ITEM 1 - BUSINESS
General
CEM Corporation (the "Company") engages in one line of business, the development, manufacture, sale and service of microwave-based instrumentation for testing, analysis and process control in analytical laboratory and industrial markets. These sample preparation products provide advantages of speed and simplicity compared to traditional methods of testing and analysis. The Company's products are used in the general analytical laboratory market and in many manufacturing and processing industries, including chemical and food processing. A significant amount of the Company's sales consists of consumable supplies, parts and service for its instrumentation. The Company was organized as a North Carolina corporation in 1971.
Products
Microwave Accelerated Reaction System("MARS") and Microwave Digestion System("MDS"). MARS and MDS and related accessories accounted for approximately 36%, 33%, and 29% of the Company's consolidated sales in fiscal 1999, 1998 and 1997, respectively. This product is a microwave heating system designed especially for use in the digestion of samples for laboratory analysis. It performs a rapid dissolution of samples in acid in a closed vessel system and is sold to the analytical laboratory market. MARS, which was introduced in the first quarter of fiscal 1998 and is the next generation of MDS, permits higher pressures to be used safely and provides greater measurement data for control of the instrument.
Moisture/Solids Analyzer. The Moisture/Solids Analyzer and related accessories accounted for approximately 20%, 17% and 19% of the Company's consolidated sales in fiscal 1999, 1998 and 1997, respectively. This product performs percent moisture or percent solids measurement in process control monitoring, quality control and product development in a variety of industries, including chemical processing, pharmaceuticals, food and dairy products, tobacco, textiles, paint and coatings, pulp and paper, water and wastewater treatment.
Microwave Ashing System. The Microwave Ashing System uses microwave energy to rapidly oxidize a sample to determine the ash (metal oxide) content. This product is primarily sold to the analytical laboratory market and petrochemical industry.
STAR System. The STAR system, which incorporates temperature control and reagent (acid) addition, is an open cavity microwave heating system designed initially for use in the digestion of samples for laboratory analysis. It performs a rapid dissolution of samples and is sold to the food, polymer, petroleum, chemical and semi-conductor industries.
Fat Analyzer System. The Company manufactures an automatic extraction unit which is used in conjunction with the Moisture/Solids Analyzer to form the Fat Analyzer System. This product measures the fat content of a variety of samples and is sold primarily to meat processing and other food industries.
ProFat II System. The ProFat II System, which was introduced in the first quarter of fiscal 1998, is a microwave-based instrument that provides rapid moisture, fat and protein results on most meat products, without solvents. The product is sold primarily to companies processing beef, poultry and pork products that require a rapid result for process control purposes and companies which utilize non solvent-based instruments for product analysis.
Microwave Extraction System. The Microwave Extraction System uses microwave energy to rapidly heat solvents to high temperatures. These elevated temperatures reduce the time necessary to extract organic compounds from solid matrices. This product uses a unique temperature control system and multiple safety devices to ensure both rapid and safe sample preparation. This product is a cost effective alternative to traditional solvent extraction due to its high recoveries and significantly reduced solvent usage. The Microwave Extraction System is marketed under the trade name, MARS-X. Sales of the MARS-X to environmental laboratories will be limited in the United States until the U.S. Environmental Protection Agency approves the use of microwave-based instruments as an alternative method for extraction.
Marketing and Sales
The Company's marketing and sales strategy is based on identifying applications for its products and providing its customers with prompt and effective technical and applications support.
The Company's marketing strategy utilizes telemarketing, direct mail, trade show demonstrations, articles, studies, trade journal advertising, product releases, seminars and makes extensive use of the Company's applications laboratory to develop specific testing applications for potential and existing customers.
Sales in the U.S. are generated by full-time sales personnel through sales and service locations throughout the country. Sales are conducted through direct selling efforts including on-site demonstrations. Sales and service representatives provide installation and training of production and laboratory personnel. Sales representatives are paid a base salary, commissions and/or other incentive compensation.
The Company's applications laboratories provide technical assistance to customers and potential customers in developing new and improved applications and related procedures. The applications laboratories perform tests in its facilities in North Carolina and Germany and provides the results to customers.
The Company's foreign sales are conducted through independent dealers throughout the world and the Company's subsidiaries in England, Germany and Italy. Foreign sales are primarily to customers in Europe, Asia and Latin America. Foreign sales accounted for 43%, 45% and 46% of net sales in fiscal 1999, 1998 and 1997, respectively.
Research and Development
The Company invests heavily in the research and development of potential new products, product improvements and enhancements, and applications research for existing products. For fiscal 1999, 1998 and 1997, research and development expense was $3,162,000, $2,943,000 and $2,742,000 respectively.
The Company's product development efforts continue to progress with respect to certain proprietary technology licensed in 1996. The Company expects to deliver prototype instruments incorporating this technology to prospective customers in fiscal 2000.
Product Protection
The Company relies upon its proprietary technology, continuing research and development and customer service support to maintain and enhance its competitive position. Important features of certain of the Company's products are protected by issued patents or pending patent applications.
Manufacturing
The Company's manufacturing operations are carried out at its headquarters in Matthews, North Carolina and consist mostly of the assembly and testing of mechanical and electronic components purchased from others.
Certain components are currently purchased from single source suppliers. An interruption of one of these sources could result in delays in the Company's production while the Company developed an alternative supplier and could result in a loss of sales and income. There are other single source components for which the Company has determined that other sources are readily available.
The Company has experienced no significant production delays because of a supplier's inability to ship an acceptable component. The Company stocks what it believes is an adequate supply of all components and materials based upon delivery lead times and orders currently in hand.
Environmental Regulations
Compliance with federal, state and local provisions relating to protection of the environment has not had, and is not expected to have, any material adverse effects upon the production, capital expenditures, earnings or competitive position of the Company and its subsidiaries.
Employees
At June 30, 1999, the Company employed 179 persons. None of the Company's employees are covered by a collective bargaining agreement.
Backlog
The Company does not have a significant backlog of orders, as it normally ships its products within a short time after it receives orders.
Competition
The Company experiences direct competition in both foreign and U.S. markets from companies using microwave technology, traditional methods of heating and drying and other technologies.
There are a number of methods for performing acid digestions, the most common of which is the traditional "open vessel on a hot plate" method. There are three other primary manufacturers of closed vessel microwave digestion systems similar in nature to the Company's products. Also competing with MARS and MDS are other advanced methods utilizing higher pressure and temperature including steel jacketed digestion vessels for use in conventional ovens and high pressure wet ashers.
There are a number of other methods for testing the moisture or solids content of various liquids and solids. In most instances, the equipment and instruments, which consist typically of simple heating and drying units and measurement techniques, are less expensive than the Moisture/Solids Analyzer produced by the Company. In addition, infrared moisture analyzers, radio frequency energy absorption techniques and the Karl Fischer titration method, a wet chemical procedure, have been developed. These systems compete directly with the Company's instrumentation in certain markets. There is one manufacturer of a microwave moisture system similar in nature to the Company's Moisture/Solids Analyzer.
The traditional method of ashing is with a resistance heat furnace. There are a number of manufacturers of laboratory furnaces used for ashing. Although these products are typically less expensive than the Microwave Ashing System sold by the Company, the Company's product offers advantages in both speed and process control.
The Company's microwave open vessel digestion system (the STAR System) is designed to digest large samples or samples that are very reactive and can not be safely digested in a closed vessel digestion system. There is currently one competitor in this market, which also utilizes microwave based technology and automatic reagent additions, but the Company believes its product offers advantages in price and performance.
The Company's Fat Analyzer System is the only direct moisture, fat and protein system available that is approved by the Association of Analytical Chemists. However, there is a competing technology using an indirect measurement method of analysis, which results in a quicker result time but is not considered as accurate. In addition, this competing system is sold at a significantly higher price than the Company's system.
There are a number of methods for performing extractions, the most common of which are the traditional Soxhlet and sonication methods. Also competing with the Company's Microwave Extraction System are other advanced methods such as Supercritical Fluid Extraction and Accelerated Solvent Extraction.
Typically the Company's selling prices are higher than those of most of its competitors. The Company competes primarily upon the speed, ease of use, applications support and long-term cost savings to the users.
International Operations and Sales
Information about the Company's international operations and sales is incorporated by reference to footnotes 1 and 8 of the financial statements contained in the Company's 1999 Annual Report to Shareholders (Exhibit 13 hereto).
ITEM 2
ITEM 2 - PROPERTIES
The Company's headquarters, research and manufacturing operations are located in an 82,000 square foot building on an eight and three-fourths acre tract of land owned by the Company in Matthews, North Carolina. The Company also owns a 5,000 square foot office and warehouse facility in England, owns a 5,200 square foot office and warehouse in Germany and leases a 4,000 square foot office in Italy. The facility in Germany is subject to a mortgage which had a balance of $68,000 at June 30, 1999. Management believes these facilities are adequate to serve existing markets for the next several years.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
Nothing is required to be disclosed pursuant to this item.
ITEM 4
ITEM 4 is inapplicable and has been omitted.
PART II
ITEM 5
ITEM 5 is incorporated by reference to Footnote 12 on page 19 "Quarterly Information (Unaudited)" and on the inside back cover "Corporate Information" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13 hereto).
ITEM 6
ITEM 6 is incorporated by reference to page 20 of items captioned "Selected Financial Data" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13 hereto).
ITEM 7
ITEM 7 is incorporated by reference to page 6 captioned "Management's Discussion and Analysis" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13 hereto).
ITEM 7A
ITEM 7A is incorporated by reference to Footnote 2 on page 14 "Financial Instruments" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13 hereto).
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, notes to the financial statements and quarterly supplemental financial data of the Company appearing on pages 9 - 20 of the Company's 1999 Annual Report to Shareholders are hereby incorporated by reference.
ITEM 9
ITEM 9 is inapplicable and has been omitted.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as to the directors and chief executive officer of the Company is incorporated herein by reference to the section captioned "Election of Directors" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held November 4, 1999. The following information is provided as to the executive officers of the Company who are not directors:
Name Age Background - --------------------- ------ --------------------------------------------
Richard N. Decker 50 Vice President - Finance, Chief Financial Officer, Secretary and Treasurer since 1995; Secretary, Treasurer and Chief Financial Officer 1993-1995; Vice President-Finance of the Water and Gas Meter Division of Schlumberger Limited Corporation 1982-1993.
All of the Company's executive officers were appointed to their current positions at the Annual Meeting of the Board of Directors held on November 5, 1998. All of the Company's executive officers' terms of office extend until the next Annual Meeting of the Board of Directors and until their successors are elected and qualified.
ITEM 11
ITEM 11 is incorporated by reference to the sections captioned "Executive Compensation" and "Director Compensation" in the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held November 4, 1999.
ITEM 12
ITEM 12 is incorporated by reference to the sections captioned "Principal Shareholders and Holdings of Management" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held November 4, 1999.
ITEM 13
ITEM 13 is inapplicable and has been omitted.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. See accompanying Index to Financial Statements. (2) Financial Statement Schedules. See accompanying Index to Financial Statements. (3) Exhibits.
3.1 Restated Charter of the Company, as amended.(1)
3.2 Bylaws of the Company.(1)
10.1 * CEM Corporation 1986 Nonqualified Stock Option Plan, as amended, incorporated herein by reference to the Company's Registration Statement on Form S-8 (File No. 33-53694).
10.2 * CEM Corporation Employee Stock Purchase Plan, as amended, incorporated herein by reference to the Company's Registration Statement on Form S-8 (File No. 33-80136).
10.3 * CEM Corporation 1987 Stock Option Plan, as amended.(1)
10.4 * CEM Corporation 1993 Management Equity Plan, incorporated herein by reference to the Company's Registration Statement on Form S-8 (File No. 33-75368).
10.5 * CEM Corporation Management Incentive Compensation Plan(2).
10.6 CEM Corporation 1993 Nonqualified Stock Option Plan for Non-Employee Directors, incorporated herein by reference to the Company's Registration Statement on Form S-8 (File No. 33-75366).
13. The Company's 1999 Annual Report to Shareholders. This Annual Report to Shareholders is furnished for the information of the Commission only and, except for the parts thereof incorporated in this report, is not deemed to be "filed" as part of this filing.
21. List of the Company's Subsidiaries.(1)
23. Consent of Independent Accountants.
27. Financial Data Schedules (filed in electronic format only). This schedule shall not be deemed "filed" for purposes of Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates.
99. Revised Item 21 of Part II to the Company's registration statements on Form S-8 (Registration Numbers 33-11952 and 33-25739).(1)
-------------------- * This exhibit is one of the Company's management contracts and compensatory plans and arrangements. (1) Incorporated herein by reference to the Company's Form 10-K for the year ended June 30, 1994. (2) Incorporated herein by reference to the Company's Form 10-K for the year ended June 30, 1997.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed during the last quarter of the period covered by this report.
(c) Exhibits. See Item 14(a)(3) above.
The 1999 Annual Report to Shareholders of CEM Corporation is not to be deemed "filed" as part of this report except for those parts thereof specifically incorporated herein by reference.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of CEM Corporation:
Our audits of the consolidated financial statements referred to in our report dated July 21, 1999 appearing on page 20 of the 1999 Annual Report to Shareholders of CEM Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina July 21, 1999
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CEM CORPORATION
By: /s/ Michael J. Collins ---------------------- Michael J. Collins President and Chief Executive Officer
By: /s/ Richard N. Decker --------------------- Dated: September 24, 1999 Richard N. Decker Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
CEM CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
EXHIBITS ITEM 14(a)(3) ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended Commission File Number - ------------------------- ---------------------- June 30, 1999 0-15383
CEM CORPORATION EXHIBIT INDEX
Exhibit No. Exhibit Description - ----------- -------------------
3.1 Restated Charter of the Company, as amended.(1)
3.2 Bylaws of the Company.(1)
10.1 CEM Corporation 1986 Nonqualified Stock Option Plan, as amended, incorporated herein by reference to the Company's Registration Statement on Form S-8 (File No. 33-53694).
10.2 CEM Corporation Employee Stock Purchase Plan, as amended, incorporated herein by reference to the Company's Registration Statement on Form S-8 (File No. 33-80136).
10.3 CEM Corporation 1987 Stock Option Plan, as amended.(1)
10.4 CEM Corporation 1993 Management Equity Plan, incorporated herein by reference to the Company's Registration Statement on Form S-8 (File No. 33-75368).
10.5 CEM Corporation Management Incentive Compensation Plan.(2)
10.6 CEM Corporation 1993 Nonqualified Stock Option Plan for Non-Employee Directors, incorporated herein by reference to the Company's Registration Statement on Form S-8 (File No. 33-75366).
13. The Company's 1999 Annual Report to Shareholders. This Annual Report to shareholders is furnished for the information of the Commission only and, except for the parts thereof incorporated in this report, is not deemed to be "filed" as part of this filing (page __ of the sequentially numbered pages).
21. List of the Company's Subsidiaries.(1)
23. Consent of Independent Accountants (page __ of the sequentially numbered pages).
27. Financial Data Schedules (filed in electronic format only). This schedule shall not be deemed "filed" for purposes of Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates.
99. Revised Item 21 of Part II to the Company's registration statements on Form S-8 (Registration Numbers 33-11952 and 33-25739).(1)
----------------------
(1) Incorporated herein by reference to the Company's Form 10-K for the year ended June 30, 1994.
(2) Incorporated herein by reference to the Company's Form 10-K for the year ended June 30, 1997.