SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ________ TO __________.
COMMISSION FILE NO. 0-9273
MODERN CONTROLS, INC.
(Exact name of the registrant as specified in its charter)
MINNESOTA 41-0903312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7500 BOONE AVENUE NORTH, MINNEAPOLIS, MINNESOTA 55428
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 493-6370
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE. NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.10 PAR VALUE
(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 the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 8, 1996, 4,295,250 shares of Common Stock of the Company
were outstanding, and the aggregate market value of the Common Stock of the
Company as of that date (based upon the last reported sale price of the Common
Stock at that date by the Nasdaq National Market System), excluding outstanding
shares beneficially owned by directors and officers, was approximately
$42,360,000.
Parts I, II and IV of this Annual Report on Form 10-K incorporate by
reference information (to the extent specific pages are referred to herein) from
the Company's 1995 Annual Report to Shareholders (the "1995 Annual Report").
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held May
21, 1996 (the "1996 Proxy Statement").
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Modern Controls, Inc., a Minnesota corporation (the "Company"), was
incorporated in February 1966. Since its incorporation, the Company has been
engaged in the design, manufacture and marketing of precision measurement and
process sensing and control instruments and systems. The Company currently has
three major product groups which service various niche markets: (i) Permeation
Products; (ii) Weighing Products; and (iii) Packaging Products.
The Permeation Products group consists of (i) products that test
packages and packaging materials for permeation of gases and water vapor; and
(ii) instruments that measure the thickness of thin films and coatings in
laboratories and on-line during production. Also included within this product
group are services provided by the Company for testing packages and packaging
materials. The Weighing Products group consists of instruments for
pharmaceutical capsule and tablet weighing and sorting. The Packaging Products
group consists of (i) instruments that detect leaks and test the seal strength
in packages; and (ii) analyzers which measure oxygen and carbon dioxide content
of the headspace in both flexible and rigid packages.
The Company has its principal executive offices at 7500 Boone Avenue
North, Minneapolis, Minnesota 55428 and its telephone number is (612) 493-6370.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in a single industry segment: the design,
manufacture and marketing of precision testing instrumentation and advanced
process sensing and control equipment.
(c) NARRATIVE DESCRIPTION OF BUSINESS
PERMEATION PRODUCTS
The Permeation Products group consists of (i) products that test
packages and packaging materials for permeation of gases and water vapor and
(ii) instruments that measure the thickness of thin films and coatings in
laboratories and on-line during production.
The various permeation measurement instruments included within the
Permeation Products group and manufactured by the Company measure the rate at
which oxygen, carbon dioxide and water vapor permeate packages and packaging
materials. The principal market for the permeation measurement instruments
consists of manufacturers of packaging materials, including manufacturers of
papers, plastics and coatings, and the users of such packaging materials in the
food, beverage, pharmaceutical and chemical industries.
The gauging products, included within the Permeation Products group,
use capacitance technology to measure the thickness of thin films and coatings.
These gauges measure all types of non-metallic materials, with very repeatable
gauge readings at thickness resolutions up to one millionth of an inch. Software
packages allow the display of each material's profile and provide analysis of
the related data. The principal market for the gauging portion of this product
group is made up of manufacturers of plastic films.
The Permeation Products line consists of the following products: (i)
oxygen permeability test systems (seven models); (ii) water vapor permeability
test systems (four models); (iii) a carbon dioxide permeability test system (one
model); (iv) flavor, aroma and odor permeability test systems (two models); (v)
gauges designed for laboratory use (one model); (vi) on-line gauges used for
measuring cast film thicknesses (one model); and (vii) on-line gauging
instruments used to measure blown film thicknesses and control related blown
film production processes (two models).
The gas permeability test systems (i, iii and iv above) measure the
ability of packages, films and bottles or other containers to resist oxygen,
carbon dioxide and/or other gas permeation. The water vapor permeability
instruments (ii above) measure water vapor permeation through films and packages
and inform food processors, container companies and basic film suppliers as to
the ability of certain packaging to retain or block out water. The gauging
products (v, vi and vii above) measure the thickness of films.
The Company also provides certain laboratory testing services utilizing
the Company's products. These services are primarily in the area of testing film
and package permeation. Users of these services are primarily those companies
with insufficient volume to warrant purchasing the Company's products or others
not familiar with such equipment. Other users include companies that have
purchased the Company's products but have a need for additional capacity.
Permeation Products accounted for 71%, 71% and 68% of the Company's
total sales during the fiscal years ended December 31, 1995, 1994 and 1993,
respectively.
WEIGHING PRODUCTS
The weighing instruments manufactured by the Company are: (i) a
high-speed capsule weighing and sorting device (VERICAP(R)); (ii) a high-speed
tablet weighing and sorting device (VERITAB(R)); and (iii) an automatic balance.
These products are marketed primarily to the pharmaceutical industry, both
domestically and in foreign countries.
The VERICAP(R) is designed to detect deviations in the weight of filled
gelatin capsules and to reject capsules outside an acceptable range at rates of
up to 2,000 capsules per minute. The VERICAP(R) 2500 can be integrated into a
production line to weigh capsules as they are produced. This device also records
and analyzes the data relating to accepted capsules during the processing.
The VERITAB(R) is designed to detect deviations in the weight of
tablets and to reject tablets outside an acceptable range at rates of up to 800
tablets per minute. Data related to accepted tablets is recorded and analyzed.
The Company also manufactures and markets a small, highly accurate
automatic balance for weighing capsules and tablets.
Weighing products accounted for 17%, 14% and 15% of the Company's total
sales during the fiscal years ended December 31, 1995, 1994 and 1993,
respectively.
PACKAGING PRODUCTS
The various packaging products manufactured by the Company include leak
detection instruments and head space analyzers. The two leak detection
instruments detect leaks in pouches, blister packs and a wide range of other
packages. The principal market for these products include packagers of food,
pharmaceuticals and sterile medical supplies. The first of the two leak
detection instruments is a non-destructive leak detector that senses small
amounts of carbon dioxide escaping from a package. The carbon dioxide may be
present in the headspace of the package or forced inside the package by carbon
dioxide pressurization. The second instrument detects leaks and checks for seal
integrity by applying and measuring pressure within the packages. The Company
markets the second instrument in North and South America and certain countries
in the Far East pursuant to a technology transfer and manufacturing rights
agreement with SKYE Equipment Company, Ltd.
The headspace analyzers sold by the Company analyze the amount of
oxygen or carbon dioxide present in the headspace of flexible and rigid food
packages. Some models also measure the oxygen content in flushing gases used in
modified or controlled atmosphere packaging. The Company sells ten different
headspace analyzer models, six of which are manufactured and sold by the Company
and four of which are manufactured by a Japanese and United States company and
are distributed by the Company. Of the six headspace analyzer models
manufactured and sold by the Company, two measure oxygen, two measure carbon
dioxide and two measure both oxygen and carbon dioxide. The four other models
sold by the Company measure only oxygen.
Packaging products accounted for 12%, 15% and 17% of the Company's
total sales during the fiscal years ended December 31, 1995, 1994 and 1993,
respectively.
COMPETITION
The Company experiences competition in both foreign and domestic
markets from one or more competitors with respect to all of its products. Some
of the Company's competitors have greater assets and resources than the Company
and some are smaller than the Company. The principal competitive factors are
price, product performance and capability, and distribution. The Company
believes that its products either exceed or are equal in performance and
capability to those of its competitors. Price comparability varies by product.
Several of the Company's larger competitors may have stronger marketing
organizations.
MANUFACTURING AND SUPPLIES
Most of the parts and materials used in the manufacture of the
Company's products are standardized and are purchased from various manufacturers
or distributors and assembled at the Company. Multiple sources of supply are
available for these items, and the Company has experienced no significant
shortages or delays from its suppliers. Components designed by the Company are
produced by others in accordance with the Company's specifications. A limited
number of components for the Company's products are available from single
suppliers. The loss of any single supplier could have a material adverse effect
on the Company until the Company either arranges for another supplier or makes
appropriate design changes.
BACKLOG
The Company had a total backlog of approximately $3,461,000 as of
December 31, 1995 for all of its products as compared to approximately
$2,029,000 as of December 31, 1994. The Company anticipates filling all of the
current backlog in 1996.
PATENTS AND LICENSES
Generally, the Company believes that the protection afforded by patent
rights is important to its business and it will continue to seek patent
protection for its technology and products. The Company has required certain
employees and consultants to assign to the Company all inventions which are
conceived and developed during their employment, except to the extent prohibited
by applicable law. The Company owns two U.S. patents and one foreign patent
relating to its VERICAP product, three U.S. patents and two foreign patents
relating to the VERITAB product, one U.S. patent and one foreign patent relating
to headspace analyzers and nine U.S. patents and three foreign patents relating
to its film thickness test systems. In addition, the Company owns thirteen U.S.
patents and two foreign patents relating to its permeability test systems. These
patents will expire during the period from 1999 through 2014.
Even though the Company has obtained the patents mentioned above, there
can be no guarantee that these patents will keep competitors from producing
substantially similar products. Although it can offer no assurance, the Company
believes its products do not infringe on patents owned by any other persons. Any
determination that a material component of the Company's products infringes upon
the rights of others could have a material adverse effect upon the Company. In
the event that the Company's products may be covered in whole or in part by
patents owned by others, the Company may find it desirable to obtain licenses
with respect to such patents. The Company has a license, under a U.S. patent, to
manufacture products relating to a multiple gas permeability test system.
Pursuant to this license, the Company must pay royalties of 4-1/2 percent of the
net selling price of any product covered by such patent until such time as the
patent expires. The patent and the license are scheduled to expire on August 14,
2001.
The Company also owns or has applied for certain trademarks which
protect and identify its products, including the trademark MOCON(R), which the
Company has designated as a house trademark under which all its products are
sold, and the trademarks VERICAP(R), OX-TRAN(R), PERMATRAN-W(R), PROFILER(R),
COULOX(R), HERSCH(R), VERITAB(R), AROMATRAN(R) and SKYE(R). The Company's
trademarks have a life, subject to periodic maintenance, of 10 to 20 years,
which may be extended.
RESEARCH AND DEVELOPMENT
The Company incurred expenses of approximately $1,060,000, $898,000 and
$814,000 during the fiscal years ended December 31, 1995, 1994 and 1993,
respectively, for research and development of its products. Research and
development costs were 8.3% of sales for the fiscal year ended December 31, 1995
and were 8.5% and 7.8%, respectively, for the preceding two fiscal years. For
the foreseeable future, the Company expects to allocate, on an annual basis,
approximately 8% of sales to research and development.
WORKING CAPITAL PRACTICES
The Company maintains inventory levels in its three product groups
consistent with projected sales. The Company's standard domestic payment terms
are net 30 days. International sales are transacted pursuant to letters of
credit in some cases. The Company generally warrants its products for one year
from the date of shipment. There have been few instances when the Company was
required to accept the return of merchandise which failed to comply with the
Company's warranty.
FOREIGN AND DOMESTIC MARKETING
The Company markets its products in the United States and Canada
through a direct sales force of 14 persons. The Company's foreign markets are
served by a network of 34 independent representatives in Africa, Asia,
Australia, Europe, Mexico, South America and certain Pacific Rim countries. To
the Company's knowledge, no independent sales representative of the Company
sells a material amount of products manufactured by the Company's competitors.
The sales representative for the Company in Europe is licensed to sell headspace
analyzers and leak detectors similar to those sold by the Company. The Company,
however, is not licensed to sell these products in Europe.
The Company's wholly owned subsidiary, MoCon FSC, Inc., a Barbados
corporation ("FSC"), carries out all the foreign distribution of the Company's
products. The Company acts as the selling agent of FSC.
The Company makes all foreign sales in U.S. dollars and consequently
does not hedge against exchange rate fluctuations. Nonetheless, should the value
of the dollar rise relative to other currencies, the Company's sales abroad
would be negatively impacted. Additionally, the Company can give no assurances
that foreign tariff, trade or tax policies or foreign economic conditions will
not negatively effect sales and earnings of the Company in the future.
For information concerning the Company's export sales by geographic
area, see Note 9 of the Notes to Consolidated Financial Statements contained on
page 22 of the Company's 1995 Annual Report. Although no single customer
accounts for 10% or more of the Company's consolidated revenues and the Company
does not believe that the loss of any single customer would have a material
adverse effect on the Company, one of the Company's independent representatives
accounted for approximately 14% of the Company's sales in fiscal 1995. For
additional information concerning sales by such independent representatives, see
Note 9 of the Notes to Consolidated Financial Statements contained on page 22 of
the Company's 1995 Annual Report. The Company's business is not seasonal in
nature.
EMPLOYEES
The Company currently has 67 full-time employees, including 27 in
manufacturing, 9 in research and development and 31 in general administration
and marketing. None of the Company's employees are represented by a labor union,
and the Company considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES
The Company's executive offices and operations are located at 7500
Boone Avenue North, Minneapolis, Minnesota. The portion of the building occupied
by the Company contains approximately 47,000 square feet, of which approximately
35,000 square feet (approximately 74%) is currently being utilized. Management
believes that the Company's manufacturing facilities are generally adequate for
its operations and such facilities are maintained in a good state of repair.
The current lease expires June 30, 2000.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal, governmental, administrative or
other proceedings to which the Company is a party or of which any of its
property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1995.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages, the year first
elected or appointed as an executive officer and the offices held, as of
February 29, 1996, are as follows:
Executive
Name Age Title (1) Officer Since
---- --- ----- -------------
William N. Mayer (2) 65 Chairman of the Board, Chief 1976
Executive Officer (3)
Robert L. Demorest (4) 50 President (5) 1985
Ronald A. Meyer 45 Vice President -- Finance & 1985
Administration, Treasurer and
Secretary (6)
Daniel W. Mayer (2) 45 Executive Vice President (7) 1988
(1) All executive officers have been employed in the capacity set forth for
at least five years unless otherwise indicated.
(2) Daniel W. Mayer is the son of William N. Mayer, Chairman of the Board
and Chief Executive Officer of the Company.
(3) W.N. Mayer has been the Chairman of the Board, Chief Executive Officer
and President of the Company for over five years. Effective January 30,
1995, Mr. W.N. Mayer resigned as President of the Company.
(4) Robert L. Demorest is the son of Howard L. Demorest, the retired
Chairman of the Board, Chief Executive Officer and Treasurer of the
Company.
(5) Mr. Demorest was elected President of the Company on January 30, 1995.
Prior to that time, Mr. Demorest was the Executive Vice President --
Sales & Marketing and Secretary.
(6) Mr. Ronald A. Meyer was elected Secretary of the Company on January 30,
1995. Prior to that time, Mr. Meyer served as Assistant Secretary.
(7) Mr. Daniel W. Mayer was elected Executive Vice President on January 30,
1995. Prior to that time, Mr. Mayer served as the Vice President --
Product Development.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information under the caption "Market for Company's Common Stock
and Related Stockholder Matters" on page 22 of the Company's 1995 Annual Report
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The financial information under the caption "Selected Financial Data"
on page 3 of the Company's 1995 Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis
of Results of Operations and Financial Condition" on pages 12 to 13 of the
Company's 1995 Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and Independent Auditors' Report
thereon on pages 14 to 22 of the Company's 1995 Annual Report are incorporated
herein by reference, as is the unaudited information set forth under the caption
"Selected Quarterly Financial Data" on page 3 of the Company's 1995 Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) DIRECTORS OF THE COMPANY
The information under the captions "Election of Directors --
Information About Nominees" and "Election of Directors -- Other Information
About Nominees" in the Company's 1996 Proxy Statement is incorporated herein by
reference.
(b) EXECUTIVE OFFICERS OF THE COMPANY
Information concerning Executive Officers of the Company is included in
this Report under Item 4A, "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Election of Directors -- Director
Compensation" and "Executive Compensation and Other Benefits" in the Company's
1996 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information under the caption "Principal Shareholders and
Beneficial Ownership of Management" in the Company's 1996 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Election of Directors -- Other
Information About Nominees" in the Company's 1996 Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. FINANCIAL STATEMENTS:
The following Consolidated Financial Statements of the Company are
incorporated herein by reference from the pages indicated in the Company's 1995
Annual Report:
Independent Auditors' Report -- page 22.
Consolidated Balance Sheets -- December 31, 1995 and 1994 --
page 15.
Consolidated Statements of Income -- Years Ended December 31,
1995, 1994 and 1993 -- page 14.
Consolidated Statements of Cash Flows -- Years Ended December
31, 1995, 1994 and 1993 -- page 16.
Notes to Consolidated Financial Statements -- pages 17 to 22.
2. FINANCIAL STATEMENT SCHEDULES:
The following supplemental financial data are included herein and
should be read in conjunction with the financial statements referred to above
(page numbers refer to pages in this Report):
Page
Independent Auditors' Report on Financial Statement Schedules 12
Financial Statement Schedules:
II - Valuation and Qualifying Accounts 13
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
3. Exhibits
The exhibits to this Report are listed in the Exhibit
Index on pages 15 to 18 below.
A copy of any of the exhibits listed or referred to
above will be furnished at a reasonable cost to any
person who was a shareholder of the Company as of
March 22, 1996, upon receipt from any such person of
a written request for any such exhibit. Such request
should be sent to Modern Controls, Inc., 7500 Boone
Avenue North, Minneapolis, Minnesota 55428; Attn.:
Shareholder Information.
The following is a list of each management contract
or compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form
10-K pursuant to Item 14(c):
A. Employee Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.2
to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990
(File No. 0-9273)).
B. 1980 Director Stock Option Plan
(incorporated by reference to Exhibit 28.1
to the Company's Registration Statement on
Form S-8 (File No. 33-42255)).
C. 1982 Restated Incentive Stock Option Plan
(incorporated by reference to Exhibit 28.2
to the Company's Registration Statement on
Form S-8 (File No. 33-27730)).
D. 1990 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 28.2
to the Company's Registration Statement on
Form S-8 (File No. 33-42255)).
E. 1992 Stock Option Plan (incorporated by
reference to Exhibit 28.1 to the Company's
Registration Statement on Form S-8 (File No.
33- 49752)).
F. Compensation Committee resolutions setting
forth the Incentive Compensation Plan for
fiscal 1994, 1995 and 1996 (incorporated by
reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1993 (File No.
0-9273).
G. Paired Profit Sharing Plan (incorporated by
reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (File No.
0-9273)).
H. Confidentiality Agreement, dated June 3,
1983, between the Company and William N.
Mayer (incorporated by reference to Exhibit
10.10 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31,
1988 (File No. 0-9273)).
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended December 31, 1995.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Modern Controls, Inc.:
Under date of February 9, 1996, we reported on the consolidated balance sheets
of Modern Controls, Inc. and subsidiary as of December 31, 1995 and 1994, and
the related consolidated statements of income, and cash flows for each of the
years in the three-year period ended December 31, 1995, as contained in the 1995
annual report to stockholders. These consolidated financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
for the year 1995. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedule as included in Item 14(a)2. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth herein.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 9, 1996
SCHEDULE II
MODERN CONTROLS, INC. AND SUBSIDIARY
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Balance
beginning costs and Deductions at end
Description of year expenses (1) of year
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
allowance for doubtful accounts $ 147,000 15,323 30,323 132,000
======================================================================================
Year ended December 31, 1994
allowance for doubtful accounts $ 150,000 0 3,000 147,000
======================================================================================
Year ended December 31, 1993
allowance for doubtful accounts $ 149,800 17,162 16,962 150,000
======================================================================================
</TABLE>
(1) Bad debts written off.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MODERN CONTROLS, INC.
Date: March 26, 1996 By /s/ William N. Mayer
---------------------
William N. Mayer, Chief
Executive Officer
(principal executive officer)
By /s/ Ronald A. Meyer
Ronald A. Meyer, Vice President --
Finance & Administration, Treasurer
and Secretary (principal financial
and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below on March 26, 1996 by the following persons on
behalf of the Company and in the capacities and on the dates indicated.
Signature and Title
/s/ William N. Mayer
William N. Mayer, Chairman
of the Board
/s/ Robert L. Demorest
Robert L. Demorest, President
and Director
/s/ Howard L. Demorest
Howard L. Demorest, Director
/s/ Paul L. Sjoquist
Paul L. Sjoquist, Director
/s/ Dean B. Chenoweth
Dean B. Chenoweth, Director
/s/ J. Leonard Frame
J. Leonard Frame, Director
/s/ Wallace W. Lindemann
Wallace W. Lindemann, Director
/s/ Richard A. Proulx
Richard A. Proulx, Director
MODERN CONTROLS, INC.
Exhibit Index to Annual Report On
Form 10-K
For Fiscal Year Ended December 31, 1995
<TABLE>
<CAPTION>
Item
No. Item Method of Filing
<S> <C> <C>
3.1 Restated Articles of Incorporation of the
Company........................................................... Incorporated by reference to Exhibit
3.2 to the Company's Annual Report
on Form 10-K for the fiscal year
ended January 31, 1984 (File No. 0-
9273)
3.2 Amendment to Restated Articles of
Incorporation of the Company, effective
May 27, 1987 ..................................................... Incorporated by reference to
Exhibit 3.1-1 to the Company's
Annual Report on Form 10-K for
the fiscal year ended December
31, 1987 (File No. 0-9273)
3.3 Amendment to Restated Articles of
Incorporation of the Company, effective
June 28, 1991..................................................... Incorporated by reference to Exhibit
4.3 to the Company's Registration
Statement on Form S-8 (File No. 33-
42255)
3.4 Third Restated Bylaws of the Company.............................. Incorporated by reference to Exhibit
3.3 to the Company's Annual Report
on Form 10-K for the fiscal year
ended December 31, 1988 (File No. 0-
9273)
4.1 Specimen Form of the Company's
Common Stock Certificate.......................................... Incorporated by reference to Exhibit
4.1 to the Company's Annual Report
on Form 10-K for the fiscal year
ended December 31, 1990 (File No. 0-
9273)
10.1 Office/Warehouse Lease, dated
July 29, 1994..................................................... Incorporated by reference to Exhibit
10.1 to the Company's Annual Report
on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-
9273)
10.2 Office/Warehouse Lease, dated
November 21, 1990................................................. Incorporated by reference to
Exhibit 10.1 to the Company's
Annual Report on Form 10-K for
the fiscal year ended December
31, 1990 (File No. 0- 9273).
10.3 Employee Stock Option Plan, as
amended........................................................... Incorporated by reference to Exhibit
10.2 to the Company's Annual Report
on Form 10-K for the fiscal year
ended December 31, 1990 (File No. 0-
9273)
10.4 1980 Director Stock Option Plan................................... Incorporated by reference to Exhibit
28.1 to the Company's Registration
Statement on Form S-8 (File No. 33-
42255)
10.5 1982 Restated Incentive Stock Option
Plan.............................................................. Incorporated by reference to Exhibit
28.2 to the Company's Registration
Statement on Form S-8 (File No. 33-
27730)
10.6 1990 Non-Employee Director Stock
Option Plan....................................................... Incorporated by reference to Exhibit
28.2 to the Company's Registration
Statement on Form S-8 (File No. 33-
42255)
10.7 1992 Stock Option Plan............................................ Incorporated by reference to Exhibit
28.1 to the Company's Registration
Statement on Form S-8 (File No. 33-
49752)
10.8 Compensation Committee resolutions
setting forth the Incentive Compensation
Plan for fiscal 1994, 1995 and 1996............................... Incorporated by reference to Exhibit
10.8 to the Company's Annual Report
on Form 10-K for the fiscal year
ended December 31, 1993 (File No. 0-
9273)
10.9 Paired Profit Sharing Plan effective June
28, 1990.......................................................... Incorporated by reference to Exhibit
10.5 to the Company's Annual Report
on Form 10-K for the fiscal year
ended December 31, 1990 (File No. 0-
9273)
10.10 Confidentiality Agreement, dated June 3,
1983, between the Company and William
N. Mayer.......................................................... Incorporated by reference to
Exhibit 10.10 to the Company's
Annual Report on Form 10-K for
the fiscal year ended December
31, 1988 (File No. 0-9273)
10.11 Agency and Service Agreement, dated
January 1, 1987, between the Company
and MoCon FSC, Inc................................................ Incorporated by reference to
Exhibit 10.12 to the Company's
Annual Report on Form 10-K for
the fiscal year ended December
31, 1988 (File No. 0-9273)
10.12 Foreign Sales Corporation Suppliers
Agreement, dated March 28, 1985, between the
Company and MoCon FSC, Inc........................................ Incorporated by reference to
Exhibit 10.13 to the Company's
Annual Report on Form 10-K for
the fiscal year ended December
31, 1988 (File No. 0-9273)
11.1 Computation of per share earnings................................. Filed herewith
13.1 1995 Annual Report to Shareholders................................ Filed herewith
21.1 Subsidiaries of the Company....................................... Incorporated by reference to Exhibit
22.1 to the Company's Annual Report
on Form 10-K for the fiscal year
ended December 31, 1988 (File No. 0-
9273)
23.1 Independent Auditors' Consent..................................... Filed herewith
27.1 Financial Data Schedule........................................... Filed herewith
</TABLE>
MODERN CONTROLS, INC.
COMPUTATION OF PER SHARE EARNINGS
Years ended December 31
------------------------------------
1995 1994 1993
------------------------------------
PRIMARY
Average shares outstanding 4,527,560 4,722,188 4,851,565
Net effect of dilutive stock
options - based on the
treasury stock method 20,843 3,422 26,261
---------- ---------- ----------
Total 4,548,403 4,725,610 4,877,826
========== ========== ==========
Net income $2,570,308 $1,852,977 $1,889,243
========== ========== ==========
Primary per share amounts $ 0.57 $ 0.39 $ 0.39
========== ========== ==========
FULLY DILUTED
Average shares outstanding 4,527,560 4,722,188 4,851,565
Net effect of dilutive stock
options - based on the
treasury stock method 25,640 1,995 24,538
---------- ---------- ----------
Total 4,553,200 4,724,183 4,876,103
========== ========== ==========
Net income $2,570,308 $1,852,977 $1,889,243
========== ========== ==========
Fully diluted per share amounts $ 0.56 $ 0.39 $ 0.39
========== ========== ==========
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- --------------------------------------------------------------------------------------------------------------------
(In thousands except per share data)
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $12,844 10,613 10,405 12,679 13,556 11,522 9,798 8,551 7,130 5,876
Net income 2,570 1,853 1,889 2,693 2,903 2,451 2,137 1,676 1,304 819
Net income per share .57 .39 .39 .55 .59 .51 .44 .35 .27 .17
Dividends declared per share .21 .20 .70 .16 .13 .11 .09 .09 .04 .04
Balance Sheet Data:
Total Assets 14,770 13,128 14,077 16,273 14,817 12,158 10,431 8,937 7,400 6,088
Long-term liabilities 168 29 18 23 3 11 17 30 48 80
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
1995 Sales Gross Profit Net Income Net Income Per Share
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $ 2,828,521 $1,820,132 $ 512,705 $ .11
2nd Quarter 3,069,162 2,020,481 630,772 .14
3rd Quarter 3,465,229 2,300,049 719,994 .16
4th Quarter 3,480,593 2,322,548 706,837 .16
- --------------------------------------------------------------------------------------------------------------------
Total $ 12,843,505 $8,463,210 $ 2,570,308 $ .57
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
1994
- --------------------------------------------------------------------------------------------------------------------
1st Quarter $ 2,438,479 $1,567,512 $ 411,975 $ .09
2nd Quarter 2,683,587 1,622,601 449,201 .09
3rd Quarter 2,700,244 1,719,039 490,189 .10
4th Quarter 2,790,442 1,761,667 501,612 .11
- --------------------------------------------------------------------------------------------------------------------
Total $ 10,612,752 $6,670,819 $ 1,852,977 $ .39
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
PAGE 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
1995-1994 COMPARISON
Sales increased 21 percent in 1995 to $12,843,505, compared with $10,612,752 in
1994. The increase in 1995 sales was due primarily to strong increases in the
foreign and domestic volume of the Company's permeation products and weighing
products and to general price increases.
The Company's permeation product group sales totaled $9,079,635, up 20 percent
from $7,565,384 in 1994. The group accounted for 71 percent of the Company's
total sales in both 1995 and 1994.
The gross profit margin was $8,463,210 in 1995 or 65.9 percent of sales,
compared to $6,670,819 in 1994 or 62.9 percent of sales. Over the past several
years the Company's gross profit percentage has been in a range of about 62 to
65 percent of sales. The 1995 profit margin was at the high end of the
historical range due to reduced warranty expenses and to the increased sales
volume which resulted in manufacturing efficiencies.
Research and development expenses increased $162,284 or 18 percent during 1995,
reflecting the Company's continued commitment to growth through new products. As
a percentage of sales, research and development expenses were 8 percent in both
1995 and 1994. For the foreseeable future, the Company expects to allocate on an
annual basis approximately 7 to 9 percent of sales to research and development.
Selling, general and administrative expenses increased $572,856 or 17 percent
during 1995. As a percentage of sales, selling, general and administrative
expenses were 30.6 percent in 1995, compared with 31.6 percent for 1994. The
increase in the dollar amount of selling, general and administrative expenses is
due primarily to an increase in commission expenses caused by the increase in
sales, particularly domestic sales. The decrease in selling, general and
administrative expenses as a percentage of sales is primarily the result of the
increased sales volume in 1995 being accommodated without an increase in general
and administrative staffing levels.
Investment income increased to approximately $405,000 in 1995 from $366,000 in
1994. The increase in 1995 is the result of an increase in the average interest
rate earned on investments and higher average investment balances in 1995 as
compared to 1994.
The Company's provision for income taxes was 33.8 percent of income before
income taxes in 1995, compared with 33.5 percent in 1994. Based on current
operating conditions and income tax laws the Company expects the tax rate for
1996 to be in the range of 33 to 35 percent.
Net income was $2,570,308, or $.57 per share, in 1995. This compares with
$1,852,977, or $.39 per share, in 1994.
PAGE 12
1994-1993 COMPARISON
Sales totaled $10,612,752 in 1994, an increase of 2 percent over $10,404,555 in
1993. The increase in 1994 sales was due primarily to strong increases in the
foreign and domestic volume of the Company's permeation products and to general
price increases, offset somewhat by decreases in the total domestic and foreign
sales volume of the Company's gauging products.
The Company's permeation product group sales totaled $7,565,384 in 1994, up 7
percent from $7,045,367 in 1993. The group accounted for 71 percent of the
Company's total 1994 sales, compared to 68 percent in 1993.
The gross profit margin was $6,670,819 in 1994 or 62.9 percent of sales,
compared to $6,492,617 or 62.4 percent in 1993. The increase in the gross profit
margin was due primarily to the increase in sales volume.
Research and development expenses increased $83,327 or 10 percent during 1994.
As a percentage of sales research and development expenses were 8.5 percent and
7.8 percent in 1994 and 1993 respectively.
Selling, general and administrative expenses increased $100,694 or 3 percent
during 1994. As a percentage of sales, selling, general and administrative
expenses were 31.6 percent in 1994, similar to the 31.3 percent experienced in
1993. The slight increase in selling, general and administrative expenses both
as a percent of sales and in total is due primarily to an increase in commission
expenses caused by the increase in sales, particularly foreign sales. Foreign
sales generally carry a higher commission rate than do domestic sales.
Investment income decreased to approximately $366,000 in 1994 from $395,000 in
1993. The decrease in 1994 is largely the result of lower average investment
balances in 1994 as compared to 1993.
Net income was $1,852,977, or $.39 per share, in 1994. This compares
with $1,889,243, or $.39 per share, in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Total cash, temporary cash investments and marketable securities increased
approximately $1,537,866 during 1995 to $9,815,983. The primary reason for the
increase is the 1995 net income, offset somewhat by stock repurchases in 1995
totalling $1,107,363 and by the payment of regular dividends totaling $906,576.
Cash flow from operations has historically been sufficient to meet liquidity
requirements, capital expenditures and research and development costs. Cash flow
from operations totaled $3,174,571, $2,044,960 and $3,142,432 in 1995, 1994 and
1993 respectively.
The Company has no long-term debt and has no material commitments for capital
expenditures as of December 31, 1995. The Company's plant and equipment does not
require any major expenditures to accommodate a significant increase in
operating demands. The Company anticipates that a combination of its existing
cash, temporary cash investments and marketable securities, plus an expected
continuation of cash flow from operations, will continue to be adequate to fund
operations, capital expenditures and dividend payments in the foreseeable
future.
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The Company adopted Financial Accounting Standards Board Statement of Financial
Accounting Standard No. 107, Disclosures about Fair Value of Financial
Instruments, in 1995. The adoption did not impact the Company's financial
condition or results of operations.
PAGE 13
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
MODERN CONTROLS, INC.
Years ended December 31, 1995 1994 1993
==================================================================================
<S> <C> <C> <C>
Sales $ 12,843,505 $ 10,612,752 $ 10,404,555
Cost of Sales 4,380,295 3,941,933 3,911,938
- ----------------------------------------------------------------------------------
Gross Profit 8,463,210 6,670,819 6,492,617
- ----------------------------------------------------------------------------------
Selling, General and Administrative
Expenses 3,926,147 3,353,291 3,252,597
Research and Development Expenses 1,060,013 897,729 814,402
Investment Income (405,258) (366,178) (394,625)
- ----------------------------------------------------------------------------------
4,580,902 3,884,842 3,672,374
- ----------------------------------------------------------------------------------
Income Before Income Taxes 3,882,308 2,785,977 2,820,243
Income Taxes 1,312,000 933,000 931,000
- ----------------------------------------------------------------------------------
Net Income $ 2,570,308 $ 1,852,977 $ 1,889,243
==================================================================================
Net Income Per Common Share $ .57 $ .39 $ .39
==================================================================================
Weighted Average Shares Outstanding 4,548,403 4,725,610 4,877,826
==================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE 14
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
MODERN CONTROLS, INC.
December 31,
=================================================================================
ASSETS 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and temporary cash investments $ 1,396,718 $ 246,265
Marketable securities, current 4,133,397 5,664,849
Trade accounts receivable, less allowance
for doubtful accounts of $132,000
in 1995 and $147,000 in 1994 1,777,521 1,511,700
Other receivables 116,210 151,480
Inventories 1,560,360 1,733,760
Prepaid expenses 250,968 177,061
Deferred income taxes 320,000 358,000
- ---------------------------------------------------------------------------------
Total current assets 9,555,174 9,843,115
- ---------------------------------------------------------------------------------
Marketable securities, noncurrent 4,285,868 2,367,003
Property and equipment 1,947,060 1,827,421
Less accumulated depreciation and amortization 1,492,224 1,310,824
- ---------------------------------------------------------------------------------
454,836 516,597
- ---------------------------------------------------------------------------------
Other assets 474,533 401,656
==================================================================================
$ 14,770,411 $ 13,128,371
============ ============
=================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 591,982 $ 347,121
Accrued compensation 405,467 365,598
Other accrued expenses 275,083 246,457
Estimated product warranties 163,000 140,000
Accrued income taxes 397,423 252,243
Dividends payable 272,543 233,905
- ---------------------------------------------------------------------------------
Total current liabilities 2,105,498 1,585,324
- ---------------------------------------------------------------------------------
Deferred income taxes 168,000 29,000
- ---------------------------------------------------------------------------------
Stockholders' equity:
Common stock - $.10 par value;
authorized 10,000,000 shares;
issued and outstanding 4,441,080 shares
in 1995 and 4,526,231 shares in 1994 444,108 452,623
Capital in excess of par value -- --
Retained earnings 11,757,805 11,171,424
Net unrealized gain(loss) on noncurrent marketable
equity securities 295,000 (110,000)
- ---------------------------------------------------------------------------------
Total stockholders' equity 12,496,913 11,514,047
Commitments and contingencies (note 5)
=================================================================================
$ 14,770,411 $ 13,128,371
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE 15
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
MODERN CONTROLS, INC.
======================================================================================================
Years ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
- ------------------------------------------------------------------------------------------------------
Net income $ 2,570,308 $ 1,852,977 $ 1,889,243
- ------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) loss on disposition of fixed assets 27,530 (712) 2,164
Depreciation and amortization 214,255 268,303 260,654
Deferred income taxes 12,000 109,000 (33,000)
Changes in operating assets and liabilities:
Trade accounts receivable (265,821) (575,780) 784,428
Other receivables 35,270 19,835 15,331
Inventories 173,400 78,976 415,169
Prepaid expenses (73,907) (57,810) 31,956
Accounts payable 244,861 162,010 (80,552)
Accrued compensation 39,869 154,810 (92,782)
Other accrued expenses 28,626 3,487 3,694
Estimated product warranties 23,000 (21,000) 9,000
Accrued income taxes 145,180 50,864 (62,873)
------- ------ -------
Net cash provided by operating activities 3,174,571 2,044,960 3,142,432
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
- ------------------------------------------------------------------------------------------------------
Purchases of marketable securities (9,919,771) (8,335,064) (6,641,485)
Proceeds from sales of marketable
securities at maturity 10,102,358 8,885,858 7,028,274
Purchases of property and equipment (163,353) (97,605) (87,574)
Purchases of patents and trademarks (83,036) (38,410) (89,779)
Other (6,512) (6,756) (6,691)
------ ------ ------
Net cash provided by (used in) investing activities (70,314) 408,023 202,745
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
- ------------------------------------------------------------------------------------------------------
Proceeds from the exercise of stock options 60,135 1,815 47,095
Purchase and retirement of common stock (1,107,363) (2,104,401) (548,332)
Dividends paid (906,576) (950,211) (3,355,277)
-------- -------- ----------
Net cash used in financing activities (1,953,804) (3,052,797) (3,856,514)
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and temporary
cash investments 1,150,453 (599,814) (511,337)
Cash and temporary cash investments:
Beginning of year 246,265 846,079 1,357,416
------- ------- ---------
End of year $ 1,396,718 $ 246,265 $ 846,079
============ ============ ============
- ------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes $ 1,156,652 $ 773,590 $ 1,024,866
- ------------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing
and financing activities:
Noncash purchase and retirement of common stock $ 313,323 $ 24,891 $ 397,854
Noncash exercise of stock options $ 313,323 $ 24,891 $ 397,854
Dividends accrued $ 272,543 $ 233,905 $ 241,929
Tax benefit from exercise of nonqualified stock options $ -- $ -- $ 218,934
</TABLE>
As of December 31, 1994 the Company recorded an unrealized loss on available for
sale marketable securities of $110,000. As of December 31, 1995 the Company has
an unrealized gain of $460,000 on marketable securities which resulted in a
$570,000 increase in long-term marketable securities with a corresponding
$165,000 increase in deferred income taxes payable.
The accompanying notes are an integral part of these financial statements.
PAGE 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MODERN CONTROLS, INC.
DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Modern Controls, Inc. (the Company) operates in one business segment, the
design, manufacture and marketing of precision testing instrumentation and
advanced process sensing and control equipment to customers in the barrier
packaging, food and pharmaceutical industries throughout the world. The
following is a summary of the significant accounting policies used in the
preparation of the Company's financial statements:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary, a Foreign Sales Corporation (FSC). All material intercompany
balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized upon shipment of product or upon completion of services.
TEMPORARY CASH INVESTMENTS
Temporary cash investments consist of short-term investments which are readily
convertible to cash.
MARKETABLE SECURITIES
Marketable securities at December 31, 1995 consist of United States government
securities, municipal bonds and equity securities. Effective January 1, 1994 the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities
(Statement 115). Under Statement 115, the Company classifies its debt and
marketable equity securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term. Held-to-maturity
securities are those securities in which the Company has the ability and intent
to hold the security until maturity. All other securities not included in
trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on available-for-sale securities are excluded from income and are
reported as a separate component of stockholders' equity until realized.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to income
resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield. Dividend and interest
income are recognized when earned. Realized gains and losses for securities
classified as available-for-sale and held-to-maturity are included in income and
are derived using the specific identification method for determining the cost of
securities sold.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization are
computed using the straight-line method. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized.
INTANGIBLE ASSETS
Intangible assets are carried at cost less accumulated amortization and consist
of patents and trademarks. Costs incurred in connection with applications for
new patents are deferred until a final determination with respect to the
application is made by appropriate regulatory agencies. Costs of patents
abandoned are charged to income in the period of abandonment. Patent costs are
amortized over the lesser of 17 years or their estimated useful life, using the
straight-line method. Trademarks are amortized over five years.
INCOME TAXES
The Company uses the asset and liability method for computing its deferred taxes
as specified by Financial Accounting Standards No. 109 (FAS No. 109), Accounting
for Income Taxes. Under the asset and liability method, deferred taxes are based
on the difference between the financial statement and tax basis of assets and
liabilities and the enacted tax rates that will be in effect when these
differences reverse. Deferred tax expense represents the change in deferred tax
assets and liabilities during the year.
PAGE 17
NET INCOME PER COMMON SHARE
Primary and fully diluted net income per common share are computed by dividing
net income by the weighted average of common and common equivalent shares
outstanding during the year. Stock options, when they have a dilutive effect,
are considered common stock equivalents for purposes of this computation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are recorded in its consolidated balance
sheets. The carrying amount for cash and temporary cash investments, accounts
receivable, accounts payable and accrued liabilities approximates fair value due
to the immediate or short-term maturity of these financial instruments. The fair
values of investments in marketable securities are based on quoted market prices
and are summarized in Note 2.
STATEMENTS OF CASH FLOWS
For purposes of cash flows, the Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
PERVASIVENESS OF 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 date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK-BASED EMPLOYEE COMPENSATION
The Company follows the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for all of its stock-based employee
compensation arrangements. Under the guidelines of Opinion 25, compensation cost
for stock-based employee compensation plans is recognized based on the
difference, if any, between the quoted market price of the stock on the date of
grant and the amount an employee must pay to acquire the stock. The Company
plans to implement the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in
fiscal year 1996 and retain its current accounting method for stock-based
employee compensation.
RECLASSIFICATION
Certain 1994 and 1993 amounts have been reclassified to conform to the 1995
presentation.
2. MARKETABLE SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for available-for-sale and held-to-maturity securities by
major security type at December 31, 1995 were as follows:
1995
-----------------------------------------
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
=============================================================
Available-for-sale:
Equity securities $ 220,000 $460,000 - $ 680,000
- -------------------------------------------------------------
$ 220,000 $460,000 - $ 680,000
=============================================================
Held-to-maturity:
United States
government
securities $1,196,343 $ 5,307 - $1,201,650
Municipal bonds 6,542,922 26,255 (3,269) 6,565,908
- -------------------------------------------------------------
$7,739,265 $ 31,562 $(3,269) $7,767,558
=============================================================
1994
-----------------------------------------
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
=============================================================
Available-for-sale:
Equity securities $ 220,000 - $(110,000) $ 110,000
- -------------------------------------------------------------
$ 220,000 - $(110,000) $ 110,000
=============================================================
Held-to-maturity:
United States
government
securities $3,309,534 - $ (48,578) $3,260,956
Municipal bonds 4,612,318 2,062 (82,988) 4,531,392
- -------------------------------------------------------------
$7,921,852 $ 2,062 $(131,566) $7,792,348
=============================================================
Maturities of investment securities classified as available-for-sale and
held-to-maturity were as follows at December 31, 1995:
Amortized Fair
cost value
========================================================
Available-for-sale:
Equity securities $ 220,000 $ 680,000
- --------------------------------------------------------
$ 220,000 $ 680,000
========================================================
Held-to-maturity:
Due within one year $ 4,133,397 $ 4,144,187
Due after one through
five years 3,605,868 3,623,371
- ---------------------------------------------------------
$ 7,739,265 $ 7,767,558
=========================================================
PAGE 18
3. INVENTORIES
The major components of inventories are as follows:
1995 1994
==========================================================
Finished products $ 176,910 $ 250,603
Work-in-process 699,070 661,282
Raw materials 684,380 821,875
- ----------------------------------------------------------
$1,560,360 $1,733,760
==========================================================
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Estimated
1995 1994 useful lives
==============================================================
Machinery and equipment $1,301,770 $1,185,721 3 to 10 years
Office equipment 438,788 438,788 2 to 15 years
Leasehold improvements 206,502 202,912 1 to 5 years
- --------------------------------------------------------------
1,947,060 1,827,421
Accumulated depreciation
and amortization 1,492,224 1,310,824
- --------------------------------------------------------------
$ 454,836 $ 516,597
Depreciation and amortization of property and equipment charged to income was
$197,587, $256,007 and $251,649 for the years ended December 31, 1995, 1994 and
1993, respectively.
5. LEASES
The Company leases its facilities and certain equipment pursuant to operating
leases. The term of the facility lease which has been renewed for five years
beginning July 1, 1995, expires in 2000. The facility lease requires the Company
to pay operating costs including real estate taxes.
Rental expense, including charges for operating costs, was as follows:
1995 1994 1993
================================
$254,002 $220,724 $220,784
--------------------------------
The following is a schedule of future minimum lease payments, excluding charges
for operating costs, for operating leases as of December 31, 1995:
Year ending December 31
=======================================================
1996 $ 198,966
1997 207,019
1998 213,633
1999 224,238
2000 112,119
- -------------------------------------------------------
$ 955,975
=======================================================
6. INCOME TAXES
The provision for income taxes consists of the following:
1995 1994 1993
=======================================================
Current tax expense:
Federal $1,150,000 $733,000 $868,000
State 150,000 91,000 96,000
- -------------------------------------------------------
Total current expense 1,300,000 824,000 964,000
Deferred 12,000 109,000 (33,000)
- -------------------------------------------------------
Provision for income
taxes $1,312,000 $933,000 $931,000
=======================================================
The effective income tax rate varies from the federal statutory tax
rate for the following reasons:
Years ended December 31, 1995 1994 1993
=========================================================
Percentage Percentage Percentage
of pretax of pretax of pretax
income income income
- ---------------------------------------------------------
Tax at statutory federal
income tax rate 34.0% 34.0% 34.0%
Increases (reductions) in
taxes resulting from:
State income taxes, net
of federal benefit 2.6 2.2 2.2
Tax-exempt earnings
of FSC (1.7) (1.8) (2.4)
Tax-exempt investment
earnings (1.7) (1.9) (1.4)
Other .6 1.0 .6
- ---------------------------------------------------------
Effective income tax rate 33.8% 33.5% 33.0%
=========================================================
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
1995 1994
=======================================================
Deferred tax assets:
Allowance for doubtful accounts
not currently deductible $ 48,000 $ 56,000
Inventory costs not currently
deductible 110,000 154,000
Inventory reserves 87,000 78,000
Warranty reserves 59,000 53,000
Other accruals 16,000 17,000
- -------------------------------------------------------
Total deferred tax assets $ 320,000 $ 358,000
- -------------------------------------------------------
Deferred tax liabilities:
Excess of tax over book
depreciation (3,000) (29,000)
Unrealized gain on noncurrent
marketable equity securities (165,000) -
- -------------------------------------------------------
Total deferred tax liabilities $(168,000) $ (29,000)
- -------------------------------------------------------
Net deferred tax asset $ 152,000 $ 329,000
=======================================================
The Company did not record a valuation allowance against deferred tax assets at
December 31, 1995 or 1994.
PAGE 19
7. STOCK OPTIONS
As of December 31, 1995, the Company has reserved 172,672 shares of common stock
for options which are still available for grant under the Company's stock option
plans, and 139,153 shares for options which have been granted but have not yet
been exercised. In addition, the Company has reserved 1,500 shares for options
which have been granted but not yet exercised under the 1980 Director Stock
Option Plan. Also, the Company has reserved 18,000 shares of common stock for
options which are still available for grant under the 1990 Non-Employee Director
Stock Option Plan, and 12,000 shares for options which have been granted but
have not yet been exercised under the plan.
Under the plans, option exercise prices are 100% of the market value of the
common stock at the date of grant, except for incentive options granted under
the 1992 Plan to persons owning more than 10% of the Company's stock, in which
case the option price is 110% of the market value, and nonqualified options
granted under the 1992 Plan, which may be granted at option prices no less than
25% of the market value. Exercise periods are generally for five years. Certain
of the plans allow for the granting of nonqualified stock options. Upon the
exercise of these nonqualified options, the Company may realize a compensation
deduction allowable for income tax purposes. The after-tax effect of these tax
deductions is included in the accompanying consolidated financial statements as
an addition to capital in excess of par value.
Changes in the shares authorized, granted and available under the stock option
plans are as follows:
Number of shares
Option price ----------------
per share Granted Available
- ----------------------------------------------------------
Balance,
December 31, 1992 $3.11-$15.33 221,909 282,356
Granted $7.25-$13.63 21,468 (21,468)
Exercised $3.11-$ 7.67 (92,457) -
Canceled or expired $6.06-$12.25 (6,520) 919
- ----------------------------------------------------------
Balance,
December 31, 1993 $6.06-$15.33 144,400 261,807
Granted $6.75-$ 8.50 32,300 (32,300)
Exercised $6.06-$ 6.44 (4,234) -
Canceled or expired $6.06-$12.25 (2,190) 925
- ----------------------------------------------------------
Balance,
December 31, 1994 $6.75-$15.33 170,276 230,432
Granted $6.63-$11.00 57,720 (57,720)
Exercised $7.25-$ 7.75 (48,651) -
Canceled or expired $6.63-$15.33 (26,692) 17,960
- ----------------------------------------------------------
Balance,
December 31, 1995 $6.63-$15.33 152,653 190,672
==========================================================
Shares exercisable at December 31, 1995 totaled 70,320.
PAGE 20
8. CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
unrealized
gain(loss) on
Common stock noncurrent
--------------------------- Capital in marketable
Number excess of Retained equity
of shares Amount par value earnings securities Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 4,818,428 $ 481,843 1,681,081 12,450,579 -- 14,613,503
Stock options exercised 92,457 9,245 435,704 -- -- 444,949
Tax benefit from stock
options exercised -- -- 218,934 -- -- 218,934
Purchase and retirement of
common stock (90,960) (9,096) (937,090) -- -- (946,186)
Dividends paid or declared
($.70 per share) -- -- -- (3,404,600) -- (3,404,600)
Net Income -- -- -- 1,889,243 -- 1,889,243
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 4,819,925 $ 481,992 1,398,629 10,935,222 -- 12,815,843
Stock options exercised 4,234 423 26,284 -- -- 26,707
Purchase and retirement
of common stock (297,928) (29,792) (1,424,913) (674,588) -- (2,129,293)
Dividends paid or declared
($.20 per share) -- -- -- (942,187) -- (942,187)
Net unrealized loss on noncurrent
marketable equity securities -- -- -- -- (110,000) (110,000)
Net Income -- -- -- 1,852,977 -- 1,852,977
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 4,526,231 $ 452,623 -- 11,171,424 (110,000) 11,514,047
Stock options exercised 48,651 4,865 368,593 -- -- 373,458
Purchase and retirement of
common stock (133,802) (13,380) (368,593) (1,038,713) -- (1,420,686)
Dividends paid or declared
($.21 per share) -- -- -- (945,214) -- (945,214)
Net unrealized gain on noncurrent
marketable equity securities, net of
income taxes -- -- -- -- 405,000 405,000
Net Income -- -- -- 2,570,308 -- 2,570,308
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 4,441,080 $ 444,108 -- 11,757,805 295,000 12,496,913
==============================================================================================================================
</TABLE>
PAGE 21
9. SALES
Export sales were $4,679,913, $3,804,511 and $3,599,279 in 1995, 1994 and 1993,
respectively. Of the export sales, $1,794,371, $1,273,816 and $1,198,614 in
1995, 1994 and 1993, respectively, were to customers in Western Europe. Sales to
customers in Japan were $889,343, $1,200,119 and $839,879 for 1995, 1994 and
1993, respectively. The Company's products are marketed outside of North America
through various independent representatives. One independent representative
accounted for approximately 14%, 13% and 12% of sales in 1995, 1994 and 1993,
respectively.
10. SAVINGS AND RETIREMENT PLAN
The Company has a 401(k) Savings and Retirement Plan covering substantially all
of its employees. The Company provides matching contributions in accordance with
the plan. The Company's contributions to this plan in 1995, 1994 and 1993 were
$19,110, $15,293 and $13,159, respectively.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Modern Controls, Inc.:
We have audited the accompanying consolidated balance sheets of Modern Controls,
Inc. and subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of income and cash flows for each of the years in the
three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with 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 of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Modern Controls,
Inc. and subsidiary as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 9, 1996
COMMON STOCK INFORMATION
Market for Company's Common Stock and Related Stockholder Matters
As of February 26, 1996 there were 671 record holders of the Company's Common
Stock. The Company's Common Stock is traded on the national over-the-counter
market, with prices quoted on the National Association of Securities Dealers
Automated Quotation (NASDAQ) National Market System. The following table sets
forth, for the fiscal periods indicated, the high and low quotations for the
Company's Common Stock as reported by the Nasdaq National Market System.
Common Stock Trading Prices
- --------------------------------------------------------------------------------
Low High Dividends declared
- --------------------------------------------------------------------------------
1995
1st Quarter $ 6 3/16 $ 8 $ .05
2nd Quarter $ 6 3/8 $ 9 1/4 $ .05
3rd Quarter $ 8 3/4 $ 10 5/8 $ .05
4th Quarter $ 9 3/4 $ 11 1/8 $ .06
- --------------------------------------------------------------------------------
1994
1st Quarter $ 7 1/4 $ 9 1/4 $ .05
2nd Quarter $ 6 1/2 $ 7 3/4 $ .05
3rd Quarter $ 6 1/4 $ 8 $ .05
4th Quarter $ 5 3/4 $ 8 1/2 $ .05
- --------------------------------------------------------------------------------
PAGE 22
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Modern Controls, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-27730, 33-42255 and 33-49752) on Form S-8 of Modern Controls, Inc. of our
reports dated February 9, 1996, relating to the consolidated balance sheets of
Modern Controls, Inc. and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income and cash flows and related financial
statement schedule for each of the years in the three-year period ended December
31, 1995, which reports appear in or are incorporated by reference in the
December 31, 1995 annual report on Form 10-K of Modern Controls, Inc.
/s/ KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
March 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statements of income and the consolidated balance sheets and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,396,718
<SECURITIES> 4,133,397
<RECEIVABLES> 1,909,521
<ALLOWANCES> 132,000
<INVENTORY> 1,560,360
<CURRENT-ASSETS> 9,555,174
<PP&E> 1,947,060
<DEPRECIATION> 1,492,224
<TOTAL-ASSETS> 14,770,411
<CURRENT-LIABILITIES> 2,105,498
<BONDS> 0
0
0
<COMMON> 444,108
<OTHER-SE> 12,052,805
<TOTAL-LIABILITY-AND-EQUITY> 14,770,411
<SALES> 12,843,505
<TOTAL-REVENUES> 12,843,505
<CGS> 4,380,295
<TOTAL-COSTS> 4,380,295
<OTHER-EXPENSES> 4,580,902
<LOSS-PROVISION> 15,323
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,882,308
<INCOME-TAX> 1,312,000
<INCOME-CONTINUING> 2,570,308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,570,308
<EPS-PRIMARY> .57
<EPS-DILUTED> .56
</TABLE>
