UNITED STATES
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 Quarter Ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _____________ to _____________
Commission File Number 0-9273
MODERN CONTROLS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0903312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7500 Boone Avenue North, Minneapolis, Minnesota 55428
(Address of principal executive offices) (Zip code)
(612) 493-6370
(Registrant's telephone number, including area code)
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 ____
6,424,217 Common Shares were outstanding as of September 30, 1997
<PAGE>
MODERN CONTROLS, INC.
INDEX TO FORM 10-Q
For the Quarter Ended September 30, 1997
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1997 and December 31, 1996 1
Condensed Consolidated Statements of Income (Unaudited)
Three months and nine months ended September 30, 1997 and 1996 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1997 and 1996 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 5-6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 7
EXHIBIT 11 Computation of Net Income Per Common Share 9
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1997 1996
----------- -----------
ASSETS
Current Assets
Cash and Temporary Cash Investments $ 183,993 $ 1,352,991
Marketable Securities, Current 5,034,240 4,186,066
Accounts Receivable 2,340,815 1,632,960
Other Receivables 201,388 118,469
Inventories 1,733,855 1,572,329
Prepaid Expenses 190,197 190,198
Deferred Income Taxes 310,000 310,000
----------- -----------
Total Current Assets 9,994,488 9,363,013
----------- -----------
Marketable Securities, Noncurrent 5,473,579 4,077,957
----------- -----------
Property and Equipment 2,626,832 2,635,521
Less: Accumulated Depreciation
and Amortization 1,644,469 1,645,365
----------- -----------
Net Property and Equipment 982,363 990,156
----------- -----------
Other Assets 371,585 450,118
----------- -----------
TOTAL ASSETS $16,822,015 $14,881,244
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 789,543 $ 563,953
Accrued Liabilities 1,654,972 1,631,625
----------- -----------
Total Current Liabilities 2,444,515 2,195,578
----------- -----------
Deferred Income Taxes 0 92,000
----------- -----------
Stockholders' Equity
Common Stock - $.10 Par Value 642,422 641,096
Capital in Excess of Par Value 29,432 5,457
Retained Earnings 13,705,646 11,752,113
Net Unrealized Gain on Noncurrent
Marketable Equity Securities 0 195,000
----------- -----------
Total Stockholders' Equity 14,377,500 12,593,666
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $16,822,015 $14,881,244
=========== ===========
Note: The condensed consolidated balance sheet at December 31, 1996 has
been summarized from the Company's audited consolidated balance sheet
at that date.
<PAGE>
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $4,342,245 $3,751,347 $12,595,297 $10,962,844
Cost of Sales 1,408,483 1,209,778 4,074,157 3,548,883
---------- ---------- ----------- -----------
Gross Profit 2,933,762 2,541,569 8,521,140 7,413,961
---------- ---------- ----------- -----------
Selling, General & Admin. Expenses 1,446,481 1,104,999 4,024,456 3,377,701
Research & Development Expenses 179,395 303,719 850,617 883,068
---------- ---------- ----------- -----------
1,625,876 1,408,718 4,875,073 4,260,769
---------- ---------- ----------- -----------
Operating Income 1,307,886 1,132,851 3,646,067 3,153,192
Investment Income 123,553 86,352 588,804 290,720
---------- ---------- ----------- -----------
Income Before Income Taxes 1,431,439 1,219,203 4,234,871 3,443,912
Income Taxes 486,560 414,529 1,445,335 1,170,930
---------- ---------- ----------- -----------
Net Income $ 944,879 $ 804,674 $ 2,789,536 $ 2,272,982
========== ========== =========== ===========
Net Income Per Common Share $ 0.15 $ 0.12 $ 0.43 $ 0.35
========== ========== =========== ===========
Weighted Average Shares Outstanding 6,505,306 6,457,218 6,474,794 6,504,308
========== ========== =========== ===========
</TABLE>
<PAGE>
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 2,789,536 $ 2,272,982
Total Adjustments to Reconcile
Net Income to Net Cash Provided
by Operating Activities (761,116) (57,895)
----------- -----------
Net Cash Provided by Operating Activities 2,028,420 2,215,087
----------- -----------
Cash Flows from Investing Activities:
Purchases of Marketable Securities (6,659,821) (4,573,962)
Proceeds from Sales of Marketable Securities 4,346,011 4,962,188
Other (137,274) (669,567)
----------- -----------
Net Cash Used in Investing Activities (2,451,084) (281,341)
----------- -----------
Cash Flows from Financing Activities:
Purchase and Retirement of Common Stock (1,509) (1,871,591)
Dividends Paid (769,701) (778,583)
Other 24,876 7,333
----------- -----------
Net Cash Used in Financing Activities (746,334) (2,642,841)
----------- -----------
Net Decrease in Cash and Temporary Cash Investments (1,168,998) (709,095)
----------- -----------
Cash and Temporary Cash Investments:
Beginning of Year 1,352,991 1,396,718
----------- -----------
End of Nine Month Period $ 183,993 $ 687,623
=========== ===========
</TABLE>
<PAGE>
MODERN CONTROLS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of September 30, 1997, the condensed
consolidated statements of income for the three- and nine-month periods ended
September 30, 1997 and 1996, and the condensed consolidated statements of cash
flows for the nine-month periods ended September 30, 1997 and 1996 have been
prepared by the Company, without audit. However, all adjustments (consisting
solely of normal recurring adjustments) which are, in the opinion of management,
necessary to present fairly the financial position, results of operations and
cash flows at September 30, 1997, and for all periods presented, have been made.
The results of operations for the period ended September 30, 1997 are not
necessarily indicative of operating results for the full year.
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 financial
statements and notes thereto included in the Company's December 31, 1996 annual
report to shareholders.
Note 2 - Inventories
Inventories consist of the following:
September 30, December 31,
1997 1996
---------- ----------
Finished Products $ 156,122 $ 169,921
Work in Process 718,769 653,300
Raw Materials 858,964 749,108
---------- ----------
$1,733,855 $1,572,329
========== ==========
Note 3 - Net Income Per Common Share
Net income per common share is computed by dividing net income by the weighted
average of common and common equivalent shares outstanding during the period.
Stock options are considered common stock equivalents for purposes of this
computation.
Note 4 - Stockholders' Equity
On August 5, 1997 the Board of Directors declared a three-for-two stock split
which was paid in the form of a stock dividend on September 12, 1997 for
shareholders of record on August 22, 1997. The effect of this split has been
retroactively applied in the accompanying condensed consolidated financial
statements.
<PAGE>
MODERN CONTROLS, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Sales for the quarter ended September 30, 1997, were $4,342,245, up 16 percent
from third quarter 1996 sales of $3,751,347. The increase in third quarter sales
is primarily due to an increase in the sales volume of the Company's weighing
products, an increase in the sales volume of the Company's consulting and
developmental services, and general price increases, offset somewhat by a
decrease in sales of the Company's permeation products.
Sales for the nine-month period ended September 30, 1997, increased 15 percent
to $12,595,297, compared to $10,962,844 for the first nine months of 1996. This
increase is primarily due to an increase in the sales volume of the Company's
permeation and weighing products, consulting and developmental services, and to
general price increases.
The Company's permeation product group sales totaled $2,853,005 in the third
quarter of 1997, compared to $2,933,240 in the third quarter of 1996. The group
accounted for 66 percent of the Company's total third quarter 1997 sales,
compared with 78 percent in the third quarter of 1996. Permeation product group
sales for the nine-month period ended September 30, 1997, were $8,924,760, or 71
percent of total sales, versus $7,836,829, or 71 percent of sales for the same
period in 1996.
Gross profit for both the quarter and the nine-month period ended September 30,
1997, was 68 percent of sales. This compares with 68 percent for both the
quarter and the nine-month period ended September 30, 1996.
Selling, general and administrative expenses were 33 percent of sales for the
third quarter of 1997, compared to 29 percent in the third quarter of 1996.
Selling, general and administrative expenses were 32 and 31 percent for the
nine-month periods ending September 30, 1997 and 1996, respectively. The
increase in selling expenses is due primarily to an increase in the sales force
in the third quarter of 1997 and the higher commissions paid as a result of the
increase in foreign sales. An increase in general and administrative expenses
was primarily the result of litigation fees incurred to protect confidential
information of the Company.
Research and development expenses as a percent of sales were 4 percent for the
quarter and 7 percent for the nine-month period ended September 30, 1997,
compared to 8 percent for the same periods in 1996. Continued research and
development expenditures are necessary as the Company develops new products to
expand in its niche markets. For the foreseeable future, the Company expects to
allocate on an annual basis approximately 6 to 8 percent of sales to research
and development.
<PAGE>
Investment income increased approximately $37,000 in the third quarter of 1997
as compared to the third quarter of 1996. For the nine months ended September
30, 1997, investment income increased approximately $298,000. The increase for
the third quarter is primarily the result of higher average investment balances
in 1997. The increase in investment income for the nine-month period is
primarily the result of a one-time gain of $235,000 realized on the sale of
equity securities.
The Company's provision for income taxes was 34 percent of income before income
taxes for the third quarter of 1997, and 34 percent for the nine-month period
ending September 30, 1997. The Company reviews the tax rate quarterly and could
make adjustments to reflect changing estimates. Based on current operating
conditions and income tax laws, the Company expects the effective tax rate for
all of 1997 to be in a range of 33 to 35 percent.
Net income increased 17 percent to $944,879 or $.15 per share for the third
quarter of 1997, compared to $804,674 or $.12 per share in the third quarter of
1996. For the nine-month period ended September 30, 1997, net income increased
23 percent to $2,789,536 or $.43 per share, compared to $2,272,982 or $.35 per
share in the same period of 1996.
Liquidity and Capital Resources
The Company continues to maintain a strong financial position. Total cash,
temporary cash investments and marketable securities increased approximately
$1,075,000 during the nine months ended September 30, 1997. The Company used
cash resources to pay dividends of approximately $770,000 during the first nine
months of 1997.
The Company has no long-term debt or material commitments for capital
expenditures as of September 30, 1997. The Company's plant and equipment do not
require any major expenditures to accommodate a significant increase in
operating demands. The Company anticipates that a combination of its existing
cash, temporary cash investments and marketable securities, plus an expected
continuation of cash flow from operations, will continue to be adequate to fund
operations, capital expenditures and dividend payments in the foreseeable
future.
Effect of Changes in Accounting Principles
The Company will adopt Statement of Financial Accounting Standards 128 (SFAS
128), EARNINGS PER SHARE, and SFAS 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL
STRUCTURE, for financial statements issued after December 15, 1997. The adoption
of these standards is not expected to materially impact the Company's reporting
of earnings per share or footnote disclosures.
<PAGE>
MODERN CONTROLS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following is a listing of the exhibits contained in this Form
10-Q filing:
Exhibit No. Description
----------- -----------
11 Earnings Per Share
27 Financial Data Schedule
b. There were no reports on Form 8-K filed for the quarter ended
September 30, 1997.
<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.
MODERN CONTROLS, INC.
Registrant
Date: October 30, 1997 /s/ William N. Mayer
William N. Mayer,
Chairman and CEO
Date: October 30, 1997 /s/ Ronald A. Meyer
Ronald A. Meyer,
Vice President and Treasurer
EXHIBIT 11
MODERN CONTROLS, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 6,419,294 6,410,270 6,415,015 6,459,288
Net effect of dilutive stock
options - based on the
treasury stock method 86,012 46,948 59,779 45,020
---------- ---------- ---------- ----------
Total 6,505,306 6,457,218 6,474,794 6,504,308
========== ========== ========== ==========
Net income $ 944,879 $ 804,674 $2,789,536 $2,272,982
========== ========== ========== ==========
Primary per share amounts $ 0.15 $ 0.12 $ 0.43 $ 0.35
========== ========== ========== ==========
FULLY DILUTED
Average shares outstanding 6,419,294 6,410,270 6,415,015 6,459,288
Net effect of dilutive stock
options - based on the
treasury stock method 86,012 46,948 65,228 45,020
---------- ---------- ---------- ----------
Total 6,505,306 6,457,218 6,480,243 6,504,308
========== ========== ========== ==========
Net income $ 944,879 $ 804,674 $2,789,536 $2,272,982
========== ========== ========== ==========
Fully diluted per share amounts $ 0.15 $ 0.12 $ 0.43 $ 0.35
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND THE CONDENSED BALANCE SHEETS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 183,993
<SECURITIES> 5,034,240
<RECEIVABLES> 2,501,879
<ALLOWANCES> 161,064
<INVENTORY> 1,733,855
<CURRENT-ASSETS> 9,994,488
<PP&E> 2,626,832
<DEPRECIATION> 1,644,469
<TOTAL-ASSETS> 16,822,015
<CURRENT-LIABILITIES> 2,444,515
<BONDS> 0
0
0
<COMMON> 642,422
<OTHER-SE> 13,735,078
<TOTAL-LIABILITY-AND-EQUITY> 16,822,015
<SALES> 4,342,245
<TOTAL-REVENUES> 4,342,245
<CGS> 1,408,483
<TOTAL-COSTS> 1,408,483
<OTHER-EXPENSES> 1,502,323
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,431,439
<INCOME-TAX> 486,560
<INCOME-CONTINUING> 944,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 944,879
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
