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, 2000 or
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___ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 0-2387
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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 August 7, 2000, 1,318,282 common shares were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RESEARCH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net Sales $ 6,441,870 $ 5,463,966 $ 20,794,143 $ 16,402,791
Cost of Sales 3,855,148 3,352,344 12,845,577 9,728,856
-------------- -------------- -------------- --------------
Gross Profit 2,586,722 2,111,622 7,948,566 6,673,935
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Expenses:
Selling 1,232,197 1,122,987 3,692,538 3,672,840
Research and Development 653,196 656,368 2,262,280 1,732,960
General and Administrative 298,799 178,803 813,418 629,522
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Total Expenses 2,184,192 1,958,158 6,768,236 6,035,322
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Income from Operations 402,530 153,464 1,180,330 638,613
Interest Expense (67,107) (109,427) (227,045) (310,702)
Other Income 1,973 -- 189,457 --
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Income Before Income Taxes 337,396 44,037 1,142,742 327,911
Income Tax Provision 118,140 18,157 400,011 114,769
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Net Income $ 219,256 $ 25,880 $ 742,731 $ 213,142
============== ============== ============== ==============
Net Income Per Common Share:
Basic $ 0.17 $ 0.02 $ 0.57 $ 0.17
Diluted 0.16 0.02 0.55 0.16
Weighed Average Shares Outstanding:
Basic 1,317,147 1,279,708 1,303,025 1,270,451
Diluted 1,376,536 1,316,781 1,356,933 1,298,352
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Unaudited
As of June 30, As of September 30,
ASSETS 2000 1999
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,141,360 $ 350,487
Accounts receivable, net of reserves of $100,000 3,978,493 5,244,383
Inventories 4,851,721 3,448,701
Deferred income tax benefit 444,239 789,249
Prepayments 469,645 482,812
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Total current assets 10,885,458 10,315,632
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PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment 3,214,077 3,836,960
Less accumulated depreciation (2,510,860) (3,015,989)
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Net property and equipment 703,217 820,971
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DEFERRED INCOME TAX BENEFIT 733,000 733,000
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Total assets $ 12,321,675 $ 11,869,603
============================================================================ ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Notes payable $ 1,714,025 $ 681,988
Accounts payable 1,889,314 2,340,345
Deferred revenues 642,922 989,490
Short-term deferred gain 315,089 315,089
Accrued liabilities:
Salaries and benefits 605,894 607,253
Warranty reserve 300,000 300,000
Restructuring reserve -- 298,065
Other 653,157 434,945
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Total current liabilities 6,120,401 5,967,175
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Long-term debt 55,912 376,660
Long-term deferred gain 1,654,217 1,890,534
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 5,000,000 shares authorized,
1,318,282 and 1,290,144 shares issued and outstanding 659,141 645,072
Additional paid-in capital 774,810 646,858
Accumulated other comprehensive income 50,871 61,963
Retained earnings 3,006,323 2,281,341
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Total stockholders' equity 4,491,145 3,635,234
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Total liabilities and stockholders' equity $ 12,321,675 $ 11,869,603
============================================================================ ============== ==============
</TABLE>
<PAGE>
RESEARCH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
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2000 1999
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<S> <C> <C>
Operating Activities:
Net income $ 742,731 $ 213,142
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 245,872 426,576
Gain on disposal of assets (190,024) --
Changes in current operating items:
Accounts receivable, net 1,265,890 (601,357)
Inventories (1,403,020) (43,752)
Prepayments 13,167 (260,199)
Accounts payable and accrued liabilities (234,178) 193,301
Deferred revenue (346,568) 469,696
Deferred gain (236,317) --
Restructuring reserve (298,065) (544,951)
Income taxes payable 345,010 696,761
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Net cash provided (used in) by operating activities (95,502) 549,217
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Investing Activities:
Property and equipment additions, net (149,339) (104,358)
Proceeds from sale of assets 211,245 --
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Net cash provided by (used in) investing activities 61,906 (104,358)
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Financing Activities:
Proceeds from (payments on) line of credit, net 1,032,037 (2,788,877)
Proceeds from long-term debt -- 3,312,000
Payments on long-term debt (320,748) (693,195)
Issuance of common stock 124,272 36,905
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Net cash provided by (used in) financing activities 835,561 (133,167)
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Foreign Currency Translation (11,092) (93,527)
Cash and cash equivalents:
Net increase in cash and cash equivalents 790,873 218,165
Beginning of year 350,487 108,647
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End of Period $ 1,141,360 $ 326,812
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
RESEARCH, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company's significant accounting policies not elsewhere set forth in the
accompanying condensed consolidated financial statements are as follows:
Consolidated Financial Statements -
The condensed consolidated balance sheet as of June 30, 2000, and September 30,
1999, the condensed consolidated statements of operations for the three and nine
months ended June 30, 2000 and 1999 and the condensed consolidated statements of
cash flows for the nine months ended June 30, 2000 and 1999 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, 2000 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,
1999 Form 10-K. The results of operations for the period ended June 30, 2000 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,
2000 1999
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Manufactured subassemblies
and purchased parts $ 3,666,275 $ 2,457,783
Work in Process 1,185,446 990,918
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Total $ 4,851,721 $ 3,448,701
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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
certain 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 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.
The number of common shares outstanding increased by 500 shares during the third
quarter of fiscal 2000 due to the issuance of shares through the employee stock
option plan.
2. Debt Obligations
Credit Facility -
The Company has a credit facility with a bank. The facility 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 credit facility consists of a line of credit with interest
charged at 2.25% above the prime rate and two term-loans with interest charged
initially at 2.75% above the prime rate. Because of the Company's favorable
financial performance over the first two quarters, the interest rate charged on
the line of credit was reduced effective May 2, 2000 from 2.25% to 1.75% above
the prime rate and for the two term loans from 2.75% to 2.25% above the prime
rate. The agreement contains certain restrictive covenants and outstanding
borrowings are secured by substantially all of the Company's assets. The Company
was in compliance with all of the covenants as of June 30, 2000.
<PAGE>
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
195,969 shares under the 1991 Plan were outstanding at June 30, 2000 at prices
ranging from $3.375 to $7.094 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. As of June 30, 2000, 52,224 shares
have been issued.
4. Comprehensive Income:
Other 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 nine month periods were:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net Income $ 219,256 $ 25,880 $ 742,731 $ 213,142
Other Comprehensive
Income (Loss) -- (79,932) (11,092) (93,527)
-------------------------- ---------------------------
Comprehensive
Income $ 219,256 $ (54,052) $ 731,639 $ 119,615
========================== ===========================
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operations
Sales were $6,442,000 for the current quarter compared to $5,464,000 for the
same period in 1999, an increase of 17.9%. Sales were $20,794,000 for the nine
months ended June 30, 2000 compared to $16,403,000 for the same period in 1999,
an increase of 26.8%. The increase in both periods was favorably impacted by
strong sales in the surface mount technology (SMT) market. In addition, sales
for the nine months were favorably impacted by the modular printing system (MPS)
which was introduced late last year.
Gross profit margins improved to 40.2% for the current quarter as compared to
38.6% in the prior year's quarter and declined to 38.2% for the nine months
ending June 30, 2000, as compared to 40.7% for the same period in 1999. A very
favorable product mix impacted the quarterly improvement. The decline in margins
over the nine month period were impacted by severance costs associated with the
discontinuance of the sheet metal operations in the first quarter of fiscal 2000
as well as the mix of products sold.
Selling expenses were $1,232,000, or 19.1% of sales for the current quarter
compared to $1,123,000, or 20.6% of sales for the same quarter in fiscal 1999.
Selling expenses were $3,693,000, or 17.8% of sales for the nine-months ended
June 30, 2000, as compared to $3,673,000, or 22.4% of sales for the same period
in 1999. The costs as a percentage of sales decreased due to higher sales volume
as discussed above and the Company's cost control efforts.
Expenditures for research and development were $653,000, or 10.1% of sales for
the current quarter compared to $656,000, or 12.0% of sales for the same period
in 1999. Research and development expenses were $2,262,000, or 10.9% of sales
for the nine months ended June 30, 2000 as compared to $1,733,000, or 10.6% of
sales for the same period last year. While actual expenses for the current
quarter were very similar to those from the same quarter last year, the decrease
as a percentage of sales reflected the increased sales during that period.
However, the nine months actual expenditures did increase due in part to fewer
customer funded research projects in the first half of fiscal 2000.
General and administrative expenses were $299,000 or 4.6% of sales for the
quarter as compared to $179,000 or 3.3% of sales for the same period in 1999.
General and administrative expenses
<PAGE>
were $813,000 or 3.9% of sales for the nine months ended June 30, 2000 as
compared to $630,000 or 3.8% of sales for the same period last year. Both the
quarter and nine month increases in expenditures were due in part to the
increased costs of employee benefit programs tied to the Company's earnings
performance and costs associated with the Company's focus on improving
operational efficiencies and supporting growth.
Net interest expense was $67,000 for the current quarter as compared to $109,000
for the same period in 1999. Net interest expense was $227,000 for the nine
months ended June 30, 2000 as compared to $311,000 for the same period last
year. This decrease was due to the impact of interest earned on short-term
investments offset in part by higher average interest rates.
Other income of $189,000 for the nine-month period of fiscal 2000 related
primarily from the gain on the sale of the Company's sheet metal equipment. The
Company began outsourcing its sheet metal requirements in the first quarter of
this year.
Liquidity and Sources of Capital
The Company's working capital was $4,765,000 at June 30, 2000 increasing from
$4,348,000 at September 30, 1999. The Company's current ratio at June 30, 2000
was 1.78 as compared to 1.73 at September 30, 1999
Accounts receivable decreased to $3,978,000 as of June 30, 2000 from $5,244,000
as of September 30, 1999 due in part to an improvement in days sales
outstanding. Inventories increased to $4,852,000 as of June 30, 2000 from
$3,449,000 as of September 30, 1999, reflecting an increase in the Company's
sales levels. The Company generated a slight reduction in net cash from
operations for the nine months ended June 30, 2000 primarily from an increase in
inventory and a decrease in accounts payable and other liabilities offset by net
income and a reduction in accounts receivable.
The Company has a credit facility with a bank. The facility 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 the prime rate and two available term loans with
interest charged initially at 2.75% above the prime rate. Because of the
Company's favorable financial performance over the first two quarters, the
interest rate charged on the line of credit was reduced effective
<PAGE>
May 2, 2000 from 2.25% to 1.75% above the prime rate and for the two term loans
from 2.75% to 2.25% above the prime rate. The agreement contains certain
restrictive covenants and outstanding borrowings are secured by substantially
all of the Company's assets.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not believe it has any material market risk exposure.
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 manufacturers in SMT, product cancellations or
rescheduling, and loss of a significant customer.
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
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(Registrant)
Date 8/10/2000 /s/ Claude C. Johnson
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Claude C. Johnson
President,
Chief Executive Officer
Date 8/10/2000 /s/ Brad C. Yopp
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Brad C. Yopp
Treasurer
