OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Year ended December 31,
1997 1996 1995
Sales $164,905 155,946 $130,783
Cost of sales 99,860 92,523 74,670
Gross profit 65,045 63,423 56,113
Operating expenses:
Selling, general and
administrative 39,603 35,079 31,377
Research, development and
engineering 10,635 10,937 9,399
Special charges 1,448 - -
51,686 46,016 40,776
Income from operations 13,359 17,407 15,337
Other income (expense), net:
Interest income 913 1,023 1,649
Interest expense (2,226) (1,594) (1,565)
Other 344 3,072 1,412
(969) 2,501 1,496
Income from continuing
operations before income 12,390 19,908 16,833
taxes
Income taxes (Note 11) 3,927 6,441 4,954
Income from continuing
operations 8,463 13,467 11,879
Recovery on discontinued
operations
(less income taxes of $617) 1,330 - -
Net income $ 9,793 $13,467 $ 11,879
Earnings per share _ basic
(Note 16)
Income from continuing
operations $0.60 $0.95 $0.84
Net income $0.70 $0.95 $0.84
Earnings per share _
assuming dilution
(Note 16)
Income from continuing
operations $0.59 $0.93 $0.83
Net income $0.68 $0.93 $0.83
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $4,872 $5,392
Marketable securities (Note 3) 17,004 19,028
Trade accounts receivable, net of
allowance for doubtful 28,969 28,200
accounts of $888 in 1997 and
$907 in 1996
Inventories (Note 4) 35,228 32,322
Deferred tax assets (Note 12) 1,413 1,559
Other current assets 1,639 2,026
Total current assets 89,125 88,527
Property and equipment, at cost:
Land and land improvements 5,535 5,485
Buildings 29,278 27,158
Machinery and equipment 62,555 50,045
Construction in progress 215 3,438
97,583 86,126
Accumulated depreciation (42,550) (34,332)
55,033 51,794
Cash restricted for purchase and
construction of equipment (Note 5) 1,130 1,960
Goodwill, net of accumulated
amortization of $960 in 1997 and 15,257 7,395
$553 in 1996
Long-term investments 1,016 726
Other assets, net of accumulated
amortization of tangible assets of 2,922 1,774
$412 in 1997 and $342 in 1996
Total assets $164,483 152,176
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $9,728 $12,511
Line of credit advances (Note 6) 14,012 2,511
Notes payable and current portion of 2,162 4,982
long-term debt (Note 9)
Accrued compensation and employee 6,125 5,254
benefits
Reserve for discontinued operations - 1,957
(Note 7)
Other accrued liabilities (Note 8) 11,825 7,306
Total current liabilities 43,852 34,521
Long-term debt (Note 9) 13,792 15,900
Deferred income taxes (Note 12) 4,439 3,616
Other liabilities 25 196
Commitments and contingencies (Note 14)
Shareholders' equity (Note 9 and 10):
Common stock, $0.01 par value
Authorized -- 50,000,000 shares
Issued -- 1997: 13,943,544 and 1996:
14,193,239 shares 140 142
Capital in excess of par value 20,261 23,128
Retained earnings 80,128 71,781
Unrealized gain on marketable
securities (Note 3) 2,180 2,864
Cumulative effect of foreign currency
translation adjustments (334) 28
Total shareholders' equity 102,375 97,943
Total liabilities and shareholders'
equity $164,483 $152,176
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
1997 1996 1995
Cash flows from operations:
Net income $9,793 $13,467 $11,879
Non-cash items included in net
income:
Depreciation and amortization 5,791 4,874 3,795
Deferred income taxes 1,176 1,849 (71)
Gain on sale of land and (573) (3,396) (810)
investments
Special charges 1,448 - -
Recovery on discontinued (1,947) - -
operations
Changes in assets and liabilities
(net of business acquisitions):
Accounts receivable 1,370 (4,648) (4,494)
Inventories 1,806 (3,349) (6,517)
Other current assets 457 155 (727)
Accounts payable and accrued
liabilities (2,553) (3,216) 5,798
Reserve for deferred
compensation - - (432)
Net cash provided (used) by
operations 16,768 5,736 8,421
Cash flows from investing
activities:
Business acquisitions (net of (13,992) - (5,380)
cash acquired)
Purchase of investments (902) (1,418) (6,633)
Maturities and sales of 2,478 9,570 13,228
investments
Purchase of property and (6,609) (15,658) (20,818)
equipment
Sales of property and equipment 456 2,535 -
Pending acquisition costs (1,200) - -
Other (245) (169) (367)
Net cash provided (used) for
investing activities (20,014) (5,140) (19,970)
Cash flows from financing
activities:
Proceeds from notes payable and
current debt 16,967 882 13,928
Reduction of long-term debt (10,394) (2,219) (5,898)
Cash restricted for purchase and
construction of equipment 830 74 (2,034)
Issuance of common stock 934 1,324 761
Purchase of common stock (5,249) - -
Dividends paid by a pooled
company - - (90)
Net cash provided (used) in
financing activities 3,088 61 6,667
Effect of exchange rate changes (362) 6 (94)
on cash
Increase (decrease) in cash and (520) 663 (4,976)
cash equivalents
Cash and cash equivalents - 5,392 4,729 9,705
beginning of year
Cash and cash equivalents - end of $4,872 $5,392 $4,729
year
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Unreal
ized
Capital Gain Cumul-
in on ative
Common Stock Excess Ret- Market Transl-
of ained able ation
Common Par Earn- Securi Adjust-
Shares Amt. Value ings ties ments
Balance -
January 1, 1995 13,999 $140 $21,045 $46,525 $1,038 $178
Net income - - - 11,879 - -
Translation
adjustment - - - - - 141
Change in
unrealized gain - - - - 2,656 -
on marketable
securities
Dividends of
pooled company - - - (90) - -
Employee stock
purchase 87 1 760 - - -
plans
Balance - 14,086 141 21,805 58,314 3,694 319
December 31,
1995
Net income - - - 13,467 - -
Translation
adjustment - - - - - (291)
Change in
unrealized gain - - - - (830) -
on marketable
securities
Employee stock
purchase 107 1 1,323 - - -
plans
Balance -
December 31, 14,193 142 23,128 71,781 2,864 28
1996
Net income 9,793
Translation
adjustment (362)
Change in
unrealized gain (684)
on marketable
securities
Employee stock
purchase 66 1 933
plans
Purchase of
common stock (316) (3) (3,800) (1,446)
Balance _
December 31, 13,943 $140 $20,261 $80,128 $2,180 $(334)
1997
FIVE-YEAR RESULTS
(In thousands, except per share amounts)
INCOME DATA: (Restated for poolings-of-interests)
Year ended December 31,
1997 1996 1995 1994 1993
Sales $164,905 $155,946 $130,783 $112,908 $108,212
Income from
continuing 8,643 13,467 11,879 10,454 9,294
operations
Net income 9,793 13,467 11,879 10,454 9,294
Earnings per
share _ basic
(Note 16)
Income from
continuing
operations $0.60 $0.95 $0.84 $0.75 $0.67
Net income $0.70 $0.95 $0.84 $0.75 $0.67
Earnings per
share -
assuming
dilution
(Note 16)
Income from
continuing
operations $0.59 $0.93 $0.83 $0.74 $0.66
Net income $0.68 $0.93 $0.83 $0.74 $0.66
Average shares
outstanding
Basic 14,031 14,145 14,058 13,941 13,897
Assuming-
dilution 14,313 14,458 14,365 14,206 14,075
BALANCE SHEET DATA: (Restated for poolings-of-interests)
Total assets $164,483 $152,176 $142,419 $110,715 $96,812
Long-term debt 13,792 15,900 20,919 14,475 14,532
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,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Sales $164,905 $155,946 $111,610 $96,180 $89,043 $50,541 $46,738 $43,553 $36,223 $31,058 $20,464
Net
income 9,793 13,467 11,212 9,955 7,895 4,528 3,902 3,714 4,047 2,990 1,151
BALANCE SHEET DATA: (As Originally Reported)
Total
asets $164,483 $152,176 $125,058 $102,035 $88,826 $60,300 $54,931 $54,370 $45,884 $43,430 $37,715
Working
capital 45,273 54,006 54,224 55,995 45,281 29,471 25,955 21,692 21,117 15,707 13,836
Long-
term
debt 13,792 15,900 12,441 14,050 13,913 13,221 13,697 13,761 3,788 3,664 3,753
Share-
holders'
equity 102,375 97,943 78,471 63,751 52,070 33,793 28,891 24,720 33,067 28,909 25,598
(a) 1992 Net income 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."
QUARTERLY FINANCIAL DATA
(In thousands, except per share amounts)
Quarterly Financial Data - 1997
Quarter Ended
March 31(b) June 30 Sept. 30 Dec. 31(b)
Sales $42,313 $41,789 $42,420 $38,383
Gross profit 16,349 16,858 16,954 14,884
Net income 2,759 2,593 2,296 2,145
Net income per
share _ $0.19 $0.18 $0.16 $0.15
basic (a)
Net income per
share _ assuming $0.19 $0.18 $0.16 $0.15
dilution(a)
Quarterly Financial Data - 1996
Quarter Ended
March 31 June 30 Sept. 30 Dec. 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 _ $0.26 $0.22 $0.23 $0.24
basic(a)
Net income per
share _ assuming $0.25 $0.21 $0.23 $0.24
dilution(a)
(a)Income per share has been restated to reflect the
adoption of the Statements of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS No. 128).
See Note 16 of the consolidated financial statements.
(b)Special charges of $1,448 ($0.07 per share after taxes)
were recorded during the fourth quarter of 1997.
Recovery from discontinued operations of $325 ($0.02 per
share) and $1,005 ($0.07 per share) were recorded in
first and fourth quarter of 1997, respectively.
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, consumer and institutional customers.
The consolidated financial statements include the
accounts of Osmonics, Inc. and its wholly and majority
owned subsidiaries (the Company). Significant
intercompany accounts and transactions have been
eliminated.
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 for two business units
which have 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 Company recorded special charges of $1,448 during
the fourth quarter of 1997. These non-recurring charges
of $0.07 per share after taxes assuming dilution were
for the write-offs of certain impaired assets and
expenses related to recent acquisitions.
The excess of cost over the fair market value of assets
acquired in acquisitions is amortized over not more than
40 years. In accordance with SFAS 121 on impairment of
long-lived assets, the carrying values of these
intangibles are reviewed quarterly for impairment using
discounted cash flows when events or circumstances
warrant such a review. Other intangibles are carried at
cost and amortized using the straight-line method over
their estimated lives of 5 to 20 years.
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
On February 25, 1997, the Company acquired all of the
equity interest of AquaMatic, Inc. of Rockford,
Illinois. The purchase price was approximately $15,000
and included $7,600 of goodwill which is being amortized
on the straight-line method over 40 years. AquaMatic
products are being 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 was recorded under the
purchase method of accounting.
The results of operations of AquaMatic are included in
the consolidated statements of income from the date of
acquisition.
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 year ended December 31, 1995
were as follows:
Six Months Year ended
ended June 30, December 31,
1996 1995
Sales:
Osmonics $ 64,405 $111,610
DSI 11,642 20,348
Eliminations (269) (1,175)
Combined $ 75,778 $130,783
Net income:
Osmonics $ 5,975 $11,212
DSI 721 667
Combined $ 6,696 $11,879
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 goodwill which is 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. Sales of
Western Filter were less than $10,000 in 1995. 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. Such
additional payments would increase recorded goodwill.
The results of operations of Western Filter are included
in the consolidated statements of income from the date
of acquisition.
3. Marketable Securities
The Company considers all of its marketable securities
available-for-sale. Marketable securities at December
31, 1997 consisted of the following:
Amorti Unreal Unreal
-ized -ized -ized Fair
Cost Gains (Losses) Value
U.S. government
securities
0-5 year
maturity $3,835 $28 $ (15) $3,848
6 year or
greater maturity 400 - (1) 399
Municipal bonds
0-5 year
maturity 3,517 175 - 3,692
6 year or
greater maturity 998 91 - 1,089
Corporate debt
securities and
other
0-5 year
maturity 707 2 (7) 702
6 year or
greater maturity 100 4 - 104
Equity securities 3,887 3,432 (149) 7,170
Total before tax
effect $13,444 3,732 (172) $17,004
Deferred tax
effect of
unrealized
(gains) losses (1,447) 67
Net unrealized
gains (losses)
on marketable
securities $2,285 $(105)
Marketable securities at December 31, 1996 consisted of the
following:
Amorti Unreal Unreal
-zed -ized -ized 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 $14,407 4,893 (272) $19,028
effect
Deferred tax
effect of
unrealized
(gains) losses (1,860) 103
Net unrealized
gains (losses)
on
marketable
securities $3,033 $(169)
Market values are based on quoted market prices.
In 1997, proceeds from sales of available-for-sale
securities were $1,678. The gains and losses on these
sales were $614 and $41, respectively, determined on the
specific identification method.
In 1996, proceeds from sales of available-for-sale
securities were $8,068. The gains and losses on these
sales were $2,832 and $44, respectively, determined on
the specific identification method.
4. Inventories
Inventories consist of the following:
December 31,
1997 1996
Finished goods $ 9,757 $ 5,276
Work in process 7,544 9,319
Raw materials 19,832 18,416
37,133 33,011
Adjustment to reduce
inventories of $12,446 and
$6,016 to the last-in, (1,905) (689)
first-out method (See Note
1)
------- -------
$35,228 $32,322
5. Restricted Cash
Cash restricted for purchase and construction of
equipment at December 31, 1997 and 1996 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. Line of Credit
The Company, at December 31, 1997, had an unsecured
revolving line of credit of $22,000 for working capital
needs. The revolving line of credit matures on October
8, 1998 and borrowings bear a variable interest rate
related to LIBOR. The terms of the credit agreement
contain certain restrictions related to financial
ratios, indebtedness, tangible net worth and capital
expenditures. As of December 31, 1997 and 1996, the
Company was in compliance with all debt covenants. At
December 31, 1997, the Company had borrowings
outstanding under the line of $14,000, and the interest
rate was 6.27%. At December 31, 1996, the Company had
borrowings outstanding under the line of $2,511, and the
interest rate was 6.19%.
7. Discontinued Operations
In September 1982, Autotrol Corporation (Autotrol),
which has since been merged with the Company,
discontinued its wastewater business. In subsequent
years Autotrol incurred certain expenses related to the
wastewater products and accrued for contingent
liabilities. The Company determined in 1997 that the
reserve was no longer required and recognized $1,330
($0.09 per share.assuming dilution) of after-tax income
as a recovery on discontinued operations.
8. Other Accrued Liabilities
Other accrued liabilities consist of the following:
December 31,
1997 1996
Warranty and start-up $1,900 $1,802
Professional fees and other 2,123 2,480
accruals
Deferred acquisition 3,000 -
payments
Customer deposits 4,802 3,024
------- ------
$11,825 $7,306
9. Debt
Long-term debt is as follows:
December 31,
1997 1996
Promissory notes; interest
payable quarterly at the
three month LIBOR rate plus
80 b.p.; due through 2001. $7,150 $ 8,575
The interest rate on
December 31, 1997 was 6.52%.
Industrial development revenue
bonds (IDRB's), principal
due in varying annual
payments over 30 years;
interest payable monthly at
a variable rate determined 7,950 8,270
periodically by the bond
remarketing agent (6.61% at
December 31, 1997).
Industrial revenue bonds
(IRB's); paid in 1997. - 2,800
Mortgage notes payable to two
French banks; interest
payable monthly at PIBOR
plus 40 b.p. The interest 502 727
rate on December 31, 1997
was 3.57%.
Other notes 352 510
------ ------
15,954 20,882
Current portion (2,162) (4,982)
------- -------
$13,792 $15,900
The IDRB 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, 1997 are:
1998 - $2,162; 1999 - $2,159; 2000 - $2,250; 2001 -
$3,700; 2002 - $834; beyond 2002 - $4,849.
The interest rate on the IRB's was determined in part by
the amount of collateral held by the lender. At
December 31, 1996, $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,
1997, approximately $38,901 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. As of
December 31, 1997 and 1996, the Company was in
compliance with all debt covenants.
Cash payments for interest related to all debts of the
Company were $2,033, $1,551, and $1,409, for the years
ended December 31, 1997, 1996, and 1995, respectively.
10.Stock Options
At December 31, 1997, the Company had reserved no 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 became
exercisable over a five-year period, after which they
expired. The following is a summary of activity under
the 1983 stock option plan. No additional options can
be granted under the 1983 plan.
1997 1996 1995
Options held by
employees
at December 31 - 7,500 86,206
Exercise price range on - $10.50 $ 6.45
to to
options held at - $10.50 $13.50
December 31
Number of options
exercised
during the year 7,500 65,805 34,920
Price range of options $10.50 $ 6.45 $ 3.63
Exercised during the to to to
year $10.50 $13.50 $10.16
Exercisable options held
at December 31 - 7,500 84,330
Exercise price range of - $10.50 $ 6.45
Exercisable options to to
- $10.50 $13.50
The Company also has reserved 298,863 common shares at
December 31, 1997 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.
1997 1996 1995
Options held by employees
at December 31 177,588 50,200 34,163
Exercise price range on $13.67 $13.67 $13.67
Options held at to to to
December 31 $22.38 $22.38 $18.25
Number of options
exercised
during the year 187 263 500
Price range of options $13.67 $13.67 $14.38
Exercised during the to to to
year $17.50 $14.38 $14.38
Exercisable options held
at December 31 20,513 10,687 2,463
Exercise price range of $13.67 $13.67 $13.67
Exercisable options to to to
$22.38 $18.25 $14.50
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.
1997 1996 1995
Options held by
employees
at December 31 371,841 371,841 371,841
Exercise price range on $3.18 $3.18 $3.18
Options held at to to to
December 31 $6.94 $6.94 $6.94
Number of options
exercised
during the year - - 14,407
Price range of options
exercised during the - - $3.47
year
Exercisable options held
at December 31 368,958 360,315 351,672
Exercise price range of $3.18 $3.18 $3.18
exercisable options to to to
$6.94 $6.94 $6.94
The Company also had a 1985 Employee Stock Purchase
Plan. In 1995, 14,548 shares were issued under the 1985
Plan at an average price of $13.58. 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 1997 and 1996, 58,720 and 41,154
shares were issued, respectively, under the 1995 Plan at
an average price per share of $14.48 and $17.41,
respectively. At December 31, 1997, 277,946 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 1997, options to
purchase 21,000 shares at a price ranging from $15.38 to
$16.81 were issued under this plan. 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, 1997, 18,000 options were exercisable
under this plan at a price of $19.88 and 18,000 options
were exercisable 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. No compensation cost has
been recognized for its stock-based compensation plans
as the exercise price of the stock option grants was
equal to the fair market value of the shares on the
grant date. Had compensation costs been determined
based on the fair value of the 1997, 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 less than a $0.01 per share
effect on the Company's pro forma net income per share
for 1997, 1996 or 1995. The fair value of options
granted under the Company's stock option plans during
1997, 1996 and 1995 was estimated using the Black-
Scholes option-pricing model with the following
weighted-average assumptions used: no dividend yield,
expected volatility between 22.6% and 25.0%, risk-free
interest rates between 6.0% and 6.1% and expected lives
of 5 years.
The Company had 500,000 authorized and unissued shares
of preferred stock at December 31, 1997 and 1996.
11.Income Taxes
Income tax expense consists of:
Year ended December 31,
1997 1996 1995
Current:
Federal $2,741 $3,556 $3,975
State (39) 395 423
Foreign 666 640 372
Deferred:
Depreciation 351 370 130
Valuation allowance
adjustment - - (197)
Allowance for doubtful
accounts, start-up,
warranty, inventory and
other accruals 100 462 310
Other 108 1,018 (462)
------ ------ ------
Total continuing
operations $3,927 $6,441 $4,954
Discontinued operations,
deferred 617 - (228)
------ ------ ------
Total provision $4,544 $6,441 $4,679
Cash payments for income taxes were $3,728, $5,204, and
$5,079, for the years ended December 31, 1997, 1996, and
1995, 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,
1997 1996 1995
Taxes at Federal rate (35%) $4,337 $6,950 $5,563
Increase (decrease)
resulting from:
Valuation allowance
adjustment - - (197)
State taxes, net of Federal
tax benefit 132 397 203
Foreign Sales Corp. benefit (546) (361) (190)
Tax credits (249) (197) (271)
Tax exempt
interest/dividend
deduction (123) (128) (200)
Effect of foreign
affiliates with different
tax rates or net losses 167 30 245
NOL and credit
carryforwards used - - (274)
Uncollectible account
write-off - (442) -
Other 209 192 (200)
------ ------ ------
Total continuing operations $3,927 $6,441 $4,679
Discontinued operations 617 - -
------ ------ ------
Total provision $4,544 $6,441 $4,679
12.Deferred Tax Assets and Liabilities
Temporary differences which give rise to deferred tax
assets and liabilities are as follows as of December 31:
1997 1996
Current assets:
Allowance for doubtful
accounts, start-up,
warranty, inventory and $2,955 $3,627
other accruals
Unrealized gain on
marketable securities (1,380) (1,757)
Inventory costs 81 115
capitalized for tax
Other (243) (426)
------ ------
Total current deferred $1,413 $1,559
assets
Noncurrent liabilities:
Depreciation $3,718 $3,130
Other 721 486
------ ------
Total non-current deferred
tax liabilities $4,439 $3,616
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).
1997 1996 1995
Sales to unaffiliated
customers from:
United States $150,753 $141,124 $116,964
Foreign operations 14,152 14,822 13,819
Transfers from (to)
geographic areas:
United States 7,818 7,890 7,936
Foreign operations (7,818) (7,890) (7,936)
$164,905 $155,946 $130,783
Income from continuing
operations before income
taxes:
United States $10,847 $18,225 $16,190
Foreign operations 1,543 1,683 643
$12,390 $19,908 $16,833
Identifiable assets:
United States $155,592 $144,609 $134,408
Foreign operations 8,891 7,567 8,011
$164,483 $152,176 $142,419
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,
1997 1996 1995
Asia/Pacific $18,643 $14,661 $10,915
Europe 13,752 9,181 7,798
Rest of the World 13,849 9,222 9,641
------- ------- -------
$46,244 $33,064 $28,354
Total international sales for the Company were as
follows:
1997 - $60,396; 1996 - $47,886; and 1995 - $42,173.
14.Commitments and Contingencies
The Company leases facilities for sales, service or
manufacturing purposes in Wisconsin, Massachusetts,
California, Florida, Iowa, Switzerland, Hong Kong,
Japan, Singapore, and Thailand.
Future minimum lease payments on all operating leases of
$5,291 are payable as follows: 1998 - $1,512; 1999 -
$1,108; 2000 - $964; 2001 - $743; 2002 - $604; and
beyond 2002 - $360. Rent expense for the three years
ended December 31 was: 1997 - $1,633; 1996 - $1,100;
and 1995 - $1,718.
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.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 $1,300, $1,435, and $996 in 1997,
1996, and 1995, respectively.
16.Earnings Per Share
Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128). Earnings per share
amounts presented for 1996 and 1995 have been restated
for the adoption of SFAS No. 128. The following table
reflects the calculation of basic and diluted earnings
per share from continuing operations.
1997 1996 1995
Earnings per share - basic
Income from continuing
operations available
to common stockholders $8,463 $13,467 $11,879
Weighted average shares
outstanding 14,031 14,145 14,058
Income from continuing
operations per share
- basic $0.60 $0.95 $0.84
Earnings per share _ assuming
dilution
Income from continuing
operations available
to common stockholders $8,463 $13,467 $11,879
Weighted average shares
outstanding 14,031 14,145 14,058
Dilutive impact of stock
options outstanding 282 313 307
Weighted average shares and
potential dilutive shares
outstanding 14,313 14,458 14,365
Income from continuing
operations per share
- assuming dilution $0.59 $0.93 $0.83
Options to purchase 128,800 shares of common stock at a
range of $17.50 to $22.38 were outstanding during 1997
but were not included in the computation of diluted
earnings per share because the options' exercise price
was greater than the average market price of the common
share.
17.Subsequent Events
On February 17, 1998, the Company completed the purchase
of all of the equity interest in Micron Separations,
Inc. (MSI) of Westborough, Massachusetts, for a total
consideration of approximately $25,000. MSI's product
will be sold through existing Osmonics distribution
channels, offering a more complete line of microfilter
membrane products for diagnostic, laboratory and
industrial use. The revenues of MSI were less than
$15,000 in each of the last three years. The
acquisition will be recorded under the purchase method
of accounting.
On March 20, 1998, the Company signed a definitive
agreement to purchase all of the equity interest in
Membrex Corp. of Fairfield, New Jersey, subject to
Membrex shareholder approval. The acquired products
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.
Effective March 18, 1998, the Company expanded its
financing arrangements in the form of a $30,000
revolving line of credit from a commercial bank, and
$20,000 of long-term loans from an insurance company.
The long-term loans include $5,000 at a fixed rate of
6.72%. The balance of the financing is at floating
rates that could vary from 30 to 150 basis points over
the 90-day LIBOR.