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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
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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.
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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
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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
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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.
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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
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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
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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.
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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.