10-Q 1 mocon014632_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 September 30, 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 ___ 5,460,312 Common Shares were outstanding as of September 30, 2001 MOCON, INC. INDEX TO FORM 10-Q For the Quarter Ended September 30, 2001 Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) September 30, 2001 and December 31, 2000 1 Condensed Consolidated Statements of Income (Unaudited) Three months and nine months ended September 30, 2001 and 2000 2 Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 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 7-10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MOCON, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, ASSETS 2001 2000 ------------ ------------ Current assets: Cash and temporary cash investments $ 2,999,748 $ 641,942 Marketable securities, current 3,242,017 4,755,640 Accounts receivable, net 2,941,918 2,848,049 Other receivables 63,098 118,807 Inventories 2,028,676 2,127,059 Prepaid expenses 232,258 243,291 Deferred income taxes 343,000 343,000 ------------ ------------ Total current assets 11,850,715 11,077,788 ------------ ------------ Marketable securities, noncurrent 2,147,271 4,111,690 ------------ ------------ Net property and equipment 1,474,036 1,198,954 ------------ ------------ Other assets: Goodwill, net 755,804 841,516 Technology rights and other intangibles, net 995,911 1,055,543 Other 136,927 132,087 ------------ ------------ Total other assets 1,888,642 2,029,146 ------------ ------------ TOTAL ASSETS $ 17,360,664 $ 18,417,578 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 658,874 $ 859,103 Accrued compensation and vacation 631,206 603,929 Other accrued expenses 1,013,430 1,152,258 ------------ ------------ Total current liabilities 2,303,510 2,615,290 ------------ ------------ Deferred income taxes 170,800 187,000 ------------ ------------ TOTAL LIABILITIES 2,474,310 2,802,290 ------------ ------------ Stockholders' equity: Common stock - $.10 par value 546,031 580,943 Capital in excess of par value 7,162 -- Retained earnings 14,315,995 15,034,345 Net unrealized gain on marketable securities 17,166 -- ------------ ------------ Total stockholders' equity 14,886,354 15,615,288 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,360,664 $ 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 Nine Months Ended September 30, September 30, -------------------------------- -------------------------------- 2000 2000 As reclassified - As reclassified - 2001 See Note 4 2001 See Note 4 -------------- -------------- -------------- -------------- Sales Products $ 4,031,649 $ 3,636,938 $ 11,855,028 $ 10,829,370 Consulting services 552,941 593,194 1,793,522 1,903,368 -------------- -------------- -------------- -------------- Total sales 4,584,590 4,230,132 13,648,550 12,732,738 -------------- -------------- -------------- -------------- Cost of Sales Products 1,449,103 1,331,689 4,201,842 3,803,615 Consulting services 288,754 280,642 946,918 927,916 -------------- -------------- -------------- -------------- Total cost of sales 1,737,857 1,612,331 5,148,760 4,731,531 -------------- -------------- -------------- -------------- Gross profit 2,846,733 2,617,801 8,499,790 8,001,207 -------------- -------------- -------------- -------------- Selling, general & administrative expenses 1,397,354 1,256,985 4,233,336 3,948,034 Research & development expenses 234,383 271,111 758,575 820,882 -------------- -------------- -------------- -------------- 1,631,737 1,528,096 4,991,911 4,768,916 -------------- -------------- -------------- -------------- Operating income 1,214,996 1,089,705 3,507,879 3,232,291 Investment income 99,337 125,860 337,689 342,619 -------------- -------------- -------------- -------------- Income before income taxes 1,314,333 1,215,565 3,845,568 3,574,910 Income taxes 434,000 389,000 1,244,000 1,144,000 -------------- -------------- -------------- -------------- Net income $ 880,333 $ 826,565 $ 2,601,568 $ 2,430,910 ============== ============== ============== ============== Net income per common share: Basic $ 0.16 $ 0.14 $ 0.47 $ 0.40 ============== ============== ============== ============== Diluted $ 0.16 $ 0.14 $ 0.46 $ 0.40 ============== ============== ============== ============== Weighted average shares outstanding: Basic 5,459,867 5,969,722 5,545,361 6,029,000 ============== ============== ============== ============== Diluted 5,535,547 5,980,296 5,602,767 6,040,393 ============== ============== ============== ==============
See accompanying notes to condensed consolidated financial statements. -2- MOCON, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ----------------------------- 2001 2000 ------------ ------------ Cash flows from operating activities: Net income $ 2,601,568 $ 2,430,910 Total adjustments to reconcile net income to net cash provided by operating activities 312,679 (431,923) ------------ ------------ Net cash provided by operating activities 2,914,247 1,998,987 ------------ ------------ Cash flows from investing activities: Purchases of marketable securities (1,172,670) (4,064,354) Proceeds from sales of marketable securities 4,667,878 3,995,879 Purchases of property and equipment (652,698) (552,702) Purchases of patents and trademarks (25,851) (408,981) Other (4,135) (4,719) ------------ ------------ Net cash provided by (used in) investing activities 2,812,524 (1,034,877) ------------ ------------ Cash flows from financing activities: Proceeds from the exercise of stock options 10,149 30,319 Purchases and retirement of common stock (2,378,473) (1,187,625) Dividends paid (1,003,641) (966,452) Other 3,000 -- ------------ ------------ Net cash used in financing activities (3,368,965) (2,123,758) ------------ ------------ Net increase (decrease) in cash and temporary cash investments 2,357,806 (1,159,648) ------------ ------------ Cash and temporary cash investments: Beginning of period 641,942 1,275,838 ------------ ------------ End of period $ 2,999,748 $ 116,190 ============ ============ Supplemental schedule of noncash investing activities: Unrealized holding gain on available-for-sale securities $ 17,166 --
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 September 30, 2001, the condensed consolidated statements of income for the three and nine month periods ended September 30, 2001 and 2000, and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 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 September 30, 2001, and for all periods presented, have been made. The results of operations for the period ended September 30, 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: September 30, December 31, 2001 2000 ------------- ------------- Finished Products $ 168,256 $ 138,505 Work in Process 601,489 710,351 Raw Materials 1,258,931 1,278,203 ------------- ------------- $ 2,028,676 $ 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 common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average common and dilutive potential common stock 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 and nine month periods ended September 30, 2001, and 2000:
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ------------------------- 2001 2000 2001 2000 ------------------------------------------------------------------------------------------ Weighted shares of common stock outstanding - basic 5,459,867 5,969,722 5,545,361 6,029,000 Weighted shares of common stock assumed upon exercise of stock options 75,680 10,574 57,406 11,393 ------------------------------------------------------------------------------------------ Weighted shares of common stock outstanding - diluted 5,535,547 5,980,296 5,602,767 6,040,393 ==========================================================================================
Note 4 - Revenue Recognition During the quarter ended December 31, 2000, the Company began classifying 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 distributor commission expenses of $360,629 and $923,080 as a reduction in revenues for the three and nine months ended September 30, 2000, respectively. 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 at September 30, 2001, resulted in a net unrealized gain of $17,166 within stockholders' equity. 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 September 30, ------------------------ 2001 2000 ------------------------------------------------------- Net income $ 880,333 $ 826,565 Net unrealized gain on marketable securities 17,166 -- ------------------------------------------------------- Comprehensive income $ 897,499 $ 826,565 ======================================================= Note 8 - Subsequent Event On October 24, 2001 the Company acquired Questar Baseline Industries, Inc. (Baseline) of Lyons, Colorado, for approximately $3.4 million. Baseline offers a full line of advanced gas analysis and monitoring instrumentation used in applications such as oil and gas exploration, process gas analysis, and industrial hygiene and safety applications. The acquisition will be accounted for as a purchase combination subject to the provisions of SFAS No. 141. For the nine months ended September 30, 2001, Baseline had sales of approximately $2,794,000 (unaudited). -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. The forward-looking statements in this filing are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 statement because these statements are subject to a number of risks and uncertainties including the risk factors described in the Company's annual report on Form 10-K for the year ended December 31, 2000, including, but not limited to, the risks entitled "Growth Potential," "Technological Change, Obsolescence, and the Development and Acceptance of New Products" and "Dependence on Capital Spending Policies and Government Funding." Persons reading this Form 10-Q should carefully review the discussion of all of the risk factors described in such Form 10-K and in the Company's other filings made from time to time with the Securities and Exchange Commission. Results of Operations Sales for the quarter ended September 30, 2001, were $4,584,590, up 8 percent from third quarter 2000 sales of $4,230,132. The increase in third quarter sales is primarily the result of an increase in the sales volume of the Company's permeation products, and general price increases, offset somewhat by a decrease in the sales volume of the Company's sample preparation products. Sales for the nine month period ended September 30, 2001, were $13,648,550, a 7 percent increase from the sales for the first nine months of 2000 of $12,732,738. The 7 percent increase is primarily due to increases in the sales volume of the Company's permeation, weighing, GC analyzer, and headspace analyzer products, and general price increases, offset somewhat by a decrease in the sales volume of the Company's sample preparation and leak detection products. 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 third quarter of 2001, product sales were $4,031,649 and consulting services were $552,941, or 88 and 12 percent, respectively, of the Company's total third quarter 2001 sales. This compares to product sales of $3,636,938 and consulting services of $593,194, or 86 and 14 percent of total sales, in the third quarter of 2000. For the nine months ended September 30, 2001, product sales were $11,855,028 and consulting services were $1,793,522, or 87 and 13 percent, respectively, of the Company's 2001 year-to-date sales compared to product sales of $10,829,370 and consulting services of $1,903,368, or 85 and 15 percent of total sales for the first nine months of 2000. -7- Gross profit was 62 percent of sales for the quarter and the nine month period ended September 30, 2001, and 62 percent of sales for the quarter and 63 percent of sales for the nine month period ended September 30, 2000. The gross profit margin was 63 percent of sales in each of the fiscal years ended December 31, 2000, 1999 and 1998, and the Company currently expects the gross profit margin for the year ending December 31, 2001 to be in a range from 60 to 65 percent of sales. Selling, general and administrative (SG&A) expenses increased approximately $140,000 in the third quarter of 2001 compared to the same quarter last year, due primarily to increases in selling expenses related to the increased sales. SG&A expenses represented 30 percent of sales in the third quarter of 2001 and 2000, and 31 percent of sales for both nine month periods ended September 30, 2001 and 2000. Research and development (R&D) expenses as a percentage of sales were 5 percent for the three month period ended September 30, 2001, and 6 percent for the same period in 2000. For the nine month periods ended September 30, 2001 and 2000, R&D expenses were 6 percent of sales. R&D expenses have been somewhat lower in 2001 due in part to an SBIR grant awarded by the National Science Foundation. Continued R&D expenditures are necessary as the Company develops new products and technologies to expand in its niche markets. For the foreseeable future, the Company expects to spend on an annual basis approximately 5 to 7 percent of sales on R&D. Investment income decreased approximately $27,000 in the third quarter of 2001 as compared to the third quarter of 2000. For the nine months ended September 30, 2001, investment income decreased approximately $5,000. The decreases are primarily the result of lower cash balances in 2001. The Company's provision for income taxes was 33 percent of income before income taxes for the three month period and 32 percent for the nine month period ending September 30, 2001, compared to 32 percent for the same periods in 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 7 percent to $880,333 for the third quarter of 2001, compared to $826,565 for the third quarter of 2000. Basic and diluted net income per share was 16 cents for the third quarter of 2001, compared to 14 cents for the same period in 2000. For the nine months ended September 30, 2001, net income increased 7 percent to $2,601,568 compared to $2,430,910 for the nine months ended September 30, 2000. Basic net income per share was 47 cents and diluted net income per share was 46 cents for the nine month period ended September 30, 2001. Both basic and diluted net income per share were 40 cents for the nine month period ended September 30, 2000. Liquidity and Capital Resources The Company continues to maintain a strong financial position. Total cash, temporary cash investments and marketable securities decreased approximately $1,120,000 during the nine months ended September 30, 2001. The Company used cash resources to pay dividends of approximately $1,004,000, and to repurchase shares of the Company's common stock during the period totaling approximately $2,378,000. Depending upon market conditions, the Company may continue to repurchase shares of its common stock on the open market at prices not exceeding the market price. -8- The Company has no long-term debt or material commitments for capital expenditures as of September 30, 2001. The Company's plant and equipment do not require 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 equipment expenditures and dividend payments in the foreseeable future. New Accounting Pronouncements In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The Company is required to adopt the provisions of Statement 141 immediately, and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. As of September 30, 2001, the Company has unamortized goodwill in the amount of approximately $756,000 and unamortized identifiable intangible assets related to acquisitions in the amount of approximately $744,000, both of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was approximately $123,000 and $86,000 for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. -9- In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it retains many of the fundamental provisions of that Statement. SFAS No. 144 becomes effective for fiscal years beginning after December 15, 2001. The Company is evaluating SFAS No. 144 to determine the impact on its financial condition and results of operations. -10- 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. -11- 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 September 30, 2001. -12- 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: November 13, 2001 /s/ Robert L. Demorest Robert L. Demorest, Chairman, President and Chief Executive Officer Date: November 13, 2001 /s/ Dane D. Anderson Dane D. Anderson, Vice President, Treasurer and Chief Financial Officer -13-