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.
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.
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.
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.
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.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data," page 29 of the Annual Report to Shareholders, is incorporated herein by reference.
ITEM 7.
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.
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.
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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the 1999 Proxy Statement.
ITEM 12.
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.
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.
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)