SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the quarterly period ended December 31, 1997 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
Commission file number 0-2387
RESEARCH, INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0908058
- --------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 24064, Minneapolis, Minnesota 55424
- ------------------------------------------ ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (612) 941-3300
- --------------------------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
As of February 12, 1998, 1,250,332 common shares were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RESEARCH, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31
-----------------------------
1997 1996
------------ ------------
Net Sales $ 4,867,960 $ 4,873,396
Cost of Sales 2,552,893 2,810,775
------------ ------------
Gross profit 2,315,067 2,062,621
------------ ------------
Expenses:
Selling 1,487,703 1,419,993
Research and development 797,633 481,924
General and administrative 240,793 219,959
------------ ------------
Total expenses 2,526,129 2,121,876
------------ ------------
Loss from Operations (211,062) (59,255)
Other Income (expense) (53,695) 1,160,993
------------ ------------
Income (loss) before Taxes (264,757) 1,101,738
Income Tax Provision (Benefit) (84,722) 415,861
------------ ------------
Net Income (Loss) $ (180,035) $ 685,877
============ ============
Earnings Per Share:
Basic $ (0.15) $ 0.47
Diluted (0.15) 0.46
Dividends Paid Per Share $ 0.06 $ 0.06
Weighted Average Shares Outstanding (Note 1):
Basic 1,224,037 1,452,130
Diluted 1,296,875 1,485,068
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated financial statements.
<PAGE>
RESEARCH, INCORPORATED
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
Assets 1997 1997
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 149,225 $ 1,204,827
Accounts receivable, net 4,107,962 3,979,299
Inventories 5,492,689 4,485,830
Other current assets 637,622 596,465
------------- -------------
Total current assets 10,387,498 10,266,421
------------- -------------
Property and Equipment:
Land and land improvements 221,927 221,927
Building 2,263,428 2,182,492
Machinery and equipment 4,843,328 4,534,825
Less-accumulated depreciation (4,576,069) (4,418,279)
------------- -------------
Net property and equipment 2,752,614 2,520,965
------------- -------------
Other Assets 58,419 61,320
------------- -------------
Total assets $ 13,198,531 $ 12,848,706
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable $ 4,031,998 $ 2,231,998
Accounts payable 1,483,694 1,689,153
Accrued liabilities:
Salaries and benefits 248,125 668,374
Warranty reserve 350,000 350,000
Real estate taxes 116,475 155,000
Other 191,301 363,971
Federal and state income taxes 387,493 873,739
------------- -------------
Total current liabilities 6,809,086 6,332,235
------------- -------------
Stockholders' Equity:
Common stock, $.50 par value, 5,000,000 shares authorized,
1,234,457 and 1,211,468 shares issued and outstanding at
December 31, 1997 and September 30, 1997 617,228 605,734
Additional paid-in capital 384,937 307,111
Foreign currency translation 72,508 39,752
Retained earnings 5,314,772 5,563,874
------------- -------------
Total stockholders' equity 6,389,445 6,516,471
------------- -------------
Total liabilities and stockholders' equity $ 13,198,531 $ 12,848,706
============= =============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
<PAGE>
RESEARCH, INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Operating Activities:
Net income (loss) $ (180,035) $ 685,877
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 165,223 137,817
Gain on sale of land -- (1,147,094)
Changes in current operating items:
Accounts receivable (128,663) (993,194)
Inventories (1,006,859) 43,252
Other current assets (41,157) (10,554)
Accounts payable and accrued liabilities (836,902) (67,534)
Federal and state income taxes (486,246) 334,976
------------ ------------
Net cash used in operating activities (2,514,639) (1,016,454)
------------ ------------
Investing Activities:
Proceeds from sale of land, net -- 1,529,543
Property and equipment additions, net (385,829) (26,718)
Other 24,613 43,673
------------ ------------
Net cash provided by (used in) investing activities (361,216) 1,546,498
------------ ------------
Financing Activities:
Cash dividends paid (69,067) (81,301)
Issuance of common stock 89,320 7,700
Borrowing under line of credit 2,500,000 --
Payments on line of credit (700,000) --
------------ ------------
Net cash provided by (used in) financing activities 1,820,253 (73,601)
------------ ------------
Cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents (1,055,602) 456,443
Cash and cash equivalents, at beginning of year 1,204,827 1,841,147
------------ ------------
Cash and cash equivalents, at end of period $ 149,225 $ 2,297,590
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated financial statements.
<PAGE>
RESEARCH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
The Company's significant accounting policies not elsewhere set forth in the
accompanying consolidated financial statements are as follows:
Consolidated Financial Statements -
The consolidated balance sheet as of December 31, 1997, the consolidated
statements of operations and cash flows for the three months ended December 31,
1997 and 1996 have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
changes in cash flows at December 31, 1997 and for all periods presented have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's September 30,
1997 Form 10-K. The results of operations for the period ended December 31, 1997
are not necessarily indicative of the operating results for the full fiscal year
or for future interim periods.
Inventories -
Inventories are stated at the lower of first-in, first-out cost or market and
include direct labor, material and overhead costs. Inventories consist of the
following components at:
December 31, September 30,
1997 1997
----------- -----------
Raw materials and
purchased parts $ 3,075,260 $ 3,070,262
Work in process and
finished goods 2,417,429 1,415,568
----------- -----------
Total $ 5,492,689 $ 4,485,830
=========== ===========
<PAGE>
Warranty Reserve -
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
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.
Earnings per Share -
Earnings per share are computed by dividing net income (loss) by the weighted
average shares outstanding. Basic weighted average shares outstanding includes
common shares outstanding. Diluted weighted average shares outstanding includes
the basic weighted average shares outstanding and dilutive common stock
equivalents. Earnings per share data for December 31, 1997 and for all periods
presented have been restated to reflect the 5 for 4 stock split effective on the
record date of December 31, 1997. The number of common shares outstanding
increased by 265,283 shares during the first quarter of fiscal 1998 due to the
exercise of 18,500 employee stock options and the issuance of 246,783 shares due
to the 5 for 4 stock split.
2. Debt Obligations:
Line of Credit -
The Company has a $5,000,000 unsecured bank line of credit which carries an
interest rate equal to the bank's base (prime) rate with no compensating balance
requirements. The Company had borrowings of $3,266,000 against the line of
credit as of December 31, 1997.
Note Payable -
The Company had 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. This note
was paid off on January 15, 1998 and refinanced with the line of credit.
<PAGE>
3. Stockholders' Equity:
Employee Stock Options -
During fiscal 1992, the Company adopted the 1991 Stock Plan (1991 Plan). On
January 15, 1998, the shareholders of Research, Inc. ratified and approved an
amendment to the 1991 Plan to increase the number of shares of common stock
available under the plan by 100,000 shares to 310,000 shares. Options for
130,938 shares under the 1991 Plan were outstanding at December 31, 1997 at
prices ranging from $3.80 to $6.20 per share.
Stock Split -
On November 5, 1997, the Board of Directors declared a 5 for 4 stock split in
the form of a 25 percent stock dividend to stockholders of record on December
31, 1997.
Employee Stock Purchase Plan -
On January 15, 1998, the shareholders of Research, Inc. ratified and approved
the Research, Inc. Employee Stock Purchase Plan and set aside 100,000 shares of
common stock for issuance under the plan.
4. New Accounting Pronouncements:
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which
changed the way companies calculated their earnings per share (EPS). SFAS No.
128 replaced primary EPS with basic EPS. Basic EPS is computed by dividing
reported earnings by weighted average shares outstanding, excluding potentially
dilutive securities. Fully diluted EPS, termed diluted EPS under SFAS No. 128,
is also to be disclosed. The Company adopted SFAS No. 128 in fiscal 1998, at
which time all prior year EPS was restated in accordance with SFAS No. 128.
<PAGE>
Item 2. 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,
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: SMT, graphic arts, glass, and infrared. In each area, the Company
identified key customers and strategic partners with whom it will work closely
to meet their respective needs. The Company also identified key geographic
markets, particularly Asia, Europe and Latin America where it will make
additional investments to capitalize on the enormous growth potential. The
Company believes the SMT and graphic arts markets have the greatest potential
for growth. In the SMT market, the Company plans to gain market share by
dedicating additional resources to key customers that have on going needs for
high quality products and excellent customer service. In the graphic arts
market, the Company plans to increase its in-house sales staff and reduce its
reliance on independent sales representatives who work with a variety of
products and industries. The Company will retain relationships with
representatives who are knowledgeable and focused on this market.
Strategic partnerships and high levels of customer service will be key
components of the Company's market-driven strategy. While the breadth of its
product line will probably decrease as it focuses efforts on selected markets,
the Company will invest in new product development at levels that will support
its goal of achieving 50% of sales from products developed in the last three
years.
The Company has implemented these changes and believes that this commitment of
additional resources will result in increased future sales and profitability.
New Alliances
The Company announced in December 1997 that it is strengthening the European
presence of its Research International Division, which builds reflow ovens used
in semiconductor packaging and circuit board assembly, primarily for surface
mount (SMT) and ball-grid array (BGA) technologies. The division has enhanced
European sales representation for its Research International Division which now
operates in England, Ireland, Scotland, Germany, Spain, Italy, the Benelux
countries, Sweden, Denmark, Finland, and Norway. Previously, its sales
activities were focused on the United Kingdom, Italy and the Benelux countries.
The Company announced in January 1998 the signing of a manufacturing license and
exclusive distribution agreement with
<PAGE>
Munich-based IndustrieSerVis G.m.b.H. Under the agreement, each company is
licensed to make, use and sell drying systems and custom system integration
components developed by the other. The agreement also grants each company
exclusive distribution rights for the other's products. The agreement will
provide the Company with the benefit of the IndustrieSerVis engineering
expertise in printing, material testing, high-temperature heating and plastics.
The Company also announced in January 1998 the signing of a distributor
agreement providing Scitex Digital Printing, Inc. with exclusive, worldwide
rights to market and sell Research, Inc. drying systems, when integrated with
Scitex ink-jet printing equipment. The agreement also provides for cooperative
development of new drying systems by the two companies. Research, Inc. will
continue to sell its drying system integration components directly or through
other sales channels when the equipment will not be used with Scitex ink-jet
printing systems.
Operations
Sales for the first three months of fiscal 1998 (the quarter ended December 31,
1997) remained at the same level as one year ago. The sales volume was lower
than anticipated due to the delay of a significant reflow oven order from a
Korean customer.
Gross profit increased by 5.2% due to the product mix and volume of the higher
margin graphic arts products. The Company expects the fiscal 1998 gross margins
to be closer to that of fiscal 1997.
Selling expenses increased 1.4% as a percentage of sales due to the lower than
anticipated volume and the expenses incurred in connection with the Company's
shift from a product-driven strategy to a market-driven strategy.
Expenditures for research and development increased 6.5% as a percentage of
sales due to the low volume and the Company's plan to increase its investment in
new product development in its major markets. This investment is in line with
its goal to generate 50% of sales from new products (developed in the last 3
years). The significant increase in the quarter was due mostly to research and
development on products for the SMT and graphic arts markets. The Company has
shifted the emphasis of its research and development efforts from product
adaptations, extensions, and enhancements to new product solutions for its
chosen markets. This will require significant investment and development of new
customer relationships. The Company expects to invest in excess of 10% of sales
on these efforts.
General and administrative expenses increased .4% as a percentage of sales due
to costs associated with hiring and training additional personnel to support
anticipated business growth. Although the Company will invest in new business
systems and
<PAGE>
processes, the Company expects these expenses to be leveraged and to provide
future productivity improvements.
The net loss was $180,035 compared to net income of $685,877 one year ago. Net
income in the prior year included a one time pretax gain on sale of land of
$1,147,000.
The Company expects the impact of the Asian financial situation and the order
delay to have a negative effect on sales and earnings in the second quarter,
which would result in a net loss for that period as well. However, the gross
margins for the full year are expected to be comparable to those of fiscal 1997.
The Company expects to see a positive impact on sales in the second half of
fiscal 1998, as a result of the agreements with IndustrieSerVis and Scitex
Digital Printing, the increased European sales presence, the effect of new
product introductions, as well as the current technology shift toward the
European Community by reflow oven customers.
Liquidity and Sources of Capital
The Company's working capital of $3,578,412 at December 31, 1997, decreased from
$3,934,186 at September 30, 1997. The current ratio at December 31, 1997 was 1.5
compared to 1.6 at September 30, 1997. The net change in working capital is due
to increased inventories and higher accounts receivable relative to sales
volume. The higher inventory is due to an order delay by a Korean reflow oven
customer and our commitment to meet customer expectations for shorter delivery
times. The Company anticipates higher inventory levels will affect working
capital in the second quarter of fiscal 1998. Accounts receivable was impacted
by the timing of shipments.
The warranty reserves reflect anticipated exposure in the SMT reflow ovens.
These ovens have the highest level of new product sales and their warranty
period 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.
The Company has an unsecured bank line of credit for $5,000,000. At December 31,
1997, the Company had borrowings of $3,266,000 at the prime rate under the line
of credit and a short-term note payable of $766,000 at 8.5% due January 15,
1998. The Company has no long-term debt. The short-term note was paid off on
January 15, 1998 and refinanced with the bank line of credit.
<PAGE>
Forward-Looking Information
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, general economic conditions, and other risks and
uncertainties as set forth in the Company's annual report, 10-K, 10-Q and other
SEC filings.
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
[27] Financial Data Schedule
(b) Reports on Form 8-K None filed during the quarter
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESEARCH, INCORPORATED
(Registrant)
Date 2/13/98 /s/ Claude C. Johnson
----------------- ------------------------------------
Claude C. Johnson
President,
Chief Executive Officer
Date 2/13/98 /s/ Richard L. Grose
----------------- ------------------------------------
Richard L. Grose
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS INCLUDED IN THE 10-Q FOR THE QUARTER ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 149
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<RECEIVABLES> 4,258
<ALLOWANCES> 150
<INVENTORY> 5,493
<CURRENT-ASSETS> 10,387
<PP&E> 7,329
<DEPRECIATION> 4,576
<TOTAL-ASSETS> 13,199
<CURRENT-LIABILITIES> 6,809
<BONDS> 0
0
0
<COMMON> 617
<OTHER-SE> 5,772
<TOTAL-LIABILITY-AND-EQUITY> 13,199
<SALES> 4,868
<TOTAL-REVENUES> 4,868
<CGS> 2,553
<TOTAL-COSTS> 2,553
<OTHER-EXPENSES> 2,526
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<INCOME-PRETAX> (265)
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</TABLE>
