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, 1999
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 ___
6,288,170 Common Shares were outstanding as of March 31, 1999
<PAGE>
MODERN CONTROLS, INC.
INDEX TO FORM 10-Q
For the Quarter Ended March 31, 1999
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income and Comprehensive
Income (Unaudited)
Three months ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4-5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 6-8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 2,193,317 $ 1,352,416
Marketable securities, current 4,348,121 4,959,151
Accounts receivable 2,286,498 2,124,060
Other receivables 104,309 127,104
Inventories 2,297,097 2,322,187
Prepaid expenses 180,792 235,658
Deferred income taxes 282,000 282,000
------------ ------------
Total current assets 11,692,134 11,402,576
------------ ------------
Marketable securities, noncurrent 3,406,420 3,063,100
------------ ------------
Property and equipment: 3,067,520 3,183,576
Less: accumulated depreciation
and amortization 1,869,956 2,036,127
------------ ------------
Net property and equipment 1,197,564 1,147,449
------------ ------------
Other assets:
Goodwill 1,043,783 1,070,078
Technology rights and other intangibles 585,000 600,000
Other 416,968 392,032
------------ ------------
Total other assets 2,045,751 2,062,110
------------ ------------
TOTAL ASSETS $ 18,341,869 $ 17,675,235
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 705,541 $ 801,536
Accrued compensation and vacation 417,767 440,696
Other accrued 1,636,072 1,228,934
------------ ------------
Total current liabilities 2,759,380 2,471,166
------------ ------------
Deferred income taxes 92,600 98,000
------------ ------------
Stockholders' equity:
Common stock - $.10 par value 628,817 628,796
Capital in excess of par value 934,937 934,031
Retained earnings 13,926,135 13,543,242
------------ ------------
Total stockholders' equity 15,489,889 15,106,069
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 18,341,869 $ 17,675,235
============ ============
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1998 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
March 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Product sales $ 3,984,322 $ 3,297,379
Consulting services 469,401 250,057
----------- -----------
Total sales 4,453,723 3,547,436
----------- -----------
Product sales 1,303,533 1,101,288
Consulting services 215,616 142,606
----------- -----------
Total cost of goods 1,519,149 1,243,894
----------- -----------
Gross profit 2,934,574 2,303,542
----------- -----------
Selling, general & administrative expenses 1,675,138 1,428,524
Research & development expenses 326,733 238,134
----------- -----------
2,001,871 1,666,658
Operating income 932,703 636,884
Investment income 103,743 119,986
----------- -----------
Income before income taxes 1,036,446 756,870
Income taxes 342,000 257,300
----------- -----------
Net income $ 694,446 $ 499,570
=========== ===========
Comprehensive income $ 694,446 $ 499,570
=========== ===========
Net income per common share:
Basic $ 0.11 $ 0.08
=========== ===========
Diluted $ 0.11 $ 0.08
=========== ===========
Weighted average shares outstanding:
Basic 6,288,065 6,444,698
=========== ===========
Diluted 6,292,755 6,520,653
=========== ===========
</TABLE>
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<PAGE>
MODERN CONTROLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 694,446 $ 499,570
Total adjustments to reconcile
net income to net cash provided
by operating activities 379,469 516,449
------------ ------------
Net cash provided by operating activities 1,073,915 1,016,019
------------ ------------
Cash flows from investing activities:
Purchases of marketable securities (969,313) (1,600,585)
Proceeds from sales of marketable securities 1,237,023 1,158,169
Other (187,253) (301,515)
------------ ------------
Net cash provided by (used in) investing activities 80,457 (743,931)
------------ ------------
Cash flows from financing activities:
Dividends paid (317,253) (322,416)
Other 3,782 84,872
------------ ------------
Net cash used in financing activities (313,471) (237,544)
------------ ------------
Net increase in cash and
temporary cash investments 840,901 34,544
------------ ------------
Cash and temporary cash investments:
Beginning of period 1,352,416 763,014
------------ ------------
End of period $ 2,193,317 $ 797,558
============ ============
</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 March 31, 1999, the condensed
consolidated statements of income and comprehensive income for the three-month
periods ended March 31, 1999 and 1998, and the condensed consolidated statements
of cash flows for the three-month periods ended March 31, 1999 and 1998 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, 1999, and for all periods presented, have
been made. The results of operations for the period ended March 31, 1999 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, 1998 annual
report to shareholders.
Note 2 - Inventories
Inventories consist of the following:
March 31, December 31,
1999 1998
------------ ------------
Finished Products $ 290,795 $ 330,812
Work in Process 816,020 836,043
Raw Materials 1,190,282 1,155,332
------------ ------------
$ 2,297,097 $ 2,322,187
============ ============
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 potential common shares outstanding during the period.
-4-
<PAGE>
The following table presents a reconciliation of the denominators used in the
computation of net income per common share-basic and net income per common
share-diluted for the three-month periods ended March 31, 1999, and 1998:
1999 1998
-----------------------------------------------------------------
Weighted shares of common stock
outstanding - basic 6,288,065 6,444,698
Weighted shares of common stock
assumed upon exercise of stock
options 4,690 75,955
-----------------------------------------------------------------
Weighted shares of common stock
outstanding - diluted 6,292,755 6,520,653
=================================================================
-5-
<PAGE>
MODERN CONTROLS, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This Form 10-Q includes certain statements that are deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
in this Form 10-Q that address activities, events, or developments that the
Company expects, believes, or anticipates will or may occur in the future, are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions, expected future developments, and
other factors it believes are appropriate in the circumstances. Such statements
are subject to a number of assumptions, risks, and uncertainties, many of which
are beyond the control of the Company. Investors are cautioned that any such
statements are not guarantees of future performance and that actual results or
developments may differ materially from those projected in the forward-looking
statements.
Results of Operations
Sales for the quarter ended March 31, 1999, were $4,453,723, up 26% percent from
first quarter 1998 sales of $3,547,436. The increase in first quarter sales is
primarily the result of increases in the sales volume of the Company's weighing
products, consulting and analytical services, the acquisitions of Microanalytics
and Lab Connections in January and December, 1998, respectively, and general
price increases.
The Company derives its revenue from product sales and consulting services,
consisting of consulting and analytical services and standard testing performed
for various customers. In the first quarter of 1999, product sales were
$3,984,322 and consulting services were $469,401, or 89 and 11 percent
respectively, of the Company's total first quarter 1999 sales. This compares to
product sales of $3,297,379 and consulting services of $250,057 in the first
quarter of 1998, or 93 and 7 percent of total sales, respectively.
Gross profit was 66 percent of sales for the first quarter of 1999 and 65
percent for the first quarter of 1998. The slight increase in the gross profit
margin was primarily due to efficiencies associated with increased sales volume.
Selling, general and administrative (SG&A) expenses increased approximately
$247,000 or 17 percent in the first quarter of 1999 compared to the first
quarter of 1998. As a percentage of sales, SG&A expenses were 38 and 40 percent
of sales for the first quarter of 1999 and 1998, respectively. The increase in
the dollar amount is due primarily to increases in commission and other selling
expenses as a result of the increased sales, as well as the amortization expense
for goodwill and other intangible assets related to the acquisition of Lab
Connections.
Research and development (R&D) expenses increased approximately $89,000 or 37
percent in the first quarter of 1999 compared to the first quarter of 1998. As a
percent of sales, R&D expenses were 7 percent of sales for both the first
quarter of 1999 and 1998. Continued R&D expenditures are necessary as the
Company develops new products to expand in its niche markets. For the
foreseeable future, the
-6-
<PAGE>
Company expects to spend on an annual basis approximately 6 to 9 percent of
sales on R&D.
Investment income decreased approximately $16,000 in the first quarter of 1999
as compared to the first quarter of 1998. The decrease is the result of lower
average investment balances in 1999.
The Company's provision for income taxes was 33 percent of income before income
taxes for the three-month period ending March 31, 1999, compared to 34 percent
for the same period in 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 1999 to be in a range of 33 to 35 percent.
Net income increased 39 percent to $694,446 for the first quarter of 1999,
compared to $499,570 for the first quarter of 1998. Basic net income per share
was $.11 for the first quarter of 1999, compared to $.08 for the same period in
1998.
Liquidity and Capital Resources
The Company continues to maintain a strong financial position. Total cash,
temporary cash investments and marketable securities increased approximately
$573,000 during the three months ended March 31, 1999. The Company used cash
resources to pay dividends of approximately $317,000 in the first quarter of
1999.
The Company has no long-term debt or material commitments for capital
expenditures as of March 31, 1999. 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.
Market Risk Management
Substantially all of the Company's marketable securities are at fixed interest
rates. However, almost all of the Company's marketable securities mature within
three years, therefore, the Company believes that the market risk arising from
its holding of these financial instruments is minimal.
The Company currently sells its products and services in United States dollars;
accordingly, the exposure to foreign currency exchange risk is minimal.
Year 2000 Conversion
Computers, software and other equipment utilizing microprocessors that use only
two digits to identify a year in a date field may be unable to accurately
process certain date-based information, including correct leap-year recognition,
at or after the year 2000. This is commonly referred to as the "Year 2000"
problem. The Company is evaluating its situation in regard to the potential
impact of the Year 2000 problem on its business.
INTERNAL SYSTEMS. The Company is evaluating and reviewing all the Company's
internal systems that
-7-
<PAGE>
could pose Year 2000 risks in order to correct issues as they are identified.
This includes information technology (IT) and non-IT systems. Although the
assessment is still underway, management currently believes that all material
internal systems will be compliant by the Year 2000 and that the cost to address
the issues will not have a material adverse impact on the Company's results of
operations and consolidated financial condition. However, there can be no
assurance that unforeseen difficulties or costs will not arise.
VENDORS. The Company is in the process of contacting its critical suppliers and
other vendors to determine if they will be able to provide the Company with
products and services through the change to 2000, and if the products and
services that they provide to the Company are Year 2000 compliant. The Company
will attempt to lessen its risks with respect to the failure of third parties to
be Year 2000 ready, including developing contingency plans where applicable.
However such failure, including failure of any contingency plans, could have a
material adverse impact on the Company's results of operations and consolidated
financial condition.
COMPANY PRODUCTS. Management believes that all the Company's products shipped
after 1998 are and will continue to be Year 2000 compliant. Information
regarding the Year 2000 status of products shipped prior to 1999 may be obtained
via the Company's web site at www.mocon.com.
Although the Company is not dependent on any single customer, the Company does
have significant sales in certain industries, including the food, polymer, paper
and pharmaceutical industries. A significant Year 2000 related disruption in
these industries into which the Company sells, could have a material adverse
impact on the Company's results of operations and consolidated financial
condition.
-8-
<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
----------- -----------
27 Financial Data Schedule
b. There were no reports on Form 8-K filed for the quarter ended March 31,
1999.
-9-
<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 6, 1999 /s/ William N. Mayer
William N. Mayer,
Chairman and CEO
Date: May 6, 1999 /s/ Ronald A. Meyer
Ronald A. Meyer,
Vice President and Treasurer
-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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,193,317
<SECURITIES> 4,348,121
<RECEIVABLES> 2,448,498
<ALLOWANCES> 162,000
<INVENTORY> 2,297,097
<CURRENT-ASSETS> 11,692,134
<PP&E> 3,067,520
<DEPRECIATION> 1,869,956
<TOTAL-ASSETS> 18,341,869
<CURRENT-LIABILITIES> 2,759,380
<BONDS> 0
0
0
<COMMON> 628,817
<OTHER-SE> 14,861,072
<TOTAL-LIABILITY-AND-EQUITY> 18,341,869
<SALES> 4,453,723
<TOTAL-REVENUES> 4,453,723
<CGS> 1,519,149
<TOTAL-COSTS> 1,519,149
<OTHER-EXPENSES> 1,898,128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,036,446
<INCOME-TAX> 342,000
<INCOME-CONTINUING> 694,446
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 694,446
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
