FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission File Number 1-14798
IVAX DIAGNOSTICS, INC.
Delaware 11- 3500746
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2140 North Miami Avenue, Miami, Florida 33127
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 324-2300
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _______
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
28,621,600 shares of Common Stock, $ .01 par value, outstanding as of July
31, 2001.
IVAX DIAGNOSTICS, INC.
----------------------
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
-------
Item 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000 2
Consolidated Statements of Operations for the
three and six months ended June 30, 2001 and 2000 3
Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 18
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, December 31,
2001 2000
--------- ----------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 24,436 $ 1,263
Accounts receivable, net of allowances for doubtful
accounts of $1,995 in 2001 and $2,202 in 2000 3,898 4,577
Inventories 2,495 2,694
Other current assets 811 643
------------- ------------
Total current assets 31,640 9,177
Property, plant and equipment, net 1,488 1,538
Goodwill, net 7,026 7,106
Equipment on lease 769 615
Other assets 158 224
------------- ------------
Total assets $ 41,081 $ 18,660
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 742 $ 769
Accrued expenses and other current liabilities 1,780 2,379
------------- ------------
Total current liabilities 2,522 3,148
------------- ------------
Due to principal shareholder - 7,962
------------- ------------
Other long-term liabilities 327 332
------------- ------------
Commitments and contingencies (Note 9)
Shareholders' equity:
Common stock, $0.01 par value, authorized 50,000 shares,
Issued and outstanding 28,622 shares in 2001 and 20,000 in 2000 286 200
Capital in excess of par value 44,197 11,258
Accumulated deficit (3,607) (2,088)
Accumulated other comprehensive loss (2,644) (2,152)
------------- ------------
Total shareholders' equity 38,232 7,218
------------- ------------
Total liabilities and shareholders' equity $ 41,081 $ 18,660
============= ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
2
IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Period Ended June 30, Three months Six months
(In thousands, except per share data) 2001 2000 2001 2000
------- ------- ------- -------
Net revenues $ 2,850 $ 2,718 $ 6,137 $ 6,640
Cost of sales 1,264 1,298 2,665 2,970
------- ------- ------- -------
Gross profit 1,586 1,420 3,472 3,670
------- ------- ------- -------
Operating expenses:
Selling 738 651 1,505 1,302
General and administrative 819 578 2,672 975
Research and development 328 350 609 656
Goodwill amortization 63 64 127 128
------- ------- ------- -------
Total operating expenses 1,948 1,643 4,913 3,061
------- ------- ------- -------
Income (loss) from operations (362) (223) (1,441) 609
------- ------- ------- -------
Other income (expense):
Interest income 276 66 355 98
Interest expense - related party - (160) (93) (330)
Other income, net 12 (21) 74 8
------- ------- ------- -------
Total other income (expense), net 288 (115) 336 (224)
------- ------- ------- -------
Income (loss) from continuing operations before
income taxes (74) (338) (1,105) 385
Provision for income taxes 125 187 414 668
------- ------- ------- -------
Net loss $ (199) $ (525) $(1,519) $ (283)
======= ======= ======= =======
Basic and diluted loss per common share $ (.01) $ (.03) $ (.05) $ (.01)
======= ======= ======= =======
BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING: 28,622 20,000 28,622 20,000
======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months Ended June 30, 2001 2000
------- -------
(In thousands)
Cash flows from operating activities:
Net loss $(1,519) $ (283)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization 509 530
Provision for losses on accounts receivable 25 23
Stock option compensation expense 1,189 -
Changes in operating assets and liabilities:
Accounts receivable 273 (342)
Inventories 67 108
Other current assets (175) (35)
Other assets (21) (1)
Accounts payable and accrued expenses (477) 875
Other long-term liabilities 28 33
------- -------
Net cash flows (used in) provided by operating activities (101) 908
------- -------
Cash flows from investing activities:
Capital expenditures (117) (78)
Acquisitions of equipment on lease (375) (160)
------- -------
Net cash flows used in investing activities (492) (238)
------- -------
Cash flows from financing activities:
Proceeds from sale of common stock 22,255 -
Funds received from (paid to) principal shareholder 1,899 (2,234)
------- -------
Net cash flows (used in) provided by financing activities 24,154 (2,234)
------- -------
Effect of exchange rate changes on cash and cash equivalents (388) (700)
------- -------
Net increase in cash and cash equivalents 23,173 (2,264)
Cash and cash equivalents at the beginning of the year 1,263 4,218
------- -------
Cash and cash equivalents at the end of the period $24,436 $ 1,954
======= =======
Supplemental disclosures:
Interest paid $ - $ -
======= =======
Income tax payments $ 640 $ 31
======= =======
Supplemental disclosure of non-cash activities:
Contribution to capital of balance due to principal shareholder $ 9,581 $ -
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share data)
(1) GENERAL:
- -----------
The accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q and, therefore, do not include all
information normally included in audited financial statements. However, in the
opinion of management, all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the results of operations, financial
position and cash flows have been made. The results of operations and cash
flows for the six months ended June 30, 2001 are not necessarily indicative of
the results of operations and cash flows which may be reported for the remainder
of 2001. The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes to
consolidated financial statements included in the IVAX Diagnostics, Inc. ("IVAX
Diagnostics" or "the Company") Form 8-K filed March 29, 2001 for the year ended
December 31, 2000.
(2) MERGER:
- ----------
On March 14, 2001, b2bstores.com, Inc. ("b2bstores.com"), IVAX Corporation
("IVAX") and IVAX Diagnostics, a wholly-owned subsidiary of IVAX, consummated a
merger (the "Merger") of IVAX Diagnostics into b2bstores.com. pursuant to which
all of the issued and outstanding shares of IVAX Diagnostics were converted
into 20,000 shares of b2bstores.com stock and b2bstores.com's name was changed
to IVAX Diagnostics, Inc. As a result of the Merger, all non-qualified stock
options previously granted to employees of IVAX Diagnostics under the IVAX
Diagnostics, Inc. 1999 Stock Option Plan were converted into non-qualified stock
options to purchase 1,109 shares of the Company's common stock. As a result of
this conversion, in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, the total non-cash compensation cost
was $2,378. Of this amount, $149 and $1,189 was recorded in general and
administrative expense in the accompanying statement of operations for the three
and six months ended June 30, 2001, respectively. The remaining cost will be
expensed over the remaining two year vesting term of the options.
IVAX Diagnostics is engaged in the development, manufacture and marketing of
diagnostic test kits, reagents and instruments. Prior to the Merger,
b2bstores.com was formerly an internet business services company that was a non-
operating public shell on the date of the Merger. Net assets of b2bstores.com
on the date of Merger were $22,255, consisting primarily of cash of $22,285.
Additionally, as a condition of the Merger, intercompany indebtedness of $9,581
existing between IVAX and IVAX Diagnostics was contributed to capital. For
accounting purposes, the Merger was accounted for as sale of stock for cash.
The historical financial statements prior to the acquisition are those of the
former IVAX Diagnostics with retroactive restatement of equity and earnings per
share. Following the Merger, IVAX' 20,000 shares of IVAX Diagnostics represents
approximately 70% of the issued and outstanding shares of IVAX Diagnostics.
5
(3) INVENTORIES:
- ---------------
Inventories consist of the following:
June 30, December 31,
2001 2000
------ -----------
Raw materials $1,130 $1,229
Work-in-process 403 309
Finished goods 962 1,156
------ ------
Total inventories $2,495 $2,694
====== ======
(4) CONCENTRATION OF CREDIT RISK:
- -------------------------------------
IVAX Diagnostics performs periodic credit evaluations of its customers'
financial condition and provides allowances for doubtful accounts as required.
One customer accounted for 21.1% of the Company's net accounts receivable as of
June 30, 2001 and 40.8% of net accounts receivable as of December 31, 2000. The
same customer accounted for, respectively, 37.5% and 41.0% of the Company's net
revenues for six months ended June 30, 2001 and 2000 as well as 31.9% and 32.8%
of the Company's net revenues for the three months ended June 30, 2001 and 2000,
respectively. The customer and IVAX Diagnostics entered into a contract in
April 1999, pursuant to which the customer agreed to purchase minimum levels of
the Company's products during the three-year period beginning May 1, 1999.
Twice during 2000, the Company's largest customer suspended its purchases of the
Company's products for several months while representatives of IVAX Diagnostics
and the customer resolved certain product issues. On January 10, 2001,
shipments to the Company's largest customer resumed. There can be no assurance
that the customer will make additional purchases at the anticipated levels or
within the anticipated time frame. The failure of the customer to do so would
have a material adverse effect on the Company's business, operating results and
financial condition.
(5) EARNINGS PER SHARE:
- -----------------------
A reconciliation of the denominator of the basic and diluted earnings per share
computation for income from continuing operations is as follows:
Period Ended June 30, Three Months Six Months
2001 2000 2001 2000
------ ------ ------ ------
Basic and diluted weighted average shares
outstanding 28,622 20,000 28,622 20,000
Not included in the calculation of diluted earnings
per share because their impact is antidilutive:
Stock options outstanding 2,780 1,109 2,780 1,109
(6) INCOME TAXES:
- ----------------
The provision for income taxes consists of the following:
Period Ended June 30, Three months Six months
2001 2000 2001 2000
------ ------ ------ ------
6
Current - Foreign $ 125 $ 187 $ 414 $ 668
===== ===== ===== =====
Through March 14, 2001, the Company reported its domestic income taxes as part
of a consolidated group with IVAX. All domestic taxable losses generated prior
to that date were utilized by IVAX. Effective March 14, 2001, as a result of
the Merger described in Note 2, the Company is no longer included in the
consolidated income tax returns of IVAX. Through March 14, 2001, the Company
accounted for income taxes on a stand-alone basis as though the Company had
filed its own income tax returns. The Company's income tax provisions for the
three months ended June 30, 2001 and 2000 were different from the amount
computed on the loss before provision for income taxes at the statutory rate of
35% primarily due to $148 of non-deductible stock option compensation expense in
2001 discussed in Note 2 and the non-recognition of the benefits of domestic
taxable losses of $219 and $717, respectively. For the six months ended June
30, 2001 and 2000, the Company's provision was different from the amount
computed on the loss before provision for income taxes at the statutory rate of
35% primarily due to $1,189 of non-deductible stock option compensation expense
in 2001 discussed in Note 2 and the non-recognition of the benefits of domestic
taxable losses of $776 and $1,283, respectively
As of June 30, 2001, the Company had no net domestic deferred tax asset as
domestic net operating losses generated prior to the Merger were utilized by
IVAX and a full valuation allowance has been established against domestic
deferred tax assets generated subsequent to March 14, 2001. The foreign net
deferred tax was $597 at June 30, 2001, and included in "Other current assets"
in the accompanying consolidated balance sheet. Realization of the net deferred
tax asset is dependent upon generating sufficient future foreign taxable income.
Although realization is not assured, management believes it is more likely than
not that the net deferred tax asset will be realized.
(7) COMPREHENSIVE INCOME:
- ------------------------
The components of IVAX Diagnostics' comprehensive loss are as follows:
Period Ended June 30, Three months Six months
2001 2000 2001 2000
------ ------ -------- ------
Net loss $(199) $(525) $(1,519) $(283)
Foreign currency translation adjustments (149) (84) (492) (554)
----- ----- ------- -----
Comprehensive loss $(348) $(609) $(2,011) $(837)
===== ===== ======= =====
(8) SEGMENT INFORMATION:
- -------------------------
The Company's management reviews financial information, allocates resources and
manages its business by geographic region. The Domestic region, which includes
corporate expenditures, contains IVAX Diagnostics' subsidiaries in the United
States. The Italian region contains subsidiaries located in Italy. The
information provided is based on internal reports and was developed and utilized
by management for the sole purpose of tracking trends and changes in the results
of the regions. The information, including the allocations of expense and
overhead, was calculated based on a management approach and may not reflect the
actual economic costs, contributions or results of operations of the regions as
stand alone businesses. If a different basis of presentation or allocation were
utilized, the relative contributions of the regions might differ but the
relative trends would, in management's view, likely not be materially impacted.
The tables below sets forth net revenue, income from operations and assets by
region.
Revenues by Region
Period Ended June 30, Three months Six months
7
2001 2000 2001 2000
------ ------- ------- -------
Domestic
External net revenues $1,099 $ 997 $ 2,313 $ 2,082
Intercompany revenues 202 189 378 296
------ ------ ------- -------
$1,301 $1,186 $ 2,691 $ 2,378
------ ------ ------- -------
Italian
External net revenues $1,750 $1,721 $ 3,824 $ 4,558
Intercompany revenues 157 75 276 177
------ ------ ------- -------
$1,907 $1,796 $ 4,100 $ 4,735
------ ------ ------- -------
Elimination (358) (264) (654) (473)
------ ------ ------- -------
Consolidated net revenues $2,850 $2,718 $ 6,137 $ 6,640
====== ====== ======= =======
Income from Operations by Region
Period Ended June 30, Three months Six months
2001 2000 2001 2000
------- ------- -------- --------
Domestic $ (621) $ (675) $(2,198) $(1,041)
Italian 260 454 752 1,614
Elimination (1) (2) 5 36
------ ------ ------- -------
Income (loss) from operations $ (362) $ (223) $(1,441) $ 609
====== ====== ======= =======
June 30,
Total Assets 2001 2000
------- -------
Domestic $28,971 $ 6,094
Italian 12,166 12,938
Elimination (56) (41)
------- -------
Total assets $41,081 $18,991
======= =======
(9) COMMITMENTS AND CONTINGENCIES:
- -----------------------------------
On March 2, 2001, b2bstores.com received notice that a shareholder of
b2bstores.com filed a lawsuit against b2bstores.com and two of its directors.
The lawsuit alleges that b2bstores.com violated certain aspects of Section 14(a)
of the Securities Exchange Act of 1934, as amended, and that certain directors
breached their fiduciary duties in connection with the Merger. The suit seeks
the court's determination of declaratory relief as to whether (i) the proxy
statement materials sent to shareholders shall be considered null, void and
unenforceable, (ii) the Merger, if accomplished based on the use of the proxy
materials, should be set aside, and (iii) the termination fee of $1.0 million,
as defined in the merger agreement, shall be found void. The directors and
officers of IVAX Diagnostics deny the allegations and intend to vigorously
defend such claims, but the ultimate outcome of any such legal proceeding cannot
be determined.
Additionally, the Company is involved in various legal claims, regulatory
matters, trademark matters and other notices and demand proceedings arising in
the ordinary course of business. While it is not feasible to predict or
determine the outcome of these proceedings, in the opinion of management, based
on a review with legal counsel, any losses resulting from such legal proceedings
will not have a material adverse impact on the financial position, results of
operations or cash flows of the Company.
8
(10) RELATED-PARTY TRANSACTIONS:
- --------------------------------
Included in the accompanying consolidated balance sheets as due to principal
shareholder are amounts due to IVAX as follows:
June 30, December 31,
2001 2000
-------- ------------
Advances from IVAX, unsecured and interest bearing $ - $ 4,145
Advances from IVAX, unsecured and noninterest bearing - 3,817
-------- --------
$ - $ 7,962
======== ========
IVAX charged interest, which is included in the accompanying statement of
operations, on the interest bearing advances made prior to March 14, 2001 at
prime plus 1%, which ranged from 8.0% to 9.5% from 2000 to 2001.
Prior to March 14, 2001, IVAX provided administration and funded health care
claims on behalf of the Company and charged the Company a fee reflective of the
cost of service. Additionally, IVAX provided certain legal, treasury, tax,
insurance, payroll and human resource services to the Company for which no fee
was charged to the Company. IVAX is continuing to provide certain services to
the Company under a cost-plus service agreement. No material payments were made
during the period after March 14, 2001.
(11) RECENTLY ISSUED ACCOUNTING STANDARDS:
- -----------------------------------------
Effective January 1, 2001, IVAX Diagnostics adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and
138, which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income and are recognized in the
income statement when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized in earnings. The
adoption of SFAS No. 133, as amended, did not have a material impact on the
Company's financial position or results of operations as the Company had no
derivative financial instruments during the first six months of 2001.
Effective July 1, 2001, IVAX adopted SFAS 141, Business Combinations which
addresses the financial accounting and reporting for business combinations. It
supersedes APB Opinion No. 16, Business Combinations and SFAS 38, Accounting for
Pre-acquisition Contingencies of Purchased Enterprises. All business
combinations under the scope of this statement must be accounted for using the
purchase method of accounting. This statement applies to all business
combinations initiated after June 30, 2001. Management believes that adoption of
SFAS 141 will not have a material impact on the company's financial condition or
statement of operations.
SFAS 142, Goodwill and Other Intangible Assets addresses financial accounting
and reporting for acquired goodwill and other intangibles assets and supersedes
APB Opinion No. 17, Intangible Assets. It addresses accounting for intangible
assets that are acquired individually or with a group of other assets (but
9
not those acquired in a business combination) upon acquisition. It also
addresses accounting for goodwill and other intangible assets after they have
been initially recognized in the financial statements. Intangible assets that
have indefinite lives and goodwill will no longer be amortized, but rather they
must be tested at least annually for impairment using fair values. Intangible
assets that have finite useful lives will be amortized over their useful lives.
The statement is effective in fiscal years beginning after December 15, 2001;
except that goodwill and intangible assets acquired after June 30, 2001 will be
subject immediately to the non-amortization and amortization provisions of this
statement. Amortization of goodwill acquired prior to June 30, 2001 will cease.
This will increase net income by approximately $64 per quarter, or $256 per
year. However, Management is unable to estimate the extent of impairment, if
any, of intangible assets with indefinite lives and goodwill, that may need to
be recorded in 2002 or future years.
10
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the related notes to consolidated
financial statements included in Form 8-K filed March 29, 2001 for the year
ended December 31, 2000 and the unaudited interim consolidated financial
statements and the related notes to unaudited interim consolidated financial
statements included in Item 1 of this Quarterly Report on Form 10-Q. Except
for the historical matters contained herein, statements made in this report are
forward-looking and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such statements may include,
but are not limited to, projections of revenues, income and cash flows, the
Company's financing needs and plans for future operations. Investors are
cautioned that forward-looking statements involve risks and uncertainties
including, but not limited to, regulatory, economic, competitive, governmental
and technological factors affecting the Company's operations, markets, products,
prices, and other factors discussed elsewhere in this Report and the documents
filed by the Company with the Securities and Exchange Commission. These factors
may cause the Company's results to differ materially from the forward-looking
statements made on this Report or otherwise by or on behalf of the Company.
Results of Operations
Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000
Net Revenues and Gross Profit
Net revenue for the six months ended June 30, 2001 totaled $6,137,000, a
decrease of $503,000 or 7.6%, from the $6,640,000 reported in the prior year
comparable period. This decrease was comprised of a decrease of $734,000 in
external net revenue from Italian operations partially offset by an increase in
external net revenue of $231,000 from domestic operations. External net revenue
from Italian operations totaled $3,824,000 for the six months ended June 30,
2001, compared to $4,558,000 in the six months ended June 30, 2000. This 16.1%
decrease was primarily attributable to decreased sales volume of instrumentation
products. External domestic operations generated net revenue of $2,313,000 for
the six months ended June 30, 2001, compared to $2,082,000 for the six months
ended June 30, 2000. The $231,000, or 11.1% increase, was primarily due to
volume increases in revenue from instrumentation placements partially offset by
decreased volume of raw material antigen sales. Gross profit for the six months
ended June 30, 2001 decreased $198,000, or 5.4%, to $3,472,000 (56.6% of net
revenue) from $3,670,000 (55.3% of net revenue) for the six months ended June
30, 2000. The decrease in gross profit was primarily attributable to decreased
revenue from sales of instrumentation products. The increase in gross profit as
a percentage of net revenue of 1.3% was primarily due to improved manufacturing
efficiencies achieved due to volume increases in revenue from domestic
instrument placements partially offset by the lower revenue from the relatively
higher gross profit sales of instrumentation products.
Operating Expenses
Selling expenses were $1,505,000 (24.5% of net revenue) for the six months ended
June 30, 2001 compared to $1,302,000 (19.6% of net revenue) for the six months
ended June 30, 2000. The increase was primarily due to the effect of greater
payroll costs related to increased instrument system sales efforts. General and
administrative expenses totaled $2,672,000 (43.5% of net revenue) in the six
months ended June 30, 2001, an increase of $1,697,000, from $975,000 (14.7% of
net revenue) in the six months ended June 30, 2000. The increase was primarily
the result of the recognition of $1,189,000 in stock option compensation expense
from the conversion of outstanding options under the Company's 1999 Stock Option
11
Plan to non-qualified stock options as a result of the merger discussed below.
The increase was also due to a partial reimbursement of legal fees received from
a settlement of patent litigation in 2000, as well as an increase in legal fees
incurred in 2001 associated with the completion of the merger. Research and
development expenses totaled $609,000 in the six months ended June 30, 2001
compared to $656,000 in the six months ended June 30, 2000, representing 9.9% of
net revenues in both periods. The future level of research and development
expenditures will depend on, among other things, the outcome of ongoing testing
of products under development, delays or changes in government required testing
and approval procedures, technological and competitive developments, strategic
marketing decisions and liquidity.
Other Income (Expense)
Interest income increased to $355,000 in the six months ended June 30, 2001 from
$98,000 in the six months ended June 30, 2000 due to interest earned as a result
of cash received in the merger. Interest expense-related party amounted to
$93,000 in the six months ended June 30, 2001 and $330,000 in the six months
ended June 30, 2000, a decrease of $237,000. The related party interest was
incurred on intercompany advances from IVAX. As a result of the merger,
intercompany advances from IVAX have been contributed to capital.
Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30,
2000
Net Revenues and Gross Profit
Net revenue for the three months ended June 30, 2001 increased $132,000, or
4.9%, to $2,850,000 from $2,718,000 reported in the prior year comparable
period. This increase was comprised of an increase of $102,000 in external net
revenue from domestic operations and an increase in Italian external net
revenues of $29,000. External net revenue from Italian operations totaled
$1,750,000 for the three months ended June 30, 2001, compared to $1,721,000 in
the three months ended June 30, 2000. The increase was primarily attributable to
increased sales volume of instrumentation products partially offset by reduced
revenues in non-core product lines. Domestic operations generated external net
revenue of $1,099,000 for the three months ended June 30, 2001, compared to
$997,000 for the three months ended June 30, 2000. The $102,000, or 10.2%,
increase was primarily due to volume increases in revenue from instrumentation
placements partially offset by decreased volume of raw material antigen sales.
Gross profit for the three months ended June 30, 2001 increased $166,000, or
11.7%, to $1,586,000 (55.6% of net revenue) from $1,420,000 (52.2% of net
revenue) for the three months ended June 30, 2000. The increase in gross profit
as a percentage of net revenue of 3.4% was primarily due to improved
manufacturing efficiencies as a result of volume increases in revenue from
domestic instrument placements.
Operating Expenses
Selling expenses were $738,000 (25.9% of net revenue) for the three months ended
June 30, 2001 compared to $651,000 (24.0% of net revenue) for the three months
ended June 30, 2000. The increase was primarily due to the effect of greater
payroll costs related to increased instrument system placement efforts. General
and administrative expenses totaled $819,000 (28.7% of net revenue) in the three
months ended June 30, 2001, an increase of $241,000 from $578,000 (21.3% of net
revenue) in the three months ended June 30, 2000. The increase was primarily
the result of the recognition of $149,000 in stock option compensation expense
from the conversion of outstanding options under the Company's 1999 Stock Option
Plan to non-qualified stock options as a result of the merger discussed below.
Research and development expenses totaled $328,000 in the three months ended
June 30, 2001 compared to $350,000 in the three
12
months ended June 30, 2000, representing 11.5% and 12.9%, respectively, of net
revenues. The future level of research and development expenditures will depend
on, among other things, the outcome of ongoing testing of products under
development, delays or changes in government required testing and approval
procedures, technological and competitive developments, strategic marketing
decisions and liquidity.
Other Income (Expense)
Interest income increased to $276,000 in the three months ended June 30, 2001
from $66,000 in the three months ended June 30, 2000 due to interest earned as a
result of cash received in the merger. Interest expense-related party expenses
were not incurred in the three months ended June 30, 2001 compared to $160,000
in the three months ended June 30, 2000. The related party interest was
incurred on intercompany advances from IVAX. As a result of the merger,
intercompany advances from IVAX have been contributed to capital.
Recently Issued Accounting Standards
Effective January 1, 2001, IVAX Diagnostics adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and
138, which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income and are recognized in the
income statement when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized in earnings. The
adoption of SFAS No. 133, as amended, did not have a material impact on the
Company's financial position or results of operations as the Company had no
derivative financial instruments during the first six months of 2001.
Effective July 1, 2001, IVAX adopted SFAS 141, Business Combinations which
addresses the financial accounting and reporting for business combinations. It
supersedes APB Opinion No. 16, Business Combinations and SFAS 38, Accounting for
Pre-acquisition Contingencies of Purchased Enterprises. All business
combinations under the scope of this statement must be accounted for using the
purchase method of accounting. This statement applies to all business
combinations initiated and accounted for after June 30, 2001. Management
believes that adoption of SFAS 141 will not have a material impact on the
company's financial condition or statement of operations.
SFAS 142, Goodwill and Other Intangible Assets addresses financial accounting
and reporting for acquired goodwill and other intangibles assets and supersedes
APB Opinion No. 17, Intangible Assets. It addresses accounting for intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) upon acquisition. It also addresses
accounting for goodwill and other intangible assets after they have been
initially recognized in the financial statements. Intangible assets that have
indefinite lives and goodwill will no longer be amortized, but rather they must
be tested at least annually for impairment using fair values. Intangible assets
that have finite useful lives will be amortized over their useful lives. The
statement is effective in fiscal years beginning after December 15, 2001; except
that goodwill and intangible assets acquired after June 30, 2001 will be subject
immediately to the non-amortization and amortization provisions of this
statement. Amortization of goodwill acquired prior to June 30, 2001 will cease.
This will increase net income by approximately $64 per quarter, or $256
13
per year. However, Management is unable to estimate the extent of impairment, if
any, of intangible assets with indefinite lives and goodwill, that may need to
be recorded in 2002 or future years.
Merger
On March 14, 2001, b2bstores.com, Inc. ("b2bstores.com"), IVAX Corporation
("IVAX") and IVAX Diagnostics, a wholly-owned subsidiary of IVAX, consummated a
merger (the "Merger") of IVAX Diagnostics into b2bstores.com. pursuant to which
all of the issued and outstanding shares of IVAX Diagnostics were converted into
20 million shares of b2bstores.com stock and b2bstores.com's name was changed to
IVAX Diagnostics, Inc. As a result of the Merger, all non-qualified stock
options previously granted to employees of IVAX Diagnostics under the IVAX
Diagnostics, Inc. 1999 Stock Option Plan were converted into non-qualified stock
options to purchase 1.1 million shares of the Company's common stock. As a
result of this conversion, in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, the total non-cash
compensation cost was $2.4 million. Of this amount, $0.1 million and $1.2
million are reflected in general and administrative expense in the accompanying
statement of operations for the three and six months ended June 30, 2001,
respectively. The remaining cost will be expensed over the remaining vesting
term of the options.
IVAX Diagnostics is engaged in the development, manufacture and marketing of
diagnostic test kits, reagents and instruments. Prior to the Merger,
b2bstores.com was formerly an internet business services company that was a non-
operating public shell on the date of the Merger. Net assets of b2bstores.com on
the date of Merger were $22.3 million, consisting primarily of cash of $22.3
million. Additionally, as a condition of the Merger, intercompany indebtedness
of $9.6 million existing between IVAX and IVAX Diagnostics was contributed to
capital. For accounting purposes, the Merger was accounted for as a sale of
stock for cash. Both companies' assets were carried forward at historical cost.
The historical financial statements prior to the acquisition are those of the
former IVAX Diagnostics with retroactive restatement of equity and earnings per
share. Following the Merger, IVAX' 20,000 shares of IVAX Diagnostics represents
approximately 70% of the issued and outstanding share of IVAX Diagnostics.
Liquidity and Capital Resources
At June 30, 2001, IVAX Diagnostics' working capital was $29.1 million, compared
to $6.0 million at December 31, 2000. Cash and cash equivalents totaled $24.4
million at June 30, 2001, as compared to $1.3 million at December 31, 2000.
Net cash flows of $0.1 million were used by operating activities during the six
months ended June 30, 2001, compared to $0.9 million generated from operations
during the six months ended June 30, 2000. The decrease in cash provided by
operating activities was primarily the result of an increase in cash utilized to
pay accounts payable and accrued expenses, partially offset by an increase in
cash received from accounts receivable collections.
Net cash flows of $0.5 million were used in investing activities during the
first quarter of 2001, as compared to $0.2 million that was used during the same
period of the prior year. The increase in cash used is the result of increased
equipment on lease placements.
Net cash flows of $24.2 million were provided from financing activities during
the first quarter of 2001, compared to $2.2 million used during the same period
of the prior year, primarily due to cash of $22.3 million that was included in
the net assets of b2bstores.com acquired in the Merger.
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IVAX Diagnostics' product research and development expenditures are expected to
be approximately $1.3 million during 2001, although actual expenditures will
depend on, among other things, the outcome of clinical testing of products under
development, delays or changes in government required testing and approval
procedures, technological and competitive developments, strategic marketing
decisions and liquidity. In addition, IVAX Diagnostics expects to spend
approximately $0.4 million in fiscal 2001 to improve and expand its equipment
and facilities.
IVAX Diagnostics' principal source of short term liquidity is existing cash and
cash equivalents received as a result of the completion of the Merger which IVAX
Diagnostics believes will be sufficient to meet its operating needs and
anticipated capital expenditures over the short term. For the long term, IVAX
Diagnostics intends to utilize principally internally generated funds, which are
anticipated to be derived primarily from the sale of existing diagnostic and
instrumentation products and diagnostic and instrumentation products currently
under development. There can be no assurance that IVAX Diagnostics will
successfully complete products under development, that IVAX Diagnostics will be
able to obtain regulatory approval for any such product, or that any approved
product will be produced in commercial quantities and at reasonable costs, and
be successfully marketed. IVAX Diagnostics may consider issuing debt or equity
securities in the future to fund potential acquisitions and growth. On March 14,
2001, the Company's Board of Directors approved a plan to repurchase up to 1
million shares of the Company's common stock. No shares were repurchased under
this plan, and on May 10, 2001, the plan was rescinded and is of no further
force or effect.
Currency Fluctuations
For the six months ended June 30, 2001 and 2000, approximately 30.6% and 28.7%,
respectively, of IVAX Diagnostics' net revenues were generated in currencies
other than the United States dollar. Fluctuations in the value of foreign
currencies relative to the United States dollar affect the reported results of
operations for IVAX Diagnostics. If the United States dollar weakens relative to
the foreign currency, the earnings generated in the foreign currency will, in
effect, increase when converted into United States dollars and vice versa. As a
result of exchange rate differences, net revenues decreased by approximately
$0.3 million for the six months ended June 30, 2001 compared to the same period
of the prior year. During the first six months of 2001 and 2000, none of IVAX
Diagnostics' subsidiaries were domiciled in highly inflationary environments.
The effects of inflation on consolidated net revenues and operating income were
not significant.
Income Taxes
IVAX Diagnostics recognized tax provision of $0.1 million, $0.4 million, $0.2
million and $0.7 million for the three and six months ended June 30, 2001 and
2000, respectively, which related to foreign operations. Through March 14, 2001,
the Company reported its domestic income taxes as part of a consolidated group
with IVAX. All domestic taxable losses generated prior to that date were
utilized by IVAX. Effective March 14, 2001, as a result of the Merger described
in Note 2, the Company is no longer included in the consolidated income tax
returns of IVAX. Through March 14, 2001, the Company accounted for income taxes
on a stand-alone basis as though the Company had filed its own income tax
returns. The Company's income tax provisions for the three months ended June 30,
2001 and 2000 were different from the amount computed on the loss before
provision for income taxes at the statutory rate of 35% primarily due to $149 of
non-deductible stock option compensation expense in 2001 discussed in Note 2 and
the non-recognition of the benefits of domestic taxable losses of $219 and $717,
respectively. For the six months ended June 30, 2001 and 2000, the Company's
provision was different from the amount computed on the loss before provision
for income taxes at the statutory rate of 35% primarily due to $1,189 of non-
deductible stock
15
option compensation expense in 2001 discussed in Note 2 and the non-recognition
of the benefits of domestic taxable losses of $776 and $1,283, respectively.
As of June 30, 2001, the Company had no net domestic deferred tax asset as
domestic net operating losses generated prior to the Merger were utilized by
IVAX and a full valuation allowance has been established against domestic
deferred tax assets generated subsequent to March 14, 2001. The foreign net
deferred tax was $597 at June 30, 2001, and included in "Other current assets"
in the accompanying consolidated balance sheet. Realization of the net deferred
tax asset is dependent upon generating sufficient future foreign taxable income.
Although realization is not assured, management believes it is more likely than
not that the net deferred tax asset will be realized.
Risk of Product Liability Claims
Developing, manufacturing and marketing diagnostic test kits, reagents and
instruments subject IVAX Diagnostics to the risk of product liability claims.
IVAX Diagnostics believes that it continues to maintain an adequate amount of
product liability insurance, but there can be no assurance that its insurance
will cover all existing and future claims. There can be no assurance that
claims arising under any pending or future product liability cases, whether or
not covered by insurance, will not have a material adverse effect on IVAX
Diagnostics' business, results of operations or financial condition. IVAX
Diagnostics' current products liability insurance is a "claims made" policy.
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Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of IVAX Diagnostics.
IVAX Diagnostics, in the normal course of doing business, is exposed to the
risks associated with foreign currency exchange rates and changes in interest
rates.
Foreign Currency Exchange Rate Risk - IVAX Diagnostics is exposed to exchange
- -----------------------------------
rate risk when its Italian subsidiary enters into transactions denominated in
currencies other than its functional currency
Interest Rate Risk - IVAX Diagnostics does not have debt obligations. IVAX
- ------------------
Diagnostics believes that its exposure to market risk relating to interest rate
risk is not material.
Commodity Price Risk - IVAX Diagnostics does not believe it is subject to any
- ---------------------
material risk associated with commodity prices.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
On March 2, 2001, b2bstores.com received notice that a shareholder of
b2bstores.com filed a lawsuit against b2bstores.com and two of its directors.
The lawsuit alleges that b2bstores.com violated certain aspects of Section 14(a)
of the Securities Exchange Act of 1934, as amended, and that certain directors
breached their fiduciary duties in connection with the Merger. The suit seeks
the court's determination of declaratory relief as to whether (i) the proxy
statement materials sent to shareholders shall be considered null, void and
unenforceable, (ii) the Merger, if accomplished based on the use of the proxy
materials, should be set aside, and (iii) the termination fee of $1.0 million,
as defined in the merger agreement, shall be found void. The directors and
officers of IVAX Diagnostics deny the allegations and intend to vigorously
defend such claims, but the ultimate outcome of any such legal proceeding cannot
be determined.
Additionally, the Company is involved in various legal claims, regulatory
matters, trademark matters and other notices and demand proceedings arising in
the ordinary course of business. While it is not feasible to predict or
determine the outcome of these proceedings, in the opinion of management, based
on a review with legal counsel, any losses resulting from such legal proceedings
will not have a material adverse impact on the financial position, results of
operations or cash flows of the Company.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(b) Reports on Form 8-K
-------------------
None
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Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IVAX Diagnostics, Inc.
Date: August 14, 2001 By: /s/ Mark Deutsch
-----------------------
Mark Deutsch
Vice President-Finance
Chief Financial Officer
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