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 30,2003
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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______
Commission file number: 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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 15, 2003 (computed by reference to the average bid and
asked prices of such stock on such date) was approximately $28,886,454.
There were 6,655,865 shares of Common Stock outstanding at September 15, 2003.
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.
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 100% 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.
The Company's 90% owned subsidiary, Acoustic Marketing Research, Inc. doing
business as Sonora Medical Systems, Inc. ("Sonora"), located in Longmont,
Colorado, is an ISO 9001 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 2003, approximately 35% 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 82% 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 the major portions of its revenues
are from the United Kingdom. Labcaire revenues outside the United Kingdom are
remitted in British Pounds.
Sonora represents approximately 4% 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 to Sonora in U.S. currency.
Misonix represents approximately 14% 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 to Misonix in U.S. currency.
MEDICAL DEVICES
The Company's medical device products are subject to the regulatory requirements
of the Food and Drug Administration ("FDA"). A medical device as defined by the
FDA is an instrument, apparatus implement, machine, contrivance, implant, in
vitro reagent, or other similar or related article, including a component, part,
or accessory which is recognized in the official National Formulary or the
United States Pharmacopoeia, or any supplement to such listings, intended for
use in the diagnosis of disease or other conditions, or in the cure, mitigation,
treatment, or prevention of disease, in man or animals, or intended to affect
the structure or any function of the body of man or animals, and which does not
achieve any of its primary intended purposes through chemical action within or
on the body of man or animals and which is not dependent upon being metabolized
for the achievement of any of its primary intended purposes (a "Medical
Device"). The Company's products that are subject to FDA regulations for
product labeling and promotion comply with all applicable regulations. The
Company is listed with the FDA as a Medical Device manufacturer and has the
appropriate FDA Establishment Numbers in place. The Company has a post-market
monitoring system in place such as Complaint Handling and Medical Device
Reporting procedures. All current devices manufactured and sold by the Company
have all the necessary regulatory approvals. The Company is not aware of any
situations which would be adverse at this time nor has the FDA sought legal
remedies available, or have there been any violations of its regulations
alleged, against the Company.
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. 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 $6,205,000, $4,060,000
and $7,685,000 during the fiscal years ended June 30, 2003, 2002 and 2001,
respectively. Total royalties from sales of this device were approximately
$664,000, $824,000 and $665,000 during the fiscal years ended June 30, 2003,
2002 and 2001, respectively.
In June 2002, the Company entered into a ten-year worldwide, royalty-free,
distribution agreement with Mentor Corporation ("Mentor") for the sale,
marketing and distribution of the Lysonix soft tissue aspirator used for
cosmetic surgery. This agreement is a standard agreement for such distribution
in that it specifies the product to be distributed, the terms of the agreement
and the price to be paid for product covered under the agreement. Total sales
of this device were approximately $536,000, $97,000 and $66,000 during the
fiscal years ended June 30, 2003, 2002 and 2001, respectively. Included in
litigation (recovery) settlement expenses is $254,606 which represents the sale
of Lysonix 2000 units by Mentor that were received by Mentor from LySonix, Inc.
("LySonix") in connection with inventory received under the settlement agreement
with LySonix. This inventory was previously reserved for in fiscal year June
30, 2002, as its salability was uncertain. See Item 3. Legal Proceedings.
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 gave 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 reclassified approximately $54,000 from property,
plant and equipment to goodwill.
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(R) 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 to utilize 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 and liver tumors utilizing HIFU technology and in
fiscal 2003 funded $100,000 to Focus, which is recorded as research and
development expenses.
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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. There have been 106 people successfully treated for
prostate cancer in Europe. Endocare, Inc. did not meet the minimum requirements
in accordance with the distribution agreement so therefore the agreement became
non-exclusive. In the U.S., the Sonablate 200 completed Phase III clinical
trials for the non-invasive treatment of BPH, commonly known as enlarged
prostate. The results of the trials have been returned to Focus due to missing
data elements which should be incorporated and submitted back to the FDA during
the third or fourth calendar quarter of 2003. Focus is also utilizing HIFU
technology to clinically treat prostate cancer in Japan where there have been
180 people successfully treated.
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
unsuccessfully 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 40 patients for prostate cancer, 20 of whom have never
been treated previously and 4 of whom have been unsuccessfully treated by
another modality.
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 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,
2003 and 2002. The related expense has been included in loss on impairment of
investment in the accompanying consolidated statements of operations. The 5.1%
Focus Debenture is currently in default and the Company is negotiating an
extended due date and conversion right. 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, 2003. The related expense has
been included in loss on impairment of investment in the accompanying
consolidated statements of operations. The 6% Focus Debenture is currently in
default and the Company is negotiating an extended due date. 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 for two years at a
conversion 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
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against the entire balance of principal and accrued interest due at June 30,
2003. The related expense has been included in loss on impairment of
investment in the accompanying consolidated statements of operations. The Focus
Debenture is currently in default and the Company is negotiating an extended due
date. The Company believes the Focus Debenture is impaired since the Company
does not anticipate that the Focus Debenture will be paid 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
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 principal and accrued interest due at June 30, 2003. The related expense has
been included in loss on impairment of investment in the accompanying
consolidated statements of operations. The loan is currently in default and the
Company is negotiating an extended due date. 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, 2003 is $0. Under the equity method of accounting, if
the equity investment was ever deemed not impaired, the Company would have to
record its share of Focus Surgery's losses since 2001 before the Company can
record income from Focus.
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 with exercise prices ranging from $1.25 to $2.25 per share were also part
of this agreement. These warrants, which are deemed nominal in value, expire in
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 Farmingdale, New York. Hearing
Innovations is focusing on multiple applications for its patented supersonic
bone conduction hearing technology. The HiSonic(R) is a 510(k) approved (FDA
approved) non-invasive 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
non-invasive 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 worldwide suffer from Tinnitus, of which approximately 2 million cases
are considered severe. There are currently no cures but only temporary relief.
Hearing Innovations started to test market the device in the Northeast of the
United States to develop marketing data for ultimately a product launch. Hearing
Innovations is still collecting data and has not drawn any conclusions for such.
Hearing Innovations has also received 510(k) approval 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, in the aggregate, warrants to
acquire 250,000 shares of Hearing Innovations common stock, at the option of the
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Company, for a purchase price of $2.25 per share. These warrants, which are
deemed nominal in value, expire in 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, 2003. 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, in the aggregate, 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 in October 2005. The Company recorded an
allowance against the entire balance and interest due at June 30, 2003. The
related expense has been included in loss on impairment of investment in the
accompanying consolidated statements of operations. The Company believes the
loans and the related interest 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
agreements. The loan agreements contain, in the aggregate, 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 in October 2005. The Company recorded
an allowance against the entire balance and accrued interest due at June 30,
2003. 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.
During fiscal 2003, the Company entered into sixteen loan agreements whereby
Hearing Innovations is required to pay the Company an aggregate amount of
$274,991 due November 30, 2003. All notes bear interest at 8% per annum. The
notes are secured by a lien on all of Hearing Innovations' right, title and
interest in accounts receivable, inventory, property, plant and equipment and
processes of specified products whether now existing or arising after the date
of these agreements. The loan agreements contain, in the aggregate, warrants to
acquire 274,991 shares of Hearing Innovations common stock, at the option of the
Company, at a cost of $.10 to $1.00 per share. These warrants, which are deemed
nominal in value, expire in October 2005. The Company recorded an allowance
against the entire balance of $274,991 for the above loans as well as accrued
interest of $23,241 for the above loans and debentures. The related expense
has been included in loss on impairment of Hearing Innovations 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. In November 2002, the Company signed a management agreement
with Hearing Innovations whereby the Company earns $17,000 per month for those
services. These amounts have been fully reserved by the Company, as the
collectibility of these amounts is uncertain.
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 44%.
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
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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, 2003 is $0. Under the equity method of
accounting, if the equity investment was ever deemed not impaired, the Company
would have to record its share of Hearing Innovations' losses since 2001 before
the Company can record income from Hearing Innovations.
In August 2002, the President of Hearing Innovations resigned and the Board of
Directors of Hearing Innovations named Kenneth Coviello Chief Executive Officer
and a board member of Hearing Innovations. This appointment has not been
ratified by the stockholders of Hearing Innovations. Kenneth Coviello is the
Vice President of Medical Devices of the Company.
In March 2003, the Board of Directors of Hearing Innovations assigned Richard
Zaremba a temporary board position. This appointment has not been ratified by
the stockholders of Hearing Innovations. Richard Zaremba is the Vice President
and Chief Financial Officer of the Company.
The current ability of companies such as Hearing Innovations to access capital
markets or incur third party debt is very limited and is likely to remain so for
the foreseeable future. In light of this fact, the Company continues to review
strategic options available to it and Hearing Innovations due to Hearing
Innovations' continuing need for financial support.
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 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
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 manufacture and
sale of the Sonicator(R) ultrasonic liquid processor and cell disrupter, the
distribution of other ultrasonic equipment for scientific and industrial
purposes, the manufacture and sale of Aura ductless fume enclosures for
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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 crime laboratories. 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 100% interest in Labcaire. The balance of the capital stock of
Labcaire was 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 was 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, which amount is being treated as goodwill. 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%) were purchased by the Company for approximately $232,394 in October 2002
for the year ended June 30, 2003. Total goodwill associated with Labcaire is
$1,214,808 of which $1,063,294 remains at June 30, 2003.
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 are similar to the Aura fume enclosures in
that 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.
7
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"), which is
used predominantly in hospitals. 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 incorporates many of the UK standards into its endoscopic cleaner and is
working toward being fully compliant with 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, a significant customer, for marketing
its ultrasonic surgical device. The Company relies on direct salespersons and
distributors such as Mentor, Aesculap, Inc. and ACMI Corporation and independent
distributors 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 U.S.
Focus is utilizing an international distribution partner, Endocare, Inc., in a
non-exclusive agreement, to distribute the Sonablate 500 in the European market.
Hearing Innovations plans on marketing and selling its products through
audiologists and otolaryngologists.
In June 2002, the Company entered into a ten-year worldwide, royalty-free,
distribution agreement with Mentor for the sale, marketing and distribution of
the Lysonix 2000 soft tissue aspirator used for cosmetic surgery.
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 three manufacturing
representatives and twenty distributors in the United States. The Company
currently employs direct sales persons who operate outside the Company's offices
and conducts direct marketing on a regional basis.
The market for the Company's ductless fume enclosures includes laboratory or
industrial environments in which workers may be exposed to noxious fumes or
vapors. The products are suited to laboratories in which personnel perform
functions which release noxious fumes or vapors (including hospital and medical
laboratories), industrial processing (particularly involving the use of
solvents) and soldering, and other general chemical processes. The products are
particularly suited to users in the pharmaceutical, semiconductor,
biotechnology, and forensic industries.
The largest market for the Company's Sonicator includes research and clinical
laboratories worldwide. In addition, the Company has expanded its sales of the
ultrasonic processor into industrial markets such as paint, pigment, ceramic and
pharmaceutical manufacturers.
8
In fiscal 2003, 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 and
hospital environmental control products, such as the Guardian endoscope cleaning
device. 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., Valley Lab, a division of Tyco Healthcare, Integra Life Sciences, Inc.,
Ambassador Medical, a subsidiary of GE Medical, and Pyramid Medical.
Industrial Products
Competitors in the ultrasonic industry for industrial products include 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
9
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 include 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, Air Cleaning Systems, Inc. and Lancer UK Ltd.
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.
REGULATORY REQUIREMENTS
The Company's Medical Device products are subject to the regulatory requirements
of the FDA. A medical device as defined by the FDA is an instrument, apparatus
implement, machine, contrivance, implant, in vitro reagent, or other similar or
related article, including a component, part, or accessory which is recognized
in the official National Formulary or the United States Pharmacopoeia, or any
supplement to such listings, intended for use in the diagnosis of disease or
other conditions, or in the cure, mitigation, treatment, or prevention of
disease, in man or animals, or intended to affect the structure or any function
of the body of man or animals, and which does not achieve any of its primary
intended purposes through chemical action within or on the body of man or
animals and which is not dependent upon being metabolized for the achievement of
any of its primary intended purposes (a "Medical Device"). The Company's
products that are subject to FDA regulations for product labeling and promotion
comply with all applicable regulations. The Company is listed with the FDA as a
Medical Device manufacturer and has the appropriate FDA Establishment Numbers in
place. The Company has a post-market monitoring system in place such as
Complaint Handling and Medical Device Reporting procedures. All current devices
manufactured and sold by the Company have all the necessary regulatory
approvals. The Company is not aware of any situations which would be adverse at
this time nor has the FDA sought legal remedies available, or have there been
any violations of its regulations alleged, against the Company.
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.
10
5,248,296 Wire with sheath - relating to the Company's 09/23/1993 12/24/2010
Alliger System for reducing transverse motion in
its catheters.
5,306,261 Guidewire guides - relating to the Company's 04/26/1994 01/22/2013
Alliger System for a catheter with collapsible
wire guide.
5,443,456 Guidewire guides - relating to the Company's 08/22/1995 02/10/2014
Alliger System for a catheter with collapsible
wire guide.
5,371,429* Flow-thru transducer - relating to the Company's 12/06/1994 09/28/2013
liposuction system and its ultrasonic industrial
products for an electromechanical transducer
device.
5,397,293 Catheter sheath -relating to the Company's 03/14/1995 11/25/2012
Alliger System for an ultrasonic device with
sheath and transverse motion damping.
5,419,761* Liposuction - relating to the Company's 05/30/1995 08/03/2013
liposuction apparatus and associated method.
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 Company's
soft tissue aspiration system and ultrasonic
industrial products.
5,516,043 Atomizer horn - relating to an ultrasonic 05/14/1996 06/30/2014
atomizing device, which is used in the
Company's industrial products.
Number Description Issue Date Expiration Date
- ---------- ------------------------------------------------ ---------- ---------------
5,527,273* Ultrasonic probes - relating to an ultrasonic 06/18/1996 10/6/2014
lipectomy probe to be used with the Company's
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.
11
5,486,162 Bubble control device for an ultrasonic surgical 01/23/1996 01/11/2015
probe.
5,562,609 Ultrasonic surgical probe. 10/08/1996 10/07/2014
5,562,610 Needle for ultrasonic surgical probe. 10/08/1996 10/07/2014
5,904,669 Magnetic ball valves and control module. 05/18/1999 10/25/2016
6,033,375 Ultrasonic probe with isolated and teflon coated 03/07/2000 12/23/2017
outer cannula.
6,270,471 Ultrasonic probe with isolated outer cannula. 08/07/2001 12/23/2017
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.
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
6,582,440 Non-clogging catheter for lithotrity. 06/24/2003 12/26/2016
6,578,659 Ultrasonic horn assembly. 06/17/2003 12/01/2020
6,454,730 Thermal film ultrasonic dose indicator. 09/24/2002 04/02/2019
* 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
- ------------ ------------ --------- ---------------------------------- ------------
2,611,532 08/27/2002 Mystaire Scrubbers Employing Fine Sprays 08/27/2012
Passing Through Mesh for
Eliminating Fumes and Odors from
Gases.
1,219,008 12/07/1982 Sonimist Ultrasonic and Sonic Spray Nozzle 03/22/2013
for Vaporizing Fluid for
Commercial, Industrial and
Laboratory Use.
12
1,200,359 04/03/2002 Water Web Lamination of Screens to Provide 04/03/2013
Mesh to be Inserted in Fluid
Stream for Mixing or Filtering of
Fluids.
2,051,093 03/27/2003 Misonix Anti-Pollution Wet Scrubbers; 03/27/2009
Ultrasonic Cleaners; Spray Nozzles
for Ultrasonic Cleaners.
2,051,092 02/13/2003 Misonix Ultrasonic Liquid Processors; 02/13/2009
Ultrasonic Biological Cell
Disrupters; Ultrasonic Cleaners.
2,320,805 02/22/2000 Aura Ductless Fume Enclosures. 02/22/2006
1,195,570 07/14/2002 Astrason Portable Ultrasonic Cleaners 07/14/2012
featuring Microscopic Shock
Waves.
BACKLOG
As of June 30, 2003, the Company's backlog (firm orders that have not yet been
shipped) was $5,600,000, as compared to approximately $5,100,000 as of June 30,
2002. The Company's backlog relating to industrial products, including
Labcaire, was approximately $2,600,000 at June 30, 2003, as compared to
$2,300,000 as of June 30, 2002. The Company's backlog relating to medical
devices, including Sonora, was approximately $3,000,000 at June 30, 2003, as
compared to approximately $2,800,000 at June 30, 2002.
EMPLOYEES
As of September 15, 2003, the Company, including Labcaire and Sonora, employed a
total of 201 full-time employees, including 25 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,
2003 2002 2001
----------- ----------- -----------
Medical devices $17,504,978 $11,695,761 $13,022,541
Industrial products 17,353,773 17,894,692 17,734,978
----------- ----------- -----------
Net sales $34,858,751 $29,590,453 $30,757,519
=========== =========== ===========
The following table provides a breakdown of foreign sales by geographic area
during the periods indicated:
Fiscal year ended
June 30,
2003 2002 2001
----------- ----------- -----------
Canada $ 446,307 $ 230,567 $ 162,526
Mexico 6,230 13,000 2,000
United Kingdom 8,767,304 7,526,478 5,646,655
13
Europe 1,357,245 980,633 966,349
Asia 1,193,294 890,621 771,805
Middle East 139,501 146,387 138,898
Other 345,643 530,097 201,193
----------- ----------- ----------
$12,255,524 $10,317,783 $7,889,426
=========== =========== ==========
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 $38,000 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.
ITEM 3. LEGAL PROCEEDINGS.
- -------- -------------------
The Company, Medical Device Alliance, Inc. ("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 awarded in favor of Mentor of
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 liposuction. The Court affirmed that the lower court did
not have the ability to increase damages or award attorneys' fees. Each
defendant was 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 the $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, leaving an
unpaid accrued balance of $174,332 as of June 30, 2002. The Company paid
$4,332 of other accrued costs during fiscal 2003. The Company also recorded an
additional reserve for net assets received in fiscal 2002 in connection with the
settlement of $80,171 during fiscal year 2003. In addition, the Company
recorded a reversal of the litigation settlement for unpaid professional fees
during the fourth quarter of fiscal 2003 of $170,000.
In June 2002, the Company entered into a ten-year worldwide, royalty-free,
distribution agreement with Mentor for the sale, marketing and distribution of
the Lysonix soft tissue aspirator used for cosmetic surgery. This agreement is
a standard agreement for such distribution in that it specifies the product to
be distributed, the terms of the agreement and the price to be paid for product
covered under the agreement. The agreement was not conditional upon execution
of the court settlement noted above.
14
The Company's revenues derived from sales of the LySonix soft tissue aspirator
and accessories were approximately $536,000, $97,000 and $66,000 during its
fiscal year ended June 30, 2003, 2002 and 2001, respectively, comprising
approximately 1.5%, 0% and 0%, respectively, of gross revenues. Included in
litigation (recovery) settlement expenses is $254,606 which represents the sale
of Lysonix 2000 units by Mentor that were received by Mentor from LySonix in
connection with inventory received under the settlement agreement with LySonix.
This inventory was previously reserved for in fiscal year June 30, 2002, as its
salability was uncertain.
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, 2003.
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 2003: High Low
- ------------ ----- -----
First Quarter . . . . . . $6.25 $5.05
Second Quarter . . . . . . 5.40 3.55
Third Quarter . . . . . . 3.77 2.38
Fourth Quarter . . . . . . 4.14 2.35
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
(b) As of September 15, 2003, the Company had 6,655,865 shares of Common Stock
outstanding and 117 shareholders of record. This does not take into account
shareholders whose shares are held in "street name" by brokerage houses.
(c) The Company has not paid any dividends since its inception. The Company
currently does not intend to pay any cash dividends in the foreseeable future,
but intends to retain all earnings, if any, in its business operations.
15
EQUITY COMPENSATION PLAN INFORMATION:
- -------------------------------------
c) NUMBER OF SECURITIES
b) WEIGHTED REMAINING FOR FUTURE
a) NUMBER OF AVERAGE EXERCISE ISSUANCE UNDER EQUITY
SECURITIES TO BE ISSUED PRICE OF THE COMPENSATION PLANS
UPON THE EXERCISE OF OUTSTANDING (EXCLUDING SECURITIES
PLAN CATEGORY OUTSTANDING OPTIONS OPTIONS REFLECTED IN COLUMN a)
- ----------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders.
- ----------------------------------------------------------------------------------------------
I. 1991 Plan 30,000 $ 7.38 17,250
II. 1996 Director's Plan 210,000 $ 3.69 211,500
III. 1996 Plan 312,207 $ 5.90 40,598
IV. 1998 Plan 462,225 $ 6.37 30,025
V. 2001 Plan 595,079 $ 5.56 404,921
- ----------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders - - -
- ----------------------------------------------------------------------------------------------
Total 1,609,511 $ 5.65 704,294
==============================================================================================
ITEM 6. SELECTED FINANCIAL DATA.
- -------- --------------------------
Selected income statement data:
Year Ended June 30,
2003 2002 2001 2000 1999
----------- ----------- ------------ ----------- -----------
Net sales $34,858,751 $29,590,453 $30,757,519 $29,042,872 $24,767,163
Net income (loss) 967,575 176,661 (4,492,290) 2,520,896 1,964,758
Net income (loss) per share-
Basic $ .15 $ .03 $ (.75) $ .42 $ .34
Net income (loss) per share-
Diluted $ .15 $ .03 $ (.75) $ .39 $ .30
Selected balance sheet data:
June 30,
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Total assets $29,794,589 $26,964,452 $33,220,788 $31,163,622 $28,779,090
Long-term debt
and capital lease
obligations $ 1,235,362 $ 1,050,254 $ 1,027,921 $ 1,274,738 $ 1,271,814
Total stockholders'
equity $21,342,663 $19,688,828 $19,106,818 $23,882,188 $21,542,385
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,
2003 2002 2001
------ ------ -------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 58.4 60.6 51.3
------ ------ -------
Gross profit 41.6 39.4 48.7
------ ------ -------
Selling expenses 11.9 15.2 13.2
General and administrative expenses 20.1 21.9 21.2
Research and development expenses 6.1 7.1 5.9
Litigation (recovery) settlement expenses (1.0) (6.5) 20.1
------ ------ -------
Total operating expenses 37.1 37.7 60.4
------ ------ -------
Income (loss) from operations 4.5 1.7 (11.7)
Other income (expense) .9 .2 (10.9)
------ ------ -------
Income (loss) before minority interest and income taxes 5.4 1.9 (22.6)
Minority interest in net (income) loss of
consolidated subsidiaries (.1) - .1
------ ------ -------
Income (loss) before provision for income
taxes 5.3 1.9 (22.5)
Income tax provision (benefit) 2.5 1.3 (7.9)
------ ------ -------
Net income (loss) 2.8% .6% (14.6)%
====== ====== =======
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 sale of Medical
Devices, which include manufacture and distribution of ultrasonic medical
devices and Industrial Products which include, 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, 2003 and 2002
- ------------------------------------------------
Net sales. Net sales of the Company's medical devices and industrial products
- -----------
increased $5,268,298 to $34,858,751 in fiscal 2003 from $29,590,453 in fiscal
2002. This difference in net sales is due to an increase in sales of medical
devices of $5,809,217 to $17,504,978 in fiscal 2003 from $11,695,761 in fiscal
2002. This increase is offset by lower industrial product sales of $540,919 to
$17,353,773 in fiscal 2003 from $17,894,692 in fiscal 2002. The increase in
17
sales of medical devices is due to an increase in sales of diagnostic medical
devices of $2,613,214 and an increase of $3,196,003 in sales of therapeutic
medical devices, both due to increased customer demand for several diagnostic
and therapeutic medical products. The increase in sales for diagnostic medical
devices was not attributable to a single customer, distributor or any other
specific factor. The increase in sales for therapeutic medical devices was
mostly attributable to an increase in sales to USS of approximately $2,145,000.
The remaining increase in therapeutic medical devices is due to increased demand
for all products. The decrease in industrial products is due to decreased wet
scrubber sales of $1,227,154 and a decrease in ductless fume enclosure sales of
$616,769 primarily offset by an increase in Labcaire sales of $1,130,075 and
ultrasonic sales of $172,929. Wet scrubber sales continue to be adversely
affected by the downturn of the semi-conductor market. The decrease in fume
enclosure sales is due to lower customer demand for several industrial products
and current economic conditions for such products. The increase in Labcaire
sales is primarily due to the demand for the new Guardian (endoscopic cleaning)
product introduced in December 2001. Export sales from the United States are
remitted in U.S. Dollars and export sales for Labcaire are remitted in British
Pounds. During fiscal 2003 and fiscal 2002, the Company had foreign net sales
of $12,255,524 and $10,317,783, respectively, representing 35.2% and 34.9% of
net sales for such years, respectively. The increase in foreign sales in fiscal
2003 as compared to fiscal 2002 is substantially due to an increase in Labcaire
sales of $1,130,075. Labcaire represented 82% and 85% of foreign net sales
during fiscal 2003 and fiscal 2002, respectively. Approximately 29% of the
Company's revenues in the year ended June 30, 2003 were received in English
Pounds currency. To the extent that the Company's revenues are generated in
English Pounds, its operating results are translated for reporting purposes into
U.S. Dollars using weighted average rates of 1.59 and 1.44 for the year ended
June 30, 2003 and 2002, respectively. A strengthening of the English Pound, in
relation to the U.S. Dollar, will have the effect of increasing reported
revenues and profits, while a weakening of the English Pound will have the
opposite effect. Since the Company's operations in England generally set prices
and bids for contracts in English Pounds, a strengthening of the English Pound,
while increasing the value of its UK assets, might place the Company at a
pricing disadvantage in bidding for work from manufacturers based overseas. The
Company collects its receivables in the currency the subsidiary resides in. The
Company has not engaged in foreign currency hedging transactions, which include
forward exchange agreements.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region for the year ending
June 30:
2003 2002
----------- -----------
United States $22,603,227 $19,272,670
Canada 446,307 230,567
Mexico 6,230 13,000
United Kingdom 8,767,304 7,526,478
Europe 1,357,245 980,633
Asia 1,193,294 890,621
Middle East 139,501 146,387
Other 345,643 530,097
----------- -----------
$34,858,751 $29,590,453
=========== ===========
Summarized financial information for each of the segments for the years ended
June 30, 2003 and 2002 are as follows:
For the year ended June 30, 2003:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
-------------- ------------- --------------- --------------
Net sales $ 17,504,978 $ 17,353,773 $ - $ 34,858,751
Cost of goods sold 9,725,617 10,628,941 - 20,354,558
-------------- ------------- --------------
Gross profit 7,779,361 6,724,832 - 14,504,193
Selling expenses 1,406,543 2,725,534 - 4,132,077
Research and development 1,400,336 708,976 - 2,109,312
-------------- ------------- --------------
Total operating expenses 2,806,879 3,434,510 6,678,653 12,920,042
-------------- ------------- --------------- --------------
Income from operations $ 4,972,482 $ 3,290,322 $ (6,678,653) $ 1,584,151
============== ============= =============== ==============
18
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
============= =========== =============== ==============
(a) Amount represents general and administrative and litigation settlement
(recovery) expenses.
Net sales for the three months ended June 30, 2003 were $10,926,239 compared to
$7,893,175 for the same period in fiscal 2002. This increase of $3,033,064 for
the three months ended June 30, 2003 is due to an increase in sales of medical
devices of $2,179,077 and an increase in industrial products sales of $853,987.
The increase in sales of medical devices is due to an increase in sales of
diagnostic medical devices of $818,761 and an increase of $1,360,316 in sales of
therapeutic medical devices, both due to increased customer demand for several
diagnostic and therapeutic medical products. The increase in sales for
diagnostic medical devices was not attributable to a single customer,
distributor or any other specific factor. The increase in sales for therapeutic
medical devices was mostly attributable to an increase in sales to USS of
approximately $950,000. The increase in industrial products sales is due to
increased Labcaire sales of $639,455, an increase in ultrasonic sales of
$226,483 and an increase in wet scrubber sales of $109,399 primarily offset by
a decrease in ductless fume enclosure sales of $121,350. The increase in
Labcaire sales is primarily due to the demand for the new Guardian (endoscopic
cleaning) product introduced in December 2001. The decrease in fume enclosure
sales is due to lower customer demand for several industrial products and
current economic conditions for such products.
Summarized financial information for each of the segments for the three months
ended June 30, 2003 and 2002 are as follows:
For the three months ended June 30, 2003:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
----------- -------------- --------------- -------------
Net sales $ 5,735,495 $ 5,190,744 $ - $ 10,926,239
Cost of goods sold 3,254,408 3,369,032 - 6,623,440
----------- -------------- -------------
Gross profit 2,481,087 1,821,712 - 4,302,799
Selling expenses 369,461 639,391 - 1,008,852
Research and development 320,514 189,032 - 509,546
----------- -------------- -------------
Total operating expenses 689,975 828,423 1,913,059 3,431,457
----------- -------------- --------------- -------------
Income from operations $ 1,791,112 $ 993,289 $ (1,913,059) $ 871,342
=========== ============== =============== =============
For the three months ended June 30, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
-------------- ------------- --------------- --------------
Net sales $ 3,556,418 $ 4,336,757 $ - $ 7,893,175
Cost of goods sold 2,641,767 3,151,304 - 5,793,071
-------------- ------------- --------------
Gross profit 914,651 1,185,453 - 2,100,104
Selling expenses 405,777 874,621 - 1,280,398
Research and development 348,754 143,642 - 492,396
-------------- ------------- --------------
Total operating expenses 754,531 1,018,263 (204) 1,772,590
-------------- ------------- --------------- --------------
Income from operations $ 160,120 $ 167,190 $ 204 $ 327,514
============== ============= =============== ==============
(a) Amount represents general and administrative and litigation settlement
(recovery) expenses.
19
Gross profit. Gross profit increased to 41.6% in fiscal 2003 from 39.4% in
- --------------
fiscal 2002. Gross profit for medical devices increased to 44.4% in fiscal
2003 from 38.2% in fiscal 2002. Gross profit for industrial products decreased
to 38.8% in fiscal 2003 from 40.2% in fiscal 2002. For fiscal year 2003,
gross profit was positively impacted by the favorable order mix for sales of
therapeutic and diagnostic medical devices; Mystaire scrubber sales had a
significant increase in gross margin on all of its products, predominately due
to the implementation of cost reduction efforts; and increased sales by
Labcaire, whose products traditionally carry lower gross margins. Gross profit
increased to 39.4% of sales in the three months ended June 30, 2003 from 26.6%
of sales in the three months ended June 30, 2002. Gross profit for medical
devices increased to 43.3% of sales in the three months ended June 30, 2003 from
25.7% of sales in the three months ended June 30, 2002. Gross profit for
industrial products increased to 35.1% of sales in the three months ended June
30, 2003 from 27.3% of sales in the three months ended June 30, 2002. For the
three months ended June 30, 2003, gross profit was positively impacted by the
favorable order mix for sales of therapeutic and diagnostic medical devices;
Mystaire scrubber and fume enclosure sales had a significant increase in gross
margin on all of its products, predominately due to the implementation of cost
reduction efforts; the above were offset by an increase in sales by Labcaire,
whose products traditionally carry lower gross margins. The Company
manufactures and sells both medical devices and industrial products with a wide
range of product costs and gross margin dollars as a percentage of revenues.
Selling expenses. Selling expenses decreased $370,096 or 8.2% to $4,132,077
- -----------------
(11.9% of sales) in fiscal 2003 from $4,502,173 (15.2% of sales) in fiscal 2002.
Medical device selling expenses increased $187,960 predominantly due to
additional sales and marketing efforts of diagnostic medical devices. Industrial
selling expenses decreased $558,056 predominantly due to a decrease in fume
enclosure and industrial ultrasonic commissions and wet scrubber employees, due
to the reduction of staff, marketing expenses and a decrease in Labcaire sales
personnel. Selling expenses decreased $271,546 or 21.2% from $1,280,398 (16.2%
of sales) in the three months ended June 30, 2002 to $1,008,852 (9.2% of sales)
in the three months ended June 30, 2003. Industrial selling expenses decreased
$235,230 predominantly due to decreased sales commissions for the wet scrubber
products and a transfer of salaries of two Labcaire employees to general and
administrative expenses from selling expenses. Medical device selling expenses
decreased $36,316 predominantly due to less sales and marketing efforts for
therapeutic medical devices partially offset by additional sales and marketing
efforts of diagnostic medical devices.
General and administrative expenses. General and administrative expenses
- --------------------------------------
increased $553,384 or 8.6% to $7,023,088 in fiscal 2003 from $6,469,704 in
fiscal 2002. The increase is predominantly due to an increase in general and
administrative expenses relating to severance costs and a transfer of two
employees from selling expenses, all attributable to Labcaire. General and
administrative expenses increased $143,633 or 7.5% to $2,056,388 in the three
months ended June 30, 2003 from $1,912,755 in the three months ended June 30,
2002. The increase is predominantly due to an increase in general and
administrative expenses relating to severance costs and an increase in
administrative staff, all attributable to Labcaire.
Research and development expenses. Research and development expenses increased
- ----------------------------------
$5,611 or .3% to $2,109,312 in fiscal 2003 from $2,103,701 in fiscal 2002.
Research and development expense related to medical devices decreased $154,103
and research and development expensed related to industrial products increased
$159,714. During fiscal year 2003, the Company funded $100,000 to Focus Surgery
to start research and development for the treatment of kidney and liver tumors
utilizing high intensity focused ultrasound technology. The Company has the
right to the technology if the Company funds the development. The Company has
exercised its right and started to fund the development of treatment of kidney
and liver tumors. During fiscal year 2003, three customers reimbursed the
Company, in the amount of approximately $260,000, for certain product
development expenditures incurred. Research and development expenses increased
$17,150 or 3.5% from $492,396 in the three months ended June 30, 2002 to
$509,546 in the three months ended June 30, 2003.
20
Litigation (recovery) settlement expenses. The Company recorded a reversal of
- ---------------------------------------------
the litigation settlement for fiscal 2003 of $344,435. This reversal represents
the following: the sale of $254,606 of Lysonix 2000 units by Mentor that were
received by Mentor from LySonix in connection with inventory received under the
settlement agreement with LySonix (this inventory was previously reserved for in
fiscal year June 30, 2002, as its salability was uncertain) and the reversal of
an accrual of $170,000 for unpaid professional fees offset by an additional
reserve for net assets received in connection with the settlement of $80,171. In
fiscal year 2002, 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 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 awarded in favor of Mentor of
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 liposuction. The Court affirmed that the lower court did
not have the ability to increase damages or award attorneys' fees. Each
defendant was 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 the $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.
In June 2002, the Company entered into a ten-year worldwide, royalty-free,
distribution agreement with Mentor for the sale, marketing and distribution of
the Lysonix 2000 soft tissue aspirator used for cosmetic surgery. This
agreement is a standard agreement for such distribution in that it specifies the
product to be distributed, the terms of the agreement and the price to be paid
for product covered under the agreement.
Other income (expense). Other income was $292,701 in fiscal 2003 as compared to
- ------------------------
$47,317 in fiscal 2002. Other income was $218,927 in the three months ended
June 30, 2003 as compared to $36,402 in the three months ended June 30, 2002.
The increase of $245,384 for the fiscal year was primarily due to a decrease in
loss on impairment of investments of Focus Surgery of $396,975 and Hearing
Innovations of $243,965, offset by lower royalty income of $159,928 and lower
interest income of $207,548. The decrease in impairment of Focus Surgery and
Hearing Innovations is a direct result of current period loans to Focus Surgery
and Hearing Innovations being less than in the prior period. Royalties
decreased since the first six months of fiscal 2002 included additional royalty
payments of approximately $150,000, which was based upon an audit of USS'
records for prior years' royalties. The audit showed that USS owed (and
subsequently paid) royalties due on prior year sales that were not included in
the original royalty computation. The decrease in interest income is due to
less cash on hand and lower interest yields during the year as compared to the
prior year.
Income taxes. The effective tax rate is 47.8% for the fiscal year ended June 30,
- ------------
2003 as compared to an effective tax rate of 68.5% for the fiscal year ended
June 30, 2002. The current effective tax rate of 47.8% was impacted by no
corresponding income tax benefit from the loss of the impairment of Hearing
Innovations and Focus Surgery by $311,957 plus the standard consolidated tax
rate of approximately 35%. The loss on impairment of investments is recorded
with no corresponding tax benefit since these transactions are capital losses.
The benefit for such losses are only utilized to the extent the Company has the
ability to generate capital gains. 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
21
due to the fiscal strength of the Company. During the fourth quarter of fiscal
2003, the Company recorded a valuation allowance of $96,642 against the deferred
tax asset related to the non-cash compensation charge due to the recent decline
in the Company's stock price. With this valuation, management believes that it
will generate taxable income sufficient to realize the tax benefit associated
with future deductible temporary differences.
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.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region for the year ending
June 30:
2002 2001
----------- -----------
United States $19,272,670 $22,868,093
Canada 230,567 162,526
Mexico 13,000 2,000
United Kingdom 7,526,478 5,646,655
Europe 980,633 966,349
Asia 890,621 771,805
Middle East 146,387 138,898
Other 530,097 201,193
----------- -----------
$29,590,453 $30,757,519
=========== ===========
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
=========== =========== =============== ==============
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.
22
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 consists 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 device sales is due to decreased sales of
therapeutic medical devices of $1,339,239 offset by an increase in diagnostic
medical device sales of $890,960.
Export sales from the United States are remitted in U.S. 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 35.2% and 34.9% 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 $1,130,075.
Labcaire represented 85% of foreign net sales during fiscal 2002 and fiscal
2001. 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 weighted average 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 reported
revenues and profits, while a weakening of the English Pound will have the
opposite effect. Since the Company's operations in England generally set 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.
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, whose
products traditionally carry lower gross margins. The Company manufactures and
sells both medical devices and industrial products with a wide range of product
costs and gross margin dollars as a percentage of revenues. An unfavorable mix
of high and low gross margin product deliveries is a direct result of the ratio
of high gross margin product shipments to total shipments versus low gross
margin product shipments to the same total shipments. In both the medical
devices and industrial products segments, there are wide variations on gross
margin percentages to revenues dependent upon the product. The variation in
gross margin percentage based upon product mix is described as either a
"favorable" or "unfavorable" mix of high and low margin product deliveries.
Selling expenses. Selling expenses 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.
23
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 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 the effect of the adoption in the first quarter of
fiscal 2002 of SFAS 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 the effect of the adoption in the first quarter of fiscal 2002 of
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
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
awarded in favor of Mentor of 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 liposuction. The Court
affirmed that the lower court did not have the ability to increase damages or
award attorneys' fees. Each defendant was 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 the $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. 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 ten-year worldwide, royalty-free,
distribution agreement with Mentor for the sale, marketing and distribution of
the Lysonix 2000 soft tissue aspirator used for cosmetic surgery. This
agreement is a standard agreement for such distribution in that it specifies the
product to be distributed, the terms of the agreement and the price to be paid
for product covered under the agreement.
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
24
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. 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. The Company recorded an
allowance against the entire balance of $473,909 and accrued interest of $16,230
for the above loans. During fiscal 2002, the Company purchased a second
$300,000, 6% Secured Cumulative Convertible Debenture from Focus, due May 25,
2003. The Company recorded an allowance against the entire balance of $300,000
and accrued interest of $16,500 for the above loans. The Company entered into a
loan agreement whereby Focus borrowed $60,000 from the Company. The Company
recorded an allowance against the entire balance of $60,000 and accrued interest
of $900 for the above loan. In addition to the current loans, included in
other income and expense was accrued interest of $33,300 due from Focus Surgery
and $52,058 due from Hearing Innovations for loans and debentures issued in
prior years.
Income taxes. The effective tax rate was 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 of 68.5% was impacted by no
corresponding income tax benefit from the loss of the impairment of Hearing
Innovations and Focus Surgery by $333,406 plus the standard consolidated tax
rate of approximately 35%. The loss on impairment of investments is recorded
with no corresponding tax benefit since these transactions are capital losses.
The benefit for such losses are only utilized to the extent the Company has the
ability to generate capital gains.
CRITICAL ACCOUNTING POLICIES:
General: Financial Reporting Release No. 60, which was released by the
- --------
Securities and Exchange Commission in December 2001, requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of the financial statements. Note 1 of the Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended June 30, 2003 includes a summary of the Company's significant
accounting policies and methods used in the preparation of its financial
statements. The Company's discussion and analysis of its financial condition
and results of operations are based upon the Company's financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. On an on-going basis,
management evaluates its estimates and judgments, including those related to bad
debts, inventories, goodwill, property, plant and equipment and income taxes.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company considers certain accounting policies
related to allowance for doubtful accounts, inventories, property, plant and
equipment, goodwill and income taxes to be critical policies due to the
estimation process involved in each.
Allowance for Doubtful Accounts: The Company's policy is to review its
- -----------------------------------
customers' financial condition prior to extending credit and, generally,
collateral is not required. The Company utilizes letters of credit on foreign
or export sales where appropriate.
Inventories: Inventories are stated at the lower of cost (first-in, first-out)
- ------------
or market and consist of raw materials, work-in-process and finished goods.
Management evaluates the need to record adjustments for impairments of inventory
on a quarterly basis. The Company's policy is to assess the valuation of all
inventories, including raw materials, work-in-process and finished goods.
Property, Plant and Equipment: Property, plant and equipment are recorded at
- ---------------------------------
cost. Depreciation of property and equipment is provided using the straight-line
method over estimated useful lives ranging from 1 to 5 years. Depreciation of
the Labcaire building is provided using the straight-line method over the
estimated useful life of 50 years. Leasehold improvements are amortized over
the life of the lease or the useful life of the related asset, whichever is
25
shorter. The Company's policy is to periodically evaluate the appropriateness
of the lives assigned to property, plant and equipment and to make adjustments
if necessary.
Goodwill: In July 2001, the Financial Accounting Standards Board issued
- ---------
Statement of Financial Accounting Standards ("SFAS") No. 141 ("SFAS 141") and
SFAS 142. SFAS 141 replaced 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
provided a six-month transitional period from the effective date of adoption for
the Company to perform an assessment of whether there is an indication that
goodwill is impaired. To the extent that an indication of impairment exists,
the Company must perform a second test to measure the amount of impairment. The
second test must be performed as soon as possible, but no later than the end of
the fiscal year. Any impairment measured as of the date of adoption will be
recognized as the cumulative effect of a change in accounting principle. The
Company performed the first test and determined that there is no indication that
the goodwill recorded is impaired and, therefore, the second test was not
required. The Company also completed its annual goodwill impairment tests for
fiscal 2003 in the fourth quarter. There were no indications that goodwill
recorded was impaired.
Income Taxes: Income taxes are accounted for in accordance with SFAS No. 109,
- --------------
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Stock-Based Compensation: 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.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at June 30, 2003 and June 30, 2002 was $13,967,805 and
$11,854,281, respectively. For the fiscal year 2003, cash provided by
operations totaled $2,303,492. The increase in the cash balance is due to the
refund of prepaid income taxes offset by cash paid for inventory purchased for
unshipped orders. For the fiscal year 2003, cash used in investing activities
was $1,042,805, which primarily consisted of the purchase of Labcaire stock, the
purchase of property, plant and equipment during the regular course of business
and loans made to Hearing Innovations. For the fiscal year 2003, cash used by
financing activities was $62,054, primarily consisting of proceeds from the
exercise of stock options and short-term borrowings offset by payments of
short-term borrowings and principal payments on capital lease obligations.
Revolving Credit Facilities
- -----------------------------
On July 1, 2002, Labcaire replaced its bank overdraft facility with HSBC Bank
plc with a debt purchase agreement with Lloyds TSB Commercial Finance. The
amount of this facility is approximately $1,520,000 ( 950,000) and bears
interest at the bank's base rate (5.25% and 4.00% at June 30, 2003 and 2002,
respectively) plus 1.75% and a service charge of .15% of sales invoice value and
fluctuates based upon the outstanding United Kingdom and European receivables.
The current facility is more flexible than the prior facility. The prior
facility established a sum certain limit where the current facility has a credit
26
limit based upon United Kingdom domestic and European receivables outstanding.
The agreement expires on December 31, 2003 and covers all United Kingdom and
European sales. At June 30, 2003, the balance outstanding under this overdraft
facility was $704,669 and Labcaire was in compliance with all financial
covenants.
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, 2003, the Company had $5,000,000 available on its line of credit.
The Company is in compliance with all such covenants.
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, 2003, 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 $ 704,669 - - - $ 704,669
Facility debt 54,688 $ 120,661 $ 132,232 $757,298 1,064,879
Capital leases 236,541 184,426 29,070 - 450,037
Operating leases 663,285 700,628 40,220 - 1,404,133
---------- ---------- ---------- -------- ----------
$1,659,183 $1,005,715 $ 201,522 $757,298 $3,623,718
========== ========== ========== ======== ==========
Labcaire
- --------
In October 2002, under the terms of the revised purchase agreement (the
"Labcaire Agreement") with Labcaire, the Company paid $232,394 for 9,286 shares
(2.70%) of the outstanding common stock of Labcaire bringing the acquired
interest to 100%. This represents the fiscal 2003 buy-back, as defined in the
Labcaire Agreement. The balance of the capital stock of Labcaire was owned by
three executives and one retired executive of Labcaire who had the right, under
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.
Hearing Innovations, Inc.
- ---------------------------
During fiscal 2003, the Company entered into sixteen loan agreements whereby
Hearing Innovations is required to pay the Company an aggregate amount of
$274,991 due November 30, 2003. All notes bear interest at 8% per annum. The
notes are secured by a lien on all of Hearing Innovations' right, title and
interest in accounts receivable, inventory, property, plant and equipment and
processes of specified products whether now existing or arising after the date
of these agreements. The loan agreements contain, in the aggregate, warrants to
acquire 274,991 shares of Hearing Innovations common stock, at the option of the
Company, at a cost of $.10 to $1.00 per share. These warrants, which are deemed
nominal in value, expire in October 2005. The Company recorded an allowance
against the entire balance of $274,991 for the above loans as well as accrued
interest of $23,241. The related expense has been included in loss on
impairment of Hearing Innovations 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. In November 2002,
the Company signed a management agreement with Hearing Innovations whereby the
Company earns $17,000 per month for those services. These amounts have been
fully reserved by the Company, as the collectibility of these amounts is
uncertain. The current ability of companies such as Hearing Innovations to
access capital markets or incur third party debt is very limited and is likely
to remain so for the foreseeable future. In light of this fact, the Company
continues to review strategic options available to it and Hearing Innovations
due to Hearing Innovations' continuing need for financial support.
27
Off-Balance Sheet Arrangements
- --------------------------------
The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on the Company's financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to the
Company.
Recent Accounting Pronouncements
- ----------------------------------
In August 2001, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which supercedes 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 Opinion 30). SFAS 144 retains the
fundamental provisions of 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 was required to adopt SFAS 144 no later than the fiscal year
beginning after December 15, 2001. In the first quarter of fiscal 2003, the
Company adopted SFAS 144 for long-lived assets held for use. The adoption of
SFAS 144 did not have a material impact on the Company's consolidated results of
operations or financial condition.
In December 2003, the FASB issued FASB Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148
amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") to provide alternative methods of transition to SFAS 123's fair value
method of accounting for stock-based employee compensation. SFAS 148 also
amends the disclosure provisions of SFAS 123 and ABP Opinion No. 28, "Interim
Financial Reporting", to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. The Company was required to
adopt SFAS 148 no later than the fiscal year ending after December 15, 2002.
The Company adopted SFAS 148 in the third quarter of fiscal 2003 and the
additional disclosure requirements are incorporated herein.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities." This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred rather than at the date of an entity's
commitment as provided under Issue No. 94-3. This Statement also establishes
that fair value is the objective for initial measurement of the liability. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not believe adoption of
the provisions of this statement will have a material impact on its consolidated
results of operations or financial condition.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities."("SFAS No. 149"). Among other
things, the Statement requires that contracts with comparable characteristics be
accounted for similarly and clarifies under what circumstances a contract with
an initial net investment meets the characteristics of a derivative. SFAS No.
28
149 was effective July 1, 2003. The Company does not expect this pronouncement
to have a material impact on its consolidated results of operations or financial
condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equity."("SFAS No.
150"). SFAS No. 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 was effective for financial instruments entered into or modified after
May 31, 2003. The Company does not expect this pronouncement to have a material
impact on its consolidated results of operations or financial condition.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." ("EITF 00-21").
The consensus provides that revenue arrangements with multiple deliverables
should be divided into separate units of accounting if certain criteria are met.
The consideration for the arrangement should be allocated to the separate units
of accounting based on their relative fair values, with different provisions if
the fair value of all deliverables are not known or if the fair value is
contingent on delivery of specified items or performance conditions. Applicable
revenue recognition criteria should be considered separately for each separate
unit of accounting. EITF 00-21 was effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. Entities may elect to
report the change as a cumulative effect adjustment in accordance with APB
Opinion 20, Accounting Changes. The Company does not believe that the adoption
of EITF 00-21 will have a material impact on its on its consolidated results of
operations or financial condition.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
defines variable interest entities and how an enterprise should assess its
interests in a variable interest entity to decide whether to consolidate that
entity. The interpretation requires certain minimum disclosures with respect to
variable interest entities in which an enterprise holds significant variable
interest but which it does not consolidate. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15, 2003
to variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. FIN 46 applies to public enterprises
as of the beginning of the applicable interim or annual period, and it applies
to nonpublic enterprises as of the end of the applicable annual period. FIN 46
may be applied prospectively with a cumulative-effect adjustment as of the date
on which it is first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect adjustment as of the
beginning of the first year restated. The Company has not determined the impact
on its consolidated results of operations or financial condition that may
result from the application of FIN 46.
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.
Foreign Exchange Rates:
Approximately 29% of the Company's revenues in fiscal 2003 were received in
English Pounds currency. To the extent that the Company's revenues are
generated in English Pounds, its operating results are translated for reporting
purposes into U.S. Dollars using weighted average rates of 1.59 and 1.44 for the
fiscal year ended June 30, 2003 and 2002, respectively. A strengthening of the
29
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 SUPPLEMENTAL 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 41.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected financial data for each quarter of fiscal
2003, 2002 and 2001. Although unaudited, this information has been prepared on a
basis consistent with the Company's audited consolidated financial statements
and, in the opinion of the Company's management, reflects all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of this information in accordance with
accounting principles generally accepted in the United States. Such quarterly
results are not necessarily indicative of future results of operations and
should be read in conjunction with the audited consolidated financial statements
of the Company and the notes thereto.
QUARTERLY FINANCIAL DATA:
FISCAL 2003
Q1 Q2 Q3 Q4 YEAR
Net sales $ 7,010,322 $8,174,513 $ 8,747,677 $10,926,239 $34,858,751
Gross profit 2,957,218 3,405,158 3,839,018 4,302,799 14,504,193
Operating expenses 2,867,500 3,180,454 3,440,631 3,431,457 12,920,042
Income from operations 89,718 224,704 398,387 871,342 1,584,151
Other income 15,111 5,221 53,442 218,927 292,701
Minority interest in net (income)
loss of consolidated subsidiaries (6,717) 40,553 (29,628) (27,693) (23,485)
Income tax provision 46,955 157,437 177,766 503,634 885,792
------------ ---------- ------------ ------------ ------------
Net income $ 51,157 $ 113,041 $ 244,435 $ 558,942 $ 967,575
============ ========== ============ ============ ============
Net income per share-Basic $ .01 $ .02 $ .04 $ .08 $ .15
Net income per share -Diluted $ .01 $ .02 $ .04 $ .08 $ .15
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
30
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.
- ---------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES.
- --------- -------------------------
Omitted pursuant to extended compliance period.
PART III
---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- --------- ---------------------------------------------------------
The Company currently has five 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 56 Chairman of the Board 1995
of Directors
Howard Alliger 76 Director 1971
31
T. Guy Minetti 52 Director 2003
Thomas F. O'Neill 57 Director 2003
Michael A. McManus, Jr. 60 President and Chief 1998
Executive Officer
Richard Zaremba 48 Vice President, Chief Financial Officer, --
Secretary and Treasurer
Kenneth Coviello 51 Vice President - Medical Devices --
Dan Voic 41 Vice President of Research and Development
and Engineering --
Bernhard Berger 41 Vice President - Industrial/Scientific Products --
Ronald Manna 49 Vice President of New Product Development
and Regulatory Affairs --
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 Directors 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 ceased to be 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.
T. GUY MINETTI currently serves as the Vice Chairman of the Board of Directors
of 1-800-Flowers.Com, a publicly-held specialty gift retailer based in Westbury,
New York. Before joining 1-800-Flowers.Com in 2000, Mr. Minetti was the
Managing Director of Bayberry Advisors, an investment-banking boutique he
founded in 1989 to provide corporate finance advisory services to
small-to-medium-sized businesses. From 1981 through 1989, Mr. Minetti was a
Managing Director of the investment banking firm, Kidder, Peabody & Company.
While at Kidder, Peabody, Mr. Minetti worked in the investment banking and high
yield bond departments. Mr. Minetti is a graduate of St. Michael's College.
THOMAS F. O'NEILL, a founding principal of Sandler O'Neil & Partners L.P., an
investment banking firm, began his Wall Street career at L.F. Rothschild. Mr.
O'Neill specialized in working with financial institutions in Rothschild's Bank
Service Group from 1972. He was appointed Managing Director of the Bank Service
Group, a group consisting of fifty-five professionals, in 1984. In 1985, he
became a Bear Stearns Managing Director and Co-Manager of the Group. Mr.
O'Neill is a graduate of New York University and a veteran of the United States
Air Force.
32
MICHAEL A. 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 serves on the
Board of Directors of the following publicly traded companies: American Home
Mortgage Holdings, Inc.; Liquid Audio, Inc.; Novavax, Inc.; and NWH, Inc. Mr.
McManus holds a B.A. degree in Economics from the University of Notre Dame and a
Juris Doctorate 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 and 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 and 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.
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. For the fiscal
year ended June 30, 2003, options to purchase 15,000 shares of Common Stock
were granted to each of Mr. Minetti and Mr. O'Neill. Each non-employee Director
is also reimbursed for reasonable expenses incurred while traveling to attend
meetings of the Board of Directors or while traveling in furtherance of the
business of the Company.
COMPLIANCE WITH SECTION 16 (a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), 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
2003.
33
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 $100,000.
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- -------------
NAME AND PRINCIPAL FISCAL YEAR SECURITIES UNDERLYING
POSITION ENDED JUNE 30, SALARY ($) BONUS ($) OPTIONS GRANTED (#)
Michael A. McManus, Jr. 2003 275,000 100,000 150,000
President and Chief 2002 275,000 150,000 150,000
Executive Officer 2001 266,687 250,000 250,000
Richard Zaremba 2003 154,121 1,595 40,000
Vice President, 2002 150,000 28,000 32,000
Chief Financial Officer, 2001 135,610 33,000 30,000
Secretary and Treasurer
Kenneth Coviello 2003 135,093 2,562 35,000
Vice President of Medical 2002 130,000 15,000 15,000
Products 2001 126,620 - 10,000
Daniel Voic 2003 116,645 12,129 10,000
Vice President of 2002 97,729 10,000 6,500
Research and Development and 2001 92,519 6,000 7,500
Engineering
Bernhard Berger 2003 108,748 17,021 20,000
Vice President of 2002 105,000 3,000 5,000
Industrial/Scientific Products 2001 15,952 - 10,000
Ronald Manna 2003 114,231 1,000 5,000
Vice President of 2002 121,072 10,000 10,000
New Product Development and 2001 116,340 25,000 15,000
Regulatory Affairs
EMPLOYMENT AGREEMENTS
In October 2002, the Company entered into an employment agreement with its
President and Chief Executive Officer which expires on October 31, 2003 and is
automatically renewable for one-year periods unless notice is given by the
Company or Mr. McManus that it or he declines to renew the agreement. This
agreement provides for an annual base compensation of $275,000 and a Company
provided automobile. The agreement also provides for an annual bonus based on
the Company's pretax operating earnings with a minimum guaranteed bonus of
$250,000. For fiscal year 2002, Mr. McManus elected to receive a bonus of
$100,000, which was paid in December 2002. During fiscal year 2001, Mr. McManus
elected to receive a bonus of $150,000, which was paid in December 2001. Mr.
McManus elected to receive a reduced bonus for each such year due to the
Company's results. Mr. McManus receives additional benefits that are generally
provided to other employees of the Company.
34
In conformity with the Company's policy, all of its Directors, officers and
employees execute confidentiality and nondisclosure agreements upon the
commencement of employment with the Company. The agreements generally provide
that all inventions or discoveries by the employee related to the Company's
business and all confidential information developed or made known to the
employee during the term of employment shall be the exclusive property of the
Company and shall not be disclosed to third parties without the prior approval
of the Company. Mr. Manna has an agreement with the Company which provides for
the payment of six months' severance upon his termination for any reason.
Messrs. McManus and Zaremba have agreements for the payment of six months'
annual base salary upon a change in control of the Company. The Company's
employment agreement with Mr. McManus also contains non-competition provisions
that preclude him from competing with the Company for a period of 18 months from
the date of his termination of employment.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning options granted to executive
officers named in the Summary Compensation Table during fiscal year ended June
30, 2003:
% OF TOTAL
OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES (a)
OPTIONS IN FISCAL EXERCISE EXPIRATION GRANT DATE
NAME GRANTED (#) YEAR PRICE ($/SH) DATE VALUE($)
- --------------------------------------------------------------------------------------
Michael A. McManus, Jr. 150,000 42.5 5.10 9/30/2012 452,400
Richard Zaremba 40,000 11.3 5.10 9/30/2012 95,512
Kenneth Coviello 35,000 9.9 5.10 9/30/2012 45,240
Bernhard Berger 20,000 5.7 5.10 9/30/2012 30,160
Daniel Voic 10,000 2.8 5.10 9/30/2012 19,604
Ronald Manna 5,000 1.4 5.10 9/30/2012 15,080
(a) The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average assumptions:
risk-free interest rates of 3.08%; no dividend yields; volatility factor of the
expected market price of the Common Stock of 59%, and a weighted-average expected life
of the options of five years.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
No options were exercised by any executive officer named in the Summary
Compensation Table during the fiscal year ended June 30, 2003. The following
table contains information concerning the number and value, at June 30, 2003, of
unexercised options held by executive officers named in the Summary Compensation
Table:
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
- ------------------------------ --------------------------- ------------------------------
Michael A. McManus, Jr. 850,000/0 12,000/0
Richard Zaremba 64,000/53,000 3,600/0
Kenneth Coviello 26,667/23,333 0/0
Dan Voic 37,000/11,000 900/0
Ronald Manna 72,500/10,000 3,600/0
Bernhard Berger 21,667/10,000 0/0
(1) Fair market value of underlying securities (the closing price of the Common
Stock on the NASD Automated Quotation System) at June 30, 2003, minus the
exercise price.
35
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 Summary Compensation Table, Mr. McManus
received a base salary of $275,000. The agreement also provides for an annual
bonus based on the Company's pretax operating earnings with a minimum guaranteed
bonus of $250,000, which is to be paid in December 2003. For fiscal year 2002,
Mr. McManus elected to receive a bonus of $100,000, which was 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 the performance of his duties.
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKING AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS.
Mr. Alliger was the Chairman of the Board and a corporate officer of the Company
until 1996 when Mr. Alliger stepped down as Chairman and was no longer a
corporate officer.
Reported upon by the Compensation Committee
Gary Gelman Howard Alliger
STOCK OPTIONS
In September 1991, in order to attract and retain persons necessary for the
success of the Company, the Company adopted a stock option plan (the "1991
Plan") which covers up to 375,000 shares of Common Stock. Pursuant to the 1991
Plan, officers, Directors, consultants and key employees of the Company are
eligible to receive incentive and/or non-incentive stock options. At June 30,
2003, options to purchase 30,000 shares of Common Stock were outstanding under
the 1991 Plan at an exercise price of $7.38 per share with a vesting period of
two years, options to purchase 327,750 shares of Common Stock had been exercised
and options to purchase 47,250 shares have been forfeited (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
36
Directors Plan") covering an aggregate of 1,125,000 shares of Common Stock of
the Company. At June 30, 2003, options to purchase 312,207 shares of Common
Stock were outstanding at exercise prices ranging from $3.07 to $18.50 per share
with a vesting period of immediate to two years under the 1996 Plan and options
to acquire 210,000 shares of Common Stock were outstanding at exercise prices
ranging from $.73 to $7.10 per share with a vesting period of immediate to two
years under the 1996 Directors Plan. At June 30, 2003, options to purchase
97,195 shares of Common Stock under the 1996 Plan have been exercised and
182,543 shares have been forfeited (of which options to purchase 141,945 shares
have been reissued). At June 30, 2003, options to purchase 703,500 shares of
Common Stock under the 1996 Directors Plan have been exercised and options to
purchase 40,000 shares have been forfeited (of which none have been reissued).
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, 2003, options to purchase 462,225 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, 2003, options to
purchase 7,750 shares of Common Stock under the 1998 Plan have been exercised
and options to purchase 58,950 shares of Common Stock under the 1998 Plan have
been forfeited (of which options to purchase 28,925 shares have been reissued).
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, 2003, options to purchase 595,079 shares of Common Stock were
outstanding under the 2001 Plan at exercise prices ranging from $5.10 to $6.07
per share with a vesting period of one to three years. At June 30, 2003,
options to purchase 35,315 shares of Common Stock under the 2001 Plan have been
forfeited 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 AND
- -------- ------------------------------------------------------------------
RELATED STOCKHOLDERS MATTERS.
- -----------------------------
The following table sets forth as of August 31, 2003, 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.
PERCENT
COMMON STOCK OF
NAME AND ADDRESS (1) BENEFICIALLY OWNED CLASS
- --------------------------------------- ------------------- -------
Michael A. McManus, Jr. . . . . . . . . 968,950 (2) 12.9
Gary Gelman . . . . . . . . . . . . . . 755,750 (3) 11.2
37
Howard Alliger. . . . . . . . . . . . . 92,108 (4) 8.7
Ronald Manna. . . . . . . . . . . . . . 125,394 (5) 1.9
Richard Zaremba . . . . . . . . . . . . 80,870 (6) 1.2
Dan Voic . . . . . . . . . . . . . . . 37,000 (7) *
Kenneth Coviello. . . . . . . . . . . . 28,867 (8) *
Bernard Berger. . . . . . . . . . . . . 21,667 (9) *
All executive officers and
Directors as a group
(eight people) . . . . . . . . . . . 2,610,606 (10) 33.0
*Less than 1%
(1) Except as otherwise noted, the business address of each of the named
individuals in this table is c/o MISONIX, INC., 1938 New Highway,
Farmingdale, New York 11735.
(2) Includes 850,000 shares which Mr. McManus has the right to acquire upon
exercise of stock options which are currently exercisable.
(3) Includes 65,000 shares which Mr. Gelman has the right to acquire upon
exercise of stock options which are currently exercisable.
(4) Includes 115,000 shares which Mr. Alliger has the right to acquire upon
exercise of stock options which are currently exercisable.
(5) Includes 72,500 shares which Mr. Manna has the right to acquire upon
exercise of stock options which are currently exercisable.
(6) Includes 64,000 shares which Mr. Zaremba has the right to acquire upon
exercise of stock options which are currently exercisable.
(7) Includes 37,000 shares which Mr. Voic has the right to acquire upon
exercise of stock options which are currently exercisable.
(8) Includes 26,667 shares which Mr. Coviello has the right to acquire upon
exercise of stock options which are currently exercisable.
(9) Represents 21,667 shares which Mr. Berger has the right to acquire upon
exercise of stock options which are currently exercisable.
(10) Includes the shares indicated in notes (2), (3), (4), (5), (6), (7), (8)
and (9).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------- ---------------------------------------------------
None.
ITEM 14. CONTROLS AND PROCEDURES.
- ------------------------------------
The Company's Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO") have reviewed and evaluated the effectiveness of the Company's diclosure
controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e)
promulgated under the Exchange Act) as of a date within ninety days prior to the
filing date of this annual report. Based on that review and evaluation, which
included inquiries made to certain other employees of the Company, the CEO and
CFO have concluded that the Company's current disclosure controls and procdures,
as designed and implemented, are reasonably adequate to ensure that they are
provided with material information relating to the Company required to be
disclosed in the reports the Company files or submits under the Exchange Act.
There have not been any significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation. There were no significant deficiencies or
material weaknesses identified, and therefore no corrective actions were taken.
38
PART IV
-------
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- --------- --------------------------------------------------------------------
a. (1) and (2) - The response to this portion of Item 16 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. (10)
10(gg) Investment Agreement dated October 14, 1999 by and
between the Company and Hearing Innovations, Inc. (10)
39
10(ii) Exclusive License Agreement dated as of February, 2001
between the Company and Medical Device Alliance, Inc.
(10)
10(jj) 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(kk) 6% Secured Convertible Debenture, dated April 12, 2001,
by Focus Surgery, Inc. payable to the Company. (9)
10(ll) 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(mm) Purchase and Sale Agreement, dated July 28, 2000, by
and between CraMar Technologies, Inc., Acoustic
Marketing Research, Inc. and Randy Muelot. (9)
10(nn) 7% Secured Convertible Debenture, dated August 28,
2000, by Hearing Innovations, Inc. payable to the
Company. (9)
10(oo) 5.1% Secured Convertible Debenture, dated November 7,
2000, by Focus Surgery, Inc. payable to the Company.
(9)
10(pp) Asset Purchase Agreement by and between Perceptron,
Inc. and Acoustic Market Research, Inc. d/b/a Sonora
Medical Systems. (9)
10(qq) First Amendment to Employment Agreement, dated October
13, 2000, by and between the Company and Michael A.
McManus, Jr. (9)
10(rr) Employment Agreement dated October 31, 1998 by and
between the Company and Michael A. McManus, Jr. (11)
10(ss) 6% Secured Convertible Debenture, dated July 31, 2001,
by Focus Surgery, Inc. payable to the Company. (11)
10(tt) Employment Agreement dated October 31, 2002 by and
between the Company and Michael A. McManus, Jr.
21 Subsidiaries of the Company.
23.1 Consent of independent auditors.
23.2 Consent of independent auditors.
31.1 Rule 13a-14(a)/15d-14(a) Certification.
31.2 Rule 13a-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
32.2 Section 1350 Certification.
__________________
(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.
40
(3) Incorporated by reference from the Company's Annual
Report on Form 10-KSB for the fiscal year 1993.
(4) Incorporated by reference from the Company's Annual
Report on Form 10-KSB for the fiscal year 1995.
(5) Incorporated by reference from the Company's Annual
Report on Form 10-KSB for the fiscal year 1996.
(6) Incorporated by reference from the Company's Annual
Report on Form 10-KSB for the fiscal year 1997.
(7) Incorporated by reference from the Company's definitive
proxy statement for the Annual Meeting of Shareholders
held on February 19, 1997.
(8) Incorporated by reference from the Company's
Registration Statement on Form S-8 (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.
(11) Incorporated by reference from the Company's Annual
Report on Form 10-K/A for the fiscal year 2002.
b. The following report on Form 8-K was filed during the last quarter of
the period covered by the Report.
On May 6, 2003, a Form 8-K was filed by the Company under Item 9. "
Regulation FD Disclosure."
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.
41
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 A. McManus, Jr.
---------------------------------
Michael McManus, Jr.
President and Chief
Executive Officer
Date: September 19, 2003
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 19, 2003
- --------------------------- Director
Gary Gelman
/s/ Michael A. McManus, Jr. President, Chief Executive September 19, 2003
- --------------------------- Officer, and Director
Michael A. McManus, Jr. (principal executive officer)
/s/ Richard Zaremba Vice President, Chief Financial September 19, 2003
- --------------------------- Officer, Treasurer and Secretary
Richard Zaremba (principal financial and accounting officer)
/s/ Howard Alliger Director September 19, 2003
- ---------------------------
Howard Alliger
/s/ T. Guy Minetti Director September 19, 2003
- ---------------------------
T. Guy Minetti
/s/ Thomas F. O'Neill Director September 19, 2003
- ---------------------------
Thomas F. O'Neill
42
Item 14(a)
----------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MISONIX, INC. and Subsidiaries
Year Ended June 30, 2003
Page
----
Reports of Independent Auditors . . . . . . . . . . . . . . . . . . . . 42-43
Consolidated Balance Sheets-June 30, 2003 and 2002 . . . . . . . . . . .44
Consolidated Statements of Operations-Years Ended
June 30, 2003, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . .45
Consolidated Statements of Stockholders' Equity-Years Ended
June 30, 2003, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . .46
Consolidated Statements of Cash Flows-Years Ended
June 30, 2003, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . .47
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . .49
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
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
43
Report of Independent Auditors
------------------------------
The Board of Directors and Stockholders
MISONIX, INC.
We have audited the accompanying consolidated balance sheets of MISONIX, INC.
and subsidiaries as of June 30, 2003 and 2002 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended June 30, 2003. Our audits also included the
financial statement schedule listed in the index at Item 14(a) for the years
ended June 30, 2003 and 2002. 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, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended June 30, 2003, 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 20, 2003
44
Report of Independent Auditors
------------------------------
The Board of Directors and Stockholders
MISONIX, INC. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of MISONIX, INC., and Subsidiaries (the
"Company") as of and 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
45
Misonix, Inc. and Subsidiaries
Consolidated Balance Sheets
JUNE 30,
--------------------------
ASSETS 2003 2002
------------ ------------
Current assets:
Cash and cash equivalents $ 2,279,869 $ 1,065,465
Accounts receivable, less allowance for doubtful accounts of $644,157 and
$223,413, respectively 7,844,399 6,656,932
Inventories 8,979,472 7,170,844
Prepaid income taxes - 1,391,978
Deferred income taxes 477,580 388,027
Prepaid expenses and other current assets 983,523 715,367
------------ ------------
Total current assets 20,564,843 17,388,613
Property, plant and equipment, net 3,574,207 3,151,909
Deferred income taxes 862,690 1,757,937
Goodwill 4,473,713 4,241,319
Other assets 319,136 424,674
------------ ------------
Total assets $29,794,589 $26,964,452
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities $ 704,669 $ 730,092
Accounts payable 3,563,208 3,072,234
Accrued expenses and other current liabilities 2,002,154 1,304,824
Litigation settlement liabilities - 174,332
Income taxes payable 47,453 -
Current maturities of long-term debt and capital lease obligations 279,554 252,850
------------ ------------
Total current liabilities 6,597,038 5,534,332
Long-term debt and capital lease obligations 1,235,362 1,050,254
Deferred income 356,076 451,073
Minority interest 263,450 239,965
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $.01 par value-shares authorized 10,000,000; 6,733,665 and 6,180,165 issued,
and 6,655,865 and 6,105,865 outstanding, respectively 67,337 61,802
Additional paid-in capital 22,712,511 22,313,991
Retained deficit (1,053,484) (2,021,059)
Treasury stock, 77,800 and 74,300 shares, respectively (412,424) (401,974)
Accumulated other comprehensive income (loss) 28,723 (263,932)
------------ ------------
Total stockholders' equity 21,342,663 19,688,828
------------ ------------
Total liabilities and stockholders' equity $29,794,589 $26,964,452
============ ============
See Accompanying Notes to Consolidated Financial Statements.
46
Misonix, Inc. and Subsidiaries
Consolidated Statements of Operations
YEAR ENDED JUNE 30,
2003 2002 2001
------------ ------------ ------------
Net sales $34,858,751 $29,590,453 $30,757,519
Cost of goods sold 20,354,558 17,931,874 15,782,740
------------ ------------ ------------
Gross profit 14,504,193 11,658,579 14,974,779
Operating expenses:
Selling expenses 4,132,077 4,502,173 4,070,125
General and administrative expenses 7,023,088 6,469,704 6,511,402
Research and development expenses 2,109,312 2,103,701 1,826,604
Litigation (recovery) settlement expenses (344,435) (1,912,959) 6,176,000
------------ ------------ ------------
Total operating expenses 12,920,042 11,162,619 18,584,131
------------ ------------ ------------
Income (loss) from operations 1,584,151 495,960 (3,609,352)
Other income (expense):
Interest income 66,202 273,750 538,016
Interest expense (166,971) (133,438) (145,436)
Option/license fees 24,312 24,312 24,313
Royalty income 663,714 823,642 665,292
Amortization of investments - - (230,900)
Loss on impairment of Focus Surgery, Inc. (13,725) (410,700) (2,529,056)
Loss on impairment of Hearing Innovations, Inc. (298,232) (542,197) (1,293,372)
Equity in loss of Focus Surgery, Inc. - - (322,565)
Equity in loss of Hearing Innovations, Inc. - - (42,694)
Foreign currency exchange gain (loss) 17,401 11,948 (1,949)
Miscellaneous income - - 720
------------ ------------ ------------
Total other income (expense) 292,701 47,317 (3,337,631)
------------ ------------ ------------
Income (loss) before minority interest and income taxes 1,876,852 543,277 (6,946,983)
Minority interest in net (income) loss of consolidated subsidiaries (23,485) 17,565 31,564
------------ ------------ ------------
Income (loss) before provision (benefit) for income taxes 1,853,367 560,842 (6,915,419)
Income tax provision (benefit) 885,792 384,181 (2,423,129)
------------ ------------ ------------
Net income (loss) $ 967,575 $ 176,661 $(4,492,290)
============ ============ ============
Net income (loss) per share - Basic $ .15 $ .03 $ (.75)
============ ============ ============
Net income (loss) per share - Diluted $ .15 $ .03 $ (.75)
============ ============ ============
47
Weighted average common shares outstanding -Basic 6,478,138 6,077,546 6,009,482
============ ============ ============
Weighted average common shares outstanding - Diluted 6,623,743 6,648,761 6,009,482
============ ============ ============
See Accompanying Notes to Consolidated Financial Statements.
48
Misonix, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 2003, 2002 and 2001
COMMON STOCK
$.01 PAR VALUE TREASURY STOCK
----------------- --------------------
ACCUMULATED
ADDITIONAL RETAINED OTHER TOTAL
NUMBER NUMBER PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL (DEFICIT) (LOSS) INCOME EQUITY
--------- ------- ---------- ---------- ----------- ------------ --------------- ---------------
BALANCE, JUNE 30, 2000 5,967,817 $59,678 (42,900) $(219,006) $21,801,969 $ 2,294,570 $ (55,023) $ 23,882,188
Net loss - - - - - (4,492,290) - (4,492,290)
Foreign currency
translation
adjustment - - - - - - (268,408) (268,408)
---------------
Comprehensive loss - - - - - - - (4,760,698)
---------------
Exercise of employee 154,098 1,541 - - 123,018 - - 124,559
options
Purchase of treasury
Stock - - (23,900) (139,231) - - - (139,231)
--------- ------- ---------- ---------- ----------- ------------ --------------- ---------------
BALANCE, JUNE 30, 2001 6,121,915 61,219 (66,800) (358,237) 21,924,987 (2,197,720) (323,431) 19,106,818
Net income - - - - - 176,661 - 176,661
Foreign currency
translation
adjustment - - - - - - 59,499 59,499
---------------
Comprehensive income - - - - - - - 236,160
---------------
Exercise of employee 58,250 583 - - 389,004 - - 389,587
options
Purchase of treasury
stock - - (7,500) (43,737) - - - (43,737)
--------- ------- ---------- ---------- ----------- ------------ --------------- ---------------
BALANCE, JUNE 30, 2002 6,180,165 61,802 (74,300) (401,974) 22,313,991 (2,021,059) (263,932) 19,688,828
Net income - - - - - 967,575 - 967,575
Foreign currency
translation
adjustment - - - - - - 292,655 292,655
---------------
Comprehensive income - - - - - - - 1,260,230
---------------
Exercise of employee
options 553,500 5,535 - - 398,520 - - 404,055
Purchase of treasury
stock - - (3,500) (10,450) - - - (10,450)
--------- ------- ---------- ---------- ----------- ------------ --------------- ---------------
BALANCE, JUNE 30, 2003 6,733,665 $67,337 (77,800) $(412,424) $22,712,511 $(1,053,484) $ 28,723 $ 21,342,663
========= ======= ========== ========== =========== ============ =============== ===============
See Accompanying Notes to Consolidated Financial Statements.
49
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED JUNE 30,
2003 2002 2001
------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 967,575 $ 176,661 $(4,492,290)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense (recovery) 409,952 97,210 (33,698)
Litigation recovery expense (344,435) (1,912,959) -
Deferred income tax expense (benefit) 805,694 2,003,343 (3,695,772)
Depreciation and amortization 689,605 599,342 1,244,313
Loss on disposal of equipment 121,384 59,280 52,293
Deferred income (94,997) (118,770) 174,783
Foreign currency exchange (gain) loss (17,401) (11,948) 1,949
Minority interest in net income (loss) of subsidiaries 23,485 (17,565) (31,564)
Equity in loss of Focus Surgery, Inc. - - 322,565
Equity in loss of Hearing Innovations, Inc. - - 42,694
Loss on impairment of Focus Surgery, Inc. 13,725 410,700 2,529,056
Loss on impairment of Hearing Innovations, Inc. 298,232 542,197 1,293,372
Income tax benefit on exercise of stock options (648,578) - (261,394)
Changes in operating assets and liabilities:
Accounts receivable (1,143,004) 144,259 55,104
Inventories (1,264,020) 929,865 (3,502,973)
Prepaid income taxes 1,869,336 (1,391,978) -
Prepaid expenses and other current assets (361,374) (1,047) (155,272)
Other assets 114,574 (290,020) (51,186)
Accounts payable and accrued expenses 901,280 (531,313) 1,202,083
Litigation settlement liabilities (174,332) (3,928,960) 6,176,000
Income taxes payable 136,791 (512,602) (536,986)
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,303,492 (3,754,305) 333,077
------------ ------------ ------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (535,420) (293,924) (623,594)
Purchase of investments held to maturity - - (1,097,696)
Redemption of investments held to maturity - 2,015,468 2,103,496
Purchase of Labcaire stock (232,394) (99,531) (117,349)
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) -
Loans to Hearing Innovations, Inc., net (274,991) (473,909) (397,678)
Cash paid for acquisition of Sonora Medical Systems, Inc.,
net of cash acquired - - (169,713)
------------ ------------ ------------
Net cash (used in) provided by investing activities (1,042,805) 770,119 (3,491,296)
------------ ------------ ------------
(continued on next page)
50
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
FINANCING ACTIVITIES
Proceeds from short-term borrowings $ 407,964 $ 293,963 $ 210,084
Payments of short-term borrowings (534,695) (127,919) (104,895)
Principal payments on capital lease obligations (298,697) (205,353) (193,699)
Proceeds of long-term debt 12,901 - -
Payment of long-term debt (43,132) (58,636) (43,629)
Proceeds from exercise of stock options 404,055 389,587 124,559
Purchase of treasury stock (10,450) (43,737) (139,231)
------------ ------------ ------------
Net cash (used in) provided by financing activities (62,054) 247,905 (146,811)
------------ ------------ ------------
Effect of exchange rate changes on assets and liabilities 15,771 27,173 10,101
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,214,404 (2,709,108) (3,294,929)
Cash and cash equivalents at beginning of year 1,065,465 3,774,573 7,069,502
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,279,869 $ 1,065,465 $ 3,774,573
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for (received from):
Interest $ 166,971 $ 133,438 $ 111,850
============ ============ ============
Income taxes $(1,785,349) $ 390,813 $ 2,130,446
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of notes receivable from Hearing Innovations, Inc.
to debentures and common stock $ - $ - $ 111,876
============ ============ ============
Capital lease additions $ 363,800 $ 296,591 $ 203,366
============ ============ ============
See Accompanying Notes to Consolidated Financial Statements.
51
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
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 100% 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, 2003, 2002 and 2001 were approximately $9,950,000, $305,000 and $8,053,000,
respectively; $8,814,000, $609,000 and $6,900,000, respectively; and $6,698,000,
$249,000 and $5,096,000, respectively.
The following is an analysis of assets related to Labcaire:
JUNE 30,
2003 2002 2001
---------- ---------- ----------
Current assets $5,421,000 $4,614,000 $3,008,000
Long - lived assets 2,632,000 2,286,000 2,088,000
---------- ---------- ----------
Total assets $8,053,000 $6,900,000 $5,096,000
========== ========== ==========
Sonora, which was acquired in November 1999 and is located in Longmont,
Colorado, is an ISO 9001 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, 2003, 2002 and 2001
were approximately $8,615,000, $877,000 and $5,181,000, respectively;
$6,002,000, $100,000 and $3,686,000, respectively; and $4,625,000, $129,000 and
$4,530,000, 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.
52
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. There were no cash
equivalents at June 30, 2003 and 2002.
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.
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 (United States Surgical Corporation
("USS")) in 2003, 2002 and 2001 were approximately $6,205,000, $4,060,000 and
$7,685,000, respectively. Total royalties from sales of this device were
approximately $664,000, $824,000 and $665,000 during the fiscal years ended
June 30, 2003, 2002 and 2001, respectively. Accounts receivable from this
customer were approximately $1,712,000 and $969,000 at June 30, 2003 and 2002,
respectively. At June 30, 2003 and 2002, the Company's accounts receivable with
customers outside the United States were approximately $2,477,000 and
$2,874,000, respectively, of which $2,129,000 and $2,687,000, 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.
53
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
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. Service contracts and royalty income is recognized when
earned.
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, 2003.
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 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 FASB issued Statement of Financial Accounting Standards
("SFAS") Nos. 141 ("SFAS 141") and 142 ("SFAS 142"), "Business Combinations" and
"Goodwill and Other Intangible Assets," respectively. SFAS 141 replaced
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 provided a six-month
transitional period from the effective date of adoption for the Company to
perform an assessment of whether there is an indication that goodwill is
impaired. To the extent that an indication of impairment exists, the Company
must perform a second test to measure the amount of impairment. The second test
must be performed as soon as possible, but no later than the end of the fiscal
year. Any impairment measured as of the date of adoption will be recognized as
the cumulative effect of a change in accounting principle. The Company
performed the first test and determined that there is no indication that the
goodwill recorded is impaired and, therefore, the second test was not required.
In addition, the Company also completed its annual goodwill impairment tests for
fiscal 2003 and 2002 in the respective fourth quarter. There were no indicators
that goodwill recorded was impaired.
54
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
Amortization of goodwill for the comparable year ended June 30, 2001 was
$525,567. The Company's pro forma information for fiscal year ended June 30,
2001 is as follows, net of applicable income tax expense (benefit):
2001
Net Income (loss): As reported $(4,492,290)
Pro forma (4,039,433)
Basic EPS: As reported (.75)
Pro forma (.67)
Diluted EPS: As reported (.75)
Pro forma (.67)
OTHER ASSETS
The cost of acquiring or processing patents, trademarks, and other intellectual
properties is 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 loss 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:
2003 2002 2001
--------- --------- ---------
Weighted average common shares
outstanding 6,478,138 6,077,546 6,009,482
Dilutive effect of stock options 145,605 571,215 -
--------- --------- ---------
Diluted weighted average common shares
outstanding 6,623,743 6,648,761 6,009,482
========= ========= =========
55
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
Employee stock options covering 1,375,161, 413,325 and 1,704,104 shares,
respectively, for the years ended June 30, 2003, 2002 and 2001 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. Total comprehensive income was $1,260,230 and $236,160 for the
years ended June 30, 2003 and 2002, respectively. Total comprehensive loss was
$4,760,698 for the year ended June 30, 2001.
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 $441,000, $412,000 and $525,000 in advertising costs
during fiscal 2003, 2002 and 2001, 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, 2003, 2002 and 2001 was approximately $228,000, $214,000, and $99,000,
respectively. Shipping and handling expenses for the years ended June 30, 2003,
2002 and 2001 were approximately $356,000, $456,000 and $244,000, respectively.
56
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee and outside directors'
compensation under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", which was released in December 2002 as an amendment
of SFAS No. 123. The following table illustrates the effect on net income (loss)
and net income (loss) per share as if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation.
2003 2002 2001
------------------------------------
Net income (loss)- As reported: $ 967,575 $ 176,661 $(4,492,290)
Stock based compensation
determined under SFAS 123 (369,601) (650,141) (1,399,636)
------------------------------------
Net income (loss)- Pro forma: $ 597,974 (473,480) (5,891,926)
Net income (loss) per share -
Basic:
As reported $ .15 .03 ( .75)
Pro forma $ .09 (.08) (.98)
Net income (loss) per share -
Diluted:
As reported $ .15 .03 (.75)
Pro forma $ .09 (.08) ( .98)
The weighted average fair value at date of grant for options granted during the
years ended June 30, 2003, 2002 and 2001 was $2.64, $3.02 and $5.02 per option,
respectively. The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model utilizing the following assumptions:
2003 2002 2001
-------------- ------------- --------------
Risk-free interest rates 2.58% - 3.08% 3.86% 5%
Expected option life in years 5 5 5
Expected stock price volatility 59% 53% 84%
Expected dividend yield -0- -0- -0-
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which supercedes 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 of 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
57
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
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 was required to adopt SFAS 144 no later than the fiscal year
beginning after December 15, 2001. In the first quarter of fiscal 2003, the
Company adopted SFAS 144 for long-lived assets held for use. The adoption of
SFAS 144 did not have a material impact on the Company's consolidated results of
operations or financial condition.
In December 2003, the FASB issued FASB Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148
amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") to provide alternative methods of transition to SFAS 123's fair value
method of accounting for stock-based employee compensation. SFAS 148 also
amends the disclosure provisions of SFAS 123 and ABP Opinion No. 28, "Interim
Financial Reporting", to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. The Company was required to
adopt SFAS 148 no later than the fiscal years ending after December 15, 2002.
The Company adopted SFAS 148 in the third quarter of fiscal year 2003 and the
additional disclosure requirements were incorporated therein.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities." This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred rather than at the date of an entity's
commitment as provided under Issue No. 94-3. This Statement also establishes
that fair value is the objective for initial measurement of the liability. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not believe adoption of
the provisions of this statement will have a material impact on its consolidated
results of operations or financial condition.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities."("SFAS 149"). Among other
things, the Statement requires that contracts with comparable characteristics be
accounted for similarly and clarifies under what circumstances a contract with
an initial net investment meets the characteristics of a derivative. SFAS 149
was effective July 1, 2003. The Company does not expect this pronouncement to
have a material impact on its consolidated results of operations or financial
condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equity."("SFAS 150").
SFAS No. 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 was effective for financial instruments entered into or modified after May
31, 2003. The Company does not expect this pronouncement to have a material
impact on its consolidated results of operations or financial condition.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." ("EITF 00-21")
The consensus provides that revenue arrangements with multiple deliverables
58
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
should be divided into separate units of accounting if certain criteria are met.
The consideration for the arrangement should be allocated to the separate units
of accounting based on their relative fair values, with different provisions if
the fair value of all deliverables are not known or if the fair value is
contingent on delivery of specified items or performance conditions. Applicable
revenue recognition criteria should be considered separately for each separate
unit of accounting. EITF 00-21 was effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. Entities may elect to
report the change as a cumulative effect adjustment in accordance with APB
Opinion 20, "Accounting Changes". The Company does not believe that the adoption
of EITF 00-21 will have a material impact on its consolidated results of
operations or financial condition.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
defines variable interest entities and how an enterprise should assess its
interests in a variable interest entity to decide whether to consolidate that
entity. The interpretation requires certain minimum disclosures with respect to
variable interest entities in which an enterprise holds significant variable
interest but which it does not consolidate. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15, 2003
to variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. FIN 46 applies to public enterprises
as of the beginning of the applicable interim or annual period, and it applies
to nonpublic enterprises as of the end of the applicable annual period. FIN 46
may be applied prospectively with a cumulative-effect adjustment as of the date
on which it is first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect adjustment as of the
beginning of the first year restated. The Company has not determined the impact
on its consolidated results of operations or financial condition that may
result from the application of FIN 46.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 and 2001 consolidated
financial statements in order to conform with the 2003 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 was 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.
In June 1996, the 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 was 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
59
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
$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%) was purchased by the
Company for approximately $232,000 in October 2002 for the year ended June 30,
2003. The Company now owns 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 were 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 reclassified approximately $54,000 from property, plant
and equipment to goodwill.
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
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.
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
60
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
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 9001 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 with exercise prices ranging from $1.25 to $2.25 per share were also part
of this agreement. These warrants, which are deemed nominal in value, expire in
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, 2003 and 2002 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, in the aggregate, warrants to acquire 250,000
shares of Hearing Innovations common stock, at the option of the Company, for a
purchase price of $2.25 per share. These warrants, which are deemed nominal in
value, expire in 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 price 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 June 30, 2003 and 2002.
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
61
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
whether now existing or hereafter arising after the date of these agreements.
The loan agreements contain, in the aggregate, 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 in October 2005. The Company recorded an
allowance against the entire balance due at June 30, 2003 and 2002. 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. 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, in the aggregate, 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 in October 2005. The Company recorded
an allowance against the entire balance due at June 30, 2003 and 2002. 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.
During fiscal 2003, the Company entered into sixteen loan agreements whereby
Hearing Innovations is required to pay the Company an aggregate amount of
$274,991 due November 30, 2003. All notes bear interest at 8% per annum. The
notes are secured by a lien on all of Hearing Innovations' right, title and
interest in accounts receivable, inventory, property, plant and equipment and
processes of specified products whether now existing or arising after the date
of these agreements. The loan agreements contain, in the aggregate, warrants to
acquire 274,991 shares of Hearing Innovations common stock, at the option of the
Company, at a cost of $.10 to $1.00 per share. These warrants, which are deemed
nominal in value, expire in October 2005. The Company recorded an allowance
against the entire balance of $274,991 for the above loans as well as accrued
interest of $23,241. The related expense has been included in loss on
impairment of Hearing Innovations 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. In November 2002,
the Company signed a management agreement with Hearing Innovations whereby the
Company earns $17,000 per month for those services. These amounts have been
fully reserved by the Company, as the collectibility of these amounts is
uncertain.
The current ability of companies such as Hearing Innovations to access capital
markets or incur third party debt is very limited and is likely to remain so for
the foreseeable future. In light of this fact, the Company continues to review
strategic options available to it and Hearing Innovations due to Hearing
Innovations' continuing need for financial support.
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 44%.
Summarized financial information of Hearing Innovations as of and for the year
ended December 31, 2002 and 2001 are as follows:
62
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
Condensed Statement of Operations Information
- -------------------------------------------------
2003 2002
---------- ------------
Sales $ 36,913 $ 70,466
Gross profit 20,435 22,608
Net loss (986,380) (1,136,468)
Condensed Balance Sheet Information
- --------------------------------------
2003 2002
------------ ------------
Current assets $ 42,007 $ 268,718
Non-current assets 66,302 71,844
Current liabilities 3,036,485 809,136
Non-current liabilities 348,125 2,698,763
Preferred stock 295,700 295,700
Common stockholders' deficit (3,572,001) (3,463,037)
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 on 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, 2003 and 2002 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, 2003 and 2002. The related expense has been included in loss on
impairment of investment in the accompanying consolidated statements of
operations. The 5.1% Focus Debenture is currently in default and the Company is
negotiating an extended due date and conversion right. 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
63
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
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, 2003 and 2002. The related
expense has been included in loss on impairment of investment in the
accompanying consolidated statements of operations. The 6% Focus Debenture is
currently in default and the Company is negotiating an extended due date. 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 for two years at a
conversion 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
entire balance of principal and accrued interest due at June 30, 2003 and 2002.
The related expense has been included in loss on impairment of investment in the
accompanying consolidated statements of operations. The Focus Debenture is
currently in default and the Company is negotiating an extended due date. 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.
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 at
June 30, 2003 and 2002. The related expense has been included in loss on
impairment of loans to affiliated entities in the accompanying consolidated
statements of operations. The loan is currently in default and the Company is
negotiating an extended due date. 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.
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%.
Summarized financial information of Focus as of and for the year ended June 30,
2003 and 2002 are as follows:
Condensed Statement of Operations Information
- ---------------------------------------------
2003 2002
----------- ------------
Sales $2,343,296 $ 1,380,714
Gross profit 1,807,221 822,028
Net loss (506,027) (1,218,013)
64
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
Condensed Balance Sheet Information
- --------------------------------------
2003 2002
------------ ------------
Current assets $ 509,493 $ 717,374
Non-current assets 586,645 426,595
Current liabilities 1,719,380 1,893,210
Non-current liabilities 2,923,990 2,291,964
Preferred stock 4,038,707 4,038,707
Common stockholders' deficit (7,585,939) (7,079,912)
3. INVENTORIES
Inventories are summarized as follows:
JUNE 30,
2003 2002
---------- ----------
Raw materials $4,230,870 $3,701,925
Work-in-process 1,112,453 824,289
Finished goods 3,636,149 2,644,630
---------- ----------
$8,979,472 $7,170,844
========== ==========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
JUNE 30,
2003 2002
---------- ----------
Buildings $1,808,195 $1,593,341
Machinery and equipment 2,705,972 2,208,609
Furniture and fixtures 848,258 668,284
Automobiles 765,951 657,470
Leasehold improvements 263,131 216,878
---------- ----------
6,391,507 5,344,582
Less: accumulated depreciation
and amortization 2,817,300 2,192,673
---------- ----------
$3,574,207 $3,151,909
========== ==========
Included in machinery and equipment and furniture and fixtures at June 30, 2003
and 2002 are approximately $258,000 and $152,000, respectively, of data
processing equipment and telephone equipment under capital leases with related
accumulated amortization of approximately $75,000 and $48,000, respectively.
Also, included in automobiles are approximately $630,000 and $532,000,
respectively, under capital leases with accumulated amortization of
approximately $181,000 and $135,000, respectively. The Company leased
approximately $364,000, $254,000 and $207,000 of automobiles and equipment under
capital lease arrangements during the years ended June 30, 2003, 2002 and 2001,
respectively.
Depreciation and amortization of property, plant and equipment amounted to
$663,057, $590,397 and $546,787 for the years ended June 30, 2003, 2002 and
2001, respectively.
65
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
5. REVOLVING CREDIT FACILITIES
On July 1, 2002, Labcaire replaced its bank overdraft facility with HSBC Bank
plc with a debt purchase agreement with Lloyds TSB Commercial Finance. The
amount of this facility is approximately $1,520,000 (pounds 950,000) and bears
interest at the bank's base rate (5.25% and 4.00% at June 30, 2003 and 2002,
respectively) plus 1.75% and a service charge of .15% of sales invoice value and
fluctuates based upon the outstanding United Kingdom and European receivables.
The current facility is more flexible than the prior facility. The prior
facility established a sum certain limit where the current facility has a credit
limit based upon United Kingdom domestic and European receivables outstanding.
The agreement expires on December 31, 2003 and covers all United Kingdom and
European sales. At June 30, 2003, the balance outstanding under this overdraft
facility was $704,669 and Labcaire was in compliance with all financial
covenants.
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, 2003, 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. On
July 1, 2002, Labcaire transferred its mortgage loan on their facility to Lloyds
TSB from HSBC Bank plc. The property loan of pounds 670,000 is repayable over
180 months with interest at base rate (5.25% at June 30, 2003) plus 1.75% and is
collateralized by a security interest in certain assets of Labcaire. As of June
30, 2003 and 2002, $1,064,879 and $964,387 were outstanding on this loan,
respectively.
At June 30, 2003, future principal maturities of long-term debt are as follows:
2004 $ 54,688
2005 59,504
2006 61,157
2007 64,463
2008 67,769
Thereafter 757,298
-----------
$ 1,064,879
===========
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following summarizes accrued expenses and other current liabilities:
66
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
JUNE 30,
2003 2002
---------- ----------
Accrued payroll and vacation $ 283,339 $ 165,350
Accrued sales tax 208,005 7,262
Accrued commissions and bonuses 212,585 216,343
Customer deposits and deferred contracts 1,116,869 526,560
Accrued professional fees 132,766 229,750
Other 48,590 159,559
---------- ----------
$2,002,154 $1,304,824
========== ==========
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 2007. The principal leases for office space provide for a monthly
rental amount of approximately $55,000. The Company also leases certain office
equipment and automobiles under capital leases expiring through fiscal 2008.
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, 2003:
Capital Operating
Leases Leases
--------- ----------
2004 $236,541 $ 663,285
2005 128,359 654,299
2006 56,067 46,329
2007 19,927 36,699
2008 9,143 3,521
--------- ----------
Total minimum lease payments 450,037 $1,404,133
==========
Amounts representing interest (74,314)
---------
Present value of net minimum lease payments
(including current portion of $224,866) $375,723
=========
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 $749,000, $714,000 and $622,000 for the years ended June 30, 2003,
2002 and 2001, respectively.
9. STOCK BASED COMPENSATION PLANS
In September 1991, in order to attract and retain persons necessary for the
success of the Company, the Company adopted a stock option plan (the "1991
Plan") which covers up to 375,000 shares of common stock, $.01 par value
("Common Stock"). Pursuant to the 1991 Plan, officers, directors, consultants
and key employees of the Company are eligible to receive 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, 2003, options to purchase 30,000 shares of Common Stock
were outstanding under the 1991 Plan at an exercise price of $7.38 per share
67
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
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 47,250
shares have been forfeited (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, 2003, options to
purchase 312,207 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 210,000 shares of Common Stock were
outstanding at exercise prices ranging from $.73 to $7.10 per share with a
vesting period of immediate to two years under the 1996 Directors Plan. At June
30, 2003, options to purchase 97,195 shares of Common Stock under the 1996 Plan
have been exercised and options to purchase 182,543 shares have been forfeited
(of which options to purchase 141,945 shares have been reissued). At June 30,
2003, options to purchase 703,500 shares of Common Stock under the 1996
Directors Plan have been exercised and options to purchase 40,000 shares have
been forfeited (of which none have been reissued).
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, 2003, options to purchase 462,225 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, 2003, options to
purchase 7,750 shares of Common Stock under the 1998 Plan have been exercised
and options to purchase 58,950 shares of Common Stock under the 1998 Plan have
been forfeited (of which options to purchase 28,925 shares have been reissued).
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, 2003, options to purchase 595,079 shares of Common Stock were
outstanding under the 2001 Plan at an exercise prices ranging from $5.10 to
$6.07 per share with a vesting period of one to three years. At June 30, 2003,
options to purchase 35,315 shares of Common Stock under the 2001 Plan have been
forfeited 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.
The following table summarizes information about stock options outstanding at
June 30, 2003, 2002 and 2001:
68
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
OPTIONS
---------------------------
WEIGHTED AVG.
SHARES EXERCISE PRICE
---------------------------
June 30, 2000 1,354,020 $ 2.62
Granted 532,525 7.23
Exercised (154,098) .77
Forfeited (28,343) 6.57
---------------------------
June 30, 2001 1,704,104 3.23
Granted 309,404 6.07
Exercised (58,250) 6.69
Forfeited (21,045) 6.25
---------------------------
June 30, 2002 1,934,213 6.64
Granted 353,000 4.94
Exercised (553,500) .73
Forfeited (124,202) 5.57
---------------------------
June 30, 2003 1,609,511 $ 5.65
===========================
The following table summarizes information about stock options outstanding at
June 30, 2003:
Options Outstanding Options Exercisable
-------------------- --------------------
Weighted Average Weighted
---------------------- Average
Range of Contractual Exercise Exercise
Exercise Price Number Life (Yrs) Price Number Price
- ------------------------------------------------------------------------
$ .73 75,000 4 $ .73 75,000 $ .73
$ 3.07 - 4.00 166,850 7 $ 3.14 166,850 $ 3.14
$ 5.06 - 7.57 1,342,661 7 $ 6.06 1,145,942 $ 6.16
$12.33 - 18.50 25,000 4 $ 14.80 25,000 $ 14.80
--------- ------------ --------- --------- ---------
1,609,511 7 $ 5.68 1,412,792 $ 5.66
========= ============ ========= ========= =========
As of June 30, 2003 and 2002, 1,609,511 and 1,934,213 shares of Common Stock are
reserved for issuance under outstanding options and 704,294 and 933,089 shares
of Common Stock are reserved for the granting of additional options,
respectively. All outstanding options expire between July 2006 and September
2012 and vest immediately or over periods of up to three years.
During fiscal years 2003 and 2002, the Company repurchased shares of its Common
Stock in the open market. During fiscal years 2003 and 2002, the Company had
purchased 3,500 and 7,500 shares at an average price of $2.99 and $5.83 per
share for an aggregate amount of $10,450 and $43,737, respectively. At June 30,
2003 and 2002, the Company had purchased a total of 77,800 and 74,300 shares at
an average price of $5.30 and $5.41 per share for an aggregate amount of
$412,424 and $401,974, 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
69
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
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 awarded in favor of Mentor of 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 liposuction. The
Court affirmed that the lower court did not have the ability to increase damages
or award attorneys' fees. Each defendant was 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 the $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 leaving an
unpaid accrual balance of $174,332 as of June 30, 2002. The Company paid
$4,332 of other accrued costs during fiscal 2003. The Company also recorded an
additional reserve for the assets received in connection with the settlement of
$80,171 during fiscal year 2003. In addition, the Company recorded a reversal
of the litigation settlement for unpaid professional fees during the fourth
quarter of fiscal 2003 of $170,000.
EMPLOYMENT AGREEMENT
In October 2002, the Company entered into an employment agreement with its
President and Chief Executive Officer which expires on October 31, 2003 and is
automatically renewable for one-year periods unless notice is given by the
Company or Mr. McManus that it or he declines to renew the agreement. This
agreement provides for an annual base compensation of $275,000 and a Company
provided automobile. The agreement also provides for an annual bonus based on
the Company's pretax operating earnings with a minimum guaranteed bonus of
$250,000. For fiscal year 2002, Mr. McManus elected to receive a bonus of
$100,000, which was 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
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
70
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
operations less general and administrative expenses, bad debt expense and
litigation (recovery) settlement expenses, which are maintained at the corporate
headquarters (corporate). The Company does not allocate assets by segment as
such information is not provided to the chief decision maker. Summarized
financial information for each of the segments for the years ended June 30,
2003, 2002 and 2001 are as follows:
For the year ended June 30, 2003:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
------------ ----------- --------------- --------------
Net sales $ 17,504,978 $17,353,773 $ - $ 34,858,751
Cost of goods sold 9,725,617 10,628,941 - 20,354,558
------------ ----------- --------------
Gross profit 7,779,361 6,724,832 - 14,504,193
Selling expenses 1,406,543 2,725,534 - 4,132,077
Research and development 1,400,336 708,976 - 2,109,312
------------ ----------- --------------
Total operating expenses 2,806,879 3,434,510 6,678,653 12,920,042
------------ ----------- --------------- --------------
Income from operations $ 4,972,482 $ 3,290,322 $ (6,678,653) $ 1,584,151
============ =========== =============== ==============
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
============ =========== =============== ==============
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 (recovery)
settlement expenses.
Approximately $6,205,000, $4,060,000 and $7,685,000 of the medical device sales
were made to one customer (USS) for the years ended June 30, 2003, 2002 and
2001, respectively. Accounts receivable from this customer were approximately
$1,712,000 and $969,000 at June 30, 2003 and 2002, respectively. There were no
significant concentrations of sales or accounts receivable for industrial
products for the years ended June 30, 2003, 2002 and 2001, respectively.
71
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
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,
2003 2002 2001
----------- ----------- -----------
United States $22,603,227 $19,272,670 $22,868,093
Canada 446,307 230,567 162,526
Mexico 6,230 13,000 2,000
United Kingdom 8,767,304 7,526,478 5,646,655
Europe 1,357,245 980,633 966,349
Asia 1,193,294 890,621 771,805
Middle East 139,501 146,387 138,898
Other 345,643 530,097 201,193
----------- ----------- -----------
$34,858,751 $29,590,453 $30,757,519
=========== =========== ===========
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:
2003 2002
------------ ------------
Deferred tax assets:
Bad debt reserves $ 184,436 $ 51,529
Inventory valuation 267,324 220,711
License fee income 125,628 135,118
Investments 2,485,583 2,363,920
Non-cash compensation charge 183,105 1,393,509
Litigation settlement - 67,990
Net federal operating loss carry forward 321,894 -
Net state operating loss carry forward 323,005 219,866
Depreciation 5,700 9,444
Other 25,820 47,797
------------ ------------
Total deferred tax assets 3,922,495 4,509,884
Valuation allowance (2,582,225) (2,363,920)
------------ ------------
Net deferred tax asset $ 1,340,270 $ 2,145,964
============ ============
As of June 30, 2003, 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, 2003. 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.
72
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
At June 30, 2003, the Company had a net operating loss carry forward ("NOL") of
approximately $1,100,000 available to reduce future federal taxable income.
This NOL expires in fiscal year 2023. At June 30, 2003, the Company had a NOL
of approximately $4,000,000 available to reduce future state taxable income.
This NOL begins to expire 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 $2,485,583 and $2,363,920
at June 30, 2003 and 2002, 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, 2003 and 2002.
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 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. During the fourth quarter of fiscal 2003, the Company recorded a
valuation allowance of $96,642 against the deferred tax asset related to the
non-cash compensation charge due to the recent decline in the Company's stock
price. With this valuation, management believes that it will generate taxable
income sufficient to realize the tax benefit associated with future deductible
temporary differences.
Significant components of the income tax expense (benefit) attributable to
operations for the years ended June 30 are as follows:
2003 2002 2001
-------- ------------ ------------
Current:
Federal $ - $(1,797,906) $ 1,147,087
State 15,284 - 108,550
Foreign 64,814 178,744 17,006
-------- ------------ ------------
Total current 80,098 (1,619,162) 1,272,643
Deferred:
Federal 702,695 1,969,113 (3,221,956)
State 102,999 34,230 (473,816)
-------- ------------ ------------
Total deferred 805,694 2,003,343 (3,695,772)
-------- ------------ ------------
$885,792 $ 384,181 $(2,423,129)
======== ============ ============
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:
73
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
2003 2002 2001
--------- ---------- ------------
Tax (benefit) at Federal
statutory rates $638,129 $ 190,686 $(2,351,242)
State income taxes, net of
Federal benefit 23,098 22,592 (241,076)
Foreign tax rate differential (9,425) (61,934) (31,224)
Valuation allowance 218,305 333,406 349,012
Goodwill - - 117,259
Travel and entertainment 4,140 3,384 8,036
Other 11,545 (103,953) (273,894)
--------- ---------- ------------
$885,792 $ 384,181 $(2,423,129)
========= ========== ============
13. LICENSING AGREEMENTS FOR MEDICAL TECHNOLOGY
In October 1996, the Company entered into a License Agreement (the "USS
License") with 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, 2003, 2002 and 2001.
In June 2002, the Company entered into a ten-year worldwide, royalty-free,
distribution agreement with Mentor for the sale, marketing and distribution of
the Lysonix 2000 soft tissue aspirator used for cosmetic surgery. This
agreement is a standard agreement for such distribution in that it specifies the
product to be distributed, the terms of the agreement and the price to be paid
for product covered under the agreement. The agreement was not conditional
upon execution of the court settlement (See note 10).
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 $12,000
or $14,500 if the employee was over 50 years of age for the year ended June 30,
2003. 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 $71,747, $63,777 and $54,856 for the years ended
June 30, 2003, 2002 and 2001, respectively.
74
Schedule II
MISONIX, INC.
Valuation and Qualifying Accounts and Reserves
Years ended June 30, 2003, 2002 and 2001
Column C
Additions
Column A Column B (Recoveries) Column D Column E
Balance at Charged (Credited) Additions Balance at
Beginning to cost and (deductions)- end of
Description of period expenses describe period
- -------------------- ----------- ------------------- --------------- -----------
Allowance for
doubtful accounts:
Year ended June 30:
2003 $ 223,413 $ 409,952 $ 10,792 $ 644,157
2002 $ 157,761 $ 97,210 $ (31,558) (A) $ 223,413
2001 $ 200,429 $ (33,698) $ (8,970) (A) $ 157,761
Valuation allowance
for deferred taxes:
Year ended June 30:
2003 $ 2,363,920 $ 218,305 - $ 2,582,225
2002 $ 2,030,514 $ 333,406 - $ 2,363,920
2001 $ 1,681,502 $ 349,012 - $ 2,030,514
(A) Reduction in allowance for doubtful accounts due to write-off of accounts
receivable balance.