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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file no. 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, New York 11735
---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-9555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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 past 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Issuer's revenues for its most recent fiscal year: $30,757,519
The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 30, 2001 (computed by reference to the average bid and
asked prices of such stock on such date) was approximately $36,355,181.
There were 6,049,115 shares of Common Stock outstanding at September 30, 2001.
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DOCUMENTS INCORPORATED BY REFERENCE
None
This Report on Form 10-K, and the Company's other periodic reports and other
documents incorporated by reference or incorporated herein as exhibits, may
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, general economic conditions, competition, technological
advances, claims or lawsuits, and the market's acceptance or non-acceptance of
the Company's products.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Misonix, Inc. ("Misonix" or the "Company") is a New York corporation, which,
through its predecessors, was first organized in 1959. The Company designs,
manufactures and markets ultrasonic medical devices. The Company also develops
and markets ultrasonic equipment for use in the scientific and industrial
markets, ductless fume enclosures for filtration of gaseous contaminates, and
environmental control products for the abatement of air pollution.
The Company's operations outside the United States, consists of a 94.65%
ownership in Labcaire Systems, Ltd. ("Labcaire"), which is based in North
Somerset, England. This business consists of designing, manufacturing and
marketing air-handling systems for the protection of personnel, products and the
environment from airborne hazards.
In fiscal 2001, approximately 26% of the Company's net sales were to foreign
markets. Labcaire, which acts as the European distributor of the Company's
industrial products and manufactures and sells the Company's fume enclosure line
as well as its own range of laboratory environmental control products,
represents approximately 85% of the Company's net sales to foreign markets.
Sales by the Company in other major industrial countries are made through
distributors.
There are no additional risks for products sold by Labcaire as compared to other
products marketed and sold by Misonix in the United States. Labcaire experiences
minimal currency exposure since major portions of its revenues are from the
United Kingdom. Labcaire revenues outside the United Kingdom are remitted in
British Pounds.
Misonix's 90% owned subsidiary, Acoustic Marketing Research, Inc. doing business
as Sonora Medical Systems, Inc. ("Sonora"), represents approximately 15% of the
net sales to foreign markets. These sales have no additional risks as most sales
are secured by letters of credit and are remitted in US currency.
MEDICAL DEVICES
In October 1996, the Company entered into a twenty-year license agreement (the
"USS License") with United States Surgical Corporation ("USS"), covering the
further development and commercial exploitation of the Company's medical
technology relating to ultrasonic cutting, which uses high frequency sound waves
to coagulate and divide tissue for both open and laproscopic surgery. The USS
License gives USS exclusive world-wide marketing and sales rights for this
technology and device. The Company received $100,000 under the option agreement
preceding the USS License. Under the USS License, the Company sells such device
to USS. In addition to receiving payment from USS for its orders of the device,
the Company has received aggregate licensing fees of $475,000 and receives
royalties based upon USS net sales of such device. Licensing fees from the USS
License are amortized over the term of the USS License. Also as part of the USS
License, the Company was reimbursed for certain product development
expenditures. There was no reimbursement for the fiscal year ended June 30,
2001. The amount of reimbursement was $53,563 and $61,800 for the fiscal years
ended June 30, 2000 and 1999, respectively. In November 1997, the Company began
manufacturing this device for USS and recognized its first revenues for this
product. Total sales of this device were approximately $7,685,000, $7,849,000
and $8,743,000 during the fiscal years ended June 30, 2001, 2000 and 1999,
respectively.
On March 30, 2000, the Company, Medical Device Alliance, Inc. ("MDA") and
LySonix, Inc. ("LySonix"), a subsidiary of MDA, signed a new ten-year exclusive
License Agreement ("MDA Agreement") for the worldwide marketing of the soft
tissue aspirator for aesthetic and cosmetic surgery applications. The MDA
Agreement calls for LySonix to purchase the soft tissue aspirators from Misonix
and exclusively represent the Company's products for the fragmentation and
aspiration of soft tissue. The new agreement has the following five major
differences from the prior agreement entered into in 1995: minimum annual
product quantity purchases; an escrow provision that will constitute
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guarantee of payment under all circumstances; provisions for a minimal amount of
capital infusion directly into marketing and selling of the product; provisions
for funding a specific number of sales people over a specific period of time;
and requires new management with extensive experience in aesthetic and cosmetic
surgery applications. Effective July 1, 2001, the MDA Agreement has become a
non-exclusive agreement due to the failure of MDA/LySonix to meet purchase
requirements and other terms of the MDA Agreement.
A competitor, Mentor Corporation ("Mentor"), instituted an action against the
Company, MDA, and LySonix for patent infringement (see "Legal Proceedings" for a
further discussion of this matter).
Fibra Sonics, Inc.
------------------
On February 8, 2001, the Company acquired certain assets and liabilities of
Fibra Sonics, Inc. ("Fibra Sonics"), a Chicago-based, privately-held producer
and marketer of ultrasonic medical devices for approximately $1,900,000. In
addition to the purchase price, contingent consideration of up to, but not
exceeding, $1,120,000, may be made based upon sales generated during the
consecutive twelve months commencing June 1, 2001. In the event any additional
payments are made to Fibra Sonics, such payments will be recorded as additional
goodwill. Subsequent to the acquisition, the Company relocated the assets of
Fibra Sonics to the Company's Farmingdale facility. The acquisition was
accounted for under the purchase method of accounting. Accordingly, the acquired
assets and liabilities have been initially recorded at their estimated fair
value at the date of acquisition. The excess of the cost of the acquisition
($1,723,208 plus acquisition costs of $144,696, which includes a broker fee of
$100,716) over the fair value of net assets acquired of $1,741,734 is being
treated as goodwill and is being amortized on a straight-line basis over a
period of 5 years. This acquisition gives the Company access to three important
new medical markets, namely, neurology with its Neuro Aspirator product, urology
and ophthalmology and also strengthens the Company's current presence in the
cosmetic surgery market with the sale of the Soft Tissue Aspirator.
Focus Surgery, Inc.
-------------------
On May 3, 1999, the Company entered into an agreement with Focus Surgery, Inc.
("Focus") to obtain a 20% equity position in Focus for $3,050,000. The agreement
provides for a series of development and manufacturing agreements whereby
Misonix would upgrade existing Focus products and create new products based on
high intensity focused ultrasound ("HIFU") technology for the non-invasive
treatment of tissue for certain medical applications. There have been 1,500
patients successfully treated for Benign Prostatic Hyperplasia ("BPH") outside
the U.S. utilizing the Sonablate(R). In the U.S., the Sonablate(R) completed
Phase III clinical trials for the noninvasive treatment of BPH, commonly known
as enlarged prostate. The Company is also utilizing HIFU technology to
successfully treat prostate cancer in Japan. There have been 35 people
successfully treated in Japan. In addition, Misonix has the right of first
refusal utilizing HIFU technology for the treatment of both benign and cancerous
tumors of the breast, liver and kidney. In December 2000, Focus Surgery received
Investigational Device Exemption ("IDE") from the FDA to treat 40 patients for
prostate cancer; these comprise 20 patients who have never been treated and 20
patients who have been successfully treated by another modality. The IDE will be
conducted at Indiana University Medical Center and Case Western Reserve Medical
Center.
On November 7, 2000, the Company purchased a $300,000, 5.1% Secured Cumulative
Convertible Debenture from Focus Surgery, due December 22, 2002 (the "5.1% Focus
Debenture"). The 5.1% Focus Debenture is convertible into 250 shares of Focus
Surgery preferred stock at the option of the Company at any time after December
22, 2000 for two years at a conversion price of $1,200 per share, if the 5.1%
Focus Debenture is not retired by Focus Surgery. Interest accrues and is payable
at maturity, or is convertible on the same terms as the Focus Debenture's
principal amount. The 5.1% Focus Debenture is secured by a lien on all of Focus
Surgery's right, title and interest in accounts receivable, inventory, property,
plant and equipment and processes of specified products whether now existing or
hereafter arising after the date of the 5.1% Focus Debenture. During the fourth
quarter of fiscal 2001, the Company recorded an allowance against the entire
balance of principal and accrued interest due at June 30, 2001 of $308,991. The
related bad debt expense has been included in loss on impairment of investment
in the accompanying consolidated statement of operations. The Company believes
the loan is impaired since the Company does not anticipate the 5.1% Focus
Debenture to be satisfied in accordance with the contractual terms of the loan
agreement.
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On April 12, 2001, the Company purchased a $300,000, 6% Secured Cumulative
Convertible Debenture from Focus Surgery, due May 25, 2003 (the "6% Focus
Debenture"). The 6% Focus Debenture is convertible into 250 shares of Focus
Surgery preferred stock at the option of the Company at any time after May 25,
2003 for two years at a conversion rate of $1,200 per share, if the 6% Focus
Debenture is not retired by Focus Surgery. Interest accrues and is payable at
maturity, or is convertible on the same terms as the 6% Focus Debenture's
principal amount. The 6% Focus Debenture is secured by a lien on all of Focus
Surgery's right, title and interest in accounts receivable, inventory, property,
plant and equipment and processes of specified products whether now existing or
hereafter arising after the date of the 6% Focus Debenture. During the fourth
quarter of fiscal 2001, the Company recorded an allowance against the entire
balance of principal and accrued interest due at June 30, 2001 of $303,667. The
related bad debt expense has been included in loss on impairment of investment
in the accompanying consolidated statement of operations. The Company believes
the loan is impaired since the Company does not anticipate the 6% Focus
Debenture to be satisfied in accordance with the contractual terms of the loan
agreement.
The Company's portion of the net losses of Focus Surgery were recorded since the
date of acquisition in accordance with the equity method of accounting. During
the fourth quarter of fiscal 2001, the Company evaluated the investment with
respect to the financial performance and the achievement of specific targets and
goals and determined that the equity investment was impaired and therefore the
Company recorded an impairment loss in the amount of $1,916,398. The net
carrying value of the investment at June 30, 2001 and 2000 is $0 and $2,381,418,
respectively.
Hearing Innovations, Inc.
-------------------------
On October 18, 1999, the Company and Hearing Innovations, Inc. ("Hearing
Innovations") completed the agreement whereby the Company invested an additional
$350,000 and cancelled notes receivable aggregating $400,000 in exchange for a
7% equity interest in Hearing Innovations and representation on its Board of
Directors. Warrants to purchase additional shares that would bring the Company's
interest in Hearing Innovations to over 15% were also a part of this agreement.
Upon exercise of the warrants, the Company has the right to manufacture Hearing
Innovations' ultrasonic products and also has the right to create a joint
venture with Hearing Innovations for the marketing and sale of its ultrasonic
tinnitus masker device. As of the date of the acquisition, the cost of
investment ($750,000 plus acquisition costs of $34,000) was being amortized on a
straight line basis over its estimated useful life of 10 years. Hearing
Innovations is focusing on multiple applications for its patented supersonic
bone conduction hearing technology. The HiSonic(R) is a 510(k) approved (FDA
approved) noninvasive hearing device that processes audible sounds into
supersonic vibrations that can be heard and understood as speech through bone
conduction. For the profoundly deaf, the HiSonic(R)is the only known available
alternative therapy to cochlear implant surgery. HiSonic(R)is completely
noninvasive and may cost 80% less than surgery. Tinnitus is characterized by
constant sound in the ear that can range from a metallic ringing, buzzing,
popping or nonrhythmic beating. Currently, it is estimated that 50 million
people suffer from Tinnitus, of which approximately 12 million cases are
considered severe. There are currently no cures but only temporary relief.
Hearing Innovations has tested an ultrasound device, which has resulted in 71%
of patients tested achieving either partial or complete masking as well as
partial residual inhibition. Hearing Innovations has submitted a 510(k) to the
FDA application for the Tinnitus product.
During the fourth quarter of fiscal 2000, the Company entered into four loan
agreements whereby Hearing Innovations was required to pay the Company amounts
of $24,000 due July 1, 2000, $45,000 due July 15, 2000, $29,000 due July 15,
2000 and $13,000 due July 15, 2000. During the first quarter of fiscal 2001, the
Company entered into an additional four loan agreements whereby Hearing
Innovations was required to pay the Company the total principal amounts of
$39,000, $13,000, $13,000 and $13,000 due September 15, 2000. All notes bore
interest at 8% per annum. The notes were secured by a lien on all of Hearing
Innovations' right, title and interest in accounts receivable, inventory,
property, plant and equipment and processes of specified products whether now
existing or hereafter arising after the date of these agreements. No payments
were made on the above notes. On September 11, 2000, the Company loaned an
additional $108,000 to Hearing Innovations, which together with the then
outstanding loans aggregating approximately $192,000 (with accrued interest)
described above were exchanged for a $300,000 7% Secured Convertible Debenture
due August 27, 2002 (the "Hearing Debenture") and warrants to acquire 66,667
shares of Hearing Innovations
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common stock at $2.25 per share. The Hearing Debenture is convertible at the
option of the Company at any time into shares of common stock of Hearing
Innovations at a conversion rate of $2.25 per share. Interest accrues and is
payable at maturity, or is convertible on the same terms as the Hearing
Debenture's principal amount. The warrants expire August 27, 2002. If the
Company were to convert the Hearing Debenture and exercise all warrants,
including those previously outstanding, the Company would hold an approximately
20% interest in Hearing Innovations. During the fourth quarter of fiscal 2001,
the Company recorded an allowance against the entire debenture balance of
principal and accrued interest due at June 30, 2001 of $316,625. The related bad
debt expense has been included in loss on impairment of investment in the
accompanying consolidated statement of operations. The Company believes the
Hearing Debenture is impaired since the Company does not anticipate such
Debenture to be satisfied in accordance with the contractual terms of the loan
agreement.
During fiscal 2001, the Company entered into fourteen loan agreements whereby
Hearing Innovations, was required to pay the Company amounts of $397,678 due May
30, 2002. 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 hereafter arising after the date of these
agreements. During the fourth quarter of fiscal 2001, the Company recorded an
allowance against the entire balance of $397,678 due at June 30, 2001. The
related bad debt expense has been included in loss on impairment of investment
in the accompanying consolidated statement of operations. The Company believes
the loans are impaired since the Company does not anticipate these loans will be
paid in accordance with the contractual terms of the loan agreements.
The Company's portion of the net losses of Hearing Innovations were recorded
since the date of acquisition in accordance with the equity method of
accounting. During the fourth quarter of fiscal 2001, the Company evaluated the
investment with respect to the financial performance and the achievement of
specific targets and goals and determined that the equity investment was
impaired and therefore the Company recorded an impairment loss in the amount of
$579,069. The net carrying value of the investment at June 30, 2001 and 2000 is
$0 and $688,118, respectively.
Sonora Medical Systems, Inc.
----------------------------
On November 16, 1999, the Company acquired a 51% interest in Sonora for
$1,400,000. Sonora authorized and issued new common stock for the 51% interest.
Sonora is utilized the proceeds of such sale to increase inventory and expand
marketing, sales and research and development efforts. An additional 4.7% was
acquired from the principals of Sonora on February 25, 2000, for $208,000,
bringing the acquired interest to 55.7%. The principals of Sonora sold an
additional 34.3% to Misonix on June 1, 2000 for approximately $1,407,000,
bringing the acquired interest to 90%. Sonora, located in Longmont, Colorado, is
an ISO 9002 certified refurbisher of high-performance ultrasound systems and
replacement transducers for the medical diagnostic ultrasound industry. Sonora
also offers a full range of aftermarket products and services such as its own
ultrasound probes and transducers, and other services that can extend the useful
life of its customers' ultrasound imaging systems beyond the usual five to seven
years. Sonora also has developed a three dimensional real time plug and play
device in conjunction with BioMedcom, LTD. The acquisition of Sonora was
accounted for under the purchase method of accounting. Accordingly, results of
operations for Sonora are included in the consolidated statement of operations
from the date of acquisition and acquired assets and liabilities have been
recorded at their estimated fair values at the date of acquisition. The excess
of the cost of the acquisition ($2,957,000 plus acquisition costs of $101,000,
which includes a broker fee of $72,000) over the fair value of net assets
acquired of $1,622,845 is being amortized on a straight-line basis over a period
of 5 years.
On October 12, 2000, the Company's subsidiary, Sonora, acquired the assets of
Sonic Technologies Laboratory Services ("Sonic Technologies"), an ultrasound
acoustic measurement and testing laboratory for approximately $320,000. The
assets of the Hatboro, Pennsylvania-based operations of privately-held Sonic
Technologies were relocated to Sonora's facility in Longmont, Colorado. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, acquired assets and liabilities have been recorded at their
estimated fair value at the date of acquisition. The excess of the cost of the
acquisition ($270,000 plus acquisition costs of $51,219, which includes a broker
fee of
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$25,000) over the fair value of net assets acquired of $301,219 is being
amortized on a straight-line basis over a period of 10 years.
On July 27, 2000, Sonora acquired 100% of the assets of CraMar Technologies,
Inc. ("CraMar"), an ultrasound equipment servicer for approximately $311,000.
The assets of the Colorado-based, privately-held operations of CraMar were
relocated to Sonora's facility in Longmont, Colorado. The acquisition was
accounted for under the purchase method of accounting. Accordingly, acquired
assets have been recorded at their estimated fair value at the date of
acquisition. The excess of the cost of the acquisition ($272,908 plus
acquisition costs of $37,898, which includes a broker fee of $25,000) over the
fair value of net assets acquired of $257,899 is being amortized on a
straight-line basis over a period of 5 years.
INDUSTRIAL PRODUCTS
The Company's other revenue-producing activities consist of the manufacturing
and sale of the Sonicator(R) ultrasonic liquid processor and cell disrupter, the
distribution of other ultrasonic equipment for scientific and industrial
purposes, the manufacturing and sale of Aura ductless fume enclosures for
filtration of gaseous contaminants and the manufacture and sale of Mystaire
scrubbers for the abatement of air pollution.
The Sonicator device is used to disrupt cells and bacteria. Similar procedures
are used in biotechnology in the production of medications and chemicals. The
Sonicator is also used in the acceleration of chemical reactions and the
extraction of proteins from cells such as Ecoli and Yeast. Sonication can strip
away the outer coating of a virus and fragment DNA for immunological studies. It
is also widely applied in manufacturing pharmaceuticals, homogenizing pigments
and dyes and improving the quality and consistency of these products. All these
processes are accomplished through the use of ultrasound, which creates a
reaction, called cavitation.
The Aura fume enclosures are ductless filtration and containment hoods which are
portable and easy to install. They work through forcing contaminated air through
a filter process that extracts the contaminants and introduces clean air back
into the environment. They eliminate the ductwork that is otherwise necessary
for exhausting to the outside air. The enclosures are sold to clinical,
research, educational and industrial laboratories for various industrial
purposes. Laboratory applications include working with organic solvents and
radioisotopes, chemical storage, chemical dispensing, pathology and histology.
Industrial markets for the product line include the pharmaceutical,
semiconductor manufacturing and asbestos containment industries. The fume
enclosures are a general purpose recirculating system with activated carbon
filters that purify air and remove airborne fumes, odors and particulates.
The technology used in the Aura ductless fume enclosures has been adapted for
specific uses in the crime laboratory. The Forensic Evidence Cabinet protects
wet evidence from contamination while it is drying and simultaneously protects
law enforcement personnel from evidence that can be noxious and hazardous. The
Cyanoacrylate (liquid glue) Fuming Chamber is used by fingerprinting experts to
develop fingerprints on non-porous surfaces. The highly hazardous cyanoacrylate
fumes must be safely controlled during the process.
The Mystaire scrubber is an air pollution abatement system, which removes
difficult airborne contaminants emitted from laboratory and industrial
processes. The contaminants are emulsified in a liquid and cleansed through a
series of filteres material. The scrubber operates on a broad range of
contaminants and is particularly effective on gaseous contaminants such as acid
gases, mists, particulate matter, negative gases and sulfur oxides. The Company
also manufactures a range of "point of use" scrubbers for the microelectronics
industry. This equipment eliminates low levels of toxic and noxious contaminants
arising from silicon wafer production.
In June 1992, the Company initially acquired an 81.4% interest in Labcaire for
$545,169. The total acquisition cost exceeded the fair value of the net assets
acquired by $241,299, which is being amortized over 25 years.
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Currently, the Company owns a 94.65% interest in Labcaire. The balance of the
capital stock of Labcaire is owned by four executives who have, under a purchase
agreement (the "Labcaire Agreement"), agreed to sell one-seventh of their total
holdings of Labcaire shares to the Company in each of seven consecutive years,
commencing with the fiscal year ended June 30, 1996. Under the Labcaire
Agreement, the Company is required to repurchase such shares at a price equal to
one-seventh of each executive's prorata share of 8.5 times Labcaire's earnings
before interest, taxes, and management charges for the preceding fiscal year.
Pursuant to the Labcaire Agreement, 9,284 shares (2.65%) of Labcaire common
stock were purchased by the Company for approximately $102,000 in October 1996
for the year ended June 30, 1997, 9,286 shares (2.65%) were purchased by the
Company for approximately $119,000 in October 1997 for the year ended June 30,
1998, 9,286 shares (2.65%) were purchased by the Company for approximately
$129,000 in October 1998 for the year ended June 30, 1999, 9,286 shares (2.65%)
were purchased by the Company for approximately $174,000 in October 1999 for the
year ended June 30, 2000, 9,286 shares (2.65%) were purchased by the Company for
approximately $117,000 in October 2000 for the year ending June 30, 2001 and
9,286 shares (2.65%) will be purchased by the Company for approximately $94,000
for the year ending June 30, 2002. The effective date of this transaction is
expected to be October 2001. As per the Labcaire Agreement, the Company is
obligated to purchase 2.65% for the next three years until the Company owns 100%
of Labcaire.
Labcaire's business consists of designing, manufacturing, and marketing air
handling systems for the protection of personnel, products and the environment
from airborne hazards. These systems work similar to the Aura fume enclosures
where they extract noxious disinfectant fumes through a series of filters to
introduce clean air back into the environment. There are no additional risks for
products sold by Labcaire as compared to other products marketed and sold by the
Company in the United States. Labcaire experiences minimal currency exposure
since a major portion of its revenues are from the United Kingdom. Revenues
outside the United Kingdom are remitted in British Pounds. Labcaire is also the
European distributor of the Company's ultrasonic industrial products. The
present management of Labcaire consists of four executives/minority interest
shareholders with experience in chemical containment and air handling
technologies. Labcaire manufactures class 100 biosafety hazard enclosures used
in laboratories to provide sterile environments and to protect lab technicians
from airborne contaminants, and class 100 laminar flow enclosures. Labcaire also
manufactures the Company's ductless fume enclosures for the European market and
sells the enclosures under its trade name. Labcaire has developed and now
manufactures and sells an automatic endoscope disinfection system ("Autoscope").
The Autoscope disinfects and rinses several endoscopes while abating the noxious
disinfectant fumes. Future improvements are expected to include new features
such as single channel flow monitoring, all improvements will be compliant with
the latest UK standards.
The Company's products are proprietary in that they primarily utilize ultrasound
as a technology base to solve both industrial and medical issues. The Company
has technical expertise in ultrasound and utilizes ultrasound in many
applications, which management believes makes the Company unique. The Company's
ultrasound technology is the core surrounding its business model.
MARKET AND CUSTOMERS
Medical Devices
The Company relies on its licensee, USS, for marketing its ultrasonic surgical
device. The Company relies on direct salespersons, distributors, such as
AESCULAP and CIRCON, and manufacturing representatives for the marketing of its
other medical products. The Company relies on its licensee MDA/LySonix for
marketing the Company's soft tissue aspirator for aesthetic and cosmetic surgery
applications (LySonix 2000).
Sonora relies on direct sales persons and distributors for the marketing of its
ultrasonic medical devices. Focus Surgery plans to sell and market its products
for BPH, once approved by the FDA, through a distribution partner in the US and
is currently utilizing a distribution partner in Japan and Europe. Hearing
Innovations plans on marketing and selling its products to the profoundly deaf
through distribution partners.
Industrial Products
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The Company relies on direct salespersons, distributors, manufacturing
representatives and catalog listings for the marketing of its industrial
products. The Company currently sells its products through five manufacturing
representatives and ten distributors in the United States. The Company currently
employs direct sales persons who operate outside the Company's offices and
conducts direct marketing on a regional basis.
The market for the Company's ductless fume enclosures includes laboratory or
industrial environments in which workers may be exposed to noxious fumes or
vapors. The products are suited to laboratories in which personnel perform
functions which release noxious fumes or vapors (including hospital and medical
laboratories), industrial processing (particularly involving the use of
solvents) and soldering, and other general chemical processes. The products are
particularly suited to users in the pharmaceutical, semiconductor,
biotechnology, and forensic industries.
The largest market for the Company's Sonicator includes research and clinical
laboratories worldwide. In addition, the Company has expanded its sales of the
ultrasonic processor into industrial markets such as paint, pigment, ceramic and
pharmaceutical manufacturers.
The Company views a wide range of industries as prospective customers for its
pollution abatement scrubbers. Scrubbers are usable in any industry or
environment in which airborne contaminants are created and, in particular,
semiconductor manufacturing, chemical processing and pharmaceuticals industries.
In fiscal 2001, approximately 26% of the Company's net sales were to foreign
markets. Labcaire, a subsidiary of the Company, acts as the European distributor
of the Company's industrial products and manufactures and sells the Company's
fume enclosure line as well as its own range of laboratory environmental control
products. Sales by the Company in other major industrial countries are made
through distributors.
MANUFACTURING AND SUPPLY
Medical Devices
The Company manufactures and assembles its medical devices at its production
facility located in Farmingdale, New York. The Company's products include
components manufactured by other companies in the United States. The Company
believes that it will not encounter difficulty in obtaining materials, supplies
and components adequate for its anticipated short-term needs.
Sonora manufactures and refurbishes its products at its facility in Longmont,
Colorado. Sonora is not dependent upon any single source of supply and has no
long-term supply agreements. The Company does not believe that Sonora will
encounter difficulty in obtaining materials, supplies and components adequate
for its anticipated short-term needs.
The Company is not dependent upon any single source of supply and has no
long-term supply agreements.
Industrial Products
The Company manufactures and assembles the majority of its industrial products
at its production facility located in Farmingdale, New York. The Company's
products include components manufactured by other companies in the United
States. The Company believes that Sonora will not encounter difficulty in
obtaining materials, supplies and components adequate for its anticipated
short-term needs. The Company is not dependent upon any single source of supply
and has no long-term supply agreements.
Labcaire manufactures and assembles its products at its facility located in
North Somerset, England. Labcaire is not dependent upon any single source of
supply and has no long-term supply agreements. The Company does not believe that
Labcaire will encounter difficulty in obtaining materials, supplies
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and components adequate for its anticipated short-term needs. Labcaire is not
dependent upon any single source of supply and has no long-term supply
agreements.
COMPETITION
Medical Devices
Competition in the medical and medical device industry is rigorous with many
companies having significant capital resources, large research laboratories and
extensive distribution systems in excess of the Company's. Some of the Company's
major competitors for our medical products are Johnson & Johnson, Inc., ESC
Medical Systems, Inc. and Surgical Medical Technologies, Inc.
Industrial Products
Competitors in the ultrasonic industry for industrial products range from large
corporations with greater production and marketing capabilities to smaller firms
specializing in single products. The Company believes that its significant
competitors in the manufacturing and distribution of industrial ultrasonic
devices are Branson Ultrasonics, a division of Emerson Electric Co., and Sonics
& Materials, Inc. It is possible that other companies in the industry are
currently developing products with the same capabilities as those of the
Company. The Company believes that the features of its Sonicator and the
Company's customer assistance in connection with particular applications give
the Sonicator a competitive advantage over comparable products.
Competitors in the air pollution abatement industry range from large,
multi-national corporations with greater production and marketing capabilities
whose financial resources are substantially greater and, in many cases, whose
share of the air pollution abatement market is significant as well as small
firms specializing in single products. The Company believes that its principal
competitors in the manufacturing and distribution of scrubbers are Ceilcote, a
division of ITEQ, Inc., and Duall Division, a division of Met-Pro Corporation.
The principal competitors for the ductless fume enclosure are Captair, Inc.,
Astec/Air Science Technologies, and Air Cleaning Systems, Inc. The Company
believes that specific advantages of its scrubbers include efficiency, price and
customer assistance and that specific advantages of its fume enclosures include
efficiency and other product features, such as durability and ease of operation.
PATENTS, TRADEMARKS, TRADE SECRETS AND LICENSES
Pursuant to a royalty free license agreement with an unaffiliated third party,
the Company has the right to use the trademark "Sonicator" in the United States.
The Company also owns trademark registrations for Mystaire in both England and
Germany.
The following is a list of the U.S. patents, which have been issued to the
Company:
Number Description Issue Date Expiration Date
------ ----------- ---------- ---------------
4,920,954 Cavitation Device - relating to the Alliger 05/01/1990 08/05/2008
System for applying ultrasonic arteries using a
generator, transducer and titanium wire.
5,026,167 Fluid Processing - relating to the Company's 06/25/1991 10/19/2009
environmental control product line for
introducing ozone and liquid into the cavitation
zone for an ultrasonic probe.
5,032,027 Fluid processing - relating to the Company's 07/16/1991 10/19/2009
environmental control product line for the
relating to the intimate mixing of ozone and
contaminated water for the purpose of
purification.
10
5,248,296 Wire with sheath - relating to the Company's 09/23/1993 12/24/2010
Alliger System for reducing transverse motion in
relating to the its catheters.
5,306,261 Guidewire guides - relating to the Company's 04/26/1994 01/22/2013
Alliger System for a catheter with collapsible
wire guide.
5,443,456 Guidewire guides - relating to the Company's 08/22/1995 02/10/2014
Alliger System for a catheter with collapsible
wire guide.
5,371,429* Flow-thru transducer - relating to the Company's 12/06/1994 09/28/2013
liposuction system and its ultrasonic industrial
products for an electromechanical transducer
device.
5,397,293 Catheter sheath -relating to the Company's 03/14/1995 11/25/2012
Alliger System for an ultrasonic device with
sheath and transverse motion damping.
5,419,761* Liposuction - relating to the Company's 05/30/1995 08/03/2013
liposuction apparatus and associated method.
11
Number Description Issue Date Expiration Date
------ ----------- ---------- ---------------
5,465,468 Flow-thru transducer - relating to the method of 11/14/1995 12/06/2014
making an electromechanical transducer device to
be used in conjunction with the soft tissue
aspiration system and the Company's ultrasonic
industrial products.
5,516,043 Atomizer horn - relating to an ultrasonic 05/14/1996 06/30/2014
atomizing device, which is used in the Company's
industrial products.
5,527,273* Ultrasonic probes - relating to an ultrasonic 06/18/1996 10/6/2014
lipectomy probe to be used
with the soft tissue aspiration
technology.
5,769,211 Autoclavable switch - relating to a medical 06/23/1998 01/21/2017
handpiece with autoclavable rotary
switch to be used in medical
procedures.
5,072,426 Shock wave hydrophone with self-monitoring 12/10/1991 02/08/2011
feature.
4,660,573 Ultrasonic lithotriptor probe. 04/28/1987 05/08/2005
4,741,731 Vented ultrasonic transducer for surgical 05/03/1988 02/14/2006
handpiece.
5,151,083 Apparatus for eliminating air bubbles in an 09/29/1992 07/29/2011
ultrasonic surgical device.
5,151,084 Ultrasonic needle with sleeve that includes a 09/29/1992 07/29/2011
baffle.
5,486,162 Bubble control device for an ultrasonic surgical 01/23/1996 01/11/2015
probe.
5,562,609 Ultrasonic surgical probe. 10/08/1996 10/07/2014
5,562,610 Needle for ultrasonic surgical probe. 10/08/1996 10/07/2014
5,904,669 Magnetic ball valves and control module. 05/18/1999 10/25/2016
6,033,375 Ultrasonic probe with isolated and teflon coated 03/07/2000 12/23/2017
outer cannula.
6,270,471 Ultrasonic probe with isolated outer cannula. 08/07/2001 12/23/2017
* Patents valid also in Japan, Europe and Canada.
12
The following is a list of the U.S. trademarks, which have been issued
to the Company:
Registration Registration
Number Date Mark Goods Renewal Date
------ ---- ---- ----- ------------
1,195,124 05/11/1982 Mystaire Scrubbers Employing Fine Sprays 05/11/2002
Passing Through Mesh for
Eliminating Fumes and Orders from
Gases.
1,219,008 12/07/1982 Sonimist Ultrasonic and Sonic Spray Nozzle 12/07/2002
for Vaporizing Fluid for
Commercial, Industrial and
Laboratory Use.
1,200,359 07/06/1982 Water Web Lamination of Screens to provide 07/06/2002
mesh to be inserted in fluid
stream for mixing or filtering of
fluids.
2,051,093 04/08/1997 Misonix Anti-Pollution Wet Scrubbers; 04/08/2002
Ultrasonic Cleaners; Spray Nozzles -04/08/2003
for Ultrasonic Cleaners.
2,051,092 04/08/1997 Misonix Ultrasonic Liquid Processors; 04/08/2002
Ultrasonic Biological Cell -04/08/2003
Disrupters; Ultrasonic Cleaners.
2,320,805 02/22/2000 Aura Ductless Fume Enclosures. 02/22/2005
-02/22/2006
BACKLOG
As of June 30, 2001, the Company's backlog (firm orders that have not yet been
shipped), including Labcaire, relating to industrial products was approximately
$2,900,000 as compared with approximately $2,300,000 as of June 30, 2000. The
Company's backlog relating to medical devices, including Sonora, were
approximately $4,300,000 at June 30, 2001, and approximately $6,700,000 at June
30, 2000. The Company's total backlog was $7,200,000 as of June 30, 2001,
compared to approximately $9,000,000 as of June 30, 2000.
EMPLOYEES
As of September 15, 2001, the Company, including Labcaire and Sonora, employed a
total of 184 full-time employees, including 29 in management and supervisory
positions. The Company considers its relationship with its employees to be good.
BUSINESS SEGMENTS
The following table provides a breakdown of net sales by business segment for
the periods indicated:
Fiscal year ended
June 30,
2001 2000 1999
---- ---- ----
(in thousands)
Medical devices $ 13,023 $11,582 $ 8,743
Industrial products 17,735 17,461 16,024
-------- ------- -------
Net sales $ 30,758 $29,043 $24,767
======== ======= =======
13
The following table provides a breakdown of foreign sales by geographic area
during the periods indicated:
Fiscal year ended
June 30,
2001 2000 1999
=======================================
(in thousands)
Canada and Mexico $ 165 $ 2,773 $ 429
United Kingdom 5,646 5,384 5,542
Europe 966 1,345 1,385
Asia 772 653 633
Middle East 139 334 167
Other 201 231 160
---------------------------------------
$ 7,889 $10,720 $ 8,316
=======================================
ITEM 2. PROPERTIES.
The Company occupies approximately 45,500 square feet at 1938 New Highway,
Farmingdale, New York under a lease expiring on June 30, 2005. The Company has
the right to extend the lease to June 30, 2010. The rental amount, which is
approximately $32,000 per month and includes a pro rata share of real estate
taxes, water and sewer charges, and other charges which are assessed on the
leased premises or the land upon which the leased premises are situated.
Labcaire owns a 20,000 square foot facility in North Somerset, England, which
was purchased, in fiscal 1999, for which there is a mortgage loan. Sonora
occupies approximately 14,000 square feet in Longmont, Colorado under a lease
expiring on July 2005. The rental amount is approximately $13,000 per month and
includes a pro rata share of real estate taxes, water and sewer charges, and
other charges which are assessed on the leased premises or the land upon which
the leased premises are situated. The Company believes that the leased
facilities are adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company, MDA and MDA's wholly-owned subsidiary, LySonix, were defendants in
an action alleging patent infringement filed by Mentor. On June 10, 1999, the
United States District Court, Central District of California, found for the
defendants that there was no infringement upon Mentor's patent. Mentor
subsequently filed an appeal. The issue concerned whether Mentor's patent is
enforceable against the Company and does not govern whether the Company's patent
in reference is invalid. On April 11, 2001, the United States Court of Appeals
for the Federal Circuit Court issued a decision reversing in large part the
decision of the trial court and granting the motion by Mentor against MDA,
LySonix and the Company for violation of Mentor's U.S. Patent No. 4,886,491.
This patent covers Mentor's license for ultrasonic assisted liposuction. Damages
were asserted in favor of Mentor for approximately $4,900,000 and $688,000 for
interest. The Court also granted a permanent injunction enjoining further sales
of the LySonix 2000 in the United States for the use of lyposuction. The Court
affirmed that the lower court did not have the ability to increase damages or
award attorneys' fees. Each defendant is jointly and severally liable as each
defendant infringed proportionally. Mentor requested further relief in the trial
court for additional damages. The Company and its co-defendants are considering
all alternatives including further legal measures that are available.
Accordingly, the Company accrued an aggregate of $6,176,000 for damages,
attorneys' fees, interest and other costs during the third quarter and fourth
quarter of fiscal year 2001.
The Company's revenues derived from sales of the LySonix 2000 instruments and
accessories were approximately $66,000, $948,000 and $164,000 during its fiscal
year ended June 30, 2001, 2000 and 1999, respectively, comprising approximately
.002%, 3.3% and .7%, respectively, of gross revenues.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the
last quarter of the fiscal year ended June 30, 2001.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's common stock, $.01 par value ("Common Stock"), is
listed on the NASDAQ National Market ("NMS") under the symbol "MSON".
The Company was listed on the NASDAQ Smallcap Market and was approved
for listing on the NMS on February 15, 2001.
The following table sets forth the high and low bid prices for the Common Stock
during the periods indicated as reported by the NMS. The prices reported reflect
inter-dealer quotations, may not represent actual transactions, and do not
include retail mark-ups, mark-downs or commissions.
Fiscal 2001: High Low
----------- ---- ---
First Quarter........................ $10.00 $ 6.38
Second Quarter....................... 9.12 4.59
Third Quarter........................ 9.00 6.94
Fourth Quarter....................... 7.50 5.45
Fiscal 2000: High Low
----------- ---- ---
First Quarter........................ $ 6.44 $ 4.88
Second Quarter....................... 5.75 4.69
Third Quarter........................ 11.94 5.13
Fourth Quarter....................... 10.00 7.00
(b) As of September 30, 2001, the Company had 6,051,115 shares of Common Stock
outstanding and 121 shareholders of record. This does not take into account
shareholders whose shares are held in "street name" by brokerage houses.
(c) The Company has not paid any dividends since its inception. The
Company currently does not intend to pay any cash dividends in the
foreseeable future, but intends to retain all earnings, if any, in its
business operations.
15
ITEM 6. SELECTED FINANCIAL DATA.
Selected income statement data:
Year Ended June 30,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net sales $30,757,519 $29,042,872 $ 24,767,163 $26,764,332 $ 17,560,041
Net (loss) income (4,492,290) 2,520,896 1,964,758 5,328,381 117,125
Net (loss) income per
share-Basic $ (.75) $ .42 $ .34 $ .94 $ .04
Net (loss) income per
share-Diluted $ (.75) $ .39 $ .30 $ .81 $ .03
Selected balance sheet data:
June 30,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Total assets $ 33,220,788 $ 31,163,622 $ 28,779,090 $ 25,328,956 $ 18,737,057
Long-term debt
and capital lease
obligations $ 1,027,921 $ 1,274,738 $ 1,271,814 $ 105,230 $ 135,195
Total stockholders'
equity $ 19,106,818 $ 23,882,188 $ 21,542,385 $ 19,252,427 $ 13,907,072
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
RESULTS OF OPERATION:
The following table sets forth, for the three most recent fiscal years, the
percentage relationship to net sales of principal items in the Company's
Consolidated Statements of Operations:
Fiscal year ended
June 30,
2001 2000 1999
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 51.3 54.3 51.1
----- ----- -----
Gross profit 48.7 45.7 48.9
----- ----- -----
Selling expenses 13.2 10.9 11.1
General and administrative expenses 21.3 18.8 18.9
Research and development expenses 5.9 4.7 4.0
Bad debt (recovery) expense (.1) (1.3) 8.6
Litigation settlement expenses 20.1 - -
----- ----- -----
Total operating expenses 60.4 33.1 42.6
----- ----- -----
(Loss) income from operations (11.7) 12.6 6.3
Other (expense) income (10.9) 1.7 5.8
----- ----- -----
(Loss) income minority interest and income
taxes (22.6) 14.3 12.1
Minority interest in net loss (income) of
consolidated subsidiaries .1 0 (.1)
----- ----- -----
(Loss) income before provision income taxes (22.5) 14.3 12.0
Income tax (benefit) provision (7.9) 5.6 4.1
----- ----- -----
Net (loss) income (14.6)% 8.7% 7.9%
===== ===== =====
16
The following discussion and analysis provides information which the Company's
management believes, is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein.
All of the Company's sales to date have been derived from the manufacture and
distribution of ultrasonic medical devices, ultrasonic equipment for scientific
and industrial purposes, ductless fume enclosures for filtration of gaseous
emissions in laboratories and environmental control equipment for the abatement
of air pollution.
Fiscal years ended June 30, 2001 and 2000
-----------------------------------------
Net sales. Net sales increased by 5.9% between the fiscal year ended June 30,
2000 and the fiscal year ended June 30, 2001 from $29,042,872 to $30,757,519.
This increase in net sales is due to the increase in sales of medical devices
and industrial products. The increase in medical devices of 12.4% is due to the
inclusion of twelve months of revenues of Sonora of $1,968,527, soft tissue
aspirator and lithotriptor sales of $771,242 from the acquisition of Fibra
Sonics offset by $1,299,388 of lower medical devices sales due to much lower
sales of the LySonix 2000 as a result of the litigation settlement described in
Item 3. Legal Proceedings. Industrial products increased $274,266 predominately
due to less Labcaire fume enclosure sales of $380,015, due to the weakening of
the English Pound which represents approximately $780,784 of the decrease in
Labcaire fume enclosure product sales due to the translation of pounds to
dollars. This decrease is offset by an increase in wet scrubber (Mystaire) sales
of $721,006. Revenues for the three-month period ended June 30, 2001 were
$8,945,114 compared to $8,455,546 for the same period in fiscal 2000. This
increase for the quarter ended June 30, 2001 is due to an increase in industrial
products sales of $766,829, which primarily consist of an increase in fume
enclosure product sales of $529,903 and an increase in wet scrubber (Mystaire)
sales of $346,648.
Export sales from the United States are remitted in US Dollars and export sales
for Labcaire are remitted in British Pounds. During fiscal 2001 and fiscal 2000,
the Company had foreign net sales of $7,889,426 and $10,719,509, respectively,
representing 25.5% and 36.9% of net sales for such years, respectively. The
decrease in foreign sales in fiscal 2001 as compared to fiscal 2000 is due to a
major Mystaire shipment of products to Canada, not typically a product that the
Company exports, in fiscal 2000. Additionally, foreign currency exchange rates
having an adverse effect of $780,784 on Labcaire's revenues of $6,697,807 in
fiscal year 2001 as compared to fiscal year 2000.
Gross profit. There was a increase in overall gross profit margin to 48.7% in
fiscal 2001 from 45.7% in fiscal 2000. Gross profit decreased to 39.7% of sales
in the three months ended June 30, 2001 from 43.6% of sales in the three months
ended June 30, 2000. The increase for the year ended is due to increased
operating efficiencies at Misonix and Sonora and opportunities in industrial
sales to capture higher prices. The decrease for the quarter is due to less
operating efficiency by the incorporation of the Fibra Sonics purchase into the
Company's New York facility and a higher mix of industrial sales than medical
devices sales, which traditionally have lower gross margins than medical devices
sales.
Selling expenses. Selling expenses increased $906,436 or 28.7% from $3,163,689
(10.9% of sales) in fiscal 2000 to $4,070,125 (13.2% of sales) in fiscal 2001.
Medical device selling expenses increased $605,180 primarily due to the
inclusion of a full year of Sonora's operations of $400,805 and increased sales
and marketing efforts in all medical devices of $167,001, such as hiring of
additional salesman. Industrial product selling expenses increased $301,256 due
to increased sales and marketing efforts in all industrial products, such as
hiring of additional salesman and increased advertising. Selling expenses
increased $284,023 or 32.2% from $881,936 (10.4% of sales) in the three months
ended June 30, 2000 to $1,165,959 (13% of sales) in the three months ended June
30, 2001, primarily due to increased sales and marketing efforts in medical
devices and industrial products, such as hiring of additional salesman.
General and administrative expenses. General and administrative expenses
increased $1,081,099 or 19.8% from $5,464,001 in the fiscal 2000 to $6,545,100
in fiscal 2001. The increase is primarily due to the inclusion a full year of
the consolidated results of Sonora of $343,636, increased expenditures for
17
investor relations activities of approximately $125,000, amortization of Sonora,
Labcaire, Sonic Technologies and Fibra Sonics goodwill of approximately $404,000
and expenses relating to the maintenance of the Fibra Sonics facility located in
Chicago during the transition to the Company's Farmingdale facility of
approximately $199,000. General and administrative expenses increased $286,513
or 17 % from $1,686,638 in the three months ended June 30, 2000 to $1,973,151 in
the three months ended June 30, 2001. The increase is primarily due to the
amortization of Sonora, Labcaire, Sonic Technologies and Fibra Sonics goodwill
of approximately $175,000 and expenses relating to the maintenance of the Fibra
Sonics facility located in Chicago during the transition to the Company's
Farmingdale facility of approximately $75,000.
Research and development expenses. Research and development expenses increased
$453,841 or 33% from $1,372,763 in fiscal 2000 to $1,826,604 in fiscal 2001. The
increase is primarily due to medical devices due to the inclusion of a full year
of the consolidated results of Sonora of $288,835 and increased development
costs associated with certain medical products of $107,095 and the remaining
increase of $57,911 is due to an increase in development costs associated with
the Sonicator 3000 and new ductless fume enclosure which will be available for
sale in fiscal 2002. Research and development expenses increased $149,589 or
49.7% from $300,999 in the three months ended June 30, 2000 to $450,588 in the
three months ended June 30, 2001. The increase is primarily related to the
Sonora subsidiary, which relate to development costs associated with certain
medical devices.
Bad debt (recovery) expense. Bad debt recovery expense decreased from $366,612
for fiscal 2000 to $33,698 for fiscal 2001. On October 22, 1998, the Company
reserved $1,700,000 against accounts receivable due and owing by MDA and its
wholly owned subsidiary, LySonix, as licensees for the Misonix ultrasonic soft
tissue aspirator. In December of 1998, an additional reserve was taken against
all remaining receivables from MDA and LySonix totaling $369,903. On June 30,
1999, the MDA and LySonix accounts receivable of $2,069,903 was written off
against the bad debt reserve, which a portion was later recovered in fiscal
2000.
On March 30, 2000, the Company, MDA and LySonix signed a new ten-year Exclusive
License Agreement ("MDA Agreement") for the marketing of the soft tissue
aspirator for aesthetic and cosmetic surgery applications. The MDA Agreement
called for LySonix to purchase the soft tissue aspirators and exclusively
represent the Company's products for the fragmentation and aspiration of soft
tissue. The Company was paid in full for the amounts due and owing by the return
of inventory by MDA and LySonix, which was in accordance with the MDA Agreement.
The Company recorded the receipt of inventory at the lower of cost or market,
thereby a recovery of bad debt expense of approximately $462,000 was recorded
during the third quarter of fiscal 2000. Effective July 1, 2001, the MDA
Agreement has become a non-exclusive agreement due to the failure of MDA/LySonix
to meet purchase requirements and other terms of the MDA Agreement.
Litigation settlement expenses. The Company recorded a litigation settlement
charge of $6,176,000 during fiscal 2001. On April 11, 2001, the United States
Court of Appeals for the Federal Circuit Court issued a decision reversing in
large part the decision of the trial court and granting the motion by Mentor
against MDA, LySonix and the Company for violation of Mentor's U.S. Patent No.
4,886,491. This patent covers Mentor's license for ultrasonic assisted
liposuction. Damages were asserted in favor of Mentor for approximately
$4,900,000 and $688,000 for interest. The Court also granted a permanent
injunction enjoining further sales of the LySonix 2000 in the United States for
the use of lyposuction. The Court affirmed that the lower court did not have the
ability to increase damages or award attorney's fees. Each defendant is jointly
and severally liable as each defendant infringed proportionally. Mentor
requested further relief in the trial court for additional damages. The Company
and its co-defendants are considering all alternatives including further legal
measures that are available. Accordingly, the Company accrued an aggregate of
$6,176,000 for damages, attorneys' fees, interest and other costs during the
third quarter and fourth quarter of fiscal year 2001.
Other income (expense). Other expense was $3,337,631 in fiscal 2001 as compared
to income of $492,241 in fiscal 2000. This decrease was principally due to the
write-down of the investments in capital stock of Focus Surgery and Hearing
Innovations of $2,495,467, the 5.1% Focus Debenture of $308,991, the 6 % Focus
Debenture of $303,667, the Hearing Debenture of $316,625 and the notes
receivable from Hearing Innovations of $397,678. During the fourth quarter of
fiscal 2001, the Company evaluated the equity investments of Focus and Hearing
Innovations with respect to the
18
financial performance and the achievement of specific targets and goals and
determined that the equity investment was impaired and therefore the Company
recorded an impairment loss in the amount of $2,495,467. The 5.1% Focus
Debenture, the 6% Focus Debenture, the Hearing Debenture and the notes
receivable from Hearing Innovations were reserved for as the Company believes
that such debentures and notes are impaired. The Company does not anticipate
these instruments to be repaid by their respective maturity dates.
Income taxes. For fiscal 2001, the Company recorded a tax benefit of $2,423,129
or 35% as compared to a tax provision of $1,630,961 or 39% for fiscal year 2000.
The current year tax benefits consisted of a reduction in the deferred tax
valuation allowance of $1,681,502 during the first quarter of 2001 offset by an
increase of the deferred tax valuation allowance of $2,030,514 in the third
quarter, relating to the write-down of the equity investments and related
debentures and notes.
In connection with the loss on impairment of equity investments, which included
the carrying value of the investments and related notes and debentures, the
Company recorded a deferred tax asset in the amount of $2,030,514. The Company
recorded a full valuation allowance against the asset in accordance with the
provisions of FASB statement No.109 "Accounting for Income Taxes". The valuation
allowance was determined by estimating the recoverability of the deferred tax
assets. In assessing the recoverability of the deferred tax asset, management
considered where then it is more likely than not that some portion or all the
deferred tax asset would not be realized. Based upon the capital nature of the
deferred tax asset and the Company's projections for future capital gains in
which the deferred tax asset would be deductible, management did not deem it
more likely than not that the asset would be recoverable at June 30, 2001.
The Company had previously recorded a reduction of the valuation allowance
applied against deferred tax assets in accordance with the provisions of FASB
statement No.109 "Accounting for Income Taxes" which provided a one-time income
tax benefit of $1,681,502 during the first quarter of fiscal year 2001. The
valuation allowance was established in fiscal year 1997 because the future tax
benefit of certain below market stock option grants issued at that time could
not be reasonably assured. The Company continually reviews the adequacy of the
valuation allowance and recognized the income tax benefit during the quarter due
to the reasonable expectation that such tax benefit will be realized due to the
fiscal strength of the Company. Management believes that it will generate
taxable income sufficient to realize the tax benefit associated with these
future deductible temporary differences and, therefore, the Company reduced the
valuation allowance during the first quarter of fiscal year 2001.
Fiscal years ended June 30, 2000 and 1999
-----------------------------------------
Net sales. Net sales increased by 17.3% between the fiscal year ended June 30,
1999 and the fiscal year ended June 30, 2000 from $24,767,163 to $29,042,872.
The increase for the period is due to an increase in therapeutic medical device
sales including shipments of the soft tissue aspirator, the consolidated
revenues of Sonora, and increased revenues of wet scrubbers (Mystaire),
partially offset by lower domestic fume enclosure and Labcaire shipments.
Revenues for the three-month period ended June 30, 2000 were $8,455,546 compared
to $7,523,095 for the same period in fiscal 1999. This increase for the quarter
ended June 30, 2000 is due to an increase in therapeutic medical devices
including shipments of the soft tissue aspirator, the consolidated revenues of
Sonora, and ultrasonic industrial sales, partially offset by lower Labcaire and
domestic fume enclosure sales. Foreign currency exchange rates had an adverse
effect on revenues for Labcaire in fiscal year 2000 as compared to fiscal year
1999.
During fiscal 2000 and fiscal 1999, the Company had foreign net sales of
$10,719,509 and $8,316,068, respectively, representing 36.9% and 33.6% of net
sales for such years, respectively. This increase in foreign sales from fiscal
1999 to fiscal 2000 is due to the shipment of a large wet scrubber (Mystaire)
contract.
Gross profit. There was a decrease in overall gross profit margin to 45.7% in
fiscal 2000 from 48.9% in fiscal 1999. The decrease is due to an unfavorable mix
of high and low margin product deliveries.
19
Selling, general and administrative expenses. There was a 16.2% increase, from
$7,427,449 to $8,627,690, in selling, general and administrative expenses from
fiscal 1999 to fiscal 2000. The increase for the period is primarily due to the
consolidated results for Sonora as well as increased expenditures for investor
relations activities.
Research and development expenses. Research and development expenses were
$1,372,763 in fiscal 2000 and $1,002,084 in fiscal 1999. The increased
development costs are associated with an increase in additional products under
development and outside clinical costs.
Bad debt (recovery) expense. Bad debt (recovery) expense decreased from an
expense of $2,131,218 for the period ended June 30, 1999 to a recovery of
$366,612 for the period ended June 30, 2000. On October 22, 1999, the Company
reserved $1,700,000 against accounts receivable due and owing by MDA and its
wholly owned subsidiary, LySonix, as licensees for the Misonix ultrasonic soft
tissue aspirator. In December 1999, an additional reserve was taken against all
remaining receivables from MDA and LySonix totaling $369,903. On June 30, 1999,
the MDA and LySonix accounts receivable of $2,069,903 was written off against
the bad debt reserve.
On March 30, 2000, the Company, MDA and LySonix signed the MDA Agreement for the
marketing of the soft tissue aspirator for aesthetic and cosmetic surgery
applications. The MDA Agreement calls for LySonix to purchase the soft tissue
aspirators from Misonix and exclusively represent the Company's products for the
fragmentation and aspiration of soft tissue. The Company was paid in full for
the amounts due and owing by the return of inventory by MDA and LySonix, which
is in accordance with the MDA Agreement. The Company recorded the receipt of
inventory at the lower of cost or market, thereby a recovery of bad debt expense
of $462,000 was recorded during the third quarter of fiscal 2000.
Other income (expense). Other income was $492,241 in fiscal 2000 and $1,436,085
in fiscal 1999. This decrease for the period was principally due to decreased
option/license fees recognized from the termination of the prior agreement with
MDA in January 1999 (approximately $357,000). The MDA Agreement discussed above
did not have an up front license fee. The decrease in other income is also due
to an increase in amortization and equity losses of the investments in capital
stock of Focus Surgery and Hearing Innovations.
Net income. For the fiscal year ended June 30, 2000, the Company recorded a
28.3% increase in net income to $2,520,896, or $.39 diluted earnings per share,
from $1,964,758, or $.30 diluted earnings per share, for the year ended June 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at June 30, 2001 and June 30, 2000 was $12,002,501 and
$17,280,404, respectively. The decrease in working capital is due to the
recording of the accrual for the litigation settlement. The Company recorded a
litigation settlement charge of $6,176,000 during the third and fourth quarter
of fiscal 2001. On April 11, 2001, the United States Court of Appeals for the
Federal Circuit Court issued a decision reversing in large part the decision of
the trial court and granting the motion by Mentor against MDA, LySonix and the
Company for violation of Mentor's U.S. Patent No. 4,886,491. This patent covers
Mentor's license for ultrasonic assisted liposuction. Damages were asserted in
favor of Mentor for approximately $4,900,000 and $688,000 for interest. The
Court also granted a permanent injunction enjoining further sales of the LySonix
2000 in the United States for the use of lyposuction. The Court affirmed that
the lower court did not have the ability to increase damages or award attorneys'
fees. Each defendant is jointly and severally liable as each defendant infringed
proportionally. Mentor requested further relief in the trial court for
additional damages. The Company and its co-defendants are considering all
alternatives including further legal measures that are available. Accordingly,
the Company accrued an aggregate of $6,176,000 for damages, attorneys' fees,
interest and other costs during the third quarter and fourth quarter of fiscal
year 2001.
The Company expects to pay the damages during fiscal 2002. The Company plans to
use existing cash, cash equivalents and investments as well as cash flow
generated from operations in fiscal 2002 to pay the damages assessed. The
Company is currently negotiating a $5,000,000 revolving credit facility
20
with a commercial bank to cover any potential short falls of the Company's cash
position as well as to support future working capital needs.
On August 29, 2001, Labcaire renewed its overdraft facility with HSBC Bank plc
until August 29, 2002. Under the new terms, the amount of this facility is
$840,000 and bears interest at the bank's base rate plus 2% up to $630,000 and
the bank's base rate plus 2.5% for amounts over $630,000. This facility is
secured by the assets of Labcaire.
The Company believes that its existing capital resources will enable it to
maintain its current and planned operations for at least 18 months from the date
hereof.
OTHER:
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
ITEM 7A. 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.
Interest Rates:
The Company's short-term investments, which approximated $2 million at June 30,
2001, are made up entirely of held to maturity investments, which include mostly
corporate bonds with a rating of A or higher. Assuming investment levels
remained the same, a one-point change in interest rates would not have a
material impact on the Company's interest income. The Company does not enter
into interest rate swap agreements.
Foreign Exchange Rates:
Approximately 22% of the Company's revenues in fiscal 2001 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 1.43 and 1.59 for the fiscal year ended June
30, 2001 and 2000, respectively. A strengthening of the English Pound, in
relation to the U.S. Dollar, will have the effect of increasing its reported
revenues and profits, while a weakening of the English Pound will have the
opposite effect. Since the Company's operations in England generally sets prices
and bids for contracts in English Pounds, a strengthening of the English Pound,
while increasing the value of its UK assets, might place the Company at a
pricing disadvantage in bidding for work from manufacturers based overseas. 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.
Euro Conversion:
The January 1, 1999 adoption of the Euro created a single-currency market in
much of Europe. For a transition period from January 1, 1999 through January 1,
2002, the existing local currencies are anticipated to remain legal tender as
denominations of the Euro. The Company does not anticipate that its operations
will be materially adversely affected by the conversion to the Euro. The Company
has analyzed the impact of conversion to the Euro on its existing systems and
operations and implemented modifications to its systems to enable the Company to
handle Euro invoicing for the transactions, which commenced in 1999. The Company
anticipates that the cost of such modifications should not have a material
adverse effect on its consolidated results of operations or liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The independent auditor's report and consolidated financial statements listed in
the accompanying index are filed as part of this report. See "Index to
Consolidated Financial Statements" on page 33.
21
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected financial data for each quarter of fiscal
2001. Although unaudited, this information has been prepared on a basis
consistent with the Company's audited consolidated financial statements and, in
the opinion of the Company's management, reflects all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of this information in accordance with accounting principles
generally accepted in the United States of America. Such quarterly results are
not necessarily indicative of future results of operations and should be read in
conjunction with the audited consolidated financial statements of the Company
and the notes thereto.
QUARTERLY FINANCIAL DATA:
FISCAL 2001
Q1 Q2 Q3 Q4 YEAR
Net sales $6,791,318 $7,616,531 $7,404,556 $8,945,114 $ 30,757,519
Gross profit 3,581,398 3,969,998 3,875,441 3,547,942 14,974,779
Operating Expenses 2,708,145 2,942,237 8,658,479 4,275,270 18,584,131
Income (loss) from operations 1,027,761 (4,783,038) (727,328) (3,609,352)
873,253
Other income (expense) 160,984 209,591 36,749 (3,744,955) (3,337,631)
Minority interest in net income
of consolidated subsidiaries (4,323) 30,566 (6,037) 11,358 31,564
Income tax (benefit) provision (1,304,246) 506,074 (1,832,997) 208,040 (2,423,129)
------------ --------- ------------ ------------ ------------
Net income (loss) $2,334,160 $ 761,844 $(2,919,329) $(4,668,965) $(4,492,290)
============ ========= ============ ============ ============
Net income (loss) per share-Basic $ .39 $ .13 $ (.48) $ (.77) $ (.75)
Net income (loss) per share -Diluted $ .36 $ .12 $ (.48) $ (.77) $ (.75)
FISCAL 2000
Q1 Q2 Q3 Q4 YEAR
Net sales $6,482,971 $7,284,134 $6,820,221 $8,455,546 $ 29,042,872
Gross profit 2,817,287 3,500,823 3,279,678 3,687,155 13,284,943
Operating Expenses 1,969,100 2,425,838 2,334,096 2,904,807 9,633,841
Income from operations 848,187 1,074,985 945,582 782,348 3,651,102
Other income 105,262 161,086 97,122 128,771 492,241
Minority interest in net income
of consolidated subsidiaries (2,977) (38,289) 7,289 42,491 8,514
Income tax provision (345,144) (487,208) (480,578) (318,031) (1,630,961)
--------- --------- --------- --------- ----------
Net income $ 605,328 $ 710,574 $ 569,415 $ 635,579 $2,520,896
========= ========= ========= ========= ==========
Net income per share-Basic $ .10 $ .12 $ .10 $ .11 $ .42
Net income per share -Diluted $ .09 $ .11 $ .09 $ .10 $ .39
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On February 6, 2001, the Board of Directors recommended and approved retaining
the firm of KPMG LLP to act as the Company's independent accountants for the
fiscal year ended June 30, 2001. The Company previously retained, the accounting
firm of Ernst & Young LLP. Ernst and Young, LLP, for the past two years did not
qualify, disclaim or have an adverse opinion on the Company's financial
statements. The Audit Committee and the shareholders have consented to the
change of accountants from Ernst and Young, LLP to KPMG, LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company currently has four Directors. Their term expires at the Annual
Meeting of Shareholders. The following table contains information regarding all
Directors and executive officers of the Company:
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
---- --- -------------------- -----
Gary Gelman 54 Chairman of the Board 1995
of Directors
Howard Alliger 74 Director 1971
Arthur Gerstenfeld 73 Director 1992
Michael McManus, Jr. 58 President and Chief 1998
Executive Officer
Richard Zaremba 46 Vice President, Chief Financial Officer, --
Secretary and Treasurer
Ronald Manna 47 Vice President of Research & Development
& Engineering --
Kenneth Coviello 49 Vice President - Medical Devices --
Bernhard Berger 38 Vice President - Industrial/Scientific Products --
Christopher Thomas 39 Vice President of Mystaire Products --
The following is a brief account of the business experience for the past five
years of the Company's Directors and executive officers:
GARY GELMAN, the founder of American Claims Evaluation, Inc., a publicly traded
company engaged in auditing hospital bills and providing vocational
rehabilitational counseling, has been Chairman of the Board and a Director of
that company for more than ten years. Since 1973, Mr. Gelman has also been Chief
Executive Officer of American Para Professional Systems, Inc., a privately held
entity, which provides nurses who perform physical examinations of applicants
for life and/or health insurance for insurance companies. He received a B.A
degree from Queens College. Mr. Gelman became a member of the Board of the
Company in 1995 and Chairman of the Board of the Company in March 1996.
HOWARD ALLIGER founded the Company's predecessor in 1955 and the Company was a
sole proprietorship until 1960. The Company name then was Heat
Systems-Ultrasonics. Mr. Alliger was
23
President of the Company until 1982 and Chairman of the Board until 1996. In
1996 Mr. Alliger stepped down as Chairman and was no longer a corporate officer.
He has been awarded 23 patents and has published various papers on ultrasonic
technology. For three years, ending in 1991, Mr. Alliger was the President of
the Ultrasonic Industry Association. Mr. Alliger holds a B.A. degree in
economics from Allegheny College and also attended Cornell University School of
Engineering for four years. He has also established, and is President of, two
privately held entities, which are engaged in pharmaceutical research and
development.
ARTHUR GERSTENFELD is currently Professor of Industrial Engineering and
Professor of Management at Worcester Polytechnic Institute, Worcester,
Massachusetts. Dr. Gerstenfeld received his Ph.D. and Masters degrees from
Massachusetts Institute of Technology (Sloan School of Management). He has
edited and authored seven books and approximately forty articles focusing on
innovation and productivity. Dr. Gerstenfeld's industrial experience has been as
founder, CEO, and Chairman of the Board of UFA, Inc. Dr. Gerstenfeld was
associated with UFA from 1985 to 1992. The business was based upon four patents
held by Mr. Gerstenfeld dealing with simulation systems for training of traffic
controllers.
MICHAEL MCMANUS, JR. became President and Chief Executive Officer of the Company
in November 1999. From November 1991 to March 1999, Mr. McManus was President
and Chief Executive Officer of New York Bancorp, Inc. Prior to New York Bancorp,
Inc., Mr. McManus held senior positions with Jamcor Pharmaceutical, Inc.,
Pfizer, Inc. and Revlon Corp. Mr. McManus also spent several years as an
Assistant to President Reagan. Mr. McManus holds a B.A. degree in Economics from
University of Notre Dame and a J.D. from Georgetown University Law Center.
RICHARD ZAREMBA became Vice President and Chief Financial Officer in February
1999. From March 1995 to February 1999, he was the Vice President and Chief
Financial Officer of Converse Information Systems, Inc., a manufacturer of
digital voice recording systems. Previously, Mr. Zaremba was Vice President and
Chief Financial Officer of Miltope Group, Inc., a manufacturer of electronic
equipment. Mr. Zaremba is a licensed certified public accountant in the state of
New York and holds BBA and MBA degrees in Accounting from Hofstra University.
RONALD MANNA became Vice President of Research and Development & Engineering of
the Company in June 2001. Prior thereto, Mr. Manna served as Vice President of
Operations and Director of Engineering of the Company. Mr. Manna holds a B.S.
degree in mechanical engineering from Hofstra University.
KENNETH COVIELLO became Vice President of Medical Products in June 2000 and
assumed the additional responsibility of Farmingdale plant operations in June
2001. Prior to joining the Company, he was Vice President-Sales and Marketing of
FNC Medical Corp. Mr. Coviello was Vice President of Graham Field Health
Products, Inc. from 1992 through 1998 and President of Lumex, a medical products
manufacturer and a division of Lumex/Cybex, Inc. from 1986 to 1991. Mr. Coviello
holds a B.S. degree in Marketing from Long Island University.
BERNHARD BERGER became Vice President of Industrial/Scientific Products in May
2001. Mr. Berger has approximately 20 years of sales and engineering experience
in ultrasonic products and process control instrumentation. From 1995 through
2000, he was Sales Manager - Worldwide of the ultrasonic products division of
Introltek International, an Edgewood, New York-based manufacturer of process
instrumentation. Mr. Berger holds a B.S. degree in Chemistry from Adelphi
University.
CHRISTOPHER THOMAS became Vice President of Mystaire Products in January 1999.
For three years prior thereto, he served as Director of Air Pollution
Technology. Prior to his employment with the Company, Mr. Thomas was an account
representative for the Business Imaging Systems Division of Eastman Kodak
Company. Mr. Thomas holds a B.S. degree in General Science from Villanova
University.
Executive officers are elected by and serve at the discretion of the board of
directors.
Each non-employee Director receives an annual fee of $20,000. In addition, Mr.
Gelman receives a special Chairman's fee of $15,000 per year. For the fiscal
year ended June 30, 2001, 50,000 stock
24
options were granted to Mr. Gelman and 25,000 stock options were granted to each
of Mr. Alliger and Dr. Gerstenfeld. Each non-employee Director is also
reimbursed for reasonable expenses incurred while traveling to attend meetings
of the Board of Directors or while traveling in furtherance of the business of
the Company.
COMPLIANCE WITH SECTION 16 (A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers, Directors and persons who own more than 10% of a
registered class of the Company's equity securities ("Reporting Persons") to
file reports of ownership and changes in ownership on Forms 3, 4, and 5 with the
Securities and Exchange Commission (the "SEC") and the National Association of
Securities Dealers, Inc. (the "NASD"). These Reporting Persons are required by
SEC regulation to furnish the Company with copies of all Forms 3, 4 and 5 they
file with the SEC and NASD. Based solely on the Company's review of the copies
of the forms it has received, the Company believes that all Reporting Persons
complied on a timely basis with all filing requirements applicable to them with
respect to transactions during fiscal year 2001.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth for the fiscal years indicated the compensation
paid by the Company to its Chief Executive Officer and any other executive
officers with annual compensation exceeding $100,000:
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
NAME AND PRINCIPAL FISCAL YEAR SECURITIES UNDERLYING
POSITION ENDED JUNE 30, SALARY ($) BONUS ($) OPTIONS GRANTED (#)
-------- -------------- ---------- --------- -------------------
Michael McManus, Jr. 2001 266,687 250,000 250,000
President and Chief 2000 250,000 250,000 0
Executive Officer 1999 166,667 0 300,000
Richard Zaremba 2001 135,610 33,000 30,000
Vice President, 2000 129,096 5,000 0
Chief Financial Officer, 1999 46,875 0 15,000
Secretary and Treasurer
Ronald Manna 2001 116,340 25,000 15,000
Vice President of 2000 113,808 15,000 0
Research & Development & 1999 107,481 0 20,000
Engineering
Kenneth Coviello 2001 126,620 0 10,000
Vice President of Medical 2000 4,808 0 0
Products 1999 0 0 0
Christopher Thomas 2001 95,201 22,000 15,000
Vice President of 2000 87,348 10,000 0
Mystaire Products 1999 111,013 0 15,000
EMPLOYMENT AGREEMENTS
In October 2000, the Company entered into an employment agreement with its chief
executive officer and president, which expires on October 31, 2002. This
agreement provides an annual base compensation of $275,000 with an annual bonus
at the discretion of the Board of Directors if certain objectives are achieved.
The agreement also provides for a guaranteed initial bonus of $250,000,
25
which is to be paid in December 2001. Mr. McManus can earn a higher bonus if
revenue and earnings targets as stipulated in his agreement are met. Mr. McManus
receives additional benefits that are generally provided to other employees of
the Company.
In conformity with the Company's policy, all of its Directors, officers and
employees execute confidentiality and nondisclosure agreements upon the
commencement of employment with the Company. The agreements generally provide
that all inventions or discoveries by the employee related to the Company's
business and all confidential information developed or made known to the
employee during the term of employment shall be the exclusive property of the
Company and shall not be disclosed to third parties without the prior approval
of the Company. Mr. Manna has an agreement with the Company which provides for
the payment of six months' severance upon his termination for any reason.
Messrs. McManus and Zaremba have agreements for the payment of six months'
annual base salary upon a change in control of the Company. The Company's
employment agreement with Mr. McManus also contains non-competition provisions
that preclude him from competing with the Company for a period of 18 months from
the date of his termination of employment.
OPTION GRANTS IN LAST FISCAL YEAR
Refer to the "Summary Compensation Table" for options granted to the executive
officers named in the Summary Compensation Table during the fiscal year ended
June 30, 2001.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
No options were exercised by any executive officer named in the Summary
Compensation Table during the fiscal year ended June 30, 2001. The following
table contains information concerning the number and value, at June 30, 2001, of
unexercised options held by executive officers named in the Summary Compensation
Table:
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
---- --------------------------- ------------------------------
Michael McManus, Jr. 425,000/125,000 $771,500/$0
Richard Zaremba 22,500/22,500 $ 63,450/$17,700
Ronald Manna 60,000/7,500 $ 97,200/$0
Kenneth Coviello 5,000/5,000 $0/$0
Christopher Thomas 34,500/7,500 $ 79,050/$0
-----------
(1) Fair market value of underlying securities (the closing price of the
Common Stock on the NASD Automated Quotation System) at June 30, 2001,
minus the exercise price.
EXECUTIVE COMPENSATION COMMITTEE REPORT
COMPENSATION POLICIES. The principal goal of our compensation program as
administered by the Board of Directors is to help us attract, motivate and
retain the executive talent required to develop and achieve our strategic and
operating goals with a view to maximizing shareholder value. The Compensation
Committee is responsible for considering and authorizing remuneration
arrangements for senior management. The key elements of this program and the
objectives of each element are as follows:
BASE SALARY. Base salaries paid to our executive officers are intended to be
competitive with those paid to executives holding comparable positions in the
marketplace. Individual performance and our performance are considered when
setting salaries within the range for each position. Annual reviews are held and
adjustments are made based on attainment of individual goals in a manner
consistent with operating and financial performance.
26
BONUSES. Annual cash bonuses are intended to motivate performance by creating
the potential to earn annual incentive awards that are contingent upon personal
and business performance. We set goals of revenue and profitability for each
group.
LONG TERM INCENTIVES. The Company provides its executive officers with long-term
incentive compensation through grants of stock options under the Company's stock
option plans. The grant of stock options aligns the executive's interest with
those of the Company's shareholders by providing the executive with an
opportunity to purchase and maintain an equity interest in the Company's stock
and to share in the appreciation of its value.
CEO'S COMPENSATION. As discussed in the Executive Compensation Table, Mr.
McManus received a base salary of $275,000 for fiscal 2001 and will receive a
bonus of $250,000 in December 2001. As per the agreement, both compensation and
bonus are guaranteed. Mr. McManus can earn a higher bonus if revenue and
earnings targets as stipulated in his agreement are met. The factors involved in
determining our CEO's compensation are our revenues and profits, his lengthy
experience and business acumen, his responsibilities, and the efforts exerted by
him in performance of his duties.
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKING AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS.
Mr. Alliger was the Chairman of the Board and a corporate officer of the Company
until 1996 when Mr. Alliger stepped down as Chairman and was no longer a
corporate officer.
Reported upon by the Compensation Committee
Gary Gelman Howard Alliger
STOCK OPTIONS
In September 1991, in order to attract and retain persons necessary for the
success of the Company, the Company adopted a stock option plan (the "1991
Plan") which covers up to 375,000 shares of Common Stock. Pursuant to the 1991
Plan, officers, Directors, consultants and key employees of the Company are
eligible to receive incentive and/or non-incentive stock options. At June 30,
2001, options to purchase 70,500 shares of Common Stock were outstanding under
the 1991 Plan at exercise prices ranging from $2.17 to $7.38 per share with a
vesting period ranging from immediate to two years and options to purchase
334,500 shares of Common Stock had been exercised or canceled.
In March 1996, the Board of Directors approved the 1996 Employee Incentive Stock
Option Plan covering an aggregate of 450,000 shares of Common Stock (the "1996
Plan") and the 1996 Non-Employee Director Stock Option Plan (the "1996 Directors
Plan") covering an aggregate of 1,125,000 shares of Common Stock of the Company.
At June 30, 2001, options to purchase 363,929 shares of Common Stock were
outstanding at exercise prices ranging from $3.07 to $18.50 with a vesting
period of immediate to two years under the 1996 Plan and options to acquire
773,500 shares of Common Stock were outstanding at exercise prices ranging from
$.73 to $7.10 with a vesting period of immediate to two years under the 1996
Directors Plan. At June 30, 2001, options to purchase 228,016 shares of Common
Stock under the 1996 Plan have been exercised or canceled. At June 30, 2001,
options to purchase 150,000 shares of Common Stock under the 1996 Directors Plan
have been exercised.
In October 1998, the Board of Directors adopted and, in January 1999, the
shareholders approved the 1998 Employee Stock Option Plan (the "1998 Plan")
covering an aggregate of 500,000 shares of Common Stock the Company. At June 30,
2001, options to purchase 496,175 shares of Common Stock were outstanding under
the 1998 Plan at exercise prices ranging from $3.07 to $7.31 per share with a
vesting period of immediate to two years. At June 30, 2001, options to purchase
31,750 shares of Common Stock under the 1998 Plan have been cancelled and
reissued and 1000 shares have been exercised.
In October 2000, the Board of Directors adopted and, in February 2001, the
shareholders approved the 2001 Employee Stock Option Plan (the "2001 Plan")
covering an aggregate of 1,000,000 shares of
27
Common Stock the Company. At June 30, 2001, no options to purchase shares of
Common Stock had been granted under the 2001 Plan.
The plans are administered by the Board of Directors with the right to designate
a committee. The selection of participants, allotments of shares and
determination of price and other conditions relating to options are determined
by the Board of Directors, or a committee thereof, in its sole discretion.
Incentive stock options granted under the plans are exercisable for a period of
up to ten years from the date of grant at an exercise price which is not less
than the fair market value of the Common Stock on the date of the grant, except
that the term of an incentive stock option granted under the plans to a
shareholder owning more than 10% of the outstanding Common Stock may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the Common Stock on the date of grant. Options shall become exercisable
at such time and in such installments as the Board shall provide in the terms of
each individual option.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of August 31, 2001, certain information with
regard to the ownership of the Company's Common Stock by (i) each beneficial
owner of 5% or more of the Company's Common Stock; (ii) each Director and
nominee for Director; (iii) each executive officer named in the "Summary
Compensation Table" above; and (iv) all executive officers and Directors of the
Company as a group. Unless otherwise stated, the persons named in the table have
sole voting and investment power with respect to all Common Stock shown as
beneficially owned by them.
PERCENT
COMMON STOCK OF
NAME AND ADDRESS (1) BENEFICIALLY OWNED CLASS
-------------------- ------------------ -----
Howard Alliger............................ 789,608 (2) 12.7
Gary Gelman .............................. 753,500 (3) 11.2
V4, Inc................................... 590,000 (4) 9.5
Michael McManus, Jr....................... 508,950 (5) 7.8
Dan Purjes................................ 381,597 (6) 6.1
Ronald Manna ............................. 112,894 (7) 1.8
Arthur Gerstenfeld........................ 98,600 (8) 1.6
Richard Zaremba .......................... 41,370 (9) *
Christopher Thomas........................ 36,262 (10) *
Kenneth Coviello.......................... 7,200 (11) *
All executive officers and
Directors as a group
(eight people)......................... 2,033,434 (12) 38.4
*Less than 1%
(1) Except as otherwise noted, the business address of each of the named
individuals in this table is c/o Misonix, Inc., 1938 New Highway,
Farmingdale, New York 11735.
(2) Includes 115,000 shares which Mr. Alliger has the right to acquire upon
exercise of stock options which are currently exercisable.
(3) Includes 603,500 shares which Mr. Gelman has the right to acquire upon
exercise of stock options which are currently exercisable.
(4) The business address of V4, Inc. is 201 S. Orange Avenue, Orlando, Florida
32801.
(5) Includes 425,000 shares which Mr. McManus has the right to acquire upon
exercise of stock options which are currently exercisable.
(6) The business address of Mr. Purjes is c/o Josephthal & Co. Inc., 200 Park
Avenue, New York, New York 10166.
(7) Includes 60,000 shares which Mr. Manna has the right to acquire upon
exercise of stock options which are currently exercisable.
(8) Includes 58,000 shares which Mr. Gerstenfeld has the right to acquire upon
exercise of stock options which are currently exercisable.
(9) Includes 22,500 shares which Mr. Zaremba has the right to acquire upon
exercise of stock options which are currently exercisable.
28
(10) Includes 34,500 shares which Mr. Thomas has the right to acquire upon
exercise of stock options which are currently exercisable.
(11) Includes 5,000 shares which Mr. Coviello has the right to acquire upon
exercise of stock options which are currently exercisable.
(12) Includes the shares indicated in notes (2), (3), (4), (7), (8), (9), (10)
and (11).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. (1) and (2) - The response to this portion of Item 14 is submitted as a
separate section of this report.
3. Exhibits
3(a) Restated Certificate of Incorporation of the Company. (1)
3(b) By-laws of the Company. (1)
10(a) Lease extension and modification agreement dated October 31,
1992. (3)
10(b) Stock Option Plan. (1)
10(g) Settlement and License Agreement dated March 12, 1984 between
the Company and Mettler Electronics Corporation. (1)
10(j) Assignment Agreement between the Company and Robert Ginsburg.
(2)
10(k) Subscription Agreement between the Company and Labcaire. (2)
10(l) Option Agreements between the Company and each of Graham
Kear, Geoffrey Spear, John Haugh, Martin Keeshan and David
Stanley. (2)
10(m) Stock Option Contract between the Company and Michael
Juliano. (2)
10(n) Form of Director's Indemnification Agreement. (2)
10(o) Stock Option Contract between the Company and Ronald Manna.
(4)
10(s) Severance Agreement between the Company and Ronald Manna. (4)
10(u) Option Agreement dated September 11, 1995 between the Company
and Medical Device Alliance Inc. (4)
10(w) Amendment to agreement with principal shareholders of
Labcaire Systems Ltd. (5)
10(y) Development and Option Agreement dated August 27, 1996
between the Company and United States Surgical Corporation.
(6)
10(z) License Agreement dated October 16, 1996 between the Company
and United States Surgical Corporation. (6)
29
10(aa) Amendment No. 1 dated January 23, 1997 to Underwriters'
Warrant Agreement. (6)
10(bb) 1996 Non-Employee Director Stock Option Plan. (7)
10(cc) 1996 Employee Incentive Stock Option Plan. (7)
10(ee) 1999 Employee Stock Option Plan. (8)
10(ff) Investment Agreement, dated as of May 3, 1999, by and between
the Company, and Focus Surgery, Inc. (9)
10(gg) Investment Agreement dated October 14, 1999 by and between
the Company and Hearing Innovations Incorporated. (10)
10(ii) Exclusive License Agreement dated as of February, 2001
between the Company and MDA, Inc. (10)
10(hh) Stock Purchase Agreement dated as of November 4, 1999 between
the Company and Acoustic Marketing Research Inc., (d/b/a
Sonora Medical Systems). (10)
10(gg) 6% Secured Convertible Debenture, dated April 12,2001, by
Focus Surgery, Inc. payable to the Company. (9)
10(hh) Asset Purchase Agreement dated January 16, 2001, by and among
the Company, Fibra-Sonics, Inc., Mary Anne Kirchschlager,
James Kirchschlager and James Conrad Kirchschlager. (9)
10(ii) Purchase and Sale Agreement, dated July 28, 2000, by and
between CraMar Technologies, Inc., Acoustic Marketing
Research, Inc. and Randy Muelot. (9)
10(jj) 7% Secured Convertible Debenture, dated August 28, 2000, by
Hearing Innovations, Inc. payable to the Company. (9)
10(kk) 5.1% Secured Convertible Debenture, dated November 7, 2000,
by Focus Surgery, Inc. payable to the Company. (9)
10(ll) Asset Purchase Agreement by and between Perceptron, Inc. and
Acoustic Market Research, Inc. d/b/a Sonora Medical Systems,
Inc. (9)
10(mm) First Amendment to Employment Agreement, dated October 13,
2000, by and between the Company and Michael A. McManus, Jr.
(9)
10(nn) 5.1% Secured Convertible Debenture of Focus Surgery, Inc.
payable to the Company. (9)
10(oo) Employment Agreement dated October 31, 1998 by and between
the Company and Michael A. McManus, Jr.
21 Subsidiaries of the Company.
23.1 Consent of independent public accountants to inclusion of
report in Form S-8 Registration Statement.
23.2 Consent of independent public accountants to inclusion of
report in Form S-8 Registration Statement.
30
-------------
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 (Reg. no. 33-43585).
(2) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year 1992.
(3) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the fiscal year 1993.
(4) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the fiscal year 1995.
(5) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the fiscal year 1996.
(6) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the fiscal year 1997.
(7) Incorporated by reference from the Company's definitive proxy statement
for the Annual Meeting of Shareholders held on February 19, 1997.
(8) Incorporated by reference from the Company's Registration Statement on
Form S-8 (file no. 333-78795).
(9) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2001.
(10) Incorporated by reference from the Company's Annual Report on Form 10-K/A
for the fiscal year 2001.
b. On January 8, 2001 the Company filed a Report on Form 8-K under the
caption "Item 4. Changes in Registrant's Certifying Accountant."
c. Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
MISONIX, INC.
By: /s/ Michael McManus, Jr.
------------------------
Michael McManus, Jr.
President and Chief
Executive Officer
Date: October 15, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Gary Gelman Chairman of the Board, October 15, 2001
--------------------------- Director
Gary Gelman
/s/ Michael McManus, Jr. President, Chief Executive October 15, 2001
--------------------------- Officer, and Director
Michael McManus, Jr. (principal executive officer)
/s/ Richard Zaremba Vice President, Chief Financial October 15, 2001
--------------------------- Officer, Treasurer and Secretary
Richard Zaremba (principal financial and
accounting officer)
/s/ Howard Alliger Director October 15, 2001
---------------------------
Howard Alliger
/s/ Arthur Gerstenfeld Director October 15, 2001
---------------------------
Arthur Gerstenfeld
32
Item 14(a)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Misonix, Inc. and Subsidiaries
Year Ended June 30, 2001
Page
Reports of Independent Auditors............................................34-35
Consolidated Balance Sheets--June 30, 2001 and 2000 ..........................36
Consolidated Statements of Operations--Years Ended
June 30, 2001, 2000 and 1999 ...............................................37
Consolidated Statements of Stockholders' Equity--Years Ended
June 30, 2001, 2000 and 1999 ...............................................38
Consolidated Statements of Cash Flows--Years Ended
June 30, 2001, 2000 and 1999 ............................................39-40
Notes to Consolidated Financial Statements....................................41
The following consolidated financial statement schedule is included in Item
14(a).
Schedule II-Valuation and Qualifying Accounts and Reserves
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
33
Report of Independent Auditors
The Board of Directors and Stockholders
Misonix, Inc.:
We have audited the accompanying consolidated balance sheet of Misonix, Inc. and
subsidiaries as of June 30, 2001 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year ended June 30,
2001. Our audit also included the financial statement schedule listed in the
index at Item 14(a). These consolidated financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Misonix, Inc. and
subsidiaries as of June 30, 2001, and the results of their operations and their
cash flows for the year ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ KPMG LLP
Melville, New York
September 24, 2001
34
Report of Independent Auditors
The Board of Directors and Stockholders
Misonix, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Misonix, Inc. and
Subsidiaries (the "Company") as of June 30, 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended June 30, 2000. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Misonix, Inc. and
Subsidiaries at June 30, 2000, and the consolidated results of their operations
and their cash flows for each of the two years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Melville, New York
August 9, 2000
35
Misonix, Inc. and Subsidiaries
Consolidated Balance Sheets
JUNE 30,
------------------------------------
ASSETS 2001 2000
------------------------------------
Current assets:
Cash and cash equivalents $ 3,774,573 $ 7,069,502
Investments held to maturity 2,015,468 3,021,268
Accounts receivable, less allowance for doubtful accounts of $157,761 and
$200,429, respectively 7,210,461 7,277,242
Inventories 7,874,372 4,273,223
Notes receivable - 111,876
Deferred income taxes 2,598,538 167,238
Prepaid expenses and other current assets 787,765 682,597
------------------------------------
Total current assets 24,261,177 22,602,946
Property, plant and equipment, net 3,195,748 3,111,112
Deferred income taxes 1,550,769 286,297
Goodwill, net of accumulated amortization of $737,083 and $211,516, respectively 4,069,497 2,007,151
Investment in Focus Surgery, Inc. and Hearing Innovations, Inc. - 3,069,536
Other assets 143,597 86,580
------------------------------------
Total assets $33,220,788 $31,163,622
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 542,532 $ 473,050
Accounts payable 3,527,449 2,053,192
Accrued expenses and other current liabilities 1,308,692 1,323,114
Litigation settlement liabilities 6,176,000 -
Income taxes payable 499,827 1,283,554
Current maturities of long-term debt and capital lease obligations 204,176 189,632
------------------------------------
Total current liabilities 12,258,676 5,322,542
Long-term debt and capital lease obligations 1,027,921 1,274,738
Deferred income 569,843 395,060
Minority interest 257,530 289,094
Stockholders' equity:
Common stock, $.01 par value--shares authorized 10,000,000; 6,121,915 and
5,967,817 issued, and 6,055,115 and 5,924,917 outstanding, respectively 61,219 59,678
Additional paid-in capital 21,924,987 21,801,969
Retained (deficit) earnings (2,197,720) 2,294,570
Treasury stock, 66,800 and 42,900 shares, respectively (358,237) (219,006)
Accumulated other comprehensive loss (323,431) (55,023)
------------------------------------
Total stockholders' equity 19,106,818 23,882,188
Commitments and contingencies (Note 10)
Total liabilities and stockholders' equity $33,220,788 $31,163,622
====================================
See Notes to Consolidated Financial Statements.
36
Misonix, Inc. and Subsidiaries
Consolidated Statements of Operations
YEAR ENDED JUNE 30,
2001 2000 1999
-------------------------------------------------------
Net sales $30,757,519 $29,042,872 $ 24,767,163
Cost of goods sold 15,782,740 15,757,929 12,649,496
-------------------------------------------------------
Gross profit 14,974,779 13,284,943 12,117,667
Operating expenses:
Selling expenses 4,070,125 3,163,689 2,740,993
General and administrative expenses 6,545,100 5,464,001 4,686,456
Research and development expenses 1,826,604 1,372,763 1,002,084
Bad debt (recovery) expense (33,698) (366,612) 2,131,218
Litigation settlement expenses 6,176,000 - -
-------------------------------------------------------
Total operating expenses 18,584,131 9,633,841 10,560,751
-------------------------------------------------------
(Loss) income from operations (3,609,352) 3,651,102 1,556,916
Other income (expense):
Interest income 538,016 660,002 601,685
Interest expense (145,436) (154,341) (107,793)
Option/license fees 24,313 24,312 405,510
Royalty income 665,292 636,657 627,063
Amortization of investments (230,900) (208,033) (25,417)
Loss on impairment of investments (3,822,428) - -
Equity in loss of Focus Surgery, Inc. (322,565) (421,785) (68,880)
Equity in loss of Hearing Innovations, Inc. (42,694) (40,349) -
Foreign currency exchange (loss) gain (1,949) (10,255) 3,382
Miscellaneous income 720 6,033 535
-------------------------------------------------------
Total other (expense) income (3,337,631) 492,241 1,436,085
(Loss) income before minority interest and income taxes (6,946,983) 4,143,343 2,993,001
Minority interest in net loss (income) of consolidated subsidiaries 31,564 8,514 (17,130)
-------------------------------------------------------
(Loss) income before provision for income taxes (6,915,419) 4,151,857 2,975,871
Income tax (benefit) provision (2,423,129) 1,630,961 1,011,113
-------------------------------------------------------
Net (loss) income $(4,492,290) $ 2,520,896 $ 1,964,758
=======================================================
Net (loss) income per share - Basic $ (.75) $ .42 $ .34
=======================================================
Net (loss) income per share - Diluted $ (.75) $ .39 $ .30
=======================================================
Weighted average common shares outstanding -Basic 6,009,482 5,937,685 5,862,445
=======================================================
Weighted average common shares outstanding - Diluted 6,009,482 6,516,387 6,624,009
=======================================================
See Notes to Consolidated Financial Statements.
37
Misonix, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
COMMON STOCK
$.01 PAR VALUE TREASURY STOCK
-------------- --------------
ACCUMULATED
NUMBER ADDITIONAL RETAINED OTHER TOTAL
NUMBER OF PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
OF SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) EQUITY
========================================================================================================
BALANCE, JUNE 30, 1998 5,767,680 $ 57,677 - - $21,383,491 $(2,191,084) $ 2,343 $ 19,252,427
Net income - - - - - 1,964,758 - 1,964,758
Foreign currency
translation adjustment - - - - - - (12,460) (12,460)
------------
Comprehensive income - - - - - - - 1,952,298
------------
Exercise of employee
options 159,750 1,598 - - 314,527 - - 316,125
Exercise of warrants 40 - - - - - - -
Non-cash compensation
charge - - - - 21,535 - - 21,535
--------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 5,927,470 59,275 - - 21,719,553 (226,326) (10,117) 21,542,385
Net income - - - - - 2,520,896 - 2,520,896
Foreign currency
translation adjustment - - - - - - (44,906) (44,906)
------------
Comprehensive income - - - - - - - 2,475,990
------------
Exercise of employee
options 40,347 403 - - 71,648 - - 72,051
Purchase of treasury stock - - (42,900) (219,006) - - - (219,006)
Non-cash compensation
charge - - - - 10,768 - - 10,768
--------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 5,967,817 $ 59,678 (42,900) $(219,006) $21,801,969 $ 2,294,570 $ (55,023) 23,882,188
Net loss - - - - - (4,492,290) - (4,492,290)
Foreign currency
translation adjustment - - - - - - (268,408) (268,408)
------------
Comprehensive loss - - - - - - - (4,760,698)
------------
Exercise of employee
options 154,098 1,541 - - 123,018 - - 124,559
Purchase of treasury stock - - (23,900) (139,231) - - - (139,231)
--------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2001 6,121,915 $ 61,219 (66,800) $(358,237) $21,924,987 $(2,197,720) $(323,431) $ 19,106,818
========================================================================================================
See Notes to Consolidated Financial Statements.
38
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED JUNE 30,
2001 2000 1999
----------------------------------------------
OPERATING ACTIVITIES
Net (loss) income $ (4,492,290) $2,520,896 $ 1,964,758
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Bad debt (recovery) expense (33,698) (366,612) 2,131,218
Deferred income tax (benefit) expense (3,695,772) (140,263) 215,740
Depreciation and amortization 1,244,313 793,205 409,893
Loss on disposal of equipment 52,293 58,289 -
Non-cash compensation charge - 10,768 21,535
Deferred income 174,783 (50,560) (381,288)
Foreign currency exchange loss (gain) 1,949 10,255 (3,382)
Minority interest in net (loss) income of subsidiaries (31,564) (8,514) 17,130
Equity in loss of Focus Surgery, Inc. 322,565 421,785 68,880
Equity in loss of Hearing Innovations, Inc. 42,694 40,349 -
Impairment loss of investments 3,822,428
Income tax benefit on exercise of stock options (261,394)
Changes in operating assets and liabilities:
Accounts receivable 55,104 (579,502) (43,598)
Inventories (3,502,973) (724,510) 74,953
Prepaid expenses and other current assets (155,272) (330,587) 533,033
Other assets (51,186) (16,065) 12,196
Accounts payable and accrued expenses 1,202,083 (1,670,172) 1,660,364
Litigation settlement liabilities 6,176,000 - -
Income taxes payable (536,986) 1,010,740 (1,305,975)
----------------------------------------------
Net cash provided by operating activities 333,077 979,502 5,375,457
----------------------------------------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (623,594) (317,667) (1,976,842)
Proceeds from sale of equipment - 110,617 -
Purchases of investments held to maturity (1,097,696) (3,004,064) (15,804,837)
Redemption of investments held to maturity 2,103,496 3,970,105 18,225,000
Purchase of Labcaire stock (117,349) (173,777) (129,172)
Cash paid for acquisition of Sonic Technologies
Laboratory Services (318,636) - -
Cash paid for acquisition of CraMar Technologies, Inc. (310,806) - -
Cash paid for acquisition of Fibra Sonics, Inc., net of cash
Acquired (1,741,904) - -
Purchase of convertible debentures - Focus Surgery, Inc. (612,658) - -
Purchase of convertible debentures - Hearing Innovations, Inc. (204,749) - -
Cash paid for investment in Hearing Innovations, Inc. - (384,000) -
Cash paid for investment in Focus Surgery, Inc. - - (3,050,000)
Loans to Hearing Innovations, Inc., net (397,687) (261,867) (250,000)
Cash paid for acquisition of Sonora Medical Systems, Inc.,
net of cash acquired (169,713) (1,463,789) -
----------------------------------------------
Net cash used in investing activities (3,491,296) (1,524,442) (2,985,851)
----------------------------------------------
(continued on next page)
39
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
FINANCING ACTIVITIES
(Payments of) proceeds from short-term borrowings, net 105,189 (26,348) (35,488)
Payment of revolving line of credit - (222,388) -
Principal payments on capital lease obligations (193,699) (243,119) (148,713)
Proceeds from long-term debt - - 1,283,256
Payment of long-term debt (43,629) (52,818) (27,388)
Proceeds from exercise of stock options 124,559 72,051 316,125
Purchase of treasury stock (139,231) (219,006) -
----------------------------------------------
Net cash (used in) provided by financing activities (146,811) (691,628) 1,387,792
----------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 10,101 (55,161) (9,078)
----------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,294,929) (1,291,729) 3,768,320
Cash and cash equivalents at beginning of year 7,069,502 8,361,231 4,592,911
----------------------------------------------
Cash and cash equivalents at end of year $3,774,573 $ 7,069,502 $ 8,361,231
==============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 111,850 $154,341 $ 99,750
==============================================
Income taxes $ 2,130,446 $931,437 $ 1,962,872
==============================================
NON-CASH INVESTING ACTIVITIES:
Conversion of notes receivable from Hearing Innovations
to debentures and common stock $ 111,876 $ 400,000 -
=================================================
See Notes to Consolidated Financial Statements.
40
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION, ORGANIZATION AND BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Misonix, Inc. ("Misonix" or the
"Company") include the accounts of Misonix, its 94.65% owned subsidiary,
Labcaire Systems, Ltd. ("Labcaire"), its 90% owned subsidiary, Acoustic
Marketing Research, Inc. doing business as Sonora Medical Systems, Inc.
("Sonora"), and its 100% owned subsidiary, Misonix, Ltd. Investments in
affiliates, which are not majority owned, are reported using the equity method
of accounting. All significant intercompany balances and transactions have been
eliminated.
ORGANIZATION AND BUSINESS
Misonix was incorporated under the laws of the State of New York on July 31,
1967 and its principal revenue producing activities, from 1967 to date, have
been the manufacturing and distribution of proprietary ultrasound equipment for
scientific and industrial purposes and environmental control equipment for the
abatement of air pollution. Misonix's products are sold worldwide. In October
1996 and March 2000, the Company entered into licensing agreements to further
develop two of its medical devices (see Note 14).
Labcaire, which began operations in February 1992, is located in the United
Kingdom, and its core business is the innovation, design, manufacture, and
marketing of air handling systems for the protection of personnel, products and
the environment from airborne hazards. Net sales to unaffiliated customers, net
income and total assets related to Labcaire as of and for the years ended June
30, 2001, 2000 and 1999 were approximately $6,698,000, $249,000 and $5,096,000;
respectively, $7,003,000, $381,000 and $5,031,000; respectively, and $7,129,000,
$386,000 and $5,010,000, respectively.
Sonora, which was acquired in November 1999 and is located in Longmont,
Colorado, is an ISO 9002 certified refurbisher of high-performance ultrasound
systems and replacement transducers for the medical diagnostic ultrasound
industry. Net sales to unaffiliated customers, net income and total assets
related to Sonora as of and for the years ended June 30, 2001 and 2000 were
approximately $4,625,000, $129,000 and $4,530,000; respectively, and $2,532,000,
$137,000 and $2,473,000, respectively.
Misonix, Ltd. was incorporated in the United Kingdom on July 19, 1993 and its
operations since inception have been insignificant to the Company. It is
presently dormant.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents at
June 30, 2001 was $1,114,940. There were no cash equivalents at June 30, 2000.
INVESTMENTS HELD TO MATURITY
The Company's investment consists of commercial paper, valued at amortized cost,
which approximates market. In accordance with the provisions of Financial
Accounting Standards Board (FASB) Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company classifies its
investments as held-to-maturity as the Company has both the intent and ability
to hold these securities until maturity. The Company's investment policy gives
primary consideration to safety of principal, liquidity and return. At June 30,
2001, 2000 and 1999, unrealized gains on held-to-maturity marketable securities
were immaterial.
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
41
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company's operations are located in Farmingdale, New York, North Somerset,
England and Longmont, Colorado. The Company's policy is to review its customers'
financial condition prior to extending credit and, generally, collateral is not
required. Sales of medical devices, which were made to one customer in 2001,
2000 and 1999, were approximately $7,685,000, $7,849,000 and $8,743,000,
respectively. Accounts receivable from this customer was approximately
$2,079,000 and $2,612,000 at June 30, 2001 and 2000, respectively. At June 30,
2001 and 2000 the Company's accounts receivable with customers outside the
United States were approximately $1,725,000 and $1,919,000, respectively, of
which $1,519,000 and $1,427,000, respectively, related to its Labcaire
operations. The Company utilizes letters of credit on foreign or export sales
where appropriate. Credit losses relating to both domestic and foreign customers
have historically been minimal and within management's expectations except as
related to Medical Device Alliance ("MDA") (see Note 12).
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
consists of 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 the 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, accounts receivable, accounts payable, and accrued
liabilities approximate their fair values principally because of the short-term
nature of these instruments. The carrying value of the Company's debt
approximates its fair value due to their variable interest rates based on prime
or other similar benchmark rates.
REVENUE RECOGNITION
The Company records revenue upon shipment for products shipped F.O.B. shipping
point. Products shipped F.O.B. destination point are recorded as revenue when
received at the point of destination. Shipments under agreements with
distributors are not subject to return, and payment for these shipments is not
contingent on sales by the distributor. The Company recognizes revenue on
shipments to distributors in the same manner as with other customers. Fees from
exclusive license agreements are recognized ratably over the terms of the
respective agreements. Royalty income is recognized when earned. The Company has
a warranty reserve, which has been estimated at the time revenue is recognized
based upon historical amounts of warranty expenditures and is adjusted as
additional information is received.
LONG-LIVED ASSETS
The carrying values of intangible and other long-lived assets are periodically
reviewed to determine if any impairment indicators are present. If it is
determined that such indicators are present and the review indicates that the
assets will not be fully recoverable, based on undiscounted estimated cash flows
over the remaining amortization and depreciation period, their carrying values
are reduced to estimated fair value. Impairment indicators include, among other
conditions, cash flow deficits, an historic or anticipated decline in revenue or
operating profit, adverse legal or regulatory developments, accumulation of
costs significantly in excess of amounts originally expected to acquire the
asset and a material decrease in the fair value of some or all of the assets.
Assets are grouped at the lowest level for which there are identifiable cash
flows that are largely independent of the cash flows generated by other asset
groups. No such impairment existed at June 30, 2001.
42
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in connection with the Company's acquisitions of 94.65% of
the common stock of Labcaire, 90% of the common stock of Sonora and the
acquisitions of Fibra Sonics, Inc. ("Fibra Sonics"), Sonic Technologies
Laboratory Services ("Sonic Technologies") and CraMar Technologies, Inc.
("CraMar"). The goodwill is being amortized using the straight-line method over
its estimated useful lives of 25 years for Labcaire, 5 years for Sonora, 5 years
for Fibra Sonics and CraMar and 10 years for Sonic Technologies. The Company
utilizes the undiscounted cash-flow method to assess any impairment of goodwill
and based upon this information the goodwill is not impaired.
OTHER ASSETS
The cost of acquiring or processing patents, trademarks, and other intellectual
properties are capitalized at cost. This amount is being amortized using the
straight-line method over the estimated useful lives of the underlying assets,
which is approximately 17 years.
INCOME TAXES
Income taxes are accounted for under the asset and liability 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 and 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 of deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
NET INCOME (LOSS) PER SHARE
Basic income (loss) per common share excludes any dilution. It is based upon
weighted average number of common shares outstanding during the period. Dilutive
earnings per share reflects the potential dilution that would occur if contracts
to issue common stock were exercised. Dilutive income per common share for
fiscal 2001 is the same as basic net loss per common share due to the
antidilutive effect of exercise of the assumed stock options. The following
table sets forth the reconciliation of weighted average shares outstanding and
diluted weighted average shares outstanding:
2001 2000 1999
---- ---- ----
Weighted average common shares outstanding 6,009,482 5,937,685 5,862,445
Dilutive effect of stock options - 578,702 761,564
--------- --------- ---------
Diluted weighted average common shares outstanding 6,009,482 6,516,387 6,624,009
========= ========= =========
Employee stock options totaling 1,704,104, 82,778 and 137,550, respectively, for
the years ended June 30, 2001, 2000 and 1999 were not included in the diluted
net income (loss) per share calculation because their effect would have been
anti-dilutive.
COMPREHENSIVE INCOME
Effective July 1, 1999, the Company adopted Statement No. 130, "Reporting
Comprehensive Income," ("Statement 130"). Statement 130 establishes rules for
the reporting of comprehensive income and its components. The components of the
Company's comprehensive income are net income and foreign currency translation
adjustments. The adoption of Statement 130 had no effect on the Company's
consolidated results of operations and financial position.
43
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
RECENT ACCOUNTING PRONOUNCEMENTS
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition in financial statements. The Company adopted SAB 101, as
required, during the fourth quarter of fiscal 2001. The impact from the adoption
of SAB 101 on the Company's consolidated financial statements was not material
to the Company's operating results or financial position.
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets", ("FASB 142"). FASB 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion 17,
"Intangible Assets". It addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition. FASB 142 also addresses how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. The provisions of this
statement are required to be applied starting with fiscal years beginning after
December 15, 2001. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not previously been issued. The Company anticipates adopting
FASB 142 during the first quarter of fiscal 2002 and the Company is currently
assessing the impact that this statement will have on the Company's consolidated
financial statements. Management believes there will be no material impact to
the Company's operating results and financial position.
FOREIGN CURRENCY TRANSLATION
The Company follows the policies prescribed by FASB Statement No. 52, "Foreign
Currency Translation," for translation of the financial results of its foreign
subsidiaries. Accordingly, assets and liabilities are translated at the foreign
currency exchange rate in effect at the balance sheet date. Resulting
translation adjustments due to fluctuations in the exchange rates are recorded
as other comprehensive income. Results of operations are translated using the
weighted average of the prevailing foreign currency rates during the fiscal
year. Stockholders' equity accounts are translated at historical exchange rates.
Gains and losses on foreign currency transactions are recorded in other income
and expense.
RESEARCH AND DEVELOPMENT
All research and development expenses are expensed as incurred and are included
in operating expenses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. Under APB 25, because the
exercise price of the Company's employee stock options is generally set equal to
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
44
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 consolidated financial
statements in order to conform with the 2001 presentation.
2. ACQUISITIONS
FIBRA SONICS, INC.
On February 8, 2001, the Company acquired certain assets and liabilities of
Fibra Sonics, Inc. ("Fibra Sonics"), a Chicago-based, privately-held producer
and marketer of ultrasonic medical devices for approximately $1,900,000. In
addition to the purchase price, contingent consideration of up to, but not
exceeding, $1,120,000, may be made based upon sales generated during the
consecutive twelve months commencing June 1, 2001. In the event any additional
payments are made to Fibra Sonics, such payments will be recorded as additional
goodwill. Subsequent to the acquisition, the Company relocated the assets of
Fibra Sonics to the Company's Farmingdale facility. The acquisition was
accounted for under the purchase method of accounting. Accordingly, the acquired
assets and liabilities have been initially recorded at their estimated fair
value at the date of acquisition. The excess of the cost of the acquisition
($1,723,208 plus acquisition costs of $144,696, which includes a broker fee of
$100,716) over the fair value of net assets acquired of $1,741,734 is being
treated as goodwill and is being amortized on a straight-line basis over a
period of 5 years.
SONIC TECHNOLOGIES LABORATORY SERVICES
On October 12, 2000, the Company's subsidiary, Sonora, acquired the assets of
Sonic Technologies, an ultrasound acoustic measurement and testing laboratory
for approximately $320,000. The assets of the Hatboro, Pennsylvania-based
operations of privately-held Sonic Technologies were relocated to Sonora's
facility in Longmont, Colorado. The acquisition was accounted for under the
purchase method of accounting. Accordingly, acquired assets and liabilities have
been recorded at their estimated fair value at the date of acquisition. The
excess of the cost of the acquisition ($270,000 plus acquisition costs of
$51,219, which includes a broker fee of $25,000) over the fair value of net
assets acquired of $301,219 is being amortized on a straight-line basis over a
period of 10 years.
LABCAIRE SYSTEMS, LTD.
In June 1992, the Company acquired an 81.4% interest in Labcaire Systems, Ltd.,
a U.K. company, for $545,169. The total acquisition cost exceeded the fair value
of the net assets acquired by $241,299, which is being amortized over 25 years.
The balance of the capital stock of Labcaire is owned by four executives of
Labcaire who had the right, under the original purchase agreement (the "Labcaire
Agreement"), to require the Company to repurchase such shares at a price equal
to its pro rata share of 8.5 times Labcaire's earnings before interest, taxes
and management charges for the preceding fiscal year.
In June 1996, this Labcaire Agreement was amended and each of the four directors
agreed to sell one-seventh of his total holdings of Labcaire shares to the
Company in each of the next seven consecutive years, commencing with fiscal year
1996. The price to be paid by the Company for these shares is based on the
formula outlined in the original Labcaire Agreement. Pursuant to the Labcaire
Agreement, 9,284 shares (2.65%) of Labcaire common stock were purchased by the
Company, in October 1996, for approximately $102,000 representing the fiscal
1997 buy-back portion, 9,286 shares (2.65%) of Labcaire common stock were
purchased by the Company, in October 1997, for approximately $119,000
representing the fiscal 1998 buy-back portion, 9,286 shares (2.65%) were
purchased by the Company, in October 1998, for approximately $129,000
representing the fiscal 1999 buy-back portion, 9,286 shares (2.65%) were
purchased by the Company, in October 1999, for approximately $174,000,
45
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
representing the fiscal 2000 buy-back portion, 9,286 shares (2.65%) were
purchased by the Company, in October 2000, for approximately $117,000,
representing the fiscal 2001 buy-back portion, bringing the acquired interest to
94.65%. 9,286 shares (2.65%) will be purchased by the Company, in October 2001,
for approximately $94,000. The cost of these purchases of Labcaire common stock
has been recorded as goodwill. As per the Labcaire Agreement, the Company is
obligated to purchase 2.65% for the next three years until the Company owns 100%
of Labcaire.
CRAMAR TECHNOLOGIES, INC.
On July 27, 2000, the Company's subsidiary, Sonora, acquired 100% of the assets
of CraMar, an ultrasound equipment servicer for approximately $311,000. The
assets of the Colorado-based, privately-held operations of CraMar were relocated
to Sonora's facility in Longmont, Colorado. The acquisition was accounted for
under the purchase method of accounting. Accordingly, acquired assets have been
recorded at their estimated fair value at the date of acquisition. The excess of
the cost of the acquisition ($272,908 plus acquisition costs of $37,898, which
includes a broker fee of $25,000) over the fair value of net assets acquired of
$257,899 is being amortized on a straight-line basis over a period of 5 years.
SONORA MEDICAL SYSTEMS, INC.
On November 16, 1999, the Company acquired a 51% interest in Sonora, for
$1,400,000. Sonora authorized and issued new common stock for the 51% interest.
Sonora utilized the proceeds of such sale to increase inventory and expand
marketing, sales and research and development efforts. An additional 4.7% was
acquired from the principals of Sonora on February 25, 2000 for $208,000,
bringing the acquired interest to 55.7%. The principals of Sonora sold an
additional 34.3% to Misonix on June 1, 2000 for approximately $1,407,000,
bringing the acquired interest to 90%. Sonora, located in Longmont, Colorado, is
an ISO 9002 certified refurbisher of high-performance ultrasound systems and
replacement transducers for the medical diagnostic ultrasound industry. Sonora
also offers a full range of aftermarket products and services such as its own
ultrasound probes and transducers, and other services that can extend the useful
life of its customers' ultrasound imaging systems beyond the usual five to seven
years. Sonora also has developed a three dimensional real time plug and play
device in conjunction with BioMedcom, LTD. The acquisition of Sonora was
accounted for under the purchase method of accounting. Accordingly, results of
operations for Sonora are included in the consolidated statement of income from
the date of acquisition and acquired assets and liabilities have been recorded
at their estimated fair values at the date of acquisition. The excess of the
cost of the acquisition ($2,957,000 plus acquisition costs of $101,000, which
includes a broker fee of $72,000) over the fair value of net assets acquired of
$1,622,845 is being amortized on a straight-line basis over a period of 5 years.
HEARING INNOVATIONS, INC.
On October 18, 1999, the Company and Hearing Innovations, Inc. ("Hearing
Innovations") completed the agreement whereby the Company invested an additional
$350,000 and cancelled notes receivable aggregating $400,000 in exchange for a
7% equity interest in Hearing Innovations and representation on its Board of
Directors. Warrants to purchase additional shares that would bring the Company's
interest in Hearing Innovations to over 15% were also a part of this agreement.
Upon exercise of the warrants, the Company has the right to manufacture Hearing
Innovations' ultrasonic products and also has the right to create a joint
venture with Hearing Innovations for the marketing and sale of its ultrasonic
tinnitus masker device. As of the date of the acquisition, the cost of
investment ($750,000 plus acquisition costs of $34,000) was being amortized on a
straight-line basis over its estimated useful life of 10 years. The Company's
portion of the net losses of Hearing Innovations were recorded since the date of
acquisition in accordance with the equity method of accounting. During the
fourth quarter of fiscal 2001, the Company evaluated the investment with respect
to the financial performance and the achievement of specific targets and goals
and determined that the equity investment was impaired and
46
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
therefore the Company recorded an impairment loss in the amount of $579,069. The
net carrying value of the investment at June 30, 2001 and 2000 is $0 and
$688,118, respectively.
During the fourth quarter of fiscal 2000, the Company entered into four loan
agreements whereby Hearing Innovations was required to pay the Company amounts
of $24,000 due July 1, 2000, $45,000 due July 15, 2000, $29,000 due July 15,
2000 and $13,000 due July 15, 2000. During the first quarter of fiscal 2001, the
Company entered into an additional four loan agreements whereby Hearing
Innovations was required to pay the Company the total principal amounts of
$39,000, $13,000, $13,000 and $13,000 due September 15, 2000. All notes bore
interest at 8% per annum. The notes were secured by a lien on all of Hearing
Innovations' right, title and interest in accounts receivable, inventory,
property, plant and equipment and processes of specified products whether now
existing or hereafter arising after the date of these agreements. No payments
were made on the above notes. On September 11, 2000, the Company loaned an
additional $108,000 to Hearing Innovations, which together with the then
outstanding loans aggregating $192,000 (with accrued interest) described above
were exchanged for a $300,000 7% Secured Convertible Debenture due August 27,
2002 (the "Hearing Debenture") and warrants to acquire 66,667 shares of Hearing
Innovations common stock at $2.25 per share. The Hearing Debenture is
convertible at the option of the Company at any time into shares of common stock
of Hearing Innovations at a conversion rate of $2.25 per share. Interest accrues
and is payable at maturity, or is convertible on the same terms as the Hearing
Debenture's principal amount. The warrants expire August 27, 2002. If the
Company were to convert the Hearing Debenture and exercise all warrants,
including those previously outstanding, the Company would hold an approximately
20% interest in Hearing Innovations. During the fourth quarter of fiscal 2001,
the Company recorded an allowance against the entire debenture balance of
principal and accrued interest due at June 30, 2001 of $316,625. The related bad
debt expense has been included in loss on impairment of investment in the
accompanying consolidated statement of operations. The Company believes the
Hearing Debenture is impaired since the Company does not anticipate such
Debenture to be satisfied in accordance with the contractual terms of the loan
agreement.
During fiscal 2001, the Company entered into fourteen loan agreements whereby
Hearing Innovations was required to pay the Company amounts of $397,678 due May
30, 2002. 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 hereafter arising after the date of these
agreements. During the fourth quarter of fiscal 2001, the Company recorded an
allowance against the entire balance of $397,678 due at June 30, 2001. The
related bad debt expense has been included in loss on impairment of investment
in the accompanying consolidated statement of operations. The Company believes
the loans are impaired since the Company does not anticipate these loans will be
paid in accordance with the contractual terms of the loan agreements.
Summarized financial information of Hearing Innoviations as of and for the year
ended June 30, 2001 is as follows:
Condensed Income Statement Information
2001
----
Sales $ 28,444
Gross profit $ 13,845
Net loss $ (609,914)
Condensed Balance Sheet Information
2001
----
Current assets $ 298,848
Non current assets $ 74,121
Current liabilities $ 2,103,838
Non current liabilities $ 300,000
Stockholder's deficit $(2,030,869)
47
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
FOCUS SURGERY, INC.
On April 12, 2001, the Company purchased a $300,000 6% Secured Cumulative
Convertible Debenture from Focus Surgery Inc. ("Focus"), due May 25, 2003 (the
"6% Focus Debenture"). The 6% Focus Debenture is convertible to 250 shares of
Focus Surgery preferred stock at the option of the Company at any time after May
25, 2003 for two years at a conversion price of $1,200 per share, if the 6%
Focus Debenture is not retired by Focus. Interest accrues and is payable at
maturity, or is convertible on the same terms as the 6% Focus Debenture's
principal amount. The 6% Focus Debenture is secured by a lien on all of Focus'
right, title and interest in accounts receivable, inventory, property, plant and
equipment and processes of specified products whether now existing or hereafter
arising after the date of the 6% Focus Debenture. During the fourth quarter of
fiscal 2001, the Company recorded an allowance against the entire balance of
principal and accrued interest due at June 30, 2001 of $303,667. The related bad
debt expense has been included in loss on impairment of investment in the
accompanying consolidated statement of operations. The Company believes the 6%
Focus Debenture is impaired since the Company does not anticipate such Debenture
to be satisfied in accordance with the contractual terms of the loan agreement.
On November 7, 2000, the Company purchased a $300,000 5.1% Secured Cumulative
Convertible Debenture from Focus, due December 22, 2002 (the "5.1% Focus
Debenture"). The 5.1% Focus Debenture is convertible into 250 shares of Focus
Surgery preferred stock at the option of the Company at any time after December
22, 2000 for two years at a conversion price of $1,200 per share, if the 5.1%
Focus Debenture is not retired by Focus. Interest accrues and is payable at
maturity, or is convertible on the same terms as the 5.1% Focus Debenture's
principal amount. The 5.1% Focus Debenture is secured by a lien on all of Focus'
right, title and interest in accounts receivable, inventory, property, plant and
equipment and processes of specified products whether now existing or hereafter
arising after the date of the 5.1% Focus Debenture. During the fourth quarter of
fiscal 2001, the Company recorded an allowance against the entire balance of
principal and accrued interest due at June 30, 2001 of $308,991. The related bad
debt expense has been included in loss on impairment of investment in the
accompanying consolidated statement of operations. The Company believes the 5.1%
Focus Debenture is impaired since the Company does not anticipate such Debenture
to be satisfied in accordance with the contractual terms of the loan agreement.
On May 3, 1999, the Company invested $3 million to obtain an approximately 20%
equity interest in Focus, a privately-held technology company. The agreement
provides for a series of development and manufacturing agreements whereby the
Company would upgrade existing Focus products and create new products based on
high intensity focused ultrasound ("HIFU") technology for the non-invasive
treatment of tissue for certain medical applications. The Company has the
optional rights to market and sell several other high potential HIFU
applications for the breast, liver, and kidney for both benign and cancerous
tumors. The excess of the cost of the investment ($3,000,000 plus acquisition
costs of $50,000) was being amortized on a straight-line basis over its
estimated useful life of 20 years. The Company's portion of the net losses of
Focus were recorded since the date of acquisition. During the fourth quarter of
fiscal 2001, the Company evaluated the investment with respect to the financial
performance and the achievement of specific targets and goals and determined
that the equity investment was impaired and therefore the Company recorded an
impairment loss in the amount of $1,916,398. The net carrying value of the
investment at June 30, 2001 and 2000 is $0 and $2,381,418, respectively.
48
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Summarized financial information of Focus as of and for the year ended June 30,
2001 and 2000 are as follows:
Condensed Income Statement Information
2001 2000
---- ----
Sales $ 716,960 $ 300,016
Gross profit $ 614,324 $ 215,409
Net loss $(1,612,827) $(2,108,913)
Condensed Balance Sheet Information
2001 2000
---- ----
Current assets $ 543,523 $ 1,120,071
Non current assets $ 487,530 $ 626,947
Current liabilities $ 700,329 $ 433,487
Non current liabilities $ 2,020,126 $ 1,390,106
Stockholder's deficit $ 1,689,402 $ 76,575
3. INVENTORIES
Inventories are summarized as follows:
JUNE 30,
2001 2000
Raw materials $3,617,258 $2,321,828
Work-in-process 860,834 362,664
Finished goods 3,396,280 1,588,731
---------------------------------
$7,874,372 $4,273,223
==================================
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
JUNE 30,
2001 2000
----------- -----------
Buildings $ 1,539,958 $ 1,789,051
Machinery and equipment 1,994,786 1,567,888
Furniture and fixtures 598,005 472,932
Automobiles 502,746 417,778
Leasehold improvements 200,973 52,588
----------- -----------
4,836,468 4,300,237
Less: Accumulated depreciation
and amortization (1,640,720) (1,189,125)
----------- -----------
$ 3,195,748 $ 3,111,112
=========== ===========
Included in machinery and equipment and furniture and fixtures at June 30, 2001
and 2000 is approximately $111,000 and $325,000 of data processing equipment and
telephone equipment under capital leases with related accumulated amortization
of approximately $36,000 and $200,000, respectively. Also, included in
automobiles are approximately $473,000 and $418,000, respectively, under capital
leases with accumulated amortization of approximately $130,000 and $58,000,
respectively. The Company leased approximately $207,000, $325,000 and $95,000 of
automobiles and
49
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
equipment under capital lease arrangements during the years ended June 30, 2001,
2000 and 1999, respectively.
Depreciation and amortization of property, plant and equipment amounted to
$546,787, 450,260 and 359,609 for the years ended June 30, 2001, 2000 and 1999,
respectively.
5. REVOLVING NOTE PAYABLE
Labcaire has an overdraft facility with a United Kingdom bank. As of June 30,
2001, the amount of this facility is $581,000 and bears interest at the bank's
base rate (5.25% and 6% at June 30, 2001 and 2000, respectively) plus 2%. This
facility is secured by the assets of Labcaire.
The facility is renewable on an annual basis in September. On August 29, 2001,
Labcaire renewed its overdraft facility with HSBC Bank plc until August 29,
2002. Under the new terms, the amount of this facility is $840,000 and bears
interest at the bank's base rate plus 2% up to $630,000 and the bank's base rate
plus 2.5% for amounts over $630,000.
The terms also stipulate that Labcaire's accounts receivable must be at least
175% of the outstanding balance of the facility at all times, and that Labcaire
must show an after tax profit of at least $155,000 for the prior four quarters.
At June 30, 2001 and 2000, the balance outstanding under this overdraft facility
was $542,532 and $473,050, respectively, and Labcaire was in compliance with all
financial covenants. If the overdraft facility were not renewed, the parent
company, Misonix would provide financial support to Labcaire.
6. DEBT
On January 22, 1999, Labcaire purchased a manufacturing facility in North
Somerset, England to house its operations. The purchase price was approximately
$2,100,000 and was partially financed with a mortgage loan of $1,283,256 from
the same bank that provides the overdraft facility. Borrowings under the
facility bear interest at the bank's base rate (5.25% and 6% at June 30, 2001
and 2000, receptively) plus 2% and are collateralized by a security interest in
all of the assets of Labcaire. The loan is payable in monthly installments of
$12,876 per month, including interest, over a term of fifteen years which began
in February 1999. There is a 1% prepayment penalty for early retirement of the
loan. As of June 30, 2001 and 2000, $989,671 and $1,203,050 were outstanding on
this loan, respectively.
At June 30, 2001, future principal maturities of long-term debt are as follows:
2002 $ 47,158
2003 53,493
2004 57,716
2005 61,939
2006 66,162
Thereafter 703,203
---------
$ 989,671
=========
50
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following summarizes accrued expenses and other current liabilities:
JUNE 30,
2001 2000
------------------------------
Accrued payroll and vacation $135,651 $111,764
Accrued sales tax 1,305 29,638
Accrued commissions and bonuses 440,603 413,292
Customer deposits 260,767 278,635
Accrued professional fees 45,889 117,640
Warranty 365,198 309,766
Other 59,279 62,379
---------- ----------
$1,308,692 $1,323,114
========== ==========
8. LEASES
Misonix has entered into several noncancellable operating leases for the rental
of certain office space, equipment and automobiles expiring in various years
through 2006. The principal leases for office space provides for a monthly
rental amount of approximately $46,000. The Company also leases certain office
equipment and automobiles under capital leases expiring through fiscal 2004.
The following is a schedule of future minimum lease payments, by year and in the
aggregate, under capital and operating leases with initial or remaining terms of
one year or more at June 30, 2001:
Capital Operating
Leases Leases
----------- ----------
2002 $174,849 $619,368
2003 88,149 615,218
2004 7,134 607,072
2005 - 608,506
2006 - 4,315
----------- ----------
Total minimum lease payments 270,132 $2,454,479
==========
Amounts representing interest (27,706)
-----------
Present value of net minimum lease payments
(including current portion of $157,018) $242,426
===========
Certain of the leases provide for renewal options and the payment of real estate
taxes and other occupancy costs. Rent expense for all operating leases was
approximately $622,000, $417,000 and $317,000 for the years ended June 30, 2001,
2000 and 1999, respectively.
9. STOCK BASED COMPENSATION PLANS
In September 1991, in order to attract and retain persons necessary for the
success of the Company, the Company adopted a stock option plan (the "1991
Plan") which covers up to 375,000 shares of common stock, $.01 par value
("Common Stock"). Pursuant to the 1991 Plan, officers, directors, consultants
and key employees of the Company are eligible to receive incentive and/or
non-incentive stock options. The 1991 Plan provides for the granting of, at the
discretion of the Board of Directors, options that are intended to qualify as
incentive stock options ("Incentive Stock Options") within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended (the "Code") to
certain employees and options not intended to so qualify ("Nonqualified Stock
Options") to employees, consultants and directors. At June 30, 2001, options to
purchase 70,500 shares of Common Stock were outstanding under the 1991 Plan at
exercise prices ranging from $2.17 to $7.38 per share with a vesting period
ranging from immediate to two years and options to purchase 334,500 shares of
Common Stock had been exercised or canceled.
51
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In March 1996, the Board of Directors approved the 1996 Employee Incentive Stock
Option Plan covering an aggregate of 450,000 shares of Common Stock (the "1996
Plan") and the 1996 Non-Employee Director Stock Option Plan (the "1996 Directors
Plan") covering an aggregate of 1,125,000 shares of Common Stock of the Company.
Both of these Plans and the transactions under which options to acquire 898,500
shares were granted were ratified and approved at the annual meeting of
shareholders on February 19, 1997. At June 30, 2001, options to purchase 363,929
shares of Common Stock were outstanding at exercise prices ranging from $3.07 to
$18.50 with a vesting period of immediate to two years under the 1996 Plan and
options to acquire 773,500 shares of Common Stock were outstanding at exercise
prices ranging from $.73 to $7.10 with a vesting period of immediate to two
years under the 1996 Directors Plan. At June 30, 2001, options to purchase
228,016 shares of Common Stock under the 1996 Plan have been exercised or
canceled. At June 30, 2001, options to purchase 150,000 shares of Common Stock
under the 1996 Directors Plan have been exercised.
In October 1998, the Board of Directors adopted and, in January 1999, the
shareholders approved the 1998 Employee Stock Option Plan (the "1998 Plan")
covering an aggregate of 500,000 shares of Common Stock the Company. At June 30,
2001, options to purchase 496,175 shares of Common Stock were outstanding under
the 1999 Plan at exercise prices ranging from $3.07 to $7.31 per share with a
vesting period of immediate to two years. At June 30, 2001, options to purchase
31,750 shares of Common Stock under the 1998 Plan have been cancelled and
reissued and 1000 shares have been exercised.
In October 2000, the Board of Directors adopted and, in February 2001, the
shareholders approved the 2001 Employee Stock Option Plan (the "2001 Plan")
covering an aggregate of 1,000,000 shares of Common Stock the Company. At June
30, 2001, no options to purchase shares of Common Stock had been granted under
the 2001 Plan.
The plans are administered by the Board of Directors with the right to designate
a committee. The selection of participants, allotments of shares and
determination of price and other conditions relating to options are determined
by the Board of Directors, or a committee thereof, in its sole discretion.
Incentive stock options granted under the plans are exercisable for a period of
up to ten years from the date of grant at an exercise price which is not less
than the fair market value of the Common Stock on the date of the grant, except
that the term of an incentive stock option granted under the plans to a
shareholder owning more than 10% of the outstanding Common Stock may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the Common Stock on the date of grant. Options shall become exercisable
at such time and in such installments as the Board shall provide in the terms of
each individual option.
Pro forma information regarding net income per share is required by Statement
123, and has been determined as if the Company had accounted for its stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions: risk-free interest rates
ranging from 5% to 6.52%; no dividend yields; volatility factor of the expected
market price of the Company's common stock of 84%, 87% and 88%; and a
weighted-average expected life of the options of five years for the years ended
June 30, 2001, 2000 and 1999, respectively.
The Company's pro forma information is as follows:
2001 2000 1999
Net Income (loss): As reported $(4,492,290) $2,520,896 $1,964,758
Pro forma (5,891,926) 1,908,019 1,313,964
Basic EPS: As reported (.75) .42 .34
Pro forma (.98) .32 .22
Diluted EPS: As reported (.75) .39 .30
Pro forma (.98) .26 .18
52
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As required by Statement 123, the fair value method of accounting has not been
applied to options granted prior to July 1, 1996. As a result, the pro forma
compensation expense may not be representative of that to be expected in future
years.
The following table summarizes information about stock options and warrants
outstanding at June 30, 2001, 2000 and 1999:
OPTIONS WARRANTS
--------------------------------------------------------------------
WEIGHTED AVG. WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------------------------------------------------------------------
June 30, 1998 1,184,000 $ 2.72 40 $ 4.00
Granted 469,650 4.20 - -
Exercised (159,750) 1.98 (40) 4.00
Canceled (81,850) 14.06 - -
--------------------------------------------------------------------
June 30, 1999 1,412,050 2.70 - -
Granted 48,695 6.91 - -
Exercised (40,347) 1.79 - -
Canceled (66,378) 8.10 - -
--------------------------------------------------------------------
June 30, 2000 1,354,020 2.62 -
-
Granted 532,525 7.23 - -
Exercised (154,098) .77 - -
Canceled (28,343) 6.57 - -
--------------------------------------------------------------------
June 30, 2001 1,704,104 $ 3.23 - $ -
====================================================================
2001 2000 1999
---- ---- ----
Weighted average fair value of options granted $ 5.02 $ 4.97 $ 3.02
The following table summarizes information about stock options outstanding at
June 30, 2001:
Weighted Average
Options Options Remaining
Exercise Price Outstanding Exercisable Contractual Life (Yrs)
--------------------------------------------------------------------------------
$ .73 628,500 628,500 6
$ 2.17 - 5.31 431,850 431,850 7
$ 5.50 - 7.57 618,754 399,667 8
$ 12.33 - 18.50 25,000 25,000 6
--------- ---------
1,704,104 1,485,017
========= =========
As of June 30, 2001 and 2000, 1,704,104 and 1,354,020 shares of common stock are
reserved for issuance under outstanding options and 1,218,626 and 680,633 shares
of common stock are reserved for the granting of additional options,
respectively. All outstanding options expire between February 2002 and August
2009 and vest immediately or over periods of one or two years.
During fiscal year 2001, the Company repurchased shares of its common stock in
the open market. As of June 30, 2001 and 2000, the Company had purchased 23,900
and 42,900 at an average price of $5.11 and $5.83 per share for an aggregate
amount of $139,231 and $219,006, respectively.
53
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company, MDA and MDA's wholly-owned subsidiary, LySonix, Inc. ("LySonix"),
were defendants in an action alleging patent infringement filed by Mentor
Corporation ("Mentor"). On June 10, 1999, the United States District Court,
Central District of California, found for the defendants that there was no
infringement upon Mentor's patent. Mentor had subsequently filed an appeal. The
issue concerned whether Mentor's patent is enforceable against the Company and
does not govern whether the Company's patent in reference is invalid. On April
11, 2001, the United States Court of Appeals for the Federal Circuit Court
issued a decision reversing in large part the decision of the trial court and
granting the motion by Mentor against MDA, LySonix and the Company for violation
of Mentor's U.S. Patent No. 4,886,491. This patent covers Mentor's license for
ultrasonic assisted liposuction. Damages were asserted in favor of Mentor for
approximately $4,900,000 and $688,000 for interest. The Court also granted a
permanent injunction enjoining further sales of the LySonix 2000 in the United
States for the use of lyposuction. The Court affirmed that the lower court did
not have the ability to increase damages or award attorneys' fees. Each
defendant is jointly and severally liable as each defendant infringed
proportionally. Mentor requested further relief in the trial court for
additional damages. The Company and its co-defendants are considering all
alternatives including further legal measures that are available. Accordingly,
the Company accrued an aggregate of $6,176,000 for damages, attorneys' fees,
interest and other costs during the third quarter and fourth quarter of fiscal
year 2001.
EMPLOYMENT AGREEMENT
In October 2000, the Company entered into an employment agreement with its chief
executive officer and president, which expires on October 31, 2002. This
agreement provides an annual base compensation of $275,000 with an annual bonus
at the discretion of the Board of Directors if certain objectives are achieved.
The agreement also provides for a guaranteed initial bonus of $250,000, which is
to be paid in December 2001. Mr. McManus can earn a higher bonus if revenue and
earnings targets as stipulated in his agreement are met.
11. BUSINESS SEGMENTS
Commencing in fiscal year 2001, the Company operates in two business segments
which are organized by product types: industrial products and medical devices.
Industrial products include the Sonicator ultrasonic liquid processor, Aura
ductless fume enclosure, the Autoscope endoscope disinfectant system from
Labcaire and the Mystaire scrubber. Medical devices include the Auto Sonix for
ultrasonic cutting and coagulatory systems, refurbishing revenues of
high-performance ultrasound systems and replacement transducers for the medical
diagnostic ultrasound industry, ultrasonic lithotriptor and ultrasonic soft
tissue aspirator. The Company evaluates the performance of the segments based
upon income (loss) from operations less general and administrative expenses, bad
debt expense and litigation settlement expenses which are maintained at the
corporate headquarters (corporate). The Company does not allocate assets by
segment as such information is not provided to the chief decision maker.
Summarized financial information for each of the segments for the twelve months
ended June 30, 2001 is as follows:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
----------- ----------- ------------- ------------
Net sales $13,022,541 $17,734,978 $ - $30,757,519
Cost of goods sold 6,632,524 9,150,216 - 15,782,740
----------- ----------- ------------
Gross profit 6,390,017 8,584,762 - 14,974,779
Selling expenses 842,805 3,227,320 - 4,070,125
Research and development 1,143,391 683,213 - 1,826,604
----------- ----------- ------------
Total operating
expenses 1,986,196 3,910,533 12,687,402 18,584,131
----------- ----------- -------------
Income (loss) from
operations $ 4,403,821 $ 4,674,229 $(12,687,402) $(3,609,352)
=========== =========== ============= ============
(a) Amount represents general and administrative, litigation settlement expenses
and bad debt recovery.
54
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Approximately $7,685,000, of the medical device sales were made to one customer.
Accounts receivable from this customer was approximately $2,079,000 at June 30,
2001. There was no significant sales or accounts receivable for industrial
products for the year ended June 30, 2001.
The following table provides a breakdown of net sales by business segment for
the periods indicated:
Fiscal year ended
June 30,
2001 2000 1999
-------- -------- --------
(in thousands)
Medical devices $ 13,023 $ 11,582 $ 8,743
Industrial products 17,735 17,461 16,024
-------- -------- --------
Net sales $ 30,758 $ 29,043 $ 24,767
======== ======== ========
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
Year ended June 30,
2001 2000 1999
===========================================
United States $22,868,093 $18,323,363 $16,451,095
Canada and Mexico 164,526 2,772,413 428,777
United Kingdom 5,646,655 5,383,518 5,541,712
Europe 966,349 1,345,879 1,385,428
Asia 771,805 652,841 633,422
Middle East 138,898 333,904 167,042
Other 201,193 230,954 159,687
-------------------------------------------
$30,757,519 $29,042,872 $24,767,163
===========================================
12. BAD DEBT RECOVERY
During fiscal 1999, the Company incurred bad debt expense of $2,069,903 against
accounts receivable due and owing by MDA and LySonix, as licensees for the
Misonix ultrasonic soft tissue aspirator relating to unpaid shipments and
royalties. The write-off relates to product shipments and royalties, in the
amounts of $1,592,235 and $477,668, respectively. A notice of default on the
license agreement with these parties was transmitted by the Company pursuant to
which the license agreement was terminated on January 11, 1999.
On March 30, 2000, the Company and MDA's subsidiary, LySonix, signed a new
ten-year Exclusive License Agreement ("MDA Agreement") for the marketing of the
soft tissue aspirator for aesthetic and cosmetic surgery applications. The MDA
Agreement calls for LySonix to purchase the soft tissue aspirators and
exclusively represent the Company's products for the fragmentation and
aspiration of soft tissue. The Company was paid in full for the amounts due and
owing by the return of inventory by MDA and LySonix, which is in accordance with
the MDA Agreement. The Company recorded the receipt of inventory at the lower of
its original cost or market, thereby a recovery of bad debt expense
55
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
of approximately $462,000 was recorded during the third quarter of fiscal 2000.
Effective July 1, 2001, the MDA Agreement has become a non-exclusive agreement
due to the failure of MDA/LySonix to meet purchase requirements and other terms
of the MDA Agreement.
13. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are presented below:
2001 2000
============ ============
Deferred tax assets:
Bad debt reserves $ 34,672 $ 46,757
Inventory valuation 231,172 89,016
License fee income 144,592 146,172
Investments 2,030,514 157,126
Non-cash compensation charge 1,393,509 1,681,502
Litigation settlement 2,288,760 -
Depreciation 12,668 -
Other 43,934 31,465
------------ ------------
Total deferred tax assets 6,179,821 2,152,038
Valuation allowance (2,030,514) (1,681,502)
Deferred tax liabilities: - -
Depreciation - (17,001)
------------ ------------
Net deferred tax asset $4,149,307 $453,535
============ ============
As of June 30, 2001, the valuation allowance was determined by estimating the
recoverability of the deferred tax assets. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. In
making this assessment, the ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income and tax planning
strategies in making this assessment. Based on the level of historical income
and projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences, net of
the existing valuation allowances at June 30, 2001. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward periods are not
realized. In order to fully realize the net deferred tax asset, the Company will
need to generate future federal taxable income of approximately $10,639,000.
In connection with the loss on impairment of equity investments, which included
the carrying value of the investments and related notes and debentures, the
Company recorded a deferred tax asset in the amount of $2,030,514. The Company
recorded a full valuation allowance against the asset in accordance with the
provisions of FASB statement No.109 "Accounting for Income Taxes". The valuation
allowance was determined by estimating the recoverability of the deferred tax
assets. In assessing the recoverability of the deferred tax asset, management
considered whether it is more likely than not that some portion or all the
deferred tax asset would not be realized. Based upon the capital nature of the
deferred tax asset and the Company's projections for future capital gains in
which the deferred tax asset would be deductible, management did not deem it
more likely than not that the asset would be recoverable at June 30, 2001.
56
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
During the first quarter of fiscal year 2001, the Company recorded a reduction
of the valuation allowance applied against deferred tax assets in accordance
with the provisions of FASB statement No.109 "Accounting for Income Taxes" which
provided a one-time income tax benefit of $1,681,502. The valuation allowance
was established in fiscal year 1997 because the future tax benefit of certain
below market stock option grants issued at that time could not be reasonably
assured. The Company continually reviews the adequacy of the valuation allowance
and recognized the income tax benefit during the quarter due to the reasonable
expectation that such tax benefit will be realized due to the fiscal strength of
the Company. Management believes that it will generate taxable income sufficient
to realize the tax benefit associated with future deductible temporary
differences and, therefore, the Company reduced the valuation allowance during
the first quarter of fiscal year 2001.
Significant components of the income tax (benefit) expense attributable to
operations for the years ended June 30 are as follows:
2001 2000 1999
----------- ----------- -----------
Current:
Federal $ 1,147,087 $ 1,527,297 $ 616,540
State 108,550 218,911 88,928
Foreign 17,006 25,016 89,905
----------- ----------- -----------
Total current 1,272,643 1,771,224 795,373
Deferred:
Federal (3,221,956) (128,890) 166,120
State (473,816) (11,373) 49,620
----------- ----------- -----------
Total deferred (3,695,772) (140,263) 215,740
----------- ----------- -----------
$(2,423,129) $ 1,630,961 $ 1,011,113
=========== =========== ===========
The reconciliation of income tax (benefit) expense computed at the Federal
statutory tax rates to income tax expense (benefit) for the periods ended
June 30 is as follows:
2001 2000 1999
---------- ---------- ----------
(Benefit) tax at Federal
statutory rates $(2,351,242) $1,411,631 $1,011,796
State income (benefit) taxes, net
of federal benefit (241,076) 144,481 91,442
Foreign tax rate differential (47,224) (54,534) (55,000)
Valuation allowance 349,012 - -
Goodwill 97,259 41,480 9,623
Travel and entertainment 8,036 4,787 8,339
Tax credit (120,000) - -
Other (117,894) 83,116 (55,087)
---------- ---------- ----------
(2,423,129) $1,630,961 $1,011,113
========== ========== ==========
14. LICENSING AGREEMENTS FOR MEDICAL TECHNOLOGY
On March 30, 2000, the Company, MDA and LySonix signed the MDA Agreement for the
marketing of the soft tissue aspirator for aesthetic and cosmetic surgery
applications. The MDA Agreement calls for LySonix to purchase the soft tissue
aspirators and exclusively represent the Company's products for the
fragmentation and aspiration of soft tissue. In January 1999, the Company had
terminated its previous license agreement with MDA and LySonix for non-payment
for product shipments and royalties owed. Therefore, the remaining portion of
the deferred licensing fee of approximately $357,000 was recognized as income
during the fourth quarter of 1999. Effective July 1, 2001, the
57
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
MDA Agreement has become a non-exclusive agreement due to the failure of
MDA/LySonix to meet purchase requirements and other terms of the MDA Agreement.
In October 1996, the Company entered into a License Agreement (the "USS
License") with United States Surgical Corporation ("USS"), for a twenty-year
period, covering the further development and commercial exploitation of the
Company's medical technology relating to ultrasonic cutting, which uses high
frequency sound waves to coagulate and divide tissue for both open and
laproscopic surgery.
The USS License gives USS exclusive world-wide marketing and sales rights for
this technology. The Company received $100,000 under the option agreement
preceding the USS License. This amount was recorded into income in fiscal 1997.
Under the USS License, the Company has received $475,000 in licensing fees
(which are being recorded as income over the term of the USS License), plus
royalties based upon net sales of such products. Also as part of the USS
License, the Company was reimbursed for certain product development expenditures
(as defined in the USS License). There was no reimbursement for the year ended
June 30, 2001. The amount of the reimbursement was $53,563 and $61,800 for the
years ended June 30, 2000 and 1999, respectively.
15. EMPLOYEE PROFIT SHARING PLAN
The Company sponsors a retirement plan pursuant to Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code") for all full time
employees. Participants may contribute a percentage of compensation not to
exceed the maximum allowed under the Code which was $10,500 for the year ended
June 30, 2001. The plan provides for a matching contribution by the Company of
10%-20% of annual eligible compensation contributed by the participants based on
years of service, which amounted to $54,856, $30,515 and $27,300 for the years
ended June 30, 2001, 2000 and 1999, respectively.
58