10-Q 1 mocon011380_10q.txt MOCON, INC. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _____________ Commission File Number 0-9273 MOCON, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0903312 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7500 Boone Avenue North, Minneapolis, Minnesota 55428 (Address of principal executive offices) (Zip code) (763) 493-6370 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the SECURITIES EXCHANGE ACT OF 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ 5,456,277 Common Shares were outstanding as of March 31, 2001 MOCON, INC. INDEX TO FORM 10-Q For the Quarter Ended March 31, 2001 Page Number PART I. FINANCIAL INFORMATION ------ Item 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) March 31, 2001 and December 31, 2000 1 Condensed Consolidated Statements of Income (Unaudited) Three months ended March 31, 2001 and 2000 2 Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2001 and 2000 3 Notes to Condensed Consolidated Financial Statements (Unaudited) 4-6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7-8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MOCON, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 2001 2000 ------------ ------------ ASSETS Current assets: Cash and temporary cash investments $ 331,566 $ 641,942 Marketable securities, current 3,679,478 4,755,640 Accounts receivable 2,391,893 2,848,049 Other receivables 95,120 118,807 Inventories 2,068,900 2,127,059 Prepaid expenses 213,232 243,291 Deferred income taxes 343,000 343,000 ------------ ------------ Total current assets 9,123,189 11,077,788 ------------ ------------ Marketable securities, noncurrent 3,967,843 4,111,690 ------------ ------------ Net property and equipment 1,364,530 1,198,954 ------------ ------------ Other assets: Goodwill, net 812,945 841,516 Technology rights and other intangibles, net 1,051,839 1,055,543 Other 133,525 132,087 ------------ ------------ Total other assets 1,998,309 2,029,146 ------------ ------------ TOTAL ASSETS $ 16,453,871 $ 18,417,578 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 717,570 $ 859,103 Accrued compensation and vacation 404,919 603,929 Other accrued 1,384,224 1,152,258 ------------ ------------ Total current liabilities 2,506,713 2,615,290 ------------ ------------ Deferred income taxes 181,600 187,000 ------------ ------------ TOTAL LIABILITIES 2,688,313 2,802,290 ------------ ------------ Stockholders' equity: Common stock - $.10 par value 545,628 580,943 Capital in excess of par value 252 -- Retained earnings 13,196,214 15,034,345 Net unrealized gain on marketable securities 23,464 -- ------------ ------------ Total stockholders' equity 13,765,558 15,615,288 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,453,871 $ 18,417,578 ============ ============
Note: The condensed consolidated balance sheet at December 31, 2000 has been summarized from the Company's audited consolidated balance sheet at that date. See accompanying notes to condensed consolidated financial statements. -1- MOCON, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, --------------------------------- 2000 As reclassified- 2001 See Note 4 -------------- -------------- Sales Products $ 3,903,842 $ 3,575,925 Consulting services 580,415 673,969 -------------- -------------- Total sales 4,484,257 4,249,894 -------------- -------------- Cost of Sales Products 1,333,546 1,272,713 Consulting services 370,532 312,540 -------------- -------------- Total cost of sales 1,704,078 1,585,253 -------------- -------------- Gross profit 2,780,179 2,664,641 -------------- -------------- Selling, general and administrative expenses 1,420,629 1,318,402 Research and development expenses 250,361 288,040 -------------- -------------- 1,670,990 1,606,442 Operating income 1,109,189 1,058,199 Investment income 132,050 109,751 -------------- -------------- Income before income taxes 1,241,239 1,167,950 Income taxes 397,000 374,000 -------------- -------------- Net income $ 844,239 $ 793,950 ============== ============== Net income per common share: Basic $ 0.15 $ 0.13 ============== ============== Diluted $ 0.15 $ 0.13 ============== ============== Weighted average shares outstanding: Basic 5,717,239 6,073,223 ============== ============== Diluted 5,764,165 6,090,953 ============== ==============
See accompanying notes to condensed consolidated financial statements. -2- MOCON, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, ----------------------------- 2001 2000 ------------ ------------ Cash flows from operating activities: Net income $ 844,239 $ 793,950 Total adjustments to reconcile net income to net cash provided by operating activities 618,139 583,949 ------------ ------------ Net cash provided by operating activities 1,462,378 1,377,899 ------------ ------------ Cash flows from investing activities: Purchases of marketable securities (1,029,716) (1,404,977) Proceeds from sales of marketable securities 2,273,189 926,086 Other (295,024) (496,616) ------------ ------------ Net cash provided by (used in) investing activities 948,449 (975,507) ------------ ------------ Cash flows from financing activities: Purchases and retirement of common stock (2,378,473) (159,375) Dividends paid (348,566) (304,078) Other 5,836 30,319 ------------ ------------ Net cash used in financing activities (2,721,203) (433,134) ------------ ------------ Net decrease in cash and temporary cash investments (310,376) (30,742) ------------ ------------ Cash and temporary cash investments: Beginning of period 641,942 1,275,838 ------------ ------------ End of period $ 331,566 $ 1,245,096 ============ ============ Supplemental schedule of noncash investing activities: Unrealized holding gain on available-for-sale securities $ 23,464 --
See accompanying notes to condensed consolidated financial statements. -3- MOCON, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Condensed Consolidated Financial Statements The condensed consolidated balance sheet as of March 31, 2001, the condensed consolidated statements of income for the three-month periods ended March 31, 2001 and 2000, and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2001 and 2000 have been prepared by the Company, without audit. However, all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows at March 31, 2001, and for all periods presented, have been made. The results of operations for the period ended March 31, 2001 are not necessarily indicative of operating results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2000 annual report to shareholders. Note 2 - Inventories Inventories consist of the following: March 31, December 31, 2001 2000 ------------ ------------ Finished Products $ 181,199 $ 138,505 Work in Process 548,117 710,351 Raw Materials 1,339,584 1,278,203 ------------ ------------ $ 2,068,900 $ 2,127,059 ============ ============ Note 3 - Net Income Per Common Share Basic net income per common share is computed by dividing net income by the weighted average of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average of common and dilutive potential common shares outstanding during the period. -4- The following table presents a reconciliation of the denominators used in the computation of net income per common share-basic and net income per common share-diluted for the three-month periods ended March 31, 2001, and 2000: Three Months Ended March 31, ----------------------------- 2001 2000 ------------------------------------------------------------------- Weighted shares of common stock outstanding - basic 5,717,239 6,073,223 Weighted shares of common stock assumed upon exercise of stock options 46,926 17,730 ------------------------------------------------------------------- Weighted shares of common stock outstanding - diluted 5,764,165 6,090,953 =================================================================== Note 4 - Revenue Recognition During the quarter ended December 31, 2000, the Company began classifying foreign distributor commission expenses as a reduction in revenue rather than operating expense. This reclassification has been reflected in the Company's historical financial statements, and has no effect on the Company's net earnings. The Company has reclassified foreign distributor commission expenses of $265,556 as a reduction in revenues for the quarter ended March 31, 2000. Note 5 - Marketable Securities During the quarter ended March 31, 2001, the Company sold $862,864 of held-to-maturity securities prior to their maturity. As further described in Note 6, the held-to-maturity securities were sold to reacquire shares from the Company's former CEO. As a result of the sale of these securities before their maturity, the Company is required to reclassify all securities as available-for-sale. Available-for-sale securities are recorded at fair value and resulted in a net unrealized gain of $23,464 within stockholders' equity. Realized gains and losses are recorded based on the specific identification method. For the quarter ended March 31, 2001, gross realized gains and losses were $1,417 and $1,253, respectively. Note 6 - Stock Repurchase In February of 2001, the Company's Board of Directors authorized the repurchase of up to $2.5 million of the Company's common stock. Pursuant to this authorization, the Company has acquired $2,053,469 of common stock of which $2,000,027 was acquired from the Company's former CEO. -5- Note 7 - Comprehensive Income Three Months Ended March 31, ---------------------------- 2001 2000 ----------------------------------------------------------- Net income $ 844,239 $ 793,950 Net unrealized gain on marketable securities 23,464 -- ----------------------------------------------------------- Comprehensive income $ 867,703 $ 793,950 =========================================================== -6- MOCON, INC. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition This Form 10-Q includes certain statements that are deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-Q that address activities, events, or developments that the Company expects, believes, or anticipates will or may occur in the future, are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks, and uncertainties, many of which are beyond the control of the Company. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. Results of Operations Sales for the quarter ended March 31, 2001, were $4,484,257, up 6% percent from first quarter 2000 sales of $4,249,894. The increase in first quarter sales is primarily the result of increases in the sales volume of the Company's weighing, headspace analyzer, and GC analyzer (Microanalytics) products and general price increases, offset somewhat by decreases in the sales volume of the Company's sample preparation (Lab Connections) products and consulting and analytical services. The Company derives its revenue from product sales and consulting services, consisting of standard laboratory testing services and consulting and analytical services performed for various customers. In the first quarter of 2001, product sales were $3,903,842 and consulting services were $580,415, or 87 and 13 percent respectively, of the Company's total first quarter 2001 sales. This compares to product sales of $3,575,925 and consulting services of $673,969 in the first quarter of 2000, or 84 and 16 percent of total sales, respectively. Gross profit was 62 percent of sales for the first quarter of 2001 and 63 percent for the first quarter of 2000. The 1 percent decline in overall gross profit margin was primarily due to increased consulting services costs related to expanded capabilities in this area, combined with a decrease in consulting services sales in the first quarter of 2001 compared with the first quarter 2000. The Company plans to closely monitor both sales and costs in this area to ensure that capabilities are matched appropriately to revenue levels. Selling, general and administrative (SG&A) expenses increased approximately $102,000 or 8 percent in the first quarter of 2001 compared to the first quarter of 2000. As a percentage of sales, SG&A expenses were 32 and 31 percent of sales for the first quarter of 2001 and 2000, respectively. The slight increase is due primarily to the increase in domestic commission and other expenses associated with the increase in sales, and to consulting expenses related to the Company's former Chief Executive Officer. -7- Research and development (R&D) expenses decreased approximately $38,000 or 13 percent in the first quarter of 2001 compared to the first quarter of 2000. As a percent of sales, R&D expenses were 6 and 7 percent of sales for the first quarter of 2001 and 2000, respectively. Continued R&D expenditures are necessary as the Company develops new products to expand in its niche markets. For the foreseeable future, the Company expects to spend on an annual basis approximately 5 to 8 percent of sales on R&D. Investment income increased approximately $22,000 in the first quarter of 2001 as compared to the first quarter of 2000. The increase is the result of higher yields, offset by lower average investment balances. The Company's provision for income taxes was 32 percent of income before income taxes for the three-month periods ending March 31, 2001 and 2000. The Company reviews the tax rate quarterly and may make adjustments to reflect changing estimates. Based on current operating conditions and income tax laws, the Company expects the effective tax rate for all of 2001 to be in a range of 32 to 35 percent. Net income increased 6 percent to $844,239 for the first quarter of 2001, compared to $793,950 for the first quarter of 2000. Basic net income per share was $.15 for the first quarter of 2001, compared to $.13 for the same period in 2000. Liquidity and Capital Resources The Company continues to maintain a strong financial position. Total cash, temporary cash investments and marketable securities decreased approximately $1,530,000 during the three months ended March 31, 2001. The Company used cash resources to pay dividends of approximately $349,000, and to repurchase shares of the Company's common stock during the period totaling approximately $2,378,000. Depending on market conditions, the Company may continue to repurchase shares of its common stock on the open market at prices not exceeding the market price. The Company has no long-term debt or material commitments for capital expenditures as of March 31, 2001. The Company's plant and equipment do not require any major expenditures to accommodate a significant increase in operating demands. The Company anticipates that a combination of its existing cash, temporary cash investments and marketable securities, plus an expected continuation of cash flow from operations, will continue to be adequate to fund operations, capital expenditures and dividend payments in the foreseeable future. New Accounting Pronouncements During 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (as amended by SFAS No. 137 with respect to the effective date), which establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. The Company adopted the new standard beginning with the first quarter of fiscal 2001. The adoption of SFAS No. 133 did not impact the Company's financial condition or results of operations. -8- MOCON, INC. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market Risk Management Substantially all of the Company's marketable securities are at fixed interest rates. However, almost all of the Company's marketable securities mature within three years, therefore, the Company believes that the market risk arising from its holding of these financial instruments is minimal. The Company currently sells its products and services in United States dollars; accordingly, the exposure to foreign currency exchange risk is minimal. There have been no significant changes since December 31, 2000. -9- MOCON, INC. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. Exhibits None b. Reports on Form 8-K There were no reports on Form 8-K filed for the quarter ended March 31, 2001. -10- SIGNATURES Pursuant to the requirements of the SECURITIES EXCHANGE ACT of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MOCON, INC. Registrant Date: May 7, 2001 /s/ Robert L. Demorest Robert L. Demorest, Chairman, President and Chief Executive Officer Date: May 7, 2001 /s/ Dane D. Anderson Dane D. Anderson, Vice President, Treasurer and Chief Financial Officer -11-