SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended MARCH 31, 1998
OR
_ Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the transition period from ____ to ____
Commission File No. 1-12714
OSMONICS, INC
____________________________________________________________________
(Exact name of registrant as specified in its charter)
Minnesota 41-0955759
____________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
5951 Clearwater Drive, Minnetonka, MN 55343
____________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612)933-2277
______________
N/A
_____________________________________________________________________
Former name, former address and former
fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes X No
___ ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. At April 30, 1998,
13,961,658 shares of the issuer's Common Stock, $0.01 par value, were
outstanding.
OSMONICS, INC.
INDEX
______
PART I. FINANCIAL INFORMATION PAGE
_____________________ ____
ITEM I. FINANCIAL STATEMENTS
Consolidated Statements of Income -................ 2
For the Three Months Ended
March 31, 1998 and 1997
Consolidated Balance Sheets -...................... 3
March 31, 1998 and December 31, 1997
Consolidated Statements of Cash Flows.............. 4
For the Three Months Ended
March 31, 1998 and 1997
Notes to Consolidated Financial Statements......... 5
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6-8
PART II. OTHER INFORMATION
_________________
ITEM 5. A. ACQUISITION OF COMPANY .................. 9
B. SUBSEQUENT EVENT ........................ 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............. 10
SIGNATURES................................................11
ITEM I - FINANCIAL STATEMENTS
____________________
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
__________________________________
(In Thousands Except Per Share Data)
THREE MONTHS ENDED MARCH 31,
1998 1997
---- ----
Sales $42,150 $42,313
Cost of sales 26,043 25,964
------ ------
Gross profit 16,107 16,349
Less:
Selling, general and administrative 9,874 9,717
Research, development
and engineering 2,328 2,786
----- -----
Income from operations 3,905 3,846
Other income (expense) (576) (101)
----- -----
Income from continuing operations
before income taxes 3,329 3,745
Income taxes 1,165 1,311
----- -----
Income from continuing operations 2,164 2,434
Recovery on discontinued operations - 325
----- ------
Net income $ 2,164 $ 2,759
======= =======
Earnings per share - basic
Income from continuing operations $0.16 $0.17
Net Income $0.15 $0.17
Earnings per share _ assuming dilution
Income from continuing operations $0.16 $0.19
Net Income $0.15 $0.19
Average shares outstanding
Basic 13,949 14,202
Assuming dilution 14,210 14,516
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
____________________________
(In Thousands Except Share Data)
MARCH 31, DECEMBER 31,
1998 1997
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 4,458 $ 4,872
Marketable securities 16,411 17,004
Trade accounts receivable, net of
allowance for doubtful accounts of
$980 in 1998, and $888 in 1997 30,825 28,969
Inventories 38,458 35,228
Deferred tax assets 6,441 1,413
Other current assets 2,752 1,639
------ ------
Total current assets 99,345 89,125
------ ------
Property and equipment, at cost
Land and land improvements 5,606 5,535
Building 30,045 29,278
Machinery and equipment 65,353 62,770
------ ------
101,004 97,583
Less accumulated depreciation (44,930) (42,550)
-------- --------
56,074 55,033
Other assets 35,844 20,325
------ ------
$191,263 $164,483
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 11,172 $ 9,728
Notes payable and current portion
of long-term debt 16,250 16,174
Other accrued liabilities 20,972 17,950
------ ------
Total current liabilities 48,394 43,852
------ ------
Long-term debt 33,696 13,792
Other liabilities 22 25
Deferred income taxes 4,470 4,439
Shareholders' equity
Common stock, $0.01 par value
Authorized -- 50,000,000 shares
Issued -- 1998: 13,957,623 and
1997: 13,943,544 shares 140 140
Capital in excess of par value 20,445 20,261
Retained earnings 82,292 80,128
Unrealized gain on
marketable securities 2,249 2,180
Foreign currency translation
adjustments (445) (334)
------ ------
Total liabilities and
shareholders' equity $191,263 $164,483
======== ========
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
Cash flows from operations:
Net income $ 2,164 $ 2,759
Non-cash items included in net income:
Depreciation and amortization 1,794 1,190
Deferred income taxes 333 111
Gain on sale of investments (105) -
Changes in assets and liabilities:
(net of business acquisitions)
Accounts receivable (353) (1,439)
Inventories and other
current assets (2,065) 2,371
Accounts payable and accrued
liabilities 2,416 (4,084)
------- -------
Net cash provided by operations 4,184 908
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition
(net of cash acquired) (23,452) (10,470)
Purchase of investments (268) (317)
Sale of investments 1,074 400
Purchase of property and equipment (1,932) (1,350)
Sales of property and equipment 73 -
Other (146) (125)
------ ------
Cash provided by (used in)
investing activities (24,651) (11,862)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and debt 20,076 9,398
Reduction of debt (96) (136)
Issuance of common stock 184 311
Purchase of company stock - (1,184)
------ ------
Net cash provided by (used in)
Financing activities 20,164 8,389
------ ------
Effect of exchange rate changes on cash (111) 141
Decrease in cash and cash equivalents (414) (2,424)
Cash and cash equivalents -
beginning of year 4,872 5,392
------ ------
Cash and cash equivalents -
end of quarter $ 4,458 $ 2,968
====== ======
OSMONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all the informa
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
normal recurring accruals) considered necessary for a fair presentation have bee
included.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (_SFAS_ ) No. 130, _ Reporting Comprehensive Income_ which establishe
standards for the reporting of comprehensive income and its components. The Com
has the following components of comprehensive income:
1st Qtr. 1st Qtr.
1998 1997
---- ----
Net income $2,164 $2,764
Other comprehensive income, before tax:
Foreign currency translation adjustments (111) (255)
Unrealized gains on securities:
Unrealized holding gains arising
during period 174 (594)
Less: reclassified adjustment
for gains included in net income (105) 69 - (594)
----- --- --- -----
Other comprehensive income, before tax (42) (849)
Income tax expense related to items of
other comprehensive income (15) (297)
----- -----
Other comprehensive income, net of tax (27) (552)
----- -----
Comprehensive income $2,137 $2,207
====== ======
Operating results for the three months ended March 31, 1998, are not necessarily
indicative of the results that may be expected for the full year 1998.
These statements should be read in conjunction with the financial statements and
related notes included in the Company's Annual Report to shareholders and Form 1
for the year ended December 31, 1997.
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
_________________________________________________
(Dollars in thousands, except share data)
As an aid to understanding the Company's operating results, the following table
shows the percentage of sales that each income statement item represents for the
three months ended March 31, 1998 and 1997.
PERCENT OF SALES
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
Sales 100.0% 100.0%
Cost of sales 61.8 61.4
----- -----
Gross profit 38.2 38.6
Selling, general and administrative 23.4 23.0
Research, development and engineering 5.5 6.6
----- -----
Operating expenses 28.9 29.6
Income from operations 9.3 9.1
Other income (expense) (1.4) (0.2)
----- -----
Income from continuing operations
before income taxes 7.9 8.9
Income taxes 2.8 3.1
----- -----
Income from continuing operations 5.1 5.8
Recovery on discontinued operations - 0.8
----- -----
Net income 5.1% 6.5%
===== =====
SALES
Sales for the first quarter ended March 31, 1998 of $42,150 decreased 0.4% from
sales for the first quarter of 1997. Sales of equipment represent 49% and
replaceable products represent 51% of first quarter 1998 sales. Comparing same
business activity before acquisitions, sales were 7.9% lower in first quarter of
1998 than first quarter of 1997 and were up 6.3% over sales for the fourth
quarter of 1997. Approximately 50% of the lower sales was reduced domestic
shipments of large capital equipment and 50% was reduced business split evenly
between the Asia/Pacific and Latin America markets.
GROSS MARGIN
Gross margin for the first quarter of 1998 was 38.2% versus 38.6% for the
corresponding period in 1997. Gross margins have been affected by product mix,
price competition and a lower level of plant utilization at several locations.
OPERATING EXPENSES
Operating expenses decreased to 28.9% in the first quarter of 1998 from 29.6% in
the first quarter of 1997. The first quarter of 1998 result is an improvement
from 30.4% operating expense experienced in calendar year 1997. This
improvement is a result of continued expense controls in response to reduced
sales levels in late and early 1998.
OTHER EXPENSE
Other expense increased by $475 in the first three months of 1998 versus the
same period for 1997. The increase is primarily the result of an increase in
interest expense of $175 and $150 for the additional borrowing of $20,000 and
$12,000 for acquisition of Micron Separations, Inc. on February 17, 1998 and
Aquamatic on February 25, 1997, respectively.
INCOME TAXES
The effective tax rate for the three months ended March 31, 1998 was 35.0% based
on the forecast for the full year. This rate is equivalent to the same period
in 1997. However, this represents an increase over the 31.7% rate incurred for
calendar year 1997, due primarily to lower R&D tax credits on reduced spending,
and other non-recurring tax credits received in 1997.
RECOVERY ON DISCONTINUED OPERATIONS
The Company recognized $325 ($0.02 per share assuming dilution) in after tax
income in the first quarter of 1997 from a reduction in the reserve for
discontinued operations from the Autotrol merger, after a lawsuit was
successfully defended.
NET INCOME
Net income for the quarter ended March 31, 1998 was $2,164 versus $2,759 for the
quarter ended March 31, 1997. Net income per common share assuming dilution for
the quarter was $0.15 versus $0.19 for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash, cash equivalents and marketable
securities of $20,869 versus $21,876 at December 31, 1997. The current ratio was
2.1 at March 31, 1998 as compared to 2.0 at year end 1997.
The Company's long-term debt increased from $13,792 at December 31, 1997 to
$33,696 at March 31, 1998. The increase was the result of entering into a new
$20,000 long-term unsecured loan from an insurance company in March. The
Company's current debt remained relatively flat from December 31, 1997 to
March 31, 1998. Also, in March 1998 the Company expanded its revolving line of
credit with a commercial bank to $30,000 from $22,000. As of March 31, 1998,
the Company had borrowings outstanding under the line of $14,000.
The Company believes that its current cash and investments position, its cash
flow from operations, and amounts available from bank credit will be adequate to
meet anticipated cash needs for working capital, capital expenditures, and
potential acquisitions during the foreseeable future.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act provides a 'safe harbor' for
forward-looking statements. Certain information included in this Form 10-Q and
other materials filed or to be filed with the Securities and Exchange
Commission (as well as information included in statements made or to be made by
the Company) contain statements that are forward looking. Such statements may
relate to plans for future expansion and acquisitions, business development
activities, capital spending, financing, or the effects of regulation and
competition. Such information involves important risks and uncertainties that
could significantly affect results in the future. Such results may differ from
those expressed in any forward-looking statements made by the Company. These
risks and uncertainties include, but are not limited to, those relating to
product development, computer systems development, dependence on existing
management, global economic and market conditions, and changes in federal or
state laws.
OSMONICS, INC.
PART II
OTHER INFORMATION
Item 5. OTHER INFORMATION
A. ACQUISITION OF COMPANY
The Company announced during the first quarter of 1998 the acquisition for cash
all the equity interest in Micron Separations, Inc. (MSI) of Westborough,
Massachusetts, for a total consideration of approximately $25,000.
MSI develops, manufactures and markets microfilter membrane products for
diagnostic laboratory and industrial use. The Company believes that these
products are complementary to the cartridge filters Osmonics manufactures for
the pharmaceutical, beverage and ultrapure water filtration markets. Also,
the Company believes that MSI's line of diagnostic and laboratory membrane
products will complement the Company's Poretics track-etch membrane and give
Osmonics a broader portfolio of products to offer the laboratory and
analytical testing market.
MSI's products will be sold through existing Osmonics distribution channels.
The revenues of MSI were less than $15,000 in each of the last three years. The
acquisition was recorded under the purchase method of accounting. Finalization
of the related purchase accounting is anticipated in the second quarter of 1998.
B. SUBSEQUENT EVENT
The Company announced during the first quarter that it signed a definitive
agreement to purchase all of the equity interest in Membrex Corp. of Fairfield,
New Jersey. Membrex shareholders approved the purchase on April 15, 1998. The
acquisition was for cash of approximately $16 million and will be recorded
under the purchase method of accounting. Membrex sales in 1997 were less than
$10 million.
Membrex, a 13-year-old, privately held company, designs and manufactures
membrane products and fluid treatment systems for industrial customers.
Applications include recycling machine tool coolant and cleaners, and minimizing
oily waste water.
Membrex has developed, what the Company believes is, the most hydrophilic
ultrafiltration (UF) membrane on the market today. The patented, solvent-
resistant membrane separates oil from water and recyclable cleaners at least
five times faster than competitive products, without fouling. This technology
allows service stations, repair facilities and manufacturing plants to more
cost-effectively clean oily parts, meet stricter environmental regulations and
reuse valuable cleansing agents. Other potential markets for the membrane
include high fouling applications in biotechnology, laboratory operations and
chemical processes.
To finance the acquisition, the Company expanded its revolving line of credit
with a commercial bank to $35,000.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) During the quarter ended March 31, 1998 the Registrant filed a
Form 8-K and a Form 8-K/A report. Financial statements were not
included with either filing.
(1) FORM 8-K - The following documents were included as an exhibit to
Form 8-K, filed March 4, 1998, and are incorporated herein by
reference:
(i) First Amended Disclosure Statement to Joint Plan of
Reorganization submitted by Micron Separations, Inc. and
Osmonics, Inc.
(ii) Joint Plan of Reorganization submitted by Micron
Separations, Inc. and Osmonics, Inc., dated December 15, 1997.
(2) FORM 8-K/A - This form was filed on April 27, 1998 and
incorporates the documents filed in Form 8-K by reference.
(c) $20,000 Note Purchase Agreement
(d) $30,000 Amended and Restated Revolving Note Agreement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: ___________________
OSMONICS, INC.
___________________________________
(Registrant)
/s/ L. Lee Runzheimer
___________________________________
L. Lee Runzheimer
Chief Financial Officer
/s/ Howard W. Dicke
___________________________________
Howard W. Dicke
Treasurer and Vice President
Corporate Development
/s/ D. Dean Spatz
___________________________________
D. Dean Spatz
Chief Executive Officer