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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File Number 1-14798
IVAX DIAGNOSTICS, INC.
Delaware 11-3500746
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2140 North Miami Avenue, Miami, Florida 33127
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 324-2300
--------------
(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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
28,647,652 shares of Common Stock, $ .01 par value, outstanding as of
August 1, 2002.
IVAX DIAGNOSTICS, INC.
----------------------
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 2
Consolidated Statements of Operations
for the three months and six months ended June 30, 2002 and 2001 3
Consolidated Statements of Cash Flows
for the six months ended June 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 4 - Submission of Matters to a Vote of Security Holders 22
Item 6 - Exhibits and Reports on Form 8-K 23
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
-------------- --------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 19,509,005 $ 23,282,155
Accounts receivable, net of allowances for doubtful
accounts of $2,219,485 in 2002 and $1,911,395 in 2001 4,758,151 3,192,782
Inventories 4,698,380 2,857,289
Other current assets 1,516,717 1,428,493
-------------- --------------
Total current assets 30,482,253 30,760,719
Property, plant and equipment, net 1,646,616 1,458,702
Goodwill, net 6,824,542 6,878,199
Equipment on lease 1,341,966 856,439
Other assets 79,329 192,469
-------------- --------------
Total assets $ 40,374,706 $ 40,146,528
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 956,014 $ 801,392
Accrued expenses and other current liabilities 2,812,096 2,147,559
-------------- --------------
Total current liabilities 3,768,110 2,948,951
-------------- --------------
Other long-term liabilities 379,438 397,674
-------------- --------------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, $0.01 par value, authorized 50,000,000 shares,
issued and outstanding 28,647,652 in 2002 and 28,635,652 in 2001 286,476 286,356
Capital in excess of par value 44,836,402 44,530,462
Accumulated deficit (7,045,806) (5,596,778)
Accumulated other comprehensive loss (1,849,914) (2,420,137)
--------------- --------------
Total shareholders' equity 36,227,158 36,799,903
--------------- --------------
Total liabilities and shareholders' equity $ 40,374,706 $ 40,146,528
=============== ==============
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
2
IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Period Ended June 30, Three Months Six Months
2002 2001 2002 2001
-------------- ------------- ------------- -------------
Net revenues $ 3,115,860 $ 2,849,283 $ 5,622,148 $ 6,137,128
Cost of sales 1,594,740 1,263,525 2,844,185 2,665,416
-------------- ------------- ------------- -------------
Gross profit 1,521,120 1,585,758 2,777,963 3,471,712
-------------- ------------- ------------- -------------
Operating expenses:
Selling 1,121,006 737,858 1,915,099 1,504,697
General and administrative 952,345 819,056 1,889,278 2,671,904
Research and development 351,597 327,256 710,092 608,805
Goodwill amortization - 63,632 - 127,469
------------- ------------- ------------- -------------
Total operating expenses 2,424,948 1,947,802 4,514,469 4,912,875
-------------- ------------- ------------- -------------
Loss from operations (903,828) (362,044) (1,736,506) (1,441,163)
Other income:
Interest income 126,210 276,353 293,016 355,594
Interest expense - related party - - - (93,472)
Other income, net 34,704 11,504 19,626 73,535
-------------- ------------- ------------- -------------
Total other income, net 160,914 287,857 312,642 335,657
-------------- ------------- ------------- -------------
Loss from continuing operations before income
taxes (742,914) (74,187) (1,423,864) (1,105,506)
Provision (benefit)for income taxes (8,158) 125,537 25,164 414,337
-------------- ------------- ------------- -------------
Net loss $ (734,756) $ (199,724) $ (1,449,028) $ (1,519,843)
============== ============= ============= =============
Basic and diluted loss per common share $ (.03) $ (.01) $ (.05) $ (.05)
============== ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic and diluted 28,646,531 28,621,643 28,641,122 28,621,643
============== ============= ============= =============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
3
IVAX DIAGNOSTICS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, 2002 2001
-------------- --------------
Cash flows from operating activities:
Net loss $ (1,449,028) $ (1,519,843)
Adjustments to reconcile net loss to net cash
flows used in operating activities:
Depreciation and amortization 405,731 508,787
Provision for losses on accounts receivable 122,654 24,889
Stock option compensation expense 297,300 1,189,183
Changes in operating assets and liabilities:
Accounts receivable (1,326,331) 272,705
Inventories 371,919 67,374
Other current assets 42,655 (175,441)
Other assets 1,195 (21,256)
Accounts payable and accrued expenses 404,007 (477,149)
Other long-term liabilities (57,845) 29,887
-------------- --------------
Net cash flows used in operating activities (1,187,743) (100,864)
-------------- --------------
Cash flows from investing activities:
Capital expenditures (290,048) (117,304)
Acquisition of business (2,258,595) -
Acquisitions of equipment on lease (278,421) (374,499)
-------------- --------------
Net cash flows used in investing activities (2,827,064) (491,803)
-------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock - 22,255,111
Proceeds from stock option exercises 8,760 -
Change in balance due to IVAX Corporation 82,000 1,898,695
-------------- --------------
Net cash flows provided by financing activities 90,760 24,153,806
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents 150,897 (387,843)
-------------- --------------
Net (decrease) increase in cash and cash equivalents (3,773,150) 23,173,296
Cash and cash equivalents at the beginning of the year 23,282,155 1,262,888
-------------- --------------
Cash and cash equivalents at the end of the period $ 19,509,005 $ 24,436,184
============== ==============
Supplemental disclosures:
Interest paid $ - $ -
============== ==============
Income tax payments $ - $ 639,620
============== ==============
Supplemental disclosure of non-cash activities:
Contribution to capital of balance due to IVAX Corporation $ - $ 9,581,110
============== ==============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
IVAX DIAGNOSTICS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Unaudited)
Six Months Ended June 30, 2002 2001
------------ ---------
Supplemental disclosure of non-cash activities:
Acquisition of business:
Fair value of assets acquired $ 2,503,595 $ -
Liabilities assumed 245,000 -
------------ ----------
Net assets acquired $ 2,258,595 $ -
============ ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL:
The accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q and, therefore, do not include all
information normally included in audited financial statements. However, in the
opinion of management, all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the results of operations, financial
position and cash flows have been made. The results of operations and cash flows
for the six months ended June 30, 2002 are not necessarily indicative of the
results of operations and cash flows which may be reported for the remainder of
2002. The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes to
consolidated financial statements included in the IVAX Diagnostics, Inc. ("the
Company") Annual Report on Form 10-K for the year ended December 31, 2001.
(2) MERGER AND ACQUISITION:
On March 14, 2001, b2bstores.com Inc. ("b2bstores.com"), IVAX Corporation
("IVAX" or the "Parent") and IVAX Diagnostics, Inc., a wholly-owned subsidiary
of IVAX at that date, consummated a merger (the "Merger") of the pre-merger
Diagnostics into b2bstores.com pursuant to which all of the issued and
outstanding shares of the pre-merger Diagnostics were converted into 20,000,000
shares of b2bstores.com stock and b2bstores.com's name was changed to IVAX
Diagnostics, Inc. Prior to the Merger, b2bstores.com was an internet business
services company that was a non-operating public shell. Net assets of
b2bstores.com on the date of Merger were $22,255,111, consisting primarily of
cash of $22,285,064. Additionally, as a condition of the Merger, intercompany
indebtedness of $9,581,110 existing between IVAX and the pre-merger Diagnostics
was contributed to capital. For accounting purposes, the Merger was accounted
for as sale of stock for cash. The historical financial statements prior to the
acquisition are those of the pre-merger Diagnostics with retroactive
restatement, as if a stock split occurred, to reflect the 20,000,000 shares of
b2bstores.com common stock that IVAX received in the Merger as outstanding for
all periods presented. Following the Merger, IVAX' 20,000,000 shares of the
Company represents approximately 70% of the issued and outstanding shares of the
Company.
On May 15, 2002 the Company consummated the acquisition of certain of the assets
of the global enzyme immunoassay (EIA) product line of Sigma Diagnostics, Inc.
("Sigma Diagnostics"), a wholly-owned subsidiary of Sigma-Aldrich Corporation,
for $2,258,595 and the assumption of certain liabilities. The fair value of
assets acquired of $2,258,595 includes reagent and instrumentation inventory as
well as EIA instrumentation placed at customer locations. Goodwill was not
recorded in this transaction. As a result of the consummation of the transaction
with Sigma Diagnostics, the Company will no longer sell reagents or
instrumentation to Sigma Diagnostics, which had been the Company's largest
customer for the past three years and which had marketed such reagents and
instrumentation throughout the world under previous agreements with the Company.
Instead, the Company intends to sell EIA instrumentation and reagents directly
to Sigma Diagnostics' customer base. Selected employees previously affiliated
with Sigma Diagnostics, primarily in the field sales, instrument service and
technical support areas, have joined the Company. As a result of the
consummation of the transaction with Sigma Diagnostics, the previous agreements
with Sigma Diagnostics have been terminated. There can be no assurance that the
Company will be able to replace its largest customer or that the acquired assets
will be successfully
6
integrated into the Company's business. Any failure to do so could have a
material adverse effect on the Company's business, prospects, operating results
and financial condition.
(3) CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES:
The Company owns certain short-term investments in marketable debt securities
with original maturities of three months or less that are classified as "cash
equivalents" in the accompanying balance sheets. From time to time, the Company
also purchases certain other short term investments in marketable debt
securities with maturities greater than three months but less than one year,
which are deemed short term, classified as available for sale securities and are
recorded at market value using the specific identification method. Unrealized
gains and losses, net of tax, are reflected in "Accumulated other comprehensive
loss" in the accompanying balance sheets. Realized gains and losses are included
in earnings using the specific identification method.
Substantially all cash and cash equivalents are presently held at one national
securities brokerage firm. Accordingly, the Company is subject to credit risk if
this brokerage firm is unable to repay the balance in the account or deliver the
Company's securities or if the brokerage firm should become bankrupt or
otherwise insolvent. At June 30, 2002 and December 31, 2001, the Company owned
no marketable securities. It is the Company's policy to invest in select money
market instruments, municipal securities and corporate issuers.
(4) INVENTORIES:
Inventories consist of the following:
June 30, December 31,
2002 2001
------------- ------------
Raw materials $ 1,336,695 $ 1,044,346
Work-in-process 435,806 478,860
Finished goods 2,925,879 1,334,083
-------------- ------------
Total inventories $ 4,698,380 $ 2,857,289
============== ============
(5) CONCENTRATION OF CREDIT RISK:
The Company performs periodic credit evaluations of its customers' financial
condition and provides allowances for doubtful accounts as required. During the
three and six months ended June 30, 2002 none of the Company's customers
accounted for 10% or more of the Company's net revenues. Sigma Diagnostics, the
Company's largest customer for the past three years, accounted for 31.9% and
37.5% of the Company's net revenues for the three and six months ended June 30,
2001. Comparatively, Sigma Diagnostics accounted for 1.3% and 3.8% of the
Company's net revenues for the three and six months ended June 30, 2002.
Beginning in the third quarter of 2001 and continuing through the consummation
of the Company's transaction with Sigma Diagnostics in May 2002, Sigma
Diagnostics made no purchases of instruments based upon its determination that
it had an adequate level of instruments in inventory. As described above in Note
2, Merger and Acquisition, the Company acquired certain assets of Sigma
Diagnostics' global enzyme immunoassay product line during the second quarter of
2002. There can be no assurance that the Company will be able to replace its
largest customer or to successfully integrate the acquired assets into the
Company's business. Any failure to do so could have a material adverse effect on
the Company's business, prospects, operating results, and financial condition.
7
The Company's accounts receivables are generated from sales made from both the
United States and Italy. As of June 30, 2002 and December 31, 2001, $3,583,067
and $2,561,948, respectively, of the Company's net accounts receivable were due
in Italy. Of the Company's total net accounts receivable, 59.7% at June 30, 2002
and 66.8% at December 31, 2001 were due from hospitals and laboratories
controlled by the Italian government.
(6) LOSS PER SHARE:
A reconciliation of the denominator of the basic and diluted loss per share
computation for loss from continuing operations is as follows:
Period Ended June 30, Three Months Six Months
2002 2001 2002 2001
-------------- -------------- ------------- --------------
Basic and diluted weighted average shares
Outstanding 28,646,531 28,621,643 28,641,122 28,621,643
Not included in the calculation of diluted
loss per share because their impact
is Antidilutive:
Stock options outstanding 2,185,028 2,779,676 2,185,028 2,779,676
(7) INCOME TAXES:
Through March 14, 2001, the Company reported its income taxes as part of a
consolidated group with IVAX. For financial statement purposes, the Company
accounted for income taxes on a stand-alone basis as though the Company had
filed its own income tax returns in the first quarter of 2001. Effective March
14, 2001, as a result of the Merger, the Company is no longer included in the
consolidated income tax returns of IVAX.
The provision for income taxes consists of the following:
Period Ended June 30, Three Months Six Months
2002 2001 2002 2001
-------------- -------------- -------------- -------------
Current:
Foreign $ (8,158) $ 125,537 $ 25,164 $ 414,337
============== ============= ============= =============
The Company's income tax provisions for the three months and six months ended
June 30, 2002 and 2001 were different from the amount computed on the loss
before provision for income taxes at the statutory rate of 35% primarily due to
the non-recognition of the benefits of domestic taxable losses. Included in the
loss before provision for income taxes was nondeductible stock option
compensation expense of $148,650 in both the three months ended June 30, 2002
and 2001, as well as $297,300 and $1,189,184 in the six months ended June 30,
2002 and 2001, respectively.
The Company has established a full valuation allowance on its net domestic
deferred tax assets, which are primarily comprised of net operating loss
carryforwards. The portion of these domestic net operating loss carryforwards
generated prior to March 14, 2001 were utilized by IVAX. On a separate return
basis, no recognition of that utilization is reflected in the accompanying
consolidated financial statements. Net operating losses generated by the Company
after March 14, 2001 are approximately $5,037,000 and
8
$4,010,000 at June 30, 2002 and December 31, 2001, respectively, and are
available for use prior to their expiration in 2021. Foreign deferred tax assets
totaled $696,000 and $624,770 at June 30, 2002 and December 31, 2001,
respectively. Realization of the net deferred tax asset is dependent upon
generating sufficient future taxable income. Although realization is not
assured, management believes that it is more likely than not that the net
deferred tax asset will be realized.
(8) COMPREHENSIVE LOSS:
The components of the Company's comprehensive loss are as follows:
Period Ended June 30, Three Months Six Months
2002 2001 2002 2001
-------------- -------------- ------------- -------------
Net income $ (734,756) $ (199,724) $ (1,449,028) $ (1,519,843)
Foreign currency translations adjustments 667,883 (148,909) 570,223 (492,544)
------------- ------------- ------------- -------------
Comprehensive loss $ (66,873) $ (348,633) $ (878,805) $ (2,012,387)
============= ============= ============= =============
(9) SEGMENT INFORMATION:
The Company's management reviews financial information, allocates resources and
manages its business by geographic region. The Domestic region, which includes
corporate expenditures, contains the Company's subsidiaries in the United
States. The Italian region contains the Company's subsidiaries located in Italy.
The information provided is based on internal reports and was developed and
utilized by management for the sole purpose of tracking trends and changes in
the results of the regions. The information, including the allocations of
expense and overhead, was calculated based on a management approach and may not
reflect the actual economic costs, contributions or results of operations of the
regions as stand-alone businesses. If a different basis of presentation or
allocation were utilized, the relative contributions of the regions might differ
but the relative trends would, in management's view, likely not be materially
impacted. The table below sets forth net revenue, income from operations and
assets by region.
Net Revenues by Region
Period Ended June 30, Three Months Six Months
2002 2001 2002 2001
----------- ----------- ----------- -----------
Domestic
External net revenues $ 1,853,370 $ 1,099,134 $ 3,170,865 $ 2,313,196
Intercompany revenues 275,264 201,099 449,349 377,882
----------- ----------- ----------- -----------
2,128,634 1,300,233 3,620,214 2,691,078
----------- ----------- ----------- -----------
Italian
External net revenues 1,262,490 1,750,148 2,451,283 3,823,932
Intercompany revenues 31,759 157,313 323,384 275,606
----------- ----------- ----------- -----------
1,294,249 1,907,461 2,774,667 4,099,537
------------ ----------- ----------- -----------
Elimination (307,023) (358,411) (772,733) (653,488)
----------- ----------- ----------- -----------
Consolidated net revenues $ 3,115,860 $ 2,849,283 $ 5,622,148 $ 6,137,128
=========== =========== =========== ===========
9
Income (Loss) from Operations by Region
Period Ended June 30, Three Months Six Months
2002 2001 2002 2001
----------- ----------- ----------- -----------
Domestic $ (868,047) $ (620,755) $(1,712,468) $(2,197,839)
Italian (53,400) 259,998 5,960 752,209
Elimination 17,619 (1,287) (29,998) 4,467
----------- ----------- ----------- -----------
Loss from operations $ (903,828) $ (362,044) $(1,736,506) $(1,441,163)
=========== =========== =========== ===========
June 30,
Total Assets: 2002 2001
----------- -----------
Domestic $27,118,515 $28,971,032
Italian 13,471,367 12,166,368
Elimination (215,176) (56,474)
----------- ------------
Total assets $40,374,706 $41,080,926
=========== ===========
(10) COMMITMENTS AND CONTIGENCIES:
On March 2, 2001, b2bstores.com received notice that a shareholder of
b2bstores.com filed a lawsuit against b2bstores.com and two of its directors.
The lawsuit alleges that b2bstores.com violated certain aspects of Section 14(a)
of the Securities Exchange Act of 1934, as amended, and that certain directors
breached their fiduciary duties in connection with the Merger described above in
Note 2, Merger and Acquisition. The suit seeks the court's determination of
declaratory relief as to whether (i) the proxy statement materials sent to
shareholders should be considered null, void and unenforceable, (ii) the Merger,
if accomplished based on the use of the proxy materials, should be set aside,
and (iii) the termination fee of $1,000,000, as defined in the Merger Agreement,
shall be found void. The directors and officers of the Company deny the
allegations and intend to vigorously defend such claims, but the ultimate
outcome of any such legal proceeding cannot be determined.
The Company is involved in various legal claims and actions and regulatory
matters, and other notices and demand proceedings arising in the ordinary course
of business. While it is not feasible to predict or determine the outcome of
these proceedings, in the opinion of management, based on a review with legal
counsel, any losses resulting from such legal proceedings would not have a
material adverse impact on the financial position, results of operations or cash
flows of the Company.
(11) RECENTLY ISSUED ACCOUNTING STANDARDS:
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, which
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. It supersedes Accounting Principles Board ("APB") Opinion No.
17, Intangible Assets. SFAS 142 addresses accounting for intangible assets that
are acquired individually or with a group of other assets (other than a business
combination) upon acquisition. It also addresses accounting for goodwill and
other intangible assets after they have been initially recognized in the
financial statements. Intangible assets that have indefinite lives and goodwill
are no longer amortized; rather, they must be tested at least annually for
impairment using fair values. On January 1, 2002 amortization of goodwill
acquired prior to June 30, 2001 ceased. This will increase the Company's net
income by approximately $255,000 per year. Intangible assets that have finite
useful lives continue to be amortized over their useful lives. The initial test
for impairment of goodwill as of January 1, 2002, was completed during the
second quarter and no impairments were indicated. An independent valuation firm
was used to perform the test.
10
Goodwill and Other Intangible Assets - Adoption of SFAS No. 142:
Period Ended June 30, Three Months Six Months
2002 2001 2002 2001
----------- ---------- ----------- --------
Reported net loss $ (734,756) $ (199,724) $(1,449,028) $(1,519,843)
Addback: Goodwill amortization - 63,632 - 127,469
---------- ---------- ----------- -----------
Adjusted net loss $ (734,756) $ (136,092) $(1,449,028) $(1,392,374)
========== ========== =========== ===========
Basic and diluted earnings per common share:
Reported net income $ (.03) $ (.01) $ (.05) $ (.05)
Goodwill amortization - .01 - -
---------- ---------- ----------- -----------
Adjusted net loss $ (.03) $ - $ (.05) $ (.05)
========== ========== =========== ===========
The following table displays the changes in the carrying amounts of goodwill by
operating segment for the six months ended June 30, 2002:
Balance Balance
December 31, Foreign June 30,
2001 Exchange 2002
----------- ----------- -----------
Domestic $ 2,050,290 $ - $ 2,050,290
Italian 4,827,909 (53,657) 4,774,252
----------- ----------- -----------
Consolidated goodwill $ 6,878,199 $ (53,657) $ 6,824,542
=========== =========== ===========
SFAS 143, Accounting for Asset Retirement Obligations, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS 143
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or normal
operation of a long-lived asset, except for certain obligations of lessees. It
requires that the fair value of an asset retirement obligation be recognized as
a liability in the period in which it is incurred if a reasonable estimate can
be made and that the associated retirement costs be capitalized as part of the
carrying amount of the long-lived asset. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. Management believes that the impact of adoption
of this statement will not have a material impact on the Company's consolidated
financial statements.
Effective January 1, 2002, the Company adopted SFAS 144, Accounting for the
Impairment or Disposal of Long-lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. It
supersedes SFAS 121, Accounting for the Impairment of Long Lived Assets and for
Long Lived Assets to be Disposed of, and certain provisions of APB Opinion No.
30, Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. It also amends ARB No. 51, Consolidated
Financial Statements. SFAS 144 establishes a single accounting model for the
accounting for a segment of a business accounted for as a discontinued operation
that was not addressed by SFAS 121 and resolves other implementation issues
related to SFAS 121. The impact of adoption of this statement did not have a
material impact on the Company's consolidated financial statements.
11
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the related notes to consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001 and the unaudited interim consolidated
financial statements and the related notes to unaudited interim consolidated
financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
We have made forward-looking statements, which are subject to risks and
uncertainties, in this quarterly report on Form 10-Q. These statements are based
on the beliefs and assumptions of our management and on the information
currently available to it. Forward-looking statements may be preceded by,
followed by, or otherwise include the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates," "projects," "would," "should,"
or similar expressions or statements that certain events or conditions "may"
occur. Actual results, performance or achievements could differ materially from
those contemplated, expressed or implied by these forward-looking statements.
These forward-looking statements are based largely on our expectations and the
beliefs and assumptions of our management and on the information currently
available to it and are subject to a number of risks and uncertainties,
including, but not limited to, the risks and uncertainties associated with:
economic, competitive, political, governmental and other factors affecting us
and our operations, markets and products; the success of technological,
strategic and business initiatives; our limited operating revenues and history
of operational losses; our agreements with IVAX, third party distributors and
key personnel; consolidation of our customers and reimbursement policies of
governmental and private third parties affecting our operations, markets and
products; price constraints imposed by our customers, governmental and private
third parties; our ability to replace our largest customer; our ability to
integrate acquired businesses or products; political and economic instability
and foreign currency fluctuation affecting our foreign operations; the holding
of substantially all of our cash and cash equivalents at a single brokerage
firm, including risks relating to the bankruptcy or insolvency of such brokerage
firm; litigation regarding intellectual property rights and product liability;
voting control of our common stock by IVAX; conflicts of interest with IVAX and
with our officers, directors and employees; and other factors discussed
elsewhere in this quarterly report on Form 10-Q. Many of these factors are
beyond our control.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001
NET REVENUES AND GROSS PROFIT
Net revenue for the six months ended June 30, 2002 totaled $5,622,000, a
decrease of $515,000, or 8.4%, from the $6,137,000 reported in the prior year
comparable period. This decrease was comprised of a decrease of $1,373,000 in
external net revenue from Italian operations partially offset by an increase in
external net revenue of $858,000 from domestic operations. External net revenue
from Italian operations totaled $2,451,000 for the six months ended June 30,
2002, compared to $3,824,000 for the six months ended June 30, 2001. This 35.9%
decrease was primarily attributable to decreased sales volume of instrumentation
products from our former largest customer, Sigma Diagnostics, as further
discussed in Note 5, "Concentration of Credit Risk" in the Notes to Consolidated
Financial Statements. Domestic operations generated external net revenue of
$3,171,000 for the six months ended June 30, 2002, compared to
12
$2,313,000 for the six months ended June 30, 2001. The $858,000, or 37.1%
increase, was primarily due to revenue from reagents sold to customers obtained
as a result of the Company's transaction with Sigma Diagnostics and volume
increases in reagent revenue generated from new instrumentation placements,
partially offset by decreased volume of instrument component and raw material
antigen sales. Gross profit for the six months ended June 30, 2002 decreased
$694,000, or 20.0%, to $2,778,000 (49.4% of net revenue) from $3,472,000 (56.6%
of net revenue) for the six months ended June 30, 2001. The decrease in gross
profit was primarily attributable to decreased revenue from sales of
instrumentation products. This decrease was partially offset by gross profit
from revenue from both reagents sold to customers obtained as a result of the
Company's transaction with Sigma Diagnostics and new domestic instrumentation
placements. The decrease in gross profit as a percentage of net revenue of 7.2%
was primarily due to lower revenue from sales of instrumentation products, which
are generally sold at a higher gross margin.
OPERATING EXPENSES
Selling expenses of $1,915,000 (34.1% of net revenue) for the six months ended
June 30, 2002 were composed of expenses of $1,187,000 from domestic operations
and $728,000 from Italian operations. For the six months ended June 30, 2001,
domestic selling expenses were $793,000 while $712,000 was incurred in Italy,
totaling $1,505,000 (24.5% of net revenue). This increase in consolidated
selling expenses of $410,000 was primarily due to greater payroll and travel
costs related to the increase in sales personnel obtained as a result of the
Company's transaction with Sigma Diagnostics as well as increased domestic
instrument system sales efforts. General and administrative expenses totaled
$1,889,000 (33.6% of net revenue) for the six months ended June 30, 2002, a
decrease of $783,000, from $2,672,000 (43.5% of net revenue) for the six months
ended June 30, 2001. This decrease was primarily the result of a decrease of
$892,000 in stock option compensation expense recognized in accordance with APB
Opinion No. 25, from the conversion of outstanding options under our 1999 Stock
Option Plan to non-qualified stock options as a result of the Merger. The
remaining $594,000 of non-cash compensation cost resulting from such conversion
will be expensed over the remaining vesting term of the options through June 30,
2003. Excluding the effect of stock option compensation expense, general and
administrative expenses increased primarily due to certain expenses related to
the consummation of the Company's transaction with Sigma Diagnostics as well as
expenses now necessary due to the Company's independent public company
structure, partially offset by professional fees incurred in 2001 associated
with the completion of the Merger. Research and development expenses totaled
$710,000 for the six months ended June 30, 2002 compared to $609,000 for the six
months ended June 30, 2001, representing 12.6% and 9.9% of net revenues,
respectively. The increase of $101,000 was primarily the result of an increase
in Italian research and development expenses to $202,000 in the six months ended
June 30, 2002 from $83,000 in the six months ended June 30, 2001. This increase
was the result of increased research related to instrumentation products. The
future level of research and development expenditures will depend on, among
other things, the outcome of ongoing testing of products and instrumentation
under development, delays or changes in government required testing and approval
procedures, technological and competitive developments, strategic marketing
decisions and liquidity. Goodwill amortization, which totaled $127,000 in the
six months ended June 30, 2001, was not recorded in the six months ended June
30, 2002 due to the adoption of SFAS 142 (See Note 11, "Recently Issued
Accounting Standards" in the Notes to Consolidated Financial Statements).
OPERATING LOSS
Operating loss was $1,737,000 for the six months ended June 30, 2002 compared to
operating loss of $1,441,000 in the six months ended June 30, 2001. Exclusive of
intersegment elimination adjustments, which increased consolidated operating
loss by $30,000, operating loss in the six months ended June 30, 2002 was
composed of an operating loss of $1,713,000 for domestic operations and
operating income of
13
$6,000 from Italian operations. Excluding intersegment elimination adjustments,
which reduced consolidated operating loss by $5,000 in the six months ended June
30, 2001, domestic operations incurred an operating loss of $2,205,000 while
Italian operations generated operating income of $759,000.
OTHER INCOME (EXPENSE)
Interest income decreased to $293,000 for the six months ended June 30, 2002
from $356,000 for the six months ended June 30, 2001. The decrease was primarily
due to lower interest rates in 2002 as well as a reduction in cash, cash
equivalents and marketable securities partially offset by interest earned on
cash received in the Merger for the full six months ended June 30, 2002 compared
to the prior year period that began with the Merger date and ended June 30,
2001. Interest expense - related party was $0 in the six months ended June 30,
2002 compared to $93,000 for the six months ended June 30, 2001. The related
party interest expense was incurred on intercompany advances from IVAX. As a
result of the Merger, intercompany advances from IVAX were contributed to
capital. Other income, net, totaled $20,000 during the six months ended June 30,
2002, compared to other income, net, of $74,000 during the six months ended June
30, 2001, a decrease of $54,000. This decrease was due to larger net foreign
currency gains recognized in 2001 on transactions by our Italian subsidiary,
which were denominated in currencies other than its functional currency.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2001
NET REVENUES AND GROSS PROFIT
Net revenue for the three months ended June 30, 2002 totaled $3,116,000, an
increase of $267,000, or 9.4%, from the $2,849,000 reported in the prior year
comparable period. This increase was comprised of an increase in external net
revenue of $754,000 from domestic operations partially offset by a decrease of
$487,000 in external net revenue from Italian operations. Domestic operations
generated external net revenue of $1,853,000 for the three months ended June 30,
2002, compared to $1,099,000 for the three months ended June 30, 2001. The
$754,000, or 68.6% increase, was primarily due to revenue from sales of products
obtained as a result of the Company's acquisition of the assets of the EIA
product line of Sigma Diagnostics. External net revenue from Italian operations
totaled $1,263,000 for the three months ended June 30, 2002, compared to
$1,750,000 for the three months ended June 30, 2001. This 27.8% decrease was
primarily attributable to decreased sales volume of instrumentation products to
our former largest customer, Sigma Diagnostics, as further discussed in Note 5,
"Concentration of Credit Risk" in the Notes to Consolidated Financial
Statements. Gross profit for the three months ended June 30, 2002 decreased
$65,000, or 4.1%, to $1,521,000 (48.8% of net revenue) from $1,586,000 (55.7% of
net revenue) for the three months ended June 30, 2001. This decrease in gross
profit was primarily attributable to decreased revenue from sales of
instrumentation products partially offset by gross margin earned on the sale of
products obtained as a result of the Company's acquisition of the assets of the
EIA product line of Sigma Diagnostics. The decrease in gross profit as a
percentage of net revenue of 6.9% was also primarily due to lower revenue from
sales of instrumentation products, which were generally sold at higher gross
margins.
OPERATING EXPENSES
Selling expenses of $1,121,000 (36.0% of net revenue) for the three months ended
June 30, 2002 were composed of expenses of $735,000 from domestic operations and
$386,000 from Italian operations. For the three months ended June 30, 2001,
domestic selling expenses were $399,000 while $339,000 was incurred in Italy,
totaling $738,000 (25.9% of net revenue). This increase in consolidated selling
expenses of
14
$383,000 was primarily due to greater payroll and travel costs related to the
expansion of the domestic sales force primarily as a result of the sale of
products acquired as a result of the Company's acquisition of the assets of the
EIA product line of Sigma Diagnostics as well as due to the Company's ongoing
domestic sales efforts. General and administrative expenses totaled $952,000
(30.6% of net revenue) for the three months ended June 30, 2002, an increase of
$133,000, from $819,000 (28.8% of net revenue) for the three months ended June
30, 2001. This increase compared to the prior period was primarily due to
expenses associated with the Company's transaction with Sigma Diagnostics as
well as an increase in reserve for bad debts incurred in the three months ended
June 30, 2002. Research and development expenses totaled $352,000 for the three
months ended June 30, 2002 compared to $327,000 for the three months ended June
30, 2001, representing 11.3% and 11.5% of net revenues, respectively. The
increase of $25,000 was the result of an increase in Italian research and
development expenses to $136,000 in the three months ended June 30, 2002 from
$50,000 in the three months ended June 30, 2001 partially offset by a decrease
in domestic research and development expenses to $216,000 in the three months
ended June 30, 2002 from $277,000 in the three months ended June 30, 2001. This
increase was the result of increased research related to instrumentation
products. The future level of research and development expenditures will depend
on, among other things, the outcome of ongoing testing of products and
instrumentation under development, delays or changes in government required
testing and approval procedures, technological and competitive developments,
strategic marketing decisions and liquidity. Goodwill amortization, which
totaled $64,000 in the three months ended June 30, 2001, was not recorded in the
three months ended June 30, 2002 due to the adoption of SFAS 142 (See Note 11,
"Recently Issued Accounting Standards" in the Notes to Consolidated Financial
Statements).
OPERATING LOSS
Operating loss was $904,000 for the three months ended June 30, 2002 compared to
operating loss of $362,000 in the three months ended June 30, 2001. Exclusive of
intersegment elimination adjustments, which decreased consolidated operating
loss by $17,000, operating loss in the three months ended June 30, 2002 was
composed of operating losses of $868,000 for domestic operations and $53,000
from Italian operations. Excluding intersegment elimination adjustments, which
increased consolidated operating loss by $1,000 in the three months ended June
30, 2001, domestic operations incurred an operating loss of $628,000 while
Italian operations generated operating income of $267,000.
OTHER INCOME (EXPENSE)
Interest income decreased to $126,000 for the three months ended June 30, 2002
from $276,000 for the three months ended June 30, 2001. The decrease was
primarily due to lower interest rates in 2002 as well as a reduction in cash,
cash equivalents and marketable securities. Other income, net, totaled $35,000
during the three months ended June 30, 2002, compared to other income, net, of
$12,000 during the three months ended June 30, 2001, an increase of $23,000.
This increase was due to larger net foreign currency gains recognized in 2002 on
transactions by our Italian subsidiary, which were denominated in currencies
other than its functional currency.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, our working capital was $26,714,000 compared to $27,812,000 at
December 31, 2001. Cash and cash equivalents totaled $19,509,000 at June 30,
2002, as compared to $23,282,000 at December 31, 2001. Substantially all cash
and cash equivalents are presently held at one national securities brokerage
firm. Accordingly, we are subject to credit risk if this brokerage firm is
unable to repay the balance in the account or deliver our securities or if the
brokerage firm should become bankrupt
15
or otherwise insolvent. We only invest in select money market instruments,
municipal securities and corporate issuers.
Net cash flows of $1,188,000 were used in operating activities during the six
months ended June 30, 2002, compared to $101,000 that was used during the six
months ended June 30, 2001. The increase in cash used in operating activities
during the six months ended June 30, 2002 compared to the same period of the
prior year was primarily the result of a decrease in cash received from accounts
receivable collections, which include the effects of sales made to customers
obtained as a result of our transaction with Sigma Diagnostics as well as
reduced operating results adjusted for non-cash items. These increases were
partially offset by a reduction in cash utilized during the six months ended
June 30, 2002 compared to the same period of the prior year for accounts payable
and accrued expenses and inventory purchases.
Net cash flows of $2,827,000 were used in investing activities during the six
months ended June 30, 2002, as compared to $492,000 used during the same period
of the prior year. The increase in cash used was primarily the result our
acquisition of the net assets of the EIA product line of Sigma Diagnostics.
Net cash flows of $91,000 were provided by financing activities during the six
months ended June 30, 2002, compared to $24,154,000 provided during the same
period of 2001. The decrease in cash provided was primarily due to cash of
$22,285,000 that was included in net assets acquired in the Merger. Other
differences in net cash flows provided by financing activities are primarily due
to a decrease in funds received from IVAX.
Our product research and development expenditures are expected to be
approximately $1,600,000 during 2002. Actual expenditures will depend on, among
other things, the outcome of clinical testing of products under development,
delays or changes in government required testing and approval procedures,
technological and competitive developments, strategic marketing decisions and
liquidity. There can be no assurance that we will successfully complete products
under development, that we will be able to obtain regulatory approval for any
such products, or that any approved product will be produced in commercial
quantities, at reasonable costs, and be successfully marketed. In addition, we
have increased our fiscal 2002 estimate of cash required to improve and expand
our facilities, equipment and information systems to $500,000, primarily as a
result of expenditures relating to our efforts to integrate into our operations
the assets of the EIA product line of Sigma Diagnostics. There can be no
assurance that we will be able to successfully integrate into our operations the
assets of the EIA product line of Sigma Diagnostics.
Our principal source of short term liquidity is existing cash and cash
equivalents received as a result of the completion of the Merger, which we
believe will be sufficient to meet our operating needs and anticipated capital
expenditures over the short term. For the long term, we intend to utilize
principally existing cash and cash equivalents as well as internally generated
funds, which are anticipated to be derived primarily from the sale of existing
diagnostic and instrumentation products and diagnostic and instrumentation
products currently under development. To the extent that the aforementioned
sources of liquidity are insufficient, we may consider issuing debt or equity
securities or curtailing or reducing our operations.
On May 15, 2002, we consummated our acquisition of certain of the assets of the
global EIA product line of Sigma Diagnostics (See Note 2, "Merger and
Acquisition" in the Notes to Consolidated Financial Statements) for
approximately $2,259,000 and the assumption of certain liabilities. Under
previous agreements with Sigma Diagnostics, we sold enzyme immunoassay
instrumentation and reagents to Sigma Diagnostics which they marketed throughout
the world. Upon the consummation of the transaction with Sigma Diagnostics, our
previous agreements with Sigma Diagnostics were terminated. As described
16
in Note 5, "Concentration of Credit Risk" in the Notes to Consolidated Financial
Statements, Sigma Diagnostics had been our largest customer for the past three
years. During the six months ended June 30, 2002 and 2001 our net revenues from
Sigma Diagnostics for sales of instruments, replacement parts and diagnostic
kits represented 3.8% and 37.5%, respectively, of our total net revenues for
such periods. There can be no assurance that we will be able to replace our
largest customer or successfully integrate the acquired assets into our
business. Any failure to do so could have a material adverse effect on our
business, prospects, operating results, and financial condition.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to product returns, allowance for doubtful accounts, inventories,
intangible assets, income and other tax accruals, warranty obligations, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions 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. Our assumptions and estimates may, however, prove to have been
incorrect and our actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
and the judgments and estimates we make concerning their application have
significant impact on our consolidated financial statements.
A principal source of revenue is our "reagent rental" program in which customers
make reagent kit purchase commitments with us that typically last for a period
of three to five years. In exchange, we provide at no cost a Mago(R) instrument
and any required instrument service, which are paid for by the customer through
these reagent kit purchases over the life of the commitment. We recognize
revenue from the reagent kit sales only at the time of shipment and passage of
title. Should actual reagent kit or instrument failure rates significantly
increase, our future operating results could be negatively impacted by increased
warranty obligations and service delivery costs.
We maintain allowances for doubtful accounts, particularly in Italy for the
operations of our Italian subsidiary, for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, then we may be required to make additional allowances
which would adversely affect our operating results during the period in which
the determination or reserve is or was made.
We regularly review inventory quantities on hand and, if necessary, record a
provision for excess and obsolete inventory based primarily on our estimates of
product demand and production requirements. These estimates of future product
demand may prove to be inaccurate, in which case any resulting adjustments to
the value of inventory would be recognized in our cost of goods sold at the time
of such determination.
Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets," we analyzed
our goodwill for impairment issues during the first six months of fiscal 2002
(See Note 11, "Recently Issued Accounting Standards" in the Notes to
Consolidated Financial Statements) and will continue to do so in future periods
on a periodic basis. In assessing the recoverability of our goodwill and other
intangibles we made assumptions regarding estimated future cash flows, including
current and projected levels of income,
17
business trends, prospects and market conditions, to determine the fair value of
the respected assets. If these estimates or their related assumptions change in
the future, we may be required to record impairment charges for these assets not
previously recorded. Any resulting impairment loss would be recorded as a charge
against our earnings and could have a material adverse impact of our financial
condition and results of operations.
We accounted for income taxes on our consolidated financial statements on a
stand-alone basis as if we had filed our own income tax returns. However, the
pre-merger Diagnostics reported its income taxes until the Merger as part of a
consolidated group. Therefore, all domestic net operating losses generated prior
to the Merger were utilized by IVAX. Since the Merger, we have experienced
domestic losses from operations. Accounting principles generally accepted in the
United States require that we record a valuation allowance against the deferred
tax asset associated with these losses if it is "more likely than not" that we
will not be able to utilize the net operating loss to offset future taxes. Due
to the losses from the operations of our domestic operations since the Merger,
we have provided full valuation reserves against domestic deferred tax assets
and currently provide for only foreign income taxes. Over time we may reach
levels of profitability which could cause our management to conclude that it is
more likely than not that we will realize all or a portion of the net operating
loss carryforward. Upon reaching such a conclusion, and upon such time as we
reversed the entire valuation against the deferred tax asset, we would then
provide for income taxes at a rate equal to our combined federal and state
effective rates. This and subsequent revisions to the estimated net realizable
value of the deferred tax asset could cause our provision for income taxes to
vary significantly from period to period.
The critical accounting policies discussed are not intended to be a
comprehensive list of all of our accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically dictated by
accounting principles generally accepted in the United States, with no need for
management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2002 we adopted SFAS 142, Goodwill and Other Intangible
Assets, which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. SFAS 142 addresses accounting for intangible assets that are acquired
individually or with a group of other assets (other than a business combination)
upon acquisition. It also addresses accounting for goodwill and other intangible
assets after they have been initially recognized in the financial statements.
Intangible assets that have indefinite lives and goodwill will no longer be
amortized; rather, they must be tested at least annually for impairment using
fair values. Intangible assets that have finite useful lives will be amortized
over their useful lives. On January 1, 2002 amortization of goodwill acquired
prior to June 30, 2001 ceased. This will increase net income by approximately
$255,000 per year. The initial test for impairment of goodwill as of January 1,
2002 was completed during the second quarter and no impairments were indicated.
An independent valuation firm was used to perform the test.
SFAS 143, Accounting for Asset Retirement Obligations, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS 143
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or normal
operation of a long-lived asset, except for certain obligations of lessees. It
requires that the fair value of an asset retirement obligation be recognized as
a liability in the period in which it is incurred if a reasonable estimate can
be made and that the associated retirement costs be capitalized as part of the
carrying amount of the long-lived asset. SFAS
18
143 is effective for fiscal years beginning after June 15, 2002. Our management
believes that the impact of adoption of this statement will not have a material
impact on the Company's consolidated financial statements.
Effective January 1, 2002 we adopted SFAS 144, Accounting for the Impairment or
Disposal of Long-lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. It supersedes
SFAS 121, Accounting for the Impairment of Long Lived Assets and for Long Lived
Assets to be Disposed of, and certain provisions of APB Opinion No. 30,
Reporting the Effects of Disposal of a Segment of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for the disposal of
a segment of a business. It also amends ARB No. 51, Consolidated Financial
Statements. SFAS 144 establishes a single accounting model for the accounting
for a segment of a business accounted for as a discontinued operation that was
not addressed by SFAS 121 and resolves other implementation issues related to
SFAS 121. The impact of adoption of this statement did not have a material
impact on the Company's consolidated financial statements.
CURRENCY FLUCTUATIONS
For the six months ended June 30, 2002 and 2001, approximately 43.2% and 30.6%,
respectively, of our net revenues were generated in currencies other than the
United States dollar. Fluctuations in the value of foreign currencies relative
to the United States dollar affect our reported results of operations. If the
United States dollar weakens relative to the foreign currency, then our earnings
generated in the foreign currency will, in effect, increase when converted into
United States dollars and vice versa. There was no material effect in net
revenues caused by exchange rate differences resulting from the strength or
weakness of the United States dollar against the Euro for the six months ended
June 30, 2002 compared to the same period of the prior year. During the six
months ended June 30, 2002 and 2001, no of subsidiary was domiciled in a highly
inflationary environment. The effects of inflation on consolidated net revenues
and operating income were not significant.
For the six months ended June 30, 2002, Delta represented 43.6% of our net
revenues. Conducting an international business inherently involves a number of
difficulties, risks, and uncertainties, such as export and trade restrictions,
inconsistent and changing regulatory requirements, tariffs and other trade
barriers, cultural issues, longer payment cycles, problems in collecting
accounts receivable, political instability, local economic downturns, seasonal
reductions in business activity in Europe during the traditional summer vacation
months, and potentially adverse tax consequences.
On January 1, 1999, members of the European Union, including Italy, introduced a
single currency, the Euro. During the transition period which ended January 1,
2002, European Monetary Union, or EMU, countries had the option of settling
transactions in local currencies or in the Euro. We have completed our
conversion to the Euro. The conversion to the Euro has resulted in increased
costs to us related to updating operating systems, reviewing the effect of the
Euro on our contracts and updating catalogues and sales materials for our
products. The adoption of the Euro will limit the ability of an individual EMU
country to manage fluctuations in the business cycles through monetary policy.
INCOME TAXES
We recognized tax (benefits) provisions of $(8,000) and $126,000 for the three
months ended June 30, 2002 and 2001, and $25,000 and $414,000 for the six months
ended June 30, 2002 and 2001, respectively, which related to foreign operations.
Through March 14, 2001, we reported our domestic income taxes as part of a
consolidated group with IVAX. All domestic taxable losses generated prior to
19
that date were utilized by IVAX. Effective March 14, 2001, as a result of the
Merger, we are no longer included in the consolidated income tax returns of
IVAX.
For financial statement purposes, we accounted for income taxes on a stand-alone
basis as though we had filed our own income tax returns. Our income tax
provisions for the three and six months ended June 30, 2002 and 2001 were
different from the amount computed on the loss before provision for income taxes
at the United States federal statutory rate of 35% primarily due to the
non-recognition of the benefits of domestic taxable losses which include the
previously discussed non-deductible stock option compensation expense.
As of June 30, 2002, we had no net domestic deferred tax asset, as domestic net
operating losses generated prior to the Merger were utilized by IVAX and a full
valuation allowance has been established against domestic deferred tax assets
generated subsequent to March 14, 2001. The foreign net deferred tax asset was
$696,000 at June 30, 2002 and is included in other current assets in the
accompanying consolidated balance sheet. Realization of the net deferred tax
asset is dependent upon generating sufficient future foreign taxable income.
Although realization is not assured, over time we believe we will reach levels
of profitability which will permit the net deferred tax asset to be realized.
RISK OF PRODUCT LIABILITY CLAIMS
Developing, manufacturing and marketing diagnostic test kits, reagents and
instruments subject us to the risk of product liability claims. We believe that
we continue to maintain an adequate amount of product liability insurance, but
there can be no assurance that our insurance will cover all existing and future
claims. There can be no assurance that claims arising under any pending or
future product liability cases, whether or not covered by insurance, will not
have a material adverse effect on our business, results of operations or
financial condition. Our current products liability insurance is a "claims made"
policy.
20
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company, in the normal course of doing business, is exposed to the risks
associated with foreign currency exchange rates and changes in interest rates.
Foreign Currency Exchange Rate Risk - The Company is exposed to exchange rate
risk when its Italian subsidiary enters into transactions denominated in
currencies other than its functional currency.
Interest Rate Risk - The Company does not have debt obligations. The Company
believes that its exposure to market risk relating to interest rate risk is not
material.
Commodity Price Risk - The Company does not believe it is subject to any
material risk associated with commodity prices.
21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On March 2, 2001, b2bstores.com received notice that a shareholder of
b2bstores.com filed a lawsuit against b2bstores.com and two of its directors.
The lawsuit alleges that b2bstores.com violated certain aspects of Section 14(a)
of the Securities Exchange Act of 1934, as amended, and that certain directors
breached their fiduciary duties in connection with the Merger. The suit seeks
the court's determination of declaratory relief as to whether (i) the proxy
statement materials sent to shareholders should be considered null, void and
unenforceable, (ii) the Merger, if accomplished based on the use of the proxy
materials, should be set aside, and (iii) the termination fee of $1,000,000, as
defined in the Merger Agreement, shall be found void. The directors and officers
of the Company deny the allegations and intend to vigorously defend such claims,
but the ultimate outcome of any such legal proceeding cannot be determined.
The Company is involved in various legal claims and actions and regulatory
matters, and other notices and demand proceedings arising in the ordinary course
of business. While it is not feasible to predict or determine the outcome of
these proceedings, in the opinion of management, based on a review with legal
counsel, any losses resulting from such legal proceedings would not have a
material adverse impact on the financial position, results of operations or cash
flows of the Company.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on July 12, 2002. The
following is a summary of the matters voted on at the annual meeting:
The stockholders voted to amend and restate the Company's Certificate of
Incorporation to, among other things, consolidate the previous amendments to the
Company's Certificate of Incorporation into one document and permit the
Company's Board of Directors to amend the Company's Bylaws without shareholder
approval. The number of votes cast for and against the amendment and restatement
of the Company's Certificate of Incorporation were as follows:
For Against Abstained Broker Non-Votes
- --- ------- --------- ----------------
20,522,126 58,610 --- ---
The stockholders voted to re-elect all eight directors to the Company's Board of
Directors. The persons elected to the Company's Board of Directors and the
number of votes cast for and withheld for each nominee for director were as
follows:
Director For Withheld
- -------- --- --------
Jack Borsting, Ph.D. 20,575,726 5,010
Randall K. Davis 20,575,726 5,010
Giorgio D'Urso 20,575,726 5,010
Neil Flanzraich 20,575,726 5,010
Phillip Frost, M.D. 20,575,726 5,010
John Harley, M.D. 20,575,726 5,010
Jane Hsiao, Ph.D. 20,575,726 5,010
Jay Raubvogel 20,575,726 5,010
22
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
3.2 Amended and Restated Bylaws
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Financial Officer
(b) Reports on Form 8-K
On June 24, 2002 the Company filed a report on Form 8-K dated June 21, 2002,
under Item 4 - Changes in Registrant's Certifying Accountant, reporting it had
dismissed its independent certified public accountants, Arthur Andersen LLP, and
had engaged the services of Ernst & Young LLP as its new independent auditors
for the Company's fiscal year ending December 31, 2002.
23
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IVAX Diagnostics, Inc.
Date: August 8, 2002 By: /s/ Mark Deutsch
---------------------------------
Mark Deutsch
Vice President-Finance
Chief Financial Officer
24
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.2 Amended and Restated Bylaws
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Financial Officer