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 March 31, 2004
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission file number: 1-10986
MISONIX, INC.
-------------
(Exact name of registrant as specified in its charter)
New York 11-2148932
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1938 New Highway, Farmingdale, NY 11735
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(631) 694-9555
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Outstanding at
Class of Common Stock May 1, 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
March 31, 2004 (Unaudited) and June 30, 2003 3
Consolidated Statements of Income
Nine months ended March 31, 2004
and 2003 (Unaudited) 4
Consolidated Statements of Income
Three months ended March 31, 2004
and 2003 (Unaudited) 5
Consolidated Statements of Cash Flows
Nine months ended March 31, 2004 6
and 2003 (Unaudited)
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MISONIX, INC.
CONSOLIDATED BALANCE SHEETS
===========================
MARCH 31, June 30,
2004 2003
--------------------------
ASSETS (UNAUDITED)
--------------------------
Current assets:
Cash and cash equivalents $ 4,140,253 $ 2,279,869
Accounts receivable, less allowance for doubtful accounts of $530,204 and
$644,157, respectively 6,513,591 7,844,399
Inventories 10,975,988 8,979,472
Deferred income taxes 599,130 477,580
Prepaid expenses and other current assets 1,238,261 983,523
--------------------------
Total current assets 23,467,223 20,564,843
Property, plant and equipment, net 3,930,592 3,574,207
Deferred income taxes 450,778 862,690
Goodwill 4,473,713 4,473,713
Other assets 348,725 319,136
--------------------------
Total assets $32,671,031 $29,794,589
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities $ 641,636 $ 704,669
Accounts payable 4,366,485 3,563,208
Accrued expenses and other current liabilities 2,070,873 2,002,154
Income taxes payable 399,245 47,453
Current maturities of long-term debt and capital lease obligations 308,007 279,554
--------------------------
Total current liabilities 7,786,246 6,597,038
Long-term debt and capital lease obligations 1,320,613 1,235,362
Deferred income 387,479 356,076
Minority interest 299,392 263,450
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 earnings (deficit) 117,593 (1,053,484)
Treasury stock, 77,800 shares (412,424) (412,424)
Accumulated other comprehensive income 392,284 28,723
--------------------------
Total stockholders' equity 22,877,301 21,342,663
------------ ------------
Total liabilities and stockholders' equity $32,671,031 $29,794,589
==========================
See Accompanying Notes to Consolidated Financial Statements.
3
MISONIX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
===========
FOR THE NINE MONTHS ENDED
MARCH 31,
2004 2003
-------------------------------
Net sales $ 28,262,256 $ 23,932,512
Cost of goods sold 16,164,154 13,731,118
-------------------------------
Gross profit 12,098,102 10,201,394
Operating expenses:
Selling expenses 3,282,312 3,123,225
General and administrative expenses 5,703,640 4,966,700
Research and development expenses 1,717,878 1,599,766
Litigation (recovery) settlement expenses - (201,106)
-------------------------------
Total operating expenses 10,703,830 9,488,585
-------------------------------
Income from operations 1,394,272 712,809
Other income (expense):
Interest income 39,278 42,722
Interest expense (119,972) (132,706)
Option/license fees 19,815 18,234
Royalty income 1,036,485 386,424
Foreign exchange (loss) gain (16,562) 4,807
Loss on impairment of Hearing Innovations, Inc. (198,800) (231,982)
Loss on impairment of Focus Surgery, Inc. - (13,725)
-------------------------------
Total other income 760,244 73,774
Income before minority interest and income taxes 2,154,516 786,583
Minority interest in net income (loss) of consolidated
subsidiary 35,941 (4,208)
-------------------------------
Income before income taxes 2,118,575 790,791
Income tax expense 947,498 382,158
-------------------------------
Net income $ 1,171,077 $ 408,633
===============================
Net income per share - Basic $ .18 $ .06
===============================
Net income per share - Diluted $ .17 $ .06
===============================
Weighted average common shares outstanding - Basic 6,655,865 6,420,118
===============================
Weighted average common shares outstanding - Diluted 6,744,207 6,598,608
===============================
See Accompanying Notes to Consolidated Financial Statements.
4
MISONIX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
===========
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
----------------- -------------
Net sales $ 10,346,249 $ 8,747,677
Cost of goods sold 5,892,060 4,908,659
--------------------------------
Gross profit 4,454,189 3,839,018
Operating expenses:
Selling expenses 1,203,820 1,090,662
General and administrative expenses 1,813,594 1,814,569
Research and development expenses 654,232 583,878
Litigation (recovery) settlement expenses - (48,478)
--------------------------------
Total operating expenses 3,671,646 3,440,631
--------------------------------
Income from operations 782,543 398,387
Other income (expense):
Interest income 11,432 1,324
Interest expense (42,969) (45,226)
Option/license fees 6,690 6,078
Royalty income 197,897 137,779
Foreign exchange (loss) gain (7,621) 2,562
Loss on impairment of Hearing Innovations, Inc. (163,200) (49,075)
--------------------------------
Total other income 2,229 53,442
Income before minority interest and income taxes 784,772 451,829
Minority interest in net income of consolidated
subsidiary 7,790 29,628
--------------------------------
Income before income taxes 776,982 422,201
Income tax expense 388,933 177,766
--------------------------------
Net income $ 388,049 $ 244,435
================================
Net income per share - Basic $ .06 $ .04
================================
Net income per share - Diluted $ .06 $ .04
================================
Weighted average common shares outstanding - Basic 6,655,865 6,643,300
================================
Weighted average common shares outstanding - Diluted 6,774,501 6,686,981
================================
See Accompanying Notes to Consolidated Financial Statements.
5
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
===========
FOR THE NINE MONTHS ENDED
MARCH 31,
2004 2003
-------------------------------
OPERATING ACTIVITIES
Net income $ 1,171,077 $ 408,633
Adjustments to reconcile net income to net cash provided by
operating activities:
Bad debt (recovery) expense (53,264) 120,560
Litigation recovery - (201,106)
Deferred income tax benefit 290,362 (68,424)
Depreciation and amortization 542,866 473,387
Loss on disposal of equipment 45,843 90,154
Foreign currency exchange loss (gain) 16,562 (4,807)
Minority interest in net income of subsidiaries 35,941 (4,208)
Loss on impairment of investments 198,800 245,707
Changes in operating assets and liabilities:
Accounts receivable 1,569,258 310,094
Inventories (1,619,688) (1,882,911)
Prepaid income taxes 25,314 2,400,894
Prepaid expenses and other current assets (194,731) (448,308)
Other assets (47,198) 145,336
Accounts payable and accrued expenses 444,557 373,460
Litigation settlement liabilities - (4,332)
Deferred income 31,403 4,262
Income taxes payable 320,010 (173,907)
-------------------------------
Net cash provided by operating activities 2,777,112 1,784,484
-------------------------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (350,870) (340,527)
Loans to Hearing Innovations, Inc. (198,800) (208,741)
Purchase of Labcaire stock - (232,394)
Cash acquired from consolidation of variable interest entity 236 -
-------------------------------
Net cash used in investing activities (549,434) (781,662)
-------------------------------
(Continued on next page)
6
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
===========
FINANCING ACTIVITIES
Proceeds from short-term borrowings 492,632 360,815
Payments of short-term borrowings (629,654) (441,719)
Principal payments on capital lease obligations (241,806) (209,103)
Proceeds from long-term debt - 11,410
Payments of long-term debt (41,756) (22,201)
Proceeds from stock options - 393,104
Purchase of treasury stock - (10,450)
-------------------------
Net cash (used in) provided by financing activities (420,584) 81,856
-------------------------
Effect of exchange rate changes on assets and liabilities 53,290 10,760
-------------------------
Net increase in cash and cash equivalents 1,860,384 1,095,438
Cash and cash equivalents at beginning of period 2,279,869 1,065,465
-------------------------
Cash and cash equivalents at end of period $4,140,253 $ 2,160,903
=========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for (received from):
Interest $ 119,972 $ 132,706
=========================
Income taxes $ 118,917 $(1,688,469)
=========================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease additions $ 236,199 $ 237,785
=========================
See Accompanying Notes to Consolidated Financial Statements.
7
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited)
==========================================================
1. Basis of Presentation
-----------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months ended March 31, 2004 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. Variable Interest Entities
----------------------------
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 ("FIN 46"). In December 2003, the FASB
modified FIN 46 to make certain technical corrections and address certain
implementation issues that had arisen. FIN 46 provides a new framework for
identifying variable interest entities ("VIEs") and determining when a
company should include the assets, liabilities, noncontrolling interests
and results of activities of a VIE in its consolidated financial
statements.
In general, a VIE is a corporation, partnership, limited liability company,
trust, or any other legal structure used to conduct activities or hold
assets that either (1) has an insufficient amount of equity to carry out
its principal activities without additional subordinated financial support,
(2) has a group of equity owners that are unable to make significant
decisions about its activities, or (3) has a group of equity owners that do
not have the obligation to absorb losses or the right to receive returns
generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable interest
holder) is obligated to absorb a majority of the risk of loss from the
VIE's activities, is entitled to receive a majority of the VIE's residual
returns (if no party absorbs a majority of the VIE's losses), or both. A
variable interest holder that consolidates the VIE is called the primary
beneficiary. Upon consolidation, the primary beneficiary generally must
initially record all of the VIE's assets, liabilities and noncontrolling
interests at fair value and subsequently account for the VIE as if it were
consolidated based on majority voting interest. FIN 46 also requires
disclosures about VIEs that the variable interest holder is not required to
consolidate but in which it has a significant variable interest.
In connection with the adoption of FIN 46 during the third quarter of
fiscal 2004, the Company consolidated Hearing Innovations, Inc. ("Hearing
Innovations") in its March 31, 2004 balance sheet as the entity was
determined to be a VIE and the Company is its primary beneficiary. The
Company elected to record the adoption of FIN 46 as a cumulative effect of
an accounting change. Consolidating Hearing Innovations did not have a
material impact on the Company's consolidated results of operations or
financial condition. Prior periods were not restated. For additional
information on Hearing Innovations, see Note 9 of the consolidated
financial statements.
8
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
3. Net Income Per Share
-----------------------
Basic income per common share excludes any dilution. It is based upon the
weighted average number of common shares outstanding during the period.
Dilutive earnings per share reflects the potential dilution that would
occur if options to purchase common stock were exercised. The following
table sets forth the reconciliation of weighted average shares outstanding
and diluted weighted average shares outstanding:
For the Nine Months For the Three Months
Ended March 31, Ended March 31,
2004 2003 2004 2003
---------- --------- ----------- ---------
Weighted average common
shares outstanding 6,655,865 6,420,118 6,655,865 6,643,300
Dilutive effect of stock options 88,342 178,490 118,636 43,681
---------- --------- ----------- ---------
Diluted weighted average common
shares outstanding 6,744,207 6,598,608 6,774,501 6,686,981
========== ========= =========== =========
4. Comprehensive Income
---------------------
Total comprehensive income was $1,534,638 and $506,051 for the nine and
three months ended March 31, 2004, respectively, and $600,974 and $221,391
for the nine and three months ended March 31, 2003, respectively.
Accumulated other comprehensive income is comprised of foreign currency
translation adjustments.
5. 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 and net income per share as if the Company had applied the fair
value recognition provisions of SFAS 123 to stock-based employee
compensation.
9
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
For the Nine Months Ended For the Three Months Ended
March 31,
2004 2003 2004 2003
---------------- ------------- --------------- --------------
Net income - As reported: $ 1,171,077 $ 408,633 $ 388,049 $ 244,435
Stock based compensation
determined under SFAS 123 (473,867) (268,441) (193,318) (117,817)
---------------- ------------- --------------- --------------
Net income - Pro forma: $ 697,210 $ 140,192 $ 194,731 $ 126,618
Net income per share -
Basic:
As reported $ .18 $ .06 $ .06 $ .04
Pro forma $ .10 $ .02 $ .03 $ .02
Net income per share -
Diluted:
As reported $ .17 $ .06 $ .06 $ .04
Pro forma $ .10 $ .02 $ .03 $ .02
6. Inventories
-----------
Inventories are summarized as follows:
MARCH 31, 2004 June 30, 2003
--------------- --------------
Raw materials $ 4,256,195 $ 4,230,870
Work-in-process 2,387,235 1,112,453
Finished goods 4,332,558 3,636,149
-------------------------------
$ 10,975,988 $ 8,979,472
===============================
7. Revolving Credit Facilities
-----------------------------
On December 31, 2003, Labcaire extended its debt purchase agreement with Lloyds
TSB Commercial Finance through June 30, 2004. During the nine months ended
March 31, 2004 Labcaire borrowed $492,632 and made payments of $629,654 under
the debt purchase agreement. At March 31, 2004, the balance outstanding under
this debt purchase agreement was $641,636 and Labcaire was in compliance with
all financial covenants.
8. Accrued Expenses and Other Current Liabilities
---------------------------------------------------
The following summarizes accrued expenses and other current liabilities:
MARCH 31, 2004 June 30, 2003
--------------- --------------
Accrued payroll and vacation $ 302,550 $ 283,339
Accrued sales tax 96,708 208,005
Accrued commissions and bonuses 145,912 212,585
Customer deposits and deferred contracts 1,335,181 1,116,869
Accrued professional fees 116,885 132,766
Other 73,637 48,590
--------------- --------------
$ 2,070,873 $ 2,002,154
=============== ==============
10
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
9. Loans to Affiliate
--------------------
Hearing Innovations, Inc.
- ---------------------------
During fiscal 2004, the Company entered into seven loan agreements whereby
Hearing Innovations is required to pay the Company an aggregate amount of
$198,800. Two of these notes aggregating $23,000 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. The remaining five notes
aggregating $175,800 are due June 30, 2004. 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 198,800 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 $198,800 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 and
Hearing Innovations has no predictable cash flows from its product revenue. 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 previously made
the decision not to continue funding Hearing Innovations' operations, however,
the Company loaned Hearing Innovations $198,800 to enable Hearing Innovations to
reduce a substantial portion of its long-term debt to certain third parties.
The Company continues to believe that Hearing Innovations' technology could
provide 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.
As discussed in Note 2, in connection with the adoption of FIN 46, the Company
consolidated Hearing Innovations in its March 31, 2004 balance sheet as the
entity was determined to be a VIE and the Company is its primary beneficiary.
The Company elected to record the adoption of FIN 46 as a cumulative effect of
an accounting change. Consolidating Hearing Innovations did not have a material
impact on the Company's consolidated results of operations or financial
condition.
10. 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:
11
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
For the nine months ended March 31, 2004:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
---------------------------------------------------------------
Net sales $15,771,176 $ 12,491,080 $ - $28,262,256
Cost of goods sold 8,700,327 7,463,827 - 16,164,154
----------- -------------------- -----------
Gross profit 7,070,849 5,027,253 - 12,098,102
Selling expenses 1,415,141 1,867,171 - 3,282,312
Research and
development expenses 1,119,595 598,283 - 1,717,878
----------- -------------------- -----------
Total operating expenses 2,534,736 2,465,454 5,703,640 10,703,830
----------- -------------------- --------------- -----------
Income from operations $ 4,536,113 $ 2,561,799 $ (5,703,640) $ 1,394,272
=========== ==================== =============== ===========
(a) Amount represents general and administrative expenses only.
For the three months ended March 31, 2004:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
--------------------------------------------------------------
Net sales $6,040,544 $ 4,305,705 $ - $10,346,249
Cost of goods sold 3,299,161 2,592,899 - 5,892,060
---------- -------------------- -----------
Gross profit 2,741,383 1,712,806 - 4,454,189
Selling expenses 551,549 652,271 - 1,203,820
Research and
development expenses 424,851 229,381 - 654,232
---------- -------------------- -----------
Total operating expenses 976,400 881,652 1,813,594 3,671,646
---------- -------------------- --------------- -----------
Income from operations $1,764,983 $ 831,154 $ (1,813,594) $ 782,543
========== ==================== =============== ===========
(a) Amount represents general and administrative expenses only.
For the nine months ended March 31, 2003:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
---------------------------------------------------------------
Net sales $11,769,483 $ 12,163,029 $ - $23,932,512
Cost of goods sold 6,471,209 7,259,909 - 13,731,118
----------- -------------------- -----------
Gross profit 5,298,274 4,903,120 - 10,201,394
Selling expenses 1,037,082 2,086,143 - 3,123,225
Research and
development expenses 1,079,821 519,945 - 1,599,766
----------- -------------------- -----------
Total operating expenses 2,116,903 2,606,088 4,765,594 9,488,585
----------- -------------------- --------------- -----------
Income from operations $ 3,181,371 $ 2,297,032 $ (4,765,594) $ 712,809
=========== ==================== =============== ===========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses only.
12
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
For the three months ended March 31, 2003:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
-------------------------------------------------------------
Net sales $4,557,903 $ 4,189,774 $ - $8,747,677
Cost of goods sold 2,389,023 2,519,636 - 4,908,659
---------- -------------------- ----------
Gross profit 2,168,880 1,670,138 - 3,839,018
Selling expenses 393,402 697,260 - 1,090,662
Research and
development expenses 388,968 194,910 - 583,878
---------- -------------------- ----------
Total operating expenses 782,370 892,170 1,766,091 3,440,631
---------- -------------------- --------------- ----------
Income from operations $1,386,510 $ 777,968 $ (1,766,091) $ 398,387
========== ==================== =============== ==========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses only.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the nine months ended March 31:
2004 2003
----------- -----------
United States $18,746,761 $15,716,426
Canada 342,071 310,182
Mexico 229,603 5,543
United Kingdom 6,383,027 5,903,344
Europe 1,133,740 1,014,798
Asia 757,271 758,022
Middle East 229,229 48,285
Other 440,554 175,912
------------------------
$28,262,256 $23,932,512
========================
11. 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.
13
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Nine Months Ended March 31, 2004 and 2003.
NET SALES. Net sales of the Company's medical devices and laboratory and
- -----------
scientific products increased $4,329,744 to $28,262,256 for the nine months
ended March 31, 2004 from $23,932,512 for the nine months ended March 31, 2003.
This difference in net sales is due to an increase in sales of medical devices
of $4,001,693 to $15,771,176 for the nine months ended March 31, 2004 from
$11,769,483 for the nine months ended March 31, 2003. This difference is also
due to an increase in sales of laboratory and scientific products of $328,051 to
$12,491,080 for the nine months ended March 31, 2004 from $12,163,029 for the
nine months ended March 31, 2003. The increase in sales of medical devices is
due to an increase in sales of therapeutic medical devices of $2,980,829 and an
increase in diagnostic medical devices of $1,020,864, 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, the Auto Sonix device
and accessories sold to United States Surgical Corporation ("USS") and an
increase of sales of the Sonoblate 500 of approximately $855,000, $657,000, and
$722,000, respectively. The increase in sales of the Sonoblate 500 is due to
both an increase in sales to Focus Surgery, Inc. ("Focus Surgery") as the
manufacturer of the device and the sale of the device in Europe by the Company,
in which sales back to the Company are not recorded as revenue until the total
earnings process is complete. The remaining increase in sales of therapeutic
medical devices is due to increased demand for several products. The increase
in sales of laboratory and scientific products is due to an increase in Labcaire
sales of $398,365 and sales of ultrasonic laboratory products of $361,584
partially offset by a decrease in wet scrubber sales of $284,255 and a decrease
in ductless fume enclosure sales of $147,643. The increase in Labcaire sales is
primarily due to the strengthening of the English Pound partially offset by a
decrease in sales of the 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, although for
the third quarter of fiscal 2004 is starting to turn around. Sales of wet
scrubbers, however, are still affected by the strong competition in this 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 nine
months ended March 31, 2004 and 2003, the Company had foreign net sales of
$9,515,495 and $8,216,086, respectively, representing 33.7% and 34.3% of net
sales for such periods, respectively. The increase in foreign sales during the
nine months ended March 31, 2004 as compared to the nine months ended March 31,
2003 is substantially due to an increase in Labcaire sales due to the
strengthening of the English Pound as well as an increase in foreign diagnostic
and therapeutic medical device sales as the Company started to sell the
ultrasonic neuroaspirator and the Sonoblate 500 to distributors in Europe.
Labcaire represented 75% and 70% of foreign net sales during the nine months
ended March 31, 2004 and 2003, respectively. The remaining 25% and 30%
represents net foreign sales remitted in U.S. Dollars during the nine months
ended March 31, 2004 and 2003, respectively. Approximately 23% of the Company's
revenues for the nine months ended March 31, 2004 were received in English
Pounds. 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 1.77 and 1.57 for the nine months ended
March 31, 2004 and 2003, 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.
14
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 nine months ended March 31:
2004 2003
----------- -----------
United States $18,746,761 $15,716,426
Canada 342,071 310,182
Mexico 229,603 5,543
United Kingdom 6,383,027 5,903,344
Europe 1,133,740 1,014,798
Asia 757,271 758,022
Middle East 229,229 48,285
Other 440,554 175,912
------------------------
$28,262,256 $23,932,512
========================
Summarized financial information for each of the segments for the nine months
ended March 31, 2004 and 2003 are as follows:
For the nine months ended March 31, 2004:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
---------------------------------------------------------------
Net sales $15,771,176 $ 12,491,080 $ - $28,262,256
Cost of goods sold 8,700,327 7,463,827 - 16,164,154
----------- -------------------- -----------
Gross profit 7,070,849 5,027,253 - 12,098,102
Selling expenses 1,415,141 1,867,171 - 3,282,312
Research and
development expenses 1,119,595 598,283 - 1,717,878
----------- -------------------- -----------
Total operating expenses 2,534,736 2,465,454 5,703,640 10,703,830
----------- -------------------- --------------- -----------
Income from operations $ 4,536,113 $ 2,561,799 $ (5,703,640) $1 ,394,272
=========== ==================== =============== ===========
(a) Amount represents general and administrative expenses only.
For the nine months ended March 31, 2003:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
---------------------------------------------------------------
Net sales $11,769,483 $ 12,163,029 $ - $23,932,512
Cost of goods sold 6,471,209 7,259,909 - 13,731,118
----------- -------------------- -----------
Gross profit 5,298,274 4,903,120 - 10,201,394
Selling expenses 1,037,082 2,086,143 - 3,123,225
Research and
development expenses 1,079,821 519,945 - 1,599,766
----------- -------------------- -----------
Total operating expenses 2,116,903 2,606,088 4,765,594 9,488,585
----------- -------------------- --------------- -----------
Income from operations $ 3,181,371 $ 2,297,032 $ (4,765,594) $ 712,809
=========== ==================== =============== ===========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses only.
15
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
GROSS PROFIT: Gross profit for the nine months ended March 31, 2004 is 42.8%.
- --------------
Gross profit for the nine months ended March 31, 2003 was 42.6%. Gross profit
for medical devices decreased to 44.8% of sales in the nine months ended March
31, 2004 from 45% of sales in the nine months ended March 31, 2003. The
decrease in gross profit for medical devices was impacted by the favorable order
mix for sales of therapeutic medical devices offset by an unfavorable order mix
of diagnostic medical devices, which traditionally carry lower margins. Gross
profit for laboratory and scientific products decreased to 40.2% for the nine
months ended March 31, 2004 from 40.3% for the nine months ended March 31, 2003.
The decrease is due to a decrease in gross profit for wet scrubber products due
to pricing pressures from competition. 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 $159,087 to $3,282,312 for the nine
- -----------------
months ended March 31, 2004 from $3,123,225 for the nine months ended March 31,
2003. Medical devices selling expenses increased $378,059 due both to
additional sales and marketing efforts for diagnostic medical devices and
therapeutic medical devices. The increase in therapeutic medical devices selling
expenses of $253,097 is due to an increase in sales and marketing efforts
relating to European distribution. Laboratory and scientific products selling
expenses decreased $218,972 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 offset by the strengthening of the English Pound.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
- --------------------------------------
increased $736,940 to $5,703,640 in the nine months ended March 31, 2004 from
$4,966,700 in the nine months ended March 31, 2003. The increase is
predominantly due to an increase in general and administrative expenses relating
to severance costs, a transfer of personnel from selling expenses and the
strengthening of the English Pound, all attributable to Labcaire, as well as an
increase in corporate expenses relating to insurance, legal fees and other
accrued corporate expenses partially offset by a decrease in bad debt expense.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses increased
- ------------------------------------
$118,112 to $1,717,878 for the nine months ended March 31, 2004 from $1,599,766
for the nine months ended March 31, 2003. Laboratory and scientific products
research and development expenses increased $78,338 predominantly due to
increased research and development efforts and the strengthening of the English
Pound at Labcaire. Medical devices research and development expenses increased
$39,774 predominantly due to an increase in research and development efforts in
therapeutic medical devices.
LITIGATION (RECOVERY) SETTLEMENT EXPENSES: The Company recorded a reversal of
- ---------------------------------------------
the litigation settlement for the nine months ended March 31, 2003 of $201,106
as compared to $0 for the nine months ended March 31, 2004. 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 nine months ended March 31, 2004
- -------------------------
was $760,244 as compared to $73,774 for the nine months ended March 31, 2003.
The increase of $686,470 was primarily due to an increase in royalty income of
$650,061 and a decrease in loss on impairment of investments of $46,907. 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 $33,182. 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.
16
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
INCOME TAXES: The effective tax rate is 44.7% for the nine months ended March
- --------------
31, 2004 as compared to an effective tax rate of 48.3% for the nine months ended
March 31, 2003. The current effective income tax rate of 44.7% was impacted by
no corresponding income tax benefit from the loss on impairment of Hearing
Innovations of approximately $78,000 plus the standard consolidated tax rate of
approximately 40%. The decrease in the effective tax rate for the current nine
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 March 31, 2004 and 2003.
NET SALES. Net sales of the Company's medical devices and laboratory and
- -----------
scientific products increased $1,598,572 to $10,346,249 for the three months
ended March 31, 2004 from $8,747,677 for the three months ended March 31, 2003.
This difference in net sales is due to an increase in sales of medical devices
of $1,482,641 to $6,040,544 for the three months ended March 31, 2004 from
$4,557,903 for the three months ended March 31, 2003. This difference is also
due to an increase in sales of laboratory and scientific products of $115,931 to
$4,305,705 for the three months ended March 31, 2004 from $4,189,774 for the
three months ended March 31, 2003. The increase in sales of medical devices is
due to an increase in sales of therapeutic medical devices of $1,396,963 and an
increase in sales of diagnostic medical devices of $85,678. 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 of the
ultrasonic neuroaspirator device, an increase in sales to Mentor of the Lysonix
3000 device and an increase in sales of the Sonoblate 500 of approximately
$290,000, $214,000, and $233,000, respectively. The increase in sales of the
Sonoblate 500 is due to both an increase in sales to Focus Surgery as the
manufacturer of the device and the sale of the device in Europe by the Company,
in which sales back to the Company are not recorded as revenue until the total
earnings process is complete. The increase in sales of laboratory and
scientific products is due to an increase in sales of ultrasonic products of
$68,621, an increase in wet scrubber sales of $56,212 and an increase in fume
enclosure sales of $33,544 partially offset by a decrease in Labcaire sales of
$42,446. The increase in laboratory and scientific ultrasonic sales, wet
scrubber sales and fume enclosure sales is due to an increase in customer demand
for several laboratory and scientific products. The decrease in Labcaire sales
is due to a decrease in sales of the Guardian (endoscopic cleaning) product.
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 March 31, 2004 and 2003, the Company had foreign net sales of $3,526,136
and $3,097,714, respectively, representing 34.1% and 35.4% of net sales for such
periods, respectively. The increase in foreign sales during the three months
ended March 31, 2004 as compared to the three months ended March 31, 2003 is
substantially due to an increase in foreign diagnostic and therapeutic medical
device sales partially offset by a decrease in Labcaire sales. The Company
started to sell the ultrasonic neuroaspirator and the Sonoblate 500 to
distributors in Europe in the third quarter of fiscal 2004. Labcaire
represented 68% and 80% of foreign net sales during the three months ended March
31, 2004 and 2003, respectively. The remaining 32% and 20% represents net
foreign sales remitted in U.S. Dollars during the three months ended March 31,
2004 and 2003, respectively. Approximately 21% of the Company's revenues for
the three months ended March 31, 2004 were received in English Pounds. 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 1.84 and 1.51 for the three months ended March 31,
2004 and 2003, 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.
17
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 March 31:
2004 2003
----------- ----------
United States $ 6,820,113 $5,649,963
Canada 193,001 144,792
Mexico 63,170 2,321
United Kingdom 2,163,826 2,257,979
Europe 621,660 337,957
Asia 339,507 263,260
Middle East 78,193 5,763
Other 66,779 85,642
-----------------------
$10,346,249 $8,747,677
=======================
Summarized financial information for each of the segments for the three months
ended March 31, 2004 and 2003 are as follows:
For the three months ended March 31, 2004:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
--------------------------------------------------------------
Net sales $6,040,544 $ 4,305,705 $ - $10,346,249
Cost of goods sold 3,299,161 2,592,899 - 5,892,060
---------- -------------------- -----------
Gross profit 2,741,383 1,712,806 - 4,454,189
Selling expenses 551,549 652,271 - 1,203,820
Research and
development expenses 424,851 229,381 - 654,232
---------- -------------------- -----------
Total operating expenses 976,400 881,652 1,813,594 3,671,646
---------- -------------------- --------------- -----------
Income from operations $1,764,983 $ 831,154 $ (1,813,594) $ 782,543
========== ==================== =============== ===========
(a) Amount represents general and administrative expenses only.
For the three months ended March 31, 2003:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
-------------------------------------------------------------
Net sales $4,557,903 $ 4,189,774 $ - $8,747,677
Cost of goods sold 2,389,023 2,519,636 - 4,908,659
---------- -------------------- ----------
Gross profit 2,168,880 1,670,138 - 3,839,018
Selling expenses 393,402 697,260 - 1,090,662
Research and
development expenses 388,968 194,910 - 583,878
---------- -------------------- ----------
Total operating expenses 782,370 892,170 1,766,091 3,440,631
---------- -------------------- --------------- ----------
Income from operations $1,386,510 $ 777,968 $ (1,766,091) $ 398,387
========== ==================== =============== ==========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses only.
18
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
GROSS PROFIT: Gross profit decreased to 43.1% for the three months ended March
- --------------
31, 2004 from 43.9% for the three months ended March 31, 2003. Gross profit for
medical devices decreased to 45.4% of sales in the three months ended March 31,
2004 from 47.6% of sales in the three months ended March 31, 2003. Gross profit
for laboratory and scientific products decreased to 39.8% for the three months
ended March 31, 2004 from 39.9% for the three months ended March 31, 2003. The
decrease in gross profit for medical devices was impacted by the favorable order
mix for sales of therapeutic medical devices offset by an unfavorable order mix
of diagnostic medical devices, which traditionally carry lower margins. The
decrease 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 partially offset by a decrease in gross profit of Labcaire and wet
scrubber products due pricing pressures from competition. 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 $113,158 to $1,203,820 for the
- ------------------
three months ended March 31, 2004 from $1,090,662 for the three months ended
March 31, 2003. Medical devices selling expenses increased $158,147 due both to
additional sales and marketing efforts for therapeutic medical devices and
diagnostic medical devices. The increase in therapeutic medical devices selling
expenses of $143,877 is due to an increase in sales and marketing efforts
relating to European distribution. Laboratory and scientific products selling
expenses decreased $44,989 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
offset by the strengthening of the English Pound.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
- --------------------------------------
decreased $975 to $1,813,594 in the three months ended March 31, 2004 from
$1,814,569 in the three months ended March 31, 2003. The decrease is
predominantly due to a decrease in corporate expenses relating to bad debt
expense partially offset by an increase in insurance and other accrued corporate
expenses in addition to an increase in general and administrative expenses
relating to severance costs, a transfer of personnel from selling expenses, and
the strengthening of the English Pound, all attributable to Labcaire.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses increased
- ------------------------------------
$70,354 to $654,232 for the three months ended March 31, 2004 from $583,878 for
the three months ended March 31, 2003. Medical devices research and
development expenses increased $35,883 predominantly due to an increase in
research and development efforts in therapeutic medical devices which included
an increase of $30,000 in funding made to Focus Surgery for the three months
ended March 31, 2004 for the development for the treatment of kidney and liver
tumors utilizing high intensity focused ultrasound technology. Laboratory and
scientific products increased $34,471 predominantly due to increased research
and development efforts at Labcaire and the strengthening of the English Pound.
LITIGATION (RECOVERY) SETTLEMENT EXPENSES: The Company recorded a reversal of
- ---------------------------------------------
the litigation settlement for the three months ended March 31, 2003 of $48,478
as compared to $0 for the three months ended March 31, 2004. 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.
19
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
OTHER INCOME (EXPENSE): Other income for the three months ended March 31, 2004
- -------------------------
was $2,229 as compared to $53,442 for the three months ended March 31, 2003.
The decrease of $51,213 was primarily due to an increase in loss on impairment
of Hearing Innovations of $114,125 partially offset by an increase in royalty
income of $60,118. The increase in loss on impairment of Hearing Innovations is
a direct result of current period loans to Hearing Innovations being greater
than in the prior period of $114,125. The 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.
INCOME TAXES: The effective tax rate is 50% for the three months ended March 31,
- -------------
2004 as compared to an effective tax rate of 42.1% for the three months ended
March 31, 2003. The current effective income tax rate of 50% was impacted by no
corresponding income tax benefit from the loss on impairment of Hearing
Innovations of approximately $64,000 plus the standard consolidated tax rate of
approximately 41%. The increase in the effective tax rate for the current three
months compared to the prior year is primarily due to the increase 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.
20
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
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.
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. In accordance with SFAS 141, the Company 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 March 31, 2004 and June 30, 2003 was $15,680,977 and
$13,967,805, respectively. In the nine months ended March 31, 2004, cash
provided by operations totaled $2,777,112. 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 period and the increase of accounts
payable and income tax payable partially offset by cash paid for inventory
purchased for unshipped orders. In the nine months ended March 31, 2004, cash
used in investing activities was $549,434, which primarily consisted of the
purchase of property, plant and equipment during the regular course of business
of $350,870 and of loans made to Hearing Innovations. In the nine months ended
March 31, 2004, cash used by financing activities was $420,584, primarily
consisting of payments of short-term borrowings and capital lease obligations
offset by proceeds from short-term borrowings.
21
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Hearing Innovations, Inc.
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During fiscal 2004, the Company entered into seven loan agreements whereby
Hearing Innovations is required to pay the Company an aggregate amount of
$198,800. Two of these notes aggregating $23,000 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. The remaining five notes
aggregating $175,800 are due June 30, 2004. 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 198,800 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 $198,800 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 and
Hearing Innovations has no predictable cash flows from its product revenue. 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 previously made
the decision not to continue funding Hearing Innovations' operations, however,
the Company loaned Hearing Innovations $198,800 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 could
provide 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.
In connection with the adoption of FIN 46, the Company consolidated Hearing
Innovations in its March 31, 2004 balance sheet as the entity was determined to
be a variable interest entity and the Company is its primary beneficiary. The
Company elected to record the adoption of FIN 46 as a cumulative effect of an
accounting change. Consolidating Hearing Innovations did not have a material
impact on the Company's consolidated results of operations or financial
condition.
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.
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MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Recent Accounting Pronouncements
- ----------------------------------
In June 2002, the 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 March 31,
2003. The adoption of SFAS No. 146 did not have a material impact on the
Company's consolidated results of operations or financial condition.
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 FASB Interpretation 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"). In
December 2003, the FASB modified FIN 46 to make certain technical corrections
and address certain implementation issues that had arisen. FIN 46 provides a new
framework for identifying variable interest entities ("VIEs") and determining
when a company should include the assets, liabilities, noncontrolling interests
and results of activities of a VIE in its consolidated financial statements.
23
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
In general, a VIE is a corporation, partnership, limited liability company,
trust, or any other legal structure used to conduct activities or hold assets
that either (1) has an insufficient amount of equity to carry out its principal
activities without additional subordinated financial support, (2) has a group of
equity owners that are unable to make significant decisions about its
activities, or (3) has a group of equity owners that do not have the obligation
to absorb losses or the right to receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable interest holder)
is obligated to absorb a majority of the risk of loss from the VIE's activities,
is entitled to receive a majority of the VIE's residual returns (if no party
absorbs a majority of the VIE's losses), or both. A variable interest holder
that consolidates the VIE is called the primary beneficiary. Upon consolidation,
the primary beneficiary generally must initially record all of the VIE's assets,
liabilities and noncontrolling interests at fair value and subsequently account
for the VIE as if it were consolidated based on majority voting interest. FIN 46
also requires disclosures about VIEs that the variable interest holder is not
required to consolidate but in which it has a significant variable interest.
In connection with the adoption of FIN 46 during the third quarter of fiscal
2004, the Company consolidated Hearing Innovations in its March 31, 2004 balance
sheet as the entity was determined to be a variable interest entity and the
Company is its primary beneficiary. The Company elected to record the adoption
of FIN 46 as a cumulative effect of an accounting change. Consolidating Hearing
Innovations did not have a material impact on the Company's consolidated results
of operations or financial condition. Prior periods were not restated. For
additional information on Hearing Innovations see Note 9 of the consolidated
financial statements.
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.
24
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 23% of the Company's revenues in the nine-month period ended March
31, 2004 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 1.77 and 1.57
for the nine months ended March 31, 2004 and 2003, 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 March 31, 2004 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 nine months of fiscal 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
25
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 January 31, 2004, a Form 8-K was filed by the Company under
"Item 9. Regulation FD Disclosure."
26
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: May 6, 2004
MISONIX, INC.
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(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
27