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, 2004
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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|_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.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 December 31, 2003 (computed by reference to the average bid and
asked prices of such stock on such date) was approximately $28,630,203.
There were 6,738,453 shares of Common Stock outstanding at September 15, 2004.
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
ITEM 1. BUSINESS.
OVERVIEW
MISONIX, INC. ("Misonix" or the "Company") is a New York corporation which,
through its predecessors, was first organized in 1959. The Company designs,
manufactures and markets ultrasonic medical devices. The Company also develops
and markets ultrasonic equipment for use in the scientific and industrial
markets, ductless fume enclosures for filtration of gaseous contaminates, and
environmental control products for the abatement of air pollution.
The Company's operations outside the United States consist of a 100% ownership
in Labcaire Systems, Ltd. ("Labcaire"), which is based in North Somerset,
England. This business consists of designing, manufacturing, servicing 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 2004, approximately 35% of the Company's net sales were to foreign
markets. Labcaire manufactures and sells the Company's fume enclosure line as
well as its own range of laboratory and medical environmental control products,
represents approximately 76% of the Company's net sales to foreign markets.
Labcaire also distributes the Company's ultrasonic equipment for use in
scientific and industrial markets, predominately in the United Kingdom. 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 portion of its
revenues are from the United Kingdom. Labcaire revenues outside the United
Kingdom are remitted in British Pounds.
Misonix represents approximately 15% of the net sales to foreign markets. These
sales have no additional risks as most sales are secured by letters of credit
and are remitted to Misonix in U.S. currency.
Sonora represents approximately 9% 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.
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
materially adverse at this time and neither has the FDA sought legal remedies
available, nor 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 $7,198,000, $6,205,000 and $4,060,000 for the
fiscal years ended June 30, 2004, 2003 and 2002, respectively. Total royalties
from sales of this device were approximately $1,402,000, $664,000 and $824,000
for the fiscal years ended June 30, 2004, 2003 and 2002, respectively. During
fiscal year 2004, the Company received an additional royalty payment in the
first quarter of fiscal 2004 of approximately $410,000, which was based upon a
review of USS' records that determined that royalties were due for prior years.
The review showed that USS owed (and subsequently paid in the first quarter)
royalties due on a product that was not included in the original royalty
computation.
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 $1,732,000, $536,000 and $97,000 for the fiscal
years ended June 30, 2004, 2003 and 2002, respectively. Included in litigation
(recovery) settlement expenses in fiscal 2003 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 the fiscal
year ended June 30, 2002, as its saleability was uncertain.
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. 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.
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 5% of the equity of Focus. Focus is
located in Indianapolis, Indiana. The agreement provides for a series of
development and manufacturing agreements whereby the Company 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 the equity 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. The Company has subcontracted Focus to
perform research and development activities for which the Company paid $155,000
in fiscal 2004 to Focus and which is recorded as research and development
expenses. During fiscal 2004, Focus entered into an exclusive agreement with the
Company to distribute the Sonoblate 500 in the European market.
2
In December 2000, Focus 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 24 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 in fiscal 2001. The
related expense has been included in loss on impairment of investment in the
accompanying consolidated statement of income. 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 in fiscal 2001. The related expense has been
included in loss on impairment of investment in the accompanying consolidated
statement of income. The 6% 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 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 after 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 against
the entire balance of principal and accrued interest due in fiscal 2002. The
related expense has been included in loss on impairment of investment in the
accompanying consolidated statement of income. The Focus Debenture is currently
in default and the Company is negotiating an extended due date and conversion
right. 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.
In May 2004, the Company's ownership was reduced to 13% due to additional
preferred stock issued by Focus.
3
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 18%.
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 in fiscal 2002. The related expense has
been included in loss on impairment of investment in the accompanying
consolidated statement of income. 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, 2004 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' losses since 2001 before the Company can record income from
Focus. Focus' unaudited net income in fiscal year 2004 was $150,810. The Company
will start to record its share of Focus' income when Focus' income is greater
than the losses from fiscal year 2002 and 2003, which total $1,847,694.
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). 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.
In fiscal year 2004, Hearing Innovations test marketed the Hisonic TRD device in
the Northeast United States to develop marketing data for ultimately a product
launch. Hearing Innovations is still collecting data and has not drawn any
conclusions from 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) was exchanged for a $300,000, 7% Secured Convertible
Debenture due August 27, 2002 and extended to November 30, 2003 (the "Hearing
Debenture"). The Hearing Debenture contains warrants to acquire 250,000 shares
of Hearing Innovations common stock, at the option of the Company, for 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 in fiscal 2001. The related expense has been included in
loss on impairment of investment in the accompanying consolidated statement of
income. 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. At June 30, 2004, the Hearing Debenture
is in default.
4
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 in fiscal 2001. The related expense
has been included in loss on impairment of investment in the accompanying
consolidated statement of income. 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. At June
30, 2004, the above loans are in default.
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 in fiscal 2002.
The related expense has been included in loss on impairment of loans in the
accompanying consolidated statement of income. 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. At June 30, 2004, the above loans are in default.
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 and accrued interest due in fiscal 2003. The related
expense has been included in loss on impairment of Hearing Innovations in the
accompanying consolidated statement of income. 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. At June 30, 2004, the above loans are in default.
5
During fiscal 2004, the Company entered into eight loan agreements whereby
Hearing Innovations is required to pay the Company an aggregate amount of
$199,255. Two of these notes aggregating $23,000 were due November 30, 2003 and
are in default due to non-payment. The remaining six notes aggregating $176,255
were due June 30, 2004 and all in default due to non-payment. The notes bear
interest at 8% per annum. The notes are secured by a lien on all of Hearing
Innovations' right, title and interest in accounts receivable, inventory,
property, plant and equipment and processes of specified products whether now
existing or arising after the date of these agreements. The loan agreements
contain warrants to acquire 199,255 shares of Hearing Innovations common stock,
at the option of the Company, at a cost of $.20 per share. These warrants, which
are deemed nominal in value, expire in October 2005. The Company recorded an
allowance against amounts loaned prior to April 1, 2004, which totaled $198,800.
The related expense has been included in loss on impairment of Hearing
Innovations in the accompanying consolidated statements of income. 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 and Hearing Innovations has no predictable cash
flows from its product revenue. The Company previously made the decision not to
continue funding Hearing Innovations' operations, however, the Company loaned
Hearing Innovations $199,255 to enable Hearing Innovations to reduce a
substantial portion of its long-term debt to certain third parties. At June 30,
2004, the above loans are currently in default. The Company continues to believe
that Hearing Innovations' technology could provide a benefit to patients but the
products require more improvement and market development. All equity investments
and debt in Hearing Innovations have been fully reserved and currently have a
zero basis.
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 46%.
Prior to April 1, 2004, 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.
In August 2002, the President of Hearing Innovations resigned and the Board of
Directors of Hearing Innovations granted the Company a management contract to
run the Hearing Innovations. Kenneth Coviello was named 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 board position. On September 30, 2003, Richard Zaremba resigned from
the board. Richard Zaremba is the Vice President and Chief Financial Officer of
the Company.
In connection with the adoption of FIN 46, the Company consolidated Hearing
Innovations in its March 31, 2004 balance sheet as the entity was determined to
be a variable interest entity ("VIE") as the Company is its primary beneficiary.
The Company elected to record the adoption of FIN 46 as a cumulative effect of
an accounting change. Consolidating Hearing Innovations did not have a material
impact on the Company's consolidated results of operations or financial
condition.
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, Hearing Innovations suspended
operations in April 2004.
On July 14, 2004, Hearing Innovations sent all shareholders and creditors a plan
for reorganization and disclosure statement. The Company committed to fund
Hearing Innovations up to $150,000 for the reorganization plan. Hearing
Innovations plans to file for relief under Chapter 11 of the U.S. Bankruptcy
Code in September 2004. If the petition is approved, the Company will own 100%
of the equity in Hearing Innovations.
6
Sonora Medical Systems, Inc.
On November 16, 1999, the Company acquired a 51% interest in Sonora for
approximately $1,400,000. Sonora authorized and issued new common stock for the
51% interest. Sonora utilized the proceeds of such sale to increase inventory
and expand marketing, sales, and research and development efforts. An additional
4.7% was acquired from the principals of Sonora on February 25, 2000, for
$208,000, bringing the acquired interest to 55.7%. The principals of Sonora sold
an additional 34.3% to Misonix on June 1, 2000 for approximately $1,407,000,
bringing the acquired interest to 90%. Sonora 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 statement of income from the date of acquisition
and acquired assets and liabilities have been recorded at their estimated fair
values at the date of acquisition. The excess of the cost of the acquisition
($2,957,000 plus acquisition costs of $101,000, which includes a broker fee of
$72,000) over the fair value of net assets acquired 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.
LABORATORY AND SCIENTIFIC PRODUCTS
The Company's other revenue producing activities consist of the manufacture and
sale of Sonicator(R) ultrasonic liquid processors and cell disruptors, Aura(TM)
ductless fume hood products and Mystaire(R) scrubbers for the abatement of air
pollution.
Since 1959, the Sonicator(R) line of products has been at the leading edge of
ultrasound technology for the laboratory. Misonix has developed the application
of sonication as it is currently used in research laboratories to disrupt cells
and bacteria, accelerate chemical reactions in the extraction of proteins from
cells, in genomic and proteomic research. Over the years our engineering staff
has greatly improved the design and performance of the instrument to include a
variety of ultrasonic generators, horns and probe accessories to handle
virtually any laboratory application and the term Sonicator has become
synonymous with ultrasonic liquid processing.
The Aura(TM) ductless fume hood products offers 40 years of experience in
providing safe work environments to Medical, Pharmaceutical, Biotech,
Semiconductor, Law Enforcement, Federal and Local Government laboratories. We
manufacture a complete line of ductless fume enclosures to control and eliminate
hazardous vapors, noxious odors and particulates in the laboratory. All fume
enclosure products utilize either activated carbon or HEPA filters to capture
contaminants and are a cost effective alternative to standard laboratory fume
hoods that require expensive ductwork to vent contaminants to the outside.
Misonix also offers laminar airflow stations and PCR enclosures. Misonix
Ductless Fume Hoods meet or exceed applicable OSHA, ANSI, NFPA, SEFA and ASHRAE
standards for ductless fume hoods.
School Demonstration Ductless Fume Hoods have proven to be a valuable addition
to hundreds of high school science laboratories. Multiple application filters
allow for the use of a variety of chemicals and a clear back panel enables
students to view demonstrations from all sides.
The technology used in the Aura ductless fume enclosures has also 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
hazardous cyanoacrylate fumes.
7
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 purchased 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. Total goodwill associated with
Labcaire is $1,214,808 of which $1,063,294 remains at June 30, 2004.
Labcaire's business consists of designing, manufacturing, servicing 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 fumes through a series of filters to
introduce clean air back into the environment, but have expanded their
applications. 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 laboratory and scientific products. Labcaire manufactures
class 100 biohazard safety 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 Autoscope Guardian version to
incorporate a number of enhancements in line with the UK guidelines. This model
has now been further developed with features designed to increase Labcaire's
compliance with the latest interpretation of these UK guidelines.
The Company's products are proprietary in that they primarily utilize ultrasound
as a technology base to solve laboratory and scientific 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 pre-engineered scrubbing system is an air pollution abatement
system, which removes difficult airborne contaminants emitted from laboratory
and industrial processes at the source. The Mystaire scrubber systems utilize a
wide variety of technologies to operate on a broad range of contaminants and is
particularly effective on gaseous contaminants such as acid gases, mists,
particulate matter, aerosol, and odor removal. The Company also manufactures a
range of "point of use" scrubbers for the microelectronics industry. This
equipment eliminates 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 distributors such as
Mentor, Aesculap, Inc. and ACMI Corporation and independent distributors for the
marketing of its other medical products.
8
Sonora relies on direct salespersons and distributors for the marketing of its
ultrasonic medical devices. Focus is utilizing the Company, in an exclusive
agreement, to distribute the Sonablate 500 in the European market, which allows
the Company to sell directly to end users such as doctors and hospitals. The
Company sells directly to end users for the neuroaspirator medical device
internationally.
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 2000/3000 soft tissue aspirator used for cosmetic surgery.
Laboratory and Scientific Products
The Company relies on direct salespersons, distributors, manufacturing
representatives and catalog listings for the marketing of its laboratory and
scientific products. The Company currently sells its products through five
manufacturers representative firms and twenty distributors in the United States
and fourteen internationally. 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
scientific 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.
In fiscal 2004, 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 laboratory and scientific 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.
The Company sells wet scrubbers directly to end users.
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.
Laboratory and Scientific Products
The Company manufactures and assembles the majority of its laboratory and
scientific 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.
9
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 devices and the medical repair and refurbishment
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., EDAP, TMS S.A., Ambassador Medical, a subsidiary of GE Medical,
Philips and Siemens.
Laboratory and Scientific Products
Competitors in the ultrasonic industry for laboratory and scientific products
range from large corporations with greater production and marketing capabilities
to smaller firms specializing in single products. The Company believes that its
significant competitors in the manufacturing and distribution of industrial
ultrasonic devices are Branson Ultrasonics, a division of Emerson Electric Co.,
and Sonics & Materials, Inc. It is possible that other companies in the industry
are currently developing products with the same capabilities as those of the
Company. The Company believes that the features of its Sonicator and the
Company's customer assistance in connection with particular applications give
the Sonicator a competitive advantage over comparable products.
Competitors in the air pollution abatement industry 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 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. Ductless fume
enclosure advantages are the quality of the product and versatility of
applications. 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.
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 materially
adverse at this time and neither has the FDA sought legal remedies available,
nor have there been any violations of its regulations alleged, against the
Company.
10
The Company received a letter dated October 31, 2003 from the FDA regarding the
Company's notification concerning the implemented procedures to "field correct"
a shock sensation that was caused by users forcing the output connector
improperly when using the Lysonix 2000. Although the output cable was properly
marked, the Company issued new sticker directions and notified all its customers
in writing. The FDA stated that it "agreed with the Company's decision to "field
correct" the Lysonix 2000."
The FDA classified this field correction as a Class II recall which means that
this is a situation in which use of or exposure to such product may cause
temporary or medically reversible adverse health consequences or which the
probability of serious adverse health consequences is remote. The Company will
do everything necessary to satisfy the FDA request for information on the "field
correction." The Company, additionally, is following FDA policies to be fully
compliant with all requirements. As of June 30, 2004, the Company has completed
a third round of Notification of Corrective Action by certified mail. The
Company will cooperate with the FDA to collect all data to allow the FDA to
determine when the Corrective Action will be officially closed. The Company has
estimated the cost of this field correction to be immaterial.
PATENTS, TRADEMARKS, TRADE SECRETS AND LICENSES
Pursuant to a royalty free license agreement with an unaffiliated third party,
the Company has the right to use the trademark "Sonicator" in the United States.
The Company also owns trademark registrations for Mystaire in both England and
Germany.
The following is a list of the U.S. patents which have been issued to the
Company:
Number Description Issue Date Expiration Date
------ ----------- ---------- ---------------
4,920,954 Cavitation Device - relating to the Alliger 05/01/1990 08/05/2008
System for applying ultrasonic arteries using a
generator, transducer and titanium wire.
5,026,167 Fluid Processing - relating to the Company's 06/25/1991 10/19/2009
environmental control product line for
introducing ozone and liquid into the cavitation
zone for an ultrasonic probe.
5,032,027 Fluid processing - relating to the Company's 07/16/1991 10/19/2009
environmental control product line for the
intimate mixing of ozone and contaminated water
for the purpose of purification.
5,248,296 Wire with sheath - relating to the Company's 09/23/1993 12/24/2010
Alliger System for reducing transverse motion in
its catheters.
5,306,261 Guidewire guides - relating to the Company's 04/26/1994 01/22/2013
Alliger System for a catheter with collapsible
wire guide.
5,443,456 Guidewire guides - relating to the Company's 08/22/1995 02/10/2014
Alliger System for a catheter with collapsible
wire guide.
5,371,429* Flow-thru transducer - relating to the Company's 12/06/1994 09/28/2013
liposuction system and its ultrasonic laboratory
and scientific products for an electromechanical
transducer device.
11
Number Description Issue Date Expiration Date
------ ----------- ---------- ---------------
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
laboratory and scientific 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
laboratory and scientific products.
5,527,273* Ultrasonic probes - relating to an ultrasonic 06/18/1996 10/06/2014
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
medical procedures. feature.
4,660,573 Ultrasonic lithotriptor probe. 04/28/1987 05/08/2005
4,741,731 Vented ultrasonic transducer for surgical 05/03/1988 02/14/2006
handpiece.
5,151,083 Apparatus for eliminating air bubbles in an 09/29/1992 07/29/2011
ultrasonic surgical device.
5,151,084 Ultrasonic needle with sleeve that includes a 09/29/1992 07/29/2011
baffle.
5,486,162 Bubble control device for an ultrasonic surgical 01/23/1996 01/11/2015
probe.
5,562,609 Ultrasonic surgical probe. 10/08/1996 10/07/2014
5,562,610 Needle for ultrasonic surgical probe. 10/08/1996 10/07/2014
5,904,669 Magnetic ball valves and control module. 05/18/1999 10/25/2016
6,033,375 Ultrasonic probe with isolated and teflon coated 03/07/2000 12/23/2017
outer cannula.
6,270,471 Ultrasonic probe with isolated outer cannula. 08/07/2001 12/23/2017
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
12
Number Description Issue Date Expiration Date
------ ----------- ---------- ---------------
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 05/27/2019
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
6,613,056 Ultrasonic probe with low-friction bushings. 09/02/2003 02/17/2019
6,648,839 Ultrasonic medical treatment device for RF
cauterization and related method. 11/18/2003 05/08/2022
6,660,054 Fingerprint processing chamber with airborne
contaminant containment and adsorption. 12/09/2003 09/10/2021
6,736,814 Ultrasonic medical treatment device for bipolar
RF cauterization and related method. 05/18/2004 02/28/2022
* 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.
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.
13
Registration Registration
Number Date Mark Goods Renewal Date
------ ---- ---- ----- ------------
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
2,812,718 02/10/2004 Misonix Ultrasonic medical devices, 02/10/2014
namely, ultrasonic surgical
aspirators, ultrasonic
lithotripters, ultrasonic
phacoemulsifiers.
1,195,570 07/14/2002 Astrason Portable Ultrasonic Cleaners 07/14/2012
featuring Microscopic Shock Waves.
BACKLOG
As of June 30, 2004, the Company's backlog (firm orders that have not yet been
shipped) was $8,700,000, as compared to approximately $5,600,000 as of June 30,
2003. The Company's backlog relating to laboratory and scientific products,
including Labcaire, was approximately $2,900,000 at June 30, 2004, as compared
to $2,600,000 as of June 30, 2003. The increase is primarily due to an increase
in wet scrubber backlog. The Company's backlog relating to medical devices,
including Sonora, was approximately $5,800,000 at June 30, 2004, as compared to
approximately $3,000,000 at June 30, 2003. This increase is primarily due to an
increase in therapeutic medical devices backlog.
EMPLOYEES
As of September 15, 2004, the Company, including Labcaire and Sonora, employed a
total of 201 full-time employees, including 33 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,
2004 2003 2002
----------- ----------- -----------
Medical devices $21,350,846 $17,504,978 $11,695,761
Laboratory and
scientific products 17,708,220 17,353,773 17,894,692
----------- ----------- -----------
Net sales $39,059,066 $34,858,751 $29,590,453
=========== =========== ===========
14
The following table provides a breakdown of foreign sales by geographic area
during the periods indicated:
Fiscal year ended
June 30,
2004 2003 2002
---------------------------------------
Canada $ 565,872 $ 446,307 $ 230,567
Mexico 229,603 6,230 13,000
United Kingdom 9,509,301 8,767,304 7,526,478
Europe 1,502,776 1,357,245 980,633
Asia 1,037,553 1,193,294 890,621
Middle East 325,365 139,501 146,387
Other 627,437 345,643 530,097
---------------------------------------
$13,797,907 $12,255,524 $10,317,783
=======================================
WEBSITE ACCESS DISCLOSURE
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K are available free of charge on the Company's
website at www.MISONIX.COM as soon as reasonably practicable after such material
is electronically filed with or furnished to the Securities and Exchange
Commission.
Also, copies of the Company's annual report will be made available, free of
charge, upon written request.
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 $40,000 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 $18,000 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 is a defendant in claims and lawsuits arising in the ordinary course
of business. The Company believes that it has meritorious defenses to such
claims and lawsuits and is vigorously contesting them. Although the outcome of
litigation cannot be predicted with certainty, the Company believes that these
actions will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
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, 2004.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
(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 2004: High Low
- ----------- ---- ---
First Quarter .............. $ 5.35 $ 3.28
Second Quarter ............. 5.10 4.00
Third Quarter .............. 7.37 4.45
Fourth Quarter ............. 11.76 6.97
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
(b) As of September 10, 2004, the Company had 6,738,453 shares of Common Stock
outstanding and 105 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.
EQUITY COMPENSATION PLAN INFORMATION:
c)NUMBER
OF SECURITIES
REMAINING FOR
b) WEIGHTED FUTURE ISSUANCE
a) NUMBER OF SECURITIES AVERAGE EXERCISE UNDER EQUITY COMPENSATION
TO BE ISSUED UPON THE EXERCISE PRICE OF THE PLANS(EXCLUDING SECURITIES
PLAN CATEGORY OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN a)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders
- ------------------------------------------------------------------------------------------------------------------------------------
I. 1991 Plan 30,000 $ 7.38 --
II. 1996 Director's Plan 255,000 $ 3.92 166,500
III. 1996 Plan 272,919 $ 6.17 40,786
IV. 1998 Plan 440,877 $ 6.36 37,775
V. 2001 Plan 791,444 $ 5.29 178,666
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,790,240 $ 5.53 423,727
====================================================================================================================================
16
ITEM 6. SELECTED FINANCIAL DATA.
Selected income statement data:
Year Ended June 30,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net sales $ 39,059,066 $ 34,858,751 $ 29,590,453 $ 30,757,519 $ 29,042,872
Net income (loss) 1,718,945 967,575 176,661 (4,492,290) 2,520,896
Net income (loss)
per share - Basic $ .26 $ .15 $ .03 $ (.75) $ .42
Net income (loss)
per share - Diluted $ .25 $ .15 $ .03 $ (.75) $ .39
Selected balance sheet data:
June 30,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Total assets $ 34,241,112 $ 29,794,589 $ 26,964,452 $ 33,220,788 $ 31,163,622
Long-term debt
and capital lease
obligations $ 1,264,480 $ 1,235,362 $ 1,050,254 $ 1,027,921 $ 1,274,738
Total stockholders'
equity $ 23,743,176 $ 21,342,663 $ 19,688,828 $ 19,106,818 $ 23,882,188
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 Income:
Fiscal year ended
June 30,
2004 2003 2002
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 57.7 58.4 60.6
----- ----- -----
Gross profit 42.3 41.6 39.4
----- ----- -----
Selling expenses 11.9 11.9 15.2
General and administrative expenses 19.6 20.1 21.9
Research and development expenses 6.2 6.1 7.1
Litigation (recovery) settlement expenses -- (1.0) (6.5)
----- ----- -----
Total operating expenses 37.7 37.1 37.7
----- ----- -----
Income from operations 4.6 4.5 1.7
Other income 2.7 .9 .2
----- ----- -----
Income before minority interest and income taxes
7.3 5.4 1.9
Minority interest in net income of
consolidated subsidiaries .2 .1 --
----- ----- -----
Income before provision for income
taxes 7.1 5.3 1.9
Income tax provision 2.7 2.5 1.3
----- ----- -----
Net income 4.4% 2.8% .6%
===== ===== =====
17
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 laboratory and scientific 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, 2004 and 2003
NET SALES. Net sales of the Company's medical devices and laboratory and
scientific products increased $4,200,315 to $39,059,066 in fiscal 2004 from
$34,858,751 in fiscal 2003. This difference in net sales is due to an increase
in sales of medical devices of $3,845,868 to $21,350,846 in fiscal 2004 from
$17,504,978 in fiscal 2003. This difference in net sales is also due to an
increase in laboratory and scientific product sales of $354,447 to $17,708,220
in fiscal 2004 from $17,353,773 in fiscal 2003. The increase in sales of medical
devices is due to an increase in sales of therapeutic medical devices of
$3,335,285 and an increase of $510,583 in sales of diagnostic medical devices,
both due to increased customer demand for several diagnostic and therapeutic
medical products. The increase in sales of diagnostic medical devices was not
attributable to a single customer, distributor or any other specific factor. The
increase in sales of therapeutic medical devices was mostly attributable to an
increase in sales to Mentor of the Lysonix 3000 device, the Auto Sonix device
and accessories sold to USS and an increase of sales of the Sonoblate 500 of
approximately $1,196,000, $993,000, and $771,000, respectively. The increase in
sales of the Sonoblate 500 is due to both an increase in sales to Focus as the
manufacturer of the device, the sale of the device in Europe by the Company and
revenue derived for fee per use or rental income. Sales are not recorded as
revenue until the total earnings process is complete. The increase in sales of
laboratory and scientific products is due to an increase in Labcaire sales of
$589,980 and sales of ultrasonic laboratory products of $286,704 partially
offset by a decrease in wet scrubber sales of $385,072 and a decrease in
ductless fume enclosure sales of $137,165. The increase in Labcaire sales is
primarily due to the strengthening of the English Pound of approximately
$917,000 offset by a decrease in sales of the Guardian (endoscopic cleaning)
product of approximately $327,000. The increase in laboratory and scientific
ultrasonic sales is due to an increase in customer demand for the ultrasonic
sonicator product. Wet scrubber sales continue to be adversely affected by the
downturn in the semi-conductor market. The decrease in fume enclosure sales is
due to lower customer demand for several laboratory and scientific products and
current economic conditions for such products. Export sales from the United
States are remitted in U.S. Dollars and export sales for Labcaire are remitted
in English Pounds. During fiscal 2004 and fiscal 2003, the Company had foreign
net sales of $13,797,907 and $12,255,524, respectively, representing 35.3% and
35.2% of net sales for such periods, respectively. The increase in foreign sales
in fiscal 2004 as compared to fiscal 2003 is substantially due to an increase in
Labcaire sales due to the strengthening of the English Pound of approximately
$917,000 as well as an increase in foreign diagnostic and therapeutic medical
device sales as the Company started to sell the ultrasonic neuroaspirator and
the Sonoblate 500 to distributors in Europe. Labcaire represented 76% and 82% of
foreign net sales during fiscal 2004 and 2003, respectively. The remaining 24%
and 18% represents net foreign sales remitted in U.S. Dollars during fiscal 2004
and 2003, respectively. Approximately 24% of the Company's revenues for fiscal
year 2004 were received in English Pounds. 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 1.77
and 1.59 for the year ended June 30, 2004 and 2003, 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.
18
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:
2004 2003
-------------------------
United States $25,261,159 $22,603,227
Canada 565,872 446,307
Mexico 229,603 6,230
United Kingdom 9,509,301 8,767,304
Europe 1,502,776 1,357,245
Asia 1,037,553 1,193,294
Middle East 325,365 139,501
Other 627,437 345,643
-------------------------
$39,059,066 $34,858,751
=========================
Summarized financial information for each of the segments for the years ended
June 30, 2004 and 2003 are as follows:
For the year ended June 30, 2004:
LABORATORY AND (a)
MEDICAL SCIENTIFIC CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
------------------------------------------------------
Net sales $21,350,846 $17,708,220 $ -- $39,059,066
Cost of goods sold 11,879,237 10,663,226 -- 22,542,463
----------- ----------- -----------
Gross profit 9,471,609 7,044,994 -- 16,516,603
Selling expenses 2,150,482 2,511,524 -- 4,662,006
Research and development 1,580,909 856,843 -- 2,437,752
----------- ----------- -----------
Total operating expenses 3,731,391 3,368,367 7,633,930 14,733,688
----------- ----------- ----------- -----------
Income from operations $ 5,740,218 $ 3,676,627 $(7,633,930) $ 1,782,915
=========== =========== =========== ===========
(a) Amount represents general and administrative expenses.
For the year ended June 30, 2003:
LABORATORY AND (a)
MEDICAL SCIENTIFIC 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
=========== =========== =========== ===========
(a) Amount represents general and administrative and litigation settlement
(recovery) expenses.
19
Net sales for the three months ended June 30, 2004 were $10,796,810 compared to
$10,926,239 for the three months ended June 30, 2003. This decrease of $129,429
for the three months ended June 30, 2004 is due to a decrease in sales of
medical devices of $155,825 partially offset by an increase in laboratory and
scientific products sales of $26,396. The decrease in sales of medical devices
is due to a decrease in sales of diagnostic medical devices of $510,282
partially offset by an increase of $354,457 in sales of therapeutic medical
devices. The decrease in diagnostic medical devices is due to decreased customer
demand for several diagnostic medical products. The decrease 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 and
Mentor. The increase in laboratory and scientific products sales is due to
increased Labcaire sales of $191,616 and an increase in ductless fume enclosure
sales of $10,478 partially offset by a decrease in ultrasonic sales of $74,880
and a decrease in wet scrubber sales of $100,818. The increase in Labcaire sales
is primarily due to the strengthening of the English Pound of approximately
$338,000 partially offset by a decrease in sales of the Guardian (endoscopic
cleaning) product of approximately $146,000. The decrease in laboratory and
scientific ultrasonic sales is due to an increase in customer demand for several
ultrasonic products. Wet scrubber sales continue to be adversely affected by the
downturn in the semi-conductor market.
Summarized financial information for each of the segments for the three months
ended June 30, 2004 and 2003 are as follows:
For the three months ended June 30, 2004:
LABORATORY AND (a)
MEDICAL SCIENTIFIC CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
------------------------------------------------------
Net sales $ 5,579,670 $ 5,217,140 $ -- $10,796,810
Cost of goods sold 3,178,910 3,199,399 -- 6,378,309
----------- ----------- -----------
Gross profit 2,400,760 2,017,741 -- 4,418,501
Selling expenses 735,341 644,353 -- 1,379,694
Research and development 461,314 258,560 -- 719,874
----------- ----------- -----------
Total operating expenses 1,196,655 902,913 1,930,290 4,029,858
----------- ----------- ----------- -----------
Income from operations $ 1,204,105 $ 1,114,828 $(1,930,290) $ 388,643
=========== =========== =========== ===========
(a) Amount represents general and administrative expenses.
For the three months ended June 30, 2003:
LABORATORY AND (a)
MEDICAL SCIENTIFIC 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
=========== =========== =========== ===========
(a) Amount represents general and administrative and litigation settlement
(recovery) expenses.
20
GROSS PROFIT. Gross profit increased to 42.3% in fiscal 2004 from 41.6% in
fiscal 2003. Gross profit for medical devices remained consistent with a gross
profit of 44.4% in fiscal 2004 and fiscal 2003. Gross profit for laboratory and
scientific products increased to 39.8% in fiscal 2004 from 38.8% in fiscal 2003.
Gross profit of medical devices was impacted by the favorable order mix for
sales of therapeutic medical devices due to the fee per use revenue for the
Sonoblate 500, which carries higher margins. This increase is offset by an
unfavorable order mix of diagnostic medical devices, which traditionally carry
lower margins. The increase in gross profit for laboratory and scientific
products is due to ultrasonic and ductless fume enclosure sales partially offset
by lower gross profit for wet scrubber and Labcaire sales. The decrease in gross
profit for wet scrubber sales is due to pricing pressures from competition.
Gross profit increased to 40.9% of sales in the three months ended June 30, 2004
from 39.4% of sales in the three months ended June 30, 2003. Gross profit for
laboratory and scientific products increased to 38.7% of sales in the three
months ended June 30, 2004 from 35.1% of sales in the three months ended June
30, 2003. Gross profit for medical devices decreased from 43.3% of sales in the
three months ended June 30, 2003 to 43.0% of sales in the three months ended
June 30, 2004. The increase in gross profit for laboratory and scientific
products was positively impacted by the favorable order mix for sales of
ultrasonic products and wet scrubber sales partially offset by a decrease in
gross profit of Labcaire and ductless fume enclosure sales. The decrease in
gross profit for medical devices was impacted by the favorable order mix for
sales of diagnostic medical devices offset by an unfavorable order mix of
therapeutic medical devices. The Company manufactures and sells both medical
devices and laboratory and scientific products with a wide range of product
costs and gross margin dollars as a percentage of revenues.
SELLING EXPENSES. Selling expenses increased $529,929 or 12.8% to $4,662,006
(11.9% of sales) in fiscal 2004 from $4,132,077 (11.9% of sales) in fiscal 2003.
Medical devices selling expenses increased $743,939 due both to additional sales
and marketing efforts for diagnostic medical devices and therapeutic medical
devices. The increase in therapeutic medical devices selling expenses of
$564,801 is due to an increase in sales and marketing efforts relating to
European distribution and the hiring of additional salesman for therapeutic
medical devices. Laboratory and scientific products selling expenses decreased
$214,010 predominantly due to a decrease in fume enclosure and wet scrubber
commissions and ultrasonic marketing expenses offset by the strengthening of the
English Pound. Selling expenses increased $370,842 or 36.8% to $1,379,694 (12.8%
of sales) in the three months ended June 30, 2004 from $1,008,852 (9.2% of
sales) in the three months ended June 30, 2003. Medical devices selling expenses
increased $365,880 due both to additional sales and marketing efforts for
diagnostic medical devices and therapeutic medical devices. The increase in
therapeutic medical devices selling expenses of $311,804 is due to an increase
in sales and marketing efforts relating to European distribution. Laboratory and
scientific products selling expenses decreased $4,962 predominantly due to a
decrease in fume enclosure, wet scrubber and ultrasonic commissions and
marketing expenses offset by the strengthening of the English Pound for Labcaire
selling expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $610,842 or 8.7% to $7,633,930 in fiscal 2004 from $7,023,088 in
fiscal 2003. The increase is predominantly due to an increase in corporate
general and administrative expenses relating to corporate insurance, information
technology consulting, legal fees and other accrued corporate expenses partially
offset by a decrease in bad debt expense due to payments received from Focus.
The remaining increase is attributable to the strengthening of the English Pound
at Labcaire. General and administrative expenses decreased $126,098 or 6.1% from
$2,056,388 in the three months ended June 30, 2003 to $1,930,290 in the three
months ended June 30, 2004. The decrease is predominantly due to a decrease in
general and administrative expenses relating to severance costs offset in part
by an increase in administrative staff, all attributable to Labcaire, and a
decrease in corporate expenses related to bad debt.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
$328,440 or 15.6% to $2,437,752 in fiscal 2004 from $2,109,312 in fiscal 2003.
Research and development expenses related to medical devices increased $180,573
and research and development expense related to laboratory and scientific
products increased $147,867. Research and development expenses related to
medical devices increased predominantly due to efforts for therapeutic medical
devices and an increase in amounts paid Focus in fiscal 2004 for the development
work performed for the Company for the treatment of kidney and liver tumors
utilizing high intensity focused ultrasound technology as compared to fiscal
2003. The increase in research and development expenses relating to laboratory
and scientific products increased efforts in research and development efforts
for Labcaire and the strengthening of the English Pound at Labcaire. Research
and development expenses increased $210,328 or 41.3% for the three months ended
June 30, 2004 from $509,546 to $719,874 for the three months ended June 30,
2003. Research and development expenses related to medical devices increased
$140,800 and research and development expense related to laboratory and
scientific products increased $69,528. Research and development expenses related
to medical devices increased predominantly due to increased efforts for
therapeutic medical devices and an increase in payments made to Focus in three
months ended June 30, 2004 for the development for the treatment of kidney and
liver tumors utilizing high intensity focused ultrasound technology as compared
to the three months ended June 30, 2003, as requested by the Company. The
increase in laboratory and scientific products is due to increased research and
development efforts for all laboratory and scientific products.
21
LITIGATION (RECOVERY) SETTLEMENT EXPENSES. The Company recorded a reversal of
the litigation settlement for the fiscal year 2003 of $344,435 as compared to $0
for the fiscal year 2004. The Company recorded a reversal of the litigation
settlement for the three months ended June 30, 2003 of $143,329 as compared to
$0 for the three months ended June 30, 2004. This reversal represents the sale
of Lysonix 2000 units by Mentor that were received by Mentor from LySonix under
the settlement agreement with LySonix (this inventory was previously reserved
for in fiscal year June 30, 2002, as its saleability was uncertain).
OTHER INCOME (EXPENSE). Other income was $1,057,191 in fiscal 2004 as compared
to $292,701 in fiscal 2003. The increase of $764,490 for the fiscal year was
primarily due to an increase in royalty income of $655,844 and a decrease in
loss on impairment of investments of $113,157. The Company received an
additional royalty payment in the first quarter of fiscal 2004 of approximately
$410,000, which was based upon a review of USS' records that determined that
royalties were due for prior years. The review showed that USS owed (and
subsequently paid in the first quarter) royalties due on a product that was not
included in the original royalty computation. The increase was also due to a
decrease in loss on impairment of investments of Hearing Innovations of $99,432.
The decrease in loss on impairment of Hearing Innovations is a direct result of
a reduction of loans made to Hearing Innovations in the current year compared to
loans made in the prior year. Other income was $296,947 in the three months
ended June 30, 2004 as compared to $218,927 in the three months ended June 30,
2003. The increase of $78,020 for the three months ended June 30, 2004 was
primarily due to a decrease in loss on impairment of investments of $66,250. The
decrease in loss on impairment of Hearing Innovations is a direct result of a
reduction of loans to Hearing Innovations in the current period compared to
loans made in the prior period.
INCOME TAXES. The effective tax rate is 38.3% for the fiscal year ended June 30,
2004 as compared to an effective tax rate of 47.8% for the fiscal year ended
June 30, 2003. The current effective income tax rate of 38.3% was impacted by no
corresponding income tax benefit from the loss on impairment of Hearing
Innovations of approximately $78,000 plus the standard consolidated tax rate of
approximately 36%. The decrease in the effective tax rate for fiscal 2004
compared to fiscal 2003 is primarily due to the reduction in the impaired loans
to Hearing Innovations. The loss on impairment of Hearing Innovations is
recorded with no corresponding tax benefit since these transactions are capital
losses. Benefits for such losses are only received if the Company has the
ability to generate capital gains. 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. During the fourth quarter of fiscal 2004, the Company
reduced the valuation allowance by $51,641 due to the recent increase in the
Company's stock price leaving a valuation allowance of $45,001.
Fiscal years ended June 30, 2003 and 2002
NET SALES. Net sales of the Company's medical devices and laboratory and
scientific 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 laboratory and
scientific product sales of $540,919 to $17,353,773 in fiscal 2003 from
$17,894,692 in fiscal 2002. The increase in 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
laboratory and scientific 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 laboratory and scientific 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.
22
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:
LABORATORY AND (a)
MEDICAL SCIENTIFIC 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
=========== =========== =========== ===========
(a) Amount represents general and administrative and litigation settlement
(recovery) expenses.
For the year ended June 30, 2002:
LABORATORY AND (a)
MEDICAL SCIENTIFIC 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.
23
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 laboratory and scientific 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 laboratory and scientific
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 laboratory and
scientific 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:
LABORATORY AND (a)
MEDICAL SCIENTIFIC 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:
LABORATORY AND (a)
MEDICAL SCIENTIFIC 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.
24
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 laboratory and scientific 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
laboratory and scientific 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 laboratory and
scientific 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. Laboratory
and scientific selling expenses decreased $558,056 predominantly due to a
decrease in fume enclosure and 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. Laboratory
and scientific 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 expenses related to medical devices decreased $154,103
and research and development expenses related to laboratory and scientific
products increased $159,714. During fiscal year 2003, the Company funded
$100,000 to Focus 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.
25
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 saleability 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 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 and Hearing Innovations is a
direct result of current period loans to Focus 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 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 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.
26
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, 2004 includes a summary of the Company's significant
accounting policies and methods used in the preparation of its financial
statements. The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. On an on-going basis, management
evaluates its estimates and judgments, including those related to bad debts,
inventories, goodwill, property, plant and equipment and income taxes.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company considers certain accounting policies
related to allowance for doubtful accounts, inventories, property, plant and
equipment, goodwill and income taxes to be critical policies due to the
estimation process involved in each.
Allowance for Doubtful Accounts: The Company's policy is to review its
customers' financial condition prior to extending credit and, generally,
collateral is not required. The Company utilizes letters of credit on foreign or
export sales where appropriate.
Inventories: Inventories are stated at the lower of cost (first-in, first-out)
or market and consist of raw materials, work-in-process and finished goods.
Management evaluates the need to record adjustments for impairments of inventory
on a quarterly basis. The Company's policy is to assess the valuation of all
inventories, including raw materials, work-in-process and finished goods.
Property, Plant and Equipment: Property, plant and equipment are recorded at
cost. Depreciation of property and equipment is provided using the straight-line
method over estimated useful lives ranging from 1 to 5 years. Depreciation of
the Labcaire building is provided using the straight-line method over the
estimated useful life of 50 years. Leasehold improvements are amortized over the
life of the lease or the useful life of the related asset, whichever is shorter.
The Company's policy is to periodically evaluate the appropriateness of the
lives assigned to property, plant and equipment and to make adjustments if
necessary.
Goodwill: In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 141 ("SFAS 141") and
SFAS 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. The Company also completed its annual goodwill impairment
tests for fiscal 2004 in the fourth quarter. There were no indications that
goodwill recorded was impaired.
27
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, 2004 and June 30, 2003 was $16,997,590 and
$13,967,805, respectively. For the fiscal year 2004, cash provided by operations
totaled $2,630,794. The increase in the cash provided by operations is due to an
increase in net income, the collection of accounts receivable and royalties from
the prior period and the increase of accounts payable and income tax payable
partially offset by cash paid for inventory purchased for unshipped orders. For
the fiscal year 2004, cash used in investing activities was $732,935, which
primarily consisted of the purchase of property, plant and equipment during the
regular course of business and loans made to Hearing Innovations. For the fiscal
year 2004, cash provided by financing activities was $616,129, primarily
consisting of proceeds from short-term borrowings and the exercise of stock
options partially offset by payments of short-term borrowings and principal
payments on capital lease obligations.
Revolving Credit Facilities
Labcaire has a debt purchase agreement with Lloyds TSB Commercial Finance. The
amount of this facility is approximately $1,710,000 ((pound)950,000) and bears
interest at the bank's base rate (5.25% and 4.00% at June 30, 2004 and 2003,
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 agreement expires on September 30, 2004 and covers all United Kingdom and
European sales. At June 30, 2004, the balance outstanding under this overdraft
facility was $1,373,681 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, 2004, the Company had $5,000,000 available on its line of credit. The
Company is in compliance with all such covenants.
28
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, 2004, 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 $1,373,681 $ -- $ -- $ -- $1,373,681
Facility debt 62,172 129,239 136,307 782,891 1,110,609
Capital leases 268,993 241,780 16,560 -- 527,333
Operating leases 663,367 123,130 49,304 -- 835,801
--------------------------------------------------------------
$2,368,213 $ 494,149 $ 202,171 $ 782,891 $3,847,424
==============================================================
Hearing Innovations, Inc.
During fiscal 2004, the Company entered into eight loan agreements whereby
Hearing Innovations is required to pay the Company an aggregate amount of
$199,255. Two of these notes aggregating $23,000 were due November 30, 2003 and
are in default due to non-payment. The remaining six notes aggregating $176,255
were due June 30, 2004 and are in default due to non-payment. Hearing
Innovations is currently negotiating with the Company to extend the due dates of
all its outstanding debt. All notes bear interest at 8% per annum. The notes are
secured by a lien on all of Hearing Innovations' right, title and interest in
accounts receivable, inventory, property, plant and equipment and processes of
specified products whether now existing or arising after the date of these
agreements. The loan agreements contain warrants to acquire 199,255 shares of
Hearing Innovations common stock, at the option of the Company, at a cost of
$.20 per share. These warrants, which are deemed nominal in value, expire in
October 2005. The Company recorded an allowance against amounts loaned prior to
April 1, 2004, which totaled $198,800. The related expense has been included in
loss on impairment of Hearing Innovations in the accompanying consolidated
statements of income. 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 and Hearing
Innovations has no predictable cash flows from its product revenue. 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. The Company previously made
the decision not to continue funding Hearing Innovations' operations, however,
the Company loaned Hearing Innovations $199,255 to enable Hearing Innovations to
reduce a substantial portion of their long-term debt to certain third parties.
The Company continues to believe that Hearing Innovations' technology could
provide a benefit to patients but the products require more improvement and
market development. All equity investments and debt in Hearing Innovations have
been fully reserved and currently have a zero basis.
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, Hearing Innovations suspended
operations in April 2004.
In connection with the adoption of FIN 46, the Company consolidated Hearing
Innovations in its March 31, 2004 balance sheet as the entity was determined to
be a VIE and the Company is its primary beneficiary. The Company elected to
record the adoption of FIN 46 as a cumulative effect of an accounting change.
Consolidating Hearing Innovations did not have a material impact on the
Company's consolidated results of operations or financial condition.
On July 14, 2004, Hearing Innovations sent all shareholders and creditors a plan
for reorganization and disclosure statement. The Company committed to fund
Hearing Innovations up to $150,000 for the reorganization plan. Hearing
Innovations plans to file for relief under Chapter 11 of the U.S. Bankruptcy
Code in September 2004. If the petition is approved, the Company will own 100%
of the equity in Hearing Innovations.
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.
29
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 due to increase in cash flow from operations. The Company expects future
cash flow from operations to fund all ongoing cash flow needs.
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 24% of the Company's revenues in fiscal 2004 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 1.77 and 1.59 for the fiscal
year ended June 30, 2004 and 2003, respectively. A strengthening of the English
Pound, in relation to the U.S. Dollar, will have the effect of increasing its
reported revenues and profits, while a weakening of the English Pound will have
the opposite effect. Since the Company's operations in England generally sets
prices and bids for contracts in English Pounds, a strengthening of the English
Pound, while increasing the value of its UK assets, might place the Company at a
pricing disadvantage in bidding for work from manufacturers based overseas. The
Company collects its receivables in the currency the subsidiary resides in. The
Company has not engaged in foreign currency hedging transactions, which include
forward exchange agreements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
The independent registered public accounting firm report and consolidated
financial statements listed in the accompanying index is filed as part of this
report. See "Index to Consolidated Financial Statements" on page 43.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected financial data for each quarter of fiscal
2004, 2003 and 2002. 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.
30
QUARTERLY FINANCIAL DATA:
FISCAL 2004
Q1 Q2 Q3 Q4 YEAR
Net sales $ 8,619,898 $ 9,296,109 $ 10,346,249 $ 10,796,810 $ 39,059,066
Gross profit 3,665,695 3,978,218 4,454,189 4,418,501 16,516,603
Operating expenses 3,500,781 3,531,403 3,671,646 4,029,858 14,733,688
Income from operations 164,914 446,815 782,543 388,643 1,782,915
Other income 511,949 246,066 2,229 296,947 1,057,191
Minority interest in net income of
consolidated subsidiaries 14,026 14,125 7,790 16,564 52,505
Income tax provision 269,095 289,470 388,933 121,158 1,068,656
------------ ------------ ------------ ------------ ------------
Net income $ 393,742 $ 389,286 $ 388,049 $ 547,868 $ 1,718,945
============ ============ ============ ============ ============
Net income per share - Basic $ .06 $ .06 $ .06 $ .08 $ .26
Net income per share - Diluted $ .06 $ .06 $ .06 $ .08 $ .25
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 46,955 157,437 503,634 177,766 885,792
------------ ------------ ------------ ------------ ------------
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
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
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of June 30, 2004. Based
on that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of June 30, 2004. There were no material changes in the Company's
internal control over financial reporting during the fourth quarter of fiscal
2004.
ITEM 9B. OTHER INFORMATION.
None.
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 57 Chairman of the Board 1995
of Directors
Howard Alliger 77 Director 1971
T. Guy Minetti 53 Director 2003
Thomas F. O'Neill 58 Director 2003
Michael A. McManus, Jr. 61 President and Chief 1998
Executive Officer
Richard Zaremba 49 Vice President, Chief Financial Officer, --
Secretary and Treasurer
Kenneth Coviello 52 Vice President - Medical Devices --
Dan Voic 42 Vice President of Research and Development
and Engineering --
Bernhard Berger 42 Vice President - Laboratory/Scientific Products --
Ronald Manna 50 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.
32
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.
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 laboratory and scientific 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.
33
BERNHARD BERGER became Vice President of Laboratory /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 annually 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, 2004, options to purchase 15,000 shares of Common Stock were
granted to each of Mr. Gelman, 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
2004.
CODE OF ETHICS
The Company has adopted a code of ethics that applies to all of its directors,
officers (including its chief executive officer, chief financial officer,
controller and any person performing similar functions) and employees. The
Company has filed a copy of this Code of Ethics as Exhibit 14 to this Form 10-K.
The Company has also made the Code of Ethics available on its website at
www.MISONIX.COM.
AUDIT COMMITTEE
The Company has a separately-designated standing audit committee established in
accordance with section 3(a)(58)(A) of the Exchange Act. The members of the
Audit Committee are Messrs. Gelman, Minetti and O'Neill. The Board of Directors
has determined that each member of the Audit Committee is "independent" not only
under the Qualitative Listing Requirements of the Nasdaq Stock Market but also
within the definition contained in a final rule of the SEC. Furthermore, the
Board of Directors has determined that all of the members of the Audit Committee
are "audit committee financial experts" within the definition contained in a
final rule adopted by the SEC.
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 $100,000.
34
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM
------------------- COMPENSATION
------------
NAME AND PRINCIPAL FISCAL YEAR SECURITIES UNDERLYING
POSITION ENDED JUNE 30, SALARY ($) BONUS ($) OPTIONS GRANTED (#)
Michael A. McManus, Jr. 2004 275,000 250,000 125,000
President and Chief 2003 275,000 100,000 150,000
Executive Officer 2002 275,000 150,000 150,000
Richard Zaremba 2004 157,878 30,000 30,000
Vice President, 2003 154,121 1,595 40,000
Chief Financial Officer, 2002 150,000 28,000 32,000
Secretary and Treasurer
Kenneth Coviello 2004 141,095 30,000 30,000
Vice President of Medical 2003 135,093 2,562 35,000
Products 2002 130,000 15,000 15,000
Daniel Voic 2004 121,141 25,000 15,000
Vice President of 2003 116,645 12,129 10,000
Research and Development and 2002 97,729 10,000 6,500
Engineering
Bernhard Berger 2004 110,692 2,000 10,000
Vice President of 2003 108,748 17,021 20,000
Laboratory /Scientific Products 2002 105,000 3,000 5,000
Ronald Manna 2004 102,522 2,000 5,000
Vice President of 2003 114,231 1,000 5,000
New Product Development and 2002 121,072 10,000 10,000
Regulatory Affairs
EMPLOYMENT AGREEMENTS
In October 2003, the Company entered into an employment agreement with its
President and Chief Executive Officer which expires on October 31, 2004 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 pre-tax operating earnings, based on a calendar year, with a
minimum guaranteed bonus of $250,000. In 2003, Mr. McManus received a bonus of
$250,000, which was paid in December. In 2002, Mr. McManus elected to receive a
bonus of $100,000, which was paid in December 2002. Mr. McManus elected to
receive a reduced bonus for such year due to the Company's results. Mr. McManus
receives additional benefits that are generally provided to other employees of
the Company.
In conformity with the Company's policy, all of its Directors, officers and
employees execute confidentiality and nondisclosure agreements upon the
commencement of employment with the Company. The agreements generally provide
that all inventions or discoveries by the employee related to the Company's
business and all confidential information developed or made known to the
employee during the term of employment shall be the exclusive property of the
Company and shall not be disclosed to third parties without the prior approval
of the Company. Mr. Manna has an agreement with the Company which provides for
the payment of six months' severance upon his termination for any reason.
Messrs. McManus and Zaremba have agreements for the payment of six months'
annual base salary upon a change in control of the Company. The Company's
employment agreement with Mr. McManus also contains non-competition provisions
that preclude him from competing with the Company for a period of 18 months from
the date of his termination of employment.
35
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning options granted to executive
officers named in the Summary Compensation Table during fiscal year ended June
30, 2004:
%OF TOTAL
OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES (a)
OPTIONS IN FISCAL EXERCISE EXPIRATION GRANT DATE
NAME GRANTED (#) YEAR PRICE ($/SH) DATE VALUE($)
- ---------------------------------------------------------------------------------------------------------
Michael A. McManus, Jr. 125,000 50 4.66 11/1/2013 438,750
Richard Zaremba 30,000 12 4.70 9/16/2013 105,300
Kenneth Coviello 30,000 12 4.70 9/16/2013 105,300
Daniel Voic 15,000 2 4.70 9/16/2013 52,650
Bernhard Berger 10,000 6 4.70 9/16/2013 35,100
Ronald Manna 5,000 4 4.70 9/16/2013 17,550
(a) The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 2.5%-2.58%; no dividend yields;
volatility factor of the expected market price of the Common Stock of 100%, and
a weighted-average expected life of the options of five years.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table contains information concerning the number and value, at
June 30, 2004, of exercised options and unexercised options held by executive
officers named in the Summary Compensation Table:
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTION AT
ACQUIRED FISCAL YEAR END (#) FISCAL YEAR END ($)
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------
Michael A. McManus, Jr. -- -- 912,500/62,500 1,660,375/180,625
Richard Zaremba 15,000 72,504 78,000/54,000 150,419/105,453
Kenneth Coviello 3,000 8,700 48,333/38,667 90,591/97,884
Daniel Voic 24,090 67,347 23,410/15,500 24,344/39,873
Bernhard Berger 19,998 48,628 10,001/15,001 25,834/37,802
Ronald Manna -- -- 79,167/8,333 130,421/18,516
(1) Fair market value of underlying securities (the closing price of the
Common Stock on the NASD Automated Quotation System) at June 30, 2004,
minus the exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
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.
36
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,
2004, options to purchase 30,000 shares 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 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 (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. At June 30, 2004,
options to purchase 272,919 shares 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 255,000 shares were outstanding at
exercise prices ranging from $.73 to $7.10 per share with a vesting period of
immediate to three years under the 1996 Directors Plan. At June 30, 2004,
options to purchase 136,295 shares under the 1996 Plan have been exercised and
182,731 shares have been forfeited (of which options to purchase 141,945 shares
have been reissued). At June 30, 2004, options to purchase 703,500 shares 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. At June 30, 2004,
options to purchase 440,877 shares 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, 2004, options to purchase 21,348 shares
under the 1998 Plan have been exercised and options to purchase 66,700 shares
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. At June 30, 2004,
options to purchase 791,444 shares were outstanding under the 2001 Plan at
exercise prices ranging from $4.66 to $6.07 per share with a vesting period of
one to three years. At June 30, 2004, options to purchase 29,890 shares under
the 2001 Plan have been exercised and options to purchase 59,062 shares under
the 2001 Plan have been forfeited (of which no options have been reissued).
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, depending on the Plan, and in accordance with
Rule 4350(c) of the Qualitative Listing Requirements of the Nasdaq Stock Market.
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 provided in the terms of each
individual option agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth as of August 31, 2004, 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.
37
PERCENT
COMMON STOCK OF
NAME AND ADDRESS (1) BENEFICIALLY OWNED CLASS
- -------------------- ------------------ -----
Michael A. McManus, Jr 1,032,450 (2) 13.9
Gary Gelman 755,750 (3) 11.1
Howard Alliger 579,608 (4) 8.5
Ronald Manna 108,061 (5) 1.2
Richard Zaremba 78,500 (6) 1.2
Kenneth Coviello 48,333 (7) *
Dan Voic 23,410 (8) *
Bernard Berger 10,001 (9) *
T. Guy Minetti 10,000(10) *
Thomas F. O'Neill 5,000(11) *
All executive officers and
Directors as a group
(ten people) 2,653,313(12) 32.8
- ----------
* 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 912,500 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 79,167 shares which Mr. Manna has the right to acquire upon
exercise of stock options which are currently exercisable.
(6) Includes 78,000 shares which Mr. Zaremba has the right to acquire
upon exercise of stock options which are currently exercisable.
(7) Includes 48,333 shares which Mr. Coviello has the right to acquire
upon exercise of stock options which are currently exercisable.
(8) Includes 23,410 shares which Mr. Voic has the right to acquire upon
exercise of stock options which are currently exercisable.
(9) Represents 10,001 shares which Mr. Berger has the right to acquire
upon exercise of stock options which are currently exercisable.
(10) Includes 5,000 shares which Mr. Minetti has the right to acquire
upon exercise of stock options which are currently exercisable.
(11) Represents 5,000 shares which Mr. O'Neill has the right to acquire
upon exercise of stock options which are currently exercisable.
(12) Includes the shares indicated in notes (2), (3), (4), (5), (6), (7),
(8), (9), (10) and (11).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees:
Ernst & Young LLP billed the Company $190,045 and $148,225 in the aggregate for
services rendered for the audit of the Company's 2004 and 2003 fiscal years and
the review of the Company's interim financial statements included in the
Company's Quarterly Reports on Form 10-Q for the Company's 2004 and 2003 fiscal
years, respectively.
38
All Audit Related and Other Fees:
Ernst & Young LLP has billed the Company $15,000 and $29,800 in the aggregate
for professional services rendered for all other services other than those
covered in the section captioned "Audit Fees" for the Company's 2004 and 2003
fiscal years, respectively. These other services include (i) assistance with
regulatory filings, (ii) audit of the Company's 401(k) plan, (iii) consultations
on the effects of various accounting issues and changes in professional
statements and (iv) income tax returns for Labcaire, the Company's U.K.
subsidiary.
Tax Fees:
Ernst & Young LLP did not render any professional services for tax compliance,
tax advice or tax planning for the Company's 2004 and 2003 fiscal years.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) 1. The response to this portion of Item 15 is submitted as a separate
section of this report.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves.
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)
39
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)
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(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. (12)
40
14 Code of Ethics
21 Subsidiaries of the Company.
23.1 Consent of independent registered public accounting firm.
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.
(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.
(12) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year 2003.
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 15, 2004
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 15, 2004
- ----------------------------- Director
Gary Gelman
/s/ Michael A. McManus, Jr. President, Chief Executive September 15, 2004
- ---------------------------- Officer, and Director
Michael A. McManus, Jr. (principal executive officer)
/s/ Richard Zaremba Vice President, Chief Financial September 15, 2004
- ----------------------------- Officer, Treasurer and Secretary
Richard Zaremba (principal financial and
accounting officer)
/s/ Howard Alliger Director September 15, 2004
- -------------------------------
Howard Alliger
/s/ T. Guy Minetti Director September 15, 2004
- ------------------------------
T. Guy Minetti
/s/ Thomas F. O'Neill Director September 15, 2004
- ---------------------------
Thomas F. O'Neill
42
Item 14(a)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MISONIX, INC. and Subsidiaries
Year Ended June 30, 2004
Page
----
Report of Independent Registered Public Accounting Firm...................... 44
Consolidated Balance Sheets--June 30, 2004 and 2003 ......................... 45
Consolidated Statements of Income--Years Ended
June 30, 2004, 2003 and 2002............................................... 46
Consolidated Statements of Stockholders' Equity--Years Ended
June 30, 2004, 2003 and 2002 .............................................. 47
Consolidated Statements of Cash Flows--Years Ended
June 30, 2004, 2003 and 2002 .............................................. 48
Notes to Consolidated Financial Statements................................... 50
The following consolidated financial statement schedule is included in Item
14(a).
Schedule II-Valuation and Qualifying Accounts and Reserves................... 79
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 Registered Public Accounting Firm
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, 2004 and 2003 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended June 30, 2004. Our audits also included the financial
statement schedule listed in the index at Item 14(a) for the years ended June
30, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (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, 2004 and 2003, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2004, in conformity with U.S. generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Melville, New York
August 23, 2004
44
Misonix, Inc. and Subsidiaries
Consolidated Balance Sheets
JUNE 30,
----------------------------
ASSETS 2004 2003
----------------------------
Current assets:
Cash and cash equivalents $ 4,839,866 $ 2,279,869
Accounts receivable, less allowance for doubtful accounts of $457,016 and
$644,157, respectively 7,601,693 7,844,399
Inventories 10,944,572 8,979,472
Deferred income taxes 645,381 477,580
Prepaid expenses and other current assets 1,114,546 983,523
----------------------------
Total current assets 25,146,058 20,564,843
Property, plant and equipment, net 3,892,920 3,574,207
Deferred income taxes 412,201 862,690
Goodwill 4,473,713 4,473,713
Other assets 316,220 319,136
----------------------------
Total assets $ 34,241,112 $ 29,794,589
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities $ 1,373,681 $ 704,669
Accounts payable 4,507,476 3,563,208
Accrued expenses and other current liabilities 1,857,097 2,002,154
Income taxes payable 107,282 47,453
Current maturities of long-term debt and capital lease obligations 302,932 279,554
----------------------------
Total current liabilities 8,148,468 6,597,038
Long-term debt and capital lease obligations 1,264,480 1,235,362
Deferred income 769,033 356,076
Minority interest 315,955 263,450
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $.01 par value--shares authorized 10,000,000; 6,816,253 and 6,733,665 issued,
and 6,738,453 and 6,655,865 outstanding, respectively 68,163 67,337
Additional paid-in capital 23,116,602 22,712,511
Retained earnings (deficit) 665,461 (1,053,484)
Treasury stock, 77,800 shares (412,424) (412,424)
Accumulated other comprehensive income 305,374 28,723
----------------------------
Total stockholders' equity 23,743,176 21,342,663
----------------------------
Total liabilities and stockholders' equity $ 34,241,112 $ 29,794,589
============================
See Accompanying Notes to Consolidated Financial Statements.
45
Misonix, Inc. and Subsidiaries
Consolidated Statements of Income
YEAR ENDED JUNE 30,
2004 2003 2002
--------------------------------------------
Net sales $ 39,059,066 $ 34,858,751 $ 29,590,453
Cost of goods sold 22,542,463 20,354,558 17,931,874
--------------------------------------------
Gross profit 16,516,603 14,504,193 11,658,579
Operating expenses:
Selling expenses 4,662,006 4,132,077 4,502,173
General and administrative expenses 7,633,930 7,023,088 6,469,704
Research and development expenses 2,437,752 2,109,312 2,103,701
Litigation (recovery) settlement expenses -- (344,435) (1,912,959)
--------------------------------------------
Total operating expenses 14,733,688 12,920,042 11,162,619
--------------------------------------------
Income from operations 1,782,915 1,584,151 495,960
Other income (expense):
Interest income 49,119 66,202 273,750
Interest expense (164,985) (166,971) (133,438)
Option/license fees 25,893 24,312 24,312
Royalty income, net of royalty expense of $82,362 in 2004 1,319,558 663,714 823,642
Loss on impairment of Focus Surgery, Inc. -- (13,725) (410,700)
Loss on impairment of Hearing Innovations, Inc. (198,800) (298,232) (542,197)
Foreign currency exchange gain 26,406 17,401 11,948
--------------------------------------------
Total other income 1,057,191 292,701 47,317
--------------------------------------------
Income before minority interest and income taxes 2,840,106 1,876,852 543,277
Minority interest in net income (loss) of consolidated subsidiaries 52,505 23,485 (17,565)
--------------------------------------------
Income before provision for income taxes 2,787,601 1,853,367 560,842
Income tax provision 1,068,656 885,792 384,181
--------------------------------------------
Net income $ 1,718,945 $ 967,575 $ 176,661
============================================
Net income per share - Basic $ .26 $ .15 $ .03
============================================
Net income per share - Diluted $ .25 $ .15 $ .03
============================================
Weighted average common shares outstanding -Basic 6,667,615 6,478,138 6,077,546
============================================
Weighted average common shares outstanding - Diluted 6,849,845 6,623,743 6,648,761
============================================
See Accompanying Notes to Consolidated Financial Statements.
46
Misonix, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 2004, 2003 and 2002
COMMON STOCK
$.01 PAR VALUE TREASURY STOCK ACCUMULATED
------------------- -------------------- ADDITIONAL RETAINED TOTAL TOTAL
NUMBER NUMBER PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL (DEFICIT) (LOSS) INCOME EQUITY
------------------------------------------------------------------------------------------------------
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
options 58,250 583 -- -- 389,004 -- -- 389,587
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
Net income -- -- -- -- -- 1,718,945 -- 1,718,945
Foreign currency
translation
Adjustment -- -- -- -- -- -- 276,651 276,651
------------
Comprehensive income -- -- -- -- -- -- -- 1,995,596
------------
Exercise of employee
options 82,588 826 -- -- 404,091 -- -- 404,917
----------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2004 6,816,253 $68,163 (77,800) $(412,424) $23,116,602 $ 665,461 $ 305,374 $ 23,743,176
====================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
47
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED JUNE 30,
2004 2003 2002
-----------------------------------------
OPERATING ACTIVITIES
Net income $ 1,718,945 $ 967,575 $ 176,661
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt (recovery) expense (112,420) 409,952 97,210
Litigation recovery expense -- (344,435) (1,912,959)
Deferred income tax expense 282,688 805,694 2,003,343
Depreciation and amortization 732,755 689,605 599,342
Loss on disposal of equipment 123,955 121,384 59,280
Deferred income (loss) 412,957 (94,997) (118,770)
Foreign currency exchange gain (26,406) (17,401) (11,948)
Minority interest in net income (loss) of subsidiaries 52,505 23,485 (17,565)
Loss on impairment of Focus Surgery, Inc. -- 13,725 410,700
Loss on impairment of Hearing Innovations, Inc. 198,800 298,232 542,197
Income tax benefit on exercise of stock options -- (648,578) --
Changes in operating assets and liabilities:
Accounts receivable 496,662 (1,143,004) 144,259
Inventories (1,654,520) (1,264,020) 929,865
Prepaid income taxes 44,204 1,869,336 (1,391,978)
Prepaid expenses and other current assets (51,798) (361,374) (1,047)
Other assets (40,136) 114,574 (290,020)
Accounts payable and accrued expenses 444,565 901,280 (531,313)
Litigation settlement liabilities -- (174,332) (3,928,960)
Income taxes payable 8,038 136,791 (512,602)
-----------------------------------------
Net cash provided by (used in) operating activities 2,630,794 2,303,492 (3,754,305)
-----------------------------------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (534,371) (535,420) (293,924)
Redemption of investments held to maturity -- -- 2,015,468
Purchase of Labcaire stock -- (232,394) (99,531)
Cash paid for acquisition of Fibra Sonics, Inc., net of cash
Acquired -- -- (17,985)
Purchase of convertible debentures - Focus Surgery, Inc. -- -- (300,000)
Loans to Focus Surgery, Inc. -- -- (60,000)
Loans to Hearing Innovations, Inc., net (198,800) (274,991) (473,909)
Cash acquired from consolidation of variable interest entity 236 -- --
-----------------------------------------
Net cash (used in) provided by investing activities (732,935) (1,042,805) 770,119
-----------------------------------------
(continued on next page)
48
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
YEAR ENDED JUNE 30,
2004 2003 2002
-----------------------------------------
FINANCING ACTIVITIES
Proceeds from short-term borrowings $ 1,243,226 $ 407,964 $ 293,963
Payments of short-term borrowings (627,479) (534,695) (127,919)
Principal payments on capital lease obligations (349,054) (298,697) (205,353)
Proceeds of long-term debt -- 12,901 --
Payment of long-term debt (55,481) (43,132) (58,636)
Proceeds from exercise of stock options 404,917 404,055 389,587
Purchase of treasury stock -- (10,450) (43,737)
-----------------------------------------
Net cash provided by (used in) financing activities 616,129 (62,054) 247,905
-----------------------------------------
Effect of exchange rate changes on assets and liabilities 46,009 15,771 27,173
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 2,559,997 1,214,404 (2,709,108)
Cash and cash equivalents at beginning of year 2,279,869 1,065,465 3,774,573
-----------------------------------------
Cash and cash equivalents at end of year $ 4,839,866 $ 2,279,869 $ 1,065,465
=========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for (received from):
Interest $ 164,985 $ 166,971 $ 133,438
=========================================
Income taxes $ 539,185 $(1,785,349) $ 390,813
=========================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
=========================================
Capital lease additions $ 321,440 $ 363,800 $ 296,591
=========================================
See Accompanying Notes to Consolidated Financial Statements.
49
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
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. As of March 31, 2004, the Company
consolidates Hearing Innovations, Inc. ("Hearing Innovations") in accordance
with FIN 46, Variable Interest Entities, as the Company determined it was a
variable interest (See Note 2). Prior to March 31, 2004, the Company reported
its investment in Hearing Innovations using the equity method of accounting. The
Company's investment in Focus Surgery, Inc. ("Focus") (See Note 2) is 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, net income and total assets
related to Labcaire as of and for the years ended June 30, 2004, 2003 and 2002
were approximately $10,530,000, $160,000 and $9,414,000, respectively;
$9,950,000, $305,000 and $8,053,000, respectively; and $8,814,000, $609,000 and
$6,900,000, respectively.
The following is an analysis of assets related to Labcaire:
JUNE 30,
2004 2003 2002
------------------------------------
Current assets $6,505,000 $5,421,000 $4,614,000
Long - lived assets 2,909,000 2,632,000 2,286,000
------------------------------------
Total assets $9,414,000 $8,053,000 $6,900,000
====================================
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, net income and total assets related to Sonora as of and for
the years ended June 30, 2004, 2003 and 2002 were approximately $9,126,000,
$574,000 and $5,376,000, respectively; $8,615,000, $877,000 and $5,181,000,
respectively; and $6,002,000, $100,000 and $3,686,000, respectively.
50
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
Hearing Innovations is located in Farmingdale, New York. Net sales, net income
and total assets related to Hearing Innovations as of and for the three months
ended June 30, 2004 were approximately $4,000, $1,000 and $100,000,
respectively.
Misonix, Ltd. was incorporated in the United Kingdom on July 19, 1993 and its
operations since inception have been insignificant to the Company. It is
presently dormant.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. There were no cash
equivalents at June 30, 2004 and 2003.
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 2004, 2003 and 2002 were approximately $7,198,000, $6,205,000 and
$4,060,000, respectively. Total royalties from sales of this device were
approximately $1,402,000, $664,000 and $824,000 during the fiscal years ended
June 30, 2004, 2003 and 2002, respectively. Accounts receivable from this
customer were approximately $1,555,000 and $1,712,000 at June 30, 2004 and 2003,
respectively. At June 30, 2004 and 2003, the Company's accounts receivable with
customers outside the United States were approximately $3,301,000 and
$2,477,000, respectively, of which $2,345,000 and $2,129,000, 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.
51
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
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.
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,
2004.
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
52
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
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 2004 and 2003 in the respective fourth quarter. There were no indicators
that goodwill recorded was impaired.
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" ("SFAS No. 109"). 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 PER SHARE
Basic income 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. The following table sets forth the
reconciliation of weighted average shares outstanding and diluted weighted
average shares outstanding:
2004 2003 2002
--------- --------- ---------
Weighted average common shares
outstanding 6,667,615 6,478,138 6,077,546
Dilutive effect of stock options 182,230 145,605 571,215
--------- --------- ---------
Diluted weighted average common shares
outstanding 6,849,845 6,623,743 6,648,761
========= ========= =========
Employee stock options covering 25,000, 1,375,161 and 413,325 shares,
respectively, for the years ended June 30, 2004, 2003 and 2002 were not included
in the diluted net income per share calculation because their effect would have
been anti-dilutive.
COMPREHENSIVE INCOME
The components of the Company's comprehensive income are net income and foreign
currency translation adjustments. The foreign currency translation adjustments
included in comprehensive income has not been tax effected as investments in
foreign affiliates are deemed to be permanent. Total comprehensive income was
$1,995,596 and $1,260,230 for the years ended June 30, 2004 and 2003,
respectively.
53
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
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 $474,000, $441,000 and $412,000 in advertising costs
during fiscal 2004, 2003 and 2002, 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, 2004, 2003 and 2002 was approximately $412,000, $228,000 and $214,000,
respectively. Shipping and handling expenses for the years ended June 30, 2004,
2003 and 2002 were approximately $555,000, $356,000 and $456,000, respectively.
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:
54
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
2004 2003 2002
-----------------------------------------------
Net income (loss)- As reported: $ 1,718,945 $ 967,575 $ 176,661
Stock based compensation
determined under SFAS 123 (635,024) (369,601) (650,141)
-----------------------------------------------
Net income (loss)- Pro forma: $ 1,083,921 $ 597,974 (473,480)
Net income (loss) per share -
Basic:
As reported $ .26 $ .15 .03
Pro forma $ .16 $ .09 (.08)
Net income (loss) per share -
Diluted:
As reported $ .25 $ .15 .03
Pro forma $ .16 $ .09 (.08)
The weighted average fair value at date of grant for options granted during the
years ended June 30, 2004, 2003 and 2002 was $3.56, $2.64 and $3.02 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:
2004 2003 2002
-------------- -------------- -------------
Risk-free interest rates 2.50% - 2.58% 2.58% - 3.08% 3.86%
Expected option life in years 5 5 5
Expected stock price volatility 100% 59% 53%
Expected dividend yield -0- -0- -0-
RECENT ACCOUNTING PRONOUNCEMENTS
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.
149 was effective July 1, 2003. In the first quarter of fiscal 2004, the Company
adopted SFAS No. 149. The adoption of SFAS No. 149 did not have a material
impact on the Company's 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. In October 2003, the FASB deferred indefinitely the application of
SFAS 150 only as it relates to non-controlling interests that are classified as
equity in the financial statements of the subsidiary but would be classified as
a liability in the parent's financial statements under SFAS No. 150. In the
first quarter of fiscal 2004, the Company adopted SFAS No. 150. The adoption of
SFAS No. 150 did not have a material impact on the Company's 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. In the first quarter of fiscal 2004, the Company
adopted EITF 00-21. The adoption of EITF 00-21 did not have a material impact on
the Company's consolidated results of operations or financial condition.
55
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). In
December 2003, the FASB modified FIN 46 to make certain technical corrections
and address certain implementation issues that had arisen. FIN 46 provides a new
framework for identifying variable interest entities ("VIEs") and determining
when a company should include the assets, liabilities, noncontrolling interests
and results of activities of a VIE in its consolidated financial statements.
In general, a VIE is a corporation, partnership, limited liability company,
trust, or any other legal structure used to conduct activities or hold assets
that either (1) has an insufficient amount of equity to carry out its principal
activities without additional subordinated financial support, (2) has a group of
equity owners that are unable to make significant decisions about its
activities, or (3) has a group of equity owners that do not have the obligation
to absorb losses or the right to receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable interest holder)
is obligated to absorb a majority of the risk of loss from the VIE's activities,
is entitled to receive a majority of the VIE's residual returns (if no party
absorbs a majority of the VIE's losses), or both. A variable interest holder
that consolidates the VIE is called the primary beneficiary. Upon consolidation,
the primary beneficiary generally must initially record all of the VIE's assets,
liabilities and noncontrolling interests at fair value and subsequently account
for the VIE as if it were consolidated based on majority voting interest. FIN 46
also requires disclosures about VIEs that the variable interest holder is not
required to consolidate but in which it has a significant variable interest.
In connection with the adoption of FIN 46 during the third quarter of fiscal
2004, the Company consolidated Hearing Innovations in its March 31, 2004 balance
sheet as the entity was determined to be a variable interest entity and the
Company is its primary beneficiary. The Company elected to record the adoption
of FIN 46 as a cumulative effect of an accounting change. Consolidating Hearing
Innovations did not have a material impact on the Company's consolidated results
of operations or financial condition. Prior periods were not restated. For
additional information on Hearing Innovations see Note 2 of the consolidated
financial statements.
On December 17, 2003 the Staff of the Securities and Exchange Commission issued
SAB No. 104, "Revenue Recognition" ("SAB 104"), which superceded SAB No. 101,
"Revenue Recognition in Financial Statements"("SAB 101"). SAB 104's primary
purpose is to rescind accounting guidance contained in SAB No. 101 related to
multiple element revenue arrangements, superceded as a result of the issuance of
EITF Issue 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables". SAB 104 did not have a material impact on our results of
operations or financial position.
56
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
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. 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. Total goodwill
associated with Labcaire is $1,214,808 of which $1,063,294 remains at June 30,
2004. The Company now owns 100% of Labcaire.
FIBRA SONICS, INC.
On February 8, 2001, the Company acquired certain assets and liabilities of
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.
57
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
SONORA MEDICAL SYSTEMS, INC.
On November 16, 1999, the Company acquired a 51% interest in Sonora for
approximately $1,400,000. Sonora authorized and issued new common stock for the
51% interest. Sonora utilized the proceeds of such sale to increase inventory
and expand marketing, sales, and research and development efforts. An additional
4.7% was acquired from the principals of Sonora on February 25, 2000 for
$208,000, bringing the acquired interest to 55.7%. The principals of Sonora sold
an additional 34.3% to Misonix on June 1, 2000 for approximately $1,407,000,
bringing the acquired interest to 90%. Sonora, located in Longmont, Colorado, is
an ISO 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 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, 2004 and 2003 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) was 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 in fiscal 2001. The related
expense has been included in loss on impairment of investment in the
accompanying consolidated statement of income. 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. At
June 30, 2004, the Hearing Debenture is in default.
58
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
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 due in fiscal 2001. The related expense has been
included in loss on impairment of investment in the accompanying consolidated
statement of income. 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. At June 30, 2004, the above loans are
in default.
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 in fiscal 2002. The related expense
has been included in loss on impairment of loans in the accompanying
consolidated statement of income. 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. At
June 30, 2004, the above loans are in default.
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 during fiscal 2003. The related expense has been included in
loss on impairment of Hearing Innovations in the accompanying consolidated
statement of income. 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. At June 30, 2004, the above loans are in default.
59
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
During fiscal 2004, the Company entered into eight loan agreements whereby
Hearing Innovations is required to pay the Company an aggregate amount of
$199,255, of which $455 was in the fourth quarter and was eliminated in
consolidation. Two of these notes aggregating $23,000 were due November 30, 2003
and are currently in default due to non-payment. The remaining six notes
aggregating $176,255 were due June 30, 2004 and are in default due to
non-payment. All notes bear interest at 8% per annum. The notes are secured by a
lien on all of Hearing Innovations' right, title and interest in accounts
receivable, inventory, property, plant and equipment and processes of specified
products whether now existing or arising after the date of these agreements. The
loan agreements contain warrants to acquire 199,255 shares of Hearing
Innovations common stock, at the option of the Company, at a cost of $.20 per
share. These warrants, which are deemed nominal in value, expire in October
2005. The Company recorded an allowance against amounts loaned prior to April 1,
2004, which totaled $198,800. The related expense has been included in loss on
impairment of Hearing Innovations in the accompanying consolidated statements of
income. 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 and Hearing Innovations has no
predictable cash flows from its product revenue.
The Company previously made the decision not to continue funding Hearing
Innovations' operations, however, during fiscal 2004, the Company loaned Hearing
Innovations $199,255 to enable Hearing Innovations to reduce a substantial
portion of its long-term debt to certain third parties. The Company continues to
believe that Hearing Innovations' technology could provide a benefit to patients
but the products require more improvement and market development. All equity
investments and debt in Hearing Innovations have been fully reserved and
currently have a zero basis.
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 46%.
In connection with the adoption of FIN 46, the Company consolidated Hearing
Innovations in its March 31, 2004 balance sheet as the entity was determined to
be a variable interest entity and the Company is its primary beneficiary. The
Company elected to record the adoption of FIN 46 as a cumulative effect of an
accounting change. Consolidating Hearing Innovations did not have a material
impact on the Company's consolidated results of operations or financial
condition.
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, Hearing Innovations suspended
operations in April 2004. See Note 15.
Summarized unaudited financial information of Hearing Innovations as of and for
the year ended December 31, 2003 and 2002 are as follows:
Condensed Statement of Operations Information
2003 * 2002
--------- ---------
Sales $ 24,436 $ 36,913
Gross profit 6,581 20,435
Net loss (532,762) (986,380)
60
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
Condensed Balance Sheet Information
2003 2002
--------- ---------
Current assets $ 85,894 $ 42,007
Non-current assets 60,539 66,302
Current liabilities 3,955,496 3,036,485
Non-current liabilities -- 348,125
Preferred stock 295,700 295,700
Common stockholders' deficit (4,104,763) (3,572,001)
* As noted above, the Company consolidated Hearing Innovations in its
balance sheet as of March 31, 2004.
FOCUS SURGERY, INC.
On May 3, 1999, the Company invested $3,050,000 to obtain an approximately 20%
equity interest in 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,
2004 and 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' losses since 2001 before the Company can record income from
Focus. Focus' unaudited net income in fiscal year 2004 was $150,810. The Company
will start to record its share of Focus' income when Focus' income is greater
than the losses from fiscal year 2002 and 2003, which total $1,847,694.
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 in
fiscal 2001. The related expense has been included in loss on impairment of
investment in the accompanying consolidated statement of income. 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
61
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
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 in fiscal 2001. The related expense has been
included in loss on impairment of investment in the accompanying consolidated
statement of income. The 6% 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 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 after 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 in fiscal 2002. The related
expense has been included in loss on impairment of investment in the
accompanying consolidated statement of income. The 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 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,
2004 and 2003. The related expense has been included in loss on impairment of
loans in the accompanying consolidated statement of income. 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.
In May 2004, the Company's ownership was reduced to 13% due to additional
preferred stock issued by Focus.
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 18%.
The Company has subcontracted Focus to perform research and development
activities for which the Company paid $155,000, $100,000 and $0 to Focus in
fiscal 2004, 2003 and 2002, respectively, which is recorded as research and
development expenses in the accompanying statement of operations. During fiscal
2004, Focus entered into an exclusive agreement with the Company to distribute
the Sonoblate 500 in the European market. The Company has purchased
approximately $199,000 of product from Focus during fiscal 2004. No purchases
were made in fiscal 2003 and 2002. Total sales to Focus were approximately
$1,151,000, $379,000 and $352,000 for the fiscal years ended June 30, 2004, 2003
and 2002, respectively. Trade accounts receivable due from Focus at June 30,
2004 and 2003 were approximately $448,000 and $642,000, respectively. No amounts
were due to Focus at June 30, 2004 and 2003.
62
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
Summarized unaudited financial information of Focus as of and for the year ended
June 30, 2004 and 2003 are as follows:
Condensed Statement of Operations Information
2004 2003
----------- -----------
Sales $ 3,357,985 $ 2,343,296
Gross profit 2,206,716 1,807,221
Net income (loss) 150,810 (591,156)
Condensed Balance Sheet Information
2004 2003
----------- ----------
Current assets $ 859,727 $ 509,493
Non-current assets 464,961 586,645
Current liabilities 1,124,684 1,719,380
Non-current liabilities 3,651,555 2,923,990
Preferred stock 4,068,707 4,038,707
Common stockholders'
deficit (7,520,258) (7,671,068)
3. INVENTORIES
Inventories are summarized as follows:
JUNE 30,
2004 2003
----------- -----------
Raw materials $ 4,397,472 $ 4,230,870
Work-in-process 1,733,577 1,112,453
Finished goods 4,813,523 3,636,149
----------- -----------
$10,944,572 $ 8,979,472
=========== ===========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
JUNE 30,
2004 2003
---------- ----------
Buildings $1,982,896 $1,808,195
Machinery and equipment 3,145,102 2,705,972
Furniture and fixtures 937,315 848,258
Automobiles 1,005,244 765,951
Leasehold improvements 339,191 263,131
---------- ----------
7,409,748 6,391,507
Less: accumulated
depreciation and
amortization 3,516,828 2,817,300
---------- ----------
$3,892,920 $3,574,207
========== ==========
63
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
Included in machinery and equipment and furniture and fixtures at June 30, 2004
and 2003 are approximately $117,000 and $258,000, respectively, of data
processing equipment and telephone equipment under capital leases with related
accumulated amortization of approximately $50,000 and $75,000, respectively.
Also, included in automobiles are approximately $676,000 and $630,000,
respectively, under capital leases with accumulated amortization of
approximately $194,000 and $181,000, respectively. The Company leased
approximately $321,000, $364,000 and $254,000 of automobiles and equipment under
capital lease arrangements during the years ended June 30, 2004, 2003 and 2002,
respectively.
Depreciation and amortization of property, plant and equipment amounted to
$699,811, $663,057 and $590,397 for the years ended June 30, 2004, 2003 and
2002, respectively.
5. REVOLVING CREDIT FACILITIES
Labcaire has a debt purchase agreement with Lloyds TSB Commercial Finance. The
amount of this facility is approximately $1,710,000 ((pound)950,000) and bears
interest at the bank's base rate (5.25% and 4.00% at June 30, 2004 and 2003,
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 agreement expires on September 30, 2004 and covers all United Kingdom and
European sales. During the year ended June 30, 2004 Labcaire borrowed $1,243,226
and made payments of $627,479 under the debt purchase agreement. At June 30,
2004 and 2003, the balance outstanding under this debt purchase agreement was
$1,373,681 and $704,669, respectively, 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, 2004, 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 (pound)670,000 is repayable over
180 months with interest at base rate (4.50% at June 30, 2004) plus 1.75% and is
collateralized by a security interest in certain assets of Labcaire. As of June
30, 2004 and 2003, $1,110,609 and $1,064,879 were outstanding on this loan,
respectively.
64
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
At June 30, 2004, future principal maturities of long-term debt are as follows:
2005 62,172
2006 63,985
2007 65,254
2008 67,247
2009 69,060
Thereafter 782,891
-------------
$ 1,110,609
=============
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following summarizes accrued expenses and other current liabilities:
JUNE 30,
2004 2003
---------- ----------
Accrued payroll and vacation $ 296,628 $ 283,339
Accrued sales tax 155,180 208,005
Accrued commissions and bonuses 387,078 212,585
Customer deposits and current deferred contracts 808,414 1,116,869
Accrued professional and legal fees 176,426 132,766
Other 33,371 48,590
---------- ----------
$1,857,097 $2,002,154
========== ==========
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 2009. The principal leases for office space provide for a monthly rental
amount of approximately $63,500. 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, 2004:
Capital Operating
Leases Leases
----------- -----------
2005 $ 268,993 $ 663,367
2006 179,450 63,993
2007 62,330 59,137
2008 16,560 32,613
2009 - 16,691
----------- -----------
Total minimum lease payments 527,333 $ 835,801
===========
Amounts representing interest (70,530)
-----------
Present value of net minimum lease payments
(including current portion of $240,760) $ 456,803
===========
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 $788,000, $749,000 and $714,000 for the years ended June 30, 2004,
2003 and 2002, respectively.
65
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
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 the Company's 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, 2004, options to purchase 30,000 shares
were outstanding under the 1991 Plan at an exercise price of $7.38 per share
with a vesting period ranging from immediate to two years, options to purchase
327,750 shares 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. At June 30,
2004, options to purchase 272,919 shares 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 255,000 shares 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, 2004, options
to purchase 136,295 shares under the 1996 Plan have been exercised and options
to purchase 182,731 shares have been forfeited (of which options to purchase
141,945 shares have been reissued). At June 30, 2004, options to purchase
703,500 shares 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. At June 30, 2004,
options to purchase 440,877 shares 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, 2004, options to purchase 21,348 shares
under the 1998 Plan have been exercised and options to purchase 66,700 shares
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. At June 30, 2004,
options to purchase 791,444 shares were outstanding under the 2001 Plan at an
exercise prices ranging from $4.66 to $6.07 per share with a vesting period of
one to three years. At June 30, 2004, options to purchase 29,890 shares under
the 2001 Plan have been exercised and options to purchase 59,062 shares under
the 2001 Plan have been forfeited (of which no options have been reissued).
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, depending on the Plan, and in accordance with
Rule 4350(c) of the Qualitative Listing Requirements of the Nasdaq Stock Market.
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 provided in the terms of each
individual option agreement.
66
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
The following table summarizes information about stock options outstanding at
June 30, 2004, 2003 and 2002:
OPTIONS
----------------------------------
WEIGHTED AVG.
SHARES EXERCISE PRICE
----------------------------------
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
Granted 295,000 4.73
Exercised (82,588) 4.90
Forfeited (31,683) 5.91
----------------------------------
June 30, 2004 1,790,240 $ 5.53
==================================
The following table summarizes information about stock options outstanding at
June 30, 2004:
Options Outstanding Options Exercisable
-------------------------------------- -------------------
Weighted Average Weighted
----------------- Average
Range of Contractual Exercise Exercise
Exercise Price Number Life (Yrs) Price Number Price
- -------------------------------------------------------------------------------------------
$ .73 75,000 3 $ .73 75,000 $ .73
$ 3.07 - 4.99 435,500 9 $ 4.22 224,667 $ 3.85
$ 5.06 - 7.57 1,254,740 6 $ 6.08 1,162,295 $ 6.13
$ 12.33 - 18.50 25,000 3 $14.80 25,000 $14.80
-------------------------------------------------------------------
1,790,240 7 $ 5.53 1,486,962 $ 5.66
===================================================================
As of June 30, 2004 and 2003, 1,790,240 and 1,609,511 shares are reserved for
issuance under outstanding options and 423,727 and 704,294 shares are reserved
for the granting of additional options, respectively. All outstanding options
expire between July 2006 and January 2014 and vest immediately or over periods
of up to three years.
During fiscal year 2003, the Company repurchased shares of its Common Stock in
the open market. During fiscal year 2003, the Company had purchased 3,500 shares
at an average price of $2.99 per share for an aggregate amount of $10,450. At
June 30, 2003, the Company had purchased a total of 77,800 shares at an average
price of $5.30 per share for an aggregate amount of $412,424.
67
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
10. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is a defendant in claims and lawsuits arising in the ordinary course
of business. The Company believes that it has meritorious defenses to such
claims and lawsuits and is vigorously contesting them. Although the outcome of
litigation cannot be predicted with certainty, the Company believes that these
actions will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
EMPLOYMENT AGREEMENT
In October 2003, the Company entered into an employment agreement with its
President and Chief Executive Officer which expires on October 31, 2004 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 pre-tax operating earnings, based on a calendar year, with a
minimum guaranteed bonus of $250,000. In 2003, Mr. McManus received a bonus of
$250,000, which was paid in December. In 2002, Mr. McManus elected to receive a
bonus of $100,000, which was paid in December. Mr. McManus elected to receive a
reduced bonus for 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: laboratory and scientific products and medical devices. Laboratory and
scientific products include the Sonicator ultrasonic liquid processor, Aura
ductless fume enclosure, the Labcaire Autoscope and Guardian endoscope
disinfectant systems and the Mystaire wet scrubber. Medical devices include the
Auto Sonix ultrasonic cutting and coagulatory system, refurbishing revenues of
high-performance ultrasound systems and replacement transducers for the medical
diagnostic ultrasound industry, ultrasonic lithotriptor, ultrasonic
neuroaspirator (used for neurosurgery) and soft tissue aspirator (used primarily
for the cosmetic surgery market). The Company evaluates the performance of the
segments based upon income from operations less general and administrative
expenses 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, 2004, 2003 and 2002 are as follows:
For the year ended June 30, 2004:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC PRODUCTS UNALLOCATED TOTAL
-------------------------------------------------------------------
Net sales $21,350,846 $17,708,220 $ -- $39,059,066
Cost of goods sold 11,879,237 10,663,226 -- 22,542,463
----------- ----------- -----------
Gross profit 9,471,609 7,044,994 -- 16,516,603
Selling expenses 2,150,482 2,511,524 -- 4,662,006
Research and development 1,580,909 856,843 -- 2,437,752
----------- ----------- -----------
Total operating expenses 3,731,391 3,368,367 7,633,930 14,733,688
----------- ----------- ----------- -----------
Income from operations $ 5,740,218 $ 3,676,627 $(7,633,930) $ 1,782,915
=========== =========== =========== ===========
(a) Amount represents general and administrative expenses
68
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
For the year ended June 30, 2003:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC 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
=========== =========== =========== ===========
(a) Amount represents general and administrative and litigation settlement
(recovery) expenses.
For the year ended June 30, 2002:
(a)
MEDICAL LABORATORY AND CORPORATE AND
DEVICES SCIENTIFIC 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.
There are two major customers for medical devices. Sales to USS were
approximately $7,198,000, $6,205,000 and $4,060,000 for the years ended June 30,
2004, 2003 and 2002, respectively. Sales to Mentor were approximately
$1,732,000, $536,000 and $97,000 during the fiscal years ended June 30, 2004,
2003 and 2002, respectively. There were no significant concentrations of sales
or accounts receivable for laboratory and scientific products for the years
ended June 30, 2004, 2003 and 2002, respectively.
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,
2004 2003 2002
--------------------------------------------
United States $25,261,159 $22,603,227 $19,272,670
Canada 565,872 446,307 230,567
Mexico 229,603 6,230 13,000
United Kingdom 9,509,301 8,767,304 7,526,478
Europe 1,502,776 1,357,245 980,633
Asia 1,037,553 1,193,294 890,621
Middle East 325,365 139,501 146,387
Other 627,437 345,643 530,097
--------------------------------------------
$39,059,066 $34,858,751 $29,590,453
============================================
69
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
Total assets, by geographic area, at June 30, are as follows:
2004 2003
--------------------------------
United States $24,827,089 $21,742,113
United Kingdom 9,414,023 8,052,476
--------------------------------
$34,241,112 $29,794,589
================================
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:
2004 2003
---------------------------
Deferred tax assets:
Bad debt reserves $ 116,508 $ 184,436
Inventory valuation 503,809 267,324
License fee income 116,147 125,628
Investments 2,563,292 2,485,583
Non-cash compensation charge 183,105 183,105
Net federal operating loss carry forward -- 321,894
Net state operating loss carry forward 159,962 323,005
Depreciation 8,213 5,700
Other 14,839 25,820
---------------------------
Total deferred tax assets 3,665,875 3,922,495
Valuation allowance (2,608,293) (2,582,225)
---------------------------
Net deferred tax asset $ 1,057,582 $ 1,340,270
===========================
As of June 30, 2004, 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, 2004. 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.
70
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
At June 30, 2004, the Company had a net operating loss carryforward ("NOL") of
approximately $2,000,000 available to reduce future New York 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 $2,563,292 and $2,485,583
at June 30, 2004 and 2003, respectively. The Company recorded a full valuation
allowance against the asset in accordance with the provisions of SFAS No. 109.
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, 2004 and 2003.
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.
During the fourth quarter of fiscal 2004, the Company reduced the valuation
allowance by $51,641 due to the recent increase in the Company's stock price
leaving a valuation allowance of $45,001. 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:
2004 2003 2002
-------------------------------------------
Current:
Federal $ 801,297 $ -- $(1,797,906)
State 27,635 15,284 --
Foreign (42,964) 64,814 178,744
-------------------------------------------
Total current 785,968 80,098 (1,619,162)
Deferred:
Federal 206,307 702,695 1,969,113
State 76,381 102,999 34,230
-------------------------------------------
Total deferred 282,688 805,694 2,003,343
-------------------------------------------
$ 1,068,656 $ 885,792 $ 384,181
===========================================
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:
2004 2003 2002
-----------------------------------------
Tax at Federal statutory
rates $ 965,636 $ 638,129 $ 190,686
State income taxes, net of
Federal benefit 68,651 23,098 22,592
Foreign tax rate differential (20,760) (9,425) (61,934)
Valuation allowance 8,862 218,305 333,406
Travel and entertainment 6,524 4,140 3,384
Other 39,743 11,545 (103,953)
-----------------------------------------
$ 1,068,656 $ 885,792 $ 384,181
=========================================
71
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
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. Total royalties from sales of
this device were approximately $1,402,000, $664,000 and $824,000 for the fiscal
years ended June 30, 2004, 2003 and 2002, respectively. Also as part of the USS
License, the Company was reimbursed for certain product development expenditures
(as defined in the USS License). The amount of reimbursement was $20,000 for the
year ended June 30, 2004. There was no reimbursement for the years ended June
30, 2003 and 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.
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 $13,000
or $16,000 if the employee was over 50 years of age for the year ended June 30,
2004. The plan provides for a matching contribution by the Company of 10%-25% of
annual eligible compensation contributed by the participants based on years of
service, which amounted to $90,785, $63,777 and $54,856 for the years ended June
30, 2004, 2003 and 2002, respectively.
15. SUBSEQUENT EVENT
On July 14, 2004, Hearing Innovations sent all shareholders and creditors a plan
for reorganization and disclosure statement. The Company committed to fund
Hearing Innovations up to $150,000 for the reorganization plan. Hearing
Innovations plans to file for relief under Chapter 11 of the U.S. Bankruptcy
Code in September 2004. If the petition is approved, the Company will own 100%
of the equity in Hearing Innovations.
72