Item 1: BUSINESS
THE COMPANY
Waters Corporation ("Waters" or the "Company") is a holding company which owns only and all of the outstanding common stock of Waters Technologies Corporation, the operating subsidiary. Waters Corporation was established to acquire ("Acquisition") the predecessor Waters Chromatography Division ("Predecessor") of Millipore Corporation ("Millipore") on August 18, 1994. Waters Corporation became a publicly traded company with its initial public offering ("IPO") in November 1995. The Company has made two significant acquisitions since its inception: TA Instruments, Inc. in May 1996 and Micromass Limited in October 1997.
BUSINESS SEGMENTS
The Company operates in only one business segment, but operates in several geographic segments. See Footnote 18 to the Financial Statements for detailed results by geographic segment found in the 1997 Annual Report which is incorporated herein by reference.
BUSINESS
Waters is the world's largest manufacturer, distributor and provider of high performance liquid chromatography ("HPLC") instruments, columns and other consumables, and related service. The Company has the largest HPLC market share in the United States, Europe and non-Japan Asia and has a leading position in Japan. HPLC, the largest product segment of the analytical instrument market, is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. With its acquisition of TA Instruments, Inc. ("TAI") in May 1996, Waters is also the world's leader in thermal analysis, a prevalent and complementary technique used in the analysis of polymers. Also, with its acquisition of Micromass Limited ("Micromass") in September 1997, Waters is a market leader in mass spectrometry, which can be integrated and used along with other analytical instruments, especially HPLC.
Developed in the 1950's, HPLC today is the standard technique used to identify and analyze the constituent components of a variety of chemicals and materials. HPLC's unique performance capabilities enable it to separate and identify 80% of all known chemicals and materials. As a result, HPLC is used to analyze substances in a wide variety of industries for research and development purposes, quality control and process engineering applications. Within the pharmaceutical and life science industries, its most important end-use market, HPLC is used extensively to identify new drugs, to develop manufacturing methods, and to assure the potency and purity of new pharmaceuticals. HPLC is used to identify food content for nutritional labeling in the food and beverages industry and to test water and air purity within the environmental testing industry. HPLC is also used in a variety of applications in other industries, such as chemical and consumer products, as well as by universities and government agencies. In many instances, Food and Drug Administration ("FDA") and Environmental Protection Agency ("EPA") regulations, and those of their international counterparts, mandate testing that requires HPLC instrumentation.
Waters manufactures over 100 HPLC instrument types. A complete HPLC system consists of five basic components: the solvent delivery system, the sample injector, the separation column, the detector and the data acquisition unit. The solvent delivery system pumps the solvent through the HPLC system, while the sample injector injects the sample into the solvent flow. The separation column then separates the sample into its components for analysis by the detector which measures the presence and amount of the constituents. The data acquisition unit then records and stores the information from the detector. Instrument and system sales comprise approximately two thirds of the Company's annual HPLC revenues.
Consumable products and service comprise the remaining one third of annual HPLC revenues. Consumable products primarily are columns packed with separation media used in the HPLC testing process and are replaced at regular intervals. The separation column contains one of several types of packing, typically stationary phase packing made from silica. As the sample flows through the column, it is separated into its constituent components.
The acquisition of TAI expanded the Company's product offerings to include thermal analysis and rheology products. TAI develops, manufactures, sells and services thermal analysis and rheology instruments which are used for the physical characterization of polymers and related materials. Thermal analysis measures the physical characteristics of materials as a function of temperature. Changes in temperature affect several characteristics of materials such as their physical state, weight, dimension and mechanical and electrical properties, which may be measured by one or more thermal analysis techniques. Consequently, thermal analysis techniques are widely used in the development, production and characterization of materials in various industries such as plastics, chemicals, automobiles, pharmaceuticals and electronics. Rheology instruments complement thermal analyzers in characterizing materials. Rheology characterizes the flow properties of materials and measures their viscosity, elasticity and deformation under different types of loading. The information obtained provides insight with regard to a material's behavior during manufacture, transport, usage and storage. Approximately 80% of TAI's annual revenues pertain to instrument sales.
The acquisition of Micromass expands the Company's product offerings in mass spectrometry instruments. Micromass is a world leader in the development, manufacture, sale and support of organic, inorganic, stable isotope and ICP mass spectrometers typically coupled with HPLC, chemical electrophoresis, chemical electrophoresis chromatography, gas chromatography or elemental analysis systems. Its products supply a diverse market with a strong emphasis on the life science, pharmaceutical, biomedical, clinical, environmental and geochemistry markets worldwide. With the acquisition of Micromass, Waters became one of the leading worldwide manufacturers of HPLC-MS systems, "hyphenated" analytical systems that bring together HPLC and mass spectrometry detection. Design innovations in HPLC-MS interfacing technology have drastically improved the operating efficiencies of these systems, greatly simplifying their operation, driving down their overall cost and making them much more affordable for the average analytical laboratory. These laboratories previously relied on expert mass spectrometrists to provide them the information they now get in minutes. The largest market for HPLC-MS is the pharmaceutical market where new drug development technologies are placing greater demands on laboratories to screen and analyze new drug compounds. Approximately 88% of Micromass' annual revenues pertain to instrument sales.
CUSTOMERS
Waters has a broad and diversified customer base that includes pharmaceutical accounts, other industrial accounts, universities and government agencies. The pharmaceutical segment represents the Company's largest sector and includes multinational pharmaceutical companies, generic drug manufacturers and biotechnology companies. The Company's other industrial customers include chemical manufacturers, polymer manufacturers, food and beverage companies and environmental testing laboratories.
The Company also sells to various universities and government agencies worldwide and Waters' technical support staff work closely with these customers in developing and implementing applications that meet their full range of analytical requirements.
The Company does not rely on any one customer or group of customers for a material portion of its sales. During fiscal 1997, no customer accounted for more than 2% of the Company's net sales.
RESEARCH AND DEVELOPMENT
Waters maintains an active research and development program focused on the development and commercialization of products which both complement and update the existing product offering. The Company's research and development expenditures for 1997, 1996 and 1995, were $25.8 million, $20.9 million, and $17.7 million, respectively. Nearly all of the current HPLC core products of the Company have been developed at the main research and development center in Milford, Massachusetts, with input and feedback from Waters' extensive field organization. Nearly all of the current thermal analysis products have been developed at TAI's research and development center in New Castle, Delaware and nearly all of the current rheology products have been developed at the TAI facility in England. The majority of the mass spectrometry products have been developed at Micromass' facilities in England. At December 31, 1997, there were approximately 305 employees involved in the Company's research and development efforts.
SALES AND SERVICE
Waters has the largest sales and service team focused exclusively on HPLC in the industry. Along with TAI and Micromass, the Company serves its customer base through over 865 field representatives in 73 sales offices throughout the world. Many of Waters' field representatives are former Waters' customers. The sales representatives have direct responsibility for account relationships, while service representatives work in the field to install instruments and minimize instrument downtime for customers. Technical support representatives work directly with customers, helping them to develop customized applications and procedures. Waters provides customers with comprehensive product literature and also makes consumable products available through a dedicated catalog. TAI and Micromass maintain their own dedicated, specialized and highly experienced sales and service forces.
MANUFACTURING
Waters provides high quality HPLC products by controlling each stage of production of its instruments and columns. The Company assembles most of its instruments at its facility in Milford, Massachusetts, where it performs machining, wiring, assembly and testing. The Milford facility employs manufacturing techniques that meet the strict ISO 9002 quality manufacturing standards and FDA mandated Good Manufacturing Practices. The Company outsources manufacturing of certain electronic components such as computers and screens to outside vendors that can meet the Company's quality requirements.
The Company manufactures its HPLC columns at its facility in Taunton, Massachusetts, where it processes, sizes and treats silica and polymer media that are packed into columns, solid phase extraction cartridges and bulk shipping containers. The Taunton facility meets the same ISO and FDA standards met by the Milford, Massachusetts facility and is approved by the FDA to produce Class 1 medical devices.
TAI manufactures its thermal analysis products at its New Castle, Delaware facility and its rheology products at its Leatherhead, England facility. Micromass manufactures its mass spectrometry products at its Manchester, England facilities.
COMPETITION
The analytical instrument and systems market is highly competitive. The Company encounters competition from several worldwide instrument manufacturers in both domestic and foreign markets. Waters competes in its markets primarily on the basis of instrument performance, reliability and service and, to a lesser extent, price. Some competitors have instrument businesses that are much larger than the Company's business, but are typically less focused on Waters' chosen markets. Certain competitors have greater financial and other resources than the Company.
The market for consumable HPLC products, including separation columns, is also highly competitive but is more fragmented than the analytical instruments market. Waters encounters competition in the columns market from chemical companies that produce column chemicals and small specialized companies that pack and distribute columns. The Company believes that it is one of the few suppliers that processes silica, packs columns, and distributes its own product. Waters competes in this market on the basis of reproducibility, reputation and performance, and, to a lesser extent, price.
PATENTS, TRADEMARKS AND LICENSES
Waters owns a number of United States and foreign patents and has patent applications pending in the United States and abroad. Certain technology and software is licensed from third parties. Waters also owns a number of trademarks. While the patents, licenses and trademarks are viewed as valuable assets, the Company's patent position is not of material importance to its operations.
EMPLOYEES
At December 31, 1997, Waters had approximately 2,640 employees. 56% of the Company's employees are located in the United States. Labor relations are considered to be excellent and no Waters employees have union affiliations.
ENVIRONMENTAL MATTERS
The Company is subject to Federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from sites of past spills, disposals or other releases of hazardous substances. The Company believes that it currently conducts its operations, and in the past has operated its business, in substantial compliance with applicable environmental laws. From time to time, operations of the Company have resulted or may result in noncompliance with or liability for cleanup pursuant to environmental laws. The Company does not currently anticipate any material adverse effect on its operations, financial condition or competitive position as a result of its efforts to comply with environmental laws.
With respect to the Predecessor operations of the Company's HPLC business, Millipore has been notified that the United States Environmental Protection Agency has determined that a release or a threat of a release of hazardous substances as defined by CERCLA has occurred at certain sites to which chemical wastes generated by its manufacturing operations have been sent. In each instance, Millipore was only one of a large number of corporations and entities which received such notification, and anticipates that any ultimate liability for remedial costs will be shared by others. In any instances involving chemical wastes generated by the Predecessor, Millipore has entered into partial settlements, paid its proportionate financial obligation and received partial releases.
In connection with the Acquisition, Millipore agreed to retain environmental liabilities resulting from pre-acquisition operations of the Company's facilities. Notwithstanding this contractual agreement, under CERCLA and similar environmental laws, the Company may remain primarily liable to certain persons for environmental cleanup costs.
Item 2:
Item 2: PROPERTIES
Waters operates 19 United States facilities and 68 international facilities. The Company believes its facilities are adequate for its current production level and for reasonable growth over the next few years. The Company's primary facilities are summarized in the table below.
PRIMARY FACILITY LOCATIONS
LOCATION FUNCTION (1) OWNED/LEASED SQUARE FEET(000'S) - --------------------------------------------------------------------------------
Etten-Leur, Netherlands D Leased 42 Franklin, MA D Leased 30 Milford, MA M, R, S Owned 408 Taunton, MA M Owned 32 St. Quentin, France S Leased 18 Singapore S Leased 5 Tokyo, Japan R, S Leased 12 Wexford, Ireland M Leased 20 Deeside Flintshire, UK M, R, S, D Leased 25 Wilmington, NC M, R, S, D Leased 5 New Castle, DE M, R, S, D Leased 49 Leatherhead, England M, R, S, D Leased 10 Manchester, England M, R, S, D Leased 54 Cheshire, England M, R, S Leased 28 - --------------
(1) M = Manufacturing; R = Research; S = Sales; D = Distribution
Waters operates and maintains 14 field offices in the United States and 59 field offices abroad in addition to sales offices in the primary facilities listed above. The Company's primary field office locations are listed below.
FIELD OFFICE LOCATIONS (2)
UNITED STATES INTERNATIONAL - ------------------------------------------------------------------------ Tustin, CA Australia Hungary Russia Wood Dale, IL Austria India Spain Fairfax, VA Belgium Italy Sweden Cary, NC Brazil Japan Switzerland Morristown, NJ Canada Malaysia Taiwan Houston, TX Czech Republic Mexico United Kingdom Pleasanton, CA Denmark Netherlands Ann Arbor, MI Finland Norway Charlotte, NC France People's Republic of China Felton, CA Germany Poland Rolling Meadows, IL Hong Kong Puerto Rico Beverly, MA
______________
(2) Waters operates more than one office within certain states and foreign countries.
Item 3:
Item 3: LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of its business. None of the matters in which the Company or its subsidiaries are currently involved, either individually or in the aggregate, is material to the Company or its subsidiaries.
The Company has asserted a claim contending that Millipore has understated the amount of assets it is obligated to transfer from the Millipore Retirement Plan to the Waters successor plan. The Federal court has recently ruled in favor of Millipore's position with respect to the claim. The Company appealed the decision in October, 1997. The Company believes it has meritorious arguments and should prevail although the outcome is not certain.
Regardless, the outcome is not expected to have a material impact on the Company's financial position.
The Company, through its subsidiary TAI, asserted a claim against The Perkin- Elmer Corporation ("PE") alleging patent infringement of three patents owned by TAI ("the TAI patents"). PE counterclaimed for infringement of a patent owned by PE ("the PE patent"). PE withdrew its claim for infringement preserving its right to appeal rulings interpreting the claims of the PE patent. A jury returned a verdict finding that no valid claims of the TAI patents were infringed by PE. TAI has appealed the verdict with the U.S. District Court for the District of Delaware and believes it has meritorious arguments and should prevail, although the outcome is not certain. The Company believes that any outcome will not be material to the Company.
The Company has filed suit against Hewlett-Packard Company and Hewlett- Packard GmbH ("HP"), seeking a declaration that certain products sold under the mark Alliance do not constitute an infringement of one or more patents owned by HP or its foreign subsidiaries ("the HP patents"). Similar actions seeking revocation or nullification of foreign HP patents have been filed in Europe. The Company believes it has meritorious arguments and should prevail, although the outcome is not certain. The Company believes that any outcome of the proceedings will not be material to the Company.
Item 4:
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5:
Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is registered under the Securities Exchange Act of 1934 and is listed on the New York Stock Exchange under the symbol WAT. As of March 23, 1998, the Company had approximately 296 common stockholders of record. The Company has not declared or paid any cash or other dividends on its Common Stock and does not expect to pay dividends for the foreseeable future.
The quarterly range of high and low sales prices for the Common Stock as reported by the New York Stock Exchange is as follows:
Price Range ----------- For the quarter ended High Low --------------------- ---- ---
March 31, 1996 24 5/8 16 3/4 June 30, 1996 33 24 3/8 September 30, 1996 33 25 1/4 December 31, 1996 33 5/8 25 7/8 March 31, 1997 31 3/8 26 June 30, 1997 37 3/4 23 1/8 September 30, 1997 45 1/4 31 7/16 December 31, 1997 48 7/16 36
Item 6:
Item 6: SELECTED FINANCIAL DATA
Reference is made to information contained in the section entitled "Selected Financial Data" on page 42 of the 1997 Annual Report, which information is incorporated herein by reference.
Item 7:
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to the information on pages 19 to 23 of the 1997 Annual Report, which information is incorporated herein by reference.
Item 8:
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Company's consolidated financial statements and notes thereto on pages 25 to 40 of the 1997 Annual Report together with the "Report of Independent Accountants" dated January 23, 1998 on page 24 and "Quarterly Results" on page 41, which information is incorporated herein by reference.
Item 9:
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10:
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
a. Information concerning the Registrant's directors is set forth in the Proxy Statement under the headings "Election of Directors" and "Directors Meetings and Compensation." Such information is incorporated herein by reference.
b. Information required by Item 405 of Regulation S-K is set forth in the Proxy Statement under the heading "Director and Officer and Ten Percent Stockholder Securities Reports." Such information is incorporated herein by reference.
Item 11:
Item 11: EXECUTIVE COMPENSATION
Information concerning compensation of the Registrant's executive officers is set forth in the Proxy Statement under the heading "Management Compensation." Such information is incorporated herein by reference.
Item 12:
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners." Such information is incorporated herein by reference.
Item 13:
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is set forth in the Proxy Statement under the heading "Certain Relationships and Related Transactions." Such information is incorporated herein by reference.
PART IV
Item 14:
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Reference is made to the Company's consolidated financial statements and notes thereto on pages 25 to 40 of the 1997 Annual Report, which information is incorporated herein by reference.
(2) Not Applicable.
(3) List of exhibits:
Exhibit Number Description of Document ------ -----------------------
2.1 Agreement for the Sale and Purchase of Micromass Limited dated as of September 12, 1997, between Micromass Limited, Schroder UK Buy-Out Fund III Trust I and Others, Waters Corporation and Waters Technologies Corporation. (Incorporated by reference to the Registrant's Report on Form 8-K, filed on October 8, 1997 as amended on December 5, 1997.)
3.1 Second Amended and Restated Certificate of Incorporation of Waters Corporation, as amended to date. (1)
3.2 Amended and Restated Bylaws of Waters Corporation, as amended to date. (1)
10.1 Credit Agreement, dated as of November 22, 1995, among Waters Corporation, Waters Technologies Corporation, Bankers Trust Company and other Lenders party thereto. (2)
10.2 First Amendment to Credit Agreement, dated as of March 6, 1996 among Waters Corporation, Waters Technologies Corporation, Bankers Trust Company and other Lenders party thereto. (2)
10.3 Waters Corporation Amended and Restated 1996 Long-Term Performance Incentive Plan. (Incorporated by reference to Exhibit A of the Proxy Statement for the 1996 Annual Meeting of Stockholders ("1996 Proxy Statement")).
10.4 Waters Corporation 1996 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit B of the 1996 Proxy Statement.)
10.5 Waters Corporation 1996 Non-Employee Director Deferred Compensation Plan. Incorporated by reference to Exhibit C of the 1996 Proxy Statement.
10.6 Waters Corporation Amended and Restated 1996 Non-Employee Directors Stock Option Plan. (Incorporated by reference to Exhibit D of the 1996 Proxy Statement.)
10.7 Agreement and Plan of Merger among Waters Corporation, TA Merger Sub, Inc. and TA Instruments, Inc. dated as of March 28, 1996. (Incorporated by reference to the Registrant's Report on Form 8-K dated March 29, 1996.)
10.8 Offer to Purchase and Consent Solicitation Statement, dated March 7, 1996, of Waters Technologies Corporation. (Incorporated by reference to the Registrant's Report on Form 8-K dated March 11, 1996.)
10.9 WCD Investors, Inc. Amended and Restated 1994 Stock Option Plan, as amended (including Form of Amended and Restated Stock Option Agreement). (2)
10.10 Waters Corporation Retirement Plan. (2)
10.11 Registration Rights Agreement made as of August 18, 1994, by and among WCD Investors, Inc., AEA Investors, Inc., certain investment funds controlled by Bain Capital, Inc. and other stockholders of Waters Corporation. (2)
10.12 Form of Indemnification Agreement, dated as of August 18, 1994, between WCD Investors, Inc. and its directors and executive officers. (2)
10.13 Form of Management Subscription Agreement, dated as of August 18, 1994, between WCD Investors, Inc. and certain members of management. (2)
13.1 1997 Annual Report to Stockholders.
21.1 Subsidiaries of Waters Corporation. (1)
22.1 Proxy Statement for the 1997 Annual Meeting of Stockholders.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule for December 31, 1997.
27.2 Restated Financial Data Schedule for September 30, 1997 and June 30, 1997.
27.3 Restated Financial Data Schedule for March 31, 1997 and December 31, 1996.
27.4 Restated Financial Data Schedule for September 30, 1996 and June 30, 1996.
27.5 Restated Financial Data Schedule for March 31, 1996 and December 31, 1995.
27.6 Restated Financial Data Schedule for December 31, 1994.
______________ (1) Incorporated by reference to the Registrant's Report on Form 10-K dated March 30, 1998. (2) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-3810).
(b) Reports on Form 8-K.
Form 8-K was filed on October 8, 1997 and amended Form 8-K was filed on December 5, 1997, both relating to the acquisition of Micromass Limited.
(c) See (3) above.
(d) Not Applicable.
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.
Date: March 31, 1998 Waters Corporation
/s/ Philip S. Taymor ------------------------------- Philip S. Taymor Senior Vice President, Finance and Administration and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 31, 1998.
Chairman of the Board of Directors, Chief Executive Officer, and President /s/ Douglas A. Berthiaume (principal executive officer) - ---------------------------------- Douglas A. Berthiaume
Senior Vice President, Finance and Administration, and Chief Financial Officer (principal financial officer and /s/ Philip S. Taymor principal accounting officer) - ---------------------------------- Philip S. Taymor
/s/ Joshua Bekenstein Director - ---------------------------------- Joshua Bekenstein
/s/ Michael J. Berendt Director - ---------------------------------- Michael J. Berendt, PhD
/s/ Philip Caldwell Director - ---------------------------------- Philip Caldwell
/s/ Edward Conard Director - ---------------------------------- Edward Conard
/s/ Laurie H. Glimcher Director - ---------------------------------- Dr. Laurie H. Glimcher
/s/ William J. Miller Director - ---------------------------------- William J. Miller
/s/ Thomas P. Salice Director - ---------------------------------- Thomas P. Salice