-----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, UPq3aYb5NoXS12X9HK7j78Dm76AeKvd898JkXw7ociNX5BOfBfLRUIsF/ja6+zP/ Xgx6vMD8Xtl7wh/rrlFpXQ== 0000950144-97-010355.txt : 19970926 0000950144-97-010355.hdr.sgml : 19970926 ACCESSION NUMBER: 0000950144-97-010355 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970925 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CEM CORP CENTRAL INDEX KEY: 0000793933 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 561019741 STATE OF INCORPORATION: NC FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15383 FILM NUMBER: 97685281 BUSINESS ADDRESS: STREET 1: 3100 SMITH FARM RD CITY: MATTHEWS STATE: NC ZIP: 28106 BUSINESS PHONE: 7048217015 MAIL ADDRESS: STREET 1: P.O. BOX 200 CITY: MATTHEWS STATE: NC ZIP: 28106-0200 10-K 1 CEM CORPORATION 10-K 6-30-1997 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-15383 CEM CORPORATION - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) North Carolina 56-1019741 - -------------------------------------------------------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 3100 Smith Farm Road, Matthews, NC 28105 - -------------------------------------------------------------------------------- (Address of principal executive offices) Post Office Box 200, Matthews, North Carolina 28106 - -------------------------------------------------------------------------------- (Mailing address of principal executive offices) Registrant's telephone number, including area code: (704) 821-7015 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: $.05 par value Common Stock --------------------------- (Title of Class) 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. [ ] The aggregate market value of shares of the Registrant's $.05 par value Common Stock, its only outstanding class of voting stock, held by non-affiliates as of September 8, 1997, was $28,986,124. The number of issued and outstanding shares of the Registrant's $.05 par value Common Stock, its only outstanding class of Common Stock, as of September 8, 1997, was 3,485,997 shares. Portions of the CEM Corporation Annual Report to Shareholders for the fiscal year ended June 30, 1997 are incorporated by reference into Parts I and II. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held November 6, 1997 are incorporated by reference into Part III. 2 PART I ITEM 1 - BUSINESS General The Registrant engages in one line of business, the development, manufacture, sale and service of microwave-based instrumentation for testing, analysis and process control in analytical laboratory and industrial markets. These sample preparation products provide advantages of speed and simplicity compared to traditional methods of testing and analysis. The Registrant's products are used in the general analytical laboratory market and in many manufacturing and processing industries, including chemical and food processing. A significant amount of the Registrant's sales consists of consumable supplies, parts and service for its instrumentation. The Registrant was organized as a North Carolina corporation in 1971. Products Microwave Digestion Systems. The Microwave Digestion System and related accessories accounted for approximately 29%, 35% and 34% of the Registrant's consolidated sales in 1997, 1996 and 1995, respectively. This product is a microwave heating system designed especially for use in the digestion of samples for laboratory analysis. It performs a rapid dissolution of samples in acid in a closed vessel system and is sold to the analytical laboratory market. The MARS (Microwave Accelerated Reaction System) System, which is the next generation of the Microwave Digestion System, performs a rapid dissolution of samples in acid in a closed vessel system and was nearing completion of development in fiscal 1997. This System permits higher pressures to be used safely and provides greater measurement data for control of the instrument. Commercial introduction of the MARS System is expected in the second quarter of fiscal 1998. Moisture/Solids Analyzer. The Moisture/Solids Analyzer and related accessories accounted for approximately 19%, 18% and 21% of the Registrant's consolidated sales in 1997, 1996 and 1995, respectively. This product performs percent moisture or percent solids measurement in process control monitoring, quality control and product development in a variety of industries, including chemical processing, pharmaceuticals, food and dairy products, tobacco, textiles, paint and coatings, pulp and paper, water and wastewater treatment. Microwave Ashing System. The Microwave Ashing System uses microwave energy to rapidly oxidize a sample to determine the ash (metal oxide) content. This product is primarily sold to the analytical laboratory market and petrochemical industry. STAR System. The STAR system, which incorporates temperature control and reagent (acid) addition, is an open cavity microwave heating system designed initially for use in the digestion of samples for laboratory analysis. It performs a rapid dissolution of samples and is sold to the food, polymer, petroleum and chemical industries. The Registrant is in investigating applications of the STAR System in the semiconductor industry and the food industry for protein testing. Fat Analyzer System. The Registrant manufactures an automatic extraction unit which is used in conjunction with the Moisture/Solids Analyzer to form the Fat Analyzer System. This product measures the fat content of a variety of samples and is sold primarily to meat processing and other food industries. ProFat 2 System. The Pro Fat 2 System is a microwave based instrument that provides rapid moisture fat and protein results on most meat products, without solvents. The product is sold primarily to companies processing beef, poultry and pork products that require a rapid result for process control purposes and companies which utilize non solvent-based instruments for product analysis. The ProFat 2 System was introduced in the first quarter of fiscal 1998. Microwave Extraction System. The Microwave Extraction System uses microwave energy to rapidly heat solvents to high temperatures. These elevated temperatures reduce the time necessary to extract organic compounds from solid matrices. This product uses a unique temperature control system and multiple safety devices to ensure both rapid and safe sample preparation. This product is a cost effective alternative to traditional solvent extraction due to its high recoveries and significantly reduced solvent usage. The Microwave Extraction System is marketed under the trade name, MES 1000. Sales of the MES 1000 will be limited in the United States until the U.S. Environmental Protection Agency approves the use of microwave-based instruments as an alternative method for extraction. SpectroPrep System. The SpectroPrep System, which is sold on an intermittent basis, is a fully automated microwave heating system using a continuous flow-through process to digest samples for laboratory analysis. Initial uses of the system include environmental, chemical and agricultural applications. 2 3 Marketing and Sales The Registrant's marketing and sales strategy is based on identifying applications for its products and providing its customers with prompt and effective technical and applications support. The Registrant's marketing strategy utilizes telemarketing, direct mail, trade show demonstrations, articles, studies and trade journal advertising, product releases, seminars and extensive use of the Registrant's applications laboratory to develop specific testing applications for potential and existing customers. Sales in the U.S. are generated by full-time sales personnel through sales and service locations throughout the country. Sales are conducted through direct selling efforts including on-site demonstrations. Sales and service representatives provide installation and training of production and laboratory personnel. Sales representatives are paid a base salary, commissions and/or other incentive compensation. The Registrant's applications laboratory provides technical assistance to customers and potential customers in developing new and improved applications and related procedures. The applications laboratory performs tests in its facility in North Carolina and provides the results to customers. The Registrant's foreign sales are conducted through independent dealers throughout the world and the Registrant's subsidiaries in England, Germany and Italy. Foreign sales are primarily to customers in Europe, Asia and Latin America. Foreign sales accounted for 46%, 46% and 42% of net sales in fiscal 1997, 1996 and 1995, respectively. Research and Development The Registrant invests heavily in the research and development of potential new products, product improvements and enhancements, and applications research for existing products. For fiscal 1997, 1996 and 1995, research and development expense was $2,742,000, $2,891,000 and $2,605,000, respectively. The Company's product development using certain proprietary technology licensed in 1996 relating to instruments used in testing for bacteria in raw milk and sterilization of dental, medical and laboratory equipment continues to progress as expected. The Company is not able to predict when prototype units will be delivered to prospective customers for testing. Product Protection The Registrant relies upon its proprietary technology, continuing research and development and customer service support to maintain and enhance its competitive position. Important features of certain of the Registrant's products are protected by issued patents or pending patent applications. Manufacturing The Registrant's manufacturing operations are carried out at its headquarters in Matthews, North Carolina and consist mostly of the assembly and testing of mechanical and electronic components purchased from others. Certain components are currently purchased from single source suppliers. An interruption of one of these sources could result in delays in the Registrant's production while the Registrant developed an alternative supplier and could result in a loss of sales and income. There are other single source components for which the Registrant has determined that other sources are readily available. The Registrant has experienced no significant production delays because of a supplier's inability to ship an acceptable component. The Registrant stocks what it believes is an adequate supply of all components and materials based upon delivery lead times and orders currently in hand. Environmental Regulations Compliance with federal, state and local provisions relating to protection of the environment has not had, and is not expected to have, any material adverse effects upon the production, capital expenditures, earnings or competitive position of the Registrant and its subsidiaries. 3 4 Employees At June 30, 1997, the Registrant employed 176 persons. None of the Registrant's employees are covered by a collective bargaining agreement. Backlog The Registrant does not have a significant backlog of orders, as it normally ships its products within a short time after it receives orders. Competition The Registrant experiences direct competition in both foreign and U.S. markets from companies using microwave technology, traditional methods of heating and drying and other technologies. There are a number of methods for performing acid digestions, the most common of which is the traditional "open vessel on a hot plate" method. There are three other primary manufacturers of closed vessel microwave digestion systems similar in nature to the Registrant's product. Also competing with the Microwave Digestion System are other advanced methods utilizing higher pressure and temperature including steel jacketed digestion vessels for use in conventional ovens and high pressure wet ashers. There are a number of other methods for testing the moisture or solids content of various liquids and solids. In most instances, the equipment and instruments, which consist typically of simple heating and drying units and measurement techniques, are less expensive than the Moisture/Solids Analyzer produced by the Registrant. In addition, infrared moisture analyzers, radio frequency energy absorption techniques and the Karl Fischer titration method, a wet chemical procedure, have been developed. These systems compete directly with the Registrant's instrumentation in certain markets. Although there is one manufacturer of a microwave moisture system similar in nature to the Registrant's Moisture/Solids Analyzer, the Registrant does not believe there have been significant sales of this competitive product to date. The traditional method of ashing is with a resistance heat furnace. There are a number of manufacturers of laboratory furnaces used for ashing. Although these products are typically less expensive than the Microwave Ashing System sold by the Registrant, the Registrant's product offers advantages in both speed and process control. The microwave open vessel digestion system (the STAR System) is designed to digest large samples or samples that are very reactive and can not be safely digested in a closed vessel digestion system. There is currently one competitor in this market, which also utilizes microwave based technology and automatic reagent additions, however the Registrant's product offers advantages in price and performance. The Registrant's Fat Analyzer System is the only Association of Analytical Chemists approved direct moisture, fat and protein system available. However, there is a competing technology using an indirect measurement method of analysis, which results in a quicker result time, but is not considered as accurate. In addition, this system is sold at a significantly higher price than the Registrant's system. There are a number of methods for performing extractions, the most common of which are the traditional Soxhlet and sonication methods. Also competing with the Registrant's Microwave Extraction System are other advanced methods such as Supercritical Fluid Extraction and Accelerated Solvent Extraction. Typically the Registrant's selling prices are higher than those of most of its competitors. The Registrant competes primarily upon the speed, ease of use, applications support and long-term cost savings to the users. International Operations and Sales Information about the Registrant's international operations and sales is incorporated by reference to footnotes 1 and 7 of the financial statements contained in the Registrant's 1997 Annual Report to Shareholders. 4 5 ITEM 2 - PROPERTIES The Registrant's headquarters, research and manufacturing operations are located in an 82,000 square foot building on an eight and three-fourths acre tract of land owned by the Registrant near Charlotte, North Carolina. The Registrant also owns a 5,000 square foot office and warehouse facility in England, owns a 5,200 square foot office and warehouse in Germany and leases a 4,000 square foot office in Italy. The facility in Germany is subject to a mortgage which had a balance of $92,000 at June 30, 1997. Management believes these facilities are adequate to serve existing markets for the next several years. ITEM 3 - LEGAL PROCEEDINGS The Registrant is not a party to any material legal proceedings other than routine litigation incidental to the business of the Registrant and the litigation entitled CEM Corporation versus Questron Corporation (Questron), in which it was judged that Questron had willfully and deliberately infringed on U.S. Patent No. 5,230,865. The Judgment by the United States District Court Eastern District of North Carolina, dated June 18, 1997, permanently enjoins Questron, its officers, directors, agents, employees and attorneys and all those in active concert with them from infringing, contributing to, or inducing others to infringe the patent. The thirty day appeal period expired on July 18, 1997, without appeal. The Registrant was awarded approximately $1.5 million plus treble damages, attorneys fees and interest. However, the collection of any significant amount by the Registrant is doubtful due to Questron's filing for Chapter 7 bankruptcy in July 1997. ITEM 4 is inapplicable and has been omitted. Separate Item - Executive Officers of the Registrant Information as to the chief executive officer of the Registrant is incorporated herein by reference to the section captioned "Election of Directors" of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held November 6, 1997. The following information is provided as to the executive officers of the Registrant who are not directors: Name Age Background - ---------------------- ----- ----------------------------------------------- Richard N. Decker 48 Vice President - Finance, Chief Financial Officer, Secretary and Treasurer since 1995; Secretary, Treasurer and Chief Financial Officer 1993-1995; Vice President-Finance of the Water and Gas Meter Division of Schlumberger Limited Corporation 1982-1993. All of the Registrant's executive officers were appointed to their current positions at the Annual Meeting of the Board of Directors held on November 7, 1996. All of the Registrant's executive officers' terms of office extend until the next Annual Meeting of the Board of Directors and until their successors are elected and qualified. PART II ITEMS 5-7 are incorporated herein by reference to the inside front cover, pages 6-8, pages 18 and 20 and items captioned "1997 Financial Highlights", "Management's Discussion and Analysis", Footnote 10 "Quarterly Information (Unaudited)" and "Shareholders of Record" of the Registrant's 1997 Annual Report to Shareholders. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements, notes to the financial statements and quarterly supplemental financial data of the Registrant appearing on pages 9-18 of the Registrant's 1997 Annual Report to Shareholders are hereby incorporated by reference. ITEM 9 is inapplicable and has been omitted. 5 6 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of CEM Corporation: We have audited the consolidated financial statements of CEM Corporation and Subsidiaries as of June 30, 1997 and 1996, and for each of the three years in the period ended June 30, 1997, which financial statements are included on pages 9 through 18 of the 1997 Annual Report to Shareholders of CEM Corporation and incorporated by reference herein. We have also audited the financial statement schedule listed in the index on page 8 of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We have conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of CEM Corporation and Subsidiaries as of June 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Charlotte, North Carolina July 23, 1997 6 7 PART III ITEMS 10 through 12 are incorporated herein by reference to the sections captioned "Principal Shareholders and Holdings of Management," "Election of Directors," "Executive Compensation," "Director Compensation" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held November 6, 1997. ITEM 13 is inapplicable and has been omitted. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements. See accompanying Index to Financial Statements. (2) Financial Statement Schedules. See accompanying Index to Financial Statements. (3) Exhibits. 3.1 Restated Charter of the Registrant, as amended.(1) 3.2 Bylaws of the Registrant.(1) 10.1 * CEM Corporation 1986 Nonqualified Stock Option Plan, as amended, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-53694). 10.2 * CEM Corporation Employee Stock Purchase Plan, as amended, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-80136). 10.3 * CEM Corporation 1987 Stock Option Plan, as amended.(1) 10.4 * CEM Corporation 1993 Management Equity Plan, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-75368). 10.5 * CEM Corporation Management Incentive Compensation Plan. 10.6 CEM Corporation 1993 Nonqualified Stock Option Plan for Non-Employee Directors, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-75366). 11. Computation of Earnings per Share. 13. The Registrant's 1997 Annual Report to Shareholders. This Annual Report to Shareholders is furnished for the information of the Commission only and, except for the parts thereof incorporated in this report, is not deemed to be "filed" as part of this filing. 21. List of the Registrant's Subsidiaries.(1) 23. Consent of Independent Accountants. 27. Financial Data Schedule (filed in electronic format only). This schedule shall not be deemed "filed" for purposes of Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates. 99. Revised Item 21 of Part II to the Registrant's registration statements on Form S-8 (Registration Numbers 33-11952 and 33-25739).(1) - -------------------- * This exhibit is one of the Registrant's management contracts and compensatory plans and arrangements. (1) Incorporated herein by reference to the Registrant's Form 10-K for the year ended June 30, 1994. (b) Reports on Form 8-K. No reports on Form 8-K have been filed during the last quarter of the period covered by this report. 7 8 PART IV (CONTINUED)
Reference (Page) ------------------------------------------- Annual Form 10-K Report to Item 14. (A) Index to Financial Statements and Schedules Annual Report Shareholders - ----------------------------------------------------------------------------- ------------- ------------ Data incorporated by reference from the attached 1997 Annual Report to Shareholders: Balance Sheets as of June 30, 1997 and 1996 9 Statements of Income for the years ended 10 June 30, 1997, 1996 and 1995 Statements of Cash Flows for the years 11 ended June 30, 1997, 1996 and 1995 Statements of Shareholders' Equity for the 12 years ended June 30, 1997, 1996 and 1995 Notes to Financial Statements 13 - 18 Data submitted herewith: Report of Independent Accountants 6 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts 10
With the exception of the consolidated financial statements listed in the above index, the information referred to in Items 5, 6, 7 and the supplementary quarterly information referred to in Item 8, all of which is included in the 1997 Annual Report to Shareholders of CEM Corporation and incorporated by reference into this Form 10-K Annual Report, the 1997 Annual Report to Shareholders is not to be deemed "filed" as part of this report. 8 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned thereunto duly authorized. CEM CORPORATION By: /s/ Michael J. Collins --------------------------------- Michael J. Collins Dated: September 24, 1997 President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date - ------------------------------ ------------------------------------------------------ --------------------------- /s/ Ronald A. Norelli Chairman of the Board of Directors September 24, 1997 - ------------------------------ Ronald A. Norelli /s/ Michael J. Collins President, Chief Executive Officer and Director September 24, 1997 - ------------------------------ (Principal Executive Officer) Michael J. Collins /s/ Richard N. Decker Vice President - Finance, Chief Financial Officer, September 24, 1997 - ------------------------------ Secretary and Treasurer (Principal Financial Richard N. Decker and Accounting Officer) /s/ John L. Chanon Director September 24, 1997 - ------------------------------ John L. Chanon /s/ John D. Correnti Director September 24, 1997 - ------------------------------ John D. Correnti
9 10 CEM CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Balance at beginning of Charged to costs Balance at Description period and expenses Deductions end of period ---------------------------- ------------ ---------------- ---------- ------------- Year ended Accounts receivable, $ 720,000 607,000 (287,000) $ 1,039,000 June 30, 1997 inventory and warranty reserves Year ended Accounts receivable, $ 752,000 301,000 (333,000) $ 720,000 June 30, 1996 inventory and warranty reserves Year ended Accounts receivable, $ 728,000 331,000 (307,000) $ 752,000 June 30, 1995 inventory and warranty reserves
10 11 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS ITEM 14(a)(3) ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended Commission File Number - ------------------------- ---------------------- June 30, 1997 0-15383 CEM CORPORATION EXHIBIT INDEX Exhibit No. Exhibit Description - ----------- ------------------- 3.1 Restated Charter of the Registrant, as amended.(1) 3.2 Bylaws of the Registrant.(1) 10.1 CEM Corporation 1986 Nonqualified Stock Option Plan, as amended, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-53694). 10.2 CEM Corporation Employee Stock Purchase Plan, as amended, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-80136). 10.3 CEM Corporation 1987 Stock Option Plan, as amended.(1) 10.4 CEM Corporation 1993 Management Equity Plan, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-75368). 10.5 CEM Corporation Management Incentive Compensation Plan (page __ of the sequentially numbered pages). 10.6 CEM Corporation 1993 Nonqualified Stock Option Plan for Non-Employee Directors, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-75366). 11. Computation of Earnings per Share (page __ of the sequentially numbered pages). 13. The Registrant's 1997 Annual Report to Shareholders. This Annual Report to shareholders is furnished for the information of the Commission only and, except for the parts thereof incorporated in this report, is not deemed to be "filed" as part of this filing (page __ of the sequentially numbered pages). 21. List of the Registrant's Subsidiaries.(1) 23. Consent of Independent Accountants (page __ of the sequentially numbered pages). 27. Financial Data Schedule (filed in electronic format only). This schedule shall not be deemed "filed" for purposes of Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates. 99. Revised Item 21 of Part II to the Registrant's registration statements on Form S-8 (Registration Numbers 33-11952 and 33-25739).(1) - ---------------------- (1) Incorporated herein by reference to the Registrant's Form 10-K for the year ended June 30, 1994. 11 EX-10.5 2 CEM CORPORATION MANAGEMENT INCENTIVE COMPENSATION 1 EXHIBIT 10.5 CEM Corporation Management Incentive Compensation Plan ("MICP") Principal Plan Features for the year ending June 30, 1997 GOALS - - To have a relatively simple management incentive compensation plan that rewards certain CEM employees for achievement of the Company's short and long term objectives. - - For the plan to link incentive rewards to these CEM employees with the interest of CEM's shareholders. - - To have a competitive total compensation package to attract and retain the caliber of talent needed to achieve the Company's long term objectives. PARTICIPANTS - - Three groups of CEM employees as defined below: -- Senior Management -- Middle Management -- Key Individuals MAXIMUM PAYOUT DETERMINATION BY GROUP - - Maximum amount of incentive compensation available to each group is determined by the Company's fiscal 1997 performance as measured by "Growth in Net Income before Interest and Taxes". - - "Growth in Net Income before Interest and Taxes" must be at least __% before funds are available for the Middle Management and Key Individual groups. - - "Growth in Net Income before Interest and Taxes" must be at least __% before funds are available for the Senior Management group. - - Any additional payout for "Growth in Net Income before Interest and Taxes" greater than __% is at the discretion of the Compensation Committee. INDIVIDUAL PAYOUT DETERMINATION - - The maximum incentive award available to an individual within any group is equal to the percentage of that individual's base salary corresponding to the average percentage of salary available to the entire group. - - There is no discretionary component in determining the incentive award for the Chief Executive Officer: 100% of the incentive award is determined by company performance defined as "Growth in Net Income before Interest and Taxes". - - For all other individuals participating in the MICP, two-thirds of each incentive award (66 2/3%) is determined by company performance defined as "Growth in Net Income before Interest and Taxes," with up to an additional one-third (33 1/3% maximum) being discretionary based on management's assessment of performance towards achievement of pre-established individual objectives related to Company goals. FORM OF INDIVIDUAL PAYOUT - - For all individuals except Chief Executive Officer, -- 60% of each individual award is in cash and 40% in company stock -- 50% of the stock component to vest on date of award, with remaining 50% to vest twelve months thereafter. -- Individuals responsible for applicable income taxes. - - The Chief Executive Officer has the option of receiving the 40% portion also in cash, either current or deferred. ADDITIONAL CONSIDERATIONS: - - Company performance targets and payout potential for subsequent years will be based on the operating plans for the particular years as well as the levels of performance consistent with the Company's long term objectives established in its strategic plan. 2 CEM Corporation Employee Stock Grant Plan Principal Plan Features for the year Ending June 30, 1997 GOAL - - To recognize and reward a broad base of CEM employees for unique achievements and thus build morale, a sense of ownership and company loyalty. ELIGIBILITY - - Any CEM employee excluding the Officer and Middle Management groups as defined in the MICP. TYPE OF AWARD - - Unrestricted Stock Grants and/or Stock Options with a four-year vesting schedule (25% at the end of each twelve-month period following the grant). - - Amount of a typical grant intended to be smaller than granted under the Company's prior Stock Option Plan. METHOD OF DETERMINING GRANTS - - Chief Executive Officer may recommend grants to the Compensation Committee. - - Compensation Committee of the Board of Directors to make grants. EX-11 3 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 CEM CORPORATION COMPUTATION OF EARNINGS PER SHARE In thousands, except per share data
1997 1996 1995 ------ ------ ----- NET INCOME............................................................................ $1,837 $2,908 $3,179 ====== ====== ====== Weighted average number of shares outstanding ........................................ 3,530 3,626 3,631 Number of shares purchasable upon exercise of options, reduced by the number of shares which could have been purchased with proceeds from the exercise of such options at average market price ............................................. 20 122 104 ------ ------ ------ Weighted average number of shares outstanding, as adjusted............................ 3,550 3,748 3,735 ------ ------ ------ PRIMARY EARNINGS PER SHARE ........................................................... $ .52 $ .78 $ .85 ====== ====== ====== NET INCOME ........................................................................... $1,837 $2,908 $3,179 Weighted average number of shares outstanding ........................................ 3,530 3,626 3,631 Number of shares purchasable upon exercise of options, reduced by the number of shares which could have been purchased with proceeds from exercise of such options at the greater of period-end market price or average market price ........ 20 122 115 ------ ------ ------ Weighted average number of shares outstanding, as adjusted............................ 3,550 3,748 3,746 ------ ------ ------ EARNINGS PER COMMON SHARE, ASSUMING FULL DILUTION .................................... $ .52 $ .78 $ .85 ====== ====== ======
EX-13 4 THE REGISTRANT'S 1997 ANNUAL REPORT 1 EXHIBIT 13 1997 Financial Highlights In thousands, except per share data
For the years ended June 30 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Income Statement and Cash Flows Net sales ................................ $30,075 $31,477 $31,611 $29,040 $26,320 Income from operations ................... 2,378 4,136 4,479 4,050 3,349 Net income ............................... 1,837 2,908 3,179 2,791 2,403 Net income per share ..................... $ .52 $ .78 $ .85 $ .70 $ .57 Weighted average shares outstanding ...... 3,550 3,748 3,735 3,994 4,204 Net cash provided by operating activities $ 4,883 $ 2,020 $ 3,134 $ 3,220 $ 5,203 As of June 30 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Balance Sheet Working capital .......................... $16,409 $15,549 $14,047 $12,892 $14,343 Total assets ............................. 29,214 27,584 26,653 22,766 23,414 Long-term debt ........................... 1,229 1,417 1,578 132 246 Shareholders' equity ..................... $23,480 $22,351 $20,592 $18,621 $20,038
FOOTNOTE: The following graphs are presented for a five-year period and are displayed below the tables: 1) Net Sales (In Millions) 2) Income from Operations (In Millions) 3) Net Income Per Share 4) Shareholders' Equity (In Millions) CEM manufactures microwave-based products for the laboratory marketplace. These products create exceptional value for customers based on advantages of speed and simplicity. They are sold on a worldwide basis to the general analytical laboratory market as well as many manufacturing industries including chemical and food processing. INSIDE FRONT COVER 2 Management's Discussion & Analysis The following table sets forth the percentage relationship of net sales, expenses and income for the periods indicated:
For the years ended June 30 -------------------------------------------------------------------- Percent Change Percentage of Sales Over Prior Period --------------------------------------- -------------------------- 1997 1996 1995 1997 1996 ------------- ------------ ------------ -------------------------- Net sales............................................ 100.0 % 100.0 % 100.0 % (4.5) % (.4) % Cost of goods sold................................... 44.8 41.6 42.2 2.9 (1.8) ------------- ------------ ------------ Gross profit......................................... 55.2 58.4 57.8 (9.7) .6 Selling, general and administrative expenses......... 38.2 36.1 35.4 1.1 1.5 Research and development expenses.................... 9.1 9.2 8.2 (5.2) 11.0 ------------- ------------ ------------ Income from operations............................... 7.9 13.1 14.2 (42.5) (7.7) Investment income.................................... 1.5 1.4 .9 2.9 55.8 Other (expense) income, net.......................... (.4) (.1) .4 nm nm ------------- ------------ ------------ Income before income taxes........................... 9.0 14.4 15.5 (40.2) (7.6) Provision for income taxes........................... 2.9 5.2 5.4 (46.3) (5.9) ------------- ------------ ------------ Net income........................................... 6.1 % 9.2 % 10.1 % (36.8) (8.5) ============= ============ ============
Results of Operations - --------------------- FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 In 1997, sales declined $1.4 million or 4.5% primarily from weakness in the U.S. and German markets. The decline primarily resulted from significantly lower MDS(TM) instrument sales in environmental, governmental, food and other industries. As expected, this decline was partially offset by increased sales of our STAR(TM) instruments which were introduced in March 1996. While activity in foreign markets is more difficult to predict, softness in the U.S. MDS(TM) market is expected to continue into fiscal 1998. Foreign sales were 46% of total sales in 1997 and 1996. Gross profit margins declined from 58.4% to 55.2% primarily from changes in product mix, additions to inventory obsolescence reserves, higher warranty costs associated with new product introductions, and increased profit sharing expenses. Additionally, gross margins were negatively impacted due to the decrease in sales by the Company's European subsidiaries which, on a consolidated basis, carry higher margins than U. S. sales. Foreign distributor commissions and legal costs, offset by a decrease in advertising, were primary contributors to the $120,000 or 1.1% increase in selling, general and administrative expenses. Research and development expenses were consistent with management's expectations and reflect the Company's continued commitment to new product development and enhancements. Management expects research and development expenses to remain between 8% and 10% of sales for the foreseeable future. The Company's effective tax rate declined from 35.6% to 32.0% resulting from the renewal of the Research and Experimentation tax credit and higher non-taxable investment income as a percentage of income before income taxes. During the fourth quarter, the United States District Court for the Eastern District of North Carolina issued a judgment that CEM's patent related to microwave digestion vessels is valid and enforceable. The Court held that Questron Corporation, a privately held manufacturer of microwave-based instruments, had willfully and deliberately infringed the Company's patent. Questron and its owners were permanently enjoined by the Court from infringing the patent or inducing others to infringe the patent. While the Company was awarded approximately $1.5 million plus treble damages, attorneys fees and interest, the collection of any significant amount by CEM is doubtful due to Questron's filing for Chapter 7 bankruptcy in July 1997, therefore no gain has been recorded. Resolution of this matter reflects management's strong commitment to enforce all rights related to the Company's intellectual property and may result in the elimination of a competitor. 6 3 Management's Discussion & Analysis FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 In 1996, sales were relatively flat as compared to 1995. Foreign sales increased as a percentage of total sales from 42% to 46%. Sales from Asia and Europe increased 42% and 5%, respectively, resulting from a concentrated sales and marketing effort and relatively stable economic conditions. The increases in foreign sales were offset by a 7% decline in U.S. sales. This decline resulted primarily from reductions in federal, state and local government spending which adversely affected sales from most product lines, continued softness in environmental markets which negatively impacted digestion systems and consumables, and the lack of regulatory approval for microwave extraction methods which limits market penetration by the MES 1000(TM). The decrease in sales from existing product lines was offset in part by the favorable initial response to the new, open vessel digestion, STAR(TM) instruments which were introduced in March 1996. Gross profit margins increased from 57.8% to 58.4% primarily resulting from the increase in sales by the Company's European subsidiaries which, on a consolidated basis, generally carry higher margins than U.S. sales, and from lower profit sharing and incentive compensation expenses. Selling, general and administrative expenses increased due to a more concentrated export sales and marketing effort in Asia and Europe. Research and development expenses increased with the introduction of the STAR(TM) product line. In March 1995, the Company replaced an intercompany note receivable with a third-party bank loan, denominated in German marks. The proceeds from this loan and an additional $0.5 million were invested in a long-term held-to-maturity investment resulting in higher investment income in fiscal 1996. The Company's effective tax rate increased slightly as the research and development tax credit expired. Liquidity and Capital Resources - ------------------------------- In 1991, the Company began a stock repurchase program which has been extended by the Board of Directors on several occasions. Repurchases totaled $0.8, $2.0, and $1.9 million in 1997, 1996, and 1995, respectively. As of June 30, 1997, an additional $2.1 million remained authorized to repurchase the Company's common stock. From time to time, repurchases may be made in the open market or directly from shareholders at prevailing market prices. The shares repurchased will reduce any dilution of earnings to existing shareholders resulting from the Company's stock option and compensation plans. In March 1995, the Company converted an intercompany note receivable to a third party bank loan of $1.5 million, denominated in German marks. The loan proceeds and an additional $0.5 million of available cash were used to acquire a long-term investment which was pledged to secure the loan. While the loan and the corresponding long-term investment are now reflected on the balance sheet, this transaction eliminated the Company's exposure to future currency fluctuations on the intercompany note receivable. Although net income declined $1.1 million, net cash provided by operating activities increased $2.9 million to $4.9 million resulting from improved balance sheet management using cross-functional teams. The Company will continue to concentrate on maintaining or reducing accounts receivable and inventory levels. The increase in accrued payroll and benefits resulted from the increase in the Company's profit-sharing contribution to historical levels. The Company maintains unsecured bank lines of credit providing for short term borrowings of up to $3.6 million at market rates. At June 30, 1997, $57,000 was outstanding under these bank lines of credit. Should the need arise, management believes the lines of credit could be increased. The Company primarily assembles components manufactured by others and significant expenditures for property and equipment are not expected. Existing facilities, which were expanded in 1991 and 1992, are expected to be sufficient to serve existing markets for the next several years. Management believes that working capital, capital expenditures, debt servicing and stock repurchases can be funded currently from cash on hand and cash generated from operations. The Company has never paid cash dividends and has no plans to do so in the foreseeable future. 7 4 Management's Discussion & Analysis Outlook - ------- The following cautionary statement identifies important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements made by or on behalf of the Company. Except for the historical information contained herein, the matters discussed in "Management's Discussion and Analysis of Results of Operations and Financial Condition" are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These cautionary statements are made pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both enacted pursuant to the Private Securities Litigation Reform Act of 1995. The industry in which the Company competes, as well as the markets that it serves, are characterized by cyclical market patterns as a consequence of, among other things, business cycles, foreign exchange fluctuations, regulatory changes, government spending levels and general economic conditions. These factors affect the timing of orders from the Company's customers and cause substantial variations in sales and profitability from quarter to quarter. Likewise, supplier-related delays and the timing of the release of Company's customer orders may affect quarter-to-quarter sales and profitability. The Company's sales may also be adversely affected by direct and indirect competition from third parties including, but not limited to, legal challenges to existing patents or pending patent applications. Demand for the Company's instrumentation is substantially affected by the enactment, timing, extent and severity of state, federal and foreign laws governing environmental testing standards as well as product labeling requirements including foods and pharmaceuticals. The Company has and may experience fluctuations in sales of such products as well as in demand for particular product enhancements as a result of actual or perceived changes in regulatory requirements. Legislation or regulations resulting in the development or expansion of acceptance standards for specific testing methods has and may result in periodic delays in sales, especially in the United States. Conversely, increases in international sales have resulted, and may result in the future, from less stringent or nonexistent acceptance standards in a given country. Moreover, the Company's success is dependent on its ability to continue to develop and engineer high-quality, high-performance products that are commercially acceptable. Risks associated with new product development include market acceptance, competition from other products and the Company's ability to manufacture and market products on an efficient and timely basis at a reasonable cost and in sufficient volume. Inflation - --------- Inflation has not had a material impact on the Company's operations. The prices of some components purchased by the Company have declined in the past several years due in part to increased volume and improved purchasing practices. Certain other materials and labor costs have increased, but management believes that such increases have not exceeded the inflation rate of the national economy as a whole. 8 5 CEM Corporation Consolidated Balance Sheets In thousands, except share data
June 30 ----------------------- 1997 1996 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents ............................................. $ 5,833 $ 1,832 Short-term investments ................................................ 3,100 4,100 Trade receivables, net ................................................ 5,990 7,061 Inventories ........................................................... 5,139 5,639 Deferred taxes ........................................................ 357 254 Other current assets .................................................. 385 425 -------- -------- Total current assets .............................................. 20,804 19,311 LONG-TERM INVESTMENTS ..................................................... 2,018 2,024 INVESTMENT IN AFFILIATE ................................................... 250 -- PROPERTY, PLANT AND EQUIPMENT, NET ........................................ 5,296 5,569 OTHER ASSETS .............................................................. 846 680 -------- -------- $ 29,214 $ 27,584 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt ................ $ 67 $ 63 Accounts payable ...................................................... 1,095 990 Accrued payroll and benefits .......................................... 916 571 Deferred income ....................................................... 1,039 1,098 Income taxes payable .................................................. 488 410 Warranty reserve ...................................................... 218 175 Other current liabilities ............................................. 572 455 -------- -------- Total current liabilities ......................................... 4,395 3,762 -------- -------- LONG-TERM DEBT, NET OF CURRENT MATURITIES ................................. 1,229 1,417 -------- -------- DEFERRED TAXES ............................................................ 110 54 -------- -------- SHAREHOLDERS' EQUITY: Preferred stock, $5 par value, 1,000,000 shares authorized; none issued -- -- Common stock, $.05 par value; 10,000,000 shares authorized; 3,487,000 and 3,551,000 shares issued and outstanding as of June 30, 1997 and 1996, respectively ......................................... 174 178 Additional paid-in capital ............................................ -- -- Retained earnings ..................................................... 23,463 22,223 Translation of foreign currencies ..................................... (157) (50) -------- -------- Total shareholders' equity ........................................ 23,480 22,351 -------- -------- $ 29,214 $ 27,584 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 9 6 CEM Corporation Consolidated Statements of Income In thousands, except per share data
For the years ended June 30 ------------------------------------- 1997 1996 1995 -------- -------- ------- Net sales ................................... $ 30,075 $ 31,477 $31,611 Cost of goods sold .......................... 13,481 13,096 13,341 -------- -------- ------- Gross profit ........................... 16,594 18,381 18,270 Selling, general and administrative expenses 11,474 11,354 11,186 Research and development expenses ........... 2,742 2,891 2,605 -------- -------- ------- Income from operations ................. 2,378 4,136 4,479 Investment income ........................... 454 441 283 Other (expense) income, net ................. (130) (58) 129 -------- -------- ------- Income before income taxes ............. 2,702 4,519 4,891 Provision for income taxes .................. 865 1,611 1,712 -------- -------- ------- Net income ............................. $ 1,837 $ 2,908 $ 3,179 ======== ======== ======= Net income per share ........................ $ .52 $ .78 $ .85 ======== ======== ======= Weighted average number of shares outstanding 3,550 3,748 3,735 ======== ======== =======
The accompanying notes are an integral part of the consolidated financial statements. 10 7 CEM Corporation Consolidated Statements of Cash Flows In thousands
For the years ended June 30 ----------------------------------- 1997 1996 1995 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ......................................... $ 1,837 $ 2,908 $ 3,179 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................. 1,116 1,052 927 Deferred income taxes .......................... (64) 151 (56) Loss (gain) on disposal of fixed assets ........ 32 (73) (7) Changes in operating assets and liabilities: Trade receivables ............................ 942 (346) (557) Inventories .................................. 389 (719) (837) Accounts payable and accrued expenses ........ 508 (690) 259 Income taxes payable ......................... 101 (3) 380 Other changes, net ........................... 22 (260) (154) ------- ------- ------- Net cash provided by operating activities ...... 4,883 2,020 3,134 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Sales of short-term investments .................... 1,500 2,603 4,500 Purchase of short-term investment .................. (500) (2,700) (5,004) Purchase of long-term investment ................... -- -- (2,032) Purchase of investment in affiliate ................ (250) -- -- Proceeds from sale of fixed assets ................. 56 193 69 Capital expenditures and acquisition of intangibles (1,165) (1,013) (1,028) ------- ------- ------- Net cash used in investing activities .......... (359) (917) (3,495) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable ........................ 59 50 200 Proceeds from long-term debt ....................... -- -- 1,333 Payment of notes payable ........................... -- (11) (200) Payment of long-term debt .......................... (8) -- (11) Repurchase of common stock ......................... (767) (2,025) (1,868) Proceeds from issuance of common stock ............. 147 639 466 ------- ------- ------- Net cash used in financing activities .......... (569) (1,347) (80) ------- ------- ------- ------- ------- ------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH ........... 46 (2) 17 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 4,001 (246) (424) Cash and cash equivalents at beginning of year ..... 1,832 2,078 2,502 ------- ------- ------- Cash and cash equivalents at end of year ........... $ 5,833 $ 1,832 $ 2,078 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 11 8 CEM Corporation Consolidated Statements of Changes in Shareholders' Equity In thousands
ADDITIONAL TRANSLATION PAID-IN RETAINED OF FOREIGN SHARES AMOUNT CAPITAL EARNINGS CURRENCIES TOTAL ------ ------ ------- -------- ---------- ----- June 30, 1994 .................... 3,718 $ 186 $ -- $ 18,533 $ (98) $ 18,621 Issuance of shares under stock benefit plans .............. 61 3 570 -- -- 573 Repurchase of common stock ... (158) (8) (328) (1,532) -- (1,868) Income tax benefit from employees' stock options ... -- -- 71 -- -- 71 Translation adjustment ....... -- -- -- -- 16 16 Net income ................... -- -- -- 3,179 -- 3,179 ------ ----- ------- -------- ----- -------- June 30, 1995 .................... 3,621 181 313 20,180 (82) 20,592 Issuance of shares under stock benefit plans .............. 77 4 717 -- -- 721 Repurchase of common stock ... (147) (7) (1,154) (865) -- (2,026) Income tax benefit from employees' stock options ... -- -- 124 -- -- 124 Translation adjustment ....... -- -- -- -- 32 32 Net income ................... -- -- -- 2,908 -- 2,908 ------ ----- ------- -------- ----- -------- June 30, 1996 .................... 3,551 178 -- 22,223 (50) 22,351 Issuance of shares under stock benefit plans .............. 16 1 146 -- -- 147 Repurchase of common stock ... (80) (5) (165) (597) -- (767) Income tax benefit from employees' stock options ... -- -- 19 -- -- 19 Translation adjustment ....... -- -- -- -- (107) (107) Net income ................... -- -- -- 1,837 -- 1,837 ------ ----- ------- -------- ----- -------- June 30, 1997 .................... 3,487 $ 174 $ -- $ 23,463 $(157) $ 23,480 ====== ===== ======= ======== ===== ========
The accompanying notes are an integral part of the consolidated financial statements. 12 9 CEM Corporation Notes to Consolidated Financial Statements 1. ACCOUNTING POLICIES CONSOLIDATION - The financial statements include the accounts of the Company and its wholly-owned domestic and foreign subsidiaries after the elimination of inter-company accounts and transactions. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. SINGLE INDUSTRY SEGMENT - The Company engages in one line of business defined as the development, manufacture, sale and service of microwave-based instrumentation for testing, analysis and process control in analytical laboratory and industrial markets. TRANSLATION OF FOREIGN CURRENCIES - The Company's export sales, other than those to its foreign subsidiaries, are denominated in U.S. dollars. For the Company's foreign subsidiaries, assets and liabilities are translated at exchange rates prevailing on the balance sheet date; revenues and expenses are translated at average exchange rates prevailing during the period. Any resulting translation adjustments are reported separately in shareholders' equity. Net exchange (losses) gains from foreign currency transactions included in income were ($26,000) in 1997, $57,000 in 1996 and $111,000 in 1995. CONCENTRATION OF CREDIT RISK - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of temporary cash investments and trade receivables. The Company places overnight cash investments with major financial institutions. On June 30, 1997 and 1996, the Company purchased $1,770,000 and $1,492,000, respectively, of Eurodollar investments under agreements to resell on July 1, 1997 and 1996, respectively. Due to the short term nature of the agreements, the Company did not take possession of the securities which were, instead, held by a custodian. The Company sells instruments on open account terms. Sales are not concentrated geographically and no single customer accounts for more than ten percent of sales. Management considers the risk of significant loss related to trade receivables at June 30, 1997 and 1996 to be minimal. STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash equivalents include short-term interest bearing investments, generally maturing within sixty days. Cash flows from operations include income taxes paid totaling $788,000, $1,312,000 and $1,384,000 in 1997, 1996 and 1995, respectively. Interest paid totaled $135,000, $143,000 and $39,000 in 1997, 1996 and 1995, respectively. The Company had noncash activity related to the income tax benefit from employees' stock options of $19,000, $124,000 and $71,000 in 1997, 1996 and 1995, respectively. INVESTMENTS - The Company records investments in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This Statement requires the use of fair value accounting for those securities the Company identifies as trading and available-for-sale, but retains the use of the amortized cost method for investments in debt securities that the Company has the positive intent and ability to hold to maturity. Unrealized holding gains and losses are included in earnings for trading securities and are shown as a separate component of shareholders' equity for available-for-sale securities net of the effects of income taxes. Realized gains or losses continue to be determined on the specific identification method and are reflected in income. INVESTMENT IN AFFILIATE - In 1996, the Company entered into an exclusive, worldwide licensing agreement with an Israel-based company, Sirotech, Ltd., related to the development and marketing of instruments used in rapid testing for bacteria in raw milk. The Company also acquired a 10% ownership interest in Sirotech, Ltd. which is accounted for under the cost method. TRADE RECEIVABLES, NET - Trade receivables are stated net of allowances for doubtful accounts of $265,000 and $245,000 at June 30, 1997 and 1996, respectively. INVENTORIES - Inventories are stated at the lower of cost or market. The first-in, first-out (FIFO) basis is used to determine the cost of inventories. ADVERTISING COSTS - The Company is actively engaged in marketing both new and existing products. All advertising and promotional costs are charged to operations as incurred and totaled $383,000, $960,000 and $742,000 in 1997, 1996 and 1995, respectively. 13 10 Notes to Consolidated Financial Statements 1. ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT, NET - Property, plant and equipment is stated at cost. Depreciation is computed generally using straight-line methods over the estimated useful lives, ranging from 3 to 40 years. When property is disposed of, the cost and related depreciation are removed from the accounts and resulting gains and losses are included in income. Major improvements are capitalized. Repair and maintenance costs are charged to expense as incurred. RESEARCH AND DEVELOPMENT COSTS - The Company is actively engaged in basic technology and applied research and development programs which are designed to develop new and improved products, and product applications. The costs of these programs as well as ongoing product and process improvement, engineering and support costs are charged to operations as incurred. DEFERRED INCOME - Revenue from service contracts is recognized in earnings ratably over the period of the service agreement. DEFERRED INCOME TAXES - Deferred tax assets or liabilities are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE - The computation of net income per common share is based on the weighted average number of common shares outstanding each year, adjusted for all stock splits, after adding dilutive common stock equivalents of 19,000 in 1997, 122,000 in 1996 and 104,000 in 1995. Common stock equivalents consist of stock options. In determining the number of dilutive common stock equivalents, the Company includes average common shares attributable to dilutive stock options using the treasury stock method. Fully diluted net income per share is not presented because it approximates net income per common and common equivalent share. STOCK OPTIONS - The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," effective July 1, 1996. This statement establishes financial accounting and reporting standards for stock-based compensation, including employee stock purchase plans and stock option plans. As allowed by SFAS No. 123, the Company continues to measure compensation expense under the provisions of APB No. 25, "Accounting for Stock Issued to Employees." NEW ACCOUNTING STANDARDS - In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is effective for the Company's 1998 fiscal year. Adoption of this statement is not expected to have a material impact on earnings per share. 2. INVESTMENTS The following table summarizes the amortized cost, fair market value and carrying value of the Company's investments at June 30, 1997 and 1996 under SFAS No. 115. Proceeds from sales of available-for-sale securities were $1,500,000 and $1,603,000 in 1997 and 1996, respectively. There were no realized gains or losses in 1997 in any security classification. In 1996, realized gains on sales of available-for-sale securities totaled $3,000 and there were no realized losses.
1997: Amortized Market Carrying (In Thousands) Cost Value Value - ----------------------------------------------------------------- Short-term available-for-sale $3,100 $3,100 $3,100 Long-term held-to-maturity (see Note 5) ............... 2,018 2,055 2,018 ------ ------ ------ $5,118 $5,155 $5,118 ====== ====== ======
1996: Amortized Market Carrying (In Thousands) Cost Value Value - ----------------------------------------------------------------- Short-term available-for-sale $4,100 $4,100 $4,100 Long-term held-to-maturity (see Note 5) ............... 2,024 2,054 2,024 ------ ------ ------ $6,124 $6,154 $6,124 ====== ====== ======
The contractual maturity on the held-to-maturity security is five years. 3. INVENTORIES Inventories at current cost are as follows at June 30:
(In Thousands) 1997 1996 - ------------------------- ------ ------ Parts and raw materials . $2,560 $2,974 Work-in-process and finished goods ........ 2,579 2,665 ------ ------ $5,139 $5,639 ====== ======
14 11 Notes to Consolidated Financial Statements 4. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment consisted of the following at June 30:
(In Thousands) 1997 1996 - -------------------------------------- ------- ------- Land.................................. $ 693 $ 685 Buildings ............................ 4,411 4,448 Machinery and equipment .............. 4,466 4,453 Vehicles ............................. 708 819 ------- ------- 10,278 10,405 Less: accumulated depreciation ..................... 4,982 4,836 ------- ------- $ 5,296 $ 5,569 ======= =======
5. FINANCING ARRANGEMENTS The Company maintains unsecured bank lines of credit providing for short term borrowings of up to $3.6 million at market rates. $57,000 and $51,000, was outstanding at June 30, 1997 and 1996, respectively under these bank lines of credit. The Company is not subject to commitment fees related to the unused portion of the lines of credit. At June 30, 1997, the Company had a foreign denominated mortgage note payable totaling $92,000 bearing interest at an average rate of 7.4%. Principal payments are due in equal installments until 2006 with the current portion totaling approximately $10,000 per year. At June 30, 1997, the Company had a term note maturing in fiscal 2000 and denominated in German marks for $1,146,000 carrying a 9.25% fixed interest rate and requiring a balloon principal payment upon maturity. The note is collateralized by a long-term held-to-maturity investment. The carrying amount of this term note approximates its fair value. 6. INCOME TAXES Pre-tax income and the provision for income taxes consisted of the following:
(In Thousands) 1997 1996 1995 - ----------------------- ------- ------ ------- Pre-tax income (loss): Domestic ............ $ 2,705 $4,456 $ 5,146 Foreign ............. (3) 63 (255) ------- ------ ------- 2,702 4,519 4,891 ======= ====== ======= Current taxes: Federal and state ... 929 1,418 1,816 Foreign ............. -- 50 (48) ------- ------ ------- 929 1,468 1,768 Deferred taxes, federal and state ........... (64) 143 (56) ------- ------ ------- Total taxes ........... $ 865 $1,611 $ 1,712 ======= ====== =======
The provision includes deferred taxes resulting from temporary differences in the recognition of income and expense for tax and financial reporting purposes. The sources of these differences and the tax effect of each are as follows:
(In Thousands) 1997 1996 1995 - -------------------------- ----- ----- ---- Unrealized foreign exchange gains (losses) $-- $ 27 $(28) Expiration of capital loss carryforwards on marketable securities .. -- 68 -- Depreciation ............. 40 (23) (26) Inventories and reserves . (139) 23 2 Other items, net ......... 35 48 (4) ----- ----- ---- $ (64) $ 143 $(56) ===== ===== ====
15 12 Notes to Consolidated Financial Statements 6. INCOME TAXES (CONTINUED) A reconciliation of the effective income tax rate to the amount computed by applying the statutory federal income tax rate to income before income taxes follows:
1997 1996 1995 ---- ---- ---- Federal statutory income tax rate........................ 34.0 % 34.0 % 34.0 % State income taxes, net of federal tax benefit......... 3.0 3.1 2.5 Foreign losses................... - 0.6 0.8 Tax-exempt foreign sales income......................... (3.0) (4.8) (4.7) Tax-exempt interest and dividends received exclusion...................... (2.4) (1.0) (0.9) Research and development credits............ (1.6) - (0.8) Other items, net................. 2.0 3.8 4.1 ----- ----- ----- Effective income tax rate........ 32.0 % 35.7 % 35.0 % ===== ===== =====
Components of net deferred tax assets and liabilities at June 30 are as follows:
(In Thousands) 1997 1996 - -------------------------------- ----- ----- Current asset (liability): Inventories and reserves ..... $ 388 $ 251 Employee compensation and benefits ................... (29) (30) Other ........................ (2) 33 ----- ----- $ 357 $ 254 ===== ===== Noncurrent liability (asset): Depreciation and difference in asset basis ................ $ 46 $ 69 Amortization of patents ...... 56 -- Foreign exchange on inter-company notes ........ 18 1 Deferred gain on sale/leaseback transaction . (10) (16) ----- ----- $ 110 $ 54 ===== =====
7. INTERNATIONAL OPERATIONS AND EXPORT SALES The Company operates three subsidiaries in Europe primarily for the distribution of microwave-based instrumentation produced by the parent in the US. Financial data by geographic area is presented below:
(In Thousands) 1997 1996 1995 - --------------------------- -------- -------- -------- NET SALES: U.S. operations: Unaffiliated customers: U.S ................. $ 16,165 $ 16,964 $ 18,313 Europe .............. 2,221 2,824 3,099 Asia ................ 3,855 3,657 2,571 Other ............... 2,561 2,353 2,608 Inter-area transfers .. 2,308 2,415 3,118 -------- -------- -------- 27,110 28,213 29,709 European operations: Unaffiliated customers 5,273 5,679 5,020 Eliminations ............ (2,308) (2,415) (3,118) -------- -------- -------- Consolidated .............. $ 30,075 $ 31,477 $ 31,611 ======== ======== ======== NET INCOME (LOSS): U.S. operations ......... $ 1,776 $ 2,970 $ 3,513 European operations ..... (3) 13 (207) Eliminations ............ 64 (75) (127) -------- -------- -------- Consolidated .............. $ 1,837 $ 2,908 $ 3,179 ======== ======== ======== IDENTIFIABLE ASSETS: U.S. operations ......... $ 25,506 $ 23,553 $ 22,404 European operations ..... 4,967 5,248 5,081 Eliminations ............ (1,259) (1,217) (832) -------- -------- -------- Consolidated .............. $ 29,214 $ 27,584 $ 26,653 ======== ======== ========
8. EMPLOYEE BENEFIT PLANS The Company has a noncontributory profit-sharing and a 401(k) tax deferred savings plan covering all employees meeting age and service requirements. Participants can make pre-tax contributions with the Company matching certain percentages of employee contributions. In addition to Company matching contributions under the 401(k) plan, contributions may be made as determined by the Board of Directors. The Company's policy is to fund amounts accrued. Expense related to this plan amounted to $627,000, $105,000 and $638,000 for the years ended June 30, 1997, 1996 and 1995, respectively. 16 13 Notes to Consolidated Financial Statements 9. MANAGEMENT INCENTIVE AND STOCK OPTION PLANS In fiscal 1994, the Company adopted the 1993 Management Equity Plan under which officers and other key employees may receive stock and cash performance-based incentive awards. Up to 375,000 shares are authorized under this plan. At June 30, 1997, 237,000 shares were reserved for future grants. No compensation expense was accrued under the plan in 1997 and 1996; $232,000 was accrued in 1995. Also in fiscal 1994, the Company adopted the 1993 Nonqualified Stock Option Plan for Non-Employee Directors under which options may be granted to outside directors. Up to 25,000 shares are authorized under this plan. At June 30, 1997, 12,000 shares were reserved for future grants. Additional information with respect to the 1993 Management Equity Plan and 1993 Nonqualified Stock Option Plan is as follows:
(In Thousands) Shares - ---------------------------------------------------- ---------- Stock awards: 1995 awards at $11.00 per share.................. 10 1996 awards at $13.00 per share.................. 7 1997 awards...................................... - ---------- Total stock awards at $11.00 - $13.00 per share.... 17 ========== Options to purchase shares: - ---------------------------------------------------- Outstanding at June 30, 1994 at $12.13 per share............................... 1 Granted at $11.00 - $13.63 per share......... 59 ---------- Outstanding at June 30, 1995 at $11.00 - $13.63 per share................... 60 Granted at $12.75 - $13.75 per share......... 61 Exercised at $11.00 per share................ (1) Canceled at $11.00 - $13.63 per share........ (15) ---------- Outstanding at June 30, 1996 at $11.00 - $13.75 per share................... 105 Granted at $8.25 - $10.69 per share.......... 65 Canceled at $10.69 - $13.00 per share........ (20) ---------- Outstanding at June 30, 1997 at $8.25 - $13.75 per share.................... 150 ========== Options exercisable at June 30, 1997 at $11.00 - $13.75 per share................... 41 ==========
Effective with the approval of the above plans, the Company's 1986 and 1987 stock option plans, under which options were granted to officers, employees, and outside directors, were terminated. At June 30, 1997, no shares were reserved for future grants. The prices for all outstanding and exercisable options related to the 1986 and 1987 stock option plans ranged from $6.56 - $13.63 per share for all periods presented. Additional information with respect to the 1986 and 1987 stock option plans is as follows:
(In Thousands) Shares - ---------------------------------------------------- ---------- Options to purchase shares: - ---------------------------------------------------- Outstanding at June 30, 1994..................... 489 Exercised at $7.69 - $10.50 per share.......... (51) Canceled at $8.88 - $10.50 per share........... (4) ---------- Outstanding at June 30, 1995..................... 434 Exercised at $7.69 - $10.50 per share.......... (69) Canceled at $6.56 - $11.00 per share........... (2) ---------- Outstanding at June 30, 1996..................... 363 Exercised at $7.69 - $10.50 per share.......... (16) Canceled at $8.50 - $10.50 per share........... (47) ---------- Outstanding at June 30, 1997..................... 300 ========== Options exercisable at June 30, 1997............. 289 ==========
Options granted under all stock option plans are exercisable at the market value of the shares at the date of grant. The options are exercisable over a period not to exceed ten years. Tax benefits arising from disqualifying dispositions are recognized at the time of disposition, are credited to additional paid-in capital and recorded as noncash activity on the statement of cash flows. PRO FORMA INFORMATION- The Company continues to apply APB No. 25 in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized in the accompanying consolidated statements of operations for its stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined in accordance with the fair value method prescribed in SFAS No. 123, the Company's net income and earnings per share would have changed to the pro forma amounts indicated below:
1997 1996 --------------------- Net income (in thousands)..... as reported $ 1,837 $ 2,908 pro forma $ 1,751 $ 2,868 Earnings per share............ as reported $ .52 $ .78 pro forma $ .49 $ .77
17 14 Notes to Consolidated Financial Statements 9. MANAGEMENT INCENTIVE AND STOCK OPTION PLANS (CONTINUED) The above pro forma amounts include compensation expense for options granted since July 1, 1995, and may not be representative of that to be expected in future years. The pro forma amounts assume that the fair value assigned to the options were amortized using the straight-line method over the vesting period of the options, which is one to four years. The fair value of each option granted under the stock option plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997 and 1996:
1997 1996 ------------- ------------ Risk-free interest rate............. 6.5 % 6.0 % Expected life....................... 6 YEARS 6 years Expected volatility................. 30 % 20 %
A dividend yield of zero was used for each year. These assumptions resulted in weighted-average values as of the grant dates of $4.52 and $4.64 per share for stock options granted in 1997 and 1996, respectively. 10. QUARTERLY INFORMATION (UNAUDITED) Selected quarterly results of operations and quarterly stock prices for fiscal 1997 and 1996 are summarized in the table below. The stock prices represent the high and low sales prices for CEM common shares as reported on the Nasdaq Stock Market. No cash dividends were declared during the two fiscal years ended June 30, 1997.
Q-1 Q-2 Q-3 Q-4 Year -------------------------------------------------------------------------- 1997: Net sales $ 6,610 $ 8,172 $ 7,137 $ 8,156 $ 30,075 Gross profit 3,552 4,472 4,041 4,529 16,594 Net income 106 605 391 735 1,837 Net income per share .03 .17 .11 .21 .52 Stock Price: High $ 14.00 $ 11.00 $ 12.75 $ 9.25 $ 14.00 Low 10.50 7.50 8.00 7.75 7.50 - -------------------------------------------------------------------------------------------------------------- 1996: Net sales $ 7,461 $ 8,731 $ 7,518 $ 7,767 $ 31,477 Gross profit 4,267 5,241 4,232 4,641 18,381 Net income 677 1,001 676 554 2,908 Net income per share .18 .27 .18 .15 .78 Stock Price: High $ 14.50 $ 14.50 $ 15.00 $ 14.25 $ 15.00 Low 11.75 12.50 12.75 13.25 11.75 - --------------------------------------------------------------------------------------------------------------
18 15 Report of Independent Accountants To the Shareholders of CEM Corporation: We have audited the accompanying consolidated balance sheets of CEM Corporation and Subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of CEM Corporation and Subsidiaries as of June 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Charlotte, North Carolina July 23, 1997 19 16 Corporate Information OFFICERS & DIRECTORS DR. MICHAEL J. COLLINS Director, President and Chief Executive Officer JOHN L. CHANON Director Area Partner Tatum CFO Partners LP (CFO Services) JOHN D. CORRENTI Director Vice Chairman, President and Chief Executive Officer Nucor Corporation (Steel Products) RICHARD N. DECKER Vice President - Finance, Chief Financial Officer, Secretary and Treasurer RONALD A. NORELLI Chairman of the Board President and Chief Executive Officer Norelli & Company (Management Consulting) CORPORATE ADDRESS CEM Corporation 3100 Smith Farm Road P.O. Box 200 Matthews, North Carolina 28106-0200 (704) 821-7015 e:mail: info@cemx.com Web: http://www.cemx.com TRANSFER AGENT Wachovia Bank of North Carolina, N.A. Winston Salem, North Carolina INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P. Charlotte, North Carolina GENERAL COUNSEL Kennedy Covington Lobdell & Hickman, L.L.P. Charlotte, North Carolina FORM 10-K/INVESTOR CONTACT The Company's Annual Report on Form 10-K for the year ended June 30, 1997 filed with the Securities and Exchange Commission is available without charge to shareholders upon written request. These requests and other investor contacts should be directed to Richard N. Decker, Secretary, at the corporate address. ANNUAL MEETING The annual meeting of shareholders of CEM Corporation will be held at 11:00 am local time on November 6, 1997 at the corporate offices, 3100 Smith Farm Road, Matthews, North Carolina. Shareholders of record as of September 8, 1997 will be entitled to vote at this meeting. TRADEMARKS CEM(TM), MAC(TM), MES 1000(TM), MDS 2000(TM), MAS 7000(TM), Airwave 7000(TM), LabWave 9000(TM), SpectroPrep(TM), STAR(TM), MARS 5(TM), ProFat 2(TM) and PrepLink(TM) are CEM Corporation trademarks. For ease of reading, designations of trademarks have sometimes been omitted from the text of this report. NASDAQ SYMBOL The Company's common shares are traded on the Nasdaq Stock Market (National Market System) under the symbol CEMX. SHAREHOLDERS OF RECORD As of September 8, 1997, The Company had approximately 2,200 shareholders of record and an estimate of the number of individual participants represented by security position listings. 20 EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of CEM Corporation on Form S-8 (File Numbers 33-11952, 33-25739, 33-53694, 33-75366, 33-75368, 33-80136 and 33-87676) of our report dated July 23, 1997, on our audits of the consolidated financial statements and financial statement schedule of CEM Corporation as of June 30, 1997 and 1996, and for the years ended June 30, 1997, 1996 and 1995, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Charlotte, North Carolina September 24, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1997 JUN-30-1997 5,833 3,100 6,255 265 5,139 20,804 10,278 4,982 29,214 4,395 1,229 0 0 174 23,306 29,214 30,075 30,075 13,481 13,481 14,216 0 0 2,702 865 0 0 0 0 1,837 .52 .52
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