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, 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
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(Exact name of registrant as specified in its charter)
Minnesota 41-0908058
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 24064, Minneapolis, Minnesota 55424
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (612) 941-3300
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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 11, 1999, 1,279,708 common shares were outstanding.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
RESEARCH, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31
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1998 1997
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<S> <C> <C>
Net Sales $ 5,393,706 $ 4,867,960
Cost of Sales 3,254,460 2,552,893
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Gross profit 2,139,246 2,315,067
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Expenses:
Selling 1,232,918 1,487,703
Research and development 474,095 797,633
General and administrative 224,149 240,793
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Total expenses 1,931,162 2,526,129
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Income (Loss) From Operations 208,084 (211,062)
Interest Expense (84,595) (53,695)
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Income (Loss) Before Income Taxes 123,489 (264,757)
Income Tax Provision (Benefit) 41,960 (84,722)
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Net Income (Loss) $ 81,529 $ (180,035)
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Net Income (Loss) Per Common Share:
Basic $ 0.06 $ (0.15)
Diluted 0.06 (0.15)
Weighted Average Common Shares Outstanding:
Basic 1,266,337 1,224,037
Diluted 1,266,337 1,224,037
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED STATEMENTS.
<PAGE>
RESEARCH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
As of December 31 As of September 30
ASSETS 1998 1998
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 144,382 $ 108,647
Accounts receivable, net of reserves of $150,000 3,719,778 2,897,503
Income tax receivable 493,241 493,241
Inventories 3,027,106 3,943,157
Deferred income tax benefit 537,000 537,000
Prepayments 211,387 215,784
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Total current assets 8,132,894 8,195,332
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PROPERTY AND EQUIPMENT, at cost:
Land and land improvements 235,569 235,569
Building 2,298,694 2,298,694
Machinery and equipment 4,335,905 4,339,268
Less accumulated depreciation (4,627,259) (4,481,995)
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Net property and equipment 2,242,909 2,391,536
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OTHER ASSETS:
Deferred income tax benefit 786,000 786,000
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Total assets $ 11,161,803 $ 11,372,868
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Notes payable $ 4,300,000 $ 4,100,000
Accounts payable 1,400,568 1,692,062
Deferred revenues 939,310 623,196
Accrued liabilities:
Salaries and benefits 272,069 326,645
Warranty reserve 350,000 350,000
Real estate taxes 129,694 160,000
Restructuring reserves 237,680 602,723
Other 309,838 299,748
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Total current liabilities 7,939,159 8,154,374
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 5,000,000 shares authorized,
1,266,337 shares issued and outstanding at
December 31, 1998 and September 30, 1998 633,168 633,168
Additional paid-in capital 591,906 591,906
Accumulated other comprehensive income 14,718 92,097
Retained earnings 1,982,852 1,901,323
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Total stockholders' equity 3,222,644 3,218,494
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Total liabilities and stockholders' equity $ 11,161,803 $ 11,372,868
======================================================================================================
</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
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1998 1997
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<S> <C> <C>
Operating Activities:
Net income (loss) $ 81,529 $ (180,035)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 145,264 165,223
Changes in current operating elements:
Accounts receivable, net (822,275) (128,663)
Inventories 916,051 (1,006,859)
Prepayments 4,397 (41,157)
Accounts payable and accrued liabilities (366,286) (836,902)
Deferred revenues 316,114 --
Restructuring reserves (365,043) --
Federal and state income taxes -- (486,246)
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Net cash used in operating activities (90,249) (2,514,639)
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Investing Activities:
Property and equipment additions, net 3,363 (385,829)
Other -- (8,143)
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Net cash provided by (used in) investing activities 3,363 (393,972)
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Financing Activities:
Borrowings under line of credit 1,700,000 2,500,000
Payments on line of credit (1,500,000) (700,000)
Issuance of common stock -- 89,320
Cash dividends paid -- (69,067)
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Net cash provided by financing activities 200,000 1,820,253
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Effect of Foreign Currency Translation (77,379) 32,756
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Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents 35,735 (1,055,602)
Beginning of year 108,647 1,204,827
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End of year $ 144,382 $ 149,225
============================================================================================
Supplemental Cash Flow Information:
Cash paid for:
Interest $ 87,503 $ 18,210
Income taxes $ -- $ 287,000
============================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED 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, 1998, the consolidated
statements of operations and cash flows for the three months ended December 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 December 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 condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's September 30,
1998 Form 10-K. The results of operations for the period ended December 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:
December 31, September 30,
1998 1998
----------- -----------
Raw materials and
purchased parts $ 1,822,445 $ 2,228,521
Work in process and
finished goods 1,204,661 1,714,636
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Total $ 3,027,106 $ 3,943,157
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<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, 1998 and for all periods
presented 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 first quarter of fiscal 1999.
2. Debt Obligations:
New Credit Facility -
On December 17, 1998, the Company signed a new three-year loan and security
agreement with a bank. The new agreement provides for total borrowings of up to
$8 million subject to lending formulas based on eligible receivables,
inventories, certain long-term assets and other terms specified in the
agreement. This new credit facility consists of a line of credit with interest
charged at 2.25% above prime and four term-loans with interest charged initially
at 2.75% above prime. The agreement contains certain restrictive covenants and
any outstanding borrowings are secured by substantially all of the Company's
assets. The Company closed on the new loan on January 21, 1999.
Line of Credit -
During the first quarter of fiscal 1999, the Company had a $5,000,000 secured
bank line of credit which carried an interest rate equal to the bank's prime
rate (8.25%) at December 31, 1998. The line was secured by substantially all of
the Company's assets. The Company had borrowings outstanding of $4,300,000 as of
December 31, 1998. The Company was not in compliance with certain net worth,
debt to equity and net income covenants at December 31,
<PAGE>
1998 and had received a waiver of those covenants from its lender. This loan was
paid off on January 21, 1999 and replaced with the new credit facility.
3. Stockholders' Equity:
Employee Stock Options -
On January 15, 1998, the shareholders of Research, Inc. ratified and approved an
amendment to the 1991 Stock Plan to increase the number of shares of common
stock available under the plan by 100,000 shares to 362,500 shares. Options for
147,938 shares under the 1991 Plan were outstanding at December 31, 1998 at
prices ranging from $4.00 to $6.625 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. As of December 31, 1998, 22,975 shares
have been issued.
4. Comprehensive Income
During June 1997, the Financial Accounting Standards Board released SFAS No.
130, "Reporting Comprehensive Income," effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 established standards for reporting and
display in the financial statements of total net income and the components of
all other nonowner changes in equity, referred to as comprehensive income. The
Company has adopted SFAS No. 130 beginning in fiscal year 1999. Comprehensive
income (loss) for the three months ended December 31, 1998 and 1997 was $4,150
and $(147,279), respectively. Other comprehensive income (loss) for the three
months ended December 31, 1998 and 1997 was $(77,379) and $32,756 and was
comprised of the effect of changes in foreign currency exchange rates in
translating assets, liabilities and the results of operations of the Company's
foreign subsidiary.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operations
Sales for the first three months of fiscal 1999 (the quarter ended December 31,
1998) compared to the same period of fiscal 1998 increased 10.8% due to higher
sales in the SMT market. The prior period was impacted by lower sales in that
market due to the Asian economic impact beginning to take effect.
Gross profit decreased 7.9% due to costs associated with the sale of excess
inventory and higher than expected new product start up costs. The prior period
gross margins were unusually high due to product mix and volume in the graphics
arts products. The Company reduced inventory approximately $900,000 during the
quarter on higher sales volume. The Company expects minimal impact on gross
margins from the sale of the remaining excess inventory during the remainder of
the year.
Selling expenses decreased 7.7% as a percentage of sales which was the effect of
the Company adjusting its expense levels due to the sales volume decrease that
began to occur in the prior year. The current levels of expense are more
representative of the expected expenditure levels.
Expenditures for research and development decreased 7.6% primarily due to the
Company temporarily devoting a portion of its engineering resources to sale of
product.
General and administrative expenses decreased 0.8% as a percentage of sales due
to lower costs associated with hiring and training which were incurred in the
prior year.
Interest expense was $85,000 compared to $54,000 one year ago due to the higher
borrowing levels. The Company expects interest costs to increase due to the
higher interest rate on its new bank financing agreement, which closed on
January 21, 1999.
Net profit was $82,000 compared to a net loss of $180,000 one-year ago.
Liquidity and Sources of Capital
The Company's working capital of $194,000 at December 31, 1998 increased from
$41,000 at September 30, 1998. The Company's current ratio at both December 31,
1998, and September 30, 1998 was 1.0 to 1.
<PAGE>
Accounts receivable increased due to timing of shipments late in the quarter.
Inventories were reduced by sales of excess inventory that had been built up to
meet customer's anticipated requirements for quick delivery. Deferred revenue
was generated from customer advances, which are a result of the Company's
efforts to aggressively manage cash. The increase in borrowings was used to pay
down accounts payable. The negative cash flow from operations during the quarter
resulted from pay down on the restructuring expenses.
On December 17, 1998, the Company signed a new three-year loan and security
agreement with a bank. The new agreement provides for total borrowings of up to
$8 million subject to lending formulas based on eligible receivables,
inventories, certain long-term assets and other terms specified in the
agreement. This new credit facility consists of a line of credit with interest
charged at 2.25% above prime and four term loans with interest charged initially
at 2.75% above prime. The agreement contains certain restrictive covenants and
any outstanding borrowings are secured by substantially all of the Company's
assets. The Company closed and drew on the new loan on January 21, 1999.
The Company's management believes its cash flow from operations and borrowing
facilities will be sufficient to meet the Company's financing requirements for
the foreseeable future. The Company believes that success in its industries
requires substantial financial flexibility due to customer expectations and
rapidly changing technologies.
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, market cycles, dependence on
capital expenditures of contract manufactures in SMT, product cancellations or
rescheduling, loss of a significant customer, interruptions in the Company's
operations or those of any of its suppliers or major customers as such may be
caused by problems arising from the Year 2000.
<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 2/12/99 /s/ Claude C. Johnson
-----------------------------------
Claude C. Johnson
President,
Chief Executive Officer
Date 2/12/99 /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, 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-30-1999
<PERIOD-END> Dec-31-1998
<CASH> 144
<SECURITIES> 0
<RECEIVABLES> 3,870
<ALLOWANCES> 150
<INVENTORY> 3,027
<CURRENT-ASSETS> 8,133
<PP&E> 6,870
<DEPRECIATION> 4,627
<TOTAL-ASSETS> 11,162
<CURRENT-LIABILITIES> 7,939
<BONDS> 0
0
0
<COMMON> 633
<OTHER-SE> 2,589
<TOTAL-LIABILITY-AND-EQUITY> 11,162
<SALES> 5,394
<TOTAL-REVENUES> 5,394
<CGS> 3,254
<TOTAL-COSTS> 3,254
<OTHER-EXPENSES> 1,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> 123
<INCOME-TAX> 42
<INCOME-CONTINUING> 82
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
