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 September 30, 2001
------------------
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, N.Y 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 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 November 1, 2001
--------------------- ----------------------
Common Stock, $.01 par value 6,056,600
MISONIX, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 2001 (Unaudited) and June 30, 2001 3
Consolidated Statements of Operations
Three Months ended September 30, 2001
and 2000 (Unaudited) 4
Consolidated Statements of Cash Flows
Three months ended September 30, 2001
and 2000 (Unaudited) 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition 11-14
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures
2
Part 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
MISONIX, INC.
CONSOLIDATED BALANCE SHEETS
===========================
September 30, June 30,
2001 2001
ASSETS (Unaudited)
------------ ------------
Current assets:
Cash and cash equivalents $ 5,421,638 $ 3,774,573
Investments held to maturity 3,700 2,015,468
Accounts receivable, net of allowance for
doubtful accounts of $178,000 and $158,000,
respectively 6,235,268 7,210,461
Inventories 8,548,903 7,874,372
Deferred income taxes 2,528,260 2,598,538
Prepaid expenses and other current assets 969,914 787,765
------------ ------------
Total current assets 23,707,683 24,261,177
Property, plant and equipment, net 3,186,062 3,195,748
Deferred income taxes 1,548,438 1,550,769
Goodwill 4,135,068 4,069,497
Other assets 233,675 143,597
------------ ------------
Total assets $ 32,810,926 $ 33,220,788
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 839,495 $ 542,532
Accounts payable 3,213,028 3,527,449
Accrued expenses and other current liabilities 1,154,449 1,308,692
Litigation settlement liabilities 6,076,000 6,176,000
Income taxes payable 210,658 499,827
Current maturities of long-term debt
and capital lease obligations 210,751 204,176
------------ ------------
Total current liabilities 11,704,381 12,258,676
Long-term debt and capital lease obligations 1,061,304 1,027,921
Deferred income 622,051 569,843
Minority interest 269,716 257,530
------------ ------------
Stockholders' equity:
Common stock, $.01 par value-shares authorized
10,000,000; 6,123,400 and 6,121,915 issued, and
6,056,600 and 6,055,115 outstanding, respectively 61,234 61,219
Additional paid-in capital 21,929,577 21,924,987
Retained deficit (2,240,775) (2,197,720)
Treasury stock, 66,800 shares (358,237) (358,237)
Accumulated other comprehensive loss (238,325) (323,431)
------------ ------------
Total stockholders' equity 19,153,474 19,106,818
------------ ------------
Commitment and contingencies (notes 2 and 7)
Total liabilities and stockholders' equity $ 32,810,926 $ 33,220,788
============ ============
See accompanying Notes to Consolidated Financial Statements.
3
MISONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
===============================
For the three months ended
September 30,
---------------------------------
2001 2000
---- ----
Net sales $ 6,822,521 $ 6,791,318
Cost of goods sold 3,637,349 3,209,920
----------- -----------
Gross profit 3,185,172 3,581,398
----------- -----------
Operating expenses:
Selling expenses 1,029,945 821,462
General and administrative expenses 1,487,532 1,539,825
Research and development expenses 459,255 346,858
----------- -----------
Total operating expenses 2,976,732 2,708,145
----------- -----------
Income from operations 208,440 873,253
Other income (expense):
Interest income 146,551 172,260
Interest expense (35,895) (34,873)
Option/license fees 972 6,078
Royalty income 293,355 169,698
Amortization of investments ---- (57,725)
Foreign exchange gain (loss) ---- 4,896
Loss on loans/debentures to affiliated entities (422,083) ----
----------- -----------
Income before equity in loss of Focus Surgery Inc.,
equity in loss of Hearing Innovations, Inc.,
minority interest and income taxes 191,340 1,133,587
Equity in loss of Focus Surgery, Inc. ---- (83,349)
Equity in loss of Hearing Innovations, Inc. ---- (16,001)
Minority interest in net income of consolidated subsidiaries (12,186) (4,323)
----------- -----------
Income before income taxes 179,154 1,029,914
Income tax benefit (provision) (222,209) 1,304,246
----------- -----------
Net (loss) income $ (43,055) $ 2,334,160
=========== ===========
Net (loss) income per share - Basic $(.01) $.39
===== ====
Net (loss) income per share - Diluted $(.01) $.36
===== ====
Weighted average common shares outstanding - Basic 6,055,176 5,923,127
=========== ===========
Weighted average common shares outstanding - Diluted 6,055,176 6,566,474
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
4
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
=================================
For the three months ended
September 30,
-------------------------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net (loss) income $(43,055) $2,334,160
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Bad debt expense 22,938 19,333
Deferred income tax (benefit) provisions 72,609 (1,903,663)
Depreciation and amortization 131,113 260,518
Foreign currency gain (972) (4,896)
Minority interest in net income of subsidiaries 12,186 4,323
Equity in loss of Focus Surgery, Inc. - 83,349
Equity in loss of Hearing Innovations, Inc. - 16,001
Loans and debentures made to affiliates 422,083 -----
Change in operating assets and liabilities:
Deferred income 52,208 111,168
Accounts receivable 929,317 336,425
Inventories (620,255) (1,791,716)
Litigation settlement liabilities (100,000)
Prepaid expenses and other current assets (134,104) (39,185)
Other assets (25,519) (30,143)
Accounts payable and accrued expenses (467,337) 1,066,492
Income taxes payable (299,096) (594,129)
---------- ----------
Net cash (used in) operating activities (47,884) (131,963)
----------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (72,582) (103,079)
Redemption of investments held to maturity 2,011,768 15,526
Loans and debenture made to affiliates (422,083) (189,008)
----------
Net cash used in investing activities 1,919,760 (276,561)
---------- ----------
FINANCING ACTIVITIES
Proceeds from short-term borrowings, net 271,607 118,920
Principal payments on capital lease obligations (89,615) (36,668)
Proceeds from exercise of stock options 4,605 6,843
Payment of long-term debt (12,067) (10,556)
---------- ----------
Net cash provided by financing activities 174,530 78,539
---------- ----------
Effect of exchange rates on cash and cash equivalents 3,316 1,625
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,647,065 (328,360)
Cash and cash equivalents at beginning of period 3,774,573 7,069,502
---------- ----------
Cash and cash equivalents at end of period $5,421,638 $6,741,142
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID FOR: Interest $ 35,895 $ 34,873
========== ==========
:Income taxes $ 341,465 $1,149,085
========== ==========
See accompanying Notes to Consolidated Financial Statements.
5
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 generally accepted accounting
principles for complete financial statements. In the opinion of the
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year
ending June 30, 2002.
The balance sheet at June 30, 2001 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, 2001.
2. Litigation Settlement
The Company, Medical Device Alliance, Inc. ("MDA") and MDA's wholly-owned
subsidiary, Lysonix, Inc. ("Lysonix"), were defendants in an action alleging
patent infringement filed by Mentor Corporation ("Mentor"). On June 10,
1999, the United States District Court, central District of California,
found for the defendants that there was no infringement upon Mentor's
patent. Mentor subsequently filed an appeal. The issue concerned whether
Mentor's patent is enforceable against the Company and does not govern
whether the Company's patent in reference is invalid. On April 11, 2001, the
United States Court of Appeals for the Federal Circuit Court issued a
decision reversing in large part the decision of the trial court and
granting the motion by Mentor against MDA, Lysonix and the Company for
violation of Mentor's U.S. Patent No. 4886491. This patent covers Mentor's
license for ultrasonic assisted liposuction. Damages were asserted in favor
of Mentor for approximately $4,900,000 and $688,000 for interest. The court
also granted a permanent injunction enjoining further sales of the Lysonix
2000 in the United States for the use of liposuction. The Court affirmed
that the lower court did not have the ability to increase damages or award
attorneys' fees. Each defendant is jointly and severally liable as each
defendant was deemed to infringe proportionally. Mentor requested further
relief in the trial court for additional damages. The Company and its
co-defendants are considering all alternatives including all legal measures
that are available. Accordingly, the Company accrued an aggregate of
$6,176,000 for damages, attorney's fees, interest and other costs during the
third and fourth quarters of fiscal 2001. The Company paid approximately
$100,000 of these accrued costs during the first fiscal quarter 2002.
6
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
3. Inventories
Inventories are summarized as follows:
September 30, 2001 June 30, 2001
------------------ -------------
Raw materials $ 4,454,851 $ 3,617,258
Work-in-process 876,306 860,834
Finished goods 3,217,746 3,396,280
------------ ------------
$ 8,548,903 $ 7,874,372
============ ============
4. Accrued Expenses and Other Current Liabilities
The following summarizes accrued expenses and other current liabilities:
September 30, 2001 June 30, 2001
------------------ -------------
Accrued payroll and vacation $ 124,632 $ 135,651
Accrued sales tax 10,458 1,305
Accrued commissions and bonuses 455,769 440,603
Customer deposits 150,963 260,767
Professional fees 25,139 45,889
Warranty 356,423 365,198
Other 31,165 59,279
------------- ------------
$ 1,154,449 $ 1,308,692
============= ============
5. Income Taxes
The Company recorded a deferred tax asset relating to the loss on
impairment of equity investments for the notes and debentures to both
Hearing Innovations, Inc. ("Hearing Innovations") and Focus Surgery, Inc.
("Focus Surgery") (note 6) during the first quarter of fiscal 2002 in the
amount of $164,970. The Company recorded a full valuation allowance against
the asset in accordance with the provisions of FASB Statement No. 109
"Accounting for Income Taxes." The valuation allowance was determined by
assessing the recoverability of the deferral tax asset. In assessing the
recoverability of the deferral tax asset, management considered whether it
is more likely than not whether some portion or all of the deferral tax
asset would be realized. Based upon the nature of the deferral tax asset
and the Company projections for future capital gains in which the deferral
tax asset would be deductible, management did not deem the asset to be
recoverable as of September 30, 2001. For the first quarter of fiscal 2001,
the Company recorded a one-time tax benefit of $1,681,502 for the reduction
of valuation allowance applied against a deferred tax asset recorded in
fiscal year 1997 for below market stock option grants.
6. Convertible Debentures and Loans
During the first quarter of fiscal 2002, the Company entered into four loan
agreements whereby Hearing Innovations was required to pay the Company
amounts of $13,000 due May 30, 2002, $22,800 due May 30, 2002, $27,200 due
May 30, 2002 and $32,700 due May 30, 2003. All notes bore interest at 8% per
annum and contain warrants to acquire additional shares. The notes were
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 hereafter arising
after the date of these agreements. If the Company were to exercise and
convert all warrants and options, the Company would hold an interest in
Hearing Innovations of
7
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
approximately 35%. The Company recorded a loss for these loans since the
Company does not anticipate that these loans will be paid in accordance with
the contracted terms of the loan agreements.
On August 3, 2001, the Company purchased a $300,000 6% Secured Cumulative
Convertible Debenture from Focus Surgery, due December 22, 2002 (the "Focus
Debenture"). The Focus Debenture is convertible into 250 shares of Focus
Surgery preferred stock at the option of the Company at any time up until
the due date at $1,200 per share. Interest accrues and is payable at
maturity, or is convertible on the same terms as the Focus Debenture's
principal amount. The Focus Debenture is secured by a lien on all of Focus
Surgery's right, title, and interest in accounts receivable, inventory,
property, plant and equipment and processes of specified products whether
now existing or hereafter arising after the date of the Focus Debenture. The
Company recorded a loss for the Focus Debenture since the Company does not
anticipate such Debenture to be satisfied within the contractual terms of
the loan agreement.
7. Business Segments
The Company operates in two business segments, which are organized by
product types: industrial products and medical devices. Industrial products
include the Sonicator ultrasonic liquid processor, Aura ductless fume
enclosure, the Autoscope endoscope disinfectant system from Labcaire and the
Mystaire scrubber. Medical devices include the Auto Sonix for ultrasonic
cutting and coagulatory system and refurbishing revenues of high-performance
ultrasound systems and replacement transducers for the medical diagnostic
ultrasound industry. The Company evaluates the performance of the segments
based upon income (loss) from operations less general and administrative
expenses, bad debt expense and litigation 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 Report
on Form 10-K for the year ended June 30, 2001. Certain items are maintained
at the corporate headquarters (corporate) and are not allocated to the
segments. They primarily include general and administrative expenses, bad
debt expense and litigation settlement expenses. The Company does not
allocate assets by segment as they are not provided to the chief decision
maker. Summarized financial information for each of the segments for the
three months ended September 30, 2001 is as follows:
8
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
- -------------------------------------------------------------------------------------------------------------------
For The Three Months Ended September 30, 2001
- -------------------------------------------------------------------------------------------------------------------
Medical Devices Industrial Products Corporate** TOTAL
Unallocated
- -------------------------------------------------------------------------------------------------------------------
Net Sales $2,742,138 $4,080,383 $6,822,521
- -------------------------------------------------------------------------------------------------------------------
Cost of Goods Sold $1,407,029 $2,230,320 $3,637,349
- -------------------------------------------------------------------------------------------------------------------
Gross Profit $1,335,109 $1,850,063 $3,185,172
- -------------------------------------------------------------------------------------------------------------------
Direct Selling Expenses $251,919 $778,026 $1,029,945
- -------------------------------------------------------------------------------------------------------------------
Direct Research and $321,573 $137,682 $459,255
Development
- -------------------------------------------------------------------------------------------------------------------
Total Direct Operating $573,492 $915,708 $1,489,200
Expenses
- -------------------------------------------------------------------------------------------------------------------
Corporate and $1,487,532 $1,487,532
Unallocated
- -------------------------------------------------------------------------------------------------------------------
Income (loss) From $761,617 $934,355 $1,487,532 $208,440
Operations
- -------------------------------------------------------------------------------------------------------------------
** represents general and administrative and bad debt expenses.
The following table provides a breakdown of foreign sales by geographic areas
during the periods indicated:
- -------------------------------------------------------------------------------------------------------------------
For The Three Months Ended September 30, 2001
- -------------------------------------------------------------------------------------------------------------------
In Thousands of Dollars
- -------------------------------------------------------------------------------------------------------------------
2001 2000
---- ----
- -------------------------------------------------------------------------------------------------------------------
Canada and Mexico $37 $648
- -------------------------------------------------------------------------------------------------------------------
United Kingdom 1,252 1,259
- -------------------------------------------------------------------------------------------------------------------
Europe 214 314
- -------------------------------------------------------------------------------------------------------------------
Asia 171 153
- -------------------------------------------------------------------------------------------------------------------
Middle East 31 78
- -------------------------------------------------------------------------------------------------------------------
Other 45 54
------ ------
- -------------------------------------------------------------------------------------------------------------------
Total $1,722 $2,506
------ ------
- -------------------------------------------------------------------------------------------------------------------
9
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
8. Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 141 and 142 (SFAS 141 and SFAS 142),
"Business Combinations" and "Goodwill and Other Intangible Assets,"
respectively. SFAS 141 replaces APB 16 and requires the use of the
purchase method for all business combinations initiated after June 30,
2001. It also provides guidance on purchase accounting related to the
recognition of intangible assets and the accounting for negative goodwill.
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, 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. Amortization of goodwill for the comparable three month period
ended September 30, 2000 was $130,382.
SFAS 142 provides a six-month transitional period from the effective date
of adoption for the Company to perform an assessment of whether there is an
indication that goodwill is impaired. To the extent that an indication of
impairment exists, the Company must perform a second test to measure the
amount of impairment. The second test must be performed as soon as
possible, but no later that 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. Because of the extensive effort
needed to complete this assessment, the Company has not determined whether
there is any indication that goodwill is impaired or the estimated the
amount of any potential impairment.
9. Subsequent Events
Labcaire Systems Ltd.
In October 2001, under the terms of the revised purchase agreement (the
"Labcaire Agreement") with Labcaire (as discussed in the Company's Report
on Form 10-K for the year ended June 30, 2001), the Company paid
approximately $97,000 for 9,286 shares (2.65%) of the outstanding common
stock of Labcaire bring the acquired interest to 97.3 %. This represents
the fiscal 2002 buy-back portion, as defined in the Labcaire Agreement. The
Company is obligated to purchase 2.65% for the next year at which time the
Company will own 100% of Labcaire.
10
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.
NET SALES: Net sales of the Company's medical devices and industrial products
increased $31,203 from $6,791,318 for the three months ended September 30, 2000
to $6,822,521 for the three months ended September 30, 2001. This increase in
net sales is due to a $273,049 increase in medical devices partially offset by
$241,846 lower industrial product sales. The increase in medical devices is due
to the $205,084 increase in diagnostic medical devices and the increase of
$67,965 of Ultrasonic medical devices. The decrease in industrial sales is
predominantly due to the decrease of $479,594 in wet scrubber sales and $53,418
industrial ultrasonic products offset by an increase of $268,682 of Labcaire
sales and $22,484 of fume enclosure sales.
GROSS PROFIT: Gross profit decreased to 46.7% in the three months ended
September 30, 2001 from 52.7% in the three months ended September 30, 2000. The
decrease in gross profit is predominantly due to the unfavorable mix of high and
low margin product deliveries in medical devices.
SELLING EXPENSES: Selling expenses increased $208,483 from $821,462 for the
three months ended September 30, 2000 to $1,029,945 for the three months ended
September 30, 2001. Medical device selling expenses increased $77,886
predominantly due to additional sales and marketing efforts from diagnostic
medical devices. Industrial selling expenses increased $130,597 predominantly
due to increased market efforts and personnel additions.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
decreased $52,293 from $1,539,825 in the three months ended September 30, 2000
to $1,487,532 in the three months ended September 30, 2001. The decrease is
predominantly due to the adoption with first quarter fiscal 2002 of FASB
Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). In
accordance with SFAS 142, the Company is no longer amortizing goodwill.
Amortization of goodwill for the comparable period in fiscal 2000 was $72,657.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses increased
$112,397 from $346,858 for the three months ended September 30, 2000 to $459,255
for the three months ended September 30, 2001. The increases are predominantly
due to the increased research and development on medical device products in the
amount of $114,399 offset by reduced efforts for industrial products in the
amount of $2,002.
OTHER INCOME (EXPENSES): Other expenses during the three months ended September
30, 2001 was $17,100. During the three months ended September 30, 2000 other
income was $260,334. The decrease of $277,434 was principally due to the
$422,183 recording of the loss for loans made to both Focus Surgery and Hearing
Innovations and lower interest income of $25,609 during the quarter ended
September 30, 2001, partially offset by increased royalties from medical devices
of $123,657. The Company is no longer amortizing goodwill for our interests in
Focus Surgery and Hearing Innovations for the first quarter ending September 30,
2001. Amortization of goodwill for the comparable period in fiscal 2000 was
$57,725.
11
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
=========================================================
INCOME TAXES: The Company recorded a valuation allowance in the amount of
$164,970 for the first quarter of fiscal 2002 against the deferred tax asset
relating to the loss on the notes and debentures to both Hearing Innovations and
Focus Surgery. The valuation allowance was recorded in accordance with the
provisions of FASB Statement No. 109 "Accounting for Income Taxes." For the
first quarter of fiscal 2001, the Company recorded a one-time tax benefit of
$1,681,502 for the reduction of valuation allowance applied against a deferred
tax asset recorded in fiscal year 1997 for below market stock option grants.
12
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at September 30, 2001 and June 30, 2001 was $12,003,230 and
$12,002,501, respectively. Cash flow from operations was predominantly
negatively impacted by the increase in inventory from both industrial and
medical products, payment of litigation settlement liabilities, payment of
accounts payable and lower accrued expenses offset by increased accounts
receivable collections.
The Company is currently negotiating a $5,000,000 revolving credit facility with
a commercial bank to cover any potential shortfalls of the Company's cash
position as well as to support future working capital needs.
In October 2001, under the terms of the revised purchase agreement (the
"Labcaire Agreement") with Labcaire (as discussed in the Company's Report on
Form 10-K for the year ended June 30, 2001), the Company paid approximately
$97,000 for 9,286 shares (2.65%) of the outstanding common stock of Labcaire.
This represents the fiscal 2002 buy-back portion, as defined in the Labcaire
Agreement.
During the first quarter of fiscal 2002, the Company entered into four loan
agreements whereby Hearing Innovations was required to pay the Company amounts
of $13,000 due May 30, 2002, $22,800 due May 30, 2002, $27,200 due May 30, 2002
and $32,700 due May 30, 2003. All notes bore interest at 8% per annum and
certain warrants to acquire additional shares. The notes were 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 hereafter arising after the date of these agreements. If
the Company were to exercise and convert all warrants and options, the Company
would hold an interest in Hearing Innovations of approximately 35%. The Company
recorded the loss on such loans since the Company does not anticipate these
loans will be paid in accordance with the contracted terms of the loan
agreements.
On August 3, 2001, the Company purchased a $300,000 6% Secured Cumulative
Convertible Debenture from Focus Surgery, due December 22, 2002 (the "Focus
Debenture"). The Focus Debenture is convertible to 250 shares of Focus Surgery
preferred stock at the option of the Company at any time up until the due date
at $1,200 per share. Interest accrues and is payable at maturity, or is
convertible on the same terms as the Focus Debenture principal amount. The Focus
Debenture is secured by a lien on all Focus Surgery's rights, title, and
interest in accounts receivable, inventory, property, plant and equipment and
processes of specified products whether now existing or hereafter arising after
the date of the Focus Debenture. The Company recorded the loss on the Focus
Debenture since the Company does not anticipate such Debenture to be satisfied
within the contractual terms of the loan agreement.
The Company believes that its existing capital resources will enable it to
maintain its current and planned operations for at least 18 months from the date
hereof.
13
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets"
(Statement 144), which supersedes both FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement No. 142, "Goodwill and Other Intangible Assets".
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001. Management does not expect the adoption of Statement
144 for long-lived assets held for use to have a material impact on the
Company's financial statements because the impairment assessment under Statement
144 is largely unchanged from Statement 121. The provisions of the Statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
Statement 144 will have on the Company's 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 venture and investment in related entities,
future economic, competitive and market conditions, the outcome of legal
proceedings, particularly those including patent litigation with Mentor
Corporation as well as management business decisions.
14
MISONIX, INC.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
=========================================================
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Currency Risk:
Approximately 26% of the Company's revenues in fiscal 2001
were received in English Pounds Sterling currency. To the extent that the
Company's revenues are generated in English Pounds, its operating results are
converted into U.S. Dollars using rates of 1.46 and 1.48 for the three months
ended September 30, 2001 and 2000, 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.
Euro Conversion: The January 1, 1999 adoption of the Euro
created a single-currency market in much of Europe. For a transition period from
January 1, 1999 through January 1, 2002, the existing local currencies are
anticipated to remain legal tender as denominations of the Euro. The Company
does not anticipate that its operations will be materially adversely effected by
the conversion to the Euro. The Company has analyzed the impact of conversion to
the Euro on its existing systems and operations and implemented modifications to
its systems to enable the Company to handle Euro invoicing for the transactions
which commenced in 1999. The Company anticipates that the cost of such
modifications should not have a material effect on its consolidated results of
operations or liquidity.
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MISONIX, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company, Medical Device Alliance, Inc. ("MDA") and MDA's wholly-owned
subsidiary, Lysonix, Inc. ("Lysonix"), were defendants in an action alleging
patent infringement filed by Mentor Corporation ("Mentor"). On June 10,
1999, the United States District Court, central District of California,
found for the defendants that there was no infringement upon Mentor's
patent. Mentor subsequently filed an appeal. The issue concerned whether
Mentor's patent is enforceable against the Company and does not govern
whether the Company's patent in reference is invalid. On April 11, 2001, the
United States Court of Appeals for the Federal Circuit Court issued a
decision reversing in large part the decision of the trial court and
granting the motion by Mentor against MDA, Lysonix and the Company for
violation of Mentor's U.S. Patent No. 4,886,491. This patent covers Mentor's
license for ultrasonic assisted liposuction. Damages were asserted in favor
of Mentor for approximately $4,900,000 and $688,000 for interest. The court
also granted a permanent injunction enjoining further sales of the Lysonix
2000 in the United States for the use of liposuction. The Court affirmed
that the lower court did not have the ability to increase damages or award
attorneys' fees. Each defendant is jointly and severally liable as each
defendant was deemed to infringe proportionally. Mentor requested further
relief in the trial court for additional damages. The Company and its
co-defendants are considering all alternatives including all legal measures
that are available. Accordingly, the Company accrued an aggregate of
$6,176,000 for damages, attorney's fees, interest and other costs during the
third and fourth quarters of fiscal 2001. The Company paid approximately
$100,000 of these accrued costs during the first fiscal quarter of 2002.
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MISONIX, INC.
Item 6. Exhibits and Reports on Form 8-K.
(a)
EXHIBIT 11 (Unaudited)
COMPUTATION OF NET (LOSS) INCOME PER SHARE
Three Months Ended
September 30.
------------
2001 2000
Net (loss) income $ (43,055) $ 2,334,160
=============================
Weighted average common
shares outstanding 6,055,176 5,925,045
=============================
Dilutive effect of stock options --- 633,406
Weighted average common
shares and common share
equivalents 6,055,176 6,558,451
=============================
Basic:
Net (loss) income per common share $ (.01) $ .39
=============================
Diluted:
Net (loss) income per common share $ (.01) $ .36
=============================
Employee stock options totaling 280,813 for the three months ended September 30,
2001 were not included in the dilutive net loss per share calculation because
the effect would have been anti-dilutive. There were no anti-dilutive stock
options for the three months ended September 30, 2000.
(b) There were no reports on Form 8-K filed during the quarter ended September
30, 2001.
17
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: November 14, 2001
MISONIX, INC.
---------------------------------
(Registrant)
By: /s/ Michael A. McManus, Jr.
---------------------------
Michael A. McManus, Jr.
President, Chief Executive Officer
By: /s/ Richard Zaremba
-------------------
Richard Zaremba
Vice President,
Chief Financial Officer,
Treasurer and Secretary
18