<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
-------- --------
Commission File Number: 0-15383
CEM CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1019741
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
3100 Smith Farm Road, Matthews, NC 28105
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Post Office Box 200, Matthews, North Carolina 28106
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(Mailing address of principal executive offices)
(704) 821-7015
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
3,482,297 shares of the issuer's $.05 par value common stock, its only class of
common stock, were outstanding as of October 22, 1997.
Page 1 of 12
<PAGE> 2
PART I. FINANCIAL INFORMATION
QUARTERLY REPORT ON FORM 10-Q
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 1997
CEM Corporation
Matthews, North Carolina
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1997.
Page 2 of 12
<PAGE> 3
CEM Corporation
Condensed Consolidated Balance Sheets
September 30 and June 30, 1997
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
September 30 June 30
------------ -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,271 $ 5,833
Short-term investments 3,800 3,100
Trade receivables 4,778 5,990
Inventories 5,042 5,139
Deferred taxes and other 577 742
------- -------
Total current assets 20,468 20,804
Long-term Investments 2,266 2,268
Property, Plant and Equipment, Net 5,183 5,296
Other Assets 876 846
------- -------
$28,793 $29,214
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,166 $ 2,868
Deferred income 1,049 1,039
Income taxes payable 579 488
------- -------
Total current liabilities 3,794 4,395
Long-term Debt, Net of Current Maturities 1,210 1,229
Deferred Taxes 110 110
Shareholders' Equity 23,679 23,480
------- -------
$28,793 $29,214
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3 of 12
<PAGE> 4
CEM Corporation
Condensed Consolidated Statements of Income
For the three months ended September 30, 1997 and 1996
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net sales $ 6,603 $ 6,610
Cost of goods sold 3,061 3,058
------- -------
Gross profit 3,542 3,552
Selling, general and administrative expenses 2,631 2,772
Research and development expenses 687 658
------- -------
Income from operations 224 122
Investment income 151 94
Other expense, net (16) (52)
------- -------
Income before income taxes 359 164
Provision for income taxes 118 58
------- -------
Net income $ 241 $ 106
======= =======
Net income per common and common equivalent share $ .07 $ .03
======= =======
Weighted average common and common equivalent
shares outstanding 3,504 3,609
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4 of 12
<PAGE> 5
CEM Corporation
Condensed Consolidated Statements of Cash Flows
For the three months ended September 30, 1997 and 1996
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net cash provided by operating activities $ 1,423 $ 712
------- -------
Cash flows from investing activities:
Purchase of available-for-sale investments (700) --
Sale of available-for-sale investments -- 500
Purchase of long-term investment -- (250)
Acquisition of intangibles (78) (129)
Capital expenditures, net (187) (148)
------- -------
Net cash used in investing activities (965) (27)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 25 142
Repurchase of common stock (47) (348)
------- -------
Net cash used in financing activities (22) (206)
------- -------
Effects of exchange rates on cash 2 2
------- -------
Net increase in cash and cash equivalents 438 481
Cash and cash equivalents at beginning of period 5,833 1,832
------- -------
Cash and cash equivalents at end of period $ 6,271 $ 2,313
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 5 of 12
<PAGE> 6
CEM Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods. The results of operations for
the three months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended June 30, 1998.
2. Inventories
The components of inventories at current cost at September 30 and June 30, 1997
are as follows:
(in thousands)
<TABLE>
<CAPTION>
September 30 June 30
------------ -------
<S> <C> <C>
Parts and raw materials $2,869 $2,560
Work-in-process and finished goods 2,173 2,579
------ ------
$5,042 $5,139
====== ======
</TABLE>
3. Net Income Per Share
The computation of net income per common share is based on the weighted average
number of common shares outstanding for each period after adding dilutive common
stock equivalents. Common stock equivalents consist of dilutive stock options
using the treasury stock method. Fully diluted net income per share is not
presented because it approximates net income per common share.
4. New Pronouncement
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS No. 128), which is
effective for periods ending after December 15, 1997, including interim periods.
SFAS No. 128 establishes standards for computing and presenting earnings per
share and applies to entities with publicly held common stock or common stock
equivalents. Management believes the impact on the Company's earnings per share
will not be materially different than earnings per share determined in
accordance with current guidance. The Company will implement SFAS No. 128 in the
required period.
Page 6 of 12
<PAGE> 7
Management's Discussion and Analysis of
Results of Operations and Financial Condition
The following table sets forth, for the three-month periods indicated, the
percentages which certain components of the condensed consolidated statements of
income bear to net sales and the percentage of change of such components from
the same period of the prior year.
<TABLE>
<CAPTION>
Three Months Ended
9/30/97 9/30/96 % Change
------- ------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% (0.1)%
Cost of goods sold 46.4 46.3 0.1
----- -----
Gross profit 53.6 53.7 (0.3)
Selling, general and administrative expenses 39.9 41.9 (5.1)
Research and development expenses 10.4 10.0 4.4
----- -----
Income from operations 3.3 1.8 83.6
Investment income 2.3 1.5 60.6
Other expense, net (0.2) (0.8) nm
----- -----
Income before income taxes 5.4 2.5 118.9
Provision for income taxes 1.8 0.9 103.4
----- -----
Net income 3.6% 1.6% 127.4
===== =====
</TABLE>
Results of Operations
The Company experienced flat sales in comparison with the prior year, partly due
to the introduction of the Company's next generation digestion system, Microwave
Accelerated Reaction System (MARS), reducing demand for the Company's existing
digestion systems. However, the Company believes this will prove temporary as
shipments of MARS should start to contribute to the Company's revenues,
especially during the second fiscal half. In addition, the Company experienced
some softness in sales in Asia, particularly in Japan. As a result, foreign
sales decreased as a percent of total sales from 47% to 46%.
Gross profit remained relatively consistent with the prior year. Selling,
general and administrative expenses decreased due to the effectiveness of cost
containment measures. Research and development remained relatively consistent
with the prior year and reflects the Company's continued commitment to new
product development and enhancements. The Company expects these expenses to
remain between 8% and 10% of net sales for the foreseeable future.
The increase in investment income was due to the increase in the Company's cash
position.
The Company's effective tax rate decreased from 35% to 33% due to the extension
of the Research and Experimentation tax credit and the increase in non-taxable
investment income as a percentage of income before taxes. Management expects the
rate to remain near 33% in fiscal 1998.
Page 7 of 12
<PAGE> 8
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Financial Condition
In the first quarter of fiscal 1998, the Company generated cash from operations
of approximately $1,423,000. The decline in accounts receivable is primarily due
to the effectiveness of the Company's focus on certain internal processes.
During the three months ended September 30, 1997, the Company used approximately
$47,000 to acquire 5,000 shares of the Company's common stock under the stock
repurchase program. As of September 30, 1997, approximately $2.1 million remains
authorized for the repurchase of the Company's common stock.
Management believes that working capital, planned capital expenditures, debt
servicing and stock repurchases can be funded currently with cash on hand and
cash generated from operations. The Company has never paid, and does not
anticipate paying, cash dividends in the foreseeable future.
The Company expects continued recovery in sales in subsequent periods due to
seasonal factors, the introduction of the Company's new MARS product and the
effectiveness of the Company's ongoing organizational transformation through the
use of cross-functional teams. The preceding forward looking statement should be
considered with the following cautionary statement.
Cautionary Statement
The following cautionary statement identifies important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements made by or on behalf of the Company. Except for the
historical information contained herein, the matters discussed in "Management's
Discussion and Analysis of Results of Operations and Financial Condition" are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
The industry in which the Company competes, as well as the markets that it
serves, are characterized by cyclical market patterns as a consequence of, among
other things, business cycles, foreign exchange fluctuations, regulatory
changes, government spending levels and general economic conditions. These
factors affect the timing of orders from the Company's customers and cause
substantial variations in sales and profitability from quarter to quarter.
Likewise, supplier-related delays in the release of orders may affect
quarter-to-quarter sales and profitability. The Company's sales may also be
adversely affected by direct and indirect competition from third parties
including, but not limited to, legal challenges to existing patents or pending
patent applications.
Demand for the Company's instrumentation is substantially affected by the
enactment, timing, extent and severity of state, federal and foreign laws
governing environmental testing standards as well as product labeling
requirements including foods and pharmaceuticals. The Company has and may
experience fluctuations in sales of such products as well as in demand for
particular product enhancements as a result of actual or perceived changes in
regulatory requirements. Legislation or regulations resulting in the development
or expansion of acceptance standards for specific testing methods has and may
result in periodic delays in sales, especially in the United States. Conversely,
increases in international sales have resulted, and may result in the future,
from less stringent or nonexistent acceptance standards in a given country.
Moreover, the Company's success is dependent on its ability to continue to
develop and engineer high-quality, high-performance products that are
commercially acceptable. Risks associated with new product development include
market acceptance, competition from other products and the Company's ability to
manufacture and market products on an efficient and timely basis at a reasonable
cost and in sufficient volume.
Page 8 of 12
<PAGE> 9
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4 and 5 are not applicable and are omitted.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(11) Statement of Computation of Earnings per Share
(27) Financial Data Schedule (filed in electronic format
only). This schedule shall not be deemed filed for
purposes of Section 11 of the Securities Act of 1933
or Section 18 of the Securities Exchange Act of 1934
or otherwise be subject to the liabilities of such
sections, nor shall it be deemed a part of any
registration statement to which it relates.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter ended
September 30, 1997.
Page 9 of 12
<PAGE> 10
CEM CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 22, 1997 CEM CORPORATION
BY: \s\ Richard N. Decker
---------------------
Richard N. Decker
Secretary, Treasurer and
Chief Financial Officer
Page 10 of 12
<PAGE> 11
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
EXHIBITS
ITEM 6(a)
Quarterly Report on Form 10-Q
For the quarter ended September 30, 1997 Commission File Number: 0-15383
CEM CORPORATION
EXHIBIT INDEX
Exhibit Number: Exhibit Description
- --------------- -------------------
11 Computation of Earnings per Share
27 Financial Data Schedule (filed in electronic
format only)
Page 11 of 12
<PAGE> 1
Exhibit 11
CEM CORPORATION
COMPUTATION OF EARNINGS PER SHARE
For the three months ended September 30, 1997 and 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996
` ------ ------
<S> <C> <C>
Net income $ 241 $ 106
====== ======
Weighted average number of shares outstanding 3,486 3,540
Number of shares purchasable upon exercise of options, reduced by the number
of shares which could have been purchased with proceeds from
exercise of such options at average market price 18 69
------ ------
Weighted average number of shares outstanding, as adjusted 3,504 3,609
====== ======
Primary earnings per share $ .07 $ .03
====== ======
Net income $ 241 $ 106
====== ======
Weighted average number of shares outstanding 3,486 3,540
Number of shares purchasable upon exercise of options, reduced by the number
of shares which could have been purchased with proceeds from exercise of
such options at the greater of period-end market price
or average market price 43 69
------ ------
Weighted average number of shares outstanding, as adjusted 3,529 3,609
====== ======
Earnings per common share, assuming full dilution $ .07 $ .03
====== ======
</TABLE>
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998<F1>
<PERIOD-END> SEP-30-1997
<CASH> 6,271
<SECURITIES> 3,800
<RECEIVABLES> 4,778
<ALLOWANCES> 0
<INVENTORY> 5,042
<CURRENT-ASSETS> 20,468
<PP&E> 5,183
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,793
<CURRENT-LIABILITIES> 3,794
<BONDS> 1,210
0
0
<COMMON> 175
<OTHER-SE> 23,504
<TOTAL-LIABILITY-AND-EQUITY> 28,793
<SALES> 6,603
<TOTAL-REVENUES> 6,603
<CGS> 3,061
<TOTAL-COSTS> 6,379
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 359
<INCOME-TAX> 118
<INCOME-CONTINUING> 241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 241
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<FN>
<F1>CERTAIN INFORMATION IN THE FINANCIAL DATA SCHEDULE ABOVE HAS BEEN CONDENSED FOR
INTERIM FINANCIAL REPORTING PURSUANT TO THE RULES AND REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION.
</FN>
</TABLE>
