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 June 30, 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 August 10, 1998, 1,266,337 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 Nine Months Ended
June 30 June 30
---------------------------- -----------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 4,308,441 $5,622,206 $12,391,481 $16,311,660
Cost of Sales 3,232,151 3,146,673 8,000,818 9,093,863
----------- ---------- ----------- -----------
Gross profit 1,076,290 2,475,533 4,390,663 7,217,797
----------- ---------- ----------- -----------
Expenses:
Selling 1,328,163 1,367,981 4,251,924 4,298,569
Research and development 739,969 727,235 2,341,590 1,876,136
General and administrative 237,926 267,051 723,713 745,599
Restructuring 1,041,000 - 1,676,000 -
----------- ---------- ----------- -----------
Total expenses 3,347,058 2,362,267 8,993,227 6,920,304
----------- ---------- ----------- -----------
Income (Loss) from Operations (2,270,768) 113,266 (4,602,564) 297,493
Interest Income (Expense) (99,342) 701 (243,795) 20,513
Gain on Sale of Land - - - 1,147,094
----------- ---------- ----------- -----------
Income (Loss) before Taxes (2,370,110) 113,967 (4,846,359) 1,465,100
Income Tax Provision (Benefit) (770,803) 44,848 (1,518,855) 557,050
----------- ---------- ----------- -----------
Net Income (Loss) $(1,599,307) $ 69,119 $(3,327,504) $ 908,050
=========== ========== =========== ===========
Earnings Per Share:
Basic $ (1.28) $ 0.05 $ (2.68) $ 0.63
Diluted (1.28) 0.05 (2.68) 0.60
Dividends Paid Per Share $ - $ 0.06 $ 0.12 $ 0.18
Weighted Average Shares Outstanding (Note 1):
Basic 1,254,237 1,401,056 1,241,229 1,445,048
Diluted 1,260,624 1,509,345 1,268,516 1,509,239
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
RESEARCH, INCORPORATED
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
Assets 1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 115,116 $ 1,204,827
Accounts receivable, net 3,054,322 3,979,299
Inventories 4,547,204 4,485,830
Deferred income taxes 1,518,855 --
Other current assets 334,935 596,465
------------ ------------
Total current assets 9,570,432 10,266,421
------------ ------------
Property and Equipment:
Land and land improvements 235,569 221,927
Building 2,298,694 2,182,492
Machinery and equipment 4,397,852 4,534,825
Less-accumulated depreciation (4,385,877) (4,418,279)
------------ ------------
Net property and equipment 2,546,238 2,520,965
Other Assets 46,480 61,320
------------ ------------
Total assets $ 12,163,150 $ 12,848,706
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable $ 4,565,998 $ 2,231,998
Accounts payable 1,672,822 1,689,153
Deferred revenue 626,520 --
Accrued liabilities:
Salaries and benefits 120,290 668,374
Warranty reserve 350,000 350,000
Real estate taxes 124,089 155,000
Restructuring reserves 1,111,850 --
Other 256,439 363,971
Federal and state income taxes 88,724 873,739
------------ ------------
Total current liabilities 8,916,732 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
June 30, 1998 and September 30, 1997 627,119 605,734
Additional paid-in capital 466,561 307,111
Foreign currency translation 60,455 39,752
Retained earnings 2,092,283 5,563,874
------------ ------------
Total stockholders' equity 3,246,418 6,516,471
------------ ------------
Total liabilities and stockholders' equity $ 12,163,150 $ 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>
Nine Months Ended June 30,
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities:
Net income (loss) $(3,327,504) $ 908,050
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 491,389 387,243
Gain on sale of land -- (1,147,094)
Changes in current operating items:
Accounts receivable 924,977 (1,098,811)
Inventories (61,374) (1,456,973)
Deferred income taxes (1,518,855) --
Other current assets 261,530 4,102
Accounts payable and accrued liabilities (702,858) 122,756
Deferred revenues 626,520 --
Restructuring reserves 1,111,850 --
Federal and state income taxes (785,015) 364,257
----------- -----------
Net cash used in operating activities (2,979,340) (1,916,470)
----------- -----------
Investing Activities:
Proceeds from sale of land, net -- 1,529,543
Property and equipment additions, net (499,497) (562,262)
Other 18,378 38,542
----------- -----------
Net cash provided by (used in) investing activities (481,119) 1,005,823
----------- -----------
Financing Activities:
Cash dividends paid (144,087) (473,357)
Issuance of common stock 180,835 175,513
Repurchase of common stock -- (765,998)
Borrowing under line of credit 5,100,000 765,998
Payments on line of credit (2,766,000) (200,000)
----------- -----------
Net cash provided by (used in) financing activities 2,370,748 (497,844)
----------- -----------
Cash and cash equivalents:
Net decrease in cash and cash equivalents (1,089,711) (1,408,491)
Cash and cash equivalents, at beginning of year 1,204,827 1,841,147
----------- -----------
Cash and cash equivalents, at end of period $ 115,116 $ 432,656
=========== ===========
Supplemental Cash Flow Information:
Noncash financing activity:
Repurchase of common stock through
issuance of notes payable $ -- $ 766,000
Cash paid for interest 186,017 --
Cash paid for income taxes 308,000 160,500
</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 June 30, 1998, the consolidated statements
of operations for the three and nine months ended June 30, 1998 and 1997 and the
consolidated statements of cash flows for the nine months ended June 30, 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 June 30, 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 June 30, 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:
June 30, September 30,
1998 1997
---- ----
Raw materials and
purchased parts $ 3,313,017 $ 3,470,262
Work in process and
finished goods 2,543,807 1,415,568
Obsolescence reserve (1,309,620) (400,000)
----------- -----------
Total $ 4,547,204 $ 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 June 30, 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 did
not change during the quarter.
2. Restructuring:
In February 1998 the Company consolidated the Control Systems business into the
Thermal Solutions Division(TSD). 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.
For the third quarter, period ended June 30, 1998, the Company announced further
restructuring plans. These actions, triggered by the continuation of the Asian
Crisis, included a workforce reduction of an additional 20 percent with a charge
against earnings of $.7 million, as well as the restructuring charge of $.3
million for TSD product line discontinuation. In addition, the Company increased
the reserve for excess inventory by $.6 million, which was the major cause of
lower gross margins for the quarter compared to the third quarter of last year.
The workforce reductions, mainly in manufacturing and support areas, were
accomplished primarily through voluntary separations and did not affect
revenue-generating activities, customer support or high-priority strategic
programs.
3. Debt Obligations:
Line of Credit -
The Company has a $5,000,000 secured bank line of credit, that carries an
interest rate equal to the bank's base (prime) rate with no compensating balance
requirements. The line is backed by accounts receivable, inventory, equipment
and other intangible
<PAGE>
assets such as patents. The net worth and debt to equity covenants were not met
at March 31, 1998 and June 30, 1998. These covenants 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.
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 June 30, 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. In February and August 1998, 10,875
and 12,100 shares respectively were issued to employees at prices ranging from
$4.93 to $2.76.
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
Operations
Sales for the third quarter and nine month periods of fiscal 1998 compared to
the same periods of fiscal 1997 decreased 23.4% and 24.0%, 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 third quarter of fiscal 1998 was down 19.0% due to
a reserve for excess inventory of $600,000 mainly in the SMT market and
unabsorbed fixed costs. The reserve for excess inventory was caused by the
continued pressure on the electronics industry as the ongoing Asian economic
turmoil affected capital equipment expenditures of manufactures around the
world. The Company will not realize further benefit from the excess inventory.
Gross profit margins for fiscal 1998 were down 8.8% for the nine month period
due to the impact in the second and third quarters.
Selling expenses for the third quarter and nine month periods of fiscal 1998
compared to the same periods of fiscal 1997 increased 6.5% and 7.9%,
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 third quarter and nine month
periods of fiscal 1998 compared to the same periods of fiscal 1997 increased 4.3
% and 7.4% as a percentage of sales, respectively due to the Company's plan to
continue its investment in new product development in its major markets and due
to the lower level of sales. 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 third quarter and nine month periods
of fiscal 1998 compared to the same periods of fiscal 1997 are slightly lower
than one year ago, but increased 0.8% and 1.2%, respectively as a percentage of
sales due to lower sales volume.
For the third quarter the Company took a restructuring charge of $.7 million,
primarily for severance pay related to a workforce reduction in the third
quarter, and a charge of $.3 million related to discontinuation of older product
lines in the Thermal Solutions Division (TSD). In July, the management team took
a ten-percent salary reduction in support of cost control efforts. The Company
took these actions in the quarter in response to continued pressure on the
electronics industry as the ongoing Asian economic turmoil
<PAGE>
affected capital equipment expenditures of manufacturers around the world. The
Company is aggressively reducing costs, restructuring and streamlining
operations while focusing product offerings increasingly on value-added customer
solutions. The Company is focusing on resource realignment to reduce fixed
costs, as well as cash and asset management programs through the fourth quarter
and into the coming fiscal year. However, the Company does not expect further
charges against earnings as a result of these actions. As part of its cash
management program, the Company discontinued dividends in the third quarter and
reduced inventory by $.4 million excluding the reserve for excess inventory and
discontinued product line. The Company is aggressively pursuing additional asset
management programs. The Company is focusing its resources on its
highest-potential products and markets, on streamlining and combining processes,
and has identified further means of reducing fixed costs in the future.
Liquidity and Sources of Capital
The Company's working capital of $653,701 at June 30, 1998, decreased from
$3,934,186 at September 30, 1997. The current ratio at June 30, 1998 was 1.1
compared to 1.6 at September 30, 1997. The net change in working capital is due
to increased financing requirements related to the restructuring costs in the
second and third quarters, excess inventory related to the impact of Asia and
lower shipments to SMT contract manufactures (because of excess inventory in the
computer segment of the industry), and our commitment to meet customer
expectations for shorter delivery times, and accounts receivable relative to
sales volume. The Company anticipates lower inventory levels to affect working
capital in the fourth quarter of fiscal 1998.
The deferred revenue of $626,520 includes a $551,520 progress payment from one
customer to develop and deliver SMT units in the fourth quarter of fiscal 1998.
The Company also expects to benefit from a net operating loss (NOL) carryback
claim which is currently estimated at $748,052. A favorable cash flow impact is
to be expected in the second quarter of fiscal year 1999.
The Company discontinued its quarterly dividend in the third quarter.
The Company has a secured bank line of credit for $5,000,000. The Company did
not meet the net worth and debt to equity covenants at June 30, 1998 and
received a waiver of both covenants from its lender. 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 June
<PAGE>
30, 1998, the Company had borrowings of $4,565,998 at the prime rate under the
line of credit. The Company has no long-term debt.
The Company believes it has the ability to meet short term financing
requirements through its existing bank line and asset management efforts related
to inventory and accounts receivables. 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 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 5. Other Information
The deadline for submission of shareholder proposals pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended, for inclusion in the
Company's proxy statement for its 1999 Annual Meeting of Shareholders is August
17, 1998. Additionally, if the Company receives notice of a shareholder proposal
after November 1, 1998, such proposal will be considered untimely pursuant to
Rules 14a-4 and 14a-5(e) and the persons named in proxies solicited by the Board
of Directors of the Company for its 1999 Annual Meeting of Shareholders may
exercise discretionary voting power with respect to such proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
[10]a Line of Credit Amendment Agreement between
Norwest Bank Minnesota N.A. and the Company dated
August 5, 1998.
[27.1] Financial Data Schedule for 3rd Quarter Ending
June 30, 1998
(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 8/14/98 /s/ Claude C. Johnson
-------------------- ----------------------------------------------
Claude C. Johnson
President,
Chief Executive Officer
Date 8/14/98 /s/ Richard L. Grose
-------------------- ----------------------------------------------
Richard L. Grose
Treasurer
Exhibit [10]a
Norwest Bank Minnesota,
National Association Waiver of Covenant and Credit Agreement
RE: Waiver of Covenant 7.2(a) and (b) of the Credit Agreement dated October
13, 1997 between Norwest Bank Minnesota, N.A. and Research,
Incorporated.
Norwest Bank Minnesota, N.A. hereby agrees to waive the violation of the
covenant outlined below for the quarter
ending June 30, 1998.
7.2(a) Tangible Net Worth. Maintain a minimum Tangible Net Worth of at least
$5,500,000 as of the end of each fiscal quarter through and including
June 30, 1998,
7.2(b) 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,
This waiver extends only to the covenants outlined above and only for the period
described above. All other terms and conditions of the agreements remain in full
force and effect.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By: /s/ Bradley D. Sullivan Dated: August 5, 1998
----------------------- --------------
Bradley D. Sullivan
Its: Assistant Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS INCLUDED IN THE 10-Q FOR THE QUARTER ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 115
<SECURITIES> 0
<RECEIVABLES> 3,204
<ALLOWANCES> 150
<INVENTORY> 4,547
<CURRENT-ASSETS> 9,570
<PP&E> 6,932
<DEPRECIATION> 4,386
<TOTAL-ASSETS> 12,163
<CURRENT-LIABILITIES> 8,917
<BONDS> 0
0
0
<COMMON> 627
<OTHER-SE> 2,619
<TOTAL-LIABILITY-AND-EQUITY> 12,163
<SALES> 12,391
<TOTAL-REVENUES> 12,391
<CGS> 8,001
<TOTAL-COSTS> 8,001
<OTHER-EXPENSES> 8,993
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,846)
<INCOME-TAX> (1,519)
<INCOME-CONTINUING> (3,328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,328)
<EPS-PRIMARY> (2.68)
<EPS-DILUTED> (2.68)
</TABLE>
