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MOCON 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q
 

(Mark One)

 

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarter Ended March 31, 2009

 

or

 

o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                  to                 

 

Commission File Number 000-09273

 

MOCON, INC.

(Exact name of registrant as specified in its charter)

 

Minnesota

 

41-0903312

(State or other jurisdiction of

 

(I.R.S. employer

incorporation or organization)

 

identification no.)

 

 

 

7500 Boone Avenue North, Minneapolis, Minnesota

 

55428

(Address of principal executive offices)

 

(Zip code)

 

(763) 493-6370

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES o  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

 

5,589,694 Common Shares were outstanding as of April 30, 2009.

 

 

 



Table of Contents

 

MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended March 31, 2009

 

 

Page
Number

PART I.   FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

Consolidated Balance Sheets (Unaudited)
March 31, 2009 and December 31, 2008

1

 

 

 

 

Consolidated Statements of Income (Unaudited)
Three months ended March 31, 2009 and 2008

2

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 2009 and 2008

3

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

4-10

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10-18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

 

 

 

Item 4T.

Controls and Procedures

19

 

 

 

 

PART II.  OTHER INFORMATION

 

 

 

Item 1A.

Risk Factors

19

 

 

 

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

19-20

 

 

 

Item 6.

Exhibits

20

 

 

Signatures

21

 

 

Exhibit Index

22

 

In this report, references to “MOCON,” “the Company,” “we,” “our,” or “us,” unless the context otherwise requires, refer to MOCON, Inc. and its subsidiaries.

 

All trademarks or trade names referred to in this report are the property of their respective owners.

 



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4,883,790

 

$

4,553,479

 

Marketable securities, current

 

7,245,679

 

7,087,373

 

Trade accounts receivable, less allowance for doubtful accounts of $141,686 in 2009 and $137,182 in 2008

 

3,830,330

 

4,514,359

 

Other receivables

 

250,971

 

255,923

 

Inventories

 

4,775,979

 

4,731,859

 

Prepaid income taxes

 

467,297

 

465,641

 

Prepaid expenses

 

537,064

 

385,264

 

Deferred income taxes

 

362,773

 

362,773

 

Total current assets

 

22,353,883

 

22,356,671

 

 

 

 

 

 

 

Marketable securities, noncurrent

 

3,065,726

 

4,468,064

 

Property, plant and equipment, net of accumulated depreciation of $4,367,239 in 2009 and $4,274,454 in 2008

 

1,838,561

 

1,826,269

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Goodwill

 

3,146,773

 

3,267,926

 

Technology rights and other intangibles, net

 

665,908

 

659,298

 

Deferred income taxes

 

298,094

 

298,094

 

Other

 

77,786

 

76,905

 

Total other assets

 

4,188,561

 

4,302,223

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

31,446,731

 

$

32,953,227

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,247,526

 

$

1,676,448

 

Accrued compensation and vacation

 

924,306

 

1,498,428

 

Other accrued expenses

 

254,415

 

310,828

 

Accrued product warranties

 

220,203

 

229,087

 

Dividends payable

 

503,072

 

503,308

 

Deferred revenue

 

317,787

 

245,793

 

Total current liabilities

 

3,467,309

 

4,463,892

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Obligations to former employees

 

52,021

 

55,522

 

Accrued income taxes

 

215,820

 

215,820

 

Total noncurrent liabilities

 

267,841

 

271,342

 

 

 

 

 

 

 

Total liabilities

 

3,735,150

 

4,735,234

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Capital stock — undesignated. Authorized 3,000,000 shares

 

 

 

Common stock — $0.10 par value. Authorized 22,000,000 shares; issued and outstanding 5,589,694 shares in 2009 and 5,592,314 shares in 2008

 

558,969

 

559,231

 

Capital in excess of par value

 

2,908,512

 

2,868,669

 

Retained earnings

 

24,164,111

 

24,268,266

 

Accumulated other comprehensive income

 

79,989

 

521,827

 

Total stockholders’ equity

 

27,711,581

 

28,217,993

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

31,446,731

 

$

32,953,227

 

 

See accompanying notes to consolidated financial statements.

 

1



Table of Contents

 

MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

Sales:

 

 

 

 

 

Products

 

$

5,842,795

 

$

7,102,453

 

Consulting services

 

328,964

 

359,981

 

Total sales

 

6,171,759

 

7,462,434

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

Products

 

2,355,464

 

2,919,612

 

Consulting services

 

225,033

 

234,303

 

Total cost of sales

 

2,580,497

 

3,153,915

 

 

 

 

 

 

 

Gross profit

 

3,591,262

 

4,308,519

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

2,581,052

 

2,582,634

 

 

 

 

 

 

 

Research and development expenses

 

507,600

 

543,951

 

 

 

 

 

 

 

Operating income

 

502,610

 

1,181,934

 

 

 

 

 

 

 

Other income

 

109,307

 

131,693

 

 

 

 

 

 

 

Income before income taxes

 

611,917

 

1,313,627

 

 

 

 

 

 

 

Income taxes

 

213,000

 

428,000

 

 

 

 

 

 

 

Net income

 

$

398,917

 

$

885,627

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

Basic

 

$

0.07

 

$

0.16

 

Diluted

 

$

0.07

 

$

0.16

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

5,591,877

 

5,532,432

 

Diluted

 

5,650,078

 

5,668,573

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

398,917

 

$

885,627

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Stock-based compensation expense

 

58,317

 

77,639

 

Loss on disposition of long-term assets

 

3,000

 

13,500

 

Depreciation and amortization

 

156,198

 

137,045

 

Deferred income taxes

 

 

(8,549

)

Excess tax benefit from employee stock plans

 

 

(5,667

)

Changes in operating assets and liabilities:

 

 

 

 

 

Trade accounts receivable

 

391,035

 

(285,839

)

Other receivables

 

4,467

 

(19,624

)

Inventories

 

(85,782

)

(39,532

)

Prepaid income taxes

 

(16,401

)

 

Prepaid expenses

 

(155,738

)

(115,569

)

Accounts payable

 

(174,451

)

470,389

 

Accrued compensation and vacation

 

(557,743

)

(244,034

)

Other accrued expenses

 

(51,822

)

(30,593

)

Accrued product warranties

 

(5,239

)

(740

)

Accrued income taxes

 

(4,465

)

17,285

 

Deferred revenue

 

71,994

 

 

Net cash provided by operating activities

 

32,287

 

851,338

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of marketable securities

 

(637,025

)

(2,136,836

)

Proceeds from maturities of marketable securities

 

1,878,530

 

1,701,475

 

Purchases of property, plant and equipment

 

(147,721

)

(82,325

)

Purchases of patents and trademarks

 

(22,944

)

(39,019

)

Other

 

(881

)

(905

)

Net cash provided by (used in) investing activities

 

1,069,959

 

(557,610

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

106,295

 

Purchases and retirement of common stock

 

(18,736

)

 

Excess tax benefit from employee stock plans

 

 

5,667

 

Dividends paid

 

(503,308

)

(442,372

)

Net cash used in financing activities

 

(522,044

)

(330,410

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(249,891

)

274,742

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

330,311

 

238,060

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

4,553,479

 

5,207,105

 

End of period

 

$

4,883,790

 

$

5,445,165

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for income taxes

 

$

219,011

 

$

196,891

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Amortization of cumulative unrealized gain on marketable securities

 

$

(2,527

)

$

 

Dividends accrued

 

$

503,072

 

$

443,296

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

MOCON, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 — Consolidated Financial Statements

 

The consolidated balance sheet as of March 31, 2009, and the consolidated statements of income and cash flows for the three-month periods ended March 31, 2009 and 2008 have been prepared by us, without audit.  However, all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows at March 31, 2009, and for all periods presented, have been made.  The results of operations for the three-month period ended March 31, 2009 are not necessarily indicative of operating results for the full year.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, previously filed with the Securities and Exchange Commission.

 

We operate in a single industry segment: the developing, manufacturing, and marketing of measurement, analytical, monitoring and consulting products for customers in the barrier packaging, food, pharmaceutical, consumer products, industrial hygiene, air quality monitoring, oil and gas exploration and other industries throughout the world.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of MOCON, Inc. and its subsidiaries after elimination of inter-company transactions and accounts.

 

Foreign Currency Translation

 

The financial statements for operations outside the United States are maintained in their local currency.  All assets and liabilities of our foreign subsidiaries are translated to United States dollars at period-end exchange rates, while revenue and expense accounts are translated at the average exchange rates during the period transactions occurred.  Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income or loss in stockholders’ equity.  Gains and losses on foreign currency transactions are included in other income or loss.

 

Use of Estimates

 

The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

4



Table of Contents

 

Recently Issued Accounting Pronouncements

 

In February 2008, the FASB amended SFAS 157 by FSP Financial Accounting Standard (FAS) 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2).  FSP FAS 157-2 deferred the effective date of SFAS 157 for all nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis to fiscal years beginning after February 15, 2008.  We adopted the required provisions of SFAS 157 effective in the first quarter of fiscal 2008.  In the first quarter 2009, we adopted the remaining provisions of SFAS 157.  Although we believe the adoption of FSP FAS 157-2 may impact the way that we determine the fair value of goodwill, indefinite-lived intangible assets, and other long-lived assets, we do not expect it to have a material impact on our results of operations or financial condition.

 

In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active.  The Staff Position is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 28, 2008.  The implementation of FAS 157-3 did not have an effect on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(R)).  SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations.  SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date.  SFAS 141(R) also requires that acquisition-related costs be recognized separately from the acquisition.  We will be required to apply the guidance of SFAS 141(R) to any business combinations completed on or after January 1, 2009.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161), an amendment of SFAS No. 133.  SFAS 161 establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities.  The intent is to provide users of financial statements with an enhanced understanding of a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  To meet those objectives, the Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.  SFAS 161 is effective for us beginning in 2009.  We currently have no derivative instruments or hedging activities but will assess the impact of SFAS 161 if and when we engage in these types of transactions.

 

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets.  FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets.  FSP FAS 142-3 was effective for us beginning January 1, 2009.  The implementation of FSP FAS 142-3 did not have an effect on our consolidated financial statements.

 

5



Table of Contents

 

Note 2 — Inventories

 

Inventories consist of the following:

 

 

 

March 31,
2009

 

December 31,
2008

 

Finished products

 

$

857,801

 

$

829,861

 

Work-in-process

 

1,576,853

 

1,633,577

 

Raw materials

 

2,341,325

 

2,268,421

 

 

 

$

4,775,979

 

$

4,731,859

 

 

Note 3 — Net Income Per Common Share

 

Basic net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.  Diluted net income per common share is computed using the treasury stock method to compute the weighted average common stock outstanding assuming the conversion of potential dilutive common shares.

 

The following table presents a reconciliation of the denominators used in the computation of net income per common share — basic, and net income per common share — diluted, for the three-month periods ended March 31, 2009 and 2008:

 

 

 

Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Weighted shares of common stock outstanding — basic

 

5,591,877

 

5,532,432

 

Weighted shares of common stock assumed upon exercise of stock options

 

58,201

 

136,141

 

Weighted shares of common stock outstanding — diluted

 

5,650,078

 

5,668,573

 

 

For the three-month period ended March 31, 2009, there were 484,574 stock options outstanding that were excluded from the above computation because they were anti-dilutive.

 

Note 4 — Goodwill and Intangible Assets

 

As of March 31, 2009 and December 31, 2008, goodwill amounted to $3,146,773 and $3,267,926, respectively.  The decrease was due to foreign currency translation relating to the acquisition of Paul Lippke Handels-GmbH.  Other identifiable intangible assets (all of which are being amortized except projects in process) are as follows:

 

 

 

As of March 31, 2009

 

 

 

Cost

 

Accumulated
Amortization

 

Net

 

Estimated
Useful Lives

 

Patents

 

$

884,265

 

$

(375,484

)

$

508,781

 

10 to 17 years

 

Trademarks and trade names

 

469,023

 

(385,229

)

83,794

 

5 to 17 years

 

Other intangibles

 

778,596

 

(705,263

)

73,333

 

3 years

 

 

 

$

2,131,884

 

$

(1,465,976

)

$

665,908

 

 

 

 

6



Table of Contents

 

 

 

As of December 31, 2008

 

 

 

Cost

 

Accumulated
Amortization

 

Net

 

Estimated
Useful Lives

 

Patents

 

$

860,422

 

$

(365,329

)

$

495,093

 

10 to 17 years

 

Trademarks and trade names

 

465,756

 

(381,551

)

84,205

 

5 to 17 years

 

Other intangibles

 

778,596

 

(698,596

)

80,000

 

3 years

 

 

 

$

2,104,774

 

$

(1,445,476

)

$

659,298

 

 

 

 

Total amortization expense for the three-month periods ended March 31, 2009 and 2008 was $20,499 and $28,058, respectively.  Projects in process are not amortized until the patent or trademark is granted by the regulatory agency.  Estimated amortization expense for the remainder of 2009 and each of the four succeeding fiscal years and thereafter based on the intangible assets as of March 31, 2009 is as follows:

 

 

 

Estimated
Expense

 

2009

 

$

61,904

 

2010

 

$

74,876

 

2011

 

$

61,103

 

2012

 

$

28,493

 

2013

 

$

23,730

 

2014 and thereafter

 

$

102,069

 

 

Note 5 — Marketable Securities

 

As of January 1, 2008, the classification of our marketable debt securities was changed from available-for-sale to held-to-maturity.  This change was made due to our current intent and ability to hold these securities until maturity or the call date as the case may be.  Currently, all of our marketable securities mature within two and one-half years.  Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.  A decline in the market value of any held-to-maturity security below the amortized cost basis that is deemed other than temporary is charged to income, resulting in the establishment of a new cost basis for the security.  There was no impairment during the first three months of 2009, therefore no adjustment to the amortized cost basis was made.  Under the prior method, these securities were recorded at fair value and the unrealized holding gains and losses were excluded from income and reported as a separate component of stockholders’ equity until realized.  For the debt securities that were outstanding at December 31, 2007, there was approximately $25,000 of unrealized gain that was recorded in stockholders’ equity, which was amortized over the remaining life of the securities.  This unrealized gain was fully amortized at March 31, 2009.

 

Note 6 — Comprehensive Income

 

Other comprehensive income pertains to foreign currency translation adjustments that are not included in net income but rather are recorded directly in stockholders’ equity.

 

 

 

Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Net income

 

$

398,917

 

$

885,627

 

Foreign currency translation adjustment

 

(439,311

)

331,693

 

Amortization of cumulative unrealized gain on marketable securities

 

(2,527

)

 

Comprehensive (loss) income

 

$

(42,921

)

$

1,217,320

 

 

7



Table of Contents

 

Note 7 — Warranty

 

We provide a warranty for most of our products.  Warranties are for periods ranging from ninety days to one year, and cover parts and labor for non-maintenance repairs, at our location.  Operator abuse, improper use, alteration, damage resulting from accident, or failure to follow manufacturer’s directions are excluded from warranty coverage.

 

Warranty expense is accrued at the time of sale based on historical claims experience.  Warranty reserves are also accrued for special rework campaigns for known major product modifications.  We also offer extended warranty service contracts for select products when the factory warranty period expires.

 

Warranty provisions and claims for the three-month periods ended March 31, 2009 and 2008 were as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Beginning balance

 

$

229,087

 

$

201,373

 

Warranty provisions

 

56,010

 

72,964

 

Warranty claims

 

(64,894

)

(71,027

)

Ending balance

 

$

220,203

 

$

203,310

 

 

Note 8 — Income Taxes

 

MOCON, Inc. or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction, several state jurisdictions, China and Germany.  With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before 2005.

 

In August 2008, the Internal Revenue Service completed its examination of MOCON’s 2006 Federal tax return.  This resulted in an assessment of an additional $37,000 in tax and interest, which had no impact on our effective tax rate.

 

As of December 31, 2008, the liability for gross unrecognized tax benefits was $168,000, which included potential benefits of $121,000 that, if recognized, would affect the effective tax rate.  During the three months ended March 31, 2009, there were no significant changes to the total gross unrecognized tax benefits.  It is expected that the amount of unrecognized tax benefits for positions which we have identified will not change significantly in the next twelve months.

 

Note 9 — Stock-Based Compensation

 

As of March 31, 2009, we have reserved 232,000 shares of common stock for options and other stock-based incentive awards that are still available for grant under our 2006 stock incentive plan, and 848,562 shares for options that have been granted under either the 2006 stock incentive plan or the 1998 stock option plan but have not yet been exercised.  We issue new shares of common stock upon exercise of stock options.  There were no options granted in the first quarter of 2009.

 

Amounts recognized in the consolidated financial statements related to stock-based compensation are as follows:

 

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Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Total cost of stock-based compensation

 

$

58,317

 

$

77,639

 

Amount capitalized in inventory and property and equipment

 

 

 

Amounts charged against income before income taxes

 

58,317

 

77,639

 

Amount of income tax benefit recognized in earnings

 

(2,657

)

(12,552

)

Amount charged against net income

 

$

55,660

 

$

65,087

 

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model (Black-Scholes).  We use historical data to estimate the expected price volatility, expected option life and expected forfeiture rate.  We base our estimate of expected volatility for awards granted on daily historical trading data of our common stock for a period equivalent to the expected term of the award.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.  We estimate the expected term consistent with historical exercise and cancellation activity of our previous share-based grants with a ten-year contractual term.  Forfeitures are based on historical experience.  The dividend yield is calculated based upon the dividend payments made during the prior four quarters as a percent of the average stock price for that period.

 

A summary of the option activity for the first three months of 2009 is as follows:

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price per
Share

 

Weighted
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2008

 

848,562

 

$

8.81

 

4.9

 

$

567,879

 

Options granted

 

 

 

 

 

 

Options cancelled

 

 

 

 

 

 

Options expired

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

Outstanding at March 31, 2009

 

848,562

 

$

8.81

 

4.6

 

$

533,300

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2009

 

693,468

 

$

8.60

 

4.3

 

$

533,300

 

 

There were no stock options exercised during the three-month period ended March 31, 2009.  The total intrinsic value of options exercised during the three-month period ended March 31, 2008 was $37,235.

 

A summary of the status of our unvested option shares as of March 31, 2009 is as follows:

 

 

 

Number of
Shares

 

Weighted
Average
Grant Date
Fair Value

 

Unvested at December 31, 2008

 

163,469

 

$

2.47

 

Options granted

 

 

 

Options cancelled

 

 

 

Options vested

 

(8,375

)

$

2.40

 

Unvested at March 31, 2009

 

155,094

 

$

2.47

 

 

As of March 31, 2009, there was $383,672 of total unrecognized compensation cost related to unvested stock-based compensation granted under our plans.  That cost is expected to be recognized over a

 

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weighted-average period of 1.4 years.  The total fair value of option shares vested during the three-month periods ended March 31, 2009 and 2008 was $20,100 and $26,884, respectively.

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations.  Statements that are not historical are forward-looking and involve risks and uncertainties discussed below under the caption “Forward-Looking Statements.”  The following discussion of the results of operations and financial condition of MOCON should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this report.

 

Overview

 

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.  We continually seek growth opportunities through technological and product improvement, by acquiring and developing new products, and by acquiring new companies.

 

We have three primary operating locations in the United States — Minnesota, Colorado and Texas — and foreign offices in Germany and China.  We use a direct sales force and independent sales representatives to market our products and services in the United States, Canada, Germany and China and use a network of independent sales representatives to market and service our products and services in other foreign countries.

 

Historically, a significant portion of our revenues have come from international customers.  In this regard, we acquired our subsidiary in Germany in 2004 to solidify our presence and opportunities in Europe.  Similarly, we opened our office in Shanghai, China in 2007 to better serve our Asian customers.

 

Our current plans for growth include continued funding for research and development to foster new product development together with strategic acquisitions where appropriate.

 

Results of Operations

 

The following table sets forth the relationship between various components of our results of operations, stated as a percent of sales, for the three-month periods ended March 31, 2009 and 2008:

 

 

 

Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Sales

 

100.0

 

100.0

 

Cost of sales

 

41.8

 

42.3

 

Gross profit

 

58.2

 

57.7

 

Selling, general and administrative expenses

 

41.8

 

34.6

 

Research and development expenses

 

8.3

 

7.3

 

Operating income

 

8.1

 

15.8

 

Other income

 

1.8

 

1.8

 

Income before income taxes

 

9.9

 

17.6

 

Income taxes

 

3.4

 

5.7

 

Net income

 

6.5

 

11.9

 

 

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Comparison of Financial Results for the Three-Month Periods Ended March 31, 2009 and 2008

 

Sales

 

Sales for the three-month period ended March 31, 2009 were $6,172,000, down 17% compared to $7,462,000 for the same period in 2008.  The effects of the global economic recession contributed to a decrease in sales across all major product lines and market regions.  On a geographical basis, sales decreased 17% in both our domestic and foreign markets.  Domestic and foreign sales accounted for 47% and 53%, respectively, of our consolidated first quarter sales in both 2009 and 2008.

 

The following table summarizes total sales by product line for the three-month periods ended March 31, 2009 and 2008:

 

 

 

Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Permeation products and services

 

$

3,592,625

 

$

3,934,053

 

Gas, headspace, and other analyzer products and services

 

2,365,996

 

3,029,078

 

Other instruments and services

 

213,138

 

499,303

 

Total sales

 

$

6,171,759

 

$

7,462,434

 

 

The following table sets forth the relationship between various components of domestic and foreign sales for the three-month periods ended March 31, 2009 and 2008:

 

 

 

Three Months Ended
March 31,

 

 

 

2009

 

2008

 

Domestic sales

 

$

2,889,432

 

$

3,492,931

 

Foreign sales:

 

 

 

 

 

Europe

 

1,593,759

 

1,982,901

 

Asia

 

1,171,583

 

1,433,195

 

Other

 

516,985

 

553,407

 

Total foreign sales

 

3,282,327

 

3,969,503

 

Total sales

 

$

6,171,759

 

$

7,462,434

 

 

Permeation Products and Services — Sales of our permeation products and services, which accounted for approximately 58% and 53% of our consolidated first quarter sales in 2009 and 2008, respectively, decreased 9% during the first quarter 2009 compared to the same period in 2008.  This decrease, which was primarily in our foreign markets, was due primarily to decreased demand for our core permeation instruments, as orders for capital equipment have weakened.

 

Gas, Headspace, and Other Analyzer Products and Services — Sales of our gas, headspace, and other analyzer products and services, which accounted for 38% and 40% of our consolidated first quarter sales in 2009 and 2008, respectively, decreased 22% during the first quarter 2009 compared to the same period in 2008.  Within this group, sales of our gas analyzer products through our Baseline subsidiary decreased 17% due primarily to reduced demand for the gas chromatograph and total hydrocarbon analyzer instruments, partially offset by an increase in sales of sensors, detectors and spares.

 

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Sales of our packaging products, which includes headspace analyzers and leak detection equipment, were consistent as a percentage of consolidated first quarter sales in 2009 and 2008.

 

Other Instruments and Services — Sales in our other instruments and services category, which accounted for 4% and 7% of our consolidated first quarter sales in 2009 and 2008, respectively, decreased 57% in the first quarter 2009, compared to the same period in 2008.  This decrease was due primarily to a reduction in contract manufacturing of sample preparation products, reduced sales of non-MOCON products by our German subsidiary and decreased demand for our gas chromatography analyzer products and consulting services.

 

Gross Profit

 

The gross profit margins for our product sales were 59.7% and 58.9% for the three-month periods ended March 31, 2009 and 2008, respectively.  This increase was primarily due to the mix of products shipped and cost reductions associated with our OEM sensor product line.

 

The gross profit margins for our consulting services were 31.6% and 34.9%, respectively, for the three-month periods ended March 31, 2009 and 2008.  This decrease was primarily due to slightly decreased sales over which the fixed costs were applied.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (SG&A) expenses were $2,581,000 in the three-month period ended March 31, 2009, consistent with $2,583,000 in the same period of 2008.  As a percentage, SG&A expenses were 41.8% and 34.6% of consolidated sales in the first quarters of 2009 and 2008, respectively, due to the lower sales level in 2009.  Decreases in incentive compensation and stock option expense were offset by increased professional fees and trade show expense in the first quarter 2009 compared to the same period in the prior year.

 

Research and Development Expenses

 

Research and development (R&D) expenses were $508,000, or 8.3% of sales in the first quarter 2009, compared to $544,000, or 7.3% of sales, in the same period of 2008.  Although this current level of expense was higher than our historical range of 6% to 8% of sales, and it may continue to be in subsequent quarters, it is lower in terms of absolute dollars spent on R&D than what we had projected to spend.

 

Other Income

 

Other income for the first quarter ended March 31, 2009 of $109,000 consisted of interest income of $118,000, partially offset by a loss of $9,000 on foreign currency exchange and other insignificant expenses.  Other income for the first quarter ended March 31, 2008 of $132,000 consisted of interest income of $139,000, partially offset by a loss of $7,000 on foreign currency exchange and other insignificant expenses.  Interest income decreased for the first quarter ended March 31, 2009, compared to the same period in 2008, due to lower average yields on slightly higher average interest bearing investments.

 

Income Tax Expense

 

Our provision for income taxes was 34.8% of income before income taxes for the first quarter ended March 31, 2009, compared to 32.6% of income before income taxes for the first quarter ended March 31, 2008.  This increase in the effective tax rate in the first quarter 2009 was primarily due to the impact of stock compensation expense, the mix of foreign earnings, and the lower income base.  Based on current projected annual operating results and current income tax rates, we expect the effective tax rate for the

 

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remainder of 2009 to be in the range of 31% to 36%.  This rate fluctuates over time based on the income tax rates in the various jurisdictions in which we operate, and also the level of profits in those jurisdictions.

 

Net Income

 

Net income was $399,000 in the first quarter 2009, compared to $886,000 in the first quarter 2008.  Diluted net income per share was $0.07 and $0.16 in the first quarters of 2009 and 2008, respectively.

 

Liquidity and Capital Resources

 

We have historically financed our operations, capital expenditures and other liquidity needs through our cash flows generated from operations.  Total cash, cash equivalents and marketable securities decreased $914,000 during the first three months of 2009 to $15,195,000 as of March 31, 2009, compared to $16,109,000 at December 31, 2008.  Our working capital as of March 31, 2009 increased $994,000 to $18,887,000, as compared to $17,893,000 at December 31, 2008.  This increase was primarily due to lower accrued compensation and accounts payable balances and marketable security maturities, offset somewhat by a decrease in accounts receivable.  Our investment in marketable securities consists primarily of municipal bonds, certificates of deposits and U.S. treasury obligations.  We do not currently have any funds invested in auction rate certificates.  We believe that a combination of our existing cash, cash equivalents and marketable securities, plus an expected continuation of cash flow from operations, will continue to be adequate to fund our operations, capital expenditures, dividend payments and authorized stock repurchases for at least the next twelve months.  Purchases of property and equipment were relatively constant between the two periods mentioned above, and we had no material commitments for capital expenditures as of March 31, 2009.

 

One of our strategic objectives is, as market and business conditions warrant, to consider acquisitions of businesses, products or technologies.  We may need to fund such activities, should they arise, with a combination of cash on hand and debt and/or equity financing, although no assurance can be given that such debt and/or equity financing will be available at reasonable terms or at all.  We currently do not have any committed lines of credit or other credit facilities available for use.  If we raise additional funds by issuing debt, we may be subject to restrictive covenants that could limit our operational flexibility and higher interest expense could dilute earnings per share.  Any plan to raise additional capital may involve an equity-based or equity-linked financing, which may be dilutive to existing shareholders.

 

Cash Flow

 

Cash Flow from Operating Activities

 

Our primary source of funds is cash provided by operating activities which totaled $32,000 and $851,000 in the first three months of 2009 and 2008, respectively.  The key components of the cash provided by operating activities in 2009 were the net income and decreased accounts receivable, primarily offset by decreases in accounts payable and accrued compensation and vacation.  The decrease in accounts receivable is primarily due to the decrease in sales; the decrease in accrued compensation and vacation is primarily due to the March 2009 payment of incentive bonuses related to 2008.

 

Cash Flow from Investing Activities

 

Cash provided by (used in) investing activities totaled $1,070,000 and ($558,000) in the first three months of 2009 and 2008, respectively.  The primary reasons for cash provided by investing activities in 2009 were net proceeds from maturities of marketable securities of $1,242,000, offset somewhat by purchases of property and equipment.  We presently do not believe that any significant property, plant and equipment expenditures are required to accommodate our current level of operations.

 

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Cash Flow from Financing Activities

 

Cash used in financing activities totaled $522,000 and $330,000 in the first three months of 2009 and 2008, respectively.  During the first three months of 2009 and 2008, we made dividend payments to our shareholders of $503,000 and $442,000, respectively.  Partially offsetting the impact of the dividend payment in 2008 were the proceeds from the exercise of stock options in the amount of $106,000.

 

Our Board of Directors has authorized, depending upon market conditions and other factors, the repurchase of up to a total of $2,000,000 of our common stock.  As of March 31, 2009, we had repurchased an aggregate of 51,532 shares of MOCON common stock under the program at a total cumulative cost of $441,000, leaving $1,559,000 remaining in this authorization at that date.  During the first three months of 2009 we repurchased 2,620 shares at a total cost of $19,000.

 

Contractual Obligations

 

We refer you to our Annual Report on Form 10-K for the year ended December 31, 2008 for a summary of our contractual obligations.  There has been no material change in this information.

 

Off-Balance Sheet Arrangements

 

Except for operating leases entered into in the ordinary course of business and customary indemnification obligations under certain of our agreements entered into in the ordinary course of business, we do not have any material off-balance sheet arrangements.

 

Recently Issued Accounting Pronouncements

 

In February 2008, the FASB amended SFAS 157 by FSP Financial Accounting Standard (FAS) 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2).  FSP FAS 157-2 deferred the effective date of SFAS 157 for all nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis to fiscal years beginning after February 15, 2008.  We adopted the required provisions of SFAS 157 effective in the first quarter of fiscal 2008.  In the first quarter 2009, we adopted the remaining provisions of SFAS 157.  Although we believe the adoption of FSP FAS 157-2 may impact the way that we determine the fair value of goodwill, indefinite-lived intangible assets, and other long-lived assets, we do not expect it to have a material impact on our results of operations or financial condition.

 

In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active.  The Staff Position is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 28, 2008.  The implementation of FAS 157-3 did not have an effect on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(R)).  SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations.  SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date.  SFAS 141(R) also requires that acquisition-related costs be recognized separately from the acquisition.  We will be required to apply the guidance of SFAS 141(R) to any business combinations completed on or after January 1, 2009.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161), an amendment of SFAS No. 133.  SFAS 161 establishes, among other things, the

 

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disclosure requirements for derivative instruments and for hedging activities.  The intent is to provide users of financial statements with an enhanced understanding of a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  To meet those objectives, the Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.  SFAS 161 is effective for us beginning in 2009.  We currently have no derivative instruments or hedging activities but will assess the impact of SFAS 161 if and when we engage in these types of transactions.

 

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets.  FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets.  FSP FAS 142-3 was effective for us beginning January 1, 2009.  The implementation of FSP FAS 142-3 did not have an effect on our consolidated financial statements.

 

Critical Accounting Policies

 

Our significant accounting policies are described in Note 1 to our consolidated financial statements.  This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  The Securities and Exchange Commission has defined a company’s most critical accounting policies as those that are most important to the portrayal of its financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.  Based on this definition, we have identified the following critical accounting policies.  Although we believe that our estimates and assumptions are reasonable, they are based upon information available when they are made.  Actual results may differ significantly from these estimates under different assumptions or conditions.

 

Revenue recognition — We recognize revenue when it is realized or realizable and earned.  In accordance with the Securities and Exchange Commission Staff Accounting Bulletin 104 (SAB 104), Revenue Recognition, we consider revenue realized or realizable when persuasive evidence of an arrangement exists, the product has been shipped or the services have been provided to the customer, title and risk of loss of products has passed to the customer, the sales price is fixed or determinable, and collectibility is reasonably assured.  Our terms are F.O.B. shipping point with no right of return, and customer acceptance of our products is not required.  The revenue recognition policy does not differ among the various product lines, the marketing venues, or various geographic destinations.  We do not have distributors who stock our equipment.  We do not offer rebates, price protection, or other similar incentives, and discounts when offered are recorded as a reduction in revenue.

 

Revenue for preventive maintenance agreements is recognized on a per visit basis and extended warranties on a straight-line basis over the life of the contracts, in accordance with FASB Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.

 

Emerging Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with Multiple Deliverables, provides revenue recognition guidance for arrangements with multiple deliverables, and the criteria to determine if items in a multiple deliverable agreement should be accounted for separately.  If products or services are sold on a standalone basis, revenue is recognized as the products or services are delivered. 

 

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When products or services are sold as part of a multiple element arrangement, we allocate revenue on a relative fair value basis.

 

Allowance for doubtful accounts and sales returns — Our allowance for doubtful accounts and sales returns is for accounts receivable balances that are estimated to be uncollectible as well as anticipated sales returns.  The reserve is based on a number of factors, including:  (1) an analysis of customer accounts and (2) our historical experience with accounts receivable write-offs and sales returns.  The analysis includes the age of the receivable, the financial condition of a customer or industry and general economic conditions.  We believe our financial results could be materially different if historical trends do not reflect actual results or if economic conditions worsened for our customers.  In the event we determined that a smaller or larger allowance for doubtful accounts is appropriate, we would record a credit or charge to selling, general and administrative expense in the period that we made such a determination.  As of March 31, 2009, we had $141,686 reserved against our accounts receivable for doubtful accounts and sales returns.

 

Accrual for excess and obsolete inventories We perform an analysis to identify excess and obsolete inventory.  We record a charge to cost of sales for amounts identified.  Our analysis includes inventory levels, the nature of the finished product and its inherent risk of obsolescence and the on-hand quantities relative to the sales history of that finished product.  We believe that our financial 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 or otherwise.  As of March 31, 2009, we had $303,976 accrued for excess and obsolete inventories.

 

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, changes in the economic environment in which we operate, competitive conditions, and other factors could result in future impairment charges.

 

Accrued product warranties Our products are generally covered by a warranty, with warranty periods ranging from ninety days to one year from the date of sale.  Estimated warranty costs are accrued in the same period in which the related revenue is recognized, based on anticipated parts and labor costs, utilizing historical experience.  Additional warranty reserves are also accrued for major rework campaigns.  We periodically assess the adequacy of our warranty reserves based on changes in these factors and record any necessary adjustments if actual claim experience indicates that adjustments are necessary.  Although we believe the likelihood to be relatively low, warranty claims experience could be materially different from actual results due to manufacturing changes that could impact product quality, a change in our warranty policy in response to industry trends, as yet unrecognized defects in products sold, or other factors.  As of March 31, 2009, we had $220,203 accrued for future estimated warranty claims.

 

Income taxes In the preparation of our consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which we operate.  This process involves estimating actual current tax exposures together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets.

 

Management reviews the deferred tax assets for recoverability on a quarterly basis and assesses the need for valuation allowances.  These deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income streams and the impact of tax planning strategies.  A valuation allowance is recorded to reduce deferred tax assets when it is determined that it is more likely

 

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than not that we would not be able to realize all or part of our deferred tax assets.  At March 31, 2009 and December 31, 2008, we provided a valuation allowance in the approximate amount of $370,000 and $364,000, respectively, against our net deferred tax assets, related primarily to the long-term capital loss carryforward.

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q contains or incorporates by reference not only historical information, but also 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, and are subject to the safe harbor created by those sections.  In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on our website or otherwise.  All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, results of operations and business.  We have identified some of these forward-looking statements with words like “believe,” “may,” “could,” “might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate” or “continue” and other words and terms of similar meaning.  These forward-looking statements may be contained in the notes to our consolidated financial statements and elsewhere in this report, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Forward-looking statements involve risks and uncertainties.  These uncertainties include factors that affect all businesses as well as matters specific to us.  Some of the factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements are described below.

 

·      Increases in prices for raw materials;

·      Risks inherent in operating internationally and selling and shipping our products and purchasing our products and components internationally;

·      Fluctuations in foreign currency exchange rates and interest rates;

·      Failure to develop new products and technologies, delays in new product introduction and lack of market acceptance of new products;

·      Failure to effect strategic acquisitions and integrate effectively newly acquired operations;

·      Incurrence of additional debt, contingent liabilities and expenses in connection with future acquisitions;

·      The effects of the global economic downturn and continuing decreases in capital spending by our customers that may occur as a result;

·      Exposure to assertions of intellectual property claims and failure to protect our intellectual property;

·      Disruption in our ability to manufacture our products or the ability of our key suppliers to provide us products or components or raw materials for products resulting in our inability to supply market demand for our products;

·      Reliance on independent sales distributors and sales associates to market and sell our products;

·      Highly competitive nature of the markets in which we sell our products and the introduction of competing products;

·      Loss of customers;

·      Failure to retain senior management or replace lost senior management;

·      Employee slowdowns, strikes or similar actions;

·      Reliance on our management information systems for inventory management, distribution,

 

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accounting and other functions;

·      Effects of any pending or threatened litigation;

·      Failure to comply with applicable laws and regulations and adverse changes in applicable laws or regulations;

·      Changes in generally accepted accounting principles; or

·      Conditions and changes in general economic and business conditions.

 

For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or could otherwise materially adversely affect our business, financial condition or operating results, see our annual report on Form 10-K for the fiscal year ended December 31, 2008 under the heading “Part I — Item 1A.  Risk Factors” on pages 8 through 12 of such report.

 

We wish to caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated.  Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, as well as others that we may consider immaterial or do not anticipate at this time. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct.  The expectations reflected in our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including those described above.  The risks and uncertainties described above are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time.  We assume no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.  We advise you, however, to consult any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K we file with or furnish to the Securities and Exchange Commission.

 

Item 3.               Quantitative and Qualitative Disclosures About Market Risk

 

Equity Price and Interest Rate Risk

 

All of our marketable securities, the majority of which are insured by the FDIC, are at fixed interest rates and mature within two and one-half years; therefore, we believe that the market risk arising from the holding of these financial instruments is minimal.

 

Foreign Currency Risk

 

Historically, in excess of 50% of our consolidated sales have been to international destinations.  Since we invoice most of these customers in U.S. dollars, we do not have significant exposure to foreign currency transaction risk.  We invoice a small amount to our international customers in their local currency which exposes us to some transaction gain or loss when converting their payments into U.S. dollars.  We also pay a small number of our international suppliers in their local currency which exposes us to transaction gain or loss.  However, these have not resulted in material amounts in the past.  Our foreign operations expose us to foreign currency exchange risk when the euro and yuan currency results of operations are translated to U.S. dollars.  While we historically have not experienced any material foreign currency translation losses, we may engage in hedging activity in the future to minimize this risk.  Our net investment in foreign subsidiary translated into U.S. dollars is not hedged.  Any changes in foreign currency exchange rates would be reflected as a foreign currency translation adjustment, a component of accumulated other comprehensive income in stockholders’ equity, and would not impact our net income.

 

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Table of Contents

 

Item 4T.            Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered in this Quarterly Report on Form 10-Q.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of such period, to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that material information relating to our Company and our consolidated subsidiaries is made known to management, including our Chief Executive Officer, and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during our quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.       OTHER INFORMATION

 

Item 1A.            Risk Factors

 

We are affected by risks specific to us as well as factors that affect all businesses operating in a global market.  The significant factors known to us that could materially adversely affect our business, financial condition or operating results are described in our annual report on Form 10-K for the fiscal year ended December 31, 2008 under the heading “Part I — Item 1A. Risk Factors.”  There has been no material change in those risk factors.

 

Item 2.               Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

Unregistered Sales of Equity Securities

 

We did not sell any equity securities of MOCON, Inc. during the first quarter ended March 31, 2009 that were not registered under the Securities Act of 1933.

 

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Issuer Repurchases of Equity Securities

 

The following table shows our stock repurchase activity during the first quarter ended March 31, 2009:

 

Period

 

Total
Number of
Shares
Purchased

 

Average
Price
Paid Per
Share

 

Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs

 

Maximum
Amount of
Authorization
Remaining
Under the
Plan

 

January 1, 2009 through January 31, 2009

 

 

 

 

 

February 1, 2009 through February 28, 2009

 

 

 

 

 

March 1, 2009 through March 31, 2009

 

2,620

(1)

$

7.15

 

2,620

 

$

1,559,000

 

 


(1)   On November 9, 2005, our Board of Directors authorized the repurchase of up to a total of $2,000,000 of our common stock.  This program has no expiration date, but may be suspended or discontinued at any time by our Board of Directors.  We purchased 2,620 shares during the period indicated above under this program which, when combined with repurchases made in prior periods, leaves $1,559,000 remaining in this authorization as of March 31, 2009.

 

Except as set forth in the table above, we did not purchase any shares of our common stock or other equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the first quarter ended March 31, 2009.

 

Item 6.               Exhibits

 

The following exhibits are being filed or furnished with this quarterly report on Form 10-Q:

 

Exhibit
No.

 

Description

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

MOCON, INC.

 

 

 

 

Date: May 14, 2009

/s/ Robert L. Demorest

 

Robert L. Demorest

 

Chairman, President and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

Date: May 14, 2009

/s/ Darrell B. Lee

 

Darrell B. Lee

 

Vice President, Treasurer and Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

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Table of Contents

 

MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED MARCH 31, 2009

 

EXHIBIT INDEX

 

Exhibit
No.

 

Description

 

Method of
Filing

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

 

 

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

 

 

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Furnished herewith

 

 

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Furnished herewith

 

22


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