SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual report pursuant to section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the fiscal year ended September 30, 1997 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 number 0-2387
RESEARCH, INCORPORATED
(Exact name of the Company as specified in its charter)
Minnesota 41-0908058
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 24064, Minneapolis, Minnesota 55424
(Address of principal executive office) (Zip Code)
(The Company's telephone number, including area code) (612) 941-3300
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
- ----------------------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock with a par value of $.50 per share NASDAQ Symbol RESR
- ----------------------------------------------- ------------------------------
Indicate by check mark whether the Company (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 Company 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 (Paragraph 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the Company's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ___
The aggregate market value of the common shares held by nonaffiliates was
approximately $ 6.8 million based upon the closing sale price of the Company's
common stock as of December 5, 1997.
As of December 9, 1997; 986,674 common shares were outstanding.
Documents incorporated by reference:
1) Portions of the Proxy Statement dated December 11, 1997, for the Annual
Meeting of Shareholders to be held on January 15, 1998, are
incorporated by reference into Part III.
<PAGE>
RESEARCH, INCORPORATED
PART I
Item 1. Business
(a) General Development of the Business
Research, Incorporated (the "Company") is engaged in the design,
manufacturing and sale of complete product solutions based on its core
competencies: precise heating and control. The Company's primary focus
is on high growth markets including Graphic Arts (ink drying), SMT
(solder reflow for surface mount technology), (BGA) ball-grid array,
(CSP) chip scale packaging and Plastics. BGA and CSP are segments of
the semi-conductor industry. Applications for the Company's products
include, solder reflow for assembly of surface mount printed circuit
boards and chip production, ink drying for on demand printing, forming
of plastics, tube shrinking, materials testing, curing/finishing and
glass melting.
During the past year the Company refocused its efforts from a
product-driven company to a market-driven company. The global market
for the Company's products includes the United States, Canada, Europe,
Asia, Australia, Latin America and South America. Sales are made both
direct and through independent sales representatives and distributors.
The Company currently operates as one business segment through four
operating divisions: Drying, Thermal Solutions, Control Systems and
Research International. Company operations are located in Eden
Prairie, Minnesota, a suburb of Minneapolis, with a subsidiary,
Research Incorporation Limited, operating as a manufacturing site and
European sales office in Humberside, England.
On November 8, 1995 the Company established a FSC (Foreign Sales
Corporation) to obtain export incentives related to Research
Incorporated's increasing international sales activities.
Also refer to Note 4 and Note 7 of Item 14, Notes to Consolidated
Financial Statements, included elsewhere in this report.
Research, Incorporated was organized as a Minnesota corporation in
October 1966, and prior to that date, operated as the R-I Controls
Division of a predecessor company which was formed in 1952. Research
Inc. is located at 2465 Flying Cloud Drive, Eden Prairie, Minnesota
55344.
(b) Financial Information About Industry Segments
The Company operates in a single industry segment, industrial
electronic instruments and systems. Financial information concerning
its operations has been presented in the financial statements referred
to under Item 8.
(c) Narrative Description of the Business
(1) (i) Products and Markets - The Company is currently engaged in the
design, manufacture, and marketing of two product classes; process
control systems and heating devices.
RESEARCH INTERNATIONAL DIVISION The electronics
manufacturing market segments addressed by the Research
International Division are characterized by exponential
growth with technology rapidly accelerating to stay ahead of
obsolescence. Surface mount technology (SMT) and ball-grid
array (BGA) represent the most advanced processes for
creating solder-connections to silicon chips. Automation
provided by Research International's reflow ovens enable
semiconductor manufacturers and assemblers around the world
to remain competitive, low cost producers. The microcircuits
that pass through Research International's reflow ovens
become the electronic intelligence of computer workstations,
laptops and palmtops, as well as cellular phones, pagers and
other high demand wireless communications products.
<PAGE>
Research International plans to gain market share through
technology leadership, market driven to address customers
future needs and leadership in customer service and
satisfaction.
The No-Clean feature of Research International's
MicriFlo(TM) and ThermaFlo(TM) ovens for SMT as well as its
ChipFlo(TM) oven for BGA introduced in the third quarter of
1997, enables manufacturers to operate their systems without
costly, periodic stops (up to 24 hours per month) to clean
flux buildup in the heater cavities. In the semi-conductor
manufacturing environment, such interruptions add
significant costs to their operations.
The low velocity nitrogen convection (LVNC) feature of the
ChipFlo oven enables solder leads to be bonded onto
substrate film without flutter or air movement interfering
with the bonding process. Similarly, the DeltaFlo 10LN oven,
introduced in the second quarter of 1997, extends low
nitrogen capabilities to fan-forced convection reflow ovens
for manufacturers of high volume SMT circuit cards.
Research International markets its products through
independent sales representatives utilizing advertising,
tradeshows and rapid customer response and excellent
customer support to gain market share.
DRYING DIVISION
The Drying Division, an offshoot of the Company's Thermal
Solutions Division, was formed in 1997 to focus on
opportunities in the ink-drying segment of the graphic arts
market. The printing industry's quest for top speeds and
enhanced productivity created the need for the Drying
Division's products, which dry ink rapidly as it is applied.
Product advantages such as precise heat control that
preserves the integrity of the printed piece, speeds of up
to 1,000 feet per minute, smaller machine footprints, and
lower power requirements have earned the division a 50
percent share of the market segment it serves. The division
estimates the size of the overall ink drying market
worldwide to be approximately $800 million annually.
The division has primarily concentrated its efforts on the
high-end, ink-jet printing market niche, through a strategic
supplier relationship with Scitex Digital Printing, Inc.,
the world's leading supplier of ink-jet printing equipment
used for high-volume, high-speed print applications such as
lottery tickets, magazine sweepstakes, and direct mail. The
Drying Division has created a full line of products
including the Speed-Dri(R) and Web-Dri(R), along with the
new Roll-Dri(TM), to work in tandem with Scitex printers.
This broad product line gives users the ability to choose a
dryer that gives them the appropriate combination of speed,
size, power, and price to ensure the highest return on their
investment.
One of the fastest growing markets for the division's
products is Asia. Despite the recent fluctuations in Asian
financial markets, the consumer movement in the region is
flourishing, direct mail solicitations and database
development are in the beginning stages, and variably
printed business forms are growing in importance. The Drying
Division has the market development strategy in place to
take advantage of these trends, while minimizing its
exposure. Scitex has expanded into the Asian market and
brought with it a need for high-speed dryers. Because space
and electricity are at a premium throughout Asia, doing
business in the region demands that dryers run on lower
power and have smaller footprints. To meet these
requirements, the division developed the Roll-Dri, which
reduces energy consumption by more than 50 percent, while
running at high speeds.
Smaller printers also need high speeds in order to compete.
Over the last 12 months, several manufacturers introduced
new, moderately priced ink-jet printers to meet the
requirements of smaller letter shops that serve the
short-run direct mail niche. Since the printers are
attractively priced, users can afford to offer their
customers versatile ink-jet production as an alternative to
preprinted glued labels. Research, Inc.'s new Speed-Dri,
which was introduced in April of this year, was designed to
serve smaller printers in the short-run, on-demand print
marketplace.
<PAGE>
THERMAL SOLUTIONS DIVISION
The Thermal Solutions Division (TSD) advances the corporate
core competency of precise heat control. TSD created a
family of products using IR in the brand, such as the SpotIR
series, infrared spot heaters and ChambIR series, infrared
chamber heaters. TSD addresses multiple markets including
plastics, metal processing, and coatings as well as paper
processing. TSD is one of the few manufacturers using
"instant on/off" infrared lamps and reflectors, with
advantages over competing hot-wall or hot-air processes in
terms of energy efficiency, accuracy of focus, high heating
rates, and temperature control. The Thermal Solutions
Division develops products providing focused heat and
complete product solutions for customers. These products are
marketed through independent sales representatives who are
knowledgeable in the targeted markets.
SYSTEMS DIVISION
The Systems Division has established itself worldwide as a
premier systems integrator and designer of control systems
for glass manufacturing. In this specialized market, which
has migrated primarily to the Pacific Rim in recent year,
manufacturers of glass containers, fiberglass and glass for
construction tend to use outside systems integrators to
design and periodically upgrade their melting processes.
The Systems Division has two market-driven strategic
thrusts. First, the division is building its business as a
systems integrator, specifying whatever hardware and
software components are best suited to the requirements of
the unit. Second, the division is expanding the market
penetration of its GlassMaster(TM) Control Systems for
combined system control of glass manufacturing, along with
its GlassMaster for Windows(R) software introduced last
year. With positive customer acceptance at installations in
1997, the division is now applying this product formula to
power control systems within the glass market. The Systems
Division is also working on a small-systems growth plan with
TSD to develop complete solutions using the Company's core
heat-control technology to address growth opportunities. One
such total solution product currently under development
incorporates heater, framework, control, and cooler in a
single package.
The Systems Division controls a 5 to 10 percent share of its
market segment, including relationships with a number of
premier glass manufacturers.
(ii) Product Investment - The Company increased expenditures for
research and development to 11 percent of sales, which is
significantly higher than the average for its industries.
Included in this expenditure was funding for the development
of a first-to-market product solution to be introduced in
fiscal 1998 intended to position the Company in the
forefront of the industry.
(iii) Sources and Availability of Raw Materials - Raw materials
essential to the business of the Company are generally
readily available from a number of sources.
(iv) Patents and Trademarks - The Company has a number of patents
and is a party to certain license agreements which, while
deemed important, are not deemed material to the business of
the Company in the aggregate.
(v) Seasonality - The business of the Company is not seasonal.
(vi) Working Capital Requirements - The practices of the Company
relating to working capital items are not considered
unusual. The Company carries inventory to support customers
short demand requirements.
(vii) Customers - The Company has one customer that accounted for
19% of net sales and 20% of accounts receivable in 1997. The
Company has another customer that accounted for 12% and 11%
of net sales during 1997 and 1996, respectively, and 10% of
accounts receivable as of September 30, 1997 and 1996.
(viii) Backlog - The dollar amount of the Company's backlog of
orders from operations believed to be firm at September 30,
1997, was $2,730,000; at September 30, 1996, it was
$2,356,000. It is anticipated that
<PAGE>
$2,330,000 of the September 30, 1997 backlog will be shipped
in the subsequent 12-month period. Backlog has no unusual
significance to the business of the Company.
(ix) Government Contracts - Government contracts which may be
subject to renegotiation of profits or termination do not
constitute a material portion of the Company's business.
(x) Competition - The Company's business is highly competitive,
particularly in the areas of price, service and product
performance. Competition involves hundreds of companies --
ranging from companies which are much smaller than the
Company to large companies in the electronics, printing,
plastics and glass manufacturing industries.
(xi) Research and Development - The Company incurred expenses of
approximately $2,581,000, $1,735,000 and $1,682,000 in
fiscal years 1997, 1996, and 1995, respectively, on
Company-sponsored research activities related to the
development of new products, new related products and to the
improvement of existing products. No material funds were
expended for customer-sponsored research activities.
(xii) Environmental Regulations - Compliance with federal, state
and local provisions regulating the discharge of materials
into the environment or otherwise relating to the protection
of the environment is not expected to have a material effect
upon the capital expenditures, earnings or competitive
position of the Company.
(xiii) Employees - At September 30, 1997, the Company had 180
employees.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
(1) The Company has a subsidiary in the United Kingdom. The results
of its operations were not material to the Company. Export sales
involve sales to customers primarily in Asia, Latin America,
Europe, Canada and Australia. See Note 6, "Foreign Sales" of the
Notes to Consolidated Financial Statements.
(2) Not applicable.
(3) Not applicable.
Item 2. Properties
The Company's plant and office, which are owned in fee, are located on
approximately 12 acres of property at 6425 Flying Cloud Drive, Eden
Prairie, Minnesota. The facilities consist of 90,000 square feet of
completely air-conditioned space deemed suitable for light
manufacturing and office use. Management considers these facilities to
be in good condition, well-maintained, and adequate for its current
operations. On October 4, 1996, the first quarter of fiscal 1997, the
Company completed the sale of 13.1 acres of undeveloped land. The
Company's subsidiary in the U.K. is operated in a 5,000 square foot
leased facility.
Item 3. Legal Proceedings
The Company is not a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
<PAGE>
Item 4A. Executive Officers
None of the executive officers of the Company has any family
relationship with any other officer, and all officers serve at the
pleasure of the Board of Directors. The following table sets forth
other information regarding the Company's executive officers:
NAME AGE POSITION OFFICER SINCE
---- ---- -------- -------------
B.E. Bailey 49 Vice President 1992
D.G. Brady 55 Vice President 1990
R.L. Grose 47 Treasurer 1997
C.C. Johnson 53 President, CEO and Director 1984
G.E. Magnuson 67 Secretary and Director; 1975
Of Counsel, Lindquist & Vennum
P.L.L.P.
K.M. O'Rourke 40 Vice President 1993
G.W. Sangster 68 Vice President 1976
There are no arrangements or understandings between any of the
officers and any other person pursuant to which any of them was
selected as an officer.
Messrs. Johnson, Brady, Bailey, Sangster and Ms. O'Rourke have each
been employed by the Company for more than five years. Mr. Johnson
became President and Chief Executive Officer in July of 1992; Mr.
Magnuson was a partner with Lindquist & Vennum P.L.L.P until January
1995, at which time he became Of Counsel for Lindquist & Vennum
P.L.L.P. Mr. Magnuson has been a director and secretary of the Company
for more than five years. Mr. Brady became Vice President in November
1990; Mr. Bailey became Vice President in November 1991;. Ms. O'Rourke
became Vice President in November 1993; previously Ms. O'Rourke was
Manager of Human Resources. Mr. Grose became Treasurer in January of
1997; previously he was Controller. He was hired in November 1992.
<PAGE>
PART II
Item 5. Market for The Company's Common Stock and Related Stockholder Matters
(a) & (c) Market Information and Dividends
Dividends paid and price range per share of common stock is as
follows:
Stock is traded on the over-the-counter market, NASDAQ symbol (RESR)
<TABLE>
<CAPTION>
Bid Price Range
---------------
Dividends Paid 1997 1996
-------------- ---- ----
During Quarter Ended 1997 1996 High Low High Low
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31 $.07 $.055 6-3/4 4-3/4 9-1/2 7-1/2
March 31 .07 .070 9-1/2 4-7/8 8 6-1/2
June 30 .27* .070 9-3/4 5-1/2 8 6-1/2
September 30 .07 .070 10 6-1/2 8-1/4 6
--------------------------------------------------------------------------------------
TOTAL $.48 $.265
=========================================
</TABLE>
* INCLUDES A ONE-TIME SPECIAL DIVIDEND OF $.20 FROM THE SALE OF THE
DIMENSION PRODUCT LINE AND SALE OF LAND.
(b) Holders
The number of holders of record of the Company's common stock as of
December 2, 1997, was 600. The Company estimates that an additional
330 shareholders own stock held for their accounts at brokerage firms
and financial institutions.
<PAGE>
Item 6. Selected Financial Data
CONSOLIDATED FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(In thousands, except per share data)
For the Years ended September 30 1997 1996 1995 1994 1993
- ------------------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Consolidated Operations:
Net sales $ 22,843 $ 19,661 $ 20,923 $ 18,163 $ 15,613
Gross profit 10,085 7,955 9,019 7,947 6,989
Percent of sales 44.1% 40.5% 43.1% 43.8% 44.8%
Income from operations 551 89 903 661 533
Gain on sale of land 1,147 -- -- -- --
Gain on sale of product line -- 344 -- -- --
Interest income (expense) (3) 25 49 64 87
Income before income taxes 1,695 458 952 725 620
Percent of sales 7.4% 2.3% 4.6% 4.0% 4.0%
Income tax provision 578 168 325 228 217
Net income $ 1,117 $ 290 $ 627 $ 497 $ 403
Percent of sales 4.9% 1.5% 3.0% 2.7% 2.6%
- ------------------------------------------------ --------- --------- --------- --------- ---------
Total Earnings per Share $ .98 $ .24 $ .56 $ .44 $ .36
- ------------------------------------------------ ========= ========= ========= ========= =========
Cash Dividends Paid per Share $ .48 $ .265 $ .22 $ .22 $ .22
Return on Beginning
Stockholders' Equity 15.3% 4.0% 9.3% 7.7% 6.4%
- ------------------------------------------------ --------- --------- --------- --------- ---------
Weighted Average Number of
Shares Outstanding (in thousands) 1,135 1,194 1,129 1,125 1,125
- ------------------------------------------------ --------- --------- --------- --------- ---------
As of September 30 1997 1996 1995 1994 1993
- ------------------------------------------------ --------- --------- --------- --------- ---------
Consolidated Financial Condition:
Net working capital $ 3,934 $ 5,091 $ 5,195 $ 4,952 $ 4,902
Current ratio 1.6 to 1 2.7 to 1 2.5 to 1 2.5 to 1 2.9 to 1
Property and Equipment, net $ 2,521 $ 2,100 $ 1,876 $ 1,695 $ 1,570
- ------------------------------------------------ --------- --------- --------- --------- ---------
Total Assets $ 12,849 $ 10,338 $ 10,593 $ 10,080 $ 9,132
Total Stockholders' Equity 6,516 7,275 7,195 6,762 6,498
- ------------------------------------------------ --------- --------- --------- --------- ---------
Number of Shares Outstanding 969 1,161 1,140 1,125 1,125
Book Value per Share $ 6.72 $ 6.27 $ 6.31 $ 6.01 $ 5.78
- ------------------------------------------------ --------- --------- --------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THIS CONSOLIDATED FINANCIAL SUMMARY.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
In 1996, the Company shifted from a product-driven to a market-driven strategy
in order to leverage its engineering expertise and to concentrate and invest
resources on customers and markets that offer the best potential return. The
Company identified four key markets in which it has the potential to be a
dominant player: surface mount technology (SMT), graphic arts, glass, and
infrared. In each area, the Company identified key customers and strategic
partners with whom it would work most closely to meet their respective needs.
The Company also identified key geographic markets, particularly Asia, where it
would 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
ongoing 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 in this market.
Strategic partnerships and high levels of customer service will be key
components of the Company's market-driven strategy. While the breadth of the
Company product line will probably decrease as efforts are focused 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 believes that this commitment of additional resources
will result in increased future sales and profitability.
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The Company has evaluated
the risks associated with the "Year 2000" problem and has determined that the
cost of addressing the Year 2000 issue will be an immaterial event for the
Company and will not affect the Company's consolidated financial position or
results of operations.
CONSOLIDATED OPERATIONS
1997-1996 COMPARISON
Sales for fiscal 1997 increased 16%. The overall increase in sales is attributed
to increased demand in the electronics industry, the Company's focus on key
customers and acceptance of new product introductions. Sales to the electronics
industry in the SMT market increased 70% over the prior year and sales to the
printing industry in the graphic arts market increased 20%. The sales increases
in the SMT and graphic arts markets were partially offset by the loss of
approximately $2,000,000 of sales of the Dimension product, which was sold in
September 1996. Management believes there will continue to be quarter-to-quarter
fluctuations in the SMT market with the electronics industry overall projected
to grow 20% per year. Such fluctuations have been typical in the electronics
industry as demand for electronic products, such as personal computers, has
fluctuated. The increase in sales to the graphic arts market is due to the
Company's focus last year to penetrate that market. Sales (excluding Dimension
sales for 1996) increased 29.0%. Sales of new products introduced in the last
three years accounted for 57% of sales.
Gross profit margin increased 3.6% due to the product mix of sales in the SMT
market, lower warranty costs and the impact of new product introductions in the
SMT and graphic arts markets. Gross margins in 1996 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 expense incurred in 1996 was related to correctable,
nonrecurring retrofit changes and the integration of a new controller in the SMT
reflow oven product line. Management has implemented design review procedures
that it believes will prevent future occurrences. Gross margins on the SMT
product line are relatively lower than other product lines.
Selling expenses as a percent of sales dropped 1.3% due to reduced reliance on
independent sales representatives in the graphic arts market and the sale of the
Dimension product line partially offset by investments to develop new customer
relationships.
Expenditures for research and development increased to 11.3% as a percentage of
sales in 1997 from 8.8% of sales in 1996 due to the Company's plan to increase
its investment in new product development in its major markets and
<PAGE>
funding of a first-to-market product solution to be introduced in fiscal 1998.
These investments are in line with the Company's goal to generate 50% of sales
from new products developed in the last three years. The Company has shifted the
emphasis of its research and development efforts from a 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 expense increased to 4.1% as a percentage of sales in
1997. This increase was due to costs associated with hiring and training
additional personnel to support the Company's growth. The Company expects the
labor shortage to continue to impact these costs. The Company will also invest
in new business systems and processes in the future with the expectation that
these expenses will be leveraged and provide future productivity improvements.
Net income for 1997 includes a one-time gain on sale of land of $1,147,000. The
gain on the sale of land is net of $312,000 of expenses such as site preparation
and professional fees.
Interest expense was $4,000 in 1997 compared to interest income of $25,000 in
1996. This change is due primarily to lower investment balances in the first
half of the year and the borrowing position in the second half of 1997.
The effective tax rate for 1997 was 34%, compared to 37% in 1996. The decrease
is due to the increase in research and development spending and the associated
legislation enacted in 1997.
1996-1995 COMPARISON
Sales decreased 6.0% due to significantly lower sales in the SMT market, which
counteracted sales gains achieved in other product lines. The decline in sales
to the SMT market is attributed to demand in the electronics industry, which is
expected to improve. Fluctuations in demand in this industry are considered
typical. Sales of new products introduced in the last three years accounted for
48% of sales in 1996.
The gross profit margin on sales decreased 2.6% due to product mix and the
impact on new product introductions, initial production costs, and new product
warranty expense in the SMT product line. Gross margins on the SMT product lines
are relatively lower that those on other product lines.
Warranty expense increased 1.1% as a percentage of sales. The increase is
unusually high and is related to nonrecurring expenditures on new product
installations. Management does not expect this trend to continue.
Selling expenses are up .5% as a percentage of sales due to the lower volume.
Expenditures for research and development increased .8% as a percentage of sales
due to the Company's increased investment in new product development.
Interest income decreased in fiscal 1996 due primarily to lower investment
balances.
On September 27, 1996, the Company sold its Dimension product line in order to
concentrate on products and markets in which management believes the Company has
potential to be a dominant player. The Dimension is an industrial process
controller designed for applications requiring sophisticated control without a
mainframe computer. While Dimension is 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 will supply
the Company with Dimension systems, which the Company will continue to use as
part of its total system solution packages for its customers.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $3,934,000 at the end of 1997 as compared to
$5,091,000 in 1996. The Company's current ratio at September 30, 1997 and 1996,
was 1.6 and 2.7, respectively. The net change in working capital was due to
proceeds from the sale of land in October 1996 of $1,530,000, offset by the
repurchase of common stock of $1,532,000, and increases in inventory and
accounts receivable. The increase in accounts receivable is due
<PAGE>
to timing of shipments and higher volume. The increase in inventory was due to
new products awaiting customer acceptance in both the SMT and graphic arts
markets, and the ability to meet customer expectations for shorter delivery
terms.
The warranty reserves have increased to reflect anticipated exposure in the SMT
reflow ovens. These ovens have the highest level of new product sales and their
warranty period was increased during the first quarter of fiscal 1997. The
reserve for product warranties represents management's estimate of warranty
expense over the next six to twelve months. The Company's experience has been
that most warranty charges occur at the time of product introduction or are due
to nonrecurring events. The reserve estimate also considers the amount of new
product introductions.
A portion of the Company's sales are generated in Asian markets that are
currently experiencing significant changes in currency valuations, which may
have an impact on the Company's future results.
The Company has an unsecured bank line of credit of $3,000,000. At September 30,
1997, the Company had borrowings outstanding of $1,466,000 at the prime rate
under the line of credit and short-term note payable of $766,000 at 8.5% due
January 15, 1998. The borrowings were used to finance the Company's repurchase
of common stock and meet working capital requirements. The Company expects to
utilize the line of credit to finance operations through 1998. The Company has
no long-term debt.
For further information regarding the current year items impacting cash flows,
see the Company's Consolidated Statements of Cash Flows.
INFLATION
In the past three years, inflation has not had a significant effect on
operations.
FORWARD-LOOKING STATEMENTS
The statements included herein that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. There are certain important
factors that could cause actual 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 or
volatility in the major markets, competition, currency fluctuations,
availability of labor, and general economic conditions.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements, together with the
report of the Company's independent public accountants, Arthur Andersen
LLP, are included in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
<PAGE>
PART III
Items 10., Pursuant to General Instruction G (3), the information required by
11., 12., Item 10 - Directors and Executive Officers of the Company,
and 13. Item 11 - Executive Compensation,
Item 12 - Security Ownership of Certain Beneficial Owners and
Management, and
Item 13 - Certain Relationships and Related Transactions, except
that portion of Item 10 relating to executive officers of the
Company, which is set forth in Item 4A of this report, is hereby
incorporated by reference from the Company's definitive Proxy
Statement, to be filed with the Commission with respect to the
Annual Meeting of Shareholders to be held on January 15, 1998.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
Page#
-----
(a)(1) Financial Statements:
The following consolidated financial statements of
Research, Incorporated and the Report of the Independent
Public Accountants thereon, are filed as part of this
Form 10-K.
(i) Report of Independent Public Accountants 15
(ii) Consolidated Balance Sheets as of September 30,
1997 and 1996 16
(iii) Consolidated Statements of Operations and
Consolidated Statements of Stockholders' Equity
for the years ended September 30, 1997, 1996, and
1995 17, 18
(iv) Consolidated Statements of Cash Flows for the
years ended September 30, 1997, 1996, and 1995 19
(v) Notes to Consolidated Financial Statements 20-25
(2) Financial Statement Schedule
The following financial statement schedule is filed with
this report:
(i) Schedule II -Valuation and qualifying accounts 26
All schedules except those listed above are omitted because they
are not applicable or not required, or because the required
information is included in the financial statements or note
thereto.
(3) Exhibits
(3.1) Articles of Incorporation - Incorporated by
reference to Exhibit (3.1) of the Company's Form
10-K for the period ended September 30,1994
(3.2) Bylaws - Incorporated by reference to Exhibit
(3.2) of the Company's Form 10-K for the period
ended September 30,1994
(4.1) Line of Credit Agreement between Norwest Bank
Minnesota N.A. and the Company dated October 13,
1997 27-36
(4.2) Revolving Note Agreement between Norwest Bank
Minnesota N.A. and the Company dated October 13,
1997 37-38
(10.1) 1991 Stock Plan - Incorporated by reference to
registration statement on Form Form S-8, file No.
33-75256 (filed February 14, 1994)
(10.2) Stock Redemption Agreement Dated May 28, 1997
between the Company and Shareholders -
Incorporated by reference to Form 8-K Report
dated May 28, 1997, filed on June 10, 1997.
(10.3) Promissory Note Dated May 28, 1997 between the
Company and Shareholders - Incorporated by
reference to Form 8-K Report dated May 28, 1997,
filed on June 10, 1997.
<PAGE>
Page#
-----
(10.4) Security Agreement Dated May 28, 1997 between the
Company and Shareholders - Incorporated by
reference to Form 8-K Report dated May 28, 1997,
filed on June 10, 1997.
(10.5) Form S-8 filed 11-5-97 - Employee Stock Purchase
Plan Incorporated by reference to Exhibit 4.1 of
registration statement, on Form S-8, file
333-39567
(21.1) Subsidiaries of the Company 39
(23.1) Consent of Arthur Andersen LLP 40
(27.0) Financial Data Schedule 41
(b) Reports on Form 8-K:
No reports on form 8-K were filed in the quarter ended September
30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESEARCH, INCORPORATED
By /s/ Claude C. Johnson
--------------------------------------
Claude C. Johnson, President and CEO
By /s/ Richard L. Grose
--------------------------------------
Richard L. Grose, Treasurer
Date: December 12, 1997
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 Company and in
the capacities and on the dates indicated:
Signature Title Date
/s/ Claude C. Johnson. President, CEO and Director December 12, 1997
- -------------------------
Claude C. Johnson *
/s/ Richard L. Grose. Treasurer December 12, 1997
- -------------------------
Richard L. Grose **
/s/ J. R. Anderson Director December 12, 1997
- -------------------------
James R. Anderson
/s/ J. G. Colwell, Jr. Director December 12, 1997
- -------------------------
John G. Colwell, Jr.
/s/ E. L. Lundstrom Director December 12, 1997
- -------------------------
Edward L. Lundstrom
/s/ G. E. Magnuson Director December 12, 1997
- -------------------------
Gerald E. Magnuson
/s/ C. G. Schiefelbein Director December 12, 1997
- -------------------------
Charles G. Schiefelbein
* Principal executive officer
* *Principal financial officer
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Research, Incorporated:
We have audited the accompanying consolidated balance sheets of RESEARCH,
INCORPORATED (a Minnesota corporation) AND SUBSIDIARY as of September 30, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1997. These consolidated financial statements and supplemental schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
supplemental schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Research, Incorporated and
Subsidiary as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed as a part of Item 14 in this
Form 10-K is presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
October 27, 1997
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of September 30
-----------------------------
ASSETS 1997 1996
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,204,827 $ 1,841,147
Accounts receivable, net of reserves of $150,000 3,979,299 2,366,814
Inventories 4,485,830 3,474,488
Prepayments, primarily deferred income taxes 596,465 471,310
- ------------------------------------------------------------------ ------------ ------------
Total current assets 10,266,421 8,153,759
- ------------------------------------------------------------------ ------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land and land improvements 221,927 212,852
Building 2,182,492 2,073,024
Machinery and equipment 4,534,825 3,863,381
Less accumulated depreciation (4,418,279) (4,048,814)
- ------------------------------------------------------------------ ------------ ------------
Net property and equipment 2,520,965 2,100,443
- ------------------------------------------------------------------ ------------ ------------
OTHER ASSETS 61,320 84,214
- ------------------------------------------------------------------ ------------ ------------
Total assets $ 12,848,706 $ 10,338,416
================================================================== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------
CURRENT LIABILITIES:
Notes payable $ 2,231,998 $ --
Accounts payable 1,689,153 1,277,805
Accrued liabilities:
Salaries and benefits 728,374 474,040
Warranty 350,000 250,000
Real estate taxes 155,000 125,000
Other 303,971 463,650
Federal and state income taxes payable 873,739 472,467
- ------------------------------------------------------------------ ------------ ------------
Total current liabilities 6,332,235 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 September 30, 1997 and 1996, respectively 484,587 580,622
Additional paid-in capital 428,258 275,470
Foreign currency translation 39,752 17,816
Retained earnings 5,563,874 6,401,546
- ------------------------------------------------------------------ ------------ ------------
Total stockholders' equity 6,516,471 7,275,454
- ------------------------------------------------------------------ ------------ ------------
Total liabilities and stockholders' equity $ 12,848,706 $ 10,338,416
================================================================== ============ ============
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED BALANCE SHEETS.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended September 30 1997 1996 1995
- ---------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Net Sales $ 22,843,081 $19,661,182 $20,922,505
Cost of Sales 12,758,030 11,705,817 11,904,004
- ---------------------------------------------------------- ------------ ----------- -----------
Gross profit 10,085,051 7,955,365 9,018,501
- ---------------------------------------------------------- ------------ ----------- -----------
Expenses:
Selling 6,013,914 5,431,240 5,674,288
Research and development 2,580,770 1,735,204 1,681,779
General and administrative 939,174 700,460 759,385
- ---------------------------------------------------------- ------------ ----------- -----------
Total expenses 9,533,858 7,866,904 8,115,452
- ---------------------------------------------------------- ------------ ----------- -----------
Income From Operations 551,193 88,461 903,049
Gain on Sale of Land 1,147,094 -- --
Gain on Sale of Product Line -- 344,400 --
Interest Income (Expense), net (3,522) 24,969 49,060
- ---------------------------------------------------------- ------------ ----------- -----------
Income Before Income Tax Provision 1,694,765 457,830 952,109
Income Tax Provision 578,000 168,000 325,000
- ---------------------------------------------------------- ------------ ----------- -----------
Net Income $ 1,116,765 $ 289,830 $ 627,109
========================================================== ============ =========== ===========
Net Income Per Common Share $ 0.98 $ 0.24 $ 0.56
========================================================== ============ =========== ===========
Weighted Average Common Shares Outstanding 1,134,701 1,193,789 1,128,848
========================================================== ============ =========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Foreign
------------ Paid-In Currency Retained
Shares Amount Capital Translation Earnings Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances,
September 30, 1994 1,125,118 $ 562,559 $145,440 $ 13,656 $ 6,040,177 $ 6,761,832
Options exercised 14,500 7,250 51,875 -- -- 59,125
Foreign currency
translation -- -- -- (4,703) -- (4,703)
Net income -- -- -- -- 627,109 627,109
Dividends -- -- -- -- (248,574) (248,574)
- ----------------------------------------------------------------------------------------------------------
Balances,
September 30, 1995 1,139,618 569,809 197,315 8,953 6,418,712 7,194,789
Options exercised 21,625 10,813 78,155 -- -- 88,968
Foreign currency
translation -- -- -- 8,863 -- 8,863
Net income -- -- -- -- 289,830 289,830
Dividends -- -- -- -- (306,996) (306,996)
- ----------------------------------------------------------------------------------------------------------
Balances,
September 30, 1996 1,161,243 580,622 275,470 17,816 6,401,546 7,275,454
Options exercised 45,450 22,725 152,788 -- -- 175,513
Foreign currency
translation -- -- -- 21,936 -- 21,936
Stock repurchase (237,519) (118,760) -- -- (1,413,238) (1,531,998)
Net income -- -- -- -- 1,116,765 1,116,765
Dividends -- -- -- -- (541,199) (541,199)
- ----------------------------------------------------------------------------------------------------------
Balances,
September 30, 1997 969,174 $ 484,587 $428,258 $ 39,752 $ 5,563,874 $ 6,516,471
==========================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended September 30 1997 1996 1995
- ---------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income $ 1,116,765 $ 289,830 $ 627,109
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 529,876 463,429 433,376
Deferred income taxes (26,000) (2,000) (20,000)
Gain on sale of land (1,147,094) -- --
Gain on sale of product line -- (344,400) --
Changes in operating elements:
Accounts receivable (1,612,485) 1,781,093 (150,491)
Inventories (1,111,342) (852,042) (125,214)
Prepayments, primarily deferred income taxes (28,155) (66,201) (104,099)
Accounts payable and accrued liabilities 353,554 (736,333) (87,208)
Federal and state income taxes payable 330,272 (142,588) 187,447
- ---------------------------------------------------------------------- ----------- ----------- -----------
Net cash provided by (used in) operating activities (1,594,609) 390,788 760,920
- ---------------------------------------------------------------------- ----------- ----------- -----------
Investing Activities:
Proceeds from sale of land, net 1,529,543 -- --
Proceeds from sale of product line -- 1,000,000 --
Maturities of short-term investments -- -- 701,679
Property and equipment additions, net (921,032) (650,352) (569,908)
Other (6,472) 2,312 (5,326)
- ---------------------------------------------------------------------- ----------- ----------- -----------
Net cash provided by investing activities 602,039 351,960 126,445
- ---------------------------------------------------------------------- ----------- ----------- -----------
Financing Activities:
Cash dividends paid (541,199) (306,996) (248,574)
Issuance of common stock 175,513 88,968 59,125
Repurchase of common stock (765,998) -- --
Net borrowing under line of credit 1,465,998 -- --
- ---------------------------------------------------------------------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 334,314 (218,028) (189,449)
- ---------------------------------------------------------------------- ----------- ----------- -----------
Foreign Currency Translation 21,936 8,863 (4,703)
- ---------------------------------------------------------------------- ----------- ----------- -----------
Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents (636,320) 533,583 693,213
Beginning of year 1,841,147 1,307,564 614,351
- ---------------------------------------------------------------------- ----------- ----------- -----------
End of year $ 1,204,827 $ 1,841,147 $ 1,307,564
====================================================================== =========== =========== ===========
Supplemental Cash Flow Information:
Non-cash financing activity:
Repurchase of common stock through
issuance of note payable $ 766,000 $ -- $ --
====================================================================== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
Research, Incorporated and its wholly owned subsidiary, Research Incorporation
Limited (collectively, the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION - The assets and liabilities of the Company's
Subsidiary are translated into U.S. dollars using current exchange rates at the
end of the period. Statements of operations items are translated at average
exchange rates prevailing during the period.
CASH & CASH EQUIVALENTS - Cash equivalents represent money market investments
that have an original maturity of three months or less. Cash and cash
equivalents are recorded at cost, which approximates fair value.
ACCOUNTS RECEIVABLE - Accounts receivable consisted of the following at
September 30:
1997 1996
- ---------------------------------------------------------------------------
Trade receivables, net $3,739,741 $2,260,915
Costs in excess of billings
on percentage-of-completion
contracts 239,558 105,899
- ---------------------------------------------------------------------------
Total $3,979,299 $2,366,814
===========================================================================
INVENTORIES - Inventories are stated at the lower of first-in, first-out, cost
or market and include direct labor costs, materials and overhead. Inventories
consisted of the following at September 30:
1997 1996
- ---------------------------------------------------------------------------
Manufactured subassemblies
and purchased parts $3,070,262 $2,406,077
Work in process 1,415,568 1,068,411
- ---------------------------------------------------------------------------
Total $4,485,830 $3,474,488
===========================================================================
DEPRECIATION - Depreciation of property and equipment is computed principally
using accelerated methods for both financial and income tax reporting purposes.
Depreciation is charged to operations over the estimated useful lives of the
property and equipment as follows:
Years
- ---------------------------------------------------------------------------
Land improvements 20
Building 33
Machinery and equipment 3 to 10
===========================================================================
REVENUE RECOGNITION - Sales and related cost of sales are recorded at the time
of shipment, except for system contracts, which are recognized on a
percentage-of-completion basis. Revenues on such contracts are recognized as the
work progresses, based on the estimated gross profit for each contract. When a
loss is anticipated on a contract, the full amount of the loss is provided
currently.
SIGNIFICANT CUSTOMERS - The Company has one customer that accounted for 19% of
net sales and 20% of accounts receivable in 1997. The Company has another
customer that accounted for 12% and 11% of net sales during 1997 and 1996,
respectively and 10% of accounts receivable as of September 30, 1997 and 1996.
WARRANTIES - The Surface Mount Technology (SMT) products are under warranty
against defects in material and workmanship for a two-year period with an
extended warranty on three components. The Company's other products are
generally under warranty for a one-year period. Estimated warranty costs are
accrued in the same period as
<PAGE>
products are shipped. An analysis of reserves for product warranties is
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.
INCOME TAXES - Deferred income tax assets or liabilities are recognized for the
differences between financial and income tax reporting basis of assets and
liabilities based on enacted tax rates and laws.
NET INCOME PER COMMON SHARE - Net income per common share is computed by
dividing net income by the weighted average number of common shares and common
share equivalents of outstanding employee stock options.
USE OF ESTIMATES - The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Ultimate results could differ from those estimates.
2. DEBT OBLIGATIONS:
LINE OF CREDIT: During 1997, the Company had a $3,000,000 unsecured bank line of
credit which carried an interest rate equal to the bank's base (prime) rate with
no compensating balance requirements. Subsequent to September 30, 1997, the line
of credit has been renewed for $5,000,000 with similar terms. As of September
30, 1997, the Company was in compliance with the terms of the line of credit,
including covenants relating to current ratio, tangible net worth, debt to
tangible net worth, and earnings. At September 30, 1997, the Company had
borrowings outstanding of $1,466,000. In 1996 and 1995, the Company had no
borrowings against the line of credit.
NOTE PAYABLE - The Company has a $766,000 note payable with interest at a rate
of 8.5% due January 15, 1998. This note resulted from the Company's common stock
repurchase during 1997 and is collateralized by certain assets of the Company.
3. INCOME TAXES:
The income tax provision consists of the following:
1997 1996 1995
- -------------------------------------------------------------------------------
Current federal $599,000 $201,000 $315,000
Current state 2,000 2,000 27,000
Foreign 3,000 (33,000) 3,000
- -------------------------------------------------------------------------------
604,000 170,000 345,000
Deferred income taxes (26,000) (2,000) (20,000)
- -------------------------------------------------------------------------------
Income tax provision $578,000 $168,000 $325,000
===============================================================================
A reconciliation of the statutory federal rate to the effective tax rate is as
follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Statutory federal rate 34% 34% 34%
State taxes, net of federal
income tax provision - - 2
Other, net - 3 (2)
- -------------------------------------------------------------------------------
Effective tax rate 34% 37% 34%
===============================================================================
Income taxes paid $161,000 $356,000 $212,000
===============================================================================
<PAGE>
The Company has recorded the following net deferred taxes:
As of September 30 1997 1996
- ----------------------------------------------------------------------
Current deferred taxes:
Gross assets $376,000 $283,000
Gross liabilities --- (1,000)
- ----------------------------------------------------------------------
Total current deferred taxes 376,000 282,000
- ----------------------------------------------------------------------
Noncurrent deferred taxes:
Gross assets 29,000 25,000
Gross liabilities (148,000) (76,000)
- ----------------------------------------------------------------------
Total noncurrent
deferred taxes (119,000) (51,000)
- ----------------------------------------------------------------------
Net deferred taxes $257,000 $231,000
======================================================================
The tax effect of significant temporary differences representing deferred tax
assets and liabilities is as follows as of September 30:
1997 1996
- ----------------------------------------------------------------------
Depreciation and amortization $(148,000) $(109,000)
Inventory reserves 122,000 100,000
Accounts receivable reserves 51,000 51,000
Warranty reserves 136,000 85,000
Accruals and other, net 96,000 104,000
- ----------------------------------------------------------------------
Net deferred taxes $257,000 $231,000
======================================================================
The Company did not record any valuation allowance against deferred tax assets
at September 30, 1997 or 1996.
4. STOCKHOLDERS' EQUITY:
STOCK REPURCHASE - On May 28, 1997, the Company repurchased 237,519 shares of
common stock at a price of $6.45 per share from a major stockholder through the
issuance of a note payable to the stockholder and through borrowing under the
Company's line-of-credit facility.
STOCK DIVIDEND - On November 5, 1997, the Board of Directors declared a 5 for 4
split in the form of a 25 percent stock dividend to stockholders of record on
December 31, 1997. The Company has not recorded the stock dividend in the
accompanying consolidated financial statements. If the Company had recorded the
stock dividend, the Company's net income per common share would have been the
following pro forma amounts for the year ended September 30:
1997 1996 1995
- --------------------------------------------------------------------------
Net income per common share:
As reported $.98 $.24 $.56
Pro forma .77 .19 .44
- --------------------------------------------------------------------------
STOCK-BASED COMPENSATION - In 1991, the Company implemented a stock option plan
(the Plan). A total of 210,000 shares or common stock were reserved for issuance
to directors, officers, and key employees. The stock options have been granted
at fair market value as determined by the Board of Directors at the date of
grant. The stock options expire after five years from the date of grant and are
exercisable at a rate of 25% per year on a cumulative basis, beginning one year
after the date of grant.
The Company counts for the options under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for the options
been determined consistent with Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and net income per common share would have been the following pro forma
amounts for the year ended September 30:
<PAGE>
1997 1996
- ------------------------------------------------------------------
Net income:
As reported $1,116,765 $289,830
Pro forma 1,093,783 279,852
Net income per
common share:
As reported $.98 $.24
Pro forma .96 .23
- ------------------------------------------------------------------
The fair market value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model. The following weighted average
assumptions were used for grants in 1997 and 1996:
ASSUMPTIONS AS OF THE GRANT DATE
- ------------------------------------------------
Risk-free interest rate 5.77%
Expected lives 5.00
Expected volatility 40%
- ------------------------------------------------
Options outstanding at September 30, 1997, have an exercise price ranging
between $4.75 and $7.75.
Information regarding stock options is shown below for the year ended September
30:
<TABLE>
<CAPTION>
1997 1996
AVERAGE WEIGHTED AVERAGE WEIGHTED
STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 112,750 $ 5.18 112,500 $ 4.38
Granted 59,000 5.72 28,500 7.64
Exercised (45,450) 3.86 (21,625) 4.19
Expired (2,300) 4.96 --- ---
Canceled (750) 6.17 (6,625) 5.83
- ----------------------------------------------------------------------------------------------------
Outstanding, end of period 123,250 $ 5.92 112,750 $ 5.18
- ----------------------------------------------------------------------------------------------------
Exercisable, end of period 34,500 $ 5.48 61,000 $ 4.15
- ----------------------------------------------------------------------------------------------------
Weighted average fair value
of options granted $ 1.11 $ 1.94
- ----------------------------------------------------------------------------------------------------
</TABLE>
5. RETIREMENT BENEFITS:
The Company has a profit sharing retirement plan that provides deferred
compensation benefits for eligible employees. The annual contribution to the
plan is discretionary and is determined in accordance with policies established
by the Board of Directors. The Board of Directors authorized contributions of
$232,000, $160,000 and $268,000 for 1997, 1996 and 1995, respectively.
Contributions for 1997 and 1995 included 401(k) and discretionary profit
sharing, while 1996 included only 401(k).
6. FOREIGN SALES:
Export sales to customers in various foreign countries totaled $11,174,000,
$6,976,000 and $6,762,000 in 1997, 1996 and 1995, respectively. Sales to
customers in Asia totaled $3,709,000, $4,542,000 and $4,475,000 in 1997, 1996
and 1995, respectively. Sales to customers in 1997 in Latin America and Europe
were $3,990,000 and $2,445,000, respectively.
7. NONRECURRING TRANSACTIONS:
<PAGE>
SALE OF LAND - On October 4, 1996, the Company sold a parcel of undeveloped land
for $1,530,000. The net gain recognized on the sale was $1,147,000 and is shown
as Gain on Sale of Land in the accompanying Consolidated Statements of
Operations.
SALE OF PRODUCT LINE - On September 27, 1996, the Company sold its Dimension
product line, including associated equipment, for a total sales price of
$1,000,000. The net gain recognized on the sale was approximately $344,000 and
is shown as Gain on Sale of Product Line in the accompanying Consolidated
Statements of Operations. An agreement was also signed with the buyer allowing
the Company to purchase the Dimension product on a discounted basis for a
minimum of three years.
8. NEW ACCOUNTING PRONOUNCEMENT:
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share", which changes the way companies calculate their earnings
per share (EPS). SFAS No. 128 replaces primary EPS with basic EPS and fully
diluted EPS with diluted EPS. Basic EPS is computed by dividing reported income
by the weighted average shares outstanding, excluding potentially dilutive
securities while diluted EPS includes the dilutive securities. The Company is
required to adopt SFAS No. 128 in fiscal 1998, at which time, all prior period
EPS data is to be restated. If the Company had adopted SFAS No. 128, the effect
on reported income per share data would have been as follows for the year ended
September 30:
1997 1996 1995
- --------------------------------------------------------------------------
Primary EPS, as reported $.98 $.24 $.56
Effect of SFAS No. 128 .03 .02 --
- --------------------------------------------------------------------------
Basic EPS, as restated $1.01 $.26 $.56
- --------------------------------------------------------------------------
Diluted EPS under SFAS No. 128 would have been substantially unchanged from
primary EPS as reported.
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 is as listed on the
following page.
<PAGE>
9
QUARTERLY FINANCIAL DATA (UNAUDITED): Summarized quarterly financial data for
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 Quarterly Results
1st 2nd 3rd 4th 1997
(In thousands, except net income per share) Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Consolidated Operations:
Net sales $ 4,873 $ 5,816 $ 5,622 $ 6,532 $ 22,843
Gross profit 2,063 2,680 2,475 2,867 10,085
Gain from sale of land 1,147 -- -- -- 1,147
Income before income taxes 1,102 249 114 230 1,695
Net Income $ 686 $ 153 $ 69 $ 209 $ 1,117
Earnings per Share:
Net Income per Share $ 0.58 $ 0.13 $ 0.06 $ 0.20 $ 0.98
Weighted average common shares outstanding 1,181 1,210 1,187 1,044 1,135
===============================================================================================================================
1996 Quarterly Results
1st 2nd 3rd 4th 1996
(In thousands, except net income per share) Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------- ---------- ---------- ---------- ---------- -----------
Consolidated Operations:
Net sales $ 4,380 $ 5,258 $ 5,793 $ 4,230 $ 19,661
Gross profit 1,804 2,129 2,294 1,728 7,955
Gain on sale of product line -- -- -- 344 344
Income before income taxes 47 57 201 153 458
Net Income $ 27 $ 39 $ 121 $ 103 $ 290
Earnings per Share:
Net Income per Share $ 0.02 $ 0.03 $ 0.10 $ 0.09 $ 0.24
Weighted average common shares outstanding 1,199 1,197 1,197 1,191 1,194
===============================================================================================================================
</TABLE>
<PAGE>
RESEARCH, INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance, Balance,
Beginning End of
of Period Additions Deductions Period
------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts (1):
Year ended September 30, 1995 150,000 10,305 (10,305) 150,000
Year ended September 30, 1996 150,000 5,480 (5,480) 150,000
Year ended September 30, 1997 150,000 12,563 (12,563) 150,000
Reserve for product warranties:
Year ended September 30, 1995 150,000 401,547 (401,547) 150,000
Year ended September 30, 1996 150,000 680,452 (580,452) 250,000
Year ended September 30, 1997 250,000 420,061 (320,061) 350,000
Reserve for inventory obsolescence:
Year ended September 30, 1995 169,844 146,737 (122,386) 194,195
Year ended September 30, 1996 194,195 216,328 (117,523) 293,000
Year ended September 30, 1997 293,000 271,109 (164,109) 400,000
</TABLE>
(1) Deductions represent amounts determined to be uncollectible and charged
against the reserve net of collections on accounts previously written off.
Exhibit 4.1
NORWEST-BANK MINNESOTA CREDIT AGREEMENT
NATIONAL ASSOCIATION
THIS CREDIT AGREEMENT (the "Agreement") dated as of October 13, 1997 (the
"Effective Date") is between Norwest Bank Minnesota, National Association (the
"Bank") and Research, Incorporated (the "Borrower").
BACKGROUND
The Borrower has asked the Bank to renew its existing line of credit and
increase the amount of credit available under the Line to Five Million and
00/100 Dollars ($5,000,000.00), which the Borrower intends to use for working
capital purposes. Borrowings under the Line are currently evidenced by a
promissory note dated October 28, 1996 (the "1996 Revolving Note")
The Bank is agreeable to meeting the Borrower's request, provided that the
Borrower agrees to the terms and conditions of this Agreement.
The Revolving Note (as defined below), this Agreement, and all "Security
Documents" described in Exhibit B shall be referred to collectively as the
"Documents."
In consideration of the above premises, the Bank and the Borrower agree as
follows:
LINE OF CREDIT
LINE OF CREDIT AMOUNT. During the Line Availability Period defined below, the
Bank agrees to provide a revolving line of credit (the "Line") to the
Borrower. Outstanding amounts under the Line shall not, at any one time,
exceed Five Million and 00/100 Dollars ($5,000,000.00). This is a
conditional revolving line of credit and each advance under the Line, if
made, shall be at the sole discretion of the Bank.
LINE AVAILABILITY PERIOD. The "Line Availability Period" shall mean the period
of time from the Effective Date or the date on which all conditions
precedent described in this Agreement have been met, whichever is later,
to the Line Expiration Date of January 31, 1999.
THE REVOLVING NOTE. The Borrower's obligation to repay advances under the Line
shall be evidenced by a single promissory note (the "Revolving Note")
dated as of the Effective Date, and in form and content acceptable to the
Bank. The Revolving Note shall replace, but not be deemed to satisfy, the
1996 Revolving Note. The initial balance of the Revolving Note shall be
the balance of the 1996 Revolving Note as of the Effective Date.
Reference is made to the Revolving Note for interest rate and repayment
terms.
MANDATORY PREPAYMENT. If at any time the principal outstanding under the
Revolving Note plus the face amount of any outstanding Standby Letters of
Credit and Documentary Letters of Credit (as defined below) exceed
$5,000,000.00, the Borrower must immediately prepay the Revolving Note in
an amount sufficient to eliminate the excess.
If after making this prepayment the face amount of outstanding Standby
Letters of Credit and Documentary Letters of Credit continue to exceed
this amount, then the Borrower shall deposit sufficient cash into a
non-interest bearing account to collateralize the excess. The Borrower
hereby grants the Bank a security interest in these funds as security for
all of the Borrower's obligations to the Bank.
STANDBY LETTERS OF CREDIT
Issuance and Expiration. During the Line Availability Period, the Bank agrees to
issue standby letters of credit ("Standby L/Cs") for the account of the
Borrower, provided that the Borrower is in compliance with the terms of
this Agreement. Each Standby L/C will have a maximum expiry that shall be
negotiated at the time of issuance. Prior to the issuance of a Standby
L/C, the Borrower will execute the Bank's standard Application
<PAGE>
and Agreement for Irrevocable Standby Letter of Credit (the "Standby L/C
Agreement") and such other documents as the Bank deems necessary.
Fees. The Borrower shall pay a Standby L/C fee of 2.0% per annum on the face
amount of each Standby L/C, subject to a minimum fee of $200.00, and
calculated on the basis of total days elapsed in a 360-day year. This fee
shall be paid quarterly in advance and is in addition to all other fees
or expenses provided for the Standby L/C Application.
Reduction of Line Availability. Availability under the Line shall be reduced
dollar for dollar by the face amount of all outstanding Standby L/Cs,
plus any unreimbursed draws. Without limiting any rights and remedies
available to the Bank under any Standby L/C Agreement, any draw under a
Standby L/C may, at the Bank's option, be repaid through an automatic
advance under the Line, which shall be repayable according to the terms
of this Agreement.
Cash Collateralization of Outstanding Standby L/Cs. Should a default occur under
this Agreement, the Bank may require the Borrower to deposit with it in a
non-interest bearing account, immediately available funds equal to the
face amount of outstanding Standby L/Cs. The Borrower hereby grants the
Bank a security interest in these funds as security for all of the
Borrower's obligations to the Bank.
DOCUMENTARY LETTERS OF CREDIT
Issuance and Expiration. During the Line Availability Period, the Bank agrees to
issue documentary letters of credit ("Documentary L/Cs") for the account
of the Borrower, provided that the Borrower is in compliance with the
terms of this Agreement. Each Documentary L/C must expire prior to the
Line Expiration Date and must require drafts payable at sight.
Prior to the issuance of a Documentary L/C, the Borrower will execute the
Bank's standard Application and Agreement for Irrevocable Documentary
Letters of Credit (the "Documentary L/C Agreement") and such other
documents as the Bank deems necessary.
Fees and Expenses. Fees and expenses related to each Documentary L/C will be
agreed upon at issuance.
Reduction of Line Availability. Availability under the Line shall be reduced
dollar for dollar by the face amount of all outstanding Documentary L/Cs,
plus any unreimbursed draws. Without limiting any rights and remedies
available to the Bank under the Documentary L/C Agreement and related
documents, any draw under a Documentary L/C may, at the Bank's option, be
repaid through an automatic advance under the Line, which shall be
repayable according to the terms of this Agreement.
Cash Collateralization of Outstanding Documentary L/Cs. Should a default occur
under this Agreement the Bank may require the Borrower to deposit with it
in a non-interest bearing account immediately available funds equal to
the face amount of outstanding Documentary L/Cs. The Borrower hereby
grants the Bank a security interest in these funds as security for all of
the Borrower's obligations to the Bank.
FEES AND EXPENSES
DOCUMENTATION EXPENSE. The Borrower agrees to reimburse the Bank for its
reasonable expenses relating to the preparation of the Documents and any
possible future amendments to the Documents, which reimbursement may
include, but shall not be limited to, reimbursement of reasonable
attorneys' fees, including the allocated costs of the Bank's in-house
counsel, which shall not be in excess of $375.00. Despite such
reimbursement the Borrower acknowledges that the Bank's counsel is
engaged solely to represent the Bank and does not represent the Borrower.
COLLECTION EXPENSE. In the event the Borrower fails to pay the Bank any amounts
due under this Agreement or under the Documents, the Borrower shall pay
all costs of collection, including reasonable attorneys' fees and legal
expenses incurred by the Bank.
<PAGE>
ADVANCES AND PAYMENTS
REQUESTS FOR ADVANCES. Any Line advance requested under the terms of this
Agreement shall be requested by telephone or in a writing delivered to
the Bank (or transmitted via facsimile) by any person reasonably
believed by the Bank to be authorized by the Borrower to do so. The
Bank will not consider any such request following an event which is, or
with notice or the lapse of time would be, an event of default under
this Agreement. Proceeds shall be deposited into the Borrower's account
at the Bank or disbursed in such other manner as the parties may agree.
LIBOR INTEREST RATE OPTION. In addition to interest rates based on the Base Rate
Option defined in the Term Note, the Borrower may elect a fixed rate of
interest for a fixed time period and principal amount agreeable to the
Bank and Borrower that is based upon the margin stated in the Revolving
Note and an interest rate derived from the current LIBOR rate available
to the Bank on national or international money markets for a similar time
period and dollar amount.
To elect the LIBOR Interest Rate Option, as defined in the Revolving
Note, the Borrower must request a quote from the Bank two days prior to
funding, which must be accepted by the Borrower following quotation by
the Bank as a condition to fixing. This request must designate an amount
(the "LIBOR Interest Rate Portion") and a period (the "LIBOR Interest
Rate Period"). The LIBOR Interest Rate Portion must be at least
$100,000.00 and the LIBOR Interest Rate Period will be for 30, 60 or 90
days or any other period to which the parties may agree. The Bank shall
not be obligated to provide a LIBOR Interest Rate quote if it determines
that no deposits with an amount and maturity equal to those for which a
quotation has been requested are available to it in the London Interbank
Market. The Borrower must orally accept a quote when received or it will
be deemed rejected. If accepted, the LIBOR Interest Rate Option will
remain in effect for the LIBOR Interest Rate Period specified in the
quote. At the end of each LIBOR Interest Rate Period the principal amount
subject to the LIBOR Interest Rate Option shall bear interest at the Base
Rate Option (as defined in the Revolving Note).
PAYMENTS. All principal, interest and fees due under the Documents shall be paid
by the direct debit of available funds deposited in the Borrower's
account with the Bank. The Bank shall debit the account on the dates the
payments become due. If a due date does not fall on a day on which the
Bank is open for substantially all of its business (a "Banking Day",
except as otherwise provided), the Bank shall debit the account on the
next Banking Day, and interest shall continue to accrue during the
extended period. If there are insufficient funds in the account on the
day the Bank enters any debit authorized by this Agreement, the debit
will be reversed and the payment shall be due immediately without
necessity of demand by direct remittance of immediately available funds.
For amounts bearing interest at the LIBOR Rate (if any) a Banking Day is
a day on which the Bank is open for business and on which dealings in
U.S. dollar deposits are carried on in the London interbank market.
SECURITY
During the time period that credit is available under this Agreement, and
afterward until all amounts due under the Documents are paid in full,
unless the Bank shall otherwise agree in writing, all amounts due under
this Agreement and the Documents shall be secured at all times as
provided in Exhibit A. The Borrower also hereby grants the Bank a
security interest (independent of the Bank's right of set-off) in its
deposit accounts at the Bank and in any other debt obligations of the
Bank to the Borrower.
CONDITIONS PRECEDENT
The Borrower must deliver to the Bank the documents described in Exhibit
A, properly executed and in form and content acceptable to the Bank,
prior to the Bank's initial advance or disbursement under this Agreement.
REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Agreement, the Borrower, to the
best of its knowledge and upon due inquiry, makes the representations and
warranties contained in Exhibit B. Each request for an advance or a
<PAGE>
disbursement under this Agreement following the Effective Date
constitutes a reaffirmation of these representations and warranties.
COVENANTS
FINANCIAL INFORMATION AND REPORTING
Except as otherwise stated in this Agreement, all financial information
provided to the Bank shall be compiled using generally accepted
accounting principles consistently applied.
During the time period that credit is available under this Agreement, and
afterward until all amounts due under the Documents are paid in full,
unless the Bank shall otherwise agree in writing, the Borrower agrees to:
Annual Financial Statements. Provide the Bank within 90 days of the Borrower's
fiscal year end, the Borrower's annual financial statements. The
statements must be audited with an unqualified opinion by a certified
public accountant acceptable to the Bank.
Interim Financial Statements. Provide the Bank within 45 days of each fiscal
quarter end, the Borrower's interim financial statements for the interim
period then ending. The statements must be current through the end of
that period and must be certified as correct by an officer of the
Borrower in form acceptable to the Bank.
Compliance Certificate. Provide the Bank concurrently with the interim financial
statements required above, a Compliance Certificate in the form of
Exhibit C, that has been signed by an officer of the Borrower, which: 1)
certifies that the statements have been accurately prepared in accordance
with generally accepted accounting principles applied consistently with
the last annual financial statements provided by the Borrower; 2)
certifies that the officer has no knowledge of any event which has or
might, after the lapse of time or the giving of notice, or both,
constitute an event of default under this Agreement or any of the other
Documents; and 3) demonstrates that the Borrower remains in compliance
with all financial covenants that must be complied with as of the date of
the financial statements.
Projected Financial Statements. Provide the Bank within 90 days of the
Borrower's fiscal year end, a projected balance sheet, income statement,
and statement of cash flow for the upcoming fiscal year.
SEC Reporting. Provide the Bank within 90 days of filing with the Securities and
Exchange Commission, copies of its Form 10-K Annual Report, and within 45
days of each quarter end, copies of its Form 10-Q Quarterly Report.
Notices of Default. Provide the Bank prompt written notice of: 1) any event
which has or might, after the lapse of time or the giving of notice, or
both, constitute an event of default under any of this Agreement or any
of the other Documents; or 2) any future event that would cause the
representations and warranties contained in this Agreement to be untrue
when applied to the Borrower's circumstances as of the date of such
event.
Additional Information. Provide the Bank with such other information as it may
reasonably request, and permit the Bank to visit and inspect its
properties and examine its books and records.
FINANCIAL COVENANTS
During the time period that credit is available under this Agreement, and
afterward until all amounts due under the Documents are paid in full,
unless the Bank shall otherwise agree in writing, the Borrower agrees to
comply with the financial covenants described below, which shall be
calculated using generally accepted accounting principles consistently
applied, except as they may be otherwise modified by the following
capitalized definitions:
"Tangible Net Worth" means total assets less total liabilities and less
the following types of assets: (1) leasehold improvements; (2)
receivables and other investments in or amounts due from any shareholder,
director, officer, employee or other person or entity related to or
affiliated with the Borrower; (3) goodwill,
<PAGE>
patents, copyrights, mailing lists, trade names, trademarks, servicing
rights, organizational and franchise costs, bond underwriting costs and
other like assets properly classified as intangible.
Tangible Net Worth. Maintain a minimum Tangible Net Worth of at least
$5,500,000.00 as of the end of each fiscal quarter through and including
June 30, 1998, and of at least $6,000,000.00 as of the end of the fiscal
year ending September 30, 1998 and the end of each fiscal quarter
thereafter.
Total Liabilities to Tangible Net Worth. Maintain a ratio of total liabilities
to Tangible Net Worth of less than 1.3 to 1.0 as of the end of each
fiscal quarter, through and including June 30, 1998, and of less than 1.3
to 1.0 as of the end of the fiscal year ending September 30, 1998, and
the end of each fiscal quarter thereafter.
Net Profit. Achieve a minimum pre-tax net profit of $750,000 as of September 30,
1997, and of $700,000.00 as of September 30, 1998.
OTHER COVENANTS
During the time period that credit is available under this Agreement, and
afterward until all amounts due under the Documents are paid in full,
unless the Bank shall otherwise agree in writing, the Borrower agrees to:
Additional Borrowings. Refrain from incurring any indebtedness except: 1) trade
credit incurred in the ordinary course of business; 2) indebtedness
expressly subordinated to the Bank in a writing acceptable to the Bank;
3) indebtedness in existence on the date of this Agreement and disclosed
in advance to the Bank in writing.
Other Liens, Assignments, and Subordinations. Refrain from allowing any security
interest or lien on property it owns now or in the future, except: 1)
liens, assignments, or subordinations in favor of the Bank; 2) liens,
assignments, or subordinations outstanding on the date of this Agreement
and disclosed in advance to the Bank in writing; 3) liens for taxes not
delinquent or which the Borrower is contesting in good faith.
Change of Ownership. Refrain from permitting or suffering any change, direct or
indirect, in its capital ownership in excess of 15%.
Change in Management. Refrain from permitting or suffering any material change
in its management personnel or management structure.
Nature of Business. Refrain from engaging in any line of business materially
different from that presently engaged in by the Borrower.
Guaranties. Refrain from assuming, guaranteeing, endorsing or otherwise becoming
contingently liable for any obligations of any other person, except for
those guaranties outstanding as of the Effective Date and disclosed to
the Bank in writing.
Sale of Assets. Refrain from selling or leasing during any fiscal year assets
with a cumulative value in excess of $200,000.00 other than sales of
inventory in the ordinary course of business.
Deposit Accounts. Maintain its principal deposit accounts with the Bank.
Form of Organization and Mergers. Refrain from changing its legal form of
organization, or consolidating, merging, pooling, syndicating or
otherwise combining with any other entity.
Maintenance of Properties. Make all repairs, renewals or replacements necessary
to keep its plant, properties and equipment in good working condition.
Books and Records. Maintain adequate books and records, refrain from making any
material changes in its accounting procedures for tax or other purposes,
and permit the Bank to inspect same upon reasonable notice.
<PAGE>
Compliance with Laws. Comply in all material respects with all laws applicable
to its form of organization, business, and the ownership of its property.
Preservation of Rights. Maintain and preserve all permits, licenses, rights,
privileges, charters and franchises that it now owns.
These covenants were negotiated by the Bank and Borrower based on
information provided to the Bank by the Borrower. A breach of a covenant
is an indication that the risk of the transaction has increased. As
consideration for any waiver or modification of these covenants, the Bank
may require: additional collateral, guaranties or other credit support;
higher fees or interest rates; and possible modifications to the
Documents and the monitoring of the Agreement. The waiver or modification
of any covenant that has been violated by the Borrower shall be made at
the sole discretion of the Bank. These options do not limit the Bank's
right to exercise its rights under Section 8 of this Agreement.
EVENTS OF DEFAULT AND REMEDIES
DEFAULT
The Line is a conditional line of credit, which means that the Bank is
not obligated to make advances under the Line even if the Borrower is in
compliance with the terms of this Agreement, and the Revolving Note
evidencing borrowings under the Line shall be payable by the Borrower
upon DEMAND by the Bank.
Despite this reservation of rights, upon the occurrence of any one or
more of the following events of default, or at any time afterward unless
the default has been cured, the Bank may declare the Line to be
terminated and in its discretion accelerate and declare the unpaid
principal, accrued interest and all other amounts payable under the
Revolving Note and the Documents to be immediately due and payable:
Failure by the Borrower to make any payment of principal or interest due under
any one of the Revolving Note or any Standby Letter of Credit Agreement
or Documentary Letter of Credit Agreement which continues for 10 days
after its due date, or failure to make the mandatory payment required
under Section 1.4 of this Agreement.
Default by the Borrower in the observance or performance of any covenant or
agreement contained in this Agreement, and continuance for more than 15
days.
Default by the Borrower in the observance or performance of any covenant or
agreement contained in any of the Documents (excepting defaults under
this Agreement, which are addressed in the preceeding subsection), after
giving effect to any grace period agreed to in any such Documents, if
applicable.
Default by the Borrower with respect to any indebtedness or obligation owed to
the Bank, which is unrelated to any loan or facility subject to the terms
of this Agreement, or to any third party creditor, which would allow the
maturity of any such indebtedness or obligation to be accelerated.
Failure by the Borrower to obtain a release of the security interest of Mep
Abrahamson in all company assets on January 15, 1998 following repayment
of the $766,000.00 promissory note dated May 28, 1997.
Any representation or warranty made by the Borrower to the Bank in this
Agreement, or in any financial statement or report submitted to the Bank
by or on behalf of the Borrower is untrue or misleading in any material
respect.
A garnishment, levy or writ of attachment, or any local, state, or federal
notice of tax lien or levy is made or issues against the Borrower, or any
post judgment process or procedure is commenced or any supplementary
remedy for the enforcement of a judgment is employed against the Borrower
or the Borrower's property.
A material adverse change occurs in the Borrower's financial condition or
ability to repay its obligations to the Bank.
<PAGE>
IMMEDIATE DEFAULT
If, with or without the Borrower's consent, a custodian, trustee or
receiver is appointed for any of the Borrower's properties, or if a
petition is filed by or against the Borrower under the United States
Bankruptcy Code, or the Borrower is dissolved, liquidated, or winds up
its business then each revolving facility documented in this Agreement
shall immediately terminate without notice, and the unpaid principal,
accrued interest, and all other amounts payable under the Revolving Note
and the Documents shall become immediately due and payable without notice
or demand.
SUPPLEMENTARY CROSS DEFAULT OF OTHER PROMISSORY NOTES
The Borrower agrees that each promissory note evidencing indebtedness of the
Borrower to the Bank which is not otherwise documented in this Agreement,
and regardless of whether delivered before or after the Effective Date,
shall hereby be amended on a supplementary basis to provide that each
such promissory note may be accelerated by the Bank in its discretion
following the occurrence of any event of default agreed to in Section
8.1, or shall be accelerated and become immediately due and payable
without notice by the Bank following the occurrence of any event of
default agreed to in Section 8.2, which events of default and rights of
acceleration are in addition to, and not exclusive of, any events of
default and rights of acceleration agreed to in the promissory note
itself.
MISCELLANEOUS.
No Waiver; Cumulative Remedies. No failure or delay by the Bank in exercising
any rights under this Agreement shall be deemed a waiver of those rights.
The remedies provided for in the Agreement are cumulative and not
exclusive of any remedies provided by law.
Amendments or Modifications. Any amendment or modification of this Agreement
must be in writing and signed by the Bank and Borrower. Any waiver of any
provision in this Agreement must be in writing and signed by the Bank.
Binding Effect: Assignment. This Agreement and the Documents are binding on the
successors and assigns of the Borrower and Bank. The Borrower may not
assign its rights under this Agreement and the Documents without the
Bank's prior written consent. The Bank may sell participations in or
assign this Agreement and the Documents and exchange financial
information about the Borrower with actual or potential participants or
assignees.
Minnesota Law. This Agreement and the Documents shall be governed by the
substantive laws of the State of Minnesota.
Severability of Provisions. If any part of this Agreement or the Documents are
unenforceable, the rest of this Agreement or the Documents may still be
enforced.
Integration. This Agreement and the Documents describes the entire understanding
and agreement of the parties and supersedes all prior agreements between
the Bank and the Borrower relating to each credit facility subject to
this Agreement, whether verbal or in writing.
Address for notices to Bank: Address for notices to Borrower:
Norwest Bank Minnesota, Research, Incorporated
National Association 6425 Flying Cloud Drive
7900 Xerxes Avenue South Eden Prairie, Minnesota 55344
Bloomington, MN 55431 Attention: Claude Johnson
Attention: Doug Van Metre President
Vice President
<PAGE>
NORWEST BANK MINNESOTA, RESEARCH, INCORPORATED
NATIONAL ASSOCIATION
BY: /S/ DOUGLAS L. VAN METRE BY: /S/ CLAUDE C. JOHNSON
--------------------------------- --------------------------------
ITS VICE PRESIDENT ITS PRESIDENT AND CEO
--------------------------------- --------------------------------
BY: /S/ RICHARD L. GROSE
--------------------------------
ITS TREASURER
<PAGE>
EXHIBIT A
CONDITIONS PRECEDENT AND SECURITY
PLEASE NOTE: This Exhibit describes the Note or Notes, and all Security
Documents, Authorizations, Organizational Documents, and all other miscellaneous
documents, reports, certificates and other information required as a condition
to each advance or disbursement under the Agreement, whether or not they have
previously been delivered to the Bank.
Each Security Document described below must continue in full force and effect at
all times in accordance with its terms during the time period that credit is
available under this Agreement, and afterward until all amounts due under the
Documents are paid in full. The failure of any Security Document to meet these
requirements may result in an event of default under the Agreement and the
acceleration of all of the Borrower's obligations to the Bank evidenced by the
Documents.
NOTES
The Revolving Note
AUTHORIZATION
Certificate of Authority of Borrower. A Certificate of Authority executed by
such person or persons authorized by the Borrower's organizational documents
and/or agreements to do so, certifying the incumbency and signatures of the
officers or other persons authorized to execute the Documents, and authorizing
the execution of the Documents and performance in accordance with their terms.
ORGANIZATION
Articles of Incorporation and By-Laws. A recently certified copy of the
Borrower's Articles of Incorporation and By-laws, and any amendments, if
applicable.
Certificate of Good Standing. A recently certified copy of the Borrower's
Certificate of Good Standing.
OTHER
Arbitration Agreement. The Bank's standard form of Arbitration Agreement signed
by the Bank and Borrower, subjecting potential controversies between them to
binding arbitration, including but not limited to those relating to the
Documents and this Agreement.
<PAGE>
EXHIBIT B
REPRESENTATIONS AND WARRANTIES
Organizational Status. The Borrower is a Corporation duly formed and in good
standing under the laws of the State of Minnesota.
Authorization. This Agreement, and the execution and delivery of the Documents,
is within the Borrower's powers, has been duly authorized and does not conflict
with any of the Borrower's organizational documents or any other agreement by
which the Borrower is bound, and has been signed by all persons authorized and
required to do so under its organizational documents.
Financial Reports. The Borrower has provided the Bank with the Borrower's annual
audited financial statement dated September 30, 1996 and its interim financial
statement dated August 31, 1997, and these statements fairly represent the
financial condition of the Borrower as of their respective dates and were
prepared in accordance with generally accepted accounting principals
consistently applied.
Litigation. There is no litigation or governmental proceeding pending or
threatened against the Borrower which could have a material adverse effect on
the Borrower's financial condition or business.
Taxes. The Borrower has paid when due all federal, state and local taxes.
No Default. There is no event which is, or with notice or the lapse of time
would be, an event of default under this Agreement.
ERISA. The Borrower is in compliance in all material respects with the Employee
Retirement Income Security Act of 1974 and has received no notice to the
contrary from the Pension Benefit Guaranty Corporation or any related
governmental entity.
Environmental Matters. 1) The Borrower is in compliance in all material respects
with all health and environmental laws applicable to the Borrower and its
operations and knows of no conditions or circumstances that could interfere with
such compliance in the future; 2) the Borrower has obtained all environmental
permits and approvals required by law for the operation of its business; and 3)
the Borrower has not identified any "recognized environmental conditions", as
that term is defined by the American Society for Testing and Materials in its
standards for environmental due diligence, which could subject the Borrower to
enforcement action if brought to the attention of appropriate governmental
authorities.
Exhibit 4.2
NORWEST-BANK MINNESOTA REVOLVING NOTE
NATIONAL ASSOCIATON
$5,000,000.00 October 13, 1997
FOR VALUE RECEIVED, Research, Incorporated (the "Borrower") promises to pay to
the order of Norwest Bank Minnesota, National Association (the "Bank"), at its
principal office or such other address as the Bank or holder may designate from
time to time, the principal sum of Five Million and 00/100 Dollars
($5,000,000.00), or the amount shown on the Bank's records to be outstanding,
plus interest (calculated on the basis of actual days elapsed in a 360-day year)
accruing each day on the unpaid principal balance at the annual interest rate(s)
defined below. Absent manifest error, the Bank's records shall be conclusive
evidence of the principal and accrued interest owing hereunder.
INTEREST RATE.
BASE RATE OPTION. Unless the Borrower chooses the LIBOR Interest Rate Option as
defined below, the principal balance outstanding under this Revolving Note shall
bear interest at an annual rate equal to the Base Rate, floating (the "Base Rate
Option"). Base Rate means the rate of interest established by the Bank from time
to time as its "base" or "prime" rate of interest at its principal office in
Minneapolis, Minnesota.
LIBOR INTEREST RATE OPTION. Subject to the terms and conditions of the Agreement
the Borrower may elect that all or portions of the principal balance of this
Revolving Note bear interest at the LIBOR Interest Rate plus 2.3% (the "LIBOR
Interest Rate Option"). Specific reference is made to the Interest Rate Options
section of the Agreement for terms governing the designation of interest periods
and rate portions.
The LIBOR Interest Rate shall be computed in accordance with the following
formula.
LIBOR Interest Rate = London Interbank Offered Rate
-----------------------------
1.00 - Reserve Requirement
Where,
(i) "London Interbank Offered Rate" means the Bank's cost of funds as determined
by the Bank's Treasury Division, based upon the average rate at which U.S.
Dollar deposits with a term equal to the applicable LIBOR Interest Rate Period
and in an amount equal to the LIBOR Interest Rate Portion are available to the
Bank at the time or determination on the London Interbank Market.
(ii) "Reserve Requirement" means the Federal Reserve System requirement
(expressed as a percentage) applicable to the dollar deposits used in
calculating the LIBOR Interest Rate above.
REPAYMENT TERMS
INTEREST. Interest accruing under the Base Rate Option shall be payable on the
first day of each month, beginning November 1, 1997. Interest accruing under the
LIBOR Interest Rate Option shall be payable, as applicable, at the end of each
LIBOR Interest Rate Period or the first day of each month, whichever is earlier.
PRINCIPAL. Principal, and any unpaid interest, shall be due on the earlier of
DEMAND or January 31, 1999.
PREPAYMENT AND PREPAYMENT FEE. The Borrower may prepay principal accruing
interest under the Base Rate Option at any time without penalty. Each prepayment
of principal accruing interest at an optional interest rate, whether voluntary
or by reason of acceleration, shall be accompanied by a prepayment fee equal to
the amount of interest that would have accrued on the amount of principal
prepaid from the date of prepayment to its maturity or repricing date, at an
annual rate equal to 1) the optional rate then in effect under this Revolving
Note on the principal being prepaid, less 2) the yield (including interest and
discount) on a United States Treasury Security of comparable term that could be
purchased on the date of prepayment with a maturity on (or about) the maturity
or repricing date, discounted to its present value using the yield on the
replacement security as a discount factor, discounted monthly;
<PAGE>
provided, however, that no prepayment fee shall be due (and no credit or rebate
required) if the yield described in clause 2) exceeds the rate described in
clause 1).
ADDITIONAL TERMS AND CONDITIONS. This Revolving Note is issued pursuant to a
Credit Agreement of even date between the Bank and the Borrower (the
"Agreement"). The Agreement, and any amendments or substitutions, contains
additional terms and conditions, including default and acceleration provisions,
which are incorporated into this Revolving Note by reference. Capitalized terms
not expressly defined herein shall have the meanings given them in the
Agreement. The Borrower agrees to pay all costs of collection, including
reasonable attorneys' fees and legal expenses incurred by the Bank if this
Revolving Note is not paid as provided above. This Revolving Note shall be
governed by the substantive laws of the State of Minnesota.
WAIVER OF PRESENTMENT AND NOTICE OF DISHONOR. Borrower and any other person who
signs, guarantees or endorses this Revolving Note, to the extent allowed by law,
hereby waives presentment, demand for payment, notice of dishonor, protest, and
any notice relating to the acceleration of the maturity of this Revolving Note.
RESEARCH, INCORPORATED
BY: /S/ CLAUDE C. JOHNSON
-------------------------------
ITS: PRESIDENT AND CEO
-------------------------------
BY: /S/ RICHARD L. GROSE
-------------------------------
ITS: TREASURER
-------------------------------
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
Research Incorporation Limited is incorporated in the United Kingdom as a
Private Limited Company. Research International Inc. is incorporated in
Barbados, West Indies as a Foreign Sales Corporation.
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included or incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statement File No. 33-21699, File No.
33-45386, File No. 33-75256 and File No. 333-39567.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
December 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE 10-K FOR THE YEAR
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,205
<SECURITIES> 0
<RECEIVABLES> 4,129
<ALLOWANCES> 150
<INVENTORY> 4,486
<CURRENT-ASSETS> 10,266
<PP&E> 6,939
<DEPRECIATION> 4,418
<TOTAL-ASSETS> 12,849
<CURRENT-LIABILITIES> 6,332
<BONDS> 0
0
0
<COMMON> 485
<OTHER-SE> 6,032
<TOTAL-LIABILITY-AND-EQUITY> 12,849
<SALES> 22,843
<TOTAL-REVENUES> 22,843
<CGS> 12,758
<TOTAL-COSTS> 12,758
<OTHER-EXPENSES> 9,534
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,695
<INCOME-TAX> 578
<INCOME-CONTINUING> 1,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,117
<EPS-PRIMARY> .98
<EPS-DILUTED> .98
</TABLE>
