10-K 1 mocon021655_10k.txt MOCON, INC. FORM 10-K 12-31-01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ . COMMISSION FILE NO.: 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) Registrant's telephone number, including area code: (763) 493-6370 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.10 PAR VALUE --------------------- 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. [ ] As of March 14, 2002, 5,480,649 shares of Common Stock of the registrant were deemed outstanding, and the aggregate market value of the Common Stock of the registrant (based upon the average of the high and low sales prices of the Common Stock at that date as reported by the Nasdaq National Market), excluding outstanding shares beneficially owned by directors and executive officers, was approximately $48,605,116. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the registrant's Proxy Statement for its 2002 Annual Meeting of Shareholders to be held May 21, 2002. 1 PART I This Annual Report on Form 10-K 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 contained in this Annual Report, other than statements of historical facts, are forward-looking statements. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments, and other factors we believe are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks, and uncertainties, many of which are beyond our control. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as "may," "will," "should," "expects," "believes," "anticipates," "estimates," "continues," "projects," "potential," or "plan" or the negative of these or other similar terms. We caution you 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. ITEM 1. BUSINESS MOCON, Inc. designs, manufactures, markets, and services products and provides consulting services primarily in the measurement and analytical instrument and services markets. Our products include instruments that detect, measure and monitor gases and chemical compounds as well as products that prepare samples of various substances for laboratory analysis. Our principal business strategy is to employ our product development and technological capabilities, manufacturing processes, and marketing skills in market niches where we can successfully penetrate the market and then strive to become a leader in the market segment. Our management team continually emphasizes product innovation, product performance, quality improvements, cost reductions and other value-adding activities. Although some of the markets for our products are maturing, we continually seek growth opportunities through technological and product improvement, by acquiring and developing new products, and by acquiring new companies. MOCON, Inc. was incorporated in February 1966 and was initially involved in the commercialization of technology developed for the measurement of water vapor permeating through various materials. Prior to 1998, we expanded our business primarily through internally developing new products and technologies, acquiring product lines and technology, and licensing our products and technology. In 1998 and 2001, we supplemented our internal growth by acquiring a total of three companies that have provided us with additional technologies, products and product development expertise. In January 1998, we acquired Microanalytics Instrumentation Corp. which is located near Austin, Texas. Microanalytics produces various gas chromatographic (GC) instruments and provides services with an emphasis on multidimensional gas chromatography. A variety of GC specific applications have been developed by Microanalytics personnel, ranging from petroleum and petrochemical purity assay to aroma and off-odor analysis for the food and packaging fields. In December 1998, we acquired Lab Connections, Inc. which is located near Boston, Massachusetts. Lab Connections manufactures hardware and software interfaces that allow the 2 components of a particular substance to be identified by spectrometry and spectroscopy after they have been separated through chromatography. Lab Connections' products extend and enhance customers' productivity by allowing for the rapid preparation of samples for laboratory analysis furnishing information regarding the identity, composition and configuration of complex mixtures. Lab Connections' products are used by a variety of customers, including bio-pharmaceutical, polymer and consumer products companies as well as companies that analyze proteins, pharmaceutical compounds, polymers, adhesives and other materials. In October 2001, we acquired Questar Baseline Industries, Inc. from Questar InfoComm, Inc., a subsidiary of Questar Corporation. We have subsequently renamed this company "Baseline-MOCON, Inc." (Baseline). Baseline is located near Denver, Colorado. Baseline produces advanced gas analysis and monitoring instrumentation used in applications such as oil and gas exploration, process gas analysis, and industrial hygiene and safety applications. Our principal executive offices are located at 7500 Boone Avenue North, Minneapolis, Minnesota 55428 and our telephone number is (763) 493-6370. PRODUCTS AND SERVICES We develop, manufacture, market, and service measurement, analytical, monitoring, sample preparation and consulting products used to detect, measure, and analyze gases and chemical compounds. PERMEATION PRODUCTS Permeation products consist of systems and services that measure the rate at which various gases and vapors are transmitted through various materials. These products perform measurements under precise temperature and relative humidity conditions. The principal market for these products consists of manufacturers of packaging materials (including manufacturers of papers, plastics and coatings) and the users of such packaging materials, such as companies in the food, beverage, pharmaceutical and chemical industries. We also provide certain laboratory testing services to companies that use our permeation products. These services consist primarily of testing film and package permeation for companies that: o have insufficient business to justify the purchase of our products; o are not familiar with such equipment; or o have purchased our products but have a need for additional capacity. Permeation products accounted for approximately 62%, 63%, and 62% of our consolidated sales in 2001, 2000, and 1999, respectively. Permeation instruments that we currently manufacture include OX-TRAN(R) systems for oxygen transmission rates, PERMATRAN-W(R) systems for water vapor transmission rates, and PERMATRAN-C(TM) systems for carbon dioxide transmission rates. WEIGHING PRODUCTS We manufacture weighing products that automatically determine the weight of pharmaceutical capsules and tablets and rejects those that are out of acceptable limits. Our VERICAP(R) high-speed 3 capsule weighing system runs at rates up to 2,000 capsules per minute and can be integrated into a capsule production line in pharmaceutical factories. Other weighing systems that we sell are designed for off-line use, and we market these products primarily to the pharmaceutical industry. Weighing products accounted for less than 15% of our consolidated sales in each of 2001, 2000 and 1999. In addition to the VERICAP(R) high-speed capsule weighing systems, we also manufacture the VERITAB(R) high-speed tablet weighing systems and the AB(TM) automatic balance weighing systems for both tablets and capsules. CONSULTING AND ANALYTICAL SERVICES We provide consulting and analytical services, on a special project basis, for customers that require custom solutions to unique problems. Services that we typically provide relate to: o absorption or diffusion of various compounds; o harsh environment applications; o shelf-life concerns; o flavor or odor detection; or o other special permeation applications. In providing consulting and analytical services, we use our most advanced measurement technologies, including proprietary TRANSORPTION(R) technology. The principal market for the consulting and analytical services consists of manufacturers of foods, beverages, pharmaceuticals, plastics, chemicals, electronics, and personal care products. HEADSPACE ANALYZER PRODUCTS Our headspace analyzers are used to analyze the amount of oxygen and carbon dioxide present in the headspace of flexible and rigid packages. Some analyzers measure the oxygen and carbon dioxide content in flushing gases used in modified or controlled atmosphere packaging. The principal market for these products consists of packagers of foods, beverages and pharmaceuticals. The headspace analyzer products that we currently manufacture include the PAC CHECK(TM) series of headspace analyzers and the GSA(TM) series of on-line gas stream analyzers for continuous and intermittent monitoring of modified atmosphere packaging (MAP) and other gas flushing operations. SAMPLE PREPARATION PRODUCTS We design, manufacture, market, and service products used in sample preparation. These products consist of hardware and software interfaces that allow the components of a particular substance to be identified by spectroscopy after they have been separated through chromatography. The most time-consuming part of chemical analysis is sample preparation and any product that reduces total sample preparation time is of benefit to companies who analyze chemical compounds. Our products provide fully automatic sample collection from various Liquid Chromatographs and Gel Permeation Chromatographs in a form suitable for immediate examination by Fourier transform infra-red spectroscopy ("FTIR") and/or matrix assisted laser desorption ionization mass spectrometry ("MALDI-MS"). The principal market for these products is laboratories that analyze proteins, polymeric 4 compounds and adhesives. The sample preparation products that we currently manufacture are the LC-Transform(R) for interfacing to FTIR and the LC-Transform for interfacing to MALDI-MS. GAS CHROMATOGRAPHY ANALYZER PRODUCTS We integrate gas chromatography components that we purchase from third parties with GCs purchased from third parties to form multidimensional GC analyzer systems. The multidimensional GC analyzers that are formed through the integration of gas chromatography components with GCs represent state of the art technology in gas chromatographic separations and are used in identifying compounds causing off-odors in various products, in identifying critical aroma compounds, and in high purity analysis of single component matrixes. The GC analyzer products that we currently manufacture are the AROMATRAX(TM) systems for odor and aroma analysis and profiling, the PURI-TRAX(TM) systems consisting of a vinyl chloride monomer purity analysis system and a system for measuring trace levels of oxygenated hydrocarbons in a variety of hydrocarbon products and process streams such as liquefied petroleum gases, and the VAPO-JECT(TM) automated vaporizing injector system for permanent and liquefied petroleum gases. The principal markets for our GC analyzer products consist of food, beverage, petroleum, chemical and petrochemical manufacturers. LEAK DETECTION PRODUCTS The leak detection products that we manufacture detect leaks in sterile medical trays, pouches, blister packs and a wide range of other packages. We currently manufacture two types of leak detection instruments. The first type of instrument is a non-destructive leak detector that senses small amounts of carbon dioxide escaping from a package or tray. The second type of instrument detects leaks and checks for seal integrity by applying and measuring pressure within a package. The principal market for these products are packagers of sterile medical items, pharmaceuticals, and food products. GAS ANALYZER PRODUCTS The company sells its gas analyzer products in two categories. Its permanent gas analyzers and systems are installed in fixed locations at the monitoring sites and generally perform their functions continually or at regular intervals. Its portable gas analyzers are hand-held, compact and are used on occasions requiring mobile equipment. The gas analyzer products are for use in (1) industrial hygiene (detection of hazardous gases in the workplace), (2) hydrocarbon gas analysis for oil and gas exploration, and gas pipeline monitoring, (3) contaminant detection in the manufacture of specialty gases, and (4) environmental monitoring (tracking the release of, or the presence of, toxic substances). COMPETITION We have several competitors in both foreign and domestic markets for all of our products and services. The principal competitive factors for our products and services are: o product performance; o product reliability; o product support; and o price. 5 We compete with a variety of competitors in each market in which we sell our products. Some of our competitors have greater assets and resources than we do, and some are smaller than we. MANUFACTURING AND SUPPLIES We manufacture products at four locations in the United States. Our manufacturing capabilities include electro-mechanical assembly, testing, integration of components and systems, calibration, and validation of systems. Certain components that we use in our products are currently purchased from single source suppliers. An interruption of one of these sources could result in delays in our production while we locate an alternative supplier, which in turn could result in a loss of sales and income. There are other single source components for which we have determined that other sources are readily available. To date, we have experienced no significant production delays because of a supplier's inability to ship an acceptable component. MARKET RISK MANAGEMENT Substantially all of our marketable securities are at fixed interest rates and therefore the fair value of these instruments is affected by changes in market interest rates. However, virtually all of the marketable securities that we purchase mature within three years. Accordingly, we believe that the market risk associated with the holding of these financial instruments is minimal. We currently sell our products and services in United States dollars and therefore have minimal foreign currency exchange risk. BACKLOG As of December 31, 2001, our total backlog was $1,146,245 for all of our products as compared to $1,958,567 and $1,870,131 as of December 31, 2000 and 1999, respectively. We anticipate filling the entire current backlog in 2002. PATENTS AND LICENSES We believe that the protection afforded us by our patent rights is important to our business and we will continue to seek patent protection for our technology and products. We require certain employees and consultants to assign to us all inventions that are conceived and developed during their employment, except to the extent prohibited by applicable law. We hold both United States and international patents and have U.S. and international patents pending. We currently hold 37 U.S. patents and 26 international patents. In addition, we hold license rights under four U.S. patents subject to royalty payments. These patents and licenses will expire during the period from 2005 through 2018. We own or have applied for certain trademarks which protect and identify our products. Among the trademarks we own is MOCON(R), which we have designated as a house trademark under which all our products manufactured at our headquarters are sold. In addition, we hold the following trademarks and servicemarks: VERICAP(R), OX-TRAN(R), PERMATRAN-W(R), PROFILER(R), COULOX(R), HERSCH(R), VERITAB(R), AROMATRAN(R), SKYE(R), PAC CHECK 200(R), LC-Transform(R), TRANSORPTION(R), 1-TIME(R), AROMATRAX(R), PAC GUARD(R), and OPTIPERM(R). Our trademarks and servicemarks have a life, subject to periodic maintenance, of 10 to 20 years, which may be extended in accordance with applicable law. 6 RESEARCH AND DEVELOPMENT We incurred expenses of $1,042,961, $1,126,564 and $1,234,204 during the fiscal years ended December 31, 2001, 2000 and 1999, respectively, for research and development of our products. Research and development costs were approximately 5% of sales for the fiscal year ended December 31, 2001 and approximately 7% of sales for the fiscal years ended December 31, 2000 and 1999. For the foreseeable future, we expect to spend, on an annual basis, approximately 4% to 7% of our sales on research and development. WORKING CAPITAL PRACTICES We strive to maintain a level of inventory that is appropriate given our projected sales. Our standard domestic payment terms are net 30 days. International sales are, in some cases, transacted pursuant to letters of credit. FOREIGN AND DOMESTIC MARKETING We market our products and services throughout the United States and foreign markets. We sell the majority of our products in the United States and Canada through our sales force directly to end-users. Most of our sales in foreign markets are conducted through a network of independent representatives. To our knowledge, none of our independent sales representatives sells a material amount of product manufactured by any of our competitors. We make almost all of our foreign sales in U.S. dollars and consequently do not hedge against exchange rate fluctuations. Nonetheless, should the value of the dollar rise relative to other currencies, our sales abroad could be negatively impacted. Additionally, it is possible that changes to foreign tariff, trade or tax policies or foreign economic conditions could negatively affect our sales and earnings in the future. For information concerning our export sales by geographic area, see Note 9 of the Notes to Consolidated Financial Statements contained on page F-17. No single customer accounted for 10% or more of our consolidated revenues in any of the fiscal years ended December 31, 2001, 2000 and 1999, and we do not believe that the loss of any single customer would have a material adverse effect on our business or financial performance. One of our independent representatives accounted for approximately 10%, 16%, and 15% of sales in 2001, 2000, and 1999, respectively. Another independent representative accounted for approximately 14%, 9%, and 6% of sales in 2001, 2000, and 1999, respectively. For additional information concerning sales by such independent representatives, see Note 9 of the Notes to Consolidated Financial Statements contained on page F-17. Our business is not seasonal in nature. EMPLOYEES As of December 31, 2001, we had 110 full-time employees. Included in this total are approximately 18 scientists and engineers who research and develop potential new products. To protect our proprietary information, we have confidentiality and non-compete agreements with those of our employees who have access to sensitive information. None of our employees are represented by a labor union, and we consider our employee relations to be satisfactory. ITEM 2. PROPERTIES 7 We lease an aggregate of 61,100 square feet of office, engineering, laboratory, and production space in Minnesota, Massachusetts, and Texas. We believe that all of our facilities are generally adequate for their present operations and that suitable space is readily available if any of our leases are not extended. Our headquarters and operations occupy approximately 47,200 square feet of space in Minneapolis, Minnesota. This space is leased until June 2010. Microanalytics' operations occupy approximately 8,600 square feet of space in the metropolitan area of Austin, Texas. This space is leased until June 2004. Lab Connections' operations occupy approximately 5,300 square feet of space near Boston, Massachusetts. This space is leased until July 2004. In addition to our leased facilities described above, we own a building within forty miles of Denver, Colorado that consists of approximately 9,300 square feet of office and production space in which Baseline conducts its operations. We also own the land, consisting of approximately two acres, on which this building sits. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal, governmental, administrative or other proceedings to which we are a party or of which any of our property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of our security holders during the fourth quarter of 2001. ITEM 4A. EXECUTIVE OFFICERS OF MOCON Our executive officers, their ages, the year first elected or appointed as an executive officer and the offices held, as of March 14, 2002, are as follows:
Executive Officer Name Age Title (1) Since ------------------------------------- -------- --------------------------------------------------------- ------------------ Robert L. Demorest (2) 56 President and Chief Executive Officer, 1985 Chairman of the Board Daniel W. Mayer 51 Executive Vice President 1988 Dane D. Anderson (3) 40 Vice President and Chief Financial Officer, 2000 Treasurer and Secretary Douglas J. Lindemann (4) 44 Vice President and General Manager 2001 Ronald A. Meyer (5) 51 Vice President 1985
---------- (1) All executive officers have been employed in the capacity set forth for at least five years unless otherwise indicated. 8 (2) Mr. Robert L. Demorest has been our President, Chief Executive Officer, and Chairman of the Board since April 2000. Prior to that time, Mr. Demorest had been our President for more than five years. (3) Mr. Dane D. Anderson has been our Chief Financial Officer, Vice President, Treasurer and Secretary since January 2001. Mr. Anderson had been our Chief Financial Officer, Treasurer and Secretary since August 2000, and was our acting Vice President - Finance and Administration, Treasurer and Secretary from May 2000 to August 2000. From July 1996 to May 2000, Mr. Anderson had been one of our Business Managers. (4) Mr. Douglas J. Lindemann has been a Vice President and General Manager for us since January 2001. From July 2000 to December 2000 Mr. Lindemann served as a General Manager for us. Prior to that time Mr. Lindemann had been one of our Business Managers since 1995. (5) Mr. Ronald A. Meyer has been a Vice President for us for more than five years. From 1995 to April 2000, Mr. Meyer also served as our Chief Financial Officer, Treasurer and Secretary. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of March 14, 2002, there were 431 record holders of our common stock. Our common stock trades on the Nasdaq Stock Market(sm) under the symbol MOCO. The following table sets forth, for the fiscal periods indicated, the high and low quotations for our common stock as reported by the Nasdaq National Market System.
2001 2000 ---- ---- Quarter Low High Dividend Low High Dividend ------- --- ---- -------- --- ---- -------- 1st Quarter.................. $6.13 $7.31 $.060 $5.06 $7.69 $.055 2nd Quarter.................. $5.85 $7.70 $.060 $5.00 $6.00 $.055 3rd Quarter.................. $6.40 $9.40 $.060 $5.19 $7.00 $.055 4th Quarter.................. $7.00 $10.10 $.060 $5.50 $6.88 $.060
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31, ---------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (in thousands, except per share data) ---------------------------------------------------------------------------- OPERATIONS DATA: Sales (1)................................... $19,261 $17,319 $17,001 $14,624 $16,390 Net income.................................. $ 3,421 $ 3,270 $ 2,899 $ 2,328 $ 3,728 Net income per share: Basic.............................. $ .62 $ .55 $ .46 $ .37 $ .58 Diluted............................ $ .61 $ .55 $ .46 $ .36 $ .57 Dividends declared per share................ $ .24 $ .225 $ .20 $ .20 $ .18 As of December 31, ---------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (in thousands) ---------------------------------------------------------------------------- BALANCE SHEET DATA: Total assets................................ $18,958 $18,418 $18,204 $17,675 $17,404 Long-term liabilities....................... $ 320 $ 187 $ 112 $ 98 $ 2
(1) As described in Note 1(k) to our financial statements on page F-8, shipping and handling costs billed to customers have been reclassified from cost of sales to an increase in sales. The amounts 10 of these reclassifications were $186,127, $160,939, $163,543, $190,543 and $216,986 in 2001, 2000, 1999, 1998 and 1997, respectively. These reclassifications had no impact on net income. Our acquisitions of Baseline-MOCON, Inc. in 2001 and of Lab Connections, Inc. and Microanalytics Instrumentation Corp. in 1998 affect the comparability of the information in the table above. The results of these subsidiaries have been included from the effective dates of purchase. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY On January 28, 1998 we acquired Microanalytics Instrumentation Corp. of metro Austin, Texas and on December 7, 1998 we acquired Lab Connections, Inc. of metro Boston, Massachusetts. In October 2001, we acquired Questar Baseline Industries, Inc. from Questar InfoComm, Inc., a subsidiary of Questar Corporation, which we subsequently renamed "Baseline-MOCON, Inc." (Baseline). Baseline is located near Denver, Colorado. The acquisitions were recorded using the purchase method of accounting and, accordingly, their results of operations have been included since the acquisition dates. Sales increased 11% in 2001 compared to 2000, while net income increased 5% for the same period. Our financial position as of December 31, 2001 reflects an increase in working capital of $1,210,141 to $9,672,639, compared to $8,462,498 at December 31, 2000. Diluted earnings per share were $0.61 in 2001, $0.55 in 2000, and $0.46 in 1999. RESULTS OF OPERATIONS Net sales were $19,261,334 in 2001, compared to $17,319,165 in 2000 and $17,001,475 in 1999. The increase in sales from 2000 to 2001 was due primarily to increases in the foreign sales volume of our permeation products, domestic and foreign sales volume of our weighing products, and the addition of Baseline effective October 2001, offset by mostly domestic decreases in the sales volume of our sample preparation products and consulting and analytical services products. In 2001, international sales increased 17% to $8,303,688 and domestic sales increased 7% to $10,957,646. International sales were 43% of total sales in 2001, compared to $7,067,386, or 41% of sales in 2000, and $6,202,822, or 36% of total sales in 1999. We use a network of independent representatives to market and service our products in foreign countries. The increase in the foreign sales volume of our permeation products was primarily due to increased sales to Japan, which we believe was the result of extraordinary selling efforts by our Japanese representative in 2001. We believe that the decrease in domestic sales of our sample preparation products was the combined result of a slowing domestic economy in 2001 and the change to a new domestic independent sales representative organization in 2001, which proved to be unsuccessful. We are currently in the process of signing up multiple independent representatives to sell our sample preparation products domestically. Several of these representatives have been successful in selling these products for us in the past. The increase in sales from 1999 to 2000 was due primarily to increases in the sales volume of our permeation, leak detection, sample preparation, and consulting and analytical services products, offset by decreases in the sales volume of the Company's gauging and weighing products. Total sales of our permeation products increased in 2001 due mostly to expanded penetration in foreign markets. We have also introduced lower priced, less precise permeation 11 products in recent years in an effort to increase sales volume, particularly in less developed international markets. We are positioning our permeation products to address applications outside the traditional measurement of barrier packages and materials. Products have been introduced to analyze high transmitting materials such as fresh salad bags, surgical gowns and diaper linings. Permeation products accounted for approximately 62%, 63%, and 62% of our consolidated sales in 2001, 2000, and 1999, respectively. Weighing product sales increased in 2001 due to increased sales of both our VERICAP and AB weighing systems. Weighing products decreased in 2000 due to declining sales of the VERICAP high-speed capsule weighing and sorting system. Weighing products accounted for approximately 9%, 7% and 10% of the Company's consolidated sales in 2001, 2000, and 1999, respectively. We believe that sample preparation product sales decreased in 2001 due to the factors mentioned above. Sales of these products increased in 2000 versus 1999 due to increased market penetration. The majority of consulting and analytical services sales are to domestic customers. We believe that the primary cause for the decrease in these sales between 2000 and 2001 was the slowdown in the domestic economy in 2001, which resulted in a reduced demand for our advanced testing services. Consulting and analytical services increased in 2000 over 1999 as our expertise in the areas of advance material analysis and specialty permeation testing expanded. Sales of headspace analyzer and leak detection products remained generally consistent in 2001 compared to 2000 and 1999. Baseline, acquired effective October 1, 2001, manufactures our gas analyzer products. Their sales for the period from October 1, 2001 through December 31, 2001, totaling $1,348,101, are included in our total 2001 consolidated sales. Our gross profit margin was 60%, 62% and 63% in each of the fiscal years ended December 31, 2001, 2000 and 1999, which is in line with our historical averages. The 2001 gross profit margin percentage was lower due in part to fair value assigned to acquired inventory associated with the acquisition of Baseline. We anticipate a somewhat lower gross margin percentage in 2002 due to Baseline's overall gross margin percentage being lower than our historical averages. Selling, general and administrative ("SG&A") expenses were $5,814,588 in 2001 or 30% of sales, compared to $5,329,514, or 31% of sales in 2000, and $5,474,447, or 32% of sales in 1999. The increase in SG&A expenses from 2000 to 2001 is primarily due to an increase in travel, marketing and other expenses associated with the increase in sales, including fourth quarter Baseline sales and marketing expenses, offset somewhat by a decrease in legal expenses in 2001 versus 2000 for legal fees incurred in the prior year to protect confidential information of the Company. The related matter was settled in 2000. The decrease in SG&A expenses from 1999 to 2000 is primarily due to a decrease in general and administrative expenses associated with the retirement of the Company's former Chief Executive Officer. Research and development expenses amounted to $1,042,961, or 5% of sales in 2001, compared to $1,126,564, or 7% of sales in 2000, and $1,234,204, or 7% of revenue in 1999. For the foreseeable future, we expect to allocate on an annual basis approximately 4% to 7% of sales to research and development. 12 Investment income decreased to $435,928 in 2001 from $468,176 in 2000. The decrease in 2001 is primarily due to lower average investment balances offset by higher average investment yields during 2001. The increase in investment income during 2000 versus 1999 was primarily due to a higher average yield on investments, partially offset by lower average investment balances during 2000. The Company's provision for income taxes was 32.5% of income before income taxes in 2001 and 32.0% and 33.5% of pretax income in 2000 and 1999, respectively. Based on current operating conditions and income tax laws, we expect the tax rate for 2002 to be in the range of 32% to 35%. Net income was $3,420,668 in 2001 compared to $3,270,272 in 2000, and $2,899,167 in 1999. Diluted net income per share was $.61 per share in 2001 compared to $.55 per share in 2000, and $.46 per share in 1999. LIQUIDITY AND CAPITAL RESOURCES Total cash, temporary cash investments and marketable securities decreased $4,574,355 during 2001 to $4,934,917. In addition to funding our operations, we used our cash resources to purchase Baseline for approximately $3,600,000, to pay dividends totaling $1,328,663, and to repurchase shares of the Company's common stock during the period totaling $2,378,473. Depending upon market conditions and subject to approval of the board of directors, we may continue to repurchase shares of our common stock on the open market at prices not exceeding the market price. Cash flow from operations has historically been sufficient to meet our liquidity requirements, capital expenditures and research and development costs. Cash flow from operations totaled $3,603,690, $3,435,594 and $3,783,269 in 2001, 2000 and 1999, respectively. We have no long-term debt and no material commitments for capital expenditures as of December 31, 2001. Our plant and equipment does not require any major expenditures to accommodate a significant increase in operating demands. We anticipate that a combination of our 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 We adopted SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (as amended by SFAS No. 137), which establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value beginning with the first quarter of fiscal 2001. The adoption of SFAS No. 133 did not impact our financial condition or results of operations. In July 2001, the Financial Accounting Standards Board (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 requires 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 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for 13 impairment in accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. We adopted the provisions of Statement 141 on July 1, 2001, and Statement 142 effective January 1, 2002. Goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001 have not been 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 have been amortized prior to the adoption of Statement 142. Statement 141 requires, upon adoption of Statement 142, that we evaluate our 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, we 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 December 31, 2001, we have unamortized goodwill in the amount of $1,346,795 and unamortized identifiable intangible assets related to acquisitions in the amount of $958,169, both of which are subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $114,282 and $123,381 for the years ended December 31, 2001 and 2000, respectively. Because of the extensive effort needed to comply with adopting Statement 142, it is not practicable to reasonably estimate the impact of adopting this Statement on our 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. 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. We are evaluating SFAS No. 144 to determine the impact on our financial condition and results of operations. CRITICAL ACCOUNTING POLICIES Our estimates related to certain assets and liabilities are an integral part of the consolidated financial statements. These estimates are considered critical to the consolidated financial statements because they require subjective and complex judgments. Allowance for doubtful accounts - This reserve is for accounts receivable balances that are potentially uncollectible. The reserve is based on (1) an analysis of customer accounts and (2) our historical experience with accounts receivable write-offs. The analysis would include the age of the 14 receivable, the financial condition of a customer or industry, and general economic conditions. Management believes the results could be materially different if historical trends do not reflect actual results or if economic conditions worsened for our customers. Inventory reserves - This reserve is for shrinkage, slow moving, and obsolete inventory. The reserve is based on an analysis of inventory trends. Our analysis includes inventory levels, physical inventory counts, cycle count adjustments, the nature of the finished product and its inherent risk of obsolescence, the gross margin of the product, and the on-hand quantities relative to the sales history of that finished product. We believe that the results could be materially different if historical trends do not reflect actual results or if demand for our products decreased because of economic or competitive conditions. Recoverability of Long-Lived Assets - We assess the recoverability of goodwill and other long-lived assets annually or whenever events or changes in circumstances indicate that expected future undiscounted cash flows might not be sufficient to support the carrying amount of an asset. We deem an asset to be impaired if a forecast of undiscounted future operating cash flows is less than an asset's carrying amount. If an asset is determined to be impaired, the loss is measured as the amount by which the carrying value of the asset exceeds its fair value. Changes in our business strategies and/or changes in the economic environment in which we operate may result in future impairment charges. CERTAIN IMPORTANT FACTORS IF WE EXPERIENCE ANY INCREASE IN THE COST OF RAW MATERIALS OR SUPPLIES, WE MAY EXPERIENCE A DECREASE IN PROFIT MARGINS. In the past, the overall cost of the materials that we purchase has not risen much more than the rate of inflation, although the price of some of the components that we purchase has increased in the past several years due in part to our purchasing less of such components. Certain other material and labor costs have increased, but we believe that such increases are approximately consistent with overall inflation rates. We believe that the price of our products and the prices of our competitors' products is a significant factor affecting our customers' buying decisions and consequently, we may not be able to pass along any cost increases in the form of price increases or sustain profit margins that we have achieved in prior years. THE MARKETS IN WHICH WE OPERATE HAVE EXPERIENCED MINIMAL GROWTH IN RECENT YEARS, AND OUR ABILITY TO INCREASE OUR REVENUES WILL DEPEND IN PART ON OUR ABILITY TO DEVELOP NEW PRODUCTS, DEVELOP NEW APPLICATIONS FOR OUR EXISTING PRODUCTS AND TO ACQUIRE COMPLEMENTARY BUSINESSES AND PRODUCT LINES. The analytical and measurement instrument markets in which we operate have not shown significant growth in recent years. Although we have identified a number of strategies that we believe will allow us to grow our business and increase our sales, including developing new products and technologies, developing new applications for our technologies, acquiring complementary businesses and product lines, and strengthening our sales force, we can not assure you that we will be able to successfully implement these strategies, or that these strategies will result in the growth of our business or an increase in sales. IF WE ACQUIRE BUSINESSES IN THE FUTURE, WE MAY EXPERIENCE A DECREASE IN OUR PROFIT MARGINS AND OUR NET INCOME. One of our growth strategies is to supplement our internal growth with the acquisition of businesses and technologies that complement or augment our existing products. Some of the businesses that we previously acquired have produced net operating losses or low levels of profitability. Businesses that we may acquire in the future may be marginally profitable or unprofitable. We will likely have to successfully change the operations of any companies that we acquire in the future and improve the market penetration of such companies in order to achieve the level of profitability that we desire. In addition, acquisitions that we believe will be beneficial to our business and financial results are difficult 15 to identify and complete for a number of reasons, including the competition among prospective buyers. We may not be able to complete acquisitions in the future and any acquisitions that we do complete may have an adverse effect on our financial performance and liquidity. It may be necessary for us to raise additional funds either through public or private financing in order to finance any future acquisitions. Any equity or debt financing, if available at all, may be on terms that are not favorable to us and may dilute the ownership of our existing shareholders. WE FACE RISKS OF TECHNOLOGICAL CHANGES THAT MAY RENDER OUR PRODUCTS OBSOLETE. The markets for our products and services are characterized by rapid and significant technological change and evolving industry standards. As a result of such changes and evolving standards, our products may become noncompetitive or obsolete and we may have to develop new products in order to maintain or increase our revenues. New product introductions that are responsive to these factors require significant planning, design, development and testing at the technological, product, and manufacturing process levels and we may not be able to timely develop new products. In addition, industry acceptance of new technologies that we may develop may be slow to develop due to, among other things, existing regulations or standards written specifically for older technologies and general unfamiliarity of users with new technologies. As a result, any new products that we may develop may not generate any meaningful revenues or profits for us for a number of years, if at all. ANY REDUCTION IN THE LEVEL OF CAPITAL EXPENDITURES BY OUR CUSTOMERS COULD NEGATIVELY IMPACT OUR SALES. Our customers include pharmaceutical, food, medical, and chemical companies, laboratories, government agencies, and public and private research institutions. The capital spending of these entities can have a significant effect on the demand for our products. The recent slowdown in the U.S. economy has resulted in certain customers decreasing the amount of their capital expenditures. Any decrease in capital spending by any of these customer groups could have a material adverse effect on our business and results of operations. A SIGNIFICANT PORTION OF OUR SALES ARE GENERATED FROM FOREIGN COUNTRIES AND SELLING IN FOREIGN COUNTRIES ENTAILS A NUMBER OF RISKS WHICH COULD RESULT IN A DECREASE IN OUR SALES OR AN INCREASE IN OUR OPERATING EXPENSES. Sales outside the United States accounted for approximately 43% of our revenues in 2001 and for approximately 41% and 36% of our revenues in 2000 and 1999. We expect that international sales will continue to account for a significant portion of our revenues in the future. Sales to customers in foreign countries are subject to a number of risks, including the following: o agreements may be difficult to enforce; o receivables may difficult to collect; o foreign customers may have longer payment cycles; o the countries into which we sell may impose tariffs or adopt other restrictions on foreign trade; o fluctuations in exchange rates may affect product demand; and o export licenses, if required, may be difficult to obtain and the protection of intellectual property in foreign countries may be more difficult to enforce. 16 If any of these risks were to materialize, our sales into foreign countries could decline, or our operating expenses could increase, which would adversely affect our financial results. SOME OF OUR COMPETITORS HAVE GREATER RESOURCES THAN WE DO, WHICH MAY PROVIDE OUR COMPETITORS WITH AN ADVANTAGE IN THE DEVELOPMENT AND MARKETING OF NEW PRODUCTS. We currently encounter, and expect to continue to encounter, competition in the sale of our products. We believe that the principal competitive factors affecting the market for our products include product quality and performance, price, reliability and customer service. Our competitors include large multinational corporations. Some of our competitors have substantially greater financial, marketing, and other resources than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than we can. In addition, competition could increase if new companies enter the market or if existing competitors expand their product lines or intensify efforts within existing product lines. Our current products, products under development and our ability to discover new technologies may be insufficient to enable us to compete effectively with our competitors. OUR RELIANCE UPON PATENTS, DOMESTIC TRADEMARK LAWS AND CONTRACTUAL PROVISIONS TO PROTECT OUR PROPRIETARY RIGHTS MAY NOT BE SUFFICIENT TO PROTECT OUR INTELLECTUAL PROPERTY FROM OTHERS WHO MAY SELL SIMILAR PRODUCTS. We hold patents relating to various aspects of our products and believe that proprietary technical know-how is critical to many of our products. Proprietary rights relating to our products are protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are maintained in confidence as trade secrets. We can not be certain that we will be issued any patents from any pending or future patent applications owned by or licensed to us or that the claims allowed under any issued patents will be sufficiently broad to protect our technology. In the absence of patent protection, we may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how. Our competitors may initiate litigation to challenge the validity of our patents, or they may use their resources to design comparable products that do not infringe our patents. We may incur substantial costs if our competitors initiate litigation to challenge the validity of our patents or if we initiate any proceedings to protect our proprietary rights and if the outcome of any such litigation is unfavorable to us, our business and results of operations could be materially adversely affected. There may also be pending or issued patents held by parties not affiliated with us that relate to our products or technologies and we may need to acquire licenses to any such patents to continue selling some or all of our products. If we had to obtain any such license in order to be able to continue to sell some or all of our products, we may not be able to do so on terms that were favorable to us, if at all. In addition, we rely on trade secrets and proprietary know-how that we seek to protect, in part, by confidentiality agreements with our collaborators, employees, and consultants. These agreements may be breached and we may not have adequate remedies for any such breach. Even if these confidentiality agreements are not breached, our trade secrets may otherwise become known or be independently developed by competitors. 17 THE MARKET PRICE OF OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE AND ANY BROAD MARKET FLUCTUATIONS MAY MATERIALLY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. The market price of our common stock has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include: o announcements of new products by us or our competitors; o quarterly fluctuations in our financial results; o customer contract awards; o developments in regulation; and o general economic and political conditions in the various markets where our products are sold. In addition, the stock prices of instrumentation companies have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of such companies. This market volatility may adversely affect the market price of our common stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Substantially all of our marketable securities are at fixed interest rates and therefore the fair value of these instruments is affected by changes in market interest rates. However, all of our marketable securities mature within three years. Accordingly, we believe that the market risk arising from our holding of these financial instruments is minimal. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements and Independent Auditors' Report are included on pages F-1 to F-18 of this Form 10-K and are incorporated herein by reference. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share data)
------------------------- -------------------------------------------------------------------------------------------- Quarter 1st 2nd 3rd 4th ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- 2001 Net Sales $ 4,539 $ 4,619 $ 4,624 $ 5,479 Gross Profit $ 2,780 $ 2,873 $ 2,847 $ 2,990 Net Income $ 844 $ 877 $ 881 $ 819 Net Income Per Share Basic $ 0.15 $ 0.16 $ 0.16 $ 0.15 Diluted $ 0.15 $ 0.16 $ 0.16 $ 0.15 2000 Net Sales $ 4,292 $ 4,291 $ 4,267 $ 4,469 Gross Profit $ 2,665 $ 2,719 $ 2,618 $ 2,795 Net Income $ 794 $ 810 $ 827 $ 839 Net Income Per Share Basic $ 0.13 $ 0.13 $ 0.14 $ 0.14 Diluted $ 0.13 $ 0.13 $ 0.14 $ 0.14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF MOCON (a) DIRECTORS The information under the captions "Election of Directors -- Information About Nominees" and "Election of Directors -- Other Information About Nominees" in MOCON's 2002 Proxy Statement is incorporated herein by reference. The information concerning our executive officers is included in this Annual Report under Item 4A, "Executive Officers of MOCON." 19 (b) COMPLIANCE WITH SECTION 16 OF THE EXCHANGE ACT The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in MOCON's 2002 Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Election of Directors -- Director Compensation" and "Executive Compensation and Other Benefits" in MOCON's 2002 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Principal Shareholders and Beneficial Ownership of Management" in MOCON's 2002 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Election of Directors -- Other Information About Nominees" in MOCON's 2002 Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS: The following Consolidated Financial Statements of MOCON and its subsidiaries are included herein: Page Independent Auditors' Report....................................... F-1 Consolidated Balance Sheets as of December 31, 2001 and 2000....... F-2 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999................................... F-3 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2001, 2000 and 1999........ F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999................................... F-5 Notes to Consolidated Financial Statements......................... F-6 20 2. FINANCIAL STATEMENT SCHEDULES: The following financial statement schedules are included herein and should be read in conjunction with the financial statements referred to above: Independent Auditors' Report on Financial Statement Schedule INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders MOCON, Inc.: Under date of February 21, 2002, we reported on the consolidated balance sheets of MOCON, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2001, as contained in this annual report on Form 10-K for the year 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as included in Item 14(a)2. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Minneapolis, Minnesota February 21, 2002 Financial Statement Schedule: II - Valuation and Qualifying Accounts All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. 21 SCHEDULE II MOCON, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts
Balance at Charged to Balance beginning costs and Deductions at end Description of year expenses (1) of year ------------------------------------------------------------------------------------------------------ Year ended December 31, 2001 allowance for doubtful accounts $159,000 49,000(2) 8,000 200,000 ------------------------------------------------------------------------------------------------------ Year ended December 31, 2000 allowance for doubtful accounts $166,000 0 7,000 159,000 ------------------------------------------------------------------------------------------------------ Year ended December 31, 1999 allowance for doubtful accounts $159,000 12,000 5,000 166,000 ------------------------------------------------------------------------------------------------------ (1) Bad debts written off. Year ended December 31, 2001 allowance for inventory obsolescence $156,000 403,000(2) 48,000 511,000 ------------------------------------------------------------------------------------------------------ Year ended December 31, 2000 allowance for inventory obsolescence $183,000 187,000 214,000 156,000 ------------------------------------------------------------------------------------------------------ Year ended December 31, 1999 allowance for inventory obsolescence $185,000 66,000 68,000 183,000 ------------------------------------------------------------------------------------------------------ (1) Inventory written off. Year ended December 31, 2001 allowance for product warranties $272,000 336,000(2) 357,000 251,000 ------------------------------------------------------------------------------------------------------ Year ended December 31, 2000 allowance for product warranties $284,000 318,000 330,000 272,000 ------------------------------------------------------------------------------------------------------ Year ended December 31, 1999 allowance for product warranties $251,000 336,000 303,000 284,000 ------------------------------------------------------------------------------------------------------
(1) Expenses written off. (2) Includes adjustment for acquisition. 3. EXHIBITS 22 The exhibits to this Report are listed in the Exhibit Index. A copy of any of the exhibits listed or referred to above will be furnished at a reasonable cost to any person who was a shareholder of MOCON as of March 22, 2002, upon receipt from any such person of a written request for any such exhibit. Such request should be sent to MOCON, Inc., 7500 Boone Avenue North, Minneapolis, Minnesota 55428; Attn.: Shareholder Information. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c): A. 1990 Non-Employee Director Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 33-42255)). B. 1992 Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 33-49752)). C. 1998 Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 33-58789)). D. Compensation Committee resolutions setting forth the Incentive Compensation Plan (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 0-9273)). E. Paired Profit Sharing Plan effective July 1, 1996 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-9273)). F. Form of Executive Severance Agreement (incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-9273)) (b) REPORTS ON FORM 8-K We filed a Form 8-K on November 6, 2001 to report the acquisition of Baseline-MOCON, Inc. (c) EXHIBITS The exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index. (d) FINANCIAL STATEMENT SCHEDULES See Item 14, section (a) 2 above for the financial statement schedules filed herewith. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 29, 2002 MOCON, INC. By: /s/ Robert L. Demorest ----------------------- Robert L. Demorest, President, Chief Executive Officer and Chairman of the Board (principal executive officer) By: /s/ Dane D. Anderson --------------------- Dane D. Anderson, Vice President, Chief Financial Officer, Treasurer and Secretary (principal financial and accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on March 29, 2002. Signature and Title /s/ Robert L. Demorest ----------------------------------------------------------------------- Robert L. Demorest, President, Chief Executive Officer and Director /s/ Dean B. Chenoweth ----------------------------------------------------------------------- Dean B. Chenoweth, Director /s/ J. Leonard Frame ----------------------------------------------------------------------- J. Leonard Frame, Director /s/ Daniel W. Mayer ----------------------------------------------------------------------- Daniel W. Mayer, Executive Vice President and Director /s/ Ronald A. Meyer ----------------------------------------------------------------------- Ronald A. Meyer, Vice President and Director /s/ Richard A. Proulx ----------------------------------------------------------------------- Richard A. Proulx, Director /s/ Paul L. Sjoquist ----------------------------------------------------------------------- Paul L. Sjoquist, Director /s/ Tom C. Thomas ----------------------------------------------------------------------- Tom C. Thomas, Director 24 MOCON, INC. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2001, 2000, and 1999 (With Independent Auditors' Report Thereon) TABLE OF CONTENTS PAGE Independent Auditors' Report F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Income F-3 Consolidated Statements of Stockholders' Equity and Comprehensive Income F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 25 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders MOCON, Inc. and subsidiaries: We have audited the accompanying consolidated balance sheets of MOCON, Inc. (the Company) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MOCON, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective July 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and certain provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as required for goodwill and intangible assets resulting from business combinations consummated after June 30, 2001. /s/ KPMG LLP Minneapolis, Minnesota February 21, 2002 F-1 MOCON, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2001 and 2000
ASSETS 2001 2000 ----------- ----------- Current assets: Cash and temporary cash investments $ 1,030,596 641,942 Marketable securities, current 3,168,858 4,755,640 Trade accounts receivable, less allowance for doubtful accounts of $200,000 in 2001 and $159,000 in 2000 4,271,430 2,848,049 Other receivables 30,527 118,807 Inventories 3,662,043 2,127,059 Prepaid expenses 250,319 243,291 Deferred income taxes 429,399 343,000 ----------- ----------- Total current assets 12,843,172 11,077,788 ----------- ----------- Marketable securities, noncurrent 735,463 4,111,690 Property, plant, and equipment, net 2,263,505 1,198,954 Other assets: Software development costs, net of accumulated amortization of $4,414 422,660 -- Goodwill, net of accumulated amortization of $359,867 in 2001 and $245,585 in 2000 1,346,795 841,516 Technology rights and other intangibles, net of accumulated amortization of $423,094 in 2001 and $281,186 in 2000 1,207,794 1,055,543 Other 138,719 132,087 ----------- ----------- Total other assets 3,115,968 2,029,146 ----------- ----------- $18,958,108 18,417,578 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,301,097 859,103 Accrued compensation and vacation 773,906 603,929 Other accrued expenses 321,651 288,749 Accrued product warranties 251,318 271,702 Accrued income taxes 194,037 242,891 Dividends payable 328,524 348,916 ----------- ----------- Total current liabilities 3,170,533 2,615,290 ----------- ----------- Deferred income taxes 319,603 187,000 ----------- ----------- Total liabilities 3,490,136 2,802,290 ----------- ----------- Stockholders' equity: Capital stock - undesignated--authorized 3,000,000 shares -- -- Common stock - $.10 par value; authorized 22,000,000 shares; issued and outstanding 5,476,453 shares in 2001 and 5,809,431 shares in 2000 547,645 580,943 Capital in excess of par value 105,057 -- Retained earnings 14,806,169 15,034,345 Accumulated other comprehensive income 9,101 -- ----------- ----------- Total stockholders' equity 15,467,972 15,615,288 Commitments and contingencies (note 5) ----------- ----------- $18,958,108 18,417,578 =========== ===========
See accompanying notes to consolidated financial statements. F-2 MOCON, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 2001, 2000, and 1999
2001 2000 1999 ----------- ----------- ----------- Sales Products $16,934,902 14,845,148 14,916,521 Consulting services 2,326,432 2,474,017 2,084,954 ----------- ----------- ----------- Total sales 19,261,334 17,319,165 17,001,475 ----------- ----------- ----------- Cost of sales Products 6,516,224 5,269,118 5,382,430 Consulting services 1,254,821 1,252,873 970,041 ----------- ----------- ----------- Total cost of sales 7,771,045 6,521,991 6,352,471 ----------- ----------- ----------- Gross profit 11,490,289 10,797,174 10,649,004 Selling, general, and administrative expenses 5,814,588 5,329,514 5,474,447 Research and development expenses 1,042,961 1,126,564 1,234,204 ----------- ----------- ----------- Operating income 4,632,740 4,341,096 3,940,353 Investment income 435,928 468,176 418,814 ----------- ----------- ----------- Income before income taxes 5,068,668 4,809,272 4,359,167 Income taxes 1,648,000 1,539,000 1,460,000 ----------- ----------- ----------- Net income $ 3,420,668 3,270,272 2,899,167 =========== =========== =========== Net income per common share: Basic $ .62 .55 .46 =========== =========== =========== Diluted $ .61 .55 .46 =========== =========== =========== Weighted average shares outstanding: Basic $ 5,526,139 5,980,467 6,250,254 =========== =========== =========== Diluted $ 5,609,079 5,995,353 6,268,358 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-3 MOCON, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income Years ended December 31, 2001, 2000, and 1999
COMMON STOCK ACCUMULATED ------------------------- CAPITAL IN OTHER NUMBER EXCESS OF RETAINED COMPREHENSIVE OF SHARES AMOUNT PAR VALUE EARNINGS INCOME TOTAL ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1998 6,287,960 $ 628,796 934,031 13,543,242 -- 15,106,069 Stock options exercised 48,300 4,830 217,926 -- -- 222,756 Purchase and retirement of common stock (263,163) (26,316) (1,151,957) (548,569) -- (1,726,842) Dividends declared ($.20 per share) -- -- -- (1,246,172) -- (1,246,172) Net income and comprehensive income -- -- -- 2,899,167 -- 2,899,167 ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1999 6,073,097 607,310 -- 14,647,668 -- 15,254,978 Stock options exercised 16,223 1,622 71,871 -- -- 73,493 Purchase and retirement of common stock (279,889) (27,989) (71,871) (1,553,475) -- (1,653,335) Dividends declared ($.225 per share) -- -- -- (1,330,120) -- (1,330,120) Net income and comprehensive income -- -- -- 3,270,272 -- 3,270,272 ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 2000 5,809,431 580,943 -- 15,034,345 -- 15,615,288 Stock options exercised 29,425 2,942 169,496 -- -- 172,438 Purchase and retirement of common stock (362,403) (36,240) (64,439) (2,337,574) -- (2,438,253) Dividends declared ($.24 per share) -- -- -- (1,311,270) -- (1,311,270) Net income -- -- -- 3,420,668 -- 3,420,668 Adjustment for unrealized gain on marketable equity securities -- -- -- -- 9,101 9,101 ----------- Comprehensive income 3,429,769 ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 2001 5,476,453 $ 547,645 105,057 14,806,169 9,101 15,467,972 =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 MOCON, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000, and 1999
2001 2000 1999 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 3,420,668 3,270,272 2,899,167 Adjustments to reconcile net income to net cash provided by operating activities: Loss on disposition of long-term assets 331 56,635 38,698 Depreciation and amortization 798,859 730,231 611,596 Deferred income taxes 17,000 77,000 (49,000) Changes in operating assets and liabilities, net of effect of acquisitions: Trade accounts receivable (826,753) (350,199) (373,790) Other receivables 88,280 20,674 (12,377) Inventories (44,074) (22,471) 217,599 Prepaid expenses 30,146 (81,704) 74,071 Accounts payable 133,044 6,073 51,494 Accrued compensation and vacation 77,828 (71,410) 234,643 Other accrued expenses (38,150) (26,240) 36,849 Accrued product warranties (50,384) (12,025) 32,869 Accrued income taxes (3,105) (161,242) 21,450 ----------- ----------- ----------- Net cash provided by operating activities 3,603,690 3,435,594 3,783,269 ----------- ----------- ----------- Cash flows from investing activities: Purchases of marketable securities (1,211,734) (5,324,204) (6,379,304) Proceeds from sales of marketable securities at maturity 6,183,844 5,063,669 5,794,760 Cash paid in acquisitions, net of cash acquired (3,606,234) -- -- Purchases of property and equipment (515,549) (540,097) (475,250) Proceeds from sale of property and equipment 705 18,686 18,308 Purchases of software (427,074) -- -- Purchases of patents and trademarks (34,884) (414,629) (50,169) Other (6,632) (6,188) (6,361) ----------- ----------- ----------- Net cash provided by (used in) investing activities 382,442 (1,202,763) (1,098,016) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from the exercise of stock options 109,658 40,368 14,630 Purchase and retirement of common stock (2,378,473) (1,620,804) (1,524,021) Dividends paid (1,328,663) (1,286,291) (1,252,440) ----------- ----------- ----------- Net cash used in financing activities (3,597,478) (2,866,727) (2,761,831) ----------- ----------- ----------- Net increase (decrease) in cash and temporary cash investments 388,654 (633,896) (76,578) Cash and temporary cash investments: Beginning of year 641,942 1,275,838 1,352,416 ----------- ----------- ----------- End of year $ 1,030,596 641,942 1,275,838 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for income taxes $ 1,677,736 1,623,242 1,487,550 =========== =========== =========== Supplemental schedule of noncash investing and financing activities: Noncash purchase and retirement of common stock $ 59,780 32,531 202,821 Noncash exercise of stock options 62,780 33,125 208,126 Dividends accrued 328,524 348,916 305,680 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MOCON, Inc. (the Company) operates in a single industry segment: the development, manufacturing, and marketing of measurement, analytical, monitoring, sample preparation, and consulting products used to detect, measure, and analyze gases and chemical compounds for customers in the barrier packaging, food, pharmaceutical, and other industries throughout the world. The following is a summary of the significant accounting policies used in the preparation of the Company's consolidated financial statements. (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. (b) STATEMENTS OF CASH FLOWS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Temporary cash investments consist of short-term investments which are readily convertible to cash. (c) MARKETABLE SECURITIES Marketable securities at December 31, 2001 consist of United States government obligations, municipal bonds, and certificates of deposit. The Company classifies its debt and marketable equity securities as available-for-sale. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from income and are reported as a separate component of stockholders' equity until realized. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary is charged to income resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in income and are derived using the specific identification method for determining the cost of securities sold. During fiscal year 2001, the Company sold held-to-maturity securities prior to their maturity. 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 $9,101 within stockholders' equity. Realized gains and losses are recorded based on the specific identification method. F-6 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 (d) INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method (FIFO), and market represents the lower of replacement cost or estimated net realizable value. (e) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Depreciation and amortization are computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred and significant renewals and betterments are capitalized. (f) INTANGIBLE ASSETS Intangible assets are carried at cost less accumulated amortization and consist of goodwill, technology rights, software development costs, patents, and trademarks. Goodwill represents the excess of the purchase price over the fair value of assets acquired. Costs incurred in connection with applications for new patents are deferred until a final determination, with respect to the application, is made by appropriate regulatory agencies. Costs of patents abandoned are charged to income in the period of abandonment. Technology rights and software development costs are amortized on a straight-line basis over 3 to 10 years. Patent costs are amortized over the lesser of 17 years or their estimated useful lives using the straight-line method. Trademarks are amortized over five years. During fiscal 2000, the Company purchased $184,000 in technology rights and $180,000 in patents which are being amortized over 7 and 10 years, respectively. (g) INCOME TAXES The Company uses the asset and liability method for computing its deferred taxes. Under the asset and liability method, deferred taxes are based on the difference between the financial statement and tax basis of assets and liabilities and the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense represents the change in deferred tax assets and liabilities during the year. (h) USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that could significantly affect the results of operations or financial condition of the Company include the estimation of doubtful accounts receivable and inventory obsolescence. F-7 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 (i) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (j) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments are recorded in its consolidated balance sheet. The carrying amount for cash and temporary cash investments, accounts receivable, accounts payable, and accrued liabilities approximates fair value due to the immediate or short-term maturity of these financial instruments. The fair values of investments in marketable securities are based on quoted market prices and are summarized in note 2. (k) REVENUE RECOGNITION Revenue is recognized upon shipment of product or upon completion of services. In 2001, the Company adopted the provisions of Emerging Issues Task Force Issue 00-10 (EITF 00-10), Accounting for Shipping and Handling Fees and Costs. The Company has historically classified shipping and handling costs billed to customers as an offset in cost of sales, with the related expenses being recorded in cost of sales. Effective with the adoption of EITF 00-10, $186,000, $161,000 and $164,000 of shipping and handling costs billed to customers were reclassified from cost of sales to revenues for the years ended December 31, 2001, 2000 and 1999, respectively. (l) ADVERTISING COSTS The Company incurs advertising costs associated with trade shows, print advertising, and brochures. Such costs are charged to expense as incurred. Advertising expense was $302,000, $211,000, and $192,000, in 2001, 2000, and 1999, respectively. (m) 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 year. 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 year. (n) STOCK-BASED EMPLOYEE COMPENSATION The Company uses the intrinsic-value method for employee stock-based compensation pursuant to APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Under the guidelines of Opinion 25, compensation cost for stock-based employee compensation plans is recognized based on the difference, if any, between the quoted market price of the stock on the date of grant and the amount an employee must pay to acquire the stock. The Company adopted the disclosure provisions for F-8 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 employee stock-based compensation and the fair-value method for nonemployee stock-based compensation of Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. (o) RECLASSIFICATIONS Certain 2000 and 1999 amounts have been reclassified to conform to the 2001 presentation. (p) NEW ACCOUNTING PRONOUNCEMENTS The Company adopted SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (as amended by SFAS No. 137), which establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value 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. In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement No. 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001. Statement No. 142 requires 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 No. 142. Statement No. 142 also requires 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 adopted the provisions of Statement No. 141 on July 1, 2001 and Statement No. 142 effective January 1, 2002. Goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001 have not been amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 have been amortized prior to the adoption of Statement No. 142. Statement No. 141 requires, upon adoption of Statement No. 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 No. 141 for recognition apart from goodwill. Upon adoption of Statement No. 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 No. 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. F-9 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 As of December 31, 2001, the Company has unamortized goodwill in the amount of approximately $1,347,000 and unamortized identifiable intangible assets related to acquisitions in the amount of approximately $958,000, both of which are subject to the transition provisions of Statement Nos. 141 and 142. Amortization expense related to goodwill was approximately $114,000 and $123,000 for the years ended December 31, 2001 and 2000, respectively. Because of the extensive effort needed to comply with adopting Statement No. 142, it is not practicable to reasonably estimate the impact of adopting this statement 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. 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. (2) MARKETABLE SECURITIES The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale and held-to-maturity securities by major security type at December 31, 2001 and 2000 were as follows:
2001 ------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ------------- -------------- -------------- ------------- Available for sale: Municipal bonds $ 1,085,799 9,101 -- 1,094,900 Other securities 2,809,421 -- -- 2,809,421 ------------- -------------- -------------- ------------- $ 3,895,220 9,101 -- 3,904,321 ============= ============== ============== =============
F-10 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999
2000 ------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ------------- -------------- -------------- ------------- Held-to-maturity: Municipal bonds $ 5,266,204 18,271 (4,179) 5,280,296 Other securities 3,601,126 132,578 (392) 3,733,312 ------------- -------------- -------------- ------------- $ 8,867,330 150,849 (4,571) 9,013,608 ============= ============== ============== =============
Other securities consist primarily of U.S. government obligations and marketable certificates of deposit. For the year ended December 31, 2001, 2000 and 1999, gross realized gains were $18,753, $0, and $0, respectively. For the year ended December 31, 2001, 2000 and 1999, gross realized losses were $1,253, $0, and $0, respectively. Maturities of investment securities classified as available-for-sale and held-to-maturity were as follows at December 31, 2001 and 2000:
2001 2000 ----------------------------- ------------------------------ AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ------------- ------------- -------------- -------------- Available-for-sale: Due within one year $ 3,160,430 3,168,858 -- -- Due after one through five years 734,790 735,463 -- -- ------------- ------------- -------------- -------------- $ 3,895,220 3,904,321 -- -- ============= ============= ============== ============== Held-to-maturity: Due within one year $ -- -- 4,755,640 4,768,435 Due after one through five years -- -- 4,111,690 4,245,173 ------------- ------------- -------------- -------------- $ -- -- 8,867,330 9,013,608 ============= ============= ============== ==============
F-11 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 (3) INVENTORIES The major components of inventories are as follows: 2001 2000 ------------- ------------- Finished products $ 338,852 138,505 Work-in-process 1,316,881 710,351 Raw materials 2,006,310 1,278,203 ------------- ------------- $ 3,662,043 2,127,059 ============= ============= (4) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
ESTIMATED 2001 2000 USEFUL LIVES -------------- -------------- ---------------- Land $ 200,000 -- -- Buildings 445,833 -- 27 years Machinery and equipment 3,197,277 2,678,703 3 to 10 years Office equipment 651,960 548,957 2 to 15 years Leasehold improvements 654,526 462,591 1 to 5 years Vehicles 168,759 99,146 3 to 5 years -------------- -------------- Total property, plant, and equipment 5,318,355 3,789,397 Less: Accumulated depreciation (3,054,850) (2,590,443) -------------- -------------- Net property, plant, and equipment $ 2,263,505 1,198,954 ============== ==============
Depreciation and amortization of property, plant and equipment charged to earnings was $525,254, $468,613, and $418,083 for the years ended December 31, 2001, 2000, and 1999, respectively. (5) COMMITMENTS AND CONTINGENCIES (a) LEASES The Company leases its facilities and certain equipment pursuant to operating leases. The facility leases expire at various times through June 2010 and require the Company to pay operating costs, including real estate taxes. F-12 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 Rental expense, including charges for operating costs, was as follows: 2001 2000 1999 ------------ ------------ ------------ $ 429,329 410,303 389,143 ============ ============ ============ The following is a schedule of future minimum lease payments, excluding charges for operating costs, for operating leases as of December 31, 2001: YEAR ENDING DECEMBER 31 ------------------- 2002 $ 327,000 2003 332,901 2004 297,402 2005 253,743 2006 259,644 Later years 932,358 ------------- $ 2,403,048 ============= (b) EXECUTIVE SEVERANCE AGREEMENTS The Company has entered into severance agreements with four executives that require payment of two times their annual salary if they are terminated within 24 months after a change of control occurs or upon the occurrence of other events as described in the agreements. (6) INCOME TAXES The provision for income taxes consists of the following:
2001 2000 1999 -------------- -------------- -------------- Current tax expense: Federal $ 1,410,000 1,246,000 1,311,000 State 221,000 216,000 198,000 -------------- -------------- -------------- Total current expense 1,631,000 1,462,000 1,509,000 Deferred 17,000 77,000 (49,000) -------------- -------------- -------------- Provision for income taxes $ 1,648,000 1,539,000 1,460,000 ============== ============== ==============
F-13 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 The effective income tax rate varies from the federal statutory tax rate for the following reasons:
PERCENTAGE OF PRETAX INCOME FOR YEARS ENDED DECEMBER 31, ----------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Tax at statutory federal income tax rate 34.0 % 34.0 % 34.0 % Increases (reductions) in taxes resulting from: State income taxes, net of federal benefit 2.9 3.0 2.9 Tax-exempt earnings of FSC (2.9) (2.3) (2.4) Tax-exempt investment earnings (0.8) (1.9) (2.3) Other (0.7) (0.8) 1.3 ----------- ----------- ----------- Effective income tax rate 32.5 % 32.0 % 33.5 % =========== =========== ===========
The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows:
2001 2000 ------------- ------------- Deferred tax assets: Allowance for doubtful accounts not currently deductible $ 72,000 57,000 Inventory costs not currently deductible 17,000 39,000 Inventory reserves 161,000 78,000 Warranty reserves 85,000 98,000 Other accruals 113,000 71,000 Other intangibles -- 47,000 ------------- ------------- Total deferred tax assets 448,000 390,000 ------------- ------------- Deferred tax liabilities: Technology rights (151,000) (173,000) Excess of book over tax depreciation (78,000) (61,000) Other intangibles (109,000) -- ------------- ------------- Total deferred tax liabilities (338,000) (234,000) ------------- ------------- Net deferred tax asset $ 110,000 156,000 ============= =============
The Company has determined that establishing a valuation allowance for the deferred tax assets is not required since it is more likely than not that the deferred tax assets will be realized through future taxable income. F-14 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 (7) STOCKHOLDERS' EQUITY From time to time, the Company's Board of Directors authorizes the repurchase of common stock. 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. As of December 31, 2001, the Company has reserved 2,788 shares of common stock for options that are still available for grant under the Company's stock option plans, and 539,795 shares for options that have been granted but have not yet been exercised. Under the stock option plans, option exercise prices are 100% of the market value of the common stock at the date of grant, except for incentive options granted under the 1992 and 1998 Plans to persons owning more than 10% of the Company's stock, in which case the option price is 110% of the market value, and nonqualified options granted under the 1992 and 1998 Plans, which may be granted at option prices no less than 25% of the market value. Exercise periods are generally for five to ten years. Certain of the plans allow for the granting of nonqualified stock options. Upon the exercise of these nonqualified options, the Company may realize a compensation deduction allowable for income tax purposes. The after-tax effect of these tax deductions is included in the accompanying consolidated financial statements as an addition to capital in excess of par value. The Company has adopted the disclosure-only provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation cost has been recognized with respect to the Company's stock option plans. Had compensation cost for these plans been determined based on the fair value methodology prescribed by SFAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
2001 2000 1999 ------------- ------------- ------------- Net earnings -- as reported $ 3,420,668 3,270,272 2,899,167 Net earnings -- pro forma 3,133,517 3,066,627 2,818,972 Earnings per share -- as reported: Basic .62 .55 .46 Diluted .61 .55 .46 Earnings per share -- pro forma: Basic .57 .51 .45 Diluted .56 .51 .45
F-15 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 The pro forma amounts may not be representative of the effects on reported net earnings for future years. The fair value of each option grant is estimated on the date of grant using the binomial option-pricing model with the following weighted-average assumptions used for grants in 2001, 2000, and 1999: 2001 2000 1999 ------------ ------------ ------------ Dividend yield 3.10% 3.30% 2.50% Expected volatility 44% 53% 44% Risk-free interest rate 4.6% 6.2% 5.5% Expected lives 8.0 years 7.9 years 7.0 years Information regarding the Company's stock option plans for 2001, 2000, and 1999 is as follows:
WEIGHTED- AVERAGE EXERCISE SHARES PRICE ------------ --------------- Options outstanding, December 31, 1998 302,288 $ 6.42 Granted 5,000 5.69 Exercised (48,300) 4.61 Canceled or expired (30,095) 6.09 ------------ --------------- Options outstanding, December 31, 1999 228,893 6.83 Granted 197,000 5.87 Exercised (16,223) 4.53 Canceled or expired (28,655) 6.29 ------------ --------------- Options outstanding, December 31, 2000 381,015 6.47 Granted 216,750 6.94 Exercised (29,425) 5.86 Canceled or expired (28,545) 5.81 ------------ --------------- Options outstanding, December 31, 2001 539,795 $ 6.73 ============ ===============
2001 2000 1999 ----------- ----------- ------------ Weighted-average fair value of options, granted during the year $ 2.68 2.67 2.23 Weighted-average exercise price of options, exercisable at end of year $ 6.73 6.66 6.77 Options exercisable 332,333 221,440 143,221
F-16 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 (8) INCOME PER COMMON SHARE 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 years ended December 31, 2001, 2000, and 1999:
2001 2000 1999 ------------- ------------- ------------- Weighted shares of common stock outstanding -- basic 5,526,139 5,980,467 6,250,254 Weighted shares of common stock assumed upon exercise of stock options 82,940 14,886 18,104 ------------- ------------- ------------- Weighted shares of common stock outstanding -- diluted 5,609,079 5,995,353 6,268,358 ============= ============= =============
The following represents securities outstanding at December 31, 2001, 2000, and 1999, which have been excluded from the net income per common share calculations because the effect on net income per common share would not have been dilutive: 2001 2000 1999 ---------- ----------- ----------- Options 59,780 94,620 107,335 (9) SALES Export sales were $8,303,688, $7,067,386, and $6,202,822, in 2001, 2000, and 1999, respectively. Of the export sales, $1,855,840, $3,182,898, and $2,766,956, in 2001, 2000, and 1999, respectively, were to customers in Western Europe. Sales to customers in Japan were $3,282,264, $1,833,964, and $1,442,925, for 2001, 2000, and 1999, respectively. The Company's products are marketed outside of North America through various independent representatives. One independent representative accounted for approximately 10%, 16%, and 15%, of sales in 2001, 2000, and 1999, respectively. Another independent representative accounted for approximately 14%, 9%, and 6%, of sales in 2001, 2000, and 1999, respectively. (10) SAVINGS AND RETIREMENT PLAN The Company has a 401(k) Savings and Retirement Plan covering substantially all of its employees. The Company provides matching contributions in accordance with the plan. The Company's contributions to this plan in 2001, 2000, and 1999 were $53,412, $47,895, and $40,626, respectively. (11) ACQUISITION Effective October 1, 2001, the Company acquired Baseline-MOCON, Inc. (Baseline) of Lyons, Colorado, a manufacturer of gas analysis and monitoring instrumentation used in applications such as oil and gas exploration, process gas analysis, and industrial hygiene and safety applications. This acquisition increases the number of gas chromatography markets served by the Company and is expected to reduce costs through economies of scale. The acquisition, valued at approximately $3.6 million, was recorded using the F-17 MOCON, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000, and 1999 purchase method of accounting and, accordingly, the acquired operations of Baseline have been included in the results of operations since the date of acquisition. The purchase price has been allocated to the net assets acquired based on estimated fair market values at the date of acquisition. The assets that comprise the $268,000 of other intangibles include: trademarks of $3,000, customer list of $30,000, backlog valuation of $15,000, product designs and drawings of $50,000, product manuals and marketing materials of $40,000, computer software of $80,000 and proprietary processes of $50,000. The cost of acquired intangible assets will be amortized on a straight-line basis typically over periods of 2 to 5 years. The estimated fair values of assets and liabilities acquired in the acquisition are summarized as follows: TOTAL ---------------- Cash $ 3,397 Net current assets 2,124,712 Property, plant and equipment 1,077,417 Goodwill 619,561 Other intangibles 268,000 Other assets 2,150 Current liabilities (468,151) Long-term liabilities (17,455) -------------- $ 3,609,631 ================ The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Baseline had occurred as of the beginning of fiscal 2000. Pro forma adjustments consist primarily of realization of other intangible amortization: 2001 2000 --------------- -------------- Net sales $ 22,055,156 22,392,429 Net income 3,270,669 3,422,911 Net income per common share: Basic 0.59 0.57 Diluted 0.58 0.57 F-18 MOCON, INC. Exhibit Index to Annual Report On Form 10-K For Fiscal Year Ended December 31, 2001
Item Method of No. Item Filing ------------ ----------------------------------------------------------------------------- ---------------- 3.1 Restated Articles of Incorporation of the Company (1) 3.2 Amendment to Restated Articles of Incorporation of the Company, effective May 27, 1987 (2) 3.3 Amendment to Restated Articles of Incorporation of the Company, effective June 28, 1991 (3) 3.4 Amendment to Restated Articles of Incorporation of the Company, effective May 21, 1998 (11) 3.5 Amendment to Restated Articles of Incorporation of the Company, effective May 26, 1999 (13) 3.6 Third Restated Bylaws of the Company (4) 10.1 Office/Warehouse Lease, dated July 29, 1994 (5) 10.2 Office/Warehouse Lease Extension, dated June 6, 1997 (8) 10.3 Office/Warehouse Lease, dated November 17, 1999 (13) 10.4 1990 Non-Employee Director Stock Option Plan (3) 10.5 1992 Stock Option Plan (6) 10.6 1998 Stock Option Plan (9) 10.7 Compensation Committee resolutions setting forth the Incentive Compensation Plan (12) 10.8 Paired Profit Sharing Plan effective July 1, 1996 (7) 10.9 Agency and Service Agreement, dated January 1, 1987, between the Company and MoCon FSC, Inc. (4) 10.10 Foreign Sales Corporation Suppliers Agreement, dated March 28, 1985, between the Company and MoCon FSC, Inc. (4) 10.11 Agreement and Plan of Merger, dated November 20, 1998, by and among Modern Controls, Inc., MOCON Acquisition Corporation and Lab Connections, Inc. (10) 10.12 Form of Executive Severance Agreement (14) 10.13 Stock Purchase Agreement dated October 24, 2001 by and among MOCON, Inc., Questar InfoComm, Inc. and Questar Corporation (15) 21.1 Subsidiaries of the Company (16) 23.1 Independent Auditors' Consent (16)
---------------- (1) Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1984 (File No. 0-9273). (2) Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1987 (File No. 0-9273). (3) Incorporated by reference to our Registration Statement on Form S-8 (File No. 33-42255). (4) Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (File No. 0-9273). (5) Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-9273). (6) Incorporated by reference to our Registration Statement on Form S-8 (File No. 33-49752). (7) Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-9273). (8) Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-9273). (9) Incorporated by reference to our Registration Statement on Form S-8 (File No. 33-58789). (10) Incorporated by reference to our Report on Form 8-K filed on December 21, 1998 (File No. 0-9273) (11) Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 0-9273). (12) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 0-9273). (13) Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-9273). (14) Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-9273). (15) Incorporated by reference to our Report on Form 8-K filed on November 6, 2001 (File No. 0-9273). (16) Filed herewith.