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 31,1999 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 May 13, 1999, 1,279,708 common shares were outstanding.
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<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
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 5,545,119 $ 3,215,080 $ 10,938,825 $ 8,083,040
Cost of sales 3,122,052 2,215,774 6,376,512 4,768,667
------------ ------------ ------------ ------------
Gross profit 2,423,067 999,306 4,562,313 3,314,373
------------ ------------ ------------ ------------
Expenses:
Selling 1,316,935 1,436,058 2,549,853 2,923,761
Research and development 602,497 803,988 1,076,592 1,601,621
General and administrative 226,570 244,994 450,719 485,787
Restructuring -- 635,000 -- 635,000
------------ ------------ ------------ ------------
Total expenses 2,146,002 3,120,040 4,077,164 5,646,169
------------ ------------ ------------ ------------
Income (loss) from operations 277,065 (2,120,734) 485,149 (2,331,796)
Interest expense (116,680) (90,758) (201,275) (144,453)
------------ ------------ ------------ ------------
Income (loss) before taxes 160,385 (2,211,492) 283,874 (2,476,249)
Income tax provision (benefit) 54,652 (663,330) 96,612 (748,052)
------------ ------------ ------------ ------------
Net income (loss) $ 105,733 $ (1,548,162) $ 187,262 $ (1,728,197)
============ ============ ============ ============
Earnings Per Share:
Basic and diluted $ 0.08 $ (1.24) $ 0.15 $ (1.40)
Weighed Average Shares Outstanding (Note 1):
Basic 1,274,657 1,245,643 1,270,451 1,234,724
Diluted 1,274,805 1,262,281 1,270,525 1,276,003
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
RESEARCH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
As of March 31 As of September 30
ASSETS 1999 1998
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 134,016 $ 108,647
Accounts receivable, net of reserves of $150,000 4,314,211 2,897,503
Income tax receivable -- 493,241
Inventories 3,050,563 3,943,157
Deferred income tax benefit 570,635 537,000
Prepayments 309,164 215,784
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Total current assets 8,378,589 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 4,372,862 4,339,268
Less accumulated depreciation (4,769,627) (4,481,995)
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Net property and equipment 2,137,498 2,391,536
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DEFERRED INCOME TAX BENEFIT 741,423 786,000
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Total assets $ 11,257,510 $ 11,372,868
======================================================================= ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Line of credit and current portion of long-term debt $ 1,686,745 $ 4,100,000
Accounts payable 1,899,293 1,692,062
Deferred revenue 964,968 623,196
Accrued liabilities:
Salaries and benefits 243,723 326,645
Warranty reserve 350,000 350,000
Real estate taxes 159,094 160,000
Restructuring reserves 99,003 602,723
Other 227,563 299,748
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Total current liabilities 5,630,389 8,154,374
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Long-term debt 2,198,055 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.50 par value, 5,000,000 shares authorized,
1,279,708 and 1,266,337 shares issued and outstanding 639,854 633,168
Additional paid-in capital 622,125 591,906
Accumulated other comprehensive income 78,502 92,097
Retained earnings 2,088,585 1,901,323
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Total stockholders' equity 3,429,066 3,218,494
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Total liabilities and stockholders' equity $ 11,257,510 $ 11,372,868
======================================================================= ============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
<PAGE>
RESEARCH, INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
-----------------------------
1999 1998
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<S> <C> <C>
Operating Activities:
Net income (loss) $ 187,262 $ (1,728,197)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 287,632 330,516
Changes in current operating items:
Accounts receivable (1,416,708) 1,613,706
Inventories 892,594 (1,359,392)
Income tax receivable 493,241 (748,052)
Prepayments (93,380) 210,751
Accounts payable and accrued liabilities (17,203) (993,318)
Deferred revenue 341,772 694,629
Restructuring reserves (503,720) 430,618
Federal and state income taxes 79,363 (784,462)
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Net cash provided by (used in) operating activities 250,853 (2,333,201)
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Investing Activities:
Purchases of property and equipment (33,594) (445,537)
Other -- (8,680)
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Net cash used in investing activities (33,594) (454,217)
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Financing Activities:
Cash dividends paid -- (144,087)
Issuance of common stock 36,905 180,835
Proceeds from (payment on) line of credit, net (2,760,739) 1,634,000
Proceeds from long-term debt 3,095,000 --
Payments on long-term debt (549,461) --
------------ ------------
Net cash provided by (used in) financing activities (178,295) 1,670,748
------------ ------------
Effect of foreign currency translation (13,595) 33,640
Cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents 25,369 (1,083,030)
Cash and cash equivalents, at beginning of year 108,647 1,204,827
------------ ------------
Cash and cash equivalents, at end of period $ 134,016 $ 121,797
============ ============
</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, 1999, the consolidated statements
of operations for the three and six months ended March 31, 1999 and 1998 and the
consolidated statements of cash flows for the six months ended March 31, 1999
and 1998 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, 1999 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, 1998 Form
10-K. The results of operations for the period ended March 31, 1999 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,
1999 1998
----------- -----------
Raw materials and
purchased parts $ 2,019,770 $ 2,228,521
Work in process and
finished goods 1,030,793 1,714,636
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Total $ 3,050,563 $ 3,943,157
=========== ===========
<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 March 31, 1999 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 13,371 shares during the second quarter of fiscal 1999 by the
issuance of shares through the employee stock purchase plan.
2. Debt Obligations
New Credit Facility -
On January 21, 1999, the Company entered 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 was in compliance with all of the covenants as of March 31,
1999.
<PAGE>
3. 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 non-owner changes in equity, referred to as comprehensive income. The
Company has adopted SFAS No. 130 beginning in fiscal 1999. Comprehensive income
(loss) 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. Comprehensive income (loss) for the following
three and six month periods were:
Three Months Ended Six Months Ended
March 31 March 31
------------------------- -------------------------
1999 1998 1999 1998
------------------------- -------------------------
Net income(loss) $105,733 $(1,548,162) $187,262 $(1,728,197)
Other comprehensive
income(loss) 63,784 884 (13,595) 33,640
------------------------- -------------------------
Comprehensive
income (loss) $169,517 $(1,547,278) $173,667 $(1,694,557)
========================= =========================
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operations
Sales for the second quarter and six month period of fiscal 1999 (the quarter
ended March 31, 1999) compared to the same periods of fiscal 1998 increased
72.5% and 35.3% due to higher sales in both the printing market and the surface
mount technology (SMT) market. The prior year periods were impacted by lower
sales due to the Asian economic impact.
Gross margin on sales for the quarter and six month period were up 12.6% and
0.7% compared to the same periods of fiscal 1998. The prior year second quarter
gross margins were unusually low due to volume and unabsorbed fixed costs which
were caused by the Asian economic crisis. The Company reduced inventory by
approximately $900,000 due to efforts to liquidate the remainder of the excess
inventory caused by the Asian financial crisis.
Selling expenses decreased 21.0% as a percentage of sales for the quarter and
12.9% for the six month period of fiscal 1999 compared to the same periods in
fiscal 1998. This was the effect of the Company adjusting its expense levels due
to the sales volume decrease that began to occur in the prior year.
Expenditures for research and development decreased 14.1% as a percentage of
sales for the quarter and 10.0% for the six month period of fiscal 1999 compared
to the same periods in fiscal 1998. This was primarily due to the Company
temporarily devoting a portion of its engineering resources to sale of product.
General and administrative expenses decreased 3.5% as a percentage of sales for
the quarter and 1.9% for the six month period of fiscal 1999 compared to the
same periods in fiscal 1998. This was due to higher levels of sales.
Interest expense was $117,000 for the quarter for fiscal 1999 compared to
$91,000 for the same quarter one year ago. This was due to higher interest rates
on the new financing bank arrangements.
Net profit was $106,000 for the quarter of fiscal 1999 compared to a net loss of
$1,548,000 for the same period in fiscal 1998. The prior year was impacted by
restructuring reserves of $635,000, which included severance costs and the
deployment of
<PAGE>
Control Systems resources and lower volume due to the Asian economic crisis.
Liquidity and Sources of Capital
The Company's working capital of $2,748,000 at March 31, 1999 increased from
$41,000 at September 30, 1998. The Company's current ratio at March 31, 1999 was
1.5 compared to 1.0 at September 30, 1998. The increase in working capital is
due to refinancing short term debt to long term debt.
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 positive cash flow from operations
during the quarter resulted from reduction of inventories, receipt of the income
tax carry back claim, net income, depreciation and additional customer advances
offset by increases in accounts receivable and pay down of restructuring
reserves.
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.
<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, 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 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of the shareholders of Research, Incorporated
was held on January 21, 1999. There were 1,266,337 shares of
common stock entitled to vote at the meeting and a total of
980,435 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 970,993 9,442
John G. Colwell, Jr. 969,840 10,595
Edward L. Lundstrom 969,840 10,595
Gerald E. Magnuson 898,808 81,627
Charles G. Schiefelbein 967,225 13,210
(c) A proposal was made to ratify and approve the appointment of
Arthur Andersen LLP as the Company's independent auditors for
fiscal 1999. Shares were voted as follows:
For Against Abstain
------- ------- -------
917,645 60,262 2,528
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 5/14/99 /s/ Claude C. Johnson
------------- -------------------------------------------
Claude C. Johnson
President,
Chief Executive Officer
Date 5/14/99 /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 MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 134
<SECURITIES> 0
<RECEIVABLES> 4,464
<ALLOWANCES> 150
<INVENTORY> 3,051
<CURRENT-ASSETS> 8,379
<PP&E> 6,907
<DEPRECIATION> 4,770
<TOTAL-ASSETS> 11,258
<CURRENT-LIABILITIES> 5,630
<BONDS> 2,198
0
0
<COMMON> 640
<OTHER-SE> 2,789
<TOTAL-LIABILITY-AND-EQUITY> 11,258
<SALES> 10,939
<TOTAL-REVENUES> 10,939
<CGS> 6,377
<TOTAL-COSTS> 6,377
<OTHER-EXPENSES> 4,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201
<INCOME-PRETAX> 284
<INCOME-TAX> 97
<INCOME-CONTINUING> 187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 187
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
