 or 1.1% to $44,195 in 2000 as compared to $43,720 in 1999. As a percentage of sales, SG&A decreased from 23.3% to 22.2% in 2000. The 2000 increase is attributed to the acquisition of ZyzaTech Water Systems in July 1999 and offset by expense control efforts of the Company. The Company has attempted to manage expenses through various efforts to restructure the Company, improve the utilization of the Company’s ERP system and rationalize the products sold and the markets served by the Company.
The Company continues to centralize its sales efforts within business segments to focus responsibility for customer relationships. The Company has increased its efforts to better understand its customers’ requirements and believes it has made progress toward improving performance and service levels to meet those requirements.
Research, Development and Engineering Expenses increased $192 or 2.5% to $7,886 in 2000, compared to $7,694 in 1999. As a percentage of sales, the R&D expenses were 3.9% and 4.1% in 2000 and 1999, respectively. The decrease in percent of sales is the result of the Company continuing to focus its R&D efforts to eliminate duplication, to concentrate on new product development and improve timeliness to market. The Company believes the current level of funding is adequate to support its product development priorities.
Special Charges (Recovery) were recorded in the first quarter of 2000 that netted to zero. Special charges included a $250 recovery of inventory accruals primarily due to gains recognized on the sale of inventory at the Company’s Rockland, Massachusetts manufacturing facility. The special charges also included $250 of workforce reduction severance costs related to the first quarter 2000 restructuring of several corporate functions. The special charges (recovery) are summarized below:
| Corporate restructuring | $250 |
| Special inventory recovery related to plant closings | (250) |
| Gross special charges (recovery) | $- |
| Less special inventory recovery – in COS | (250) |
| Special charge in Operating Expense | $250 |
Other Expense decreased $1,390 to income of $7 in 2000, compared to expense of $1,383 in 1999. The 2000 change is primarily the result of gains on the sale of investment securities of $3,788 in 2000 compared to $2,371 in 1999. Net interest expense increased $499 to $3,940 in 2000 compared to $3,441 in 1999. This resulted from a $215 decrease in interest income during 2000 resulting from the liquidation of marketable securities in 2000. Also, 2000 interest expense increased $284 as interest rate increases negatively impacted the reduced average debt carrying balance of the Company.
Income Taxes increased $579 to $2,663 in 2000 compared to $2,084 in 1999. The effective tax rate for the year ended December 31, 2000 was 32.9% compared to 31.8% for the same period in 1999. The 1999 effective tax rate was computed after excluding the non-deductible $3,500 goodwill asset impairment special charge related to AquaMatic products.
Net Income increased $4,455 to $5,419 ($0.38 per diluted share) in 2000, compared to $964 ($0.07 per diluted share) in 1999. Net income in 1999 was negatively impacted by special charges. Without the special charges, 1999 net income would have been $4,533 ($0.32 per diluted share).
Comparison of Years Ended December 31, 1999 and December 31, 1998
Net Sales for 1999 increased $7,286 or 4.1% to $187,028 as compared to net sales of $179,742 for 1998. The 1999 sales increase was primarily attributed to the third quarter 1999 acquisition of ZyzaTech Water Systems and the full year impact of the 1998 MSI and Membrex acquisitions. Existing business sales were down $3,053 in 1999 due to decreases in capital equipment sales, components sold to OEM customers, sales of certain consumable products impacted by availability of product and the sale of certain product lines. Overall, 1999 sales improved $3,009 (19%) to customers in Asia/Pacific, while sales decreased $1,138 (4%) to customers in Euro/Africa.
Gross Profit decreased $4,681 or 7.4% to $58,420 as compared to $63,101 in 1998. As a percentage of net sales, gross profit decreased to 31.2% from 35.1% in 1998. 1999 gross profit includes $1,035 (0.6% of net sales) of special inventory charges related to plant closings. The decrease in gross profit is primarily due to lower utilization and production issues at certain manufacturing facilities. To reduce excess manufacturing capacity, reduce costs and improve gross margins, one facility was closed on December 31, 1999 and another location was closed in October 2000. The Company is relocating certain production and product capabilities in efforts to focus its factories and eliminate duplicate capabilities and the associated cost and overhead structures. The reduction of manufacturing scrap and the improvement of raw material sourcing have been identified as major priorities in Year 2000.
Selling, General and Administrative Expenses increased $233 or 0.5% to $43,720 in 1999 as compared to $43,487 in 1998. As a percentage of sales, SG&A expenses decreased to 23.3% from 24.3% in 1998. The 1999 increase is attributed to the acquisition of ZyzaTech Water Systems in July 1999 and offset by expense control efforts of the Company.
The Company’s marketing priority is to get its products into distribution as soon as possible. The Company continues to centralize its sales groups to focus responsibility for customer relationships. In addition, the Company has invested in customer satisfaction initiatives and surveys during the year to identify areas where the Company can improve performance and service levels to better serve and meet our customers’ requirements. The Company believes that these actions have enhanced customer service and will increase market penetration in the future; however, in 1999 no significant sales benefit was achieved.
Research, Development and Engineering Expenses decreased $2,219 or 22.4% to $7,694 in 1999, compared to $9,913 in 1998. As a percentage of sales, the R&D expenses decreased to 4.1% from 5.5% in 1998. The Company has continued to centralize and rationalize its R&D efforts to eliminate duplication of efforts. The Company believes the current level of funding is adequate to support its product development priorities.
Special Charges of $3,610 ($3,569 net-of-tax or $0.25 per diluted share) were recorded in the second half of 1999. Charges included a $3,500 asset impairment charge for goodwill associated with the acquisition of AquaMatic, Inc. in 1997, a $1,035 charge to cost of sales for inventory related to plant closings and a $1,233 charge to operating expense for corporate restructuring and consolidation of operations. Operating expense recoveries included a $1,943 gain on the sale of operations and $215 recovery on second quarter 1998 special charges. The special charges are summarized below:
| Asset impairment – goodwill | $3,500 | |
| Inventory charge related to plant closings | 1,035 | |
| Corporate restructuring | 1,233 | |
| Gain on sale of operations | (1,943) | |
| Recovery on second quarter 1998 special charge | (215) | |
| Gross special charge | $3,610 | |
| Less inventory charge – in COS | 1,035 | |
| Special charge in Operating Expense | $2,575 | |
Other Expense decreased $1,408 to $1,383 in 1999, compared to $2,791 in 1998. The 1999 change is primarily the result of gains on the sale of investment securities of $2,371 during 1999. Offsetting these gains was additional interest expense for the full year of $200 and $480 on the borrowing of $20,000 and $18,000 for the first quarter 1998 acquisition of Micron Separations, Inc. and the second quarter 1998 acquisition of Membrex Corp., respectively. Also, additional interest expense of $320 was recorded related to the borrowing of $8,000 for the third quarter 1999 acquisition of ZyzaTech Water Systems, Inc.
Income Taxes increased $2,109 to $2,084 in 1999 compared to the tax benefit of $25 recorded in 1998. The effective tax rate for the year ended December 31, 1999 was 31.8% excluding the non-deductible $3,500 goodwill asset impairment special charge related to AquaMatic products. The 1998 benefit was less than might have been anticipated due to the non-deductibility of the Micron Separations, Inc. in-process R&D that was written off in the second quarter of 1998.
Net Income increased $2,017 to income of $964 ($0.07 per diluted share) in 1999, compared to a loss of $1,053 ($0.08 loss per diluted share) in 1998. Net income in 1999 and 1998 was negatively impacted by special charges. Without the special charges, 1999 and 1998 net income would have been $4,533 ($0.32 per diluted share) and $6,516 ($0.46 per diluted share), respectively.
Liquidity and Capital Resources
At December 31, 2000, the Company had cash and marketable securities of $1,910 as compared to $15,814 at December 31, 1999. The decrease in cash and marketable securities was primarily the result of the Company liquidating $14,029 of its marketable securities portfolio during 2000.
Cash provided by operations was $2,395, $20,089 and $8,102 for the years ended December 31, 2000, 1999 and 1998, respectively. The decrease in cash provided by operating activities during 2000 was principally due to the Company’s decision to strategically build inventory levels of high volume items to better serve its customers. The combination of Year 2000 increase of $8,158 and a 1999 decrease of $5,372 resulted in total cash flow from operations impact change of $13,530. The increase in cash provided by operating activities during 1999 was principally due to improved management of current liability balances of the Company, the receipt of tax refunds and the timing of tax payments.
Capital expenditures for the years ended December 31, 2000, 1999 and 1998 were $7,058, $8,323 and $7,808, respectively. Depreciation for the same time periods was $7,300, $6,632 and $6,290, respectively. The Company anticipates increasing its investment in capital assets in 2001.
In the first quarter of 2000, the Company entered into a loan agreement amendment that reduced the Company’s unsecured revolving line of credit to $30,000 from $35,000. In the second quarter 2000, the Company negotiated the release of collateral arrangements with its lenders associated with $10,000 of its marketable securities portfolio. As a result, the Company liquidated that portion of its marketable securities portfolio and used the proceeds to reduce aggregate debt levels, fund current operations and enter into a loan agreement amendment that reduced the Company’s unsecured revolving line of credit to $24,000 from $30,000. At December 31, 2000, the Company had $9,000 available under the revolving line of credit, compared to $16,500 as of December 31, 1999.
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” SFAS No. 133 established accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives, including those embedded in other contracts, be recognized as either assets or liabilities and that those financial instruments be measured at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and designation. Management has reviewed the requirements of SFAS No. 133 and has determined that they have embedded derivatives. All contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Company’s policy is to not enter into contracts containing derivatives with terms that cannot be designated as normal purchases or sales.
The Company adopted Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements,” which provides guidance on revenue recognition. The Company’s adoption of the bulletin had no effect on the financial position or results of operations.
The Company adopted EITF 00-10 “Accounting for Shipping and Handling Fees and Costs” issued by the Emerging Issues Task Force in 2000. Comparative financial statements for prior periods have been reclassified to comply with the classification guidelines. The freight amounts reclassified from cost of sales into revenues were $3,104, $2,357 and $1,923 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company’s operating cash requirements consist principally of working capital requirements, capital expenditures and scheduled payments of principal on outstanding indebtedness. The Company believes that its cash and marketable securities, cash flow from operating activities and borrowings under its bank facility will be adequate to meet the Company’s liquidity and capital investment requirements in the foreseeable future.
Review of Industry Segments
As discussed in Note 12 to the consolidated financial statements, in 2000 the Company changed the focus of its reporting structure from a two-segment, product-focused structure to a three-segment, market-focused structure. Certain financial results for the 12 months ended December 31, 2000 and 1999 are presented below as a percentage of net sales by segment (all segment information excludes the impact of special charges in both years):
| Year Ended | |||
| December 31, | |||
| Increase | |||
| 2000 | 1999 | (Decrease) | |
| Filtration and Separations | |||
| Sales | 100.0% | 100.0% | 1.7% |
| Gross Profit | 34.4 | 38.5 | (9.2) |
| Operating Income | 6.2 | 9.1 | (30.4) |
| Process Water | |||
| Sales | 100.0% | 100.0% | 13.1% |
| Gross Profit | 25.0 | 24.0 | 17.9 |
| Operating Income | (0.2) | (1.8) | (85.3) |
| Household Water | |||
| Sales | 100.0% | 100.0% | 6.6% |
| Gross Profit | 31.6 | 32.5 | 3.5 |
| Operating Income | 8.3 | 5.9 | 50.4 |
Sales to unaffiliated customers in foreign geographic areas are as follows:
| % of | % of | % of | ||||
| Total | Total | Total | ||||
| 2000 | Sales | 1999 | Sales | 1998 | Sales | |
| Asia/Pacific | $22,653 | 11.3 | $17,953 | 9.6 | $15,967 | 8.9 |
| Euro/Africa | 32,586 | 16.3 | 33,271 | 17.8 | 31,621 | 17.6 |
| Americas | 15,297 | 7.6 | 10,491 | 5.6 | 11,227 | 6.2 |
| Total International Sales | $70,536 | 35.2 | $61,715 | 33.0 | $58,815 | 32.7 |
All three segments experienced internal sales growth in the year ended December 31, 2000 compared to the same period in 1999. Process Water Treatment segment sales growth in 2000 was primarily the result of sales from ZyzaTech ($6,500) acquired on July 1, 1999.
The gross margin and operating income percentage declines in Filtration and Separations in 2000 compared to 1999 were primarily related to production issues and lower production levels which resulted in unabsorbed overhead at certain manufacturing locations. In addition, an unfavorable sales mix contributed to the reduced margins.
The gross margin and operating income percentage improvements in Process Water in 2000 compared to 1999 were principally the result of improved gross profits on engineered systems and products. Offsetting the improvements were over $400 of one-time move expenses related to the relocation of certain manufacturing activities in 2000. Operating expenses decreased as a percent of sales; however, they increased $1,955 or 10.6% in 2000 compared to 1999 primarily related to the full year impact of the July 1999 acquisition of ZyzaTech Water Systems. The remaining increase was the result of the segment reinvesting in sales and marketing resources in an effort to utilize remaining surplus manufacturing capacity.
The gross margin percentage decline in Household Water in 2000 compared to 1999 was principally related to production issues that included increased manufacturing scrap and variances at a certain manufacturing location. Offsetting this decline was a reduction in operating expenses of $672 or 6.8% in 2000. This decrease, related entirely to increased focus of R&D efforts and related expenditures, helped drive operating income percentage improvements in 2000 compared to 1999.
Currently, management does not report the balance sheet or any cash-generating measurements by such segments.
Bankruptcy of Major Customer
The Company has $14,200 of goodwill recorded as of December 31, 2000 associated with the second quarter 1998 acquisition of Membrex Corp. (Membrex). Safety Kleen (SK), the principal customer for the Membrex products, filed for Chapter 11 bankruptcy in June of 2000. As a result, second, third and fourth quarter 2000 sales to SK of $700, $750 and $264, respectively, were substantially below first quarter 2000 sales of $2,100. SK has continued to order product and parts at reduced levels to support its installed base. Future sales levels are uncertain and could be minimal.
Inventory related to the Membrex products for SK was $1,700 while net receivables from SK were current at December 31, 2000. The Company is monitoring the Chapter 11 bankruptcy proceedings to determine any further financial impact to the Company.
The Company has a contract with SK that provides some exclusivity to SK for certain Membrex products. This contract is contingent on both companies meeting certain service, production and sales levels. The exclusivity provisions are conditioned on certain minimum purchase requirements by SK. The Company anticipates that the exclusivity provisions of the contract will expire in the third quarter of 2001 due to the anticipated failure of SK to buy the required minimum amount of products and has begun discussions with SK to renegotiate the contract based on the current situation.
The Company has determined that two-thirds ($9,500) of the Membrex goodwill is associated with the SK products. The Company has concluded there was no impairment of goodwill at December 31, 2000. In its analysis, Management used a discounted cash flow model in accordance with current accounting guidelines, a detailed five-year sales plan and anticipated an ongoing business relationship with SK while it proceeds through and comes out of bankruptcy. This ongoing business relationship assumes that SK will continue to purchase replacement membrane for existing product installations at the rate of two or three replacements per year per installation.
In the event that SK does not survive bankruptcy, Management believes it will be capable of selling and marketing these products through other sales channels in a manner that will support the goodwill value. The Company is investigating alternative approaches to market as allowed by the contract for these products. Additionally, the Company is continuing to investigate new applications for the technology acquired from Membrex. The Company believes the patented technology associated with Membrex brings a cost-effective solution to hazardous waste disposal, which could become a required environmental standard.
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act provides a “safe harbor” for forward-looking statements. Certain information included in this Annual Report and other materials filed or to be filed with the Securities and Exchange Commission (as well as information included in statements made or to be made by the Company) contains statements that are forward-looking. Such statements may relate to plans for future expansion and market penetration, sales, business development activities, capital spending, financing, product reorganizations, plant rationalizations, scrap reductions, contract negotiations, 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.
