<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 DECEMBER 31, 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
- --------------------------------------------------------------------------------
(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
----- -----
3,435,989 shares of the issuer's $.05 par value common stock, its only class of
common stock, were outstanding as of January 19, 1998.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial statements
QUARTERLY REPORT ON FORM 10-Q
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended December 31, 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.
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<PAGE> 3
CEM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31 AND JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands)
December 31 June 30
----------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,787 $ 5,833
Short-term investments 3,700 3,100
Trade receivables 5,720 5,990
Inventories 5,109 5,139
Deferred taxes and other 889 742
------- -------
Total current assets 20,205 20,804
LONG-TERM INVESTMENTS 3,377 2,268
PROPERTY, PLANT AND EQUIPMENT, NET 5,152 5,296
OTHER ASSETS 875 846
------- -------
$29,609 $29,214
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,546 $ 2,868
Deferred income 1,099 1,039
Income taxes payable 908 488
------- -------
Total current liabilities 4,553 4,395
LONG-TERM DEBT, NET OF CURRENT MATURITIES 1,184 1,229
DEFERRED TAXES 110 110
SHAREHOLDERS' EQUITY 23,762 23,480
------- -------
$29,609 $29,214
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
CEM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per share data)
1997 1996
------ ------
<S> <C> <C>
Net sales $8,705 $8,172
Cost of goods sold 4,051 3,699
------ ------
Gross profit 4,654 4,473
Selling, general and administrative expenses 2,966 2,947
Research and development expenses 740 694
------ ------
Income from operations 948 832
Investment income 144 106
Other expenses, net 24 14
------ ------
Income before income taxes 1,068 924
Provision for income taxes 343 319
------ ------
Net income $ 725 $ 605
====== ======
Net income per common share (basic) $ .21 $ .17
====== ======
Average common shares outstanding (basic) 3,468 3,534
====== ======
Net income per common share (diluted) $ .21 $ .17
====== ======
Average common shares outstanding (diluted) 3,522 3,545
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
CEM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per share data)
1997 1996
------- -------
<S> <C> <C>
Net sales $15,308 $14,782
Cost of goods sold 7,112 6,757
------- -------
Gross profit 8,196 8,025
Selling, general and administrative expenses 5,598 5,719
Research and development expenses 1,426 1,352
------- -------
Income from operations 1,172 954
Investment income 294 200
Other expenses, net 39 66
------- -------
Income before income taxes 1,427 1,088
Provision for income taxes 461 377
------- -------
Net income $ 966 $ 711
======= =======
Net income per common share (basic) $ .28 $ .20
======= =======
Average common shares outstanding (basic) 3,478 3,537
======= =======
Net income per common share (diluted) $ .28 $ .20
======= =======
Average common shares outstanding (diluted) 3,514 3,564
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 6
CEM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands)
1997 1996
------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,958 $ 1,808
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of available-for-sale investments 2,000 1,000
Purchase of available-for-sale investments (2,600) (500)
Purchase of long-term investment (1,152) (250)
Acquisition of intangibles (124) (215)
Capital expenditures, net (438) (313)
------- -------
Net cash used in investing activities (2,314) (278)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable (66) --
Proceeds from issuance of common stock 251 142
Repurchase of common stock (867) (348)
------- -------
Net cash used in financing activities (682) (206)
------- -------
EFFECTS OF EXCHANGE RATES ON CASH (8) 25
------- -------
Net increase (decrease) in cash and cash equivalents (1,046) 1,349
Cash and cash equivalents at beginning of period 5,833 1,832
------- -------
Cash and cash equivalents at end of period $ 4,787 $ 3,181
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 7
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.
2. INVENTORIES
The components of inventories at current cost at December 31 and June 30, 1997
are as follows:
<TABLE>
<CAPTION>
(in thousands)
December 31 June 30
----------- -------
<S> <C> <C>
Parts and raw materials $2,959 $2,560
Work-in-process and finished goods 2,150 2,579
------ ------
$5,109 $5,139
====== ======
</TABLE>
3. NET INCOME PER COMMON SHARE
Basic Earnings Per Share Computation:
The computation of basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common share
outstanding during the period. Shares issued during the period and shares
repurchased by the Company during the period are weighted for the portion of the
period that they were outstanding. Income and share information for the three
months ended December 31, 1997 follows:
<TABLE>
<CAPTION>
(in thousands, except per share data)
<S> <C>
Net income $725
Less: preferred stock dividends --
====
Income available to common stockholders $725
====
</TABLE>
<TABLE>
<CAPTION>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
<S> <C> <C> <C>
October 1, 1997 3,486
Shares repurchased during the period (75) 37/92 (30)
Stock options exercised during the period 25 42/92 12
------
Weighted average shares 3,468
======
Basic earnings per common share $ .21
======
</TABLE>
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<PAGE> 8
CEM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. NET INCOME PER COMMON SHARE (CONTINUED)
Income and share information for the six months ended December 31, 1997 follows:
<TABLE>
<CAPTION>
(in thousands, except per share data)
<S> <C>
Net income $966
Less: preferred stock dividends --
----
Income available to common stockholders $966
====
</TABLE>
<TABLE>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
<S> <C> <C> <C>
July 1, 1997 3,487
Shares repurchased during the period (80) 41/184 (18)
Stock options exercised during the period 29 57/184 9
------
Weighted average shares 3,478
======
Basic earnings per common share $ .28
======
</TABLE>
Diluted Earnings Per Share Computation:
The computation of diluted earnings per common share is similar to the
computation of basic earnings per common share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. Potential
common shares consist of dilutive stock options using the treasury stock method.
<TABLE>
<CAPTION>
(in thousands, except per share data)
For the three months ended For the six months ended
December 31, December 31,
1997 1997
------ ------
<S> <C> <C>
Income available to common shareholders $ 725 $ 966
Plus: Preferred stock dividends -- --
------ ------
Income available to common stockholders $ 725 $ 966
------ ------
Weighted average shares 3,468 3,478
Dilutive potential common shares (stock options) 54 36
------ ------
Adjusted weighted average shares 3,522 3,514
====== ======
Diluted earnings per share $ .21 $ .28
====== ======
</TABLE>
Options to purchase 128,000 and 230,000 shares of common stock at a weighted
average price of $10.62 and $9.94 per share were outstanding during the three
and six months ended December 31, 1997, respectively, which were not included in
the computation of diluted earnings per share because the option exercise prices
were greater than the average market price of the common shares during the
periods.
4. NEW PRONOUNCEMENTS
There have been no new pronouncements issued which have not already been
implemented by the Company which management believes would have a material
impact on the financial statements.
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<PAGE> 9
ITEM 2. 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
--------------------------------------------
12/31/97 12/31/96 % Change
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 6.5%
Cost of goods sold 46.5 45.3 9.5
----- ----
GROSS PROFIT 53.5 54.7 4.0
Selling, general and administrative expenses 34.1 36.0 0.6
Research and development expenses 8.5 8.5 6.6
----- ----
INCOME FROM OPERATIONS 10.9 10.2 13.9
Investment income 1.6 1.3 35.8
Other expenses, net 0.3 0.2 71.4
----- ----
INCOME BEFORE INCOME TAXES 12.2 11.3 15.6
Provision for income taxes 3.9 3.9 7.5
----- ----
NET INCOME 8.3% 7.4% 19.8
===== ====
</TABLE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1997
The increase in sales primarily resulted from the introduction of MARS, the
Company's new closed-vessel digestion system, which accounted for approximately
$1.1 million or 13% of net sales for the quarter. Substantial currency weakness
in various countries within Asia, particularly South Korea, Japan, Thailand and
Indonesia, resulted in a 5% sales decline in this area. We expect the
difficulties with Asian currencies to potentially result in a decline in sales
to Asia. Foreign sales increased as a percent of total sales from 46% to 49% as
weakness in Asia was offset by growth of sales in Europe.
As expected, integrating MARS into our manufacturing operations during the
quarter caused an overall reduction in gross margin from 54.7% to 53.5%. We
expect to realize greater economies of scale for MARS during the second half of
the fiscal year.
Selling, general and administrative expenses remained relatively flat with the
prior year due to cost containment initiatives. Research and development
increased slightly as the MARS platform was finalized. The Company is committed
to new product development and enhancements, and expects research and
development expenses to remain between 8% and 10% of net sales for the
foreseeable future.
Investment income increased 35.8% due to increases in short-term and long-term
investments which resulted from cash provided by operating activities.
The Company's effective tax rate declined from 34.5% to 32.1% resulting from the
renewal of the Research and Experimentation tax credit through June 30, 1998 and
higher non-taxable investment income as a percentage of income before income
taxes. Management expects the rate to remain near 32% for the remainder of
fiscal 1998.
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<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth, for the six-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>
Six Months Ended
--------------------------------------------
12/31/97 12/31/96 % Change
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 3.6%
Cost of goods sold 46.5 45.7 5.3
----- ----
GROSS PROFIT 53.5 54.3 2.1
Selling, general and administrative expenses 36.6 38.7 (2.1)
Research and development expenses 9.3 9.1 5.5
----- ----
INCOME FROM OPERATIONS 7.6 6.5 22.9
Investment income 1.9 1.4 47.0
Other expenses, net 0.2 0.5 (40.9)
----- ----
INCOME BEFORE INCOME TAXES 9.3 7.4 31.2
Provision for income taxes 3.0 2.6 22.3
----- ----
NET INCOME 6.3% 4.8% 35.9
===== ====
</TABLE>
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1997
The increase in total sales resulted primarily from the same factors described
for the quarter ended December 31, 1997. Foreign sales as a percent of total
sales remained flat at 47%.
Gross profit declined primarily due to the factors described for the quarter
ended December 31, 1997. Selling, general and administrative expenses declined
due to cost containment measures while research and development expenses
increased based on MARS development costs.
Investment income and the Company's effective tax rate are primarily due to the
factors described for the quarter ended December 31, 1997.
FINANCIAL CONDITION
In the first half of fiscal 1998, the Company generated cash from operations of
approximately $2.0 million including $1.0 million in net income, a decline in
accounts receivable due to the effectiveness of the Company's focus on certain
internal processes, and other temporary changes in working capital needs.
In November 1997, the Company invested $1.2 million in long-term held to
maturity investments denominated in 2.0 million German marks. This transaction
was designated as a hedge of a future investment in CEM GmbH which will be used
to retire long-term debt when it matures in fiscal 2000.
During the six months ended December 31, 1997, the Company used approximately
$867,000 to acquire 80,000 shares of the Company's common stock under the stock
repurchase program. On January 26, 1998, the Company's Board of Directors has
authorized the use of up to $4.0 million for additional repurchases of shares of
CEM's Common Stock which extends through September 1999. Including the $1.2
million remaining from a previous authorization which expires in June 1998, the
Company has a total of $5.2 million available for repurchases.
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<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
The Company is in the process of assessing its systems and other exposures
related to customers, suppliers and other constituents for compatibility with
the year 2000. The Company expects to upgrade or replace existing systems by the
year 2000. Based on our preliminary assessment, management does not believe the
cost to upgrade or replace its systems for compatibility with the year 2000
issue will be material to the financial statements.
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.
Management expects U.S. and Europe sales and continued worldwide market
penetration of the new MARS product to offset potential declines in Asia. The
Company also expects realization of greater economies of scale related to MARS
during the second half of fiscal 1998 and continued effectiveness of the
Company's ongoing organizational transformation through the use of
cross-functional teams. The preceding forward looking statements 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 and the timing of the release of orders by the
Company's customers 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.
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<PAGE> 12
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, and 5 are not applicable and are omitted.
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Registrant's Annual Meeting of Shareholders held on
November 6, 1997, the following matters were submitted to a
vote of the shareholders of the Registrant:
1. Election of four nominees to the Board of Directors
of the Registrant for terms ending at the Annual
Meeting of Shareholders in 1998:
<TABLE>
<CAPTION>
Shares Voted Shares Shares Not
Nominee in Favor Withheld Voted
-------------------------------- ------------ -------- ---------
<S> <C> <C> <C>
Michael J. Collins 3,117,829 34,688 333,480
Ronald A. Norelli 3,117,279 35,238 333,480
John L. Chanon 3,117,229 35,288 333,480
John D. Correnti 3,117,429 35,088 333,480
</TABLE>
2. Ratification of the selection of Coopers & Lybrand,
L.L.P. as independent public accountants to audit the
Corporation's financial statements for the fiscal
year ending June 30, 1998, which was approved by a
vote of 3,146,653 shares in favor and 3,810 shares
against, with 2,054 shares abstaining.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(11) Statement of Computation of Earnings per Share -
Paragraph 40 of FAS 128 requires that a
reconciliation of the numerators and the denominators
of the basic and diluted per-share computations for
income from continuing operations be disclosed in the
footnotes to the financial statements and since the
registrant complies with FAS 128 and the required
information is disclosed in footnote 3 in the interim
financial statements, Exhibit 11 is not required.
(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
December 31, 1997.
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<PAGE> 13
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: January 26, 1998 CEM CORPORATION
BY: \s\ Richard N. Decker
-------------------------------
Richard N. Decker
Secretary, Treasurer and
Chief Financial Officer
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<PAGE> 14
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
ITEM 6(A)
Quarterly Report on Form 10-Q
For the quarter ended December 31, 1997 Commission File Number: 0-15383
CEM CORPORATION
EXHIBIT INDEX
Exhibit Number: Exhibit Description
- --------------- -------------------
27 Financial Data Schedule (filed in electronic format
only)
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998<FN>
<PERIOD-END> DEC-31-1997
<CASH> 4,787,000
<SECURITIES> 3,700,000
<RECEIVABLES> 5,720,000
<ALLOWANCES> 0
<INVENTORY> 5,109,000
<CURRENT-ASSETS> 20,205,000
<PP&E> 5,152,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,609,000
<CURRENT-LIABILITIES> 4,553,000
<BONDS> 1,184,000
0
0
<COMMON> 172,000
<OTHER-SE> 23,590,000
<TOTAL-LIABILITY-AND-EQUITY> 29,609,000
<SALES> 15,308,000
<TOTAL-REVENUES> 15,308,000
<CGS> 7,112,000
<TOTAL-COSTS> 7,112,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,427,000
<INCOME-TAX> 461,000
<INCOME-CONTINUING> 966,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 966,000
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
<FN>
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>
