UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarter Ended September 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _________________ to ________________
Commission File Number 0-9273
MOCON, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0903312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7500 Boone Avenue North, Minneapolis, Minnesota 55428
(Address of principal executive offices) (Zip code)
(763) 493-6370
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the SECURITIES EXCHANGE ACT OF 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO ___
5,498,189 Common Shares were outstanding as of September 30, 2002
MOCON, INC.
INDEX TO FORM 10-Q
For the Quarter Ended September 30, 2002
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2002 (Unaudited) and December 31, 2001 1
Condensed Consolidated Statements of Income (Unaudited)
Three months and nine months ended September 30, 2002 and 2001 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4-7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8-11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Certifications 15-16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MOCON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 2002 2001
------------------ ------------------
Current assets:
Cash and temporary cash investments $ 471,932 $ 1,030,596
Marketable securities, current 3,883,931 3,168,858
Accounts receivable, net 3,903,547 4,271,430
Other receivables 48,108 30,527
Inventories 4,095,418 3,662,043
Prepaid expenses 294,737 250,319
Deferred income taxes 429,399 429,399
------------------ ------------------
Total current assets 13,127,072 12,843,172
------------------ ------------------
Marketable securities, noncurrent 669,218 735,463
------------------ ------------------
Net property, plant, and equipment 2,232,259 2,263,505
------------------ ------------------
Other assets:
Software development costs, net 704,434 422,660
Goodwill, net 1,346,795 1,346,795
Technology rights and other intangibles, net 1,134,610 1,207,794
Other 143,690 138,719
------------------ ------------------
Total other assets 3,329,529 3,115,968
------------------ ------------------
TOTAL ASSETS $ 19,358,078 $ 18,958,108
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 931,100 $ 1,301,097
Accrued compensation and vacation 536,993 773,906
Other accrued expenses 1,240,394 1,095,530
------------------ ------------------
Total current liabilities 2,708,487 3,170,533
Deferred income taxes 303,403 319,603
------------------ ------------------
Total liabilities 3,011,890 3,490,136
------------------ ------------------
Stockholders' equity:
Common stock - $.10 par value 549,819 547,645
Capital in excess of par value 238,767 105,057
Retained earnings 15,556,638 14,806,169
Accumulated other comprehensive income 964 9,101
------------------ ------------------
Total stockholders' equity 16,346,188 15,467,972
------------------ ------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 19,358,078 $ 18,958,108
================== ==================
Note: The condensed consolidated balance sheet at December 31, 2001 has
been summarized from the Company's audited consolidated balance sheet
at that date.
See accompanying notes to condensed consolidated financial statements.
-1-
MOCON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
2002 2001 2002 2001
-------------------------------- ---------------------------------
Sales
Products $ 4,364,453 $ 4,070,845 $ 13,205,189 $ 11,988,369
Consulting services 489,159 552,941 1,432,136 1,793,522
--------------- --------------- ---------------- ---------------
Total sales 4,853,612 4,623,786 14,637,325 13,781,891
--------------- --------------- ---------------- ---------------
Cost of sales
Products 2,121,364 1,488,300 6,096,312 4,335,183
Consulting services 214,656 288,754 768,647 946,918
--------------- --------------- ---------------- ---------------
Total cost of sales 2,336,020 1,777,054 6,864,959 5,282,101
--------------- --------------- ---------------- ---------------
Gross profit 2,517,592 2,846,732 7,772,366 8,499,790
--------------- --------------- ---------------- ---------------
Selling, general and administrative expenses 1,445,890 1,397,353 4,422,349 4,233,336
Research and development expenses 306,674 234,383 911,188 758,575
--------------- --------------- ---------------- ---------------
1,752,564 1,631,736 5,333,537 4,991,911
Operating income 765,028 1,214,996 2,438,829 3,507,879
Investment income 43,322 99,337 158,205 337,689
--------------- --------------- ---------------- ---------------
Income before income taxes 808,350 1,314,333 2,597,034 3,845,568
Income taxes 271,000 434,000 857,000 1,244,000
--------------- --------------- ---------------- ---------------
Net income $ 537,350 $ 880,333 $ 1,740,034 $ 2,601,568
=============== =============== ================ ===============
Net income per common share:
Basic $ 0.10 $ 0.16 $ 0.32 $ 0.47
=============== =============== ================ ===============
Diluted $ 0.10 $ 0.16 $ 0.31 $ 0.46
=============== =============== ================ ===============
Weighted average shares outstanding:
Basic 5,498,089 5,459,867 5,490,713 5,545,361
=============== =============== ================ ===============
Diluted 5,593,549 5,535,547 5,634,126 5,602,767
=============== =============== ================ ===============
See accompanying notes to condensed consolidated financial statements.
-2-
MOCON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
---------------------------------
2002 2001
--------------- ---------------
Cash flows from operating activities:
Net income $ 1,740,034 $ 2,601,568
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss (gain) on disposition of property, plant and equipment 1,824 (7,644)
Depreciation and amortization 636,861 555,750
Deferred income taxes (16,200) (16,200)
Changes in operating assets and liabilities:
Accounts receivable 367,883 (93,869)
Other receivables (17,581) 55,709
Inventories (433,375) 98,383
Prepaid expenses (44,418) 11,033
Accounts payable (369,997) (200,229)
Accrued compensation and vacation (236,913) 27,277
Other accrued expenses 143,503 (117,531)
--------------- ---------------
Net cash provided by operating activities 1,771,621 2,914,247
--------------- ---------------
Cash flows from investing activities:
Purchases of marketable securities (3,188,742) (1,172,670)
Proceeds from sales of marketable securities 2,531,777 4,667,878
Purchases of property and equipment (382,904) (449,698)
Proceeds from sale of property, plant and equipment 0 705
Purchases and development of software (373,220) (203,000)
Purchases of patents, trademarks and technology rights (59,905) (25,851)
Other (4,971) (4,840)
--------------- ---------------
Net cash (used in) provided by investing activities (1,477,965) 2,812,524
--------------- ---------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 135,883 10,149
Purchases and retirement of common stock 0 (2,378,473)
Dividends paid (988,203) (1,003,641)
Other 0 3,000
--------------- ---------------
Net cash used in financing activities (852,320) (3,368,965)
--------------- ---------------
Net (decrease) increase in cash and
temporary cash investments (558,664) 2,357,806
Cash and temporary cash investments:
Beginning of period 1,030,596 641,942
--------------- ---------------
End of period $ 471,932 $ 2,999,748
=============== ===============
Supplemental schedule of noncash investing activities:
Unrealized holding (loss) gain on available-for-sale securities $ (8,137) $ 17,166
See accompanying notes to condensed consolidated financial statements.
-3-
MOCON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of September 30, 2002, the condensed
consolidated statements of income for the three- and nine-month periods ended
September 30, 2002 and 2001, and the condensed consolidated statements of cash
flows for the nine-month periods ended September 30, 2002 and 2001 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 September 30, 2002, and for all periods presented, have been made. The
results of operations for the period ended September 30, 2002 are not
necessarily indicative of operating results for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the financial statements and notes included in our December 31, 2001 annual
report to shareholders.
Note 2 - Inventories
Inventories consist of the following:
September 30, December 31, 2001
2002
----------------------- ------------------------
Finished Products $ 471,738 $ 338,852
Work in Process 1,391,305 1,316,881
Raw Materials 2,232,375 2,006,310
----------------------- ------------------------
$ 4,095,418 $ 3,662,043
======================= ========================
Note 3 - Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average common stock outstanding during the period. Diluted net income
per share is computed by dividing net income by the weighted average common and
dilutive potential common stock outstanding during the period.
-4-
The following table presents a reconciliation of the denominators used in the
computation of net income per common share-basic and net income per common
share-diluted for the three- and nine-month periods ended September 30, 2002,
and 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ------------------------------
2002 2001 2002 2001
----------------- --------------- -------------- ---------------
Weighted shares of common stock
outstanding - basic 5,498,089 5,459,867 5,490,713 5,545,361
Weighted shares of common stock
assumed upon exercise of stock
options 95,460 75,680 143,413 57,406
----------------- --------------- -------------- ---------------
Weighted shares of common stock
outstanding - diluted 5,593,549 5,535,547 5,634,126 5,602,767
================= =============== ============== ===============
Note 4 - Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board approved for issuance
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Other Intangible Assets. For all business
combinations initiated after June 30, 2001, these Statements require the use of
the purchase, rather than the pooling, method of accounting. Intangible assets
acquired in a business combination are recorded separately from goodwill if they
arise from contractual or other legal rights or are separable from the acquired
entity and can be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability.
The Statements also provide that effective January 1, 2002, goodwill is no
longer amortized. Instead, goodwill and intangible assets with indefinite lives
are tested for impairment annually and whenever there is an impairment
indicator. We adopted SFAS 142 effective January 1, 2002. As required by SFAS
142, we performed an initial assessment to determine whether there was an
indication that goodwill was impaired at the date of adoption. To test for
potential impairment, we first determined that the Company consisted of a single
reporting unit. We next determined the fair value of our single reporting unit
based upon the quoted market price of the Company's common stock at January 1,
2002. We then compared the fair value of the Company with the carrying value of
our net assets. Based on this comparison we determined that no impairment
existed. Accordingly, we were not required to perform step two of the impairment
analysis, in which the exact amount of an impairment would have been determined.
In step two of the impairment analysis, the Company would have been required to
compare the implied fair value of goodwill, determined by allocating the
reporting unit's fair value to all of its assets and liabilities, to its
carrying amount, both of which would be measured as of the date of adoption.
-5-
The following table presents a reconciliation of net income and income per share
adjusted for the exclusion of goodwill, net of tax:
Three Months Ended Nine Months Ended Year Ended
September 30, September 30, December 31,
----------------------------- ------------------------------- -------------------
2002 2001 2002 2001 2001
-------------- -------------- --------------- --------------- -------------------
Reported net income $537,350 $880,333 $1,740,034 $2,601,568 $3,420,668
Add: Goodwill amortization, net of tax - 19,142 - 57,998 77,140
-------------- -------------- --------------- --------------- -------------------
Adjusted net income $537,350 $899,475 $1,740,034 $2,659,566 $3,497,808
============== ============== =============== =============== ===================
Reported basic income per share $ 0.10 $ 0.16 $ 0.32 $ 0.47 $ 0.62
Add: Goodwill amortization, net of tax - - - 0.01 0.01
-------------- -------------- --------------- --------------- -------------------
Adjusted basic income per share $ 0.10 $ 0.16 $ 0.32 $ 0.48 $ 0.63
============== ============== =============== =============== ===================
Reported diluted income per share $ 0.10 $ 0.16 $ 0.31 $ 0.46 $ 0.61
Add: Goodwill amortization, net of tax - - - 0.01 0.01
-------------- -------------- --------------- --------------- -------------------
Adjusted diluted income per share $ 0.10 $ 0.16 $ 0.31 $ 0.47 $ 0.62
============== ============== =============== =============== ===================
As of September 30, 2002, we have unamortized goodwill in the amount of
$1,346,795. Other intangible assets (all of which are being amortized except
projects in process) are as follows:
As of September 30, 2002
---------------------------------------------------------
Carrying Accumulated
Amount Amortization Net
------------------- ------------------ ------------------
Patents $ 545,457 $147,619 $ 397,838
Trademarks and tradenames 64,623 52,724 11,899
Technology rights 600,000 225,000 375,000
Other intangibles 454,158 129,211 324,947
Projects in process 24,926 - 24,926
------------------- ------------------ ------------------
$1,689,164 $554,554 $1,134,610
=================== ================== ==================
Total amortization expense for the three and nine months ended September 30,
2002 was $44,419 and $133,092 respectively. Estimated amortization expense for
each of the five succeeding fiscal years based on the intangible assets as of
September 30, 2002 is as follows:
Estimated Expense
-------------------
2002 $176,735
2003 175,229
2004 174,873
2005 174,780
2006 161,472
-6-
Note 5 - Shipping and Handling Fees and Costs
In 2001, we adopted the provisions of Emerging Issues Task Force 00-10 (EITF
00-10), Accounting for Shipping and Handling Fees and Costs. We 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, approximately $39,000 and $133,000 of shipping
and handling costs billed to customers were reclassified from cost of sales to
revenues for the three- and nine-month periods ended September 30, 2001,
respectively.
Note 6 - Marketable Securities
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. At
September 30, 2002, and September 30, 2001, this resulted in a net unrealized
gain of $964 and $17,166, respectively, within stockholders' equity.
Note 7 - Comprehensive Income
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------- ---------------- ---------------- -----------------
Net income $537,350 $880,333 $1,740,034 $2,601,568
Net unrealized gain (loss) on marketable
securities 1,001 (3,066) (8,137) 17,166
--------------- ---------------- ---------------- -----------------
Comprehensive income $538,351 $877,267 $1,731,897 $2,618,734
=============== ================ ================ =================
-7-
MOCON, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This Form 10-Q includes certain statements that are deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
in this Form 10-Q that address activities, events, or developments that we
expect, believe, or anticipate will or may occur in the future, are
forward-looking statements. The forward-looking statements in this filing are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that any such statements are not
guarantees of future performance and that actual results or developments may
differ materially from those projected in the forward-looking statement because
these statements are subject to a number of risks and uncertainties including
the risk factors described in our annual report on Form 10-K for the year ended
December 31, 2001, including, but not limited to, the factors included in the
section entitled "Certain Important Factors." Persons reading this Form 10-Q
should carefully review the discussion of all of the risk factors described in
such Form 10-K and in our other filings made from time to time with the
Securities and Exchange Commission.
Summary
Sales increased 5 percent and 6 percent for the three- and nine-month periods
ended September 30, 2002 compared to the same periods in 2001. International
sales were 32 percent of sales in the three months ended September 30, 2002, and
34 percent of sales in the nine months ended September 30, 2002. We use a
network of independent representatives to market and service our products in
foreign countries, and expect that international sales will continue to account
for a significant portion of our revenues for the foreseeable future. We have
four operating locations, all of which are located in the United States. Net
income decreased 39 percent and 33 percent for the three-month and nine-month
periods ended September 30, 2002 compared to the same periods in 2001.
Effective October 1, 2001, we acquired Questar Baseline Industries, Inc. from
Questar InfoComm, Inc., a subsidiary of Questar Corporation, which we
subsequently renamed "Baseline-MOCON, Inc." (Baseline). This acquisition was
recorded using the purchase method of accounting. Accordingly, Baseline's
results of operations have been included with our results of operations since
the effective date of the acquisition. As part of the acquisition of Baseline,
we entered into a five-year distribution and support agreement with Questar.
This agreement has not had a material impact on our capital resources, results
of operations or liquidity.
Results of Operations
Sales for the three-month period ended September 30, 2002, were $4,853,612, up 5
percent from third quarter 2001 sales of $4,623,786. The increase in 2002 sales
was primarily the result of Baseline sales in the third quarter totaling
$1,035,866 (Baseline was acquired in the fourth quarter of 2001), and increased
sales volume of our sample preparation products, offset somewhat by decreases in
the sales volume of our permeation products and weighing products, which
continue to be affected by the global economic slowdown. The increase in sales
of our sample preparation products was primarily due to continued sales in the
third quarter of 2002 of a new unit to Waters Corporation of Milford, MA, for
use in the drug discovery and life sciences
-8-
markets. Third quarter sales to Waters Corporation were approximately $285,000.
The impact of price increases was not significant.
Sales for the nine-month period ended September 30, 2002, were $14,637,325, up 6
percent from sales for the first nine months of 2001 of $13,781,891. The 6
percent increase was primarily the result of Baseline sales in the first nine
months of 2002 totaling $3,201,071, and increased sales volume of our sample
preparation products, offset somewhat by decreases in the sales volume of our
permeation products and weighing products, and decreases in consulting services
sales. The increase in sales of our sample preparation products during this
period was primarily due to continued sales of a new unit to Waters Corporation
of Milford, MA, for use in the drug discovery and life sciences markets. The
impact of price increases was not significant.
Total domestic sales for the quarter ended September 30, 2002, including
domestic Baseline sales of $789,122, increased 81 percent over the third quarter
of 2001 to $3,287,711, and total foreign sales, including foreign Baseline sales
of $246,744, decreased 44 percent to $1,565,901. Domestic sales were 68 percent
of total third quarter 2002 sales, compared to $1,815,813, or 39 percent, of
third quarter 2001 sales. Foreign sales were 32 percent of total third quarter
2002 sales, compared to $2,807,974, or 61 percent, of third quarter 2001 sales.
This decrease was due primarily to the economic slowdown in our major foreign
markets.
Total domestic sales for the nine months ended September 30, 2002, including
domestic Baseline sales of $2,446,076, increased 38 percent over the nine months
ended September 30, 2001, to $9,724,449, and total foreign sales, including
foreign Baseline sales of $754,995, decreased 27 percent to $4,912,876. Domestic
sales were 66 percent of total sales for the nine months ended September 30,
2002, compared to $7,063,515, or 51 percent, for the same period in 2001.
Foreign sales were 34 percent of total sales for the first nine months of 2002,
compared to $6,718,377, or 49 percent, for the same period in 2001. Our sales to
customers located in foreign countries are subject to a number of risks. These
include, but are not limited to, the following: agreements may be difficult to
enforce; receivables may be difficult to collect; foreign customers may have
longer payment cycles; the countries into which we sell may impose tariffs or
adopt other restrictions on foreign trade; fluctuations in exchange rates may
affect product demand; export licenses, if required, may be difficult to obtain;
and the protection of intellectual property in foreign countries may be more
difficult to enforce. If any of the above risks were to materialize, our sales
into foreign countries could decline further, or our operating costs could
increase, which would adversely affect our financial results.
We derive our revenue from product sales and consulting services, consisting of
standard laboratory testing services and consulting and analytical services
performed for various customers. In the third quarter of 2002, product sales
were $4,364,453 and consulting services were $489,159, or 90 and 10 percent,
respectively, of our total third quarter 2002 sales. This compares to product
sales of $4,070,845 and consulting services of $552,941 in the third quarter of
2001, or 88 and 12 percent of total sales, respectively. For the first nine
months of 2002, product sales were $13,205,189 and consulting services were
$1,432,136, or 90 and 10 percent, respectively, of our total sales for the first
nine months of 2002. This compares to product sales of $11,988,369 and
consulting services of $1,793,522, or 87 and 13 percent of total sales,
respectively, for the same period in 2001.
Gross profit was 52 and 53 percent of sales for the quarter and nine-month
period ended September 30, 2002, respectively, compared to 62 percent of sales
for the quarter and nine- month period ended September 30, 2001. The percentage
decrease in the gross profit margin was primarily due to the product mix in the
third quarter and first nine months of 2002 including
-9-
Baseline sales, which on average carry a lower gross margin percentage. We are
currently working on increasing Baseline's gross margin percentage in several
ways, including increasing prices where appropriate, and introducing new higher
margin products.
Selling, general and administrative (SG&A) expenses were 30 percent of total
sales for both the three- and nine-month periods ended September 30, 2002. This
compares to 30 and 31 percent of sales for the three- and nine-month periods
ended September 30, 2001, respectively. The $48,537 and $189,013 total dollar
increases for the three and nine months ended September 30, 2002, respectively,
are due primarily to an increase in commission and other expenses associated
with the increase in sales, including Baseline sales.
Research and development (R&D) expenses as a percentage of sales were 6 percent
for the quarter and nine-month period ended September 30, 2002, and 5 and 6
percent for the quarter and nine-month period ended September 30, 2001,
respectively. Continued R&D expenditures are necessary as we develop new
products to expand in our niche markets. For the foreseeable future, we expect
to spend on an annual basis approximately 5 to 8 percent of sales on R&D.
Investment income decreased $56,015 in the third quarter of 2002 as compared to
the third quarter of 2001, and decreased $179,484 in the first nine months of
2002 as compared to the same period in 2001. The decreases are the result of
lower average investment balances and investment yields in 2002 versus 2001.
Our provision for income taxes was 33.5 and 33.0 percent of income before income
taxes for the three- and nine-month periods ending September 30, 2002,
respectively, and 33.0 and 32.3 percent of income before income taxes for the
three- and nine-month periods ending September 30, 2001. We review the tax rate
quarterly and may make adjustments to reflect changing estimates. Based on
current operating conditions and income tax laws, we expect the effective tax
rate for all of 2002 to be in a range of 32 to 35 percent.
Net income was $537,350 for the third quarter of 2002, compared to $880,333, for
the third quarter of 2001. Diluted net income per share was $.10 for the third
quarter of 2002, compared to $.16 for the same period in 2001. For the nine
months ended September 30, 2002, net income was $1,740,034 compared to
$2,601,568 for the nine months ended September 30, 2001. Diluted net income per
share was $.31 and $.46, respectively, for the nine-month periods ended
September 30, 2002, and 2001.
Liquidity and Capital Resources
We continue to maintain a strong financial position. Cash flow provided by
operating activities totaled $1,771,621 in the first nine months of 2002. Total
cash, temporary cash investments and marketable securities increased $90,164
during the same period, mostly due to the net income for the period and a
decrease in accounts receivable, offset by an increase in inventory, a decrease
in current liabilities, and dividends paid totaling $988,203. The $367,883
year-to-date decrease in accounts receivable is primarily due to lower shipments
in the third quarter of 2002 as compared to the fourth quarter of 2001, as well
as improved collection of receivables. Inventories increased $433,375 in the
first nine months of 2002, primarily due to shipments being lower than
expectations. The $462,046 year-to-date decrease in current liabilities is
largely due to decreases in accrued compensation (incentive bonuses) versus the
prior year, and to the timing of payments.
-10-
We have no long-term debt or material commitments for capital expenditures as of
September 30, 2002. Our plant and equipment do 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.
Critical Accounting Policies
Our estimates related to certain significant assets and liabilities are an
integral part of these consolidated financial statements. These estimates are
considered critical to the consolidated financial statements because they
require subjective and complex judgements. We consider our critical accounting
policies to be the allowance for doubtful accounts, inventory reserves, and the
recoverability of long-lived assets. These policies are discussed in the section
of the Management's Discussion and Analysis of Financial Condition and Results
of Operations entitled Critical Accounting Policies contained in our Annual
Report on Form 10-K for the year ended December 31, 2001. No material change
occurred in these policies in the periods covered by this report.
New Accounting Pronouncements
We adopted the provisions of 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 were
amortized prior to the adoption of Statement 142.
As of September 30, 2002, we have unamortized goodwill in the amount of
$1,346,795 and unamortized identifiable intangible assets related to
acquisitions in the amount of $840,297. If the new accounting standards would
have been in effect for the third quarter of 2001, net income would have
increased by $19,142 and $57,998 for the quarter and nine-month periods ended
September 30, 2001, respectively, increasing by $.01 basic and diluted net
income per common share for the nine-month period ended September 30, 2001.
We adopted the provisions of FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective January 1, 2002.
Statement 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While Statement 144 supersedes Statement 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.
The adoption of Statement 144 did not impact our financial condition or results
of operations.
-11-
MOCON, INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Management
Substantially all of our marketable securities are at fixed interest rates.
However, all of our marketable securities mature within three years, therefore,
we believe that the market risk arising from the holding of these financial
instruments is minimal.
We currently sell our products and services in United States dollars;
accordingly, the exposure to foreign currency exchange risk is minimal.
There have been no significant changes since December 31, 2001.
Item 4. Controls and Procedures
a. Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and President, and Vice President, Treasurer and Chief
Financial Officer, have evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"). Based on
such evaluation, such officers have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are effective in
alerting them, on a timely basis, to material information relating to the
Company (including its consolidated subsidiaries) required to be included
in the Company's periodic filings under the Exchange Act.
b. Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in the Company's internal controls or in
other factors that could significantly affect such controls.
-12-
MOCON, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits. None.
b. Reports on Form 8-K. On August 13, 2002, the Company furnished a report
on Form 8-K under Item 9, Regulation FD Disclosure, to announce that
its Chief Executive Officer and Chief Financial Officer were supplying
the certification required by Section 906 of the Sarbanes-Oxley Act of
2002 relating to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002.
-13-
SIGNATURES
Pursuant to the requirements of the SECURITIES EXCHANGE ACT of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOCON, INC.
Registrant
Date: November 14, 2002 /s/ Robert L. Demorest
-----------------------------
Robert L. Demorest,
Chairman, President and Chief
Executive Officer
Date: November 14, 2002 /s/ Dane D. Anderson
-----------------------------------
Dane D. Anderson,
Vice President, Treasurer and Chief
Financial Officer
The written statements of our Chief Executive Officer and Chief Financial
Officer required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, accompanied the filing of this
report by correspondence to the Securities and Exchange Commission and have been
furnished under Item 9 of our Form 8-K filed November 14, 2002.
-14-
I, Robert L. Demorest, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MOCON, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Robert L. Demorest
- -----------------------
Robert L. Demorest,
Chairman, Chief Executive Officer and President
-15-
I, Dane D. Anderson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MOCON, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Dane D. Anderson
- ---------------------
Dane D. Anderson,
Vice President, Treasurer and Chief Financial Officer
-16-