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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 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 number 0-15383
CEM CORPORATION
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(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 28104
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(Address of principal executive offices)
Post Office Box 200, Matthews, North Carolina 28106
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(Mailing address of principal executive offices)
Registrant's telephone number, including area code: (704) 821-7015
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
$.05 par value Common Stock
---------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of shares of the Registrant's $.05 par value Common
Stock, its only outstanding class of voting stock, held by non-affiliates as of
September 8, 1999, was $17,179,844 assuming, for purposes of this filing, that
all executive officers and directors of the Registrant are affiliates. The
number of issued and outstanding shares of the Registrant's $.05 par value
Common Stock, its only outstanding class of Common Stock, as of September 8,
1999, was 3,043,443 shares.
Portions of the CEM Corporation Annual Report to Shareholders for the fiscal
year ended June 30, 1999 are incorporated by reference into Parts I and II.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held November 4, 1999 are incorporated by reference into Part III.
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PART I
ITEM 1 - BUSINESS
General
CEM Corporation (the "Company") engages in one line of business, the
development, manufacture, sale and service of microwave-based instrumentation
for testing, analysis and process control in analytical laboratory and
industrial markets. These sample preparation products provide advantages of
speed and simplicity compared to traditional methods of testing and analysis.
The Company's products are used in the general analytical laboratory market and
in many manufacturing and processing industries, including chemical and food
processing. A significant amount of the Company's sales consists of consumable
supplies, parts and service for its instrumentation. The Company was organized
as a North Carolina corporation in 1971.
Products
Microwave Accelerated Reaction System("MARS") and Microwave Digestion
System("MDS"). MARS and MDS and related accessories accounted for approximately
36%, 33%, and 29% of the Company's consolidated sales in fiscal 1999, 1998 and
1997, respectively. This product is a microwave heating system designed
especially for use in the digestion of samples for laboratory analysis. It
performs a rapid dissolution of samples in acid in a closed vessel system and is
sold to the analytical laboratory market. MARS, which was introduced in the
first quarter of fiscal 1998 and is the next generation of MDS, permits higher
pressures to be used safely and provides greater measurement data for control of
the instrument.
Moisture/Solids Analyzer. The Moisture/Solids Analyzer and related
accessories accounted for approximately 20%, 17% and 19% of the Company's
consolidated sales in fiscal 1999, 1998 and 1997, respectively. This product
performs percent moisture or percent solids measurement in process control
monitoring, quality control and product development in a variety of industries,
including chemical processing, pharmaceuticals, food and dairy products,
tobacco, textiles, paint and coatings, pulp and paper, water and wastewater
treatment.
Microwave Ashing System. The Microwave Ashing System uses microwave energy
to rapidly oxidize a sample to determine the ash (metal oxide) content. This
product is primarily sold to the analytical laboratory market and petrochemical
industry.
STAR System. The STAR system, which incorporates temperature control and
reagent (acid) addition, is an open cavity microwave heating system designed
initially for use in the digestion of samples for laboratory analysis. It
performs a rapid dissolution of samples and is sold to the food, polymer,
petroleum, chemical and semi-conductor industries.
Fat Analyzer System. The Company manufactures an automatic extraction unit
which is used in conjunction with the Moisture/Solids Analyzer to form the Fat
Analyzer System. This product measures the fat content of a variety of samples
and is sold primarily to meat processing and other food industries.
ProFat II System. The ProFat II System, which was introduced in the first
quarter of fiscal 1998, is a microwave-based instrument that provides rapid
moisture, fat and protein results on most meat products, without solvents. The
product is sold primarily to companies processing beef, poultry and pork
products that require a rapid result for process control purposes and companies
which utilize non solvent-based instruments for product analysis.
Microwave Extraction System. The Microwave Extraction System uses microwave
energy to rapidly heat solvents to high temperatures. These elevated
temperatures reduce the time necessary to extract organic compounds from solid
matrices. This product uses a unique temperature control system and multiple
safety devices to ensure both rapid and safe sample preparation. This product is
a cost effective alternative to traditional solvent extraction due to its high
recoveries and significantly reduced solvent usage. The Microwave Extraction
System is marketed under the trade name, MARS-X. Sales of the MARS-X to
environmental laboratories will be limited in the United States until the U.S.
Environmental Protection Agency approves the use of microwave-based instruments
as an alternative method for extraction.
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Marketing and Sales
The Company's marketing and sales strategy is based on identifying
applications for its products and providing its customers with prompt and
effective technical and applications support.
The Company's marketing strategy utilizes telemarketing, direct mail, trade
show demonstrations, articles, studies, trade journal advertising, product
releases, seminars and makes extensive use of the Company's applications
laboratory to develop specific testing applications for potential and existing
customers.
Sales in the U.S. are generated by full-time sales personnel through sales
and service locations throughout the country. Sales are conducted through direct
selling efforts including on-site demonstrations. Sales and service
representatives provide installation and training of production and laboratory
personnel. Sales representatives are paid a base salary, commissions and/or
other incentive compensation.
The Company's applications laboratories provide technical assistance to
customers and potential customers in developing new and improved applications
and related procedures. The applications laboratories perform tests in its
facilities in North Carolina and Germany and provides the results to customers.
The Company's foreign sales are conducted through independent dealers
throughout the world and the Company's subsidiaries in England, Germany and
Italy. Foreign sales are primarily to customers in Europe, Asia and Latin
America. Foreign sales accounted for 43%, 45% and 46% of net sales in fiscal
1999, 1998 and 1997, respectively.
Research and Development
The Company invests heavily in the research and development of potential
new products, product improvements and enhancements, and applications research
for existing products. For fiscal 1999, 1998 and 1997, research and development
expense was $3,162,000, $2,943,000 and $2,742,000 respectively.
The Company's product development efforts continue to progress with respect
to certain proprietary technology licensed in 1996. The Company expects to
deliver prototype instruments incorporating this technology to prospective
customers in fiscal 2000.
Product Protection
The Company relies upon its proprietary technology, continuing research and
development and customer service support to maintain and enhance its competitive
position. Important features of certain of the Company's products are protected
by issued patents or pending patent applications.
Manufacturing
The Company's manufacturing operations are carried out at its headquarters
in Matthews, North Carolina and consist mostly of the assembly and testing of
mechanical and electronic components purchased from others.
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. The Company stocks what it
believes is an adequate supply of all components and materials based upon
delivery lead times and orders currently in hand.
Environmental Regulations
Compliance with federal, state and local provisions relating to protection
of the environment has not had, and is not expected to have, any material
adverse effects upon the production, capital expenditures, earnings or
competitive position of the Company and its subsidiaries.
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Employees
At June 30, 1999, the Company employed 179 persons. None of the Company's
employees are covered by a collective bargaining agreement.
Backlog
The Company does not have a significant backlog of orders, as it normally
ships its products within a short time after it receives orders.
Competition
The Company experiences direct competition in both foreign and U.S. markets
from companies using microwave technology, traditional methods of heating and
drying and other technologies.
There are a number of methods for performing acid digestions, the most
common of which is the traditional "open vessel on a hot plate" method. There
are three other primary manufacturers of closed vessel microwave digestion
systems similar in nature to the Company's products. Also competing with MARS
and MDS are other advanced methods utilizing higher pressure and temperature
including steel jacketed digestion vessels for use in conventional ovens and
high pressure wet ashers.
There are a number of other methods for testing the moisture or solids
content of various liquids and solids. In most instances, the equipment and
instruments, which consist typically of simple heating and drying units and
measurement techniques, are less expensive than the Moisture/Solids Analyzer
produced by the Company. In addition, infrared moisture analyzers, radio
frequency energy absorption techniques and the Karl Fischer titration method, a
wet chemical procedure, have been developed. These systems compete directly with
the Company's instrumentation in certain markets. There is one manufacturer of a
microwave moisture system similar in nature to the Company's Moisture/Solids
Analyzer.
The traditional method of ashing is with a resistance heat furnace. There
are a number of manufacturers of laboratory furnaces used for ashing. Although
these products are typically less expensive than the Microwave Ashing System
sold by the Company, the Company's product offers advantages in both speed and
process control.
The Company's microwave open vessel digestion system (the STAR System) is
designed to digest large samples or samples that are very reactive and can not
be safely digested in a closed vessel digestion system. There is currently one
competitor in this market, which also utilizes microwave based technology and
automatic reagent additions, but the Company believes its product offers
advantages in price and performance.
The Company's Fat Analyzer System is the only direct moisture, fat and
protein system available that is approved by the Association of Analytical
Chemists. However, there is a competing technology using an indirect measurement
method of analysis, which results in a quicker result time but is not considered
as accurate. In addition, this competing system is sold at a significantly
higher price than the Company's system.
There are a number of methods for performing extractions, the most common
of which are the traditional Soxhlet and sonication methods. Also competing with
the Company's Microwave Extraction System are other advanced methods such as
Supercritical Fluid Extraction and Accelerated Solvent Extraction.
Typically the Company's selling prices are higher than those of most of its
competitors. The Company competes primarily upon the speed, ease of use,
applications support and long-term cost savings to the users.
International Operations and Sales
Information about the Company's international operations and sales is
incorporated by reference to footnotes 1 and 8 of the financial statements
contained in the Company's 1999 Annual Report to Shareholders (Exhibit 13
hereto).
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ITEM 2 - PROPERTIES
The Company's headquarters, research and manufacturing operations are
located in an 82,000 square foot building on an eight and three-fourths acre
tract of land owned by the Company in Matthews, North Carolina. The Company also
owns a 5,000 square foot office and warehouse facility in England, owns a 5,200
square foot office and warehouse in Germany and leases a 4,000 square foot
office in Italy. The facility in Germany is subject to a mortgage which had a
balance of $68,000 at June 30, 1999. Management believes these facilities are
adequate to serve existing markets for the next several years.
ITEM 3 - LEGAL PROCEEDINGS
Nothing is required to be disclosed pursuant to this item.
ITEM 4 is inapplicable and has been omitted.
PART II
ITEM 5 is incorporated by reference to Footnote 12 on page 19 "Quarterly
Information (Unaudited)" and on the inside back cover "Corporate Information" of
the Registrant's 1999 Annual Report to Shareholders (Exhibit 13 hereto).
ITEM 6 is incorporated by reference to page 20 of items captioned "Selected
Financial Data" of the Registrant's 1999 Annual Report to Shareholders (Exhibit
13 hereto).
ITEM 7 is incorporated by reference to page 6 captioned "Management's Discussion
and Analysis" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13
hereto).
ITEM 7A is incorporated by reference to Footnote 2 on page 14 "Financial
Instruments" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13
hereto).
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, notes to the financial statements and quarterly
supplemental financial data of the Company appearing on pages 9 - 20 of the
Company's 1999 Annual Report to Shareholders are hereby incorporated by
reference.
ITEM 9 is inapplicable and has been omitted.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as to the directors and chief executive officer of the Company
is incorporated herein by reference to the section captioned "Election of
Directors" of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held November 4, 1999. The following information is provided
as to the executive officers of the Company who are not directors:
Name Age Background
- --------------------- ------ --------------------------------------------
Richard N. Decker 50 Vice President - Finance, Chief Financial
Officer, Secretary and Treasurer since 1995;
Secretary, Treasurer and Chief Financial
Officer 1993-1995; Vice President-Finance of
the Water and Gas Meter Division of
Schlumberger Limited Corporation 1982-1993.
All of the Company's executive officers were appointed to their current
positions at the Annual Meeting of the Board of Directors held on November 5,
1998. All of the Company's executive officers' terms of office extend until the
next Annual Meeting of the Board of Directors and until their successors are
elected and qualified.
ITEM 11 is incorporated by reference to the sections captioned "Executive
Compensation" and "Director Compensation" in the Registrant's Proxy Statement
for Annual Meeting of Shareholders to be held November 4, 1999.
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ITEM 12 is incorporated by reference to the sections captioned "Principal
Shareholders and Holdings of Management" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's Proxy Statement for Annual Meeting of
Shareholders to be held November 4, 1999.
ITEM 13 is inapplicable and has been omitted.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. See accompanying Index to Financial Statements.
(2) Financial Statement Schedules. See accompanying Index to Financial
Statements.
(3) Exhibits.
3.1 Restated Charter of the Company, as amended.(1)
3.2 Bylaws of the Company.(1)
10.1 * CEM Corporation 1986 Nonqualified Stock Option Plan,
as amended, incorporated herein by reference to the
Company's Registration Statement on Form S-8 (File
No. 33-53694).
10.2 * CEM Corporation Employee Stock Purchase Plan, as
amended, incorporated herein by reference to the
Company's Registration Statement on Form S-8 (File
No. 33-80136).
10.3 * CEM Corporation 1987 Stock Option Plan, as
amended.(1)
10.4 * CEM Corporation 1993 Management Equity Plan,
incorporated herein by reference to the Company's
Registration Statement on Form S-8 (File No.
33-75368).
10.5 * CEM Corporation Management Incentive Compensation
Plan(2).
10.6 CEM Corporation 1993 Nonqualified Stock Option Plan
for Non-Employee Directors, incorporated herein by
reference to the Company's Registration Statement on
Form S-8 (File No. 33-75366).
13. The Company's 1999 Annual Report to Shareholders.
This Annual Report to Shareholders is furnished for
the information of the Commission only and, except
for the parts thereof incorporated in this report, is
not deemed to be "filed" as part of this filing.
21. List of the Company's Subsidiaries.(1)
23. Consent of Independent Accountants.
27. Financial Data Schedules (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.
99. Revised Item 21 of Part II to the Company's
registration statements on Form S-8 (Registration
Numbers 33-11952 and 33-25739).(1)
--------------------
* This exhibit is one of the Company's management
contracts and compensatory plans and arrangements.
(1) Incorporated herein by reference to the Company's
Form 10-K for the year ended June 30, 1994.
(2) Incorporated herein by reference to the Company's
Form 10-K for the year ended June 30, 1997.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed during the last
quarter of the period covered by this report.
(c) Exhibits. See Item 14(a)(3) above.
6
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<TABLE>
<CAPTION>
Reference (Page)
-----------------------------------
Annual
Form 10-K Report to
Item 14. (d) Index to Financial Statements and Schedules Annual Report Shareholders
- -------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
Data incorporated by reference from the attached
1999 Annual Report to Shareholders:
Report of Independent Accountants 20
Consolidated Balance Sheets as of June 30, 1999 and 1998 9
Consolidated Statements of Income for the years ended 10
June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years 11
ended June 30, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for the 12
years ended June 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements 13 - 20
Data submitted herewith:
Report of Independent Accountants 8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 10
</TABLE>
The 1999 Annual Report to Shareholders of CEM Corporation is not to be deemed
"filed" as part of this report except for those parts thereof specifically
incorporated herein by reference.
7
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REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of CEM Corporation:
Our audits of the consolidated financial statements referred to in our report
dated July 21, 1999 appearing on page 20 of the 1999 Annual Report to
Shareholders of CEM Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
July 21, 1999
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CEM CORPORATION
By: /s/ Michael J. Collins
----------------------
Michael J. Collins
President and Chief Executive Officer
By: /s/ Richard N. Decker
---------------------
Dated: September 24, 1999 Richard N. Decker
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------------------------------- ----------------------------------------------- ------------------
<S> <C> <C>
/s/ Ronald A. Norelli Chairman of the Board of Directors September 24, 1999
- ---------------------------------
Ronald A. Norelli
/s/ Michael J. Collins President, Chief Executive Officer and Director September 24, 1999
- --------------------------------- (Principal Executive Officer)
Michael J. Collins
/s/ John L. Chanon Director September 24, 1999
- ---------------------------------
John L. Chanon
/s/ George F. Krall Director September 24, 1999
- ---------------------------------
George F. Krall
</TABLE>
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CEM CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Balance at
beginning of Charged to costs Balance at
Description period and expenses Deductions End of period
--------------------------- ----------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended Accounts receivable, $ 1,019,000 $ 360,000 $ (151,000) $ 1,228,000
June 30, 1999 inventory and warranty
reserves
Year ended Accounts receivable, 1,040,000 404,000 (425,000) 1,019,000
June 30, 1998 inventory and warranty
reserves
Year ended Accounts receivable, $ 720,000 $ 607,000 $ (287,000) $ 1,040,000
June 30, 1997 inventory and warranty
reserves
</TABLE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
ITEM 14(a)(3)
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended Commission File Number
- ------------------------- ----------------------
June 30, 1999 0-15383
CEM CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit Description
- ----------- -------------------
3.1 Restated Charter of the Company, as amended.(1)
3.2 Bylaws of the Company.(1)
10.1 CEM Corporation 1986 Nonqualified Stock Option Plan,
as amended, incorporated herein by reference to
the Company's Registration Statement on Form S-8
(File No. 33-53694).
10.2 CEM Corporation Employee Stock Purchase Plan, as
amended, incorporated herein by reference to the
Company's Registration Statement on Form S-8 (File
No. 33-80136).
10.3 CEM Corporation 1987 Stock Option Plan, as
amended.(1)
10.4 CEM Corporation 1993 Management Equity Plan,
incorporated herein by reference to the Company's
Registration Statement on Form S-8 (File No.
33-75368).
10.5 CEM Corporation Management Incentive Compensation
Plan.(2)
10.6 CEM Corporation 1993 Nonqualified Stock Option Plan
for Non-Employee Directors, incorporated herein by
reference to the Company's Registration Statement
on Form S-8 (File No. 33-75366).
13. The Company's 1999 Annual Report to Shareholders.
This Annual Report to shareholders is furnished
for the information of the Commission only and,
except for the parts thereof incorporated in this
report, is not deemed to be "filed" as part of
this filing (page __ of the sequentially numbered
pages).
21. List of the Company's Subsidiaries.(1)
23. Consent of Independent Accountants (page __ of the
sequentially numbered pages).
27. Financial Data Schedules (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.
99. Revised Item 21 of Part II to the Company's
registration statements on Form S-8 (Registration
Numbers 33-11952 and 33-25739).(1)
----------------------
(1) Incorporated herein by reference to the Company's Form
10-K for the year ended June 30, 1994.
(2) Incorporated herein by reference to the Company's Form
10-K for the year ended June 30, 1997.
11
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MANAGEMENT'S DISCUSSION & ANALYSIS
The following table sets forth the percentage relationship of net sales,
expenses and income for the periods indicated:
<TABLE>
<CAPTION>
For the years ended June 30
------------------------------------------------------------
Percent Change
Percentage of Sales Over Prior Period
1999 1998 1997 1999 1998
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% (.9)% 7.6%
Cost of goods sold 47.1 46.4 44.8 .5 11.5
----- ----- ----- ----- ----
Gross profit 52.9 53.6 55.2 (2.1) 4.4
Selling, general and administrative expenses 34.8 35.1 38.2 (1.6) (1.2)
Research and development expenses 9.9 9.1 9.1 7.4 7.3
----- ----- ----- ----- ----
Income from operations 8.2 9.4 7.9 (13.2) 28.2
Investment income 1.3 1.7 1.5 (22.1) 20.5
Other expense, net .3 .2 .4 nm nm
----- ----- ----- ----- ----
Income before income taxes 9.2 10.9 9.0 (15.8) 30.8
Provision for income taxes 2.9 3.4 2.9 (15.5) 28.3
----- ----- ----- ----- ----
Net income 6.3% 7.5% 6.1% (16.0)% 32.0%
===== ===== ===== ====== ====
</TABLE>
RESULTS OF OPERATIONS
Fiscal Year 1999 Compared to Fiscal Year 1998
Net sales for fiscal 1999 decreased .9% to $32.1 million. Foreign sales were
down 5% primarily due to weakness in Europe and Latin America. The shortfall in
foreign sales was somewhat offset by an increase in U.S. sales, primarily
resulting from the Company's Microwave Accelerated Reaction System (MARS). The
MARS accounted for approximately 26% of net sales for fiscal 1999 compared to
18% for fiscal 1998. Foreign sales as a percentage of total sales decreased from
45% to 43%.
Gross profit margins decreased from 53.6% to 52.9% primarily due to competitive
pricing pressures in Europe and a shift in product mix from the MDS to the MARS
platform. The Company expects margins to improve in fiscal 2000 on the MARS
platform. The Company began realizing the benefit of these reductions in the
second half of fiscal 1999.
Selling, general and administrative expenses decreased 1.6% compared to the
prior year primarily due to reduced legal costs as a result of the settlement of
litigation the Company initiated to establish the validity of a patent for
microwave digestion vessels and a decline in incentive compensation and
distributor commissions resulting from decreased sales. The 7.4% increase in
research and development expenses was consistent with management's expectations
and reflects the Company's continued commitment to new product development and
enhancements. Management expects research and development expenses to remain
between 8% and 10% of net sales for the foreseeable future.
Investment income decreased due to a reduction in average cash and investment
balances during fiscal 1999. These balances declined as a result of purchases of
the Company's stock pursuant to the Company's stock repurchase program.
The Company's effective tax rate remained relatively consistent with the prior
year.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net sales for fiscal 1998 increased to a record of $32.4 million or 7.6% above
prior year. The primary driver for the increase in net sales was the Company's
Microwave Accelerated Reaction System (MARS), the new closed vessel digestion
system, which was introduced in the first quarter of fiscal 1998 and accounted
for 18% of sales in that year. The increase in net sales was accomplished
against the backdrop of a sharp slowdown in sales to Asia, which declined 31%.
Sales in the U.S., Europe and other international areas contributed substantial
gains for the year and offset the Asian downturn. Foreign sales as a percentage
of total sales decreased from 46% to 45%.
As expected, gross profit margins declined from 55.2% to 53.6% primarily due to
high MARS costs and changes in product mix.
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Cost containment measures continued to show positive results during fiscal 1998
as selling, general and administrative expenses decreased slightly from prior
year. Research and development expenses increased by 7.3%.
Investment income increased due to effective cash management strategies and an
increase in average cash and investment balances during the year.
The Company's effective tax rate decreased from 32.0% to 31.4% as a result of
lower state income taxes and various other factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for fiscal 1999 totaled $2.9 million and
decreased $900K from the prior year primarily due to lower net income and
increased prepayments for health and welfare costs.
The Company maintains unsecured bank lines of credit providing for short term
borrowings of up to $3.6 million at market rates. At June 30, 1999, the Company
had no outstanding balance. At June 30, 1998, the Company had $83,000
outstanding under these bank lines of credit. Should the need arise, management
believes the lines of credit could be increased.
In 1995, the Company converted an intercompany note receivable to a third party
bank loan of $1.5 million, denominated in German marks. The loan proceeds and an
additional $0.5 million of available cash were used to acquire a long-term
investment which was pledged to collateralize the loan. While the loan and the
corresponding investment are now reflected on the balance sheet, this
transaction eliminated the Company's exposure to future currency fluctuations on
the intercompany note receivable.
In 1991, the Company began a stock repurchase program which has been extended by
the Board of Directors on several occasions. Repurchases totaled $1.4, $5.0, and
$0.8 million in 1999, 1998, and 1997, respectively. As of June 30, 1999, an
additional $1.7 million remained authorized to repurchase the Company's common
stock. From time to time, repurchases may be made in the open market at
prevailing market prices. The shares repurchased will reduce any dilution of
earnings to existing shareholders resulting from the Company's stock option and
compensation plans. The stock repurchase program had the effect of increasing
earnings per diluted share by $.07, $.02 and $.01 in 1999, 1998, and 1997,
respectively.
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
currencies and one common currency (the "euro"). The euro trades on currency
exchanges and is being used in certain business transactions. Beginning in
January, 2002, bills and coins denominated in the euro will be issued and
existing currencies will be withdrawn from circulation. The Company's foreign
subsidiaries do not expect to transact a material portion of their business in
the euro until fiscal 2001.
The Company's foreign subsidiaries are not yet required to prepare reports to
local regulatory agencies using the euro. IT systems used by the company's
foreign subsidiaries should be updated or replaced in a timely manner to
facilitate business transactions and reporting to local government agencies.
Costs to update and/or replace IT systems are not expected to exceed $50,000.
The Company primarily assembles components manufactured by others and
significant expenditures for property and equipment are not expected. Existing
facilities, which were expanded in 1991 and 1992, are expected to be sufficient
to serve existing markets for the next several years. Management believes that
working capital, capital expenditures, debt servicing and stock repurchases can
be funded currently from cash on hand and cash generated from operations.
The Company has never paid cash dividends and has no plans to do so in the
foreseeable future.
YEAR 2000 ISSUE
The Company continued implementing its plan for addressing the Year 2000 Issue
(also known as Y2K) during fiscal 1999. The Year 2000 Issue results from
computers and other systems that process or use date sensitive information and
may incorrectly respond to dates on or after January 1, 2000. Plans for
addressing information technology (IT) systems are nearly complete and involve
primarily software upgrades and/or hardware upgrades. To date, the Company has
spent less than $100,000 to address the Year 2000 Issue and does not believe its
future expenditures to address this issue will be more than $25,000. For non-IT
systems, the Company has not identified and does not expect to identify any
areas where Year 2000 problems would have a material impact on the Company that
are not capable of being repaired or replaced at a fairly low cost.
7
<PAGE> 3
The Company has initiated formal communications with all of its third party
vendors, suppliers and customers with whom the Company has a significant
relationship to evaluate whether these third parties have significant Year 2000
problems that could have a material adverse effect on the Company; no such
problems have been identified. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or conversion that
is incompatible with the Company's systems, would not have a material effect on
the Company. The Company, in turn, has responded to all inquiries from customers
as to the Year 2000 readiness of the Company. CEM instrument operations will be
unaffected by the year 2000 issue. CEM instruments do not use the date for
operation; rather, they use the date as a stamp for printouts only.
The plans to address the Year 2000 Issue for the Company's foreign subsidiaries
should be complete by September 30, 1999. If the Company's plans to address
these issues are not successful, the Company would attempt to identify and
purchase replacement systems that do not have problems associated with the Year
2000 Issue. The cost of such replacement systems would be immaterial to the
Company.
The discussion is this section contains Year 2000 readiness disclosures within
the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998.
OUTLOOK
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" may be
deemed forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are statements that
include projections, predictions, expectations or beliefs about future events or
results or otherwise are not statements of historical fact. Such statements are
often characterized by the use of qualifying words (and their derivatives) such
as "expect," "believe," "plan," "project," or other statements concerning
opinions or judgment of the Company and its management about future events.
These cautionary statements are made pursuant to Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both enacted
pursuant to 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 the Company's
customer 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 experienced
and may continue to 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.
INFLATION
Inflation has not had a material impact on the Company's operations. In the past
several years, prices of some components purchased by the Company have
increased, while prices of other components have declined due, in part, to
changes in volume. Management believes that increases in costs have not exceeded
the inflation rate of the national economy as a whole.
8
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 June 30
In thousands, except share data 1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,865 $ 2,963
Short-term investments 6,262 3,200
Trade receivables, net 6,634 6,616
Inventories 5,335 5,675
Deferred taxes 351 231
Other current assets 613 257
-------- --------
Total current assets 22,060 18,942
-------- --------
Long-term Investments 113 3,117
Investment in Affiliate 363 325
Property, Plant and Equipment, Net 4,984 4,925
Other Assets 1,036 989
-------- --------
$ 28,556 $ 28,298
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current maturities of long-term debt $ 1,066 $ 92
Accounts payable 1,318 1,491
Accrued payroll and benefits 951 1,115
Deferred income 1,402 1,280
Income taxes payable 819 538
Warranty reserve 261 213
Other current liabilities 344 577
-------- --------
Total current liabilities 6,161 5,306
-------- --------
Long-term Debt, Net of Current Maturities 173 1,177
-------- --------
Deferred Taxes 127 96
-------- --------
Shareholders' Equity:
Preferred stock, $5 par value, 1,000,000 shares authorized; none issued -
Common stock, $.05 par value; 10,000,000 shares authorized; 3,046,000 and
3,180,000 shares issued and outstanding as of June 30, 1999 and 1998, respectively 152 159
Additional paid-in capital -- --
Retained earnings 22,422 21,800
Accumulated other comprehensive loss (479) (240)
-------- --------
Total shareholders' equity 22,095 21,719
-------- --------
$ 28,556 $ 28,298
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
9
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended June 30
In thousands, except per share data 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net sales $32,077 $32,362 $30,075
Cost of goods sold 15,110 15,030 13,481
------- ------- -------
Gross profit 16,967 17,332 16,594
Selling, general and administrative expenses 11,158 11,340 11,474
Research and development expenses 3,162 2,943 2,742
------- ------- -------
Income from operations 2,647 3,049 2,378
Investment income 426 547 454
Other expense, net 99 62 130
------- ------- -------
Income before income taxes 2,974 3,534 2,702
Provision for income taxes 938 1,110 865
------- ------- -------
Net income $ 2,036 $ 2,424 $ 1,837
======= ======= =======
Earnings per share
Basic $ .66 $ .71 $ .52
Diluted $ .66 $ .70 $ .52
Average shares outstanding
Basic 3,093 3,435 3,530
Diluted 3,102 3,469 3,550
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
10
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended June 30
In thousands 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,036 $ 2,424 $ 1,837
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,299 1,261 1,116
Deferred income taxes (89) 112 (64)
Loss on disposal of fixed assets, net 2 21 32
Changes in operating assets and liabilities:
Trade receivables (35) (673) 942
Inventories 266 (580) 389
Accounts payable and accrued expenses (429) 885 508
Income taxes payable 287 163 101
Other changes, net (487) 131 22
------- ------- -------
Net cash provided by operating activities 2,850 3,744 4,883
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short-term investments -- 3,100 1,500
Purchase of short-term investment -- (3,200) (500)
Purchase of long-term investment -- (1,152) --
Purchase of investment in affiliate (38) (75) (250)
Proceeds from sale of fixed assets 52 29 56
Capital expenditures and acquisition of intangibles (1,447) (1,119) (1,165)
------- ------- -------
Net cash used in investing activities (1,433) (2,417) (359)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- 84 59
Repayment of long-term debt (88) (65) (8)
Repurchase of common stock (1,445) (4,999) (767)
Proceeds from issuance of common stock 21 784 147
------- ------- -------
Net cash used in financing activities (1,512) (4,196) (569)
------- ------- -------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (3) (1) 46
------- ------- -------
Net (decrease) increase in cash and cash equivalents (98) (2,870) 4,001
Cash and cash equivalents at beginning of year 2,963 5,833 1,832
------- ------- -------
Cash and cash equivalents at end of year $ 2,865 $ 2,963 $ 5,833
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
11
<PAGE> 7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Comprehensive Additional Other
Income Paid-in Retained Comprehensive
In thousands (Loss) Shares Amount Capital Earnings Loss Total
------------- ------ ------ ---------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
JUNE 30, 1996 3,551 $ 178 $ -- $ 22,223 $ (50) $ 22,351
Issuance of shares under stock benefit plans 16 1 146 -- -- 147
Repurchase of common stock (80) (5) (165) (597) -- (767)
Income tax benefit from employees' stock options -- -- 19 -- -- 19
Net income $ 1,837 -- -- -- 1,837 -- 1,837
Translation adjustment (107) -- -- -- -- (107) (107)
------- ----- ----- ----- -------- ----- ---------
Comprehensive income $ 1,730
=======
JUNE 30, 1997 3,487 174 -- 23,463 (157) 23,480
Issuance of shares under stock benefit plans 95 5 779 -- -- 784
Repurchase of common stock (402) (20) (892) (4,087) -- (4,999)
Income tax benefit from employees' stock options -- -- 113 -- -- 113
Net income 2,424 -- -- -- 2,424 -- 2,424
Translation adjustment (83) -- -- -- -- (83) (83)
------- ----- ----- ----- -------- ----- ---------
Comprehensive income $ 2,341
=======
JUNE 30, 1998 3,180 159 -- 21,800 (240) 21,719
Issuance of shares under stock benefit plans 3 -- 21 -- -- 21
Repurchase of common stock (137) (7) (24) (1,414) -- (1,445)
Income tax benefit from employees' stock options -- -- 3 -- -- 3
Net income 2,036 -- -- -- 2,036 -- 2,036
Translation adjustment (239) -- -- -- -- (239) (239)
------- ----- ----- ----- -------- ----- ---------
Comprehensive income $ 1,797
=======
JUNE 30, 1999 3,046 $ 152 $ -- $ 22,422 $(479) $ 22,095
===== ===== ===== ======== ===== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
12
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Consolidation - The financial statements include the accounts of the Company and
its wholly-owned domestic and foreign subsidiaries after the elimination of
inter-company accounts and transactions.
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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Comprehensive Income - Effective July 1, 1998 the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
Accordingly, the Consolidated Statements of Changes in Shareholders' Equity and
the shareholders' equity section of the Consolidated Balance Sheets have been
reclassified to comply with the new requirements.
Translation of Foreign Currencies - The Company's export sales, other than those
to its foreign subsidiaries, are denominated in U.S. dollars. For the Company's
foreign subsidiaries, assets and liabilities are translated at exchange rates
prevailing on the balance sheet date; revenues and expenses are translated at
average exchange rates prevailing during the period. Any resulting translation
adjustments are reported separately in shareholders' equity. Net exchange gains
(losses) from foreign currency transactions included in income were ($19,000) in
1999, $51,000 in 1998, and ($26,000) in 1997.
Statement of Cash Flows - For purposes of reporting cash flows, cash equivalents
include short-term interest bearing investments, generally maturing within sixty
days. Cash flows from operations include income taxes paid totaling $642,000,
$817,000 and $788,000 in 1999, 1998 and 1997, respectively. Interest paid
totaled $128,000, $127,000 and $135,000 in 1999, 1998 and 1997, respectively.
The Company had non-cash activity related to the income tax benefit from
employees' stock options of $3,000, $113,000 and $19,000 in 1999, 1998 and 1997,
respectively.
Investments - The Company records investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
Statement requires the use of fair value accounting for those securities the
Company identifies as trading and available-for-sale. The Company uses the
amortized cost method for investments in debt securities that the Company has
the positive intent and ability to hold to maturity. Unrealized holding gains
and losses are included in earnings for trading securities and are shown as a
separate component of shareholders' equity for available-for-sale securities net
of the effects of income taxes. Realized gains or losses continue to be
determined on the specific identification method and are reflected in income.
Investment in Affiliate - The Company has an exclusive, worldwide licensing
agreement with an Israel-based company, Sirotech, Ltd., related to the
development and marketing of instruments used in rapid testing for bacteria. The
Company has a 13% ownership in Sirotech, Ltd. The investment is accounted for
under the cost method.
Trade Receivables, Net - Trade receivables are stated net of allowances for
doubtful accounts of $291,000 and $306,000 at June 30, 1999 and 1998,
respectively.
Inventories - Inventories are stated at the lower of cost or market. The
first-in, first-out (FIFO) basis is used to determine the cost of inventories.
Advertising Costs - The Company is actively engaged in marketing both new and
existing products. All advertising and promotional costs are charged to
operations as incurred and totaled $522,000, $480,000 and $383,000 in 1999, 1998
and 1997, respectively.
Property, Plant and Equipment, Net - Property, plant and equipment is stated at
cost less depreciation. Depreciation is computed generally using straight-line
methods over the estimated useful lives as follows: 20-40 years for buildings,
3-10 years for machinery and equipment, and 3-5 years for vehicles. When
property, plant and equipment is disposed of, the cost and related depreciation
are removed from the accounts and resulting gains and losses are included in
income. Major improvements are capitalized. Repair and maintenance costs are
charged to expense as incurred.
Research and Development Costs - The Company is actively engaged in basic
technology and applied research and development programs which are designed to
develop new and improved products, and product applications. The costs of these
programs as well as ongoing product and process improvement, engineering and
support costs are charged to expense as incurred.
Deferred Income - Revenue from service contracts is recognized in earnings
ratably over the period of the service agreement.
Deferred Income Taxes - Deferred tax assets or liabilities are established for
temporary differences between financial and tax reporting bases and are
subsequently adjusted to reflect changes in tax rates expected to be in effect
when the temporary differences reverse.
Stock Options - The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and
13
<PAGE> 9
reporting standards for stock-based compensation, including employee stock
purchase plans and stock option plans. As allowed by SFAS No. 123, the Company
continues to measure compensation expense under the provisions of APB No. 25,
"Accounting for Stock Issued to Employees."
2. FINANCIAL INSTRUMENTS
Foreign Currency Risk - The Company has a term note denominated in German marks
for $1,058,000 maturing in fiscal 2000. To mitigate the effect of foreign
currency movements, the Company has investments denominated in German marks also
maturing in fiscal 2000 which management intends to utilize to extinguish this
debt.
Interest Rate Swap - The Company has entered into an interest rate swap whereby
a variable rate, based on IBOR (Interstate Bank Offered Rate) plus 1.65% on the
Company's term note denominated in German marks, was swapped for a fixed
interest rate.
Concentration of Credit Risk - Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of temporary
cash investments and trade receivables. The Company places overnight cash
investments with major financial institutions. On June 30, 1999 and 1998, the
Company purchased $1,515,000 and $997,000, respectively, of Eurodollar
investments under agreements to resell on July 1, 1999 and 1998, respectively.
Due to the short term nature of the agreements, the Company did not take
possession of the securities which were, instead, held by a custodian.
The Company sells instruments on open account terms. Sales are not concentrated
geographically and no single customer accounts for more than ten percent of
sales. Management considers the risk of significant loss related to trade
receivables at June 30, 1999 and 1998 to be minimal.
3. INVESTMENTS
The following table summarizes the amortized cost, fair market value and
carrying value of the Company's investments at June 30, 1999 and 1998. Proceeds
from sales of available-for-sale securities were $0 and $3,100,000 in 1999 and
1998, respectively. There were no realized gains or losses in 1999 or 1998 in
any security classification.
<TABLE>
<CAPTION>
In thousands
1999 Amortized Cost Market Value Carrying Value
-------------- ------------ --------------
<S> <C> <C> <C>
Short-term available-for-sale $3,200 $3,200 $3,200
Short-term held-to-maturity 3,062 3,086 3,062
Long-term held-to-maturity 113 113 113
------ ------ ------
$6,375 $6,399 $6,375
====== ====== ======
1998 Amortized Cost Market Value Carrying Value
-------------- ------------ --------------
Short-term held-to-maturity $3,200 $3,200 $3,200
Long-term held-to-maturity (see Note 6) 3,117 3,165 3,117
------ ------ ------
$6,317 $6,365 $6,317
====== ====== ======
</TABLE>
4. INVENTORIES
Inventories at current cost are as follows at June 30:
<TABLE>
<CAPTION>
In thousands 1999 1998
------ ------
<S> <C> <C>
Parts and raw materials $3,233 $3,302
Work-in-process and finished goods 2,102 2,373
------ ------
$5,335 $5,675
====== ======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following at June 30:
<TABLE>
<CAPTION>
In thousands 1999 1998
------- -------
<S> <C> <C>
Land $ 671 $ 691
Buildings 4,465 4,432
Machinery and equipment 5,841 4,928
Vehicles 463 690
------- -------
11,440 10,741
Less: accumulated depreciation 6,456 5,816
------- -------
$ 4,984 $ 4,925
======= =======
</TABLE>
14
<PAGE> 10
6. FINANCING ARRANGEMENTS
The Company maintains unsecured bank lines of credit providing for short term
borrowings of up to $3.6 million at market rates. The Company did not have any
amounts outstanding at June 30, 1999 under these bank lines of credit. The
Company had $83,000 outstanding at June 30, 1998 under these bank lines of
credit. The Company is not subject to commitment fees related to the unused
portion of the lines of credit.
At June 30, 1999, the Company had a foreign denominated mortgage note payable
totaling $68,000 bearing interest at an average rate of 7.4%. Principal payments
are due in equal installments until 2006 with the current portion totaling
approximately $10,000 per year.
At June 30, 1999, the Company had a term note maturing in fiscal 2000 and
denominated in German marks for $1,058,000 carrying a 9.25% fixed interest rate
and requiring a balloon principal payment upon maturity. The note is
collateralized by a long-term held-to-maturity investment.
The carrying amount of this term note approximates its fair value.
7. INCOME TAXES
Pre-tax income and the provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
------- ------ -------
<S> <C> <C> <C>
Pre-tax income (loss):
Domestic $ 2,579 $3,266 $ 2,705
Foreign 395 268 (3)
------- ------ -------
2,974 3,534 2,702
======= ====== =======
Current taxes:
Federal and state 934 845 929
Foreign 93 153 --
------- ------ -------
1,027 998 929
Deferred taxes, federal and state (89) 112 (64)
------- ------ -------
Total taxes $ 938 $1,110 $ 865
======= ====== =======
</TABLE>
The provision includes deferred taxes resulting from temporary differences in
the recognition of income and expense for tax and financial reporting purposes.
The sources of these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Depreciation $ 17 $ 14 $ 40
Inventories and reserves (108) 185 (139)
Other items, net 2 (87) 35
----- ----- -----
$ (89) $ 112 $ (64)
===== ===== =====
</TABLE>
A reconciliation of the effective income tax rate to the amount computed by
applying the statutory federal income tax rate to income before income taxes
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 2.4 2.8 3.0
Foreign income .4 1.7 --
Tax-exempt foreign sales income (2.5) (3.0) (3.0)
Tax-exempt interest and dividends received exclusion (1.8) (2.4) (2.4)
Research and development credits (2.2) (1.6) (1.6)
Other items, net 1.2 (0.1) 2.0
---- ---- ----
Effective income tax rate 31.5% 31.4% 32.0%
==== ==== ====
</TABLE>
15
<PAGE> 11
Components of net deferred tax assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998
----- -----
<S> <C> <C>
Current asset (liability):
Inventories and reserves $ 311 $ 203
Employee compensation and benefits 15 (3)
Other 25 31
----- -----
$ 351 $ 231
===== =====
Noncurrent liability (asset):
Depreciation and difference in asset basis $ (39) $ (19)
Amortization of patents 167 128
Foreign exchange on inter-company notes (1) (10)
Deferred gain on sale/leaseback transaction -- (3)
----- -----
$ 127 $ 96
===== =====
</TABLE>
8. SEGMENT REPORTING
The Company engages in one line of business defined as the development,
manufacture, sale and service of microwave-based instrumentation for testing,
analysis and process control in analytical laboratory and industrial markets.
The Company considers this to be one industry segment for financial reporting
purposes. The Company operates three subsidiaries in Europe primarily for the
distribution of microwave-based instrumentation produced by the parent.
Financial data by geographic area is presented below:
<TABLE>
<CAPTION>
In thousands
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET SALES:
U.S. operations:
Unaffiliated customers:
U.S $ 18,189 $ 17,793 $ 16,165
Europe 2,807 3,311 2,221
Asia 2,591 2,678 3,855
Other 2,908 3,064 2,561
Inter-area transfers 1,844 2,724 2,308
-------- -------- --------
$ 28,339 $ 29,570 $ 27,110
======== ======== ========
European operations:
Unaffiliated customers 5,582 5,516 5,273
Eliminations (1,844) (2,724) (2,308)
-------- -------- --------
Consolidated $ 32,077 $ 32,362 $ 30,075
======== ======== ========
NET INCOME (LOSS):
U.S. operations $ 1,541 $ 2,446 $ 1,776
European operations 286 35 (3)
Eliminations 209 (57) 64
-------- -------- --------
Consolidated $ 2,036 $ 2,424 $ 1,837
======== ======== ========
IDENTIFIABLE ASSETS:
U.S. operations $ 24,634 $ 24,659 $ 25,506
European operations 4,365 4,652 4,967
Eliminations (443) (1,013) (1,259)
-------- -------- --------
Consolidated $ 28,556 $ 28,298 $ 29,214
======== ======== ========
</TABLE>
16
<PAGE> 12
9. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory profit-sharing and a 401(k) tax deferred
savings plan covering all employees meeting age and service requirements.
Participants can make pre-tax contributions with the Company matching certain
percentages of employee contributions. In addition to Company matching
contributions under the 401(k) plan, contributions may be made as determined by
the Board of Directors. The Company's policy is to fund amounts accrued. Expense
related to this plan amounted to $497,000, $573,000 and $569,000 for the years
ended June 30, 1999, 1998 and 1997, respectively.
10. 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 shares
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 they were outstanding. Income and share information for the years ended
June 30, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
In thousands, except per share data 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net income $2,036 $2,424 $1,837
Less: preferred stock dividends -- -- --
------ ------ ------
Income available to common shareholders $2,036 $2,424 $1,837
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Fraction Fraction Fraction
DATES OUTSTANDING Shares of Period Shares Shares of Period Shares Shares of Period Shares
------ --------- ------ ------ --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shares outstanding, beginning 3,180 3,487 3,551
Shares repurchased during the period (137) 237/365 (89) (402) 77/365 (85) (80) 160/365 (35)
Stock options exercised during the period 3 240/365 2 95 127/365 33 16 320/365 14
----- ------- ------ ---- ------- ----- --- ------- -----
Weighted average shares 3,093 3,435 3,530
----- ------- ------ ---- ------- ----- --- ------- -----
Basic earnings per common share $ .66 $ .71 $ .52
----- ------- ------ ---- ------- ------ --- ------- ------
</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.
Income and share information for the year ended June 30, 1999, 1998 and 1997
follows:
<TABLE>
<CAPTION>
In thousands, except per share data 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net Income $2,036 $2,424 $1,837
Less: preferred stock dividends -- -- --
------ ------ ------
Income available to common stockholders $2,036 $2,424 $1,837
====== ====== ======
Weighted average shares 3,093 3,435 3,530
Dilutive potential common shares (stock options) 9 34 20
------ ------ ------
Adjusted weighted average shares 3,102 3,469 3,550
====== ====== ======
Diluted earnings per share $ .66 $ .70 $ .52
====== ====== ======
</TABLE>
Options to purchase 272,000, 160,000 and 308,000 shares of common stock at a
weighted average price of $9.54, $10.45 and $9.52 per share were outstanding
during the twelve months ended June 30, 1999, 1998 and 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.
17
<PAGE> 13
11. MANAGEMENT INCENTIVE AND STOCK OPTION PLANS
In fiscal 1994, the Company adopted the 1993 Management Equity Plan under which
officers and other key employees may receive stock and cash performance-based
incentive awards. Up to 375,000 shares are authorized under this plan. At June
30, 1999, 96,000 shares were reserved for future grants. No compensation expense
was accrued under the plan in 1999, 1998, and 1997.
Also in fiscal 1994, the Company adopted the 1993 Nonqualified Stock Option Plan
for Non-Employee Directors under which options may be granted to outside
directors. Up to 25,000 shares are authorized under this plan. At June 30, 1999,
3,000 shares were reserved for future grants.
Additional information with respect to the 1993 Management Equity Plan and 1993
Nonqualified Stock Option Plan is as follows:
<TABLE>
<CAPTION>
In thousands Shares
------
<S> <C>
STOCK AWARDS:
1996 awards at $13.00 per share 7
1997 awards --
1998 & 1999 awards --
---
Total stock awards at $13.00 per share 7
OPTIONS TO PURCHASE SHARES:
Outstanding at June 30, 1996
at $11.00 - $13.75 per share 105
---
Granted at $8.25 - $10.69 per share 65
Canceled at $10.69 - $13.00 per share (20)
---
Outstanding at June 30, 1997
at $8.25 - $13.75 per share 150
---
Granted at $9.06 - $11.25 per share 65
Exercised at $10.69 - $11.00 per share (2)
Canceled at $9.06 - $13.00 per share (21)
---
Outstanding at June 30, 1998
at $8.25 - $13.75 192
Granted at $7.50 - $11.38 per share 117
Exercised at $10.69 - $11.00 per share --
Canceled at $9.06 - $13.00 per share (13)
---
Outstanding at June 30, 1999
at $7.50 - $13.75 296
===
Options exercisable at June 30, 1999
at $8.25 - $13.75 110
===
</TABLE>
Effective with the approval of the above plans, the Company's 1986 and 1987
stock option plans, under which options were granted to officers, employees, and
outside directors, were terminated. At June 30, 1999, no shares were reserved
for future grants.
Additional information with respect to the 1986 and 1987 stock option plans is
as follows:
<TABLE>
<CAPTION>
In thousands Shares
------
OPTIONS TO PURCHASE SHARES:
<S> <C>
Outstanding at June 30, 1996
at $6.56 - $13.63 per share 363
---
Exercised at $7.69 - $10.50 per share (16)
Canceled at $8.50 - $10.50 per share (47)
---
Outstanding at June 30, 1997
at $6.56 - $13.63 per share 300
---
Exercised at $6.56 - $10.50 per share (93)
Canceled at $7.75 - $11.25 per share (24)
---
Outstanding at June 30, 1998 at $7.75 - $13.63 per share 183
---
Exercised at $7.75 - $7.88 per share (3)
Canceled at $8.50 - $13.62 per share (44)
---
Outstanding at June 30, 1999
at $8.00 - $10.50 per share 136
===
Options exercisable at June 30, 1999
at $8.00 - $10.50 136
===
</TABLE>
Options granted under all stock option plans are exercisable at the market value
of the shares at the date of grant. The options are exercisable over a period
not to exceed ten years. Tax benefits arising from disqualifying dispositions
are recognized at the time of disposition, are credited to additional paid-in
capital and recorded as noncash activity on the statement of cash flows.
18
<PAGE> 14
Pro Forma Information - The Company continues to apply APB No. 25 in accounting
for its stock-based compensation plans. Accordingly, no compensation cost has
been recognized in the accompanying consolidated statements of operations for
its stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined in accordance with the fair value method
prescribed in SFAS No. 123, the Company's net income and earnings per share
would have changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income as reported $ 2,036 $ 2,424 $ 1,837
Net income pro forma 1,843 2,291 1,751
Earnings per share
Basic as reported $ .66 $ .71 $ .52
Basic pro forma .60 .67 .50
Diluted as reported $ .66 $ .70 $ .52
Diluted pro forma .59 .66 .49
</TABLE>
The above pro forma amounts include compensation expense for options granted
since July 1, 1996, and may not be representative of that to be expected in
future years. The pro forma amounts assume that the fair value assigned to the
options were amortized using the straight-line method over the vesting period of
the options, which is one to four years.
The fair value of each option granted under the stock option plans is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.1% 5.8% 6.5%
Expected life 6 years 6 years 6 years
Expected volatility 41% 40% 30%
</TABLE>
A dividend yield of zero was used for each year. These assumptions resulted in
weighted-average values as of the grant dates of $4.71, $5.26 and $4.52 per
share for stock options granted in 1999, 1998 and 1997 respectively.
12. QUARTERLY INFORMATION (UNAUDITED)
Selected quarterly results of operations and quarterly stock prices for fiscal
1999 and 1998 are summarized in the table below. The stock prices represent the
high and low sales prices for CEM common shares as reported on the Nasdaq Stock
Market.
No cash dividends were declared during the two fiscal years ended June 30, 1999.
<TABLE>
<CAPTION>
In thousands, except per share data Q-1 Q-2 Q-3 Q-4 Year
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
1999
Net sales $ 7,152 $ 8,492 $ 7,537 $ 8,896 $ 32,077
Gross profit 3,643 4,429 4,011 4,884 16,967
Net income 283 702 327 724 2,036
Net income per share
Basic .09 .23 .11 .24 .66
Diluted .09 .23 .11 .24 .66
Stock Price:
High $ 13.00 $ 11.50 $ 10.13 $ 9.13 $ 13.00
Low 10.00 9.00 7.88 6.88 6.88
1998
Net sales $ 6,603 $ 8,705 $ 8,012 $ 9,042 $ 32,362
Gross profit 3,542 4,654 4,234 4,902 17,332
Net income 241 725 582 876 2,424
Net income per share
Basic .07 .21 .17 .26 .71
Diluted .07 .21 .17 .26 .70
Stock Price:
High $ 10.75 $ 11.25 $ 11.63 $ 13.75 $ 13.75
Low 7.50 9.00 9.25 8.75 7.50
</TABLE>
19
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of CEM Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
CEM Corporation and its subsidiaries at June 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
July 21, 1999
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the years ended June 30
In thousands, except per share data 1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income Statement and Cash Flows
Net sales $32,077 $32,362 $30,075 $31,477 $31,611
Income from operations 2,647 3,049 2,378 4,136 4,479
Net income 2,036 2,424 1,837 2,908 3,179
Net income per share
Basic $ .66 $ .71 $ .52 $ .80 $ .88
Diluted .66 .70 .52 .78 .85
Average shares outstanding
Basic 3,093 3,435 3,530 3,626 3,630
Diluted 3,102 3,469 3,550 3,748 3,735
Net cash provided by operating activities $ 2,850 $ 3,744 $ 4,883 $ 2,020 $ 3,134
<CAPTION>
As of June 30
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet
Working capital $15,899 $13,636 $16,409 $15,549 $14,047
Total assets 28,556 28,298 29,214 27,584 26,653
Long-term debt 173 1,177 1,229 1,417 1,578
Shareholders' equity $22,095 $21,719 $23,480 $22,351 $20,592
</TABLE>
20
<PAGE> 16
CORPORATE INFORMATION
OFFICERS & DIRECTORS
Dr. Michael J. Collins
Director, President and
Chief Executive Officer
John L. Chanon
Director, Area Partner
Tatum CFO Partners LP (CFO Services)
Richard N. Decker
Vice President-Finance
Chief Financial Officer
Secretary and Treasurer
George F. Krall
Director, President and
Chief Executive Officer
Mebane Packaging Group
(Packaging Products)
Ronald A. Norelli
Chairman of the Board
President and Chief Executive Officer
Norelli & Company
(Management Consulting)
CORPORATE ADDRESS
CEM Corporation
3100 Smith Farm Road
P.O. Box 200
Matthews, North Carolina 28106-0200
(704) 821-7015
email: [email protected]
www.cem.com
TRANSFER AGENT
American Stock Transfer & Trust
New York, New York
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Charlotte, North Carolina
GENERAL COUNSEL
Robinson, Bradshaw & Hinson, P.A.
Charlotte, North Carolina
SUBSIDIARIES
CEM (Microwave Technology) Ltd.
Unit 2 Middle Slade
Buckingham Industrial Park
Buckingham MK18 1 WA
United Kingdom
Tel: (44) 1280-822873
Fax: (44) 1280-822342
email: [email protected]
CEM GmbH
Carl-Friedrich-Gauss-Str. 9
47475 Kamp-Linfort
Germany
Tel: (49) 2842-9644-0
Fax: (49) 2842-9644-11
email: [email protected]
www.cem.com.de
CEM S.r.l.
Via Dell'Artigianato, 6/8
24055 Cologno al Serio (Bg)
Italy
Tel: (39) 035-896224
Fax: (39) 035-891661
email: [email protected]
FORM 10-K/INVESTOR CONTACT
The Company's Annual Report on Form 10-K for the year ended June 30, 1999 filed
with the Securities and Exchange Commission is available without charge to
shareholders upon written request. These requests and other investor contacts
should be directed to Richard N. Decker, Secretary, at the corporate address.
ANNUAL MEETING
The annual meeting of shareholders of CEM Corporation will be held at 11:00 am
local time on November 4, 1999 at the corporate offices, 3100 Smith Farm Road,
Matthews, North Carolina. Shareholders of record as of September 8, 1999 will
be entitled to vote at this meeting.
TRADEMARKS
CEM(R), MAC(TM), MAS 7000(TM), Airwave 7000(TM), LabWave 9000(TM), CEM STAR
System 6(R), MARS 5(R), ProFat 2(TM), CustomerCare Plus(R), PrepLink(TM), Clean
STAR(TM), MARS X(TM), and SMART System5(TM) are CEM Corporation trademarks. For
ease of reading, designations of trademarks have sometimes been omitted from
the text of this report.
NASDAQ SYMBOL
The Company's common shares are traded on the Nasdaq Stock Market (National
Market System) under the symbol CEMX.
SHAREHOLDERS OF RECORD
As of September 8, 1999, The Company had approximately 1,550 shareholders of
record and an estimate of the number of individual participants represented by
security position listings.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of CEM Corporation on Form S-8 (File Numbers 33-11952, 33-25739,
33-53694, 33-75366, 33-75368, 33-80136 and 33-87676) of our report dated July
21, 1999, on our audits of the consolidated financial statements and financial
statement schedule of CEM Corporation as of June 30, 1999 and 1998, and for the
years ended June 30, 1999, 1998 and 1997, which report is included in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
September 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,865
<SECURITIES> 6,262
<RECEIVABLES> 6,925
<ALLOWANCES> 291
<INVENTORY> 5,335
<CURRENT-ASSETS> 22,060
<PP&E> 11,440
<DEPRECIATION> 6,456
<TOTAL-ASSETS> 28,556
<CURRENT-LIABILITIES> 6,161
<BONDS> 173
0
0
<COMMON> 152
<OTHER-SE> 21,943
<TOTAL-LIABILITY-AND-EQUITY> 28,556
<SALES> 32,077
<TOTAL-REVENUES> 32,077
<CGS> 15,110
<TOTAL-COSTS> 15,110
<OTHER-EXPENSES> 14,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,974
<INCOME-TAX> 938
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,036
<EPS-BASIC> .66
<EPS-DILUTED> .66
</TABLE>
