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 March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ______________ to ______________
Commission File Number 0-9273
MODERN CONTROLS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0903312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7500 Boone Avenue North, Minneapolis, Minnesota 55428
(Address of principal executive offices) (Zip Code)
(612) 493-6370
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the SECURITIES EXCHANGE ACT OF 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
6,454,056 Common Shares were outstanding as of March 31, 1998
<PAGE>
MODERN CONTROLS, INC.
INDEX TO FORM 10-Q
For the Quarter Ended March 31, 1998
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income and Comprehensive
Income (Unaudited)
Three months ended March 31, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 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 5-6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 7
EXHIBIT 11 Computation of Net Income Per Common Share 9
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1998 1997
----------- -----------
ASSETS
Current Assets
Cash and Temporary Cash Investments $ 797,558 $ 763,014
Marketable Securities, Current 4,577,824 4,396,232
Accounts Receivable 2,290,245 2,921,456
Other Receivables 176,235 176,051
Inventories 2,121,768 1,614,779
Prepaid Expenses 179,291 168,851
Deferred Income Taxes 270,000 270,000
----------- -----------
Total Current Assets 10,412,921 10,310,383
----------- -----------
Marketable Securities, Noncurrent 6,025,469 5,764,645
----------- -----------
Property and Equipment 2,809,644 2,668,760
Less: Accumulated Depreciation
and Amortization 1,785,564 1,712,094
----------- -----------
Net Property and Equipment 1,024,080 956,666
----------- -----------
Other Assets 504,338 371,959
----------- -----------
TOTAL ASSETS $17,966,808 $17,403,653
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 1,056,766 $ 560,702
Accrued Liabilities 1,614,171 1,808,451
----------- -----------
Total Current Liabilities 2,670,937 2,369,153
----------- -----------
Deferred Income Taxes 2,000 2,000
----------- -----------
Stockholders' Equity
Common Stock - $.10 Par Value 645,406 643,534
Capital in Excess of Par Value 150,253 67,253
Retained Earnings 14,498,212 14,321,713
----------- -----------
Total Stockholders' Equity 15,293,871 15,032,500
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $17,966,808 $17,403,653
=========== ===========
Note: The condensed consolidated balance sheet at December 31, 1997 has
been summarized from the Company's audited consolidated balance sheet
at that date.
<PAGE>
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------------
1998 1997
---------- ----------
Sales $3,547,436 $4,064,002
Cost of Sales 1,243,894 1,323,701
---------- ----------
Gross Profit 2,303,542 2,740,301
---------- ----------
Selling, General & Administrative Expenses 1,428,524 1,274,358
Research & Development Expenses 238,134 354,511
---------- ----------
1,666,658 1,628,869
---------- ----------
Operating Income 636,884 1,111,432
Investment Income 119,986 347,925
---------- ----------
Income Before Income Taxes 756,870 1,459,357
Income Taxes 257,300 499,100
---------- ----------
Net Income $ 499,570 $ 960,257
========== ==========
Comprehensive Income $ 499,570 $ 765,257
========== ==========
Net Income Per Common Share -- Basic $ 0.08 $ 0.15
========== ==========
Net Income Per Common Share -- Diluted $ 0.08 $ 0.15
========== ==========
Weighted Average Shares Outstanding -- Basic 6,444,698 6,412,084
========== ==========
Weighted Average Shares Outstanding -- Diluted 6,520,653 6,452,247
========== ==========
<PAGE>
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
-----------------------------
1998 1997
----------- -----------
Cash Flows from Operating Activities:
Net Income $ 499,570 $ 960,257
Total Adjustments to Reconcile
Net Income to Net Cash Provided
by Operating Activities 516,449 (444,864)
----------- -----------
Net Cash Provided by Operating Activities 1,016,019 515,393
----------- -----------
Cash Flows from Investing Activities:
Purchases of Marketable Securities (1,600,585) (2,457,655)
Proceeds from Sales of Marketable Securities 1,158,169 1,513,937
Other (301,515) (53,353)
----------- -----------
Net Cash Used in Investing Activities (743,931) (997,071)
----------- -----------
Cash Flows from Financing Activities:
Dividends Paid (322,416) (256,528)
Other 84,872 6,917
----------- -----------
Net Cash Used in Financing Activities (237,544) (249,611)
----------- -----------
Net Increase (Decrease) in Cash and
Temporary Cash Investments 34,544 (731,289)
----------- -----------
Cash and Temporary Cash Investments:
Beginning of Year 763,014 1,352,991
----------- -----------
End of Three Month Period $ 797,558 $ 621,702
=========== ===========
<PAGE>
MODERN CONTROLS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of March 31, 1998, the condensed
consolidated statements of income and comprehensive income for the three-month
periods ended March 31, 1998 and 1997, and the condensed consolidated statements
of cash flows for the three-month periods ended March 31, 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 March 31, 1998, and for all periods presented, have
been made. The results of operations for the period ended March 31, 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:
March 31, December 31,
1998 1997
---------- ----------
Finished Products $ 233,229 $ 169,823
Work in Process 938,004 571,991
Raw Materials 950,535 872,965
---------- ----------
$2,121,768 $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.
<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 March 31, 1998 were $3,547,436, down 13 percent from
first quarter 1997 sales of $4,064,002. The decrease in first quarter sales is
primarily the result of decreases in the sales volume of the Company's
permeation and weighing products, offset somewhat by increases in the sales
volume of the Company's packaging products and consulting and developmental
services, and general price increases.
The Company's permeation product group sales totaled $2,477,424 in the first
quarter of 1998, compared to $3,151,248 in the first quarter of 1997. The group
accounted for 70 percent of the Company's total first quarter 1998 sales,
compared with 78 percent in the first quarter of 1997.
Gross profit was 65 percent of sales for the first quarter of 1998 and 67
percent for the first quarter of 1997. The decline in the gross profit margin
was primarily due to the decreased sales volume.
Selling, general and administrative expenses increased approximately $154,000 or
12 percent in the first quarter of 1998 compared to the first quarter of 1997.
As a percentage of sales, selling, general and administrative expenses were 40
percent of sales for the first quarter of 1998, compared to 31 percent in the
first quarter of 1997. The increase in selling expenses was due primarily to an
increase in the sales force in the third quarter of 1997. The increase in
general and administrative expenses was primarily attributable to the litigation
fees incurred to protect confidential information of the Company.
Research and development expenses decreased approximately $116,000 in the first
quarter of 1998 compared to the first quarter of 1997. Research and development
expenses were 7 percent of sales in the first quarter of 1998, compared to 9
percent for the same period 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.
<PAGE>
Investment income decreased approximately $228,000 in the first quarter of 1998,
compared to the first quarter of 1997. The decrease 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 first quarter of 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 48 percent to $499,570 for the first quarter of 1998
compared to $960,257 for the first quarter of 1997. Basic net income per share
was $.08 for the first quarter of 1997, compared to $.15 for the same period in
1997.
Liquidity and Capital Resources
The Company continues to maintain a strong financial position. Total cash,
temporary cash investments and marketable securities increased approximately
$477,000 during the three months ended March 31, 1998. The Company used cash
resources to pay dividends of approximately $322,000 in the first quarter of
1998.
The Company has no long-term debt or material commitments for capital
expenditures as of March 31, 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.
<PAGE>
MODERN CONTROLS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following is a listing of the exhibits contained in this Form 10-Q
filing:
Exhibit No. Description
----------- -----------
11 Earnings Per Share
27 Financial Data Schedule
b. There were no reports on Form 8-K filed for the quarter ended March 31,
1998.
<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: May 7, 1998 /s/ William N. Mayer
William N. Mayer,
Chairman and CEO
Date: May 7, 1998 /s/ Ronald A. Meyer
Ronald A. Meyer,
Vice President and Treasurer
EXHIBIT 11
MODERN CONTROLS, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
Three Months Ended
March 31,
--------------------------
1998 1997
---------- ----------
BASIC
Average shares outstanding 6,444,698 6,412,084
========== ==========
Net income $ 499,570 $ 960,257
========== ==========
Basic per share amounts $ 0.08 $ 0.15
========== ==========
DILUTED
Average shares outstanding 6,444,698 6,412,084
Net effect of dilutive stock
options - based on the
treasury stock method 75,955 40,163
---------- ----------
Total 6,520,653 6,452,247
========== ==========
Net income $ 499,570 $ 960,257
========== ==========
Diluted per share amounts $ 0.08 $ 0.15
========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND THE CONDENSED BALANCE SHEETS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 797,558
<SECURITIES> 4,577,824
<RECEIVABLES> 2,455,245
<ALLOWANCES> 165,000
<INVENTORY> 2,121,768
<CURRENT-ASSETS> 10,412,921
<PP&E> 2,809,644
<DEPRECIATION> 1,785,564
<TOTAL-ASSETS> 17,966,808
<CURRENT-LIABILITIES> 2,670,937
<BONDS> 0
0
0
<COMMON> 645,406
<OTHER-SE> 14,648,465
<TOTAL-LIABILITY-AND-EQUITY> 17,966,808
<SALES> 3,547,436
<TOTAL-REVENUES> 3,547,436
<CGS> 1,243,894
<TOTAL-COSTS> 1,243,894
<OTHER-EXPENSES> 1,546,672
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 756,870
<INCOME-TAX> 257,300
<INCOME-CONTINUING> 499,570
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 499,570
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
