-----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, JW3xEaYQ2RmH5E2jCP2FfTkC2RiCL0P9Oa9J7pp5zcSUZ04P5yK21iMTo3ysbBU/ Q75tk8cFCzm7p7h16dJzvQ== 0000950144-99-011475.txt : 19991227 0000950144-99-011475.hdr.sgml : 19991227 ACCESSION NUMBER: 0000950144-99-011475 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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: 99718064 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 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, 1999 [ ] 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 28104 - -------------------------------------------------------------------------------- (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, 1999, was $17,179,844 assuming, for purposes of this filing, that all executive officers and directors of the Registrant are affiliates. 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, 1999, was 3,043,443 shares. Portions of the CEM Corporation Annual Report to Shareholders for the fiscal year ended June 30, 1999 are incorporated by reference into Parts I and II. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held November 4, 1999 are incorporated by reference into Part III. 2 PART I ITEM 1 - BUSINESS General CEM Corporation (the "Company") 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 Company'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 Company's sales consists of consumable supplies, parts and service for its instrumentation. The Company was organized as a North Carolina corporation in 1971. Products Microwave Accelerated Reaction System("MARS") and Microwave Digestion System("MDS"). MARS and MDS and related accessories accounted for approximately 36%, 33%, and 29% of the Company's consolidated sales in fiscal 1999, 1998 and 1997, 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. MARS, which was introduced in the first quarter of fiscal 1998 and is the next generation of MDS, permits higher pressures to be used safely and provides greater measurement data for control of the instrument. Moisture/Solids Analyzer. The Moisture/Solids Analyzer and related accessories accounted for approximately 20%, 17% and 19% of the Company's consolidated sales in fiscal 1999, 1998 and 1997, 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, chemical and semi-conductor industries. Fat Analyzer System. The Company 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 II System. The ProFat II System, which was introduced in the first quarter of fiscal 1998, 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. 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, MARS-X. Sales of the MARS-X to environmental laboratories 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. 2 3 Marketing and Sales The Company'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 Company's marketing strategy utilizes telemarketing, direct mail, trade show demonstrations, articles, studies, trade journal advertising, product releases, seminars and makes extensive use of the Company'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 Company's applications laboratories provide technical assistance to customers and potential customers in developing new and improved applications and related procedures. The applications laboratories perform tests in its facilities in North Carolina and Germany and provides the results to customers. The Company's foreign sales are conducted through independent dealers throughout the world and the Company's subsidiaries in England, Germany and Italy. Foreign sales are primarily to customers in Europe, Asia and Latin America. Foreign sales accounted for 43%, 45% and 46% of net sales in fiscal 1999, 1998 and 1997, respectively. Research and Development The Company invests heavily in the research and development of potential new products, product improvements and enhancements, and applications research for existing products. For fiscal 1999, 1998 and 1997, research and development expense was $3,162,000, $2,943,000 and $2,742,000 respectively. The Company's product development efforts continue to progress with respect to certain proprietary technology licensed in 1996. The Company expects to deliver prototype instruments incorporating this technology to prospective customers in fiscal 2000. Product Protection The Company 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 Company's products are protected by issued patents or pending patent applications. Manufacturing The Company'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 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. The Company 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 Company and its subsidiaries. 3 4 Employees At June 30, 1999, the Company employed 179 persons. None of the Company's employees are covered by a collective bargaining agreement. Backlog The Company does not have a significant backlog of orders, as it normally ships its products within a short time after it receives orders. Competition The Company 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 Company's products. Also competing with MARS and MDS 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 Company. 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 Company's instrumentation in certain markets. There is one manufacturer of a microwave moisture system similar in nature to the Company's Moisture/Solids Analyzer. 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 Company, the Company's product offers advantages in both speed and process control. The Company's 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, but the Company believes its product offers advantages in price and performance. The Company's Fat Analyzer System is the only direct moisture, fat and protein system available that is approved by the Association of Analytical Chemists. 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 competing system is sold at a significantly higher price than the Company'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 Company's Microwave Extraction System are other advanced methods such as Supercritical Fluid Extraction and Accelerated Solvent Extraction. Typically the Company's selling prices are higher than those of most of its competitors. The Company 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 Company's international operations and sales is incorporated by reference to footnotes 1 and 8 of the financial statements contained in the Company's 1999 Annual Report to Shareholders (Exhibit 13 hereto). 4 5 ITEM 2 - PROPERTIES The Company'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 Company in Matthews, North Carolina. The Company 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 $68,000 at June 30, 1999. Management believes these facilities are adequate to serve existing markets for the next several years. ITEM 3 - LEGAL PROCEEDINGS Nothing is required to be disclosed pursuant to this item. ITEM 4 is inapplicable and has been omitted. PART II ITEM 5 is incorporated by reference to Footnote 12 on page 19 "Quarterly Information (Unaudited)" and on the inside back cover "Corporate Information" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13 hereto). ITEM 6 is incorporated by reference to page 20 of items captioned "Selected Financial Data" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13 hereto). ITEM 7 is incorporated by reference to page 6 captioned "Management's Discussion and Analysis" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13 hereto). ITEM 7A is incorporated by reference to Footnote 2 on page 14 "Financial Instruments" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13 hereto). ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements, notes to the financial statements and quarterly supplemental financial data of the Company appearing on pages 9 - 20 of the Company's 1999 Annual Report to Shareholders are hereby incorporated by reference. ITEM 9 is inapplicable and has been omitted. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information as to the directors and chief executive officer of the Company is incorporated herein by reference to the section captioned "Election of Directors" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held November 4, 1999. The following information is provided as to the executive officers of the Company who are not directors: Name Age Background - --------------------- ------ -------------------------------------------- Richard N. Decker 50 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 Company's executive officers were appointed to their current positions at the Annual Meeting of the Board of Directors held on November 5, 1998. All of the Company'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. ITEM 11 is incorporated by reference to the sections captioned "Executive Compensation" and "Director Compensation" in the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held November 4, 1999. 5 6 ITEM 12 is incorporated by reference to the sections captioned "Principal Shareholders and Holdings of Management" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held November 4, 1999. 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 Company, as amended.(1) 3.2 Bylaws of the Company.(1) 10.1 * CEM Corporation 1986 Nonqualified Stock Option Plan, as amended, incorporated herein by reference to the Company'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 Company'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 Company's Registration Statement on Form S-8 (File No. 33-75368). 10.5 * CEM Corporation Management Incentive Compensation Plan(2). 10.6 CEM Corporation 1993 Nonqualified Stock Option Plan for Non-Employee Directors, incorporated herein by reference to the Company's Registration Statement on Form S-8 (File No. 33-75366). 13. The Company's 1999 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 Company's Subsidiaries.(1) 23. Consent of Independent Accountants. 27. Financial Data Schedules (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 Company's registration statements on Form S-8 (Registration Numbers 33-11952 and 33-25739).(1) -------------------- * This exhibit is one of the Company's management contracts and compensatory plans and arrangements. (1) Incorporated herein by reference to the Company's Form 10-K for the year ended June 30, 1994. (2) Incorporated herein by reference to the Company's Form 10-K for the year ended June 30, 1997. (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. (c) Exhibits. See Item 14(a)(3) above. 6 7
Reference (Page) ----------------------------------- Annual Form 10-K Report to Item 14. (d) Index to Financial Statements and Schedules Annual Report Shareholders - -------------------------------------------------------------------------- ------------- ------------ Data incorporated by reference from the attached 1999 Annual Report to Shareholders: Report of Independent Accountants 20 Consolidated Balance Sheets as of June 30, 1999 and 1998 9 Consolidated Statements of Income for the years ended 10 June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years 11 ended June 30, 1999, 1998 and 1997 Consolidated Statements of Changes in Shareholders' Equity for the 12 years ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements 13 - 20 Data submitted herewith: Report of Independent Accountants 8 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts 10
The 1999 Annual Report to Shareholders of CEM Corporation is not to be deemed "filed" as part of this report except for those parts thereof specifically incorporated herein by reference. 7 8 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of CEM Corporation: Our audits of the consolidated financial statements referred to in our report dated July 21, 1999 appearing on page 20 of the 1999 Annual Report to Shareholders of CEM Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina July 21, 1999 8 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company 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 President and Chief Executive Officer By: /s/ Richard N. Decker --------------------- Dated: September 24, 1999 Richard N. Decker Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting 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 Company and in the capacities and on the dates indicated.
Signature Capacity Date - --------------------------------- ----------------------------------------------- ------------------ /s/ Ronald A. Norelli Chairman of the Board of Directors September 24, 1999 - --------------------------------- Ronald A. Norelli /s/ Michael J. Collins President, Chief Executive Officer and Director September 24, 1999 - --------------------------------- (Principal Executive Officer) Michael J. Collins /s/ John L. Chanon Director September 24, 1999 - --------------------------------- John L. Chanon /s/ George F. Krall Director September 24, 1999 - --------------------------------- George F. Krall
9 10 CEM CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Balance at beginning of Charged to costs Balance at Description period and expenses Deductions End of period --------------------------- ----------- ---------------- ------------ ------------- Year ended Accounts receivable, $ 1,019,000 $ 360,000 $ (151,000) $ 1,228,000 June 30, 1999 inventory and warranty reserves Year ended Accounts receivable, 1,040,000 404,000 (425,000) 1,019,000 June 30, 1998 inventory and warranty reserves Year ended Accounts receivable, $ 720,000 $ 607,000 $ (287,000) $ 1,040,000 June 30, 1997 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, 1999 0-15383 CEM CORPORATION EXHIBIT INDEX Exhibit No. Exhibit Description - ----------- ------------------- 3.1 Restated Charter of the Company, as amended.(1) 3.2 Bylaws of the Company.(1) 10.1 CEM Corporation 1986 Nonqualified Stock Option Plan, as amended, incorporated herein by reference to the Company'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 Company'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 Company's Registration Statement on Form S-8 (File No. 33-75368). 10.5 CEM Corporation Management Incentive Compensation Plan.(2) 10.6 CEM Corporation 1993 Nonqualified Stock Option Plan for Non-Employee Directors, incorporated herein by reference to the Company's Registration Statement on Form S-8 (File No. 33-75366). 13. The Company's 1999 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 Company's Subsidiaries.(1) 23. Consent of Independent Accountants (page __ of the sequentially numbered pages). 27. Financial Data Schedules (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 Company's registration statements on Form S-8 (Registration Numbers 33-11952 and 33-25739).(1) ---------------------- (1) Incorporated herein by reference to the Company's Form 10-K for the year ended June 30, 1994. (2) Incorporated herein by reference to the Company's Form 10-K for the year ended June 30, 1997. 11 EX-13 2 1999 ANNUAL REPORT 1 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 1999 1998 1997 1999 1998 ----- ----- ----- ----- ---- Net sales 100.0% 100.0% 100.0% (.9)% 7.6% Cost of goods sold 47.1 46.4 44.8 .5 11.5 ----- ----- ----- ----- ---- Gross profit 52.9 53.6 55.2 (2.1) 4.4 Selling, general and administrative expenses 34.8 35.1 38.2 (1.6) (1.2) Research and development expenses 9.9 9.1 9.1 7.4 7.3 ----- ----- ----- ----- ---- Income from operations 8.2 9.4 7.9 (13.2) 28.2 Investment income 1.3 1.7 1.5 (22.1) 20.5 Other expense, net .3 .2 .4 nm nm ----- ----- ----- ----- ---- Income before income taxes 9.2 10.9 9.0 (15.8) 30.8 Provision for income taxes 2.9 3.4 2.9 (15.5) 28.3 ----- ----- ----- ----- ---- Net income 6.3% 7.5% 6.1% (16.0)% 32.0% ===== ===== ===== ====== ====
RESULTS OF OPERATIONS Fiscal Year 1999 Compared to Fiscal Year 1998 Net sales for fiscal 1999 decreased .9% to $32.1 million. Foreign sales were down 5% primarily due to weakness in Europe and Latin America. The shortfall in foreign sales was somewhat offset by an increase in U.S. sales, primarily resulting from the Company's Microwave Accelerated Reaction System (MARS). The MARS accounted for approximately 26% of net sales for fiscal 1999 compared to 18% for fiscal 1998. Foreign sales as a percentage of total sales decreased from 45% to 43%. Gross profit margins decreased from 53.6% to 52.9% primarily due to competitive pricing pressures in Europe and a shift in product mix from the MDS to the MARS platform. The Company expects margins to improve in fiscal 2000 on the MARS platform. The Company began realizing the benefit of these reductions in the second half of fiscal 1999. Selling, general and administrative expenses decreased 1.6% compared to the prior year primarily due to reduced legal costs as a result of the settlement of litigation the Company initiated to establish the validity of a patent for microwave digestion vessels and a decline in incentive compensation and distributor commissions resulting from decreased sales. The 7.4% increase in research and development expenses was consistent with management's expectations and reflects the Company's continued commitment to new product development and enhancements. Management expects research and development expenses to remain between 8% and 10% of net sales for the foreseeable future. Investment income decreased due to a reduction in average cash and investment balances during fiscal 1999. These balances declined as a result of purchases of the Company's stock pursuant to the Company's stock repurchase program. The Company's effective tax rate remained relatively consistent with the prior year. Fiscal Year 1998 Compared to Fiscal Year 1997 Net sales for fiscal 1998 increased to a record of $32.4 million or 7.6% above prior year. The primary driver for the increase in net sales was the Company's Microwave Accelerated Reaction System (MARS), the new closed vessel digestion system, which was introduced in the first quarter of fiscal 1998 and accounted for 18% of sales in that year. The increase in net sales was accomplished against the backdrop of a sharp slowdown in sales to Asia, which declined 31%. Sales in the U.S., Europe and other international areas contributed substantial gains for the year and offset the Asian downturn. Foreign sales as a percentage of total sales decreased from 46% to 45%. As expected, gross profit margins declined from 55.2% to 53.6% primarily due to high MARS costs and changes in product mix. 6 2 Cost containment measures continued to show positive results during fiscal 1998 as selling, general and administrative expenses decreased slightly from prior year. Research and development expenses increased by 7.3%. Investment income increased due to effective cash management strategies and an increase in average cash and investment balances during the year. The Company's effective tax rate decreased from 32.0% to 31.4% as a result of lower state income taxes and various other factors. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities for fiscal 1999 totaled $2.9 million and decreased $900K from the prior year primarily due to lower net income and increased prepayments for health and welfare costs. 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, 1999, the Company had no outstanding balance. At June 30, 1998, the Company had $83,000 outstanding under these bank lines of credit. Should the need arise, management believes the lines of credit could be increased. In 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 collateralize the loan. While the loan and the corresponding investment are now reflected on the balance sheet, this transaction eliminated the Company's exposure to future currency fluctuations on the intercompany note receivable. In 1991, the Company began a stock repurchase program which has been extended by the Board of Directors on several occasions. Repurchases totaled $1.4, $5.0, and $0.8 million in 1999, 1998, and 1997, respectively. As of June 30, 1999, an additional $1.7 million remained authorized to repurchase the Company's common stock. From time to time, repurchases may be made in the open market 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. The stock repurchase program had the effect of increasing earnings per diluted share by $.07, $.02 and $.01 in 1999, 1998, and 1997, respectively. Effective January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing currencies and one common currency (the "euro"). The euro trades on currency exchanges and is being used in certain business transactions. Beginning in January, 2002, bills and coins denominated in the euro will be issued and existing currencies will be withdrawn from circulation. The Company's foreign subsidiaries do not expect to transact a material portion of their business in the euro until fiscal 2001. The Company's foreign subsidiaries are not yet required to prepare reports to local regulatory agencies using the euro. IT systems used by the company's foreign subsidiaries should be updated or replaced in a timely manner to facilitate business transactions and reporting to local government agencies. Costs to update and/or replace IT systems are not expected to exceed $50,000. 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. YEAR 2000 ISSUE The Company continued implementing its plan for addressing the Year 2000 Issue (also known as Y2K) during fiscal 1999. The Year 2000 Issue results from computers and other systems that process or use date sensitive information and may incorrectly respond to dates on or after January 1, 2000. Plans for addressing information technology (IT) systems are nearly complete and involve primarily software upgrades and/or hardware upgrades. To date, the Company has spent less than $100,000 to address the Year 2000 Issue and does not believe its future expenditures to address this issue will be more than $25,000. For non-IT systems, the Company has not identified and does not expect to identify any areas where Year 2000 problems would have a material impact on the Company that are not capable of being repaired or replaced at a fairly low cost. 7 3 The Company has initiated formal communications with all of its third party vendors, suppliers and customers with whom the Company has a significant relationship to evaluate whether these third parties have significant Year 2000 problems that could have a material adverse effect on the Company; no such problems have been identified. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or conversion that is incompatible with the Company's systems, would not have a material effect on the Company. The Company, in turn, has responded to all inquiries from customers as to the Year 2000 readiness of the Company. CEM instrument operations will be unaffected by the year 2000 issue. CEM instruments do not use the date for operation; rather, they use the date as a stamp for printouts only. The plans to address the Year 2000 Issue for the Company's foreign subsidiaries should be complete by September 30, 1999. If the Company's plans to address these issues are not successful, the Company would attempt to identify and purchase replacement systems that do not have problems associated with the Year 2000 Issue. The cost of such replacement systems would be immaterial to the Company. The discussion is this section contains Year 2000 readiness disclosures within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. 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" may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "plan," "project," or other statements concerning opinions or judgment of the Company and its management about future events. 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 the 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 experienced and may continue to 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. In the past several years, prices of some components purchased by the Company have increased, while prices of other components have declined due, in part, to changes in volume. Management believes that increases in costs have not exceeded the inflation rate of the national economy as a whole. 8 4 CONSOLIDATED BALANCE SHEETS
June 30 June 30 In thousands, except share data 1999 1998 -------- -------- ASSETS Current Assets: Cash and cash equivalents $ 2,865 $ 2,963 Short-term investments 6,262 3,200 Trade receivables, net 6,634 6,616 Inventories 5,335 5,675 Deferred taxes 351 231 Other current assets 613 257 -------- -------- Total current assets 22,060 18,942 -------- -------- Long-term Investments 113 3,117 Investment in Affiliate 363 325 Property, Plant and Equipment, Net 4,984 4,925 Other Assets 1,036 989 -------- -------- $ 28,556 $ 28,298 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable and current maturities of long-term debt $ 1,066 $ 92 Accounts payable 1,318 1,491 Accrued payroll and benefits 951 1,115 Deferred income 1,402 1,280 Income taxes payable 819 538 Warranty reserve 261 213 Other current liabilities 344 577 -------- -------- Total current liabilities 6,161 5,306 -------- -------- Long-term Debt, Net of Current Maturities 173 1,177 -------- -------- Deferred Taxes 127 96 -------- -------- Shareholders' Equity: Preferred stock, $5 par value, 1,000,000 shares authorized; none issued - Common stock, $.05 par value; 10,000,000 shares authorized; 3,046,000 and 3,180,000 shares issued and outstanding as of June 30, 1999 and 1998, respectively 152 159 Additional paid-in capital -- -- Retained earnings 22,422 21,800 Accumulated other comprehensive loss (479) (240) -------- -------- Total shareholders' equity 22,095 21,719 -------- -------- $ 28,556 $ 28,298 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 9 5 CONSOLIDATED STATEMENTS OF INCOME
For the years ended June 30 In thousands, except per share data 1999 1998 1997 ------- ------- ------- Net sales $32,077 $32,362 $30,075 Cost of goods sold 15,110 15,030 13,481 ------- ------- ------- Gross profit 16,967 17,332 16,594 Selling, general and administrative expenses 11,158 11,340 11,474 Research and development expenses 3,162 2,943 2,742 ------- ------- ------- Income from operations 2,647 3,049 2,378 Investment income 426 547 454 Other expense, net 99 62 130 ------- ------- ------- Income before income taxes 2,974 3,534 2,702 Provision for income taxes 938 1,110 865 ------- ------- ------- Net income $ 2,036 $ 2,424 $ 1,837 ======= ======= ======= Earnings per share Basic $ .66 $ .71 $ .52 Diluted $ .66 $ .70 $ .52 Average shares outstanding Basic 3,093 3,435 3,530 Diluted 3,102 3,469 3,550
The accompanying notes are an integral part of the consolidated financial statements. 10 6 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30 In thousands 1999 1998 1997 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,036 $ 2,424 $ 1,837 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,299 1,261 1,116 Deferred income taxes (89) 112 (64) Loss on disposal of fixed assets, net 2 21 32 Changes in operating assets and liabilities: Trade receivables (35) (673) 942 Inventories 266 (580) 389 Accounts payable and accrued expenses (429) 885 508 Income taxes payable 287 163 101 Other changes, net (487) 131 22 ------- ------- ------- Net cash provided by operating activities 2,850 3,744 4,883 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Sale of short-term investments -- 3,100 1,500 Purchase of short-term investment -- (3,200) (500) Purchase of long-term investment -- (1,152) -- Purchase of investment in affiliate (38) (75) (250) Proceeds from sale of fixed assets 52 29 56 Capital expenditures and acquisition of intangibles (1,447) (1,119) (1,165) ------- ------- ------- Net cash used in investing activities (1,433) (2,417) (359) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of notes payable -- 84 59 Repayment of long-term debt (88) (65) (8) Repurchase of common stock (1,445) (4,999) (767) Proceeds from issuance of common stock 21 784 147 ------- ------- ------- Net cash used in financing activities (1,512) (4,196) (569) ------- ------- ------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH (3) (1) 46 ------- ------- ------- Net (decrease) increase in cash and cash equivalents (98) (2,870) 4,001 Cash and cash equivalents at beginning of year 2,963 5,833 1,832 ------- ------- ------- Cash and cash equivalents at end of year $ 2,865 $ 2,963 $ 5,833 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 11 7 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated Comprehensive Additional Other Income Paid-in Retained Comprehensive In thousands (Loss) Shares Amount Capital Earnings Loss Total ------------- ------ ------ ---------- -------- ------------- ----- 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 Net income $ 1,837 -- -- -- 1,837 -- 1,837 Translation adjustment (107) -- -- -- -- (107) (107) ------- ----- ----- ----- -------- ----- --------- Comprehensive income $ 1,730 ======= JUNE 30, 1997 3,487 174 -- 23,463 (157) 23,480 Issuance of shares under stock benefit plans 95 5 779 -- -- 784 Repurchase of common stock (402) (20) (892) (4,087) -- (4,999) Income tax benefit from employees' stock options -- -- 113 -- -- 113 Net income 2,424 -- -- -- 2,424 -- 2,424 Translation adjustment (83) -- -- -- -- (83) (83) ------- ----- ----- ----- -------- ----- --------- Comprehensive income $ 2,341 ======= JUNE 30, 1998 3,180 159 -- 21,800 (240) 21,719 Issuance of shares under stock benefit plans 3 -- 21 -- -- 21 Repurchase of common stock (137) (7) (24) (1,414) -- (1,445) Income tax benefit from employees' stock options -- -- 3 -- -- 3 Net income 2,036 -- -- -- 2,036 -- 2,036 Translation adjustment (239) -- -- -- -- (239) (239) ------- ----- ----- ----- -------- ----- --------- Comprehensive income $ 1,797 ======= JUNE 30, 1999 3,046 $ 152 $ -- $ 22,422 $(479) $ 22,095 ===== ===== ===== ======== ===== =========
The accompanying notes are an integral part of the consolidated financial statements. 12 8 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. Comprehensive Income - Effective July 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Accordingly, the Consolidated Statements of Changes in Shareholders' Equity and the shareholders' equity section of the Consolidated Balance Sheets have been reclassified to comply with the new requirements. 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 gains (losses) from foreign currency transactions included in income were ($19,000) in 1999, $51,000 in 1998, and ($26,000) in 1997. 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 $642,000, $817,000 and $788,000 in 1999, 1998 and 1997, respectively. Interest paid totaled $128,000, $127,000 and $135,000 in 1999, 1998 and 1997, respectively. The Company had non-cash activity related to the income tax benefit from employees' stock options of $3,000, $113,000 and $19,000 in 1999, 1998 and 1997, 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. The Company uses 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 - The Company has 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. The Company has a 13% ownership in Sirotech, Ltd. The investment is accounted for under the cost method. Trade Receivables, Net - Trade receivables are stated net of allowances for doubtful accounts of $291,000 and $306,000 at June 30, 1999 and 1998, 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 $522,000, $480,000 and $383,000 in 1999, 1998 and 1997, respectively. Property, Plant and Equipment, Net - Property, plant and equipment is stated at cost less depreciation. Depreciation is computed generally using straight-line methods over the estimated useful lives as follows: 20-40 years for buildings, 3-10 years for machinery and equipment, and 3-5 years for vehicles. When property, plant and equipment 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 expense 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. Stock Options - The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes financial accounting and 13 9 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." 2. FINANCIAL INSTRUMENTS Foreign Currency Risk - The Company has a term note denominated in German marks for $1,058,000 maturing in fiscal 2000. To mitigate the effect of foreign currency movements, the Company has investments denominated in German marks also maturing in fiscal 2000 which management intends to utilize to extinguish this debt. Interest Rate Swap - The Company has entered into an interest rate swap whereby a variable rate, based on IBOR (Interstate Bank Offered Rate) plus 1.65% on the Company's term note denominated in German marks, was swapped for a fixed interest rate. 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, 1999 and 1998, the Company purchased $1,515,000 and $997,000, respectively, of Eurodollar investments under agreements to resell on July 1, 1999 and 1998, 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, 1999 and 1998 to be minimal. 3. INVESTMENTS The following table summarizes the amortized cost, fair market value and carrying value of the Company's investments at June 30, 1999 and 1998. Proceeds from sales of available-for-sale securities were $0 and $3,100,000 in 1999 and 1998, respectively. There were no realized gains or losses in 1999 or 1998 in any security classification.
In thousands 1999 Amortized Cost Market Value Carrying Value -------------- ------------ -------------- Short-term available-for-sale $3,200 $3,200 $3,200 Short-term held-to-maturity 3,062 3,086 3,062 Long-term held-to-maturity 113 113 113 ------ ------ ------ $6,375 $6,399 $6,375 ====== ====== ====== 1998 Amortized Cost Market Value Carrying Value -------------- ------------ -------------- Short-term held-to-maturity $3,200 $3,200 $3,200 Long-term held-to-maturity (see Note 6) 3,117 3,165 3,117 ------ ------ ------ $6,317 $6,365 $6,317 ====== ====== ======
4. INVENTORIES Inventories at current cost are as follows at June 30:
In thousands 1999 1998 ------ ------ Parts and raw materials $3,233 $3,302 Work-in-process and finished goods 2,102 2,373 ------ ------ $5,335 $5,675 ====== ======
5. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment consisted of the following at June 30:
In thousands 1999 1998 ------- ------- Land $ 671 $ 691 Buildings 4,465 4,432 Machinery and equipment 5,841 4,928 Vehicles 463 690 ------- ------- 11,440 10,741 Less: accumulated depreciation 6,456 5,816 ------- ------- $ 4,984 $ 4,925 ======= =======
14 10 6. FINANCING ARRANGEMENTS The Company maintains unsecured bank lines of credit providing for short term borrowings of up to $3.6 million at market rates. The Company did not have any amounts outstanding at June 30, 1999 under these bank lines of credit. The Company had $83,000 outstanding at June 30, 1998 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, 1999, the Company had a foreign denominated mortgage note payable totaling $68,000 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, 1999, the Company had a term note maturing in fiscal 2000 and denominated in German marks for $1,058,000 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. 7. INCOME TAXES Pre-tax income and the provision for income taxes consisted of the following:
In thousands 1999 1998 1997 ------- ------ ------- Pre-tax income (loss): Domestic $ 2,579 $3,266 $ 2,705 Foreign 395 268 (3) ------- ------ ------- 2,974 3,534 2,702 ======= ====== ======= Current taxes: Federal and state 934 845 929 Foreign 93 153 -- ------- ------ ------- 1,027 998 929 Deferred taxes, federal and state (89) 112 (64) ------- ------ ------- Total taxes $ 938 $1,110 $ 865 ======= ====== =======
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 1999 1998 1997 ----- ----- ----- Depreciation $ 17 $ 14 $ 40 Inventories and reserves (108) 185 (139) Other items, net 2 (87) 35 ----- ----- ----- $ (89) $ 112 $ (64) ===== ===== =====
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:
1999 1998 1997 ---- ---- ---- Federal statutory income tax rate 34.0% 34.0% 34.0% State income taxes, net of federal tax benefit 2.4 2.8 3.0 Foreign income .4 1.7 -- Tax-exempt foreign sales income (2.5) (3.0) (3.0) Tax-exempt interest and dividends received exclusion (1.8) (2.4) (2.4) Research and development credits (2.2) (1.6) (1.6) Other items, net 1.2 (0.1) 2.0 ---- ---- ---- Effective income tax rate 31.5% 31.4% 32.0% ==== ==== ====
15 11 Components of net deferred tax assets and liabilities at June 30 are as follows:
In thousands 1999 1998 ----- ----- Current asset (liability): Inventories and reserves $ 311 $ 203 Employee compensation and benefits 15 (3) Other 25 31 ----- ----- $ 351 $ 231 ===== ===== Noncurrent liability (asset): Depreciation and difference in asset basis $ (39) $ (19) Amortization of patents 167 128 Foreign exchange on inter-company notes (1) (10) Deferred gain on sale/leaseback transaction -- (3) ----- ----- $ 127 $ 96 ===== =====
8. SEGMENT REPORTING 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. The Company considers this to be one industry segment for financial reporting purposes. The Company operates three subsidiaries in Europe primarily for the distribution of microwave-based instrumentation produced by the parent. Financial data by geographic area is presented below:
In thousands 1999 1998 1997 -------- -------- -------- NET SALES: U.S. operations: Unaffiliated customers: U.S $ 18,189 $ 17,793 $ 16,165 Europe 2,807 3,311 2,221 Asia 2,591 2,678 3,855 Other 2,908 3,064 2,561 Inter-area transfers 1,844 2,724 2,308 -------- -------- -------- $ 28,339 $ 29,570 $ 27,110 ======== ======== ======== European operations: Unaffiliated customers 5,582 5,516 5,273 Eliminations (1,844) (2,724) (2,308) -------- -------- -------- Consolidated $ 32,077 $ 32,362 $ 30,075 ======== ======== ======== NET INCOME (LOSS): U.S. operations $ 1,541 $ 2,446 $ 1,776 European operations 286 35 (3) Eliminations 209 (57) 64 -------- -------- -------- Consolidated $ 2,036 $ 2,424 $ 1,837 ======== ======== ======== IDENTIFIABLE ASSETS: U.S. operations $ 24,634 $ 24,659 $ 25,506 European operations 4,365 4,652 4,967 Eliminations (443) (1,013) (1,259) -------- -------- -------- Consolidated $ 28,556 $ 28,298 $ 29,214 ======== ======== ========
16 12 9. 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 $497,000, $573,000 and $569,000 for the years ended June 30, 1999, 1998 and 1997, respectively. 10. NET INCOME PER COMMON SHARE Basic Earnings Per Share Computation: The computation of basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Shares issued during the period and shares repurchased by the Company during the period are weighted for the portion of the period they were outstanding. Income and share information for the years ended June 30, 1999, 1998 and 1997 follows:
In thousands, except per share data 1999 1998 1997 ------ ------ ------ Net income $2,036 $2,424 $1,837 Less: preferred stock dividends -- -- -- ------ ------ ------ Income available to common shareholders $2,036 $2,424 $1,837 ====== ====== ======
Fraction Fraction Fraction DATES OUTSTANDING Shares of Period Shares Shares of Period Shares Shares of Period Shares ------ --------- ------ ------ --------- ------ ------ --------- ------ Shares outstanding, beginning 3,180 3,487 3,551 Shares repurchased during the period (137) 237/365 (89) (402) 77/365 (85) (80) 160/365 (35) Stock options exercised during the period 3 240/365 2 95 127/365 33 16 320/365 14 ----- ------- ------ ---- ------- ----- --- ------- ----- Weighted average shares 3,093 3,435 3,530 ----- ------- ------ ---- ------- ----- --- ------- ----- Basic earnings per common share $ .66 $ .71 $ .52 ----- ------- ------ ---- ------- ------ --- ------- ------
Diluted Earnings Per Share Computation: The computation of diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Potential common shares consist of dilutive stock options using the treasury stock method. Income and share information for the year ended June 30, 1999, 1998 and 1997 follows:
In thousands, except per share data 1999 1998 1997 ------ ------ ------ Net Income $2,036 $2,424 $1,837 Less: preferred stock dividends -- -- -- ------ ------ ------ Income available to common stockholders $2,036 $2,424 $1,837 ====== ====== ====== Weighted average shares 3,093 3,435 3,530 Dilutive potential common shares (stock options) 9 34 20 ------ ------ ------ Adjusted weighted average shares 3,102 3,469 3,550 ====== ====== ====== Diluted earnings per share $ .66 $ .70 $ .52 ====== ====== ======
Options to purchase 272,000, 160,000 and 308,000 shares of common stock at a weighted average price of $9.54, $10.45 and $9.52 per share were outstanding during the twelve months ended June 30, 1999, 1998 and 1997 respectively, which were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares during the periods. 17 13 11. 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, 1999, 96,000 shares were reserved for future grants. No compensation expense was accrued under the plan in 1999, 1998, and 1997. 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, 1999, 3,000 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: 1996 awards at $13.00 per share 7 1997 awards -- 1998 & 1999 awards -- --- Total stock awards at $13.00 per share 7 OPTIONS TO PURCHASE SHARES: 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 --- Granted at $9.06 - $11.25 per share 65 Exercised at $10.69 - $11.00 per share (2) Canceled at $9.06 - $13.00 per share (21) --- Outstanding at June 30, 1998 at $8.25 - $13.75 192 Granted at $7.50 - $11.38 per share 117 Exercised at $10.69 - $11.00 per share -- Canceled at $9.06 - $13.00 per share (13) --- Outstanding at June 30, 1999 at $7.50 - $13.75 296 === Options exercisable at June 30, 1999 at $8.25 - $13.75 110 ===
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, 1999, no shares were reserved for future grants. 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, 1996 at $6.56 - $13.63 per share 363 --- Exercised at $7.69 - $10.50 per share (16) Canceled at $8.50 - $10.50 per share (47) --- Outstanding at June 30, 1997 at $6.56 - $13.63 per share 300 --- Exercised at $6.56 - $10.50 per share (93) Canceled at $7.75 - $11.25 per share (24) --- Outstanding at June 30, 1998 at $7.75 - $13.63 per share 183 --- Exercised at $7.75 - $7.88 per share (3) Canceled at $8.50 - $13.62 per share (44) --- Outstanding at June 30, 1999 at $8.00 - $10.50 per share 136 === Options exercisable at June 30, 1999 at $8.00 - $10.50 136 ===
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. 18 14 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:
In thousands 1999 1998 1997 --------- --------- --------- Net income as reported $ 2,036 $ 2,424 $ 1,837 Net income pro forma 1,843 2,291 1,751 Earnings per share Basic as reported $ .66 $ .71 $ .52 Basic pro forma .60 .67 .50 Diluted as reported $ .66 $ .70 $ .52 Diluted pro forma .59 .66 .49
The above pro forma amounts include compensation expense for options granted since July 1, 1996, 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 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- Risk-free interest rate 5.1% 5.8% 6.5% Expected life 6 years 6 years 6 years Expected volatility 41% 40% 30%
A dividend yield of zero was used for each year. These assumptions resulted in weighted-average values as of the grant dates of $4.71, $5.26 and $4.52 per share for stock options granted in 1999, 1998 and 1997 respectively. 12. QUARTERLY INFORMATION (UNAUDITED) Selected quarterly results of operations and quarterly stock prices for fiscal 1999 and 1998 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, 1999.
In thousands, except per share data Q-1 Q-2 Q-3 Q-4 Year --------- --------- --------- --------- ---------- 1999 Net sales $ 7,152 $ 8,492 $ 7,537 $ 8,896 $ 32,077 Gross profit 3,643 4,429 4,011 4,884 16,967 Net income 283 702 327 724 2,036 Net income per share Basic .09 .23 .11 .24 .66 Diluted .09 .23 .11 .24 .66 Stock Price: High $ 13.00 $ 11.50 $ 10.13 $ 9.13 $ 13.00 Low 10.00 9.00 7.88 6.88 6.88 1998 Net sales $ 6,603 $ 8,705 $ 8,012 $ 9,042 $ 32,362 Gross profit 3,542 4,654 4,234 4,902 17,332 Net income 241 725 582 876 2,424 Net income per share Basic .07 .21 .17 .26 .71 Diluted .07 .21 .17 .26 .70 Stock Price: High $ 10.75 $ 11.25 $ 11.63 $ 13.75 $ 13.75 Low 7.50 9.00 9.25 8.75 7.50
19 15 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of CEM Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of CEM Corporation and its subsidiaries at June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Charlotte, North Carolina July 21, 1999 SELECTED FINANCIAL DATA
For the years ended June 30 In thousands, except per share data 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Income Statement and Cash Flows Net sales $32,077 $32,362 $30,075 $31,477 $31,611 Income from operations 2,647 3,049 2,378 4,136 4,479 Net income 2,036 2,424 1,837 2,908 3,179 Net income per share Basic $ .66 $ .71 $ .52 $ .80 $ .88 Diluted .66 .70 .52 .78 .85 Average shares outstanding Basic 3,093 3,435 3,530 3,626 3,630 Diluted 3,102 3,469 3,550 3,748 3,735 Net cash provided by operating activities $ 2,850 $ 3,744 $ 4,883 $ 2,020 $ 3,134 As of June 30 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Balance Sheet Working capital $15,899 $13,636 $16,409 $15,549 $14,047 Total assets 28,556 28,298 29,214 27,584 26,653 Long-term debt 173 1,177 1,229 1,417 1,578 Shareholders' equity $22,095 $21,719 $23,480 $22,351 $20,592
20 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) Richard N. Decker Vice President-Finance Chief Financial Officer Secretary and Treasurer George F. Krall Director, President and Chief Executive Officer Mebane Packaging Group (Packaging Products) 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 email: info@cem.com www.cem.com TRANSFER AGENT American Stock Transfer & Trust New York, New York INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP Charlotte, North Carolina GENERAL COUNSEL Robinson, Bradshaw & Hinson, P.A. Charlotte, North Carolina SUBSIDIARIES CEM (Microwave Technology) Ltd. Unit 2 Middle Slade Buckingham Industrial Park Buckingham MK18 1 WA United Kingdom Tel: (44) 1280-822873 Fax: (44) 1280-822342 email: info.uk@cem.com CEM GmbH Carl-Friedrich-Gauss-Str. 9 47475 Kamp-Linfort Germany Tel: (49) 2842-9644-0 Fax: (49) 2842-9644-11 email: info.gmbh@cem.com www.cem.com.de CEM S.r.l. Via Dell'Artigianato, 6/8 24055 Cologno al Serio (Bg) Italy Tel: (39) 035-896224 Fax: (39) 035-891661 email: info.srl@cem.com FORM 10-K/INVESTOR CONTACT The Company's Annual Report on Form 10-K for the year ended June 30, 1999 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 4, 1999 at the corporate offices, 3100 Smith Farm Road, Matthews, North Carolina. Shareholders of record as of September 8, 1999 will be entitled to vote at this meeting. TRADEMARKS CEM(R), MAC(TM), MAS 7000(TM), Airwave 7000(TM), LabWave 9000(TM), CEM STAR System 6(R), MARS 5(R), ProFat 2(TM), CustomerCare Plus(R), PrepLink(TM), Clean STAR(TM), MARS X(TM), and SMART System5(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, 1999, The Company had approximately 1,550 shareholders of record and an estimate of the number of individual participants represented by security position listings. EX-23 3 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 21, 1999, on our audits of the consolidated financial statements and financial statement schedule of CEM Corporation as of June 30, 1999 and 1998, and for the years ended June 30, 1999, 1998 and 1997, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina September 23, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1999 JUN-30-1999 2,865 6,262 6,925 291 5,335 22,060 11,440 6,456 28,556 6,161 173 0 0 152 21,943 28,556 32,077 32,077 15,110 15,110 14,320 0 0 2,974 938 0 0 0 0 2,036 .66 .66
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