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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 NO.: 0-9273
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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)
Registrant's telephone number, including area code: (612) 493-6370
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.10 PAR VALUE
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 16, 1998, 6,446,857 shares of Common Stock of the
registrant were deemed outstanding, and the aggregate market value of the Common
Stock of the registrant (based upon the average of the high and low sales prices
of the Common Stock at that date as reported by the Nasdaq National Market),
excluding outstanding shares beneficially owned by directors and executive
officers, was approximately $62,141,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV of this Annual Report on Form 10-K incorporate by
reference information (to the extent specific pages are referred to herein) from
the Company's 1997 Annual Report to Shareholders (the "1997 Annual Report").
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held May
19, 1998 (the "1998 Proxy Statement").
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<PAGE>
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Modern Controls, Inc., a Minnesota corporation (the "Company"), was
incorporated in February 1966. Since its incorporation, the Company has been
engaged in the design, manufacture and marketing of precision measurement and
process sensing instruments and systems. The Company currently has four major
product groups which service various niche markets: (i) Permeation Products;
(ii) Consulting and Developmental Services; (iii) Weighing Products; and (iv)
Packaging Products.
The Permeation Products group consists of (i) products and services
that test packages and packaging materials for permeation of gases and water
vapor; and (ii) instruments that measure the thickness of thin films and
coatings in laboratories. The Consulting and Developmental Services group
performs studies for its customers and provides solutions for packaging
applications using the Company's most advanced technologies and systems. The
Weighing Products group consists of instruments for pharmaceutical capsule and
tablet weighing and sorting. The Packaging Products group consists of (i)
instruments that detect leaks and test the seal strength in packages; (ii)
analyzers which measure oxygen and carbon dioxide content of the headspace in
both flexible and rigid packages; and (iii) analyzers for the on-line
measurement of oxygen and carbon dioxide.
The Company's principal executive offices are located at 7500 Boone
Avenue North, Minneapolis, Minnesota 55428 and its telephone number is (612)
493-6370.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in a single industry segment: the design,
manufacture and marketing of precision testing instrumentation, advanced process
sensing equipment and related services.
(c) NARRATIVE DESCRIPTION OF BUSINESS
PERMEATION PRODUCTS
The Permeation Products group consists of (i) products and services
that test packages and packaging materials for permeation of gases and water
vapor and (ii) instruments that measure the thickness of thin films and coatings
in laboratories.
The various permeation measurement instruments included within the
Permeation Products group and manufactured by the Company measure the rate at
which oxygen, carbon dioxide and water vapor permeate through packages and
packaging materials. The principal market for the permeation measurement
instruments consists of manufacturers of packaging materials, including
manufacturers of papers, plastics and coatings, and the users of such packaging
materials in the food, beverage, pharmaceutical and chemical industries.
<PAGE>
The gauging products, included within the Permeation Products group,
use capacitance technology to measure the thickness of thin films and coatings.
These gauges measure all types of non-metallic materials, with very repeatable
gauge readings at thickness resolutions up to one millionth of an inch. Software
packages allow the display of each material's profile and provide analysis of
the related data. The principal market for the gauging portion of this product
group is made up of manufacturers of plastic films.
The Permeation Products line consists of the following products: (i)
oxygen permeability test systems (seven models); (ii) water vapor permeability
test systems (five models); (iii) carbon dioxide permeability test systems (two
models); (iv) flavor, aroma and odor permeability test systems (two models); and
(v) gauges designed for laboratory use (one model).
The gas permeability test systems (i, iii and iv above) measure the
ability of packages, films and bottles or other containers to resist oxygen,
carbon dioxide and/or other gas permeation. The water vapor permeability
instruments (ii above) measure water vapor permeation through films and packages
and inform food processors, container companies and basic film suppliers as to
the ability of certain packaging to retain or block out water. The gauging
products (v above) measure the thickness of films.
The Company also provides certain laboratory testing services utilizing
the Company's products. These services are primarily in the area of testing film
and package permeation. Users of these services are primarily those companies
with insufficient volume to warrant purchasing the Company's products or others
not familiar with such equipment. Other users include companies that have
purchased the Company's products but have a need for additional capacity.
Permeation Products accounted for approximately 71%, 73% and 71% of the
Company's total sales during the fiscal years ended December 31, 1997, 1996 and
1995, respectively.
CONSULTING AND DEVELOPMENTAL SERVICES
The Company provides consulting and developmental services, on a
special project basis, for customers that require unique problem solving
capabilities. The Company's services may relate to absorption or diffusion of
various compounds, harsh environment applications, shelf-life concerns, flavor
or odor detection, contract research or special permeation applications. In
providing the consulting and developmental services, the Company uses its most
advanced measurement technologies, including proprietary TRANSORPTION(R)
technology. The principal market for the consulting and developmental services
consists of manufacturers of foods, beverages, pharmaceuticals, plastics,
chemicals, electronics, and personal care products.
Consulting and developmental services accounted for less than 15% of
the Company's total sales during the fiscal years ended December 31, 1997, 1996
and 1995, respectively.
WEIGHING PRODUCTS
The weighing instruments manufactured by the Company are: (i) a
high-speed capsule weighing and sorting device (VERICAP(R)); (ii) a high-speed
tablet weighing and sorting device (VERITAB(R)); and (iii) an automatic balance.
These products are marketed primarily to the pharmaceutical industry, both
domestically and in foreign countries.
<PAGE>
The VERICAP(R) is designed to detect deviations in the weight of filled
gelatin capsules and to reject capsules outside an acceptable range at rates of
up to 2,000 capsules per minute. The VERICAP(R) 2500 can be integrated into a
production line to weigh capsules as they are produced. This device also records
and analyzes the data relating to accepted capsules during the processing.
The VERITAB(R) is designed to detect deviations in the weight of
tablets and to reject tablets outside an acceptable range at rates of up to 800
tablets per minute. Data related to accepted tablets is recorded and analyzed.
The Company also manufactures and markets a small, highly accurate
automatic balance for weighing capsules and tablets.
Weighing products accounted for approximately 15%, 15% and 17% of the
Company's total sales during the fiscal years ended December 31, 1997, 1996 and
1995, respectively.
PACKAGING PRODUCTS
The various packaging products manufactured by the Company include leak
detection instruments and head space analyzers. The two leak detection
instruments detect leaks in pouches, blister packs and a wide range of other
packages. The principal market for these products include packagers of food,
pharmaceuticals and sterile medical supplies. The first of the two leak
detection instruments is a non-destructive leak detector that senses small
amounts of carbon dioxide escaping from a package. The carbon dioxide may be
present in the headspace of the package or forced inside the package by carbon
dioxide pressurization. The second instrument detects leaks and checks for seal
integrity by applying and measuring pressure within the packages.
The headspace analyzers sold by the Company analyze the amount of
oxygen or carbon dioxide present in the headspace of flexible and rigid food
packages. Some analyzers measure the oxygen and/or carbon dioxide content in
flushing gases used in modified or controlled atmosphere packaging. The Company
sells and manufactures six different headspace analyzer models, two that measure
oxygen, two that measure carbon dioxide and two that measure both oxygen and
carbon dioxide. There are six corresponding models for analyzing flushing gases.
Packaging products accounted for less than 15% of the Company's total
sales during the fiscal years ended December 31, 1997, 1996 and 1995,
respectively.
COMPETITION
The Company experiences competition in both foreign and domestic
markets from one or more competitors with respect to all of its products and
services. Some of the Company's competitors have greater assets and resources
than the Company and some are smaller than the Company. The principal
competitive factors are price, product performance and capability, and
distribution. The Company believes that its products either exceed or are equal
in performance and capability to those of its competitors. Price comparability
varies by product. Several of the Company's larger competitors may have stronger
marketing organizations.
<PAGE>
MANUFACTURING AND SUPPLIES; YEAR 2000 COMPLIANCE
Most of the parts and materials used in the manufacture of the
Company's products are standardized and are purchased from various manufacturers
or distributors and assembled at the Company. Multiple sources of supply are
available for these items, and the Company has experienced no significant
shortages or delays from its suppliers. Components designed by the Company are
produced by others in accordance with the Company's specifications. A limited
number of components for the Company's products are available from single
suppliers. The loss of any single supplier could have a material adverse effect
on the Company until the Company either arranges for another supplier or makes
appropriate design changes.
The Company continues to assess its ability to process information
correctly into the Year 2000. The Company does not anticipate incurring
significant additional costs to address Year 2000 issues, although the
effectiveness of the Company's present efforts to address this issue can not be
assured. If the Company's efforts are not successful or if vendors or other
third parties with which the Company conducts business do not successfully
address this issue, the Company's business, financial condition and results of
operations could be adversely affected.
BACKLOG
The Company had a total backlog of approximately $398,000 as of
December 31, 1997 for all of its products as compared to approximately
$3,148,000 and $3,461,000 as of December 31, 1996 and 1995, respectively. The
Company anticipates filling all of the current backlog in 1998.
PATENTS AND LICENSES
Generally, the Company believes that the protection afforded by patent
rights is important to its business and it will continue to seek patent
protection for its technology and products. The Company has required certain
employees and consultants to assign to the Company all inventions which are
conceived and developed during their employment, except to the extent prohibited
by applicable law. The Company owns two U.S. patents and one foreign patent
relating to its VERICAP product, three U.S. patents and three foreign patents
relating to the VERITAB product, one U.S. patent and two foreign patents
relating to headspace analyzers and nine U.S. patents and seven foreign patents
relating to its film thickness measurement systems. In addition, the Company
owns twelve U.S. patents and eight foreign patents relating to its permeability
test systems and it owns two patents relating to products offered through its
consulting and developmental services. These patents will expire during the
period from 1999 through 2015.
Even though the Company has obtained the patents mentioned above, there
can be no guarantee that these patents will keep competitors from producing
substantially similar products. Although it can offer no assurance, the Company
believes its products do not infringe on patents owned by any other persons. Any
determination that a material component of the Company's products infringes upon
the rights of others could have a material adverse effect upon the Company. In
the event that the Company's products may be covered in whole or in part by
patents owned by others, the Company may find it desirable to obtain licenses
with respect to such patents. The Company has a license, under a U.S. patent, to
manufacture products relating to a multiple gas permeability test system.
Pursuant to this license, the Company must pay royalties of 4-1/2 percent
<PAGE>
of the net selling price of any product covered by such patent until such time
as the patent expires. The patent and the license are scheduled to expire on
August 14, 2001.
The Company also owns or has applied for certain trademarks which
protect and identify its products, including the trademark MOCON(R), which the
Company has designated as a house trademark under which all its products are
sold, and the trademarks and servicemarks VERICAP(R), OX-TRAN(R),
PERMATRAN-W(R), PROFILER(R), COULOX(R), HERSCH(R), VERITAB(R), AROMATRAN(R),
SKYE(R), PAC CHECK 200(R) and TRANSORPTION(R). The Company's trademarks have a
life, subject to periodic maintenance, of 10 to 20 years, which may be extended.
RESEARCH AND DEVELOPMENT
The Company incurred expenses of approximately $1,016,000, $1,216,000
and $1,060,000 during the fiscal years ended December 31, 1997, 1996 and 1995,
respectively, for research and development of its products. Research and
development costs were 6.0% of sales for the fiscal year ended December 31, 1997
and were 8.2% and 8.3%, respectively, for the preceding two fiscal years. For
the foreseeable future, the Company expects to allocate, on an annual basis,
approximately 8% of sales to research and development.
WORKING CAPITAL PRACTICES
The Company maintains inventory levels in its four product groups
consistent with projected sales. The Company's standard domestic payment terms
are net 30 days. International sales are transacted pursuant to letters of
credit in some cases. The Company generally warrants its products for one year
from the date of shipment. There have been few instances when the Company was
required to accept the return of merchandise which failed to comply with the
Company's warranty.
FOREIGN AND DOMESTIC MARKETING
The Company markets its products in the United States and Canada
through a direct sales force of 23 persons. The Company's foreign markets are
served by a network of 37 independent representatives in Africa, Asia,
Australia, Europe, Mexico, South America and certain Pacific Rim countries. To
the Company's knowledge, no independent sales representative of the Company
sells a material amount of products manufactured by the Company's competitors.
The sales representative for the Company in Europe is licensed to sell headspace
analyzers and leak detectors similar to those sold by the Company. The Company,
however, is not licensed to sell these products in Europe.
The Company's wholly owned subsidiary, MoCon FSC, Inc., a Barbados
corporation ("FSC"), carries out all the foreign distribution of the Company's
products. The Company acts as the selling agent of FSC.
The Company makes all foreign sales in U.S. dollars and consequently
does not hedge against exchange rate fluctuations. Nonetheless, should the value
of the dollar rise relative to other currencies, the Company's sales abroad
would be negatively impacted. Additionally, the Company can give no assurances
that foreign tariff, trade or tax policies or foreign economic conditions will
not negatively affect sales and earnings of the Company in the future.
<PAGE>
For information concerning the Company's export sales by geographic
area, see Note 9 of the Notes to Consolidated Financial Statements contained on
page 21 of the Company's 1997 Annual Report. Although no single customer
accounts for 10% or more of the Company's consolidated revenues and the Company
does not believe that the loss of any single customer would have a material
adverse effect on the Company, two of the Company's independent representatives
accounted for approximately 16% and 11%, respectively, of the Company's sales in
fiscal 1997. For additional information concerning sales by such independent
representatives, see Note 9 of the Notes to Consolidated Financial Statements
contained on page 21 of the Company's 1997 Annual Report. The Company's business
is not seasonal in nature.
EMPLOYEES
The Company currently has 92 full-time employees, including 39 in
manufacturing, 9 in research and development and 44 in general administration
and marketing. None of the Company's employees are represented by a labor union,
and the Company considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES
The Company's executive offices and operations are located at 7500
Boone Avenue North, Minneapolis, Minnesota. The portion of the building occupied
by the Company contains approximately 47,000 square feet, of which approximately
36,000 square feet (approximately 78%) is currently being utilized. Management
believes that the Company's manufacturing facilities are generally adequate for
its operations and such facilities are maintained in a good state of repair. The
current lease expires June 30, 2005.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal, governmental, administrative or
other proceedings to which the Company is a party or of which any of its
property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information under the caption "Common Stock Information" on page 21
of the Company's 1997 Annual Report is incorporated herein by reference. The
Company has not sold any securities during the fiscal year ending December 31,
1997 that were not registered under the Securities Act of 1933, as amended.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The financial information under the caption "Selected Financial Data"
on page 1 of the Company's 1997 Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information under the caption "Management's Discussion and Analysis
of Results of Operations and Financial Condition" on pages 11 to 12 of the
Company's 1997 Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Substantially all of the Company's marketable securities are at fixed
interest rates and therefore the fair value of these instruments is affected by
changes in market interest rates. However, almost all of the Company's
marketable securities mature within three years. Accordingly, the Company
believes that the market risk arising from its holding of these financial
instruments is minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and Independent Auditors' Report
thereon on pages 13 to 21 of the Company's 1997 Annual Report are incorporated
herein by reference, as is the unaudited information set forth under the caption
"1997 * Year in Review" on page 1 of the Company's 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) DIRECTORS OF THE COMPANY
The information under the captions "Election of Directors --
Information About Nominees" and "Election of Directors -- Other Information
About Nominees" in the Company's 1998 Proxy Statement is incorporated herein by
reference.
<PAGE>
(b) EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages, the year first
elected or appointed as an executive officer and the offices held, as of
February 20, 1998, are as follows:
Executive
Officer
Name Age Title (1) Since
- -------------------- --- ----------------------------------------- ---------
William N. Mayer (2) 67 Chairman of the Board and Chief Executive 1976
Officer (3)
Robert L. Demorest 52 President (4) 1985
Ronald A. Meyer 47 Vice President -- Finance & Administration, 1985
Treasurer and Secretary (5)
Daniel W. Mayer (2) 47 Executive Vice President (6) 1988
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(1) All executive officers have been employed in the capacity set forth for
at least five years unless otherwise indicated.
(2) Daniel W. Mayer is the son of William N. Mayer, Chairman of the Board
and Chief Executive Officer of the Company.
(3) W.N. Mayer has been the Chairman of the Board, Chief Executive Officer
and President of the Company for over five years. Effective January 30,
1995, Mr. W.N. Mayer resigned as President of the Company.
(4) Mr. Demorest was elected President of the Company on January 30, 1995.
Prior to that time, Mr. Demorest was the Executive Vice President --
Sales & Marketing and Secretary.
(5) Mr. Ronald A. Meyer was elected Secretary of the Company on January 30,
1995. Prior to that time, Mr. Meyer served as Assistant Secretary.
(6) Mr. Daniel W. Mayer was elected Executive Vice President on January 30,
1995. Prior to that time, Mr. Mayer served as the Vice President --
Product Development.
(c) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1998 Proxy Statement is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Election of Directors -- Director
Compensation" and "Executive Compensation and Other Benefits" in the Company's
1998 Proxy Statement is incorporated herein by reference.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Principal Shareholders and
Beneficial Ownership of Management" in the Company's 1998 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Election of Directors -- Other
Information About Nominees" in the Company's 1998 Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
The following Consolidated Financial Statements of the Company are
incorporated herein by reference from the pages indicated in the Company's 1997
Annual Report:
Independent Auditors' Report -- page 21.
Consolidated Balance Sheets -- December 31, 1997 and 1996 -- page 14.
Consolidated Statements of Income -- Years Ended December 31, 1997,
1996 and 1995 -- page 13.
Consolidated Statements of Cash Flows -- Years Ended December 31, 1997,
1996 and 1995 -- page 15.
Notes to Consolidated Financial Statements -- pages 16 to 21.
(2) Financial Statement Schedules:
The following financial statement schedules are included herein and
should be read in conjunction with the financial statements referred to above:
Independent Auditors' Report on Financial Statement Schedule
Financial Statement Schedule:
II - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Modern Controls, Inc.:
Under date of February 12, 1998, we reported on the consolidated balance sheets
of Modern Controls, Inc. and subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of income, and cash flows for each of the
years in the three-year period ended December 31, 1997, as contained in the 1997
annual report to stockholders. These consolidated financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
for the year 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedule as included in Item 14(a)2. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth herein.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 12, 1998
SCHEDULE II
MODERN CONTROLS, INC. AND SUBSIDIARY
Valuation and Qualifying Accounts
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR
----------- ------- -------- ------------- -------
Year ended December 31, 1997
allowance for doubtful accounts $ 155,000 9,090 1,090 163,000
Year ended December 31, 1996
allowance for doubtful accounts $ 132,000 25,312 2,312 155,000
Year ended December 31, 1995
allowance for doubtful accounts $ 147,000 15,323 30,323 132,000
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(1) Bad debts written off
(3) Exhibits
The exhibits to this Report are listed in the Exhibit Index.
<PAGE>
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Company as of March 20, 1998, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to Modern Controls,
Inc., 7500 Boone Avenue North, Minneapolis, Minnesota 55428; Attn.: Shareholder
Information.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual Report on
Form 10-K pursuant to Item 14(c):
A. Employee Stock Option Plan, as amended (incorporated by
reference to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0-9273)).
B. 1982 Restated Incentive Stock Option Plan (incorporated by
reference to the Company's Registration Statement on Form S-8
(File No. 33-27730)).
C. 1990 Non-Employee Director Stock Option Plan (incorporated by
reference to the Company's Registration Statement on Form S-8
(File No. 33-42255)).
D. 1992 Stock Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-8 (File No.
33-49752)).
E. Compensation Committee resolutions setting forth the Incentive
Compensation Plan for fiscal 1997, 1998 and 1999 (incorporated
by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-9273)).
F. Paired Profit Sharing Plan effective July 1, 1996
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File
No. 0-9273)).
G. Confidentiality Agreement, dated June 3, 1983, between the
Company and William N. Mayer (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988 (File No. 0-9273)).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended December 31, 1997.
(c) Exhibits
The exhibits to this Report are listed in the Exhibit Index.
(d) Financial Statement Schedules
See Item 14, section (a)(2) above for the financial statement schedules
filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 20, 1998 MODERN CONTROLS, INC.
By: /s/ William N. Mayer
--------------------------------------------
William N. Mayer, Chief Executive Officer
(principal executive officer)
By: /s/ Ronald A. Meyer
--------------------------------------------
Ronald A. Meyer, Vice President --
Finance & Administration,
Treasurer and Secretary
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on March 20, 1998.
Signature and Title
-------------------
/s/ William N. Mayer
--------------------------------------------
William N. Mayer, Chairman of the Board
/s/ Robert L. Demorest
--------------------------------------------
Robert L. Demorest, President and Director
/s/ Richard A. Proulx
--------------------------------------------
Richard A. Proulx, Director
/s/ Paul L. Sjoquist
--------------------------------------------
Paul L. Sjoquist, Director
/s/ Dean B. Chenoweth
--------------------------------------------
Dean B. Chenoweth, Director
/s/ J. Leonard Frame
--------------------------------------------
J. Leonard Frame, Director
/s/ Thomas C. Thomas
--------------------------------------------
Thomas C. Thomas, Director
<PAGE>
MODERN CONTROLS, INC.
Exhibit Index to Annual Report On
Form 10-K
For Fiscal Year Ended December 31, 1997
Item Method of
No. Item Filing
- ---- -------------------------------------------------------------- ------
3.1 Restated Articles of Incorporation of the Company (1)
3.2 Amendment to Restated Articles of Incorporation of the Company,
effective May 27, 1987 (2)
3.3 Amendment to Restated Articles of Incorporation of the Company,
effective June 28, 1991 (3)
3.4 Third Restated Bylaws of the Company (4)
10.1 Office/Warehouse Lease, dated July 29, 1994 (5)
10.2 Office/Warehouse Lease Extension, dated June 6, 1997 (9)
10.3 Employee Stock Option Plan, as amended (8)
10.4 1982 Restated Incentive Stock Option Plan (6)
10.5 1990 Non-Employee Director Stock Option Plan (6)
10.6 1992 Stock Option Plan (7)
10.7 Compensation Committee resolutions setting forth the Incentive
Compensation Plan for fiscal 1997, 1998 and 1999 (8)
10.8 Paired Profit Sharing Plan effective July 1, 1996 (8)
10.9 Confidentiality Agreement, dated June 3, 1983, between the Company
and William N. Mayer (4)
10.10 Agency and Service Agreement, dated January 1, 1987, between the
Company and MoCon FSC, Inc. (4)
<PAGE>
10.11 Foreign Sales Corporation Suppliers Agreement, dated
March 28, 1985, between the Company and MoCon FSC, Inc. (4)
11.1 Computation of per share earnings (9)
13.1 Selected pages from the 1997 Annual Report to Shareholders (9)
21.1 Subsidiaries of the Company (4)
23.1 Independent Auditors' Consent (9)
27.1 Financial Data Schedule for the year ended December 31, 1997 (9)
27.2 Amended and Restated Financial Data Schedule for the (9)
quarter ending September 30, 1997
27.3 Amended and Restated Financial Data Schedule for the
quarter ending June 30, 1997 (9)
27.4 Restated Financial Data Schedule for the quarter ending
March 31, 1997 (9)
27.5 Restated Financial Data Schedule for the year ended
December 31, 1996 (9)
27.6 Restated Financial Data Schedule for the quarter ending
September 30, 1996 (9)
27.7 Restated Financial Data Schedule for the quarter ending
June 30, 1996 (9)
27.8 Restated Financial Data Schedule for the quarter ending
March 31, 1996 (9)
27.9 Restated Financial Data Schedule for the year ended
December 31, 1995 (9)
- ----------
(1) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1984 (File No. 0-9273).
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1987 (File No. 0-9273).
<PAGE>
(3) Incorporated by reference to the Company's Registration Statement on
Form S-8 (File No. 33-42255).
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988 (File No. 0-9273).
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (File No. 0-9273).
(6) Incorporated by reference to the Company's Registration Statement on
Form S-8 (File No. 33-42255).
(7) Incorporated by reference to the Company's Registration Statement on
Form S-8 (File No. 33-49752).
(8) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (File No. 0-9273).
(9) Filed herewith.
Exhibit 10.2
LEASE MODIFICATION AND EXTENSION AGREEMENT
THIS LEASE MODIFICATION AND EXTENSION AGREEMENT ("Agreement") is made
and entered into this 6th day of June, 1997, between DRESCO III, Inc., a
Delaware corporation (hereinafter called "Lessor"), and Modern Controls, Inc., a
Minnesota corporation (hereinafter called "Tenant").
W I T N E S S E T H:
WHEREAS, Lessor and Tenant entered into a lease agreement (the "Lease
Agreement") dated July 29, 1994, wherein Lessor leased to Tenant the premises
addressed as 7500 Boone Avenue North, Brooklyn Park, Minnesota ("Demised
Premises") consisting of approximately 47,208 square feet of area; and
WHEREAS, the lease term ("Lease Term") as defined within the Lease
Agreement is to expire on June 30, 2000; and
WHEREAS, Lessor and Tenant have agreed to extend the Lease Term for an
additional 60 months ending June 30, 2005, upon terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual promises of the parties
hereto and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Lease Agreement shall be amended as follows:
1. Recitals. The above recitals shall constitute an integral part of
this Agreement.
2. Capitalized Terms. Capitalized terms set forth in this Agreement
shall have the same meaning as in the Lease Agreement, unless specifically
modified and amended herein.
3. Lessor. The current owning entity is DRESCO III.
4. Lease Term. The Lease Term shall be amended to provide for a sixty
(60) month extension, commencing July 1, 2000, and expiring June 30, 2005
("Extended Lease Term"), unless sooner terminated as provided within the Lease
Agreement.
5. Base Rent. The Base Rent provision of the Lease Agreement shall be
amended as follows:
MONTHS PSF RATE ANNUALLY MONTHLY
------ -------- -------- -------
7/1/00 - 6/30/01 $4.90 $231,319.20 $19,276.60
7/1/01 - 6/30/02 $5.00 $236,040.00 $19,670.00
7/1/02 - 6/30/03 $5.00 $236,040.00 $19,670.00
7/1/03 - 6/30/04 $5.25 $247,842.00 $20,653.20
7/1/04 - 6/30/05 $5.25 $247,842.00 $20,653.20
<PAGE>
Prior to the Extended Lease Term, Tenant shall pay Base Rent as provided in the
Lease Agreement.
6. Survival of Other Terms and Conditions. Except as modified herein,
all other terms and conditions of the Lease Agreement shall remain in full force
and effect and nothing herein shall be construed to relieve either Lessor or
Tenant of any obligations as set forth therein.
7. Entire Agreement. The Lease Agreement, this Agreement, and the
Exhibits attached thereto constitute the entire understanding of the parties
hereto with respect to the transaction and contemplated thereby, and supersede
all prior agreements and understandings between the parties with respect to the
subject matter. No representations, warranties, undertakings or promises,
whether oral, implied, written or otherwise, have been made by either party
hereto to the other unless expressly stated in the above-referenced documents or
unless mutually agreed to in writing between the parties hereto after the date
hereof, and neither party has relied on any verbal representations, agreements,
or understandings not expressly set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
LESSOR: DRESCO III TENANT: MODERN CONTROLS, INC.
By: /s/ David A. Belnap By: /s/ Ronald A. Meyer
David A. Belnap Ronald A. Meyer
Its: Senior Vice President Its: Chief Financial Officer
CONSULT YOUR ATTORNEY: This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the legal
sufficiency, legal effect, or tax consequence of this document or the
transaction to which it relates. These are questions for your attorney and
financial advisors.
Exhibit 11.1
MODERN CONTROLS, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
BASIC
- -----
Average shares outstanding 6,418,731 6,447,201 6,791,340
---------- ---------- ----------
Net income $3,728,028 $3,081,862 $2,570,308
---------- ---------- ----------
Basic per share amounts $ 0.58 $ 0.48 $ 0.38
---------- ---------- ----------
DILUTED
- -------
Average shares outstanding 6,418,731 6,447,201 6,791,340
Net effect of dilutive stock options -
based on the treasury stock method 69,075 43,487 31,265
---------- ---------- ----------
Total 6,487,806 6,490,688 6,822,605
---------- ---------- ----------
Net Income $3,728,028 $3,081,862 $2,570,308
---------- ---------- ----------
Diluted per share amounts $ 0.57 $ 0.47 $ 0.38
---------- ---------- ----------
</TABLE>
<PAGE>
eps-qtr
MODERN CONTROLS, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------
3 MOS 6 MOS. 9 MOS. 12 MOS.
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC
- -----
Average shares outstanding 6412084 6412875 6414999 6418731
======== ========== ========== ==========
Net income $960,257 $1,844,657 $2,789,536 $3,728,028
======== ========== ========== ==========
Basic per share amounts $ 0.15 $ 0.29 $ 0.43 $ 0.58
======== ========== ========== ==========
DILUTED
- -------
Average shares outstanding 6412084 6412875 6414999 6418731
Net effect of dilutive stock options -
based on the treasury stock method 40163 46662 59777 69075
-------- ---------- ---------- ----------
Total 6452247 6459537 6474776 6487806
======== ========== ========== ==========
Net income $960,257 $1,844,657 $2,789,536 $3,728,028
======== ========== ========== ==========
Diluted per share amounts $ 0.15 $ 0.29 $ 0.43 $ 0.57
======== ========== ========== ==========
</TABLE>
<PAGE>
eps-qtr
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
3 MOS 6 MOS. 9 MOS. 12 MOS.
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC
- -----
Average shares outstanding 6558012 6483797 6459288 6447201
======== ========== ========== ==========
Net income $700,247 $1,468,308 $2,272,982 $3,081,862
======== ========== ========== ==========
Basic per share amounts $ 0.11 $ 0.23 $ 0.35 $ 0.48
======== ========== ========== ==========
DILUTED
- -------
Average shares outstanding 6558012 6483797 6459288 6447201
Net effect of dilutive stock options -
based on the treasury stock method 49242 44057 44908 43487
-------- ---------- ---------- ----------
Total 6607254 6527854 6504196 6490688
======== ========== ========== ==========
Net income $700,247 $1,468,308 $2,272,982 $3,081,862
======== ========== ========== ==========
Diluted per share amounts $ 0.11 $ 0.22 $ 0.35 $ 0.47
======== ========== ========== ==========
</TABLE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------
(In thousands except per share data)
Operations Data:
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $17,017 14,768 12,844 10,613 10,405
Net income 3,728 3,082 2,570 1,853 1,889
Net income per share Basic .58 .48 .38 .26 .26
Diluted .57 .47 .38 .26 .26
Dividends declared per share .18 .16 .14 .13 .47
Balance Sheet Data:
- -------------------------------------------------------------------------------------------
Total assets 17,404 14,881 14,770 13,128 14,077
Long-term liabilities 2 92 168 29 18
- -------------------------------------------------------------------------------------------
</TABLE>
1997 * YEAR IN REVIEW
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
NET INCOME PER SHARE
1997 SALES GROSS PROFIT NET INCOME BASIC DILUTED
<S> <C> <C> <C> <C> <C>
1st Quarter $ 4,064,002 $ 2,740,301 $ 960,257 $ .15 $ .15
2nd Quarter 4,189,050 2,847,077 884,400 .14 .14
3rd Quarter 4,342,245 2,933,762 944,879 .15 .15
4th Quarter 4,421,681 2,919,872 938,492 .15 .14
- -------------------------------------------------------------------------------------------------
Total $17,016,978 $11,441,012 $ 3,728,028 $ .58 $ .57
- -------------------------------------------------------------------------------------------------
1996
1st Quarter $ 3,564,165 $ 2,364,509 $ 700,247 $ .11 $ .11
2nd Quarter 3,647,332 2,507,883 768,061 .12 .12
3rd Quarter 3,751,347 2,541,569 804,674 .13 .12
4th Quarter 3,804,929 2,597,870 808,880 .13 .13
- ------------------------------------------------------------------------------------------------
Total $14,767,773 $10,011,831 $ 3,081,862 $ .48 $ .47
- ------------------------------------------------------------------------------------------------
</TABLE>
Selected Financial Data 1
Corporate Profile 2
Letter to Shareholders 3-4
About The Company 5-10
Management's Discussion and Analysis 11-12
Consolidated Statements of Income 13
Consolidated Balance Sheets 14
Consolidated Statements of Cash Flows 15
Notes to Consolidated
Financial Statements 16-21
Independent Auditors' Report/
Common Stock Information 21
Corporate Information 22
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
1997-1996 COMPARISON
Sales increased 15 percent in 1997 to $17,016,978, compared with $14,767,773 in
1996. The increase in 1997 sales was due primarily to increases in the sales
volume of the Company's permeation and weighing products, an increase in the
sales volume of the Company's consulting and developmental services and to
general price increases.
The Company's permeation product group sales totaled $12,131,236, up 13 percent
from $10,737,789 in 1996. The group accounted for 71 percent of the Company's
total 1997 sales, compared to 73 percent in 1996.
The gross profit margin was $11,441,012 in 1997 or 67.2 percent of sales,
compared to $10,011,831 in 1996 or 67.8 percent of sales. Over the past several
years the Company's gross profit percentage has been in a range of about 62 to
65 percent of sales. The 1996 and 1997 profit margins were at the high end of
the historical range due to reduced warranty expenses and to the increased sales
volume which resulted in manufacturing efficiencies.
Selling, general and administrative expenses increased $962,839 or 21 percent
during 1997. As a percentage of sales, selling, general and administrative
expenses were 32.2 percent in 1997and 30.6 percent in 1996. The increase in
selling expenses is due to an increase in the sales staff and an increase in
commission expenses as a result of the increase in sales. The increase in
general and administrative expenses was primarily the result of litigation fees
incurred to protect confidential information of the Company. The Company may
continue to incur legal fees associated with this litigation throughout 1998.
Research and development expenses decreased $200,518 or 16 percent during 1997.
As a percentage of sales, research and development expenses were 6 percent in
1997 and 8 percent in 1996. 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 to approximately $712,000 in 1997 from $390,000 in
1996. The increase in 1997 is primarily the result of a one-time gain of
approximately $235,000 realized on the sale of equity securities, and to a
lesser extent, is due to the higher average investment balances in 1997 as
compared to 1996.
The Company's provision for income taxes was 34.1 percent of income before
income taxes in 1997, compared with 34 percent in 1996. Based on current
operating conditions and income tax laws, the Company expects the tax rate for
1998 to be in the range of 33 to 35 percent.
Net income was $3,728,028 in 1997 compared to $3,081,862 in 1996. Basic net
income per share was $.58 in 1997 compared to $.48 in 1996.
1996-1995 COMPARISON
Sales increased 15 percent in 1996 to $14,767,773, compared with $12,843,505 in
1995. The increase in 1996 sales was due primarily to strong increases in the
domestic and foreign volume of the Company's permeation and packaging products
and to general price increases.
The Company's permeation product group sales totaled $10,737,789 up 18 percent
from $9,079,635 in 1995. The group accounted for 73 percent of the Company's
total 1996 sales, compared to 71 percent in 1995.
The gross profit margin was $10,011,831 in 1996 or 67.8 percent of sales,
compared to $8,463,210 in 1995 or 65.9 percent of sales. Over the past several
years the Company's gross profit percentage has been in a range of about 62 to
65 percent of sales. The 1996 profit margin was at the high end of the
historical range due to reduced warranty expenses and to the increased sales
volume which resulted in manufacturing efficiencies.
11
<PAGE>
Selling, general and administrative expenses increased $590,736 or 15 percent
during 1996. As a percentage of sales, selling, general and administrative
expenses were 30.6 percent in 1996 and 1995. The increase in the dollar amount
of selling, general and administrative expenses is due primarily to an increase
in commission expenses as a result of increased sales.
Research and development expenses increased $156,480 or 15 percent during 1996,
reflecting the Company's continued commitment to growth through new products. As
a percentage of sales, research and development expenses were 8 percent in both
1996 and 1995.
Investment income decreased to approximately $390,000 in 1996 from $405,000 in
1995. The decrease in 1996 is the result of lower average investment balances
due to stock repurchases made in the first quarter of 1996, offset by a gain
realized on the sale of land and an increase in the average interest rate earned
on investments in 1996 as compared to 1995.
Net income was $3,081,862 in 1996 compared to $2,570,308 in 1995. Basic net
income per share was $.48 in 1996 compared to $.38 per share in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Total cash, temporary cash investments and marketable securities increased
$1,306,877 during 1997 to $10,923,891. The increase is primarily attributable to
the Company's 1997 net income. In addition to funding its operations, the
Company used its cash resources to pay dividends totaling $1,091,312.
Cash flow from operations has historically been sufficient to meet liquidity
requirements, capital expenditures and research and development costs. Cash flow
from operations totaled $2,685,798, $3,638,329, and $3,178,427 in 1997, 1996 and
1995, respectively.
The Company has no long-term debt and has no material commitments for capital
expenditures as of December 31, 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 adopted the provisions of Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE (Statement 128). The adoption did not
impact the Company's financial condition or results of operations.
12
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
MODERN CONTROLS, INC.
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 17,016,978 14,767,773 12,843,505
Cost of Sales 5,575,966 4,755,942 4,380,295
- ----------------------------------------------------------------------------------------------
Gross Profit 11,441,012 10,011,831 8,463,210
- ----------------------------------------------------------------------------------------------
Selling, General and Administrative
Expenses 5,479,722 4,516,883 3,926,147
Research and Development Expenses 1,015,975 1,216,493 1,060,013
Investment Income (711,713) (390,407) (405,258)
- ----------------------------------------------------------------------------------------------
5,783,984 5,342,969 4,580,902
- ----------------------------------------------------------------------------------------------
Income Before Income Taxes 5,657,028 4,668,862 3,882,308
Income Taxes 1,929,000 1,587,000 1,312,000
- ----------------------------------------------------------------------------------------------
Net Income $ 3,728,028 3,081,862 2,570,308
==============================================================================================
Net Income Per Common Share - Basic $ .58 .48 .38
- Diluted .57 .47 .38
==============================================================================================
Weighted Average
Shares Outstanding - Basic 6,418,731 6,447,201 6,791,340
- Diluted 6,487,806 6,490,688 6,822,605
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE>
CONSOLIDATED BALANCE SHEETS
MODERN CONTROLS, INC.
December 31,
- --------------------------------------------------------------------------------
ASSETS 1997 1996
- --------------------------------------------------------------------------------
Current Assets:
Cash and temporary cash investments $ 763,014 1,352,991
Marketable securities, current 4,396,232 4,186,066
Trade accounts receivable, less allowance
for doubtful accounts of $163,000
in 1997 and $155,000 in 1996 2,921,456 1,632,960
Other receivables 176,051 118,469
Inventories 1,614,779 1,572,329
Prepaid expenses 168,851 190,198
Deferred income taxes 270,000 310,000
- --------------------------------------------------------------------------------
Total current assets 10,310,383 9,363,013
- --------------------------------------------------------------------------------
Marketable securities, noncurrent 5,764,645 4,077,957
Property and equipment 2,668,760 2,635,521
Less accumulated depreciation and amortization 1,712,094 1,645,365
- --------------------------------------------------------------------------------
956,666 990,156
- --------------------------------------------------------------------------------
Other assets 371,959 450,118
================================================================================
$17,403,653 14,881,244
=========== ==========
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 560,702 563,953
Accrued compensation 492,138 483,876
Other accrued expenses 362,900 320,973
Estimated product warranties 198,924 190,405
Accrued income taxes 432,879 379,931
Dividends payable 321,610 256,440
- --------------------------------------------------------------------------------
Total current liabilities 2,369,153 2,195,578
- --------------------------------------------------------------------------------
Deferred income taxes 2,000 92,000
- --------------------------------------------------------------------------------
Stockholders' equity:
Common stock - $.10 par value;
authorized 10,000,000 shares;
issued and outstanding 6,435,340 shares
in 1997 and 6,410,964 shares in 1996 643,534 641,096
Capital in excess of par value 67,253 5,457
Retained earnings 14,321,713 11,752,113
Net unrealized gain on noncurrent marketable
equity securities -- 195,000
- --------------------------------------------------------------------------------
Total stockholders' equity 15,032,500 12,593,666
Commitments and contingencies (Note 5)
================================================================================
$17,403,653 14,881,244
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
MODERN CONTROLS, INC.
<TABLE>
<CAPTION>
====================================================================================================
Years ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 3,728,028 3,081,862 2,570,308
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) loss on disposition of long-term assets (145,758) 14,486 31,386
Depreciation and amortization 302,304 255,695 214,255
Deferred income taxes 60,000 (11,000) 12,000
Changes in operating assets and liabilities:
Trade accounts receivable (1,288,496) 144,561 (265,821)
Other receivables (57,582) (2,259) 35,270
Inventories (42,450) (11,969) 173,400
Prepaid expenses 21,347 60,770 (73,907)
Accounts payable (3,251) (28,029) 244,861
Accrued compensation 8,262 78,409 39,869
Other accrued expenses 41,927 45,890 28,626
Estimated product warranties 8,519 27,405 23,000
Accrued income taxes 52,948 (17,492) 145,180
----------- ----------- -----------
Net cash provided by operating activities 2,685,798 3,638,329 3,178,427
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
- ----------------------------------------------------------------------------------------------------
Purchases of marketable securities (8,117,262) (5,888,298) (9,919,771)
Proceeds from sales of marketable securities at maturity 5,695,408 5,888,540 10,102,358
Proceeds from sale of equity securities 454,985 -- --
Proceeds from sale of land -- 59,181 --
Purchases of property and equipment (249,543) (776,096) (163,353)
Purchases of patents and trademarks (24,037) (57,831) (86,892)
Other (6,302) (6,340) (6,512)
----------- ----------- -----------
Net cash used in investing activities (2,246,751) (780,844) (74,170)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
- ----------------------------------------------------------------------------------------------------
Proceeds from the exercise of stock options 63,807 7,400 60,135
Purchase and retirement of common stock (1,519) (1,873,590) (1,107,363)
Dividends paid (1,091,312) (1,035,022) (906,576)
----------- ----------- -----------
Net cash used in financing activities (1,029,024) (2,901,212) (1,953,804)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and temporary
cash investments (589,977) (43,727) 1,150,453
Cash and temporary cash investments:
Beginning of year 1,352,991 1,396,718 246,265
----------- ----------- -----------
End of year $ 763,014 1,352,991 1,396,718
=========== =========== ===========
- ----------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes $ 1,816,052 1,615,492 1,156,652
- ----------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing
and financing activities:
Noncash purchase and retirement of common stock $ 227,657 3,452 313,323
Noncash exercise of stock options 227,657 3,452 313,323
Dividends accrued 321,610 256,440 272,543
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MODERN CONTROLS, INC.
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Modern Controls, Inc. (the Company) operates in one business segment, the
design, manufacture and marketing of precision testing instrumentation, advanced
process sensing, and control equipment to customers in the barrier packaging,
food, and pharmaceutical industries throughout the world. The following is a
summary of the significant accounting policies used in the preparation of the
Company's financial statements:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary, a Foreign Sales Corporation (FSC). All material intercompany
balances and transactions have been eliminated in consolidation.
STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Temporary cash investments consist of short-term investments which are readily
convertible to cash.
MARKETABLE SECURITIES
Marketable securities at December 31, 1997 consist of United States government
obligations, municipal bonds and certificates of deposit. The Company classifies
its debt and marketable equity securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term. Held-to-maturity
securities are those securities in which the Company has the ability and intent
to hold until maturity. All other securities not included in trading or
held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on available-for-sale securities are excluded from income and are
reported as a separate component of stockholders' equity until realized.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to income
resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield. Dividend and interest
income are recognized when earned. Realized gains and losses for securities
classified as available-for-sale and held-to-maturity are included in income and
are derived using the specific identification method for determining the cost of
securities sold.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization are
computed using the straight-line method. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to income as incurred and
significant renewals and betterments are capitalized.
INTANGIBLE ASSETS
Intangible assets are carried at cost less accumulated amortization and consist
of patents and trademarks. Costs incurred in connection with applications for
new patents are deferred until a final determination with respect to the
application is made by appropriate regulatory agencies. Costs of patents
abandoned are charged to income in the period of abandonment. Patent costs are
amortized over the lesser of 17 years or their estimated useful lives using the
straight-line method. Trademarks are amortized over five years.
INCOME TAXES
The Company uses the asset and liability method for computing its deferred
taxes. Under the asset and liability method, deferred taxes are based on the
difference between the financial statement and tax basis of assets and
liabilities and the enacted tax rates that will be in effect when these
differences reverse. Deferred tax expense represents the change in deferred tax
assets and liabilities during the year.
16
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are recorded in its consolidated balance
sheet. The carrying amount for cash and temporary cash investments, accounts
receivable, accounts payable, and accrued liabilities approximates fair value
due to the immediate or short-term maturity of these financial instruments. The
fair values of investments in marketable securities are based on quoted market
prices and are summarized in Note 2.
REVENUE RECOGNITION
Revenue is recognized upon shipment of product or upon completion of services.
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 year. 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.
STOCK-BASED EMPLOYEE COMPENSATION
The Company uses the intrinsic-value method for employee stock-based
compensation pursuant to APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Under the guidelines of Opinion 25, compensation cost for stock-based
employee compensation plans is recognized based on the difference, if any,
between the quoted market price of the stock on the date of grant and the amount
an employee must pay to acquire the stock. The Company adopted the disclosure
provisions for employee stock-based compensation and the fair-value method for
nonemployee stock-based compensation of SFAS No. 123 ACCOUNTING FOR STOCK-BASED
COMPENSATION in 1996.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
2. MARKETABLE SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses, and fair value for available-for-sale and held-to-maturity securities by
major security type at December 31, 1997 and 1996 were as follows:
1997
---------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
======================================================================
Held-to-maturity:
Municipal bonds $ 9,130,249 33,679 (674) 9,163,254
Other securities 1,030,628 2,090 (263) 1,032,455
- ----------------------------------------------------------------------
$10,160,877 35,769 (937) 10,195,709
======================================================================
1996
---------------------------------------------
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
======================================================================
Available-for-sale:
Equity securities $ 220,000 305,000 - 525,000
- ----------------------------------------------------------------------
$ 220,000 305,000 - 525,000
======================================================================
Held-to-maturity:
Municipal bonds $6,070,878 36,113 (1,065) 6,105,926
Other securities 1,668,145 3,644 (307) 1,671,482
- ----------------------------------------------------------------------
$7,739,023 39,757 (1,372) 7,777,408
======================================================================
Other securities consist primarily of U.S. government obligations and marketable
certificates of deposit.
Maturities of investment securities classified as available-for-sale and
held-to-maturity were as follows at December 31, 1997 and 1996:
1997 1996
-----------------------------------------------
AMORTIZED FAIR Amortized Fair
COST VALUE cost value
======================================================================
Available-for-sale:
Equity securities $ -- -- 220,000 525,000
- ----------------------------------------------------------------------
$ -- -- 220,000 525,000
======================================================================
Held-to-maturity:
Due within one year $ 4,396,232 4,411,573 4,186,066 4,209,228
Due after one through
five years 5,764,645 5,784,136 3,552,957 3,568,180
- ----------------------------------------------------------------------
$10,160,877 10,195,709 7,739,023 7,777,408
======================================================================
17
<PAGE>
3. INVENTORIES
The major components of inventories are as follows:
1997 1996
=========================================================
Finished products $ 169,823 169,921
Work-in-process 571,991 653,300
Raw materials 872,965 749,108
- ---------------------------------------------------------
$1,614,779 1,572,329
=========================================================
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Estimated
1997 1996 useful lives
================================================================
Machinery and equipment $1,832,599 1,708,395 3 to 10 years
Office equipment 500,038 600,067 2 to 15 years
Leasehold improvements 280,270 271,206 1 to 5 years
Vehicles 55,853 55,853 3 to 5 years
- ----------------------------------------------------------------
$2,668,760 2,635,521
================================================================
Depreciation and amortization of property and equipment charged to income was
$277,836, $232,075, and $197,587 for the years ended December 31, 1997, 1996 and
1995, respectively.
5. LEASES
The Company leases its facilities and certain equipment pursuant to operating
leases. The facility lease expiring July 1, 2005, requires the Company to pay
operating costs including real estate taxes.
Rental expense, including charges for operating costs, was as follows:
1997 1996 1995
=======================================================
$308,855 295,124 254,002
- -------------------------------------------------------
The following is a schedule of future minimum lease payments, excluding charges
for operating costs, for operating leases as of December 31, 1997:
Year ending December 31
=======================================================
1998 213,633
1999 224,238
2000 227,779
2001 233,680
2002 236,040
Later Years 613,704
=======================================================
$ 1,749,074
- -------------------------------------------------------
6. INCOME TAXES
The provision for income taxes consists of the following:
1997 1996 1995
=====================================================================
Current tax expense:
Federal $1,636,000 1,421,000 1,150,000
State 233,000 177,000 150,000
- ---------------------------------------------------------------------
Total current expense 1,869,000 1,598,000 1,300,000
Deferred 60,000 (11,000) 12,000
- ---------------------------------------------------------------------
Provision for income taxes $1,929,000 1,587,000 1,312,000
=====================================================================
The effective income tax rate varies from the federal statutory tax rate for the
following reasons:
Years ended December 31, 1997 1996 1995
================================================================
PERCENTAGE Percentage Percentage
OF PRETAX of pretax of pretax
INCOME income income
- ----------------------------------------------------------------
Tax at statutory federal
income tax rate 34.0% 34.0% 34.0%
Increases (reductions) in
taxes resulting from:
State income taxes, net
of federal benefit 2.7 2.5 2.6
Tax-exempt earnings of FSC (2.0) (1.9) (1.7)
Tax-exempt investment
earnings (2.1) (1.4) (1.7)
Other 1.5 .8 .6
- -------------------------------------------------------------
Effective income tax rate 34.1% 34.0% 33.8%
=============================================================
<PAGE>
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
1997 1996
=============================================================
Deferred tax assets:
Allowance for doubtful accounts
not currently deductible $ 59,000 56,000
Inventory costs not currently
deductible 29,000 68,000
Inventory reserves 85,000 99,000
Warranty reserves 72,000 69,000
Other accruals 25,000 18,000
- -------------------------------------------------------------
Total deferred tax assets 270,000 310,000
- -------------------------------------------------------------
Deferred tax liabilities:
Excess of tax over book depreciation (2,000) 18,000
Unrealized gain on noncurrent
marketable equity securities -- (110,000)
- -------------------------------------------------------------
Total deferred tax liabilities (2,000) (92,000)
- -------------------------------------------------------------
Net deferred tax asset $268,000 218,000
=============================================================
The Company has determined that establishing a valuation allowance for the
deferred tax assets is not required since it is more likely than not that the
deferred tax assets will be realized through future taxable income.
18
<PAGE>
7. STOCK OPTIONS
As of December 31, 1997, the Company has reserved 216,012 shares of common stock
for options that are still available for grant under the Company's stock option
plans, and 198,773 shares for options that have been granted but have not yet
been exercised.
Under the plans, option exercise prices are 100% of the market value of the
common stock at the date of grant, except for incentive options granted under
the 1992 Plan to persons owning more than 10% of the Company's stock, in which
case the option price is 110% of the market value, and nonqualified options
granted under the 1992 Plan, which may be granted at option prices no less than
25% of the market value. Exercise periods are generally for five to ten years.
Certain of the plans allow for the granting of nonqualified stock options. Upon
the exercise of these nonqualified options, the Company may realize a
compensation deduction allowable for income tax purposes. The after-tax effect
of these tax deductions is included in the acco!mpanying consolidated financial
statements as an addition to capital in excess of par value.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), ACCOUNTING FOR STOCK-BASED
COMPENSATION. Accordingly, no compensation cost has been recognized with respect
to the Company's stock option plans. Had compensation cost for these plans been
determined based on the fair value methodology prescribed by SFAS 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
1997 1996 1995
- ---------------------------------------------------------
Net earnings -
as reported $ 3,728,028 3,081,862 2,570,308
Net earnings -
pro forma 3,565,316 3,020,719 2,520,352
Earnings per share -
as reported - Basic $ .58 .48 .38
- Diluted .57 .47 .38
Earnings per share -
pro forma - Basic .56 .47 .37
- Diluted .55 .47 .37
The pro forma net earnings reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net earnings amounts presented
above because compensation cost for options granted prior to January 1, 1995 is
not considered.
The pro forma amounts may not be representative of the effects on reported net
earnings for future years. The fair value of each option grant is estimated on
the date of grant using the binomial option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995:
1997 1996 1995
- ---------------------------------------------------------
Dividend yield 2.25% 2.25% 2.25%
Expected volatility 31% 37% 43%
Risk-free interest rate 6.2% 6.1% 6.4%
Expected lives 9.0 YEARS 8.1 years 4.5 years
Information regarding the Company's stock option plans for 1997, 1996, and 1995
is as follows:
Weighted
average
Shares exercise price
- ------------------------------------------------------------------
Options outstanding, December 31, 1994 255,415 $ 6.09
Granted 86,580 4.98
Exercised (72,977) 5.11
Canceled or expired (40,038) 6.25
- ------------------------------------------------------------------
Options outstanding, December 31, 1995 228,980 5.96
Granted 54,255 6.97
Exercised (2,457) 4.42
Canceled or expired (13,875) 7.12
- ------------------------------------------------------------------
Options outstanding, December 31, 1996 266,903 6.12
Granted 31,036 10.58
Exercised (45,994) 6.29
Canceled or expired (53,172) 8.03
- ------------------------------------------------------------------
Options outstanding, December 31, 1997 198,773 $ 6.26
==================================================================
1997 1996 1995
- ------------------------------------------------------------------------
Weighted-average fair value of options,
granted during the year $ 3.80 2.77 1.83
Weighted-average exercise price of options,
exercisable at end of year 5.99 6.23 6.61
19
<PAGE>
8. CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
unrealized
gain(loss) on
Common stock noncurrent
-------------------------- Capital in marketable
Number excess of Retained equity
of shares Amount par value earnings securities Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 6,789,346 $ 678,935 -- 10,945,112 (110,000) 11,514,047
Stock options exercised 72,977 7,298 366,160 -- -- 373,458
Purchase and retirement
of common stock (200,703) (20,071) (366,160) (1,034,455) -- (1,420,686)
Dividends declared
($.14 per share) -- -- -- (945,214) -- (945,214)
Net unrealized loss on noncurrent
marketable equity securities -- -- -- -- 405,000 405,000
Net Income -- -- -- 2,570,308 -- 2,570,308
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995
6,661,620 666,162 -- 11,535,751 295,000 12,496,913
Stock options exercised 2,457 246 10,606 -- -- 10,852
Purchase and retirement of
common stock (253,113) (25,312) (5,149) (1,846,581) -- (1,877,042)
Dividends declared
($.16 per share) -- -- -- (1,018,919) -- (1,018,919)
Net unrealized gain on noncurrent
marketable equity securities, net of
income taxes -- -- -- -- (100,000) (100,000)
Net Income -- -- -- 3,081,862 -- 3,081,862
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 6,410,964 641,096 5,457 11,752,113 195,000 12,593,666
Stock options exercised 45,994 4,599 286,865 -- -- 291,464
Purchase and retirement
of common stock (21,618) (2,161) (225,069) (1,946) -- (229,176)
Dividends declared
($.18 per share) -- -- -- (1,156,482) -- (1,156,482)
Net unrealized loss on noncurrent
marketable equity securities, net of
income taxes -- -- -- -- (195,000) (195,000)
Net Income -- -- -- 3,728,028 -- 3,728,028
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 6,435,340 $ 643,534 67,253 14,321,713 -- 15,032,500
=========== =========== =========== =========== =========== ===========
</TABLE>
On August 5, 1997, the Board of Directors declared a three-for-two stock split
effective September 12, 1997, for shareholders of record on August 22, 1997. For
each share issued in connection with the stock split, an amount equal to the par
value of $.10 was transferred to common stock account from retained earnings.
All share and per share data in this report have been retroactively adjusted to
reflect this stock split.
20
<PAGE>
9. SALES
Export sales were $6,314,227, $5,460,339, and $4,679,913 in 1997, 1996 and 1995,
respectively. Of the export sales, $2,450,013, $1,910,265, and $1,794,371 in
1997, 1996 and 1995, respectively, were to customers in Western Europe. Sales to
customers in Japan were $1,651,983, $1,619,542, and $889,343 for 1997, 1996 and
1995, respectively. The Company's products are marketed outside of North America
through various independent representatives. One independent representative
accounted for approximately 16%, 16% and 14% of sales in 1997, 1996 and 1995,
respectively. Another independent representat!ive accounted for approximately
11%, 12%, and 7% of sales in 1997, 1996, and 1995, respectively.
10. SAVINGS AND RETIREMENT PLAN
The Company has a 401(k) Savings and Retirement Plan covering substantially all
of its employees. The Company provides matching contributions in accordance with
the plan. The Company's contributions to this plan in 1997, 1996 and 1995 were
$29,572, $25,608, and $19,110, respectively.
11. SUBSEQUENT EVENT
In January 1998 the Company purchased 100 percent of the common stock of
Microanalytics Instrumentation Corporation for $25,010 in cash and 6,350 shares
of Modern Controls, Inc. stock.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Modern Controls, Inc.:
We have audited the accompanying consolidated balance sheets of Modern Controls,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, and cash flows for each of the years in the
three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Modern Controls,
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 12 , 1998
COMMON STOCK INFORMATION
Market for Company's Common Stock and Related Stockholder Matters
As of March 16, 1998 there were 573 record holders of the Company's Common
Stock. The Company's Common Stock trades on the Nasdaq Stock Market(SM) under
the symbol MOCO. The following table sets forth, for the fiscal periods
indicated, the high and low quotations for the Company's Common Stock as
reported by the Nasdaq National Market System. The Common Stock trading prices
and dividends per share shown below have been retroactively adjusted for the
1997 three-for-two stock split.
Common Stock Trading Prices
- -----------------------------------------------------------------------------
Low High Dividends declared
- -----------------------------------------------------------------------------
1997
1st Quarter $ 6.33 7.17 .04
2nd Quarter 6.33 9.17 .04
3rd Quarter 8.50 10.83 .05
4th Quarter 9.25 15.00 .05
- -----------------------------------------------------------------------------
1996
1st Quarter $ 6.58 7.92 .04
2nd Quarter 6.50 7.58 .04
3rd Quarter 6.58 8.00 .04
4th Quarter 6.42 7.17 .04
- -----------------------------------------------------------------------------
21
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Modern Controls, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-27730, 33-42255 and 33-49752) on Form S-8 of Modern Controls, Inc. of our
reports dated February 12, 1998, relating to the consolidated balance sheets of
Modern Controls, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income and cash flows and related financial
statement schedule for each of the years in the three-year period ended December
31, 1997, which reports appear in or are incorporated by reference in the
December 31, 1997 annual report on Form 10-K of Modern Controls, Inc.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 27, 1998
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 763,014
<SECURITIES> 4,396,232
<RECEIVABLES> 3,084,456
<ALLOWANCES> 163,000
<INVENTORY> 1,614,779
<CURRENT-ASSETS> 10,310,383
<PP&E> 2,668,760
<DEPRECIATION> 1,712,094
<TOTAL-ASSETS> 17,403,653
<CURRENT-LIABILITIES> 2,369,153
<BONDS> 0
0
0
<COMMON> 643,534
<OTHER-SE> 14,388,966
<TOTAL-LIABILITY-AND-EQUITY> 17,403,653
<SALES> 17,016,978
<TOTAL-REVENUES> 17,016,978
<CGS> 5,575,966
<TOTAL-COSTS> 5,575,966
<OTHER-EXPENSES> 5,783,984
<LOSS-PROVISION> 9,090
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,657,028
<INCOME-TAX> 1,929,000
<INCOME-CONTINUING> 3,728,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,728,028
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.57
</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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-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> 12,595,297
<TOTAL-REVENUES> 12,595,297
<CGS> 4,074,157
<TOTAL-COSTS> 4,074,157
<OTHER-EXPENSES> 4,286,269
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,234,871
<INCOME-TAX> 1,445,335
<INCOME-CONTINUING> 2,789,536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,789,536
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 459,510
<SECURITIES> 5,200,184
<RECEIVABLES> 2,350,052
<ALLOWANCES> 161,000
<INVENTORY> 1,699,202
<CURRENT-ASSETS> 10,115,134
<PP&E> 2,579,307
<DEPRECIATION> 1,605,448
<TOTAL-ASSETS> 15,705,841
<CURRENT-LIABILITIES> 1,968,317
<BONDS> 0
0
0
<COMMON> 641,414
<OTHER-SE> 13,096,110
<TOTAL-LIABILITY-AND-EQUITY> 15,705,841
<SALES> 8,253,052
<TOTAL-REVENUES> 8,253,052
<CGS> 2,665,674
<TOTAL-COSTS> 2,665,674
<OTHER-EXPENSES> 2,783,946
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,803,432
<INCOME-TAX> 958,775
<INCOME-CONTINUING> 1,844,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,844,657
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 621,702
<SECURITIES> 4,630,849
<RECEIVABLES> 1,939,858
<ALLOWANCES> 158,000
<INVENTORY> 1,680,794
<CURRENT-ASSETS> 9,355,751
<PP&E> 2,530,330
<DEPRECIATION> 1,561,606
<TOTAL-ASSETS> 15,283,639
<CURRENT-LIABILITIES> 2,174,418
<BONDS> 0
0
0
<COMMON> 641,321
<OTHER-SE> 12,467,900
<TOTAL-LIABILITY-AND-EQUITY> 15,283,639
<SALES> 4,064,002
<TOTAL-REVENUES> 4,064,002
<CGS> 1,323,701
<TOTAL-COSTS> 1,323,701
<OTHER-EXPENSES> 1,280,944
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,459,357
<INCOME-TAX> 499,100
<INCOME-CONTINUING> 960,257
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 960,257
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,352,991
<SECURITIES> 4,186,066
<RECEIVABLES> 1,787,960
<ALLOWANCES> 155,000
<INVENTORY> 1,572,329
<CURRENT-ASSETS> 9,363,013
<PP&E> 2,635,521
<DEPRECIATION> 1,645,365
<TOTAL-ASSETS> 14,881,244
<CURRENT-LIABILITIES> 2,195,578
<BONDS> 0
0
0
<COMMON> 641,096
<OTHER-SE> 11,952,570
<TOTAL-LIABILITY-AND-EQUITY> 14,881,244
<SALES> 14,767,773
<TOTAL-REVENUES> 14,767,773
<CGS> 4,755,942
<TOTAL-COSTS> 4,755,942
<OTHER-EXPENSES> 5,342,969
<LOSS-PROVISION> 25,312
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,668,862
<INCOME-TAX> 1,587,000
<INCOME-CONTINUING> 3,081,862
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,081,862
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.47
</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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 687,623
<SECURITIES> 3,000,045
<RECEIVABLES> 2,002,811
<ALLOWANCES> 151,750
<INVENTORY> 1,595,962
<CURRENT-ASSETS> 7,786,631
<PP&E> 2,562,933
<DEPRECIATION> 1,580,800
<TOTAL-ASSETS> 14,150,867
<CURRENT-LIABILITIES> 1,921,700
<BONDS> 0
0
0
<COMMON> 641,093
<OTHER-SE> 11,448,074
<TOTAL-LIABILITY-AND-EQUITY> 14,150,867
<SALES> 10,962,844
<TOTAL-REVENUES> 10,962,844
<CGS> 3,548,883
<TOTAL-COSTS> 3,548,883
<OTHER-EXPENSES> 3,970,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,443,912
<INCOME-TAX> 1,170,930
<INCOME-CONTINUING> 2,272,982
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<NET-INCOME> 2,272,982
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 802,188
<SECURITIES> 3,589,601
<RECEIVABLES> 2,392,534
<ALLOWANCES> 150,000
<INVENTORY> 1,762,208
<CURRENT-ASSETS> 8,952,396
<PP&E> 2,344,055
<DEPRECIATION> 1,561,531
<TOTAL-ASSETS> 13,529,722
<CURRENT-LIABILITIES> 1,711,377
<BONDS> 0
0
0
<COMMON> 640,962
<OTHER-SE> 10,986,383
<TOTAL-LIABILITY-AND-EQUITY> 13,529,722
<SALES> 7,211,497
<TOTAL-REVENUES> 7,211,497
<CGS> 2,339,105
<TOTAL-COSTS> 2,339,105
<OTHER-EXPENSES> 2,647,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,224,709
<INCOME-TAX> 756,401
<INCOME-CONTINUING> 1,468,308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,468,308
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 436,852
<SECURITIES> 3,844,407
<RECEIVABLES> 2,185,875
<ALLOWANCES> 135,227
<INVENTORY> 1,618,544
<CURRENT-ASSETS> 8,527,027
<PP&E> 2,267,494
<DEPRECIATION> 1,525,609
<TOTAL-ASSETS> 13,164,431
<CURRENT-LIABILITIES> 1,910,167
<BONDS> 0
0
0
<COMMON> 640,955
<OTHER-SE> 10,437,309
<TOTAL-LIABILITY-AND-EQUITY> 13,164,431
<SALES> 3,564,165
<TOTAL-REVENUES> 3,564,165
<CGS> 1,199,656
<TOTAL-COSTS> 1,199,656
<OTHER-EXPENSES> 1,306,734
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,057,775
<INCOME-TAX> 357,528
<INCOME-CONTINUING> 700,247
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 700,247
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,396,718
<SECURITIES> 4,133,397
<RECEIVABLES> 1,909,521
<ALLOWANCES> 132,000
<INVENTORY> 1,560,360
<CURRENT-ASSETS> 9,555,174
<PP&E> 1,947,060
<DEPRECIATION> 1,492,224
<TOTAL-ASSETS> 14,770,411
<CURRENT-LIABILITIES> 2,105,498
<BONDS> 0
0
0
<COMMON> 666,162
<OTHER-SE> 11,830,751
<TOTAL-LIABILITY-AND-EQUITY> 14,770,411
<SALES> 12,843,505
<TOTAL-REVENUES> 12,843,505
<CGS> 4,380,295
<TOTAL-COSTS> 4,380,295
<OTHER-EXPENSES> 4,580,902
<LOSS-PROVISION> 15,323
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,882,308
<INCOME-TAX> 1,312,000
<INCOME-CONTINUING> 2,570,308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,570,308
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
