SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission file number: 1-10986
MISONIX, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-2148932
--------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1938 New Highway, Farmingdale, NY 11735
--------------------------------- -----
(Address of principal executive offices) (Zip Code)
(631) 694-9555
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Outstanding at
Class of Common Stock May 1, 2003
--------------------- --------------
Common Stock, $.01 par value 6,640,865
1
MISONIX, INC.
-------------
INDEX
-----
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
March 31, 2003 (Unaudited) and June 30, 2002 3
Consolidated Statements of Operations
Nine months ended March 31, 2003
and 2002 (Unaudited) 4
Consolidated Statements of Operations
Three months ended March 31, 2003
and 2002 (Unaudited) 5
Consolidated Statements of Cash Flows
Nine months ended March 31, 2003
and 2002 (Unaudited) 6-7
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial Condition 14-24
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28-31
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MISONIX, INC.
CONSOLIDATED BALANCE SHEETS
===========================
MARCH 31, June 30,
2003 2002
------------ ------------
ASSETS (UNAUDITED)
------------ ------------
Current assets:
Cash and cash equivalents $ 2,160,903 $ 1,065,465
Accounts receivable, less allowance for doubtful accounts of $344,792 and
$223,413, respectively 6,428,598 6,656,932
Inventories 9,452,396 7,170,844
Prepaid income taxes 306,900 1,391,978
Deferred income taxes 467,275 388,027
Prepaid expenses and other current assets 1,060,201 715,367
------------ ------------
Total current assets 19,876,273 17,388,613
Property, plant and equipment, net 3,369,137 3,151,909
Deferred income taxes 571,029 1,757,937
Goodwill 4,473,713 4,241,319
Other assets 304,115 424,674
------------ ------------
Total assets $28,594,267 $26,964,452
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities $ 706,083 $ 730,092
Accounts payable 3,564,666 3,072,234
Accrued expenses and other current liabilities 1,369,478 1,304,824
Litigation settlement liabilities 170,000 174,332
Current maturities of long-term debt and capital lease obligations 258,965 252,850
------------ ------------
Total current liabilities 6,069,192 5,534,332
Long-term debt and capital lease obligations 1,161,527 1,050,254
Deferred income 455,335 451,073
Minority interest 235,757 239,965
Stockholders' equity:
Common stock, $.01 par value-shares authorized 10,000,000; 6,718,665 and
6,180,165 issued and 6,640,865 and 6,105,865 outstanding, respectively 67,186 61,802
Additional paid-in capital 22,701,711 22,313,991
Retained deficit (1,612,426) (2,021,059)
Treasury stock, 77,800 and 74,300 shares, respectively (412,424) (401,974)
Accumulated other comprehensive loss (71,591) (263,932)
------------ ------------
Total stockholders' equity 20,672,456 19,688,828
------------ ------------
Total liabilities and stockholders' equity $28,594,267 $26,964,452
============ ============
See accompanying Notes to Consolidated Financial Statements.
3
MISONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
===========
FOR THE NINE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
Net sales $23,932,512 $21,697,278
Cost of goods sold 13,731,118 12,138,803
------------ ------------
Gross profit 10,201,394 9,558,475
Operating expenses:
Selling expenses 3,123,225 3,221,775
General and administrative expenses 4,966,700 4,556,949
Research and development expenses 1,599,766 1,611,305
Litigation (recovery) settlement expenses (201,106) -
------------ ------------
Total operating expenses 9,488,585 9,390,029
------------ ------------
Income from operations 712,809 168,446
Other income (expense):
Interest income 42,722 249,433
Interest expense (132,706) (103,469)
Option/license fees 18,234 18,234
Royalty income 386,424 614,551
Foreign exchange gain 4,807 (408)
Loss on impairment of Hearing Innovations, Inc. (231,982) (370,451)
Loss on impairment of Focus Surgery, Inc. (13,725) (396,975)
------------ ------------
Total other income 73,774 10,915
Income before minority interest and income taxes 786,583 179,361
Minority interest in net loss of consolidated subsidiaries 4,208 25,631
------------ ------------
Income before income taxes 790,791 204,992
Income tax expense 382,158 198,199
------------ ------------
Net income $ 408,633 $ 6,793
============ ============
Net income per share-Basic $ .06 $ -
============ ============
Net income per share - Diluted $ .06 $ -
============ ============
Weighted average common shares outstanding - Basic 6,420,118 6,068,272
============ ============
Weighted average common shares outstanding - Diluted 6,598,608 6,247,761
============ ============
See accompanying Notes to Consolidated Financial Statements.
4
MISONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
===========
FOR THE THREE MONTHS ENDED
MARCH 31,
2003 2002
----------- -----------
Net sales $8,747,677 $7,371,220
Cost of goods sold 4,908,659 4,323,252
----------- -----------
Gross profit 3,839,018 3,047,968
Operating expenses:
Selling expenses 1,090,662 1,164,287
General and administrative expenses 1,814,569 1,551,239
Research and development expenses 583,878 647,108
Litigation (recovery) settlement expenses (48,478) -
----------- -----------
Total operating expenses 3,440,631 3,362,634
----------- -----------
Income (loss) from operations 398,387 (314,666)
Other income (expense):
Interest income 1,324 4,510
Interest expense (45,226) (31,609)
Option/license fees 6,078 6,078
Royalty income 137,779 173,414
Foreign exchange gain (loss) 2,562 (149)
Loss on impairment of Hearing Innovations, Inc. (49,075) (155,811)
Loss on impairment of Focus Surgery, Inc. - (70,273)
----------- -----------
Total other income (expense) 53,442 (73,840)
Income (loss) before minority interest and income taxes 451,829 (388,506)
Minority interest in net income of consolidated
subsidiaries (29,628) (5,099)
----------- -----------
Income (loss) before income taxes 422,201 (393,605)
Income tax expense (benefit) 177,766 (182,833)
----------- -----------
Net income (loss) $ 244,435 $ (210,772)
=========== ===========
Net income (loss) per share-Basic $ .04 $ (.03)
=========== ===========
Net income (loss) per share - Diluted $ .04 $ (.03)
=========== ===========
Weighted average common shares outstanding - Basic 6,643,300 6,096,887
=========== ===========
Weighted average common shares outstanding - Diluted 6,686,981 6,096,887
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
5
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
===========
FOR THE NINE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income $ 408,633 $ 6,793
Adjustments to reconcile net income to net cash used in operating activities:
Bad debt expense 120,560 69,218
Litigation recovery (201,106) -
Deferred income tax benefit (68,424) (2,545)
Depreciation and amortization 473,387 424,030
Loss on disposal of equipment 90,154 -
Deferred income 4,262 (183,247)
Foreign currency exchange gain (4,807) 408
Minority interest in net income of subsidiaries (4,208) (25,631)
Loss on impairment of investments 245,707 767,426
Changes in operating assets and liabilities:
Accounts receivable 310,094 619,529
Inventories (1,882,911) 1,487
Prepaid income taxes 2,400,894 -
Prepaid expenses and other current assets (448,308) (52,492)
Other assets 145,336 (200,503)
Accounts payable and accrued expenses 373,460 (1,463,557)
Litigation settlement liabilities (4,332) (122,871)
Income taxes payable (173,907) (195,931)
------------ ------------
Net cash provided by (used in) operating activities 1,784,484 (357,886)
------------ ------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (340,527) (94,480)
Purchase of Labcaire stock (232,394) (99,531)
Redemption of investments held to maturity - 2,015,468
Purchase of convertible debentures - Focus Surgery, Inc. - (300,000)
Loans to Focus Surgery, Inc. - (112,725)
Cash paid for acquisition of Fibra Sonics, Inc., net of cash acquired - (72,291)
Loans to Hearing Innovations, Inc. (208,741) (354,701)
------------ ------------
Net cash (used in) provided by investing activities (781,662) 981,740
------------ ------------
(continued on next page)
6
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
===========
FOR THE NINE MONTHS ENDED
MARCH 31,
2003 2002
FINANCING ACTIVITIES
Proceeds from short-term borrowings 360,815 158,037
Payments of short-term borrowings (441,719) -
Principal payments on capital lease obligations (209,103) (159,078)
Proceeds from long-term debt 11,410 -
Payments of long-term debt (22,201) (44,477)
Proceeds from exercise of stock options 393,104 381,912
Purchase of treasury stock (10,450) (43,737)
------------ -----------
Net cash provided by financing activities 81,856 292,657
------------ -----------
Effect of exchange rate changes on assets and liabilities 10,760 13,824
------------ -----------
Net increase in cash and cash equivalents 1,095,438 930,335
Cash and cash equivalents at beginning of period 1,065,465 3,774,573
------------ -----------
Cash and cash equivalents at end of period $ 2,160,903 $4,704,908
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for (received from):
Interest $ 132,706 $ 103,469
============ ===========
Income taxes $(1,688,469) $ 366,251
============ ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease additions $ 237,785 $ 104,316
============ ===========
See accompanying Notes to Consolidated Financial Statements.
7
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited)
==========================================================
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ending June 30, 2003.
The balance sheet at June 30, 2002 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended June 30, 2002.
2. Net Income Per Share
--------------------
Basic income per common share excludes any dilution. It is based upon the
weighted average number of common shares outstanding during the period.
Dilutive earnings per share reflects the potential dilution that would
occur if options to purchase common stock were exercised. The following
table sets forth the reconciliation of weighted average shares outstanding
and diluted weighted average shares outstanding:
For the Nine months For the Three months
Ended March 31, Ended March 31,
2003 2002 2003 2002
--------- --------- --------- ----------
Weighted average common
shares outstanding 6,420,118 6,068,272 6,643,300 6,096,887
Dilutive effect of stock options 178,490 179,489 43,681 _ (a)
--------- --------- --------- ----------
Diluted weighted average common
shares outstanding 6,598,608 6,247,761 6,686,981 6,096,887
========= ========= ========= ==========
(a) Effect of stock options not included as their inclusion would be
anti-dilutive.
3. Comprehensive Income
---------------------
Total comprehensive income was $221,391 and $600,974 for the three and nine
months ended March 31, 2003, respectively, and $115,810 and $101,201 for
the three and nine months ended March 31, 2002, respectively. Accumulated
other comprehensive loss is comprised of foreign currency translation
adjustments.
8
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
4. Stock-Based Compensation
-------------------------
The Company complies with the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). This statement established
financial accounting and reporting standards for stock-based employee
compensation plans. The provisions of SFAS 123 encourage entities to adopt
a fair value-based method of accounting for stock compensation plans;
however, these provisions also permit the Company to continue to measure
compensation costs under pre-existing accounting pronouncements. In
December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." ("SFAS No. 148"). SFAS 148 amends SFAS 123 to provide
alternative methods of transition for a voluntary change in the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require more prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
additional disclosure requirements of SFAS 148 have been incorporated
herein. Pursuant to SFAS 123, the Company has elected to continue the
accounting set forth in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("ABP No. 125") and to provide
the necessary pro forma disclosures.
The following table illustrates the effect on net income (loss) and net
income (loss) per share as if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation.
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (loss)- As reported: $ 244,435 $(210,772) $ 408,633 $ 6,793
Stock based compensation
determined under SFAS 123 (117,817) (313,694) (268,441) (532,796)
---------- ---------- ---------- ----------
Net income (loss)- Pro forma: $ 126,618 $(524,466) $ 140,192 $(526,003)
Net income (loss) per share -
Basic:
As reported $ .04 $ (.03) $ .06 $ -
Pro forma $ .02 $ (.09) $ .02 $ (.09)
Net income (loss) per share -
Diluted:
As reported $ .04 $ (.03) $ .06 $ -
Pro forma $ .02 $ (.09) $ .02 $ (.08)
5. Acquisition
Labcaire Systems Ltd. ("Labcaire")
----------------------------------
In October 2002, under the terms of the revised purchase agreement (the
"Labcaire Agreement") with Labcaire (as discussed in the Company's Annual
Report on Form 10-K for the year ended June 30, 2002), the Company paid
$232,394 for 9,286 shares (2.70%) of the outstanding common stock of
Labcaire bringing the acquired interest to 100%. This represents the fiscal
2003 buy-back, as defined in the Labcaire Agreement. The balance of the
capital stock of Labcaire was owned by three executives and one retired
executive of Labcaire who had the right, under the Labcaire Agreement, to
require the Company to repurchase such shares at a price equal to its pro
rata share of 8.5 times Labcaire's earnings before interest, taxes and
management charges for the preceding fiscal year.
9
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
6. Inventories
-----------
Inventories are summarized as follows:
MARCH 31, 2003 June 30, 2002
--------------- --------------
Raw materials $ 4,563,225 $ 3,701,925
Work-in-process 1,649,126 824,289
Finished goods 3,240,045 2,644,630
--------------- --------------
$ 9,452,396 $ 7,170,844
=============== ==============
7. Accrued Expenses and Other Current Liabilities
----------------------------------------------
The following summarizes accrued expenses and other current liabilities:
MARCH 31, 2003 June 30, 2002
--------------- --------------
Accrued payroll and vacation $ 165,733 $ 165,350
Accrued sales tax - 7,262
Accrued commissions and bonuses 83,586 216,343
Customer deposits and deferred contracts 887,304 526,560
Accrued professional fees 155,911 229,750
Warranty 62,583 68,000
Other 14,361 91,559
--------------- --------------
$ 1,369,478 $ 1,304,824
=============== ==============
8. Loans to Affiliate
------------------
Hearing Innovations, Inc.
---------------------------
During fiscal 2003, the Company entered into thirteen loan agreements whereby
Hearing Innovations, Inc. ("Hearing Innovations") is required to pay the Company
an aggregate amount of $231,982 due November 30, 2003. All notes bear interest
at 8% per annum. The notes are secured by a lien on all of Hearing Innovations'
right, title and interest in accounts receivable, inventory, property, plant and
equipment and processes of specified products whether now existing or arising
after the date of these agreements. The loan agreements contain warrants to
acquire 207,741 shares of Hearing Innovations common stock, at the option of the
Company, at a cost of $.10 to $1.00 per share. These warrants, which are deemed
nominal in value, expire in October 2005. The Company recorded an allowance
against the entire balance of $208,741 for the above loans as well as accrued
interest of $23,241. The related expense has been included in loss on
impairment of Hearing Innovations in the accompanying consolidated statements of
operations. The Company believes the loans and related interest are impaired
since the Company does not anticipate that these loans will be paid in
accordance with the contractual terms of the loan agreements. The current
ability of companies such as Hearing Innovations to access capital markets or
incur third party debt is very limited and is likely to remain so for the
foreseeable future. In light of this fact, the Company continues to review
strategic options available to it and Hearing Innovations due to Hearing
Innovations' continuing need for financial support.
10
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
9. Business Segments
------------------
The Company operates in two business segments which are organized by
product types: industrial products and medical devices. Industrial products
include the Sonicator ultrasonic liquid processor, Aura ductless fume
enclosure, the Labcaire Autoscope and Guardian endoscope disinfectant
systems and the Mystaire wet scrubber. Medical devices include the Auto
Sonix ultrasonic cutting and coagulatory system, refurbishing of
high-performance ultrasound systems, replacement transducers for the
medical diagnostic ultrasound industry, ultrasonic lithotriptor, ultrasonic
neuroaspirator (used for neurosurgery) and soft tissue aspirator (used
primarily for the cosmetic surgery market). The Company evaluates the
performance of the segments based upon income from operations before
general and administrative expenses and litigation (recovery) settlement
expenses. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies (Note 1) in the
Company's Annual Report on Form 10-K for the year ended June 30, 2002.
Certain items are maintained at the corporate headquarters (corporate) and
are not allocated to the segments. They primarily include general and
administrative expenses and litigation (recovery) settlement expenses. The
Company does not allocate assets by segment. Summarized financial
information for each of the segments are as follows:
For the nine months ended March 31, 2003:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
----------- ----------- ------------ -----------
Net sales $11,769,483 $12,163,029 $ - $23,932,512
Cost of goods sold 6,471,209 7,259,909 - 13,731,118
----------- ----------- -----------
Gross profit 5,298,274 4,903,120 - 10,201,394
Selling expenses 1,037,082 2,086,143 - 3,123,225
Research and
development expenses 1,079,821 519,945 - 1,599,766
----------- ----------- -----------
Total operating expenses 2,116,903 2,606,088 4,765,594 9,488,585
----------- ----------- ------------ -----------
Income from operations $ 3,181,371 $ 2,297,032 $(4,765,594) $ 712,809
=========== =========== ============ ===========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses.
For the three months ended March 31, 2003:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
---------- ---------- ------------ ----------
Net sales $4,557,903 $4,189,774 $ - $8,747,677
Cost of goods sold 2,389,023 2,519,636 - 4,908,659
---------- ---------- ----------
Gross profit 2,168,880 1,670,138 - 3,839,018
Selling expenses 393,402 697,260 - 1,090,662
Research and development
expenses 388,968 194,910 - 583,878
---------- ---------- ----------
Total operating expenses 782,370 892,170 1,766,091 3,440,631
---------- ---------- ------------ ----------
Income from operations $1,386,510 $ 777,968 $(1,766,091) $ 398,387
========== ========== ============ ==========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses.
11
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
For the nine months ended March 31, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
---------- ----------- ------------ -----------
Net sales $8,139,343 $13,557,935 $ - $21,697,278
Cost of goods sold 4,591,768 7,547,035 - 12,138,803
---------- ----------- -----------
Gross profit 3,547,575 6,010,900 - 9,558,475
Selling expenses 812,806 2,408,969 - 3,221,775
Research and development
expenses 1,205,684 405,621 - 1,611,305
---------- ----------- -----------
Total operating expenses 2,018,490 2,814,590 4,556,949 9,390,029
---------- ----------- ------------ -----------
Income from operations $1,529,085 $ 3,196,310 $(4,556,949) $ 168,446
========== =========== ============ ===========
(a) Amount represents general and administrative expenses.
For the three months ended March 31, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
---------- ---------- ------------ -----------
Net sales $2,335,242 $5,035,978 $ - $7,371,220
Cost of goods sold 1,439,075 2,884,177 - 4,323,252
---------- ---------- -----------
Gross profit 896,167 2,151,801 - 3,047,968
Selling expenses 272,636 891,651 - 1,164,287
Research and development
expenses 527,095 120,013 - 647,108
---------- ---------- -----------
Total operating expenses 799,731 1,011,664 1,551,239 3,362,634
---------- ---------- ------------ -----------
Income (loss) from operations $ 96,436 $1,140,137 $(1,551,239) $ (314,666)
========== ========== ============ ===========
(a) Amount represents general and administrative expenses.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the nine months ended March 31:
2003 2002
----------- -----------
(IN THOUSANDS)
United States $15,717,000 $14,502,000
Canada 310,000 55,000
Mexico 6,000 -
United Kingdom 5,903,000 5,294,000
Europe 1,015,000 806,000
Asia 758,000 638,000
Middle East 48,000 99,000
Other 176,000 303,000
----------- -----------
$23,933,000 $21,697,000
=========== ===========
12
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
10. Revolving Credit Facilities
-----------------------------
On July 1, 2002, Labcaire replaced its bank overdraft facility with HSBC
Bank plc with a debt purchase agreement with Lloyds TSB Commercial Finance.
The current facility is more flexible than the prior facility. The prior
facility established a sum certain limit whereas the current facility has a
credit limit based upon United Kingdom domestic and European receivables
outstanding. The Company's needs are better served by the current facility.
The amount of this facility is approximately $1,384,000 (950,000 Lbs.
Sterling) and bears interest at the bank's base rate plus 1.75% and a
service charge of .15% of sales invoice value and fluctuates based upon the
outstanding United Kingdom and European receivables. The outstanding
balance at March 31, 2003 and June 30, 2002 are $706,083 and $730,092,
respectively. The agreement expires on June 28, 2003 and covers all United
Kingdom and European sales.
13
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Nine Months Ended March 31, 2003 and 2002.
NET SALES: Net sales of the Company's medical devices and industrial products
-----------
increased $2,235,234 to $23,932,512 for the nine months ended March 31, 2003
from $21,697,278 for the nine months ended March 31, 2002. This difference in
net sales is due to an increase in sales of medical devices of $3,630,140 offset
by lower industrial products sales of $1,394,906. The increase in sales of
medical devices is due to an increase in sales of diagnostic medical devices of
$1,794,452 and an increase of $1,835,688 in sales of therapeutic medical
devices, both due to increased customer demand for several diagnostic and
therapeutic medical products. The increase in sales was not attributable to a
single customer, distributor or any other specific factor. The increase was
across all products for which there was increased demand. The decrease in
industrial products is due to decreased wet scrubber sales of $1,336,553, a
decrease in ultrasonic sales of $53,554 and a decrease in ductless fume
enclosure sales of $495,419 primarily offset by an increase in Labcaire sales of
$490,620. Wet scrubber sales continue to be adversely affected by the downturn
of the semi-conductor market. The decrease in fume enclosure and ultrasonic
sales is due to lower customer demand for several industrial products and
current economic conditions for such products. The increase in Labcaire sales
is primarily due to the product demand for the new Guardian product introduced
in December 2001, which is currently compliant with the new United Kingdom
standards for such products. Approximately 29% of the Company's revenues in the
period ending March 31, 2003 were received in English Pounds currency. To the
extent that the Company's revenues are generated in English Pounds, its
operating results are translated for reporting purposes into U.S. Dollars using
rates of 1.57 and 1.46 for the nine months ended March 31, 2003 and 2002,
respectively. A strengthening of the English Pound, in relation to the U.S.
Dollar, will have the effect of increasing its reported revenues and profits,
while a weakening of the English Pound will have the opposite effect. Since the
Company's operations in England generally sets prices and bids for contracts in
English Pounds, a strengthening of the English Pound, while increasing the value
of its UK assets, might place the Company at a pricing disadvantage in bidding
for work from manufacturers based overseas. The Company collects its
receivables in the currency the subsidiary resides in. The Company has not
engaged in foreign currency hedging transactions, which include forward exchange
agreements.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the nine months ended March 31:
2003 2002
----------- -----------
(IN THOUSANDS)
United States $15,717,000 $14,502,000
Canada 310,000 55,000
Mexico 6,000 -
United Kingdom 5,903,000 5,294,000
Europe 1,015,000 806,000
Asia 758,000 638,000
Middle East 48,000 99,000
Other 176,000 303,000
----------- -----------
$23,933,000 $21,697,000
=========== ===========
14
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
The Company does not allocate assets by segment. Summarized financial
information for each of the segments are as follows:
For the nine months ended March 31, 2003:
(a)
MEDICAL NDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
----------- ----------- ------------ -----------
Net sales $11,769,483 $12,163,029 $ - $23,932,512
Cost of goods sold 6,471,209 7,259,909 - 13,731,118
----------- ----------- -----------
Gross profit 5,298,274 4,903,120 - 10,201,394
Selling expenses 1,037,082 2,086,143 - 3,123,225
Research and development expenses 1,079,821 519,945 - 1,599,766
----------- ----------- -----------
Total operating expenses 2,116,903 2,606,088 4,765,594 9,488,585
----------- ----------- ------------ -----------
Income from operations $ 3,181,371 $ 2,297,032 $(4,765,594) $ 712,809
=========== =========== ============ ===========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses.
For the nine months ended March 31, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
---------- ----------- ------------ -----------
Net sales $8,139,343 $13,557,935 $ - $21,697,278
Cost of goods sold 4,591,768 7,547,035 - 12,138,803
---------- ----------- -----------
Gross profit 3,547,575 6,010,900 - 9,558,475
Selling expenses 812,806 2,408,969 - 3,221,775
Research and development
expenses 1,205,684 405,621 - 1,611,305
---------- ----------- -----------
Total operating expenses 2,018,490 2,814,590 4,556,949 9,390,029
---------- ----------- ------------ -----------
Income from operations $1,529,085 $ 3,196,310 $(4,556,949) $ 168,446
========== =========== ============ ===========
(a) Amount represents general and administrative expenses.
GROSS PROFIT: Gross profit decreased to 42.6% for the nine months ended March
--------------
31, 2003 from 44.1% for the nine months ended March 31, 2002. The decrease in
gross profit is predominantly due to the reduced revenue volume for industrial
products
SELLING EXPENSES: Selling expenses decreased $98,550 to $3,123,225 for the nine
------------------
months ended March 31, 2003 from $3,221,775 for the nine months ended March 31,
2002. Medical device selling expenses increased $224,276 predominantly due to
additional sales and marketing efforts for diagnostic medical devices.
Industrial selling expenses decreased $322,826 predominantly due to a decrease
in fume enclosure and industrial ultrasonic commissions and wet scrubber
salaries, due to the reduction of staff, and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
--------------------------------------
increased $409,751 from $4,556,949 in the nine months ended March 31, 2002 to
$4,966,700 in the nine months ended March 31, 2003. The increase is
predominantly due to an increase in general and administrative expenses relating
to severance costs and an increase in administrative staff, all attributable to
Labcaire.
15
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses decreased
------------------------------------
$11,539 from $1,611,305 for the nine months ended March 31, 2002 to $1,599,766
for the nine months ended March 31, 2003. During the first and second quarter
of fiscal 2003, the Company funded $100,000 to Focus Surgery, Inc. ("Focus
Surgery") to start research and development for the treatment of kidney tumors
utilizing high intensity focused ultrasound technology. The Company has the
right to the technology if the Company funds the development. The Company has
exercised its right and started to fund the development of treatment of kidney
tumors. During the second and third quarters of fiscal 2003, three customers
reimbursed the Company, in the amount of approximately $188,000, for certain
product development expenditures incurred.
LITIGATION (RECOVERY) SETTLEMENT EXPENSES: The Company recorded a reversal of
---------------------------------------------
the litigation settlement for the nine months ended March 31, 2003 of $201,106.
The recovery of litigation settlement expenses represents the sale of Lysonix
2000 units by Mentor Corporation ("Mentor") that were received from Mentor from
LySonix, Inc. ("LySonix") in connection with inventory received under the
settlement agreement with LySonix. This inventory was previously reserved for
in fiscal year June 30, 2002, as its sale ability was uncertain. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
June 30, 2002.
OTHER INCOME (EXPENSE): Other income during the nine months ended March 31, 2003
-----------------------
was $73,774. During the nine months ended March 31, 2002, other income was
$10,915. The increase of $62,859 was primarily due to a decrease in loss on
impairment of investments of Focus Surgery of $383,250 and Hearing Innovations,
Inc. ("Hearing Innovations") of $138,469, offset by lower royalty income of
$228,127 and lower interest income of $206,711. The decrease in impairment of
Focus Surgery and Hearing Innovations is a direct result of current period loans
to Focus Surgery and Hearing Innovations being less than in the prior period.
Royalties decreased since the first six months of fiscal 2002 included
additional royalty payments of approximately $150,000, which was based upon an
audit of U.S Surgical's records for prior years' royalties. The audit yielded
that U.S Surgical owed and subsequent paid for royalties due on prior year sales
that were not included in the original royalty computation. The decrease in
interest income is due to less cash on hand and interest yields during the
current nine-month period as compared to the prior nine-month period.
INCOME TAXES: The effective tax rate is 48.3% for the nine months ended March
--------------
31, 2003 as compared to an effective tax rate of 96.7% for the nine months ended
March 31, 2002. The current effective income tax rate of 48.3% was impacted by
no corresponding income tax benefit from the loss on impairment of Hearing
Innovations and Focus Surgery by $95,826 plus the standard consolidated tax rate
of approximately 35%. The loss on impairment of Hearing Innovations and Focus
Surgery are recorded with no corresponding tax benefit since these transactions
are capital losses. Benefit for such losses are only received if Hearing
Innovations and Focus Surgery have the ability to generate capital gains.
16
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
Three Months Ended March 31, 2003 and 2002.
NET SALES: Net sales of the Company's medical devices and industrial products
-----------
increased $1,376,457 to $8,747,677 for the three months ended March 31, 2003
from $7,371,220 for the three months ended March 31, 2002. This difference in
net sales is due to an increase in sales of medical devices of $2,222,661 offset
by lower industrial products sales of $846,204. The increase in sales of medical
devices is due to an increase in sales of diagnostic medical devices of $848,738
and an increase of $1,373,923 in sales of therapeutic medical devices, both due
to increased customer demand for several diagnostic and therapeutic medical
products. The decrease in industrial products is due to decreased wet scrubber
sales of $337,141, a decrease in ductless fume enclosure sales of $108,008 and a
decrease in Labcaire sales of $441,465 primarily offset by an increase in
ultrasonic sales of $40,410. Wet scrubber sales continue to be adversely
affected by the downturn of the semi-conductor market. The decrease in fume
enclosure sales is due to lower customer demand for various products and current
economic conditions for such products. The decrease in Labcaire sales is due to
lower Guardian product sales To the extent that the Company's revenues are
generated in English Pounds, its operating results are translated for reporting
purposes into U.S. Dollars using rates of 1.57 and 1.46 for the nine months
ended March 31, 2003 and 2002, respectively. A strengthening of the English
Pound, in relation to the U.S. Dollar, will have the effect of increasing its
reported revenues and profits, while a weakening of the English Pound will have
the opposite effect. Since the Company's operations in England generally sets
prices and bids for contracts in English Pounds, a strengthening of the English
Pound, while increasing the value of its UK assets, might place the Company at a
pricing disadvantage in bidding for work from manufacturers based overseas. The
Company collects its receivables in the currency the subsidiary resides in. The
Company has not engaged in foreign currency hedging transactions, which include
forward exchange agreements.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the three months ended March 31:
2003 2002
---------- -----------
(IN THOUSANDS)
United States $5,651,000 $3,972,000
Canada 144,000 (61,000)
Mexico 3,000 -
United Kingdom 2,258,000 2,683,000
Europe 338,000 386,000
Asia 263,000 154,000
Middle East 5,000 (10,000)
Other 86,000 247,000
---------- -----------
$8,748,000 $7,371,000
========== ===========
17
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
The Company does not allocate assets by segment. Summarized financial
information for each of the segments are as follows:
For the three months ended March 31, 2003:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
---------- ---------- ------------ ----------
Net sales $4,557,903 $4,189,774 $ - $8,747,677
Cost of goods sold 2,389,023 2,519,636 - 4,908,659
---------- ---------- ----------
Gross profit 2,168,880 1,670,138 - 3,839,018
Selling expenses 393,402 697,260 - 1,090,662
Research and development
expenses 388,968 194,910 - 583,878
---------- ---------- ----------
Total operating expenses 782,370 892,170 1,766,091 3,440,631
---------- ---------- ------------ ----------
Income from operations $1,386,510 $ 777,968 $(1,766,091) $ 398,387
========== ========== ============ ==========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses.
For the three months ended March 31, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
---------- ---------- ------------ -----------
Net sales $2,335,242 $5,035,978 $ - $7,371,220
Cost of goods sold 1,439,075 2,884,177 - 4,323,252
---------- ---------- -----------
Gross profit 896,167 2,151,801 - 3,047,968
Selling expenses 272,636 891,651 - 1,164,287
Research and development
expenses 527,095 120,013 - 647,108
---------- ---------- -----------
Total operating expenses 799,731 1,011,664 1,551,239 3,362,634
---------- ---------- ------------ -----------
Income (loss) from operations $ 96,436 $1,140,137 $(1,551,239) $ (314,666)
========== ========== ============ ===========
(a) Amount represents general and administrative expenses.
GROSS PROFIT: Gross profit increased to 43.9% for the three months ended March
--------------
31, 2003 from 41.4% for the three months ended March 31, 2002. The increase in
gross profit is due predominantly to an increase in higher margin product sales
predominately from diagnostic medical devices
SELLING EXPENSES: Selling expenses decreased $73,625 to $1,090,662 for the three
-----------------
months ended March 31, 2003 from $1,164,287 for the three months ended March 31,
2002. Medical device selling expenses increased $120,766 predominantly due to
additional sales and marketing efforts for diagnostic medical devices.
Industrial selling expenses decreased $194,391 predominantly due to a decrease
in fume enclosure and ultrasonic commissions, wet scrubber salaries, due to a
reduction in staff and marketing expenses and by a decrease in marketing efforts
by Labcaire.
18
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
--------------------------------------
increased $263,330 from $1,551,239 in the three months ended March 31, 2002 to
$1,814,569 in the three months ended March 31, 2003. The increase is
predominantly due to an increase in general and administrative expenses relating
to severance costs and an increase in administrative staff, all attributable to
Labcaire.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses decreased
------------------------------------
$63,230 from $647,108 for the three months ended March 31, 2002 to $583,878 for
the three months ended March 31, 2003. The decrease is predominantly due to
decreased research and development on medical device products of $138,127 offset
by increased efforts for industrial products in the amount of $74,897.
LITIGATION (RECOVERY) SETTLEMENT EXPENSES: The Company recorded a reversal of
---------------------------------------------
the litigation settlement during the third quarter of fiscal 2003 of $48,478.
The recovery of litigation settlement expenses represents the sale of Lysonix
2000 units by Mentor that were received from Mentor from LySonix in connection
with inventory received under the settlement agreement with LySonix. This
inventory was previously reserved for in fiscal year June 30, 2002, as its sale
ability was uncertain. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 2002.
OTHER INCOME (EXPENSE): Other income during the three months ended March 31,
-------------------------
2003 was $53,442. During the three months ended March 31, 2002, other expense
was $73,840. The increase of $127,282 was principally due to a decrease in loss
on impairment of investments of Hearing Innovations of $106,736 and Focus
Surgery of $70,273. The decrease in impairment is a direct result of current
period loans to Hearing Innovations and Focus Surgery being less than in the
prior period.
INCOME TAXES: The effective tax rate is 42.1% for the three months ended March
--------------
31, 2003 as compared to an effective tax rate of 46.5% for the three months
ended March 31, 2002. The current effective income tax rate of 42.1% was
impacted by no corresponding income tax benefit from the loss on impairment of
Hearing Innovations by $19,139 plus the standard consolidated tax rate of
approximately 35%. The loss on impairment of Hearing Innovations is recorded
with no corresponding tax benefit as these transactions are capital losses.
Benefit for such losses are only received if Hearing Innovations has the ability
to generate capital gains.
19
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
CRITICAL ACCOUNTING POLICIES:
General: Financial Reporting Release No. 60, which was released by the
--------
Securities and Exchange Commission in December 2001, requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of the financial statements. Note 1 of the Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended June 30, 2002 includes a summary of the Company's significant
accounting policies and methods used in the preparation of its financial
statements. The Company's discussion and analysis of its financial condition
and results of operations are based upon the Company's financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. On an on-going basis,
management evaluates its estimates and judgments, including those related to bad
debts, inventories, goodwill, property, plant and equipment and income taxes.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company considers certain accounting policies
related to allowance for doubtful accounts, inventories, property, plant and
equipment, goodwill and income taxes to be critical policies due to the
estimation process involved in each.
Allowance for Doubtful Accounts: The Company's policy is to review its
-----------------------------------
customers' financial condition prior to extending credit and, generally,
collateral is not required. The Company utilizes letters of credit on foreign
or export sales where appropriate.
Inventories: Inventories are stated at the lower of cost (first-in, first-out)
------------
or market and consist of raw materials, work-in-process and finished goods.
Management evaluates the need to record adjustments for impairments of inventory
on a quarterly basis. The Company's policy is to assess the valuation of all
inventories, including raw materials, work-in-process and finished goods.
Property, Plant and Equipment: Property, plant and equipment are recorded at
---------------------------------
cost. Depreciation of property and equipment is provided using the straight-line
method over estimated useful lives ranging from 1 to 5 years. Depreciation of
the Labcaire building is provided using the straight-line method over the
estimated useful life of 50 years. Leasehold improvements are amortized over
the life of the lease or the useful life of the related asset, whichever is
shorter. The Company's policy is to periodically evaluate the appropriateness
of the lives assigned to property, plant and equipment and to make adjustments
if necessary.
20
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Goodwill: In July 2001, the Financial Accounting Standards Board issued
---------
Statement of Financial Accounting Standards ("SFAS") Nos. 141 ("SFAS 141") and
142 ("SFAS 142"), "Business Combinations" and "Goodwill and Other Intangible
Assets," respectively. SFAS 141 replaces Accounting Principles Board ("APB")
Opinion 16 "Business Combinations" and requires the use of the purchase method
for all business combinations initiated after June 30, 2001. SFAS 142 requires
goodwill and intangible assets with indefinite useful lives to no longer be
amortized, but instead be tested for impairment at least annually and whenever
events or circumstances occur that indicate goodwill might be impaired. With
the adoption of SFAS 142, as of July 1, 2001, the Company reassessed the useful
lives and residual values of all acquired intangible assets to make any
necessary amortization period adjustments. Based on that assessment, only
goodwill was determined to have an indefinite useful life and no adjustments
were made to the amortization period or residual values of other intangible
assets. SFAS 142 provides a six-month transitional period from the effective
date of adoption for the Company to perform an assessment of whether there is an
indication that goodwill is impaired. To the extent that an indication of
impairment exists, the Company must perform a second test to measure the amount
of impairment. The second test must be performed as soon as possible, but no
later than the end of the fiscal year. Any impairment measured as of the date
of adoption will be recognized as the cumulative effect of a change in
accounting principle. The Company performed the first test and determined that
there is no indication that the goodwill recorded is impaired and, therefore,
the second test was not required. The Company also completed its annual
goodwill impairment tests for fiscal 2002 in the fourth quarter. There were no
indications that goodwill recorded was impaired. The fiscal 2003 annual
impairment test will be performed in the fourth quarter.
Income Taxes: Income taxes are accounted for in accordance with SFAS No. 109,
--------------
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Stock-Based Compensation: The Company accounts for its stock-based compensation
--------------------------
plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. Under APB 25, because the
exercise price of the Company's employee stock options is generally set equal to
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at March 31, 2003 and June 30, 2002 was $13,807,081 and
$11,854,281, respectively. In the nine months ended March 31, 2003, cash
provided by operations totaled $1,784,484. The increase in the cash balance is
due to the refund of prepaid income taxes offset by cash paid for inventory
purchased for unshipped orders. In the nine months ended March 31, 2003, cash
used in investing activities was $781,662, which primarily consisted of the
purchase of Labcaire stock, the purchase of property, plant and equipment during
the regular course of business and of loans made to Hearing Innovations. In the
nine months ended March 31, 2003, cash provided by financing activities was
$81,856, primarily consisting of proceeds from the exercise of stock options and
short-term borrowings offset by payments of short-term borrowings and principal
payments on capital lease obligations.
21
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Regulatory Requirements
The Company's medical device products are subject to the regulatory requirements
of the Food and Drug Administration ("FDA"). A medical device as defined by the
FDA is an instrument, apparatus implement, machine, contrivance, implant, in
vitro reagent, or other similar or related article, including a components,
part, or accessory, which is recognized in the official National Formulary, or
the United States Pharmacopoeia, or any supplement to them, intended for use in
the diagnosis of disease or other conditions, or in the cure, mitigation,
treatment, or prevention of disease, in man or animals, or intended to affect
the structure or any function of the body of man or other animals, and which
does not achieve any of its primary intended purposes through chemical action
within or on the body of man or other animals and which is not dependent upon
being metabolized for the achievement of any of its primary intended purposes.
All current devices manufactured and sold by the Company have all the necessary
regulatory approvals. The Company's products that are subject to FDA regulations
for product labeling and promotion comply with all applicable regulations. The
Company is listed with the FDA as a Medical Device Manufacturer and has the
appropriate Establishment Numbers in place. The Company has post-market
monitoring system in place such as Complaint Handling and Medical Device
Reporting procedures. The Company is not aware of any situations which would be
adverse at this time nor has the FDA sought legal remedies available against or
have there been any violations of its regulations alleged against the Company.
Hearing Innovations, Inc.
---------------------------
During fiscal 2003, the Company entered into thirteen loan agreements whereby
Hearing Innovations, Inc. ("Hearing Innovations") is required to pay the Company
an aggregate amount of $208,741 due November 30, 2003. All notes bear interest
at 8% per annum. The notes are secured by a lien on all of Hearing Innovations'
right, title and interest in accounts receivable, inventory, property, plant and
equipment and processes of specified products whether now existing or arising
after the date of these agreements. The loan agreements contain warrants to
acquire 207,741 shares of Hearing Innovations common stock, at the option of the
Company, at a cost of $.10 to $1.00 per share. These warrants, which are deemed
nominal in value, expire in October 2005. The Company recorded an allowance
against the entire balance of $208,741 for the above loans. The related
expense has been included in loss on impairment of Hearing Innovations in the
accompanying consolidated statements of operations. The Company believes the
loans and related interest are impaired since the Company does not anticipate
that these loans will be paid in accordance with the contractual terms of the
loan agreements. The current ability of companies such as Hearing Innovations
to access capital markets or incur third party debt is very limited and is
likely to remain so for the foreseeable future. In light of this fact, the
Company continues to review strategic options available to it and Hearing
Innovations due to Hearing Innovations' continuing need for financial support.
Revolving Credit Facilities
-----------------------------
On July 1, 2002, Labcaire Systems Ltd. ("Labcaire") replaced its bank overdraft
facility with HSBC Bank plc with a debt purchase agreement with Lloyds TSB
Commercial Finance. The current facility is more flexible than the prior
facility. The prior facility established a sum certain limit where the current
facility has a credit limit based upon United Kingdom domestic and European
receivables outstanding. The Company's needs are better served by the current
facility. The amount of this facility is approximately $1,384,000 ( 950,000)
and bears interest at the bank's base rate plus 1.75% and a service charge of
..15% of sales invoice value and fluctuates based upon the outstanding United
Kingdom and European receivables. The outstanding balance at March 31, 2003 and
June 30, 2002 are $706,083 and $730,092, respectively. The agreement expires on
June 28, 2003 and covers all United Kingdom and European sales.
22
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
Labcaire
--------
In October 2002, under the terms of the revised purchase agreement (the
"Labcaire Agreement") with Labcaire (as discussed in the Company's Annual Report
on Form 10-K for the year ended June 30, 2002), the Company paid $232,394 for
9,286 shares (2.70%) of the outstanding common stock of Labcaire bringing the
acquired interest to 100%. This represents the fiscal 2003 buy-back, as defined
in the Labcaire Agreement. The balance of the capital stock of Labcaire was
owned by three executives and one retired executive of Labcaire who had the
right, under Labcaire Agreement, to require the Company to repurchase such
shares at a price equal to its pro rata share of 8.5 times Labcaire's earnings
before interest, taxes and management charges for the preceding fiscal year.
Recent Accounting Pronouncements
----------------------------------
In August 2001, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which supersedes both FASB Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS 121") and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("Opinion 30"), for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS 144 retains the
fundamental provisions of SFAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
SFAS 121. For example, SFAS 144 provides guidance on how a long-lived asset
that is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike SFAS 121, SFAS 144 does not address the impairment of goodwill. Rather,
goodwill is evaluated for impairment under SFAS No. 142, "Goodwill and Other
Intangible Assets".
The Company is required to adopt SFAS 144 no later than the fiscal year
beginning after December 15, 2001. In the first quarter of fiscal 2003, the
Company adopted SFAS 144 for long-lived assets held for use. The adoption of
SFAS 144 did not have a material impact on the Company's financial statements
because the impairment assessment under SFAS 144 is largely unchanged from SFAS
121.
In December 2003, the FASB issued FASB Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148
amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") to provide alternative methods of transition to SFAS 123's fair value
method of accounting for stock-based employee compensation. SFAS 148 also
amends the disclosure provisions of SFAS 123 and ABP Opinion No. 28, "Interim
Financial Reporting", to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. The Company is required to
adopt SFAS 148 no later than the fiscal years ending after December 15, 2002.
The Company adopted SFAS 148 in the current quarter and the additional
disclosure requirements are incorporated herein.
23
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Forward Looking Statements: This report contains certain forward looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, which are intended to be covered by the safe harbors
created thereby. Although the Company believes that the assumptions underlying
the forward looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward looking statements contained in this report will prove to be
accurate. Factors that could cause actual results to differ from the results
specifically discussed in the forward looking statements include, but are not
limited to, the absence of anticipated contracts, higher than historical costs
incurred in performance of contracts or in conducting other activities, product
mix in sales, results of joint venture and investment in related entities,
future economic, competitive and market conditions, and the outcome of legal
proceedings as well as management business decisions.
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MISONIX, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk:
The principal market risks (i.e. the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed are interest rates
on short-term investments and foreign exchange rates, which generate translation
gains and losses due to the English Pound to U.S. Dollar conversion of Labcaire.
Foreign Exchange Rates:
Approximately 29% of the Company's revenues in the period ending March 31, 2003
were received in English Pounds currency. To the extent that the Company's
revenues are generated in English Pounds, its operating results are translated
for reporting purposes into U.S. Dollars using rates of 1.57 and 1.46 for the
nine months ended March 31, 2003 and 2002, respectively. A strengthening of the
English Pound, in relation to the U.S. Dollar, will have the effect of
increasing its reported revenues and profits, while a weakening of the English
Pound will have the opposite effect. Since the Company's operations in England
generally sets prices and bids for contracts in English Pounds, a strengthening
of the English Pound, while increasing the value of its UK assets, might place
the Company at a pricing disadvantage in bidding for work from manufacturers
based overseas. The Company collects its receivables in the currency the
subsidiary resides in. The Company has not engaged in foreign currency hedging
transactions, which include forward exchange agreements.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
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Disclosure controls and procedures are designed to ensure the reliability of
financial statements and other disclosures included in this report. Within the
90 days prior to the filing of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective
and timely in alerting them to material information required to be included in
the Company's periodic Securities and Exchange Commission filings.
(b) Changes in Internal Controls
-------------------------------
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date the Company carried out its evaluation.
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MISONIX, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 31.1 - Certification by Chief Executive Officer
Exhibit 31.2 - Certification by Chief Financial Officer
Exhibit 32.1 - Certification by Chief Executive Officer
Exhibit 32.2 - Certification by Chief Financial Officer
(b) There were no reports on Form 8-K filed during the quarter ended March
31, 2003.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 18, 2003
MISONIX, INC.
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(Registrant)
By: /s/ Michael A. McManus, Jr.
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Michael A. McManus, Jr.
President and Chief Executive Officer
By: /s/ Richard Zaremba
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Richard Zaremba
Vice President, Chief Financial Officer,
Treasurer and Secretary
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