UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarter Ended June 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ______________ to _______________
Commission File Number 0-9273
MOCON, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0903312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7500 Boone Avenue North, Minneapolis, Minnesota 55428
(Address of principal executive offices) (Zip code)
(612) 493-6370
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the SECURITIES EXCHANGE ACT OF 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO ___
6,288,178 Common Shares were outstanding as of June 30, 1999
<PAGE>
MOCON, INC.
INDEX TO FORM 10-Q
For the Quarter Ended June 30, 1999
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income and Comprehensive
Income (Unaudited)
Three months and six months ended June 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4-5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 6-8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MOCON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 1,377,482 $ 1,352,416
Marketable securities, current 3,512,619 4,959,151
Accounts receivable 2,420,774 2,124,060
Other receivables 134,649 127,104
Inventories 2,192,453 2,322,187
Prepaid expenses 129,683 235,658
Deferred income taxes 282,000 282,000
------------ ------------
Total current assets 10,049,660 11,402,576
------------ ------------
Marketable securities, noncurrent 5,179,893 3,063,100
------------ ------------
Property and equipment: 3,170,292 3,183,576
Less accumulated depreciation
and amortization 2,017,104 2,036,127
------------ ------------
Net property and equipment 1,153,188 1,147,449
------------ ------------
Other assets:
Goodwill 1,017,488 1,070,078
Technology rights and other intangibles 575,000 600,000
Other 409,663 392,032
------------ ------------
Total other assets 2,002,151 2,062,110
------------ ------------
TOTAL ASSETS $ 18,384,892 $ 17,675,235
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 628,391 $ 801,536
Accrued compensation and vacation 514,805 440,696
Other accrued 1,296,027 1,228,934
------------ ------------
Total current liabilities 2,439,223 2,471,166
------------ ------------
Deferred income taxes 92,600 98,000
------------ ------------
Stockholders' equity:
Common stock - $.10 par value 628,818 628,796
Capital in excess of par value 896,703 934,031
Retained earnings 14,327,548 13,543,242
------------ ------------
Total stockholders' equity 15,853,069 15,106,069
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 18,384,892 $ 17,675,235
============ ============
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1998 has been
summarized from the Company's audited consolidated balance sheet at that
date.
-1-
<PAGE>
MOCON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product sales $ 3,803,513 $ 3,473,113 $ 7,787,834 $ 6,770,492
Consulting services 628,276 322,659 1,097,677 572,716
----------- ----------- ----------- -----------
Total sales 4,431,789 3,795,772 8,885,511 7,343,208
----------- ----------- ----------- -----------
Product sales 1,304,415 1,213,273 2,607,949 2,314,561
Consulting services 251,888 148,024 467,503 290,630
----------- ----------- ----------- -----------
Total cost of goods 1,556,303 1,361,297 3,075,452 2,605,191
----------- ----------- ----------- -----------
Gross profit 2,875,486 2,434,475 5,810,059 4,738,017
----------- ----------- ----------- -----------
Selling, general & administrative expenses 1,527,766 1,647,561 3,202,904 3,076,085
Research & development expenses 364,913 309,757 691,646 547,891
----------- ----------- ----------- -----------
1,892,679 1,957,318 3,894,550 3,623,976
Operating income 982,807 477,157 1,915,509 1,114,041
Investment income 101,015 124,145 204,758 244,132
----------- ----------- ----------- -----------
Income before income taxes 1,083,822 601,302 2,120,267 1,358,173
Income taxes 368,000 204,500 710,000 461,800
----------- ----------- ----------- -----------
Net income $ 715,822 $ 396,802 $ 1,410,267 $ 896,373
=========== =========== =========== ===========
Comprehensive income $ 715,822 $ 396,802 $ 1,410,267 $ 896,373
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.11 $ 0.06 $ 0.22 $ 0.14
=========== =========== =========== ===========
Diluted $ 0.11 $ 0.06 $ 0.22 $ 0.14
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 6,288,177 6,454,056 6,288,121 6,449,377
=========== =========== =========== ===========
Diluted 6,301,532 6,505,928 6,297,144 6,513,291
=========== =========== =========== ===========
</TABLE>
-2-
<PAGE>
MOCON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,410,267 $ 896,373
Total adjustments to reconcile
net income to net cash provided
by operating activities 206,617 461,208
----------- -----------
Net cash provided by operating activities 1,616,884 1,357,581
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities (3,844,145) (2,294,712)
Proceeds from sales of marketable securities 3,173,884 3,013,267
Purchases of property and equipment (210,313) (369,081)
Other (45,131) (155,598)
----------- -----------
Net cash (used in) provided by investing activities (925,705) 193,876
----------- -----------
Cash flows from financing activities:
Dividends paid (631,662) (645,119)
Other (34,451) 84,872
----------- -----------
Net cash used in financing activities (666,113) (560,247)
----------- -----------
Net increase in cash and
temporary cash investments 25,066 991,210
----------- -----------
Cash and temporary cash investments:
Beginning of period 1,352,416 763,014
----------- -----------
End of period $ 1,377,482 $ 1,754,224
=========== ===========
</TABLE>
-3-
<PAGE>
MOCON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of June 30, 1999, the condensed
consolidated statements of income and comprehensive income for the three- and
six-month periods ended June 30, 1999 and 1998, and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 1999 and 1998
have been prepared by the Company, without audit. However, all adjustments
(consisting solely of normal recurring adjustments) which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows at June 30, 1999, and for all periods presented, have
been made. The results of operations for the period ended June 30, 1999 are not
necessarily indicative of operating results for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 1998 annual
report to shareholders.
Note 2 - Inventories
Inventories consist of the following:
June 30, December 31,
1999 1998
------------ ------------
Finished Products $ 263,700 $ 330,812
Work in Process 804,936 836,043
Raw Materials 1,123,817 1,155,332
------------ ------------
$ 2,192,453 $ 2,322,187
============ ============
Note 3 - Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average of common shares outstanding during the period. Diluted net
income per share is computed by dividing net income by the weighted average of
common and dilutive potential common shares outstanding during the period.
-4-
<PAGE>
The following table presents a reconciliation of the denominators used in the
computation of net income per common share-basic and net income per common
share-diluted for the three- and six-month periods ended June 30, 1999, and
1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted shares of common stock
outstanding - basic 6,288,177 6,454,056 6,288,121 6,449,377
Weighted shares of common stock
assumed upon exercise of stock
options 13,355 51,872 9,023 63,914
- ----------------------------------------------------------------------------------------------
Weighted shares of common stock
outstanding - diluted 6,301,532 6,505,928 6,297,144 6,513,291
==============================================================================================
</TABLE>
-5-
<PAGE>
MOCON, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This Form 10-Q includes certain statements that are deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
in this Form 10-Q that address activities, events, or developments that the
Company expects, believes, or anticipates will or may occur in the future, are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions, expected future developments, and
other factors it believes are appropriate in the circumstances. Such statements
are subject to a number of assumptions, risks, and uncertainties, many of which
are beyond the control of the Company. Investors are cautioned that any such
statements are not guarantees of future performance and that actual results or
developments may differ materially from those projected in the forward-looking
statements.
Results of Operations
Sales for the quarter ended June 30, 1999, were $4,431,789, up 17 percent from
second quarter 1998 sales of $3,795,772. The increase in second quarter sales is
primarily the result of increases in the sales volume of the Company's
permeation products and consulting and analytical services, as well as the sales
volume of Lab Connections, the Company's wholly-owned subsidiary acquired in
December of 1998, and general price increases, offset somewhat by a decrease in
the sales volume of the Company's weighing products.
Sales for the six-month period ended June 30, 1999, were $8,885,511, a 21
percent increase from the sales for the first six months of 1998 of $7,343,208.
The 21 percent increase is primarily due to increases in the sales volume of the
Company's permeation products and consulting and analytical services, the sales
volume of Lab Connections, and general price increases.
The Company derives its revenue from product sales and consulting services,
consisting of consulting and analytical services and standard testing performed
for various customers. In the second quarter of 1999, product sales were
$3,803,513 and consulting services were $628,276, or 86 and 14 percent,
respectively, of the Company's total second quarter 1999 sales. This compares to
product sales of $3,473,113 and consulting services of $322,659, 91 and 9
percent of total sales, in the second quarter of 1998.
For the six months ended June 30, 1999, product sales were $7,787,834 and
consulting services were $1,097,677, 88 and 12 percent, respectively, of the
Company's 1999 year-to-date sales compared to product sales of $6,770,492 and
consulting services of $572,716, 92 and 8 percent of total sales for the first
six months of 1998.
Gross profit was 65 percent of sales for the quarter and the six-month period
ended June 30, 1999, compared to 64 and 65 percent of sales, respectively, for
the quarter and six-months ended June 30, 1998.
-6-
<PAGE>
Selling, general and administrative (SG&A) expenses decreased approximately
$120,000 to 34 percent in the second quarter of 1999, compared to 43 percent in
the second quarter of 1998. SG&A expenses were 36 and 42 percent of sales for
the six months ended June 30, 1999 and 1998, respectively. These decreases were
due primarily to decreases in litigation fees incurred to protect confidential
information of the Company, offset somewhat by amortization of intangible assets
related to the acquisition of Lab Connections and increases in commission and
other selling expenses as a result of the increased sales.
Research and development (R&D) expenses as a percentage of sales were 8 percent
for the quarter and six-month period ended June 30, 1999, compared to 8 and 7
percent for the same periods in 1998, respectively. Continued R&D expenditures
are necessary as the Company develops new products and technologies to expand in
its niche markets. For the foreseeable future, the Company expects to spend on
an annual basis approximately 6 to 9 percent of sales on R&D.
Investment income decreased approximately $23,000 in the second quarter of 1999
as compared to the second quarter of 1998. For the six months ended June 30,
1999, investment income decreased approximately $39,000. The decrease is the
result of lower average investment balances in 1999, offset somewhat by an
overall slightly higher yield.
The Company's provision for income taxes was 33.5 percent of income before
income taxes for the six-month period ending June 30, 1999, compared to 34
percent for the same period in 1998. The Company reviews the tax rate quarterly
and may make adjustments to reflect changing estimates. Based on current
operating conditions and income tax laws, the Company expects the effective tax
rate for all of 1999 to be in a range of 33 to 35 percent.
Net income increased 80 percent to $715,822 for the second quarter of 1999,
compared to $396,802 for the second quarter of 1998. Basic net income per share
was 11 cents for the second quarter of 1999, compared to 6 cents for the same
period in 1998. For the six months ended June 30, 1999, net income increased 57
percent to $1,410,267 compared to $896,373 for the six months ended June 30,
1998. Basic net income per share was 22 and 14 cents for the six-month periods
ended June 30, 1999, and 1998, respectively.
Liquidity and Capital Resources
The Company continues to maintain a strong financial position. Total cash,
temporary cash investments and marketable securities increased approximately
$695,000 during the six months ended June 30, 1999. The Company used cash
resources to pay dividends of approximately $632,000 during the first six months
of 1999.
The Company has no long-term debt or material commitments for capital
expenditures as of June 30, 1999. The Company's plant and equipment do not
require any major expenditures to accommodate a significant increase in
operating demands. The Company anticipates that a combination of its existing
cash, temporary cash investments and marketable securities, plus an expected
continuation of cash flow from operations, will continue to be adequate to fund
operations, capital expenditures and dividend payments in the foreseeable
future.
-7-
<PAGE>
Market Risk Management
Substantially all of the Company's marketable securities are at fixed interest
rates. However, almost all of the Company's marketable securities mature within
three years, therefore, the Company believes that the market risk arising from
its holding of these financial instruments is minimal.
The Company currently sells its products and services in United States dollars;
accordingly, the exposure to foreign currency exchange risk is minimal.
Year 2000 Conversion
Computers, software and other equipment utilizing microprocessors that use only
two digits to identify a year in a date field may be unable to accurately
process certain date-based information, including correct leap-year recognition,
at or after the year 2000. This is commonly referred to as the "Year 2000"
problem. The Company has evaluated its situation in regard to the potential
impact of the Year 2000 problem on its business.
INTERNAL SYSTEMS. The Company has evaluated and reviewed the Company's internal
systems that could pose Year 2000 risks in order to correct issues. This
includes information technology (IT) and non- IT systems. Management currently
believes that all material internal systems will be compliant by the Year 2000
and that the cost to address the issues will not have a material adverse impact
on the Company's results of operations and consolidated financial condition.
However, there can be no assurance that unforeseen difficulties or costs will
not arise.
VENDORS. The Company has contacted its suppliers and other vendors to determine
if they will be able to provide the Company with products and services through
the change to 2000, and if the products and services that they provide to the
Company are Year 2000 compliant. The Company has attempted to lessen its risks
with respect to the failure of third parties to be Year 2000 ready, including
developing contingency plans where applicable. However such failure, including
failure of any contingency plans, could have a material adverse impact on the
Company's results of operations and consolidated financial condition.
COMPANY PRODUCTS. Management believes that all the Company's products shipped
after 1998 are and will continue to be Year 2000 compliant. Information
regarding the Year 2000 status of products shipped prior to 1999 may be obtained
via the Company's web site at www.mocon.com.
Although the Company is not dependent on any single customer, the Company does
have significant sales in certain industries, including the food, polymer, paper
and pharmaceutical industries. A significant Year 2000 related disruption in
these industries into which the Company sells, could have a material adverse
impact on the Company's results of operations and consolidated financial
condition.
-8-
<PAGE>
MOCON, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of MOCON, Inc. on May 25, 1999,
the nominees for election as Directors of the Company were elected
without opposition as follows:
Director-Nominee Votes For Votes Withheld/Against
---------------- --------- ----------------------
William N. Mayer 5,773,618 128,255
Dean B. Chenoweth 5,763,945 137,928
J. Leonard Frame 5,764,020 137,853
Paul J. Sjoquist 5,776,232 125,641
Richard A. Proulx 5,784,445 117,428
Robert L. Demorest 5,781,980 119,893
Thomas C. Thomas 5,876,837 25,036
The proposal to amend the Company's Restated Articles of Incorporation
to change the Company's name to MOCON, Inc. was adopted as follows:
For the proposal: 5,741,770 shares
Against the proposal: 114,641 shares
Abstaining: 45,462 shares
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following is a listing of the exhibits contained in this
Form 10-Q filing:
Exhibit No. Description
----------- -----------
10.1 MOCON Incentive Pay Plan
27 Financial Data Schedule
b. There were no reports on Form 8-K filed for the quarter ended
June 30, 1999.
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements of the SECURITIES EXCHANGE ACT of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOCON, INC.
Registrant
Date: August 11, 1999 /s/ William N. Mayer
William N. Mayer,
Chairman and CEO
Date: August 11, 1999 /s/ Ronald A. Meyer
Ronald A. Meyer,
Vice President and Treasurer
-10-
EXHIBIT 10.1
MOCON, INC.
MOCON INCENTIVE PAY PLAN
WHEREAS, the MOCON Incentive Pay Plan, covering the years 1997, 1998
and 1999, was adopted on January 3, 1997 subject to terms and conditions adopted
by resolution of the Compensation Committee; and
WHEREAS, the Company has made acquisitions since the adoption of the
current Incentive Pay Plan and it is determined that it is desirable to modify
the Incentive Pay Plan for 1999 and future years.
NOW, THEREFORE, be it hereby resolved that the MOCON Incentive Pay Plan
for 1999 and subsequent years is as set forth in the following provisions, with
the proviso that these provisions shall be reviewed and modified by the
Compensation Committee as considered necessary;
1) This Incentive Pay Plan covers employees who do not have a
variable compensation component based on sales.
2) Total incentives to such employees are not to exceed 9.5% of
the net income before taxes and before incentives for such
calendar years under this Incentive Pay Plan.
3) The CEO and President incentive shall be 50% and 35% of salary
at goal; the actual incentive paid will be based on the
percentage of goal achieved, up to a maximum of 150%
4) The net income goal before tax and incentives shall be
determined annually by the Compensation Committee.
5) After the CEO's and President's incentive has been determined
for a year, the remaining amount available shall be
distributed at the discretion of the CEO. For example, the
incentives available for distribution, at goal, will be 9.5%
of the net income before taxes reduced by the CEO and
President incentives of 50% and 35% of salary, respectively,
leaving a total for discretionary incentives.
6) The incentives for each calendar year shall be paid in one
payment prior to March 15 of the following year.
7) Any amounts of discretionary incentives which are not
distributed shall remain as net income for the company.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND THE CONDENSED BALANCE SHEETS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,377,482
<SECURITIES> 3,512,619
<RECEIVABLES> 2,585,774
<ALLOWANCES> 165,000
<INVENTORY> 2,192,453
<CURRENT-ASSETS> 10,049,660
<PP&E> 3,170,292
<DEPRECIATION> 2,017,104
<TOTAL-ASSETS> 1,153,188
<CURRENT-LIABILITIES> 2,439,223
<BONDS> 0
0
0
<COMMON> 628,818
<OTHER-SE> 15,224,251
<TOTAL-LIABILITY-AND-EQUITY> 18,384,892
<SALES> 8,885,511
<TOTAL-REVENUES> 8,885,511
<CGS> 3,075,452
<TOTAL-COSTS> 3,075,452
<OTHER-EXPENSES> 3,689,792
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,120,267
<INCOME-TAX> 710,000
<INCOME-CONTINUING> 1,410,267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,410,267
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
</TABLE>
