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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-10986
MISONIX, INC.
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(Name of small business issuer in its charter)
New York 11-2148932
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1938 New Highway, Farmingdale, New York 11735
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (516) 694-9555
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value Boston Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $26,764,332
The aggregate market value of the voting stock held by non affiliates of the
registrant on September 15, 1998 (computed by reference to the average bid and
asked prices of such stock on such date) was approximately: $31,555,245
There were 5,767,680 shares of Common Stock outstanding at September 15, 1998
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DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one):
Yes No X
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- -------------------------------------------------------------------------------
This Report on Form 10-KSB and the Company's other periodic reports
and other documents incorporated by reference or incorporated herein as
exhibits, may contain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, general economic conditions,
competition, technological advances, claims or lawsuits, and the market's
acceptance or non-acceptance of the Company's products.
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PART I
Item 1. Description of Business.
Misonix, Inc. (the "Company") is a New York corporation
which, through its predecessors, was first organized in 1959. The Company
designs, develops, manufactures and markets ultrasonic equipment for scientific
and industrial applications, ductless fume enclosures for filtration of gaseous
contaminates, and environmen tal control products for the abatement of air
pollution, as well as medical devices.
Medical Products
In December 1995, the Company entered into a ten-year
license agreement with Medical Device Alliance, Inc.("MDA"), giving MDA
exclusive world-wide marketing and sales rights for the Company's ultrasonic
soft tissue aspiration medical device. Pursuant to the License Agreement, the
Company sells such device to MDA. In addition to receiving payment from MDA for
its orders of the device, the Company received one-time aggregate licensing
fees of $500,000 and receives royalties based upon MDA net sales of such
device. Also as part of the agreement, the Company is reimbursed up to a
maximum of $30,000 per month (commencing September 1995) for certain product
development expenditures. The amount of reimbursements for the years ended June
30, 1998 and 1997 were $65,435 and $127,487, respectively. This license deals
with, among other matters, the Company's patent for a liposuction apparatus
granted in May, 1995 and its 510(K) approval from the United States Food and
Drug Administration to market and sell a device for ultrasonic tissue
aspiration. In September 1996, the Company began manufacturing this device for
MDA and recognized its first revenues for this product. Total sales of this
device to MDA were approximately $5,000,000 and $5,200,000 during the fiscal
years ended June 30, 1998 and 1997, respectively.
A competitor, Mentor Corporation ("Mentor"), instituted an
action against the Company, MDA, and a subsidiary of MDA alleging patent
infringement. The Company and its licensee are vigorously contesting and
defending against this claim (see "Item 3. Legal Proceedings").
In October 1996, the Company entered into a twenty-year
license agreement with United States Surgical Corporation ("USS"), covering the
further development and commercial exploitation of the Company's medical
technology relating to ultrasonic cutting, which uses high frequency sound
waves to coagulate and divide tissue for both open and laparoscopic surgery.
The license agreement gives USS exclusive world-wide marketing and sales rights
for this technology. The Company received $100,000 under the option agreement
preceding the license agreement. Under the license agreement, the Company sells
such device to USS. In addition to
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receiving payment from USS for its orders of the device, the Company received
one-time aggregate licensing fees of $475,000 and receives royalties based upon
USS net sales of such device. Also as part of the agreement, the Company was
reimbursed for certain product development expenditures (as defined in the
agreement). The amount of reimbursement (which began in February 1997) was
$278,231 and $349,028 in the fiscal years ended June 30, 1998 and 1997,
respectively. In November 1997, the Company began manufacturing this device for
USS and recognized its first revenues for this product. Total sales of this
device were approximately $6,500,000 during the fiscal year ended June 30,
1998.
Licensing fees from both the MDA and the USS license
agreements are amortized over the respective terms of such agreements.
Scientific and Industrial Products
The Company's other revenue-producing activities consist of
the manufacture and sale of the Sonicator(R) ultrasonic liquid processor and
cell disruptor, the distribution of other ultrasonic equipment for scientific
and industrial purposes, the manufacture and sale of Mystaire(R) ductless fume
enclosures for filtration of gaseous contaminants and the manufacture and sale
of Mystaire scrubbers for the abatement of air pollution.
The Sonicator is used in laboratories as a biological cell
and tissue disruptor and for the preparation of substances used to target drug
delivery in the body and certain agents used to visualize the circulatory
system non-invasively. In analytical chemistry, ultrasonic processors such as
the Sonicator remove gases from solvents and prepare samples for chemical
analysis. Similar procedures are used in biotechnology in the production of
medications and chemicals. The Sonicator is also used in the acceleration of
chemical reactions and the extraction of proteins from cells such as E.coli and
yeast. Sonication can strip away the outer coating of a virus and fragment DNA
for immunological studies. It is also widely applied in manufacturing
pharmaceu- ticals, fuel/oil emulsions, homogenizing pigments and dyes and
improving the quality and consistency of these products. Additional uses of the
Sonicator are, among others, quality control, including the dispersion of black
carbon in the ink industry, improving polymer films, degassing carbonated
beverages, beer, wines and spirits, and solvents.
In addition to the Sonicator, the Company also manufac tures
and sells an ultrasonic spray nozzle, marketed under the name Sonimist(R), and
distributes ultrasonic cleaners, marketed under the names Astrason(R) bench-top
cleaner and Astramax(R) industrial ultrasonic cleaner. The Sonimist ultrasonic
spray nozzles are used for, among other things, coating, cleaning, cooling and
disinfecting products in the food, pharmaceutical, paint, chemical,
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electronic, environmental and printing industries. Ultrasonic cleaners are
marketed to research and industrial laboratories to remove various
contaminants, such as radioactive particles, proteins, rust, blood and oil,
from laboratory equipment.
The Mystaire fume enclosure is a ductless filtration and
containment hood which is portable and easy to install. It eliminates the duct
work that is otherwise necessary for exhausting to the outside air. The
enclosure is sold to clinical, research, and industrial laboratories for
various industrial purposes. Laboratory applications include working with
organic solvents and radioisotopes, chemical storage, chemical dispensing,
pathology and histology. Industrial markets for the product line include the
pharmaceutical, semiconductor manufacturing, and asbestos containment
industries. The Mystaire air purifier is a general purpose recirculating system
with activated carbon filters that purify air and remove airborne fumes, odors,
and particulates. A new product which utilizes the same technology as the
Mystaire fume enclosure, the Forensic Evidence Cabinet, is being marketed to
crime labs, medical examiners, and police stations. Its primary use is to
insure proper storage and minimize cross contamination as well as protect staff
from exposure to airborne pathogens during storage of evidence.
The Mystaire scrubber is an air pollution abatement system
which removes difficult airborne contaminants emitted from laboratory,
industrial and sewage treatment processes. The scrubber operates on a broad
range of contaminants and is par ticularly effective on gaseous contaminants
such as sulfur oxides. The Company also manufactures a range of "point of use"
scrubbers for the microelectronics industry. This equipment eliminates low
levels of toxic and noxious contaminants arising from silicon wafer production.
The Company received its largest order ever for a scrubber
system valued at approximately $1,100,000. The system shipped in May 1998 to a
semiconductor gas manufacturing company.
The Company owns an 86.7% interest in Labcaire Systems Ltd.
("Labcaire"), a United Kingdom company formed in February 1992 with its
principal place of business in Clevedon, England. The balance of the capital
stock of Labcaire is owned by four executives who have, under a purchase
Agreement ("Agreement"), agreed to sell one-seventh of their total holding of
Labcaire shares to the Company in each of seven consecutive years, commencing
with the fiscal year ended 1996. Under the Agreement, the Company is required
to repurchase such shares at a price equal to one-seventh of each executive's
prorata share of 8.5 times Labcaire's earnings before interest, taxes, and
management charges for the preceding fiscal year. Pursuant to the Agreement,
9,284 shares (2.65%) of Labcaire common stock were purchased by the Company for
(pound)62,388 (approximately $102,100), in October 1996, for
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the year ended June 30, 1996; 9,286 shares (2.65%) were purchased by the
Company for (pound)70,666 (approximately $119,000), in October 1997, for the
year ended June 30, 1997, and 9,286 shares (2.65%) will be purchased by the
Company for (pound)73,638 (approximately $124,000) for the year ended June 30,
1998. The effective date of this transaction is expected to be October 1998.
Labcaire's business consists of designing, manufacturing, and marketing air
handling systems for the protection of personnel, products and the environment
from airborne hazards. Labcaire is the European distributor of the Company's
ultrasonic scientific and industrial products. The present management of
Labcaire consists of four executives/minority interest shareholders with
experience in chemical containment and air handling technologies. Labcaire
manufactures class 100 biosafety hazard enclosures, used in laboratories to
provide sterile environments and 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 tradename. Labcaire has developed and now manufactures and
sells an automatic endoscope disinfection system ("Autoscope"). The Autoscope
disinfects and rinses several endoscopes while abating the noxious disinfectant
fumes.
Market and Customers
The Company relies on its joint venture partner, MDA, for
marketing its ultrasonic soft tissue aspiration medical device and relies on
its joint venture partner, USS, for marketing its ultrasonic surgical device.
The Company will seek to control the development and marketing of other
potential ultrasonic medical devices where possible, as well as considering
other joint ventures.
The largest market for the Company's Sonicator includes
research and clinical laboratories worldwide. In addition, the Company has
expanded its sales of the ultrasonic processor into industrial markets such as
paint, pigment, ceramic and pharmaceutical manufacturers.
The Company views a wide range of industries as prospec tive
customers for its pollution abatement scrubbers. Scrubbers are usable in any
industry or environment in which airborne contaminants are created.
The market for the Company's ductless fume enclosures
includes laboratory or industrial environments in which workers may be exposed
to noxious fumes or vapors. The products are suited to laboratories in which
personnel perform functions which release noxious fumes or vapors (including
hospital and medical laboratories), industrial processing (particularly
involving the use of solvents) and soldering and other general chemical
processes. The products are particularly suited to users in the
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pharmaceutical, semiconductor, biotechnology, and forensic industries.
The Company relies on direct salespersons, distributors,
manufacturing representatives, and catalogue listings for the marketing of its
scientific and industrial products. The Company currently sells through more
than seven manufacturing representatives and distributors in the United States.
The Company currently employs three direct sales persons who operate outside
the Company's offices and conduct direct marketing on a regional basis, two
sales specialists, one marketing manager, and a vice-president of sales and
marketing who work in the Company's offices. The Company's sales efforts
include advertising and participating in trade shows.
In fiscal 1998, approximately 27.3% 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 scientific and industrial products
and manufactures and sells the Company's fume enclosure line as well as its own
range of laboratory environmental control products. Sales by the Company in
other major industrial countries are made through distributors.
Manufacturing and Supply
The Company manufactures and assembles the majority of its
scientific and industrial products and its medical devices at its production
facility located in Farmingdale, New York. The Company's products include
components manufactured by other companies in the United States. The Company
believes that it will not encounter difficulty in obtaining materials, supplies
and components adequate for its anticipated short-term needs. The Company is
not dependent upon any single source of supply and has no long-term supply
agreements.
Labcaire manufactures and assembles its products at its
facility located in Clevedon, England. It is not dependent upon any single
source of supply and has no long-term supply agreements.
Competition
Competition in the medical and medical device industry is
rigorous with many companies having significant capital resources, large
research laboratories and extensive distribution systems in excess of the
Company's.
Competitors in the ultrasonic industry for industrial
products range from large corporations with greater production and marketing
capabilities to smaller firms specializing in single products. The Company
believes that its significant competitors in the manufacture and distribution
of industrial ultrasonic devices are Branson Sonic Power, a division of Emerson
Electric Co., and
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Sonics & Materials, Inc. In addition, the Company is aware of at least four
other manufacturers of ultrasonic liquid processors. It is possible that other
companies in the industry are currently developing products with the same
capabilities as those of the Company. The Company believes that the features of
its Sonicator and the Company's customer assistance in connection with
particular applications give the Sonicator a competitive advantage over
comparable products.
Competitors in the air pollution abatement industry range
from large, multi-national corporations with greater production and marketing
capabilities to small firms specializing in single products. The Company
competes with other entities whose financial resources are substantially
greater and, in many cases, whose share of the air pollution abatement market
is significant. The Company believes that its principal competitors in the
manufacture and distribution of scrubbers are The Ceilcote Company, Inc., Duall
Division, a division of Met-Pro Corporation, and Croll-Reynolds Company, Inc.
The principal competitor for the ductless fume enclosure is Captair, Inc. The
Company believes that specific advantages of its scrubbers include efficiency,
price and customer assistance and that specific advantages of its fume
enclosures include efficiency and other product features, such as durability
and ease of operation.
Patents, Trademarks, Trade Secrets and Licenses
The Company owns United States trademark registrations for
the following marks: Mystaire, Waterweb, Sonimist, Astrason and Astramax.
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 and issue date Description
- --------------------- -----------
4,920,954 (May 1990) Cavitation Device - relating to the
Alliger System for applying ultrasonic
forces on clots and plaque in human
arteries using a generator, transducer and
titanium wire.
5,026,167 (June 1991) Fluid Processing - relating to the
Company's environmental control product
line for introducing ozone and liquid into
the cavitation zone for an ultrasonic
probe.
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Number and issue date Description
- --------------------- -----------
5,032,027 (July 1991) Fluid processing - relating to the
Company's environmental control product
line for the intimate mixing of ozone and
contaminated water for the purpose of
purification.
5,248,296 (Sept. 1993) Wire with sheath - relating to the
Company's Alliger System for reducing
transverse motion in its catheters.
5,306,261 (April 1994) Guidewire guides - relating to the
Company's Alliger System for a catheter
with collapsible wire guide.
5,443,456 (August 1995) Guidewire guides - relating to the
Company's Alliger System for a catheter
with collapsible wire guide.
5,371,429 (Dec. 1994) Flow-thru transducer - relating to the
Company's liposuction system and its
ultrasonic industrial products for an
electromechanical transducer device.
5,397,293 (March 1995) Catheter sheath -relating to the Company's
Alliger System for an ultrasonic device
with sheath and transverse motion damping.
5,419,761 (May 1995) Liposuction - relating to the Company's
liposuction apparatus and associated
method. The Company has settled the
dispute with the two individuals who are
joint inventors, with the Company's
founder, of this patent (see "Medical
Products").
5,465,468 (Nov.1995) Flow-thru transducer - relating to the
method of making an electromechanical
transducer device to be used in
conjunction with the soft tissue
aspiration system and the Company's
ultrasonic industrial products.
5,516,043 (May 1996) Atomizer horn - relating to an ultrasonic
atomizing device which is used in the
Company's industrial products.
5,527,273 (June 1996) Ultrasonic probes - relating to an
ultrasonic lipectomy probe to be used
with the soft tissue aspiration
technology.
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Number and issue date Description
- --------------------- -----------
5,769,211 (June 1998) Autoclavable switch - relating a medical
handpiece with autoclavable rotary switch
to be used in medical procedures.
The Company filed three foreign patent applications (one in
April 1995 and two in April 1997) relating to an ultrasonic lipectomy probe to
be used with the soft tissue aspiration technology.
Backlog
As of June 30, 1998, the Company's backlog, including
Labcaire, relating to industrial products was approximately $2,100,000 as
compared with approximately $1,700,000 as of June 30, 1997. The Company's
backlog relative to medical products was approximately $6,700,000 at June 30,
1998 and approximately $2,900,000 at June 30, 1997.
Employees
As of September 15, 1998, the Company, including Labcaire,
employed a total of 143 full-time people, including 35 in management and
supervisory positions. The Company considers its relationship with its
employees to be satisfactory.
Item 2. Description of Property.
The Company occupies approximately 34,000 square feet, at
1938 New Highway, Farmingdale, New York, under a lease expiring on April 30,
1999. The rental amount, which is approximately $22,000 per month, 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 is exploring alternatives, to take effect
following expiration of this lease, which include a move to new facilities or
the expansion and renewal of the lease covering its existing facilities.
Labcaire occupies approximately 12,000 square feet, at 15 Hither Green,
Clevedon, England, under a lease expiring July 20, 1999. The rental amount is
approximately $6,000 per month with a pro rata share of local taxes and water
and sewer charges billed separately. Both properties are in good condition.
Item 3. Legal Proceedings.
The Company, Medical Device Alliance, Inc. ("MDA"), and MDA's
wholly-owned subsidiary, Lysonix, Inc., are defendants in an action alleging
patent infringement filed by Mentor. Both the Company and its licensee (MDA)
are aggressively contesting Mentor's claim. A motion for preliminary injunction
filed by Mentor, requesting that the Company and its licensees be precluded
from selling the ultrasonic soft tissue aspirator, was heard and dismissed by
the U.S. District Court on September 11, 1998, at which time a trial on the
merits was scheduled for January 1999. Based upon the current status of
matters, management believes that
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the outcome of this suit will not have a material adverse effect on the
Company's consolidated financial position and consolidated 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, 1998.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock, $.01 par value ("Common Stock")
is listed on the Boston Stock Exchange under the symbol "MSO" and is traded in
the over-the-counter market on the National Association of Securities Dealers'
Automated Quotation System ("NASDAQ") under the symbol "MSON". Trading on both
the Boston Stock Exchange and on NASDAQ commenced on January 23, 1992.
On September 9, 1997, the Board of Directors of the Company
declared a 3 for 2 stock split payable as a 50% stock dividend to shareholders
of record on October 10, 1997. All common stock data, per share data and market
prices per common share in this report have been retroactively adjusted to
reflect the stock split.
The following table sets forth the high and low bid prices
for the Common Stock during the periods indicated as reported by NASDAQ. The
prices reported reflect inter-dealer quotations, may not represent actual
transactions, and do not include retail mark-ups, mark-downs or commissions.
The trading on the Boston Stock Exchange has been limited to date and has been
at prices substantially similar to those quoted below for NASDAQ.
Fiscal 1998 High Low
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First Quarter..................... $ 15.17 $ 5.13
Second Quarter.................... 15.67 6.50
Third Quarter..................... 7.75 5.50
Fourth Quarter.................... 8.75 5.50
Fiscal 1997: High Low
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First Quarter..................... $ 2.92 $ 2.00
Second Quarter.................... 5.75 2.25
Third Quarter..................... 7.00 4.33
Fourth Quarter.................... 7.50 4.42
As of September 15, 1998, the Company had 5,767,680 shares of Common Stock
outstanding and 150 shareholders of record. This does not take into account
stockholders whose shares are held in "street name" by brokerage houses. 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.
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Item 6. Management's Discussion and Analysis
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein.
All of the Company's sales to date have been derived from the
manufacture and distribution of ultrasonic equipment for scientific and
industrial purposes, ductless fume enclosures for filtration of gaseous
emissions in laboratories, environmental control equipment for the abatement of
air pollution, and ultrasonic medical devices.
Results of Operations:
The following table sets forth, for the two most recent fiscal years,
the percentage relationship to net sales of principal items in the Company's
Statement of Operations:
Fiscal years ended
June 30,
-------------------
1998 1997
---- ----
Net sales .......................................100.0% 100.0%
Cost of goods sold .............................. 45.7 43.2
----- -----
Gross profit .................................... 54.3 56.8
----- -----
Selling, general and administrative expenses .... 27.7 31.1
Research and development expenses
-medical products............................. 2.1 .6
Research and development expenses
-industrial products.......................... 1.1 1.4
Non-cash compensation charge..................... - 25.9
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Total operating expenses......................... 30.9 59.0
----- -----
Income (loss) from operations................... 23.4 (2.2)
Other income .................................... 4.3 3.7
---- -----
Income before minority interest
and income taxes.............................. 27.7 1.5
Minority interest ............................... (.1) (.2)
----- -----
Income before income taxes....................... 27.6 1.3
Income taxes..................................... 7.7 .3
---- ----
Net income 19.9 1.0
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The following table provides a breakdown of net sales by major
category for the periods indicated:
Fiscal years ended
June 30,
----------------------
1998 1997
(in thousands)
Ultrasonic medical devices................$11,500 $ 5,217
Ultrasonic products ...................... 3,431 3,174
Scrubbers ................................ 3,760 1,943
Ductless fume enclosures ................. 8,073 7,226
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Net sales ................................ $26,764 $17,560
======= ========
The following table provides a breakdown of foreign sales by
geographic area during the periods indicated:
Fiscal years ended
June 30,
---------------------
1998 1997
(in thousands)
Canada and Mexico ........................$ 265 $ 122
Europe ................................... 5,883 4,894
Asia ..................................... 786 934
Middle East .............................. 180 180
Other .................................... 185 336
----- --------
$ 7,299 $ 6,466
======= ========
Fiscal years ended June 30, 1997 and 1998
Net Sales. Net sales increased by 52.4% between the fiscal
year ended June 30, 1997 and the fiscal year ended June 30, 1998 from
$17,560,041 to $26,764,332. Approximately 68% of this increase was due to the
Company's medical device sales which were approximately $11,500,000 during the
fiscal year ended June 30, 1998. These revenues are the result of the Company's
strategic alliances with MDA and USS.
Ultrasonic products include the Sonicator liquid processor
and cell disrupter systems, ultrasonic cleaners, related accessories, and
repair and service. The increase of approximately $257,000 or 8.1% in sales of
ultrasonic products in fiscal 1998 is the result of new marketing strategies
which improved distribution efforts and allowed the Company to increase its
market share and explore new markets.
The increase of approximately $1,817,000 or 93.5% in scrubber
sales between fiscal 1997 and fiscal 1998 was due to
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continued growth in traditional markets and expansion into full production
scale systems, which included a sale in the amount of approximately $1,100,000
for a semiconductor gas manufacturer.
Sales of fume enclosures increased by approximately $847,000
or 11.7% in the fiscal year ended 1998 due to increased marketing efforts for
its domestic products, the introduction of the Aura Ductless Fume Enclosure and
the continued success of the Company's forensic product line and Labcaire's
Autoscope.
During fiscal 1997 and fiscal 1998, the Company had foreign
net sales of $6,465,673 and $7,299,136, respectively, representing 36.8% and
27.3% of net sales for such years, respectively. This increase in sales is
principally due to Labcaire's increased sales volume in fiscal 1998 over fiscal
1997, increasing to $5,956,763 from $5,469,992. The decrease in foreign sales
as a percent of total sales is a result of the Company selling approximately
$11,500,000 of medical devices domestically during fiscal 1998 as compared to
$5,200,000 during fiscal 1997.
Gross profit. There was an decrease in overall gross profit
margin to 54.3% in fiscal 1998 from 56.8% in fiscal 1997 because of increased
revenue from product lines with lower gross profits.
Selling, general and administrative expenses. There was a
35.6% increase, from $5,464,391 to $7,407,038 in SG&A expenses from fiscal 1997
to fiscal 1998 owing in part to higher commissions on increased sales volume
and the hiring of additional employees. However, the increased sales volume
resulted in a decrease of these expenses to 27.7% of net sales in fiscal 1998
compared to 31.1% in fiscal 1997.
Research and development expenses. Medical product research
and development expenses were $105,120 in fiscal 1997 and $574,018 in fiscal
1998 The increase in medical product R&D expenses is due to non-funded
development costs, associated with the Company's medical devices. Industrial
product R&D expenses were $245,668 in fiscal 1997 and $285,401 in fiscal 1998.
Non-Cash Compensation Charge. During fiscal 1997, the Company
recorded a non-cash compensation charge for certain stock options aggregating
approximately $4,500,000. This represented the increase in the Company's market
price per share between the date of grant by the Board of Directors and the
date of shareholder approval.
Interest expense. Interest expense was $68,649 in fiscal 1997
and $75,870 in fiscal 1998. This increase was due to higher United Kingdom
interest rates on Labcaire's bank borrowings and automobile leases.
Option/license Fees. In December 1995, the Company
entered into a licensing agreement with MDA. As part of this
agreement, the Company has received $500,000 in licensing fees, of
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which $52,609 and $45,000 has been recorded as income during fiscal 1998 and
fiscal 1997, respectively. In October 1996, the Company entered a licensing
agreement with USS. The Company has received $100,000 under the option
agreement preceding the license agreement and $475,000 in licensing fees, of
which $21,004 and $10,312 has been recorded as income during fiscal 1998 and
fiscal 1997, respectively.
Net income. For the fiscal year ended June 30, 1998, the
Company recorded net income of $5,328,381, or $.81 diluted earnings per share,
compared to net income of $177,125, or $.03 diluted earnings per share, for the
year ended June 30, 1997.
Liquidity and Capital Resources:
At June 30, 1998, the Company had a cash and cash equivalent
balance of $4,592,911 and investments held to maturity of $6,407,472 compared
with a cash and cash equivalent balance of $5,409,830 and investments held to
maturity of $6,367,595 at June 30, 1997. This decrease is due principally to
extended payment terms with certain major customers.
Accounts receivable have increased from $2,748,566 at June
30, 1997 to $8,161,539 at June 30, 1998 primarily due to increased sales of the
Company's medical devices and extended payment terms with certain major
customers.
Inventories have increased from $2,304,732 at June 30, 1997
to $3,011,913 at June 30, 1998 reflecting, in part, higher inventory levels due
to increased sales of the Company's medical devices.
The Company believes that its existing capital resources will
enable it to maintain its current and planned operations for at least 12 months
from the date hereof.
Currency Risk:
Approximately 23% of the Company's revenues in fiscal 1998
were received in English Pounds Sterling currency. To the extent that the
Company's revenues are generated in English Pounds and, for purposes of the
Company reporting its financial position, its operating results are converted
into U.S. Dollars using rates of 1.65 and 1.62 in the years ended June 30, 1998
and 1997, 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 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.
15
<PAGE>
Year 2000 Compliance:
The Company utilizes and is dependent upon data processing
systems and software to conduct its business. The data processing systems and
software include those developed and maintained by the Company's third-party
data processing vendors and software which is run on in-house computer
networks. During the first quarter of fiscal 1998, the Company initiated a
review and assessment of all hardware and software to confirm that it will
function properly in the year 2000. With respect to internal systems, the
results of that evaluation to date have not revealed any year 2000 issues that,
in the Company's opinion, cannot be remediated in a timely manner; and
therefore are not expected to create a material risk of disruption of
operations. With respect to outside vendors, those vendors which have been
contacted have indicated that their hardware or software is or will be year
2000 compliant in time frames that meet regulatory requirements. Evaluations of
these issues is continuing and there can be no assurance that additional
issues, not presently known to the Company, will not be discovered which could
present a material risk of disruption to the Company's operations.
Other:
In the opinion of management, inflation has not had a
material effect on the operations of the Company.
Item 7. Financial Statements
The independent auditor's report and consolidated
financial statements listed in the accompanying index are filed as
part of this report and incorporated herein by this reference. See
"Index to Financial Statements" on page F-1.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
16
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act.
The Company currently has four Directors. Their term expires at the
Annual Meeting and all four are standing for reelection for a term of one year.
The following tables contains information regarding all Directors and executive
officers of the Company:
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
- ---- --- -------------------- --------
<S> <C> <C>
Gary Gelman 51 Chairman of the Board 1995
of Directors
Joseph Librizzi 60 President, 1971
Chief Executive Officer,
Treasurer and a Director
Peter Gerstheimer 49 Vice President, --
Chief Financial Officer
and Secretary
Ronald Manna 44 Vice President of Operations --
Robert Lee 39 Vice President of Sales and Marketing --
Howard Alliger 71 Director 1971
Arthur Gerstenfeld 70 Director 1992
</TABLE>
The following is a brief account of the business experience for the
past five years of the Company's Directors and 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
Chairman of the Board of the Company in March 1996.
Joseph Librizzi became President and Chief Executive Officer
of the Company in March 1995. Prior to this he was Executive Vice
President, Chief Operating Officer, Treasurer and Secretary of the
Company since September 1991. Dr. Librizzi was previously
President of the Company (prior to the merger between the Company
and Sonic Needle Corp.) from 1986 to September 1991. Dr. Librizzi
17
<PAGE>
holds a doctorate in applied mechanics and aerospace engineering from
Polytechnic Institute of Brooklyn.
Peter Gerstheimer became Vice President and Chief Financial Officer of
the Company in September 1992. From December 1984 to September 1992, he was
Vice President of Finance at Thermex- Thermatron, Inc., a manufacturer of
high-frequency electronic heat sealing and processing equipment. Previously, he
served as Treasurer and Controller of LogiMetrics, a manufacturer of electronic
test components and systems for military and non- military use. Mr. Gerstheimer
is a licensed certified public accountant in the State of New York and was a
senior accountant at Touche Ross & Co. Mr. Gerstheimer holds a B.A. Degree from
Hofstra University.
Ronald Manna became Vice President - Operations of the Company
in September 1989. For more than three years prior thereto, Mr.
Manna served as the Director of Engineering of the Company. Mr.
Manna holds a B.S. Degree in mechanical engineering from Hofstra
University.
Robert Lee became Vice President of Sales and Marketing in
August 1996. For the year prior thereto, he served as Director of
Sales and Marketing for the laboratory products division of the
Company. Prior to employment with the Company, Mr. Lee was a
Divisional General Manager, National Sales Manager and Regional
Sales Manager for Pall Corporation, a leading filtration company
where he worked for seven years. Prior to Pall Corporation, Mr.
Lee worked for American Bionetics as a Regional Manager. Mr. Lee
holds a B.A. Degree in Chemistry from the State University of New
York at Plattsburg.
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. He
has been awarded 23 patents and has published various papers on
ultrasonic technology. For three years, ending in 1991, Mr.
Alliger was the President of the Ultrasonic Industry Association.
Mr. Alliger holds a B.A. degree in economics from Allegheny College
and also attended Cornell University School of Engineering for four
years. He has also established, and is President of, two privately
held entities which are engaged in pharmaceutical research and
development.
Arthur Gerstenfeld is currently Professor of Industrial
Engineering and Professor of Management at Worcester Polytechnic
Institute, Worcester, Massachusetts. Dr. Gerstenfeld received his
Ph.D. and Masters Degree from Massachusetts Institute of Technology
(Sloan School of Management). He has edited and authored seven
books and approximately forty articles focusing on innovation and
productivity. Dr. Gerstenfeld's industrial experience has been as
founder, CEO, and Chairman of the Board of UFA, Inc. He is the
holder of four patents on which that company is based.
18
<PAGE>
Item 10. Executive Compensation.
The following table sets forth for the fiscal years indicated the
compensation paid by the Company to its Chief Executive Officer and any other
executive officers with annual compensation exceeding $100,000:
Summary Compensation Table
Annual Compensation
Name and Principal Fiscal
Position Year Salary ($) Bonus ($)
- ------------------------- ----- ---------- ---------
Joseph Librizzi 1998 193,333 170,141
President, Chief 1997 160,000 379,394
Executive Officer 1996 160,000 23,971
and Treasurer
Robert Lee 1998 78,160 6,307
Vice President of 1997 67,708 38,818
Sales & Marketing 1996 52,303 14,925
Employment Agreements
The Company has entered into an employment agreement with Dr. Librizzi,
who is employed pursuant thereto as President and Chief Executive Officer. The
agreement expires on September 30, 1998. It is automatically renewed for a
successive one-year term unless the Company or the executive elects not to
renew. The agreement provides for an annual salary (starting September 1, 1997)
of $200,000 plus a Company provided automobile and bonus measured by pretax
operating earnings. Dr. Librizzi receives additional benefits that are
generally provided to other employees of the Company.
In conformity with the Company's policy, all of its Directors, officers
and employees execute confidentiality and nondisclosure agreements upon the
commencement of employment with the Company. The agreements generally provide
that all inventions or discoveries by the employee related to the Company's
business and all confidential information developed or made known to the
employee during the term of employment shall be the exclusive property of the
Company and shall not be disclosed to third parties without prior approval of
the Company. Messrs. Librizzi, Gerstheimer, and Manna also have agreements with
the Company which provide for the payment of six months severance upon their
termination for any reason. The Company's employment agreement with Dr.
Librizzi also contains non-competition provisions that preclude him from
competing with the Company for a period of one year from the date of his
termination of employment unless his employment is
19
<PAGE>
terminated by the Company without cause.
Option Exercises in Last Fiscal Year and Year-end Values
No options were exercised by any executive officer named in the Summary
Compensation Table during the fiscal year ended June 30, 1998. The following
table contains information concerning the number and value, at June 30, 1998,
of unexercised options held by executive officers named in the Summary
Compensation Table:
Value of
Number of Securities Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
Fiscal Year End (#) Fiscal Year End ($)
Name (Exercisable/Unexercisable) (Exercisable/Unexercisable)(1)
---- --------------------------- ------------------------------
Joseph Librizzi 150,000/50,000 $939,000/$0
Robert Lee 30,000/25,000 $216,000/$0
- -------
(1) Fair market value of underlying securities (the closing price of the
Common Stock on the National Association of Securities Dealers
Automated Quotation System) at June 30, 1998 minus the exercise price.
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, 1998, options to purchase 162,750 shares were outstanding under the 1991
Plan at exercise prices ranging from $.50 to $6.78 per share and options to
purchase 212,250 shares had been exercised or canceled.
In March 1996, the Board of Directors approved the 1996 Employee
Incentive Stock Option Plan covering an aggregate of 450,000 shares of Common
Stock of the Company and the 1996 Outside Directors Stock Option Plan covering
an aggregate of 1,125,000 shares of Common Stock of the Company. At June 30,
1998, options to purchase 242,750 shares were outstanding at exercise prices
ranging from $4.00 to $18.50 under the Employee Incentive Stock Option Plan and
options to acquire 778,500 shares were outstanding at an exercise price of $.73
under the Outside Directors Plan. At June 30, 1998, options to purchase 2,250
shares under the Employee Incentive Stock Option Plan have been exercised. Both
of these plans, and the transactions under which options to acquire 898,500
shares were granted, were ratified and approved at the annual
20
<PAGE>
meeting of shareholders on February 19, 1997. Since the exercise price of the
granted options was less than the market price of the Company's stock on
February 19, 1997, this resulted in a non-cash compensation charge in the
amount of $4,544,600, of which $185,000 was recorded during the fourth quarter
of fiscal 1997.
The plans are administered by the Board of Directors with the right to
designate a committee. The selection of participants, allotments of shares,
determination of price and other conditions relating to options are determined
by the Board of Directors, or a committee thereof, in its sole discretion.
Incentive stock options granted under the plans are exercisable for a period of
up to ten years from the date of grant at an exercise price which is not less
than the fair market value of the Common Stock on the date of the grant, except
that the term of an incentive stock option granted under the plans to a
shareholder owning more than 10% of the outstanding Common Stock may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the Common Stock on the date of grant.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934 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"), the Boston Stock Exchange,
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
1998.
Item 11. Security Ownership of Certain Beneficial
Owners and Management.
The following table sets forth as of July 31, 1998 certain information
with regard to ownership of the Company's Common Stock by (i) each beneficial
owner of 5% or more of the Company's Common Stock; (ii) each Director and
nominee for Director; (iii) each executive officer named in the "Summary
Compensation Table" above; and (iv) all executive officers and Directors of the
Company as a group. Unless otherwise stated, the persons named in the table
have sole voting and investment power with respect to all Common Stock shown as
beneficially owned by them.
21
<PAGE>
Common Stock Percent
Name and Address (1) Beneficially Owned of Class
- -------------------- ------------------ --------
Howard Alliger...................... 909,108 (2) 13.5
Joseph Librizzi..................... 209,700 (3) 3.1
Gary Gelman......................... 788,145 (4) 11.7
Arthur Gerstenfeld.................. 53,200 (5) *
All executive- officers and
Directors as a group
(seven persons).................. 2,059,548 (6) 30.5
----------
*Less than 1%
(1) 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 75,000 shares which Mr. Alliger has the right to acquire upon
exercise of stock options which are currently exercisable.
(3) Includes 150,000 shares which Dr. Librizzi has the right to acquire upon
exercise of stock options which are currently exercisable.
(4) Includes 688,500 shares which Mr. Gelman has the right to acquire upon
exercise of stock options which are currently exercisable.
(5) Includes 18,000 shares which Mr. Gerstenfeld has the right to acquire
upon exercise of stock options which are currently exercisable.
(6) Includes (i) the shares indicated in notes (2), (3),(4), and
(5), (ii) 60,395 shares which are beneficially owned by an
executive officer of the Company (7,500 of which he has a
right to acquire upon exercise of stock options which are
currently exercisable), (iii) 31,500 shares which are
beneficially owned by another executive officer (30,000 shares
of which he has the right to acquire upon exercise of stock
options which are currently exercisable), and (iv) 7,500
shares which another executive officer has the right to
acquire upon exercise of stock options which are currently
exercisable.
Item 12. Certain Relationships and Related Transactions.
None
22
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K.
a. 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(h) Know-How, Trademark and License Agreement
dated July 25, 1983, between the Company and
Astec Environmental Systems, Ltd. (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) Stock Option Contract between the Company and
Joseph Librizzi. (2)
10(o) Form of Director's Indemnification Agreement. (2)
10(p) Stock Option Contract between the Company and Peter
Gerstheimer. (4)
10(q) Stock Option Contract between the Company and
Ronald Manna. (4)
10(r) Severance Agreement between the Company and Peter
Gerstheimer. (4)
10(s) Severance Agreement between the Company and Ronald
Manna. (4)
10(t) Employee Agreement dated September 1, 1995 between
the Company and Joseph Librizzi. (4)
10(u) Option Agreement dated September 11, 1995 between
23
<PAGE>
the Company and Medical Device Alliance Inc. (4)
10(w) Amendment to agreement with principal shareholders
of Labcaire Systems Ltd. (5)
10(x) Employee Agreement dated July 24, 1996 between the
Company and Joseph Librizzi. (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(dd) Employee Agreement dated August 5, 1997 between the
Company and Joseph Librizzi. (6)
22 Subsidiaries of the Company. (2)
23 Consent of independent public accountants to
inclusion of report in Form S-8 Registration
Statement. (6)
---------------------------
(1) Incorporated by reference from the Company's
Registration Statement on Form S-1 (file 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.
b. No reports on Form 8-K were filed by the registrant during the
fiscal quarter ended June 30, 1998.
24
<PAGE>
[Ernst & Young Letterhead]
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-18907) of Misonix, Inc. pertaining to the Misonix, Inc. 1996
Employee Incentive Stock Option Plan and the 1996 Non-Employee Director Stock
Option Plan of our report dated August 7, 1998, with respect to the
consolidated financial statements of Misonix,Inc. included in the Annual Report
(Form 10-KSB) for the year ended June 30, 1998, filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Melville, New York
September 23, 1998
<PAGE>
Item 7
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Misonix, Inc. and Subsidiaries
Year Ended June 30, 1998
Consolidated Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors....................................................................... F-2
Consolidated Balance Sheet--June 30, 1998............................................................. F-3
Consolidated Statements of Income--Years Ended
June 30, 1998 and 1997............................................................................ F-4
Consolidated Statements of Stockholders' Equity--Years Ended
June 30, 1998 and 1997............................................................................ F-5
Consolidated Statements of Cash Flows--Years Ended
June 30, 1998 and 1997............................................................................ F-6
Notes to Consolidated Financial Statements........................................................... F-7
</TABLE>
F-1
<PAGE>
[Ernst & Young Letterhead]
Report of Independent Auditors
The Board of Directors and Stockholders
Misonix, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Misonix, Inc.
and Subsidiaries (the "Company") as of June 30, 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the two years in the period then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Misonix, Inc. and
Subsidiaries at June 30, 1998, and the consolidated results of their operations
and their cash flows for each of the two years in the period then ended, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Melville, New York
August 7, 1998
F-2
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,592,911
Investments held to maturity 6,407,472
Accounts receivable, less allowance for doubtful accounts of $240,911 8,161,539
Inventories 3,011,913
Prepaid expenses and other current assets 894,851
Total current assets 23,068,686
-------------
Property and equipment, net 1,249,264
Deferred income taxes 529,012
Goodwill, net of amortization of $67,084 395,501
Other assets
86,493
-------------
Total assets $25,328,956
Liabilities and stockholders' equity
Current liabilities:
Notes payable $ 534,886
Accounts payable 1,980,041
Accrued expenses and other current liabilities 805,703
Income taxes payable 1,578,789
Current maturities of capital lease obligations 123,850
-------------
Total current liabilities 5,023,269
Capital lease obligations, net of current portion 105,230
Deferred income 826,908
Minority interest 121,122
Commitments and contingencies (Notes 6, 9 and 12)
Stockholders' equity:
Common stock, $.01 par value--shares authorized 10,000,000;
issued and outstanding 5,767,680 57,677
Additional paid-in capital 21,383,491
Deficit (2,191,084)
Foreign currency translation adjustment 2,343
-------------
Total stockholders' equity 19,252,427
-------------
Total liabilities and stockholders' equity $25,328,956
See accompanying notes.
</TABLE>
F-3
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended June 30
1998 1997
------------------------------------------------
<S> <C> <C>
Net sales $26,764,332 $17,560,041
Cost of goods sold 12,236,393 7,591,510
------------------------------------------------
Gross profit 14,527,939 9,968,531
Operating expenses:
Selling, general and administrative expenses 7,407,038 5,464,391
Research and development expenses 859,419 350,788
Non-cash compensation charge - 4,544,600
------------------------------------------------
Total operating expenses 8,266,457 10,359,779
------------------------------------------------
Income (loss) from operations 6,261,482 (391,248)
Other income (expense):
Interest income 519,727 191,176
Interest expense (75,870) (68,649)
Option/license fees 73,613 155,312
Royalty income 630,971 333,576
Miscellaneous (3,374) 33,070
Foreign currency exchange (loss) gain (1,873) 7,406
------------------------------------------------
Income before minority interest and income taxes 7,404,676 260,643
Minority interest in net income of consolidated subsidiary (14,159) (31,684)
------------------------------------------------
Income before income taxes 7,390,517 228,959
Income taxes 2,062,136 51,834
Net income $ 5,328,381 $ 177,125
===============================================
Net income per share - Basic $ .94 $ .04
===============================================
Net income per share - Diluted $ .81 $ .03
===============================================
Weighted average common shares 5,690,160 4,834,809
===============================================
Diluted weighted average common shares outstanding 6,562,157 5,201,511
===============================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
$.01 Par value
-------------- Foreign Total
Additional Currency Equity
Number Paid-in Translation Stockholders'
of Shares Amount Capital Deficit Adjustment Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 4,200,000 $42,000 $11,086,793 $(7,696,590) $(34,555) $3,397,648
Exercise of outside director
options 61,500 615 44,485 - - 45,100
Exercise of employee options 106,500 1,065 52,185 - - 53,250
Exercise of warrants 1,093,692 10,937 5,644,987 - - 5,655,924
Exercise of underwriter rights 210,462 2,105 (2,105) - - -
Non-cash compensation charge - - 4,544,600 - - 4,544,600
Foreign currency translation
adjustment - - - - 33,425 33,425
Net income - - - 177,125 - 177,125
------------------------------------------------------------------------------------------
Balance, June 30, 1997 5,672,154 56,722 21,370,945 (7,519,465) (1,130) 13,907,072
Exercise of employee options 2,250 22 13,479 - - 13,501
Exercise of warrants 93,276 933 (933) - - -
Foreign currency translation
adjustment - - - - 3,473 3,473
Net income - - - 5,328,381 - 5,328,381
----------------------------------------------------------------------------------------
Balance, June 30, 1998 5,767,680 $57,677 $21,383,491 $(2,191,084) $ 2,343 $19,252,427
========================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30
1998 1997
-------------------------------------------
Operating activities
<S> <C> <C>
Net income $5,328,381 $ 177,125
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for net losses on accounts receivable 201,296 7,408
Deferred income tax benefit (439,012) (90,000)
Depreciation and amortization 289,130 231,017
Loss on disposal of equipment - 17,175
Minority interest in net income of subsidiary 14,159 31,684
Foreign currency loss 1,873 4,124
Noncash compensation charge - 4,544,600
Changes in operating assets and liabilities:
Accounts receivable (5,622,369) (717,973)
Inventories (705,774) (1,057,766)
Prepaid expenses and other current assets (329,744) ( 51,068)
Other assets 5,286 63,282
Accounts payable and accrued expenses (526,472) 1,605,012
Income taxes payable 1,594,041 -
Deferred income 79,857 366,218
-------------------------------------------
Net cash (used in) provided by operating activities (109,348) 5,130,838
-------------------------------------------
Investing activities
Proceeds from sale of equipment - 32,234
Acquisition of property and equipment (392,834) (382,958)
Patent costs - (14,424)
Purchases of investments held to maturity (9,904,461) (7,143,456)
Sales of investments held to maturity 9,864,584 1,128,914
Purchase of Labcaire stock (119,187) (102,099)
-------------------------------------------
Net cash used in investing activities (551,898) (6,481,789)
-------------------------------------------
Financing activities
Increase (decrease) in short-term borrowings 33,387 (54,114)
Principal payments on capital lease obligations (200,841) (94,289)
Proceeds from exercise of stock options 13,501 98,350
Proceeds from exercise of warrants, net of expenses - 5,655,924
-------------------------------------------
Net cash provided by financing activities (153,953) 5,605,871
-------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (1,720) 911
-------------------------------------------
Net (decrease) increase in cash and cash equivalents (816,919) 4,255,831
-------------------------------------------
Cash and cash equivalents at beginning of year 5,409,830 1,153,999
Cash and cash equivalents at end of year $4,592,911 $5,409,830
===========================================
Supplemental disclosure of cash flow information
Interest paid $ 75,870 $ 40,953
===========================================
Income taxes paid $ 928,361 $ 51,834
===========================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation, Organization and Business,
and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of Misonix, Inc. ("Misonix") include the
accounts of Misonix, its 86.7% owned subsidiary, Labcaire Systems, Ltd.
("Labcaire"), and its 100% owned subsidiary, Misonix, Ltd. (collectively, the
"Company"). 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 manufacture 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 December
1995 and October 1996, the Company entered into licensing agreements to further
develop two of its medical devices (see Note 13).
Labcaire, which began operations in February 1992, is located in the United
Kingdom, and its core business is the innovation, design, manufacture, and
marketing of air handling systems for the protection of personnel, products and
the environment from airborne hazards. Net sales to unaffiliated customers, net
income and total assets related to Labcaire as of and for the year ended June
30, 1998 were approximately $5,957,000, $236,000 and $2,870,000, respectively.
For the year ended June 30, 1997, these amounts were approximately $5,470,000,
$232,000 and $2,565,000, 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.
Investments Held to Maturity
The Company's investments, maturing at various dates through April 1999,
consist of U.S. Government Treasury Bills which are valued at amortized cost
which approximates market. In accordance with the provisions of Financial
Accounting Standards Board (FASB) Statement No. 115, "Accounting for Certain
Investments in Debt and Equity
F-7
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation, Organization and Business,
and Summary of Significant Accounting Policies (continued)
Investments Held to Maturity (continued)
Securities," the Company classifies its investments as held-to-maturity as the
Company has both the intent and ability to hold these securities until
maturity. The Company's investment policy gives primary consideration to safety
of principal, liquidity and return. At June 30, 1998 and 1997, unrealized gains
on held-to-maturity marketable securities were immaterial.
Major Customers and Concentration of Credit Risk
The Company's operations are located in New York and Clevedon, England. The
Company's policy is to review its customers' financial condition prior to
extending credit and, generally, collateral is not required. Sales of medical
devices, which were made to two customers in 1998 and one customer in 1997,
were $11,500,492 ($6,513,475 and $4,987,017) and $5,217,124 during the years
ended June 30, 1998 and 1997, respectively. Amounts receivable from these
customers were $4,961,356 ($3,147,173 and $1,814,183) and $414,000 at June 30,
1998 and 1997, respectively. At June 30, 1998, the Company's accounts
receivable with customers outside the United States was $1,467,610 of which
$1,276,610 related to its Labcaire operations. Where necessary, the Company
utilizes letters of credit on foreign or export sales. 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.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives ranging from 1 to 5 years. Leasehold improvements are amortized over the
life of the lease or the useful life of the related asset, whichever is
shorter.
Fair Value of Financial Instruments
The book values of the cash, accounts receivable, accounts payable, and accrued
liabilities approximate their fair values principally because of the short-term
maturities of these instruments.
F-8
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation, Organization and Business,
and Summary of Significant Accounting Policies (continued)
Revenue Recognition
Sales are recognized upon shipment of products. Fees from exclusive license
agreements are recognized ratably over the terms of the respective agreements.
Long-Lived Assets
The Company periodically reviews the carrying value of its long-lived assets in
determining the ultimate recoverability of their unamortized values using
future undiscounted cash flow analyses. Such a review has been performed by
management and does not indicate an impairment of such assets.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in connection with the Company's acquisition of 86.7% of
the common stock of Labcaire. The goodwill is being amortized by the
straight-line method over its estimated useful life of 25 years.
Other Assets
The cost of acquiring or processing patents, trademarks, and other intellectual
properties are capitalized at cost. This amount is being amortized using the
straight-line method over the estimated useful lives of the underlying assets
which is approximately 17 years.
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with FASB Statement No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Net Income Per Share
In March 1997, the FASB issued Statement No. 128, "Earnings Per Share", which
was adopted by the Company for the quarter ended December 31, 1997, and all
prior periods were restated. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible
F-9
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation, Organization and Business,
and Summary of Significant Accounting Policies (continued)
Net Income Per Share (continued)
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. The impact of adopting Statement 128
was not material.
The following table sets forth the reconcilation of weighted-average shares
outstanding and diluted weighted-average shares outstanding:
1998 1997
---- ----
Weighted-average shares outstanding 5,690,160 4,834,809
Dilutive effect of stock options 871,997 366,702
--------- ---------
Diluted weighted-average shares outstanding 6,562,157 5,201,511
========= =========
Recent Accounting Development
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all charges in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
Statement No. 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displyed with the same prominence as
other financial statements. This new standard is effective for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. The implementation of this new standard will not
affect the Company's results of operations and financial position.
Foreign Currency Translation
The Company follows the policies prescribed by FASB Statement No. 52 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. 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.
F-10
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation, Organization and Business,
and Summary of Significant Accounting Policies (continued)
Research and Development
All research and development expenses related to the Company's products are
expensed as incurred and are included in operating expenses.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Stock-Based Compensation
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123") which the Company adopted in the fiscal year
ended June 30, 1997. The new standard defines a fair value method of accounting
for the issuance of stock options and other equity instruments. Under the fair
value method, compensation cost is measured at the stock options' grant date
based on the fair value of the stock option award and is recognized over the
service period, which is usually the vesting period. Pursuant to Statement 123,
companies are encouraged, but not required, to adopt the fair value method of
accounting for employee stock-based transactions.
Companies also are permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") but are required to disclose in a note to the financial
statements pro forma net income and per share amounts as if the Company had
applied the new method of accounting. Statement 123 also requires increased
disclosures for stock-based
compensation arrangements.
The Company has elected to continue to account for such transactions under APB
25 and to provide the pro forma information required under Statement 123 (see
Note 8).
F-11
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Inventories
Inventories are summarized as follows:
June 30,
1998
----------------
Raw materials $1,756,358
Work-in-process 607,089
Finished goods 648,466
----------------
$3,011,913
================
3. Property and Equipment
Property and equipment consist of the following:
June 30
1998
--------------
Machinery and equipment $ 1,823,033
Furniture and fixtures 531,163
Automobile 408,698
Leasehold improvements 284,828
------------
3,047,722
Less: accumulated depreciation and amortization 1,798,458
--------------
$ 1,249,264
==============
Included in machinery and equipment at June 30, 1998 is approximately $246,000
of data processing equipment and telephone equipment under capital leases with
related accumulated amortization of approximately $168,000. Also, included in
automobiles is approximately $409,000 under capital leases with accumulated
amortization of approximately $110,000. The Company purchased approximately
$171,000 and 189,000 of equipment under capital lease arrangements during the
years ended June 30, 1998 and 1997, respectively.
4. Revolving Note Payable and Line of Credit
Since October 1992, Labcaire has had an overdraft facility with a United
Kingdom bank. As of June 30, 1998, the amount of this facility is
(pound)350,000 and bears interest at the United Kingdom prime rate (7.25% at
June 30, 1998) plus 2%. This facility is secured by the assets of Labcaire and
(pound)25,000 (approximately $42,000 at June 30, 1998) is guaranteed by its
directors. The facility expires on September 9, 1999. At June 30, 1998,
F-12
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Revolving Note Payable and Line of Credit (continued)
the balance outstanding under this overdraft facility was (pound)320,732
($534,886).
In October 1992, Misonix secured a $500,000 line of credit with a bank bearing
interest at the bank's prime rate (8.50% at June 30, 1998) plus 2%. The line of
credit, renewable on an annual basis, currently expires on June 30, 1999 and is
secured by all assets of Misonix. No amounts were outstanding under this line
at June 30, 1998.
5. Accrued Expenses and Other Current Liabilities
The following summarizes accrued expenses and other current liabilities:
June 30, 1998
--------------------
Accrued payroll and vacation $120,291
Accrued payroll taxes 2,641
Accrued commissions and bonuses 418,339
Accrued royalties 93,403
Other 171,029
--------------------
$805,703
====================
6. Leases
Misonix has entered into several noncancellable operating leases for the rental
of certain office space, equipment and automobiles expiring in various years
through 2002. The principal lease for office space provides for a monthly
rental amount of approximately $22,000. The Company also leases certain office
equipment and automobiles under capital leases expiring through fiscal 2003.
F-13
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Leases (continued)
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, 1998:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------------------- ---------------------
<S> <C> <C>
1999 $145,924 $348,042
2000 96,608 34,611
2001 14,293 24,426
2002 6,464 2,586
2003 5,387 -
---------------------- ---------------------
Total minimum lease payments 268,676 $409,665
=====================
Amounts representing interest 39,596
----------------------
Present value of net minimum lease payments
(Including current portion of $123,850) $229,080
======================
</TABLE>
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 $321,000 and $308,000
for the years ended June 30, 1998 and 1997, respectively.
7. Stockholders' Equity
On September 9, 1997, the Board of Directors of the Company declared a
three-for-two stock split payable to the shareholders of record on October 10,
1997. All common stock data and per share data in the accompanying consolidated
financial statements, and notes thereto, give retroactive effect to this stock
split.
In January 1992, the Company completed an initial public offering of 2,400,000
shares of its common stock and 2,760,000 warrants to purchase 2,760,000 shares
of its common stock at $5.20 per share, for $8,686,024, net of expenses. On
February 3, 1997, 1,093,692 of the previously issued warrants were exercised
and a like number of common shares were issued. The balance of these warrants
expired. As a result of the exercise, the Company received proceeds of
$5,655,924, net of expenses of approximately $31,000.
Also, in connection with this initial public offering, the Company granted the
underwriters a right through January 1997 to acquire an additional 240,000
shares of common stock at an exercise price of $7.15 per share and warrants to
acquire 240,000 shares of common stock in similar form to the public offering
warrants, but at an exercise price of $8.58 per share. In January 1997, this
arrangement was modified and, in lieu of the foregoing, the
F-14
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Stockholders' Equity (continued)
holders of the underwriters' rights received the right to purchase 240,000
shares of common stock at $ .67 per share which, by cashless purchase, resulted
in the issuance of 210,462 shares, and warrants to acquire an additional
240,000 shares of common stock at a price of $6.00 per share, exerciseable
through the close of business on May 31, 1998. Prior to this date, warrants to
acquire 93,276 shares of common stock were exercised by cashless purchase and
warrants to acquire 146,724 shares of common stock expired on May 31, 1998.
In connection with a private placement which occurred in October 1991,
redeemable warrants entitling the holders the right to purchase 150,000 shares
of common stock at $5.20 were issued. These warrants expired in February 1997.
8. Stock Based Compensation Plans
In September 1991, the Board of Directors adopted and, in October 1991, the
shareholders approved, the 1991 Stock Option Plan (the "Option Plan"). The
Option 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. The total number of shares of Common Stock for which
options may be granted under the Option Plan is 375,000 shares.
In March 1996, the Board of Directors adopted the 1996 Employee Incentive Stock
Option Plan covering an aggregate of 450,000 common shares of the Company and a
1996 Outside Directors Stock Option plan covering an aggregate of 1,125,000
common shares of the Company. The Board then granted options to acquire 120,000
shares at prices of $4.00 and $6.00 under the 1996 Employee Incentive Stock
Option Plan and options to acquire 778,500 shares at a price of $.73 under the
1996 Outside Directors Plan. Both of these Plans and the transactions under
which options to acquire 898,500 shares were granted were ratified and approved
at the annual meeting of shareholders on February 19, 1997. During the period
between the dates of grant by the Board and the shareholder approval, the
Company's market price per share increased thereby causing the Company to be
required to record a non-cash compensation charge in the amount of $4,544,600,
of which $185,000 was recorded during the fourth quarter of fiscal 1997.
The exercise price of all stock options granted under the Plans must be at
least equal to the fair market value of such shares on the date of grant. With
respect to any participant who owns stock possessing more than 10% of the
voting rights on the Company's outstanding capital stock, the exercise price of
any incentive stock option must be not less than 110% of the fair market value
on the date of grant. The maximum term of each
F-15
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stock Based Compensation Plans (continued)
option is ten years. Options shall become exercisable at such time and in such
installments as the Board shall provide in the terms of each individual option.
The Company has elected to follow APB 25 in accounting for its stock options
because, as discussed below, the alternative fair value accounting provided for
under Statement 123 requires use of option valuation models that were not
developed for use in valuing such stock options. Under APB 25, when the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income per share is required by Statement
123, and has been determined as if the Company had accounted for its stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions: risk-free interest rates
ranging from 5.70 % to 6.52%; no dividend yields; volatility factor of the
expected market price of the Company's common stock of 99.6% and 93.7%; and a
weighted-average expected life of the options of five years at June 30, 1998
and 1997.
The Black-Scholes option valuation model was developed for use in estimating
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options. The Company's pro forma
information is as follows:
1998 1997
---- ----
Net Income: As Reported $ 5,328,381 $ 177,125
Pro Forma 4,040,160 3,949,685
Basic EPS: As Reported $ .94 $ .04
Pro Forma .71 .82
Diluted EPS: As Reported $ .81 $ .03
Pro Forma .56 .67
As required by Statement 123, the fair value method of accounting has not been
applied to options granted prior to July 1, 1996. As a result, the pro forma
compensation cost may not by representative of that to be expected in future
years.
F-16
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stock Based Compensation Plans (continued)
The following table summarizes information about stock options and warrants
outstanding at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Options Warrants
---------------------------------------------------------------------------
Weighted Avg Weighted Avg
Shares Exercise Price Shares Exercise Price
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1996 375,000 $1.37 3,150,000 $5.46
Granted 898,500 1.27 240,000 4.00
Exercised (168,000) .59 (1,093,692) 5.20
Cancelled (6,750) 1.24 (2,056,308) 5.45
---------------------------------------------------------------------------
June 30, 1997 1,098,750 1.41 240,000 4.00
Granted 125,000 14.80 - -
Exercised (2,250) 6.00 (93,276) 4.00
Cancelled (37,500) 4.33 (146,724) 4.00
---------------------------------------------------------------------------
June 30, 1998 1,184,000 $2.72 - $ -
===========================================================================
</TABLE>
1998 1997
---- ----
Weighted average fair value of options granted $ 11.47 $ .85
The following table summarizes information about stock options outstanding at
June 30, 1998:
Weighted Average
Options Options Remaining
Exercise Price Outstanding Exercisable Contractual Life (Yrs)
- -------------------------------------------------------------------------------
$ .50 - .96 900,750 900,750 9
2.17 - 6.78 158,250 158,250 9
12.33 - 18.50 125,000 - 10
-------- ---------
1,184,000 1,059,000
========= =========
As of June 30, 1998, 1,184,000 shares of common stock are reserved for issuance
under outstanding options and 551,500 shares of common stock are reserved for
the granting of additional options. All outstanding options are exercisable and
expire between February 2002 and October 2007.
F-17
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Commitments and Contingencies
Employment Agreements
The Company has entered into an employment agreement with its chief executive
officer which expires on September 30, 1998. This agreement provides for an
annual base compensation of $200,000 plus incentives as defined in the
agreement.
Legal Proceedings
The Company, Medical Device Alliance, Inc. ("MDA"), and MDA's wholly-owned
subsidiary, Lysonix, Inc., are being sued for alleged patent infringement by
Mentor Corporation. Both the Company and its licensee (MDA) are aggressively
contesting Mentor's claim. A motion for preliminary injunction filed by Mentor,
requesting that the Company and its licensees be precluded from selling the
ultrasonic soft tissue aspirator, was heard and dismissed by the U.S. District
Court on September 11, 1998, at which time a trial on the merits was scheduled
for January 1999. Based upon the current status of this matter, management
believes that the outcome of this suit will not have a material adverse effect
on the Company's consolidated financial position and consolidated results of
operations.
10. Geographic Information
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
1998 1997
-----------------------------------
United States $19,465,196 $11,094,368
Canada and Mexico 265,474 122,058
Europe 5,883,431 4,894,074
Asia 785,520 934,313
Middle East 179,911 179,520
Other 184,800 335,708
-----------------------------------
$26,764,332 $17,560,041
===================================
F-18
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. 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.
Significant components of the Company's deferred tax assets at June 30 are as
follows:
1998 1997
-------------------------------------
Deferred tax assets:
Depreciation $ 45,068 $ 4,600
Bad debt reserves 67,044 26,400
Inventory valuation 65,139 29,900
License fee income 330,763 299,000
Net operating loss carryforwards - 584,000
Other 20,998 90,000
-------------------------------------
Total deferred tax assets 529,012 1,033,900
Valuation allowance - (943,900)
-------------------------------------
Net deferred tax asset $529,012 $ 90,000
=====================================
Significant components of the provision for income taxes attributable to
operations for the years ended June 30 are as follows:
1998 1997
------------------------------------------------
Current:
Federal $2,079,837 $ 90,000
State 353,042 -
Foreign 68,269 51,834
------------------------------------------------
Total current 2,501,148 141,834
Deferred:
Federal (339,237) (90,000)
State (99,775) -
------------------------------------------------
Total deferred (439,012) (90,000)
------------------------------------------------
$2,062,136 $ 51,834
================================================
Effective July 1, 1997, the Company changed its year end for tax purposes from
December 31 to June 30.
The reconciliation of income tax expense computed at the federal statutory tax
rates to
F-19
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Income Taxes (continued)
income tax expense for the periods ended June 30 is as follows:
1998 1997
------------------------------------------
Tax at statutory rates $2,512,776 $ 77,900
State income taxes, net
of federal benefit 167,182 -
Non cash compensation charge - 1,548,600
Foreign tax rate differential (36,500) (28,184)
Valuation allowance (943,900) (1,796,200)
Travel and entertainment 37,100 7,480
Other 325,478 242,238
------------------------------------------
$2,062,136 $ 51,834
==========================================
12. Acquisition
In June 1992, the Company acquired an 81.4% interest in Labcaire Systems, Ltd.,
a U.K. company, for $545,169. The total acquisition cost exceeded the fair
value of the net assets acquired by $241,299, which is being amortized over 25
years. The balance of the capital stock of Labcaire is owned by four executives
of Labcaire who had the right, under the original purchase agreement (the
"Agreement"), to require the Company to repurchase such shares at a price equal
to its pro rata share of 8.5 times Labcaire's earnings before interest, taxes
and management charges for the preceding fiscal year.
In June 1996, this Agreement was amended and each of the four directors agreed
to sell one-seventh of his total holding of Labcaire shares to the Company in
each of the next seven consecutive years, commencing with fiscal year 1996. The
price to be paid by the Company for these shares is based on the formula
outlined in the original Agreement. Pursuant to the Agreement, 9,284 shares
(2.65%) of Labcaire common stock were purchased by the Company, in October
1996, for (pound)62,388 (approximately $102,100) representing the fiscal 1996
buy-back portion, 9,286 shares (2.65%) of Labcaire common stock were purchased
by the Company, in October 1997, for (pound)70,666 (approximately $119,000)
representing the fiscal 1997 buy-back portion, and 9,286 shares (2.65%) will be
purchased by the Company, in October 1998, for (pound)73,638 (approximately
$124,000) for the year ended June 30, 1998. The cost of these purchases of
Labcaire common stock has been recorded as goodwill.
F-20
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. Licensing Agreements For Medical Technology
In December 1995, the Company entered into a licensing agreement with Medical
Device Alliance, Inc. ("MDA"), for a ten-year period, covering the further
development and commercial exploitation of the Company's medical technology
relating to soft tissue removal. This agreement primarily focuses on the
Company's patent for a liposuction apparatus granted in May 1995 and its 510(K)
approval from the United States Food and Drug Administration to market and sell
a device for ultrasonic soft tissue removal. The licensing agreement gives MDA
exclusive world-wide marketing and sales rights for the device, with
manufacturing to be performed by the Company. Pursuant to the license
agreement, the Company received $500,000 in licensing fees (which are being
recorded as income over the term of the agreement) and will receive royalties
based upon net sales of such products. Also as part of the agreement, the
Company was reimbursed for certain pre-marketing costs and has received up to a
maximum of $30,000 per month (from September 1995) for product development
expenditures (as defined in the agreement). The amount of reimbursements for
the years ended June 30, 1998 and 1997 were $65,435 and $127,487, respectively.
In October 1996, the Company entered into a License Agreement with United
States Surgical Corporation ("USS"), for a twenty-year period, covering the
further development and commercial exploitation of the Company's medical
technology relating to ultrasonic cutting, which uses high frequency sound
waves to coagulate and divide tissue for both open and laproscopic surgery. The
license agreement gives USS exclusive world-wide marketing and sales rights for
this technology. The Company received $100,000 under the option agreement
preceding the license agreement. This amount was recorded into income in fiscal
1997. Under the license agreement, the Company has received $475,000 in
licensing fees (which are being recorded as income over the term of the
agreement), plus royalties based upon net sales of such products. Also as part
of the agreement, the Company was reimbursed for certain product development
expenditures (as defined in the agreement) the amount of reimbursement (which
began in February 1997) was $278,231 and $349,028 in the fiscal years ended
June 30, 1998 and 1997, respectively.
The Company has settled a dispute with two individuals who claimed that they,
together with the Company's founder, were joint inventors of the technology
covered under the Patent for Liposuction Method and Apparatus. As a result, the
two individuals have reconfirmed their assignment of the patent rights to the
Company in exchange for 5% of all net sales and royalties received by the
Company from this technology, including those received from the MDA license.
F-21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Misonix, Inc.
By: /s/ Joseph Librizzi
-------------------------------------
Joseph Librizzi,
President and Chief
Executive Officer
Date: September 23, 1998
In accordance with the Exchange Act, 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 23,1998
Gary Gelman Director
/s/ Joseph Librizzi
- ----------------------- President, Chief Executive September 23, 1998
Joseph Librizzi Officer, and Director
(principal executive
officer)
/s/ Peter Gerstheimer
- ----------------------- Vice President and September 23, 1998
Peter Gerstheimer Chief Financial Officer
(principal financial and
accounting officer)
/s/ Howard Alliger
- ----------------------- Director September 23, 1998
Howard Alliger
/s/ Arthur Gerstenfeld
- ----------------------- Director September 23, 1998
Arthur Gerstenfeld
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 4,592,911
<SECURITIES> 6,407,472
<RECEIVABLES> 8,402,450
<ALLOWANCES> 240,911
<INVENTORY> 3,011,913
<CURRENT-ASSETS> 23,068,686
<PP&E> 3,047,722
<DEPRECIATION> 1,798,458
<TOTAL-ASSETS> 25,328,956
<CURRENT-LIABILITIES> 5,023,269
<BONDS> 0
0
0
<COMMON> 57,677
<OTHER-SE> 19,194,750
<TOTAL-LIABILITY-AND-EQUITY> 25,328,956
<SALES> 26,764,332
<TOTAL-REVENUES> 26,764,332
<CGS> 12,236,393
<TOTAL-COSTS> 20,502,850
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,870
<INCOME-PRETAX> 7,390,517
<INCOME-TAX> 2,062,136
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,328,381
<EPS-PRIMARY> .94
<EPS-DILUTED> .81
</TABLE>
