UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________.
COMMISSION FILE NO.: 0-9273
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MOCON, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0903312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7500 BOONE AVENUE NORTH
MINNEAPOLIS, MINNESOTA 55428
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (763) 493-6370
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.10 PAR VALUE
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 10, 2000, 6,056,556 shares of Common Stock of the
registrant were deemed outstanding, and the aggregate market value of the Common
Stock of the registrant (based upon the average of the high and low sales prices
of the Common Stock at that date as reported by the Nasdaq National Market),
excluding outstanding shares beneficially owned by directors and executive
officers, was approximately $31,295,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held May
23, 2000 (the "2000 Proxy Statement").
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PART I
ITEM 1. BUSINESS
(a) GENERAL
MOCON, Inc., (the "Company"), designs, manufactures, markets, services
products and provides consulting primarily for specialized applications in the
measurement and analytical instrument and services markets, including detection,
sample preparation, measurement, and monitoring instruments and services used to
analyze gases and chemical compounds. Several of the Company's analytical
services and products focus on the Company's expertise in barrier analysis. The
Company's principal business strategy is to employ its product development and
technological capabilities, manufacturing processes, and marketing skills in
market niches where the Company can successfully penetrate the market and then
pursue a strategy to become a leader in the market segment. Management
continually emphasizes product innovation, product performance, quality
improvements, cost reductions and other value-adding activities. Although some
of the markets for the Company's products are maturing, the Company seeks growth
opportunities through technological and product improvement and by acquiring and
developing new products that can be sold through its distribution channels.
The Company's principal executive offices are located at 7500 Boone
Avenue North, Minneapolis, Minnesota 55428 and its telephone number is (763)
493-6370.
(b) DEVELOPMENT OF THE COMPANY
MOCON, Inc. was incorporated in February 1966 and was involved in the
commercialization of technology developed for the measurement of water vapor
permeating through various materials. The Company historically has expanded
through internal development of new products and technologies, the acquisition
of product lines, technology or companies, and licensing of products or
technology. During 1998, the Company completed complementary acquisitions that
have provided additional technologies, products and product development
expertise.
On January 28, 1998, the Company acquired Microanalytics
Instrumentation Corporation ("Microanalytics"), located near Austin, Texas.
Microanalytics produces ancillary gas chromatographic ("GC") instrumentation and
services with emphasis on multidimensional gas chromatography. A variety of GC
specific applications have been developed by Microanalytics personnel ranging
from petroleum and petrochemical purity assay to aroma and off-odor analysis for
the food and packaging fields.
On December 7, 1998, the Company acquired Lab Connections, Inc. ("Lab
Connections"), located near Boston, Massachusetts. Lab Connections manufactures
hardware and software interfaces that combine the separations capability of
chromatography with the power to identify individual components by spectroscopy.
Lab Connections is a global specialty analytical instrument and software company
focused on laboratory measurements of commercial importance. Lab Connections'
products extend and enhance customers' productivity and their ability to obtain
crucial knowledge regarding the identification, composition and configuration of
complex mixtures. Typical applications are in the analysis of polymers and
adhesives.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
PRODUCTS AND SERVICES
The Company develops, manufactures, markets, and services measurement,
analytical, monitoring, sample preparation and consulting products used to
detect, measure, and analyze gases and chemical compounds.
PERMEATION PRODUCTS
Permeation products consist of systems and services designed to measure
the rate of transmission of various gases and vapors through packages and
various materials. These products are designed to perform these measurements
under precise temperature and relative humidity conditions. The principal market
for these products consists of manufacturers of packaging materials, including
manufacturers of papers, plastics and coatings, and the users of such packaging
materials in the food, beverage, pharmaceutical and chemical industries. The
Company also provides certain laboratory testing services utilizing the
Company's permeation products. These services are primarily in the area of
testing film and package permeation. Users of these services are primarily those
companies with insufficient volume to warrant purchasing the Company's products
or others not familiar with such equipment. Other users include companies that
have purchased the Company's products but have a need for additional capacity.
Permeation products accounted for approximately 63%, 60%, and 69% of the
Company's consolidated sales in 1999, 1998, and 1997, respectively. Permeation
instruments currently manufactured by the Company include OX-TRAN(R) systems for
oxygen transmission rates, PERMATRAN-W(R) systems for water vapor transmission
rates, PERMATRAN-C(TM) systems for carbon dioxide transmissions rates, and
AROMATRAN(R) systems for transmission rates of volatile organics and vapors.
WEIGHING PRODUCTS
Weighing products manufactured by the Company are used to automatically
determine the weight of pharmaceutical capsules and/or tablets and to reject
those found to be out of acceptable limits. The Company's VERICAP(R) high-speed
capsule weighing system runs at rates up to 2,000 capsules per minute and can be
integrated into a capsule production line in pharmaceutical factories. The other
weighing systems are designed for off-line use. These products are marketed
primarily to the pharmaceutical industry. Weighing products accounted for less
than 15% of the Company's consolidated sales in 1999 and approximately 19% and
15% of the Company's consolidated sales in 1998 and 1997, respectively. Weighing
instruments currently manufactured by the Company include the VERICAP(R)
high-speed capsule weighing systems, the VERITAB(R) high-speed tablet weighing
systems, and the AB(TM) automatic balance weighing systems for tablets or
capsules.
CONSULTING AND ANALYTICAL SERVICES
The Company provides consulting and analytical services, on a special
project basis, for customers that require unique problem solving capabilities.
The Company's services may relate to absorption or diffusion of various
compounds, harsh environment applications, shelf-life concerns, flavor or odor
detection, contract research or special permeation applications. In providing
the consulting and analytical services, the Company uses its most advanced
measurement technologies, including proprietary TRANSORPTION(R) technology. The
principal market for the consulting and
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analytical services consists of manufacturers of foods, beverages,
pharmaceuticals, plastics, chemicals, electronics, and personal care products.
HEAD SPACE ANALYZER PRODUCTS
The Company's headspace analyzers are used to analyze the amount of
oxygen and/or carbon dioxide present in the headspace of flexible and rigid
packages. Some analyzers measure the oxygen and/or carbon dioxide content in
flushing gases used in modified or controlled atmosphere packaging. The
principal market for these products consists of packagers of foods, beverages
and pharmaceuticals. The headspace analyzer products currently manufactured by
the Company include the PAC CHECK(TM) series of headspace analyzers and the
GSA(TM) series of on-line gas stream analyzers for continuous and intermittent
monitoring of modified atmosphere packaging (MAP) and other gas flushing
operations.
SAMPLE PREPARATION PRODUCTS
The Company designs, manufactures, markets, and services sample
preparation products. These products consist of hardware and software interfaces
that combine the separations capability of chromatography with the power to
identify individual components by spectroscopy analysis. The most time-consuming
part of chemical analysis is sample preparation. Procedures, techniques, and
instruments that reduce total sample preparation time are highly desirable for
analysis of chemical compounds. The Company's products provide fully automatic
sample collection from any Liquid Chromatograph or Gel Permeation Chromatograph
in a form suitable for immediate examination by Fourier transform infra-red
spectroscopy ("FTIR") and/or matrix assisted laser desorption ionization mass
spectrometry ("MALDI-MS"). The principal market for these products is to
analytical laboratories of polymer and adhesive manufacturers. The sample
preparation products currently manufactured by the Company are the LC-Transform
for interfacing to FTIR and the LC-Transform for interfacing to MALDI-MS.
GC ANALYZER PRODUCTS
The Company integrates its gas chromatography components with GCs to
form multidimensional GC analyzer systems. Multidimensional GC analyzers
represent state of the art technology in gas chromatographic separations. These
systems are used in identifying compounds causing off-odors in various products,
in identifying critical aroma compounds and in high purity analysis of single
component matrixes. The GC analyzer products currently manufactured by the
Company are the AROMATRAX(TM) systems for odor and aroma analysis and profiling,
the PURI-TRAX(TM) systems consisting of a vinyl chloride monomer purity analysis
system and a system for measuring trace levels of oxygenated hydrocarbons in a
variety of hydrocarbon products and process streams such as liquefied petroleum
gases, and the VAPO-JECT(TM) automated vaporizing injector system for permanent
and liquefied petroleum gases.
The principal markets for the GC analyzer products consist of food,
beverage, petroleum, chemical and petrochemical manufacturers. The Company does
not manufacture gas chromatographs but purchases such components from Agilent
Technologies, Inc. pursuant to a Channel Partner arrangement.
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GAUGING PRODUCTS
The Company's gauging products use capacitance technology to measure
the thickness of thin films and coatings in laboratories. These gauges measure
all types of non-metallic materials, with very repeatable gauge readings at
thickness resolutions up to one millionth of an inch. Software packages allow
the display of each material's profile and provide analysis of the related data.
The principal market for the gauging portion of this product group is made up of
manufacturers of plastic films. The Company currently manufactures the
PROFILER(R) 140E laboratory gauge.
LEAK DETECTION PRODUCTS
The leak detection products manufactured by the Company detect leaks in
pouches, blister packs and a wide range of other packages. The principal market
for these products includes packagers of food, pharmaceuticals and sterile
medical supplies. The Company manufactures two types of leak detection
instruments. One 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.
COMPETITION
The Company experiences competition in both foreign and domestic
markets from one or more competitors with respect to all of its products and
services. The Company competes with several others in the design, manufacture
and sale of its measurement, analytical, monitoring, sample preparation and
consulting products. The principal competitive factors are product technology
and performance, quality and reliability, sales and marketing ability, product
support, delivery, and price. Some of the Company's competitors have greater
assets and resources than the Company and some are smaller than the Company.
Some of the Company's larger competitors may have greater financial resources,
stronger marketing organizations, broader product lines and other resources than
those of the Company.
MANUFACTURING AND SUPPLIES
The Company manufactures products at three locations in the United
States. The Company's manufacturing capabilities include electro-mechanical
assembly, testing, integration of components and systems, calibration, and
validation of systems. Certain components are currently purchased from single
source suppliers. An interruption of one of these sources could result in delays
in the Company's production while the Company developed an alternative supplier
and could result in a loss of sales and income. There are other single source
components for which the Company has determined that other sources are readily
available. The Company has experienced no significant production delays because
of a supplier's inability to ship an acceptable component.
MARKET RISK MANAGEMENT
Substantially all of the Company's marketable securities are at fixed
interest rates and therefore the fair value of these instruments is affected by
changes in market interest rates. However, almost all of the Company's
marketable securities mature within three years.
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Accordingly, the Company believes that the market risk arising from its holding
of these financial instruments is minimal.
The Company currently sells its products and services in United States
dollars; accordingly, the exposure to foreign currency exchange risk is minimal.
BACKLOG
The Company had a total backlog of approximately $1,980,000 as of
December 31, 1999 for all of its products as compared to approximately
$1,952,000 and $398,000 as of December 31, 1998 and 1997, respectively. The
Company anticipates filling the entire current backlog in 2000.
PATENTS AND LICENSES
Generally, the Company believes that the protection afforded by patent
rights is important to its business and it will continue to seek patent
protection for its technology and products. The Company has required certain
employees and consultants to assign to the Company all inventions that are
conceived and developed during their employment, except to the extent prohibited
by applicable law. The Company holds both United States and international
patents and has both U.S. and international patents pending. The Company
currently holds 37 U.S. patents and 24 international patents. In addition, the
Company holds license rights under four U.S. patents subject to royalty payments
and/or minimum required royalties. These patents and licenses will expire during
the period from 2000 through 2018.
Even though the Company has obtained the patents mentioned above, there
can be no guarantee that these patents will keep competitors from producing
substantially similar products. Although it can offer no assurance, the Company
believes its products do not infringe on patents owned by any other persons. Any
determination that a material component of the Company's products infringes upon
the rights of others could have a material adverse effect upon the Company. In
the event that the Company's products may be covered in whole or in part by
patents owned by others, the Company may find it desirable to obtain licenses
with respect to such patents.
The Company also owns or has applied for certain trademarks which
protect and identify its products, including the trademark MOCON(R), which the
Company has designated as a house trademark under which all its products
manufactured at its headquarters are sold, and the trademarks and servicemarks
VERICAP(R), OX-TRAN(R), PERMATRAN-W(R), PROFILER(R), COULOX(R), HERSCH(R),
VERITAB(R), AROMATRAN(R), SKYE(R), PAC CHECK 200(R), LC-Transform(R),
TRANSORPTION(R) and 1-TIME(R). The Company's trademarks have a life, subject to
periodic maintenance, of 10 to 20 years, which may be extended.
RESEARCH AND DEVELOPMENT
The Company incurred expenses of approximately $1,234,000, $1,061,000
and $1,016,000 during the fiscal years ended December 31, 1999, 1998 and 1997,
respectively, for research and development of its products. Research and
development costs were 7% of sales for the fiscal year ended December 31, 1999
and were 7% and 6%, respectively, for the preceding two fiscal years. For the
foreseeable future, the Company expects to allocate, on an annual basis,
approximately 5% to 8% of sales to research and development.
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WORKING CAPITAL PRACTICES
The Company maintains inventory levels in its product groups consistent
with projected sales. The Company's standard domestic payment terms are net 30
days. International sales are transacted pursuant to letters of credit in some
cases. The Company generally warrants its products for one year from the date of
shipment. There have been few instances when the Company was required to accept
the return of merchandise that failed to comply with the Company's warranty.
FOREIGN AND DOMESTIC MARKETING
The Company markets its products and services, provides support
services, and distributes expendables and accessories required to support the
operation of the products. The Company sells its products in the United States
and Canada through a direct sales channel to end-users. A network of independent
representatives serves the Company's foreign markets. To the Company's
knowledge, no independent sales representative of the Company sells a material
amount of products manufactured by the Company's competitors.
The Company's wholly-owned subsidiary, MoCon FSC, Inc., a Barbados
corporation ("FSC") carries out all the foreign distribution of the Company's
products. The Company acts as the selling agent of FSC.
The Company 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 affect sales and earnings of the Company in the future.
For information concerning the Company's export sales by geographic
area, see Note 9 of the Notes to Consolidated Financial Statements contained on
page F-16. No single customer 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 17% of the
Company's sales in fiscal 1999. For additional information concerning sales by
such independent representatives, see Note 9 of the Notes to Consolidated
Financial Statements contained on page F-16. The Company's business is not
seasonal in nature.
EMPLOYEES
As of December 31, 1999, the Company had 88 full-time employees. The
Company employs scientists and engineers who research and develop potential new
products. To protect the Company's proprietary information, the Company has
confidentiality and non-compete agreements with its employees. None of the
Company's employees are represented by a labor union, and the Company considers
its employee relations to be satisfactory.
ITEM 2. PROPERTIES
The Company leases 54,900 square feet of office, engineering,
laboratory, and production space in Minnesota, Massachusetts, and Texas.
Management believes that the Company's facilities
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are generally adequate for its present operations and that suitable space is
readily available if any of such leases are not extended.
The Company headquarters and operations occupy approximately 47,200
square feet of space in Minneapolis, Minnesota. The current lease expires in
June 2010.
Microanalytics' operations occupy approximately 2,400 square feet of
space in the metropolitan area of Austin, Texas. This space is leased until
January 2002.
Lab Connections' operations occupy approximately 5,300 square feet of
space near Boston, Massachusetts. This space is leased until July 2001.
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 1999.
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 18, 2000, are as follows:
Executive
Officer
Name Age Title(1) Since
- --------------------------------------------------------------------------------
William N. Mayer (2) 69 Chairman of the Board and Chief Executive 1976
Officer
Robert L. Demorest 54 President 1985
Ronald A. Meyer 49 Vice President - Finance & Administration, 1985
Treasurer and Secretary
Daniel W. Mayer (2) 48 Executive Vice President 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. William N. Mayer will
retire as a director and as Chief Executive Officer of the Company
effective April 1, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 2, 2000, there were 511 record holders of the Company's
Common Stock. The Company's Common Stock trades on the Nasdaq Stock Market under
the symbol MOCO. The following table sets forth, for the fiscal periods
indicated, the high and low quotations for the Company's Common Stock as
reported by the Nasdaq National Market System.
<TABLE>
<CAPTION>
1999 1998
---- ----
Quarter Low High Dividend Low High Dividend
- ------- --- ---- -------- --- ---- --------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter............ $ 4.38 $ 5.88 $ .05 $ 7.63 $ 11.63 $ .05
2nd Quarter............ $ 4.38 $ 6.13 $ .05 $ 7.00 $ 9.75 $ .05
3rd Quarter............ $ 4.38 $ 8.50 $ .05 $ 4.06 $ 7.50 $ .05
4th Quarter............ $ 4.50 $ 7.38 $ .05 $ 4.50 $ 5.88 $ .05
</TABLE>
The Company issued 181,344 shares in conjunction with acquisitions
during the fiscal year ending December 31, 1998 that were not registered under
the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands, except per share data)
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Sales .............................. $17,843 $15,146 $17,017 $14,768 $12,844
Net Income ......................... $ 2,899 $ 2,328 $ 3,728 $ 3,082 $ 2,570
Net Income per share:
Basic ..................... $ .46 $ .37 $ .58 $ .48 $ .38
Diluted ................... $ .46 $ .36 $ .57 $ .47 $ .38
Dividends declared per share ....... $ .20 $ .20 $ .18 $ .16 $ .14
<CAPTION>
As of December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
---------------------------------------------------
BALANCE SHEET DATA:
Total Assets ....................... $18,204 $17,675 $17,404 $14,881 $14,770
Long-term liabilities .............. $ 112 $ 98 $ 2 $ 92 $ 168
</TABLE>
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The Company's acquisition of Lab Connections, Inc. and Microanalytics
Instrumentation Corp. in 1998 affects the comparability of the information in
the table above. For information concerning these acquisitions, see Note 11 to
our financial statements on page F-17.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K includes certain statements that are deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
in this Form 10-K that address activities, events, or developments that the
Company expects, believes, or anticipates will or may occur in the future, are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions, expected future developments, and
other factors it believes are appropriate in the circumstances. Such statements
are subject to a number of assumptions, risks, and uncertainties, many of which
are beyond the control of the Company. Investors are cautioned that any such
statements are not guarantees of future performance and that actual results or
developments may differ materially from those projected in the forward-looking
statements.
SUMMARY
On January 28, 1998 the Company acquired Microanalytics Instrumentation
Corp. of metro Austin, Texas and on December 7, 1998 the Company acquired Lab
Connections, Inc. of metro Boston, Massachusetts. The acquisitions were recorded
using the purchase method of accounting and, accordingly, their results of
operations have been included since the acquisition dates. Sales increased 18%
in 1999 compared to 1998, while net income increased 25% for the same period.
The Company's financial position as of December 31, 1999 reflects a decrease in
working capital to $8,035,000 compared to $8,931,000 at December 31, 1998. Basic
earnings per share were $0.46 in 1999, $0.37 in 1998, and $0.58 in 1997.
RESULTS OF OPERATIONS
Net sales were $17,843,000 in 1999, compared to $15,146,000 in 1998,
and $17,017,000 in 1997. The increase in sales from 1998 to 1999 was due
primarily to increases in the sales volume of the Company's permeation,
consulting and analytical service products, and the sales volume of Lab
Connections, a wholly-owned subsidiary of the Company. The decrease in sales
from 1997 to 1998 was primarily attributable to decreases in the sales volume of
the Company's permeation products, offset somewhat by an increase in the sales
volume of the Company's weighing products and the addition of Microanalytics in
January, 1998. In 1999, international sales increased 28% to $7,207,000 and
domestic sales increased 12% to $10,636,000. International and domestic sales
each decreased 11% in 1998 to $5,624,000, and $9,522,000, respectively.
Sales of the Company's permeation products increased in 1999 due to
expanded market penetration with lower priced, less precise multiple test
station products. The Company is positioning its permeation products to address
applications outside the traditional measurement of barrier packages and
materials. Products have been introduced to analyze high transmitting
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materials such as surgical gowns and diaper lining. Permeation products
accounted for approximately 63%, 60%, and 69% of the Company's consolidated
sales in 1999, 1998, and 1997, respectively.
Weighing product sales decreased in 1999 due to declining sales of the
VERICAP high-speed capsule weighing and sorting system. Weighing products
accounted for approximately 10%, 19% and 15% of the Company's consolidated sales
in 1999, 1998, and 1997, respectively.
Consulting and Analytical Services revenues increased in 1999 as
expertise in the analysis of materials expanded. Applications using the
Company's most advanced technologies are positioning the Company to address
other markets such as life sciences, medical and electronics. A significant
portion of the revenues from these products are from customers outside of the
Company's traditional measurements of barrier packages and materials.
Sales of headspace analyzer products remained steady in 1999 compared
to 1998. GC analyzer product sales increased in 1999 due to increased market
penetration. Sales of sample preparation products increased in 1999 due to the
acquisition of these products in late 1998.
International revenues increased 28% to $7,207,000, or 40% of total
revenue in 1999 compared to $5,624,000, or 37% of revenue in 1998, and
$6,314,000, or 37% of total revenue in 1997. The Company uses a network of
independent representatives to market and service its products in foreign
countries. A single currency called the euro was introduced in Europe on January
1, 1999. Although, MOCON sells its products in United States dollars, the
increased price transparency resulting from the use of a single currency may
affect the ability of its independent representatives to price products
differently in the various European markets. The use of a single European
currency may increase the foreign currency risks of such independent
representatives and affect the prices at which products are sold.
The gross profit margin was 65% in 1999 compared to 65% in 1998, and
67% in 1997. Over the past several years the Company's gross profit percentage
has been in a range of about 62 to 67 percent of sales. The 1997 gross profit
margin was at the high end of the historical range due to reduced warranty
expenses.
Selling, general and administrative ("SG&A") expenses were $6,479,000
in 1999 or 36% of revenue, compared to $5,747,000, or 38% of revenue in 1998,
and $5,480,000, or 32% of revenue in 1997. The increase in SG&A expenses from
1998 to 1999 is primarily due to higher commission expenses resulting from the
increase in sales and due to the amortization of intangible assets related to
the acquisition of Lab Connections. The increase in SG&A expenses from 1997 to
1998 resulted from the addition of regional sales management, the addition of
sales representatives, and an increase in travel and legal fees incurred to
protect confidential information of the Company. The Company may continue to
incur legal fees associated with this cause throughout 2000.
Research and development expenses amounted to $1,234,000, or 7% of
revenue in 1999, compared to $1,061,000, or 7% of revenue in 1998, and
$1,016,000, or 6% of revenue in 1997. For the foreseeable future, the Company
expects to allocate on an annual basis approximately 5 to 8 percent of sales to
research and development.
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Investment income decreased to approximately $419,000 in 1999 from
$470,000 in 1998. The decrease in 1999 is primarily due to lower average
investment balances during 1999. The decrease in investment income from 1997 to
1998 is the result of a one-time gain of approximately $235,000 realized in 1997
on the sale of equity securities, and to a lesser extent is due to a lower
average yield on investments in 1998.
The Company's provision for income taxes was 33.5% of income before
income taxes in 1999 and was 34% of pretax income in 1998 and 1997. Based on
current operating conditions and income tax laws, the Company expects the tax
rate for 2000 to be in the range of 32 to 34%.
Net income was $2,899,000 in 1999 compared to $2,328,000 in 1998, and
$3,728,000 in 1997. Basic net income per share was $.46 per share in 1999
compared to $.37 per share in 1998, and $.58 per share in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Total cash, temporary cash investments and marketable securities
increased $508,000 during 1999 to $9,883,000. The increase is primarily
attributable to the Company's net income. In addition to funding its operations,
the Company used its cash resources to pay dividends totaling $1,252,000 and to
repurchase shares of the Company's common stock during the period totaling
approximately $1,524,000. Depending upon market conditions and subject to
approval of the Board of Directors, the Company may continue to repurchase
shares of its Common Stock on the open market at prices not exceeding the market
price.
Cash flow from operations has historically been sufficient to meet
liquidity requirements, capital expenditures and research and development costs.
Cash flow from operations totaled $3,783,000, $3,222,000 and $2,686,000 in 1999,
1998 and 1997, respectively.
The Company has no long-term debt and has no material commitments for
capital expenditures as of December 31, 1999. The Company's plant and equipment
does not require any major expenditures to accommodate a significant increase in
operating demands. The Company anticipates that a combination of its existing
cash, temporary cash investments and marketable securities, plus an expected
continuation of cash flow from operations, will continue to be adequate to fund
operations, capital expenditures and dividend payments in the foreseeable
future.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC staff issued Staff Accounting Bulletin (SAB)
No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB No. 101 summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company will
implement SAB No. 101 in the first quarter of 2000 and is currently in the
process of evaluating the impact.
During 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (as amended by SFAS No. 137 with
respect to the effective date), which establishes new standards for recognizing
all derivatives as either assets or liabilities, and measuring those instruments
at fair value. The Company will be required to adopt the new standard beginning
with the first quarter of fiscal 2001. The Company is currently in the process
of evaluating the impact of this statement. Its adoption is not expected to
materially impact the Company's financial condition or results of operations.
12
<PAGE>
CERTAIN IMPORTANT FACTORS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution readers
that the following important factors, among others, in some cases have affected,
and in the future could affect, the Company's actual results and could cause its
actual results in 2000 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company.
CHANGING PRICES/EFFECT OF INFLATION. Inflation has not had a material
impact on the Company's operations. The prices of some components purchased by
the Company have increased in the past several years due in part to decreased
volume. Certain other material and labor costs have increased, but the Company
believes that such increases are approximately consistent with overall inflation
rates. The Company believes that competition based on price is a significant
factor affecting its customers' buying decisions. There is no assurance that the
Company can pass along cost increases in the form of price increases or sustain
profit margins that have been achieved in prior years.
GROWTH POTENTIAL. The analytical and measurement instrument markets in
which the Company operates have been somewhat flat in recent years. The Company
has identified a number of strategies it believes will allow it to grow its
business, including developing new products and technologies, developing new
applications for its technologies, acquiring complementary businesses or product
lines, and strengthening its sales force. No assurance can be given that the
Company will be able to successfully implement these strategies, or that these
strategies will result in growth of the Company's business.
ACQUISITION STRATEGY. One of the Company's growth strategies is to
supplement its internal growth with the acquisition of businesses and
technologies that complement or augment the Company's products. Certain
businesses recently acquired by the Company have produced net operating losses
or low levels of profitability. In addition, businesses that the Company may
seek to acquire in the future may also be marginally profitable or unprofitable.
In order for any acquired business to achieve the level of profitability desired
by the Company, the Company must successfully change operations of the acquired
companies and improve their market penetration. No assurance can be given that
the Company will be successful in this regard. In addition, promising
acquisitions are difficult to identify and complete for a number of reasons,
including competition among prospective buyers. There can be no assurance that
the Company will be able to complete future acquisitions. In order to finance
any such acquisitions, it may be necessary for the Company to raise additional
funds either through public or private financing. Any equity or debt financing,
if available at all, may be on terms that are not favorable to the Company and
may result in dilution to the Company's shareholders.
13
<PAGE>
TECHNOLOGICAL CHANGE, OBSOLESCENCE, AND THE DEVELOPMENT AND ACCEPTANCE
OF NEW PRODUCTS. The market for the Company's products and services is
characterized by rapid and significant technological change and evolving
industry standards. New product introductions responsive to these factors
require significant planning, design, development and testing at the
technological, product, and manufacturing process levels, and may render
existing products and technologies uncompetitive or obsolete. There can be no
assurance that the Company's products will not become uncompetitive or obsolete.
In addition, industry acceptance of new technologies developed by the Company
may be slow to develop due to, among other things, existing regulations or
standards written specifically for older technologies and general unfamiliarity
of users with new technologies.
DEPENDENCE ON CAPITAL SPENDING POLICIES AND GOVERNMENT FUNDING. The
Company's customers include pharmaceutical, food, and chemical companies,
laboratories, government agencies, and public and private research institutions.
The capital spending of these entities can have a significant effect on the
demand for the Company's products. Any decrease in capital spending by any of
the customer groups that account for a significant portion of the Company's
sales could have a material adverse effect on the Company's business and results
of operations.
INTERNATIONAL SALES. Sales outside the United States accounted for
approximately 40% of the Company's revenues in 1999 and for approximately 37% of
the Company's revenues in 1998 and 1997. The Company expects that international
sales will continue to account for a significant portion of the Company's
revenues in the future. Sales to customers in foreign countries are subject to a
number of risks, including the following: agreements may be difficult to enforce
and receivables difficult to collect through a foreign country's legal system;
foreign customers may have longer payment cycles; impose tariffs, or adopt other
restrictions on foreign trade; fluctuations in exchange rates may affect product
demand; export licenses, if required, may be difficult to obtain and the
protection of intellectual property in foreign countries may be more difficult
to enforce. There can be no assurance that any of these factors will not have a
material adverse effect on the Company's business and results of operations.
COMPETITION. The Company encounters and expects to continue to
encounter competition in the sale of its products. The Company believes that the
principal competitive factors affecting the market for its products include
product performance, price, reliability, and customer service. The Company's
competitors include large multinational corporations and their operating units.
Some of the Company's competitors have substantially greater financial,
marketing, and other resources than those of the Company. As a result, they may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale
of their products than the Company. In addition, competition could increase if
new companies enter the market or if existing competitors expand their product
lines or intensify efforts within existing product lines. There can be no
assurance that the Company's current products, products under development or
ability to discover new technologies will be sufficient to enable it to compete
effectively with its competitors.
PROTECTION, DEFENSE, AND USE OF INTELLECTUAL PROPERTY. The Company
holds patents relating to various aspects of its products and believes that
proprietary technical know-how is critical to many of its products. Proprietary
rights relating to the Company's products are protected from unauthorized use by
third parties only to the extent that they are covered by valid and enforceable
14
<PAGE>
patents or are maintained in confidence as trade secrets. There can be no
assurance that patents will issue from any pending or future patent applications
owned by or licensed to the Company or that the claims allowed under any issued
patents will be sufficiently broad to protect the Company's technology, and in
the absence of patent protection, the Company may be vulnerable to competitors
who attempt to copy the Company's products or gain access to its trade secrets
and know-how. Proceedings initiated by the Company to protect its proprietary
rights could result in substantial costs to the Company. There can be no
assurance that competitors of the Company will not initiate litigation to
challenge the validity of the Company's patents, or that they will not use their
resources to design comparable products that do not infringe the Company's
patents. There may also be pending or issued patents held by parties not
affiliated with the Company that relate to the Company's products or
technologies. The Company may need to acquire licenses to, or contest the
validity of, any such patents. There can be no assurance that any license
required under any such patent would be made available on acceptable terms or
that the Company would prevail in any such contest. The Company could incur
substantial costs in defending itself in suits brought against it or in suits in
which the Company may assert its patent rights against others. If the outcome of
any such litigation is unfavorable to the Company, the Company's business and
results of operations could be materially adversely affected. In addition, the
Company relies on trade secrets and proprietary know-how that it seeks to
protect, in part, by confidentiality agreements with its collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
FLUCTUATION OF STOCK PRICE. The Company believes factors such as
announcements of new products by the Company or its competitors, quarterly
fluctuations in the Company's financial results, customer contract awards,
developments in regulation and general conditions in the various markets where
the Company's products are sold have caused and are likely to continue to cause
the market price of the Company's common stock to fluctuate substantially. In
addition, instrumentation company stocks have experienced significant price and
volume fluctuations that often have been unrelated to the operating performance
of such companies. This market volatility may adversely affect the market price
of the Company's common stock.
YEAR 2000 IMPACT
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 not experienced significant difficulty with
regard to this situation and continues to monitor its business in regard to the
potential impact of the Year 2000 problem on its business.
INTERNAL SYSTEMS. The Company has not experienced significant Year 2000
issues and the costs incurred to update non-compliant systems were not material.
The Company continues to monitor its systems for Year 2000 problems and does not
expect issues that would 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.
15
<PAGE>
VENDORS. The Company is not aware of any critical suppliers and other
vendors that will not be able to provide the Company with products and services
through the change to 2000 or their inability to provide products to the Company
that are Year 2000 compliant. 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 of 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 or other industries into which the Company sells, could have
a material adverse impact on the Company's results of operations and
consolidated financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of the Company's marketable securities are at fixed
interest rates and therefore the fair value of these instruments is affected by
changes in market interest rates. However, almost all of the Company's
marketable securities mature within three years. Accordingly, the Company
believes that the market risk arising from its holding of these financial
instruments is minimal.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and Independent
Auditors' Report are included on pages F-1 to F-17 of this Form 10-K and are
incorporated herein by reference.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share data)
- --------------------------------------------------------------------------------
Quarter
1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
1999
Net Sales $ 4,454 $ 4,432 $ 4,465 $ 4,492
Gross Profit $ 2,935 $ 2,876 $ 2,909 $ 2,935
Net Income $ 694 $ 716 $ 753 $ 736
Net Income
Per Share
Basic $ 0.11 $ 0.11 $ 0.12 $ 0.12
Diluted $ 0.11 $ 0.11 $ 0.12 $ 0.12
1998
Net Sales $ 3,547 $ 3,796 $ 3,861 $ 3,942
Gross Profit $ 2,304 $ 2,434 $ 2,559 $ 2,568
Net Income $ 500 $ 397 $ 716 $ 715
Net Income
Per Share
Basic $ 0.08 $ 0.06 $ 0.11 $ 0.11
Diluted $ 0.08 $ 0.06 $ 0.11 $ 0.11
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 2000 Proxy Statement is incorporated herein by
reference. The information concerning executive officers of the Company is
included in this Report under Item 4a, "Executive Officers of the Company."
17
<PAGE>
(b) COMPLIANCE WITH SECTION 16 OF THE EXCHANGE ACT
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 2000 Proxy Statement is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Election of Directors -- Director
Compensation" and "Executive Compensation and Other Benefits" in the Company's
2000 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 2000 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 2000 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 and its
subsidiaries are included herein:
Page
Independent Auditors' Report....................................... F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998....... F-2
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997................................... F-3
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended December 31, 1999, 1998 and 1997........ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................... F-5
Notes to Consolidated Financial Statements......................... F-6
18
<PAGE>
2. FINANCIAL STATEMENT SCHEDULES:
The following financial statement schedules are included herein and
should be read in conjunction with the financial statements referred to above:
Independent Auditors' Report on Financial Statement Schedule
Financial Statement Schedule:
II - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
MOCON, Inc.:
Under date of February 18, 2000, we reported on the consolidated balance sheets
of MOCON, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999, as contained in this annual report on Form 10-K
for the year 1999. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule as included in Item 14(a)2. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth herein.
/s/ KPMG LLP
Minneapolis, Minnesota
February 18, 2000
19
<PAGE>
SCHEDULE II
MOCON, INC. AND SUBSIDIARIES
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, 1999
allowance for doubtful accounts $159,000 12,000 5,000 166,000
Year ended December 31, 1998
allowance for doubtful accounts $163,000 11,000 15,000 159,000
Year ended December 31, 1997
allowance for doubtful accounts $155,000 9,000 1,000 163,000
(1) Bad debts written off.
Year ended December 31, 1999
allowance for inventory obsolescence $185,000 66,000 68,000 183,000
Year ended December 31, 1998
allowance for inventory obsolescence $188,000 72,000 75,000 185,000
Year ended December 31, 1997
allowance for inventory obsolescence $230,000 106,000 148,000 188,000
(1) Inventory written off.
Year ended December 31, 1999
allowance for product warranties $251,000 336,000 303,000 284,000
Year ended December 31, 1998
allowance for product warranties $199,000 315,000 263,000 251,000
Year ended December 31, 1997
allowance for product warranties $190,000 260,000 251,000 199,000
(1) Expenses written off.
</TABLE>
20
<PAGE>
3. EXHIBITS
The exhibits to this Report are listed in the Exhibit Index.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Company as of March 24, 2000, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to MOCON, Inc., 7500
Boone Avenue North, Minneapolis, Minnesota 55428; Attn.: Shareholder
Information.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual Report on
Form 10-K pursuant to Item 14(c):
A. 1990 Non-Employee Director Stock Option Plan (incorporated by
reference to the Company's Registration Statement on Form S-8
(File No. 33-42255)).
B. 1992 Stock Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-8 (File No.
33-49752)).
C. 1998 Stock Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-8 (File No.
33-58789)).
D. Compensation Committee resolutions setting forth the Incentive
Compensation Plan (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999 (File No. 0-9273)).
E. Paired Profit Sharing Plan effective July 1, 1996
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File
No. 0-9273)).
F. Confidentiality Agreement, dated June 3, 1983, between the
Company and William N. Mayer (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988 (File No. 0-9273)).
(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, 1999.
(c) EXHIBITS
The exhibits to this Report are listed in the Exhibit Index.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14, section (a) 2 above for the financial statement schedules
filed herewith.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 23, 2000 MOCON, INC.
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 by the following persons on behalf of the
Registrant and in the capacities and on March 23, 2000.
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/ Richard A. Proulx
------------------------------------------------
Richard A. Proulx, Director
------------------------------------------------
Paul L. Sjoquist, Director
/s/ Dean B. Chenoweth
------------------------------------------------
Dean B. Chenoweth, Director
/s/ J. Leonard Frame
------------------------------------------------
J. Leonard Frame, Director
/s/ Tom C. Thomas
------------------------------------------------
Tom C. Thomas, Director
22
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
TABLE OF CONTENTS
PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity
and Comprehensive Income F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
MOCON, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of MOCON, Inc. (the
Company) and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1999. 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 MOCON, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Minneapolis, Minnesota
February 18, 2000
F-1
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 1,275,838 1,352,416
Marketable securities, current 4,347,724 4,959,151
Trade accounts receivable, less allowance for doubtful
accounts of $166,000 in 1999 and $159,000 in 1998 2,497,850 2,124,060
Other receivables 139,481 127,104
Inventories 2,104,588 2,322,187
Prepaid expenses 161,587 235,658
Deferred income taxes 345,000 282,000
------------ ------------
Total current assets 10,872,068 11,402,576
------------ ------------
Marketable securities, noncurrent 4,259,071 3,063,100
Property and equipment 3,388,294 3,183,576
Less accumulated depreciation and amortization 2,205,801 2,036,127
------------ ------------
1,182,493 1,147,449
------------ ------------
Other assets:
Goodwill, net of accumulated amortization of $105,181 in 1999 and $17,023 in 1998 964,897 1,070,078
Technology rights and other intangibles, net of accumulated amortization of $60,000
in 1999 and $0 in 1998 540,000 600,000
Other 385,347 392,032
------------ ------------
Total other assets 1,890,244 2,062,110
------------ ------------
$ 18,203,876 17,675,235
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 853,030 801,536
Accrued compensation and vacation 675,339 440,696
Other accrued expenses 314,989 278,140
Accrued product warranties 283,727 250,858
Accrued income taxes 404,133 382,683
Dividends payable 305,680 317,253
------------ ------------
Total current liabilities 2,836,898 2,471,166
------------ ------------
Deferred income taxes 112,000 98,000
------------ ------------
Total liabilities 2,948,898 2,569,166
------------ ------------
Stockholders' equity:
Capital stock--undesignated--authorized 3,000,000 shares -- --
Common stock--$.10 par value; authorized 22,000,000 shares; issued and outstanding
6,073,097 shares in 1999 and 6,287,960 shares in 1998 607,310 628,796
Capital in excess of par value -- 934,031
Retained earnings 14,647,668 13,543,242
------------ ------------
Total stockholders' equity 15,254,978 15,106,069
Commitments and contingencies (note 5)
------------ ------------
$ 18,203,876 17,675,235
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales
Products $ 15,751,913 13,789,561 15,786,865
Consulting services 2,090,694 1,356,807 1,230,113
------------ ------------ ------------
Total sales 17,842,607 15,146,368 17,016,978
------------ ------------ ------------
Cost of sales
Products 5,218,887 4,639,320 4,895,634
Consulting services 970,041 642,735 680,332
------------ ------------ ------------
Total cost of sales 6,188,928 5,282,055 5,575,966
------------ ------------ ------------
Gross profit 11,653,679 9,864,313 11,441,012
------------ ------------ ------------
Selling, general, and administrative expenses 6,479,122 5,747,232 5,479,722
Research and development expenses 1,234,204 1,060,883 1,015,975
Investment income (418,814) (470,411) (711,713)
------------ ------------ ------------
7,294,512 6,337,704 5,783,984
------------ ------------ ------------
Income before income taxes 4,359,167 3,526,609 5,657,028
Income taxes 1,460,000 1,199,000 1,929,000
------------ ------------ ------------
Net income $ 2,899,167 2,327,609 3,728,028
============ ============ ============
Net income per common share:
Basic $ .46 .37 .58
============ ============ ============
Diluted $ .46 .36 .57
============ ============ ============
Weighted average shares outstanding:
Basic 6,250,254 6,358,963 6,418,731
============ ============ ============
Diluted 6,268,358 6,397,847 6,487,806
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
COMMON STOCK OTHER
------------------------- CAPITAL IN COMPREHENSIVE
NUMBER EXCESS OF RETAINED INCOME
OF SHARES AMOUNT PAR VALUE EARNINGS (LOSS) TOTAL
----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 6,410,964 $ 641,096 5,457 11,752,113 195,000 12,593,666
Stock options exercised 45,994 4,599 286,865 -- -- 291,464
Purchase and retirement
of common stock (21,618) (2,161) (225,069) (1,946) -- (229,176)
Dividends declared
($.18 per share) -- -- -- (1,156,482) -- (1,156,482)
Net unrealized loss on non-
current marketable equity
securities, net of income taxes -- -- -- -- (195,000) (195,000)
Net income -- -- -- 3,728,028 -- 3,728,028
-----------
Total comprehensive income 3,533,028
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 6,435,340 643,534 67,253 14,321,713 -- 15,032,500
Stock options exercised 34,645 3,465 91,289 71,000 -- 165,754
Purchase and retirement
of common stock (363,369) (36,337) (225,772) (1,907,613) -- (2,169,722)
Dividends declared
($.20 per share) -- -- -- (1,269,467) -- (1,269,467)
Issuance of shares in conjunction
with the acquisitions of
Microanalytics Instrumentation
Corp. and Lab Connections, Inc. 181,344 18,134 1,001,261 -- -- 1,019,395
Net income and comprehensive
income -- -- -- 2,327,609 -- 2,327,609
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 6,287,960 628,796 934,031 13,543,242 -- 15,106,069
Stock options exercised 48,300 4,830 217,926 -- -- 222,756
Purchase and retirement
of common stock (263,163) (26,316) (1,151,957) (548,569) -- (1,726,842)
Dividends declared
($.20 per share) -- -- -- (1,246,172) -- (1,246,172)
Net income and comprehensive
income -- -- -- 2,899,167 -- 2,899,167
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 6,073,097 $ 607,310 -- 14,647,668 -- 15,254,978
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,899,167 2,327,609 3,728,028
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (gain) on disposition of long-term assets 38,698 19,401 (145,758)
Depreciation and amortization 611,596 378,887 302,304
Deferred income taxes (49,000) (7,000) 60,000
Changes in operating assets and liabilities, net of impact of acquisitions:
Trade accounts receivable (373,790) 1,094,145 (1,288,496)
Other receivables (12,377) 48,947 (57,582)
Inventories 217,599 (362,520) (42,450)
Prepaid expenses 74,071 (43,628) 21,347
Accounts payable 51,494 125,435 (3,251)
Accrued compensation and vacation 234,643 (194,730) 131,330
Other accrued expenses 36,849 (149,525) (81,141)
Accrued product warranties 32,869 36,466 8,519
Accrued income taxes 21,450 (51,740) 52,948
----------- ----------- -----------
Net cash provided by operating activities 3,783,269 3,221,747 2,685,798
----------- ----------- -----------
Cash flows from investing activities:
Purchases of marketable securities (6,379,304) (2,744,874) (8,117,262)
Proceeds from sales of marketable securities at maturity 5,794,760 4,883,500 5,695,408
Cash paid in acquisitions, net of cash acquired -- (1,032,642) --
Proceeds from sale of equity securities -- -- 454,985
Purchases of property and equipment (475,250) (401,085) (249,543)
Proceeds from sale of property and equipment 18,308 -- --
Purchases of patents and trademarks (50,169) (53,179) (24,037)
Other (6,361) (6,273) (6,302)
----------- ----------- -----------
Net cash (used in) provided by investing activities (1,098,016) 645,447 (2,246,751)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options 14,630 17,006 63,807
Purchase and retirement of common stock (1,524,021) (2,022,475) (1,519)
Dividends paid (1,252,440) (1,272,323) (1,091,312)
----------- ----------- -----------
Net cash used in financing activities (2,761,831) (3,277,792) (1,029,024)
----------- ----------- -----------
Net (decrease) increase in cash and temporary cash investments (76,578) 589,402 (589,977)
Cash and temporary cash investments:
Beginning of year 1,352,416 763,014 1,352,991
----------- ----------- -----------
End of year $ 1,275,838 1,352,416 763,014
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes $ 1,487,550 1,258,363 1,816,052
=========== =========== ===========
Supplemental schedule of noncash investing and financing activities:
Noncash purchase and retirement of common stock $ 202,821 147,247 227,657
Noncash exercise of stock options 208,126 148,748 227,657
Dividends accrued 305,680 317,253 321,610
Issuance of common stock for acquisitions -- 1,019,395 --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MOCON, Inc. (the Company) operates in a single industry segment: the
development, manufacturing, and marketing of measurement, analytical,
monitoring, sample preparation, and consulting products used to detect,
measure, and analyze gases and chemical compounds for customers in the
barrier packaging, food, and pharmaceutical industries throughout the
world. The following is a summary of the significant accounting policies
used in the preparation of the Company's consolidated financial
statements.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
(b) STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
Temporary cash investments consist of short-term investments which
are readily convertible to cash.
(c) MARKETABLE SECURITIES
Marketable securities at December 31, 1999 consist of United States
government obligations, municipal bonds, and certificates of
deposit. The Company classifies its debt and marketable equity
securities in one of three categories: trading, available-for-sale,
or held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold until maturity. All other
securities not included in trading or held-to-maturity are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on available-for-sale securities
are excluded from income and are reported as a separate component of
stockholders' equity until realized.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary is charged to income resulting in the establishment of a
new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of
the related held-to-maturity security as an adjustment to yield.
Dividend and interest income are recognized when earned. Realized
gains and losses for securities classified as available-for-sale and
held-to-maturity are included in income and are derived using the
specific identification method for determining the cost of
securities sold.
(Continued)
F-6
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(d) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
(e) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and
amortization are computed using the straight-line method. When
assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in income for the period. The
cost of maintenance and repairs is charged to income as incurred and
significant renewals and betterments are capitalized.
(f) INTANGIBLE ASSETS
Intangible assets are carried at cost less accumulated amortization
and consist of goodwill, technology rights, patents, and trademarks.
Goodwill represents the excess of the purchase price over the fair
value of assets acquired. Costs incurred in connection with
applications for new patents are deferred until a final
determination, with respect to the application, is made by
appropriate regulatory agencies. Costs of patents abandoned are
charged to income in the period of abandonment. Goodwill and
technology rights are amortized on a straight-line basis over 7 to
10 years. Patent costs are amortized over the lesser of 17 years or
their estimated useful lives using the straight-line method.
Trademarks are amortized over five years.
(g) INCOME TAXES
The Company uses the asset and liability method for computing its
deferred taxes. Under the asset and liability method, deferred taxes
are based on the difference between the financial statement and tax
basis of assets and liabilities and the enacted tax rates that will
be in effect when these differences reverse. Deferred tax expense
represents the change in deferred tax assets and liabilities during
the year.
(h) USE OF ESTIMATES
The preparation of financial statements in conformity with 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.
(Continued)
F-7
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(i) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(j) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are recorded in its consolidated
balance sheet. The carrying amount for cash and temporary cash
investments, accounts receivable, accounts payable, and accrued
liabilities approximates fair value due to the immediate or
short-term maturity of these financial instruments. The fair values
of investments in marketable securities are based on quoted market
prices and are summarized in note 2.
(k) REVENUE RECOGNITION
Revenue is recognized upon shipment of product or upon completion of
services.
(l) ADVERTISING COSTS
The Company incurs advertising costs associated with trade shows,
print advertising, and brochures. Such costs are charged to expense
as incurred. Advertising expense was $192,000, $219,000, and
$219,000, in 1999, 1998, and 1997, respectively.
(m) NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income
by the weighted average of common shares outstanding during the
year. Diluted net income per share is computed by dividing net
income by the weighted average of common and dilutive potential
common shares outstanding during the year.
(n) STOCK-BASED EMPLOYEE COMPENSATION
The Company uses the intrinsic-value method for employee stock-based
compensation pursuant to APB Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES. Under the guidelines of Opinion 25,
compensation cost for stock-based employee compensation plans is
recognized based on the difference, if any, between the quoted
market price of the stock on the date of grant and the amount an
employee must pay to acquire the stock. The Company adopted the
disclosure provisions for employee stock-based compensation and the
fair-value method for nonemployee stock-based compensation of
Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION.
(Continued)
F-8
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(o) RECLASSIFICATIONS
Certain 1998 and 1997 amounts have been reclassified to conform to
the 1999 presentation.
(p) NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC staff issued Staff Accounting Bulletin
(SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB No.
101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in
financial statements. The Company will implement SAB No. 101 in the
first quarter of 2000 and is currently in the process of evaluating
the impact.
During 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (as
amended by SFAS No. 137 with respect to the effective date), which
establishes new standards for recognizing all derivatives as either
assets or liabilities, and measuring those instruments at fair
value. The Company will be required to adopt the new standard
beginning with the first quarter of fiscal 2001. The Company is
currently in the process of evaluating the impact of this statement.
Its adoption is not expected to materially impact the Company's
financial condition or results of operations.
(2) MARKETABLE SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for available-for-sale and held-to-maturity
securities by major security type at December 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
Municipal bonds $ 635,000 -- -- 635,000
----------- ----------- ----------- -----------
$ 635,000 -- -- 635,000
=========== =========== =========== ===========
Held-to-maturity:
Municipal bonds $ 7,002,798 4,509 (28,318) 6,978,989
Other securities 968,997 27,004 (7,509) 988,492
----------- ----------- ----------- -----------
$ 7,971,795 31,513 (35,827) 7,967,481
=========== =========== =========== ===========
</TABLE>
(Continued)
F-9
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
Municipal bonds $ 585,000 -- -- 585,000
----------- ----------- ----------- -----------
$ 585,000 -- -- 585,000
=========== =========== =========== ===========
Held-to-maturity:
Municipal bonds $ 6,498,382 38,014 (3,464) 6,532,932
Other securities 938,869 1,424 (264) 940,029
----------- ----------- ----------- -----------
$ 7,437,251 39,438 (3,728) 7,472,961
=========== =========== =========== ===========
</TABLE>
Other securities consist primarily of U.S. government obligations and
marketable certificates of deposit.
Maturities of investment securities classified as available-for-sale and
held-to-maturity were as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Amortized Amortized
cost Fair value cost Fair value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
Municipal bonds $ 635,000 635,000 585,000 585,000
----------- ----------- ----------- -----------
$ 635,000 635,000 585,000 585,000
=========== =========== =========== ===========
Held-to-maturity:
Due within one year $ 3,712,724 3,720,183 4,374,151 4,393,997
Due after one through five years 4,259,071 4,247,298 3,063,100 3,078,964
----------- ----------- ----------- -----------
$ 7,971,795 7,967,481 7,437,251 7,472,961
=========== =========== =========== ===========
</TABLE>
(Continued)
F-10
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(3) INVENTORIES
The major components of inventories are as follows:
1999 1998
----------- -----------
Finished products $ 240,784 330,812
Work-in-process 808,267 836,043
Raw materials 1,055,537 1,155,332
----------- -----------
$ 2,104,588 2,322,187
=========== ===========
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED
1999 1998 USEFUL LIVES
----------- ----------- -------------
Machinery and equipment $ 2,381,625 2,289,632 3 to 10 years
Office equipment 516,660 519,511 2 to 15 years
Leasehold improvements 377,352 286,021 1 to 5 years
Vehicles 112,657 88,412 3 to 5 years
----------- -----------
$ 3,388,294 3,183,576
=========== ===========
Depreciation and amortization of property and equipment charged to
earnings was $418,083, $336,886, and $277,836, for the years ended
December 31, 1999, 1998, and 1997, respectively.
(5) LEASES
The Company leases its facilities and certain equipment pursuant to
operating leases. The facility leases expire at various times through June
2010, and require the Company to pay operating costs, including real
estate taxes.
Rental expense, including charges for operating costs, was as follows:
1999 1998 1997
----------- ----------- -----------
$ 389,143 329,123 308,855
=========== =========== ===========
(Continued)
F-11
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The following is a schedule of future minimum lease payments, excluding
charges for operating costs, for operating leases as of December 31, 1999:
YEAR ENDING
DECEMBER 31:
--------------
2000 $ 291,139
2001 297,040
2002 286,200
2003 290,901
2004 276,402
Later years 1,445,745
-----------
$ 2,887,427
===========
(6) INCOME TAXES
The provision for income taxes consists of the following:
1999 1998 1997
----------- ----------- -----------
Current tax expense:
Federal $ 1,311,000 1,021,000 1,636,000
State 198,000 185,000 233,000
----------- ----------- -----------
Total current expense 1,509,000 1,206,000 1,869,000
Deferred (49,000) (7,000) 60,000
----------- ----------- -----------
Provision for income taxes $ 1,460,000 1,199,000 1,929,000
=========== =========== ===========
The effective income tax rate varies from the federal statutory tax rate
for the following reasons:
PERCENTAGE OF PRETAX INCOME
FOR YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
---- ---- ----
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 2.9 3.5 2.7
Tax-exempt earnings of FSC (2.4) (2.7) (2.0)
Tax-exempt investment earnings (2.3) (3.5) (2.1)
Other 1.3 2.7 1.5
---- ---- ----
Effective income tax rate 33.5% 34.0% 34.1%
==== ==== ====
(Continued)
F-12
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The tax effect of significant temporary differences representing deferred
tax assets and liabilities are as follows:
1999 1998
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts not
currently deductible $ 60,000 57,000
Inventory costs not currently deductible 35,000 35,000
Inventory reserves 88,000 88,000
Warranty reserves 108,000 96,000
Other accruals 54,000 47,000
Net operating loss and tax credit carryforwards 76,000 76,000
Excess of book over tax depreciation 6,000 1,000
---------- ----------
Total deferred tax assets 427,000 400,000
---------- ----------
Deferred tax liabilities:
Technology rights and other intangibles (194,000) (216,000)
---------- ----------
Total deferred tax liabilities (194,000) (216,000)
---------- ----------
Net deferred tax asset $ 233,000 184,000
========== ==========
The Company has determined that establishing a valuation allowance for the
deferred tax assets is not required since it is more likely than not that
the deferred tax assets will be realized through future taxable income.
Net operating loss and tax credit carryforwards aggregated $145,000 and
$25,000, respectively, at December 31, 1999. These carryforwards are
subject to certain IRS usage limitations and begin to expire in 2012.
(7) STOCKHOLDERS' EQUITY
On May 19, 1998, the number of authorized shares of capital stock was
increased from 10,000,000 shares to 25,000,000 shares, consisting of
22,000,000 shares of common stock with a $.10 par value and 3,000,000
shares undesignated as to series.
As of December 31, 1999, the Company has reserved 351,883 shares of common
stock for options that are still available for grant under the Company's
stock option plans, and 228,893 shares for options that have been granted
but have not yet been exercised.
(Continued)
F-13
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
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 and 1998 Plans to persons owning more than 10% of
the Company's stock, in which case the option price is 110% of the market
value, and nonqualified options granted under the 1992 and 1998 Plans,
which may be granted at option prices no less than 25% of the market
value. Exercise periods are generally for five to ten years. Certain of
the plans allow for the granting of nonqualified stock options. Upon the
exercise of these nonqualified options, the Company may realize a
compensation deduction allowable for income tax purposes. The after-tax
effect of these tax deductions is included in the accompanying
consolidated financial statements as an addition to capital in excess of
par value.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation cost
has been recognized with respect to the Company's stock option plans. Had
compensation cost for these plans been determined based on the fair value
methodology prescribed by SFAS 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below:
1999 1998 1997
----------- ----------- -----------
Net earnings--as reported $ 2,899,167 2,327,609 3,728,028
Net earnings--pro forma 2,818,972 2,202,542 3,623,892
Earnings per share--as reported:
Basic .46 .37 .58
Diluted .46 .36 .57
Earnings per share--pro forma:
Basic .45 .35 .56
Diluted .45 .34 .56
The pro forma amounts may not be representative of the effects on reported
net earnings for future years. The fair value of each option grant is
estimated on the date of grant using the binomial option-pricing model
with the following weighted-average assumptions used for grants in 1999,
1998, and 1997:
1999 1998 1997
----------- ----------- -----------
Dividend yield 2.50% 2.25% 2.25%
Expected volatility 44% 36% 31%
Risk-free interest rate 5.5% 5.1% 6.2%
Expected lives 7.0 years 7.6 years 9.0 years
(Continued)
F-14
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
Information regarding the Company's stock option plans for 1999, 1998, and
1997 is as follows:
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
--------- ---------
Options outstanding, December 31, 1996 266,903 $ 6.12
Granted 31,036 10.58
Exercised (45,994) 6.29
Canceled or expired (53,172) 8.03
--------- ---------
Options outstanding, December 31, 1997 198,773 6.26
Granted 145,460 6.33
Exercised (34,645) 4.78
Canceled or expired (7,300) 8.16
--------- ---------
Options outstanding, December 31, 1998 302,288 6.42
Granted 5,000 5.69
Exercised (48,300) 4.61
Canceled or expired (30,095) 6.09
--------- ---------
Options outstanding, December 31, 1999 228,893 $ 6.83
========= =========
1999 1998 1997
--------- --------- ---------
Weighted-average fair value of options,
granted during the year $ 2.23 2.38 3.80
Weighted-average exercise price of
options, exercisable at end of year 6.77 6.17 5.99
Options exercisable 143,221 147,809 119,442
Subsequent to year end, the Company issued options to purchase 48,350
shares of its common stock at $5.63 to officers and employees of the
Company.
(Continued)
F-15
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(8) INCOME PER COMMON SHARE
The following table presents a reconciliation of the denominators used in
the computation of net income per common share--basic and net income per
common share--diluted for the years ended December 31, 1999, 1998, and
1997:
1999 1998 1997
---------- ---------- ----------
Weighted shares of common stock
outstanding--basic 6,250,254 6,358,963 6,418,731
Weighted shares of common stock
assumed upon exercise of stock options 18,104 38,884 69,075
---------- ---------- ----------
Weighted shares of common stock
outstanding--diluted 6,268,358 6,397,847 6,487,806
========== ========== ==========
The following represents securities outstanding at December 31, 1999,
1998, and 1997, which have been excluded from the net income per common
share calculations because the effect on net income per common share would
not have been dilutive:
1999 1998 1997
---------- ---------- ----------
Options 107,335 166,110 --
(9) SALES
Export sales were $7,207,497, $5,624,038, and $6,314,227, in 1999, 1998,
and 1997, respectively. Of the export sales, $3,255,242, $2,065,199, and
$2,450,013 in 1999, 1998 and 1997, respectively, were to customers in
Western Europe. Sales to customers in Japan were $1,697,559, $1,379,742,
and $1,651,983, for 1999, 1998, and 1997, respectively. The Company's
products are marketed outside of North America through various independent
representatives. One independent representative accounted for
approximately 17%, 14%, and 16%, of sales in 1999, 1998, and 1997,
respectively. Another independent representative accounted for
approximately 7%, 8%, and 11%, of sales in 1999, 1998, and 1997,
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 1999, 1998, and 1997 were $40,626, $31,122, and $29,572,
respectively.
(Continued)
F-16
<PAGE>
MOCON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(11) ACQUISITION
On December 7, 1998, the Company acquired Lab Connections, Inc.
(LabCon), a manufacturer of instruments used to automate sample
preparation from liquid chromatography for analysis by spectroscopy, of
Marlborough, Massachusetts. Under the terms of the agreement, the
Company exchanged $1,112,882 and 174,994 shares of the Company's common
stock with a market value of approximately $951,530 for all of the
capital stock of LabCon. The acquisition was recorded using the purchase
method of accounting and, accordingly, the acquired operations of LabCon
have been included in the results of operations since the date of
acquisition. The purchase price has been allocated to the net assets
acquired based on estimated fair market values at the date of
acquisition. The cost of acquired intangible assets will be amortized on
a straight-line basis over 7 to 10 years. In addition, the Company
acquired Microanalytics Instrumentation Corp. (Micro) on January 28,
1998 for aggregate consideration of $92,875 payable in common stock and
cash. The estimated fair values of assets and liabilities acquired in
these acquisitions are summarized as follows:
TOTAL
-----------
Cash $ 105,250
Net current assets 324,352
Property and equipment 126,584
Goodwill 1,087,101
Deferred tax assets 125,000
Technology rights 600,000
Other assets 5,000
Deferred tax liabilities (216,000)
-----------
$ 2,157,287
===========
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisition of LabCon and Micro had occurred as of
the beginning of fiscal 1998 and 1997. Pro forma adjustments consist
primarily of realization of tax benefits resulting from operating losses
and goodwill and other intangible amortization:
1998 1997
------------ ----------
Net sales $ 16,558,277 18,961,648
Net income 2,001,721 3,675,813
Net income per common share:
Basic .31 .56
Diluted .31 .55
F-17
<PAGE>
MOCON, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
Item Method of
No. Item Filing
- ------ --------------------------------------------------------- ---------
3.1 Restated Articles of Incorporation of the Company (1)
3.2 Amendment to Restated Articles of Incorporation of the
Company, effective May 27, 1987 (2)
3.3 Amendment to Restated Articles of Incorporation of the
Company, effective June 28, 1991 (3)
3.4 Amendment to Restated Articles of Incorporation of the
Company, effective May 21, 1998 (11)
3.5 Amendment to Restated Articles of Incorporation of the
Company, effective May 26, 1999 (13)
3.6 Third Restated Bylaws of the Company (4)
10.1 Office/Warehouse Lease, dated July 29, 1994 (5)
10.2 Office/Warehouse Lease Extension, dated June 6, 1997 (8)
10.3 Office/Warehouse Lease Extension, dated November 17, 1999 (13)
10.4 1990 Non-Employee Director Stock Option Plan (3)
10.5 1992 Stock Option Plan (6)
10.6 1998 Stock Option Plan (9)
10.7 Compensation Committee resolutions setting forth the
Incentive Compensation Plan (12)
10.8 Paired Profit Sharing Plan effective July 1, 1996 (7)
10.9 Confidentiality Agreement, dated June 3, 1983, between the
Company and William N. Mayer (4)
<PAGE>
10.10 Agency and Service Agreement, dated January 1, 1987,
between the Company and MoCon FSC, Inc. (4)
10.11 Foreign Sales Corporation Suppliers Agreement, dated March
28, 1985, between the Company and MoCon FSC, Inc. (4)
10.12 Agreement and Plan of Merger, dated November 20, 1998, by
and among Modern Controls, Inc., MOCON Acquisition
Corporation and Lab Connections, Inc. (10)
21.1 Subsidiaries of the Company (13)
23.1 Independent Auditors' Consent (13)
27.1 Financial Data Schedule for the year ended December 31,
1999 (13)
- -----------------------
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1984 (File No. 0-9273).
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1987 (File No. 0-9273).
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 33-42255).
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1988 (File No. 0-9273).
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-9273).
(6) Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 33-49752).
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-9273).
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (File No. 0-9273).
(9) Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 33-58789).
(10) Incorporated by reference to the Company's Report on Form 8-K filed on
December 21, 1998 (File No. 0-9273)
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 (File No. 0-9273).
<PAGE>
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 (File No. 0-9273).
(13) Filed herewith.
EXHIBIT 3.5
AMENDMENT TO RESTATED ARTICLES OF INCORPORATION
[SEAL] MINNESOTA SECRETARY OF STATE
AMENDMENT OF ARTICLES OF INCORPORATION
BEFORE COMPLETING THIS FORM, PLEASE READ INSTRUCTIONS LISTED BELOW.
CORPORATE NAME: (List the name of the company prior to any desired name change)
Modern Controls, Inc.
- --------------------------------------------------------------------------------
This amendment is effective on the day it is filed with the Secretary of State,
unless you indicate another date, no later than 30 days after filing with the
Secretary of State. ____________________________
The following amendment(s) of articles regulating the above corporation were
adopted: (Insert full text of newly amended article(s) indicating which
article(s) is (are) being amended or added.) If the full text of the amendment
will not fit in the space provided, attach additional numbered pages. (Total
number of pages including this form _1_
ARTICLE ___I___
RESOLVED, that Article I of the Company's Articles of Incorporation is amended
in its entirety to read as follows:
The name of the corporation is MOCON, Inc.
This amendment has been approved pursuant to MINNESOTA STATUTES CHAPTER 302A OR
317A. I certify that I am authorized to execute this amendment and I further
certify that I understand that by signing this amendment, I am subject to the
penalties of perjury as set forth in section 609.48 as if I had signed this
amendment under oath.
/s/ Ronald A. Meyer
--------------------------------------------
Ronald A. Meyer, Vice President Finance and
Administration
(Signature of Authorized Person)
EXHIBIT 10.3
SECOND LEASE MODIFICATION AND EXTENSION AGREEMENT
THIS LEASE MODIFICATION AND EXTENSION AGREEMENT ("Agreement") is made
and entered into this 17th day of November, 1999, between Boone Associates LLC,
a Minnesota corporation (hereinafter called "Lessor"), and MOCON, Inc., a
Minnesota corporation (hereinafter called "Tenant").
WITNESSETH:
WHEREAS, Lessor and Tenant entered into a lease agreement (the "Lease
Agreement") dated July 29, 1994, wherein Lessor leased to Tenant the premises
addressed as 7500 Boone Avenue North, Brooklyn Park, Minnesota ("Demised
Premises") consisting of approximately 47,208 square feet of area; and
WHEREAS, the lease term ("Lease Term") as defined within the Lease
Agreement is to expire on June 30, 2005; and
WHEREAS, Lessor and Tenant have agreed to extend the Lease Term for an
additional 60 months ending June 30, 2010, upon terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual promises of the parties
hereto and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Lease Agreement shall be amended as follows:
1. RECITALS. The above recitals shall constitute an integral part of this
Agreement.
2. CAPITALIZED TERMS. Capitalized terms set forth in this Agreement shall
have the same meaning as in the Lease Agreement, unless specifically
modified and amended herein.
3. LESSOR. The current owning entity is Boone Associates LLC.
4. LEASE TERM. The Lease Term shall be amended to provide for a sixty (60)
month extension, commencing July 1, 2005, and expiring June 30, 2010
("Extended Lease Term"), unless sooner terminated as provided within
the Lease Agreement.
5. BASE RENT. The Base Rent provision of the Lease Agreement shall be
amended as follows:
----------------------------------------------------------------------
MONTHS PSF RATE ANNUALLY MONTHLY
----------------------------------------------------------------------
7/1/05 - 6/30/08 $5.50 $259,644.00 $21,637.00
----------------------------------------------------------------------
7/1/08 - 6/30/10 $5.75 $271,446.00 $22,620.50
----------------------------------------------------------------------
Prior to the Extended Lease Term, Tenant shall pay base Rent as
provided in the Lease Agreement.
<PAGE>
6. OTHER PERIODIC PAYMENTS. Tenant's pro rata share of property taxes and
operating expenses will be increased from 35% to 38%. Prior to the
Extended Lease Term, Tenant shall pay property taxes and operating as
provided in the Lease Agreement.
7. SURVIVAL OF OTHER TERMS AND CONDITIONS. Except as modified herein, all
other terms and conditions of the Lease Agreement shall remain in full
force and effect and nothing herein shall be construed to relieve
either Lessor or Tenant of any obligations as set forth therein.
8. ENTIRE AGREEMENT. The Lease Agreement, this Agreement, and the Exhibits
attached thereto constitute the entire understanding of the parties
hereto with respect to the transaction and contemplated thereby, and
supersede all prior agreements and understandings between the parties
with respect to the subject matter. No representations, warranties,
undertakings or promises, whether oral, implied, written or otherwise,
have been made by either party hereto the other unless expressly stated
in the above-referenced documents or unless mutually agreed to in
writing between the parties hereto after the date hereof, and neither
party has relied on any verbal representations, agreements, or
understandings not expressly set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
LESSOR: Boone Associates LLC TENANT: MOCON, Inc.
By: /s/ Stewart R. Stender By: /s/ Ronald A. Meyer
------------------------------------ -----------------------------------
Stewart R. Stender Ronald A. Meyer
Its: President Its: Chief Financial Officer
- --------------------------------------------------------------------------------
CONSULT YOUR ATTORNEY: This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the legal
sufficiency, legal effect, or tax consequence of this document or the
transaction to which it relates. These are questions for your attorney and
financial advisors.
- --------------------------------------------------------------------------------
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
The following are wholly-owned subsidiaries of MOCON, Inc.:
Name of Entity Jurisdiction of Organization
- -------------- ----------------------------
Microanalytics Instrumentation Corporation Texas
Lab Connections, Inc. Minnesota
MoCon FSC, Inc. Barbados
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
MOCON, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-42255, 33-49752 and 33-58789) on Form S-8 of MOCON, Inc. of our reports dated
February 18, 2000, relating to the consolidated balance sheets of MOCON, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and comprehensive income, and cash
flows and related financial statement schedule for each of the years in the
three-year period ended December 31, 1999, which reports appear in or are
incorporated by reference in the December 31, 1999 annual report on Form 10-K of
MOCON, Inc.
/s/ KPMG LLP
Minneapolis, Minnesota
March 23, 2000
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,275,838
<SECURITIES> 4,347,724
<RECEIVABLES> 2,663,850
<ALLOWANCES> 166,000
<INVENTORY> 2,104,588
<CURRENT-ASSETS> 10,872,068
<PP&E> 3,388,294
<DEPRECIATION> 2,205,801
<TOTAL-ASSETS> 18,203,876
<CURRENT-LIABILITIES> 2,836,898
<BONDS> 0
0
0
<COMMON> 607,310
<OTHER-SE> 14,647,668
<TOTAL-LIABILITY-AND-EQUITY> 18,203,876
<SALES> 17,842,607
<TOTAL-REVENUES> 17,842,607
<CGS> 6,188,928
<TOTAL-COSTS> 6,188,928
<OTHER-EXPENSES> 7,294,512
<LOSS-PROVISION> 11,818
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,359,167
<INCOME-TAX> 1,460,000
<INCOME-CONTINUING> 2,899,167
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,899,167
<EPS-BASIC> 0.46
<EPS-DILUTED> 0.46
</TABLE>
