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, 2006, the condensed consolidated statements of income for the second quarters and six-month periods ended June 30, 2006 and 2005, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2006 and 2005 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, 2006, and for all periods presented, have been made. The results of operations for the second quarter and six-month periods ended June 30, 2006 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, previously filed with the Securities and Exchange Commission.
We operate in a single industry segment: the development, manufacturing, and marketing of measurement, analytical, monitoring and consulting products used to detect, measure, and analyze gases and chemical compounds for customers in the barrier packaging, food, pharmaceutical, and other industries throughout the world.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of MOCON, Inc. and our 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 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.
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Share-Based Compensation Expense
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors. SFAS 123(R) supersedes our previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25).
We adopted the modified prospective transition method of applying SFAS 123(R) which requires the application of the standard as of January 1, 2006. As a result, as of June 30, 2006, our results of operations reflected compensation expense for new stock options granted and vested during the first six months of 2006 and the unvested portion of previous stock option grants vested during the first six months of 2006. Our consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).
Amounts recognized in the consolidated financial statements related to stock-based compensation are as follows:
| | Second Quarter
Ended
June 30,
2006 | | Six Months
Ended
June 30,
2006 | |
Total cost of stock-based compensation | | $ | 52,297 | | $ | 97,666 | |
Amount capitalized in inventory and property and equipment | | — | | — | |
Amounts charged against income, before income taxes | | 52,297 | | 97,666 | |
Amount of income tax benefit recognized in earnings | | — | | — | |
Amount charged against net income | | $ | 52,297 | | $ | 97,666 | |
| | | | | |
Impact on net income per common share: | | | | | |
Basic | | $ | 0.01 | | $ | 0.02 | |
Diluted | | $ | 0.01 | | $ | 0.02 | |
Stock-based compensation expense was reflected in the statements of income for the second quarter and first six months of 2006 as follows:
| | Second Quarter
Ended
June 30,
2006 | | Six Months
Ended
June 30,
2006 | |
Cost of sales | | $ | 14,768 | | $ | 28,148 | |
Selling, general and administrative expenses | | 30,853 | | 57,465 | |
Research and development expenses | | 6,676 | | 12,053 | |
| | $ | 52,297 | | $ | 97,666 | |
Prior to January 1, 2006, we accounted for stock-based employee compensation arrangements in accordance with the provisions and related interpretations of APB 25, using the intrinsic-value method. Under the guidelines of APB 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 had adopted the disclosure-only provisions for employee stock-based compensation, and therefore, had not recorded compensation cost in our financial statements. Had compensation cost for stock-based compensation been
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determined consistent with SFAS 123(R), net income and net income per share would have been adjusted to the following pro forma amounts:
| | Second Quarter
Ended
June 30,
2005 | | Six Months
Ended
June 30,
2005 | |
Net income – as reported | | $ | 775,040 | | $ | 1,569,211 | |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | (27,892 | ) | (56,721 | ) |
Net income – pro forma | | $ | 747,148 | | $ | 1,512,490 | |
| | | | | |
Net income per common share – as reported: | | | | | |
Basic | | $ | 0.14 | | $ | 0.29 | |
Diluted | | $ | 0.14 | | $ | 0.28 | |
Net income per common share – pro forma: | | | | | |
Basic | | $ | 0.14 | | $ | 0.28 | |
Diluted | | $ | 0.14 | | $ | 0.27 | |
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. 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. 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. The following assumptions were used to estimate the fair value of options granted during the first six months of 2006 and 2005 using the Black-Scholes model:
| | Second Quarter Ended
June 30, | | Six Months Ended
June 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Stock options: | | | | | | | | | |
Volatility | | 31 | % | 32 | % | 31 | % | 32 | % |
Risk-free interest rate | | 4.0 | % | 3.4 | % | 4.0 | % | 3.4 | % |
Expected option life (years) | | 7.9 | | 7.8 | | 7.9 | | 7.8 | |
Dividend yield | | 3.0 | % | 3.1 | % | 3.0 | % | 3.1 | % |
A summary of the option activity for the first six months of 2006 is as follows:
| | | | Weighted- | | Weighted- | | | |
| | | | average | | average | | | |
| | | | Exercise | | Remaining | | Aggregate | |
| | Number of | | Price per | | Contractual | | Intrinsic | |
| | Shares | | Share | | Term | | Value | |
Outstanding at December 31, 2005 | | 850,449 | | $ | 7.70 | | 6.7 | | | |
Options granted | | 3,000 | | 8.90 | | 9.5 | | | |
Options cancelled | | (29,587 | ) | 9.15 | | — | | | |
Options expired | | — | | — | | — | | | |
Options exercised | | (79,425 | ) | 7.10 | | — | | | |
Outstanding at June 30, 2006 | | 744,437 | | $ | 7.72 | | 6.4 | | $ | 1,405,215 | |
| | | | | | | | | |
Exercisable at June 30, 2006 | | 580,312 | | $ | 7.47 | | 5.8 | | $ | 1,254,296 | |
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There were no options granted in the second quarter of 2006. The weighted average grant date fair value based on the Black-Scholes model for options granted in the first six months of 2006 was $2.10. There were no options granted in the first six months of 2005. We issue new shares of common stock upon exercise of stock options. The total intrinsic value of options exercised was $86,504 and $159,686 during the second quarters 2006 and 2005, respectively, and $159,153 and $169,567 during the first six months of 2006 and 2005, respectively.
A summary of the status of our unvested option shares as of June 30, 2006 is as follows:
| | | | Weighted- | |
| | | | average | |
| | Number of | | Grant-Date | |
| | Shares | | Fair Value | |
| | | | | |
Unvested at December 31, 2005 | | 175,887 | | $ | 2.26 | |
Options granted | | 3,000 | | 2.10 | |
Options cancelled | | (11,637 | ) | 2.30 | |
Options vested | | (3,125 | ) | 2.11 | |
Unvested at June 30, 2006 | | 164,125 | | $ | 2.26 | |
As of June 30, 2006, there was $279,670 of total unrecognized compensation cost related to unvested share-based compensation granted under our plans. That cost is expected to be recognized over a weighted-average period of 1.6 years. The total fair value of option shares vested was $284 during the second quarter 2006 and $6,584 for the first six months of 2006.
New Accounting Pronouncements
In September 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections — a replacement of APB No. 20 and SFAS No. 3 (SFAS 154). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS 154. SFAS 154 is required to be adopted in fiscal years beginning after December 15, 2005. Accordingly, we have adopted SFAS 154 in our fiscal year beginning January 1, 2006. Adoption of SFAS 154 did not have a material effect on our financial position, results of operations or cash flows.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (SFAS 151) to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current period charges, and that fixed production overheads should be allocated to inventory based on normal capacity of production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Accordingly, we have adopted SFAS 151 in our fiscal year beginning January 1, 2006. Adoption of SFAS 151 did not have a material effect on our financial position, results of operations or cash flows.
Reclassifications
Certain 2005 amounts have been reclassified to conform to the 2006 presentation.
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Note 2 – Inventories
Inventories consist of the following:
| | June 30,
2006 | | December 31,
2005 | |
Finished products | | $ | 514,572 | | $ | 656,587 | |
Work-in-process | | 1,514,537 | | 1,511,314 | |
Raw materials | | 1,863,629 | | 1,889,613 | |
| | $ | 3,892,738 | | $ | 4,057,514 | |
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 second quarter and six-month periods ended June 30, 2006 and 2005:
| | Second Quarter Ended
June 30, | | Six Months Ended
June 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Weighted shares of common stock outstanding – basic | | 5,424,877 | | 5,356,438 | | 5,414,897 | | 5,347,808 | |
Weighted shares of common stock assumed upon exercise of stock options | | 89,663 | | 174,644 | | 85,991 | | 177,730 | |
Weighted shares of common stock outstanding – diluted | | 5,514,540 | | 5,531,082 | | 5,500,888 | | 5,525,538 | |
Note 4 – Goodwill and Intangible Assets
As of June 30, 2006 and December 31, 2005, unamortized goodwill amounted to $2,641,599. Other identifiable intangible assets are as follows
| | As of June 30, 2006 | |
| | Carrying
Amount | | Accumulated
Amortization | | Net | | Estimated
Useful Lives | |
Patents | | $ | 665,276 | | $ | (269,903 | ) | $ | 395,373 | | 10 to 17 years | |
Trademarks and trade names | | 386,125 | | (196,148 | ) | 189,977 | | 5 to 17 years | |
Technology rights | | 184,008 | | (159,912 | ) | 24,096 | | 7 to 10 years | |
Other intangibles | | 701,596 | | (607,896 | ) | 93,700 | | Less than 1 year to
5 years | |
| | $ | 1,937,005 | | $ | (1,233,859 | ) | $ | 703,146 | | | |
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| | As of December 31, 2005 | |
| | Carrying | | Accumulated | | | | Estimated | |
| | Amount | | Amortization | | Net | | Useful Lives | |
Patents | | $ | 614,594 | | $ | (249,713 | ) | $ | 364,881 | | 10 to 17 years | |
Trademarks and trade names | | 385,053 | | (160,069 | ) | 224,984 | | 5 to 17 years | |
Technology rights | | 184,008 | | (146,768 | ) | 37,240 | | 7 to 10 years | |
Other intangibles | | 715,043 | | (533,882 | ) | 181,161 | | Less than 1 year to 5
years | |
| | $ | 1,898,698 | | $ | (1,090,432 | ) | $ | 808,266 | | | |
Total amortization expense for the second quarter and six months ended June 30, 2006 was $73,098 and $144,812, respectively. Estimated amortization expense for the remainder of 2006 and each of the four succeeding fiscal years based on the intangible assets as of June 30, 2006 is as follows:
| | Estimated
Expense | |
2006 | | $ | 130,985 | |
2007 | | $ | 164,603 | |
2008 | | $ | 107,871 | |
2009 | | $ | 45,031 | |
2010 | | $ | 29,411 | |
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. At June 30, 2006 and June 30, 2005, this resulted in a net cumulative unrealized loss of $10,549 and $3,930, respectively, within stockholders’ equity. 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.
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.
| | Second Quarter Ended | | Six Months Ended | |
| | June 30, | | June 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Net income | | $ | 862,894 | | $ | 775,040 | | $ | 1,997,653 | | $ | 1,569,211 | |
| | | | | | | | | |
Foreign currency translation adjustment | | 75,222 | | (88,321 | ) | 108,681 | | (147,006 | ) |
Net unrealized (loss) gain on marketable securities | | (1,075 | ) | 2,695 | | (3,417 | ) | (1,170 | ) |
Comprehensive income | | $ | 937,041 | | $ | 689,414 | | $ | 2,102,917 | | $ | 1,421,035 | |
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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. 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, 2006 and 2005 were as follows:
| | Six Months Ended
June 30, | |
| | 2006 | | 2005 | |
Beginning balance | | $ | 327,015 | | $ | 352,634 | |
Warranty provisions | | 167,302 | | 145,178 | |
Warranty claims | | (195,474 | ) | (153,620 | ) |
Decrease due to sale of LCI | | (33,248 | ) | — | |
Ending balance | | $ | 265,595 | | $ | 344,192 | |
Note 8 – Sale of Subsidiary
In February 2006, we sold all the outstanding common stock of Lab Connections, Inc. (LCI), a wholly-owned subsidiary of ours. Pursuant to the sale agreement, we received a net cash payment of $478,721 in exchange for all the outstanding shares of LCI. As a result of the sale, we recognized an after-tax gain of approximately $92,000 in the first quarter of 2006. This gain was reflected in the other income line on the condensed consolidated statements of income. In addition, we have signed a manufacturing agreement with the purchaser which provides that we will be the exclusive manufacturer/supplier of the LCI equipment for at least one year.
Note 9 – Discontinued Operations
In July 2005, we sold substantially all of the assets used in our discontinued Vaculok product line. Pursuant to the sale agreement, we received an up-front payment of $125,000, along with the right to receive an additional amount upon the occurrence of certain post-closing events. In the first quarter of 2006, we received an additional $35,000 related to this previous sale. The after-tax effect of this additional payment is a gain of $22,225 which is reflected on the (loss) gain from discontinued operations line of the condensed consolidated statements of income.
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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 condensed 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. 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.
We have three primary operating locations in the United States – Minnesota, Colorado and Texas – and one in Germany. We use a direct sales force and independent sales representatives to market our products and services in the United States, Canada and Germany and use a network of independent sales representatives to market and service our products and services in other foreign countries.
Prior to 1998, we expanded our business primarily through internally developing new products and technologies and licensing products and technology. Since 1998, we have supplemented our internal growth through acquisitions that have provided us with additional technologies, products and product development expertise. During the last twelve months, we divested two product lines to allow us to better concentrate on our core product lines, particularly our gas detection and measurement products.
We completed our most recent acquisition effective January 1, 2004, by acquiring 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 plus three earnout payments 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. It is anticipated that the remaining earnout payment will be made at or near the end of the first quarter of 2007. The earnout payment due for 2005 based on Lippke’s 2005 net profits in the amount of $433,339 was paid during the first quarter 2006.
In March 2005, we committed to a plan to discontinue production of our Vaculok® vacuum insulated panels and exit this product line as the result of the poor financial performance since it was acquired in November 2003. We recorded a one-time pre-tax charge to earnings in our first quarter 2005, totaling approximately $207,000, to reflect the results of operations and asset impairment write-down associated with the discontinuation of our Vaculok business. The $207,000 charge included a non-cash asset impairment charge of $162,000 relating to equipment and inventory used in the Vaculok business. The after-tax loss reflected in the first quarter 2005 was $131,453. We sold the assets associated with the vacuum insulated panel product line in July 2005 in exchange for an up front payment of $125,000, along with the right to receive up to an additional amount upon the occurrence of certain post-closing events. As a result of the sale, we recognized a pre-tax gain of approximately $69,000 in the third quarter 2005. We received an additional $35,000 in the first quarter 2006, which resulted in an after-tax gain of $22,225. The results of this line of business are shown in the discontinued operations section of our consolidated statements of income.
In February 2006, we sold the capital stock of Lab Connections, Inc. in exchange for $517,296 in cash, subject to a purchase price adjustment based on the amount of Lab Connections’ net tangible assets as of the closing date. As a result of the sale, after recognition of the purchase price adjustment, we
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recognized an after-tax gain of approximately $92,000 in the first quarter 2006.
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No.123 (revised), Share-Based Payment (SFAS 123 (R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors. As a result, as of June 30, 2006, our results of operations reflected compensation expense for new stock options granted and vested during the first six months of 2006 and the unvested portion of previous stock option grants which will vest during 2006. The total amount charged to operations in the second quarter and six-month periods ended June 30, 2006 was $52,297 and $97,666, respectively.
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 second quarter and six-month periods ended June 30, 2006, and 2005.
| | Second Quarter Ended
June 30, | | Six Months Ended
June 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Sales | | 100.0 | | 100.0 | | 100.0 | | 100.0 | |
Cost of sales | | 42.2 | | 44.6 | | 41.8 | | 44.7 | |
Gross profit | | 57.8 | | 55.4 | | 58.2 | | 55.3 | |
Selling, general and administrative expenses | | 32.1 | | 32.5 | | 30.7 | | 32.4 | |
Research and development expenses | | 7.2 | | 6.2 | | 7.1 | | 6.4 | |
Operating income | | 18.5 | | 16.7 | | 20.4 | | 16.5 | |
Other income | | 2.6 | | 1.6 | | 2.4 | | 1.6 | |
Income from continuing operations before income taxes | | 21.1 | | 18.3 | | 22.8 | | 18.1 | |
Income taxes | | 7.5 | | 6.1 | | 7.4 | | 4.8 | |
Income from continuing operations | | 13.6 | | 12.2 | | 15.4 | | 13.3 | |
(Loss) gain from discontinued operations, net of tax | | — | | (0.1 | ) | 0.1 | | (1.1 | ) |
Net income | | 13.6 | | 12.1 | | 15.5 | | 12.2 | |
Comparison of Financial Results for the Second Quarter and Six Months Ended June 30, 2006 and 2005
Sales
Sales for the second quarter 2006 were $6,340,523, down 1% compared to $6,382,302 for the same period in 2005. On a product line basis, this decrease was primarily due to decreased sales of our weighing and pharmaceutical products, headspace analyzer and gas analyzer products, offset somewhat by an increase in sales of our permeation and leak detection products. Sales for the first six months of 2006 were $12,859,435, consistent with $12,826,697 for the same period in 2005. On a product line basis, this increase was primarily due to increased sales of our weighing and pharmaceutical products, gas chromatography and headspace analyzer products, offset somewhat by a decrease in sales of our sample preparation and leak detection products. The reduction in sample preparation products was due to the sale of Lab Connections which occurred in the first quarter 2006. There were no significant price increases or decreases during either the second quarter 2006 or the first six months of 2006 compared to the same respective periods in 2005.
The following table summarizes total sales by product line for the second quarter and six-month periods
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ended June 30, 2006 and 2005.
| | Second Quarter Ended | | Six Months Ended | |
| | June 30, | | June 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Permeation Products and Services | | $ | 3,734,412 | | $ | 3,495,579 | | $ | 7,230,650 | | $ | 7,333,911 | |
Gas, Headspace, and Other Analyzer Products | | 2,188,947 | | 2,436,760 | | 4,820,712 | | 4,587,472 | |
Other Instruments and Services | | 417,164 | | 449,963 | | 808,073 | | 905,314 | |
Total sales | | $ | 6,340,523 | | $ | 6,382,302 | | $ | 12,859,435 | | $ | 12,826,697 | |
The following table sets forth the relationship between various components of domestic and foreign sales for the second quarter and six-month periods ended June 30, 2006 and 2005.
| | Second Quarter Ended | | Six Months Ended | |
| | June 30, | | June 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Domestic sales | | $ | 2,508,746 | | $ | 3,432,697 | | $ | 5,609,130 | | $ | 6,537,499 | |
Foreign sales: | | | | | | | | | |
Europe | | 2,025,742 | | 1,492,634 | | 3,550,142 | | 3,013,298 | |
Asia | | 1,339,152 | | 912,333 | | 2,732,504 | | 2,299,330 | |
Other | | 466,883 | | 544,638 | | 967,659 | | 976,570 | |
Total foreign sales | | 3,831,777 | | 2,949,605 | | 7,250,305 | | 6,289,198 | |
Total sales | | $ | 6,340,523 | | $ | 6,382,302 | | $ | 12,859,435 | | $ | 12,826,697 | |
Sales of our permeation products and services, which accounted for approximately 59% and 55% of our consolidated second quarter sales in 2006 and 2005, respectively, increased 7% during the second quarter 2006 compared to the same period in 2005. This increase resulted from a 37% increase in international shipments due primarily to increased sales to our European, Asian and South American markets. Offsetting this increase in foreign sales was a 41% decrease in domestic shipments. We believe the domestic packaging market was impacted by higher raw material costs for plastic resins in the second quarter 2006 compared to the same period in 2005, resulting in a decline in capital equipment spending domestically. We believe this caused some of our customers to purchase raw materials from suppliers overseas during second quarter 2006, resulting in increased demand for our products from those international suppliers. We expect to see an improvement in domestic sales going forward as we are expecting new product introductions to have a positive impact.
Sales of our permeation products and services, which accounted for approximately 56% and 57% of our consolidated sales during the first six months of 2006 and 2005, respectively, decreased 1% during the first six months of 2006 compared to the same period in 2005. This decrease resulted from a 25% decrease in our domestic shipments, offset by a 12% increase in our foreign shipments.
Sales of our gas, headspace, and other analyzer products, which accounted for 34% and 38% of our consolidated second quarter sales in 2006 and 2005, respectively, decreased 10% during the second quarter 2006 compared to the same period in 2005. Within this group, sales of our weighing and pharmaceutical products decreased 50%, which decrease was evenly spread between domestic and foreign markets, and was due to decreased demand. Our weighing and pharmaceutical products group consists of a relatively fewer number of products compared to our other product groups and will typically experience significant fluctuations in demand. Sales of our headspace
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analyzer products decreased 13% in the second quarter 2006 compared to the same quarter in 2005, which was primarily the result of a decrease in domestic sales. One reason for the decrease in sales of our headspace analyzer products was due to the strong demand for our handheld units in the same period in 2005, shortly after their introduction. Sales of our gas analyzer products through our Baseline subsidiary decreased 4% in the second quarter 2006 compared to the same quarter in 2005 primarily as a result of a 28% decrease in domestic sales, partially offset by a 76% increase in shipments of equipment and sensors into our foreign markets. As a result of increased demand primarily in our foreign markets, sales of our leak detection products increased 47% during the second quarter 2006 compared to the same period in 2005.
Sales of our gas, headspace, and other analyzer products, which accounted for 37% and 36% of our consolidated sales for the first six months of 2006 and 2005, respectively, increased 5% during the first six months of 2006 compared to the same period in 2005. Within this group, sales of our weighing and pharmaceutical products increased by 41%, which increase was evenly spread between our domestic and foreign markets, and was due to increased demand. Sales of our headspace analyzer products increased 6% in the first six months of 2006 compared to the same period in 2005 primarily as a result of a 10% increase in domestic sales, partially offset by a small decrease in foreign sales. Sales of our gas analyzer products increased slightly over 1% for the first six months of 2006 compared to the same period in 2005 primarily as a result of a significant increase in foreign sales, partially offset by a 26% decrease in domestic sales. Sales of our leak detection products decreased 14% for the first six months of 2006 compared to the same period in 2005, primarily as a result of decreased foreign and domestic sales during the first quarter 2006 compared to the same period in 2005 and partially offset by increased foreign sales during the second quarter 2006 compared to the same period in 2005.
Sales in our other instruments and services category decreased 7% in the second quarter 2006 compared to the same quarter in 2005 due to reduced foreign sales. This product group accounted for 7% of our consolidated sales in both second quarter periods.
Sales in our other instruments and services category accounted for 7% of our consolidated sales for the first six months of both 2006 and 2005, and decreased 11% in the first six months of 2006 compared to the same period in 2005 due to reduced foreign demand.
On a geographical basis, domestic and foreign sales accounted for 40% and 60%, respectively, of our consolidated second quarter sales in 2006, and 54% and 46%, respectively, for the same period in 2005. Domestic and foreign sales accounted for 44% and 56%, respectively, of our sales for the first six months of 2006, and 51% and 49% for the same period in 2005.
Gross Profit
The gross profit margins for our products were 58.5% and 55.3% for the second quarters 2006 and 2005, respectively. The higher margin for second quarter 2006 was primarily due to a shift in the product mix to higher margin items, the elimination of production inefficiencies due to the sale of our Lab Connections subsidiary, and moving production of certain products in-house.
The gross profit margins for our consulting services were 48.9% and 56.9%, respectively, for the second quarters ended June 30, 2006 and 2005. This decrease was primarily due to higher contract analytical testing services in the prior period, which produced higher margins.
The gross profit margins for our products for the six-month periods ended June 30, 2006 and 2005 were 58.9% and 56.0%, respectively. The higher margin for the first six months of 2006 was primarily due to the elimination of production inefficiencies due to the sale of our Lab Connections subsidiary, moving production of certain products in-house, and a shift in product mix to higher margin items.
The gross profit margins for our consulting services were 48.7% and 45.9% for the six-month periods ended June 30, 2006 and 2005, respectively. This increase was primarily due to increased contract analytical testing services in the current period, combined with a reduction in related costs.
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Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses in the second quarter 2006 were $2,031,958, or 32.1% of sales, compared to $2,074,736, or 32.5% of sales in the second quarter 2005. The decrease in SG&A expenses was primarily due to lower headcount in 2006, reduced operating costs in our Lab Connections subsidiary which was sold during the first quarter 2006, and reduced consulting costs related to Sarbanes-Oxley Act of 2002 compliance in the second quarter 2006 compared to the same period in 2005.
SG&A expenses were $3,951,098, or 30.7% of sales, during the first six months of 2006, compared to $4,157,324, or 32.4% of sales, for the same period in 2005. The decrease in SG&A expenses was primarily due to lower headcount in 2006 and reduced operating costs in our Lab Connections subsidiary which was sold during the first quarter 2006.
Research and Development Expenses
Research and development (R&D) expenses were $456,187, or approximately 7.2% of sales, in the second quarter 2006, compared to $397,224, or approximately 6.2% of sales, in the same period of 2005. R&D expenses were 7.1% and 6.4% for the six-month periods ended June 30, 2006 and 2005, respectively. This planned increase in R&D expenditures is considered by management to be necessary to 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 second quarter ended June 30, 2006 consisted of interest income of $93,614, gain on sale of fixed assets of $60,804, gain on foreign currency exchange of $7,882 and other income of $323. Other income for the second quarter ended June 30, 2005 consisted of interest income of $45,303, gain on sale of fixed assets of $41,898, gain on foreign currency exchange of $15,432 and other income of $4,051. For the six months ended June 30, 2006, other income consisted of interest income of $174,591, a $92,345 gain on the sale of Lab Connections, gain on sale of fixed assets of $60,804 and other income $1,610, offset by a loss on foreign currency exchange of $11,430. For the six months ended June 30, 2005, other income consisted of interest income of $83,230, gain on foreign currency exchange of $57,001, gain on sale of fixed assets of $41,898 and other income of $15,760. Interest income increased for the second quarter and six months ended June 30, 2006 compared to the same respective periods in 2005 due both to higher average yields and higher average cash balances.
Income Tax Expense
Our provision for income taxes from continuing operations was 35.5% of income before income taxes for the second quarter ended June 30, 2006, compared to 33.1% of income before income taxes for the second quarter ended June 30, 2005.
For the six months ended June 30, 2006, our provision for income taxes from continuing operations was 32.8% of income before income taxes compared to 26.3% of income before income taxes for the six months ended June 30, 2005. The rate for the first six months of 2006 was favorably impacted by the resolution of a proposed income tax assessment in the state of New Jersey, which reduced income tax expense by approximately $50,000. Also, because the sale of Lab Connections generated a taxable loss, there was no tax provision applicable to the $92,345 gain that was realized in the first quarter 2006. The rate for the first six months of 2005 was favorably impacted by the finalization of an Internal Revenue Service examination, which reduced income tax expense by approximately $156,000 in the first quarter 2005 as well as benefiting from the newly enacted tax law. Based on current operating conditions and income tax laws, we expect the tax rate for the remaining quarters of 2006 to
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be in the range of 33% to 36%.
Net Income
Net income was $862,894 in the second quarter 2006, compared to $775,040 in the second quarter 2005. Diluted net income was $0.16 per share in the second quarter 2006 compared to $0.14 per share in the second quarter 2005. For the six months ended June 30, 2006, net income was $1,997,653, or $0.36 per diluted share, compared to net income of $1,569,211, or $0.28 per diluted share in the prior year.
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 increased $1,694,493 during the first six months of 2006 to $10,715,862 as of June 30, 2006, compared to $9,021,369 at December 31, 2005, due in part to a significant reduction in trade accounts receivable, the receipt of the net proceeds from the sale of Lab Connections of $478,721, and the exercise of stock options. Our working capital as of June 30, 2006 increased $1,358,112 to $15,197,445, as compared to $13,839,333 at December 31, 2005. 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, stock repurchases, and the final required earnout payment to the former parent company of Lippke, for at least the next twelve months. However, 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 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.
Cash Flow
Cash Flow from Operating Activities
Our primary source of funds is cash provided by operating activities of continuing operations which totaled $1,931,608 and $1,376,002 in the first six months of 2006 and 2005, respectively. In the first six months of 2006, the cash provided by operating activities increased by $555,606, or 40%, compared to the first six months of 2005. The key components of the increases in 2006 were net income of $1,975,428, the decrease in accounts receivable of $283,955 and the add-back of non-cash depreciation and amortization of $377,499. Offsetting these increases were reductions in accounts payable, accrued income taxes and other accrued expenses of $272,469, $238,865 and $246,139, respectively, and the gain on disposition of long-term assets of $152,149.
Cash Flow from Investing Activities
Cash used in investing activities of continuing operations totaled $488,305 and $1,557,431 in the first six months of 2006 and 2005, respectively. The proceeds from sale of subsidiary of $478,721 in the first six months of 2006 related to the sale of Lab Connections in the first quarter. Purchases of marketable securities, net of proceeds, were $876,191 in the first six months of 2006. Purchases of property, plant and equipment totaled $166,310 in the same period, primarily for additions of office, manufacturing and laboratory equipment, as compared to $144,563 in the first half of 2005. We had no material commitments for capital expenditures as of June 30, 2006. 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 of continuing operations consists primarily of the payment of dividends to our shareholders. During the first six months of 2006 and 2005, we made dividend payments to our shareholders of $811,970 and $747,678, respectively, and purchases of our common stock in the amount of $363,125 in 2006. Offsetting these payments were the proceeds from the exercise of stock options in the amount of $451,833 and $270,208 in the first six months of 2006 and 2005, respectively.
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 June 30, 2006, we had repurchased an aggregate of 41,500 shares of MOCON common stock under the program at a total cumulative cost of $363,125. Therefore, as of June 30, 2006, $1,636,875 was remaining in this authorization.
Contractual Obligations
We refer you to our Annual Report on Form 10-K for the year ended December 31, 2005 for a summary of our contractual obligations. Except for the earnout payment paid in connection with the Lippke acquisition, 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.
New Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The requirements are effective for fiscal years beginning after December 15, 2006. Although we are still evaluating the impact that the adoption of FIN 48 will have on our consolidated financial statements, we do not believe it will have a material impact.
Critical Accounting Policies
Our significant accounting policies are described in Note 1 to our condensed consolidated financial statements. This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed 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.
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 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 June 30, 2006, we had $172,482 reserved against our accounts receivable for doubtful accounts and sales returns.
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Allowance 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.
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. Special 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 June 30, 2006, we had $265,595 accrued related to 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 sheet.
We have significant amounts of deferred tax assets. 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 than not that we would not be able to realize all or part of its deferred tax assets. We carried no valuation allowance against our net deferred tax assets at either June 30, 2006 or 2005.
Forward-Looking Statements
This quarterly report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are subject to the safe harbor created by those statutes. 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 internet website or otherwise. Statements that are not historical are forward-looking and reflect expectations and assumptions. We try to identify forward-looking statements in this report and elsewhere by using words such as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential” or “continue” or the negative of these or similar terms. Examples of forward-looking statements in this report include, but are not limited to,
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statements regarding our expectation of improved domestic sales due to new product introductions, our allocation of 6% to 8% of our sales to research and development expenses, our expected tax rate for the remaining quarters of 2006 being in the range of 33% to 36%, our belief that no significant future capital expenditures are required to accommodate our current level of operations, our expectations regarding future cash expenditures, and the effect of new accounting pronouncements on our financial position, results of operations and cash flows.
Forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors that affect all businesses operating in a global market as well as matters specific to MOCON. These uncertainties and factors are difficult to predict and many of them are beyond our control. The following are some of the uncertainties and factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements:
· 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;
· Decreases in capital spending;
· 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 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 otherwise could 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, 2005 under the heading “Part I – Item 1A. Risk Factors” on pages 8 through 13 of such report.
All forward-looking statements included in this report are expressly qualified in their entirety by the
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foregoing cautionary statements. 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 below, 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. Our expectations reflected in our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown uncertainties and factors, 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
Substantially all of our marketable securities are at fixed interest rates and all of our marketable securities mature within two years or less; therefore, we believe that the market risk arising from the holding of these financial instruments is minimal.
Foreign Currency Exchange Risk
Because our products are manufactured or sourced primarily from the United States, a stronger U.S. dollar generally has a negative impact on our results from operations outside of the United States while a weaker dollar generally has a positive effect. We currently sell our products and services in United States dollars or the local currency of our foreign subsidiary (euros). Accordingly, our foreign operations expose us to foreign currency exchange risk when the euro currency results of operations are translated to United States 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 will 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.
Item 4. 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
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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 June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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, 2005 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 second quarter ended June 30, 2006 that were not registered under the Securities Act of 1933.
Issuer Repurchases of Equity Securities
The following table shows our stock repurchase activity during the second quarter ended June 30, 2006:
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 | |
April 1, 2006 through April 30, 2006 | | 12,000 | (1) | $ | 8.75 | | 12,000 | | $ | 1,636,875 | |
May 1, 2006 through May 31, 2006 | | 6,335 | (2) | 9.65 | | — | | 1,636,875 | |
June 1, 2006 through June 30, 2006 | | 5,238 | (2) | 9.73 | | — | | 1,636,875 | |
| | | | | | | | | | | |
(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 12,000 shares during the period indicated above under this program.
(2) Consists of shares repurchased from employees in connection with the tender of previously acquired shares in payment of the exercise price of stock options. These transactions do not affect the amount available for stock repurchases in the future.
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Except as set forth in the table above, we did not purchase any shares of our common stock or other equity securities of ours registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the second quarter ended June 30, 2006.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Our Annual Meeting of Shareholders was held on May 18, 2006.
(b) The results of the shareholder votes were as follows:
| | For | | Against/Withhold | | Abstain | | Broker
Non-Votes | |
1. Election of Directors | | | | | | | | | |
Robert L. Demorest | | 5,086,397 | | 32,747 | | — | | — | |
Dean B. Chenoweth | | 5,074,643 | | 44,501 | | — | | — | |
J. Leonard Frame | | 5,023,956 | | 95,188 | | — | | — | |
Robert F. Gallagher | | 5,084,161 | | 34,983 | | — | | — | |
Richard A. Proulx | | 5,082,734 | | 36,410 | | — | | — | |
Tom C. Thomas | | 5,010,766 | | 108,378 | | — | | — | |
Ronald A. Meyer | | 5,068,080 | | 51,064 | | — | | — | |
Daniel W. Mayer | | 5,086,397 | | 32,747 | | — | | — | |
2. Approval of MOCON, Inc. 2006 Stock Incentive Plan | | 2,226,971 | | 449,729 | | 126,828 | | 2,315,616 | |
3. Ratification of Independent Registered Public Accounting Firm | | 5,092,518 | | 6,428 | | 20,198 | | — | |
Broker non-votes are not considered to be entitled to vote on Proposal Two, and therefore were not counted in determining the votes cast on the matter.
Item 6. Exhibits
The following exhibits are being filed or furnished with this quarterly report on Form 10-Q:
Exhibit
No. | | Description |
10.1 | | MOCON, Inc. 2006 Stock Incentive Plan |
| | |
10.2 | | Form of Incentive Stock Option Agreement under the MOCON, Inc. 2006 Stock Incentive Plan |
| | |
10.3 | | Form of Non-Statutory Stock Option Agreement under the MOCON, Inc. 2006 Stock Incentive Plan |
| | |
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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