Back to GetFilings.com

MOCON, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarter Ended June 30, 2004

        Page

      Number

PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

    Condensed Consolidated Balance Sheets

June 30, 2004 (Unaudited) and December 31, 2003

 1

    Condensed Consolidated Statements of Income (Unaudited)

Three months and six months ended June 30, 2004 and 2003

 2

    Condensed Consolidated Statements of Cash Flows (Unaudited)

Six months ended June 30, 2004 and 2003

 3

    Notes to Condensed Consolidated Financial Statements (Unaudited)

4-9

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

   and Results of Operations

         10-17

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk

18

  Item 4.  Controls and Procedures

18

PART II.  OTHER INFORMATION

  Item 2.  Changes in Securities, Use of Proceeds and Issuer

   Purchases of Equity Securities

19

  Item 4.  Submission of Matters to a Vote of Security Holders

19

  Item 6.  Exhibits and Reports on Form 8-K

20

Signatures

21

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

MOCON, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

-1-

MOCON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

-2-

MOCON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

-3-

MOCON, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Condensed Consolidated Financial Statements

The condensed consolidated balance sheet as of June 30, 2004, the condensed consolidated statements of income for the three- and six-month periods ended June 30, 2004 and 2003, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2004 and 2003 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 June 30, 2004, and for all periods presented, have been made. The results of operations for the period ended June 30, 2004 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 consolidated financial statements and notes included in the Company’s Annual 10-K Report for the fiscal year ended December 31, 2003, previously filed with the Securities and Exchange Commission.

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 subsidiary 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 in stockholders’ equity. Gains and losses on foreign currency transactions are included in other income or loss.

Stock-Based Compensation

We use the intrinsic-value method for employee stock-based compensation pursuant to Accounting Principles Board Opinion No. 25 (Opinion 25), Accounting for Stock Issued to Employees. Under the guidelines of Opinion 25, compensation cost for stock-based employee compensation plans is recognized based on the difference, if any, between the quoted market price of the stock on the date of grant and the amount an employee must pay to acquire the stock.

We have adopted the disclosure-only provisions for employee stock-based compensation and the fair-value method for nonemployee stock-based compensation of Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation. These provisions require us to show, on a pro forma basis, our net income and income per common

-4-

share if we had recorded an expense for our stock options at the time of grant. Other than disclosure in this footnote, we do not use these pro forma results for any purpose. No stock options were granted during the three-month period ended June 30, 2004.

Had we recorded compensation cost based on the estimated fair value on the date of grant, as defined by SFAS No. 123, our net income and net income per common share would have been reduced to the pro forma amounts indicated below:

New Accounting Pronouncements

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. We will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. FIN 46R did not have an impact on the Company’s condensed consolidated financial statements.

-5-

Note 2 – Inventories

Inventories consist of the following:

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- and six-month periods ended June 30, 2004, and 2003:

Note 4 – Goodwill and Intangible Assets

As of June 30, 2004, unamortized goodwill amounted to $1,868,556, which includes the current year addition of $521,761 related to the acquisition of Paul Lippke Handels-GmbH. Other identifiable intangible assets are as follows:

-6-

Total amortization expense for the three and six months ended June 30, 2004 was $92,733 and $237,645, respectively. Estimated amortization expense for each of the five succeeding fiscal years based on the intangible assets as of June 30, 2004 is as follows:

Note 5 – 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. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary is charged to income resulting in the establishment of a new cost basis for the security. At June 30, 2004, and June 30, 2003, this resulted in a net unrealized (loss) gain of ($2,073) and $6,334, respectively, within stockholders’ equity.

Note 6 – Comprehensive Income

Other comprehensive income pertains to net unrealized gains and losses on marketable securities and foreign currency translation adjustments that are not included in net income but rather are recorded directly in stockholders’ equity.

-7-

Note 7 – Warranty Guarantees

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 sales based on historical claims experience. Special warranty reserves are also accrued for special rework campaigns for known major product modifications. We also offer service contracts for select products when the factory warranty period expires.

Warranty provisions and claims for the six-month periods ended June 30, 2004 and 2003 were as follows:

Note 8 – Acquisition

Effective January 1, 2004, we acquired Paul Lippke Handels-GmbH Prozess- und Laborsysteme (Lippke) which is located in Germany. Lippke had been the primary distributor of our products in Europe for approximately thirty years, and also served in the capacity of distributor or agent for several companies in addition to MOCON. The acquisition of Lippke provides us with a direct presence in Europe, which we plan to leverage to benefit all of our product and service offerings. We acquired all of the shares of Lippke for a base purchase price of $802,688. In addition, we are obligated to make three future “earnout” payments to Lippke’s former parent company based on the net profits of Lippke in each of the years 2004, 2005, and 2006, with a minimum payment amount of 100,000 euros per year which is included in the financial statements.

The purchase price of the acquisition was:

Purchase Price Allocation

The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date:

-8-

The allocation of the purchase price was based, in part, on a third-party valuation of the fair value of identifiable intangible assets, and certain property, plant and equipment. Other non-current liabilities includes deferred income taxes of $264,683 and obligations payable to two former employees totaling $107,080. The cost of the identifiable intangible assets will be amortized on a straight-line basis over periods of less than 1 to 5 years. We expect that substantially all of the amount allocated to goodwill will not be deductible for tax purposes.

The results of Lippke have been included in the consolidated financial statements since the date of acquisition of January 1, 2004.  Unaudited pro forma results of operations for the three- and six-month periods ended June 30, 2003 are included below.  Such pro forma information assumes that the above acquisition had occurred as of January 1, 2003.  This summary is not necessarily indicative of what our results of operations would have been had we been a combined entity during the period ended June 30, 2003, nor does it purport to represent results of operations for any future periods. Pro forma adjustments consist primarily of amortization of intangible assets.

-9-

MOCON, INC.

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

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 statements 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, 2003, 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.

Overall Summary of Second Quarter and First Half 2004 Financial Results

Sales for the second quarter of 2004 were $6,123,771, an increase of 19% compared to $5,132,273 for 2003. The increase is primarily due to the acquisition of Paul Lippke Handels-GmbH Prozess- und Laborsysteme (Lippke) as explained below in the Company Overview section. Net income was $629,808, a 3% increase compared to $609,260 in the second quarter of 2003. Net income per share was 12 cents (diluted) in the second quarter of 2004, a 9% increase compared to 11 cents (diluted) for the same period in 2003. Six-month sales increased 17% to $11,876,176 compared to $10,161,423 for the first six months of 2003. Net income and net income per share were $965,993 and 18 cents (diluted), respectively, for the first half of 2004, down 21% and 18% compared to $1,215,937 and 22 cents (diluted) during the same period in 2003.

Company 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 as well as products that prepare samples of various substances for laboratory analysis. Although some of the markets for our products are maturing, we continually seek growth opportunities through technological and product improvement, by acquiring and developing new products, and by acquiring new companies.

Effective January 1, 2004, we acquired Lippke which is located in Germany. Lippke had been the primary distributor of our products in Europe for approximately thirty years, and also served in the capacity of distributor or agent for several companies in addition to MOCON. The acquisition of Lippke provides us with a direct presence in Europe, which we plan to leverage to benefit all of our product and service offerings. We acquired all of the shares of Lippke for a base purchase price of $802,688. In addition, we are obligated to make three future “earnout” payments to

-10-

Lippke’s former parent company based on the net profits of Lippke in each of the years 2004, 2005, and 2006, with a minimum payment amount of 100,000 euros per year.

Prior to 1998, we expanded our business primarily through internally developing new products and technologies, acquiring product lines and technology, and licensing our products and technology. In 1998, 2001, 2003, and 2004, we supplemented our internal growth through a total of five acquisitions that have provided us with additional technologies, products and product development expertise. We have three primary operating locations in the United States and one in Germany.

Critical Accounting Policies

Our estimates related to certain assets and liabilities are an integral part of the consolidated financial statements. These estimates are considered critical to the consolidated financial statements because they require subjective and complex judgments.

Allowance for doubtful accounts – This reserve is for accounts receivable balances that are potentially uncollectible. The reserve is based on (1) an analysis of customer accounts and (2) our historical experience with accounts receivable write-offs. The analysis includes the age of the receivable, the financial condition of a customer or industry, and general economic conditions. We believe the results could be materially different if historical trends do not reflect actual results or if economic conditions worsened for our customers.

Inventory obsolescence analysis – We perform an analysis to identify inventory shrinkage, slow moving, and obsolete inventory. We record a charge to cost of sales for amounts identified. Our analysis includes inventory levels, physical inventory counts, cycle count adjustments, the nature of the finished product and its inherent risk of obsolescence, the gross margin of the product, and the on-hand quantities relative to the sales history of that finished product. We believe that the results could be materially different if historical trends do not reflect actual results or if demand for our products decreased because of economic or competitive conditions.

Recoverability of long-lived assets – We assess the recoverability of goodwill and other long-lived assets annually or whenever events or changes in circumstances indicate that expected future undiscounted cash flows might not be sufficient to support the carrying amount of an asset. We deem an asset to be impaired if a forecast of undiscounted future operating cash flows is less than an asset’s carrying amount. If an asset is determined to be impaired, the loss is measured as the amount by which the carrying value of the asset exceeds its fair value. Changes in our business strategies and/or changes in the economic environment in which we operate may result in future impairment charges.

Results of Operations

The following table sets forth the relationship between various components of operations, stated as a percent of sales, for the three- and six-month periods ended June 30, 2004, and 2003.

-11-

The following table sets forth the relationship between various components of domestic and foreign sales, stated as a percent of total sales, for the three- and six-month periods ended June 30, 2004 and 2003.

Net Sales

Sales for the second quarter of 2004 were $6,123,771, up 19% compared to $5,132,273 for the same period in 2003. The increase in sales from 2003 to 2004 was primarily the result of the addition of Lippke, which provided $909,425 in net incremental sales. On a product basis, the increase in sales from 2003 to 2004 was primarily due to increased foreign sales of our permeation products (including $615,464 in net additional foreign permeation sales from Lippke), and the sales of our weighing products, offset somewhat by decreases in the domestic sales of our permeation products. The impact of price increases was not significant.

Sales for the six-month period ended June 30, 2004, were $11,876,176 in 2004, up 17% compared to $10,161,423 for the six months ended June 30, 2003. The increase in sales from 2003 to 2004 was primarily the result of the addition of Lippke, which provided $1,772,745 in net incremental sales. On a product basis, the increase in sales from 2003 to 2004 was primarily due to increased foreign sales of our permeation products (including $1,047,335 in net additional foreign permeation sales from Lippke), the foreign sales of our leak detection products (including $259,275 in net additional foreign leak detection sales from Lippke), and the sales of our sample preparation products, offset somewhat by decreases in the domestic sales of our permeation

-12-

products and the domestic sales of our weighing products. The impact of price increases was not significant.

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. Effective January 1, 2004, we acquired Paul Lippke Handels-GmbH Prozess- und Laborsysteme (Lippke) which is located in Germany. Lippke had been the primary distributor of our products in Europe for approximately thirty years, and also served in the capacity of distributor or agent for several companies in addition to MOCON. This acquisition gives us a direct presence in Europe. The acquisition of Lippke is expected to have a positive impact on sales in 2004, particularly for revenues associated with our permeation products.

        Permeation Products

Permeation products accounted for approximately 62% and 61% of our consolidated second quarter sales in 2004 and 2003, respectively. The volume of foreign permeation sales increased during the second quarter of 2004, while the volume of domestic permeation sales decreased during this same period. The increase in foreign sales was due primarily to the increase in sales in Western Europe, which includes the net additional sales associated with Lippke. Sales of permeation products for the six-month periods ended June 30, 2004, and 2003, were 60% and 62%, respectively.

        Weighing Products

Weighing products accounted for approximately 4% and 2% of our consolidated second quarter sales in 2004 and 2003, respectively. Weighing product sales increased in the second quarter of 2004 versus 2003 due to increased sales of our Automatic Balance weighing system. Weighing products accounted for approximately 3% and 4% of our consolidated sales for the six months ended June 30, 2004, and 2003, respectively.

        Sample Preparation Products

Sample preparation products accounted for approximately 3% and 2% of our consolidated second quarter sales in 2004 and 2003, respectively. Sample preparation products accounted for approximately 3% and 1%, respectively, of consolidated sales for the six-month periods ended June 30, 2004, and 2003. Sales of the sample preparation products sold by our Lab Connections, Inc. subsidiary increased in 2004 versus 2003 due to increases in both domestic and foreign sales. During the first quarter of 2004 we moved Lab Connections into our Round Rock, Texas, location and closed the Boston location. The total costs incurred in the first quarter associated with this relocation were $78,900. This consolidation is expected to result in reduced operating costs going forward.

        Gas Analyzer Products

Gas analysis and monitoring instrumentation products sold at our Baseline-MOCON, Inc. subsidiary were approximately 14% and 17% of our consolidated second quarter sales in 2004 and 2003, respectively, and approximately 14% and 16%, of consolidated sales for the six months ended June 30, 2004, and 2003, respectively. In order to reduce operating costs and increase operating efficiencies, we moved a portion of Baseline’s production to our Minneapolis, Minnesota facility during the first quarter of 2004.

-13-

        Gas Chromatography Analyzer Products

Sales of gas chromatography components at our Microanalytics Instrumentation Corp. subsidiary accounted for approximately 2% and 4% of our consolidated second quarter sales in 2004 and 2003, respectively, and approximately 3% for both the six-month periods ended June 30, 2004 and 2003.

        Leak Detection Products

Sales of our leak detection products were approximately 3% and 2% of our consolidated second quarter sales in 2004 and 2003, respectively. Leak detection products accounted for approximately 4% and 3% of our consolidated sales for the six months ended June 30, 2004, and 2003, respectively. The increases are primarily due to net additional foreign leak detection sales associated with Lippke.

        Headspace Analyzer Products

Headspace analyzer products were approximately 6% and 8% of our consolidated second quarter sales in 2004 and 2003, respectively. Sales of headspace analyzer products for the six-month periods ended June 30, 2004, and 2003, were consistent at 7% of consolidated sales for those periods.

        Consulting and Analytical Services

Consulting and analytical services sales were approximately 3% and 4%, respectively, of our consolidated second quarter sales in 2004 and 2003. Consulting and analytical services sales were also approximately 3% and 4% of our consolidated sales for the six months ended June 30, 2004, and 2003, respectively.

Gross Profit

Our gross profit margin was 54.5% and 56.3% for the three-month periods ended June 30, 2004 and 2003, respectively. The second quarter 2004 gross profit margin is lower as a percentage of sales than the same period in 2003 due mostly to costs related to the acquisition of Lippke including the write-off of costs assigned to finished goods inventory under purchase accounting rules of $50,000, and additional costs associated with moving a portion of our Baseline subsidiary’s manufacturing to Minneapolis, Minnesota. We believe this manufacturing consolidation will positively impact future operating income as reduced costs and increased operating efficiencies are realized.

Our gross profit margin for the six-month periods ended June 30, 2004 and 2003, respectively, was 53.2% and 55.6%. The gross profit margin as a percentage of sales is lower for the six months ended June 30, 2004 compared to the same period in 2003 due mostly to costs related to the acquisition of Lippke including the write-off of costs assigned to finished goods inventory under purchase accounting rules of $146,000, costs associated with the relocation of our Lab Connections subsidiary to Round Rock, Texas, and additional costs associated with moving a portion of our Baseline subsidiary’s manufacturing to Minneapolis, Minnesota. We believe both of these manufacturing consolidations will positively impact future operating income as reduced costs and increased operating efficiencies are realized.

-14-

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses in second quarter 2004 were $2,071,024, or 33.8% of sales, compared to $1,640,637, or 32.0% of sales in 2003. The increase in SG&A expenses from second quarter 2003 to second quarter 2004 is primarily due to costs associated with the increase in sales, including Lippke sales, and also to costs associated with the acquisition of Lippke including ongoing amortization related to various purchased intangibles of $44,000.

Six-month SG&A expenses were $4,228,153, or 35.6% of sales, in 2004, compared to $3,151,626, or 31.0% of sales, in 2003. The increase in SG&A expenses from 2003 to 2004 is primarily due to costs associated with the increase in sales, including Lippke sales, and also to costs associated with the acquisition of Lippke including amortization of $61,000 related to purchased backlog and ongoing amortization related to various other purchased intangibles of $88,000.

Research and Development Expenses

Research and development (R&D) expenses were $367,991, or approximately 6.0% of sales in second quarter 2004, compared to $344,884, or approximately 6.7% of sales in second quarter 2003. For the six months ended June 30, 2004, R&D expenses were $709,707, or approximately 6.0% of sales, compared to $691,202, or approximately 6.8% of sales for the same period in 2003. Continued R&D expenditures are necessary as we develop new products to expand in our niche markets. For the foreseeable future, we expect to allocate on an annual basis approximately 6% to 8% of sales to research and development.

Other Income

Other income for the six months ended June 30, 2004 consists of interest income of $52,112 and gain on foreign currency exchange of $20,642. Interest income decreased from $64,443 in the six months ended June 30, 2003, due to slightly lower average yields on lower cash balances.

Income Tax Expense

Our provision for income taxes was 33.75% of income before income taxes for the three- and six-month periods ended June 30, 2004, compared to 35% of income before income taxes for the three- and six-month periods ended June 30, 2003. Based on current operating conditions and income tax laws, we expect the tax rate for all of 2004 to be in the range of 33% to 36%.

Net Income

Net income was $629,808 in the second quarter of 2004, compared to $609,260 in the second quarter of 2003. Diluted net income per share was $.12 per share in 2004 compared to $.11 per share in 2003. For the six months ended June 30, 2004, net income was $965,993 compared to $1,215,937 for the six months ended June 30, 2003. Diluted net income per share was $.18 and $.22, respectively, for the six-month periods ended June 30, 2004, and 2003.

-15-

Liquidity and Capital Resources

Operating Activities

Cash flow from operations has historically been sufficient to meet our liquidity requirements, capital expenditures and research and development costs. Cash flow from operations totaled $2,230,285 and $2,387,455 in 2004 and 2003, respectively.

The inventory balance at June 30, 2004, has increased $159,841 compared to December 31, 2003, primarily due to the acquisition of Lippke, partially offset by a decrease in work-in-process inventory. Prepaid expenses decreased $126,872 in the first six months of 2004, mostly due to decreases in prepaid insurance and also vendor deposits. The $613,985 increase in accounts payable is due primarily to the acquisition of Lippke and, to a lesser extent, to increases in commission payable and customer advance payments.

Investing Activities

Cash flow used in investing activities totaled $544,373 in the first six months of 2004. Proceeds from sales or maturities of marketable securities, net of purchases, were $151,803. Purchases of property and equipment totaled $197,920, primarily for additions of manufacturing and laboratory equipment.

Effective January 1, 2004, we acquired Paul Lippke Handels-GmbH Prozess- und Laborsysteme (Lippke) which is located in Germany. We acquired all of the shares of Lippke for a base purchase price of $802,688. In addition, we are obligated to make three future “earnout” payments to Lippke’s former parent company based on the net profits of Lippke in each of the years 2004, 2005, and 2006, with a minimum payment amount of 100,000 euros per year.

Financing Activities

During the first half of 2004, we made final dividend payments of $449,087 to Lippke’s former parent company and dividend payments of $703,204 to our shareholders.

Our Board of Directors has authorized, depending upon market conditions and other factors, the repurchase of up to a total of $3,200,000 of our common stock at prices not exceeding the market price at the time of the purchase. During the second quarter of 2004, we repurchased 114,000 shares of our common stock at a total cost of $900,360. As of June 30, 2004, $1,672,034 was remaining in this authorization.

We continue to maintain a strong financial position. Our financial position as of June 30, 2004 reflects a decrease in working capital of $409,770 to $10,492,356, compared to $10,902,126 at December 31, 2003. Total cash, temporary cash investments and marketable securities decreased $442,165 during the first half of 2004 to $6,349,485.

We had no material commitments for capital expenditures as of June 30, 2004. We do not believe that any major property, plant and equipment expenditures are required to accommodate the current level of operations. 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.

-16-

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Foreign Currency Exchange Risk

We have one foreign operation that exposes us to translation risk when the local currency financial statements are translated to U.S. dollars. Since changes in translation risk are reported as adjustments to stockholders’ equity, a 10% change in the foreign exchange rate would not have a material effect on our financial position, results of operations or cash flows.

-17-

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, virtually all of our marketable securities mature within two 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, or the local currency of our foreign subsidiary (euros); accordingly, our foreign operation exposes us to translation risk when the local currency financial statements are translated to U.S. dollars. Since changes in translation risk are reported as adjustments to stockholders’ equity, a 10% change in the foreign exchange rate would not have a material effect on our financial position, results of operations or cash flows.

Item 4.   Controls and Procedures

As of June 30, 2004, the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in alerting them in a timely manner to material information required to be included in our periodic SEC filings. There were no changes identified by our Chief Executive Officer and Chief Financial Officer in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

-18-

MOCON, INC.

PART II.   OTHER INFORMATION

Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Purchases of MOCON, Inc. common stock made by the Company during the three months ended June 30, 2004 are as follows:

In November 2002, our board of directors authorized the repurchase of up to $2,000,000 of our common stock at prices not exceeding the market price at the time of the purchase. In May 2003, our board of directors authorized a $1,200,000 increase in our stock repurchase program increasing the total to $3,200,000. As of June 30, 2004, we have repurchased 204,000 shares of common stock at a total cost of approximately $1,527,966. The repurchase program does not have an expiration date.

Item 4.   Submission of Matters to a Vote of Security Holders

At the Annual Meeting of Shareholders of MOCON, Inc. on May 18, 2004, the nominees for election as Directors of the Company were elected without opposition as follows:

We received no broker non-votes with respect to the election of Directors of the Company.

-19-

Item 6.   Exhibits and Reports on Form 8-K

-20-

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.

-21-