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, 1997
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 (I.R.S. Employer
of incorporation or Identification No.)
organization)
5951 Clearwater Drive, Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
(612) 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 4, 1998, 13,953,584 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 4, 1998) was $228,489,938.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the
fiscal year ended December 31, 1997 (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 13, 1998
(the "Proxy Statement"), and to be filed within 120 days
after the Registrant's fiscal year ended December 31, 1997,
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.
Osmonics, Inc. and its wholly-owned subsidiaries (the
"Company") design, manufacture and market machines, systems
and components used in the processing and handling of
fluids. The Company was founded in 1969 and manufactures
replaceable, semi-permeable membranes and other filter media
for use in fluid separation and filtration. The Company's
processing equipment employs crossflow filtration (including
reverse osmosis, nanofiltration, ultrafiltration and
microfiltration), normal filtration (including
microfiltration and particle filtration), coalescing
filtration, ion exchange, clarification, chromatography,
ozonation and distillation. The Company's fluid handling
equipment includes centrifugal, diaphragm and bellows pumps;
electronic controllers to operate precision valves for water
conditioning; flow control and measuring devices and
instrumentation; and specialty holders and devices for
retaining its membranes and filter media.
Crossflow, normal and coalescing filtration are
precision processes in which a semi-permeable membrane or
other filter material separates a fluid's components.
Separation is accomplished by applying pressure to a fluid
in order to cause selective passage of some components of
the fluid through the membrane or filter media. Ion
exchange and chromatography are quasi-filtration processes
in which specialized plastic beads are used to selectively
remove ionized or charged particles from a fluid. The fluid
is pressurized and passes through a bed of the plastic beads
in a normal filtration mode. Distillation is the
condensation of steam from boiling water to produce
ultrapure water. Ozone generation equipment uses
electricity to develop a corona discharge which produces
ozone, a strong oxidant used in the purification of water
and other fluids.
The Company's processing products are used in
fractionation, preferential separation, conditioning and
purification in connection with such processes as
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 electronics, potable
water, health care, biotechnology, food and beverage,
chemical processing and power generation industries.
Filtration processes cover a broad spectrum ranging
from those which separate discrete molecules and ions to
those which separate particles visible to the naked eye.
Historically, the Company specialized in products utilizing
crossflow filtration processes designed to separate
particles in the molecular range. Through acquisitions and
internal product developments, the Company now has a full
line of filtration products including depth cartridge
filters for particle filtration and pleated membrane
cartridge filters for microfiltration. The filtration media
and membrane is produced primarily from polymers; however,
inorganic membranes and filters of metal and ceramic are
also manufactured. In addition, the Company manufactures
housings to contain the filters. The crossflow filter
membrane elements, and the microfilter and depth filter
cartridges are replaceable while the housings are a
permanent fixture in the fluid processing system.
To provide a complete line of products for the
production of pure water, the Company manufactures
distillation equipment, both single-effect and more energy
efficient multi-effect. In addition, deionization and
softening equipment in both laboratory size and large scale
is manufactured in multiple locations.
In June 1989, the Company acquired Ozone Research &
Equipment Corporation of Phoenix, Arizona. Ozone Research
was founded in 1957 and is a pioneer in the manufacture of
ozone generation equipment for the purification of water and
the testing of elastomeric materials.
In November 1989, the Company acquired certain assets
for the manufacture and sale of MACE flow control and
pumping products to increase its fluid handling offerings.
MACE products are made from Teflon PTFE, the most chemically
stable polymer available, and are used to handle ultrapure
and aggressive chemicals.
In December 1990, the Company acquired certain assets
of the FASTEK Division of Eastman Kodak for the production
of reverse osmosis membrane, home reverse osmosis membrane
elements, a rolled filter product, and a blown microfiber
filter cartridge product. This Syracuse, New York facility
and manufacturing equipment provides the Company with added
capacity and capability and gives the Company three sites
for manufacturing membrane and membrane elements.
In October 1993, the Company acquired Autotrol
Corporation through a pooling-of-interests, stock-for-stock
transaction. Autotrol was founded in 1962 and is a leader
in the manufacture of controllers for water softening and
filtration equipment. In addition, Autotrol manufactures
other fluid control and measuring devices such as a
totalizing flow meter and dosing system to assure proper
treatment of cooling tower water. Most of Autotrol's
products are sold to OEM's who then use them as a component
in a water conditioning device which is then sold to
consumers.
In November 1994, the Company acquired substantially
all of the assets of Lakewood Instruments of Phoenix,
Arizona. This acquisition adds a line of instruments,
sensors and analyzers used in the measurement of fluid
characteristics in the chemical water treatment and pure
water industries.
In October 1995, the Company acquired the assets and
operations of Western Filter Company, Denver, Colorado, an
important supplier to the beverage and bottled water
industry for over 50 years. Western Filter has extensive
experience in providing the beverage market with
conventional water treatment technologies and membrane water
treatment. Western Filter also has experience in
coagulation clarification pretreatment technologies. These
technologies will be utilized with Osmonics' existing
distribution channels, allowing the Company to expand
capability in the international markets where conventional
water treatment is required, as well as complement municipal
sales in the United States where ozone disinfection is
becoming accepted.
In July 1996, the Company acquired Desalination
Systems, Inc. ("Desal") through a pooling-of-interests,
stock-for-stock transaction. Desal manufactures crossflow
filtration membrane and membrane elements. Desal has
manufacturing facilities in Vista, California, and markets
its products world-wide. Desal's products extend the range
of membranes and membrane elements previously offered by the
Company. The acquisition also extends the Company's
distribution network for such products.
In February 1997, the Company acquired AquaMatic, Inc.
of Rockford, Illinois. AquaMatic, started in 1930, offers a
line of specialty valves and controllers for the water
conditioning market, which will be sold through existing
Osmonics distribution channels.
In December 1997, the Company acquired Purifications
Products Company ("PPC") of San Marcos, California. PPC
manufactures a line of reverse osmosis membrane elements and
related products for purifying home drinking water and
producing high-quality water for other applications. In
addition, PPC has a line of Silt Density Index instruments
and a line of UV sterilization products. These products
will be sold through existing Osmonics distribution
channels.
In February 1998, the Company acquired Micron
Separations, Inc. ("MSI") of Westborough, Massachusetts.
MSI, in business for 16 years, develops, manufactures and
markets microfilter membrane and membrane products for
diagnostic, laboratory and industrial use. These products
will expand the Company's range of nylon and cellulosic
membrane applications. The products will be sold through
existing Osmonics distribution channels.
In March 1998, the Company signed a definitive
agreement, to acquire Membrex Corp. of Fairfield, New
Jersey. The acquisition is subject to Membrex shareholder
approval. The acquisition of Membrex would give the Company
the most hydrophilic UF membrane in the market, which is
used to separate oil from water in a variety of
applications, including biotechnology, laboratory and
chemical processes. Membrex also has a patented machine
using its UF membrane which will separate oil from water for
use in parts cleaning and other industrial and commercial
applications. Some products will be sold through our
exclusive agreement with Safety-Kleen Corp. and the
remainder through existing Osmonics distribution channels.
The Company focuses the marketing of its products
through three domestic and international sales groups:
1. Large equipment and systems.
2. Components and product sales.
3. Catalog and telephone sales.
These sales groups are supported by application engineers
and market support personnel.
Products
Membranes: The Company markets polymer membranes for
crossflow applications sold in replaceable elements. Most
membranes are produced in a spiral-wound configuration
ranging in diameter from two to twelve inches and in length
from twelve to sixty inches.
Membrane elements are typically replaced every 6 to 60
months, depending upon the severity of the application. The
Company manufactures the membrane material and membrane
elements used in its own systems, and also manufactures
membrane elements for other original equipment manufacturers
(OEM's) who include them as component parts in their
products.
The Company's 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 and waste removal for pollution control
compliance. In addition, the Company sells its home reverse
osmosis (HRO) membrane elements to OEM's who package them
into systems for use in homes, offices and retail vending
establishments to produce purified drinking water. 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 is registered with the U.S. FDA for the manufacture
of Class II medical devices used to purify water for
hemodialysis.
The Company markets microfiltration normal flow membrane and
the hardware for use in a variety of laboratory and medical
diagnostic applications. The Company manufactures nylon,
cellulosic polysulfone, polycarbonate, and numerous other
polymer-based microfiltration membrane as well as silver
microfiltration membranes and ceramic microfilters.
Numerous applications exist for the Company's microfilters
because of unique features, including use in air monitoring
and in laboratory procedures for cancer and other research.
Filters: The Company markets replaceable depth
cartridge filters, pleated cartridge filters, and rolled
cartridge filters. The depth cartridge filters consist of a
matrix of thermally-bonded polypropylene blown microfibers.
The structure of these fibers allows particles to be
trapped throughout the depth of the cartridge filter rather
than simply on its surface, enhancing the efficiency of the
filtration process. The pleated cartridge filters use
either a specially processed sheet of blown polypropylene
microfibers or microporous membranes and use surface
filtration to act as a very selective filter. Rolled
cartridge filters use media similar to pleated filters in a
semicrossflow configuration, for enhanced filtration in
specialized applications. Cartridge filters are
manufactured in a range of pore sizes and particulate
retention ratings. As a result of retention of particles in
the filters, cartridge filters are typically replaced at
intervals of eight hours to four weeks.
The Company markets ceramic cartridge filters for
microfiltration and particulate filtration. The ceramic
cartridge filters operate similar to the pleated cartridge
filters in that particles are trapped on the surface.
Ceramic cartridge filters are used to sterilize
pharmaceutical solutions and are used in laboratory
applications, where many analytic and diagnostic procedures
require purification or sterilization.
The Company also markets separation elements and
equipment used in coalescing filtration, a process distinct
from crossflow and normal filtration, which separates
different liquids based on their density and adsorption
differences. This process can reduce concentrations of
contaminants of several percent to only a few parts per
million. Applications of coalescing filtration include
removal of contaminants from compressed air and gas lines,
dewatering of solvents and jet fuel, and removal of trace
oil from waste water prior to disposal.
Ion Exchange and Chromatography Equipment: The Company
markets equipment using ion exchange technology. Ion
exchange plastic beads and selected polymer gels are
utilized to preferentially adsorb ionized and charged
material from a fluid stream. After the ion exchange beads
have adsorbed a certain amount of material, they must be
regenerated, typically with acid or caustic, or in the case
of chromatography with a selected fluid to strip off the
adsorbed material. The most 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. The Company is a
leader in the manufacture of the controllers and valves used
to effect ion exchange. Another ion exchange application is
to polish ultrapure water for electronics manufacture and
high pressure boiler feed. Chromatography is primarily used
to purify biotech fluids and food proteins.
Distillation Equipment: The Company markets
distillation and related water purification equipment used
primarily in the laboratory and pharmaceutical industries.
Distillation, which involves the condensation of steam from
boiling water, was one of the first technologies used to
purify water. The Company's distillation product lines
range from laboratory stills to elaborate 5000-gallon-per-
hour multi-stage purifiers.
Ozonation Equipment: The Company 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 waste water.
In 1997, the Company announced a partnership with Fuji
Electric Co., Ltd., Japan and Fuji Electric Corp. of America
(Fuji) to manufacture high concentration ozone generators
using proprietary Fuji technology and components. This
partnership will provide the Company a strong entry into the
municipal water treatment market, as well as pulp and paper
and other large-scale oxidation applications. As part of
the agreement, the Company has the rights to manufacture and
sell such equipment world-wide except for Japan and Korea.
Pumps, Valves and Flow Control Devices: The Company
markets 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 markets two types of chemical-resistant,
air-operated pumps used in both the chemical and electronics
industries. These unique pumps are constructed of Teflon
PTFE or polypropylene materials making them resistant to
acids, caustics, solvents and numerous other aggressive
chemicals.
The Company markets a dry chemical feeder system to
sanitize well water and reduce iron and sulfur odors, and
also markets the pellets used in the feeder.
The Company markets totalizing flow meters and
electronic controllers made of corrosion resistant Noryl
plastic, as well as a line of Teflon PTFE fluid control
products including valves, fittings and flow meters used in
the electronics, pharmaceutical and chemical industries.
The PTFE is molded and machined into unique shapes to
provide extremely chemical resistant high temperature parts.
The Company markets both analog and digital instruments
for chemical water treatment and monitoring.The instruments
are used to measure and control conductivity, pH, ORP,
chlorine, specific ions, trihalomethanes (THM's) and
solvents in water, such as trichloroethyleneThe instruments
are capable of being used in local operating network (LON)
communications and data acquisition.
Machines and Systems: The crossflow and normal
filtration machines manufactured by the Company 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 following table shows the percentage of net sales
during the past five years attributable to the Company's
fluid processing and handling equipment compared to its
replaceable components:
Year Ended Replaceable
December 31 Equipment(1) Components(2)
1997 46% 54%
1996 49% 51%
1995 48% 52%
1994 51% 49%
1993 49% 51%
(1) Equipment includes: (i) pumps, control valves,
instruments and machines sold separately, (ii) pumps,
controls, instruments, valves, fittings, chemicals, and
other ancillary equipment sold with systems and (iii)
membrane elements, filter elements, ion exchange resin
and filter cartridges sold with machines.
(2) Replaceable components include only those membrane,
coalescer and dielectric elements, cartridges,
membranes, filters and other components sold by the
Company as replacements for its machines, systems and
products, or as replaceable components for products
manufactured by others. They do not include those
components originally sold as parts of new machines or
systems manufactured by the Company. Sales of
components and replacement parts provide the Company
with a relatively stable and continuing source of
revenue.
Sales and Marketing
The Company markets its custom machines and systems
through its direct sales force. The Company's standard
products are marketed to a network of independent
distributors with the help of Company district managers.
These distributors provide world-wide installation service
and stocking of a wide range of the Company's standard
products. 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 mail 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
$10,635,000 in 1997, $10,937,000 in 1996 and $9,399,000 in
1995. The Company anticipates that research and development
expenditures in 1998 will be reduced fromthe 1997 level as a
percent of sales.
Patents and Trademarks
The Company has been granted domestic and certain
foreign trademarks on numerous product names, and on its
logo-types. The Company holds domestic and foreign patents
on certain of its filter media, filters, controlling valves,
machine designs and other products. Although the Company
believes that its patents have value, the Company's business
is not dependent on any patent or group of related patents.
The Company considers its technological position to be
based primarily on its proprietary manufacturing methods,
innovative engineering and marketing expertise.
Employees
As of December 31, 1997, the Company employed 1,433
persons, including 257 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 and distillation
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 products business activities.
With respect to the Company's disposable filter and lab
products, two companies, Pall and Millipore, 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, and PTFE; ceramic and
glass materials, stainless steel, steel, brass, copper,
titanium, silver 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 chemical 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.
To date, the Company has experienced no difficulty in
securing any of its needed raw materials and components.
Customers
No one customer accounted for 10 percent or more of the
Company's consolidated revenue in 1997, 1996 or 1995.
Backlog
The dollar amount of the Company's backlog of orders
considered to be firm at December 31, 1997, was $28.2
million. The comparable backlog at December 31, 1996, was
$27.9 million. The Company expects that nearly all orders
included in the backlog at December 31, 1997, will be filled
during the 1998 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 distillation 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
distillation 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.
To date, compliance with federal, state and local
provisions relating to the protection of the environment has
had no material effect upon the capital expenditures,
earnings or competitive position of the Company.
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, 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.
Large export sales are primarily made on the basis of
confirmed irrevocable letters of credit or time drafts to
selected customers in U.S. dollars. Therefore, the Company
believes that problems of currency fluctuation or political
and economic stability do not constitute substantial risks.
See Note 13 of Notes to Consolidated Financial Statements
for a breakdown of the Company's foreign operations and
export sales by geographic area.
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 Sales, Manufacturing,
ft Warehouse
Vista, CA Owned 108,000 sq Sales, Manufacturing,
ft Warehouse
Milwaukee, WI Owned 103,700 sq Sales, Manufacturing,
ft Warehouse
Rockford, IL Owned 58,400 sq Sales, Manufacturing,
ft Warehouse
Phoenix, AZ Owned 57,600 sq Sales, Manufacturing,
ft Warehouse
Syracuse, NY Owned 48,500 sq Sales, Manufacturing,
ft Warehouse
Westborough, M Leased 47,500 sq Sales, Manufacturing,
ft Warehouse
Rockland, MA Leased 38,200 sq Sales, Manufacturing,
ft Warehouse
Escondido, CA Leased 30,000 sq Manufacturing
ft
Upland, CA Leased 22,000 sq Sales, Manufacturing,
ft Warehouse
Denver, CO Owned 20,700 sq Sales, Manufacturing,
ft Warehouse
Ft. Lauderdale Leased 20,000 sq Sales, Warehouse
FL ft
Le Mee, France Owned 18,300 sq Sales, Manufacturing,
ft Warehouse
Emmetsburg, IA Leased 8,800 sq Manufacturing,
ft Warehouse
Livermore, CA Leased 6,000 sq Sales, Manufacturing,
ft Warehouse
Bryan, TX Owned 2,500 sq Manufacturing,
ft Warehouse
Total Owned 727,300 sq
ft
Total Leased 172,500 sq
ft
Total Owned
and Leased 899,800 sq
ft
Certain industrial revenue bonds 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, 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, 1997.
Executive Officers of the Registrant
Officer
Name and Age Position with Company Since
D. Dean Spatz (53) Chief Executive Officer 1969
and Chairman of the Board
Ruth Carol Spatz (53) Secretary 1969
Howard W. Dicke (60) Vice President Human 1978
Resources and Corporate
Development, and Treasurer
L. Lee Runzheimer (55) Chief Financial Officer 1988
James J. Carbonari (56) Vice President Sales &
Marketing 1989
Kenneth E. Jondahl (41) Vice President
International 1991
Andrew T. Rensink (41) Vice President Technology 1991
Kenton C. Toomey (50) Vice President Operations 1997
All of the executive officers except Mr. Toomey have
been officers of the Company for more than five years. Mr.
Toomey joined Osmonics in April of 1997 as Vice President
Operations. Prior to that he had been the Vice President of
Operations for DeZurik, a unit of General Signal.
Previously, throughout his 26 years with 3M Company, Mr.
Toomey held numerous director and management positions in
several 3M business units including plant manager of the
Dental Products Division. 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 19-23 of the Annual Report to
Shareholders, are incorporated herein by reference. As of
March 4, 1998 there were 2,499 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 which contain a
covenant limiting the payment of dividends to shareholders.
At December 31, 1997, approximately $38,901,000 of retained
earnings was restricted under this covenant.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data," page 29 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 24 and 25 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:
Page(s)
Consolidated Statements of Income . . . . . 16
Consolidated Balance Sheets . . . . . . . . 17
Consolidated Statements of Cash Flows . . . 18
Consolidated Statements of Changes in
Shareholders' Equity . . . . . . . . . . . 19
Notes to Consolidated Financial Statements . 19-23
Independent Auditors' Report . . . . . . . 24
Quarterly Income Data . . . . . . . . . . . 26
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,
1997 and forwarded to stockholders prior to the Company's 1998
Annual Meeting of Stockholders (the 1998 Proxy Statement).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated
herein by reference to the 1998 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 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated
herein by reference to the 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND
REPORTS ON FORM 8-K
(a) (1) Financial Statement
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 Schedules
Reports of Independent Public Accountants on
Supplemental Schedules 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.)
C.* 1983 Stock Option Plan and related
form of stock option agreement.
(Incorporated herein by reference to
Exhibit 10.2 to Registration Statement
on Form S-2, File No. 33-336.)
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) 1997 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, 1997.
SIGNATURES
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, President
Dated: March 30, 1998
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/ L.Lee Runzheimer Chief Financial March 30,
L.Lee Runzheimer Officer 1998
(Principal Finance
and Accounting
Officer)
/s/ Howard W. Dicke Vice President March 30,
Howard W. Dicke Human Resources 1998
and Corporate
Development, and
Treasurer
/s/ Ruth Carol Spatz Director March 30,
Ruth Carol Spatz 1998
/s/ Michael L. Snow Director March 30,
Michael L. Snow 1998
/s/ Ralph E. Crump Director March 30,
Ralph E. Crump 1998
/s/ Verity C. Smith Director March 30,
Verity C. Smith 1998
/s/ Charles W. Palmer Director March 30,
Charles W. Palmer 1998
/s/ William Eykamp Director March 30,
William Eykamp 1998
/s/ D. Dean Spatz President, March 30,
D. Dean Spatz Chairman of the 1998
Board and Director
(Principal
Executive Officer)