FORM 10-Q/A
Amendment No. 2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission file number: 1-10986
MISONIX, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-2148932
--------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1938 New Highway, Farmingdale, NY 11735
--------------------------------- -----
(Address of principal executive offices) (Zip Code)
(631) 694-9555
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Outstanding at
Class of Common Stock February 1, 2003
------------------------ ----------------
Common Stock, $.01 par value 6,644,365
1
MISONIX, INC.
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INDEX
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PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
December 31, 2002 (Unaudited) and June 30, 2002 3
Consolidated Statements of Operations
Six months ended December 31, 2002
and 2001 (Unaudited) 4
Consolidated Statements of Operations
Three months ended December 31, 2002
and 2001 (Unaudited) 5
Consolidated Statements of Cash Flows
Six months ended December 31, 2002 6
and 2001 (Unaudited)
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition 12-21
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
Part II - OTHER INFORMATION 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Certifications 25-28
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MISONIX, INC.
CONSOLIDATED BALANCE SHEETS
===========================
DECEMBER 31, June 30,
2002 2002
------------ ------------
ASSETS (UNAUDITED) Audited
------------ ------------
Current assets:
Cash and cash equivalents $ 1,330,933 $ 1,065,465
Accounts receivable, less allowance for doubtful accounts of $231,544 and
$223,413, respectively 6,917,694 6,656,932
Inventories 8,817,528 7,170,844
Prepaid income taxes 1,903,168 1,391,978
Deferred income taxes 412,174 388,027
Prepaid expenses and other current assets 614,472 715,367
------------ ------------
Total current assets 19,995,969 17,388,613
Property, plant and equipment, net 3,511,668 3,151,909
Deferred income taxes 577,104 1,757,937
Goodwill 4,473,713 4,241,319
Other assets 302,406 424,674
------------ ------------
Total assets $28,860,860 $26,964,452
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities $ 1,195,076 $ 730,092
Accounts payable 3,580,796 3,072,234
Accrued expenses and other current liabilities 1,215,905 1,304,824
Litigation settlement liabilities 170,000 174,332
Current maturities of long-term debt and capital lease obligations 288,688 252,850
------------ ------------
Total current liabilities 6,450,465 5,534,332
Long-term debt and capital lease obligations 1,252,373 1,050,254
Deferred income 490,377 451,073
Minority interest 206,130 239,965
Stockholders' equity:
Common stock, $.01 par value-shares authorized 10,000,000; 6,718,665 issued,
6,644,365 outstanding 67,186 61,802
Additional paid-in capital 22,701,711 22,313,991
Retained deficit (1,856,861) (2,021,059)
Treasury stock, 74,300 shares (401,974) (401,974)
Accumulated other comprehensive loss (48,547) (263,932)
------------ ------------
Total stockholders' equity 20,461,515 19,688,828
------------ ------------
Total liabilities and stockholders' equity $28,860,860 $26,964,452
============ ============
See accompanying Notes to Consolidated Financial Statements.
3
MISONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
===========
FOR THE SIX MONTHS ENDED
DECEMBER 31,
2002 2001
------------ ------------
Net sales $15,184,835 $14,326,058
Cost of goods sold 8,822,459 7,815,551
------------ ------------
Gross profit 6,362,376 6,510,507
Operating expenses:
Selling expenses 2,032,563 2,057,488
General and administrative expenses 3,152,131 3,005,710
Research and development expenses 1,015,888 964,197
Litigation (recovery) settlement expenses (152,628) -
------------ ------------
Total operating expenses 6,047,954 6,027,395
------------ ------------
Income from operations 314,422 483,112
Other income (expense):
Interest income 41,398 244,923
Interest expense (87,480) (71,860)
Option/license fees 12,156 12,156
Royalty income 248,645 441,137
Foreign exchange gain 2,245 (259)
Loss on impairment of Hearing Innovations, Inc. (182,907) (214,640)
Loss on impairment of Focus Surgery, Inc. (13,725) (326,702)
------------ ------------
Total other income 20,332 84,755
Income before minority interest and income taxes 334,754 567,867
Minority interest in net income of consolidated
subsidiaries 33,836 30,730
------------ ------------
Income before income taxes 368,590 598,597
Income tax expense 204,392 381,032
------------ ------------
Net income $ 164,198 $ 217,565
============ ============
Net income per share-Basic $ .03 $ .04
============ ============
Net income per share - Diluted $ .03 $ .03
============ ============
Weighted average common shares outstanding - Basic 6,308,526 6,053,965
============ ============
Weighted average common shares outstanding - Diluted 6,554,421 6,530,789
============ ============
See accompanying Notes to Consolidated Financial Statements.
4
MISONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
===========
FOR THE THREE MONTHS ENDED
DECEMBER 31,
2002 2001
----------- -----------
Net sales $8,174,513 $7,503,537
Cost of goods sold 4,769,355 4,178,202
----------- -----------
Gross profit 3,405,158 3,325,335
Operating expenses:
Selling expenses 1,096,960 1,027,543
General and administrative expenses 1,632,258 1,518,178
Research and development expenses 476,562 504,942
Litigation (recovery) settlement expenses (25,326) -
----------- -----------
Total operating expenses 3,180,454 3,050,663
----------- -----------
Income from operations 224,704 274,672
Other income (expense):
Interest income 2,684 98,372
Interest expense (44,503) (35,965)
Option/license fees 6,078 12,156
Royalty income 126,000 147,782
Foreign exchange gain (1,038) (1,231)
Loss on impairment of Hearing Innovations, Inc. (84,000) (105,153)
Loss on impairment of Focus Surgery, Inc. - (14,106)
----------- -----------
Total other income 5,221 101,855
Income before minority interest and income taxes 229,925 376,527
Minority interest in net income of consolidated
subsidiaries 40,553 42,916
----------- -----------
Income before income taxes 270,478 419,443
Income tax expense 157,437 158,823
----------- -----------
Net income $ 113,041 $ 260,620
=========== ===========
Net income per share-Basic $ .02 $ .04
=========== ===========
Net income per share - Diluted $ .02 $ .04
=========== ===========
Weighted average common shares outstanding - Basic 6,511,188 6,052,755
=========== ===========
Weighted average common shares outstanding - Diluted 6,598,096 6,585,953
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
5
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
===========
FOR THE SIX MONTHS ENDED
DECEMBER 31,
2002 2001
------------ -----------
OPERATING ACTIVITIES
Net income $ 164,198 $ 217,565
Adjustments to reconcile net income to net cash used in operating activities:
Bad debt expense 29,530 45,873
Litigation recovery (152,628) -
Deferred income tax expense (19,398) 72,609
Depreciation and amortization 327,684 290,948
Loss on disposal of equipment 66,873 -
Deferred income 39,304 (26,454)
Foreign currency exchange gain (2,245) 259
Minority interest in net income of subsidiaries (33,836) (30,730)
Loss on impairment of investments 196,632 541,342
Changes in operating assets and liabilities:
Accounts receivable (1,483) 944,461
Inventories (1,269,619) (324,020)
Prepaid income taxes 657,914 -
Prepaid expenses and other current assets (7,662) (71,980)
Other assets 160,842 (98,286)
Accounts payable and accrued expenses 192,804 (954,259)
Litigation settlement liabilities (4,332) (100,000)
Income taxes payable (36,292) (126,706)
------------ -----------
Net cash provided by operating activities 308,286 380,622
------------ -----------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (267,025) (109,080)
Purchase of Labcaire stock (232,394) (99,531)
Redemption of investments held to maturity - 2,015,468
Purchase of convertible debentures - Focus Surgery, Inc. - (300,000)
Loans to Focus Surgery, Inc. - (36,858)
Loans to Hearing Innovations, Inc. (159,666) (204,484)
------------ -----------
Net cash (used in) provided by investing activities (659,085) 1,265,515
------------ -----------
FINANCING ACTIVITIES
Proceeds from (payments of) short-term borrowings, net 360,815 292,379
Principal payments on capital lease obligations (134,008) (128,798)
Proceeds from long-term debt 11,409
Payments of long-term debt (10,754) (43,737)
Proceeds from exercise of stock options 393,104 89,812
Purchase of treasury stock - (27,593)
------------ -----------
Net cash provided by financing activities 620,566 182,063
------------ -----------
Effect of exchange rate changes on assets and liabilities (4,299) 46,918
------------ -----------
Net increase in cash and cash equivalents 265,468 1,875,118
Cash and cash equivalents at beginning of year 1,065,465 3,774,573
------------ -----------
Cash and cash equivalents at end of year $ 1,330,933 $5,649,691
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for (received from):
Interest $ 87,480 $ 71,860
============ ===========
Income taxes $ (531,213) $ 366,965
============ ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease additions $ 237,785 $ 67,668
============ ===========
See accompanying Notes to Consolidated Financial Statements.
6
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited)
==========================================================
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended December 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2003.
The balance sheet at June 30, 2002 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended June 30, 2002.
2. Acquisition
Labcaire Systems Ltd.
-----------------------
In October 2002, under the terms of the revised purchase agreement (the
"Labcaire Agreement") with Labcaire (as discussed in the Company's Annual
Report on Form 10-K for the year ended June 30, 2002), the Company paid
$232,394 for 9,286 shares (2.70%) of the outstanding common stock of
Labcaire bringing the acquired interest to 100%. This represents the fiscal
2003 buy-back, as defined in the Labcaire Agreement.
3. Inventories
-----------
Inventories are summarized as follows:
DECEMBER 31, 2002 June 30, 2002
------------------ --------------
Raw materials $ 4,442,882 $ 3,701,925
Work-in-process 1,478,587 824,289
Finished goods 2,896,059 2,644,630
------------------ --------------
$ 8,817,528 $ 7,170,844
================== ==============
7
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
4. Accrued Expenses and Other Current Liabilities
---------------------------------------------------
The following summarizes accrued expenses and other current liabilities:
DECEMBER 31, 2002 June 30, 2002
------------------ --------------
Accrued payroll and vacation $ 153,819 $ 165,350
Accrued sales tax 21,228 7,262
Accrued commissions and bonuses 18,737 216,343
Customer deposits and deferred contracts 750,646 526,560
Accrued professional fees 138,622 229,750
Warranty 69,868 68,000
Other 62,985 91,559
------------------ --------------
$ 1,215,905 $ 1,304,824
================== ==============
5. Loans to Affiliates
---------------------
Hearing Innovations, Inc.
---------------------------
During fiscal 2003, the Company entered into seven loan agreements whereby
Hearing Innovations, Inc. ("Hearing Innovations") is required to pay the
Company an aggregate amount of $159,666 due November 30, 2003. All notes
bear interest at 8% per annum. The notes are secured by a lien on all of
Hearing Innovations' right, title and interest in accounts receivable,
inventory, property, plant and equipment and processes of specified
products whether now existing or arising after the date of these
agreements. The loan agreements contain warrants to acquire 159,666 shares
of Hearing Innovations common stock, at the option of the Company, at a
cost of $.10 to $1.00 per share. These warrants, which are deemed nominal
in value, expire in October 2005. The Company recorded an allowance against
the entire balance of $159,666 for the above loans. The related expense has
been included in loss on impairment of investments in the accompanying
consolidated statements of operations. The Company believes the loans and
related interest are impaired since the Company does not anticipate that
these loans will be paid in accordance with the contractual terms of the
loan agreements.
8
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
6. Business Segments
------------------
The Company operates in two business segments which are organized by
product types: industrial products and medical devices. Industrial products
include the Sonicator ultrasonic liquid processor, Aura ductless fume
enclosure, the Autoscope and Guardian endoscope disinfectant systems from
Labcaire and the Mystaire wet scrubber. Medical devices include the Auto
Sonix ultrasonic cutting and coagulatory system, refurbishing of
high-performance ultrasound systems and replacement transducers for the
medical diagnostic ultrasound industry, ultrasonic lithotriptor, ultrasonic
neuroaspirator, used for neurosurgery, and soft tissue aspirator, used
primarily for the cosmetic surgery market. The Company evaluates the
performance of the segments based upon income from operations before
general and administrative expenses and litigation (recovery) settlement
expenses. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies (Note 1) in the
Company's Annual Report on Form 10-K for the year ended June 30, 2002.
Certain items are maintained at the corporate headquarters (corporate) and
are not allocated to the segments. They primarily include general and
administrative expenses and litigation (recovery) settlement expenses. The
Company does not allocate assets by segment. Summarized financial
information for each of the segments are as follows:
For the six months ended December 31, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
---------- ----------- --------------- -----------
Net sales $7,211,580 $ 7,973,255 $ - $15,184,835
Cost of goods sold 4,082,186 4,740,273 - 8,822,459
---------- ----------- -----------
Gross profit 3,129,394 3,232,982 - 6,362,376
Selling expenses 643,680 1,388,883 - 2,032,563
Research and development
expenses 690,853 325,035 - 1,015,888
---------- ----------- -----------
Total operating expenses 1,334,533 1,713,918 2,999,503 6,047,954
---------- ----------- --------------- -----------
Income from operations $1,794,861 $ 1,519,064 $ (2,999,503) $ 314,422
========== =========== =============== ===========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses.
For the three months ended December 31, 2002:
(a)
Medical Industrial Corporate and
Devices Products Unallocated Total
----------- ----------- --------------- ----------
Net sales $ 4,042,908 $ 4,131,605 $ - $8,174,513
Cost of goods sold 2,238,416 2,530,939 - 4,769,355
----------- ----------- ----------
Gross profit 1,804,492 1,600,666 - 3,405,158
Selling expenses 376,055 720,905 - 1,096,960
Research and development
expenses 307,832 168,730 - 476,562
----------- ----------- ----------
Total operating expenses 683,887 889,635 1,606,932 3,180,454
----------- ----------- --------------- ----------
Income from operations $ 1,120,605 $ 711,031 $ (1,606,932) $ 224,704
=========== =========== =============== ==========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses.
9
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
For the six months ended December 31, 2001:
(a)
Medical Industrial Corporate and
Devices Products Unallocated Total
----------- ----------- --------------- -----------
Net sales $ 5,804,101 $ 8,521,957 $ - $14,326,058
Cost of goods sold 3,152,693 4,662,858 - 7,815,551
----------- ----------- -----------
Gross profit 2,651,408 3,859,099 - 6,510,507
Selling expenses 462,045 1,595,443 - 2,057,488
Research and development
expenses 678,589 285,608 - 964,197
----------- ----------- -----------
Total operating expenses 1,140,634 1,881,051 3,005,710 6,027,395
----------- ----------- --------------- -----------
Income from operations $ 1,510,774 $ 1,978,048 $ (3,005,710) $ 483,112
=========== =========== =============== ===========
(a) Amount represents general and administrative expenses.
For the three months ended December 31, 2001:
(a)
Medical Industrial Corporate and
Devices Products Unallocated Total
----------- ----------- --------------- ----------
Net sales $ 3,061,963 $ 4,441,574 $ - $7,503,537
Cost of goods sold 1,745,664 2,432,538 - 4,178,202
----------- ----------- ----------
Gross profit 1,316,299 2,009,036 - 3,325,335
Selling expenses 210,126 817,417 - 1,027,543
Research and development
expenses 357,016 147,926 - 504,942
----------- ----------- ----------
Total operating expenses 567,142 965,343 1,518,178 3,050,663
----------- ----------- --------------- ----------
Income from operations $ 749,157 $ 1,043,693 $ (1,518,178) $ 274,672
=========== =========== =============== ==========
(a) Amount represents general and administrative expenses.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the six months ended December 31:
2002 2001
----------- -----------
(IN THOUSANDS)
United States $10,066,000 $10,530,000
Canada 166,000 116,000
Mexico 3,000 -
United Kingdom 3,645,000 2,611,000
Europe 677,000 420,000
Asia 495,000 484,000
Middle East 43,000 109,000
Other 90,000 56,000
----------- -----------
$15,185,000 $14,326,000
=========== ===========
10
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
7. Revolving Credit Facilities
-----------------------------
On July 1, 2002, Labcaire replaced its bank overdraft facility with HSBC
Bank plc with a debt purchase agreement with Lloyds TSB Commercial Finance.
The current facility is more flexible than the prior facility. The prior
facility established a sum certain limit where the current facility has a
credit limit based upon United Kingdom domestic and European receivables
outstanding. The Company's needs are better served from the current
facility. The amount of this facility is approximately $1,384,000 (950,000
Lbs. Sterling) and bears interest at the bank's base rate plus 1.75% and a
service charge of .15% of sales invoice value and fluctuates based upon the
outstanding United Kingdom and European receivables. The agreement expires
on June 28, 2003 and covers all United Kingdom and European sales.
11
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Six Months Ended December 31, 2002 and 2001.
NET SALES: Net sales of the Company's medical devices and industrial products
-----------
increased $858,777 to $15,184,835 for the six months ended December 31, 2002
from $14,326,058 for the six months ended December 31, 2001. This difference in
net sales is due to an increase in sales of medical devices of $1,407,479 offset
by lower industrial products sales of $548,702. The increase in sales of medical
devices is due to an increase in sales of diagnostic medical devices of $945,715
and an increase of $461,764 in sales of therapeutic medical devices, both due to
increased customer demand. The decrease in industrial products is due to
decreased wet scrubber sales of $999,413, a decrease in ultrasonic sales of
$93,963 and a decrease in ductless fume enclosure sales of $387,411 primarily
offset by an increase in Labcaire sales of $932,085. Wet scrubber sales
continue to be adversely affected by the downturn of the semi-conductor market.
The decrease in fume enclosure and ultrasonic sales is due to customer demand
and current economic conditions for such products. The increase in Labcaire
sales is primarily due to the product demand of the new Guardian product
introduced in December 2001, which is currently compliant with the new United
Kingdom standards for such products. Approximately 24% of the Company's
revenues in the first and second quarters of fiscal 2003 were received in
English Pounds currency. To the extent that the Company's revenues are
generated in English Pounds, its operating results are translated for reporting
purposes into U.S. Dollars using rates of 1.57 and 1.46 for the six months ended
December 31, 2002 and 2001, respectively. A strengthening of the English Pound,
in relation to the U.S. Dollar, will have the effect of increasing its reported
revenues and profits, while a weakening of the English Pound will have the
opposite effect. Since the Company's operations in England generally sets
prices and bids for contracts in English Pounds, a strengthening of the English
Pound, while increasing the value of its UK assets, might place the Company at a
pricing disadvantage in bidding for work from manufacturers based overseas. The
Company collects its receivables in the currency the subsidiary resides in. The
Company has not engaged in foreign currency hedging transactions, which include
forward exchange agreements.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the six months ended December 31:
2002 2001
----------- -----------
(IN THOUSANDS)
United States $10,066,000 $10,530,000
Canada 166,000 116,000
Mexico 3,000 -
United Kingdom 3,645,000 2,611,000
Europe 677,000 420,000
Asia 495,000 484,000
Middle East 43,000 109,000
Other 90,000 56,000
----------- -----------
$15,185,000 $14,326,000
=========== ===========
12
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
===================================================================
Summarized financial information for each of the business segments are as
follows:
For the six months ended December 31, 2002:
(a)
Medical Industrial Corporate and
Devices Products Unallocated Total
----------- ----------- --------------- -----------
Net sales $ 7,211,580 $ 7,973,255 $ - $15,184,835
Cost of goods sold 4,082,186 4,740,273 - 8,822,459
----------- ----------- -----------
Gross profit 3,129,394 3,232,982 - 6,362,376
Selling expenses 643,680 1,388,883 - 2,032,563
Research and development
expenses 690,853 325,035 - 1,015,888
----------- ----------- -----------
Total operating expenses 1,334,533 1,713,918 2,999,503 6,047,954
----------- ----------- --------------- -----------
Income from operations $ 1,794,861 $ 1,519,064 $ (2,999,503) $ 314,422
=========== =========== =============== ===========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses.
For the six months ended December 31, 2001:
(a)
Medical Industrial Corporate and
Devices Products Unallocated Total
----------- ----------- --------------- -----------
Net sales $ 5,804,101 $ 8,521,957 $ - $14,326,058
Cost of goods sold 3,152,693 4,662,858 - 7,815,551
----------- ----------- -----------
Gross profit 2,651,408 3,859,099 - 6,510,507
Selling expenses 462,045 1,595,443 - 2,057,488
Research and development
expenses 678,589 285,608 - 964,197
----------- ----------- -----------
Total operating expenses 1,140,634 1,881,051 3,005,710 6,027,395
----------- ----------- --------------- -----------
Income from operations $ 1,510,774 $ 1,978,048 $ (3,005,710) $ 483,112
=========== =========== =============== ===========
(a) Amount represents general and administrative expenses.
GROSS PROFIT: Gross profit decreased to 41.9% for the six months ended December
--------------
31, 2002 from 45.4% for the six months ended December 31, 2001. The decrease in
gross profit is predominantly due to the unfavorable mix of high and low margin
product deliveries for industrial products, primarily ductless fume enclosures
and ultrasonic products and the reduced revenue volume for industrial products.
The Company manufactures and sell both medical devices and industrial products
with wide range of product costs and gross margin dollars as a percentage of
revenues. An unfavorable mix of high and low gross margin product deliveries is
a direct result of the ratio of high gross margin product shipments to total
shipments versus low gross margin product shipments to the same total shipments.
In both the medical devices and industrial products segments, there are wide
variations on gross margin percentages to revenues dependent upon the product.
The variation in gross margin percentage based upon product mix is described as
either a "favorable" or "unfavorable" mix of high and low margin product
deliveries.
SELLING EXPENSES: Selling expenses decreased $24,925 to $2,032,563 for the six
------------------
months ended December 31, 2002 from $2,057,488 for the six months ended December
31, 2001. Medical device selling expenses increased $181,635 predominantly due
to additional sales and marketing efforts for diagnostic medical devices.
Industrial selling expenses decreased $206,560 predominantly due to a decrease
in fume enclosure, ultrasonic and wet scrubber commissions and wet scrubber
marketing expenses.
13
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
===================================================================
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
--------------------------------------
increased $146,421 from $3,005,710 in the six months ended December 31, 2001 to
$3,152,131 in the six months ended December 31, 2002. The increase is
predominantly due to an increase in general and administrative expenses relating
to severance costs for Labcaire personnel partially offset by lower travel and
stockholder relations expenses of approximately $36,000 and $10,000,
respectively.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses increased
------------------------------------
$51,691 from $964,197 for the six months ended December 31, 2001 to $1,015,888
for the six months ended December 31, 2002. During the first and second quarter
of fiscal 2003, the Company funded $100,000 to Focus Surgery, Inc. ("Focus
Surgery") to start research and development for the treatment of kidney tumors
utilizing high intensity focused ultrasound technology. During the second
quarter of fiscal 2003, the Company was reimbursed from two customers certain
product development expenditures incurred, in the amount of approximately
$164,000.
LITIGATION (RECOVERY) SETTLEMENT EXPENSES: The Company recorded a reversal of
---------------------------------------------
the litigation settlement during the first and second quarters of fiscal 2003 of
$152,628. The reversal of litigation represents the sale of Lysonix 2000 units
by Mentor Corporation that were previously reserved for in connection with
inventory received under the settlement agreement from LySonix, Inc. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended June 30, 2002.
OTHER INCOME (EXPENSE): Other income during the six months ended December 31,
-------------------------
2002 was $20,332. During the six months ended December 31, 2001, other income
was $84,755. The decrease of $64,423 was principally due to a decrease in loss
on impairment of investments of $344,710, offset by lower interest income of
$203,525 and reduced royalty income of $192,492. During fiscal 2003, the
Company entered into seven loan agreements whereby Hearing Innovations is
required to pay the Company an aggregate amount of $159,666 due November 30,
2003, which the Company recorded an allowance against the entire balance of
$159,666 and accrued interest of $23,241.
INCOME TAXES: The effective tax rate is 55.5% for the six months ended December
--------------
31, 2002 as compared to an effective tax rate of 63.7% for the six months ended
December 31, 2001. The current effective income tax rate of 55.5% was impacted
by no corresponding income tax benefit from the loss of the impairment of
Hearing Innovations and Focus Surgery by $75,516 plus the standard consolidated
tax rate of approximately 35%. The loss on impairments of Hearing Innovations
and Focus Surgery are recorded with no corresponding tax benefit due to these
transactions are capital losses. Benefit for such losses are only utilized if
the Company has the ability to generate capital gains.
14
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
Three Months Ended December 31, 2002 and 2001.
NET SALES: Net sales of the Company's medical devices and industrial products
-----------
increased $670,976 to $8,174,513 for the three months ended December 31, 2002
from $7,503,537 for the three months ended December 31, 2001. This difference
in net sales is due to an increase in sales of medical devices of $980,945
offset by lower industrial products sales of $309,969. The increase in sales of
medical devices is due to an increase in sales of diagnostic medical devices of
$561,537 and an increase of $419,408 in sales of therapeutic medical devices,
both due to increased customer demand. The decrease in industrial products is
due to decreased wet scrubber sales of $253,379, a decrease in ductless fume
enclosure sales of $471,567 and a decrease in ultrasonic sales of $194,037
primarily offset by an increase in Labcaire sales of $609,014. Wet scrubber
sales continue to be adversely affected by the downturn of the semi-conductor
market. The decrease in fume enclosure and ultrasonic sales is due to customer
demand and current economic conditions for such products. The increase in
Labcaire sales is primarily due to the product demand of the new Guardian
product introduced in December 2001, which is currently compliant with the new
United Kingdom standards for such products. To the extent that the Company's
revenues are generated in English Pounds, its operating results are translated
for reporting purposes into U.S. Dollars using rates of 1.57 and 1.46 for the
six months ended December 31, 2002 and 2001, respectively. A strengthening of
the English Pound, in relation to the U.S. Dollar, will have the effect of
increasing its reported revenues and profits, while a weakening of the English
Pound will have the opposite effect. Since the Company's operations in England
generally sets prices and bids for contracts in English Pounds, a strengthening
of the English Pound, while increasing the value of its UK assets, might place
the Company at a pricing disadvantage in bidding for work from manufacturers
based overseas. The Company collects its receivables in the currency the
subsidiary resides in. The Company has not engaged in foreign currency hedging
transactions, which include forward exchange agreements.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the three months ended December 31:
2002 2001
----------- ----------
(IN THOUSANDS)
United States $ 5,585,000 $5,457,000
Canada 60,000 79,000
Mexico 3,000 -
United Kingdom 1,930,000 1,359,000
Europe 205,000 206,000
Asia 341,000 313,000
Middle East 30,000 78,000
Other 21,000 11,000
----------- ----------
$8,175,0000 $7,503,000
=========== ==========
15
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
Summarized financial information for each of the business segments are as
follows:
For the three months ended December 31, 2002:
(a)
Medical Industrial Corporate and
Devices Products Unallocated Total
----------- ----------- --------------- ----------
Net sales $ 4,042,908 $ 4,131,605 $ - $8,174,513
Cost of goods sold 2,238,416 2,530,939 - 4,769,355
----------- ----------- ----------
Gross profit 1,804,492 1,600,666 - 3,405,158
Selling expenses 376,055 720,905 - 1,096,960
Research and development
expenses 307,832 168,730 - 476,562
----------- ----------- ----------
Total operating expenses 683,887 889,635 1,606,932 3,180,454
----------- ----------- --------------- ----------
Income from operations $ 1,120,605 $ 711,031 $ (1,606,932) $ 224,704
=========== =========== =============== ==========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses.
For the three months ended December 31, 2001:
(a)
Medical Industrial Corporate and
Devices Products Unallocated Total
----------- ----------- --------------- ----------
Net sales $ 3,061,963 $ 4,441,574 $ - $7,503,537
Cost of goods sold 1,745,664 2,432,538 - 4,178,202
----------- ----------- ----------
Gross profit 1,316,299 2,009,036 - 3,325,335
Selling expenses 210,126 817,417 - 1,027,543
Research and development
expenses 357,016 147,926 - 504,942
----------- ----------- ----------
Total operating expenses 567,142 965,343 1,518,178 3,050,663
----------- ----------- --------------- ----------
Income from operations $ 749,157 $ 1,043,693 $ (1,518,178) $ 274,672
=========== =========== =============== ==========
(a) Amount represents general and administrative expenses.
GROSS PROFIT: Gross profit decreased to 41.7% for the three months ended
--------------
December 31, 2002 from 44.3% for the three months ended December 31, 2001. The
decrease in gross profit is predominantly due to the unfavorable mix of high and
low margin product deliveries for industrial products, primarily
ultrasonic products and the reduced revenue volume for industrial products. The
decrease is offset by an increase in gross profit of diagnostic medical devices
SELLING EXPENSES: Selling expenses increased $69,417 to $1,096,960 for the three
-----------------
months ended December 31, 2002 from $1,027,543 for the three months ended
December 31, 2001. Medical device selling expenses increased $165,929
predominantly due to additional sales and marketing efforts for diagnostic
medical devices. Industrial selling expenses decreased $96,512 predominantly
due to a decrease in fume enclosure, ultrasonic and wet scrubber commissions and
wet scrubber marketing expenses offset by an increase in marketing efforts by
Labcaire.
16
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
--------------------------------------
increased $114,080 from $1,518,178 in the three months ended December 31, 2001
to $1,632,258 in the three months ended December 31, 2002. The increase is
predominantly due to an increase in general and administrative expenses relating
to severance costs for a Labcaire executive partially offset by lower
stockholder relations expenses of approximately $15,000.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses decreased
------------------------------------
$28,380 from $504,942 for the three months ended December 31, 2001 to $476,562
for the three months ended December 31, 2002. During second quarter of fiscal
2003, the Company funded $50,000 to Focus Surgery to start research and
development for the treatment of kidney tumors utilizing high intensity focused
ultrasound technology. During the second quarter of fiscal 2003, the Company
was reimbursed from two customers certain product development expenditures
incurred, in the amount of approximately $164,000.
LITIGATION (RECOVERY) SETTLEMENT EXPENSES: The Company recorded a reversal of
---------------------------------------------
the litigation settlement during the second quarter of fiscal 2003 of $25,326.
The reversal of litigation represents the sale of Lysonix 2000 units by Mentor
Corporation that were previously reserved for in connection with inventory
received under the settlement agreement from LySonix, Inc. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
June 30, 2002.
OTHER INCOME (EXPENSE): Other income during the three months ended December 31,
------------------------
2002 was $5,221. During the three months ended December 31, 2001, other income
was $101,855. The decrease of $96,634 was principally due to a decrease in loss
on impairment of investments of $35,259, offset by lower interest income of
$95,688 and reduced royalty income of $21,782. During the three months ended
December 31, 2003, the Company entered into five loan agreements whereby Hearing
Innovations is required to pay the Company an aggregate amount of $84,000 due
November 30, 2003, which the Company recorded an allowance against the entire
balance of $84,000 for the above loans.
INCOME TAXES: The effective tax rate is 58.2% for the three months ended
--------------
December 31, 2002 as compared to an effective tax rate of 37.9% for the three
months ended December 31, 2001. The current effective income tax rate of 55.5%
was impacted by no corresponding income tax benefit from the loss of the
impairment of Hearing Innovations and Focus Surgery by $31,590 plus the standard
consolidated tax rate of approximately 35%. The loss on impairments of Hearing
Innovations and Focus Surgery are recorded with no corresponding tax benefit due
to these transactions are capital losses. Benefit for such losses are only
utilized if the Company has the ability to generate capital gains.
17
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
CRITICAL ACCOUNTING POLICIES:
General: Financial Reporting Release No. 60, which was released by the
--------
Securities and Exchange Commission ("SEC") in December 2001, requires all
companies to include a discussion of critical accounting policies or methods
used in the preparation of the financial statements. Note 1 of the Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended June 30, 2002 includes a summary of the Company's
significant accounting policies and methods used in the preparation of its
financial statements. The Company's discussion and analysis of its financial
condition and results of operations are based upon the Company's financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an on-going
basis, management evaluates its estimates and judgments, including those related
to bad debts, inventories, goodwill, property, plant and equipment and income
taxes. Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company considers certain accounting policies
related to allowance for doubtful accounts, inventories, property, plant and
equipment, goodwill and income taxes to be critical policies due to the
estimation process involved in each.
Allowance for Doubtful Accounts: The Company's policy is to review its
-----------------------------------
customers' financial condition prior to extending credit and, generally,
collateral is not required. The Company utilizes letters of credit on foreign
or export sales where appropriate.
Inventories: Inventories are stated at the lower of cost (first-in, first-out)
------------
or market and consist of raw materials, work-in-process and finished goods.
Management evaluates the need to record adjustments for impairments of inventory
on a quarterly basis. The Company's policy is to assess the valuation of all
inventories, including raw materials, work-in-process and finished goods.
Property, Plant and Equipment: Property, plant and equipment are recorded at
---------------------------------
cost. Depreciation of property and equipment is provided using the straight-line
method over estimated useful lives ranging from 1 to 5 years. Depreciation of
the Labcaire building is provided using the straight-line method over the
estimated useful life of 50 years. Leasehold improvements are amortized over
the life of the lease or the useful life of the related asset, whichever is
shorter. The Company's policy is to periodically evaluate the appropriateness
of the lives assigned to property, plant and equipment and to make adjustments
if necessary.
18
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Goodwill: In July 2001, the Financial Accounting Standards Board issued
---------
Statement of Financial Accounting Standards ("SFAS") Nos. 141 ("SFAS 141") and
142 ("SFAS 142"), "Business Combinations" and "Goodwill and Other Intangible
Assets," respectively. SFAS 141 replaces Accounting Principles Board ("APB")
Opinion 16 "Business Combinations" and requires the use of the purchase method
for all business combinations initiated after June 30, 2001. SFAS 142 requires
goodwill and intangible assets with indefinite useful lives to no longer be
amortized, but instead be tested for impairment at least annually and whenever
events or circumstances occur that indicate goodwill might be impaired. With
the adoption of SFAS 142, as of July 1, 2001, the Company reassessed the useful
lives and residual values of all acquired intangible assets to make any
necessary amortization period adjustments. Based on that assessment, only
goodwill was determined to have an indefinite useful life and no adjustments
were made to the amortization period or residual values of other intangible
assets. SFAS 142 provides a six-month transitional period from the effective
date of adoption for the Company to perform an assessment of whether there is an
indication that goodwill is impaired. To the extent that an indication of
impairment exists, the Company must perform a second test to measure the amount
of impairment. The second test must be performed as soon as possible, but no
later than the end of the fiscal year. Any impairment measured as of the date
of adoption will be recognized as the cumulative effect of a change in
accounting principle. The Company performed the first test and determined that
there is no indication that the goodwill recorded is impaired and, therefore,
the second test was not required. The Company also completed its annual
goodwill impairment tests for fiscal 2002 in the fourth quarter. There were no
indications that goodwill recorded was impaired.
Income Taxes: Income taxes are accounted for in accordance with SFAS No. 109,
--------------
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at December 31, 2002 and June 30, 2002 was $13,545,504 and
$11,854,281, respectively. In the six months ended December 31, 2002, cash
provided by operations totaled $308,286. This was primarily due to the cash
paid for inventory purchased for unshipped orders offset by the receipt of a
portion of prepaid income taxes. In the six months ended December 31, 2002,
cash used in investing activities was $659,085, which primarily consisted of the
purchase of Labcaire stock, the purchase of property, plant and equipment during
the regular course of business and of loans made to Hearing Innovations. In the
six months ended December 31, 2002, cash provided by financing activities was
$620,566 which primarily consisted of proceeds from the exercise of stock
options and short-term borrowings offset by principal payments on capital lease
obligations.
19
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Regulatory Requirements
The Company's medical device products are subject to the regulatory requirements
of the Food and Drug Administration ("FDA"). A medical device as defined by the
FDA is a an instrument, apparatus implement, machine, contrivance, implant, in
vitro reagent, or other similar or related article, including a components,
part, or accessory, which is recognized in the official National Formulary, or
the United States Pharmacopoeia, or any supplement to them, intended for use in
the diagnosis of disease or other conditions, or in the cure, mitigation,
treatment, or prevention of disease, in man or animals, or intended to affect
the structure or any function of the body of man or other animals, and which
does not achieve any of its primary intended purposes through chemical action
within or on the body of man or other animals and which is not dependent upon
being metabolized for the achievement of any of its primary intended purposes.
All current devices manufactured and sold by the Company have all the necessary
regulatory approvals. The Company's products that are subject to FDA
regulations for product labeling and promotion comply with all applicable
regulations. The Company is listed with the FDA as a Medical Device
Manufacturer and has the appropriate Establishment Numbers in place. The
Company has post-market monitoring system in place such as Complaint Handling
and Medical Device Reporting procedures. The Company is not aware of any
situations which would be adverse at this time nor has the FDA sought legal
remedies available against or have there been any violations of its regulations
alleged against the Company.
Hearing Innovations, Inc.
---------------------------
During fiscal 2003, the Company entered into seven loan agreements whereby
Hearing Innovations is required to pay the Company an aggregate amount of
$159,666 due November 30, 2003. All notes bear interest at 8% per annum. The
notes are secured by a lien on all of Hearing Innovations' right, title and
interest in accounts receivable, inventory, property, plant and equipment and
processes of specified products whether now existing or arising after the date
of these agreements. The loan agreements contain warrants to acquire 159,766
shares of Hearing Innovations common stock, at the option of the Company, at a
cost of $.10 to $1.00 per share. These warrants, which are deemed nominal in
value, expire in October 2005. The Company recorded an allowance against the
entire balance of $159,666 and accrued interest for the above loans. The
related expense has been included in loss on impairment of investments in the
accompanying consolidated statements of operations. The Company believes the
loans and related interest are impaired since the Company does not anticipate
that these loans will be paid in accordance with the contractual terms of the
loan agreements.
Revolving Credit Facilities
-----------------------------
On July 1, 2002, Labcaire replaced its bank overdraft facility with HSBC Bank
plc with a debt purchase agreement with Lloyds TSB Commercial Finance. The
amount of this facility is approximately $1,384,000 ( 950,000) and bears
interest at the bank's base rate plus 1.75% and a service charge of .15% of
sales invoice value and fluctuates based upon the outstanding United Kingdom and
European receivables. The agreement expires on June 28, 2003 and covers all
United Kingdom and European sales.
Labcaire
--------
In October 2002, under the terms of the Labcaire Agreement (as discussed in the
Company's Annual Report on Form 10-K for the year ended June 30, 2002), the
Company paid $232,394 for 9,286 shares (2.70%) of the outstanding common stock
of Labcaire bringing the acquired interest to 100%. This represents the fiscal
2003 buy-back, as defined in the Labcaire Agreement.
20
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Recent Accounting Pronouncements
----------------------------------
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which supersedes both FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121") and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("Opinion 30"), for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS 144 retains the
fundamental provisions in SFAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
SFAS 121. For example, SFAS 144 provides guidance on how a long-lived asset
that is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike SFAS 121, SFAS 144 does not address the impairment of goodwill. Rather,
goodwill is evaluated for impairment under SFAS No. 142, "Goodwill and Other
Intangible Assets".
The Company is required to adopt SFAS 144 no later than the fiscal year
beginning after December 15, 2001. In the first quarter of fiscal 2003, the
Company adopted SFAS 144 for long-lived assets held for use. The adoption of
SFAS 144 did not have a material impact on the Company's financial statements
because the impairment assessment under SFAS 144 is largely unchanged from SFAS
121. The provisions of the Statement for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities. Therefore, management cannot determine the
potential effects that adoption of SFAS 144 will have on the Company's financial
statements.
Forward Looking Statements: This report contains certain forward looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, which are intended to be covered by the safe harbors
created thereby. Although the Company believes that the assumptions underlying
the forward looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward looking statements contained in this report will prove to be
accurate. Factors that could cause actual results to differ from the results
specifically discussed in the forward looking statements include, but are not
limited to, the absence of anticipated contracts, higher than historical costs
incurred in performance of contracts or in conducting other activities, product
mix in sales, results of joint venture and investment in related entities,
future economic, competitive and market conditions, and the outcome of legal
proceedings as well as management business decisions.
21
MISONIX, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk:
The principal market risks (i.e. the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed are interest rates
on short-term investments and foreign exchange rates, which generate translation
gains and losses due to the English Pound to U.S. Dollar conversion of Labcaire.
Foreign Exchange Rates:
Approximately 24% of the Company's revenues in the first and second quarters of
fiscal 2003 were received in English Pounds currency. To the extent that the
Company's revenues are generated in English Pounds, its operating results are
translated for reporting purposes into U.S. Dollars using rates of 1.57 and 1.46
for the six months ended December 31, 2002 and 2001, respectively. A
strengthening of the English Pound, in relation to the U.S. Dollar, will have
the effect of increasing its reported revenues and profits, while a weakening of
the English Pound will have the opposite effect. Since the Company's operations
in England generally sets prices and bids for contracts in English Pounds, a
strengthening of the English Pound, while increasing the value of its UK assets,
might place the Company at a pricing disadvantage in bidding for work from
manufacturers based overseas. The Company collects its receivables in the
currency the subsidiary resides in. The Company has not engaged in foreign
currency hedging transactions, which include forward exchange agreements.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
-----------------------------------------------------
Disclosure controls and procedures are designed to ensure the reliability of
financial statements and other disclosures included in this report. Within the
90 days prior to the filing of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective
and timely in alerting them to material information required to be included in
the Company's periodic Securities and Exchange Commission filings.
(b) Changes in Internal Controls
-------------------------------
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date the Company carried out its evaluation.
22
MISONIX, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 31.1 - Certification by Chief Executive Officer
Exhibit 31.2 - Certification by Chief Financial Officer
Exhibit 32.1 - Certification by Chief Executive Officer
Exhibit 32.2 - Certification by Chief Financial Officer
(b) There were no reports on Form 8-K filed during the quarter ended
December 31, 2002.
23
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 18, 2003
MISONIX, INC.
---------------------------------------------
(Registrant)
By: /s/ Michael A. McManus, Jr.
----------------------------------------
Michael A. McManus, Jr.
President and Chief Executive Officer
By: /s/ Richard Zaremba
----------------------------------------
Richard Zaremba
Vice President, Chief Financial Officer,
Treasurer and Secretary
24