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, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file no. 1-10986
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MISONIX, INC.
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(Exact name of registrant as specified in its charter)
New York 11-2148932
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1938 New Highway, Farmingdale, New York 11735
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(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 preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec.229.405 of this chapter) 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 16, 2002 (computed by reference to the average bid and
asked prices of such stock on such date) was approximately $35,414,017.
There were 6,105,865 shares of Common Stock outstanding at September 16, 2002.
1
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
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ITEM 1. BUSINESS.
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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 consist of a 97.3% 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.
Misonix's 90% owned subsidiary, Acoustic Marketing Research, Inc. doing business
as Sonora Medical Systems, Inc. ("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.
In fiscal 2002 approximately 34.9% 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 primarily
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.
Sonora represents approximately 3% 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 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
worldwide 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 years ended June 30, 2002 and 2001. The amount of
reimbursement was $53,563 for the fiscal year ended June 30, 2000. 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
$4,060,000, $7,685,000 and $7,849,000 during the fiscal years ended June 30,
2002, 2001 and 2000, 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 (the "MDA Agreement") for the worldwide marketing of the soft
tissue aspirator for aesthetic and cosmetic surgery applications. As of July 1,
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2001, the MDA Agreement became a non-exclusive agreement. Effective April 2002,
the Company and MDA/LySonix mutually agreed to terminate the MDA Agreement. In
connection with the litigation discussed further in Item. 3, "Legal Proceeding",
the Company paid $1,000,000 to purchase certain assets of MDA/LySonix, which the
Company expects to utilize in the future.
In June 2002, the Company entered into a worldwide distribution agreement with
Mentor Corporation ("Mentor") to develop and produce products in the aesthetic
and cosmetic surgery market worldwide.
Fibra Sonics, Inc.
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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. This
acquisition gives the Company access to three important new medical markets,
namely, neurology with its Neuro Aspirator product, urology and ophthalmology.
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 values 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 was $1,814,025 and is being treated
as goodwill. In fiscal year 2002, the Company re-evaluated fixed assets
acquired from Fibra Sonics and reclassed approximately $54,000 from property
plant and equipment to goodwill. In addition to the purchase price, contingent
consideration of up to, but not exceeding, $1,120,000 may have been paid based
upon sales generated during the consecutive twelve months commencing June 1,
2001. As of June 30, 2002, sales generated did not meet the criteria to warrant
additional consideration, therefore, no additional payments were made for the
acquisition of Fibra Sonics.
Focus Surgery, Inc.
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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 and
representation on its Board of Directors. Additionally, the Company has options
and warrants to purchase an additional 7% of Focus. Focus is located in
Indianapolis, Indiana. The agreement provides for a series of development and
manufacturing agreements whereby Misonix would upgrade existing Focus products,
currently the Sonablate 500, 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 right of utilizing HIFU
technology for the treatment of both benign and cancerous tumors of the breast,
liver and kidney and the right of first refusal to purchase 51% of Focus. In
February 2001, the Company exercised its right to start research and development
for the treatment of kidney tumors utilizing HIFU technology and in September
2002, funded $50,000 to Focus, which is being treated as a research and
development expense in the first quarter of fiscal 2003 using HIFU technology.
There have been over 1,500 patients successfully treated for Benign Prostatic
Hyperplasia ("BPH") outside the U.S. utilizing the HIFU technology. Focus has
signed a three-year distribution agreement with Endocare, Inc. to distribute the
Sonablate 500 in Europe. In the U.S., the Sonablate 500 completed Phase III
clinical trials for the noninvasive treatment of BPH, commonly known as enlarged
prostate. Focus is currently waiting for the time allowed for follow up on all
parties to expire and expects to submit the remaining data to the FDA in October
2002. Focus is also utilizing HIFU technology to treat prostate cancer in
Japan. There have been 85 people successfully treated in Japan.
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. To date, Focus has
treated 14 of the 40 patients for prostate cancer.
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
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
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Debenture is not retired by Focus. 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' 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. The Company recorded an allowance
against the entire balance of principal and accrued interest due at June 30,
2002 and 2001 of $15,300 and $308,991, respectively. The related expense has
been included in loss on impairment of investment in the accompanying
consolidated statements 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.
On April 12, 2001, the Company purchased a $300,000, 6% Secured Cumulative
Convertible Debenture from Focus, due May 25, 2003 (the "6% Focus Debenture").
The 6% Focus Debenture is convertible into 250 shares of Focus 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. 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. The Company recorded an allowance against the entire balance
of principal and accrued interest due at June 30, 2002 and 2001 of $18,000 and
$303,667, respectively. The related expense has been included in loss on
impairment of investment in the accompanying consolidated statement of
operations. The related expense has been included in loss on impairment of
investment in the accompanying consolidated statements 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.
On July 31, 2001, the Company purchased a second $300,000, 6% Secured Cumulative
Convertible Debenture from Focus, due May 25, 2003 (the "Focus Debenture"). The
Focus Debenture is convertible into 250 shares of Focus preferred stock at the
option of the Company at any time up until the due date at a purchase price of
$1,200 per share. The Focus Debenture also contains warrants, which are deemed
nominal in value, to purchase an additional 125 shares to be exercised at the
option of the Company. Interest accrues and is payable at maturity or is
convertible on the same terms as the Focus Debenture's principal amount. The
Focus Debenture is secured by a lien on all of Focus' right, title, and interest
in accounts receivable, inventory, property, plant and equipment and process of
specified products whether now existing or arising after the date of the Focus
Debenture. The Company recorded an allowance against the Focus Debenture of
$300,000 and accrued interest of $16,500 since the Company does not anticipate
that the Focus Debenture will be paid in accordance with the contractual terms
of the loan agreement. The related expense has been included in loss on
impairment of loans to affiliated entities in the accompanying consolidated
statements of operations.
If the Company were to convert the 5.1% Focus Debenture, 6% Focus Debenture and
Focus Debenture and exercise all warrants, the Company would hold an interest in
Focus of approximately 27%.
During fiscal 2002, the Company entered into a loan agreement whereby Focus
borrowed $60,000 from the Company. This loan matured on May 30, 2002 and was
extended to December 31, 2002. The loan bears interest at 6% per annum and
contains warrants to acquire additional shares. These warrants are deemed
nominal in value. The loan 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 arising after the
date of the loan. The Company recorded an allowance against the entire balance
of $60,000 and accrued interest of $900. The related expense has been included
in loss on impairment of loans to affiliated entities in the accompanying
consolidated statements of operations. The Company believes that this loan is
impaired since the Company does not anticipate that this loan will be paid in
accordance with the contractual terms of the loan agreement.
The Company's portion of the net losses of Focus were recorded since the date of
acquisition in accordance with the equity method of accounting. During 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, 2002 and 2001 is $0.
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Hearing Innovations, Inc.
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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 acquire 388,680 shares of Hearing Innovations common
stock ranging from $1.25 to $2.25 per share are also part of this agreement.
These warrants, which are deemed nominal in value, expire October 2005. 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 the
investment was $784,000 ($750,000 plus acquisition costs of $34,000). Hearing
Innovations is located in Tucson, Arizona. Hearing Innovations is focusing on
multiple applications for its patented supersonic bone conduction hearing
technology. The HiSonic 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 is the only known available alternative therapy to cochlear implant
surgery. HiSonic 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 2
million cases are considered severe. There are currently no cures but only
temporary relief. Hearing Innovations has tested an ultrasound device which
resulted in 71% of patients tested achieving either partial or complete masking
as well as partial residual inhibition. Hearing Innovations has also received a
510(k) from the FDA for the Tinnitus product, Hisonic, TRD.
On September 11, 2000, the Company loaned $108,000 to Hearing Innovations, which
together with the then outstanding loans aggregating approximately $192,000
(with accrued interest) were exchanged for a $300,000, 7% Secured Convertible
Debenture due August 27, 2002 and extended to November 30, 2003 (the "Hearing
Debenture"). The Hearing Debenture contains warrants to acquire 250,000 shares
of Hearing Innovations common stock, at the option of the Company, for $2.25 per
share. These warrants, which are deemed nominal in value, expire October 2005.
Interest accrues and is payable at maturity, or is convertible on the same terms
as the Hearing Debenture's principal amount. The Company recorded an allowance
against the entire balance of principal and accrued interest due at June 30,
2002 and 2001 of $21,000 and $316,625, respectively. The related expense has
been included in loss on impairment of investment in the accompanying
consolidated statements 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 an aggregate amount of
$397,678 due May 30, 2002. The maturity date was extended to November 30, 2003.
All notes bear interest at 8% per annum. The notes are secured by a lien on all
of Hearing Innovations' right, title and interest in accounts receivable,
inventory, property, plant and equipment and processes of specified products
whether now existing or hereafter arising after the date of these agreements.
The loan agreements contain warrants to acquire 1,045,664 shares of Hearing
Innovations common stock, at the option of the Company, at a cost that ranges
from $2.00 to $2.25 per share. These warrants, which are deemed nominal in
value, expire October 2005. The Company recorded an allowance against the
entire balance of $31,058 and $397,678 due at June 30, 2002 and 2001,
respectively. The related expense has been included in loss on impairment of
investment in the accompanying consolidated statements 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.
During fiscal 2002, the Company entered into fifteen loan agreements whereby
Hearing Innovations was required to pay the Company an aggregate amount of
$322,679 due May 30, 2002, extended to November 30, 2003, and $151,230 due
November 30, 2003. All notes bear interest at 8% per annum. The notes are
secured by a lien on all of Hearing Innovations' right, title and interest in
accounts receivable, inventory, property, plant and equipment and processes of
specified products whether now existing or arising after the date of these
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agreements. The loan agreements contain warrants to acquire 548,329 shares of
Hearing Innovations common stock, at the option of the Company, at a cost that
ranges from $.01 to $2.00 per share. These warrants, which are deemed nominal
in value, expire October 2005. The Company recorded an allowance against the
entire balance of $473,909 and accrued interest of $16,230 for the above loans.
The related expense has been included in loss on impairment of loans to
affiliated entities in the accompanying consolidated statement of operations.
The Company believes the loans and related interest are impaired since the
Company does not anticipate that these loans will be paid in accordance with the
contractual terms of the loan agreements.
If the Company were to exercise all warrants associated with the above loans,
exercise the warrants associated with the Hearing Debenture and the original
investment and include the original investment ownership, the Company would hold
an interest in Hearing Innovations of approximately 41%.
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 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, 2002 and 2001 is $0.
In August 2002, the President of Hearing Innovations resigned and the Board of
Directors of Hearing Innovations named Kenneth Coviello Chief Executive Officer
of Hearing Innovations. Kenneth Coviello is the Vice President of Medical
Devices of the Company.
Sonora Medical Systems, Inc.
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On November 16, 1999, the Company acquired a 51% interest in Sonora for
approximately $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 has developed the First Call 2000, a device
that provides objective data necessary to periodically test transducers for
performance variances. The acquisition of Sonora was accounted for under the
purchase method of accounting. Accordingly, results of operations for Sonora are
included in the consolidated statements 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 was $1,622,845
and is being treated as goodwill.
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 values 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 was $257,899 and is being treated as goodwill.
On October 12, 2000, 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 values at the
date of acquisition. The excess of the cost of the acquisition ($270,000 plus
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acquisition costs of $51,219, which includes a broker fee of $25,000) over the
fair value of net assets acquired was $301,219 and is being treated as goodwill.
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 while providing protection from the
highly hazardous cyanoacrylate fumes.
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 treated as goodwill.
Currently, the Company owns a 97.3% interest in Labcaire. The balance of the
capital stock of Labcaire is owned by three executives and one retired executive
of Labcaire, 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 ended June 30, 2001, 9,286 shares (2.65%) were
purchased by the Company for approximately $100,000 in October 2001 for the year
ended June 30, 2002 and the remaining 9,286 shares (2.7%) will be purchased by
the Company for approximately $209,000 for the year ended June 30, 2003. The
effective date of this transaction is expected to be in October 2002. The
Company will then own 100% of Labcaire.
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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 produced by the cleaning process. In fiscal 2002, Labcaire
introduced the Guardian endoscope cleaner, which is 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.
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 filtered 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.
MARKET AND CUSTOMERS
Medical Devices
The Company relies on its licensee, USS, for marketing its ultrasonic surgical
device. The Company relies on direct salespersons and distributors such as
Mentor Corporation, Aesculab, Inc. and ACMI Corporation and manufacturing
representatives for the marketing of its other medical products.
Sonora relies on direct salespersons 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.
Focus is utilizing an international distribution partner, Endocare Inc. to
distribute the Sonablate 500 in the European market. Hearing Innovations plans
on marketing and selling its products to the profoundly deaf and tinnitus
product directly to customers.
In June 2002, the Company entered into a worldwide distribution agreement with
Mentor to develop and produce products in the aesthetic and cosmetic surgery
market worldwide.
Industrial Products
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
9
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.
In fiscal 2002, approximately 35% 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, such as the Guardian endoscope. Sales by the
Company in other major industrial countries are made through distributors.
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, in particular, the
semiconductor manufacturing, chemical processing and pharmaceuticals industries.
MANUFACTURING AND SUPPLY
Medical Devices
The Company manufactures and assembles its medical devices and Focus and Hearing
Innovations 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 is not dependent upon any single source of
supply and has no long-term supply agreements. 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.
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 it 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. The Company does not believe that Labcaire will
encounter difficulty in obtaining materials, supplies 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., Luminis, Inc. and Surgical Medical Technologies, Inc.
Industrial Products
10
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
intimate mixing of ozone and contaminated
water for the purpose of purification.
5,248,296 Wire with sheath - relating to the Company's 09/23/1993 12/24/2010
Alliger System for reducing transverse motion in
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.
11
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.
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.
Number Description Issue Date Expiration Date
- ---------- ------------------------------------------------ ---------- ---------------
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
12
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
6,443,969 Ultrasonic blade with cooling. 09/03/2002 08/15/2020
6,379,371 Ultrasonic blade with cooling. 04/30/2002 11/15/2019
6,375,648 Infiltration cannula with teflon coated outer 04/23/2002 10/02/2018
surface.
6,326,039 Skinless sausage or frankfurter manufacturing 12/04/2001 10/31/2020
method and apparatus utilizing reusable
deformable support.
6,322,832 Manufacturing method and apparatus utilizing 11/27/2001 10/31/2020
reusable deformable support.
Number Description Issue Date Expiration Date
- ---------- ------------------------------------------------ ---------- ---------------
6,146,674 Method and device for manufacturing hot dogs 11/14/2000 5/27/2019
using high power ultrasound.
6,063,050 Ultrasonic dissection and coagulation system. 05/16/2000 10/16/2017
6,036,667 Ultrasonic dissection and coagulation system. 03/14/2000 08/14/2017
* Patents valid also in Japan, Europe and Canada.
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 Scubbers Employing Fine Sprays 05/11/2002
Passing Through Mesh for
Eliminating Fumes and Odors 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, 2002, the Company's backlog (firm orders that have not yet been
shipped) was $5,100,000, as compared to approximately $7,200,000 as of June 30,
2001. The Company's backlog relating to industrial products, including
Labcaire, was approximately $2,300,000 at June 30, 2002, as compared to
$2,900,000 as of June 30, 2001. The Company's backlog relating to medical
devices, including Sonora, was approximately $2,800,000 at June 30, 2002, as
compared to approximately $4,300,000 at June 30, 2001.
13
EMPLOYEES
As of September 15, 2002, the Company, including Labcaire and Sonora, employed a
total of 191 full-time employees, including 26 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,
(in thousands)
2002 2001 2000
------- ------- -------
Medical devices $11,696 $13,023 $11,582
Industrial products 17,894 17,735 17,461
------- ------- -------
Net sales $29,590 $30,758 $29,043
======= ======= =======
The following table provides a breakdown of foreign sales by geographic area
during the periods indicated:
Fiscal year ended
June 30,
(in thousands)
2002 2001 2000
------- ------ -------
Canada and Mexico $ 244 $ 165 $ 2,772
United Kingdom 7,526 5,646 5,384
Europe 981 966 1,346
Asia 891 772 653
Middle East 146 139 334
Other 530 201 231
------- ------ -------
$10,318 $7,889 $10,720
======= ====== =======
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 $35,000 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 in July 2005. The rental amount is approximately $17,000 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.
14
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. Accordingly, the
Company accrued an aggregate of $6,176,000 for damages, interest and other costs
during fiscal year 2001.
On April 24, 2002, the Company resolved all issues related to the lawsuit
brought by Mentor. Under the terms of the settlement, the Company paid Mentor
$2,700,000 for its share of a combined $5,600,000 settlement with Mentor in
exchange for a complete release from any monetary liability in connection with
the lawsuit and judgment. In connection with this litigation settlement, the
Company paid $1,000,000 and forgave accounts receivable of $455,500 in exchange
for certain assets from MDA/LySonix, which the Company expects to utilize in the
future. The net realizable value of those assets was $295,751. In addition,
the Company paid $228,960 of other accrued costs during fiscal 2002. The
Company will pay the remaining accrued costs of $174,332 in fiscal 2003.
Accordingly, the Company recorded a reversal of the litigation settlement during
the fourth quarter of fiscal 2002 of $1,912,959.
The Company's revenues derived from sales of the LySonix 2000 instruments and
accessories were approximately $97,000, $66,000 and $948,000 during its fiscal
year ended June 30, 2002, 2001 and 2000, respectively, comprising approximately
..003%, .002% and 3.3%, 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, 2002.
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 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 2002: High Low
- -------------- ------ -----
First Quarter. $ 7.57 $5.71
Second Quarter 9.98 5.84
Third Quarter. 9.89 6.30
Fourth Quarter 8.82 6.00
15
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
(b) As of September 16, 2002, the Company had 6,105,865 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.
ITEM 6. SELECTED FINANCIAL DATA.
- ------ ------------------------
Selected income statement data:
Year Ended June 30,
2002 2001 2000 1999 1998
----------- ------------ ----------- ----------- -----------
Net sales $29,590,453 $30,757,519 $29,042,872 $24,767,163 $26,764,332
Net income (loss) 176,661 (4,492,290) 2,520,896 1,964,758 5,328,381
Net income (loss) per share-
Basic $ .03 $ (.75) $ .42 $ .34 $ .94
Net income (loss) per share-
Diluted $ .03 $ (.75) $ .39 $ .30 $ .81
Selected balance sheet data:
June 30,
2002 2001 2000 1999 1998
----------- ------------ ----------- ----------- -----------
Total assets $26,964,452 $33,220,788 $31,163,622 $28,779,090 $25,328,956
Long-term debt
and capital lease
obligations $ 1,050,254 $ 1,027,921 $ 1,274,738 $ 1,271,814 $ 105,230
Total stockholders'
equity $19,688,828 $19,106,818 $23,882,188 $21,542,385 $19,252,427
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:
16
Fiscal year ended
June 30,
2002 2001 2000
------ ------- ------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 60.6 51.3 54.3
------ ------- ------
Gross profit 39.4 48.7 45.7
------ ------- ------
Selling expenses 15.2 13.2 10.9
General and administrative expenses 21.9 21.2 17.5
Research and development expenses 7.1 5.9 4.7
Litigation settlement (recovery) expenses (6.5) 20.1 -
------ ------- ------
Total operating expenses 37.7 60.4 33.1
------ ------- ------
Income (loss) from operations 1.7 (11.7) 12.6
Other income (expense) .2 (10.9) 1.7
------ ------- ------
Income (loss) minority interest and income
taxes 1.9 (22.6) 14.3
Minority interest in net income of
consolidated subsidiaries - .1 -
------ ------- ------
Income (loss) before provision for income
taxes 1.9 (22.5) 14.3
Income tax provision (benefit) 1.3 (7.9) 5.6
------ ------- ------
Net income (loss) .6% (14.6)% 8.7%
====== ======= ======
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, 2002 and 2001
- -----------------------------------------
Net sales. Net sales of the Company's medical devices and industrial products
- -----------
decreased $1,167,066 to $29,590,453 in fiscal 2002 from $30,757,519 in fiscal
2001. This difference in net sales is due to an increase in industrial products
of $159,714 to $17,894,692 in fiscal 2002 from $17,734,978 in fiscal 2001. This
increase is offset by lower medical device sales of $1,326,780 to $11,695,761
for the year ended June 30, 2002 from $13,022,541 for the year ended June 30,
2001. The increase in industrial products is predominantly due to an increase
in fume enclosure sales of $566,272 and Labcaire sales of $2,116,323 offset by
lower wet scrubber sales of $2,253,747 and ultrasonic sales of $269,134. The
increase in fume enclosure sales is due to customer demand. The increase in
Labcaire sales is due to the new Guardian product introduced in fiscal 2002.
The decrease in wet scrubber sales is due to the decrease in growth of the
semi-conductor market. The decrease in medical devices is due to decreased
sales of therapeutic medical devices of $2,828,318 offset by an increase in
sales of diagnostic medical devices of $1,501,538, both driven by customer
demand.
17
Net sales for the three month period ended June 30, 2002 were $7,893,175
compared to $8,945,114 for the same period in fiscal 2001. This decrease for
the quarter ended June 30, 2002 is due to a decrease in industrial products
sales of $603,660 and medical devices of $448,279. The decrease in industrial
products sales consist of a decrease in wet scrubber sales of $805,762, a
decrease in fume enclosure product sales of $286,845, and a decrease in
ultrasonic sales of $234,123 offset by an increase in Labcaire sales of
$723,070. The decrease in medical devices is due to decreased sales of
therapeutic medical devices of $1,339,239 offset by an increase in diagnostic
medical devices of $890,960.
Export sales from the United States are remitted in US Dollars and export sales
for Labcaire are remitted in British Pounds. During fiscal 2002 and fiscal
2001, the Company had foreign net sales of $10,317,783 and $7,889,426,
respectively, representing 34.9% and 25.5% of net sales for such years,
respectively. The increase in foreign sales in fiscal 2002 as compared to
fiscal 2001 is substantially due to an increase in Labcaire sales of $2,116,323.
Labcaire represented 85% of foreign net sales during fiscal 2002 and fiscal
2001, respectively.
Gross profit. Gross profit decreased to 39.4% in fiscal 2002 from 48.7% in
- --------------
fiscal 2001. Gross profit decreased to 26.6% of sales in the three months ended
June 30, 2002 from 39.7% of sales in the three months ended June 30, 2001. The
decrease in gross profit is predominantly due to the unfavorable mix of high and
low margin product deliveries caused by the following: gross profit was
negatively impacted by the unfavorable order mix for sales of therapeutic
medical devices; Mystaire scrubber sales had a significant decrease in gross
margin on all of its products, predominately due to reduced volume; and
increased sales of diagnostic medical devices and sales by Labcaire, which
traditionally carry lower gross margins.
Selling expenses. Selling expenses increased $432,048 or 10.6% from $4,070,125
- -----------------
(13.2% of sales) in fiscal 2001 to $4,502,173 (15.2% of sales) in fiscal 2002.
Medical device selling expenses increased $375,778 predominantly due to
additional sales and marketing efforts of diagnostic medical devices. Industrial
selling expenses increased $56,270 predominantly due to increased marketing
efforts, advertising initiatives and personnel additions. Selling expenses
increased $114,439 or 9.8% from $1,165,959 (13% of sales) in the three months
ended June 30, 2001 to $1,280,398 (16.2% of sales) in the three months ended
June 30, 2002. Medical device selling expenses increased $184,039 predominantly
due to additional sales and marketing efforts of diagnostic medical devices.
Industrial selling expenses decreased $69,600 predominantly due to decreased
sales commissions for the wet scrubber products.
General and administrative expenses. General and administrative expenses
- --------------------------------------
decreased $41,698 or .6% to $6,469,704 in fiscal 2002 from $6,511,402 in the
fiscal 2001. The decrease is predominantly due to increased accounting and legal
fees and facility and administration costs in Longmont, Colorado, offset by
lower bonus and salary expense and due to the adoption in the first quarter of
fiscal 2002 of FASB Statement No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). In accordance with SFAS 142, the Company is no longer amortizing
goodwill. Amortization of goodwill for the comparable period in fiscal 2001 was
$525,567. General and administrative expenses decreased $19,969 or 1% from
$1,932,723 in the three months ended June 30, 2001 to $1,912,755 in the three
months ended June 30, 2002. The decrease is predominantly due to increased
administration costs in Longmont, Colorado, offset by lower bonus and salary
expense and due to the adoption in the first quarter of fiscal 2002 of FASB
Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). In
accordance with SFAS 142, the Company is no longer amortizing goodwill.
Amortization of goodwill for the comparable period in fiscal 2001 was $232,408.
Research and development expenses. Research and development expenses increased
- ----------------------------------
$277,097 or 15.2% from $1,826,604 in fiscal 2001 to $2,103,701 in fiscal 2002.
The increase is due to increased research and development on medical device
products in the amount of $411,047 partially offset by reduced efforts for
industrial products in the amount of $133,950. Research and development
expenses increased $41,808 or 9.3% from $450,588 in the three months ended June
30, 2001 to $492,396 in the three months ended June 30, 2002. The increase is
due to increased research and development on medical device products in the
amount of $55,613 partially offset by reduced efforts for industrial products in
the amount of $13,805. The increase in research and development on medical
device products is due to the new Neuroaspirator product.
Litigation settlement (recovery) expenses. The Company recorded a reversal of
- ---------------------------------------------
the litigation settlement during the fourth quarter of fiscal 2002 of
$1,912,959. 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
18
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. 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. On April 24,
2002, the Company resolved all issues related to the lawsuit brought by Mentor.
Under the terms of the settlement, the Company paid Mentor $2,700,000 for its
share of a combined $5,600,000 settlement with Mentor in exchange for a complete
release from any monetary liability in connection with the lawsuit and judgment.
In connection with this litigation settlement, the Company paid $1,000,000 and
forgave accounts receivable of $455,500 in exchange for certain assets from
MDA/LySonix, which the Company expects to utilize in the future. The net
realizable value of those assets was $295,751. In addition, the Company paid
$228,960 of other accrued costs during fiscal 2002. The Company will pay the
remaining accrued costs of $174,332 in fiscal 2003. Accordingly, the Company
recorded a reversal of the litigation settlement during the fourth quarter of
fiscal 2002 of $1,912,959.
In June 2002, the Company entered into a worldwide distribution agreement with
Mentor to develop and produce products in the aesthetic and cosmetic surgery
market worldwide.
Other income (expense). Other income was $47,317 in fiscal 2002 as compared to
- -------------------------
other expense of $3,337,631 in fiscal 2001. Other income was $36,402 in the
three months ended June 30, 2002 as compared to other expense of $3,744,955 in
the three months ended June 30, 2001. This increase was principally due to the
following: an increase in royalty income; a decrease in interest income due to
less cash and investments; the prior year included the write-down of investments
in Focus and Hearing Innovations and of related notes of $3,822,428 for fiscal
year 2001 as compared to $952,897 for fiscal year 2002. The Company is no
longer amortizing the investments or recording the equity in loss for its
investments in Focus and Hearing Innovations for the fiscal year 2002 since the
investments were written down to zero at June 30, 2001, accordingly amortization
of the investments for the comparable period in fiscal 2001 was $230,900 and the
equity in loss on the investments was $365,259.
Income taxes. The effective tax rate is 68.5% for the fiscal year ended June 30,
- ------------
2002 as compared to an effective tax rate of 35.0% for the fiscal year ended
June 30, 2001. The current effective tax rate is a mixture of the Labcaire tax
expense offset by domestic entities benefits which also incorporate the
valuation allowance recorded. The Company recorded a valuation allowance in the
amount of $333,406 for the fiscal year ended June 30, 2002 against the deferred
tax asset relating to the loss on the loans and debentures issued by Hearing
Innovations and Focus because the Company does not anticipate capital gains to
offset the capital losses. The valuation allowance was recorded in accordance
with the provisions of FASB Statement No. 109 "Accounting for Income Taxes".
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 lower 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.
19
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 we export, in fiscal 2000. Additionally, foreign
currency exchange rates had 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 June 30, 2001 is due to
increased operating efficiencies at Misonix and Sonora and opportunities in
industrial sales to capture higher prices. The decrease for the quarter ended
June 30, 2001 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 of a full year of
the consolidated results of Sonora of $343,636, increased expenditures for
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. 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 and 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, a portion of which was later recovered in fiscal
2000.
20
On March 30, 2000, the Company, MDA and LySonix signed a new ten-year Exclusive
License Agreement (the "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. As of July 1, 2001, the MDA
Agreement became 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, 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 other 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 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 whether it is more likely than not that some portion or
all of 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.
21
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.
CRITICAL ACCOUNTING POLICIES:
General: The Company's discussion and analysis of its financial condition and
- --------
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements require the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. On an on-going basis, management
evaluates its estimates and judgments, including those related to bad debts,
inventories, goodwill, property, plant and equipment and income taxes.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company considers certain accounting policies
related to allowance for doubtful accounts, inventories, property, plant and
equipment, goodwill and income taxes to be critical policies due to the
estimation process involved in each.
Allowance for Doubtful Accounts: The Company's policy is to review its
- -----------------------------------
customers' financial condition prior to extending credit and, generally,
collateral is not required. The Company utilizes letters of credit on foreign
or export sales where appropriate.
Inventories: Inventories are stated at the lower of cost (first-in, first-out)
- ------------
or market and consist of raw materials, work-in-process and finished goods.
Management evaluates the need to record adjustments for impairments of inventory
on a quarterly basis. The Company's policy is to assess the valuation of all
inventories, including raw materials, work-in-process and finished goods.
Property, Plant and Equipment: Property, plant and equipment are recorded at
- ---------------------------------
cost. Depreciation of property and equipment is provided using the straight-line
method over estimated useful lives ranging from 1 to 5 years. Depreciation of
the Labcaire building is provided using the straight-line method over the
estimated useful life of 50 years. Leasehold improvements are amortized over
the life of the lease or the useful life of the related asset, whichever is
shorter. The Company's policy is to periodically evaluate the appropriateness
of the lives assigned to property, plant and equipment and to adjust if
necessary.
Goodwill: In July 2001, the Financial Accounting Standards Board issued
- ---------
Statement of Financial Accounting Standards ("SFAS") Nos. 141 and 142 (SFAS 141
and SFAS 142), "Business Combinations" and "Goodwill and Other Intangible
Assets," respectively. SFAS 141 replaces Accounting Principles Board ("APB")
Opinion 16 "Business Combinations" and requires the use of the purchase method
for all business combinations initiated after June 30, 2001. SFAS 142 requires
goodwill and intangible assets with indefinite useful lives to no longer be
amortized, but instead be tested for impairment at least annually and whenever
events or circumstances occur that indicate goodwill might be impaired. With
the adoption of SFAS 142, as of July 1, 2001, the Company reassessed the useful
lives and residual values of all acquired intangible assets to make any
necessary amortization period adjustments. Based on that assessment, only
goodwill was determined to have an indefinite useful life and no adjustments
were made to the amortization period or residual values of other intangible
assets. SFAS 142 provides a six-month transitional period from the effective
date of adoption for the Company to perform an assessment of whether there is an
indication that goodwill is impaired. To the extent that an indication of
impairment exists, the Company must perform a second test to measure the amount
22
of impairment. The second test must be performed as soon as possible, but no
later that the end of the fiscal year. Any impairment measured as of the date
of adoption will be recognized as the cumulative effect of a change in
accounting principle. The Company performed the first test and determined that
there is no indication that the goodwill recorded is impaired and, therefore,
the second test was not required. The Company also completed its annual
goodwill impairment tests for fiscal 2002 in the fourth quarter. There was no
indicators that goodwill recorded was impaired.
Income Taxes: Income taxes are accounted for in accordance with SFAS No. 109,
- --------------
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply for taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at June 30, 2002 and June 30, 2001 was $11,854,281 and
$12,002,501, respectively. In fiscal 2002 cash utilized in operations totaled
$3,754,305. This was primarily due to the cash paid in connection with the
settlement of litigation (see below for discussion). In fiscal 2002, cash
provided by investing activities was $770,119 which consisted of redemptions of
investments held to maturity offset by loans to Hearing Innovations and Focus.
In fiscal 2002, cash provided by financing activities was $247,905 which
represents proceeds from the exercise of stock options and proceeds from
short-term borrowings offset by principal payments on capital lease obligations.
Revolving Credit Facilities
- -----------------------------
The Company secured a $5,000,000 revolving credit facility with Fleet Bank on
January 18, 2002 to cover any potential shortfalls of the Company's cash
position as well as to support future working capital needs. The revolving
credit facility expires January 18, 2005 and has interest rate options ranging
from Libor plus 1.0% per annum to prime rate plus .25% per annum. This facility
is secured by the assets of the Company. This facility contains certain
financial covenants, including requiring that the Company maintain a ratio of
debt to earnings before interest, depreciation, taxes and amortization of not
greater than 2 to 1; that the Company maintain a working capital ratio of not
less than 1.5 to 1; and that the Company maintain a tangible net worth of
$14,500,000. The terms provide for the repayment of the debt in full on its
maturity date. On June 30, 2002, the Company had $5,000,000 available on its
line of credit.
On July 1, 2002, Labcaire replaced its bank overdraft facility with HSBC Bank
plc with a debt purchase agreement with Lloyds TSB Commercial Finance. The
amount of this facility is approximately $1,384,000 ( 950,000) and bears
interest at the bank's base rate plus 1.75% and a service charge of .15% of
sales invoice value. The agreement expires on June 28, 2003 and covers all
United Kingdom and European sales.
Commitments
- -----------
The Company has commitments under a revolving note payable, facility debt and
capital and operating leases that will be funded from operating sources. At
June 30, 2002, the Company's contractual cash obligations and commitments
relating to the revolving note payable, facility debt and capital and operating
leases are as follows:
LESS THAN AFTER
COMMITMENT 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS TOTAL
- --------------------------------------------------------------------------------
Revolving note payable $ 730,092 - - - $ 730,092
Facility debt 57,654 $ 128,173 $ 139,824 $638,736 964,387
Capital leases 219,869 144,523 31,522 - 395,914
Operating leases 613,797 1,213,487 4,315 - 1,831,599
--------------------------------------------------------
$1,621,412 $1,486,183 $ 175,661 $638,736 $3,921,992
========================================================
23
Labcaire
- --------
In October 2001, under the terms of the Labcaire Agreement, the Company paid
$99,531 for 9,286 shares (2.65%) of the outstanding common stock of Labcaire.
This represents the fiscal 2002 buy-back portion, as defined in the Labcaire
Agreement. The remaining 9,286 shares (2.7%) will be purchased by the Company
for approximately $209,000 for the year ended June 30, 2003. The effective
date of this transaction is expected to be in October 2002. The Company will
then own 100% of Labcaire.
Hearing Innovations, Inc.
- ---------------------------
During fiscal 2002, the Company entered into fifteen loan agreements whereby
Hearing Innovations was required to pay the Company an aggregate amount of
$322,679 due May 30, 2002, extended to November 30, 2003, and $151,230 due
November 30, 2003. All notes bear interest at 8% per annum and contain
warrants to acquire additional shares. The notes are secured by a lien on all
of Hearing Innovations' right, title and interest in accounts receivable,
inventory, property, plant and equipment and processes of specified products
whether now existing or arising after the date of these agreements. The loan
agreements contain warrants to acquire 548,329 shares of Hearing Innovations
common stock, at the option of the Company, at a cost that ranges from $.01 to
$2.00 per share. These warrants, which are deemed nominal in value, expire
October 2005. The Company recorded an allowance against the entire balance of
$473,909 and accrued interest of $16,230 for the above loans. The related
expense has been included in loss on impairment of loans to affiliated entities
in the accompanying consolidated statements of operations. The Company believes
the loans and related interest are impaired since the Company does not
anticipate that these loans will be paid in accordance with the contractual
terms of the loan agreements.
Focus Surgery, Inc.
- ---------------------
On July 31, 2001, the Company purchased the Focus Debenture due May 25, 2003.
The Focus Debenture is convertible into 250 shares of Focus preferred stock at
the option of the Company at any time up until the due date at a purchase price
of $1,200 per share. The Focus Debenture also contains warrants, which are
nominal in value, to purchase an additional 125 shares to be exercised at the
option of the Company. Interest accrues and is payable at maturity or is
convertible on the same terms as the Focus Debenture's principal amount. The
Focus Debenture is secured by a lien on all of Focus' right, title, and interest
in accounts receivable, inventory, property, plant and equipment and process of
specified products whether now existing or arising after the date of the Focus
Debenture. The Company recorded an allowance against the Focus Debenture of
$300,000 and accrued interest of $16,500 since the Company does not anticipate
that the Focus Debenture will be paid in accordance with the contractual terms
of the loan agreement. The related expense has been included in loss on
impairment of loans to affiliated entities in the accompanying consolidated
statements of operations.
During fiscal 2002, the Company entered into a loan agreement whereby Focus
borrowed $60,000 from the Company. This loan matured on May 30, 2002 and was
extended to December 31, 2002. The loan bears interest at 6% per annum and
contain warrants to acquire additional shares. These warrants are deemed
nominal in value. The loan 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 arising after the
date of the loan. The Company recorded an allowance against the entire balance
of $60,000 and accrued interest of $900. The related expense has been included
in loss on impairment of loans to affiliated entities in the accompanying
consolidated statements of operations. The Company believes that this loan is
impaired since the Company does not anticipate that this loan will be paid in
accordance with the contractual terms of the loan agreement.
In February 2001, the Company exercised its right to start research and
development for the treatment of kidney tumors utilizing HIFU technology and in
September 2002, funded $50,000 to Focus which is being treated as a research and
development expense in the first quarter of fiscal 2003.
Litigation Settlement
- ----------------------
On April 24, 2002, the Company resolved all issues related to the lawsuit
brought by Mentor (see Item 3. Legal Proceedings for further discussion). Under
the terms of the settlement, the Company paid Mentor $2,700,000 for its share of
a combined $5,600,000 settlement with Mentor in exchange for a complete release
from any monetary liability in connection with the lawsuit and judgment. In
connection with this litigation settlement, the Company paid $1,000,000 and
forgave accounts receivable of $455,500 in exchange for certain assets from
MDA/LySonix, which the Company expects to utilize in the future. The net
24
realizable value of those assets was $295,751. In addition, the Company paid
$228,960 of other accrued costs during fiscal 2002. The Company will pay the
remaining accrued costs of $174,332 in fiscal 2003. Accordingly, the Company
recorded a reversal of the litigation settlement during the fourth quarter of
fiscal 2002 of $1,912,959.
In June 2002, the Company entered into a worldwide distribution agreement with
Mentor to develop and produce products in the aesthetic and cosmetic surgery
market worldwide.
Other
- -----
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.
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 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 30% of the Company's revenues in fiscal 2002 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 1.44 and 1.43 for the fiscal year
ended June 30, 2002 and 2001, respectively. A strengthening of the English
Pound, in relation to the U.S. Dollar, will have the effect of increasing its
reported revenues and profits, while a weakening of the English Pound will have
the opposite effect. Since the Company's operations in England generally sets
prices and bids for contracts in English Pounds, a strengthening of the English
Pound, while increasing the value of its UK assets, might place the Company at a
pricing disadvantage in bidding for work from manufacturers based overseas. The
Company collects its receivables in the currency the subsidiary resides in. The
Company has not engaged in foreign currency hedging transactions, which include
forward exchange agreements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -------- ------------------------------------------------
The independent auditors' reports and consolidated financial statements listed
in the accompanying index are filed as part of this report. See "Index to
Consolidated Financial Statements" on page 44.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected financial data for each quarter of fiscal
2002, 2001 and 2000. 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. 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.
25
QUARTERLY FINANCIAL DATA:
FISCAL 2002
Q1 Q2 Q3 Q4 YEAR
Net sales $ 6,822,521 $7,503,537 $ 7,371,220 $ 7,893,175 $29,590,453
Gross profit 3,185,172 3,325,335 3,047,968 2,100,104 11,658,579
Operating expenses 2,976,732 3,050,663 3,362,634 1,772,590 11,162,619
Income (loss) from operations 208,440 274,672 (314,666) 327,514 495,960
Other income (expense) (17,100) 101,855 (73,840) 36,402 47,317
Minority interest in net (loss)
income of consolidated subsidiaries (12,186) 42,916 (5,099) (8,066) 17,565
Income tax provision (benefit) 222,209 158,823 (182,833) 185,982 384,181
------------- ---------- ------------ ------------ ------------
Net (loss) income $ (43,055) $ 260,620 $ (210,772) $ 169,868 $ 176,661
============= ========== ============ ============ ============
Net (loss) income per share-Basic $ (.01) $ .04 $ (.03) $ .03 $ .03
Net (loss) income per share -Diluted $ (.01) $ .04 $ (.03) $ .03 $ .03
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 873,253 1,027,761 (4,783,038) (727,328) (3,609,352)
Other income (expense) 160,984 209,591 36,749 (3,744,955) (3,337,631)
Minority interest in net (loss)
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)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------- ---------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
On January 22, 2002, the Board of Directors recommended and approved retaining
the firm of Ernst & Young LLP to act as the Company's independent accountants
for the fiscal year ended June 30, 2002. The Company previously retained the
accounting firm of KPMG LLP for the fiscal year ended June 30, 2001. KPMG did
not qualify, disclaim or have an adverse opinion of the Company's financial
statements. The Audit Committee and the shareholders have consented to the
change of accountants from KPMG, LLP to Ernst & Young LLP.
26
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 55 Chairman of the Board 1995
of Directors
Howard Alliger 75 Director 1971
Arthur Gerstenfeld 74 Director 1992
Michael McManus, Jr. 59 President and Chief 1998
Executive Officer
Richard Zaremba 47 Vice President, Chief Financial Officer, --
Secretary and Treasurer
Kenneth Coviello 50 Vice President - Medical Devices --
Dan Voic 40 Vice President of Research & Development
& Engineering --
Bernhard Berger 40 Vice President - Industrial/Scientific Products --
Ronald Manna 48 Vice President of New Product Development
& Regulatory Affairs --
Christopher Thomas 40 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 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
27
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 the 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.
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.
DAN VOIC became Vice President of Research and Development & Engineering in
January 2002. Prior thereto, he served as Engineering Manager and Director of
Engineering with the Company. Mr. Voic has approximately 14 years experience in
both medical and industrial products development. Mr. Voic holds a M.S. degree
in mechanical engineering from Polytechnic University "Traian Vuia" of
Timisoara, Romania and a MS degree in applied mechanics from Polytechnic
University of New York.
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.
RONALD MANNA became Vice President of New Product Development and Regulatory
Affairs of the Company in January 2002. Prior thereto, Mr. Manna served as
Vice President of Research and Development & Engineering, Vice President of
Operations and Director of Engineering of the Company. Mr. Manna holds a B.S.
degree in mechanical engineering from Hofstra 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 $15,000. In addition, Mr.
Gelman receives a special Chairman's fee of $15,000 per year. No stock options
were granted to any non-employee Directors during the fiscal year ending June
30, 2002. 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.
28
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 2002.
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. 2002 275,000 150,000 150,000
President and Chief 2001 266,687 250,000 250,000
Executive Officer 2000 250,000 250,000 -
Richard Zaremba 2002 150,000 28,000 32,000
Vice President, 2001 135,610 33,000 30,000
Chief Financial Officer, 2000 129,096 5,000 -
Secretary and Treasurer
Kenneth Coviello 2002 130,000 15,000 15,000
Vice President of Medical 2001 126,620 - 10,000
Products 2000 4,808 - -
Daniel Voic 2002 97,729 10,000 6,500
Vice President of 2001 92,519 6,000 7,500
Research & Development & 2000 74,642 5,000 -
Engineering
Bernhard Berger 2002 105,000 3,000 5,000
Vice President of 2001 15,952 - 10,000
Industrial/Scientific Products 2000 - - -
Ronald Manna 2002 121,072 10,000 10,000
Vice President of 2001 116,340 25,000 15,000
New Product Development & 2000 113,808 15,000 -
Regulatory Affairs
Christopher Thomas 2002 100,000 30,000 17,000
Vice President of 2001 95,201 22,000 15,000
Mystaire Products 2000 87,348 10,000 -
29
EMPLOYMENT AGREEMENTS
In October 2000, the Company entered into an employment agreement with its
President and Chief Executive Officer which expires on October 31, 2002. This
agreement provides for an annual base compensation of $275,000 with a guaranteed
bonus of $250,000. At the discretion of the Board of Directors, if certain
objectives are achieved, Mr. McManus can earn a higher bonus if revenue and
earnings targets as stipulated in his agreement are met. For fiscal year 2002,
Mr. McManus elected to receive a bonus of $100,000, which is to be paid in
December 2002. During fiscal year 2001, Mr. McManus elected to receive a bonus
of $150,000, which was paid in December 2001. Mr. McManus elected to receive a
reduced bonus for each such year due to the Company's results. Mr. McManus
receives additional benefits that are generally provided to other employees of
the Company.
In conformity with the Company's policy, all of its Directors, officers and
employees execute confidentiality and nondisclosure agreements upon the
commencement of employment with the Company. The agreements generally provide
that all inventions or discoveries by the employee related to the Company's
business and all confidential information developed or made known to the
employee during the term of employment shall be the exclusive property of the
Company and shall not be disclosed to third parties without the prior approval
of the Company. Mr. Manna has an agreement with the Company which provides for
the payment of six months' severance upon his termination for any reason.
Messrs. McManus and Zaremba have agreements for the payment of six months'
annual base salary upon a change in control of the Company. The Company's
employment agreement with Mr. McManus also contains non-competition provisions
that preclude him from competing with the Company for a period of 18 months from
the date of his termination of employment.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning options granted to executive
officers named in the Summary Compensation Table during fiscal year ended June
30, 2002:
% OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO (A)
NAME AND PRINCIPAL OPTIONS EMPLOYEES IN EXERCISE EXPIRATION GRANT DATE
POSITION GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE VALUE($)
- --------------------------------------------------------------------------------------
Michael McManus, Jr. 150,000 48.5 6.07 10/17/2011 452,400
Richard Zaremba 32,000 10.3 6.07 10/17/2011 95,512
Kenneth Coviello 15,000 4.9 6.07 10/17/2011 45,240
Daniel Voic 6,500 2.1 6.07 10/17/2011 19,604
Bernhard Berger 5,000 3.2 6.07 10/17/2011 30,160
Ronald Manna 10,000 1.6 6.07 10/17/2011 15,080
Christopher Thomas 17,000 5.5 6.07 10/17/2011 51,272
(a) The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 3.86%; no dividend yields; volatility
factor of the expected market price of the Common Stock of 53%, and a
weighted-average expected life of the options of five years.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
No options were exercised by any executive officer named in the Summary
Compensation Table during the fiscal year ended June 30, 2002. The following
table contains information concerning the number and value, at June 30, 2002, of
unexercised options held by executive officers named in the Summary Compensation
Table:
30
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)
NAME (EXERCISABLE/UNEXERCISABLE (EXERCISABLE/UNEXERCISABLE)(1)
- -------------------- --------------------------- -------------------------------
Michael McManus, Jr. 550,000/150,000 $ 468,500/$33,000
Richard Zaremba 37,500/39,500 $ 49,575/$8,315
Kenneth Coviello 10,000/15,000 $ 0/$3,300
Dan Voic 31,500/6,500 $ 15,773/$1,430
Ronald Manna 67,500/10,000 $ 69,425/$2,200
Bernhard Berger 5,000/10,000 $ 850/$1,950
Christopher Thomas 42,000/17,000 $ 51,780/$3,740
(1) Fair market value of underlying securities (the closing price of the Common
Stock on the NASD Automated Quotation System) at June 30, 2002, 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.
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. The agreement also provides for a
guaranteed bonus of $250,000. At the discretion of the Board of Directors, if
certain objectives are achieved, Mr. McManus can earn a higher bonus if revenue
and earnings targets as stipulated in his agreement are met. For fiscal year
2002, Mr. McManus elected to receive a bonus of $100,000, which is to be paid in
December 2002. During fiscal year 2001, Mr. McManus elected to receive a bonus
of $150,000, which was paid in December 2001. Mr. McManus elected to receive a
reduced bonus for each such year due to the Company's results. 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
31
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,
2002, options to purchase 33,000 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, options to purchase 327,750
shares of Common Stock had been exercised and options to purchase 44,250 shares
have been cancelled (of which options to purchase 30,000 shares have been
reissued).
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, 2002, options to purchase 339,494 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, 2002, options to purchase 97,195 shares of
Common Stock under the 1996 Plan have been exercised and 155,256 shares have
been cancelled (of which options to purchase 141,945 shares have been reissued).
At June 30, 2002, 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 of the Company. At June
30, 2002, options to purchase 480,825 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, 2002, options to
purchase 40,350 shares of Common Stock under the 1998 Plan have been cancelled
(of which options to purchase 28,925 shares have been reissued) and options to
purchase 7,750 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 of the Company. At
June 30, 2002, options to purchase 307,394 shares of Common Stock were
outstanding under the 2001 Plan at exercise price of $6.07 per share with a
vesting period of three years. At June 30, 2002, options to purchase 2,010
shares of Common Stock under the 2001 Plan have been cancelled and no options
have been exercised or reissued.
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, 2002, 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; (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.
32
PERCENT
COMMON STOCK OF
NAME AND ADDRESS (1) BENEFICIALLY OWNED CLASS
- ------------------------------------------- ------------------------- ------
V4, Inc . . . . . . . . . . . . . . . . . . 771,000 (2) 12.4
Howard Alliger. . . . . . . . . . . . . . . 728,608 (3) 11.7
Gary Gelman . . . . . . . . . . . . . . . . 753,500 (4) 11.2
Michael McManus, Jr.. . . . . . . . . . . . 637,950 (5) 9.6
Dan Purjes. . . . . . . . . . . . . . . . . 381,597 (6) 6.1
DePrince, Race & Zollo, Inc . . . . . . . . 330,400 (7) 5.3
Ronald Manna. . . . . . . . . . . . . . . . 120,394 (8) 2.0
Arthur Gerstenfeld. . . . . . . . . . . . . 98,600 (9) 1.6
Richard Zaremba . . . . . . . . . . . . . . 54,370 (10) *
Christopher Thomas. . . . . . . . . . . . . 43,762 (11) *
Dan Voic. . . . . . . . . . . . . . . . . . 31,500 (12) *
Kenneth Coviello. . . . . . . . . . . . . . 12,200 (13) *
Bernard Berger. . . . . . . . . . . . . . . 5,000 (14) *
All executive officers and
Directors as a group
(ten people) . . . . . . . . . . . . . . 2,485,884 (15) 40.7
*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) The business address of V4, Inc. is 201 S. Orange Avenue, Orlando, Florida
32801.
(3) Includes 115,000 shares which Mr. Alliger has the right to acquire upon
exercise of stock options which are currently exercisable.
(4) Includes 603,500 shares which Mr. Gelman has the right to acquire upon
exercise of stock options which are currently exercisable.
(5) Includes 550,000 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) The business address of DePrince, Race & Zollo, Inc. is 201 S. Orange
Avenue, Orlando, Florida 32801.
(8) Includes 67,500 shares which Mr. Manna has the right to acquire upon
exercise of stock options which are currently exercisable.
(9) Includes 58,000 shares which Mr. Gerstenfeld has the right to acquire upon
exercise of stock options which are currently exercisable.
(10) Includes 37,500 shares which Mr. Zaremba has the right to acquire upon
exercise of stock options which are currently exercisable.
(11) Includes 42,000 shares which Mr. Thomas has the right to acquire upon
exercise of stock options which are currently exercisable.
(12) Includes 31,500 shares which Mr. Voic has the right to acquire upon
exercise of stock options which are currently exercisable.
(13) Includes 10,000 shares which Mr. Coviello has the right to acquire upon
exercise of stock options which are currently exercisable.
(14) Represents 5,000 shares which Mr. Berger has the right to acquire upon
exercise of stock options which are currently exercisable.
(15) Includes the shares indicated in notes (3), (4), (5), (8), (9), (10),
(11), (12), (13) and (14).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------- ---------------------------------------------------
None.
33
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)
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)
34
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) Employment Agreement dated October 31, 1998 by and
between the Company and Michael A. McManus, Jr.
10(oo) 6% Secured Convertible Debenture, dated July 31, 2001
by Focus Surgery, Inc. payable to the Company.
21 Subsidiaries of the Company.
23.1 Consent of independent auditors to inclusion of report
in Form S-8 Registration Statement.
23.2 Consent of independent auditors to inclusion of report
in Form S-8 Registration Statement.
99.1 Certification by Chief Executive Officer.
99.2 Certification by Chief Financial Officer.
- ---------------
(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.
35
(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 (Reg. 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. No Reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2002.
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.
36
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.
Michael McManus, Jr.
President and Chief
Executive Officer
Date: September 27, 2002
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, September 27, 2002
- ------------------------ Director
Gary Gelman
/s/ Michael McManus, Jr. President, Chief Executive September 27, 2002
- ------------------------ Officer, and Director
Michael McManus, Jr. (principal executive officer)
/s/ Richard Zaremba Vice President, Chief Financial September 27, 2002
- ------------------------ (principal financial and
Richard Zaremba accounting officer)
/s/ Howard Alliger Director September 27, 2002
- ------------------------
Howard Alliger
/s/ Arthur Gerstenfeld Director September 27, 2002
- ------------------------
Arthur Gerstenfeld
37
CERTIFICATIONS
--------------
I, Michael A. McManus, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of MISONIX, INC.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report.
Date: September 27, 2002 /s/ Michael A. McManus, Jr.
Chief Executive Officer
38
CERTIFICATIONS
--------------
I, Richard Zaremba, certify that:
1. I have reviewed this annual report on Form 10-K of MISONIX, INC.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report.
Date: September 27, 2002 /s/ Richard Zaremba
Chief Financial Officer
39
Item 14(a)
----------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MISONIX, INC. and Subsidiaries
Year Ended June 30, 2002
Page
-----
Reports of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . 45-46
Consolidated Balance Sheets-June 30, 2002 and 2001 . . . . . . . . . . . . . . . . 47
Consolidated Statements of Operations-Years Ended
June 30, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Consolidated Statements of Stockholders' Equity-Years Ended
June 30, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Consolidated Statements of Cash Flows-Years Ended
June 30, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 50-51
Notes to Consolidated Financial Statements 52
The following consolidated financial statement schedule is included in Item 14(a).
Schedule II-Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . 78
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.
42
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, 2002 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years ended June 30,
2002 and 2000. Our audits also included the financial statement schedule listed
in the index at Item 14(a) for the years ended June 30, 2002 and 2000. 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 as of June 30, 2002, and the consolidated results of their
operations and their cash flows for the years ended June 30, 2002 and 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.
As discussed in Note 1 to the consolidated financial statements, in fiscal year
2002, the Company changed its method of accounting for goodwill and other
intangible assets.
/s/ Ernst & Young LLP
Melville, New York
August 22, 2002
43
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, 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 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 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 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 audit provides 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, 2001, and the consolidated 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 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
44
Misonix, Inc. and Subsidiaries
Consolidated Balance Sheets
JUNE 30,
--------------------------
ASSETS 2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 1,065,465 $ 3,774,573
Investments held to maturity - 2,015,468
Accounts receivable, less allowance for doubtful accounts of $223,413 and
$157,761, respectively 6,656,932 7,210,461
Inventories 7,170,844 7,874,372
Prepaid income taxes 1,391,978 -
Deferred income taxes 388,027 2,598,538
Prepaid expenses and other current assets 715,367 787,765
------------ ------------
Total current assets 17,388,613 24,261,177
Property, plant and equipment, net 3,151,909 3,195,748
Deferred income taxes 1,757,937 1,550,769
Goodwill 4,241,319 4,069,497
Other assets 424,674 143,597
------------ ------------
Total assets $26,964,452 $33,220,788
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities $ 730,092 $ 542,532
Accounts payable 3,072,234 3,527,449
Accrued expenses and other current liabilities 1,304,824 1,308,692
Litigation settlement liabilities 174,332 6,176,000
Income taxes payable - 499,827
Current maturities of long-term debt and capital lease obligations 252,850 204,176
------------ ------------
Total current liabilities 5,534,332 12,258,676
Long-term debt and capital lease obligations 1,050,254 1,027,921
Deferred income 451,073 569,843
Minority interest 239,965 257,530
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $.01 par value-shares authorized 10,000,000; 6,180,165 and 6,121,915 issued,
and 6,105,865 and 6,055,115 outstanding, respectively 61,802 61,219
Additional paid-in capital 22,313,991 21,924,987
Retained deficit (2,021,059) (2,197,720)
Treasury stock, 74,300 and 66,800 shares, respectively (401,974) (358,237)
Accumulated other comprehensive loss (263,932) (323,431)
------------ ------------
Total stockholders' equity 19,688,828 19,106,818
------------ ------------
Total liabilities and stockholders' equity $26,964,452 $33,220,788
============ ============
See Notes to Consolidated Financial Statements.
45
Consolidated Statements of Operations
YEAR ENDED JUNE 30,
Misonix, Inc. and Subsidiaries
2002 2001 2000
------------ ------------ ------------
Net sales $29,590,453 $30,757,519 $29,042,872
Cost of goods sold 17,931,874 15,782,740 15,757,929
------------ ------------ ------------
Gross profit 11,658,579 14,974,779 13,284,943
Operating expenses:
Selling expenses 4,502,173 4,070,125 3,163,689
General and administrative expenses 6,469,704 6,511,402 5,097,389
Research and development expenses 2,103,701 1,826,604 1,372,763
Litigation (recovery) settlement expenses (1,912,959) 6,176,000 -
------------ ------------ ------------
Total operating expenses 11,162,619 18,584,131 9,633,841
------------ ------------ ------------
Income (loss) from operations 495,960 (3,609,352) 3,651,102
Other income (expense):
Interest income 273,750 538,016 660,002
Interest expense (133,438) (145,436) (154,341)
Option/license fees 24,312 24,313 24,312
Royalty income 823,642 665,292 636,657
Amortization of investments - (230,900) (208,033)
Loss on impairment of investments (952,897) (3,822,428) -
Equity in loss of Focus Surgery, Inc. - (322,565) (421,785)
Equity in loss of Hearing Innovations, Inc. - (42,694) (40,349)
Foreign currency exchange gain (loss) 11,948 (1,949) (10,255)
Miscellaneous income - 720 6,033
------------ ------------ ------------
Total other income (expense) 47,317 (3,337,631) 492,241
------------ ------------ ------------
Income (loss) before minority interest and income taxes 543,277 (6,946,983) 4,143,343
Minority interest in net income of consolidated subsidiaries 17,565 31,564 8,514
------------ ------------ ------------
Income (loss) before provision (benefit) for income taxes 560,842 (6,915,419) 4,151,857
Income tax provision (benefit) 384,181 (2,423,129) 1,630,961
------------ ------------ ------------
Net income (loss) $ 176,661 $(4,492,290) $ 2,520,896
============ ============ ============
Net income (loss) per share - Basic $ .03 $ (.75) $ .42
============ ============ ============
Net income (loss) per share - Diluted $ .03 $ (.75) $ .39
============ ============ ============
Weighted average common shares outstanding -Basic 6,077,546 6,009,482 5,937,685
============ ============ ============
Weighted average common shares outstanding - Diluted 6,648,761 6,009,482 6,516,387
============ ============ ============
See Notes to Consolidated Financial Statements.
45
Misonix, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
COMMON STOCK
$.01 PAR VALUE TREASURY STOCK
------------------ ---------------------
ACCUMULATED
ADDITIONAL RETAINED OTHER
NUMBER NUMBER PAID-IN EARNINGS COMPREHENSIVE
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL (DEFICIT) (LOSS) INCOME
--------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 5,927,470 $59,275 - - $21,719,553 $ (226,326) $ (10,117)
Net income - - - - - 2,520,896 -
Foreign currency translation
adjustment - - - - - - (44,906)
Comprehensive income - - - - - - -
Exercise of employee options 40,347 403 - - 71,648 - -
Purchase of treasury stock - - (42,900) $(219,006) - - -
Non-cash compensation charge - - - - 10,768 - -
--------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 5,967,817 59,678 (42,900) (219,006) 21,801,969 2,294,570 (55,023)
Net loss - - - - - (4,492,290) -
Foreign currency translation
adjustment - - - - - - (268,408)
Comprehensive loss - - - - - - -
Exercise of employee options 154,098 1,541 - - 123,018 - -
Purchase of treasury stock - - (23,900) (139,231) - - -
--------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2001 6,121,915 61,219 (66,800) (358,237) 21,924,987 (2,197,720) (323,431)
Net income - - - - - 176,661 -
Foreign currency translation
adjustment - - - - - - 59,499
Comprehensive income - - - - - - -
Exercise of employee options 58,250 583 - - 389,004 - -
Purchase of treasury stock - - (7,500) (43,737) - - -
--------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2002 6,180,165 $61,802 (74,300) $(401,974) $22,313,991 $(2,021,059) $ (263,932)
======================================================================================
TOTAL
STOCKHOLDERS'
EQUITY
---------------
BALANCE, JUNE 30, 1999 $ 21,542,385
Net income 2,520,896
Foreign currency translation
adjustment (44,906)
---------------
Comprehensive income 2,475,990
---------------
Exercise of employee options 72,051
Purchase of treasury stock (219,006)
Non-cash compensation charge 10,768
---------------
BALANCE, JUNE 30, 2000 23,882,188
Net loss (4,492,290)
Foreign currency translation
adjustment (268,408)
---------------
Comprehensive loss (4,760,698)
---------------
Exercise of employee options 124,559
Purchase of treasury stock (139,231)
---------------
BALANCE, JUNE 30, 2001 19,106,818
Net income 176,661
Foreign currency translation
adjustment 59,499
---------------
Comprehensive income 236,160
---------------
Exercise of employee options 389,587
Purchase of treasury stock (43,737)
---------------
BALANCE, JUNE 30, 2002 $ 19,688,828
===============
See Notes to Consolidated Financial Statements.
47
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED JUNE 30,
2002 2001 2000
----------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 176,661 $(4,492,290) $ 2,520,896
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense (recovery) 97,210 (33,698) (366,612)
Litigation recovery expense (1,912,959) - -
Deferred income tax expense (benefit) 2,003,343 (3,695,772) (140,263)
Depreciation and amortization 599,342 1,244,313 793,205
Loss on disposal of equipment 59,280 52,293 58,289
Non-cash compensation charge - - 10,768
Deferred income (118,770) 174,783 (50,560)
Foreign currency exchange (gain) loss (11,948) 1,949 10,255
Minority interest in net loss of subsidiaries (17,565) (31,564) (8,514)
Equity in loss of Focus Surgery, Inc. - 322,565 421,785
Equity in loss of Hearing Innovations, Inc. - 42,694 40,349
Loss on impairment of investments 952,897 3,822,428 -
Income tax benefit on exercise of stock options - (261,394) -
Changes in operating assets and liabilities:
Accounts receivable 144,259 55,104 (579,502)
Inventories 929,865 (3,502,973) (724,510)
Prepaid income taxes (1,391,978) - -
Prepaid expenses and other current assets (1,047) (155,272) (330,587)
Other assets (290,020) (51,186) (16,065)
Accounts payable and accrued expenses (531,313) 1,202,083 (1,670,172)
Litigation settlement liabilities (3,928,960) 6,176,000 -
Income taxes payable (512,602) (536,986) 1,010,740
----------------------------------------
Net cash (used in) provided by operating activities (3,754,305) 333,077 979,502
----------------------------------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (293,924) (623,594) (317,667)
Proceeds from sale of equipment - - 110,617
Purchases of investments held to maturity - (1,097,696) (3,004,064)
Redemption of investments held to maturity 2,015,468 2,103,496 3,970,105
Purchase of Labcaire stock (99,531) (117,349) (173,777)
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 (17,985) (1,741,904) -
Purchase of convertible debentures - Focus Surgery, Inc. (300,000) (612,658) -
Purchase of convertible debentures - Hearing Innovations, Inc. - (204,758) -
Loans to Focus Surgery, Inc., (60,000) - -
Cash paid for investment in Hearing Innovations, Inc. - - (384,000)
Loans to Hearing Innovations, Inc., net (473,909) (397,678) (261,867)
Cash paid for acquisition of Sonora Medical Systems, Inc.,
net of cash acquired - (169,713) (1,463,789)
----------------------------------------
Net cash provided by (used in) investing activities 770,119 (3,491,296) (1,524,442)
----------------------------------------
48
Misonix, Inc. and Subsidiaries
(continued on next page)
Consolidated Statements of Cash Flows (Continued)
FINANCING ACTIVITIES
Proceeds from (payments of) short-term borrowings, net 166,044 105,189 (26,348)
Payment of revolving line of credit - - (222,388)
Principal payments on capital lease obligations (205,353) (193,699) (243,119)
Payment of long-term debt (58,636) (43,629) (52,818)
Proceeds from exercise of stock options 389,587 124,559 72,051
Purchase of treasury stock (43,737) (139,231) (219,006)
----------------------------------------
Net cash provided by (used in) financing activities 247,905 (146,811) (691,628)
----------------------------------------
Effect of exchange rate changes on assets and liabilities 27,173 10,101 (55,161)
----------------------------------------
Net decrease in cash and cash equivalents (2,709,108) (3,294,929) (1,291,729)
Cash and cash equivalents at beginning of year 3,774,573 7,069,502 8,361,231
----------------------------------------
Cash and cash equivalents at end of year $ 1,065,465 $ 3,774,573 $ 7,069,502
========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 133,438 $ 111,850 $ 154,341
========================================
Income taxes $ 390,813 $ 2,130,446 $ 931,437
========================================
NON-CASH INVESTING ACTIVITIES:
Conversion of notes receivable from Hearing Innovations, Inc.
to debentures and common stock $ - $ 111,876 $ 400,000
========================================
See Notes to Consolidated Financial Statements.
49
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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 97.3% 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, the Company entered into licensing agreements to further develop one of
its medical devices (see Note 13).
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, 2002, 2001 and 2000 were approximately $8,814,000, $609,000 and $6,900,000,
respectively; $6,698,000, $249,000 and $5,096,000, respectively; and $7,003,000,
$381,000 and $5,031,000, respectively.
The following is an analysis of assets related to Labcaire:
JUNE 30,
2002 2001 2000
----------------------------------
Current assets $4,614,000 $3,008,000 $2,655,000
Long - lived assets 2,286,000 2,088,000 2,376,000
----------------------------------
Total assets $6,900,000 $5,096,000 $5,031,000
==================================
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, 2002, 2001 and 2000
were approximately $6,002,000, $100,000 and $3,686,000, respectively;
$4,625,000, $129,000 and $4,530,000, respectively; and $2,532,000, $137,000 and
$2,437,000, 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
50
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. There were no cash
equivalents at June 30, 2002. Cash equivalents at June 30, 2001 were
$1,114,940.
INVESTMENTS HELD TO MATURITY
The Company's investments consisted of commercial paper, valued at amortized
cost, which approximated 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 classified its
investments as held-to-maturity as the Company had 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 and 2000, unrealized gains on held-to-maturity marketable securities were
immaterial.
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company's policy is to review its customers' financial condition prior to
extending credit and, generally, collateral is not required. Included in sales
of medical devices, sales to one customer in 2002, 2001 and 2000 were
approximately $4,060,000, $7,685,000 and $7,849,000, respectively. Accounts
receivable from this customer were approximately $969,000 and $2,079,000 at
June 30, 2002 and 2001, respectively. At June 30, 2002 and 2001, the Company's
accounts receivable with customers outside the United States were approximately
$2,874,000 and $1,725,000, respectively, of which $2,687,000 and $1,519,000,
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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of raw materials, work-in-process and finished goods. Management
evaluates the need to record adjustments for impairments of inventory on a
quarterly basis. The Company's policy is to assess the valuation of all
inventories, including raw materials, work-in-process and finished goods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation of property and
equipment is provided using the straight-line method over estimated useful lives
ranging from 1 to 5 years. Depreciation of the Labcaire building is provided
using the straight-line method over the estimated useful life of 50 years.
Leasehold improvements are amortized over the life of the lease or the useful
life of the related asset, whichever is shorter. The Company's policy is to
periodically evaluate the appropriateness of the lives assigned to property,
plant and equipment and to adjust if necessary.
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 variable interest rates based on prime or
other similar benchmark rates.
51
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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, excluding
goodwill, 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, 2002.
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 97.3% 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").
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") Nos. 141 and 142 (SFAS 141 and SFAS
142), "Business Combinations" and "Goodwill and Other Intangible Assets,"
respectively. SFAS 141 replaces Accounting Principles Board ("APB") Opinion 16
"Business Combinations" and requires the use of the purchase method for all
business combinations initiated after June 30, 2001. It also provides guidance
on purchase accounting related to the recognition of intangible assets and the
accounting for negative goodwill. SFAS 142 requires goodwill and intangible
assets with indefinite useful lives to no longer be amortized, but instead be
tested for impairment at least annually and whenever events or circumstances
occur that indicate goodwill might be impaired.
With the adoption of SFAS 142, as of July 1, 2001, the Company reassessed the
useful lives and residual values of all acquired intangible assets to make any
necessary amortization period adjustments. Based on that assessment, only
goodwill was determined to have an indefinite useful life and no adjustments
were made to the amortization period or residual values of other intangible
assets. SFAS 142 provides a six-month transitional period from the effective
date of adoption for the Company to perform an assessment of whether there is an
indication that goodwill is impaired. To the extent that an indication of
impairment exists, the Company must perform a second test to measure the amount
of impairment. The second test must be performed as soon as possible, but no
later that the end of the fiscal year. Any impairment measured as of the date of
adoption will be recognized as the cumulative effect of a change in
52
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
accounting principle. The Company performed the first test and determined that
there is no indication that the goodwill recorded was impaired and, therefore,
the second test is not required as of the effective date. In addition, the
Company also completed its annual goodwill impairment tests for fiscal 2002 in
the fourth quarter. There were no indicators that goodwill recorded was
impaired.
Amortization of goodwill for the comparable years ended June 30, 2001 and 2000
was $525,567 and $122,053 respectively. The Company's pro forma information is
as follows for fiscal year ended June 30, 2001 and 2000 are as follows, net of
applicable income tax expense (benefit):
2001 2000
Net Income (loss): As reported $(4,492,290) $2,520,896
Pro forma (4,039,433) 2,642,949
Basic EPS: As reported (.75) .42
Pro forma (.67) .45
Diluted EPS: As reported (.75) .39
Pro forma (.67) .41
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 in accordance with SFAS No. 109, "Accounting for
Income Taxes". Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases 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 on 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
the weighted average number of common shares outstanding during the period.
Dilutive earnings per share reflects the potential dilution that would occur if
options to purchase 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 the exercise of the assumed stock options. The following
table sets forth the reconciliation of weighted average shares outstanding and
diluted weighted average shares outstanding:
2002 2001 2000
--------- --------- ---------
Weighted average common shares outstanding 6,077,546 6,009,482 5,937,685
Dilutive effect of stock options 571,215 - 578,702
--------- --------- ---------
Diluted weighted average common shares outstanding 6,648,761 6,009,482 6,516,387
========= ========= =========
53
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Employee stock options covering 413,325, 1,704,104 and 82,778 shares,
respectively, for the years ended June 30, 2002, 2001 and 2000 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," ("SFAS 130"). SFAS 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.
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.
ADVERTISING EXPENSE
The cost of advertising is expensed as of the first showing. The Company
incurred approximately $412,000, $525,000 and $262,000 in advertising costs
during 2002, 2001 and 2000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and judgments 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.
SHIPPING AND HANDLING COSTS
The Company includes all shipping and handling income and expenses incurred as a
component of selling expenses. Shipping and handling income for the years ended
June 30, 2002, 2001 and 2000 was approximately $214,000, $99,000 and $59,000,
respectively. Shipping and handling expenses, for the years ended June 30,
2002, 2001 and 2000 was approximately $456,000, $244,000 and $145,000,
respectively.
STOCK-BASED COMPENSATION
54
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
The Company accounts for its stock-based compensation plans in accordance with
APB 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which supersedes both FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121) and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS 144 retains the
fundamental provisions in SFAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
SFAS 121. For example, SFAS 144 provides guidance on how a long-lived asset
that is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike SFAS 121, SFAS 144 does not address the impairment of goodwill. Rather,
goodwill is evaluated for impairment under SFAS No. 142, "Goodwill and Other
Intangible Assets".
The Company is required to adopt SFAS 144 no later than the fiscal year
beginning after December 15, 2001. Management does not expect the adoption of
SFAS 144 for long-lived assets held for use to have a material impact on the
Company's financial statements because the impairment assessment under SFAS 144
is largely unchanged from SFAS 121. The provisions of the Statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
SFAS 144 will have on the Company's financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 and 2000 consolidated
financial statements in order to conform with the 2002 presentation.
2. ACQUISITIONS
LABCAIRE SYSTEMS, LTD.
In June 1992, the Company acquired an 81.4% interest in Labcaire, 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 treated as goodwill.
The balance of the capital stock of Labcaire is owned by three executives and
one retired executive 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.
55
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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 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 ended June 30, 2001, 9,286 shares (2.65%) were
purchased by the Company for approximately $100,000 in October 2001 for the year
ended June 30, 2002 and the remaining 9,286 shares (2.7%) will be purchased by
the Company for approximately $209,000 for the year ended June 30, 2003. The
effective date of this transaction is expected to be in October 2002. The
Company will then own 100% of Labcaire.
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.
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 values 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 was $1,814,025 and is being treated
as goodwill. In fiscal year 2002, the Company re-evaluated fixed assets
acquired from Fibra Sonics and reclassed approximately $54,000 from property
plant and equipment to goodwill. In addition to the purchase price, contingent
consideration of up to, but not exceeding, $1,120,000 may have been paid based
upon sales generated during the consecutive twelve months commencing June 1,
2001. As of June 30, 2002, sales generated did not meet the criteria to warrant
additional consideration, therefore, no additional payments were made for the
acquisition of Fibra Sonics.
SONIC TECHNOLOGIES LABORATORY SERVICES
On October 12, 2000, 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 values 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 was
$301,219 and is being treated as goodwill.
CRAMAR TECHNOLOGIES, INC.
On July 27, 2000, 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
56
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
cost of the acquisition ($272,908 plus acquisition costs of $37,898, which
includes a broker fee of $25,000) over the fair values of net assets acquired
was $257,899 and is being treated as goodwill.
SONORA MEDICAL SYSTEMS, INC.
On November 16, 1999, the Company acquired a 51% interest in Sonora for
approximately $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. The acquisition of Sonora was accounted for under the
purchase method of accounting. Accordingly, results of operations for Sonora are
included in the consolidated statements 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 was $1,622,845 and is being
treated as goodwill.
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 acquire 388,680 shares of Hearing Innovations common
stock ranging from $1.25 to $2.25 per share are also part of this agreement.
These warrants, which are deemed nominal in value, expire October 2005. 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 the
investment was $784,000 ($750,000 plus acquisition costs of $34,000). 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 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, 2002 and 2001 is $0.
On September 11, 2000, the Company loaned $108,000 to Hearing Innovations, which
together with the then outstanding loans aggregating $192,000 (with accrued
interest) were exchanged for a $300,000, 7% Secured Convertible Debenture due
August 27, 2002 and extended to November 30, 2003 (the "Hearing Debenture").
The Hearing Debenture contains warrants to acquire 250,000 shares of Hearing
Innovations common stock, at the option of the Company, for $2.25 per share.
These warrants, which are deemed nominal in value, expire October 2005. 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 Company recorded an
allowance against the entire balance of principal and accrued interest due at
57
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
June 30, 2002 and 2001 of $21,000 and $316,625, respectively. The related
expense has been included in loss on impairment of investment in the
accompanying consolidated statements 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 an aggregate amount of
$397,678 due May 30, 2002. The maturity date was extended to November 30, 2003.
All notes bear interest at 8% per annum. The notes are secured by a lien on all
of Hearing Innovations' right, title and interest in accounts receivable,
inventory, property, plant and equipment and processes of specified products
whether now existing or hereafter arising after the date of these agreements.
The loan agreements contain warrants to acquire 1,045,664 shares of acquire
Hearing Innovations common stock, at the option of the Company, at a cost that
ranges from $2.00 to $2.25 per share. These warrants, which are deemed nominal
in value, expire October 2005. The Company recorded an allowance against the
entire balance of $31,058 and $397,678 due at June 30, 2002 and 2001,
respectively. The related expense has been included in loss on impairment of
investment in the accompanying consolidated statements of operations. The
Company believes the loans are impaired since the Company does not anticipate
that these loans will be paid in accordance with the contractual terms of the
loan agreements.
During fiscal 2002, the Company entered into fifteen loan agreements whereby
Hearing Innovations was required to pay the Company an aggregate amount of
$322,679 due May 30, 2002, extended to November 30, 2003, and $151,230 due
November 30, 2003. All notes bear interest at 8% per annum and contain
warrants to acquire additional shares. The notes are secured by a lien on all
of Hearing Innovations' right, title and interest in accounts receivable,
inventory, property, plant and equipment and processes of specified products
whether now existing or arising after the date of these agreements. The loan
agreements contain warrants to acquire 548,329 shares of Hearing Innovations
common stock, at the option of the Company, at a cost that ranges from $.01 to
$2.00 per share. These warrants, which are deemed nominal in value, expire
October 2005. The Company recorded an allowance against the entire balance of
$473,909 and accrued interest of $16,230 for the above loans. The related
expense has been included in loss on impairment of loans to affiliated entities
in the accompanying consolidated statements of operations. The Company believes
the loans and related interest are impaired since the Company does not
anticipate that these loans will be paid in accordance with the contractual
terms of the loan agreements.
If the Company were to exercise all warrants associated with the above loans,
exercise the warrants associated with the Hearing Debenture and the original
investment and include the original investment ownership, the Company would hold
an interest in Hearing Innovations of approximately 41%.
Summarized financial information of Hearing Innovations as of and for the year
ended June 30, 2002 and 2001 are as follows:
Condensed Statement of Operations Information
---------------------------------------------
2002 2001
------------ ------------
Sales $ 70,466 $ 28,444
Gross profit 22,608 13,845
Net loss (1,136,468) (609,914)
57
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Condensed Balance Sheet Information
--------------------------------------
2002 2001
------------ ------------
Current assets $ 268,718 $ 298,848
Non current assets 71,844 74,121
Current liabilities 809,136 2,103,838
Non current liabilities 2,698,763 300,000
Preferred stock 295,700 295,700
Common stockholders' deficit (3,463,037) (2,326,569)
FOCUS SURGERY, INC.
On May 3, 1999, the Company invested $3,050,000 to obtain an approximately 20%
equity interest in Focus Surgery, Inc. ("Focus"), a privately-held technology
company and representation of its Board of Directors. 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 Company's
portion of the net losses of Focus were recorded since the date of acquisition.
During 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, 2002 and 2001 is $0.
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
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. The Company recorded an
allowance against the entire balance of principal and accrued interest due at
June 30, 2002 and 2001 of $15,300 and $308,991, respectively. The related
expense has been included in loss on impairment of investment in the
accompanying consolidated statements 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.
On April 12, 2001, the Company purchased a $300,000, 6% Secured Cumulative
Convertible Debenture from Focus, due May 25, 2003 (the "6% Focus Debenture").
The 6% Focus Debenture is convertible into 250 shares of Focus 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. The Company recorded an allowance against the entire balance of
principal and accrued interest due at June 30, 2002 and 2001 of $18,000 and
$303,667, respectively. The related expense has been included in loss on
impairment of investment in the accompanying consolidated statements 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.
59
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
On July 31, 2001 the Company purchased a second $300,000, 6% Secured Cumulative
Convertible Debenture from Focus, due May 25, 2003 (the "Focus Debenture"). The
Focus Debenture is convertible into 250 shares of Focus preferred stock at the
option of the Company at any time up until the due date at a purchase price of
$1,200 per share. The Focus Debenture also contains warrants, deemed nominal in
value, to purchase an additional 125 shares to be exercised at the option of the
Company. Interest accrues and is payable at maturity or is convertible on the
same terms as the Focus Debenture's principal amount. The 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 arising after the date of the Focus Debenture.
The Company recorded an allowance against the Focus Debenture of $300,000 and
accrued interest of $16,500. The related expense has been included in loss on
impairment of investment in the accompanying consolidated statements of
operations. The Company believes the loan is impaired since the Company does
not anticipate the Focus Debenture to be satisfied in accordance with the
contractual terms of the loan agreement.
If the Company were to convert the 5.1% Focus Debenture, 6% Focus Debenture and
Focus Debenture, and exercise all warrants, the Company would hold an interest
in Focus of approximately 27%.
During fiscal 2002, the Company entered into a loan agreement whereby Focus
borrowed $60,000 from the Company. This loan matured on May 30, 2002 and was
extended to December 31, 2002. The loan bears interest at 6% per annum and
contain warrants, which are deemed nominal in value, to acquire additional
shares. The loan 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 arising after the date
of the loan. The Company recorded an allowance against the entire balance of
$60,000 and accrued interest of $900. The related expense has been included in
loss on impairment of loans to affiliated entities in the accompanying
consolidated statements of operations. The Company believes that this loan is
impaired since the Company does not anticipate that this loan will be paid in
accordance with the contractual terms of the loan agreement.
Summarized financial information of Focus as of and for the year ended June 30,
2002 and 2001 are as follows:
Condensed Statement of Operations Information
- ---------------------------------------------
2002 2001
------------ ------------
Sales $ 1,380,714 $ 716,960
Gross profit 822,028 614,324
Net loss (1,218,013) (1,612,827)
Condensed Balance Sheet Information
- -----------------------------------
2002 2001
------------ ------------
Current assets $ 717,374 $ 543,523
Non current assets 426,595 487,530
Current liabilities 1,893,210 700,329
Non current liabilities 2,291,964 2,020,126
Preferred stock 4,038,707 4,038,707
Common stockholders' deficit (7,079,912) (5,728,109)
60
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
3. INVENTORIES
Inventories are summarized as follows:
JUNE 30,
2002 2001
----------------------
Raw materials $3,701,925 $3,617,258
Work-in-process 824,289 860,834
Finished goods 2,644,630 3,396,280
----------------------
$7,170,844 $7,874,372
======================
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
JUNE 30,
2002 2001
----------------------
Buildings $1,593,341 $1,539,958
Machinery and equipment 2,208,609 1,994,786
Furniture and fixtures 668,284 598,005
Automobiles 657,470 502,746
Leasehold improvements 216,878 200,973
---------- ----------
5,344,582 4,836,468
Less: accumulated depreciation
and amortization 2,192,673 1,640,720
---------- ----------
$3,151,909 $3,195,748
========== ==========
Included in machinery and equipment and furniture and fixtures at June 30, 2002
and 2001 is approximately $152,000 and $111,000, respectively, of data
processing equipment and telephone equipment under capital leases with related
accumulated amortization of approximately $48,000 and $36,000, respectively.
Also, included in automobiles are approximately $532,000 and $473,000,
respectively, under capital leases with accumulated amortization of
approximately $135,000 and $130,000, respectively. The Company leased
approximately $254,000, $207,000 and $325,000 of automobiles and equipment under
capital lease arrangements during the years ended June 30, 2002, 2001 and 2000,
respectively.
Depreciation and amortization of property, plant and equipment amounted to
$590,397, $546,787 and $450,260 for the years ended June 30, 2002, 2001 and
2000, respectively.
5. REVOLVING CREDIT FACILITIES
61
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Labcaire has an overdraft facility of $840,000 with HSBC Bank plc. until August
29, 2002. The facility bears interest at the bank's base rate (4.00% and 5.25%
at June 30, 2002 and 2001, respectively) 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 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, 2002 and 2001, the balance
outstanding under this overdraft facility was $730,092 and $542,532,
respectively, and Labcaire was in compliance with all financial covenants.
On July 1, 2002, Labcaire replaced its bank overdraft facility with HSBC Bank
plc with a debt purchase agreement with Lloyds TSB Commercial Finance. The
amount of this facility is approximately $1,384,000 ( 950,000) and bears
interest at the bank's base rate plus 1.75% and a service charge of .15% of
sales invoice value. The agreement expires on June 28, 2003 and covers all
United Kingdom and European sales.
The Company secured a $5,000,000 revolving credit facility with Fleet Bank on
January 18, 2002 to support future working capital needs. The revolving credit
facility expires January 18, 2005 and has interest rate options ranging from
Libor plus 1.0% per annum to prime rate plus .25% per annum. This facility is
secured by the assets of the Company. This facility contains certain financial
covenants, including requiring that the Company maintain a ratio of debt to
earnings before interest, depreciation, taxes and amortization of not greater
than 2 to 1; that the Company maintain a working capital ratio of not less than
1.5 to 1; and that the Company maintain a tangible net worth of $14,500,000.
The terms provide for the repayment of the debt in full on its maturity date.
On June 30, 2002, the Company had $5,000,000 available on its line of credit.
The Company is in compliance with all such covenants.
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 (4.00% and 5.25% at
June 30, 2002 and 2001, respectively) plus 2% and are collateralized by a
security interest in certain 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, 2002 and 2001, $964,387 and $989,671 were
outstanding on this loan, respectively.
On July 1 2002, Labcaire transferred its mortgage loan on their facility to
Lloyds TSB from HSBC Bank plc. The property loan of 670,000 is repayable over
180 months with interest at base rate (4% at July 1, 2002) plus 1.75% and is
collateralized by a security interest in certain assets of Labcaire.
At June 30, 2002, future principal maturities of long-term debt are as follows:
2003 $ 57,654
2004 62,630
2005 65,543
2006 68,456
2007 71,368
Thereafter 638,736
--------
$964,387
========
62
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following summarizes accrued expenses and other current liabilities:
JUNE 30,
2002 2001
---------- ----------
Accrued payroll and vacation $ 165,350 $ 135,651
Accrued sales tax 7,262 1,305
Accrued commissions and bonuses 216,343 440,603
Customer deposits and deferred contracts 526,560 557,965
Accrued professional fees 229,750 45,889
Warranty 68,000 68,000
Other 91,559 59,279
---------- ----------
$1,304,824 $1,308,692
========== ==========
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 provide for a monthly
rental amount of approximately $52,000. The Company also leases certain office
equipment and automobiles under capital leases expiring through fiscal 2007.
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, 2002:
Capital Operating
Leases Leases
-------- -----------
2003 $219,869 $ 613,797
2004 112,443 604,915
2005 32,080 608,572
2006 15,761 4,315
2007 15,761 -
-------- -----------
Total minimum lease payments 395,914 $1,831,599
===========
Amounts representing interest (57,197)
---------
Present value of net minimum lease payments
(including current portion of $195,196) $338,717
=========
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 $714,000, $622,000 and $417,000 for the years ended June 30, 2002,
2001 and 2000, respectively.
9. STOCK BASED COMPENSATION PLANS
63
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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 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, 2002, options to purchase 33,000 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,
options to purchase 327,750 shares of Common Stock had been exercised and
options to purchase 44,250 shares have been cancelled (of which options to
purchase 30,000 shares have been reissued).
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, 2002, options to
purchase 339,494 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, 2002,
options to purchase 97,195 shares of Common Stock under the 1996 Plan have been
exercised and 155,256 shares have been cancelled (of which options to purchase
141,945 shares have been reissued). At June 30, 2002, 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 of the Company. At June
30, 2002, options to purchase 480,825 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, 2002, options to
purchase 40,350 shares of Common Stock under the 1998 Plan have been cancelled
(of which options to purchase 28,925 shares have been reissued) and options to
purchase 7,750 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 of the Company. At
June 30, 2002, options to purchase 307,394 shares of Common Stock were
outstanding under the 2001 Plan at an exercise price of $6.07 per share with a
vesting period of three years. At June 30, 2002, options to purchase 2,010
shares of Common Stock under the 2001 Plan have been cancelled and no options
have been exercised.
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
64
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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 (loss) per share is required by SFAS
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 3.86% to 6.52%; no dividend yields; volatility
factor of the expected market price of the Common Stock of 53%, 84%, and 87% and
a weighted-average expected life of the options of five years for the years
ended June 30, 2002, 2001 and 2000, respectively.
The Company's pro forma information is as follows:
2002 2001 2000
------------------------------------
Net Income (loss): As reported $ 176,661 $(4,492,290) $2,520,896
Pro forma (473,480) (5,891,926) 1,908,019
Basic EPS: As reported .03 ( .75) .42
Pro forma (.08) (.98) .32
Diluted EPS: As reported .03 (.75) .39
Pro forma (.08) ( .98) .26
As required by SFAS 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 outstanding at
June 30, 2002, 2001 and 2000:
OPTIONS
---------------------------
WEIGHTED AVG.
SHARES EXERCISE PRICE
---------------------------
June 30, 1999 1,412,050 $ 2.70
Granted 48,695 6.91
Exercised (40,347) 1.79
Cancelled (66,378) 8.10
---------------------------
June 30, 2000 1,354,020 2.62
Granted 532,525 7.23
Exercised (154,098) .77
Cancelled (28,343) 6.57
---------------------------
June 30, 2001 1,704,104 3.23
GRANTED 309,404 6.07
EXERCISED (58,250) 6.69
CANCELLED (21,045) 6.25
---------------------------
JUNE 30, 2002 1,934,213 6.64
===========================
2002 2001 2000
---- ---- ----
Weighted average fair value of options granted $ 3.02 $ 5.02 $ 4.97
The following table summarizes information about stock options outstanding at
June 30, 2002:
65
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted
----------------- Average
Range of Contractual Exercise
Exercise Price Number Life (Yrs) Price Number Price
..73 628,500 5 $ .73 628,500 $ .73
2.17 - 5.31 421,850 6 $ 4.27 421,850 $ 4.27
5.50 - 7.57 858,863 8 $ 6.77 538,969 $ 7.18
12.33 - 18.50 25,000 5 $14.80 25,000 $14.80
========= ========== ====== ========= ======
1,934,213 7 $ 4.37 1,614,319 $ 4.03
--------- ---------- ------ --------- ------
As of June 30, 2002 and 2001, 1,934,213 and 1,704,104 shares of Common Stock are
reserved for issuance under outstanding options and 933,089 and 1,218,626 shares
of Common Stock are reserved for the granting of additional options,
respectively. All outstanding options expire between March 2003 and October 2011
and vest immediately or over periods of up to three years.
During fiscal years 2002 and 2001, the Company repurchased shares of its Common
Stock in the open market. During fiscal years 2002 and 2001, the Company had
purchased 7,500 and 23,900 shares at an average price of $5.83 per share for an
aggregate amount of $43,737 and $139,231, respectively. At June 30, 2002 and
2001, the Company had purchased a total of 74,300 and 66,800 shares at an
average price of $5.41 and $5.36 per share for an aggregate amount of $401,974
and $358,237, respectively.
10. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company, Medical Device Alliance, Inc. ("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
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. Accordingly, the
Company accrued an aggregate of $6,176,000 for damages, interest and other costs
during the third quarter and fourth quarter of fiscal year 2001.
On April 24, 2002, the Company resolved all issues related to the lawsuit
brought by Mentor. Under the terms of the settlement, the Company paid Mentor
$2,700,000 for its share of a combined $5,600,000 settlement with Mentor in
exchange for a complete release from any monetary liability in connection with
the lawsuit and judgment. In connection with this litigation settlement, the
Company paid $1,000,000 and forgave accounts receivable of $455,500 in exchange
for certain assets from MDA/LySonix, which the Company expects to utilize in the
future. The net realizable value of those assets was $295,751. In addition,
the Company paid $228,960 of other accrued costs during fiscal 2002. The
Company will pay the remaining accrued costs of $174,332 in fiscal 2003.
Accordingly, the Company recorded a reversal of the litigation settlement during
the fourth quarter of fiscal 2002 of $1,912,959.
66
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
In June 2002, the Company entered into a worldwide distribution agreement with
Mentor to develop and produce products in the aesthetic and cosmetic surgery
market worldwide.
EMPLOYMENT AGREEMENT
In October 2000, the Company entered into an employment agreement with its
President and Chief Executive Officer which expires on October 31, 2002. This
agreement provides for an annual base compensation of $275,000 with a guaranteed
bonus of $250,000. At the discretion of the Board of Directors, if certain
objectives are achieved, Mr. McManus can earn a higher bonus if revenue and
earnings targets as stipulated in his agreement are met. For fiscal year 2002,
Mr. McManus elected to receive a bonus of $100,000, which is to be paid in
December 2002. During fiscal year 2001, Mr. McManus elected to receive a bonus
of $150,000, which was paid in December 2001. Mr. McManus elected to receive a
reduced bonus for each such year due to the Company's results. Mr. McManus
receives additional benefits that are generally provided to other employees of
the Company.
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 (recovery) 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 years ended
June 30, 2002 and 2001 is as follows:
For the year ended June 30, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
Net sales $11,695,761 $17,894,692 $ - $ 29,590,453
Cost of goods sold 7,233,535 10,698,339 - 17,931,874
----------- ----------- --------------
Gross profit 4,462,226 7,196,353 - 11,658,579
Selling expenses 1,218,583 3,283,590 - 4,502,173
Research and development 1,554,438 549,263 - 2,103,701
----------- ----------- --------------
Total operating expenses 2,773,021 3,832,853 4,556,745 11,162,619
----------- ----------- --------------- --------------
Income from operations $ 1,689,205 $ 3,363,500 $ (4,556,745) $ 495,960
=========== =========== =============== ==============
67
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
For the year ended June 30, 2001:
(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 and litigation settlement
(recovery) expenses.
Approximately $4,060,000 and $7,685,000 of the medical device sales were made to
one customer for the years ended June 30, 2002 and 2001, respectively. Accounts
receivable from this customer were approximately $969,000 and $2,079,000 at June
30, 2002 and 2001, respectively. There were no significant concentrations of
sales or accounts receivable for industrial products for the year ended June 30,
2002 and 2001.
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,
2002 2001 2000
=====================================
United States $19,272,670 $22,868,093 $18,323,363
Canada and Mexico 243,567 164,526 2,772,413
United Kingdom 7,526,478 5,646,655 5,383,518
Europe 980,633 966,349 1,345,879
Asia 890,621 771,805 652,841
Middle East 146,387 138,898 333,904
Other 530,097 201,193 230,954
-------------------------------------
$29,590,453 $30,757,519 $29,042,872
=====================================
12. 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:
2002 2001
--------------------------
Deferred tax assets:
Bad debt reserves $ 51,529 $ 34,672
Inventory valuation 220,711 231,172
License fee income 135,118 144,592
Investments 2,363,920 2,030,514
Non-cash compensation charge 1,393,509 1,393,509
Litigation settlement 67,990 2,288,760
Net operating loss carry forward 219,866 -
Depreciation 9,444 12,668
Other 47,797 43,934
--------------------------
Total deferred tax assets 4,509,884 6,179,821
Valuation allowance (2,363,920) (2,030,514)
--------------------------
Net deferred tax asset $ 2,145,964 $ 4,149,307
==========================
68
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
As of June 30, 2002, 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, 2002. 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.
At June 30, 2002 , the Company had a net operating loss carry forward (NOL), of
approximately $2,400,000, available to reduce future state taxable income. This
NOL expires in fiscal year 2022.
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 $2,363,920 and $2,030,514
at June 30, 2002 and 2001, respectively. The Company recorded a full valuation
allowance against the asset in accordance with the provisions of SFAS No. 109
"Accounting for Income Taxes". 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, 2002 and 2001.
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 SFAS 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 expense (benefit) attributable to
operations for the years ended June 30 are as follows:
2002 2001 2000
---------------------------------------
Current:
Federal $(1,797,906) $ 1,147,087 $1,527,297
State - 108,550 218,911
Foreign 178,744 17,006 25,016
---------------------------------------
Total current (1,619,162) 1,272,643 1,771,224
Deferred:
Federal 1,969,113 (3,221,956) (128,890)
State 34,230 (473,816) (11,373)
---------------------------------------
Total deferred 2,003,343 (3,695,772) (140,263)
---------------------------------------
$ 384,181 $(2,423,129) $1,630,961
=======================================
69
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
The reconciliation of income tax expense (benefit) computed at the Federal
statutory tax rates to income tax expense (benefit) for the periods ended June
30 is as follows:
2002 2001 2000
------------------------------------
Tax (benefit) at Federal statutory
rates $190,686 $(2,351,242) $1,411,631
State income taxes, net of
Federal benefit 22,592 (241,076) 144,481
Foreign tax rate differential (61,934) (31,224) (54,534)
Valuation allowance 333,406 349,012 -
Goodwill - 117,259 41,480
Travel and entertainment 3,384 8,036 4,787
Other (103,953) (273,894) 83,116
------------------------------------
$384,181 $(2,423,129) $1,630,961
====================================
13. LICENSING AGREEMENTS FOR MEDICAL TECHNOLOGY
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 worldwide 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 years ended
June 30, 2002 and 2001. The amount of the reimbursement was $53,563 for the
fiscal year ended June 30, 2000.
On March 30, 2000, the Company, MDA and LySonix signed a new ten-year exclusive
License Agreement (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. As of July 1, 2001, the MDA Agreement became a non-exclusive agreement.
Effective April 2002, the Company and MDA/LySonix mutually agreed to terminate
the MDA Agreement.
The Company entered into a worldwide distribution agreement with Mentor to
develop and produce products in the aesthetic and cosmetic surgery market
worldwide.
70
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
14. EMPLOYEE PROFIT SHARING PLAN
The Company sponsors a retirement plan pursuant to Section 401(k) of 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 $11,000
for the year ended June 30, 2002. 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 $63,777, $54,856 and
$30,515 for the years ended June 30, 2002, 2001 and 2000, respectively.
71