**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

##### **FORM 10-Q**

##### ** **

**(Mark One)**

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

**For the Quarter Ended June 30, 2005**

 

**or**

 

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

**For the transition period from                 to                 **

 

**CommissionFile Number 0-9273**

 

**MOCON, INC.**

(Exact name of registrant asspecified in its charter)

 
| **Minnesota**                                                    | ** ** | **41-0903312**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State or  other jurisdiction of  incorporation or organization) |       | (I.R.S.  employer  identification no.) |

 
| **7500  Boone Avenue North, Minneapolis, Minnesota 55428**                                                              |
|-------------------------------------------------------------------------------------------------------------------------|
| (Address of  principal executive  offices)           (Zip  code) |

 

**(763) 493-6370**

(Registrant’s telephone number,including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

YES ý  NO o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 

YES o  NO ý

 

5,384,083 Common Shares were outstanding as of June 30, 2005.

 

 

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MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended June 30,2005

 
| PART I. FINANCIAL INFORMATION                                                                                      |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                    |   |
| Item 1. Financial Statements                                                                                            |   |
| Condensed Consolidated Balance Sheets  June 30, 2005 (Unaudited) and December 31, 2004                        |   |
|                                                                                                                    |   |
| Condensed Consolidated Statements of Income  (Unaudited)  Three months and six months ended June 30, 2005 and 2004 |   |
|                                                                                                                    |   |
| Condensed Consolidated Statements of Cash Flows  (Unaudited)  Six months ended June 30, 2005 and 2004              |   |
|                                                                                                                    |   |
| Notes to Condensed Consolidated Financial  Statements (Unaudited)                                                       |   |
|                                                                                                                    |   |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations                     |   |
|                                                                                                                    |   |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                                     |   |
|                                                                                                                    |   |
| Item 4. Controls and Procedures                                                                                         |   |
|                                                                                                                    |   |
| PART II. OTHER INFORMATION                                                                                         |   |
|                                                                                                                    |   |
| Item 2. Unregistered Sales of Equity  Securities, Use of Proceeds and Issuer Purchases of Equity Securities             |   |
|                                                                                                                    |   |
| Item 4. Submission of Matters to a Vote of  Security Holders                                                            |   |
|                                                                                                                    |   |
| Item 6.  Exhibits                                                                                                       |   |
|                                                                                                                    |   |
| Signatures                                                                                                              |   |

 

----

 

PART I.  FINANCIALINFORMATION

 

Item 1.  Financial Statements

 

MOCON, INC. & SUBSIDIARIES

 

CONDENSEDCONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                                        | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                        | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| ASSETS                                                                                                                                            |       |              |       |                  |       |
| Current  assets:                                                                                                                                  |       |              |       |                  |       |
| Cash and  cash equivalents                                                                                                                        |       | $                 | 1,924,142  |                  | $          | 2,648,879 |   |
| Marketable  securities, current                                                                                                                   |       | 6,441,235         |       | 4,808,840             |       |
| Trade  accounts receivable, less allowance for doubtful accounts of $206,101 in 2005  and $222,040 in 2004                                        |       | 3,685,701         |       | 4,297,884             |       |
| Other  receivables                                                                                                                                |       | 131,604           |       | 44,941                |       |
| Inventories                                                                                                                                       |       | 4,178,346         |       | 3,778,376             |       |
| Prepaid  expenses                                                                                                                                 |       | 352,106           |       | 362,607               |       |
| Deferred  income taxes                                                                                                                            |       | 435,864           |       | 435,864               |       |
| Assets of  discontinued operations                                                                                                                |       | 38,594            |       | 221,793               |       |
| Total  current assets                                                                                                                             |       | 17,187,592        |       | 16,599,184            |       |
|                                                                                                                                              |       |              |       |                  |       |
| Marketable securities,  noncurrent                                                                                                                |       | 62,296            |       | 231,000               |       |
|                                                                                                                                              |       |              |       |                  |       |
| Property,  plant and equipment, net of accumulated depreciation of $4,755,322 in 2005  and $4,558,195 in 2004                                     |       | 1,762,011         |       | 1,954,998             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Other  assets:                                                                                                                                    |       |              |       |                  |       |
| Software  development costs, net of accumulated amortization of $884,121 in 2005 and  $766,490 in 2004                                            |       | 122,300           |       | 239,931               |       |
| Goodwill                                                                                                                                          |       | 2,315,774         |       | 2,315,774             |       |
| Technology  rights and other intangibles, net                                                                                                     |       | 918,325           |       | 1,030,847             |       |
| Other                                                                                                                                             |       | 161,729           |       | 143,803               |       |
| Total other  assets                                                                                                                               |       | 3,518,128         |       | 3,730,355             |       |
|                                                                                                                                              |       |              |       |                  |       |
| TOTAL ASSETS                                                                                                                                      |       | $                 | 22,530,027 |                  | $          | 22,515,537 |   |
|                                                                                                                                              |       |              |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                        |       |              |       |                  |       |
| Current  liabilities:                                                                                                                             |       |              |       |                  |       |
| Accounts  payable                                                                                                                                 |       | $                 | 1,956,968  |                  | $          | 2,107,268 |   |
| Accrued  compensation and vacation                                                                                                                |       | 869,365           |       | 1,024,958             |       |
| Other accrued  expenses                                                                                                                           |       | 416,570           |       | 457,640               |       |
| Accrued  product warranties                                                                                                                       |       | 344,192           |       | 352,634               |       |
| Accrued  income taxes                                                                                                                             |       | 66,645            |       | 455,718               |       |
| Dividends  payable                                                                                                                                |       | 376,886           |       | 373,694               |       |
| Total  current liabilities                                                                                                                        |       | 4,030,626         |       | 4,771,912             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Obligations  to former employees                                                                                                                  |       | 99,683            |       | 112,720               |       |
| Minimum  earnout payable                                                                                                                          |       | 109,529           |       | 247,708               |       |
| Deferred  income taxes                                                                                                                            |       | 149,271           |       | 182,651               |       |
| Total  noncurrent liabilities                                                                                                                     |       | 358,483           |       | 543,079               |       |
|                                                                                                                                              |       |              |       |                  |       |
| Total  liabilities                                                                                                                                |       | 4,389,109         |       | 5,314,991             |       |
|                                                                                                                                              |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                       |       |              |       |                  |       |
| Capital  stock – undesignated – authorized 3,000,000 shares                                                                             |       | —            |       | —                |       |
| Common stock  – $0.10 par value. Authorized 22,000,000 shares; issued and outstanding  5,384,083 shares in 2005 and 5,338,489 shares in 2004 |       | 538,408           |       | 533,849               |       |
| Capital in  excess of par value                                                                                                                   |       | 465,354           |       | 199,705               |       |
| Retained  earnings                                                                                                                                |       | 17,196,049        |       | 16,377,709            |       |
| Accumulated  other comprehensive (loss) income                                                                                                    |       | (58,893           | )     | 89,283                |       |
| Total  stockholders’ equity                                                                                                                  |       | 18,140,918        |       | 17,200,546            |       |
|                                                                                                                                              |       |              |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                  |       | $                 | 22,530,027 |                  | $          | 22,515,537 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

1

----

 

MOCON,INC. & SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                             | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Sales:                                                                                 |       |                   |       |                 |       |   |   |   |   |
| Products                                                                               |       | $                      | 5,823,945  |                 | $          | 5,573,115 |   | $ | 11,936,032 |   | $ | 10,826,659 |   |
| Consulting  services                                                                   |       | 558,357                |       | 518,719              |       | 890,665 |   | 980,297 |   |
| Total sales                                                                            |       | 6,382,302              |       | 6,091,834            |       | 12,826,697 |   | 11,806,956 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Cost of  sales:                                                                        |       |                   |       |                 |       |   |   |   |   |
| Products                                                                               |       | 2,604,607              |       | 2,447,412            |       | 5,246,187 |   | 4,915,415 |   |
| Consulting  services                                                                   |       | 240,418                |       | 261,355              |       | 482,038 |   | 481,198 |   |
| Total cost  of sales                                                                   |       | 2,845,025              |       | 2,708,767            |       | 5,728,225 |   | 5,396,613 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Gross profit                                                                           |       | 3,537,277              |       | 3,383,067            |       | 7,098,472 |   | 6,410,343 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Selling,  general, and administrative expenses                                         |       | 2,074,736              |       | 2,034,663            |       | 4,157,324 |   | 4,154,046 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Research and  development expenses                                                     |       | 397,224                |       | 366,057              |       | 817,852 |   | 707,129 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Operating  income                                                                      |       | 1,065,317              |       | 982,347              |       | 2,123,296 |   | 1,549,168 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Other income                                                                           |       | 106,684                |       | 51,578               |       | 197,889 |   | 72,754 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Income  before income taxes                                                            |       | 1,172,001              |       | 1,033,925            |       | 2,321,185 |   | 1,621,922 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Income taxes                                                                           |       | 387,461                |       | 351,338              |       | 611,021 |   | 551,834 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Income from  continuing operations                                                     |       | 784,540                |       | 682,587              |       | 1,710,164 |   | 1,070,088 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Loss from  discontinued operations, including impairment charge in Q1 2005 of $162,420 |       | (14,961                | )          | (83,117              | )          | (221,974 | ) | (163,929 | ) |
| Income tax  benefit on loss from discontinued operations                               |       | 5,461                  |       | 30,338               |       | 81,021 |   | 59,834 |   |
| Loss from  discontinued operations, net of tax benefit                                 |       | (9,500                 | )          | (52,779              | )          | (140,953 | ) | (104,095 | ) |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Net income                                                                             |       | $                      | 775,040    |                 | $          | 629,808 |   | $ | 1,569,211 |   | $ | 965,993 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Basic net  income per common share:                                                    |       |                   |       |                 |       |   |   |   |   |
| Income from  continuing operations                                                     |       | $                      | 0.15       |                 | $          | 0.13 |   | $ | 0.32 |   | $ | 0.20 |   |
| Loss from  discontinued operations                                                     |       | (0.01                  | )          | (0.01                | )          | (0.03 | ) | (0.02 | ) |
| Basic net  income per common share:                                                    |       | $                      | 0.14       |                 | $          | 0.12 |   | $ | 0.29 |   | $ | 0.18 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Basic  weighted average common shares outstanding                                      |       | 5,356,438              |       | 5,372,325            |       | 5,347,808 |   | 5,389,639 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Diluted net  income per common share:                                                  |       |                   |       |                 |       |   |   |   |   |
| Income from  continuing operations                                                     |       | $                      | 0.14       |                 | $          | 0.12 |   | $ | 0.31 |   | $ | 0.19 |   |
| Loss from  discontinued operations                                                     |       | (0.00                  | )          | (0.00                | )          | (0.03 | ) | (0.01 | ) |
| Diluted net  income per common share:                                                  |       | $                      | 0.14       |                 | $          | 0.12 |   | $ | 0.28 |   | $ | 0.18 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Diluted  weighted average common shares outstanding                                    |       | 5,531,082              |       | 5,474,899            |       | 5,525,538 |   | 5,500,785 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

2

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MOCON, INC. & SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                                                                          | ** ** | **Six Months**          | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                          | ** ** | **Ended June 30,** | ** ** |
| ** **                                                                                                                          | ** ** | **2005**                | ** ** | **2004** | ** ** |
| Cash flows  from operating activities:                                                                                              |       |                    |       |   |   |
| Net income                                                                                                                          |       | $                       | 1,569,211  |   | $ | 965,993 |   |
| Loss from  discontinued operations, net of tax                                                                                      |       | 140,953                 |       | 104,095 |   |
| Income from  continuing operations                                                                                                  |       | 1,710,164               |       | 1,070,088 |   |
| Adjustments  to reconcile income from continuing operations to net cash provided by operating  activities of continuing operations: |       |                    |       |   |   |
| (Gain) loss  on disposition of long-term assets                                                                                     |       | (40,286                 | )          | 1,577 |   |
| Depreciation  and amortization                                                                                                      |       | 536,409                 |       | 687,349 |   |
| Deferred  income taxes                                                                                                              |       | (33,380                 | )          | (124,620 | ) |
| Changes in  operating assets and liabilities, net of effect of acquisition in 2004:                                                 |       |                    |       |   |   |
| Trade  accounts receivable                                                                                                          |       | 678,278                 |       | 512,713 |   |
| Other  receivables                                                                                                                  |       | (90,202                 | )          | (46,777 | ) |
| Inventories                                                                                                                         |       | (454,685                | )          | 388,661 |   |
| Prepaid  expenses                                                                                                                   |       | 9,379                   |       | 140,435 |   |
| Accounts  payable                                                                                                                   |       | (169,680                | )          | 168,914 |   |
| Accrued  compensation and vacation                                                                                                  |       | (138,974                | )          | (254,930 | ) |
| Other  accrued expenses                                                                                                             |       | (242,418                | )          | (149,296 | ) |
| Accrued  product warranties                                                                                                         |       | —                  |       | 9,650 |   |
| Accrued  income taxes                                                                                                               |       | (388,603                | )          | (44,833 | ) |
| Net cash  provided by operating activities of continuing operations                                                                 |       | 1,376,002               |       | 2,358,931 |   |
|                                                                                                                                |       |                    |       |   |   |
| Cash flows  from investing activities:                                                                                              |       |                    |       |   |   |
| Cash paid in  acquisitions, net of cash acquired                                                                                    |       | —                  |       | (468,683 | ) |
| Purchases of  marketable securities                                                                                                 |       | (3,995,079              | )          | (1,765,104 | ) |
| Proceeds  from sales or maturities of marketable securities                                                                         |       | 2,530,218               |       | 1,916,907 |   |
| Purchases of  property and equipment                                                                                                |       | (144,563                | )          | (191,793 | ) |
| Proceeds  from sale of fixed assets                                                                                                 |       | 96,073                  |       | — |   |
| Purchases of  patents and trademarks                                                                                                |       | (26,154                 | )          | (26,075 | ) |
| Other                                                                                                                               |       | (17,926                 | )          | (3,498 | ) |
| Net cash  used in investing activities of continuing operations                                                                     |       | (1,557,431              | )          | (538,246 | ) |
|                                                                                                                                |       |                    |       |   |   |
| Cash flows from  financing activities:                                                                                              |       |                    |       |   |   |
| Proceeds  from the exercise of stock options                                                                                        |       | 270,208                 |       | 84,866 |   |
| Purchases  and retirement of common stock                                                                                           |       | —                  |       | (900,360 | ) |
| Dividends  paid to former parent company of Paul Lippke Handels                                                                     |       | —                  |       | (449,087 | ) |
| Dividends  paid to MOCON shareholders                                                                                               |       | (747,678                | )          | (703,204 | ) |
| Net cash  used in financing activities of continuing operations                                                                     |       | (477,470                | )          | (1,967,785 | ) |
|                                                                                                                                |       |                    |       |   |   |
| Net cash  provided by (used in) discontinued operations                                                                             |       | 27,904                  |       | (134,773 | ) |
|                                                                                                                                |       |                    |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                                                       |       | (93,742                 | )          | (3,198 | ) |
|                                                                                                                                |       |                    |       |   |   |
| Net decrease  in cash and cash equivalents                                                                                          |       | (724,737                | )          | (285,071 | ) |
|                                                                                                                                |       |                    |       |   |   |
| Cash and  cash equivalents:                                                                                                         |       |                    |       |   |   |
| Beginning of  period                                                                                                                |       | 2,648,879               |       | 1,399,837 |   |
| End of  period                                                                                                                      |       | $                       | 1,924,142  |   | $ | 1,114,766 |   |
|                                                                                                                                |       |                    |       |   |   |
| Supplemental  disclosures of cash flow information:                                                                                 |       |                    |       |   |   |
| Cash paid  during the period for income taxes                                                                                       |       | $                       | 703,725    |   | $ | 661,318 |   |
|                                                                                                                                |       |                    |       |   |   |
| Supplemental  schedule of noncash investing and financing activities:                                                          |       |                    |       |   |   |
| Unrealized  holding loss on available-for-sale securities                                                                           |       | $                       | (1,170     | ) | $ | (5,291 | ) |
| Dividends  accrued                                                                                                                  |       | 376,886                 |       | 346,908 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

3

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MOCON, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

(Unaudited)

 

Note 1 – Condensed Consolidated Financial Statements

 

The condensed consolidated balance sheet as of June 30, 2005, thecondensed consolidated statements of income for the three- and six-month periodsended June 30, 2005 and 2004, and the condensed consolidated statements ofcash flows for the six-month periods ended June 30, 2005 and 2004 havebeen 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 thefinancial position, results of operations and cash flows at June 30, 2005,and for all periods presented, have been made. The results of operations for the three- and six-month period ended June 30,2005 are not necessarily indicative of operating results for the full year.

 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted.  It is suggested that thesecondensed consolidated financial statements be read in conjunction with theconsolidated financial statements and notes included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2004, previously filed with theSecurities and Exchange Commission.

 

We operate in a single industry segment:  the development, manufacturing, and marketingof measurement, analytical, monitoring, sample preparation, and consultingproducts used to detect, measure, and analyze gases and chemical compounds forcustomers in the barrier packaging, food, pharmaceutical, and other industriesthroughout the world.

 

*Principles of Consolidation*

 

The consolidatedfinancial statements include the accounts of MOCON, Inc. and oursubsidiaries after elimination of inter-company transactions and accounts.

 

*Foreign Currency Translation*

 

The financial statementsfor operations outside the United States are maintained in their local currency.  All assets and liabilities of our foreignsubsidiary are translated to United States dollars at period-end exchangerates, while revenue and expense accounts are translated at the averageexchange rates during the period transactions occurred.  Translation adjustments arising from the useof differing exchange rates are included in accumulated other comprehensiveincome or loss in stockholders’ equity. Gains and losses on foreign currency transactions are included in otherincome or loss. 

 

*Use of Estimates*

 

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

4

----

 

*Stock-Based Compensation*

 

We use the intrinsic-value method for employee stock-based compensationpursuant 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 recognizedbased on the difference, if any, between the quoted market price of the stockon 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-basedcompensation and the fair-value method for nonemployee stock-based compensationof Statement of Financial Accounting Standard (SFAS) No. 123, *Accounting for Stock-Based Compensation*.  These provisions require us to show, on a proforma basis, our net income and income per common share as if we had recordedan expense for our stock options at the time of grant.  Other than disclosure in this footnote, we donot use these pro forma results for any purpose.  No stock options were granted during thethree- and six-month periods ended June 30, 2005 and 2004.

 

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

 
| ** **                                                                                                                                    | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income –  as reported                                                                                                                |       | $                                     | 775,040    |                                | $          | 629,808 |   | $ | 1,569,211 |   | $ | 965,993 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       | (27,892                               | )          | (39,294                             | )          | (56,721 | ) | (80,178 | ) |
| Net income –  pro forma                                                                                                                  |       | $                                     | 747,148    |                                | $          | 590,514 |   | $ | 1,512,490 |   | $ | 885,815 |   |
|                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Net income  per common share – as reported:                                                                                              |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                                                                                                         |       | $                                     | 0.14       |                                | $          | 0.12 |   | $ | 0.29 |   | $ | 0.18 |   |
| Diluted                                                                                                                                       |       | $                                     | 0.14       |                                | $          | 0.12 |   | $ | 0.28 |   | $ | 0.18 |   |
| Net income  per common share – pro forma:                                                                                                |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                                                                                                         |       | $                                     | 0.14       |                                | $          | 0.11 |   | $ | 0.28 |   | $ | 0.16 |   |
| Diluted                                                                                                                                       |       | $                                     | 0.14       |                                | $          | 0.11 |   | $ | 0.27 |   | $ | 0.16 |   |

 

In December 2004, the FASB issued Statement of FinancialAccounting Standards No. 123 (revised 2004), *Share-BasedPayments* (FAS 123(R)), which is a revision of SFAS No.123 and supercedesOpinion 25.  FAS 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer analternative.  FAS 123(R) is effective atthe beginning of the first annual period beginning after June 15,2005.  We expect to adopt FAS 123(R) on January 1,2006.  The ultimate amount of increasedcompensation expense will be dependent on the number of options granted, theirtiming and vesting periods, and the method used to calculate the fair value ofthe awards, among other things.

 

5

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*Reclassifications*

 

Certain 2004 amounts have been reclassified to conform to the 2005presentation.

 

Note 2 – Inventories

 

Inventoriesconsist of the following:

 
| ** **         | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished  products |       | $                       | 708,456    |                        | $          | 717,507 |   |
| Work-in-process    |       | 1,694,678               |       | 1,395,364                   |       |
| Raw  materials     |       | 1,775,212               |       | 1,665,505                   |       |
|               |       | $                       | 4,178,346  |                        | $          | 3,778,376 |   |

 

Note 3 – Net Income Per Common Share

 

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

 

The following table presents a reconciliation of the denominators usedin the computation of net income per common share – basic, and net income percommon share – diluted, for the three- and six-month periods ended June 30, 2005and 2004:

 
| ** **                                                              | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted  shares of common stock outstanding – basic               |       | 5,356,438                             |       | 5,372,325                           |       | 5,347,808 |   | 5,389,639 |   |
| Weighted  shares of common stock assumed upon exercise of stock options |       | 174,644                               |       | 102,574                             |       | 177,730 |   | 111,146 |   |
| Weighted  shares of common stock outstanding – diluted             |       | 5,531,082                             |       | 5,474,899                           |       | 5,525,538 |   | 5,500,785 |   |

 

Note 4 – Goodwill and Intangible Assets

 

As of June 30, 2005and December 31, 2004, unamortized goodwill amounted to $2,315,774.  Other identifiable intangible assets are asfollows:

 
| ** **                  | ** ** | **As of June 30, 2005** | ** ** |
|-----------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **Carrying  Amount**         | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                            | 573,457    |   | $ | 231,290 |   | $ | 342,167 |   | 10 to 17  years |   |
| Trademarks  and trade names |       | 393,460                      |       | 126,410 |   | 267,050 |   | 5 to 17  years |   |
| Technology  rights          |       | 184,008                      |       | 133,625 |   | 50,383 |   | 7 to 10  years |   |
| Other intangibles           |       | 715,043                      |       | 456,318 |   | 258,725 |   | Less than 1  year to  5 years |   |
|                        |       | $                            | 1,865,968  |   | $ | 947,643 |   | $ | 918,325 |   |   |   |

 

6

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| ** **                  | ** ** | **As of December 31, 2004** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **Carrying  Amount**             | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                                | 548,748    |   | $ | 221,288 |   | $ | 327,460 |   | 10 to 17  years |   |
| Trademarks  and trade names |       | 392,015                          |       | 90,413 |   | 301,602 |   | 5 to 17  years |   |
| Technology  rights          |       | 184,008                          |       | 120,481 |   | 63,527 |   | 7 to 10  years |   |
| Other  intangibles          |       | 715,043                          |       | 376,785 |   | 338,258 |   | Less than 1  year to 5  years |   |
|                        |       | $                                | 1,839,814  |   | $ | 808,967 |   | $ | 1,030,847 |   |   |   |

 

Total amortizationexpense for the three and six months ended June 30, 2005 was $73,529 and$147,216, respectively.  Estimatedamortization expense for the remainder of 2005 and each of the four succeedingfiscal years based on the intangible assets as of June 30, 2005 is asfollows:

 

| ** ** | ** ** | **Estimated  Expense** | ** ** |
|------------|------------|------------------------|------------|
| 2005       |       | $                      | 145,527    |   |
| 2006       |       | $                      | 279,384    |   |
| 2007       |       | $                      | 162,608    |   |
| 2008       |       | $                      | 105,897    |   |
| 2009       |       | $                      | 43,196     |   |

###  

### Note 5 –Marketable Securities

###  

Available-for-salesecurities are recorded at fair value. Unrealized holding gains and losses on available-for-sale securities areexcluded from income and are reported as a separate component of stockholders’equity until realized.  A decline in themarket value of any available-for-sale security below cost that is deemed otherthan temporary is charged to income resulting in the establishment of a newcost basis for the security.  At June 30,2005 and June 30, 2004, this resulted in a net cumulative unrealized lossof $3,930 and $2,073, respectively, within stockholders’ equity.

 

Note 6 – Comprehensive Income

 

Other comprehensiveincome pertains to net unrealized gains and losses on marketable securities andforeign currency translation adjustments that are not included in net incomebut rather are recorded directly in stockholders’ equity.

 
| ** **                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                           |       | $                                     | 775,040    |                                | $          | 629,808 |   | $ | 1,569,211 |   | $ | 965,993 |   |
| Foreign currency  translation adjustment             |       | (88,321                               | )          | (3,256                              | )          | (147,006 | ) | (13,346 | ) |
| Net  unrealized gain (loss) on marketable securities |       | 2,695                                 |       | (5,286                              | )          | (1,170 | ) | (5,291 | ) |
| Comprehensive  income                                |       | $                                     | 689,414    |                                | $          | 621,266 |   | $ | 1,421,035 |   | $ | 947,356 |   |

 

7

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Note 7 – Warranty

 

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

 

Warranty expense is accrued at the time of sale based on historicalclaims experience.  Special warrantyreserves are also accrued for special rework campaigns for known major productmodifications.  We also offer servicecontracts for select products when the factory warranty period expires.

 

Warranty provisions and claims for the six-month periods ended June 30,2005 and 2004 were as follows: 

 

| ** **           | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Beginning  balance   |       | $                                   | 352,634    |   | $ | 279,639 |   |
| Warranty  provisions |       | 145,178                             |       | 212,900 |   |
| Warranty  claims     |       | (153,620                            | )          | (157,327 | ) |
| Ending  balance      |       | $                                   | 344,192    |   | $ | 335,212 |   |

 

Note 8 – Subsequent Event

 

In July 2005,we sold substantially all of the assets used in our discontinued Vaculokproduct line.  As previously reported inthe first quarter, the decision had been made to cease production of Vaculokvacuum insulated panels and exit the product line.

 

Pursuant to thesale agreement, we received an up-front payment of $125,000, along with theright to receive up to an additional $60,000 upon the occurrence of certainpost-closing events.  As a result of thesale, we expect to recognize a pre-tax gain of approximately $95,000 in thethird quarter ended September 30, 2005. After tax, we expect to recognize a gain of approximately $60,000, or$0.01 per diluted share, which will be reported in the discontinued operations section ofthe condensed consolidated statements of income.

 

8

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

 

This Management’sDiscussion and Analysis provides material historical and prospectivedisclosures intended to enable investors and other users to assess ourfinancial condition and results of operations. Statements that are not historical are forward-looking and involve risksand uncertainties discussed below under the caption “Forward-LookingStatements.”  The following discussion ofthe results of operations and financial condition of MOCON should be read inconjunction with our condensed consolidated financial statements and therelated notes thereto.

 

### *CompanyOverview*

###  

MOCON, Inc.designs, manufactures, markets, and services products and provides consultingservices primarily in the measurement and analytical instrument and servicesmarkets.  Our products includeinstruments that detect, measure and monitor gases and chemical compounds aswell as products that prepare samples of various substances for laboratoryanalysis.  Although some of the marketsfor our products are maturing, we continually seek growth opportunities throughtechnological and product improvement, by acquiring and developing newproducts, and by acquiring new companies.

 

Prior to 1998, weexpanded our business primarily through internally developing new products andtechnologies, acquiring product lines and technology, and licensing productsand technology.  Since 1998, we havesupplemented our internal growth through several acquisitions that haveprovided us with additional technologies, products and product developmentexpertise.

 

We completed ourmost recent acquisition effective January 1, 2004, by acquiring PaulLippke Handels GmbH Prozess- und Laborsysteme (Lippke), which is located inGermany.  Lippke had been the primarydistributor of our products in Europe for approximately thirty years, and alsoserved in the capacity of distributor or agent for several companies inaddition to MOCON.  The acquisition ofLippke provides us with a direct presence in Europe, which we plan to leverageto benefit many of our product and service offerings.  We acquired all of the shares of Lippke for abase purchase price of $802,688.  Inaddition, based on Lippke’s 2004 net profits, we made an earnout payment toLippke’s former parent company of $549,257 near the end of the first quarter of2005 and are obligated to make two future earnout payments based on the shared netprofits of Lippke in the years 2005 and 2006, with a minimum payment amount of100,000 euros ($120,660 at June 30, 2005) per year, and no maximum.  It is anticipated that these earnout paymentswill be made to the former parent company of Lippke at or near the end of thefirst quarters of 2006 and 2007.

 

We have threeprimary operating locations in the United States – Minnesota, Colorado, andTexas – and one in Germany.  We primarilyuse a direct sales force to market our products and services in the UnitedStates, Canada and Germany and use a network of independent representatives tomarket and service our products and services in other foreign countries.  Our international sales have historicallyaccounted for a significant portion of our revenues and we expect this trend tocontinue for the foreseeable future, especially as a result of our acquisitionof Lippke, which thus far has had, and is expected to continue to have, apositive impact on our sales in 2005.

 

### *OverallSummary of Financial Results for Second Quarter and First Half of 2005*

###  

Sales for thesecond quarter of 2005 were $6,382,302 an increase of 5% compared to $6,091,834for the second quarter of 2004.  Theincrease is primarily the result of increased sales of our headspace analyzerproducts, gas analyzer products, and weighing and pharmaceutical products,offset by a decrease in permeation products and services sales.  Net income was $775,040, a 23% increasecompared to $629,808 in the second quarter of 2004.  Net income per diluted share was $0.14 in thesecond quarter of 2005, a 17% increase compared to $0.12 for the same period in2004.

 

9

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Six-month salesincreased 9% to $12,826,697 compared to $11,806,956 for the first six months of2004.  The increase is primarily theresult of increased sales of our gas analyzer, headspace analyzer, leakdetection, and weighing and pharmaceutical products.  Net income and net income per diluted sharewere $1,569,211 and $0.28, respectively, for the first half of 2005, up 62% and56% compared to $965,993 and $0.18 during the same period in 2004.

 

### *Resultsof Operations*

###  

The followingtable sets forth the relationship between various components of our results ofoperations, stated as a percent of sales, for the three- and six-month periodsended June 30, 2005, and 2004. 

 
| ** **                                             | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                             | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales                                                  |       | 100.0                                 |       | 100.0                               |       | 100.0 |   | 100.0 |   |
| Cost of  sales                                         |       | 44.6                                  |       | 44.5                                |       | 44.7 |   | 45.7 |   |
| Gross profit                                           |       | 55.4                                  |       | 55.5                                |       | 55.3 |   | 54.3 |   |
| Selling,  general, and administrative expenses         |       | 32.5                                  |       | 33.4                                |       | 32.4 |   | 35.2 |   |
| Research and  development expenses                     |       | 6.2                                   |       | 6.0                                 |       | 6.4 |   | 6.0 |   |
| Operating  income                                      |       | 16.7                                  |       | 16.1                                |       | 16.5 |   | 13.1 |   |
| Other income                                           |       | 1.6                                   |       | 0.9                                 |       | 1.6 |   | 0.6 |   |
| Income before  income taxes                            |       | 18.3                                  |       | 17.0                                |       | 18.1 |   | 13.7 |   |
| Income taxes                                           |       | 6.1                                   |       | 5.8                                 |       | 4.8 |   | 4.6 |   |
| Income from  continuing operations                     |       | 12.2                                  |       | 11.2                                |       | 13.3 |   | 9.1 |   |
| Loss from  discontinued operations                     |       | (0.2                                  | )          | (1.4                                | )          | (1.7 | ) | (1.4 | ) |
| Income tax  benefit on loss from disc. operations      |       | 0.1                                   |       | 0.5                                 |       | 0.6 |   | 0.5 |   |
| Loss from  discontinued operations, net of tax benefit |       | (0.1                                  | )          | (0.9                                | )          | (1.1 | ) | (0.9 | ) |
| Net income                                             |       | 12.1                                  |       | 10.3                                |       | 12.2 |   | 8.2 |   |

###  

### *Sales*

###  

Sales for thesecond quarter of 2005 were $6,382,302, up 5% compared to $6,091,834 for the sameperiod in 2004.  On a product line basis,this increase was primarily due to increased domestic sales of our permeation,gas analyzer, headspace and weighing and pharmaceutical products, offsetsomewhat by decreases in the foreign sales of our permeation products andforeign sales of our sample preparation products.  Year-to-date sales were $12,826,697, up 9%compared to $11,806,956 for the same period in 2004.  The increase was primarily due to increaseddomestic sales of our permeation, gas analyzer, headspace analyzer, leakdetection and weighing and pharmaceutical products, offset somewhat bydecreases in the foreign sales of our permeation products, the domestic andforeign sales of our sample preparation products and the domestic sales of ourconsulting and analytical services.  Allof these sales increases were generally the result of increased demand.  There were no significant price increases.

 

10

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Thefollowing table summarizes total sales by product line for the three- andsix-month periods ended June 30, 2005 and 2004.

 
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                   | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Permeation  Products and Services            |       | $                                     | 3,495,579  |                                | $          | 3,821,224 |   | $ | 7,333,911 |   | $ | 7,169,695 |   |
| Gas,  Headspace, and Other Analyzer Products |       | 2,436,760                             |       | 1,631,524                           |       | 4,587,472 |   | 3,342,014 |   |
| Other                                        |       | 449,963                               |       | 639,086                             |       | 905,314 |   | 1,295,247 |   |
| Total sales                                  |       | $                                     | 6,382,302  |                                | $          | 6,091,834 |   | $ | 12,826,697 |   | $ | 11,806,956 |   |

 

The followingtable sets forth the relationship between various components of domestic andforeign sales for the three- and six-month periods ended June 30, 2005 and2004.

 
| ** **           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Domestic  sales      |       | $                                     | 3,432,697  |                                | $          | 2,428,351 |   | $ | 6,537,499 |   | $ | 5,223,892 |   |
| Foreign  sales:      |       |                                  |       |                                |       |   |   |   |   |
| Western  Europe      |       | 1,484,786                             |       | 1,765,261                           |       | 3,001,586 |   | 3,317,320 |   |
| Asia                 |       | 1,042,189                             |       | 1,076,157                           |       | 2,429,186 |   | 1,918,115 |   |
| Other                |       | 422,630                               |       | 822,065                             |       | 858,426 |   | 1,347,629 |   |
| Total  foreign sales |       | 2,949,605                             |       | 3,663,483                           |       | 6,289,198 |   | 6,583,064 |   |
| Total sales          |       | $                                     | 6,382,302  |                                | $          | 6,091,834 |   | $ | 12,826,697 |   | $ | 11,806,956 |   |

 

Sales of ourpermeation products and services which accounted for approximately 55% and 63%of our consolidated second quarter sales in 2005 and 2004, respectively,decreased 9% during the second quarter of 2005 compared to the same period in2004.  This was due primarily todecreased sales into Western European and other foreign markets as a result ofdecreased demand, which we believe was primarily due to weaknesses in some ofthese economies, offset somewhat by an increase in sales to a stronger domesticmarket.  Sales of our gas, headspace, andother analyzer products  which accountedfor 38% and 27% of our consolidated second quarter sales in 2005 and 2004,respectively, increased 49% during the second quarter of 2005 compared to thesame period in 2004. Within this group, headspace analyzer, gas analyzer andweighing and pharmaceutical products increased 84%, 33% and 82%, respectively.  This increase was mostly due to an increasein sales to our domestic markets.

 

For the six-monthperiods, sales of our permeation products and services, which accounted forapproximately 57% and 61% of our consolidated sales in 2005 and 2004,respectively, increased 2%.  Thisincrease was due primarily to an increase in sales to our domestic markets,offset somewhat by a decrease in sales to our Western European and otherforeign markets.  Sales of our gas,headspace, and other analyzer products, which accounted for 36% and 28% of ourconsolidated six-month sales in 2005 and 2004, respectively, increased26%.   Within this group, gas analyzer,headspace analyzer, leak detection and weighing and pharmaceutical productsincreased 26%, 43%, 49% and 60% respectively. These increases were due mostly to sales in our domestic markets.

 

On a geographicalbasis, total foreign sales, which accounted for 46% and 60% of our consolidatedsecond quarter sales in 2005 and 2004, respectively, were down 19% during thesecond quarter of 2005 compared to the same period in 2004. This decrease wasdue primarily to a 28% decrease in sales of permeation products to our WesternEuropean and other foreign markets. Total domestic sales accounted for 54% and 40% of our consolidatedsecond quarter sales in 2005 and 2004, respectively, and were up 41%.  This domestic sales increase was primarilydue to increased sales of

 

11

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permeation, gasanalyzer and headspace analyzer products.

 

Total foreignsales, which accounted for 49% and 56% of our consolidated sales during thefirst six month of 2005 and 2004, respectively, were down 4% during the firstsix months of  2005 compared to the sameperiod in 2004.  This decrease was dueprimarily to decreased sales of our permeation and sample preparation products,offset partially by an increase in leak detection products.  Total domestic sales accounted for 51% and44% of our consolidated sales during the first six months in 2005 and 2004,respectively, and were up 25% during the first six months of 2005 compared tothe same period in 2004.  This domesticsales increase was primarily due to increased sales of permeation, gasanalyzer, and headspace analyzer products.

 

### *GrossProfit*

###  

Our gross profitmargins were consistent at 55.4% and 55.5% for the second quarters ended June 30,2005 and 2004, respectively.  The grossprofit margin for our consulting services was 56.9% for the quarter ended June 30,2005, compared to 49.6% for the same period in 2004.  This increase was primarily due to decreasedheadcount in the second quarter of 2005 as compared to 2004.

 

Our gross profitmargins for the six-month periods ended June 30, 2005 and 2004 were 55.3%and 54.3%, respectively.  The slightlylower margin for the previous period was primarily due to costs related to theacquisition of Lippke, including the write-off of costs assigned to finishedgoods inventory under purchase accounting rules, costs associated with therelocation of our Lab Connections subsidiary to Texas in the first quarter of2004, and additional costs associated with moving a portion of our Baselinesubsidiary’s manufacturing to Minneapolis, Minnesota.  The gross profit margin for our consultingservices was 45.9% and 50.9%, respectively, for the six-month periods ended June 30,2005 and June 30, 2004.  Thisdecrease was primarily due to higher overall headcount and higher maintenanceand supply expenses in the first half of 2005, as compared to the first half of2004.

 

*Selling, General and Administrative Expenses*

 

### Selling, generaland administrative (SG&A) expenses in the second quarter of 2005 were$2,074,736, or 32.5% of sales, compared to $2,034,663, or 33.4% of sales in thesecond quarter of 2004.  The percentagedecrease in SG&A expenses was primarily due to decreased sales expenses,including costs in the second quarter of 2004 associated with the acquisitionof Lippke, including amortization related to various purchased intangibles of$44,000, which did not reoccur in the second quarter of 2005, and also to lowerheadcount and marketing costs in 2005, offset by an increase in general andadministrative expenses, primarily related to recently enacted changes insecurities laws and regulations.

###  

### Selling, generaland administrative (SG&A) expenses in the first six months of 2005 were$4,157,324, or 32.4% of sales, compared to $4,154,046, or 35.2% of sales in thesame period of 2004.  The percentagedecrease in SG&A expenses was primarily due to decreased sales expenses,including costs in the first half of 2004 associated with the acquisition ofLippke, including amortization of $61,000 related to purchased backlog and$88,000 related to various purchased intangibles, which did not reoccur in thefirst half of 2005, and also to lower headcount and marketing costs in 2005,offset by an increase in general and administrative expenses, primarily relatedto recently enacted changes in securities laws and regulations.

###  

### *Researchand Development Expenses*

###  

Research anddevelopment (R&D) expenses were $397,224, or approximately 6.2% of sales,in the second quarter of 2005, compared to $366,057, or approximately 6.0% ofsales, in the same period of 2004.  Forthe first six months of 2005,  R&Dexpenses were $817,852, or 6.4% of sales, compared to $707,129, or 6.0% ofsales, for the first six months of 2004. This planned increase in R&D

 

12

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expenditures isconsidered necessary to develop new products to expand in our nichemarkets.  For the foreseeable future, weexpect to allocate on an annual basis approximately 6% to 8% of sales toresearch and development.

 

### *OtherIncome*

###  

Other income forthe three months ended June 30, 2005 consisted of interest income of$45,303, gain on foreign currency exchange of $15,432, gain on sale of fixedassets of $41,898, and other income of $4,051. Other income for the six months ended June 30, 2005 consisted ofinterest income of $83,230, gain on foreign currency exchange of $57,001, gainon sale of fixed assets of $41,898, and other income of $15,760.  Interest income increased from $52,112 forthe six months ended June 30, 2004, primarily due to higher average yieldson higher cash balances.

 

### *IncomeTax Expense*

###  

Our provision forincome taxes from continuing operations was 33.1% of income before income taxesfor the three months ended June 30, 2005, compared to 34.0% of incomebefore income taxes for the three months ended June 30, 2004.  The slightly lower rate for the most recentperiod was  primarily due to a newly enactedtax law which was effective January 1, 2005.

 

Our provision forincome taxes from continuing operations was 26.3% of income before income taxesfor the six months ended June 30, 2005, compared to 34.0% of income beforeincome taxes for the six months ended June 30, 2004. The rate for thefirst half of 2005 was favorably impacted by the finalization of an InternalRevenue Service examination which reduced income tax expense by approximately$156,000 in the first quarter of 2005 as well as benefiting from the newlyenacted tax law.  Based on currentoperating conditions and income tax laws, we expect the tax rate for theremaining two quarters of 2005 to be in the range of 33% to 35%.

 

### *NetIncome*

###  

Net income was$775,040 in the second quarter of 2005, compared to $629,808 in the secondquarter of 2004.  Diluted net income pershare was $0.14 per share in the second quarter of 2005 compared to $0.12 pershare in the second quarter of 2004.  Forthe six months ended June 30, 2005, net income was $1,569,211, or $0.28per diluted share, compared to net income of $965,993, or $0.18 per dilutedshare in the prior year.

 

*Liquidityand Capital Resources*

 

We have historically financed our operations and capital equipmentrequirements through our cash flows generated from operations.  Total cash, cash equivalents and marketablesecurities increased $738,954 during the first six months of 2005 to $8,427,673as of June 30, 2005, compared to $7,688,719 at December 31, 2004 duein part to a significant reduction in trade accounts receivable as well as the exerciseof stock options.  Our working capital asof June 30, 2005 increased $1,329,694 to $13,156,966 for the six-monthperiod, as compared to $11,827,272 at December 31, 2004.  We believe that a combination of our existingcash, cash equivalents and marketable securities, plus an expected continuationof cash flow from operations, will continue to be adequate to fund ouroperations, capital expenditures, dividend payments, stock repurchases, andrequired earnout payments to the former parent company of Lippke, for at leastthe next twelve months.  However, one ofour strategic objectives is, as market and business conditions warrant, toconsider acquisitions of businesses, products or technologies.  We may need to fund such activities, shouldthey arise, with debt and/or equity financing.

 

13

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*Cash Flow*

 

Cash Flow from Operating Activities

 

Our primary sourceof funds is cash provided by operations. Cash flow from operations totaled $1,376,002 and $2,358,931 in the firstsix months of 2005 and 2004, respectively. The net cash provided by trade accounts receivable was primarily due todecreased sales in the second quarter of 2005 as compared to the fourth quarterof 2004.  The net cash used for inventorywas primarily due to increases in work-in-process inventory. The net cash usedby other accrued expenses was due primarily to the reclassification of thesecond of three required minimum earnout payments to the former parent companyof Lippke from noncurrent liabilities. The net cash used by income taxes was due primarily to income taxpayments made during the first six months of 2005.

 

### Cash Flow fromInvesting Activities

###  

Cash used ininvesting activities totaled $1,557,431 and $538,246 in the first six months of2005 and 2004, respectively.  Purchasesof marketable securities, net of maturities, were $1,464,861 in the first halfof 2005.  Purchases of property, plantand equipment totaled $144,563 in the first half of 2005, primarily foradditions of office, manufacturing and laboratory equipment, as compared to$191,793 in the first half of 2004.

 

As part of the purchase price for theacquisition of Lippke in 2004, we were obligated to make three future earnoutpayments to Lippke’s former parent company based on the shared net profits ofLippke in each of the years 2004, 2005, and 2006, with a minimum earnoutpayment amount of 100,000 euros per year, and no maximum. The present value ofthese future minimum earnout payments was included in cash paid inacquisitions, net of cash acquired, in the investing activities section ofour consolidated statements of cash flows, at the time of the acquisition.  Actual earnout amounts due in excess of theminimums, if any, will be reflected as an increase in cash paid inacquisitions, net of cash acquired, in the investing section of ourconsolidated statements of cash flows, in the fourth quarters of 2004, 2005 and2006 respectively, when the actual earnout amount is calculated, and the relatedadditional liability is accrued.  Theearnout payment related to the 2004 net profits was made in the first quarterof 2005, and it is anticipated that the remaining two earnout payments will bemade in the first quarters of 2006 and 2007, respectively.

 

We had no materialcommitments for capital expenditures as of June 30, 2005.  We presently do not believe that anysignificant property, plant and equipment expenditures are required toaccommodate our current level of operations.

 

Cash Flow from FinancingActivities

 

Cash used infinancing activities consists primarily of the payment of dividends to ourshareholders.  During the first sixmonths of 2005 and 2004, we made dividend payments to our shareholders of$747,678 and $703,204, respectively.

 

A final dividendpayment was also made to Lippke’s former parent company in the first quarter of2004 totaling $449,087.  This payment wasfor 2003 profits earned by Lippke prior to the acquisition, was paid by Lippketo its former parent company as a dividend in 2004, and has accordingly beenreflected in the financing activities section of our consolidatedstatements of cash flows as a dividend payment to former owners.

 

Our Board of Directors has authorized, depending upon market conditionsand other factors, the repurchase of up to a total of $3,200,000 of our commonstock at prices not exceeding prevailing market prices at the time ofpurchase.  There were no repurchases ofour common stock during the second quarter of 2005.  As of June 30, 2005, $1,672,034 wasremaining in this authorization.

 

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*ContractualObligations*

 

We refer you toour Annual Report on Form 10-K for the year ended December 31, 2004for a summary of our contractual obligations. Except for the earnout payment paid in connection with the Lippkeacquisition, there has been no material change in this information.

 

### *Off-BalanceSheet Arrangements*

###  

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

 

*CriticalAccounting Policies*

 

The preparation ofour consolidated financial statements requires management to make estimates andjudgments that affect the reported amount of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities.  The Securities and Exchange Commission hasdefined a company’s most critical accounting policies as those that are mostimportant to the portrayal of its financial condition and results ofoperations, and which require the company to make its most difficult andsubjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, we have identified the following criticalaccounting policies.  Although we believethat our estimates and assumptions are reasonable, they are based uponinformation available when they are made. Actual results may differ significantly from these estimates underdifferent assumptions or conditions.

 

Allowance fordoubtful accounts and sales returns – This reserve is for accounts receivablebalances that are estimated to be uncollectible as well as estimated salesreturns.  This reserve is based on anumber of factors, including: (1) an analysis of customer accounts and (2) ourhistorical experience with accounts receivable write-offs and salesreturns.  The analysis includes the ageof the receivable, the financial condition of a customer or industry, andgeneral economic conditions.  We believethe results could be materially different if historical trends do not reflectactual results or if economic conditions worsened for our customers.  In the event we determined that a smaller orlarger allowance for doubtful accounts and sales returns is appropriate, wewould record a credit or charge to selling, general and administrative expensein the period that we made such a determination.  As of June 30, 2005, we had $206,101reserved against our accounts receivable for doubtful accounts and salesreturns.

 

Allowance forexcess and obsolete inventories – We perform an analysis to identify inventoryshrinkage, and excess and obsolete inventory. We record a charge to cost of sales for amounts identified.  Our analysis includes inventory levels, thenature of the finished product and its inherent risk of obsolescence, the grossmargin of the product, and the on-hand quantities relative to the sales historyof that finished product.  We believethat the operating results could be materially different if historical trendsdo not reflect actual results or if demand for our products decreased because ofeconomic or competitive conditions or otherwise.  Our allowance for excess and obsoleteinventories at June 30, 2005 was $728,869.

 

Recoverability of long-lived assets – We assess the recoverability ofgoodwill and other long-lived assets annually or whenever events or changes incircumstances indicate that expected future undiscounted cash flows might notbe sufficient to support the carrying amount of an asset.  We deem an asset to be impaired if a forecastof undiscounted future operating cash flows is less than an asset’s carryingamount.  If an asset is determined to beimpaired, the loss is measured as the amount by which the carrying value of theasset exceeds its fair value.  During thefirst quarter of 2005, we incurred a non-cash asset impairment charge of$162,000 relating to equipment and inventory used in our Vaculok vacuuminsulated panels business as a result of our decision during that quarter todiscontinue the product line.  Changes inour business strategies and/or changes in the economic

 

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environment in which we operate may result in future impairmentcharges.

 

Accrued productwarranties – Our products are generally covered by a warranty, with warrantyperiods ranging from ninety days to one year from the date of sale.  Estimated warranty costs are accrued in thesame period in which the related revenue is recognized, based on anticipatedparts and labor costs, utilizing historical experience.  Special warranty reserves are also accrued formajor rework campaigns.  We periodicallyassess the adequacy of our warranty reserves based on changes in these factorsand record any necessary adjustment if actual claim experience indicates thatadjustments are necessary.  Although webelieve the likelihood to be relatively low, warranty claims experience couldbe materially different from actual results due to manufacturing changes thatcould impact product quality, a change in our warranty policy in response toindustry trends, as yet unrecognized defects in products sold, or other factors.  As of June 30, 2005, we had $344,192accrued related to future estimated warranty claims.

 

Income taxes – Inthe preparation of our consolidated financial statements, management isrequired to estimate income taxes in each of the jurisdictions in which weoperate.  This process involvesestimating actual current tax exposures together with assessing temporarydifferences resulting from different treatment of items for tax and accountingpurposes.  These differences result indeferred tax assets and liabilities, which are included in our consolidatedbalance sheet.

 

We havesignificant amounts of deferred tax assets. Management reviews the deferred tax assets for recoverability on aquarterly basis and assesses the need for valuation allowances.  These deferred tax assets are evaluated byconsidering historical levels of income, estimates of future taxable incomestreams and the impact of tax planning strategies.  A valuation allowance is recorded to reducedeferred tax assets when it is determined that it is more likely than not thatwe would not be able to realize all or part of its deferred tax assets.  We carried no valuation allowance against ournet deferred tax assets at either June 30, 2005 or 2004.

 

*New AccountingPronouncements*

 

In June 2005,the FASB issued SFAS No. 154, *AccountingChanges and Error Corrections – a replacement of APB No. 20 and SFAS No. 3. *SFAS 154 provides guidance on theaccounting for and reporting of accounting changes and error corrections. Itestablishes, unless impracticable, retrospective application as the requiredmethod for reporting a change in accounting principle in the absence ofexplicit transition requirements specific to the newly adopted accountingprinciple.  SFAS 154 also providesguidance for determining whether retrospective application of a change inaccounting principle is impracticable and for reporting a change whenretrospective application is impracticable. The correction of an error in previously issued financial statements isnot an accounting change.  However, thereporting of an error correction involves adjustments to previously issuedfinancial statements similar to those generally applicable to reporting anaccounting change retrospectively, Therefore, the reporting of a correction of an error by restatingpreviously issued financial statements is also addressed by SFAS 154.  SFAS 154 is required to be adopted in fiscalyears beginning after December 15, 2005. Adoption of SFAS 154 is not expected to have a material effect on ourfinancial 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 abnormalamounts of idle facility expense, freight, handling costs, and wasted material(spoilage) should be recognized as current period charges, and that fixedproduction overheads should be allocated to inventory based on normal capacityof production facilities.  This statementis effective for inventory costs incurred during fiscal years beginning after June 15,2005.  Accordingly, we will adopt SFAS151 in the fiscal year beginning January 1, 2006.  Adoption of SFAS 151 is not expected to havea material effect on our financial position, results of operations or cashflows.

 

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In December 2004,the FASB issued SFAS No. 123 (revised 2004), *Share–BasedPayments* (FAS 123(R)), which is a revision of FASB Statement No. 123,*Accounting for Stock-Based Compensation*.  FAS 123(R) supercedes  APB Opinion No. 25, *Accountingfor Stock Issued to Employees* and amends FAS Statement No. 95, *Statement of Cash Flows*. FAS 123(R) requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the income statementbased on their fair values and the pro forma disclosure is no longerallowable.  FAS 123(R) is effective atthe beginning of the first  annual periodafter June 15, 2005.  We expect toadopt FAS 123(R) on January 1, 2006. We are currently evaluating the impact of the adoption ofFAS 123(R), which will result in additional pre-tax compensation expensein fiscal 2006 for remaining unvested stock options and any future stock optiongrants.  The ultimate amount of increasedcompensation expense will be dependent on the number of option shares granted,their timing and vesting periods, and the method used to calculate the fairvalue of the awards, among other things.

 

### *Forward-Looking Statements*

###  

This Quarterly Report onForm 10-Q contains or incorporates by reference not only historicalinformation, but also forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934, and are subject to the safe harbor created by those statutes.  In addition, we or others on our behalf maymake forward-looking statements from time to time in oral presentations,including telephone conferences and/or web casts open to the public, in pressreleases or reports, on our internet website or otherwise.  Statements that are not historical areforward-looking and reflect expectations and assumptions.  We try to identify forward-looking statementsin 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 inthis report include, but are not limited to, statements regarding ourinternational sales continuing to account for a significant portion of ourrevenues, our acquisition of Lippke continuing to have a positive impact on oursales in 2005, our expected Section 404 compliance costs and increasedgeneral and administrative expenses associated with the Sarbanes-Oxley Act of2002 and other securities and corporate governance rules and regulationscompliance, our allocation of 6% to 8% of our sales to research and developmentexpenses, our expected tax rate for the remaining two quarters of 2005 being inthe range of 33% to 35%, our need not to make future capital expenditures toaccommodate our current level of operations, and our expectations regardingfuture cash expenditures.

 

Forward-lookingstatements involve risks and uncertainties. These uncertainties include factors that affect all businesses as wellas matters specific to MOCON.  Below aresome of the factors known to us that could cause our actual results to differmaterially from what we have anticipated in our forward-lookingstatements.  We wish to caution readersnot to place undue reliance on any forward-looking statement that speaks onlyas of the date made and to recognize that forward-looking statements arepredictions of future results, which may not occur as anticipated.  Actual results could differ materially fromthose anticipated in the forward-looking statements and from historicalresults, due to the risks and uncertainties described below, as well as othersthat we may consider immaterial or do not anticipate at this time.  The following risks and uncertainties are notexclusive and further information concerning us and our business, includingfactors that potentially could materially affect our financial results or condition,may emerge from time to time.  We assumeno obligation to update forward-looking statements to reflect actual results orchanges in factors or assumptions affecting such forward-lookingstatements.  We advise you, however, toconsult any further disclosures we make on related subjects in our quarterlyreports on Form 10-Q and current reports on Form 8-K we file with orfurnish to the Securities and Exchange Commission.

 

***If we experience any increase in the cost of rawmaterials or supplies, we may experience a decrease in profit margins.***

 

In the past, the overall cost of the materials that we purchase has notrisen much more than the rate of

 

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inflation, although the price of some of the components that wepurchase has increased in the past several years due in part to our purchasingfewer of such components.  Certain othermaterial and labor costs have increased, but we believe that such increases areapproximately consistent with overall inflation rates.  We believe that the price of our products andthe prices of our competitors’ products is a significant factor affecting ourcustomers’ buying decisions and consequently, we may not be able to pass alongany cost increases in the form of price increases or sustain profit marginsthat we have achieved in prior years.

 

***The markets in which we operate haveexperienced minimal growth in recent years, and our ability to increase ourrevenues will depend in part on our ability to develop new products, developnew applications for our existing products and to acquire complementarybusinesses and product lines.***

 

The analytical and measurement instrument markets in which we operatehave not shown significant growth in recent years. Although we have identifieda number of strategies that we believe will allow us to grow our business andincrease our sales, including developing new products and technologies,developing new applications for our technologies, acquiring complementarybusinesses and product lines, and strengthening our sales force, we cannotassure you that we will be able to successfully implement these strategies, orthat these strategies will result in the growth of our business or an increasein sales.

 

***If we acquire businesses in the future, wemay experience a decrease in our profit margins, a decrease in our net income,and other adverse consequences.***

 

One of our growth strategies is to supplement our internal growth withthe acquisition of businesses and technologies that complement or augment ourexisting products.  Some of the businessesthat we previously acquired have produced net operating losses or low levels ofprofitability.  For example, the Vaculokvacuum insulated panel business that we acquired in November 2003financially performed poorly, resulting in our decision to discontinue theproduct line during the first quarter of 2005. Businesses that we may acquirein the future may be marginally profitable or unprofitable.  We will likely have to successfully changethe operations of any companies that we acquire in the future and improve themarket penetration of such companies in order to achieve the level ofprofitability that we desire.  This couldresult in the diversion of management’s attention from other businessconcerns.  In addition, acquisitions thatwe believe will be beneficial to our business and financial results aredifficult to identify and complete for a number of reasons, including thecompetition among prospective buyers.  Wemay not be able to complete acquisitions in the future and any acquisitionsthat we do complete may have an adverse effect on our financial performance andliquidity.  It may be necessary for us toraise additional funds either through public or private financing in order tofinance any future acquisitions.  Anyequity or debt financing, if available at all, may be on terms that are notfavorable to us and may dilute the ownership of our existing shareholders.

 

***We face risks of technological changesthat may render our products obsolete.***

 

The markets for our products and services are characterized by rapidand significant technological change and evolving industry standards.  As a result of such changes and evolvingstandards, our products may become noncompetitive or obsolete and we may haveto develop new products in order to maintain or increase our revenues.  New product introductions that are responsiveto these factors require significant planning, design, development and testingat the technological, product, and manufacturing process levels and we may notbe able to timely develop new products. In addition, industry acceptance of new technologies that we may developmay be slow to develop due to, among other things, existing regulations orstandards written specifically for older technologies and general unfamiliarityof users with new technologies.  As aresult, any new products that we may develop may not generate any meaningfulrevenues or profits for us for a number of years, if at all.

 

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***Any reduction in the level of capital expendituresby our customers could negatively impact our sales.***

 

Our customers include pharmaceutical, food, medical, and chemicalcompanies, laboratories, government agencies, and public and private researchinstitutions.  The capital spending ofthese entities can have a significant effect on the demand for ourproducts.  Any decrease in capitalspending by any of these customer groups could have a material adverse effecton our business and results of operations.

 

***A significant portion of our sales are generatedfrom foreign countries and selling in foreign countries entails a number ofrisks which could result in a decrease in our sales or an increase in ouroperating expenses.***

 

Sales outside the United States accounted for approximately 46% of oursales for the three months ended June 30, 2005 and approximately 60% ofour sales for the same period in 2004.  We expect that foreign sales will continue toaccount for a significant portion of our sales in the future.  Sales to customers in foreign countries aresubject to a number of risks, including the following:

 

•                    agreements may be difficult to enforce;

•                    receivables may be difficult to collect;

•                    certain regions are experiencing political unrest and conflict;

•                    foreign customers may have longer payment cycles;

•                    the countries into which we sell may impose tariffs or adopt otherrestrictions on foreign trade;

•                    currency fluctuations could reduce reported profitability in futureperiods;

•                    fluctuations in exchange rates may affect product demand;

•                    export licenses, if required, may be difficult to obtain and;

•                    protection of intellectual property in foreign countries may be moredifficult to enforce.

 

If any of theserisks were to materialize, our sales into foreign countries could decline, orour operating costs could increase, which would adversely affect our financialresults.

 

***Some of our competitors have greaterresources than we do, which may provide our competitors with an advantage inthe development and marketing of new products.***

 

We currently encounter, and expect to continue to encounter,competition in the sale of our products. We believe that the principal competitive factors affecting the marketfor our products include product quality and performance, price, reliabilityand customer service.  Our competitorsinclude large multinational corporations. Some of our competitors have substantially greater financial, marketing,and other resources than we do.  As aresult, they may be able to adapt more quickly to new or emerging technologiesand changes in customer requirements, or to devote greater resources to thepromotion and sale of their products than we can.  In addition, competition could increase ifnew companies enter the market or if existing competitors expand their productlines or intensify efforts within existing product lines.  Our current products, products underdevelopment and our ability to discover new technologies may be insufficient toenable us to compete effectively with our competitors. 

 

***Our reliance upon patents,domestic trademark laws and contractual provisions to protect our proprietaryrights may not be sufficient to protect our intellectual property from otherswho may sell similar products.***

 

We hold patents relating to various aspects of our products and believethat proprietary technical know-how is critical to many of our products.  Proprietary rights relating to our productsare protected from unauthorized use by third parties only to the extent thatthey are covered by valid and enforceable patents or are maintained inconfidence as trade secrets.  We cannotbe certain that we will be issued

 

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any patents from any pending or future patent applications owned by orlicensed to us or that the claims allowed under any issued patents will besufficiently broad to protect our technology. In the absence of patent protection, we may be vulnerable to competitorswho attempt to copy our products or gain access to our trade secrets and know-how.  Our competitors may initiate litigation tochallenge the validity of our patents, or they may use their resources todesign comparable products that do not infringe our patents.  We may incur substantial costs if ourcompetitors initiate litigation to challenge the validity of our patents or ifwe initiate any proceedings to protect our proprietary rights and if theoutcome of any such litigation is unfavorable to us, our business and resultsof operations could be materially adversely affected.  There may also be pending or issued patentsheld by parties not affiliated with us that relate to our products ortechnologies and we may need to acquire licenses to any such patents tocontinue selling some or all of our products. If we had to obtain any such license in order to be able to continue tosell some or all of our products, we may not be able to do so on terms thatwere favorable to us, if at all.

 

In addition, we rely on trade secrets and proprietary know-how that weseek to protect, in part, by confidentiality agreements with our collaborators,employees, and consultants.  Theseagreements may be breached and we may not have adequate remedies for any suchbreach.  Even if these confidentialityagreements are not breached, our trade secrets may otherwise become known or beindependently developed by competitors.

 

***The market price of our commonstock has fluctuated significantly in the past and will likely continue to doso in the future and any broad market fluctuations may materially adverselyaffect the market price of our common stock.***

 

The market price of our common stock has beenvolatile in the past, ranging from a high sales price of $10.43 and a low salesprice of $8.76 during the second quarter of 2005, and several factors couldcause the price to fluctuate substantially in the future.  These factors include:

•                    announcements of new products by us or our competitors;

•                    quarterly fluctuations in our financial results;

•                    customer contract awards;

•                    developments in regulation; and

•                    general economic and political conditions in the various markets whereour products are sold.

 

In addition, the stock prices of instrumentation companies haveexperienced significant price and volume fluctuations that often have beenunrelated to the operating performance of such companies.  This market volatility may adversely affectthe market price of our common stock.

 

***Recently enacted and future changes insecurities laws and regulations have increased and are likely to continue toincrease our costs.***

 

Changing laws, regulations and standards relatingto corporate governance and public disclosure, including the Sarbanes-Oxley Actof 2002, new SEC regulations and Nasdaq National Market rules, are creatingchallenges for publicly-held companies including us.  We are committed to maintaining highstandards of corporate governance and public disclosure.  As a result, our efforts to comply withevolving laws, regulations and standards have resulted in, and are likely tocontinue to result in, increased general and administrative expenses and adiversion of management time and attention from revenue-generating activitiesto compliance activities.  In particular,our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002and the related regulations regarding our assessment of our internal control overfinancial reporting and our independent registered public accounting firm’sreport on that assessment will require the commitment of significant financialand managerial resources.  We currentlyestimate that Section 404 compliance costs will be approximately $250,000in 2005, and expect that Section 404 compliance will require significantongoing financial and managerial resources in 2006 and beyond.

 

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Item 3.  Quantitative andQualitative Disclosures About Market Risk

 

*Equity Price and Interest Rate Risk*

 

Substantially all of ourmarketable securities are at fixed interest rates and virtually all of ourmarketable securities mature within one year or less; therefore, we believethat the market risk arising from the holding of these financial instruments isminimal.

 

### *ForeignCurrency Exchange Risk*

###  

Because our products aremanufactured or sourced primarily from the United States, a stronger U.S.dollar generally has a negative impact on our results from operations outsideof the United States while a weaker dollar generally has a positiveeffect.  We currently sell our productsand services in United States dollars or the local currency of our foreignsubsidiary (Euros).  Accordingly, ourforeign operations expose us to foreign currency exchange risk when the Eurocurrency results of operations are translated to United States dollars.  While we historically have not experiencedany material foreign currency translation losses, we may engage in hedgingactivity in the future to minimize this risk. Our net investment in foreign subsidiary translated into U.S. dollars isnot hedged.  Any changes in foreigncurrency exchange rates will be reflected as a foreign currency translationadjustment, a component of accumulated other comprehensive income instockholders’ equity, and would not impact our net income.

 

Item 4.  Controls andProcedures

 

*Evaluation of Disclosure Controls andProcedures*

 

We maintain disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) that are designed to ensure that information required to bedisclosed by us in the reports we file or submit under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized, and reported,within the time periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, werecognize that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and we necessarily are required to apply our judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  Our management evaluated,with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered in this QuarterlyReport on Form 10-Q.  Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end ofsuch period.

 

*Changes in Internal Control Over FinancialReporting*

 

There was no change inour internal control over financial reporting that occurred during our quarterended June 30, 2005 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

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

 

*Unregistered Sales of Equity Securities*

 

We did not sellany equity securities of MOCON, Inc. during the three months ended June 30,2005 that were not registered under the Securities Act of 1933.

 

*Issuer Repurchases of Equity Securities*

 

Wedid not repurchase any equity securities of MOCON, Inc. during the threemonths ended June 30, 2005.  In November 2002,our Board of Directors authorized the repurchase of up to $2,000,000 of ourcommon stock in the open market at prices not exceeding the market price at thetime of purchase.  In May 2003, ourBoard of Directors authorized a $1,200,000 increase in our stock repurchaseprogram, increasing the total to $3,200,000. As of June 30, 2005, we had repurchased 204,000 shares of MOCONcommon stock under the program at a total cumulative cost of approximately$1,527,966.  The repurchase program doesnot have an expiration date and the Board may terminate it at any time.

 

Item4.  Submission of Matters to a Vote ofSecurity Holders

 

Atthe Annual Meeting of Shareholders of MOCON, Inc. on May 17, 2005,the nominees for election as directors of the company were elected withoutopposition as follows:

 
| **Director-Nominee** | ** ** | **Votes For** | ** ** | **Votes Withheld/Against** |
|----------------------|------------|---------------|------------|----------------------------|
|                 |       |          |       |                       |
| Robert L. Demorest   |       | 4,894,529     |       | 39,052                     |
| Dean B. Chenoweth    |       | 4,869,157     |       | 64,424                     |
| J. Leonard Frame     |       | 4,892,579     |       | 41,002                     |
| Richard A. Proulx    |       | 4,892,216     |       | 41,365                     |
| Tom C. Thomas        |       | 4,894,129     |       | 39,452                     |
| Ronald A. Meyer      |       | 4,876,329     |       | 57,252                     |
| Daniel W. Mayer      |       | 4,894,529     |       | 39,052                     |

 

The proposal to ratifythe selection of KPMG LLP as the independent auditors for the fiscal yearending December 31, 2005 was adopted as follows:

 
| For the proposal:     |   | 4,902,969  shares |
|-----------------------|--------|-------------------|
| Against the proposal: |   | 16,187  shares    |
| Abstaining:           |   | 14,425  shares    |

 

We received no broker non-votes with respectto the above proposals.

 

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Item 6.             Exhibits

 
| 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-Oxley Act of 2002 |
| 32.2 |   | Certification of Chief Financial Officer  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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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 theundersigned thereunto duly authorized.

 

 
|                       | MOCON, INC.                                   |
|----------------------------|-----------------------------------------------|
|                       |                                          |
|                       |                                          |
| Date: August 15, 2005 | /s/ Robert L. Demorest                        |   |
|                       | Robert L. Demorest                            |
|                       | Chairman, President and Chief                 |
|                       | Executive Officer                             |
|                       | (Principal Executive Officer)                 |
|                       |                                          |
|                       |                                          |
| Date: August 15, 2005 | /s/ Dane D. Anderson                          |   |
|                       | Dane D. Anderson                              |
|                       | Vice President, Treasurer and Chief           |
|                       | Financial Officer                             |
|                       | (Principal Financial and Accounting  Officer) |

 

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MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED JUNE 30,2005

 

EXHIBIT INDEX

 
| **Exhibit  No.** | ** ** | **Description**                                                                                          | ** ** | **Method of  Filing** | ** ** |
|------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| 31.1             |       | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 |       | Filed herewith        |       |
| 31.2             |       | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 |       | Filed herewith        |       |
| 32.1             |       | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 |       | Furnished herewith    |       |
| 32.2             |       | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 |       | Furnished herewith    |       |

 

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