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 June 30, 1998
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 _____
6,454,056 Common Shares were outstanding as of June 30, 1998
<PAGE>
MODERN CONTROLS, INC.
INDEX TO FORM 10-Q
For the Quarter Ended June 30, 1998
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income and Comprehensive
Income (Unaudited)
Three months and six months ended June 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 5-7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Events 8
Item 6. Exhibits and Reports on Form 8-K 8
EXHIBIT 11 Computation of Net Income Per Common Share 10
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Temporary Cash Investments $ 1,754,224 $ 763,014
Marketable Securities, Current 4,676,536 4,396,232
Accounts Receivable 1,899,342 2,921,456
Other Receivables 157,733 176,051
Inventories 1,953,873 1,614,779
Prepaid Expenses 151,586 168,851
Deferred Income Taxes 270,000 270,000
------------- -------------
Total Current Assets 10,863,294 10,310,383
------------- -------------
Marketable Securities, Noncurrent 4,765,785 5,764,645
------------- -------------
Property and Equipment 3,012,840 2,668,760
Less: Accumulated Depreciation
and Amortization 1,862,064 1,712,094
------------- -------------
Net Property and Equipment 1,150,776 956,666
------------- -------------
Other Assets 507,353 371,959
------------- -------------
TOTAL ASSETS $ 17,287,208 $ 17,403,653
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 795,676 $ 560,702
Accrued Liabilities 1,101,998 1,808,451
------------- -------------
Total Current Liabilities 1,897,674 2,369,153
------------- -------------
Deferred Income Taxes 2,000 2,000
------------- -------------
Stockholders' Equity:
Common Stock - $.10 Par Value 645,406 643,534
Capital in Excess of Par Value 150,253 67,253
Retained Earnings 14,591,875 14,321,713
------------- -------------
Total Stockholders' Equity 15,387,534 15,032,500
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 17,287,208 $ 17,403,653
============= =============
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1997 has been
summarized from the Company's audited consolidated balance sheet at
that date.
1
<PAGE>
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 3,795,772 $ 4,189,050 $ 7,343,208 $ 8,253,052
Cost of Sales 1,361,297 1,341,973 2,605,191 2,665,674
----------- ----------- ----------- -----------
Gross Profit 2,434,475 2,847,077 4,738,017 5,587,378
----------- ----------- ----------- -----------
Selling, General & Administrative Expenses 1,647,561 1,303,617 3,076,085 2,577,975
Research & Development Expenses 309,757 316,711 547,891 671,222
----------- ----------- ----------- -----------
1,957,318 1,620,328 3,623,976 3,249,197
----------- ----------- ----------- -----------
Operating Income 477,157 1,226,749 1,114,041 2,338,181
Investment Income 124,145 117,326 244,132 465,251
----------- ----------- ----------- -----------
Income Before Income Taxes 601,302 1,344,075 1,358,173 2,803,432
Income Taxes 204,500 459,675 461,800 958,775
----------- ----------- ----------- -----------
Net Income $ 396,802 $ 884,400 $ 896,373 $ 1,844,657
=========== =========== =========== ===========
Comprehensive Income $ 396,802 $ 884,400 $ 896,373 $ 1,649,657
=========== =========== =========== ===========
Net Income Per Common Share
Basic $ 0.06 $ 0.14 $ 0.14 $ 0.29
=========== =========== =========== ===========
Diluted $ 0.06 $ 0.14 $ 0.14 $ 0.29
=========== =========== =========== ===========
Weighted Average Shares Outstanding
Basic 6,454,056 6,413,666 6,449,377 6,412,875
=========== =========== =========== ===========
Diluted 6,505,928 6,466,826 6,513,291 6,459,537
=========== =========== =========== ===========
</TABLE>
2
<PAGE>
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 896,373 $ 1,844,657
Total Adjustments to Reconcile
Net Income to Net Cash Provided
by Operating Activities 461,208 (928,435)
----------- -----------
Net Cash Provided by Operating Activities 1,357,581 916,222
----------- -----------
Cash Flows from Investing Activities:
Purchases of Marketable Securities (2,294,712) (4,076,155)
Proceeds from Sales of Marketable Securities 3,013,267 2,841,017
Purchases of Property and Equipment (369,081) (122,957)
Other (155,598) 54,100
----------- -----------
Net Cash Provided by (Used in) Investing Activities 193,876 (1,303,995)
----------- -----------
Cash Flows from Financing Activities:
Dividends Paid (645,119) (513,056)
Other 84,872 7,348
----------- -----------
Net Cash Used in Financing Activities (560,247) (505,708)
----------- -----------
Net Increase (Decrease) in Cash and
Temporary Cash Investments 991,210 (893,481)
----------- -----------
Cash and Temporary Cash Investments:
Beginning of Year 763,014 1,352,991
----------- -----------
End of Six Month Period $ 1,754,224 $ 459,510
=========== ===========
</TABLE>
3
<PAGE>
MODERN CONTROLS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of June 30, 1998, the condensed
consolidated statements of income and comprehensive income for the three- and
six-month periods ended June 30, 1998 and 1997, and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 1998 and 1997
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 June 30, 1998, and for all periods presented, have
been made. The results of operations for the period ended June 30, 1998 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, 1997 annual
report to shareholders.
Note 2 - Inventories
Inventories consist of the following:
June 30, December 31,
1998 1997
---------- -----------
Finished Products $ 219,486 $ 169,823
Work in Process 836,234 571,991
Raw Materials 898,153 872,965
---------- ----------
$1,953,873 $1,614,779
========== ==========
Note 3 - Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average of common shares outstanding during the period. Diluted net
income per share is computed by dividing net income by the weighted average of
common and dilutive common stock equivalent shares outstanding during the year.
4
<PAGE>
MODERN CONTROLS, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This Form 10-Q contains certain forward-looking statements. For this purpose,
any statements contained in this Form 10-Q that are not statements of historical
fact may be deemed to be forward- looking statements. Without limiting the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may be materially different. It is not reasonably possible to
itemize all of the many factors and specific events that could affect the
outlook of the Company's operations. Some factors that could cause actual
results to differ materially include, but are not limited to, product demand and
market acceptance risks, commercialization and technological difficulties,
capacity and supply constraints or difficulties, general economic conditions,
business conditions in the testing and packaging industry, and competitive
factors.
Results of Operations
Sales for the quarter ended June 30, 1998, were $3,795,772 down 9 percent from
second quarter 1997 sales of $4,189,050. The decrease in second quarter sales is
primarily the result of decreases in the sales volume of the Company's
permeation and weighing products, offset somewhat by general price increases.
Sales for the six-month period ended June 30, 1998, decreased 11 percent to
$7,343,208, compared to $8,253,052 for the first six months of 1997. The 11
percent decrease is primarily due to decreases in the sales volume of the
Company's permeation and weighing products, offset somewhat by increases in the
sales volume of the Company's packaging products, and general price increases.
The Company's permeation product group sales totaled $2,577,852 in the second
quarter of 1998, compared to $2,920,507 in the second quarter of 1997. The group
accounted for 68 percent of the Company's total second quarter 1998 sales,
compared with 70 percent in the second quarter of 1997. Permeation product group
sales for the six-month period ended June 30, 1998, were $5,055,276, or 69
percent of total sales, versus $6,071,755, or 74 percent of sales for the same
period in 1997.
Gross profit for the quarter and the six-month period ended June 30, 1998, was
64 and 65 percent of sales, respectively. This compares with 68 percent for both
the quarter and six-month period ended June 30, 1997. The decrease in gross
profit margin was due to reduced economies of scale due to the decline in sales
volume.
Selling, general and administrative expenses were 43 percent of sales for the
second quarter of 1998, compared to 31 percent for the second quarter of 1997.
Selling, general and administrative expenses were 42 and 31 percent for the
six-month periods ending June 30, 1998 and 1997, respectively . The increase in
general and administrative expenses was primarily attributable to the litigation
fees incurred to protect confidential information of the Company. These expenses
are expected to be substantially reduced in the third quarter of 1998.
5
<PAGE>
Research and development expenses as a percent of sales were 8 percent for the
quarter and 7 percent for the six-month period ended June 30, 1998, compared to
8 percent for the same periods in 1997. 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 9 percent of sales to research and development.
Investment income increased approximately $7,000 in the second quarter of 1998
as compared to the second quarter of 1997. For the six months ended June 30,
1998, investment income decreased approximately $221,000. The increase for the
second quarter is primarily the result of higher average investment balances in
1998. The decrease in investment income for the six-month period is primarily
the result of a one-time gain of approximately $235,000 realized on the sale of
equity securities in the first quarter of 1997.
The Company's provision for income taxes was 34 percent of income before income
taxes for the six-month period ending June 30, 1998. The Company reviews the tax
rate quarterly and may 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 1998 to be in a range of 33 to 35 percent.
Net income decreased 55 percent to $396,802 for the second quarter of 1998,
compared to $884,400 for the second quarter of 1997. Basic net income per share
was $.06 for the second quarter of 1998, compared to $.14 for the same period in
1997. For the six-month period ended June 30, 1998, net income decreased 51
percent to $896,373 compared to $1,844,657 for the six-month period ended June
30, 1997. Basic net income per share was $.14 and $.29 for the six-month periods
ended June 30, 1998, and 1997, respectively.
Liquidity and Capital Resources
The Company continues to maintain a strong financial position. Total cash,
temporary cash investments and marketable securities increased approximately
$273,000 during the six months ended June 30, 1998. The Company used cash
resources to pay dividends of approximately $645,000 during the first six months
of 1998.
The Company has no long-term debt or material commitments for capital
expenditures as of June 30, 1998. 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.
Year 2000 Compliance
The Company has considered the potential impact of Year 2000 issues on its
business, operations, and financial condition. The Company does not have a
comprehensive or formal Year 2000 plan for its operations. However, the
Company's analysis of its existing systems indicates a majority are Year 2000
compliant. Specific systems which are subject to Year 2000 exposure and require
remediation have been identified.
6
<PAGE>
The Company has plans to upgrade and test these systems by June 30, 1999, and
believes that these systems will function properly with respect to dates in the
year 2000 and thereafter. The Company is primarily relying on its vendors to
implement Year 2000 compliance with respect to the third-party software sold or
used by the Company.
To date, the cost associated with Year 2000 readiness has been immaterial and
the Company anticipates that costs related to this issue will not have a
material impact on their financial condition. Some risks associated with the
year 2000 issue are beyond the ability of the Company to control, including the
extent to which the Company's suppliers and service providers identify and
remedy potential Year 2000 issues. As a result, the Company may incur unexpected
expenditures in connection with the Year 2000 compliance.
7
<PAGE>
MODERN CONTROLS, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of Modern Controls, Inc. on May
19, 1998, the nominees for election as Directors of the Company were
elected without opposition and two proposals of the Board of Directors
were adopted as follows:
Proposal to amend the Company's Restated Articles of
Incorporation to increase the authorized number of shares of
capital stock from 10,000,000 to 25,000,000 shares, consisting
of 22,000,000 shares of common stock, $.10 par value, and
3,000,000 shares undesignated as to series:
For the proposal: 3,314,994 shares
Against the proposal: 1,216,404 shares
Abstaining: 55,660 shares
Proposal to adopt the Company's 1998 Stock Option Plan:
For the proposal: 3,825,654 shares
Against the proposal: 490,354 shares
Abstaining: 271,050 shares
Item 5. Other Events
Pursuant to recent amendments to the proxy rules under the Securities
Exchange Act of 1934, as amended, the Company's shareholders are hereby
notified that the deadline for providing the Company timely notice of
any shareholder proposal to be submitted outside of the Rule 14a-8
process for consideration at the Company's 1999 Annual Meeting of
Shareholders is February 20, 1999.
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 June 30,
1998.
8
<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: August 13, 1998 /s/ William N. Mayer
William N. Mayer,
Chairman and CEO
Date: August 13, 1998 /s/ Ronald A. Meyer
Ronald A. Meyer,
Vice President and Treasurer
9
EXHIBIT 11
MODERN CONTROLS, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC
Average shares outstanding 6,454,056 6,413,666 6,449,377 6,412,875
=========== =========== =========== ===========
Net income $ 396,802 $ 884,400 $ 896,373 $ 1,844,657
=========== =========== =========== ===========
Basic per share amounts $ 0.06 $ 0.14 $ 0.14 $ 0.29
=========== =========== =========== ===========
DILUTED
Average shares outstanding 6,454,056 6,413,666 6,449,377 6,412,875
Net effect of dilutive stock
options - based on the
treasury stock method 51,872 53,160 63,914 46,662
----------- ----------- ----------- -----------
Total 6,505,928 6,466,826 6,513,291 6,459,537
=========== =========== =========== ===========
Net income $ 396,802 $ 884,400 $ 896,373 $ 1,844,657
=========== =========== =========== ===========
Diluted per share amounts $ 0.06 $ 0.14 $ 0.14 $ 0.29
=========== =========== =========== ===========
</TABLE>
10
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,754,224
<SECURITIES> 4,676,536
<RECEIVABLES> 2,067,342
<ALLOWANCES> 168,000
<INVENTORY> 1,953,873
<CURRENT-ASSETS> 10,863,294
<PP&E> 3,012,840
<DEPRECIATION> 1,862,064
<TOTAL-ASSETS> 17,287,208
<CURRENT-LIABILITIES> 1,897,674
<BONDS> 0
0
0
<COMMON> 645,406
<OTHER-SE> 14,742,128
<TOTAL-LIABILITY-AND-EQUITY> 17,287,208
<SALES> 7,343,208
<TOTAL-REVENUES> 7,343,208
<CGS> 2,605,191
<TOTAL-COSTS> 2,605,191
<OTHER-EXPENSES> 3,379,844
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,358,173
<INCOME-TAX> 461,800
<INCOME-CONTINUING> 896,373
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 896,373
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
