OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Year ended December 31,
1996 1995 1994
Sales $155,946 $130,783 $112,908
Cost of sales 92,523 74,670 62,503
Gross profit 63,423 56,113 50,405
Operating expenses:
Selling, general and administrative 35,079 31,377 27,967
Research, development and engineering 10,937 9,399 8,989
46,016 40,776 36,956
Income from operations 17,407 15,337 13,449
Other income (expense), net:
Interest income 1,023 1,649 1,543
Interest expense (1,594) (1,565) (878)
Other 3,072 1,412 148
2,501 1,496 813
Income before income taxes 19,908 16,833 14,262
Income taxes (Note 11) 6,441 4,954 3,808
Net income $ 13,467 $ 11,879 $ 10,454
Net income per common and
common equivalent share $ 0.93 $ 0.83 $ 0.74
Weighted average number of common and
common equivalent shares outstanding 14,458,000 14,365,000 14,206,000
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 5,392 $ 4,729
Marketable securities (Note 3) 19,028 26,307
Trade accounts receivable, net of allowance for doubtful
accounts of $907 in 1996 and $1,177 in 1995 28,200 23,552
Inventories (Note 4) 32,322 28,973
Deferred tax assets (Note 12) 1,559 2,007
Other current assets 2,026 2,181
Total current assets 88,527 87,749
Property and equipment, at cost:
Land and land improvements 5,485 4,558
Buildings 27,158 18,928
Machinery and equipment 50,045 41,592
Construction in progress 3,438 8,009
86,126 73,087
Less accumulated depreciation and amortization (34,332) (30,598)
51,794 42,489
Cash restricted for purchase and construction of
equipment (Note 5) 1,960 2,034
Goodwill, net of accumulated amortization of
$553 in 1996 and $289 in 1995 7,395 7,655
Long-term investments 726 142
Other assets, net of accumulated amortization of
intangible assets of $342 in 1996 and $230 in 1995 1,774 2,350
Total assets $152,176 $142,419
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,511 $ 13,957
Line of credit advances (Note 7) 2,511 1,619
Notes payable and current portion of
long-term debt (Note 9) 4,982 2,192
Accrued compensation and employee benefits 5,254 4,231
Reserve for discontinued operations 1,957 1,957
Other accrued liabilities (Note 8) 7,306 10,099
Total current liabilities 34,521 34,055
Long-term debt (Note 9) 15,900 20,919
Deferred income taxes (Note 12) 3,616 2,722
Other liabilities 196 450
Commitments and contingencies (Note 14)
Shareholders' equity (Note 10):
Common stock, $0.01 par value
Authorized -- 50,000,000
Issued -- 1996: 14,193,239 and 1995: 14,086,007 142 141
Capital in excess of par value 23,128 21,805
Retained earnings 71,781 58,314
Unrealized gain on marketable securities (Note 3) 2,864 3,694
Cumulative effect of foreign currency
translation adjustments 28 319
Total shareholders' equity 97,943 84,273
Total liabilities and shareholders' equity $152,176 $142,419
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
1996 1995 1994
Cash flows from operations:
Net income $13,467 $11,879 $10,454
Non-cash items included in net income:
Depreciation and amortization 4,874 3,795 3,523
Deferred income taxes 1,849 (71) (231)
Gain on sale of land and investments (3,396) (810) -
Changes in assets and liabilities
(net of business acquisitions):
Reserve for VAT tax - - (1,605)
Accounts receivable (4,648) (4,494) (1,902)
Inventories (3,349) (6,517) (2,617)
Other current assets 155 (727) 1,479
Accounts payable and accrued liabilities (3,216) 5,798 1,074
Reserve for deferred compensation - (432) (78)
Net cash provided (used) by operations 5,736 8,421 10,097
Cash flows from investing activities:
Business acquisitions (net of cash acquired) - (5,380) (673)
Purchase of investments (1,418) (6,633) (17,467)
Maturities and sales of investments 9,570 13,228 11,225
Purchase of property and equipment (15,658) (20,818) (4,212)
Sales of property and equipment 2,535 - -
Other (169) (367) 367
Net cash provided (used) for investing
activities (5,140) (19,970) (10,760)
Cash flows from financing activities:
Notes payable and current debt 882 13,928 1,674
Reduction of long-term debt (2,219) (5,898) (1,365)
Cash restricted for purchase and construction
of equipment 74 (2,034) -
Issuance of common stock 1,324 761 680
Dividends paid by a pooled company - (90) (180)
Net cash provided (used) in financing
activities 61 6,667 809
Effect of exchange rate changes on cash 6 (94) (444)
Increase (decrease) in cash and cash equivalents 663 (4,976) (298)
Cash and cash equivalents - beginning of year 4,729 9,705 10,003
Cash and cash equivalents - end of year $ 5,392 $ 4,729 $ 9,705
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
Unrealized
Capital Gain on Cumulative
Common Stock in Excess Retained Marketable Translation
Shares Amount Par Value Earnings Securities Adjustments
Balance, January 1, 1994 as
previously reported 12,637,473 $126 $20,321 $31,453 - $ 170
Restatement for pooling of
interests 1,298,416 13 45 4,798 - -
____________________________________________________________________________________________________
Balance - January 1, 1994
as restated 13,935,889 139 20,366 36,251 - 170
Net income - - - 10,454 - -
Translation adjustment - - - - - 8
Change in unrealized gain on
marketable securities - - - - 1,038 -
Dividend of pooled company - - - (180) - -
Business combinations 7,000 - 102 - - -
Employee stock purchase
plans 56,568 1 577 - - -
____________________________________________________________________________________________________
Balance - December 31, 1994 13,999,457 140 21,045 46,525 1,038 178
Net income - - - 11,879 - -
Translation adjustment - - - - - 141
Change in unrealized gain on
marketable securities - - - - 2,656 -
Dividend of pooled company - - - (90) - -
Employee stock purchase
plans 86,550 1 760 - - -
____________________________________________________________________________________________________
Balance - December 31, 1995 14,086,007 141 21,805 58,314 3,694 319
Net income - - - 13,467 - -
Translation adjustment - - - - - (291)
Change in unrealized gain on
marketable securities - - - - (830) -
Employee stock purchase
plans 107,232 1 1,323 - - -
____________________________________________________________________________________________________
Balance - December 31, 1996 14,193,239 $142 $23,128 $71,781 $2,864 $ 28
FIVE-YEAR RESULTS
(In thousands, except per share amounts)
INCOME DATA: (Restated for poolings-of-interests)
Year ended December 31,
1996 1995 1994 1993 1992
Sales $155,946 $130,783 $112,908 $108,212 $99,992
Net income 13,467 11,879 10,454 9,294 4,482(a)
Net income per common
and common
equivalent share $0.93 $0.83 $0.74 $0.66 $0.32(a)
Average shares
outstanding 14,458 14,365 14,206 14,075 14,036
BALANCE SHEET DATA: (Restated for poolings-of-interests)
Total assets $152,176 $142,419 $110,715 $ 96,812 $89,730
Long-term debt 15,900 20,919 14,475 14,532 14,705
________________________________________________________________________________________________________________
ELEVEN-YEAR RESULTS
(In thousands, except per share amounts)
SUPPLEMENTARY DATA:
These schedules present the prior eleven-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,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
Sales $155,946 $111,610 $96,180 $89,043 $50,541 $46,738 $43,553 $36,223 $31,058 $20,464 $15,472
Net income 13,467 11,212 9,955 7,895 4,528<Fa> 3,902 3,714 4,047 2,990 1,151 836
Net income per
common and
common
equivalent
share $0.93 $0.88 $0.79 $0.63 $0.50<Fa> $0.43 $0.40 $0.34 $0.25 $0.10 $0.08
Average shares
outstanding 14,458 12,745 12,668 12,624 9,065 8,999 9,246 11,853 11,820 11,801 10,773
BALANCE SHEET DATA: (As Originally Reported)
Total
assets $152,176 $125,058 $102,035 $88,826 $60,300 $54,931 $54,370 $45,884 $43,430 $37,715 $33,328
Working
capital 54,006 54,224 55,995 45,281 29,471 25,955 21,692 21,117 15,707 13,836 17,660
Long-term
debt 15,900 12,441 14,050 13,913 13,221 13,697 13,761 3,788 3,664 3,753 3,618
Shareholders'
equity 97,943 78,471 63,751 52,070 33,793 28,891 24,720 33,067 28,909 25,598 24,664
<FN>
<Fa>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."
</FN>
QUARTERLY INCOME DATA
(In thousands, except per share amounts)
Quarterly Income Data - 1996
Quarter Ended
March 31 June 30 September 30 December 31
Sales $39,051 $36,727 $39,493 $40,675
Gross profit 16,024 15,225 16,246 15,928
Net income 3,635 3,061 3,314 3,457
Net income per share $0.25 $0.21 $0.23 $0.24
Quarterly Income Data - 1995
Quarter Ended
March 31 June 30 September 30 December 31
Sales $31,412 $31,422 $31,995 $35,954
Gross profit 13,700 13,803 13,462 15,148
Net income 2,926 2,821 2,713 3,419
Net income per share $0.20 $0.20 $0.19 $0.24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
1. Summary of Significant Accounting Policies
The Company is a manufacturer and marketer of high technology water
purification, fluid filtration, fluid separation, and fluid transfer
equipment 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 and
institutional customers.
The consolidated financial statements include the accounts of
Osmonics, Inc. and its wholly and majority owned subsidiaries (the
Company). Significant intercompany accounts and transactions have
been eliminated.
Sales are recorded when the product is shipped.
The estimated fair value for 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 (FIFO method) or market for
all operations except the Milwaukee Operation which has historically
valued inventory on the LIFO method.
Depreciation and amortization of property and equipment are provided
on the straight-line method over estimated lives of 3 to 40 years.
Deferred income taxes have been provided for income and expenses
which are recognized in different accounting periods for financial
reporting purposes than for income tax purposes.
The Company accrues for the estimated cost of warranty and start-up
obligations at the time revenue is recognized.
The excess of cost over the fair market value of assets acquired in
acquisitions is amortized over not more than 40 years, with the
majority at 30 years. In accordance with SFAS 121 on impairment of
assets, the carrying values of these intangibles are reviewed
quarterly for impairment. Other intangibles are carried at cost and
amortized using the straight-line method over their estimated lives
of 5 to 20 years.
Net income per common and common equivalent share is based on the
weighted average number of shares outstanding during each year and,
when applicable, those outstanding options that are dilutive. Fully
diluted earnings per share did not differ significantly from primary
earnings per share in any period presented.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to
conform with current year presentations.
2. Business Acquisitions
Pending Acquisition
In December 1996, the Company announced an agreement in principle to
acquire AquaMatic, Inc. of Rockford, Illinois. AquaMatic products
will be sold through existing Osmonics distribution channels,
offering a more complete line of specialty valves and controllers
for the water treatment market. Revenues of AquaMatic were less
than $15,000 in 1996 and 1995. The acquisition will be recorded
under the purchase method of Accounting.
Completed Acquisitions
On July 24, 1996, Desalination Systems, Inc. (DSI) merged with the
Company through an exchange of 1,312,827 shares of the Company's
common stock for the Class A common stock and Class B common stock
of DSI. The transaction was accounted for as a pooling-of-
interests. DSI's principal business is the manufacture of membranes
used for reverse osmosis, nanofiltration, ultrafiltration and
microfiltration.
The historical financial statements of the Company have been
restated to give effect to the acquisition as though the companies
had operated together from the beginning of the earliest period
presented. Separate results of operations of the combined entities
for the six months ended June 30, 1996 and the years ended
December 31, 1995 and 1994 were as follows:
Six Months
ended June 30, Year ended December 31,
1996 1995 1994
Sales:
Osmonics $ 64,405 $111,610 $ 96,180
DSI 11,642 20,348 17,610
Eliminations (269) (1,175) (882)
Combined $ 75,778 $130,783 $112,908
Net income:
Osmonics $ 5,975 $11,212 $ 9,955
DSI 721 667 499
Combined $ 6,696 $11,879 $10,454
The eliminations represent sales between the combined entities prior
to the combination. The sales elimination had no significant effect
on net income in the years presented.
On October 4, 1995, the Company acquired the assets and operations
of Western Filter Co., Denver, Colorado. The purchase price was
approximately $7,000 and included $5,780 of intangible assets which
are being amortized on the straight line method over 30 years.
Western Filter products are being sold through the existing Osmonics
distribution channels, offering a more complete line of water and
waste water treatment options. Revenues of Western Filter were less
than $10,000 in 1995 and 1994. The purchase method of accounting
was used. The Company may be required to make additional payments
of up to $2,000 over the period ending December 1998, contingent
upon the sales and gross margins of Western Filter Co.
On November 18, 1994, the Company acquired the assets of Lakewood
Instruments, Inc. The purchase method of accounting was used.
On January 1, 1994, the Company acquired the 18% minority
shareholder interest of its majority-owned subsidiary, Poretics.
The Company owns 100% of Poretics' shares after the transaction.
The purchase method of accounting was used.
The Western Filter, Lakewood, and Poretics minority interest
acquisitions had no significant pro forma effect on the Company's
sales, net income, or net income per share in 1995 or 1994. The
results of operations of Western Filter, Lakewood and Poretics are
included in the consolidated statements of income from the
respective dates of acquisition.
3. Marketable Securities
The Company considers all of its marketable securities available-
for-sale. Marketable securities at December 31, 1996 consisted of
the following:
AmortizedUnrealized Unrealized Fair
Cost Gains (Losses) Value
U.S. government securities
0-5 year maturity $ 3,781 $ 29 $ (49) $ 3,761
6 year or greater maturity 447 0 (10) 437
Municipal bonds
0-5 year maturity 2,836 118 - 2,954
6 year or greater maturity 2,281 134 - 2,415
Corporate debt securities and other
0-5 year maturity 866 - (67) 799
6 year or greater maturity 299 - (3) 296
Equity securities 3,897 4,612 (143) 8,366
Total before tax effect $14,407 4,893 (272) $19,028
Deferred tax effect of
unrealized (gains) losses (1,860) 103
Net unrealized gains (losses) on
marketable securities $3,033 $(169)
Marketable securities at December 31, 1995 consisted of the following:
AmortizedUnrealized Unrealized Fair
Cost Gains (Losses) Value
U.S. government securities
0-5 year maturity $ 4,784 $ 60 $ (23) $ 4,821
6 year or greater maturity 648 24 - 672
Municipal bonds
0-5 year maturity 2,320 112 - 2,432
6 year or greater maturity 4,777 211 - 4,988
Corporate debt securities and other
0-5 year maturity 1,505 24 (43) 1,486
6 year or greater maturity 699 16 - 715
Equity securities 5,616 5,681 (104) 11,193
Total before tax effect $20,349 6,128 (170) $26,307
Deferred tax effect of
unrealized (gains) losses (2,329) 65
Net unrealized gains (losses) on
marketable securities $3,799 $(105)
Market values are based on quoted market prices.
In 1996, proceeds from sales of available-for-sale securities were
$8,068. The net gain on these sales was $2,788, determined on the
specific identification method.
In 1995, proceeds from sales of available-for-sale securities were
$7,037. The net gain on these sales was $919, determined on the
specific identification method.
4. Inventories
Inventories consist of the following:
December 31,
1996 1995
Finished goods $ 5,276 $ 4,979
Work in process 9,319 7,759
Raw materials 18,416 16,884
33,011 29,622
Less adjustment to reduce
inventories of $6,016 and $4,728
to last-in, first-out method
(See Note 1) (689) (649)
$32,322 $28,973
5. Restricted Cash
Cash restricted for purchase and construction of equipment at
December 31, 1996 and 1995 represents proceeds received from the
issuer of Industrial Development Revenue Bonds (see Note 9)
restricted to the purchase and construction of property and
equipment used in the Company's operations.
6. Note Receivable - Fully Reserved
In 1988, DSI, a pooled company, sold its 50% interest in another
company in exchange for a $750 note receivable due in October of
1998. The note receivable is secured only by the shares of the
company sold. Because the company sold has no significant book
value, the note receivable has been fully reserved.
7. Line of Credit
In 1996, the Company established a $7,000 unsecured revolving line
of credit for working capital needs. The revolving line of credit
is for two years with a variable interest rate which is a function
of the LIBO rate and the Federal Reserve System reserve requirement
for Eurocurrency liabilities. The terms of the credit agreement
contain certain restrictions related to financial ratios,
indebtedness, tangible net worth and capital expenditures. At
December 31, 1996, the Company had borrowings outstanding under the
line of $2,511, and the interest rate was 6.19%. In January 1997
the line of credit agreement was amended and increased to $12,000.
Prior to its merger with the Company, DSI had an available bank line
of credit which provided for borrowings up to $4,000. Advances
under the line were repaid after the merger and the line has been
terminated. At December 31, 1995, DSI had outstanding borrowings
under the line of $1,619.
8. Other Accrued Liabilities
Other accrued liabilities consist of the following:
December 31,
1996 1995
Warranty and start-up $1,802 $1,868
Professional fees and other accruals 1,592 2,425
Acquisition liabilities - 1,827
Customer deposits 3,024 2,258
Accrued property taxes, income
taxes and other taxes 888 1,721
$7,306 $10,099
9. Debt
Long-term debt is as follows:
December 31,
1996 1995
Promissory notes; interest payable
quarterly at the three month LIBOR
rate plus 80 b.p.; due through
2001. The interest rate on
December 31, 1996 was 6.46%. $ 8,575 $10,000
Industrial development revenue bonds
(IDRB's), principal due in varying
annual payments over 30 years; interest
payable monthly at a variable rate
determined periodically by the bond
remarketing agent (4.25% at
December 31, 1996). 8,270 8,550
Industrial revenue bonds (IRB's);
interest payable at LIBOR plus 45 to
95 b.p. depending on collateral
deposited with the lender; due in 1997.
The interest rate on December 31, 1996
was 5.97%. 2,800 2,800
Mortgage notes payable to two French
banks; interest payable monthly at PIBOR
plus 40 b.p. The interest rate on
December 31, 1996 was 3.83%. 727 928
Other notes 510 833
20,882 23,111
Less current portion (4,982) (2,192)
$15,900 $20,919
The IDRB debt, IRB debt and 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,
1996 are:
1997 - $4,982; 1998 - $2,150; 1999 - $2,150; 2000 - $2,242;
2001 - $3,692; beyond 2001 - $5,666.
The interest rate on the IRB's is determined in part by the amount
of collateral held by the lender. At December 31, 1996 and December
31, 1995, $2,000 of collateral was held by the lender, resulting in
an interest rate of LIBOR plus 45 b.p. The $2,000 of collateral is
included in marketable securities.
The promissory notes contain a covenant which limits the payment of
dividends to shareholders. At December 31, 1996 approximately
$33,583 of retained earnings were restricted under this covenant.
In addition, the Company's various debt agreements contain certain
restrictions related to financial ratios, indebtedness, tangible net
worth and capital expenditures.
Cash payments for interest related to all debts of the Company were
$1,551, $1,409, and $865, for 1996, 1995, and 1994, respectively.
10. Stock Options
At December 31, 1996, the Company had reserved 7,500 common shares
for issuance to key employees under a 1983 stock option plan.
Options were issued at a price not less than market value on the
date of grant and become exercisable over a five-year period, after
which they expire. The following is a summary of activity under the
1983 stock option plan. No additional options can be granted under
the 1983 plan.
1996 1995 1994
Options held by employees
at December 31 7,500 86,206 121,126
Exercise price range on $10.50 to $ 6.45 to $ 3.63 to
options held at December 31 $10.50 $13.50 $13.50
Number of options exercised
during the year 65,805 34,920 22,724
Price range of options $ 6.45 to $ 3.63 to $ 3.63 to
exercised during the year $13.50 $10.16 $10.16
Exercisable options held at
December 31 7,500 84,330 97,500
Exercise price range of $10.50 to $ 6.45 to $ 3.63 to
exercisable options $10.50 $13.50 $13.50
The Company also has reserved 299,050 common shares at December 31,
1996 for issuance to key employees under a 1993 Stock Option Plan.
Options are granted at a price not less than market value on the
date of the grant and become exercisable over a period of up to ten
years, after which they expire. The following is a summary of
activity under the 1993 Stock Option Plan.
1996 1995 1994
Options held by employees
at December 31 50,200 34,163 12,633
Exercise price range on $13.67 to $13.67 to $13.67 to
options held at December 31 $22.38 $18.25 $14.50
Number of options exercised
during the year 263 500 187
Price range of options $13.67 to $14.38 to $13.67 to
exercised during the year $14.38 $14.38 $13.67
Exercisable options held at
December 31 10,687 2,463 375
Exercise price range of $13.67 to $13.67 to $13.67 to
exercisable options $18.25 $14.50 $13.67
Desalination Systems, Inc. (DSI), a pooled company (Note 2), has a
stock option plan for which 371,841 shares of the Company's common
stock are reserved. Options issued under the plan vest in varying
periods of up to 5 years and expire on various dates through March
2003. The following is a summary of activity under the plan. No
additional options can be granted under the DSI plan.
1996 1995 1994
Options held by employees
at December 31 371,841 371,841 386,248
Exercise price range on $3.18 to $3.18 to $3.18 to
options held at December 31 $6.94 $6.94 $6.94
Number of options exercised
during the year - 14,407 -
Price range of options
exercised during the year - $3.47 -
Exercisable options held at
December 31 360,315 351,672 354,553
Exercise price range of $3.18 to $3.18 to $3.18 to
exercisable options $6.94 $6.94 $6.94
The Company also had a 1985 Employee Stock Purchase Plan. In 1995
and 1994, 14,548 and 33,657 shares were issued, respectively, under
the 1985 Plan at an average price of $13.58 and $12.80,
respectively. No additional shares may be issued under the 1985
Plan.
The 1985 Plan was superseded by the 1995 Employee Stock Purchase
Plan, approved by the shareholders at the 1995 Annual Meeting and
effective June 1, 1995. Employees may purchase common shares of the
Company at 85% of market price. In 1996 and 1995, 41,154 and 22,175
shares were issued, respectively, under the 1995 Plan at an average
price per share of $17.41 and $14.79, respectively. At December 31,
1996, 336,666 shares remain unissued in the 1995 Plan.
In 1993, the Company granted a director an option to purchase
45,000 shares of common stock at an exercise price of $12.33 per
share. This option vests over a five-year period.
In 1995, the Board of Directors adopted a 1995 Director Stock Option
Plan. The plan provides that each director of the Company shall
automatically receive, as of the date of each Annual Meeting of
Shareholders, a non-qualified option to purchase 3,000 shares of the
Company's common stock. The options have a ten-year term and are
exercisable one year after the grant date at an exercise price equal
to the fair market value of the shares on the grant date. In 1996,
options to purchase 18,000 shares at a price of $19.88 were issued
under this plan. In 1995, options to purchase 18,000 shares at a
price of $17.13 were issued under this plan. At December 31, 1996,
18,000 options were exercisable under this plan at a price of
$17.13.
The Company applies APB Opinion No. 25 "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for
its stock-based compensation plans. Had compensation costs been
determined based on the fair value of the 1996 and 1995 stock option
grants consistent with the requirements of SFAS No. 123 "Accounting
for Stock-Based Compensation" (FAS 123), there would have been no
material effect on the Company's pro forma net income or net income
per common and common equivalent share for 1996 or 1995.
The Company had 500,000 authorized and unissued shares of preferred
stock at December 31, 1996 and 1995.
11. Income Taxes
Income tax expense consists of:
Year ended December 31,
1996 1995 1994
Current:
Federal $3,556 $4,219 $3,520
State 395 429 370
Foreign 640 372 156
Deferred:
Depreciation 370 144 (204)
Valuation allowance adjustment - (197) -
Allowance for doubtful
accounts, start-up, warranty,
inventory and other accruals 462 314 (223)
Discontinued operations - 228 350
Other 1,018 (555) (161)
$6,441 $4,954 $3,808
Cash payments for income taxes were $5,716, $5,382, and $3,195 for
1996, 1995, and 1994, respectively.
A reconciliation of the income taxes computed at the Federal
statutory rate to the Company's income tax expense is as follows:
Year ended December 31,
1996 1995 1994
Taxes at Federal rate (35%) $6,968 $5,892 $4,992
Increase (decrease) resulting from:
Valuation allowance adjustment - (471) (608)
State taxes, net of Federal tax
benefit 397 201 231
Foreign Sales Corp. benefit (361) (248) (223)
Tax credits (197) (273) (312)
Tax exempt interest/dividend
deduction (128) (200) (193)
Effect of foreign affiliates with
different tax rates or net losses 12 245 (324)
Uncollectible account write-off (442) - -
Other 192 (192) 245
$6,441 $4,954 $3,808
12. Deferred Tax Assets and Liabilities
Temporary differences which give rise to Deferred Tax Assets and
Liabilities are as follows as of December 31:
1996 1995
Current assets:
Allowance for doubtful
accounts, start-up, warranty,
inventory and other accruals $3,627 $3,863
Unrealized gain on marketable
securities (1,757) (2,264)
Inventory costs capitalized for tax 115 363
Other (426) 45
Total current deferred assets $1,559 $2,007
Noncurrent liabilities:
Depreciation $3,130 $2,641
Other 486 81
Total non-current deferred
tax liabilities $3,616 $2,722
The deferred tax asset valuation reserve decreased $471 during the
year ended December 31, 1995. This decrease was due to the use of
net operating loss carryforwards and credits during the year, as
offsets against taxable income, and to the determination that the
remaining deferred tax assets are more likely than not to confer
future tax benefits to the Company.
13. Sales and Segment Information
All continuing operations for which geographic data is presented
below are in one principal industry (design, manufacture and
marketing of machines, systems, instruments and components used in
the processing of fluids).
1996 1995 1994
Sales to unaffiliated customers from:
United States $141,124 $116,964 $100,632
Foreign operations 14,822 13,819 12,276
Transfers from (to) geographic areas:
United States 7,890 7,936 6,699
Foreign operations (7,890) (7,936) (6,699)
$155,946 $130,783 $112,908
Pretax income:
United States $ 18,225 $ 16,190 $ 12,950
Foreign operations 1,683 643 1,312
$ 19,908 $ 16,833 $ 14,262
Identifiable assets:
United States $144,609 $134,408 $103,184
Foreign operations 7,567 8,011 7,531
$152,176 $142,419 $110,715
NOTE: Transfers are made at market value.
Sales by United States operations to unaffiliated customers in
foreign geographic areas are as follows:
Year ended December 31,
1996 1995 1994
Asia/Pacific $14,661 $10,915 $ 8,187
Europe 9,181 7,798 7,853
Rest of the World 9,222 9,641 7,841
$33,064 $28,354 $23,881
Total international sales for the Company were as follows:
1996 - $47,886; 1995 - $42,173; and 1994 - $36,157.
14. Commitments and Contingencies
The Company leases facilities for sales, service or manufacturing
purposes in Wisconsin, Massachusetts, California, Florida, Iowa,
Arizona, Switzerland, Hong Kong, Japan, Singapore, and Thailand.
Future minimum lease payments on all operating leases of $2,750 are
as follows: 1997 - $780; 1998 - $584; 1999 - $395; 2000 - $271;
2001 - $180; and beyond 2001 - $540. Rent expense for the past
three years was: 1996 - $1,100; 1995 - $1,718; and 1994 - $1,851.
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.
15. Stock Split
On February 18, 1994, the Company approved a three-for-two stock
split in the form of a 50% stock dividend for shareholders of record
March 4, 1994. All share and per share amounts have been restated
to reflect the stock split.
16. Employee Benefit Plans
The Company has a noncontributory discretionary profit sharing plan
covering certain employees meeting age and length of service
requirements. The Company contributes annually to the plan an
amount established at the discretion of the Board of Directors.
Total expense recognized by the Company under these plans amounted
to $1,435, $996, and $1,077 in 1996, 1995, and 1994, respectively.
INDEPENDENT AUDITORS REPORT
Board of Directors and Shareholders Osmonics, Inc.
Minnetonka, Minnesota
We have audited the accompanying consolidated balance sheets of Osmonics, Inc.
and Subsidiaries ( the Company) as of December 31, 1996 and 1995 and the
related consolidated statements of income, changes in shareholders' equity,
and chash flow for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express and opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and signifigant 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
represent fairly, in all material respects, the financial position of
Osmonics, Inc. and subsidiaries at December 31, 1996 and 1995 and the
results of their operations and their cash flow for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Deloitte and Touche LLP
Minneapolis, Minnesota
February 10, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
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 statement of operations
data as a percentage of net sales for the periods indicated.
Years Ending Percentage
December 31, Increase (Decrease)
1996 vs 1995 vs
1996 1995 1994 1995 1994
Net Sales 100.0% 100.0% 100.0% 19.2% 15.8%
Cost of Goods Sold 59.3 57.1 55.4 23.9 19.5
Gross Profit 40.7 42.9 44.6 13.0 11.3
SG&A 22.5 24.0 24.7 11.8 12.2
RD&E 7.0 7.2 8.0 16.4 4.6
Operating Profit 11.2 11.7 11.9 13.5 14.0
Other Income 1.5 1.2 0.8 67.2 84.0
Income Taxes 4.1 3.8 3.4 30.0 30.1
Net Income 8.6 9.1 9.3 13.4 13.6
Comparison of Years Ended December 31, 1996 and December 31, 1995
Net Sales for 1996 increased $25,163 or 19.2% to $155,946 as
compared to net sales of $130,783 for 1995. The sales increase was
realized across nearly all product lines, and for both domestic and
international markets.
Gross Profit increased $7,310 or 13.0% to $63,423 in 1996,
compared to $56,113 in 1995. As a percentage of net sales, gross profit
decreased to 40.7% from 42.9%. The reduction in gross profit 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 included
some order backlog acquired from Western Filter in October 1995, which
was at lower gross margins than other of the Company's products.
Selling, General and Administrative Expenses increased $3,702 or
11.8% to $35,079 in 1996, compared to $31,377 in 1995. As a percentage
of sales, SG&A expense decreased to 22.5% from 24.0%, primarily
reflecting improved productivity of both sales and administrative
personnel.
The Company's marketing priority is to get its products into
distribution as soon as possible. In 1994, 1995 and 1996, the Company
invested significantly in growing its sales and marketing organization.
The number of sales personnel increased by 24%, 26% and 6% in 1994, 1995
and 1996, respectively. As a result of the Company's acquisitions, the
Company inherited a number of separate sales forces selling individual
products. In 1996, the Company reorganized and centralized its sales
groups to focus responsibility for customer relationships for all
products through expanded local sales offices and to provide technical
sales support from the appropriate product manufacturing site. The
Company believes these changes will enhance customer service and
increase market penetration in the future.
Research, Development and Engineering Expenses increased $1,538 to
$10,937 in 1996, from $9,399 in 1995. As a percentage of sales, these
expenses were 7.0% of sales in 1996, compared to 7.2% in 1995. The
Company believes the current level of funding is adequate to support its
product development programs.
Other Income increased to $2,501 in 1996, compared to $1,496 in
1995, due primarily to gains on the sale of investments.
The effective tax rate for the years ended December 31, 1996 and
1995 were 32.4% and 29.4%, respectively. The increase in the tax rate
is primarily due to the reduced availability of tax loss carryforwards
and credits from Autotrol and its subsidiaries.
Net Earnings increased $1,588 or 13.4% to $13,467 or $0.93 per
share for 1996, compared to $11,879 or $0.83 per share for 1995. As a
percentage of net sales, net earnings were 8.6% for 1996 compared to
9.1% for 1995.
Comparison of Years Ended December 31, 1995 and December 31, 1994
Net Sales for 1995 increased $17,875 or 15.8% to $130,783 from
$112,908 for 1994. International sales increased at approximately the
same rate as domestic sales in 1995 due to improved marketing and
selling efforts in the Asia/Pacific and Americas areas. The 1995 sales
growth also benefited from the October 1995 acquisition of Western
Filter and the November 1994 acquisition of Lakewood Instruments.
Gross Profit increased $5,708 or 11.3% to $56,113 in 1995 compared
to $50,405 in 1994. As a percentage of net sales, gross profit
decreased to 42.9% in 1995, compared to 44.6% in 1994. The decrease was
due to an increased mix of sales of lower margin products, increased
material costs and more aggressive pricing.
Selling, General and Administrative Expenses increased $3,410 or
12.2% to $31,377 in 1995 compared to $27,967 in 1994. As a percentage
of net sales, these expenses were 24.0% in 1995, compared to 24.7% in
1994. The increase in spending was attributable to increased marketing
programs and expanded domestic and international selling efforts. These
expenses did not increase at as high a rate as the sales increase due to
the continued cost savings in administrative expenses as recent
acquisitions were assimilated.
Research, Development and Engineering Expenses increased $410 or
4.6% to $9,399 in 1995 compared to $8,989 in 1994. As a percentage of
net sales, these expenses were 7.2% in 1995, compared to 8.0% in 1994.
Other Income increased to $1,496 in 1995, compared to $813 in
1994, due primarily to gains on the sale of land and investments.
The Company's effective tax rate for 1995 was 29.4% compared to
26.7% in 1994. The increase in the tax rate was primarily due to the
reduced availability of tax loss carryforwards and credits from Autotrol
and its subsidiaries.
Net Earnings increased $1,425 or 13.6% to $11,879 ($0.83 per
share) in 1995 compared to $10,454 ($0.74 per share) in 1994. As a
percentage of net sales, net earnings were 9.1% in 1995, compared to
9.3% in 1994.
Liquidity and Capital Resources
At December 31, 1996, the Company had cash and marketable
securities of $24,420 as compared to $31,036 at December 31, 1995. The
reduction in cash and marketable securities was primarily the result of
investments of $15,658 in facilities and equipment during 1996.
Cash provided by operations was $5,736, $8,421, and $10,097 for
the years ending December 31, 1996, 1995 and 1994, respectively. The
decrease in cash provided by operating activities in 1996 and 1995 was
principally due to increased working capital requirements to support the
Company's sales growth.
Capital expenditures for the years ending December 31, 1996, 1995
and 1994 were $15,658, $20,818, and $4,212, respectively. In 1995 and
1996, the Company expanded and reconfigured its Minnetonka, Minnesota
and Vista, California facilities. During 1995, the Company also
purchased its previously leased Milwaukee facility for $3,100. The
Company currently has eleven manufacturing facilities in the U.S. and
one in France. The level of capital expenditures in 1997 is expected to
be less than the levels of 1996 and 1995.
The Company in 1996 negotiated a $7,000 unsecured revolving line
of credit for working capital needs. The revolving line of credit is
for two years with a variable interest rate which is a function of the
LIBO rate and the Federal Reserve System reserve requirement for
Eurocurrency liabilities. This revolving line of credit replaced a
$1,000 line of credit. At December 31, 1996, the Company had $4,489
available under the revolving line of credit.
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.
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 Annual Report 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.