UNITED STATES
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, 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 41-0955959
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 New York Stock Exchange
$0.01 per share (Name of each exchange on which
(Title of each class) 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
or any amendment to this form 10-K. [X].
As of March 17, 1999, 14,008,163 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 17, 1999) was $112,065,304.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the
fiscal year ended December 31, 1998 (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 12, 1999
(the "Proxy Statement"), and to be filed within 120 days
after the Registrant's fiscal year ended December 31, 1998,
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. See "Certain Factors" and other
portions of this Form 10-K for discussion of some of these
risks and uncertainties.
Osmonics, Inc., founded in 1969, and its wholly-owned
subsidiaries (the "Company") design, manufacture and market
a wide range of products used in the filtration, separation
and processing of fluids. The Company classifies its
products into two segments, namely Consumables and Equipment.
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 Consumables and
Equipment utilizing crossflow filtration processes designed
to separate particles in the molecular range. Through
acquisitions and internal product developments, the Company
now manufactures a full line of filtration Consumables and
Equipment.
DEVELOPMENT OF BUSINESS
In addition to developing the Company's product line
through internal research and development, the Company has
expanded its business through a series of acquisitions.
Recent primary acquisitions include:
AUTOTROL - In October 1993, the Company acquired Autotrol
Corporation, founded in 1962, a manufacturer 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 utilize them as a component in a water conditioning
device which is then sold to consumers.
LAKEWOOD INSTRUMENTS - In November 1994, the Company
acquired substantially all of the assets of Lakewood
Instruments, a Phoenix-based manufacturer of instruments,
sensors and analyzers used in the measurement of fluid
characteristics in the chemical water treatment and pure
water industries.
WESTERN FILTER COMPANY - In October 1995, the Company
acquired the assets and operations of Western Filter
Company, a 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.
DESALINATION SYSTEMS - In July 1996, the Company acquired
Desalination Systems, Inc. ("Desal"), a manufacturer of
crossflow filtration membrane and membrane elements that
are marketed worldwide. Desal, which has facilities in
Vista, California, has products that extend the range of
membranes and membrane elements previously offered by the
Company. The acquisition extended the Company's
distribution network for such products.
AQUAMATIC - In February 1997, the Company acquired
AquaMatic, Inc., a Rockford, Illinois-based company
offering a line of specialty valves and controllers for
the water conditioning market, which are sold through the
Company's existing distribution channels.
PURIFICATIONS PRODUCT COMPANY - In December 1997, the
Company acquired the assets of Purifications Products
Company ("PPC"), a manufacturer of 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, the PPC
division offers a line of Silt Density Index instruments
and a line of UV sterilization products. These products
are sold through the Company's existing distribution
channels.
MICRON SEPARATIONS, INC. - In February 1998, the Company
acquired Micron Separations, Inc. ("MSI"), a Westborough,
Massachusetts-based developer and manufacturer of
microfilter membrane and membrane products for diagnostic,
laboratory and industrial use. These products expand the
Company's range of nylon and cellulosic membrane
applications. The products are sold through the Company's
existing distribution channels.
MEMBREX CORP. - In April 1998, the Company acquired
Membrex Corp. of Fairfield, New Jersey. The acquisition
gives the Company the most hydrophilic UF membrane in the
market. This patented membrane is primarily used to
separate oil from water and is also used in a variety of
applications in biotechnology, laboratory and
petrochemical processes. Membrex also has a patented
machine using its UF membrane which separates oil from
aqueous chemical cleaners used in parts cleaning and other
industrial and commercial applications. Some Membrex
products are sold through an exclusive agreement with
Safety-Kleen Corp. and the remainder through the Company's
existing distribution channels.
PRODUCTS
The Company's products are divided into two primary
categories, namely, Consumables and Equipment.
CONSUMABLES GROUP:
The Company's Consumables consist primarily of
membranes, filter media, membrane elements and filter
cartridges. The filtration media and membrane used in the
Company's Consumables are produced primarily from polymers
or polymer-based compounds; however, other Consumables
utilize various inorganic compounds, metals and ceramics.
MEMBRANES AND ELEMENTS: Membranes are generally sheets
of material which, due to their unique characteristics, can
separate various materials from a fluid. Membrane elements
are the combination of membrane, support materials and
connections which allows the membrane to be broadly
utilized.
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 and 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 also registered with the U.S. FDA for the
manufacture of Class II medical devices used to purify water
for hemodialysis.
The Company markets its microfiltration normal flow
membrane for use in a variety of laboratory and medical
diagnostic applications. Numerous applications exist for
the Company's microfilters because of unique features,
including use in diagnostics, air monitoring and in
laboratory procedures for cancer and other research.
FILTER CARTRIDGES: The Company markets several types
of replaceable cartridge filters. Cartridge filters consist
of the various membranes and filtration media manufactured
by the Company and third parties together with various end
caps and other parts that allow them to be used and replaced
in filtration equipment and systems. These cartridge
filters include depth cartridge filters, pleated cartridge
filters, and rolled cartridge filters.
Cartridge filters are manufactured in a range of pore
sizes and particulate retention ratings. Cartridge filters
are designed to retain particles in the filters. As a
result, cartridge filters are typically replaced at
intervals of eight hours to four weeks, depending on the
particular application.
The Company's ceramic cartridge filters are marketed
for use in microfiltration and particulate filtration.
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. 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.
EQUIPMENT GROUP:
The Company manufactures a broad range of equipment
products ranging from large independent fluid treatment
systems custom designed for a particular customer and its
related filtration requirements to instruments used to
determine the amount of a particular substance in a fluid.
The Company's filtration equipment utilizes a wide range of
filtration techniques including: crossflow filtration
(which includes reverse osmosis, nanofiltration,
ultrafiltration and microfiltration), normal filtration
(which includes microfiltration and particle filtration),
coalescing filtration, ion exchange, clarification,
chromatography, ozonation and distillation. As a result,
the Company's Equipment is used in a broad range of
applications from complete fluid processing systems used in
beverage production to sensors for detecting the presence of
various levels of materials. The Company's Equipment
products are divided into three categories: Equipment and
Pumps, Fluid Controls and Valves, and Systems. The
Company's Equipment products are manufactured in multiple
locations throughout the United States.
EQUIPMENT AND PUMPS:
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. The Company's distillation product
lines range from laboratory stills to elaborate 5000-gallon-
per-hour multi-stage purifiers. The Company markets
distillation and related water purification equipment used
primarily in the laboratory and pharmaceutical industries.
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 wastewater.
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.
Other types of equipment manufactured by the Company
include centrifugal, diaphragm, and bellows pumps;
electronic controllers to operate precision valves for water
conditioning; flow control and measuring devices and
instrumentation; and housings and specialty holders and
devices for containing and retaining various membranes and
filters.
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.
CONTROLS AND VALVES:
The Company is a leader in the manufacture of the
controllers and valves used to effect ion exchange
technology. 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. Another ion exchange
application is to polish ultrapure water for electronics
manufacture and high-pressure boiler feed.
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 Company markets both analog and digital products
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 trichloroethylene. The
instruments are capable of being used in local operating
network (LON) communications and data acquisition.
CUSTOM EQUIPMENT AND SYSTEMS:
The Company also manufacturers crossflow and normal
filtration machines. Such machines 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.
REPLACEABLE AND EQUIPMENT SALES
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 Components
----------- --------- -----------
1998 48% 52%
1997 46% 54%
1996 49% 51%
1995 48% 52%
1994 51% 49%
1993 49% 51%
As a result of a Company-wide reorganization on July 1, 1998
and to meet new SEC reporting requirements, the above sales
comparison will no longer be reported. Instead, business
results will be reported based on the two segments previously
discussed (Consumables and Equipment).
For the last six months of 1998, the Consumables Group
was 41% of total sales and the Equipment Group made up 59%
of sales. Although we will discontinue our previous method
of reporting, it is still our goal to have an equal balance
of replaceable sales to equipment sales.
SALES AND MARKETING
As a result of our broad range of Equipment and
Consumables, the Company's Equipment and Consumables are
used in the 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
potable water, health care, biotechnology, food and
beverage, electronics, chemical processing and power
generation industries.
The Company focuses the marketing of its products through
four selling groups:
1. Custom equipment and systems.
2. Components and product sales.
3. Catalog and telephone sales.
4. International
These sales groups are supported by application engineers
and market support personnel.
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
$9,913,000 in 1998, $10,635,000 in 1997, and $10,937,000 in
1996.
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, 1998, the Company employed 1,360 persons
including 213 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 1998, 1997, or 1996.
BACKLOG
The dollar amount of the Company's backlog of orders
considered to be firm at December 31, 1998, was $21.6
million. The comparable backlog at December 31, 1997, was
$28.2 million. The Company expects that nearly all orders
included in the backlog at December 31, 1998, will be filled
during the 1999 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, Germany, 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 currency fluctuation or political and economic
instability 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.
CERTAIN FACTORS
In addition to the factors discussed elsewhere in the
Company's Annual Report to Shareholders or this Form 10-K,
such as intellectual property and other technological risks,
regulatory risks, environmental risks and Year 2000 risks,
the following are some important factors that could cause
actual results or events to differ materially from those
contained in any forward-looking statements made by or on
behalf of the Company.
EARNINGS VARIATIONS:
The sale of capital equipment within the water
purification and fluid filtration industry is cyclical and
influenced by various economic factors including interest
rates and general fluctuations of the business cycle. A
significant portion of the Company's revenues are derived
from capital equipment sales. While the Company sells
capital equipment to customers in diverse industries and in
global markets, cyclicality of capital equipment sales and
instability of general economic conditions, including those
in Asia and Latin America and certain other markets, could
have a material adverse effect on the Company's revenues and
profitability.
Operating results from the sale of water purification
and fluid filtration industry also can be expected to
fluctuate significantly as a result of the limited pool of
existing and potential customers for these systems, the
timing of new contracts, possible deferrals or cancellations
of existing contracts and the evolving and unpredictable
nature of the markets for water purification systems. As a
result of these and other factors, the Company's operating
results may be subject to quarterly or annual fluctuations.
There can be no assurance that at any given time the
Company's operating results will meet or exceed stock market
analysts' expectations.
COMPETITION:
All of the markets in which the Company competes are
highly competitive, and most are fragmented, with numerous
regional and local participants. There are competitors of
the Company in certain markets that are divisions or
subsidiaries of companies that have significantly greater
resources than the Company. Competitive factors include
price, technical expertise, product quality and
responsiveness to customer needs, including service and
technical support. The Company competes not only with a
large number of independent wholesalers and with other
distribution chains similar to the Company, but also with
manufacturers who sell directly to customers. The Company's
HRO business also competes with companies with national
distribution networks, businesses with regional scope, and
local product assemblers or service companies, as well as
retail outlets. The Company believes that there are
thousands of participants in the residential water business.
The HRO business competes principally on the basis of
price, product quality and "taste," service, distribution
capabilities, geographic presence and reputation.
Competitive pressures, including those described above, and
other factors could cause the Company to lose market share
or could result in significant price erosion, either of
which could have a material adverse effect upon the
Company's financial position, results of operations and cash
flows.
RISKS RELATED TO ACQUISITIONS:
The Company has, since 1987, acquired a number of
United States-based companies and product lines. The
Company plans to continue to consider and potentially pursue
acquisitions that expand the segments of the water and
wastewater treatment and water-related industries in which
it participates, complement its technologies, products or
services, broaden its customer base and geographic areas
served and/or expand its global distribution network, as
well as acquisitions which provide opportunities. The
Company's acquisition strategy entails the potential risks
inherent in assessing the value, strengths, weaknesses,
contingent or other liabilities and potential profitability
of acquisition candidates and in integrating the operations
of acquired companies. Although the Company believes that
it has generally been successful in pursuing acquisitions,
there can be no assurance that acquisition opportunities
will continue to be available, that the Company will have
access to the capital required to finance potential
acquisitions, that the Company will continue to acquire
businesses or that any business acquired will be integrated
successfully or prove profitable.
PROFIT UNCERTAINTY IN FIXED-PRICE CONTRACTS:
A significant portion of the Company's revenues are
generated under fixed price contracts. To the extent that
original cost estimates are inaccurate, scheduled deliveries
are delayed or progress under a contract is otherwise
impeded, revenue recognition and profitability from a
particular contract may be adversely affected.
RISKS OF DOING BUSINESS IN OTHER COUNTRIES:
The Company sells a significant amount of its product
in markets outside the United States. While these
activities may provide important opportunities for the
Company to offer its products and services internationally,
they also entail the risks associated with conducting
business internationally, including the risk of currency
fluctuations, slower payment of invoices, the lack in some
jurisdictions of well-developed legal systems,
nationalization and possible social, political and economic
instability.
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 ft Sales, Manufacturing,
Warehouse
Vista, CA Owned 110,000 sq ft Sales, Manufacturing,
Warehouse
Milwaukee, WI Owned 103,700 sq ft Sales, Manufacturing,
Warehouse
Rockford, IL Owned 58,400 sq ft Sales, Manufacturing,
Warehouse
Phoenix, AZ Owned 57,600 sq ft Sales, Manufacturing,
Warehouse
Syracuse, NY Owned 48,500 sq ft Sales, Manufacturing,
Warehouse
Westborough, MA Leased 46,800 sq ft Sales, Manufacturing,
Warehouse
Rockland, MA Leased 38,200 sq ft Sales, Manufacturing,
Warehouse
Fairfield, NJ Leased 23,800 sq ft Research & Development
Upland, CA Leased 22,000 sq ft Sales, Manufacturing,
Warehouse
Denver, CO Owned 20,700 sq ft Warehouse
Escondido, CA Leased 20,000 sq ft Manufacturing
Ft. Lauderdale, Leased 20,000 sq ft Sales, Warehouse
Le Mee, France Owned 18,300 sq ft Sales, Manufacturing,
Warehouse
Emmetsburg, IA Leased 8,800 sq ft Manufacturing, Warehouse
Bryan, TX Owned 2,500 sq ft Manufacturing, Warehouse
Total Owned 729,300 sq ft
Total Leased 179,600 sq ft
Total Owned and Leased 908,900 sq ft
Certain borrowings 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, Germany, 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, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICER
NAME AND AGE POSITION WITH COMPANY SINCE
-------------------- ----------------------- -------
D. Dean Spatz (54) Chief Executive Officer 1969
and Chairman of the Board
Ruth Carol Spatz (54) Secretary 1969
Howard W. Dicke (61) Vice President Human Resource 1978
and Corporate Development,
and Treasurer
L. Lee Runzheimer (56) Chief Financial Officer 1988
Roger S. Miller (40) Sr. Vice President Corporate 1998
Sales & Marketing
Kenneth E. Jondahl (42) Vice President Commercial 1991
Development
Andrew T. Rensink (42) Vice President Quality and
Regulatory Affairs 1991
Phillip M. Rolchigo (37) Vice President Research & 1998
Development
Kenton C. Toomey (51) Executive Vice President 1997
Operations
Bjarne N. Nicolaisen (55) Vice President International 1998
All of the executive officers have been officers of the
Company for more than five years except the following:
Mr. Miller joined Osmonics in 1993 as a product manager
for pumps. Previously, Mr. Miller managed sales and
marketing for a machine tool manufacturer and for a capital
equipment manufacturer in the water treatment industry.
Mr. Nicolaisen came to Osmonics with the merger with
Desalination Systems, Inc. in 1996. Mr. Nicolaisen began
his career as a chemical engineer and regional sales manager
for Radiometer A/S in Denmark. He then joined DDS Group as
a sales manager in the reverse osmosis division, eventually
moving to the U.S. as sales director for dairy equipment in
1980. Mr. Nicolaisen became vice president of sales and
marketing for Desalination Systems in 1987.
Dr. Rolchigo came to Osmonics from Membrex Corp., which
Osmonics acquired in 1998. Dr. Rolchigo is the principal
inventor of advanced vortex flow filtration technology. His
technical expertise spans diverse industries from
environmental waste to pharmaceutical processing. He has
served as a research affiliate in chemical engineering for
MIT, and belongs to numerous industry organizations.
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 16-21 of the Annual Report to
Shareholders, are incorporated herein by reference. As of
March 17, 1999 there were 2,313 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, 1998, approximately $5,000,000 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 22-25 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 . . . . . . . . 12
Consolidated Balance Sheets . . . . . . . . . . . 13
Consolidated Statements of Cash Flows . . . . . . 14
Consolidated Statements of Changes in
Shareholders' Equity . . . . . . . . . . . 15
Notes to Consolidated Financial Statements . . 16-21
Independent Auditors' Report . . . . . . . . . . 25
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, 1998 and forwarded to stockholders prior to the
Company's 1999 Annual Meeting of Stockholder (the "1999
Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated
herein by reference to the 1999 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 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated
herein by reference to the 1999 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND
REPORTS ON FORM 8-K
(a) (1) Financial Statements
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 Schedule
Reports of Independent Public Accountants on
Supplemental Schedule 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.)
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) 1998 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, 1998.
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, 1999
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, 1999
L. Lee Runzheimer Officer
(Principal Finance and
Accounting Officer)
/s/Howard W. Dicke Vice President Human March 30, 1999
Howard W. Dicke Resources and
Corporate Development,
and Treasurer
/s/Ruth Carol Spatz Director March 30, 1999
Ruth Carol Spatz
/s/Michael L. Snow Director March 30, 1999
Michael L. Snow
/s/Ralph E. Crump Director March 30, 1999
Ralph E. Crump
/s/Verity C. Smith Director March 30, 1999
Verity C. Smith
/s/Charles W. Palmer Director March 30, 1999
Charles W. Palmer
/s/William Eykamp Director March 30, 1999
William Eykamp
/s/D. Dean Spatz President, Chairman of March 30, 1999
D. Dean Spatz the Board and Director
(Principal Executive
Officer)