SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1996
OR
Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File No. 1-12714
OSMONICS, INC
(Exact name of registrant as specified in its charter)
Minnesota 41-0955759
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
5951 Clearwater Drive, Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 933-2277
N/A
Former name, former address and former
fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for at least the past
90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. At
August 9, 1996, 12,853,107 shares of the issuer's Common Stock,
$0.01 par value, were outstanding. Subsequent to June 30, 1996, the
registrant completed the previously announced merger with Desalination
Systems, Inc. (DESAL). Under the merger agreement, the outstanding
shares of DESAL will be converted, in a tax-free exchange, into shares
of the registrant. As a result of the merger, 1,312,827 shares are
currently issuable.
1
OSMONICS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM I. FINANCIAL STATEMENTS
Consolidated Statements of Income - . . . . . . . . . 2
For the Three and Six Months Ended
June 30, 1996 and 1995
Consolidated Balance Sheets - . . . . . . . . . . . . 3
June 30, 1996 and December 31, 1995
Consolidated Statements of Cash Flows . . . . . . . . 4
For the Six Months Ended
June 30, 1996 and 1995
Notes to Consolidated Financial Statements. . . . . . 5
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL . . 6-8
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . 9
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . .10-11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . 11
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
ITEM I - FINANCIAL STATEMENTS
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Sales $31,176 $26,796 $64,405 $53,666
Cost of sales 18,228 14,838 37,895 29,796
Gross profit 12,948 11,958 26,510 23,870
Less:
Selling, general
and administrative 7,463 6,607 14,588 13,073
Research, development
and engineering 2,232 2,007 4,313 3,876
Income from operations 3,253 3,344 7,609 6,921
Other income 825 443 1,051 950
Income before income
taxes 4,078 3,787 8,660 7,871
Income taxes 1,265 1,116 2,685 2,400
Net income $ 2,813 $ 2,671 $ 5,975 $ 5,471
Net income per common
share $ 0.22 $ 0.21 $ 0.47 $ 0.43
Average common shares
outstanding 12,814 12,740 12,803 12,731
3
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
June 30, December 31,
1996 1995
ASSETS
Current assets
Cash and cash equivalents $ 2,160 $ 4,361
Marketable securities 20,907 26,307
Trade accounts receivable, net of
allowance for doubtful accounts of
$884 in 1996, and $1,127 in 1995 20,752 20,501
Inventories 28,059 26,227
Deferred tax assets 3,505 3,719
Other current assets 1,582 1,851
Total current assets 76,965 82,966
Property and equipment, at cost
Land and land improvements 2,210 2,310
Building 22,775 15,557
Machinery and equipment 39,507 36,645
Construction in progress 3,877 5,970
68,369 60,482
Less accumulated depreciation and
amortization (29,445) (27,923)
38,924 32,559
Other assets 9,843 9,533
$125,732 $125,058
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 10,089 $ 12,247
Notes payable and current portion
of long-term debt 1,914 1,695
Reserve for discontinued operations 1,957 1,957
Other accrued liabilities 10,789 12,843
Total current liabilities 24,749 28,742
Long-term debt 12,441 12,441
Deferred compensation and other liabilities 226 450
Deferred income taxes 4,488 4,954
Shareholders' equity
Common stock, $0.01 par value
Authorized -- 50,000,000
Issued -- 1996: 12,828,391 and
1995: 12,773,184 shares 129 129
Capital in excess of par value 22,348 21,709
Retained earnings 58,595 52,620
Unrealized gain on marketable securities 2,656 3,694
Foreign currency translation adjustments 100 319
Total shareholders' equity 83,828 78,471
$125,732 $125,058
4
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30,
Cash flows from: 1996 1995
Operations:
Net income $ 5,975 $ 5,471
Non-cash items included in net income:
Depreciation and amortization 2,100 1,691
Gain on sale of investments (715) (628)
Gain on sale of land (640) -
Deferred income taxes 214 -
Accounts receivable (251) (1,000)
Inventories and other current assets (1,563) (2,406)
Accounts payable and accrued liabilities (4,436) (213)
Net cash provided by operations 684 2,915
Investing activities:
Purchase of investments (454) (3,462)
Sale of investments 4,823 3,328
Purchase of property and equipment (8,497) (5,405)
Sale of land 731 -
Other (377) 122
Cash provided (used) in investing activities (3,774) (5,417)
Financing activities:
Short-term borrowing 219 -
Reduction of debt - (432)
Issuance of common stock 640 348
Net cash provided (used) in
financing activities 859 (84)
Effect of exchange rates on cash 30 (66)
Increase (decrease) in cash and cash
equivalents (2,201) (2,652)
Cash and cash equivalents -
beginning of year 4,361 9,453
Cash and cash equivalents -
end of quarter $2,160 $6,801
5
OSMONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1996, are not
necessarily indicative of the results that may be expected for the
year 1996.
These statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report to
shareholders and Form 10-K for the year ended December 31, 1995.
6
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
As an aid to understanding the Company's operating results, the
following table shows the percentage of sales that each income statement
item represents for the three-month and six-month periods ended
June 30, 1996 and 1995.
Percent of Sales Percent of Sales
Three Months Ended Six Months Ended
June 30 June 30,
1996 1995 1996 1995
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 58.5 55.4 58.8 55.5
Gross profit 41.5 44.6 41.2 44.5
Selling, general
and administrative 23.9 24.6 22.7 24.4
Research, development
and engineering 7.2 7.5 6.7 7.2
Operating expenses 31.1 32.1 29.4 31.6
Income from operations 10.4 12.5 11.8 12.9
Other income 2.6 1.6 1.6 1.8
Income before income taxes 13.0 14.1 13.4 14.7
Income taxes 4.0 4.1 4.2 4.5
Net income 9.0% 10.0% 9.2% 10.2%
Sales
Sales for the quarter ended June 30, 1996 of $31,176 increased 16.3%
over sales for the second quarter of 1995. Year-to-date 1996 sales
through June have increased 20.0% over their 1995 level. The sales
increase was realized across most product lines. Sales of capital
equipment represent 58% of year-to-date sales. Sales for 1996 include
sales of Western Filter, acquired in October 1995, but do not include
any sales from Desalination Systems, Inc. (DESAL). The previously
announced merger with DESAL was completed in July 1996.
Gross Margin
The gross margin for the second quarter of 1996 was 41.5% versus 44.6%
for the corresponding period in 1995. The gross margin for the six
months ended June 30 was 41.2% in 1996 and 44.5% in 1995. The reduction
in gross margin was due to a less favorable sales mix, more aggressive
pricing in certain product lines, and some effect of higher material
costs. Sales in 1996 include order backlog acquired from Western Filter
in October 1995, which was at lower gross margins than other Osmonics
products.
7
Operating Expenses
Operating expenses decreased from 32.1% of sales in the second quarter
of 1995 to 31.1% in the second quarter of 1996, and from 31.6% of sales
in the first half of 1995 to 29.3% of sales in the first half of 1996.
The rate of growth in operating expense slowed to 11.5%, compared to the
sales growth rate of 20.0%. The aggressive expansion in sales and
marketing efforts during the prior two years is now producing results,
and recent investments in office automation are also showing good
returns in higher productivity.
Other Income
Other income increased by $101 from the first half of 1995 to the first
half of 1996. The increase included $715 of gain on the sale of
investments and $640 of gain on the sale of land. The usefulness of the
land as a future facility site for the Company was impaired by a county
road expansion.
Income Taxes
The effective tax rate for the six months ended June 30, 1996 was 31.0%
based on the forecast for the full year. This compares to 30.5% in the
corresponding period of 1995.
Net Income
Net income for the quarter ended June 30, 1996 was $2,813, up 5.3% from
$2,671 in the corresponding quarter last year. Net income per common
share for the quarter was $0.22 versus $0.21 a year ago. Year-to-date
net income was $5,975, up 9.2% from $5,471 in 1995. Net income per
common share year-to-date was $0.47 in 1996 versus $0.43 in 1995.
Liquidity and Capital Resources
As of June 30, 1996, the Company had cash, cash equivalents and
marketable securities of $23,067 versus $30,668 at December 31, 1995.
This reduction in cash and marketable securities is primarily the result
of investments of $8,497 in new facilities and equipment. The current
ratio was 3.1 at June 30, 1996, as compared to 2.9 at year-end 1995.
The Company believes that its current cash and investments position, its
cash flow from operations, and amounts available from bank credit will
be adequate to meet its anticipated cash needs for working capital,
capital expenditures, and potential acquisitions during the foreseeable
future.
Stock Option Plans
The Company has elected to continue accounting for stock options in
accordance with APB 25 as provided by Statement of Financial Accounting
Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation."
8
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in
this Form 10-Q and other materials filed or to be filed with the
Securities and Exchange Commission (as well as information included in
oral or other written statements made or to be made by the Company)
contains statements that are forward-looking. Such statements may
relate to plans for future expansion, business development activities,
other capital spending, financing, or the effects of regulation and
competition. Such information involves important risks and
uncertainties that could significantly affect anticipated results in the
future and, accordingly, such results may differ from those expressed in
any forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those
relating to product development activities, dependence on existing
management, global economic and market conditions, and changes in
federal or state laws.
9
OSMONICS, INC.
PART II
OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on
May 9, 1996. The following members were elected to the
Company's Board of Directors to hold office for the ensuing
three years:
Nominee In Favor Withheld
Ralph E. Crump 10,675,686 488,577
Charles W. Palmer 10,681,701 482,562
The Company's Articles of Incorporation were amended by the
following vote to grant the Company the authority to issue
fifty million five hundred thousand (50,500,000) total shares
of all classes, of which fifty million (50,000,000) shall be
common shares, par value $0.01 per share and five hundred
thousand (500,000) shall be preferred shares, par value $1 per
share:
For: 9,864,427
Against: 1,269,397
Abstain: 30,439
Broker Non-votes: 0
10
Item 5. OTHER INFORMATION
The Company announced in December 1995 the execution of an
agreement in principle to merge with Desalination Systems, Inc.
(DESAL) in a stock transaction. The transaction was completed
subsequent to June 30, 1996. The transaction was structured as
a tax-free exchange of common shares to be accounted for as a
"pooling-of-interests." Pro Forma Financial Statements as if
the transaction had been completed on June 30, 1996 are
presented below.
OSMONICS, INC.
PRO FORMA STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Sales $36,727 $31,422 $75,778 $62,834
Cost of sales 21,502 17,619 44,529 35,331
Gross profit 15,225 13,803 31,249 27,503
Less:
Selling, general
and administrative 8,560 7,711 16,893 15,320
Research, development
and engineering 2,676 2,416 5,180 4,655
Income from operations 3,989 3,676 9,176 7,528
Other income 459 335 615 726
Income before income
taxes 4,448 4,011 9,791 8,254
Income taxes 1,387 1,190 3,095 2,507
Net income $ 3,061 $ 2,821 $ 6,696 $ 5,747
Net income per common
share $ 0.21 $ 0.20 $ 0.46 $ 0.40
Average common shares
outstanding 14,483 14,399 14,462 14,338
11
OSMONICS, INC.
PRO FORMA BALANCE SHEETS
(In Thousands Except Share Data)
June 30, December 31,
1996 1995
ASSETS
Current assets
Cash and cash equivalents $ 2,524 $ 4,524
Marketable securities 20,907 26,307
Trade accounts receivable, net 24,036 23,552
Inventories 32,253 28,973
Deferred tax assets 3,972 4,186
Other current assets 1,706 2,181
Total current assets 85,398 89,723
Property and equipment, at cost 81,928 73,087
Less accumulated depreciation and
amortization (32,416) (30,598)
Property and equipment, net 49,512 42,489
Other assets 11,974 12,439
Total Assets $146,884 $144,651
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 12,268 $ 13,958
Notes payable and current portion
of long-term debt 4,527 3,811
Reserve for discontinued operations 1,957 1,957
Other accrued liabilities 12,291 14,330
Total current liabilities 31,043 34,056
Long-term debt 20,829 20,919
Deferred income taxes 4,488 4,954
Other liabilities 226 450
Shareholders' equity
Common stock, $0.01 par value 142 142
Capital in excess of par value 22,443 21,803
Retained earnings 64,957 58,314
Unrealized gain on marketable securities 2,656 3,694
Foreign currency translation adjustments 100 319
Total shareholders' equity 90,298 84,272
Total Liabilities and
Shareholders' Equity $146,884 $144,651
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) During the quarter ended June 30, 1996, the Registrant did
not file a Form 8-K report.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: August 14, 1996
OSMONICS, INC.
(Registrant)
/s/ L. Lee Runzheimer
L. Lee Runzheimer
Chief Financial Officer
/s/ Howard W. Dicke
Howard W. Dicke
Treasurer and Vice President
Corporate Development
/s/ D. Dean Spatz
D. Dean Spatz
Chief Executive Officer