-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FSEHnrcvqizHgBhDYXkXaBcitLe4NdblkLxpXGuHlCPh9KQAO7Ue7YSofe4DZiQm oxJsiHzKp1Zoo/LMXhN0jw== 0000897101-01-500086.txt : 20010409 0000897101-01-500086.hdr.sgml : 20010409 ACCESSION NUMBER: 0000897101-01-500086 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MODERN CONTROLS INC CENTRAL INDEX KEY: 0000067279 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 410903312 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-09273 FILM NUMBER: 1590239 BUSINESS ADDRESS: STREET 1: 7500 BOONE AVE N CITY: MINNEAPOLIS STATE: MN ZIP: 55428 BUSINESS PHONE: 6124936370 MAIL ADDRESS: STREET 2: 7500 BOONE AVE N CITY: MINNEAPOLIS STATE: MN ZIP: 55428 10-K405 1 mocon010604_10-k.txt MOCON, INC. FORM 10-K405 YEAR ENDED 12-31-00 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, 2000 [ ] 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 -------------------- MOCON, 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: (763) 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 -------------------- 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. [X] As of March 14, 2001, 5,458,827 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 $34,431,078. DOCUMENTS INCORPORATED BY REFERENCE 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 22, 2001 (the "2001 Proxy Statement"). 1 PART I ITEM 1. BUSINESS MOCON, Inc., (the "Company"), designs, manufactures, markets, and services products and provides consulting primarily for specialized applications in the measurement and analytical instrument and services markets, including detection, sample preparation, measurement, and monitoring instruments and services used to analyze gases and chemical compounds. Several of the Company's analytical services and products focus on the Company's expertise in barrier analysis. The Company's principal business strategy is to employ its product development and technological capabilities, manufacturing processes, and marketing skills in market niches where the Company can successfully penetrate the market and then pursue a strategy to become a leader in the market segment. Management continually emphasizes product innovation, product performance, quality improvements, cost reductions and other value-adding activities. Although some of the markets for the Company's products are maturing, the Company seeks growth opportunities through technological and product improvement and by acquiring and developing new products that can be sold through its distribution channels. The Company's principal executive offices are located at 7500 Boone Avenue North, Minneapolis, Minnesota 55428 and its telephone number is (763) 493-6370. DEVELOPMENT OF THE COMPANY MOCON, Inc. was incorporated in February 1966 and was involved in the commercialization of technology developed for the measurement of water vapor permeating through various materials. The Company has historically expanded through internal development of new products and technologies, the acquisition of product lines, technology or companies, and licensing of products or technology. During 1998, the Company completed complementary acquisitions that have provided additional technologies, products and product development expertise. On January 28, 1998, the Company acquired Microanalytics Instrumentation Corp. ("Microanalytics"), located near Austin, Texas. Microanalytics produces ancillary gas chromatographic ("GC") instrumentation and services with emphasis on multidimensional gas chromatography. A variety of GC specific applications have been developed by Microanalytics personnel ranging from petroleum and petrochemical purity assay to aroma and off-odor analysis for the food and packaging fields. On December 7, 1998, the Company acquired Lab Connections, Inc. ("Lab Connections"), located near Boston, Massachusetts. Lab Connections manufactures hardware and software interfaces that combine the separations capability of chromatography with the power to identify individual components by spectroscopy. Lab Connections is a global specialty analytical instrument and software company focused on laboratory measurements of commercial importance. Lab Connections' products extend and enhance customers' productivity and their ability to obtain crucial knowledge regarding the identification, composition and configuration of complex mixtures. Typical applications are in the analysis of polymers and adhesives. 2 FINANCIAL INFORMATION ABOUT SEGMENTS The Company operates in one segment; the development, manufacturing and marketing of measurement, analytical, monitoring, sample preparation, and consulting products used to detect, measure and analyze gases and chemical compounds. PRODUCTS AND SERVICES The Company develops, manufactures, markets, and services measurement, analytical, monitoring, sample preparation and consulting products used to detect, measure, and analyze gases and chemical compounds. PERMEATION PRODUCTS Permeation products consist of systems and services designed to measure the rate of transmission of various gases and vapors through packages and various materials. These products are designed to perform these measurements under precise temperature and relative humidity conditions. The principal market for these products 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. The Company also provides certain laboratory testing services utilizing the Company's permeation 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 63%, 62%, and 58% of the Company's consolidated sales in 2000, 1999, and 1998, respectively. Permeation instruments currently manufactured by the Company include OX-TRAN(R) systems for oxygen transmission rates, PERMATRAN-W(R) systems for water vapor transmission rates, and PERMATRAN-C(TM) systems for carbon dioxide transmission rates. WEIGHING PRODUCTS Weighing products manufactured by the Company are used to automatically determine the weight of pharmaceutical capsules and/or tablets and to reject those found to be out of acceptable limits. The Company's VERICAP(R) high-speed capsule weighing system runs at rates up to 2,000 capsules per minute and can be integrated into a capsule production line in pharmaceutical factories. The other weighing systems are designed for off-line use. These products are marketed primarily to the pharmaceutical industry. Weighing products accounted for less than 15% of the Company's consolidated sales in 2000 and 1999, and approximately 19% of the Company's consolidated sales in 1998. Weighing instruments currently manufactured by the Company include the VERICAP(R) high-speed capsule weighing systems, the VERITAB(R) high-speed tablet weighing systems, and the AB(TM) automatic balance weighing systems for both tablets and capsules. CONSULTING AND ANALYTICAL SERVICES The Company provides consulting and analytical 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, 3 flavor or odor detection, contract research or special permeation applications. In providing the consulting and analytical services, the Company uses its most advanced measurement technologies, including proprietary TRANSORPTION(R) technology. The principal market for the consulting and analytical services consists of manufacturers of foods, beverages, pharmaceuticals, automotive, plastics, chemicals, electronics, and personal care products. HEADSPACE ANALYZER PRODUCTS The Company's headspace analyzers are used to analyze the amount of oxygen and/or carbon dioxide present in the headspace of flexible and rigid packages. Some analyzers measure the oxygen and/or carbon dioxide content in flushing gases used in modified or controlled atmosphere packaging. The principal market for these products consists of packagers of foods, beverages and pharmaceuticals. The headspace analyzer products currently manufactured by the Company include the PAC CHECK(TM) series of headspace analyzers and the GSA(TM) series of on-line gas stream analyzers for continuous and intermittent monitoring of modified atmosphere packaging (MAP) and other gas flushing operations. SAMPLE PREPARATION PRODUCTS The Company designs, manufactures, markets, and services sample preparation products. These products consist of hardware and software interfaces that combine the separations capability of chromatography with the power to identify individual components by spectroscopy analysis. The most time-consuming part of chemical analysis is sample preparation. Procedures, techniques, and instruments that reduce total sample preparation time are highly desirable for analysis of chemical compounds. The Company's products provide fully automatic sample collection from any Liquid Chromatograph or Gel Permeation Chromatograph in a form suitable for immediate examination by Fourier transform infra-red spectroscopy ("FTIR") and/or matrix assisted laser desorption ionization mass spectrometry ("MALDI-MS"). The principal market for these products is to analytical laboratories of polymer and adhesive manufacturers. The sample preparation products currently manufactured by the Company are the LC-Transform(R) for interfacing to FTIR and the LC-Transform for interfacing to MALDI-MS. GC ANALYZER PRODUCTS The Company integrates its gas chromatography components with GCs to form multidimensional GC analyzer systems. Multidimensional GC analyzers represent state of the art technology in gas chromatographic separations. These systems are used in identifying compounds causing off-odors in various products, in identifying critical aroma compounds and in high purity analysis of single component matrixes. The GC analyzer products currently manufactured by the Company are the AROMATRAX(TM) systems for odor and aroma analysis and profiling, the PURI-TRAX(TM) systems consisting of a vinyl chloride monomer purity analysis system and a system for measuring trace levels of oxygenated hydrocarbons in a variety of hydrocarbon products and process streams such as liquefied petroleum gases, and the VAPO-JECT(TM) automated vaporizing injector system for permanent and liquefied petroleum gases. The principal markets for the GC analyzer products consist of food, beverage, petroleum, chemical and petrochemical manufacturers. The Company does not manufacture gas 4 chromatographs but purchases such components from Agilent Technologies, Inc. pursuant to a Channel Partner arrangement. GAUGING PRODUCTS The Company's gauging products use capacitance technology to measure the thickness of thin films and coatings in laboratories. 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 this product group is made up of manufacturers of plastic films. The Company currently manufactures the PROFILER(R) 140E laboratory gauge. LEAK DETECTION PRODUCTS The leak detection products manufactured by the Company detect leaks in sterile medical trays, pouches, blister packs and a wide range of other packages. The principal market for these products includes packagers of sterile medical items, pharmaceuticals, and food products. The Company manufactures two main types of leak detection instruments. The first type of instrument is a non-destructive leak detector that senses small amounts of carbon dioxide escaping from a package or tray. The second type of instrument detects leaks and checks for seal integrity by applying and measuring pressure within a package. 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. The Company competes with several others in the design, manufacture and sale of its measurement, analytical, monitoring, sample preparation and consulting products. The principal competitive factors are product technology and performance, quality and reliability, sales and marketing ability, product support, delivery, and price. Some of the Company's competitors have greater assets and resources than the Company and some are smaller than the Company. Some of the Company's larger competitors may have greater financial resources, stronger marketing organizations, broader product lines and other resources than those of the Company. MANUFACTURING AND SUPPLIES The Company manufactures products at three locations in the United States. The Company's manufacturing capabilities include electro-mechanical assembly, testing, integration of components and systems, calibration, and validation of systems. Certain components are currently purchased from single source suppliers. An interruption of one of these sources could result in delays in the Company's production while the Company developed an alternative supplier and could result in a loss of sales and income. There are other single source components for which the Company has determined that other sources are readily available. The Company has experienced no significant production delays because of a supplier's inability to ship an acceptable component. 5 MARKET RISK MANAGEMENT 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. The Company currently sells its products and services in United States dollars; accordingly, the exposure to foreign currency exchange risk is minimal. BACKLOG The Company had a total backlog of approximately $1,959,000 as of December 31, 2000 as compared to approximately $1,870,000 and $1,876,000 as of December 31, 1999 and 1998, respectively. The Company anticipates filling the entire current backlog in 2001. 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 that are conceived and developed during their employment, except to the extent prohibited by applicable law. The Company holds both United States and international patents and has both U.S. and international patents pending. The Company currently holds 36 U.S. patents and 25 international patents. In addition, the Company holds license rights under four U.S. patents subject to royalty payments and/or minimum required royalties. These patents and licenses will expire during the period from 2005 through 2018. 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 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 manufactured at its headquarters 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), LC-Transform(R), TRANSORPTION(R) and 1-TIME(R). The Company's trademarks have a life, subject to periodic maintenance, of 10 to 20 years, which may be extended. 6 RESEARCH AND DEVELOPMENT The Company incurred expenses of approximately $1,127,000, $1,234,000 and $1,061,000 during the fiscal years ended December 31, 2000, 1999 and 1998, respectively, for research and development of its products. Research and development costs were 7% of sales for the fiscal years ended December 31, 2000, 1999 and 1998. For the foreseeable future, the Company expects to allocate, on an annual basis, approximately 6% to 9% of sales to research and development. WORKING CAPITAL PRACTICES The Company maintains inventory levels in its 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 that failed to comply with the Company's warranty. FOREIGN AND DOMESTIC MARKETING The Company markets its products and services, provides support services, and distributes expendables and accessories required to support the operation of the products. The Company sells the majority of its products in the United States and Canada through a direct sales channel to end-users. A network of independent representatives serves the Company's foreign markets. 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 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 denominates 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. For information concerning the Company's export sales by geographic area, see Note 9 of the Notes to Consolidated Financial Statements contained on page F-16. No single customer accounted for 10% or more of the Company's consolidated sales in the fiscal years ended December 31, 2000, 1999 and 1998 and the Company does not believe that the loss of any single customer would have a material adverse effect on the Company. One of the Company's independent representatives accounted for approximately 16%, 15%, and 12% of the Company's sales in 2000, 1999 and 1998 respectively. For additional information concerning sales by such independent representatives, see Note 9 of the Notes to Consolidated Financial Statements contained on page F-16. The Company's business is not seasonal in nature. 7 EMPLOYEES As of December 31, 2000, the Company had 85 full-time employees. The Company employs scientists and engineers who research and develop potential new products. To protect the Company's proprietary information, the Company has confidentiality and non-compete agreements with its employees. 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 leases 54,900 square feet of office, engineering, laboratory, and production space in Minnesota, Massachusetts, and Texas. Management believes that the Company's facilities are generally adequate for its present operations and that suitable space is readily available if any of such leases are not extended. The Company headquarters and operations occupy approximately 47,200 square feet of space in Minneapolis, Minnesota. The current lease expires in June 2010. Microanalytics' operations occupy approximately 2,400 square feet of space in the metropolitan area of Austin, Texas. This space is leased until January 2002. Lab Connections' operations occupy approximately 5,300 square feet of space near Boston, Massachusetts. This space is leased until July 2004. 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 2000. 8 ITEM 4A. 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 March 14, 2001, are as follows: Executive Officer Name Age Title (1) Since - -------------------------------------------------------------------------------- Robert L. Demorest (2) 55 President and Chief Executive Officer, 1985 Chairman of the Board Daniel W. Mayer 50 Executive Vice President 1988 Dane D. Anderson (3) 39 Vice President and Chief Financial 2000 Officer, Treasurer and Secretary Douglas J. Lindemann (4) 43 Vice President and General Manager 2001 Ronald A. Meyer (5) 50 Vice President 1985 - ------------------------ (1) All executive officers have been employed in the capacity set forth for at least five years unless otherwise indicated. (2) Mr. Robert L. Demorest has been the Company's President, Chief Executive Officer, and Chairman of the Board since April 2000. Prior to that time, Mr. Demorest had been President of the Company for more than five years. (3) Mr. Dane D. Anderson has been the Company's Chief Financial Officer, Vice President, Treasurer and Secretary since January 2001. Mr. Anderson had been the Company's Chief Financial Officer, Treasurer and Secretary since August 2000, and was the acting Vice President - Finance and Administration, Treasurer and Secretary from May 2000 to August 2000. From July 1996 to May 2000 Mr. Anderson had been a Business Manager for the Company. Prior to July 1996, Mr. Anderson had been the Company's Controller for more than five years. (4) Mr. Douglas J. Lindemann has been a Vice President and General Manager for the Company since January 2001. From July 2000 to December 2000 Mr. Lindemann was a General Manager for the Company. Prior to that time Mr. Lindemann had been a Business Manager for the Company since 1995. (5) Mr. Ronald A. Meyer has been a Vice President of the Company for more than five years. From 1995 to April 2000, Mr. Meyer also served as the Company's Chief Financial Officer, Treasurer and Secretary. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of March 8, 2001, there were 458 record holders of the Company's Common Stock. The Company's Common Stock trades on the Nasdaq Stock Market 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.
2000 1999 ---- ---- Quarter Low High Dividend Low High Dividend - ------- --- ---- -------- --- ---- -------- 1st Quarter.................. $ 5.06 $ 7.69 $ .055 $ 4.38 $ 5.88 $ .05 2nd Quarter.................. $ 5.00 $ 6.00 $ .055 $ 4.38 $ 6.13 $ .05 3rd Quarter.................. $ 5.19 $ 7.00 $ .055 $ 4.38 $ 8.50 $ .05 4th Quarter.................. $ 5.50 $ 6.88 $ .060 $ 4.50 $ 7.38 $ .05
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31, ----------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (in thousands, except per share data) ----------------------------------------------------- OPERATIONS DATA: Sales (1) .............................. $17,158 $16,838 $14,432 $16,173 $14,085 Net income ............................. $ 3,270 $ 2,899 $ 2,328 $ 3,728 $ 3,082 Net income per share: Basic ......................... $ .55 $ .46 $ .37 $ .58 $ .48 Diluted ....................... $ .55 $ .46 $ .36 $ .57 $ .47 Dividends declared per share ........... $ .225 $ .20 $ .20 $ .18 $ .16 As of December 31, ----------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (in thousands) ----------------------------------------------------- BALANCE SHEET DATA: Total assets ........................... $18,418 $18,204 $17,675 $17,404 $14,881 Long-term liabilities .................. $ 187 $ 112 $ 98 $ 2 $ 92
- ------------------------ (1) As further described in Note 1(k) to the Company's financial statements on page F-8, certain foreign distributor commission expenses have been reclassified from operating expenses to a reduction in revenues. The amounts of these reclassifications were $1,158,000, $1,005,000, $714,000, $844,000, and $682,000 in 2000, 1999, 1998, 1997 and 1996, respectively. This reclassification had no impact on previously recorded net income. The Company's acquisition of Lab Connections, Inc. and Microanalytics Instrumentation Corp. in 1998 affects the comparability of the information in the table above. For information concerning these acquisitions, see Note 11 to the Company's financial statements on page F-17. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-K 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-K 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. SUMMARY On January 28, 1998 the Company acquired Microanalytics Instrumentation Corp. of metro Austin, Texas and on December 7, 1998 the Company acquired Lab Connections, Inc. of metro Boston, Massachusetts. The acquisitions were recorded using the purchase method of accounting and, accordingly, their results of operations have been included since the acquisition dates. Sales increased 2 percent in 2000 compared to 1999, while net income increased 13 percent for the same period. The Company's financial position as of December 31, 2000 reflects an increase in working capital to $8,462,000 compared to $8,035,000 at December 31, 1999. Basic earnings per share were $0.55 in 2000, $0.46 in 1999, and $0.37 in 1998. RESULTS OF OPERATIONS Net sales were $17,158,000 in 2000, compared to $16,838,000 in 1999 and $14,432,000 in 1998. The increase in sales from 1999 to 2000 was due primarily to increases in the sales volume of the Company's permeation products, consulting and analytical service products, leak detection products, and the sales volume of Lab Connections, a wholly owned subsidiary of the Company, offset by decreases in the sales volume of the Company's gauging products and weighing products. The increase in sales from 1998 to 1999 was due primarily to increases in the sales volume of the Company's permeation products, consulting and analytical service products, and the sales volume of Lab Connections, a wholly owned subsidiary of the Company, offset by decreases in the sales volume of the Company's weighing products. In 2000, international sales increased 14% to $7,067,000 and domestic sales decreased 5% to $10,091,000. International and domestic sales increased 26% and 12% in 1999 to $6,203,000, and $10,635,000, respectively. Total sales of the Company's permeation products increased in 2000 due to expanded market penetration with lower priced, less precise multiple test station products, and to testing services. The Company is positioning its permeation products to address applications outside the traditional measurement of barrier packages and materials. Products have been introduced to analyze high transmitting materials such as surgical gowns and diaper lining. Permeation products 11 accounted for approximately 63%, 62%, and 58% of the Company's consolidated sales in 2000, 1999, and 1998, respectively. Weighing product sales decreased in 2000 due to declining sales of the VERICAP high-speed capsule weighing and sorting system. Weighing products accounted for approximately 7%, 10% and 19% of the Company's consolidated sales in 2000, 1999, and 1998, respectively. Consulting and analytical service sales increased in 2000 as expertise in the areas of material analysis and specialty permeation testing expanded. Services using the Company's most advanced technologies are positioning the Company to address new applications in markets such as life sciences, medical, automotive and electronics. A significant portion of the sales from these services relate to applications outside of the Company's traditional measurements of barrier packages and materials. Sales of headspace and GC analyzer products remained steady in 2000 compared to 1999. Sales of sample preparation products increased in 2000 due to increased market penetration. International revenues increased 14% to $7,067,000, or 41% of total revenue in 2000 compared to $6,203,000, or 37% of revenue in 1999, and $4,910,000, or 34% of total revenue in 1998. The Company uses a network of independent representatives to market and service its products in foreign countries. A single currency called the euro was introduced in Europe on January 1, 1999. Although MOCON sells its products in United States dollars, the increased price transparency resulting from the use of a single currency may affect the ability of its independent representatives to price products differently in the various European markets. The use of a single European currency may increase the foreign currency risks of such independent representatives and affect the prices at which products are sold. The gross profit margin was 63% in each of the fiscal years ended December 31, 2000, 1999 and 1998, which is in line with the Company's historical average of approximately 62 to 67 percent of sales. The 2000, 1999 and 1998 gross profit percentages are at the low end of the historical range primarily due to reclassifications of certain foreign distributor commission expenses as outlined in Note 1(k) of the Company's consolidated financial statements. Selling, general and administrative ("SG&A") expenses were $5,330,000 in 2000 or 31% of sales, compared to $5,474,000, or 33% of sales in 1999, and $5,033,000, or 35% of sales in 1998. The decrease in SG&A expenses from 1999 to 2000 is primarily due to a decrease in general and administrative expenses associated with the retirement of the Company's former Chief Executive Officer. The increase in SG&A expenses from 1998 to 1999 is primarily due to the amortization of intangible assets related to the acquisition of Lab Connections. Research and development expenses amounted to $1,127,000, or 7% of sales in 2000, compared to $1,234,000, or 7% of sales in 1999, and $1,061,000, or 7% of sales in 1998. 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 $468,000 in 2000 from $419,000 in 1999. The increase in 2000 is primarily due to a higher average yield on investments, partially offset by 12 lower average investment balances, during 2000. The decrease in investment income from 1998 to 1999 is primarily the result of lower average investment balances during 1999 as compared to 1998. The Company's provision for income taxes was 32% of income before income taxes in 2000 and 33.5% and 34% of pretax income in 1999 and 1998, respectively. Based on current operating conditions and income tax laws, the Company expects the tax rate for 2001 to be in the range of 32 to 35%. Net income was $3,270,000 in 2000 compared to $2,899,000 in 1999, and $2,328,000 in 1998. Basic net income per share was $.55 per share in 2000 compared to $.46 per share in 1999, and $.37 per share in 1998. LIQUIDITY AND CAPITAL RESOURCES Total cash, temporary cash investments and marketable securities decreased $373,000 during 2000 to $9,509,000. In addition to funding its operations, the Company used its cash resources to pay dividends totaling $1,286,000 and to repurchase of shares of the Company's common stock during the period totaling approximately $1,621,000. Depending upon market conditions and subject to approval of the board of directors, the Company plans to continue to repurchase shares of its common stock at prices not exceeding the market price. Cash flow from operations has historically been sufficient to meet liquidity requirements, capital expenditures and research and development costs. Cash flow from operations totaled $3,436,000, $3,783,000 and $3,222,000 in 2000, 1999 and 1998, respectively. The Company has no long-term debt and has no material commitments for capital expenditures as of December 31, 2000. The Company's plant and equipment does 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. NEW ACCOUNTING PRONOUNCEMENTS During 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (as amended by SFAS No. 137 with respect to the effective date), which establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. The Company adopted the new standard beginning in fiscal 2001. Its adoption did not impact the Company's financial condition or results of operations. 13 RISK FACTORS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in 2001 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. CHANGING PRICES/EFFECT OF INFLATION. Inflation has not had a material impact on the Company's operations. The prices of some components purchased by the Company have increased in the past several years due in part to decreased volume. Certain other material and labor costs have increased, but the Company believes that such increases are approximately consistent with overall inflation rates. The Company believes that competition based on price is a significant factor affecting its customers' buying decisions. There is no assurance that the Company can pass along cost increases in the form of price increases or sustain profit margins that have been achieved in prior years. GROWTH POTENTIAL. The analytical and measurement instrument markets in which the Company operates have been somewhat flat in recent years. The Company has identified a number of strategies it believes will allow it to grow its business, including developing new products and technologies, developing new applications for its technologies, acquiring complementary businesses or product lines, and strengthening its sales force. No assurance can be given that the Company will be able to successfully implement these strategies, or that these strategies will result in growth of the Company's business. ACQUISITION STRATEGY. One of the Company's growth strategies is to supplement its internal growth with the acquisition of businesses and technologies that complement or augment the Company's products. Certain businesses acquired by the Company have initially produced net operating losses or low levels of profitability. In addition, businesses that the Company may seek to acquire in the future may also be marginally profitable or unprofitable. In order for any acquired business to achieve the level of profitability desired by the Company, the Company typically must successfully change operations of the acquired companies and improve their market penetration. No assurance can be given that the Company will be successful in this regard. In addition, promising acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers. There can be no assurance that the Company will be able to complete future acquisitions. In order to finance any such acquisitions, it may be necessary for the Company to raise additional funds either through public or private financing. Any equity or debt financing, if available at all, may be on terms that are not favorable to the Company and may result in dilution to the Company's shareholders. 14 TECHNOLOGICAL CHANGE, OBSOLESCENCE, AND THE DEVELOPMENT AND ACCEPTANCE OF NEW PRODUCTS. The market for the Company's products and services is characterized by rapid and significant technological change and evolving industry standards. New product introductions responsive to these factors require significant planning, design, development and testing at the technological, product, and manufacturing process levels, and may render existing products and technologies uncompetitive or obsolete. There can be no assurance that the Company's products will not become uncompetitive or obsolete. In addition, industry acceptance of new technologies developed by the Company may be slow to develop due to, among other things, existing regulations or standards written specifically for older technologies and general unfamiliarity of users with new technologies. DEPENDENCE ON CAPITAL SPENDING POLICIES AND GOVERNMENT FUNDING. The Company's customers include pharmaceutical, food, and chemical companies, laboratories, government agencies, and public and private research institutions. The capital spending of these entities can have a significant effect on the demand for the Company's products. Any decrease in capital spending by any of the customer groups that account for a significant portion of the Company's sales could have a material adverse effect on the Company's business and results of operations. INTERNATIONAL SALES. Sales outside the United States accounted for approximately 41% of the Company's revenues in 2000 and for approximately 37% and 34% of the Company's revenues in 1999 and 1998. The Company expects that international sales will continue to account for a significant portion of the Company's revenues in the future. Sales to customers in foreign countries are subject to a number of risks, including the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; foreign customers may have longer payment cycles; impose tariffs, or adopt other restrictions on foreign trade; fluctuations in exchange rates may affect product demand; export licenses, if required, may be difficult to obtain and the protection of intellectual property in foreign countries may be more difficult to enforce. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business and results of operations. COMPETITION. The Company encounters and expects to continue to encounter competition in the sale of its products. The Company believes that the principal competitive factors affecting the market for its products include product performance, price, reliability, and customer service. The Company's competitors include large multinational corporations and their operating units. Some of the Company's competitors have substantially greater financial, marketing, and other resources than those of the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than the Company. In addition, competition could increase if new companies enter the market or if existing competitors expand their product lines or intensify efforts within existing product lines. There can be no assurance that the Company's current products, products under development or ability to discover new technologies will be sufficient to enable it to compete effectively with its competitors. PROTECTION, DEFENSE, AND USE OF INTELLECTUAL PROPERTY. The Company holds patents relating to various aspects of its products and believes that proprietary technical know-how is critical to many of its products. Proprietary rights relating to the Company's products are protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable 15 patents or are maintained in confidence as trade secrets. There can be no assurance that patents will issue from any pending or future patent applications owned by or licensed to the Company or that the claims allowed under any issued patents will be sufficiently broad to protect the Company's technology, and in the absence of patent protection, the Company may be vulnerable to competitors who attempt to copy the Company's products or gain access to its trade secrets and know-how. Proceedings initiated by the Company to protect its proprietary rights could result in substantial costs to the Company. There can be no assurance that competitors of the Company will not initiate litigation to challenge the validity of the Company's patents, or that they will not use their resources to design comparable products that do not infringe the Company's patents. There may also be pending or issued patents held by parties not affiliated with the Company that relate to the Company's products or technologies. The Company may need to acquire licenses to, or contest the validity of, any such patents. There can be no assurance that any license required under any such patent would be made available on acceptable terms or that the Company would prevail in any such contest. The Company could incur substantial costs in defending itself in suits brought against it or in suits in which the Company may assert its patent rights against others. If the outcome of any such litigation is unfavorable to the Company, the Company's business and results of operations could be materially adversely affected. In addition, the Company relies on trade secrets and proprietary know-how that it seeks to protect, in part, by confidentiality agreements with its collaborators, employees, and consultants. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. FLUCTUATION OF STOCK PRICE. The Company believes factors such as announcements of new products by the Company or its competitors, quarterly fluctuations in the Company's financial results, customer contract awards, developments in regulation and general conditions in the various markets where the Company's products are sold have caused and are likely to continue to cause the market price of the Company's common stock to fluctuate substantially. In addition, instrumentation company stocks have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of such companies. This market volatility may adversely affect the market price of the Company's common stock. 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. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements and Independent Auditors' Report are included on pages F-1 to F-17 of this Form 10-K and are incorporated herein by reference. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share data) - -------------------------------------------------------------------------------- Quarter 1st 2nd 3rd 4th - -------------------------------------------------------------------------------- 2000 Net Sales $ 4,250 $ 4,253 $ 4,230 $ 4,425 Gross Profit $ 2,665 $ 2,719 $ 2,618 $ 2,795 Net Income $ 794 $ 810 $ 827 $ 839 Net Income Per Share Basic $ 0.13 $ 0.13 $ 0.14 $ 0.14 Diluted $ 0.13 $ 0.13 $ 0.14 $ 0.14 1999 Net Sales $ 4,197 $ 4,210 $ 4,169 $ 4,262 Gross Profit $ 2,678 $ 2,654 $ 2,613 $ 2,704 Net Income $ 694 $ 716 $ 753 $ 736 Net Income Per Share Basic $ 0.11 $ 0.11 $ 0.12 $ 0.12 Diluted $ 0.11 $ 0.11 $ 0.12 $ 0.12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 17 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 2001 Proxy Statement is incorporated herein by reference. The information concerning executive officers of the Company is included in this Report under Item 4a, "Executive Officers of the Company." (b) COMPLIANCE WITH SECTION 16 OF THE EXCHANGE ACT The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 2001 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 2001 Proxy Statement is incorporated herein by reference. 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 2001 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 2001 Proxy Statement is incorporated herein by reference. 18 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 and its subsidiaries are included herein: Page Independent Auditors' Report........................................... F-1 Consolidated Balance Sheets as of December 31, 2000 and 1999........... F-2 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998....................................... F-3 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2000, 1999 and 1998............ F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998....................................... F-5 Notes to Consolidated Financial Statements............................. F-6 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. 19 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders MOCON, Inc.: Under date of February 23, 2001, we reported on the consolidated balance sheets of MOCON, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000, as contained in this annual report on Form 10-K for the year 2000. In connection with our audits of the aforementioned consolidated financial statements, we also 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 LLP Minneapolis, Minnesota February 23, 2001 20 SCHEDULE II MOCON, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts
Balance at Charged to Balance beginning costs and Deductions at end Description of year expenses (1) of year - -------------------------------------------------------------------------------------------------- Year ended December 31, 2000 allowance for doubtful accounts $166,000 0 7,000 159,000 Year ended December 31, 1999 allowance for doubtful accounts $159,000 12,000 5,000 166,000 Year ended December 31, 1998 allowance for doubtful accounts $163,000 11,000 15,000 159,000 (1) Bad debts written off. Year ended December 31, 2000 allowance for inventory obsolescence $183,000 187,000 214,000 156,000 Year ended December 31, 1999 allowance for inventory obsolescence $185,000 66,000 68,000 183,000 Year ended December 31, 1998 allowance for inventory obsolescence $188,000 72,000 75,000 185,000 (1) Inventory written off. Year ended December 31, 2000 allowance for product warranties $284,000 318,000 330,000 272,000 Year ended December 31, 1999 allowance for product warranties $251,000 336,000 303,000 284,000 Year ended December 31, 1998 allowance for product warranties $199,000 315,000 263,000 251,000 (1) Expenses written off.
21 3. EXHIBITS The exhibits to this Report are listed in the Exhibit Index. 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 23, 2001, upon receipt from any such person of a written request for any such exhibit. Such request should be sent to MOCON, 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. 1990 Non-Employee Director Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 33-42255)). B. 1992 Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 33-49752)). C. 1998 Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 33-58789)). D. Compensation Committee resolutions setting forth the Incentive Compensation Plan (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 0-9273)). E. 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)). F. 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)). G. Form of Executive Severance Agreement (filed herewith) (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, 2000. (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. 22 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 30, 2001 MOCON, INC. By: /s/ Robert L. Demorest -------------------------------------------- Robert L. Demorest, President, Chief Executive Officer, and Chairman of the Board (principal executive officer) By: /s/ Dane D. Anderson -------------------------------------------- Dane D. Anderson, Vice President, Chief Financial Officer, 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 indicated and on March 30, 2001. Signature and Title ------------------- /s/ Robert L. Demorest ------------------------------------------------------------------- Robert L. Demorest, President, Chief Executive Officer and Director /s/ Dean B. Chenoweth ------------------------------------------------------------------- Dean B. Chenoweth, Director /s/ J. Leonard Frame ------------------------------------------------------------------- J. Leonard Frame, Director /s/ Daniel W. Mayer ------------------------------------------------------------------- Daniel W. Mayer, Executive Vice President and Director /s/ Ronald A. Meyer ------------------------------------------------------------------- Ronald A. Meyer, Vice President and Director /s/ Richard A. Proulx ------------------------------------------------------------------- Richard A. Proulx, Director /s/ Paul L. Sjoquist ------------------------------------------------------------------- Paul L. Sjoquist, Director /s/ Tom C. Thomas ------------------------------------------------------------------- Tom C. Thomas, Director 23 MOCON, INC. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2000, 1999, and 1998 (With Independent Auditors' Report Thereon) TABLE OF CONTENTS PAGE Independent Auditors' Report F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Income F-3 Consolidated Statements of Stockholders' Equity and Comprehensive Income F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders MOCON, Inc. and subsidiaries: We have audited the accompanying consolidated balance sheets of MOCON, Inc. (the Company) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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 MOCON, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1(k) to the consolidated financial statements, the Company has retroactively reclassified certain foreign distributor commission expenses as a reduction of revenue for all periods presented. /s/ KPMG LLP Minneapolis, Minnesota February 23, 2001 F-1 MOCON, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2000 and 1999
ASSETS 2000 1999 ------------ ------------ Current assets: Cash and temporary cash investments $ 641,942 1,275,838 Marketable securities, current 4,755,640 4,347,724 Trade accounts receivable, less allowance for doubtful accounts of $159,000 in 2000 and $166,000 in 1999 2,848,049 2,497,850 Other receivables 118,807 139,481 Inventories 2,127,059 2,104,588 Prepaid expenses 243,291 161,587 Deferred income taxes 343,000 345,000 ------------ ------------ Total current assets 11,077,788 10,872,068 ------------ ------------ Marketable securities, noncurrent 4,111,690 4,259,071 Property and equipment 3,789,397 3,388,294 Less accumulated depreciation and amortization 2,590,443 2,205,801 ------------ ------------ 1,198,954 1,182,493 ------------ ------------ Other assets: Goodwill, net of accumulated amortization of $245,585 in 2000 and $122,204 in 1999 841,516 964,897 Technology rights and other intangibles, net of accumulated amortization of $281,186 in 2000 and $176,731 in 1999 1,055,543 799,448 Other 132,087 125,899 ------------ ------------ Total other assets 2,029,146 1,890,244 ------------ ------------ $ 18,417,578 18,203,876 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 859,103 853,030 Accrued compensation and vacation 603,929 675,339 Other accrued expenses 288,749 314,989 Accrued product warranties 271,702 283,727 Accrued income taxes 242,891 404,133 Dividends payable 348,916 305,680 ------------ ------------ Total current liabilities 2,615,290 2,836,898 ------------ ------------ Deferred income taxes 187,000 112,000 ------------ ------------ Total liabilities 2,802,290 2,948,898 ------------ ------------ Stockholders' equity: Capital stock - undesignated--authorized 3,000,000 shares -- -- Common stock - $.10 par value; authorized 22,000,000 shares; issued and outstanding 5,809,431 shares in 2000 and 6,073,097 shares in 1999 580,943 607,310 Capital in excess of par value -- -- Retained earnings 15,034,345 14,647,668 ------------ ------------ Total stockholders' equity 15,615,288 15,254,978 Commitments and contingencies (note 5) ------------ ------------ $ 18,417,578 18,203,876 ============ ============
See accompanying notes to consolidated financial statements. F-2 MOCON, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 2000, 1999, and 1998
1999 1998 as reclassified as reclassified 2000 see note 1(k) see note 1(k) --------------- --------------- --------------- Sales Products $ 14,684,209 14,752,978 13,080,297 Consulting services 2,474,017 2,084,954 1,352,152 --------------- --------------- --------------- Total sales 17,158,226 16,837,932 14,432,449 --------------- --------------- --------------- Cost of sales Products 5,108,179 5,218,887 4,639,320 Consulting services 1,252,873 970,041 642,735 --------------- --------------- --------------- Total cost of sales 6,361,052 6,188,928 5,282,055 --------------- --------------- --------------- Gross profit 10,797,174 10,649,004 9,150,394 Selling, general, and administrative expenses 5,329,514 5,474,447 5,033,313 Research and development expenses 1,126,564 1,234,204 1,060,883 --------------- --------------- --------------- Operating income 4,341,096 3,940,353 3,056,198 Investment income 468,176 418,814 470,411 --------------- --------------- --------------- Income before income taxes 4,809,272 4,359,167 3,526,609 Income taxes 1,539,000 1,460,000 1,199,000 --------------- --------------- --------------- Net income $ 3,270,272 2,899,167 2,327,609 =============== =============== =============== Net income per common share: Basic $ .55 .46 .37 =============== =============== =============== Diluted $ .55 .46 .36 =============== =============== =============== Weighted average shares outstanding: Basic 5,980,467 6,250,254 6,358,963 =============== =============== =============== Diluted 5,995,353 6,268,358 6,397,847 =============== =============== ===============
See accompanying notes to consolidated financial statements. F-3 MOCON, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income Years ended December 31, 2000, 1999, and 1998
COMMON STOCK ---------------------------- CAPITAL IN NUMBER EXCESS OF RETAINED OF SHARES AMOUNT PAR VALUE EARNINGS TOTAL ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 6,435,340 $ 643,534 67,253 14,321,713 15,032,500 Stock options exercised 34,645 3,465 91,289 71,000 165,754 Purchase and retirement of common stock (363,369) (36,337) (225,772) (1,907,613) (2,169,722) Dividends declared ($.20 per share) -- -- -- (1,269,467) (1,269,467) Issuance of shares in conjunction with the acquisitions of Microanalytics Instrumentation Corp. and Lab Connections, Inc. 181,344 18,134 1,001,261 -- 1,019,395 Net income and comprehensive income -- -- -- 2,327,609 2,327,609 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 6,287,960 628,796 934,031 13,543,242 15,106,069 Stock options exercised 48,300 4,830 217,926 -- 222,756 Purchase and retirement of common stock (263,163) (26,316) (1,151,957) (548,569) (1,726,842) Dividends declared ($.20 per share) -- -- -- (1,246,172) (1,246,172) Net income and comprehensive income -- -- -- 2,899,167 2,899,167 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1999 6,073,097 607,310 -- 14,647,668 15,254,978 Stock options exercised 16,223 1,622 71,871 -- 73,493 Purchase and retirement of common stock (279,889) (27,989) (71,871) (1,553,475) (1,653,335) Dividends declared ($.225 per share) -- -- -- (1,330,120) (1,330,120) Net income and comprehensive income -- -- -- 3,270,272 3,270,272 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2000 5,809,431 $ 580,943 -- 15,034,345 15,615,288 ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 MOCON, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2000, 1999, and 1998
2000 1999 1998 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 3,270,272 2,899,167 2,327,609 Adjustments to reconcile net income to net cash provided by operating activities: Loss on disposition of long-term assets 56,635 38,698 19,401 Depreciation and amortization 730,231 611,596 378,887 Deferred income taxes 77,000 (49,000) (7,000) Changes in operating assets and liabilities, net of effect of acquisitions: Trade accounts receivable (350,199) (373,790) 1,094,145 Other receivables 20,674 (12,377) 48,947 Inventories (22,471) 217,599 (362,520) Prepaid expenses (81,704) 74,071 (43,628) Accounts payable 6,073 51,494 125,435 Accrued compensation and vacation (71,410) 234,643 (194,730) Other accrued expensess (26,240) 36,849 (149,525) Accrued product warranties (12,025) 32,869 36,466 Accrued income taxes (161,242) 21,450 (51,740) ----------- ----------- ----------- Net cash provided by operating activities 3,435,594 3,783,269 3,221,747 ----------- ----------- ----------- Cash flows from investing activities: Purchases of marketable securities (5,324,204) (6,379,304) (2,744,874) Proceeds from sales of marketable securities at maturity 5,063,669 5,794,760 4,883,500 Cash paid in acquisitions, net of cash acquired -- -- (1,032,642) Purchases of property and equipment (540,097) (475,250) (401,085) Proceeds from sale of property and equipment 18,686 18,308 -- Purchases of patents and trademarks (414,629) (50,169) (53,179) Other (6,188) (6,361) (6,273) ----------- ----------- ----------- Net cash (used in) provided by investing activities (1,202,763) (1,098,016) 645,447 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from the exercise of stock options 40,368 14,630 17,006 Purchase and retirement of common stock (1,620,804) (1,524,021) (2,022,475) Dividends paid (1,286,291) (1,252,440) (1,272,323) ----------- ----------- ----------- Net cash used in financing activities (2,866,727) (2,761,831) (3,277,792) ----------- ----------- ----------- Net (decrease) increase in cash and temporary cash investments (633,896) (76,578) 589,402 Cash and temporary cash investments: Beginning of year 1,275,838 1,352,416 763,014 ----------- ----------- ----------- End of year $ 641,942 1,275,838 1,352,416 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for income taxes $ 1,623,242 1,487,550 1,258,363 =========== =========== =========== Supplemental schedule of noncash investing and financing activities: Noncash purchase and retirement of common stock $ 32,531 202,821 147,247 Noncash exercise of stock options 33,125 208,126 148,748 Dividends accrued 348,916 305,680 317,253 Issuance of common stock for acquisitions -- -- 1,019,395 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MOCON, Inc. (the Company) operates in a single industry segment: the development, manufacturing, and marketing of measurement, analytical, monitoring, sample preparation, and consulting products used to detect, measure, and analyze gases and chemical compounds for 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 consolidated financial statements. (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. (b) STATEMENTS OF CASH FLOWS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Temporary cash investments consist of short-term investments which are readily convertible to cash. (c) MARKETABLE SECURITIES Marketable securities at December 31, 2000 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. F-6 (Continued) MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 (d) INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method (FIFO), and market represents the lower of replacement cost or estimated net realizable value. (e) 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. (f) INTANGIBLE ASSETS Intangible assets are carried at cost less accumulated amortization and consist of goodwill, technology rights, patents, and trademarks. Goodwill represents the excess of the purchase price over the fair value of assets acquired. 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. Goodwill and technology rights are amortized on a straight-line basis over 7 to 10 years. 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. During fiscal 2000, the Company purchased $184,000 in technology rights and $180,000 in patents which are being amortized over 7 and 10 years, respectively. (g) 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. (h) USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. F-7 (Continued) MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 (i) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (j) 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. (k) REVENUE RECOGNITION Revenue is recognized upon shipment of product or upon completion of services. During the quarter ended December 31, 2000, the Company reclassified foreign distributor commission expenses from operating expense to a reduction in revenues. This reclassification has been reflected in the Company's historical financial statements, and has no effect on the Company's net earnings. The Company has reclassified foreign distributor commission expenses of $1,158,000, $1,005,000, and $714,000 as a reduction in revenues for the years ended December 31, 2000, 1999, and 1998, respectively. (l) ADVERTISING COSTS The Company incurs advertising costs associated with trade shows, print advertising, and brochures. Such costs are charged to expense as incurred. Advertising expense was $211,000, $192,000, and $219,000, in 2000, 1999, and 1998, respectively. (m) 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 potential common shares outstanding during the year. F-8 (Continued) MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 (n) 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 Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. (o) RECLASSIFICATIONS Certain 1999 and 1998 amounts have been reclassified to conform to the 2000 presentation. (p) NEW ACCOUNTING PRONOUNCEMENTS During 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (as amended by SFAS No. 137 with respect to the effective date), which establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. The Company adopted the new standard beginning with the first quarter of fiscal 2001. The adoption of SFAS No. 133 did not impact the Company's financial condition or results of operations. (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, 2000 and 1999 were as follows:
2000 --------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- Held-to-maturity: Municipal bonds $5,266,204 18,271 (4,179) 5,280,296 Other securities 3,601,126 132,578 (392) 3,733,312 ---------- ---------- ---------- ---------- $8,867,330 150,849 (4,571) 9,013,608 ========== ========== ========== ==========
F-9 (Continued) MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998
1999 --------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- Available-for-sale: Municipal bonds $ 635,000 -- -- 635,000 ---------- ---------- ---------- ---------- $ 635,000 -- -- 635,000 ========== ========== ========== ========== Held-to-maturity: Municipal bonds $7,002,798 4,509 (28,318) 6,978,989 Other securities 968,997 27,004 (7,509) 988,492 ---------- ---------- ---------- ---------- $7,971,795 31,513 (35,827) 7,967,481 ========== ========== ========== ==========
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, 2000 and 1999:
2000 1999 ----------------------- ----------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ---------- ---------- ---------- ---------- Available-for-sale: Municipal bonds $ -- -- 635,000 635,000 ---------- ---------- ---------- ---------- $ -- -- 635,000 635,000 ========== ========== ========== ========== Held-to-maturity: Due within one year $4,755,640 4,768,435 3,712,724 3,720,183 Due after one through five years 4,111,690 4,245,173 4,259,071 4,247,298 ---------- ---------- ---------- ---------- $8,867,330 9,013,608 7,971,795 7,967,481 ========== ========== ========== ==========
F-10 (Continued) MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 (3) INVENTORIES The major components of inventories are as follows: 2000 1999 ------------ ------------ Finished products $ 138,505 240,784 Work-in-process 710,351 808,267 Raw materials 1,278,203 1,055,537 ------------ ------------ $ 2,127,059 2,104,588 ============ ============ (4) PROPERTY AND EQUIPMENT Property and equipment consist of the following: ESTIMATED 2000 1999 USEFUL LIVES ------------ ------------ ------------- Machinery and equipment $ 2,678,703 2,381,625 3 to 10 years Office equipment 548,957 516,660 2 to 15 years Leasehold improvements 462,591 377,352 1 to 5 years Vehicles 99,146 112,657 3 to 5 years ------------ ------------ $ 3,789,397 3,388,294 ============ ============ Depreciation and amortization of property and equipment charged to earnings was $468,613, $418,083, and $336,886 for the years ended December 31, 2000, 1999, and 1998, respectively. (5) COMMITMENTS AND CONTINGENCIES (a) LEASES The Company leases its facilities and certain equipment pursuant to operating leases. The facility leases expire at various times through June 2010 and require the Company to pay operating costs, including real estate taxes. Rental expense, including charges for operating costs, was as follows: 2000 1999 1998 ----------- ----------- ----------- $ 410,303 389,143 329,123 =========== =========== =========== F-11 (Continued) MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 The following is a schedule of future minimum lease payments, excluding charges for operating costs, for operating leases as of December 31, 2000: YEAR ENDING DECEMBER 31 ------------- 2001 $ 297,040 2002 286,200 2003 290,901 2004 276,402 2005 253,743 Later years 1,192,002 ------------ $ 2,596,288 ============ (b) EXECUTIVE SEVERANCE AGREEMENTS The Company has entered into severance agreements with four executives that require payment of two times their annual salary if they are terminated within 24 months after a change of control occurs or upon the occurrence of other events as described in the agreements. (6) INCOME TAXES The provision for income taxes consists of the following: 2000 1999 1998 ---------- ---------- ---------- Current tax expense: Federal $1,246,000 1,311,000 1,021,000 State 216,000 198,000 185,000 ---------- ---------- ---------- Total current expense 1,462,000 1,509,000 1,206,000 Deferred 77,000 (49,000) (7,000) ---------- ---------- ---------- Provision for income taxes $1,539,000 1,460,000 1,199,000 ========== ========== ========== F-12 (Continued) MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 The effective income tax rate varies from the federal statutory tax rate for the following reasons: PERCENTAGE OF PRETAX INCOME FOR YEARS ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 -------- -------- -------- 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 3.0 2.9 3.5 Tax-exempt earnings of FSC (2.3) (2.4) (2.7) Tax-exempt investment earnings (1.9) (2.3) (3.5) Other (0.8) 1.3 2.7 -------- -------- -------- Effective income tax rate 32.0 % 33.5 % 34.0 % ======== ======== ======== The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows: 2000 1999 ------------ ------------ Deferred tax assets: Allowance for doubtful accounts not currently deductible $ 57,000 60,000 Inventory costs not currently deductible 39,000 35,000 Inventory reserves 78,000 88,000 Warranty reserves 98,000 108,000 Other accruals 71,000 78,000 Other intangibles 47,000 43,000 Net operating loss and tax credit carryforwards -- 76,000 ----------- ----------- Total deferred tax assets 390,000 488,000 ----------- ----------- Deferred tax liabilities: Technology rights (173,000) (194,000) Excess of book over tax depreciation (61,000) (61,000) ----------- ----------- Total deferred tax liabilities (234,000) (255,000) ----------- ----------- Net deferred tax asset $ 156,000 233,000 =========== =========== 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. Net operating loss and tax credit carryforwards aggregated $145,000 and $25,000, respectively, at December 31, 1999. All net operating loss and tax credit carryforwards were utilized in 2000. F-13 (Continued) MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 (7) STOCKHOLDERS' EQUITY As of December 31, 2000, the Company has reserved 190,993 shares of common stock for options that are still available for grant under the Company's stock option plans, and 381,015 shares for options that have been granted but have not yet been exercised. Under the stock option 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 and 1998 Plans 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 and 1998 Plans, 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 accompanying consolidated financial statements as an addition to capital in excess of par value. The Company has adopted the disclosure-only provisions of SFAS No. 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: 2000 1999 1998 ------------ ----------- ------------ Net earnings - as reported $ 3,270,272 2,899,167 2,327,609 Net earnings - pro forma 3,066,627 2,818,972 2,202,542 Earnings per share - as reported: Basic .55 .46 .37 Diluted .55 .46 .36 Earnings per share - pro forma: Basic .51 .45 .35 Diluted .51 .45 .34 F-14 (Continued) MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 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 2000, 1999, and 1998: 2000 1999 1998 ---------- ---------- ---------- Dividend yield 3.30% 2.50% 2.25% Expected volatility 53% 44% 36% Risk-free interest rate 6.2% 5.5% 5.1% Expected lives 7.9 years 7.0 years 7.6 years Information regarding the Company's stock option plans for 2000, 1999, and 1998 is as follows: WEIGHTED- AVERAGE EXERCISE SHARES PRICE ----------- ------------ Options outstanding, December 31, 1997 198,773 $ 6.26 Granted 145,460 6.33 Exercised (34,645) 4.78 Canceled or expired (7,300) 8.16 ----------- ------------ Options outstanding, December 31, 1998 302,288 6.42 Granted 5,000 5.69 Exercised (48,300) 4.61 Canceled or expired (30,095) 6.09 ----------- ------------ Options outstanding, December 31, 1999 228,893 6.83 Granted 197,000 5.87 Exercised (16,223) 4.53 Canceled or expired (28,655) 6.29 ----------- ------------ Options outstanding, December 31, 2000 381,015 $ 6.47 =========== ============ F-15 (Continued) MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 2000 1999 1998 ---------- ---------- ---------- Weighted-average fair value of options, granted during the year $ 2.67 2.23 2.38 Weighted-average exercise price of options, exercisable at end of year $ 6.66 6.77 6.17 Options exercisable 221,440 143,221 147,809 (8) INCOME PER COMMON SHARE 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 years ended December 31, 2000, 1999, and 1998: 2000 1999 1998 ----------- ----------- ----------- Weighted shares of common stock outstanding - basic 5,980,467 6,250,254 6,358,963 Weighted shares of common stock assumed upon exercise of stock options 14,886 18,104 38,884 ----------- ----------- ----------- Weighted shares of common stock outstanding - diluted 5,995,353 6,268,358 6,397,847 =========== =========== =========== The following represents securities outstanding at December 31, 2000, 1999, and 1998, which have been excluded from the net income per common share calculations because the effect on net income per common share would not have been dilutive: 2000 1999 1998 ---------- ---------- ---------- Options 94,620 107,335 166,110 (9) SALES Export sales were $7,067,386, $6,202,822, and $4,910,119, in 2000, 1999, and 1998, respectively. Of the export sales, $3,182,898, $2,766,956, and $1,755,419, in 2000, 1999, and 1998, respectively, were to customers in Western Europe. Sales to customers in Japan were $1,833,964, $1,442,925, and $1,172,781, for 2000, 1999, and 1998, respectively. The Company's products are marketed outside of North America through various independent representatives. One independent representative accounted for approximately 16%, 15%, and 12%, of sales in 2000, 1999, and 1998, respectively. Another independent representative accounted for approximately 9%, 7%, and 7%, of sales in 2000, 1999, and 1998, respectively. F-16 (Continued) MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 (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 2000, 1999, and 1998 were $47,895, $40,626, and $31,122, respectively. (11) ACQUISITION On December 7, 1998, the Company acquired Lab Connections, Inc. (LabCon), a manufacturer of instruments used to automate sample preparation from liquid chromatography for analysis by spectroscopy, of Marlborough, Massachusetts. In addition, the Company acquired Microanalytics Instrumention Corp. (Micro) on January 28, 1998. The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of LabCon and Micro had occurred as of the beginning of fiscal 1998. Pro forma adjustments consist primarily of realization of tax benefits resulting from operating losses and goodwill and other intangible amortization: 1998 ------------- Net sales $ 15,844,277 Net income 2,001,721 Net income per common share: Basic .31 Diluted .31 F-17 MOCON, INC. EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000 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 Amendment to Restated Articles of Incorporation of the Company, effective May 21, 1998 (11) 3.5 Amendment to Restated Articles of Incorporation of the Company, effective May 26, 1999 (13) 3.6 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 (8) 10.3 Office/Warehouse Lease Extension, dated November 17, 1999 (13) 10.4 1990 Non-Employee Director Stock Option Plan (3) 10.5 1992 Stock Option Plan (6) 10.6 1998 Stock Option Plan (9) 10.7 Compensation Committee resolutions setting forth the Incentive Compensation Plan (12) 10.8 Paired Profit Sharing Plan effective July 1, 1996 (7) 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) 10.11 Foreign Sales Corporation Suppliers Agreement, dated March 28, 1985, between the Company and MoCon FSC, Inc. (4) 10.12 Agreement and Plan of Merger, dated November 20, 1998, by and among Modern Controls, Inc., MOCON Acquisition Corporation and Lab Connections, Inc. (10) 10.13 Form of Executive Severance Agreement (14) 21.1 Subsidiaries of the Company (14) 23.1 Independent Auditors' Consent (14) - ------------------------ (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). (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. 33-49752). (7) 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). (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-9273). (9) Incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 33-58789). (10) Incorporated by reference to the Company's Report on Form 8-K filed on December 21, 1998 (File No. 0-9273) (11) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 0-9273). (12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 0-9273). (13) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-9273). (14) Filed herewith. EX-10 2 mocon010604_ex10-13.txt EXHIBIT 10.13 FORM OF EXECUTIVE SEVERANCE AGRMNT EXHIBIT 10.13 FORM OF EXECUTIVE SEVERANCE AGREEMENT This SEVERANCE AGREEMENT ("Agreement"), dated as of November 14, 2000, is made and entered into between MOCON, Inc., a Minnesota corporation ("Company") and _______________________, an individual resident of the State of Minnesota ("Employee"). WHEREAS, The Employee has been employed by the Company since _________, most recently as its ___________________; and WHEREAS, The Board of Directors of the Company has determined that it is in the best interests of the Company and its stockholders to provide competitive severance benefits to the Employee that include additional protections designed to assure that the Company will have the continued dedication of the Employee despite the possibility, threat or occurrence of a change in the ownership or control of the Company; and WHEREAS, This Agreement is intended to specify the severance benefits that the Company will provide to the Employee upon Employee's separation from service with the Company under certain circumstances as described herein; NOW, THEREFORE, In consideration of the mutual covenants and agreements stated herein, and other good and valuation consideration, the receipt and adequacy of which are hereby acknowledged, the Employee and Company agree as follows: ARTICLE I CERTAIN DEFINED TERMS Section 1.1. Annual Base Salary -- shall mean the Employee's annualized base salary at the time of the determination, excluding any special compensation such as incentives, commissions, bonuses, stock options and all other stock-based forms of compensation, and any type of fringe benefit. Section 1.2. Cause -- shall mean any of the following: (a) Employee's total disability which results in Employee's inability to perform the essential functions of Employee's position, with or without reasonable accommodation, provided Employee has exhausted Employee's entitlement to any applicable leave, if Employee desires to take and satisfies all eligibility requirements for such leave; (b) the continued failure by the Employee to substantially perform the Employee's duties after a demand for substantial performance is made that identifies the manner in which the Company believes that the Employee has not substantially performed the Employee's duties, and the Employee has failed to resume substantial performance within thirty (30) days; or (c) Employee's conviction, or the entry of a pleading of guilty or nolo contendere by Employee, of any crime involving theft, embezzlement, fraud, or other dishonesty, or any felony; or (d) the willful engaging by the Employee in conduct that is demonstrably and materially injurious to the Company. Section 1.3. Change in Control -- shall mean any of the following events: (a) the sale, lease, exchange or other transfer, directly or indirectly, of substantially all of the assets of the Company (in one transaction or in a series of related transactions) to a person or entity that is not controlled by the Company; (b) the approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company; (c) any person becomes after the effective date of this Agreement the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of (i) 25% or more, but not 50% or more, of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors, unless the transaction resulting in such ownership has been approved in advance by the Continuity Directors (as defined in Section 1.4 below), or (ii) 50% or more of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors (regardless of approval by the Continuity Directors); (d) a merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to effective date of such merger or consolidation have "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), immediately following the effective date of such merger or consolidation, of securities of the surviving corporation representing (i) more than 50%, but less than 75%, of the combined voting power of the surviving corporation's then outstanding securities ordinarily having the right to vote at elections of directors, unless such merger or consolidation has been approved in advance by the Continuity Directors, or (ii) 50% or less of the combined voting power of the surviving corporation's then outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the Continuity Directors); (e) the Continuity Directors cease for any reason to constitute at least a majority of the Board; or -2- (f) any other change in control of the Company of a nature that would be required to be reported pursuant to Section 13 or 15(d) of the Exchange Act, whether or not the Company is then subject to such reporting requirement. Section 1.4 Continuity Directors -- shall mean any individuals who are members of the Board of Directors of the Company on the date of this Agreement and any individual who subsequently becomes a member of the Board of Directors of the Company whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the Continuity Directors (either by specific vote or by approval of the Company's proxy statement in which such individual is named as a nominee for director without objection to such nomination). Section 1.5. Exchange Act -- shall mean the Securities Exchange Act of 1934, as amended. Section 1.6. Good Reason -- shall mean the occurrence of any one or more of the following events within twenty-four (24) months following a Change in Control: (a) a substantial adverse change in the nature or scope of the Employee's duties, powers, responsibilities, authorities or title from the Employee's duties, powers, responsibilities, authorities or title immediately prior to the Change in Control; (b) any reduction in the Employee's Annual Base Salary, or target level of annual incentive compensation, as in effect immediately prior to the Change in Control; (c) the Company's requiring the Employee to be based at a location that is both outside the same metropolitan area of, and in excess of 50 miles from, the location of the Employee's principal office immediately prior to the Change in Control; and (d) the failure of the Resulting Corporation or any other successor to the Company to assume and agree to perform under this Agreement, as contemplated in section 4.2 of this Agreement. Section 1.7. Resulting Corporation -- shall mean the surviving corporation in any consolidation, merger or other reorganization to which the Company is a party; provided, however, that if the surviving corporation in any such transaction is a subsidiary of another corporation, then the Resulting Corporation is the ultimate parent corporation of such surviving corporation. Section 1.8. Termination Date -- shall mean the effective date of any notice of Termination of Employment delivered by one party to the other thereunder. Section 1.9. Termination of Employment -- shall mean actual termination of the Employee's employment with the Company and its subsidiaries: (a) by the Company for any reason other than Cause; or -3- (b) after a Change in Control has occurred, by the Employee for Good Reason. Termination of Employment shall not include termination by reason of the Employee's death. ARTICLE II SEVERANCE BENEFITS Section 2.1. Termination of Employment Following a Change in Control. If the Employee has a Termination of Employment at any time within twenty-four months after a Change in Control, or prior to and in connection with a Change in Control, and the Employee executes a general release of all claims against the Company in the form and manner prescribed by the Company, the Company shall make a severance payment to the Employee in an amount equal to two (2) times the Employee's highest Annual Base Salary in effect at any time prior to such Termination of Employment; provided, however, the amount of the severance payment will be reduced by any amount paid to the Employee for employment following the Change in Control, but not below an amount equal to such Annual Base Salary. Section 2.2. Other Termination of Employment. If the Employee has a Termination of Employment other than a Termination of Employment within twenty-four (24) months after a Change in Control or prior to and in connection with a Change in Control, and the Employee executes a general release of all claims against the Company in the form and manner prescribed by the Company, the Company shall make a severance payment to the Employee in an amount equal to the Employee's highest Annual Base Salary in effect at any time prior to such Termination of Employment. Section 2.3. Failure to Work Up to Termination Date. Notwithstanding any provision of this Agreement that provides for the payment of severance to the Employee, the Employee will forfeit all rights to any severance payment under this Agreement and no severance payment will be made to the Employee if the Employee terminates his employment with the Company and its subsidiaries prior to the Termination Date. Section 2.4. Effect of Reemployment. If the Employee is reemployed by the Company or any of its subsidiaries before the date the final severance payment would have been made if payment had been made at regular payroll intervals instead of in a lump sum, the Employee will be required to refund to the Company that portion of the lump sum payment representing severance payments the Employee would have received after the date of reemployment. Section 2.5. Time and Form of Payment. Any severance payment due under this Agreement will be made to the Employee in a single lump sum cash payment as soon as administratively possible after the Termination Date and execution by the Employee of the general release described in Section 2.1 or 2.2 (whichever applies); provided, however, that no payment will be made until the expiration of any revocation or rescission period for the aforementioned required release of claims and in no event will payment be made if the Employee attempts to revoke or rescind the aforementioned required release of claims. If the Employee should die after becoming -4- fully entitled to severance but before the Employee actually receives payment, payment will be made first to the Employee's surviving spouse, if any, and if there is no surviving spouse, to the Employee's estate. Section 2.6 Acceleration of Exercisability of Options. (a) If a Change in Control occurs, all outstanding stock options then held by the Employee under the Company's 1998 Stock Option Plan (the "Options") will become immediately exercisable in full and will remain exercisable for the remainder of their terms, regardless of whether the Employee remains in the employ or service of the Company or any of its subsidiaries. (b) Notwithstanding subsection (a) above, if, with respect to the Employee, acceleration of the exercisability of the Options (which acceleration could be deemed a "payment" within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), together with any other payments which the Employee has the right to receive from the Company or any corporation which is a member of an "affiliated group" (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), such acceleration of exercisability will be reduced to the largest amount as will result in no portion of such deemed "payments" being subject to the excise tax imposed by Section 4999 of the Code; provided, however, that, such acceleration of exercisability shall only be reduced if such reduction would result in the Employee receiving a greater net benefit, on an after-tax basis (including after payment of any excise tax imposed by Section 4999 of the Code), than the Employee would have received had such reduction not occurred. Section 2.7. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes that the Company is required to withhold pursuant to any law or government regulation or ruling. Section 2.8. Source of Severance Payments. This Agreement is unfunded. No fund is being set aside or allocated specifically for the purpose of this Agreement. All severance payments shall be paid out of the general assets of the Company. An Employee shall not have any secured or preferred interest by way of a trust, escrow, lien or otherwise in any specific asset of the Company for unpaid severance payments. -5- ARTICLE III TERM & TERMINATION OF AGREEMENT Section 3.1. Term. This Agreement shall commence as of the date first written above and shall continue in effect until terminated as provided for in section 3.2 of this Agreement. Section 3.2. Termination. This Agreement shall terminate upon the earliest of the following: (a) the date of the Employee's death; provided, however, that if the Employee should die after becoming fully entitled to severance but before the Employee actually receives payment, payment will be made pursuant to section 2.5 of this Agreement; (b) the date the Employee is no longer employed by the Company (other than a Termination of Employment that results in a qualifying severance event described in section 2.1 or 2.2 of this Agreement); or (c) the Employee receives all severance payments due under this Agreement. ARTICLE IV MISCELLANEOUS PROVISIONS Section 4.1. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, bonus, incentive, retirement or other plan or program provided by the Company and for which the Employee may qualify, nor shall anything in this Agreement limit or reduce such rights as the Employee may have under any other agreement with, or plan, program, policy or practice of, the Company. Notwithstanding the foregoing, if the Employees becomes entitled to benefits under this Agreement, the Employee shall not be entitled to receive payments under any other severance pay plan or program sponsored or maintained by the Company. Section 4.2. Successors. The Company will require the Resulting Corporation or any other successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or consolidated assets of the Company and its subsidiaries to expressly assume and agree to perform under the terms of this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Section 4.3. Employment. This Agreement does not constitute a contract of employment or impose on the Company any obligation to retain the Employee as an employee, to continue the Employee's current employment status or to change any employment policies of the Company. Section 4.4. Severability. The invalidity of any one or more provisions hereof or of any other agreement or instrument given pursuant to or in connection with this Agreement shall not -6- affect the remaining portions of this Agreement or any such other agreement or instrument or any part thereof; and in the event that one or more of the provisions contained herein or therein should be invalid, or should operate to render this Agreement or any such other agreement or instrument invalid, this Agreement and such other agreements and instruments shall be construed as if such invalid provisions had not been inserted. Section 4.5. Waiver. The failure of either party, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right, privilege or remedy hereunder shall not be construed as a waiver of any such provisions, rights, remedies or privileges hereunder. Section 4.6. Limitation on Benefits. It is the explicit intention of the parties that no person or entity other than the parties is or shall be entitled to bring any action to enforce any provision of this Agreement against any party, and that the covenants, undertakings and agreements set forth in this Agreement shall be solely for the benefit of, and shall be enforceable only by, the parties (or their respective heirs, legal representatives, successors and assigns as permitted hereunder). Section 4.7. Spendthrift Provisions. The Employee shall not have any transmissible interest under this Agreement nor shall the Employee have any power to anticipate, alienate, dispose of, pledge or encumber benefits under this Agreement, nor shall the Company recognize any assignment thereof, either in whole or in part, nor shall this Agreement be subject to attachment, garnishment, execution following judgment or other legal process. Section 4.8. Company. Functions generally assigned to the Company shall be discharged by their respective officers or delegated and allocated as provided herein. The Company may delegate or redelegate and allocate and reallocate to one or more persons or to a committee of persons jointly or severally, whether or not such persons are officers or employees, such functions assigned to them hereunder as they may from time to time deem advisable. Section 4.9. Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the matters contained herein and supersedes all prior written or oral agreements, commitments or understandings with respect to the matters provided for herein. Section 4.10. Headings. Article and Section headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof. Section 4.11. Governing Law. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the laws of the State of Minnesota (but not including the choice of law rules thereof). -7- Section 4.12. Modification. This Agreement shall not be altered, amended or modified except by a written instrument signed by each of the parties. MOCON INC. By - ------------------------- ------------------------------------- Date Its --------------------------------- EMPLOYEE - ------------------------- ------------------------------------- Date -8- EX-21 3 mocon010604_ex21-1.txt EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY The following are wholly-owned subsidiaries of MOCON, Inc.: Name of Entity Jurisdiction of Organization - -------------- ---------------------------- Microanalytics Instrumentation Corporation Texas Lab Connections, Inc. Minnesota MoCon FSC, Inc. Barbados EX-23 4 mocon010604_ex23-1.txt EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors MOCON, Inc.: We consent to incorporation by reference in the registration statements (Nos. 33-42255, 33-49752, and 33-58789) on Form S-8 of MOCON, Inc. of our reports dated February 23, 2001, relating to the consolidated balance sheets of MOCON, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows and related financial statement schedule for each of the years in the three-year period ended December 31, 2000, which reports appear in or are incorporated by reference in the December 31, 2000 annual report on Form 10-K of MOCON, Inc. /s/ KPMG LLP Minneapolis, Minnesota March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----