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 September 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.
28,635,652 shares of Common Stock, $ .01 par value, outstanding as of October
31, 2001.
IVAX DIAGNOSTICS, INC.
----------------------
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 2
Consolidated Statements of Operations for the three
and nine months ended September 30, 2001 and 2000 3
Consolidated Statements of Cash Flows for the
nine months ended September 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)
September 30, December 31,
2001 2000
-------------- -----------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $22,001 $ 1,263
Marketable securities 2,475 -
Accounts receivable, net of allowances for doubtful
accounts of $2,032 in 2001 and $2,202 in 2000 3,054 4,577
Inventories 2,752 2,694
Other current assets 1,334 1,096
------- -------
Total current assets 31,616 9,630
Property, plant and equipment, net 1,453 1,538
Goodwill, net 6,930 7,106
Equipment on lease 909 615
Other assets 145 224
------- -------
Total assets $41,053 $19,113
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 421 $ 769
Accrued expenses and other current liabilities 2,371 2,832
------- -------
Total current liabilities 2,792 3,601
------- -------
Due to principal shareholder - 7,962
------- -------
Other long-term liabilities 366 332
------- -------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, $0.01 par value, 50,000 shares authorized,
issued and outstanding 28,636 shares at September 30, 2001
and 20,000 shares at December 31, 2000 286 200
Capital in excess of par value 44,382 11,258
Accumulated deficit (4,472) (2,088)
Accumulated other comprehensive loss (2,301) (2,152)
------- -------
Total shareholders' equity 37,895 7,218
------- -------
Total liabilities and shareholders' equity $41,053 $19,113
======= =======
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 September 30, Three months Nine months
(In thousands, except per share data) 2001 2000 2001 2000
------- ------- ------- -------
Net revenues $ 1,910 $ 3,288 $ 8,047 $ 9,928
Cost of sales 989 1,430 3,654 4,399
------- ------- ------- -------
Gross profit 921 1,858 4,393 5,529
------- ------- ------- -------
Operating expenses:
Selling 794 621 2,299 1,924
General and administrative 842 526 3,514 1,500
Research and development 349 312 958 968
Goodwill amortization 64 64 191 192
------- ------- ------- -------
Total operating expenses 2,049 1,523 6,962 4,584
------- ------- ------- -------
Income (loss) from operations (1,128) 335 (2,569) 945
------- ------- ------- -------
Other income (expense):
Interest income 228 14 583 112
Interest expense - related party - (102) (93) (432)
Other income, net (23) (6) 51 1
------- ------- ------- -------
Total other income (expense), net 205 (94) 541 (319)
------- ------- ------- -------
Income (loss) from continuing operations before
income taxes (923) 241 (2,028) 626
Provision (benefit) for income taxes (58) 372 356 1,040
------- ------- ------- -------
Net loss $ (865) $ (131) $(2,384) $ (414)
======= ======= ======= =======
Basic and diluted loss per common share $ (.03) $ (.01) $ (.09) $ (.02)
======= ======= ======= =======
BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING: 28,629 20,000 26,293 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)
Nine Months Ended September 30, 2001 2000
------- -------
(In thousands)
Cash flows from operating activities:
Net loss $(2,384) $ (414)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization 787 756
Provision for losses on accounts receivable 37 34
Stock option compensation expense 1,338 -
Changes in operating assets and liabilities:
Accounts receivable 1,325 (634)
Inventories (107) (4)
Other current assets (215) (17)
Other assets (16) 22
Accounts payable and accrued expenses (732) 1,098
Other long-term liabilities 44 -
------- -------
Net cash flows provided by operating activities 77 841
------- -------
Cash flows from investing activities:
Capital expenditures (157) (111)
Investment in marketable securities (2,475) -
Acquisitions of equipment on lease (625) (299)
------- -------
Net cash flows used in investing activities (3,257) (410)
------- -------
Cash flows from financing activities:
Exercise of stock options 36 -
Proceeds from sale of common stock 22,255 -
Funds received from (paid to) principal shareholder 1,899 (1,797)
------- -------
Net cash flows (used in) provided by financing activities 24,190 (1,797)
------- -------
Effect of exchange rate changes on cash and cash equivalents (272) (1,140)
------- -------
Net increase (decrease) in cash and cash equivalents 20,738 (2,506)
Cash and cash equivalents at the beginning of the year 1,263 4,218
------- -------
Cash and cash equivalents at the end of the period $22,001 $ 1,712
======= =======
Supplemental disclosures:
Interest paid $ - $ -
======= =======
Income tax payments $ 640 $ 208
======= =======
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 nine months ended September 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 $1,338 was recorded in general and
administrative expense in the accompanying statement of operations for the three
and nine months ended September 30, 2001, respectively. The remaining cost will
be expensed over the remaining vesting term of the options through June 30,
2003.
IVAX Diagnostics is engaged in the development, manufacture and marketing of
diagnostic test kits, reagents and instruments. Prior to the Merger,
b2bstores.com was 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.
(3) CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES:
- ---------------------------------------------------------
The Company owns certain short-term investments in marketable debt securities
with original maturities of three months or less that are classified as cash
equivalents. The Company also owns certain other short term investments in
marketable debt securities with maturities greater than three months but less
than one year. These cash equivalents and other short-term marketable
securities consist primarily of taxable
5
municipal bonds, commercial paper and money market funds. All securities are
deemed short term, classified as available for sale securities and are recorded
at market value using the specific identification method. Unrealized gains and
losses, net of tax, are reflected in other comprehensive income in the
accompanying balance sheets. Realized gains and losses are included in earnings
using the specific identification method.
Substantially all cash and cash equivalents and all marketable securities are
held at one broker. IVAX Diagnostics is subject to credit risk if the broker is
unable to repay the balance in the account or deliver the Company's securities.
IVAX Diagnostics manages this risk by only investing in high-quality money
market instruments, municipal securities and corporate issuers.
(4) INVENTORIES:
- ---------------
Inventories consist of the following:
September 30, December 31,
2001 2000
------------- ------------
Raw materials $1,147 $1,229
Work-in-process 482 309
Finished goods 1,123 1,156
------ ------
Total inventories $2,752 $2,694
====== ======
(5) 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 0.6% of the Company's net accounts receivable as of
September 30, 2001 and 40.8% of net accounts receivable as of December 31, 2000.
The same customer accounted for, respectively, 29.3% and 45.8% of the Company's
net revenues for nine months ended September 30, 2001 and 2000 as well as 3.1%
and 54.3% of the Company's net revenues for the three months ended September 30,
2001 and 2000, respectively.
This customer and IVAX Diagnostics entered into a contract in April 1999,
pursuant to which, subject to terms of the agreement, the customer agreed to
purchase minimum levels of the Company's instrumentation products during the
three-year period beginning May 1, 1999. Twice during 2000, the 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 customer resumed. During the three
months ended September 30, 2001, the customer made no purchases of
instrumentation products based upon the customer's determination that they had
an adequate level of instruments in inventory. There can be no assurance that
the customer will make additional purchases at the anticipated levels or within
any particular time frame. The failure of the customer to make additional
purchases would have a material adverse effect on the Company's business,
operating results and financial condition.
(6) 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 September 30, Three Months Nine Months
2001 2000 2001 2000
------ ------ ------ ------
Basic and diluted weighted average shares
Outstanding 28,629 20,000 26,293 20,000
Not included in the calculation of diluted earnings
per share because their impact is antidilutive:
Stock options outstanding 2,201 1,109 2,201 1,109
6
(7) INCOME TAXES:
- ----------------
The provision (benefit) for income taxes consists of the following:
Period Ended September 30, Three months Six months
2001 2000 2001 2000
----- ----- ----- -----
Current - Foreign $ (58) $ 372 $ 356 $1040
===== ===== ===== =====
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 September 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 the non-deductible stock option compensation expense in
2001 discussed in Note 2 and the non-recognition of the benefits of domestic
taxable losses of $544 and $571, respectively. For the nine months ended
September 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 the non-deductible stock option compensation
expense in 2001 discussed in Note 2 and the non-recognition of the benefits of
domestic taxable losses of $1,320 and $1,854, respectively.
As of September 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 asset was $640 at September 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.
(8) COMPREHENSIVE INCOME:
- ------------------------
The components of IVAX Diagnostics' comprehensive loss are as follows:
Period Ended September 30, Three months Nine months
2001 2000 2001 2000
----- ----- ------- -------
Net loss $(865) $(131) $(2,384) $ (414)
Foreign currency translation adjustments 344 (436) (148) (990)
Unrealized loss on marketable securities (1) - (1) -
----- ----- ------- -------
Comprehensive loss $(522) $(567) $(2,533) $(1,404)
===== ===== ======= =======
7
(9) 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.
Net Revenues by Region
Period Ended September 30, Three months Nine months
2001 2000 2001 2000
------ ------- ------ ------
Domestic
External net revenues $1,095 $ 1,124 $3,408 $3,206
Intercompany revenues 138 178 516 474
------ ------- ------ ------
1,233 1,302 3,924 3,680
------ ------- ------ ------
Italian
External net revenues 815 2,164 4,639 6,722
Intercompany revenues 293 84 569 261
------ ------- ------ ------
1,108 2,248 5,208 6,983
------ ------- ------ ------
Elimination (431) (262) (1,085) (735)
------ ------- ------- ------
Consolidated net revenues $1,910 $3,288 $ 8,047 $9,928
====== ====== ======= ======
Income from Operations by Region
Period Ended September 30, Three months Nine months
2001 2000 2001 2000
----- ------- ------- -------
Domestic $ (953) $ (551) $(3,150) $(1,592)
Italian (178) 898 574 2,512
Elimination 3 (12) 7 25
------- ------- ------- -------
Income (loss) from operations $(1,128) $ 335 $(2,569) $ 945
======= ======= ======= =======
September 30,
Total Assets 2001 2000
------- -------
Domestic $28,800 $ 5,979
Italian 12,307 13,280
Elimination (54) (53)
------- -------
Total assets $41,053 $19,206
======= =======
(10) 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
8
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.
(11) RELATED-PARTY TRANSACTIONS:
- -------------------------------
Included in the accompanying consolidated balance sheets as due to principal
shareholder are amounts due to IVAX as follows:
September 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.
(12) 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 nine months of 2001.
9
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 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. On January 1, 2002 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, the timing and amount of purchases from its largest customer 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
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended September
30, 2000
Net Revenues and Gross Profit
Net revenue for the nine months ended September 30, 2001 totaled $8,047,000, a
decrease of $1,881,000 or 18.9%, from the $9,928,000 reported in the prior year
comparable period. This decrease was comprised of a decrease of $2,083,000 in
external net revenue from Italian operations partially offset by an increase in
external net revenue of $202,000 from domestic operations. External net revenue
from Italian operations totaled $4,639,000 for the nine months ended September
30, 2001, compared to $6,722,000 in the nine months ended September 30, 2000.
This 31.0% decrease was primarily attributable to decreased sales volume of
instrumentation products. External domestic operations generated net revenue of
$3,408,000 for the nine months ended September 30, 2001, compared to $3,206,000
for the nine months ended September 30, 2000. The $202,000, or 6.3% 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 nine months ended September 30, 2001 decreased $1,136,000, or
20.5%, to $4,393,000 (54.6% of net revenue) from $5,529,000 (55.7% of net
revenue) for the nine months ended September 30, 2000. The decrease in gross
profit was primarily attributable to decreased revenue from sales of
instrumentation products. The decrease in gross profit as a percentage of net
revenue of 1.1% was primarily due to lower revenue from the relatively higher
gross profit sales of instrumentation products partially offset by improved
manufacturing efficiencies achieved due to volume increases in revenue from
domestic instrument placements.
Operating Expenses
Selling expenses were $2,299,000 (28.6% of net revenue) for the nine months
ended September 30, 2001 compared to $1,924,000 (19.4% of net revenue) for the
nine months ended September 30, 2000. The increase was primarily due to the
effect of greater payroll costs related to increased domestic instrument system
sales efforts. General and administrative expenses totaled $3,514,000 (43.7% of
net revenue) in the nine months ended September 30, 2001, an increase of
$2,014,000, from $1,500,000 (15.1% of net revenue) in the nine months ended
September 30, 2000. The increase was primarily the result of
11
the recognition of $1,338,000 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. 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 professional
fees incurred in 2001 associated with the completion of the merger. Research and
development expenses totaled $958,000 in the nine months ended September 30,
2001 compared to $968,000 in the nine months ended September 30, 2000,
representing 11.9% and 9.8% of net revenues, respectively. 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 $583,000 in the nine months ended September 30,
2001 from $112,000 in the nine months ended September 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 nine months ended September 30, 2001 and
$432,000 in the nine months ended September 30, 2000, a decrease of $339,000.
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 September 30, 2001 Compared to the Three Months Ended
September 30, 2000
Net Revenues and Gross Profit
Net revenue for the three months ended September 30, 2001 decreased $1,378,000,
or 41.9%, to $1,910,000 from $3,288,000 reported in the prior year comparable
period. This decrease was comprised of a decrease of $1,349,000 in Italian
external net revenue and a decrease in domestic operation external net revenues
of $29,000. External net revenue from Italian operations totaled $815,000 for
the three months ended September 30, 2001, compared to $2,164,000 in the three
months ended September 30, 2000. The decrease was primarily attributable to
decreased sales volume of instrumentation products. Domestic operations
generated external net revenue of $1,095,000 for the three months ended
September 30, 2001, compared to $1,124,000 for the three months ended September
30, 2000. The $29,000 decrease was primarily due to decreased volume of raw
material antigen and instrumentation component revenue partially offset by
volume increases in revenue from instrumentation placements. Gross profit for
the three months ended September 30, 2001 decreased $937,000, or 50.4%, to
$921,000 (48.2% of net revenue) from $1,858,000 (56.5% of net revenue) for the
three months ended September 30, 2000. The decrease in gross profit was
primarily attributable to decreased revenue from sales of instrumentation
products. The decrease in gross profit as a percentage of net revenue of 8.3%
was primarily due to lower Italian external net revenue from the relatively
higher gross profit sales of instrumentation products.
Operating Expenses
Selling expenses were $794,000 (41.6% of net revenue) for the three months ended
September 30, 2001 compared to $621,000 (18.9% of net revenue) for the three
months ended September 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 $842,000 (44.1% of net
revenue) in the three months ended September 30, 2001, an increase of $316,000
from $526,000 (16.0% of net revenue) in the three months ended September 30,
2000. The increase was primarily the result of the recognition of
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$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, and, to a lesser degree,
increased professional and insurance costs resulting primarily from the
Company's new independent public structure. Research and development expenses
totaled $349,000 in the three months ended September 30, 2001 compared to
$312,000 in the three months ended September 30, 2000, representing 18.3% and
9.5%, 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 $228,000 in the three months ended September 30,
2001 from $14,000 in the three months ended September 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 September 30, 2001
compared to $102,000 in the three months ended September 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 nine 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 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
13
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. On January 1, 2002 amortization of goodwill acquired prior to June
30, 2001 will cease. This will increase net income by approximately $64,000 per
quarter, or $256,000 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 $1.3
million are reflected in general and administrative expense in the accompanying
statement of operations for the three and nine months ended September 30, 2001,
respectively. The remaining cost will be expensed over the remaining vesting
term of the options through June 30, 2003.
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 September 30, 2001, IVAX Diagnostics' working capital was $28.8 million,
compared to $6.0 million at December 31, 2000. Cash and cash equivalents
totaled $22.0 million at September 30, 2001, as compared to $1.3 million at
December 31, 2000. Additionally, the Company's investment in marketable
securities totaled $2.5 million at September 30, 2001. Substantially all cash
and cash equivalents and all marketable securities are held at one national
securities brokerage firm. Accordingly, IVAX Diagnostics is subject to credit
risk if this broker is unable to repay the balance in the account or deliver the
Company's securities. IVAX Diagnostics only invests in high-quality money market
instruments, municipal securities and corporate issuers.
Net cash flows of $0.1 million were provided by operating activities during the
nine months ended September 30, 2001, compared to $0.8 million provided by
operations during the nine months ended September 30, 2000. The decrease in
cash provided by operating activities was primarily the result of
14
reduced operating results and 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 $3.3 million were used in investing activities during the
first quarter of 2001, as compared to $0.4 million that was used during the same
period of the prior year. The increase in cash used is primarily the result of
the investment in marketable securities.
Net cash flows of $24.2 million were provided from financing activities during
the nine months ended September 30, 2001, compared to $1.8 million used during
the same period of the prior year. The increase in cash provided is primarily
due to cash of $22.3 million that was included in the net assets of
b2bstores.com acquired in the Merger.
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 $0.3 million in fiscal 2001 to improve and expand its equipment
and facilities.
IVAX Diagnostics' principal source of short term liquidity is existing cash,
cash equivalents and marketable securities 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 one 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.
In April 1999, IVAX Diagnostics and Sigma Diagnostics, Inc. entered into a
three-year contract pursuant to which, subject to the terms of the agreement,
Sigma agreed to purchase a minimum number of scientific instruments per year
from IVAX diagnostics. During the nine month periods ending September 30, 2001
and 2000, net revenues received by IVAX Diagnostics from Sigma represented
29.3% and 45.8%, respectively, of IVAX Diagnostics' total net revenues for such
periods. Twice during the year 2000, Sigma notified IVAX Diagnostics that Sigma
desired to suspend shipments of instruments pending resolution of hardware and
software upgrade issues. The first suspension lasted for a period of
approximately four months. The second suspension began in October 2000 and ended
in January 2001. During the three months ended September 30, 2001, Sigma made no
purchases of instrumentation products based upon Sigma's determination that it
had an adequate level of instruments in inventory. There can be no assurance
that Sigma will make additional purchases at the anticipated levels or will do
so within a particular time frame. The failure by Sigma to make additional
purchases would have a material adverse effect on our business, prospects,
operating results, and financial condition.
Currency Fluctuations
For the nine months ended September 30, 2001 and 2000, approximately 33.4% and
26.4%, 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 nine months ended September 30, 2001 compared
to the same period of the prior year. During the first nine 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
15
IVAX Diagnostics recognized a tax provision (benefit) of $(0.1) million, $0.4
million, $0.4 million and $1.0 million for the three and nine months ended
September 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 September 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 the non-deductible stock option compensation expense in
2001 discussed in Note 2 and the non-recognition of the benefits of domestic
taxable losses of $544 and $571, respectively. For the nine months ended
September 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 the non-deductible stock option compensation
expense in 2001 discussed in Note 2 and the non-recognition of the benefits of
domestic taxable losses of $1,320 and $1,854, respectively.
As of September 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 asset was $640 at September 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.
17
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: November 13, 2001 By: /s/ Mark Deutsch
-----------------------
Mark Deutsch
Vice President-Finance
Chief Financial Officer
19