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 March 31,1998 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 May 11, 1998, 1,254,237 common shares were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RESEARCH, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 3,215,080 $ 5,816,058 $ 8,083,040 $10,689,454
Cost of Sales 2,215,774 3,136,415 4,768,667 5,947,190
----------- ----------- ----------- -----------
Gross profit 999,306 2,679,643 3,314,373 4,742,264
----------- ----------- ----------- -----------
Expenses:
Selling 1,436,058 1,510,595 2,923,761 2,930,588
Research and development 803,988 666,977 1,601,621 1,148,901
General and administrative 244,994 258,589 485,787 478,548
Restructuring 635,000 -- 635,000 --
----------- ----------- ----------- -----------
Total expenses 3,120,040 2,436,161 5,646,169 4,558,037
----------- ----------- ----------- -----------
Income (Loss) from Operations (2,120,734) 243,482 (2,331,796) 184,227
Interest Income (Expense) (90,758) 5,913 (144,453) 19,812
Gain on Sale of Land -- -- -- 1,147,094
----------- ----------- ----------- -----------
Income (Loss) before Taxes (2,211,492) 249,395 (2,476,249) 1,351,133
Income Tax Provision (Benefit) (663,330) 96,341 (748,052) 512,202
----------- ----------- ----------- -----------
Net Income (Loss) $(1,548,162) $ 153,054 $(1,728,197) $ 838,931
=========== =========== =========== ===========
Earnings Per Share:
Basic $ (1.24) $ 0.10 $ (1.40) $ 0.57
Diluted (1.24) 0.10 (1.40) 0.55
Dividends Paid Per Share $ 0.06 $ 0.06 $ 0.12 $ 0.12
Weighted Average Shares Outstanding (Note 1):
Basic 1,245,643 1,479,788 1,234,724 1,463,901
Diluted 1,262,281 1,542,640 1,276,003 1,533,397
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
RESEARCH, INCORPORATED
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
Assets 1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 121,797 $ 1,204,827
Accounts receivable, net 2,365,593 3,979,299
Inventories 5,845,222 4,485,830
Income tax receivable 748,052 --
Other current assets 385,714 596,465
------------ ------------
Total current assets 9,466,378 10,266,421
------------ ------------
Property and Equipment:
Land and land improvements 221,927 221,927
Building 2,263,428 2,182,492
Machinery and equipment 4,906,129 4,534,825
Less-accumulated depreciation (4,738,741) (4,418,279)
------------ ------------
Net property and equipment 2,652,743 2,520,965
Other Assets 53,243 61,320
------------ ------------
Total assets $ 12,172,364 $ 12,848,706
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable $ 3,865,998 $ 2,231,998
Accounts payable 1,246,594 1,689,153
Deferred revenue 694,629 --
Accrued liabilities:
Salaries and benefits 246,943 668,374
Warranty reserve 350,000 350,000
Real estate taxes 155,055 155,000
Restructuring reserves 430,618 --
Other 234,588 363,971
Federal and state income taxes 89,277 873,739
------------ ------------
Total current liabilities 7,313,702 6,332,235
------------ ------------
Stockholders' Equity:
Common stock, $.50 par value, 5,000,000 shares authorized,
1,254,237 and 1,211,468 shares issued and outstanding at
March 31, 1998 and September 30, 1997 627,119 605,734
Additional paid-in capital 466,561 307,111
Foreign currency translation 73,392 39,752
Retained earnings 3,691,590 5,563,874
------------ ------------
Total stockholders' equity 4,858,662 6,516,471
------------ ------------
Total liabilities and stockholders' equity $ 12,172,364 $ 12,848,706
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
RESEARCH, INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities:
Net income (loss) $(1,728,197) $ 838,931
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 330,516 255,475
Gain on sale of land -- (1,147,094)
Changes in current operating items:
Accounts receivable 1,613,706 (1,303,747)
Inventories (1,359,392) (684,191)
Income tax receivable (748,052) --
Other current assets 210,751 12,374
Accounts payable and accrued liabilities (993,318) 525,121
Deferred revenues 694,629 --
Restructuring reserves 430,618 --
Federal and state income taxes (784,462) 329,855
----------- -----------
Net cash used in operating activities (2,333,201) (1,173,276)
----------- -----------
Investing Activities:
Proceeds from sale of land, net -- 1,529,543
Property and equipment additions, net (445,537) (212,672)
Other 24,960 30,219
----------- -----------
Net cash provided by (used in) investing activities (420,577) 1,347,090
----------- -----------
Financing Activities:
Cash dividends paid (144,087) (405,568)
Issuance of common stock 180,835 164,950
Borrowing under line of credit 4,100,000 --
Payments on line of credit (2,466,000) --
----------- -----------
Net cash provided by (used in) financing activities 1,670,748 (240,618)
----------- -----------
Cash and cash equivalents:
Net decrease in cash and cash equivalents (1,083,030) (66,804)
Cash and cash equivalents, at beginning of year 1,204,827 1,841,147
----------- -----------
Cash and cash equivalents, at end of period $ 121,797 $ 1,774,343
=========== ===========
</TABLE>
The accompanying notes 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 March 31, 1998, the consolidated statements
of operations for the three and six months ended March 31, 1998 and 1997 and the
consolidated statements of cash flows for the six months ended March 31, 1998
and 1997 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 March 31, 1998 and for all periods presented have been
made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's September 30, 1997 Form
10-K. The results of operations for the period ended March 31, 1998 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:
March 31, September 30,
1998 1997
---- ----
Raw materials and
purchased parts $ 4,163,662 $ 3,070,262
Work in process and
finished goods 1,681,560 1,415,568
----------- -----------
Total $ 5,845,222 $ 4,485,830
=========== ===========
<PAGE>
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 March 31, 1998 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 19,780 shares during the second quarter of fiscal 1998 due to the
exercise of 8,905 employee stock options and the issuance of 10,875 shares due
to the employee stock purchase plan.
2. Restructuring:
In February 1998 the Company consolidated the Control Systems business into the
Thermal Solutions Division. Control Systems, which dealt primarily with Asian
glass manufacturers, contributed less than 5 percent of sales in fiscal 1997. At
the same time expenses were lowered through process improvements and a workforce
reduction, in the production, support, and administrative areas. Overall, the
Company expects that these initiatives will result in cost reductions of more
than $1.5 million on an annualized basis beginning in the third quarter of
fiscal 1998. Costs associated with the restructuring and the redeployment of
Control Systems' resources were taken as a one-time charge of $635,000 in the
second quarter of fiscal 1998.
3. Debt Obligations:
Line of Credit -
The Company had a $5,000,000 unsecured bank line of credit, that carried an
interest rate equal to the bank's base (prime) rate with no compensating balance
requirements. Subsequent to March 31, 1998, the line became a secured line
backed by accounts receivable, inventory, equipment and other intangible assets
such as patents. The net worth and debt to equity covenants were not met at
March 31, 1998 and were waived by the lender.
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 was collateralized by certain assets of the Company. This note
was paid off on January 15, 1998 and refinanced with the line of credit.
<PAGE>
4. 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
153,563 shares under the 1991 Plan were outstanding at March 31, 1998 at prices
ranging from $4.00 to $6.63 per share.
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.
5. New Accounting Pronouncement:
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
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 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 second quarter and six month periods of fiscal 1998 compared to
the same periods of fiscal 1997 decreased 44.7% and 24.4%, respectively due to a
significant reduction in orders for reflow ovens from the Asian market as a
result of the financial situation in Asia and from decreased reflow oven sales
to contract manufacturers.
Gross profit on sales for the second quarter of fiscal 1998 was down 15.0% due
to unabsorbed fixed costs. Cost of sales increased as a result of warranty
charges on a limited number of ink drying units. The Company does not expect
third quarter warranty to be significantly impacted. The Company expects the
gross profit margin for the second half of fiscal 1998 to be closer to that of
fiscal 1997.
<PAGE>
Gross profit margins for fiscal 1998 were down 3.4% for the six month period due
to the impact in the second quarter.
Selling expenses for the second quarter and six month periods of fiscal 1998
compared to the same periods of fiscal 1997 increased 18.7% and 8.8%,
respectively as a percent of sales due to continued investments in connection
with the Company's shift from a product-driven strategy to a market-driven
strategy offset by decreased expenses associated with the lower sales volume.
Expenditures for research and development for the second quarter and six month
periods of fiscal 1998 compared to the same periods of fiscal 1997 increased
13.5 % and 9.1%, respectively due to the Company's plan to increase its
investment in new product development in its major markets. These investments
are in line with its goal to generate 50% of sales from new products (developed
in the last 3 years).
General and administrative expenses for the second quarter and six month periods
of fiscal 1998 compared to the same periods of fiscal 1997 have remained at
approximately the same level as one year ago, but increased 3.2% and 1.5%,
respectively as a percentage of sales due to lower sales volume.
In February 1998, the Company consolidated the Control Systems business into the
Thermal Solutions Division. Control Systems, which dealt primarily with Asian
glass manufacturers, contributed less than 5 percent of sales in fiscal 1997. At
the same time, expenses were lowered through process improvements and a
workforce reduction, in the production, support, and administrative areas.
Overall, the Company expects that these initiatives will result in cost
reductions of more than $1.5 million on an annualized basis beginning in the
third quarter of fiscal 1998. Costs associated with the restructuring and the
redeployment of Control Systems' resources were taken as a one-time charge of
$635,000 in the second quarter of fiscal 1998. Costs associated with the
restructuring primarily consists of severance costs and the redeployment of
Control Systems resources.
The Company expects the impact of the Asian financial situation to have a
negative effect on sales and earnings in the second half of fiscal 1998 which
would result in a net loss for that period and for the fiscal year. However, the
gross profit margin for the second half is expected to be comparable to those of
fiscal 1997. The Company expects to see a favorable 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. The Company expects fiscal 1998
sales to be lower than fiscal 1997.
<PAGE>
Liquidity and Sources of Capital
The Company's working capital of $2,152,676 at March 31, 1998, decreased from
$3,934,186 at September 30, 1997. The current ratio at March 31, 1998 was 1.3
compared to 1.6 at September 30, 1997. The net change in working capital is due
to increased inventories and accounts receivable relative to sales volume. The
increased inventory is due to order delays by Asian reflow oven customers, lower
shipments to SMT contract manufacturers (because of excess inventory in the
computer segment of the industry), and our commitment to meet customer
expectations for shorter delivery times. The Company anticipates increased
inventory levels will affect working capital in the third quarter of fiscal
1998. Accounts receivable is impacted by the timing of shipments.
The deferred revenue of $694,629 includes a $643,440 progress payment from one
customer to develop and deliver SMT units in the third and fourth quarters of
fiscal 1998.
The Company also expects to benefit from an NOL (net operating loss) carryback
claim which is currently estimated at $748,052. The cash is expected to be
received in the second quarter of fiscal 1999.
The Company had an unsecured bank line of credit for $5,000,000. The Company did
not meet the net worth and debt to equity covenants at March 31, 1998 and
received a waiver of both covenants from its lender. The lender also received a
security interest in the Company's assets: accounts receivable, inventory,
equipment, and other in-tangible assets. The Company is pursuing additional
financing to meet working capital requirements and fund the investments in
research and development programs which will impact future growth. At March 31,
1998, the Company had borrowings of $3,865,998 at the prime rate under the line
of credit. The Company has no long-term debt. A short-term note payable of
$766,000 was paid off on January 15, 1998 and refinanced with the bank line of
credit.
The Company believes it has the ability to meet short term financing
requirements through its existing bank line and asset management efforts. The
Company is investigating additional financing alternatives and expects to have a
favorable cash flow impact from the NOL carryback claim in the second quarter of
fiscal 1999.
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
<PAGE>
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, Asian economic conditions, demand for computers 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 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of the shareholders of Research, Incorporated
was held on January 15, 1998. There were 986,674 shares of common
stock entitled to vote at the meeting and a total of 819,472
shares were represented at the meeting.
(b) Five directors were elected at the meeting to serve for one year
or until their successors are elected and qualified. Shares were
voted as follows:
For Against
--- -------
Claude C. Johnson 811,889 7,583
John G. Colwell, Jr. 811,938 7,534
Edward L. Lundstrom 811,438 8,034
Gerald E. Magnuson 811,038 8,434
Charles G. Schiefelbein 804,422 15,050
(c) A proposal was made to amend the Company's bylaws to fix the
number of members on the Board of Directors to five. Shares were
voted as follows:
For Against Abstain
--------- ------- -------
820,110 1,941 4,326
(c) The Research, Incorporated Employee Stock Purchase Plan was
ratified and approved. Shares were voted as follows:
For Against Abstain
--------- ------- -------
552,849 73,739 16,447
(c) An amendment to the Research, Incorporated 1991 Stock Plan to
increase by 100,000 the number of shares of Common Stock available
under the plan was ratified and approved. Shares were voted as
follows:
For Against Abstain
--------- ------- -------
554,503 71,615 16,917
(c) A proposal was made to ratify and approve the appointment of
Arthur Andersen as the Company's independent auditors for 1997.
Shares were voted as follows:
For Against Abstain
--------- ------- -------
822,038 513 3,421
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
[10] Line of Credit Amendment Agreement between Norwest Bank
Minnesota N.A. and the Company dated May 13, 1998.
[27.1] Financial Data Schedule for 2nd Quarter Ending March 31,
1998
[27.2] Financial Data Schedule for years ending September 30, 1996
and September 30, 1997
[27.3] Financial Data Schedule for periods ending December 31,
1995, March 31, 1996 and June 30, 1996
[27.4] Financial Data Schedule for periods ending December 31,
1996, March 31, 1997, June 30, 1997
(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 5/14/98 /s/ Claude C. Johnson
Claude C. Johnson
President,
Chief Executive Officer
Date 5/14/98 /s/ Richard L. Grose
Richard L. Grose
Treasurer
EXHIBIT 10
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION FIRST AMENDMENT
================================================================================
This First Amendment to Credit Agreement ("First Amendment") dated as of May 13,
1998 is between Norwest Bank Minnesota, National Association ("Bank") and
Research, Incorporated ("Borrower").
RECITALS
The Borrower and the Bank entered into a Credit Agreement dated October 13, 1997
("Agreement"), pursuant to which the Bank extended to the Borrower a
$5,000,000.00 revolving line of credit ("Line"). Borrowings under the Line are
evidenced by a promissory note dated October 13, 1997 ("Revolving Note"). The
principal balance outstanding on April 27, 1998 under the 1997 Revolving Note is
$4,365,998; accrued and unpaid interest to that date amounts to $27,597.
The Borrower acknowledges that it is in violation of the financial covenants set
forth in Sections 7.2(a) and 7.2(b) of the Agreement with respect to the second
quarter ending March 31, 1998. The Bank agreed to waive on a one-time only basis
the Borrower's defaults under Sections 7.2(a) and 7.2(b), conditioned upon the
Borrower granting to the Bank a security interest in all assets of the Borrower
(excluding real estate). The Borrower acknowledges that, notwithstanding the
fact that the Bank has waived said default by the Borrower, the Bank shall be
under no obligation to grant a waiver of any covenant in the future.
The Bank and the Borrower have agreed to memorialize their understanding by
means of this First Amendment. Capitalized terms not otherwise defined in this
First Amendment shall have the meaning given them in the Agreement.
AGREEMENT
In consideration of the premises, the Bank and the Borrower agree that the
Agreement is hereby amended as of the date of this First Amendment as follows:
1. ACKNOWLEDGMENT. The Borrower acknowledges and agrees that the Recitals
herein are true and correct and that the indebtedness evidenced by the
Revolving Note is due and owing to the Bank without offset, defense or
counterclaims.
2. AMENDMENTS TO AGREEMENT.
2.1. Section 2 of the Agreement is hereby amended in its entirely
to read as follows:
2. FEES AND EXPENSES. The Borrower agrees, within 10
days of invoice, to pay all expenses, including the
reasonable fees and expenses of legal counsel for
the Bank, incurred in connection with the
preparation, administration, amendment, modification
or enforcement of this Agreement and the collateral
documents and the collection or attempted collection
of the Indebtedness. Despite such reimbursement the
Borrower acknowledges that the Bank's counsel is
engaged solely to represent the Bank and does not
represent the Borrower.
<PAGE>
2.2. Section 7.1(b) is hereby amended in its entirety to read as
follows:
7.1(b)Interim Financial Statements and Borrowing Base
Certificate. Provide the Bank within 20 days of each
month 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 a form acceptable to the
Bank.
2.3. A new Section 7.3(n) is hereby added to the Agreement as
follows:
7.3(n) Dividends. Refrain from declaring or paying any
dividends on any shares of stock of the Borrower,
now or hereafter outstanding if: (1) a default has
occurred under any of the Documents that the Bank
has not waived in writing; or (2) payment of the
dividends would result in the occurrence of a
default under any of the Documents.
2.4. A new Section 7.3(o) is hereby added to the Agreement as
follows:
7.3(o) Insurance. Cause its properties to be adequately
insured by a reputable insurance company against
loss or damage and to carry such other insurance
(including business interruption, floor, or
environmental risk insurance) as is required of or
usually carried by persons engaged in the same or
similar business. Such insurance must, with respect
to the Bank's collateral security, include a
lender's loss payable endorsement in favor of the
Bank in a form acceptable to the Bank.
3. GRANT OF SECURITY INTEREST. In consideration of the Bank's waiver of the
defaults described in the Recitals, the Borrower has executed and
delivered to the Bank a security agreement, granting the Bank a first
lien security interest in the Borrower's accounts, inventory, equipment
and general intangibles described in the security agreement, together
with one or more UCC-1 Financing Statements sufficient to perfect the
security interest granted to the Bank under applicable law.
4. WARRANTIES AND REPRESENTATIONS. The Borrower hereby represents and
warrants to the Bank as follows:
4.1 The Agreement as amended by this First Amendment remains in
full force and effect and the Borrower reaffirms each and every
representation and warranty set forth on Exhibit B to the
Agreement as true and correct as of the effective date of this
First Amendment except for the Financial Reports section which is
hereby amended to read in its entirety as follows: "The Borrower
has provided the Bank with the Borrower's annual audited financial
statement dated September 30, 1997 and its interim financial
statement dated March 31, 1998, 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."
4.2 The Borrower has no knowledge of any default under the terms
of the Agreement (with the exception of Sections 7.2(a) and 7.2(b)
as disclosed above) or the Revolving Note or of any event that
with notice or the lapse of time or both would constitute a
default under the Agreement or such note.
<PAGE>
4.3 The execution, delivery and performance of this First
Amendment is within its corporate powers, have been duly
authorized and are not in contravention of law or the terms of the
Borrower's articles of incorporation or by-laws, or of any
undertaking to which the Borrower is a party or by which it is
bound.
4.4 The resolutions set forth in the Corporate Certificate of
Authority dated March 24, 1997 and delivered by the Borrower to
the Bank have not been amended or rescinded, and remain in full
force and effect.
5. CONDITIONS PRECEDENT. This Amendment shall be of no force or effect until
the Bank has received the following, in form and substance satisfactory
to the Bank and its counsel:
5.1 This First Amendment fully executed by the Borrower; and
5.2 Evidence that the Borrower has obtained all insurance coverage
required by the Agreement, as amended hereby, including a lender's
loss payable endorsement in favor of the Bank in a form acceptable
to the Bank; and
5.3 Reimbursement to the Bank for its expenses, including the
reasonable fees and expenses of legal counsel, incurred in
connection with the preparation, of this Amendment and the
collateral documents.
6. RELEASE. In consideration of the accommodations by the Bank hereunder,
Borrower does hereby, on behalf of itself, its agents, insurers, heirs,
successors and assigns, release, acquit and forever discharge the Bank
and Norwest Corporation, (and any and all of their parent corporations,
subsidiary corporations, affiliated corporations, insurers, indemnitors,
successors and assigns, together with all of their present and former
directors, officers, agents and employees) from any and all claims,
demands or causes of action of any kind, nature or description whether
arising in law or equity or upon contract or tort or under any state or
federal law or otherwise, which the Borrower has had, now has or has made
claim to have against any such party for or by reason of any act,
omission, matter, cause or thing whatsoever from the beginning of time to
and including the date of this First Amendment, whether such claims,
demands and causes of action are matured or unmatured or known or
unknown.
7. MISCELLANEOUS.
7.1 Except as revised or amended or modified herein, all other terms and
conditions of the Agreement, Revolving Note and all other loan documents
attached thereto or incorporated therein remain fully enforceable and in effect
and are incorporated herein and shall remain fully enforceable and in effect and
survive any default herein by the Borrower.
7.2 Except as otherwise specifically provided in this Amendment, the execution
of this First Amendment shall not be deemed to be a waiver of any default or
Event of Default, whether or not existing on the date of this First Amendment,
and the Bank expressly denies any intention to waive any such default or events
of default.
7.3 The Agreement, as amended hereby, shall inure to the benefit of, and shall
be binding upon, the respective successors and permitted assigns of the parties
<PAGE>
hereto. The Borrower has no right to assign any of their rights or obligations
hereunder without the prior written consent of the Bank. The Agreement, as
amended hereby, and the documents referred to herein or executed and delivered
pursuant hereto, constitute the entire agreement between the parties, and may be
amended only by a writing signed on behalf of each party. There are no promises,
inducements or terms and conditions other than as specifically set forth herein.
7.4 If any provision contained in this First Amendment or the Agreement is
inconsistent with any of the documents described herein or any other document in
favor of the Bank, the provision contained in this First Amendment or the
Agreement shall supersede such inconsistent provision in the documents described
herein or in any document in favor of the Bank.
8. ADVICE OF COUNSEL. The Borrower acknowledges that it has reviewed this
Amendment in its entirety, having consulted such legal, tax or other
advisors as it deems appropriate and understands and agrees to each of
the provisions of this First Amendment and further acknowledge that it
has entered into this First Amendment voluntarily.
IN WITNESS WHEREOF, the Bank and Borrower have executed this First Amendment as
of the date and year first above written.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION RESEARCH, INCORPORATED
By: /s/ Brad Sullivan By: /s/ Richard L. Grose
Its: Portfolio Manager Its: Treasurer
By: /s/ Claude C. Johnson
Its: President and CEO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS INCLUDED IN THE 10-Q FOR THE QUARTER ENDED MARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 122
<SECURITIES> 0
<RECEIVABLES> 2,516
<ALLOWANCES> 150
<INVENTORY> 5,845
<CURRENT-ASSETS> 9,466
<PP&E> 7,391
<DEPRECIATION> 4,739
<TOTAL-ASSETS> 12,172
<CURRENT-LIABILITIES> 7,314
<BONDS> 0
0
0
<COMMON> 627
<OTHER-SE> 4,232
<TOTAL-LIABILITY-AND-EQUITY> 12,172
<SALES> 3,215
<TOTAL-REVENUES> 3,215
<CGS> 2,216
<TOTAL-COSTS> 2,216
<OTHER-EXPENSES> 3,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,211)
<INCOME-TAX> (663)
<INCOME-CONTINUING> (1,548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,548)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
<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 YEARS ENDING
SEPTEMBER 30, 1996 AND 1997 QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1997
<PERIOD-END> SEP-30-1996 SEP-30-1997
<CASH> 1,841 1,205
<SECURITIES> 0 0
<RECEIVABLES> 2,517 4,129
<ALLOWANCES> 150 150
<INVENTORY> 3,474 4,486
<CURRENT-ASSETS> 8,154 10,266
<PP&E> 6,149 6,939
<DEPRECIATION> 4,049 4,418
<TOTAL-ASSETS> 10,338 12,849
<CURRENT-LIABILITIES> 3,063 6,332
<BONDS> 0 0
0 0
0 0
<COMMON> 581 485
<OTHER-SE> 6,695 6,032
<TOTAL-LIABILITY-AND-EQUITY> 10,338 12,849
<SALES> 19,661 22,843
<TOTAL-REVENUES> 19,661 22,843
<CGS> 11,706 12,758
<TOTAL-COSTS> 11,706 12,758
<OTHER-EXPENSES> 7,867 9,534
<LOSS-PROVISION> 5 13
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 458 1,695
<INCOME-TAX> 168 578
<INCOME-CONTINUING> 290 1,117
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 290 1,117
<EPS-PRIMARY> .20 .80
<EPS-DILUTED> .19 .77
</TABLE>
<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 PERIODS ENDING
DECEMBER 31, 1996, MARCH 31, 1997, JUNE 30, 1997, DECEMBER 31, 1995, MARCH 31,
1996 AND JUNE 30, 1996 QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1996 SEP-30-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996 JUN-30-1996
<CASH> 1,126 341 580
<SECURITIES> 0 0 0
<RECEIVABLES> 2,708 3,146 3,426
<ALLOWANCES> 150 150 150
<INVENTORY> 3,323 3,739 3,453
<CURRENT-ASSETS> 7,529 7,527 7,789
<PP&E> 6,264 6,275 6,331
<DEPRECIATION> 4,249 4,253 4,195
<TOTAL-ASSETS> 9,656 9,651 10,019
<CURRENT-LIABILITIES> 2,453 2,451 2,770
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 576 580 581
<OTHER-SE> 6,626 6,620 6,668
<TOTAL-LIABILITY-AND-EQUITY> 9,656 9,651 10,019
<SALES> 4,381 9,638 15,431
<TOTAL-REVENUES> 4,381 9,638 15,431
<CGS> 2,576 5,705 9,204
<TOTAL-COSTS> 2,576 5,705 9,204
<OTHER-EXPENSES> 1,757 3,829 5,922
<LOSS-PROVISION> 10 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 47 104 305
<INCOME-TAX> 20 38 118
<INCOME-CONTINUING> 27 66 187
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 27 66 187
<EPS-PRIMARY> .02 .05 .13
<EPS-DILUTED> .02 .04 .12
</TABLE>
<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 PERIODS ENDING
DECEMBER 31, 1996, MARCH 31, 1997, JUNE 30, 1997, DECEMBER 31, 1995, MARCH 31,
1996 AND JUNE 30, 1996 QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997 SEP-30-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997
<CASH> 2,298 1,774 433
<SECURITIES> 0 0 0
<RECEIVABLES> 3,510 3,821 3,616
<ALLOWANCES> 150 150 150
<INVENTORY> 3,331 4,059 4,831
<CURRENT-ASSETS> 9,471 9,963 9,197
<PP&E> 6,068 6,251 6,581
<DEPRECIATION> 4,058 4,173 4,277
<TOTAL-ASSETS> 11,561 12,113 11,569
<CURRENT-LIABILITIES> 3,613 4,200 5,164
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 582 602 485
<OTHER-SE> 7,366 7,310 5,920
<TOTAL-LIABILITY-AND-EQUITY> 11,561 12,113 11,569
<SALES> 4,873 10,689 16,312
<TOTAL-REVENUES> 4,873 10,689 16,312
<CGS> 2,811 5,947 9,094
<TOTAL-COSTS> 2,811 5,947 9,094
<OTHER-EXPENSES> 2,122 4,558 6,920
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 1,102 1,351 1,465
<INCOME-TAX> 416 512 557
<INCOME-CONTINUING> 686 839 908
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 686 839 908
<EPS-PRIMARY> .47 .57 .63
<EPS-DILUTED> .46 .55 .60
</TABLE>
