UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarter Ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ________________ to ________________
Commission File Number 0-9273
MODERN CONTROLS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0903312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7500 Boone Avenue North, Minneapolis, Minnesota 55428
(Address of principal executive offices) (Zip code)
(612) 493-6370
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the SECURITIES EXCHANGE ACT OF 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO ___
6,168,556 Common Shares were outstanding as of September 30, 1998
<PAGE>
MODERN CONTROLS, INC.
INDEX TO FORM 10-Q
For the Quarter Ended September 30, 1998
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income and Comprehensive
Income (Unaudited)
Three months and nine months ended September 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 5-7
PART II. OTHER INFORMATION
Item 5. Other Events 8
Item 6. Exhibits and Reports on Form 8-K 8
EXHIBIT 11 Computation of Net Income Per Common Share 10
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Temporary Cash Investments $ 1,340,959 $ 763,014
Marketable Securities, Current 5,122,006 4,396,232
Accounts Receivable 1,951,838 2,921,456
Other Receivables 133,481 176,051
Inventories 1,999,706 1,614,779
Prepaid Expenses 213,671 168,851
Deferred Income Taxes 270,000 270,000
------------ ------------
Total Current Assets 11,031,661 10,310,383
------------ ------------
Marketable Securities, Noncurrent 3,626,006 5,764,645
------------ ------------
Property and Equipment: 3,072,681 2,668,760
Less: Accumulated Depreciation
and Amortization 1,947,020 1,712,094
------------ ------------
Net Property and Equipment 1,125,661 956,666
------------ ------------
Other Assets 506,277 371,959
------------ ------------
TOTAL ASSETS $ 16,289,605 $ 17,403,653
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 818,014 $ 560,702
Accrued Liabilities 1,441,865 1,808,451
------------ ------------
Total Current Liabilities 2,259,879 2,369,153
------------ ------------
Deferred Income Taxes 2,000 2,000
------------ ------------
Stockholders' Equity:
Common Stock - $.10 Par Value 616,856 643,534
Capital in Excess of Par Value 0 67,253
Retained Earnings 13,410,870 14,321,713
------------ ------------
Total Stockholders' Equity 14,027,726 15,032,500
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 16,289,605 $ 17,403,653
============ ============
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1997 has been
summarized from the Company's audited consolidated balance sheet at that
date.
-1-
<PAGE>
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 3,860,663 $ 4,342,245 $11,203,871 $12,595,297
Cost of Sales 1,302,073 1,408,483 3,907,264 4,074,157
----------- ----------- ----------- -----------
Gross Profit 2,558,590 2,933,762 7,296,607 8,521,140
----------- ----------- ----------- -----------
Selling, General & Administrative Expenses 1,306,038 1,446,481 4,382,123 4,024,456
Research & Development Expenses 282,413 179,395 830,304 850,617
----------- ----------- ----------- -----------
1,588,451 1,625,876 5,212,427 4,875,073
----------- ----------- ----------- -----------
Operating Income 970,139 1,307,886 2,084,180 3,646,067
Investment Income 115,331 123,553 359,462 588,804
----------- ----------- ----------- -----------
Income Before Income Taxes 1,085,470 1,431,439 2,443,642 4,234,871
Income Taxes 369,100 486,560 830,900 1,445,335
----------- ----------- ----------- -----------
Net Income $ 716,370 $ 944,879 $ 1,612,742 $ 2,789,536
=========== =========== =========== ===========
Comprehensive Income $ 716,370 $ 944,879 $ 1,612,742 $ 2,594,536
=========== =========== =========== ===========
Net Income Per Common Share
Basic $ 0.11 $ 0.15 $ 0.25 $ 0.43
=========== =========== =========== ===========
Diluted $ 0.11 $ 0.15 $ 0.25 $ 0.43
=========== =========== =========== ===========
Weighted Average Shares Outstanding
Basic 6,289,805 6,419,246 6,396,186 6,414,999
=========== =========== =========== ===========
Diluted 6,307,928 6,505,256 6,444,836 6,474,776
=========== =========== =========== ===========
</TABLE>
-2-
<PAGE>
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,612,742 $ 2,789,536
Total Adjustments to Reconcile
Net Income to Net Cash Provided
by Operating Activities 776,699 (761,116)
----------- -----------
Net Cash Provided by Operating Activities 2,389,441 2,028,420
----------- -----------
Cash Flows from Investing Activities:
Purchases of Marketable Securities (2,599,876) (6,659,821)
Proceeds from Sales of Marketable Securities 4,012,739 4,346,011
Purchases of Property and Equipment (428,922) (201,414)
Other (165,237) 64,140
----------- -----------
Net Cash Provided by (Used in) Investing Activities 818,704 (2,451,084)
----------- -----------
Cash Flows from Financing Activities:
Purchases and Retirement of Common Stock (1,751,250) (1,509)
Dividends Paid (963,822) (769,701)
Other 84,872 24,876
----------- -----------
Net Cash Used in Financing Activities (2,630,200) (746,334)
----------- -----------
Net Increase (Decrease) in Cash and
Temporary Cash Investments 577,945 (1,168,998)
----------- -----------
Cash and Temporary Cash Investments:
Beginning of Year 763,014 1,352,991
----------- -----------
End of Nine-Month Period $ 1,340,959 $ 183,993
=========== ===========
</TABLE>
-3-
<PAGE>
MODERN CONTROLS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of September 30, 1998, the condensed
consolidated statements of income and comprehensive income for the three- and
nine-month periods ended September 30, 1998 and 1997, and the condensed
consolidated statements of cash flows for the nine-month periods ended September
30, 1998 and 1997 have been prepared by the Company, without audit. However, all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary to present fairly the financial position,
results of operations and cash flows at September 30, 1998, and for all periods
presented, have been made. The results of operations for the period ended
September 30, 1998 are not necessarily indicative of operating results for the
full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 1997 annual
report to shareholders.
Note 2 - Inventories
Inventories consist of the following:
September 30, December 31,
1998 1997
------------- ------------
Finished Products $ 189,341 $ 169,823
Work in Process 827,980 571,991
Raw Materials 982,385 872,965
---------- ----------
$1,999,706 $1,614,779
========== ==========
Note 3 - Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average of common shares outstanding during the period. Diluted net
income per share is computed by dividing net income by the weighted average of
common and dilutive common stock equivalent shares outstanding during the year.
-4-
<PAGE>
MODERN CONTROLS, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This Form 10-Q contains certain forward-looking statements. For this purpose,
any statements contained in this Form 10-Q that are not statements of historical
fact may be deemed to be forward- looking statements. Without limiting the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may be materially different. It is not reasonably possible to
itemize all of the many factors and specific events that could affect the
outlook of the Company's operations. Some factors that could cause actual
results to differ materially include, but are not limited to, product demand and
market acceptance risks, commercialization and technological difficulties,
capacity and supply constraints or difficulties, general economic conditions,
business conditions in the testing and packaging industry, and competitive
factors.
Results of Operations
Sales for the quarter ended September 30, 1998, were $3,860,663 down 11 percent
from third quarter 1997 sales of $4,342,245. The decrease in third quarter sales
is primarily the result of decreases in the sales volume of the Company's
permeation and packaging products, offset somewhat by general price increases.
Sales for the nine-month period ended September 30, 1998, decreased 11 percent
to $11,203,871, compared to $12,595,297 for the first nine months of 1997. The
11 percent decrease is primarily due to decreases in the sales volume of the
Company's permeation and weighing products, offset somewhat by general price
increases.
The Company's permeation product group sales totaled $2,251,798 in the third
quarter of 1998, compared to $2,853,005 in the third quarter of 1997. The group
accounted for 58 percent of the Company's total third quarter 1998 sales,
compared with 66 percent in the third quarter of 1997. Permeation product group
sales for the nine-month period ended September 30, 1998, were $7,307,064, or 65
percent of total sales, versus $8,924,760, or 71 percent of sales for the same
period in 1997.
Gross profit for the quarter and the nine-month period ended September 30, 1998,
was 66 and 65 percent of sales, respectively. This compares with 68 percent for
both the quarter and nine-month period ended September 30, 1997. The decrease in
gross profit margin was due to reduced economies of scale due to the decline in
sales volume.
Selling, general and administrative expenses were 34 percent of sales for the
third quarter of 1998, compared to 33 percent for the third quarter of 1997.
Selling, general and administrative expenses were 39 and 32 percent for the
nine-month periods ending September 30, 1998 and 1997, respectively. The
increase in general and administrative expenses for the nine-month period is
primarily attributable to the litigation fees incurred to protect confidential
information of the Company.
-5-
<PAGE>
Research and development expenses as a percent of sales were 7 percent for both
the quarter and nine-month period ended September 30, 1998, compared to 4 and 7
percent for the comparable periods in 1997. Continued research and development
expenditures are necessary as the Company develops new products to expand in its
niche markets. For the foreseeable future, the Company expects to allocate on an
annual basis approximately 6 to 9 percent of sales to research and development.
Investment income decreased approximately $8,000 in the third quarter of 1998 as
compared to the third quarter of 1997. For the nine months ended September 30,
1998, investment income decreased approximately $229,000. The decrease for the
third quarter is the result of lower average investment balances and slightly
lower average investment yields in 1998. The decrease in investment income for
the nine-month period is primarily the result of a one-time gain of
approximately $235,000 realized on the sale of equity securities in the first
quarter of 1997.
The Company's provision for income taxes was 34 percent of income before income
taxes for the nine-month period ending September 30, 1998. The Company reviews
the tax rate quarterly and may make adjustments to reflect changing estimates.
Based on current operating conditions and income tax laws, the Company expects
the effective tax rate for all of 1998 to be in a range of 33 to 35 percent.
Net income decreased 24 percent to $716,370 for the third quarter of 1998,
compared to $944,879 for the third quarter of 1997. Basic net income per share
was $.11 for the third quarter of 1998, compared to $.15 for the same period in
1997. For the nine-month period ended September 30, 1998, net income decreased
42 percent to $1,612,742 compared to $2,789,536 for the nine-month period ended
September 30, 1997. Basic net income per share was $.25 and $.43 for the
nine-month periods ended September 30, 1998, and 1997, respectively.
Liquidity and Capital Resources
The Company continues to maintain a strong financial position. Total cash,
temporary cash investments and marketable securities decreased approximately
$835,000 during the nine months ended September 30, 1998. This decrease is
primarily due to repurchases of the Company's common stock during the period
totaling approximately $1,750,000.
The Company has no long-term debt or material commitments for capital
expenditures as of September 30, 1998. The Company's plant and equipment do not
require any major expenditures to accommodate a significant increase in
operating demands. The Company anticipates that a combination of its existing
cash, temporary cash investments and marketable securities, plus an expected
continuation of cash flow from operations, will continue to be adequate to fund
operations, capital expenditures and dividend payments in the foreseeable
future.
Year 2000 Compliance
The Company has considered the potential impact of Year 2000 issues on its
business, operations, and financial condition. The Company's analysis of its
existing systems indicates a majority are Year 2000 compliant. Specific systems
which are subject to Year 2000 exposure and require remediation have been
identified. The Company has plans to upgrade and test these systems by June 30,
1999, and believes that these systems will function properly with respect to
dates in the year 2000 and thereafter.
-6-
<PAGE>
The Company is primarily relying on its vendors to implement Year 2000
compliance with respect to the third-party software sold or used by the Company.
The Company has sent questionnaires to material vendors to confirm their Year
2000 compliance. The Company is in the process of evaluating responses. Although
the Company anticipates that its vendors will be Year 2000 compliant, there can
be no assurance given that this will in fact happen. The Company is in the
process of developing contingency plans to address the possibility that certain
vendors will not be Year 2000 compliant.
To date, the cost associated with Year 2000 readiness has been immaterial and
the Company anticipates that costs related to this issue will not have a
material impact on their financial condition and results of operations. Some
risks associated with the Year 2000 issue are beyond the ability of the Company
to control, including the extent to which the Company's suppliers and service
providers identify and remedy potential Year 2000 issues. As a result, the
Company may incur unexpected expenditures in connection with the Year 2000
compliance.
-7-
<PAGE>
MODERN CONTROLS, INC.
PART II. OTHER INFORMATION
Item 5. Other Events
Pursuant to recent amendments to the proxy rules under the Securities
Exchange Act of 1934, as amended, the Company's shareholders are
hereby notified that the deadline for providing the Company timely
notice of any shareholder proposal to be submitted outside of the Rule
14a-8 process for consideration at the Company's 1999 Annual Meeting
of Shareholders is February 20, 1999.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following is a listing of the exhibits contained in this Form 10-Q
filing:
Exhibit No. Description
----------- -----------
11 Earnings Per Share
27 Financial Data Schedule
b. There were no reports on Form 8-K filed for the quarter ended
September 30, 1998.
-8-
<PAGE>
SIGNATURES
Pursuant to the requirements of the SECURITIES EXCHANGE ACT of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MODERN CONTROLS, INC.
Registrant
Date: November 12, 1998 /s/ William N. Mayer
William N. Mayer,
Chairman and CEO
Date: November 12, 1998 /s/ Ronald A. Meyer
Ronald A. Meyer,
Vice President and Treasurer
-9-
EXHIBIT 11
MODERN CONTROLS, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC
Average shares outstanding 6,289,805 6,419,246 6,396,186 6,414,999
========== ========== ========== ==========
Net income $ 716,370 $ 944,879 $1,612,742 $2,789,536
========== ========== ========== ==========
Basic per share amounts $ 0.11 $ 0.15 $ 0.25 $ 0.43
========== ========== ========== ==========
DILUTED
Average shares outstanding 6,289,805 6,419,246 6,396,186 6,414,999
Net effect of dilutive stock
options - based on the
treasury stock method 18,123 86,010 48,650 59,777
---------- ---------- ---------- ----------
Total 6,307,928 6,505,256 6,444,836 6,474,776
========== ========== ========== ==========
Net income $ 716,370 $ 944,879 $1,612,742 $2,789,536
========== ========== ========== ==========
Diluted per share amounts $ 0.11 $ 0.15 $ 0.25 $ 0.43
========== ========== ========== ==========
</TABLE>
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND THE CONDENSED BALANCE SHEETS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,340,959
<SECURITIES> 5,122,006
<RECEIVABLES> 2,120,838
<ALLOWANCES> 169,000
<INVENTORY> 1,999,706
<CURRENT-ASSETS> 11,031,661
<PP&E> 3,072,681
<DEPRECIATION> 1,947,020
<TOTAL-ASSETS> 16,289,605
<CURRENT-LIABILITIES> 2,259,879
<BONDS> 0
0
0
<COMMON> 616,856
<OTHER-SE> 13,410,870
<TOTAL-LIABILITY-AND-EQUITY> 16,289,605
<SALES> 11,203,871
<TOTAL-REVENUES> 11,203,871
<CGS> 3,907,264
<TOTAL-COSTS> 3,907,264
<OTHER-EXPENSES> 4,852,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,443,642
<INCOME-TAX> 830,900
<INCOME-CONTINUING> 1,612,742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,612,742
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
