SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 0-2387
RESEARCH, INCORPORATED
(Exact name of registrant as specified in its charter)
Minnesota 41-0908058
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
P.O. Box 24064, Minneapolis, Minnesota 55424
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (612) 941-3300
________________________________________________________________________________
Former name, former address, and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_ No___
As of August 11, 1997, 969,174 common shares were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RESEARCH, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 5,622,206 $ 5,792,896 $16,311,660 $15,431,089
Cost of Sales 3,146,673 3,499,273 9,093,863 9,204,187
----------- ----------- ----------- -----------
Gross profit 2,475,533 2,293,623 7,217,797 6,226,902
----------- ----------- ----------- -----------
Expenses:
Selling 1,367,981 1,530,553 4,298,569 4,140,848
Research and development 727,235 396,654 1,876,136 1,246,702
General and administrative 267,051 165,234 745,599 552,310
----------- ----------- ----------- -----------
Total expenses 2,362,267 2,092,441 6,920,304 5,939,860
----------- ----------- ----------- -----------
Income From Operations 113,266 201,182 297,493 287,042
Other Income 701 91 1,167,607 18,182
----------- ----------- ----------- -----------
Income before Taxes 113,967 201,273 1,465,100 305,224
Provision for Income Taxes 44,848 80,246 557,050 118,531
----------- ----------- ----------- -----------
Net Income $ 69,119 $ 121,027 $ 908,050 $ 186,693
=========== =========== =========== ===========
Earnings Per Share $ 0.06 $ 0.10 $ 0.77 $ 0.16
=========== =========== =========== ===========
Dividends Paid Per Share $ 0.07 $ 0.07 $ 0.41 $ 0.195
=========== =========== =========== ===========
Weighted Average Shares Outstanding (Note 1) 1,186,527 1,196,936 1,184,657 1,198,934
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated financial statements.
<PAGE>
RESEARCH, INCORPORATED
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
June 30 September 30
Assets 1997 1996
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 432,656 $ 1,841,147
Accounts receivable, net 3,465,625 2,366,814
Inventories 4,831,461 3,474,488
Other current assets 467,208 471,310
------------ ------------
Total current assets 9,196,950 8,153,759
------------ ------------
Property and Equipment:
Land and land improvements 54,660 212,852
Building 2,139,745 2,073,024
Machinery and equipment 4,386,748 3,863,381
Less-accumulated depreciation (4,277,148) (4,048,814)
------------ ------------
Net property and equipment 2,304,005 2,100,443
------------ ------------
Other Assets 68,448 84,214
------------ ------------
Total assets $ 11,569,403 $ 10,338,416
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable $ 1,331,998 $ --
Accounts payable 1,590,149 1,277,805
Accrued liabilities:
Salaries and benefits 447,396 314,040
Profit sharing contribution 93,250 160,000
Warranty reserve 350,000 250,000
Real estate taxes 151,275 125,000
Other 363,630 463,650
Federal and state income taxes 836,724 472,467
------------ ------------
Total current liabilities 5,164,422 3,062,962
------------ ------------
Stockholders' Equity:
Common stock, $.50 par value, 5,000,000 shares authorized,
969,174 and 1,161,243 shares issued and outstanding at
June 30, 1997 and September 30, 1996 484,587 580,622
Additional paid-in capital 428,258 275,470
Foreign currency translation 69,135 17,816
Retained earnings 5,423,001 6,401,546
------------ ------------
Total stockholders' equity 6,404,981 7,275,454
------------ ------------
Total liabilities and stockholders' equity $ 11,569,403 $ 10,338,416
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
<PAGE>
RESEARCH, INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating Activities:
Net income $ 908,050 $ 186,693
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 387,243 345,471
Gain on sale of land (1,147,094) --
Changes in current operating items:
Accounts receivable (1,098,811) 872,103
Inventories (1,456,973) (730,765)
Other current assets 4,102 (65,370)
Accounts payable and accrued liabilities 122,756 (389,559)
Federal and state income taxes 364,257 (238,815)
----------- -----------
Net cash used in operating activities (1,916,470) (20,242)
----------- -----------
Investing Activities:
Proceeds from sale of land, net 1,529,543 --
Property and equipment additions, net (562,262) (578,630)
Other 38,542 8,034
----------- -----------
Net cash provided by (used in) investing activities 1,005,823 (570,596)
----------- -----------
Financing Activities:
Cash dividends paid (473,357) (225,709)
Issuance of common stock 175,513 88,968
Repurchase of common stock (765,998) --
Net borrowing under line of credit 565,998 --
----------- -----------
Net cash used in financing activities (497,844) (136,741)
----------- -----------
Cash and Cash Equivalents:
Net decrease in cash and cash equivalents (1,408,491) (727,579)
Cash and cash equivalents, at beginning of year 1,841,147 1,307,564
----------- -----------
Cash and cash equivalents at end of period $ 432,656 $ 579,985
=========== ===========
Supplemental Cash Flow Information:
Noncash financing activity:
Repurchase of common stock through
issuance of notes payable $ 766,000 $ --
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated financial statements.
<PAGE>
RESEARCH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
The Company's significant accounting policies not elsewhere set forth in the
accompanying consolidated financial statements are as follows:
Consolidated Financial Statements -
The consolidated balance sheet as of June 30, 1997, the consolidated statements
of operations for the three and nine month periods ended June 30, 1997 and 1996
and the consolidated statements of cash flows for the nine months ended June 30,
1997 and 1996 have been prepared by the Company, without audit. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
changes in cash flows at June 30, 1997 and for all periods presented have been
made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's September 30, 1996 Form
10-K. The results of operations for the period ended June 30, 1997 are not
necessarily indicative of the operating results for the full fiscal year.
Inventories -
Inventories are stated at the lower of first-in, first-out cost or market and
include direct labor, material and overhead costs. Inventories consist of the
following components at:
June 30 September 30
1997 1996
---------- ----------
Raw materials and
purchased parts $3,510,858 $2,406,077
Work in process and
finished goods 1,320,603 1,068,411
---------- ----------
Total $4,831,461 $3,474,488
========== ==========
<PAGE>
Warranty Reserve -
An analysis of reserves for product warranties are performed on a quarterly
basis by reviewing the status of new product introductions, trends of warranty
expense by product, and internal management information to identify known or
potential defects and the estimated warranty exposure.
Earnings per Share -
Earnings per share are based on the weighted average number of common and, where
dilutive, common equivalent shares outstanding. The number of common shares
outstanding decreased by a net of 192,069 shares during the nine months ended
June 30, 1997 due to the exercise of 45,450 employee stock options, and the
repurchase of 237,519 shares from a major stockholder.
2. Line of Credit:
The Company has a $3,000,000 unsecured bank line of credit which carries an
interest rate equal to the bank's base (prime) rate with no compensating balance
requirements.
3. Stockholders' Equity:
Employee Stock Options -
During fiscal 1992, the Company adopted the 1991 Stock Plan (1991 Plan). The
1991 Plan has 210,000 shares of the Company's common stock reserved for issuance
pursuant to the exercise of options. Options for 123,250 shares under the 1991
Plan were outstanding at June 30, 1997 at prices ranging from $4.75 to $7.75 per
share.
Stock Repurchase -
On May 28, 1997, the Company repurchased 237,519 shares of common stock from a
major stockholder through the issuance of a note payable to the stockholder and
through borrowing under the Company line of credit facility.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Sources of Capital
The Company's working capital was $4,032,528 at June 30, 1997 compared to
$5,090,797 at September 30, 1996. The current ratio at June 30, 1997 was 1.8 to
1 compared to 2.7 to 1 at September 30, 1996. The net change in working capital
was due to proceeds from the sale of land in October 1996 of $1,529,543, the
repurchase of common stock of $1,531,998, and increases in inventory and
accounts receivable of $1,456,973 and $1,098,811, respectively. The increase in
accounts receivable is due to timing of shipments. The increase in inventory was
due to delays in customer orders, new products awaiting customer acceptance in
both the Surface Mount Technology (SMT) and Graphic Arts products, and the
ability to meet customer expectations for shorter deliveries.
The warranty reserves have increased to reflect the increase in warranty costs
and anticipated exposure in the SMT reflow ovens. These ovens have the highest
level of new product sales and their warranty period was increased as of the
first quarter of fiscal 1997.
The reserve for product warranties represents management's estimate of warranty
expense over the next six months. The Company's experience has been that most
warranty charges occur at the time of product introduction or are due to
non-recurring events. Accordingly, after separating out one-time events, such
reserve generally represents approximately one-half year's claims.
The Company has an unsecured bank line of credit for $3,000,000. At June 30,
1997 the Company had borrowings of $565,998 at the prime rate under the line of
credit and a short term note payable of $766,000 at 8.5% due January 15, 1998.
The borrowings were to finance the repurchase of stock and meet work capital
requirements. The Company expects to utilize the line of credit to finance
operations through Fiscal 1998. The Company has no long term debt.
Overview
In 1996, the Company shifted from a product-driven to a market-driven strategy,
to leverage its engineering expertise and to concentrate and invest resources on
customers and markets that
<PAGE>
offer the best potential return. The Company identified four key markets in
which it has the potential to be a dominant player: SMT, Graphic Arts, Glass,
and Infrared. In each area, the Company identified key customers and strategic
partners with whom it will work closely to meet their respective needs. The
Company also identified key geographic markets, particularly Asia, where it will
make additional investments to capitalize on the enormous growth potential. The
Company believes the SMT and Graphic Arts markets have the greatest potential
for growth. In the SMT market, the Company plans to gain market share by
dedicating additional resources to key customers that have on going needs for
high quality products and excellent customer service. In the Graphic Arts
market, the Company plans to increase its in-house sales staff and reduce its
reliance on independent sales representatives who work with a variety of
products and industries. The Company will retain relationships with
representatives who are knowledgeable and focused on this market.
Strategic partnerships and high levels of customer service will be key
components of the Company's market-driven strategy. While the breath of its
product line will probably decrease as it focuses efforts on selected markets,
the Company will invest in new product development at levels that will support
its goal of achieving 50% of sales from products developed in the last three
years.
The Company has implemented these changes and believes that this commitment of
additional resources will result in increased future sales and profitability.
On September 27, 1996, the Company sold its Dimension product in order to
concentrate on products and markets in which the Company has potential to be a
dominant player. The Dimension product was an industrial process controller
designed for applications requiring sophisticated control without a mainframe
computer. While the Dimension product was an excellent product, it served a
broad market, of which the Company controlled only a small percentage. Eurotherm
is a market leader with the resources to support this product. Eurotherm has
agreed to supply the Company with Dimension systems, which it will continue to
use as part of its total system solution packages for its customers.
Operations
Sales for the quarter ending June 30, 1997 were $5,622,206 compared to
$5,792,896 for the same quarter last year. Sales (excluding Dimension sales of
approximately $600,000 for the third
<PAGE>
quarter of 1996), increased 8% over the third quarter in the prior year. Sales
for the first nine months of fiscal 1997 were $16,311,660 compared to
$15,431,089 for the first nine months of fiscal 1996. Sales (excluding Dimension
sales of approximately $1,400,000 for the first nine months of 1996) increased
16% over the prior year due primarily to the increase in sales in the SMT
market.
Gross profit on sales for the quarter ended June 30, 1997 was 44.0% compared to
39.6% for quarter ended June 30, 1996 and 44.2% compared to 40.4% for the nine
month periods ended June 30, 1997 and 1996, respectively. The increase in gross
margin for the quarter ended June 30, 1997 was primarily due to the product mix
of sales in the SMT product line and lower warranty costs. Gross margins
increased from 40.4% to 44.2% on a year to date basis. The increase in gross
margin for the nine months ended June 30, 1997 is due to sales of new products
in the Graphic Arts and SMT product lines and lower warranty costs. Gross
margins in the previous year were affected by initial production costs and
product warranty expense associated with new product introductions in the SMT
product line and lower gross margins from Dimension products. Warranty expenses
incurred in the prior year were related to correctable, non-recurring retrofit
changes and the integration of a new controller in the SMT reflow oven product
line. Management has implemented design review procedures which it believes will
prevent future occurrences.
Selling expenses were 24.3% and 26.4% of sales for the quarters ended June 30,
1997 and 1996, respectively and 26.4% and 26.8% of sales for the nine months
ended June 30, 1997 and 1996, respectively. Selling expenses were lower than the
same quarter last year as a percentage of sales due to reduced reliance on
independent sales representatives in the Graphic Arts market. Selling expenses
for the nine months ended June 30, 1997 compared to last year, decreased due to
reduced reliance on Graphic Arts independent sales representatives and the sale
of the Dimension product line.
Expenditures for research and development increased from 6.8% of sales for the
quarter ended June 30, 1996 to 12.9% of sales for the quarter ended June 30,
1997. Research and development expenses were 11.5% and 8.1% of sales for the
nine month periods ended June 30, 1997 and 1996, respectively. These expenses
increased due to the Company's plan to increase its investment in new product
development in its major markets. This investment is in line with its goal to
generate 50% of sales from new products (developed in the last 3 years). The
significant increase in the
<PAGE>
quarter ended June 30, 1997 compared to the same period last year was due mostly
to research and development on products for the SMT and Graphic Arts markets.
The Company has shifted the emphasis of its research and development efforts
from product adaptations, extensions and enhancements to new product solutions
for its chosen markets. This will require significant investment and development
of new customer relationships. The Company expects to invest in excess of 10% of
sales on these efforts.
General and administrative expenses were 4.7% and 2.9% of sales for the quarters
ended June 30, 1997 and 1996, respectively and 4.6% and 3.6% of sales for the
nine months ended June 30, 1997 and 1996, respectively. General and
administrative expenses increased due to costs associated with hiring and
training additional personnel to support business growth. Although the Company
will invest in new business systems and processes, the Company expects these
expenses to be leveraged and to provide future productivity improvements.
As a result of the above, there was a consolidated net profit before income
taxes of $113,967 for the third quarter of fiscal 1997 as compared to $201,273
for the same quarter last year. The results for the quarter were impacted
favorably by higher gross margins and lower selling expenses, offset by higher
research and development and general and administrative expenses. The net profit
for the first nine months of fiscal 1997 was $1,465,100 which includes a one
time gain on sale of land as compared to $305,224 for the same period last year.
The gain on the sale of the land of $1,147,094 is net of $312,043 of expenses
such as site preparation and professional fees.
Forward-Looking Information
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There are
certain important factors that could cause results to differ materially from
those anticipated by some of the statements made herein. Investors are cautioned
that all forward-looking statements involve risks and uncertainty. Some of the
factors that could affect results are the effectiveness of new product
introductions, the product mix of our sales, the amount of sales generated in
the SMT and Graphics Arts markets and strategic partner relationships.
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
[4.1] Amendment to Line of Credit Agreement between Norwest
Bank Minnesota N.A. and the Company dated May 21, 1997
[27] Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K Report dated May 28, 1997, filed on June 10, 1997,
reporting Item 2 of 8-K (stock repurchase by the Company)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESEARCH, INCORPORATED
(Registrant)
Date 8/13/97 /s/ Claude C. Johnson
------- -----------------------------
Claude C. Johnson
President and
Chief Executive Officer
Date 8/13/97 /S/ Richard L. Grose
------- -----------------------------
Richard L. Grose
Treasurer
Exhibit 4.1
May 21, 1997
Claude Johnson
President and Chief Executive Officer
and
Richard Grose
Treasurer
Research, Inc.
6425 Flying Cloud Drive
Eden Prairie, MN 55344
Gentlemen:
I am pleased to inform you that Norwest has agreed to modify Research, Inc.'s
covenant measures required under the Letter Agreement dated October 28, 1996.
Specifically, the tangible net worth covenant shall be amended and reduced and
from $6,500,000 to $5,500,000 and the maximum debt to tangible net worth ratio
covenant shall be amended and increased from 1.0:1.0 to 1.25:1.0. All other
covenants required under the Letter Agreement will remain unchanged.
Please acknowledge your acceptance of the foregoing modifications to the Letter
Agreement by signing below where indicated and return to me, along with the
enclosed Promissory Note, once executed, at your earliest convenience. If you
have any questions or comments, please feel free to contact me or Brad Sullivan
at 830-8926.
Most sincerely,
/s/ Douglas L. Van Metre
- ----------------------------
Vice President
Norwest Bank Minnesota, N.A.
Accepted and agreed to this 27th day of May, 1997.
RESEARCH, INCORPORATED
By: /s/ Claude C. Johnson
----------------------
Its: President and CEO
-----------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS INCLUDED IN THE 10-Q FOR THE QUARTER ENDED JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 433
<SECURITIES> 0
<RECEIVABLES> 3,616
<ALLOWANCES> 150
<INVENTORY> 4,831
<CURRENT-ASSETS> 9,197
<PP&E> 6,581
<DEPRECIATION> 4,277
<TOTAL-ASSETS> 11,569
<CURRENT-LIABILITIES> 5,164
<BONDS> 0
0
0
<COMMON> 485
<OTHER-SE> 5,920
<TOTAL-LIABILITY-AND-EQUITY> 11,569
<SALES> 16,312
<TOTAL-REVENUES> 16,312
<CGS> 9,094
<TOTAL-COSTS> 9,094
<OTHER-EXPENSES> 6,920
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,465
<INCOME-TAX> 557
<INCOME-CONTINUING> 908
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 908
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
