FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 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 February 1, 2004
---------------------------- ----------------
Common Stock, $.01 par value 6,655,865
MISONIX, INC.
-------------
INDEX
-----
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
December 31, 2003 (Unaudited) and June 30, 2003 3
Consolidated Statements of Income
Six months ended December 31, 2003
and 2002 (Unaudited) 4
Consolidated Statements of Income
Three months ended December 31, 2003
and 2002 (Unaudited) 5
Consolidated Statements of Cash Flows
Six months ended December 31, 2003
and 2002 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MISONIX, INC.
CONSOLIDATED BALANCE SHEETS
===========================
DECEMBER 31, June 30,
2003 2003
----------------------------
ASSETS (UNAUDITED)
----------------------------
Current assets:
Cash and cash equivalents $ 4,915,875 $ 2,279,869
Accounts receivable, less allowance for doubtful accounts of $747,199 and
$644,157, respectively 6,383,146 7,844,399
Inventories 9,499,832 8,979,472
Deferred income taxes 605,313 477,580
Prepaid expenses and other current assets 654,560 983,523
----------------------------
Total current assets 22,058,726 20,564,843
Property, plant and equipment, net 3,769,931 3,574,207
Deferred income taxes 459,677 862,690
Goodwill 4,473,713 4,473,713
Other assets 328,960 319,136
----------------------------
Total assets $ 31,091,007 $29,794,589
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities $ 1,258,477 $ 704,669
Accounts payable 3,091,945 3,563,208
Accrued expenses and other current liabilities 1,664,524 2,002,154
Income taxes payable 416,651 47,453
Current maturities of long-term debt and capital lease obligations 297,652 279,554
----------------------------
Total current liabilities 6,729,249 6,597,038
Long-term debt and capital lease obligations 1,304,031 1,235,362
Deferred income 394,875 356,076
Minority interest 291,602 263,450
Stockholders' equity:
Common stock, $.01 par value-shares authorized 10,000,000; 6,733,665
issued and 6,655,865 outstanding 67,337 67,337
Additional paid-in capital 22,712,511 22,712,511
Retained deficit (270,456) (1,053,484)
Treasury stock, 77,800 shares (412,424) (412,424)
Accumulated other comprehensive income 274,282 28,723
----------------------------
Total stockholders' equity 22,371,250 21,342,663
----------------------------
Total liabilities and stockholders' equity $ 31,091,007 $29,794,589
============================
See Accompanying Notes to Consolidated Financial Statements.
3
MISONIX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
===========
FOR THE SIX MONTHS ENDED
DECEMBER 31,
2003 2002
------------ ------------
Net sales $17,916,007 $15,184,835
Cost of goods sold 10,272,094 8,822,459
--------------------------
Gross profit 7,643,913 6,362,376
Operating expenses:
Selling expenses 2,078,492 2,032,563
General and administrative expenses 3,890,046 3,152,131
Research and development expenses 1,063,646 1,015,888
Litigation (recovery) settlement expenses - (152,628)
--------------------------
Total operating expenses 7,032,184 6,047,954
--------------------------
Income from operations 611,729 314,422
Other income (expense):
Interest income 27,846 41,398
Interest expense (77,003) (87,480)
Option/license fees 13,125 12,156
Royalty income 838,588 248,645
Foreign exchange (loss) gain (8,941) 2,245
Loss on impairment of Hearing Innovations, Inc. (35,600) (182,907)
Loss on impairment of Focus Surgery, Inc. - (13,725)
--------------------------
Total other income 758,015 20,332
Income before minority interest and income taxes 1,369,744 334,754
Minority interest in net income (loss) of consolidated
subsidiary 28,151 (33,836)
--------------------------
Income before income taxes 1,341,593 368,590
Income tax expense 558,565 204,392
--------------------------
Net income $ 783,028 $ 164,198
==========================
Net income per share - Basic $ .12 $ .03
==========================
Net income per share - Diluted $ .12 $ .03
==========================
Weighted average common shares outstanding - Basic 6,655,865 6,308,526
==========================
Weighted average common shares outstanding - Diluted 6,729,060 6,554,421
==========================
See Accompanying Notes to Consolidated Financial Statements.
4
MISONIX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
===========
FOR THE THREE MONTHS ENDED
DECEMBER 31,
2003 2002
----------- -----------
Net sales $9,296,109 $8,174,513
Cost of goods sold 5,317,891 4,769,355
Gross profit 3,978,218 3,405,158
Operating expenses:
Selling expenses 1,121,959 1,096,960
General and administrative expenses 1,834,278 1,632,258
Research and development expenses 575,166 476,562
Litigation (recovery) settlement expenses - (25,326)
------------------------
Total operating expenses 3,531,403 3,180,454
------------------------
Income from operations 446,815 224,704
Other income (expense):
Interest income 21,018 2,684
Interest expense (39,207) (44,503)
Option/license fees 6,664 6,078
Royalty income 274,539 126,000
Foreign exchange loss (4,348) (1,038)
Loss on impairment of Hearing Innovations, Inc. (12,600) (84,000)
------------------------
Total other income 246,066 5,221
Income before minority interest and income taxes 692,881 229,925
Minority interest in net income (loss) of consolidated
subsidiary 14,125 (40,553)
------------------------
Income before income taxes 678,756 270,478
Income tax expense 289,470 157,437
------------------------
Net income $ 389,286 $ 113,041
========================
Net income per share - Basic $ .06 $ .02
========================
Net income per share - Diluted $ .06 $ .02
========================
Weighted average common shares outstanding - Basic 6,655,865 6,511,188
========================
Weighted average common shares outstanding - Diluted 6,732,540 6,598,096
========================
See Accompanying Notes to Consolidated Financial Statements.
5
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
===========
FOR THE SIX MONTHS ENDED
DECEMBER 31,
2003 2002
-------------------------
OPERATING ACTIVITIES
Net income $ 783,028 $ 164,198
Adjustments to reconcile net income to net cash provided by
operating activities:
Bad debt expense 127,099 29,530
Litigation recovery - (152,628)
Deferred income tax benefit 275,280 (19,398)
Depreciation and amortization 358,029 327,684
Loss on disposal of equipment 41,975 66,873
Foreign currency exchange loss (gain) 8,941 (2,245)
Minority interest in net income of subsidiaries 28,151 (33,836)
Loss on impairment of investments 35,600 196,632
Changes in operating assets and liabilities:
Accounts receivable 1,425,679 (1,483)
Inventories (268,059) (1,269,619)
Prepaid income taxes (119,657) 657,914
Prepaid expenses and other current assets 355,672 (7,662)
Other assets (36,853) 160,842
Accounts payable and accrued expenses (923,500) 192,804
Litigation settlement liabilities - (4,332)
Deferred income 38,799 39,304
Income taxes payable 483,252 (36,292)
-------------------------
Net cash provided by operating activities 2,613,436 308,286
-------------------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (214,509) (267,025)
Loans to Hearing Innovations, Inc. (35,600) (159,666)
Purchase of Labcaire stock - (232,394)
-------------------------
Net cash used in investing activities (250,109) (659,085)
-------------------------
FINANCING ACTIVITIES
Proceeds from short-term borrowings 451,063 360,815
Principal payments on capital lease obligations (153,787) (134,008)
Proceeds from long-term debt - 11,409
Payments of long-term debt (25,432) (10,754)
Proceeds from stock options - 393,104
-------------------------
Net cash provided by financing activities 271,844 620,566
-------------------------
Effect of exchange rate changes on assets and liabilities 835 (4,299)
-------------------------
Net increase in cash and cash equivalents 2,636,006 265,468
Cash and cash equivalents at beginning of period 2,279,869 1,065,465
-------------------------
Cash and cash equivalents at end of period $4,915,875 $ 1,330,933
=========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for (received from):
Interest $ 77,003 $ 87,480
=========================
Income taxes $ (177,389) $ (531,213)
=========================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease additions $ 153,364 $ 237,785
=========================
See Accompanying Notes to Consolidated Financial Statements.
6
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 six months ended December 31, 2003 are not
necessarily indicative of the results that may be expected for the year
ending June 30, 2004.
The balance sheet at June 30, 2003 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, 2003.
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 Six Months For the Three Months
Ended December 31, Ended December 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Weighted average common
shares outstanding 6,655,865 6,308,526 6,655,865 6,511,188
Dilutive effect of stock options 73,195 245,895 76,675 86,908
--------- --------- --------- ---------
Diluted weighted average common
shares outstanding 6,729,060 6,554,421 6,732,540 6,598,096
========= ========= ========= =========
3. Comprehensive Income
---------------------
Total comprehensive income was $1,028,587 and $607,804 for the six and
three months ended December 31, 2003, respectively, and $379,583 and
$177,294 for the six and three months ended December 31, 2002,
respectively. Accumulated other comprehensive income is comprised of
foreign currency translation adjustments.
7
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
4. Stock-Based Compensation
-------------------------
The Company accounts for stock-based employee and outside directors'
compensation under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. The Company has adopted the
disclosure-only provisions of Statements of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123") and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", which was released in December 2002 as an
amendment of SFAS No. 123. 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 six months ended For the three months ended
December 31,
2003 2002 2003 2002
---------------------------------------------------------
Net income - As reported: $ 783,028 $ 164,198 $ 389,286 $113,041
Stock based compensation
determined under SFAS 123 (280,549) (170,717) (172,635) (97,558)
---------------------------------------------------------
Net income (loss)- Pro forma: $ 502,479 $ (6,519) $ 216,651 $ 15,483
Net income (loss) per share -
Basic:
As reported $ .12 $ .03 $ .06 $ .02
Pro forma $ .08 - $ .03 -
Net income (loss) per share -
Diluted:
As reported $ .12 $ .03 $ .06 $ .02
Pro forma $ .07 $ - $ .03 $ -
5. Inventories
-----------
Inventories are summarized as follows:
DECEMBER 31, 2003 June 30, 2003
------------------ --------------
Raw materials $ 4,217,326 $ 4,230,870
Work-in-process 1,496,299 1,112,453
Finished goods 3,786,207 3,636,149
----------------------------------
$ 9,499,832 $ 8,979,472
==================================
8
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
6. Revolving Credit Facilities
-----------------------------
On December 31, 2003, Labcaire extended its debt purchase agreement with
Lloyds TSB Commercial Finance through June 30, 2004. During the six months
ended December 31, 2003 Labcaire borrowed $553,808 under the debt purchase
agreement. At December 31, 2003, the balance outstanding under this debt
purchase agreement was $1,258,477 and Labcaire was in compliance with all
financial covenants.
7. Accrued Expenses and Other Current Liabilities
---------------------------------------------------
The following summarizes accrued expenses and other current liabilities:
DECEMBER 31, 2003 June 30, 2003
------------------ --------------
Accrued payroll and vacation $ 289,895 $ 283,339
Accrued sales tax 147,912 208,005
Accrued commissions and bonuses 275,698 212,585
Customer deposits and deferred contracts 811,664 1,116,869
Accrued professional fees 89,476 132,766
Other 49,879 48,590
------------------ --------------
$ 1,664,524 $ 2,002,154
================== ==============
8. Loans to Affiliate
--------------------
Hearing Innovations, Inc.
- ---------------------------
During fiscal 2004, the Company entered into three loan agreements whereby
Hearing Innovations, Inc. ("Hearing Innovations") is required to pay the Company
an aggregate amount of $35,600. These notes are currently in default due to
non-payment. Hearing Innovations is currently negotiating with the Company to
extend the due dates of all its outstanding debt. 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 35,600 shares of Hearing Innovations common stock, at the option of the
Company, at a cost of $.20 per share. These warrants, which are deemed nominal
in value, expire in October 2005. The Company recorded an allowance against the
entire balance of $35,600 for the above loans. The related expense has been
included in loss on impairment of Hearing Innovations in the accompanying
consolidated statements of income. 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. The Company has made the
decision not to continue funding Hearing Innovations' operations at this time,
however, in January 2004, the Company loaned Hearing Innovations $100,000 to
enable Hearing Innovations to reduce a substantial portion of their long term
debt to certain third parties. The Company continues to believe that Hearing
Innovations' technology provides a benefit to patients but the products require
more improvement and market development. All equity investments and debt in
Hearing Innovations have been fully reserved and currently have a zero basis.
9
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: laboratory and scientific products and medical devices.
Laboratory and scientific 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 revenues of high-performance ultrasound systems and
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, 2003. Certain items are maintained at the corporate
headquarters (corporate) and are not allocated to the segments. They
primarily include general and administrative expenses. The Company does not
allocate assets by segment. Summarized financial information for each of
the segments are as follows:
For the six months ended December 31, 2003:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
---------------------------------------------------------------
Net sales $ 9,730,632 $ 8,185,375 $ - $17,916,007
Cost of goods sold 5,401,166 4,870,928 - 10,272,094
----------- -------------------- -----------
Gross profit 4,329,466 3,314,447 - 7,643,913
Selling expenses 863,592 1,214,900 - 2,078,492
Research and
development expenses 694,744 368,902 - 1,063,646
----------- -------------------- -----------
Total operating expenses 1,558,336 1,583,802 3,890,046 7,032,184
----------- -------------------- --------------- -----------
Income from operations $ 2,771,130 $ 1,730,645 $ (3,890,046) $ 611,729
=========== ==================== =============== ===========
(a) Amount represents general and administrative expenses only.
For the three months ended December 31, 2003:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
--------------------------------------------------------------
Net sales $ 5,128,512 $ 4,167,597 $ - $9,296,109
Cost of goods sold 2,850,274 2,467,617 - 5,317,891
----------- -------------------- ----------
Gross profit 2,278,238 1,699,980 - 3,978,218
Selling expenses 489,353 632,606 - 1,121,959
Research and
development expenses 376,678 198,488 - 575,166
----------- -------------------- ----------
Total operating expenses 866,031 831,094 1,834,278 3,531,403
----------- -------------------- --------------- ----------
Income from operations $ 1,412,207 $ 868,886 $ (1,834,278) $ 446,815
=========== ==================== =============== ==========
(a) Amount represents general and administrative expenses only.
10
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
For the six months ended December 31, 2002:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
---------------------------------------------------------------
Net sales $ 7,211,580 $ 7,973,255 $ - $15,184,835
Cost of goods sold 4,082,186 4,740,273 - 8,822,459
----------- -------------------- -----------
Gross profit 3,129,394 3,232,982 - 6,362,376
Selling expenses 643,680 1,388,883 - 2,032,563
Research and
development expenses 690,853 325,035 - 1,015,888
----------- -------------------- -----------
Total operating expenses 1,334,533 1,713,918 2,999,503 6,047,954
----------- -------------------- --------------- -----------
Income from operations $ 1,794,861 $ 1,519,064 $ (2,999,503) $ 314,422
=========== ==================== =============== ===========
(a) Amount represents general and administrative and litigation (recovery) settlement
expenses only.
For the three months ended December 31, 2002:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
--------------------------------------------------------------
Net sales $ 4,042,908 $ 4,131,605 $ - $8,174,513
Cost of goods sold 2,238,416 2,530,939 - 4,769,355
----------- -------------------- ----------
Gross profit 1,804,492 1,600,666 - 3,405,158
Selling expenses 376,055 720,905 - 1,096,960
Research and
development expenses 307,832 168,730 - 476,562
----------- -------------------- ----------
Total operating expenses 683,887 889,635 1,606,932 3,180,454
----------- -------------------- --------------- ----------
Income from operations $ 1,120,605 $ 711,031 $ (1,606,932) $ 224,704
=========== ==================== =============== ==========
(a) Amount represents general and administrative expenses and litigation (recovery)
settlement expenses only.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the six months ended December 31:
2003 2002
----------- -----------
United States $11,926,648 $10,066,463
Canada 149,070 165,390
Mexico 166,433 3,222
United Kingdom 4,219,201 3,645,365
Europe 512,080 676,841
Asia 417,764 494,762
Middle East 151,036 42,522
Other 373,775 90,270
------------------------
$17,916,007 $15,184,835
========================
11
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
10. Regulatory Requirements
------------------------
The Company received a letter dated October 31, 2003 from the Food and Drug
Administration ("FDA") regarding the Company's notification concerning the
implemented procedures to "field correct" a shock sensation that was caused
by users forcing the output connector improperly when using the Lysonix
2000. Although the output cable was properly marked, the Company issued new
sticker directions and notified all its customers in writing. The FDA
stated that it "agreed with the Company's decision to "field correct" the
Lysonix 2000."
The FDA classified this field correction as a Class II recall which means
that this is a situation in which use of or exposure to such product may
cause temporary or medically reversible adverse health consequences or
which the probability of serious adverse health consequences is remote. The
Company will do everything necessary to satisfy the FDA request for
information on the "field correction." The Company, additionally, is
following FDA policies to be fully compliant with all requirements. The
Company has estimated the cost of this field correction to be immaterial.
12
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.
Six Months Ended December 31, 2003 and 2002.
NET SALES. Net sales of the Company's medical devices and laboratory and
- -----------
scientific products increased $2,731,172 to $17,916,007 for the six months ended
December 31, 2003 from $15,184,835 for the six months ended December 31, 2002.
This difference in net sales is due to an increase in sales of medical devices
of $2,519,052 to $9,730,632 for the six months ended December 31, 2003 from
$7,211,580 for the six months ended December 31, 2002. This difference is
also due to an increase in sales of laboratory and scientific products of
$212,120 to $8,185,375 for the six months ended December 31, 2003 from
$7,973,255 for the six months ended December 31, 2002. The increase in sales of
medical devices is due to an increase in sales of therapeutic medical devices of
$1,583,865 and an increase in diagnostic medical devices of $935,187, both due
to increased customer demand for several therapeutic and diagnostic medical
devices. The increase in sales of diagnostic medical devices was not
attributable to a single customer, distributor or any other specific factor.
The increase in sales of therapeutic medical devices was mostly attributable to
an increase in sales to Mentor Corporation ("Mentor") of the Lysonix 3000 device
and Auto Sonix device and accessories to sold United States Surgical Corporation
("USS") of approximately $726,000 and $564,000, respectively. The remaining
increase in therapeutic medical devices is due to increased demand for several
products. The increase in laboratory and scientific products is due to an
increase in Labcaire sales of $440,810 and ultrasonic sales of $292,963
partially offset by a decrease in wet scrubber sales of $340,467 and a decrease
in ductless fume enclosure sales of $181,186. The increase in Labcaire sales is
primarily due to the strengthening of the English Pound of which represented
$268,958 of the increase. The remaining increase of $171,852 is due to an
increased demand for the new Guardian (endoscopic cleaning) product. The
increase in laboratory and scientific ultrasonic sales is due to an increase in
customer demand for several ultrasonic products. Wet scrubber sales continue to
be adversely affected by the downturn in the semi-conductor market. The
decrease in fume enclosure sales is due to lower customer demand for several
laboratory and scientific products and current economic conditions for such
products. Export sales from the United States are remitted in U.S. Dollars and
export sales for Labcaire are remitted in English Pounds. During the six months
ended December 31, 2003 and 2002, the Company had foreign net sales of
$5,989,359 and $5,118,372, respectively, representing 33.4% and 33.7% of net
sales for such years, respectively. The increase in foreign sales during the
six months ended December 31, 2003 as compared to the six months ended December
31, 2002 is substantially due to an increase in Labcaire sales of approximately
$441,000 as well as an increase in foreign diagnostic and therapeutic medical
device sales. Labcaire represented 80% and 86% of foreign net sales during the
six months ended December 31, 2003 and 2002, respectively. The remaining 20%
and 14% represents net foreign sales remitted in United States currency during
the six months ended December 31, 2003 and 2002, respectively. Approximately
24% of the Company's revenues for the six months ended December 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 weighted average rates of 1.62 and
1.50 for the six months ended December 31, 2003 and 2002, respectively. A
strengthening of the English Pound, in relation to the U.S. Dollar, will have
the effect of increasing reported revenues and profits, while a weakening of the
English Pound will have the opposite effect. Since the Company's operations in
England generally set 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.
13
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the six months ended December 31:
2003 2002
----------- -----------
United States $11,926,648 $10,066,463
Canada 149,070 165,390
Mexico 166,433 3,222
United Kingdom 4,219,201 3,645,365
Europe 512,080 676,841
Asia 417,764 494,762
Middle East 151,036 42,522
Other 373,775 90,270
------------------------
$17,916,007 $15,184,835
========================
Summarized financial information for each of the segments for the six months
ended December 31, 2003 and 2002 are as follows:
For the six months ended December 31, 2003:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
---------------------------------------------------------------
Net sales $ 9,730,632 $ 8,185,375 $ - $17,916,007
Cost of goods sold 5,401,166 4,870,928 - 10,272,094
----------- -------------------- -----------
Gross profit 4,329,466 3,314,447 - 7,643,913
Selling expenses 863,592 1,214,900 - 2,078,492
Research and
development expenses 694,744 368,902 - 1,063,646
----------- -------------------- -----------
Total operating expenses 1,558,336 1,583,802 3,890,046 7,032,184
----------- -------------------- --------------- -----------
Income from operations $ 2,771,130 $ 1,730,645 $ (3,890,046) $ 611,729
=========== ==================== =============== ===========
(a) Amount represents general and administrative expenses only.
For the six months ended December 31, 2002:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
---------------------------------------------------------------
Net sales $ 7,211,580 $ 7,973,255 $ - $15,184,835
Cost of goods sold 4,082,186 4,740,273 - 8,822,459
----------- -------------------- -----------
Gross profit 3,129,394 3,232,982 - 6,362,376
Selling expenses 643,680 1,388,883 - 2,032,563
Research and
development expenses 690,853 325,035 - 1,015,888
----------- -------------------- -----------
Total operating expenses 1,334,533 1,713,918 2,999,503 6,047,954
----------- -------------------- --------------- -----------
Income from operations $ 1,794,861 $ 1,519,064 $ (2,999,503) $ 314,422
=========== ==================== =============== ===========
(a) Amount represents general and administrative expenses and litigation (recovery)
settlement expenses only.
14
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
GROSS PROFIT: Gross profit increased to 42.7% for the six months ended December
- --------------
31, 2003 from 41.9% for the six months ended December 31, 2002. Gross profit
for medical devices increased to 44.5% of sales in the six months ended December
31, 2003 from 43.4% of sales in the six months ended December 31, 2002. The
increase in gross profit for medical devices was positively impacted by the
favorable order mix for sales of therapeutic medical devices offset by a
decrease in diagnostic medical devices, which traditionally carry lower margins.
Gross profit for laboratory and scientific products decreased to 40.5% for the
six months ended December 31, 2003 from 40.6% for the six months ended December
31, 2002. The decrease is due to a decrease in gross profit for Mystaire due
to product mix. The Company manufactures and sells both medical devices and
laboratory and scientific products with a wide range of product costs and gross
margin dollars as a percentage of revenues.
SELLING EXPENSES: Selling expenses increased $45,929 to $2,078,492 for the six
- ------------------
months ended December 31, 2003 from $2,032,563 for the six months ended December
31, 2002. Medical device selling expenses increased $219,912 due both to
additional sales and marketing efforts for diagnostic medical devices and
therapeutic medical devices. Laboratory and scientific selling expenses
decreased $173,983 predominantly due to a decrease in fume enclosure and
laboratory and scientific ultrasonic commissions and marketing expenses and a
transfer of Labcaire personnel to general and administrative expenses from
selling expenses.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
- --------------------------------------
increased $737,915 to $3,890,046 in the six months ended December 31, 2003 from
$3,152,131 in the six months ended December 31, 2002. The increase is
predominantly due to an increase in general and administrative expenses relating
to severance costs and a transfer of personnel to selling expenses, all
attributable to Labcaire, as well as an increase in corporate expenses relating
to insurance, bad debt, legal fees and other accrued corporate expenses.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses increased
- ------------------------------------
$47,758 to $1,063,646 for the six months ended December 31, 2003 from $1,015,888
for the six months ended December 31, 2002. Laboratory and scientific research
and development expenses increased $43,867 predominantly due to increased
research and development efforts at Labcaire. Medical device research and
development expenses increased $3,891 predominantly due to an increase in
research and development efforts in both therapeutic and diagnostic medical
devices.
LITIGATION (RECOVERY) SETTLEMENT EXPENSES: The Company recorded a reversal of
- ---------------------------------------------
the litigation settlement for the six months ended December 31, 2002 of $152,628
as compared to $0 for the six months ended December 31, 2003. This reversal
represents the sale of Lysonix 2000 units by Mentor that were received by Mentor
from LySonix, Inc. ("LySonix") under the settlement agreement with LySonix (this
inventory was previously reserved for in fiscal year June 30, 2002, as its
salability 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, 2003.
OTHER INCOME (EXPENSE): Other income for the six months ended December 31, 2003
- ------------------------
was $758,015 as compared to $20,332 for the six months ended December 31, 2002.
The increase of $737,683 was primarily due to an increase in royalty income of
$589,943 and a decrease in loss on impairment of investments of $161,032. The
Company received an additional royalty payment in the first quarter of fiscal
2004 of approximately $410,000, which was based upon a review of USS' records
that determined that royalties were due for prior years. The review showed that
USS owed (and subsequently paid in the first quarter) royalties due on a product
that was not included in the original royalty computation. The increase was
also due to a decrease in loss on impairment of investments of Hearing
Innovations, Inc. ("Hearing Innovations") of $147,307. The decrease in loss on
impairment of Hearing Innovations is a direct result of current period loans to
Hearing Innovations being less than in the prior period.
15
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
INCOME TAXES: The effective tax rate is 41.6% for the six months ended December
- --------------
31, 2003 as compared to an effective tax rate of 55.4% for the six months ended
December 31, 2002. The current effective income tax rate of 41.6% was impacted
by no corresponding income tax benefit from the loss on impairment of Hearing
Innovations of approximately $14,000 plus the standard consolidated tax rate of
approximately 37%. The decrease in the effective tax rate for the current six
months compared to the prior year is primarily due to the reduction in the
impaired loans to Hearing Innovations. The loss on impairment of Hearing
Innovations is recorded with no corresponding tax benefit since these
transactions are capital losses. Benefits for such losses are only received if
the Company has the ability to generate capital gains.
Three Months Ended December 31, 2003 and 2002.
NET SALES. Net sales of the Company's medical devices and laboratory and
- -----------
scientific products increased $1,121,596 to $9,296,109 for the three months
ended December 31, 2003 from $8,174,513 for the three months ended December 31,
2002. This difference in net sales is due to an increase in sales of medical
devices of $1,085,604 to $5,128,512 for the three months ended December 31, 2003
from $4,042,908 for the three months ended December 31, 2002. This difference
is also due to an increase in sales of laboratory and scientific products of
$35,992 to $4,167,597 for the three months ended December 31, 2003 from
$4,131,605 for the three months ended December 31, 2002. The increase in sales
of medical devices is due to an increase in sales of therapeutic medical devices
of $781,841 and an increase in sales of diagnostic medical devices of $303,763.
The increase is both due to increased customer demand for several therapeutic
devices, such as the neruoaspirator and the Auto Sonix device and accessories,
and diagnostic medical devices. The increase in sales for diagnostic and
therapeutic medical devices was not attributable to a single customer,
distributor or any other specific factor. The increase in laboratory and
scientific products is due to an increase in ultrasonic products of $271,496 and
an increase in Labcaire sales of $88,774 partially offset by a decrease in wet
scrubber sales of $231,912 and a decrease in ductless fume enclosure sales of
$92,366. The increase in laboratory and scientific ultrasonic sales is due to
an increase in customer demand for several ultrasonic products. The increase in
Labcaire sales is primarily due to the strengthening of the English Pound. Wet
scrubber sales continue to be adversely affected by the downturn in the
semi-conductor market. The decrease in fume enclosure sales is due to lower
customer demand for several laboratory and scientific products and current
economic conditions for such products. Export sales from the United States are
remitted in U.S. Dollars and export sales for Labcaire are remitted in English
Pounds. During the three months ended December 31, 2003 and 2002, the Company
had foreign net sales of $3,134,521 and $2,589,344, respectively, representing
33.7% and 31.7% of net sales for such years, respectively. The increase in
foreign sales during the three months ended December 31, 2003 as compared to the
three months ended December 31, 2002 is substantially due to an increase in
diagnostic medical devices of approximately $277,000 and therapeutic medical
devices of approximately $170,000 and of Labcaire sales of $89,000. Labcaire
represented 73% and 86% of foreign net sales during the three months ended
December 31, 2003 and 2002, respectively. The remaining 27% and 14% represents
net foreign sales remitted in United States currency during the three months
ended December 31, 2003 and 2002, respectively. Approximately 22% of the
Company's revenues for the three months ended December 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 weighted average rates of 1.62 and 1.53 for the
three months ended December 31, 2003 and 2002, respectively. A strengthening of
the English Pound, in relation to the U.S. Dollar, will have the effect of
increasing reported revenues and profits, while a weakening of the English Pound
will have the opposite effect. Since the Company's operations in England
generally set 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.
16
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
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 December 31:
2003 2002
---------- -----------
United States $6,161,588 $5,585,169
Canada 82,431 64,017
Mexico 166,433 (1,099)
United Kingdom 2,088,286 1,930,184
Europe 338,869 204,456
Asia 235,774 340,767
Middle East 77,313 29,504
Other 145,415 21,515
-----------------------
$9,296,109 $8,174,513
=======================
Summarized financial information for each of the segments for the three months
ended December 31, 2003 and 2002 are as follows:
For the three months ended December 31, 2003:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
--------------------------------------------------------------
Net sales $ 5,128,512 $ 4,167,597 $ - $9,296,109
Cost of goods sold 2,850,274 2,467,617 - 5,317,891
----------- -------------------- ----------
Gross profit 2,278,238 1,699,980 - 3,978,218
Selling expenses 489,353 632,606 - 1,121,959
Research and
development expenses 376,678 198,488 - 575,166
----------- -------------------- ----------
Total operating expenses 866,031 831,094 1,834,278 3,531,403
----------- -------------------- --------------- ----------
Income from operations $ 1,412,207 $ 868,886 $ (1,834,278) $ 446,815
=========== ==================== =============== ==========
(a) Amount represents general and administrative expenses only.
For the three months ended December 31, 2002:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
--------------------------------------------------------------
Net sales $ 4,042,908 $ 4,131,605 $ - $8,174,513
Cost of goods sold 2,238,416 2,530,939 - 4,769,355
----------- -------------------- ----------
Gross profit 1,804,492 1,600,666 - 3,405,158
Selling expenses 376,055 720,905 - 1,096,960
Research and
development expenses 307,832 168,730 - 476,562
----------- -------------------- ----------
Total operating expenses 683,887 889,635 1,606,932 3,180,454
----------- -------------------- --------------- ----------
Income from operations $ 1,120,605 $ 711,031 $ (1,606,932) $ 224,704
=========== ==================== =============== ==========
(a) Amount represents general and administrative expenses and litigation (recovery)
settlement expenses only.
17
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
GROSS PROFIT: Gross profit increased to 42.8% for the three months ended
- --------------
December 31, 2003 from 41.7% for the three months ended December 31, 2002.
Gross profit for medical devices decreased to 44.4% of sales in the three months
ended December 31, 2003 from 44.6% of sales in the three months ended December
31, 2002. Gross profit for laboratory and scientific products increased to
40.8% for the three months ended December 31, 2003 from 38.7% for the three
months ended December 31, 2002. The increase in gross profit for laboratory
and scientific products was positively impacted by the favorable order mix for
sales of ultrasonic products, due to volume, and custom fume enclosures, which
traditionally carry a higher gross profit. The Company manufactures and sells
both medical devices and laboratory and scientific products with a wide range of
product costs and gross margin dollars as a percentage of revenues.
SELLING EXPENSES: Selling expenses increased $24,999 to $1,121,959 for the three
- -----------------
months ended December 31, 2003 from $1,096,960 for the three months ended
December 31, 2002. Medical device selling expenses increased $113,298 due both
to additional sales and marketing efforts for diagnostic medical devices and
therapeutic medical devices. Laboratory and scientific selling expenses
decreased $88,299 predominantly due to a decrease in fume enclosure and mystaire
commissions and marketing expenses and a transfer of salaries of Labcaire
personnel to general and administrative expenses from selling expenses.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
- --------------------------------------
increased $202,020 to $1,834,278 in the three months ended December 31, 2003
from $1,632,258 in the three months ended December 31, 2002. The increase is
predominantly due to an increase in general and administrative expenses relating
to a transfer of Labcaire personnel from selling expenses, as well as an
increase in corporate expenses relating to insurance, consultants and legal fees
and other accrued corporate expenses.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses increased
- ------------------------------------
$98,604 to $575,166 for the three months ended December 31, 2003 from $476,562
for the three months ended December 31, 2002. Medical device research and
development expenses increased $68,846 predominantly due to an increase in
research and development efforts in therapeutic medical devices which included
an increase of $20,000 in funding made to Focus Surgery, Inc. ("Focus Surgery")
to $70,000 for the three months ended December 31, 2003 as compared to $50,000
for the three months ended December 31, 2002. Laboratory and scientific
products increased $29,758 predominantly due to increased research and
development efforts at Labcaire.
LITIGATION (RECOVERY) SETTLEMENT EXPENSES: The Company recorded a reversal of
- ---------------------------------------------
the litigation settlement for the three months ended December 31, 2002 of
$25,326 as compared to $0 for the three months ended December 31, 2003. This
reversal represents the sale of Lysonix 2000 units by Mentor that were received
by Mentor from LySonix under the settlement agreement with LySonix (this
inventory was previously reserved for in fiscal year June 30, 2002, as its
salability 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, 2003.
OTHER INCOME (EXPENSE): Other income for the three months ended December 31,
- -------------------------
2003 was $246,066 as compared to $5,221 for the three months ended December 31,
2002. The increase of $240,845 was primarily due to an increase in royalty
income of $148,539 and a decrease in loss on impairment of Hearing Innovations
of $71,400. This increase in royalty income is due to the Company currently
receiving royalty payments on a product that was not included in the prior
year's royalty computation. The decrease in loss on impairment of Hearing
Innovations is a direct result of current period loans to Hearing Innovations
being less than in the prior period.
18
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
INCOME TAXES: The effective tax rate is 42.6% for the three months ended
- --------------
December 31, 2003 as compared to an effective tax rate of 58.2% for the three
months ended December 31, 2002. The current effective income tax rate of 42.6%
was impacted by no corresponding income tax benefit from the loss on impairment
of Hearing Innovations of approximately $5,040 plus the standard consolidated
tax rate of approximately 37%. The decrease in the effective tax rate for the
current three months compared to the prior year is primarily due to the
reduction in the impaired loans to Hearing Innovations. The loss on impairment
of Hearing Innovations is recorded with no corresponding tax benefit since these
transactions are capital losses. Benefits for such losses are only received if
the Company has the ability to generate capital gains.
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, 2003 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.
19
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
Goodwill: In July 2001, the Financial Accounting Standards Board ("FASB") issued
- ---------
Statement of Financial Accounting Standards ("SFAS") No. 141 ("SFAS 141") and
No. 142 ("SFAS 142"), "Business Combinations" and "Goodwill and Other Intangible
Assets," respectively. SFAS 141 replaced 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 provided 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 2003 in the fourth quarter with no
impairment noted.
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 losses and tax credit
carry forwards. 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 December 31, 2003 and June 30, 2003 was $15,329,477 and
$13,967,805, respectively. In the six months ended December 31, 2003, cash
provided by operations totaled $2,613,436. The increase in the cash provided by
operations is due to an increase in net income, the collection of accounts
receivable and royalties from the prior and current years and a refund of
prepaid income taxes offset by cash paid for inventory purchased for unshipped
orders and the reduction of accounts payable and accrued expenses. In the six
months ended December 31, 2003, cash used in investing activities was $250,109,
which primarily consisted of the purchase of property, plant and equipment
during the regular course of business and of loans made to Hearing Innovations.
In the six months ended December 31, 2003, cash provided by financing activities
was $271,844, primarily consisting of proceeds from short-term borrowings offset
by payments on capital lease obligations.
20
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Hearing Innovations, Inc.
- ---------------------------
During fiscal 2004, the Company entered into three loan agreements whereby
Hearing Innovations is required to pay the Company an aggregate amount of
$35,600. These notes are currently in default due to non-payment. Hearing
Innovations is currently negotiating with the Company to extend the due dates of
all its outstanding debt. All notes bear interest of 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 35,600 shares of
Hearing Innovations common stock, at the option of the Company, at a cost of
$.20 per share. These warrants, which are deemed nominal in value, expire in
October 2005. The Company recorded an allowance against the entire balance of
$35,600 for the above loans. The related expense has been included in loss on
impairment of Hearing Innovations in the accompanying consolidated statements of
income. 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. The Company has made the decision not to continue funding
Hearing Innovations' operations at this time, however, in January 2004, the
Company loaned Hearing Innovations $100,000 to enable Hearing Innovations to
reduce a substantial portion of their long term debt to certain third parties.
The Company continues to believe that Hearing Innovations' technology provides a
benefit to patients but the products require more improvement and market
development. All equity investments and debt in Hearing Innovations have been
fully reserved and currently have a zero basis.
Regulatory
- ----------
The Company received a letter dated October 31, 2003 from the Food and Drug
Administration ("FDA") regarding the Company's notification concerning the
implemented procedures to "field correct" a shock sensation that was caused by
users forcing the output connector improperly when using the Lysonix 2000.
Although the output cable was properly marked, the Company issued new sticker
directions and notified all its customers in writing. The FDA stated that it
"agreed with the Company's decision to "field correct" the Lysonix 2000." The
FDA classified this field correction as a Class II recall which means that this
is a situation in which use of or exposure to such product may cause temporary
or medically reversible adverse health consequences or which the probability of
serious adverse health consequences is remote. The Company will do everything
necessary to satisfy the FDA request for information on the "field correction."
The Company, additionally, is following FDA policies to be fully compliant with
all requirements. The Company has estimated the cost of this field correction
to be immaterial.
Recent Accounting Pronouncements
- ----------------------------------
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
No. 146"). This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" ("Issue No. 94-3"). This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred rather than at the date of an entity's
commitment as provided under Issue No. 94-3. This Statement also establishes
that fair value is the objective for initial measurement of the liability. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of SFAS No. 146 did not
have a material impact on the Company's consolidated results of operations or
financial condition.
21
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). Among other
things, the Statement requires that contracts with comparable characteristics be
accounted for similarly and clarifies under what circumstances a contract with
an initial net investment meets the characteristics of a derivative. SFAS No.
149 was effective July 1, 2003. In the first quarter of fiscal 2004, the
Company adopted SFAS No. 149. The adoption of SFAS No. 149 did not have a
material impact on the Company's consolidated results of operations or financial
condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 was effective for financial instruments entered into or modified after
May 31, 2003. In October 2003, the FASB deferred indefinitely the application
of SFAS 150 only as it relates to non-controlling interests that are classified
as equity in the financial statements of the subsidiary but would be classified
as a liability in the parent's financial statements under SFAS No. 150. In the
first quarter of fiscal 2004, the Company adopted SFAS No. 150. The adoption of
SFAS No. 150 did not have a material impact on the Company's consolidated
results of operations or financial condition.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21").
The consensus provides that revenue arrangements with multiple deliverables
should be divided into separate units of accounting if certain criteria are met.
The consideration for the arrangement should be allocated to the separate units
of accounting based on their relative fair values, with different provisions if
the fair value of all deliverables are not known or if the fair value is
contingent on delivery of specified items or performance conditions. Applicable
revenue recognition criteria should be considered separately for each separate
unit of accounting. EITF 00-21 was effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. Entities may elect to
report the change as a cumulative effect adjustment in accordance with APB
Opinion 20, Accounting Changes. In the first quarter of fiscal 2004, the
Company adopted EITF 00-21. The adoption of EITF 00-21 did not have a material
impact on the Company's consolidated results of operations or financial
condition.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
defines variable interest entities and how an enterprise should assess its
interests in a variable interest entity to decide whether to consolidate that
entity. The interpretation requires certain minimum disclosures with respect to
variable interest entities in which an enterprise holds significant variable
interest but which it does not consolidate. In December 2003, the FASB issued a
revision to FIN 46 ("FIN 46R"). Among other changes, the revisions of FIN 46R
(a) clarified some requirements of the original FIN 46, (b) eased some
implementation problems, and (c) added new scope exceptions. FIN 46R deferred
the effective date of the Interpretation for public companies to the end of the
first reporting period ending after March 15, 2004, except that all public
companies must at a minimum apply the unmodified provisions of the
Interpretation to entities that were previously considered "special-purpose
entities" in practice and under the FASB literature prior to the issuance of FIN
46R by the end of the first reporting period ending after December 15, 2003.
Among the scope exceptions, companies are not required to apply the modified
Interpretation to an entity that meets the criteria to be considered a
"business" as defined in the Interpretation unless one or more of the four named
conditions exist. FIN 46R applies immediately to variable interest entities
created or acquired after January 31, 2003. FIN 46 may be applied prospectively
with a cumulative-effect adjustment as of the date on which it is first applied
or by restating previously issued financial statements for one or more years
with a cumulative-effect adjustment as of the beginning of the first year
restated. The Company has not yet determined the impact on its consolidated
results of operations or financial condition that may result from the
application of FIN 46. FIN 46 will now be effective March 31, 2004 for the
Company.
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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 ventures and investments 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 risk (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 24% of the Company's revenues in the period ended December 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 1.62 and 1.50 for the
six months ended December 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.
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) are designed to ensure that information required to be disclosed in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. 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 as of December 31, 2003 and, based on their
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that
occurred during the first six months of fiscal 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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MISONIX, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) Certification
Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) Certification
Exhibit 32.1 - Section 1350 Certification of Chief Executive Officer
Exhibit 32.2 - Section 1350 Certification of Chief Financial Officer
(b) The following report on Form 8-K was filed during the last quarter of
the period covered by the Report.
On October 31, 2003, a Form 8-K was filed by the Company under "Item
9. Regulation FD Disclosure."
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 6, 2004
MISONIX, INC.
------------------------------------
(Registrant)
By: /s/ Michael A. McManus, Jr.
-------------------------------
Michael A. McManus, Jr.
President and Chief Executive Officer
By: /s/ Richard Zaremba
-------------------------------
Richard Zaremba
Vice President, Chief Financial Officer,
Treasurer and Secretary
26