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, 2002
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OR
[x] 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.
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(Exact name of registrant as specified in its charter)
New York 11-2148932
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1938 New Highway, Farmingdale, NY 11735
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(Address of principal executive offices) (Zip Code)
(631) 694-9555
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(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 November 6, 2002
---------------------------- ----------------
Common Stock, $.01 par value 6,644,365
1
MISONIX, INC.
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INDEX
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PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 2002 (Unaudited) and June 30, 2002 3
Consolidated Statements of Operations
Three months ended September 30, 2002
and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows
Three months ended September 30, 2002
and 2001 (Unaudited) 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition 9-13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
Part II - OTHER INFORMATION 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Certifications 17-20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MISONIX, INC.
CONSOLIDATED BALANCE SHEETS
===========================
SEPTEMBER 30, June 30,
2002 2002
--------------- ------------
ASSETS (UNAUDITED) Audited
--------------- ------------
Current assets:
Cash and cash equivalents $ 952,294 $ 1,065,465
Accounts receivable, less allowance for doubtful accounts of $227,328 and
$223,413, respectively 6,509,931 6,656,932
Inventories 8,362,598 7,170,844
Prepaid income taxes 1,321,592 1,391,978
Deferred income taxes 413,413 388,027
Prepaid expenses and other current assets 663,192 715,367
--------------- ------------
Total current assets 18,223,020 17,388,613
Property, plant and equipment, net 3,402,243 3,151,909
Deferred income taxes 1,755,559 1,757,937
Goodwill 4,241,319 4,241,319
Other assets 305,415 424,674
--------------- ------------
Total assets $ 27,927,556 $26,964,452
=============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities $ 970,392 $ 730,092
Accounts payable 3,484,707 3,072,234
Accrued expenses and other current liabilities 1,173,962 1,304,824
Litigation settlement liabilities 170,000 174,332
Current maturities of long-term debt and capital lease obligations 288,317 252,850
--------------- ------------
Total current liabilities 6,087,378 5,534,332
Long-term debt and capital lease obligations 1,249,015 1,050,254
Deferred income 453,363 451,073
Minority interest 246,683 239,965
Stockholders' equity:
Common stock, $.01 par value-shares authorized 10,000,000; 6,180,165 issued,
6,105,865 outstanding 61,802 61,802
Additional paid-in capital 22,313,991 22,313,991
Retained deficit (1,969,902) (2,021,059)
Treasury stock, 74,300 shares (401,974) (401,974)
Accumulated other comprehensive loss (112,800) (263,932)
--------------- ------------
Total stockholders' equity 19,891,117 19,688,828
--------------- ------------
Total liabilities and stockholders' equity $ 27,927,556 $26,964,452
=============== ============
<FN>
See accompanying Notes to Consolidated Financial Statements.
3
MISONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
===========
For the three months ended
Septemer 30,
2002 2001
--------------- --------------
Net sales $ 7,010,322 $ 6,822,521
Cost of goods sold 4,053,104 3,637,349
--------------- --------------
Gross profit 2,957,218 3,185,172
Operating expenses:
Selling expenses 935,603 1,029,945
General and administrative expenses 1,519,873 1,487,532
Research and development expenses 539,326 459,255
Litigation (recovery) settlement expenses (127,302) -
--------------- --------------
Total operating expenses 2,867,500 2,976,732
--------------- --------------
Income from operations 89,718 208,440
Other income (expense):
Interest income 38,714 146,551
Interest expense (42,977) (35,895)
Option/license fees 6,078 972
Royalty income 122,645 293,355
Foreign exchange gain 3,283 -
Loss on impairment of investments (112,632) (422,083)
--------------- --------------
Total other income (expense) 15,111 (17,100)
Income before minority interest and income taxes 104,829 191,340
Minority interest in net income of consolidated subsidiaries (6,717) (12,186)
--------------- --------------
Income before income taxes 98,112 179,154
Income tax expense 46,955 222,209
--------------- --------------
Net income (loss) $ 51,157 $ (43,055)
=============== ==============
Net income (loss) per share-Basic $ .01 $ (.01)
=============== ==============
Net income (loss) per share - Diluted $ .01 $ (.01)
=============== ==============
Weighted average common shares outstanding - Basic 6,105,865 6,055,176
=============== ==============
Weighted average common shares outstanding - Diluted 6,510,746 6,055,176
=============== ==============
<FN>
See accompanying Notes to Consolidated Financial Statements.
4
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
===========
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
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OPERATING ACTIVITIES $ 51,157 $ (43,055)
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Bad debt expense 16,608 22,938
Litigation recovery expense (127,302) -
Deferred income tax expense (benefit) (23,008) 72,609
Depreciation and amortization 153,558 131,113
Loss on disposal of equipment 53,795 -
Deferred income 2,290 52,208
Foreign currency exchange gain (3,283) (972)
Minority interest in net income of subsidiaries 6,717 12,186
Loss on impairment of investments 112,632 422,083
Changes in operating assets and liabilities:
Accounts receivable 321,909 929,317
Inventories (943,179) (620,255)
Prepaid income taxes 72,384 -
Prepaid expenses and other current assets (6,224) (134,104)
Other assets 114,500 (25,519)
Accounts payable and accrued expenses 171,113 (467,337)
Litigation settlement liabilities (4,332) (100,000)
Income taxes payable (37,392) (299,096)
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Net cash used in operating activities (68,057) (47,884)
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INVESTING ACTIVITIES
Acquisition of property, plant and equipment (97,830) (72,582)
Redemption of investments held to maturity - 2,011,768
Purchase of convertible debentures - Focus Surgery, Inc. - (300,000)
Loans to Focus Surgery, Inc. - (12,595)
Loans to Hearing Innovations, Inc. (75,666) (109,488)
--------------- --------------
Net cash (used in) provided by investing activities (173,496) 1,517,103
--------------- --------------
FINANCING ACTIVITIES
Proceeds from (payments of) short-term borrowings, net 189,491 271,607
Principal payments on capital lease obligations (65,387) (89,615)
Proceeds (payments of) of long-term debt 11,824 (12,067)
Proceeds from exercise of stock options - 4,605
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Net cash provided by financing activities 135,928 174,530
--------------- --------------
Effect of exchange rate changes on assets and liabilities (7,546) 3,316
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Net (decrease) increase in cash and cash equivalents (113,171) 1,647,065
Cash and cash equivalents at beginning of year 1,065,465 3,774,573
--------------- --------------
Cash and cash equivalents at end of year $ 952,294 $ 5,421,638
=============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 42,977 $ 35,895
=============== ==============
Income taxes $ 50,114 $ 341,465
=============== ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease additions $ 198,722 $ 49,798
=============== ==============
<FN>
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 months ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2003.
The balance sheet at June 30, 2002 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended June 30, 2002.
2. Inventories
-----------
Inventories are summarized as follows:
SEPTEMBER 30, 2002 JUNE 30, 2002
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Raw materials $ 4,582,535 $ 3,701,925
Work-in-process 1,170,926 824,289
Finished goods 2,609,137 2,644,630
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$ 8,362,598 $ 7,170,844
=================== ==============
3. Accrued Expenses and Other Current Liabilities
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The following summarizes accrued expenses and other current liabilities:
SEPTEMBER 30, 2002 JUNE 30, 2002
------------------- --------------
Accrued payroll and vacation $ 148,401 $ 165,350
Accrued sales tax 4,965 7,262
Accrued commissions and bonuses 211,330 216,343
Customer deposits and deferred
contracts 603,536 526,560
Accrued professional fees 122,256 229,750
Warranty 68,000 68,000
Other 15,474 91,559
------------------- --------------
$ 1,173,962 $ 1,304,824
=================== ==============
6
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
4. Loans to Affiliates
---------------------
Hearing Innovations, Inc.
---------------------------
During fiscal 2003, the Company entered into two loan agreements whereby
Hearing Innovations, Inc. ("Hearing Innovations") is required to pay the
Company an aggregate amount of $75,666 due November 30, 2003. All notes
bear interest at 8% per annum. The notes are secured by a lien on all of
Hearing Innovations' right, title and interest in accounts receivable,
inventory, property, plant and equipment and processes of specified
products whether now existing or arising after the date of these
agreements. The loan agreements contain warrants to acquire 75,666 shares
of Hearing Innovations common stock, at the option of the Company, at a
cost of $1.00 per share. These warrants, which are deemed nominal in value,
expire in October 2005. The Company recorded an allowance against the
entire balance of $75,666 and accrued interest for the above loans. The
related expense has been included in loss on impairment of investments in
the accompanying consolidated statements of operations. The Company
believes the loans and related interest are impaired since the Company does
not anticipate that these loans will be paid in accordance with the
contractual terms of the loan agreements.
5. 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 and Guardian endoscope disinfectant system from
Labcaire and the Mystaire wet scrubber. Medical devices include the Auto
Sonix for ultrasonic cutting and coagulatory system, refurbishing of
high-performance ultrasound systems and replacement transducers for the
medical diagnostic ultrasound industry, ultrasonic lithotriptor and the
ultrasonic neuro aspirator, used for neurosurgery, and soft tissue
aspirator, primarily for the cosmetic surgery market. The Company evaluates
the performance of the segments based upon income from operations before
general and administrative expenses and litigation (recovery) settlement
expenses. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies (Note 1) in the
Company's Annual Report on Form 10-K for the year ended June 30, 2002.
Certain items are maintained at the corporate headquarters (corporate) and
are not allocated to the segments. They primarily include general and
administrative expenses and litigation (recovery) settlement expenses. The
Company does not allocate assets by segment. Summarized financial
information for each of the segments are as follows:
For the three months ended September 30, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
---------- ----------- --------------- ----------
Net sales $3,168,672 $ 3,841,650 $ - $7,010,322
Cost of goods sold 1,843,770 2,209,334 - 4,053,104
---------- ----------- ----------
Gross profit 1,324,902 1,632,316 - 2,957,218
Selling expenses 267,625 667,978 - 935,603
Research and development
expenses 383,021 156,305 - 539,326
---------- ----------- ----------
Total operating expenses 650,646 824,283 1,392,571 2,867,500
---------- ----------- --------------- ----------
Income from operations $ 674,256 $ 808,033 $ (1,392,571) $ 89,718
========== =========== =============== ==========
<FN>
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses.
7
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
For the three months ended September 30, 2001:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
---------- ----------- --------------- ----------
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
Selling expenses 251,919 778,026 - 1,029,945
Research and development
expenses 321,573 137,682 - 459,255
----------- ----------- ---------
Total operating expenses 573,492 915,708 1,487,532 2,976,732
---------- ----------- --------------- ----------
Income from operations $ 761,617 $ 934,355 $ (1,487,532) $ 208,440
========== =========== =============== ==========
<FN>
(a) Amount represents general and administrative expenses.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the three months ended September 30:
2002 2001
---------- -----------
(IN THOUSANDS)
United States $4,481,000 $ 5,073,000
Canada and Mexico 106,000 37,000
United Kingdom 1,715,000 1,252,000
Europe 472,000 214,000
Asia 154,000 171,000
Middle East 13,000 31,000
Other 69,000 45,000
---------- -----------
$7,010,000 $ 6,823,000
========== ===========
6. Revolving Credit Facilities
-----------------------------
On July 1, 2002, Labcaire replaced its bank overdraft facility with HSBC
Bank plc with a debt purchase agreement with Lloyds TSB Commercial Finance.
The amount of this facility is approximately $1,384,000 ( 950,000) and
bears interest at the bank's base rate plus 1.75% and a service charge of
.15% of sales invoice value. The agreement expires on June 28, 2003 and
covers all United Kingdom and European sales.
The Company was not in compliance with, and has received a waiver of,
certain covenants under its revolving line of credit facility with Fleet
Bank (as discussed in the Company's Annual Report on Form 10-K for the
ended June 30, 2002) for the period ending September 30, 2002. The Company
has not borrowed against this revolving credit facility.
7. Subsequent Events
------------------
Labcaire Systems Ltd.
-----------------------
In October 2002, under the terms of the revised purchase agreement (the
"Labcaire Agreement") with Labcaire (as discussed in the Company's Annual
Report on Form 10-K for the year ended June 30, 2002), the Company paid
$232,394 for 9,286 shares (2.70%) of the outstanding common stock of
Labcaire bringing the acquired interest to 100%. This represents the fiscal
2003 buy-back and last portion, as defined in the Labcaire Agreement.
8
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.
Three Months Ended September 30, 2002 and 2001.
NET SALES: Net sales of the Company's medical devices and industrial products
- -----------
increased $187,801 to $7,010,322 for the three months ended September 30, 2002
from $6,822,521 for the three months ended September 30, 2001. This difference
in net sales is due to an increase in medical devices of $426,534 offset by
lower industrial products sales of $238,733. The increase in medical devices is
due to an increase in sales of diagnostic medical devices of $384,177 and an
increase of $42,357 in therapeutic medical devices, both due to customer demand.
The decrease in industrial products is due to decreased wet scrubber sales of
$746,033 primarily offset by an increase in Labcaire sales of $323,071, an
increase of ultrasonic sales of $100,073 and an increase in ductless fume
enclosure sales of $84,156. Wet scrubber sales continue to be adversely
affected by the downturn of the semi-conductor market. The increase in Labcaire
sales is due to the new Guardian product introduced in December 2001.
GROSS PROFIT: Gross profit decreased to 42.2% for the three months ended
- --------------
September 30, 2002 from 46.7% for the three months ended September 30, 2001.
The decrease in gross profit is predominantly due to the unfavorable mix of high
and low margin product deliveries for industrial products, primarily ductless
fume enclosures and medical devices. The medical devices decrease in gross
profit is due to the unfavorable mix between sales of units and accessories.
SELLING EXPENSES: Selling expenses decreased $94,342 to $935,603 for the three
- ------------------
months ended September 30, 2002 from $1,029,945 for the three months ended
September 30, 2001. Medical device selling expenses increased $15,706
predominantly due to additional sales and marketing efforts for diagnostic
medical devices. Industrial selling expenses decreased $110,048 predominantly
due to a decrease in ultrasonic commissions and wet scrubber commissions and
marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
- --------------------------------------
increased $32,341 from $1,487,532 in the three months ended September 30, 2001
to $1,519,873 in the three months ended September 30, 2002. The increase is
predominantly due to an increase in general and administrative expenses relating
to severance costs for a Labcaire executive partially offset by lower travel and
stockholder relations expenses.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses increased
- ------------------------------------
$80,071 from $459,255 for the three months ended September 30, 2001 to $539,326
for the three months ended September 30, 2002. The increase is predominantly
due to increased research and development on medical device products in the
amount of $61,448. In September 2002, the Company funded $50,000 to Focus
Surgery, Inc. ("Focus Surgery") to start research and development for the
treatment of kidney tumors utilizing high intensity focused ultrasound
technology.
LITIGATION (RECOVERY) SETTLEMENT EXPENSES. The Company recorded a reversal of
- ---------------------------------------------
the litigation settlement during the first quarter of fiscal 2003 of $127,302,
which represents the sale of Lysonix 2000 units by Mentor Corporation under our
manufacturing and distribution agreement, that was previously reserved for.
Accordingly, the Company recorded a reversal of the litigation settlement of
$127,302. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended June 30, 2002.
9
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
OTHER INCOME (EXPENSE): Other income during the three months ended September 30,
- -----------------------
2002 was $15,111. During the three months ended September 30, 2001, other
expense was $17,100. The increase of $32,211 was principally due to a decrease
in loss on impairment of investments of $309,451, offset by lower interest
income of $107,837 and reduced royalty income of $170,710.
INCOME TAXES: The effective tax rate is 47.9% for the three months ended
- --------------
September 30, 2002 as compared to an effective tax rate of 124% for the three
months ended September 30, 2001. The current effective tax rate is a mixture of
the Labcaire tax expense offset by domestic entities benefits which also
incorporate the valuation allowance recorded. The Company recorded a valuation
allowance in the amount of $43,926 for the three months ended September 30, 2002
against the deferred tax asset relating to the loss on the loans and debentures
issued by Hearing Innovations because the Company does not anticipate capital
gains to offset the capital losses. The valuation allowance was recorded in
accordance with the provisions of FASB Statement No. 109 "Accounting for Income
Taxes".
CRITICAL ACCOUNTING POLICIES:
General: Financial Reporting Release No. 60, which was released by the
- --------
Securities and Exchange Commission ("SEC"), in December 2001, requires all
companies to include a discussion of critical accounting policies or methods
used in the preparation of the financial statements. Note 1 of the Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended June 30, 2002 includes a summary of the Company's
significant accounting policies and methods used in the preparation of its
financial statements. The Company's discussion and analysis of its financial
condition and results of operations are based upon the Company's financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an on-going
basis, management evaluates its estimates and judgments, including those related
to bad debts, inventories, goodwill, property, plant and equipment and income
taxes. Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company considers certain accounting policies
related to allowance for doubtful accounts, inventories, property, plant and
equipment, goodwill and income taxes to be critical policies due to the
estimation process involved in each.
Allowance for Doubtful Accounts: The Company's policy is to review its
- --------------------------------
customers' financial condition prior to extending credit and, generally,
collateral is not required. The Company utilizes letters of credit on foreign
or export sales where appropriate.
Inventories: Inventories are stated at the lower of cost (first-in, first-out)
- ------------
or market and consist of raw materials, work-in-process and finished goods.
Management evaluates the need to record adjustments for impairments of inventory
on a quarterly basis. The Company's policy is to assess the valuation of all
inventories, including raw materials, work-in-process and finished goods.
10
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 issued
- ---------
Statement of Financial Accounting Standards ("SFAS") Nos. 141 ("SFAS 141") and
142 ("SFAS 142"), "Business Combinations" and "Goodwill and Other Intangible
Assets," respectively. SFAS 141 replaces Accounting Principles Board ("APB")
Opinion 16 "Business Combinations" and requires the use of the purchase method
for all business combinations initiated after June 30, 2001. SFAS 142 requires
goodwill and intangible assets with indefinite useful lives to no longer be
amortized, but instead be tested for impairment at least annually and whenever
events or circumstances occur that indicate goodwill might be impaired. With
the adoption of SFAS 142, as of July 1, 2001, the Company reassessed the useful
lives and residual values of all acquired intangible assets to make any
necessary amortization period adjustments. Based on that assessment, only
goodwill was determined to have an indefinite useful life and no adjustments
were made to the amortization period or residual values of other intangible
assets. SFAS 142 provides a six-month transitional period from the effective
date of adoption for the Company to perform an assessment of whether there is an
indication that goodwill is impaired. To the extent that an indication of
impairment exists, the Company must perform a second test to measure the amount
of impairment. The second test must be performed as soon as possible, but no
later than the end of the fiscal year. Any impairment measured as of the date
of adoption will be recognized as the cumulative effect of a change in
accounting principle. The Company performed the first test and determined that
there is no indication that the goodwill recorded is impaired and, therefore,
the second test was not required. The Company also completed its annual
goodwill impairment tests for fiscal 2002 in the fourth quarter. There were no
indicators that goodwill recorded was impaired.
Income Taxes: Income taxes are accounted for in accordance with SFAS No. 109,
- --------------
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at September 30, 2002 and June 30, 2002 was $12,135,642 and
$11,854,281, respectively. In the quarter ended September 30, 2002, cash
utilized in operations totaled $68,057. This was primarily due to the cash paid
for inventory purchased for unshipped orders. In the quarter ended September
30, 2002, cash used in investing activities was $173,496, which primarily
consisted of loans made to Hearing Innovations, Inc. ("Hearing Innovations") and
the purchase of property, plant and equipment during the regular course of
business. In the quarter ended September 30, 2002, cash provided by financing
activities was $135,928 with primarily consisted of proceeds from short-term
borrowings offset by principal payments on capital lease obligations.
11
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Hearing Innovations, Inc.
- ---------------------------
During fiscal 2003, the Company entered into two loan agreements whereby Hearing
Innovations is required to pay the Company an aggregate amount of $75,666 due
November 30, 2003. All notes bear interest at 8% per annum. The notes are
secured by a lien on all of Hearing Innovations' right, title and interest in
accounts receivable, inventory, property, plant and equipment and processes of
specified products whether now existing or arising after the date of these
agreements. The loan agreements contain warrants to acquire 75,666 shares of
Hearing Innovations common stock, at the option of the Company, at a cost of
$1.00 per share. These warrants, which are deemed nominal in value, expire in
October 2005. The Company recorded an allowance against the entire balance of
$75,666 and accrued interest of $738 for the above loans. The related expense
has been included in loss on impairment of investments in the accompanying
consolidated statements of operations. The Company believes the loans and
related interest are impaired since the Company does not anticipate that these
loans will be paid in accordance with the contractual terms of the loan
agreements.
Revolving Credit Facilities
- -----------------------------
On July 1, 2002, Labcaire replaced its bank overdraft facility with HSBC Bank
plc with a debt purchase agreement with Lloyds TSB Commercial Finance. The
amount of this facility is approximately $1,384,000 ( 950,000) and bears
interest at the bank's base rate plus 1.75% and a service charge of .15% of
sales invoice value. The agreement expires on June 28, 2003 and covers all
United Kingdom and European sales.
The Company was not in compliance with, and has received a waiver of, certain
covenants under its revolving line of credit facility with Fleet Bank (as
discussed in the Company's Annual Report on Form 10-K for the ended June 30,
2002) for the period ending September 30, 2002. The Company has not borrowed
against this revolving credit facility.
Labcaire
- --------
In October 2002, under the terms of the revised purchase agreement (the
"Labcaire Agreement") with Labcaire (as discussed in the Company's Annual Report
on Form 10-K for the year ended June 30, 2002), the Company paid $232,394 for
9,286 shares (2.70%) of the outstanding common stock of Labcaire bringing the
acquired interest to 100%. This represents the fiscal 2003 buy-back and last
portion, as defined in the Labcaire Agreement.
Recent Accounting Pronouncements
- ----------------------------------
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which supersedes both FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121) and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS 144 retains the
fundamental provisions in SFAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
SFAS 121. For example, SFAS 144 provides guidance on how a long-lived asset
that is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike SFAS 121, SFAS 144 does not address the impairment of goodwill. Rather,
goodwill is evaluated for impairment under SFAS No. 142, "Goodwill and Other
Intangible Assets".
12
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
The Company is required to adopt SFAS 144 no later than the fiscal year
beginning after December 15, 2001. In the first quarter of fiscal 2003, the
Company adopted SFAS 144 for long-lived assets held for use and the adoption of
SFAS 144 did not have a material impact on the Company's financial statements
because the impairment assessment under SFAS 144 is largely unchanged from SFAS
121. 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 SFAS 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, and the outcome of legal
proceedings as well as management business decisions.
13
MISONIX, INC.
QUANTATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK AND CONROLS AND PROCEDURS
===========================================
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk:
The principal market risks (i.e. the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed are interest rates
on short-term investments and foreign exchange rates, which generate translation
gains and losses due to the English Pound to U.S. Dollar conversion of Labcaire.
Foreign Exchange Rates:
Approximately 31% of the Company's revenues in the first quarter of fiscal 2003
were received in English Pounds currency. To the extent that the Company's
revenues are generated in English Pounds, its operating results are translated
for reporting purposes into U.S. Dollars using rates of 1.55 and 1.46 for the
three months ended September 30, 2002 and 2001, respectively. A strengthening
of the English Pound, in relation to the U.S. Dollar, will have the effect of
increasing its reported revenues and profits, while a weakening of the English
Pound will have the opposite effect. Since the Company's operations in England
generally sets prices and bids for contracts in English Pounds, a strengthening
of the English Pound, while increasing the value of its UK assets, might place
the Company at a pricing disadvantage in bidding for work from manufacturers
based overseas. The Company collects its receivables in the currency the
subsidiary resides in. The Company has not engaged in foreign currency hedging
transactions, which include forward exchange agreements.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Disclosure controls and procedures are designed to ensure the reliability of
financial statements and other disclosures included in this report. Within the
90 days prior to the filing of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information required to be included in the
Company's periodic Securities and Exchange Commission filings.
(b) Changes in Internal Controls
----------------------------
There has been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date the Company carried out its evaluation.
14
MISONIX, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 99.1 - Certification of Periodic Report by Chief Executive Officer
Exhibit 99.2 - Certification of Periodic Report by Chief Financial Officer
(b) There were no reports on Form 8-K filed during the quarter ended September
30, 2002.
15
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 13, 2002
MISONIX, INC.
--------------------------------------------
(Registrant)
By: /s/ Michael McManus, Jr.
---------------------------------------
Michael McManus, Jr.
President, Chief Executive Officer
By: /s/ Richard Zaremba
---------------------------------------
Richard Zaremba
Vice President, Chief Financial Officer,
Treasurer and Secretary
16
CERTIFICATIONS
I, Michael McManus, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MISONIX, INC.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Michael McManus, Jr.
-----------------------------
Michael McManus, Jr.
President, Chief Executive Officer
17
CERTIFICATIONS
I, Richard Zaremba, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MISONIX, INC.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Richard Zaremba
-----------------------------
Richard Zaremba
Vice President, Chief Financial Officer,
Treasurer and Secretary
18