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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, 1999
|_| 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.
(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
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. $24,767,163
The aggregate market value of the voting stock held by non affiliates of the
registrant on September 15, 1999 (computed by reference to the average bid and
asked prices of such stock on such date) was approximately $30,561,821.
There were 5,957,470 shares of Common Stock outstanding at September 15, 1999.
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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 medical devices, ultrasonic equipment for
scientific and industrial applications, ductless fume enclosures for filtration
of gaseous contaminates, and environmental control products for the abatement of
air pollution.
Medical Products
In October 1996, the Company entered into a twenty-year
license agreement (the "USS License") with United States Surgical Corporation
("USS"), covering the further development and commercial exploitation of the
Company's medical technology relating to ultrasonic cutting, which uses high
frequency sound waves to coagulate and divide tissue for both open and
laproscopic surgery. The USS License agreement gives USS exclusive world-wide
marketing and sales rights for this technology and device. The Company received
$100,000 under the option agreement preceding the license agreement. Under the
USS License, the Company sells such device to USS. In addition to receiving
payment from USS for its orders of the device, the Company has received
aggregate licensing fees of $475,000 and receives royalties based upon USS net
sales of such device. Licensing fees from the USS License are amortized over the
term of the USS License. Also as part of the USS License, the Company was
reimbursed for certain product development expenditures (as defined in the USS
License). The amount of reimbursement (which began in February 1997) was $61,800
and $278,231 in the fiscal years ended June 30, 1999 and 1998, 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 $8,579,000 and $6,500,000 during the fiscal years ended June 30,
1999 and 1998, respectively.
On May 3, 1999 the Company entered into an agreement with
Focus Surgery, Inc. ("Focus") to obtain an approximate 20% equity position in
Focus for $3,000,000. The agreement provides for a series of development and
manufacturing agreements whereby Misonix would upgrade existing Focus products
and create new products based on high intensity focused ultrasound (HIFU)
technology for the non-invasive treatment of tissue for certain medical
applications.
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 sold
such device to MDA. On January 11, 1999, the Company terminated the MDA license
agreement due to a default by MDA for non-payment of both products shipped from
the Company to MDA of $1,592,235 and royalties owed for products sold by MDA to
third parties of $477,668.
A competitor, Mentor Corporation ("Mentor"), instituted an
action against the Company, MDA, and Lysonix Inc, a subsidiary of MDA, alleging
patent infringement. On June 10, 1999, the court found the Company did not
infringe on the Mentor patent (see Item #3 Legal Proceedings for further
discussion).
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Scientific and Industrial Products
The Company's other revenue-producing activities consist of
the manufacture and sale of the Sonicator(Registered) ultrasonic liquid
processor and cell disrupter, the distribution of other ultrasonic equipment for
scientific and industrial purposes, the manufacture and sale of
Mystaire(Registered) 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 disrupter, 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 Achillea and Yeast. Sonication
can strip away the outer coating of a virus and fragment DNA for immunological
studies. It is also widely applied in manufacturing pharmaceuticals, 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 manufactures
and sells an ultrasonic spray nozzle, marketed under the name
Sonimist(Registered), and distributes ultrasonic cleaners, marketed under the
names Astrason(Registered) bench-top cleaner and Astramax(Registered) 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, 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 particulate.
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 particularly 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 owns an 89.35% interest in Labcaire Systems Ltd.
("Labcaire"), a United Kingdom company formed in February 1992 with its
principal place of business in North Somerset, England. The balance of the
capital stock of Labcaire is owned by four executives who have, under a purchase
agreement (the "Labcaire Agreement"), agreed to sell one-seventh of their total
holding of Labcaire shares to the Company in each of seven consecutive years,
commencing with the fiscal year ended June 30, 1996. Under the Labcaire
Agreement, the Company is required to repurchase such shares at a price equal to
one-seventh of each executive's prorata share of 8.5 times Labcaire's earnings
before interest, taxes, and management charges for the preceding fiscal year.
Pursuant to the Labcaire Agreement, 9,284 shares (2.65%) of Labcaire common
stock were purchased by the Company for approximately $102,000 in October 1996,
for the year ended June 30, 1997, 9,286 shares (2.65%) were purchased by the
Company for approximately $119,000, in October 1997, for the year ended June 30,
1998, 9,286 shares (2.65%) were purchased by the Company for $129,000 for the
year ended June 30, 1999 and 9,286 shares (2.65%) will be purchased by the
Company for approximately $163,000 for the year ending June 30, 2000. The
effective date of this transaction is expected to be October 1999.
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Labcaire's business consists of designing, manufacturing, and
marketing air handling systems for the protection of personnel, products and the
environment from airborne hazards. Labcaire is also 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 to protect lab technicians
from airborne contaminants, and class 100 laminar flow enclosures. Labcaire also
manufactures the Company's ductless fume enclosures for the European market and
sells the enclosures under its trade name. Labcaire has developed and now
manufactures and sells an automatic endoscope disinfection system ("Autoscope").
The Autoscope disinfects and rinses several endoscopes while abating the noxious
disinfectant fumes.
Market and Customers
The Company relies on its licensee, 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 Company entered into a series of development and
manufacturing agreements whereby Focus products will be upgraded and new
products created based upon HIFU technology for the non-invasive treatment of
tissue for certain medical applications. The Company also has the option to
market, and sell other high potential (HIFU) applications for the breast, liver,
and kidney for both benign and cancerous tumors.
The largest market for the Company's Sonicator includes
research and clinical laboratories worldwide. In addition, the Company has
expanded its sales of the ultrasonic processor into industrial markets such as
paint, pigment, ceramic and pharmaceutical manufacturers.
The Company views a wide range of industries as prospective
customers for its pollution abatement scrubbers. Scrubbers are usable in any
industry or environment in which airborne contaminants are created.
The market for the Company's ductless fume enclosures includes
laboratory or industrial environments in which workers may be exposed to noxious
fumes or vapors. The products are suited to laboratories in which personnel
perform functions which release noxious fumes or vapors (including hospital and
medical laboratories), industrial processing (particularly involving the use of
solvents) and soldering, and other general chemical processes. The products are
particularly suited to users in the pharmaceutical, semiconductor,
biotechnology, and forensic industries.
The 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 direct sales persons who operate outside the
Company's offices and conduct direct marketing on a regional basis.
In fiscal 1999, approximately 33.6% 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.
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Labcaire manufactures and assembles its products at its
facility located in North Somerset, 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 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 trademarks: 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
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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
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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.
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
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5,769,211 (June 1998) Autoclavable switch - relating to 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, 1999, the Company's backlog, including
Labcaire, relating to industrial products was approximately $3,700,000 as
compared with approximately $2,100,000 as of June 30, 1998. The Company's
backlog relative to medical products was approximately $4,500,000 at June 30,
1999 and approximately $6,700,000 at June 30, 1998. The Company's total backlog
was $8,200,000 as of June 30, 1999 compared to approximately $8,800,000 as of
June 30, 1998.
Employees
As of September 15, 1999, the Company, including Labcaire,
employed a total of 149 full-time employees, including 28 in management and
supervisory positions. The Company considers its relationship with its employees
to be good.
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, 2000. The
rental amount, which is approximately $24,000 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 planning on renewing its lease covering its existing
facilities and expanding to 45,000 square feet in June 2000. Labcaire owns a
20,000 square foot facility in North Somerset, England which was purchased in
fiscal 1999.
Item 3. Legal Proceedings.
The Company, MDA, and MDA's wholly-owned subsidiary, Lysonix,
Inc. ("Lysonix"), were defendants in an action alleging patent infringement
filed by Mentor. On June 10, 1999, the United States District Court, Central
District of California, found for the defendants that there was no infringement
upon Mentor's patent. Mentor has subsequently filed an appeal. Based upon the
current status of the matter, management believes the outcome of this appeal
will not have a material adverse effect on the Company's financial position and
results of operations.
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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, 1999.
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".
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 share of Common Stock 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 1999: High Low
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First Quarter...................... $ 7.94 $ 5.25
Second Quarter..................... 6.38 4.81
Third Quarter...................... 5.88 3.00
Fourth Quarter..................... 6.75 3.06
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
As of September 15, 1999, the Company had 5,957,470 shares of Common Stock
outstanding and 148 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 or Plan of Operation.
The following discussion and analysis provides information
which the Company's management believes is relevant to an assessment and
understanding of the Company's results of operations and financial condition.
This discussion should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere herein.
All of the Company's sales to date have been derived from the
manufacture and distribution of ultrasonic medical devices, ultrasonic equipment
for scientific and industrial purposes, ductless fume enclosures for filtration
of gaseous emissions in laboratories and environmental control equipment for the
abatement of air pollution.
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 Consolidated Statement of Operations:
Fiscal years ended
June 30
1999 1998
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Net sales ........................................ 100.0% 100.0%
Cost of goods sold ............................... 51.1 45.7
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Gross profit ..................................... 48.9 54.3
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Selling, general and administrative expenses ..... 30.0 26.9
Research and development expenses
-medical products.............................. 2.3 2.1
Research and development expenses
-industrial products........................... 1.7 1.1
Bad debt expense.................................. 8.6 .8
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Total operating expenses.......................... 42.6 30.9
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Income from operations............................ 6.3 23.4
Other income ..................................... 6.1 4.3
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Income before minority interest
and income taxes............................... 12.4 27.7
Minority interest ................................ (.4) (.1)
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Income before income taxes........................ 12.0 27.6
Income taxes...................................... 4.1 7.7
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Net income........................................ 7.9% 19.9%
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The following table provides a breakdown of net sales by major
category for the periods indicated:
Fiscal year ended
June 30
1999 1998
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(in thousands)
Ultrasonic medical devices.......................... $ 8,743 $11,500
Ultrasonic products ................................ 3,003 3,431
Scrubbers .......................................... 2,451 3,760
Ductless fume enclosures ........................... 3,441 2,116
Other laboratory and hospital equipment ............ 7,129 5,957
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Net sales .......................................... $24,767 $26,764
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The following table provides a breakdown of foreign sales by
geographic area during the periods indicated:
Fiscal year ended
June 30
1999 1998
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(in thousands)
Canada and Mexico ..................... $ 429 $ 265
Europe ................................ 6,927 5,883
Asia .................................. 633 786
Middle East ........................... 167 180
Other ................................. 160 185
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$ 8,316 $ 7,299
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Fiscal years ended June 30, 1998 and 1999
Net Sales. Net sales decreased by 7.5% between the fiscal year
ended June 30, 1998 and the fiscal year ended June 30, 1999 from $26,764,332 to
$24,767,163. The results reflect a slight decrease in Medical Products sales due
to the absence of current year revenue from the Company's soft tissue aspirator
product compared to approximately $5,000,000 in fiscal 1998 and the delayed
shipments of Mystaire Products which will be delivered in fiscal 2000. This
decrease is offset, in part, by an increase in Labcaire and fume enclosure
sales. Revenues for the three-month period ended June 30, 1999 were $7,523,095
compared to $9,410,354 for the same period in fiscal 1998.
During fiscal 1999 and fiscal 1998, the Company had foreign
net sales of $8,316,068 and $7,299,136, respectively, representing 33.6% and
27.3% of net sales for such years, respectively. This increase in foreign sales
is principally due to Labcaire's increased sales volume in fiscal 1999 over
fiscal 1998, increasing to $7,129,170 from $5,956,763.
Gross profit. There was a decrease in overall gross profit
margin to 48.9% in fiscal 1999 from 54.3% in fiscal 1998. The decrease is due to
an unfavorable mix of high and low margin product deliveries and disposal of
obsolete inventory.
Selling, general and administrative expenses. There was a 3.1%
increase, from $7,205,742 to $7,427,449, in selling, general and administrative
expenses from fiscal 1998 to fiscal 1999. This increase is due to higher selling
expenses, consulting costs and legal fees.
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Research and development expenses. Research and development
expenses were $1,002,084 in fiscal 1999 and $859,419 in fiscal 1998. The
increase is predominately due to development costs associated with the Company's
Medical Devices and Ultrasound products
Bad debt expense. Bad debt expense increased from $201,296 for
the year ended June 30, 1998 to $2,131,218 for the year ended June 30, 1999. On
October 22, 1998, the Company announced that it had reserved $1,700,000 against
accounts receivable due and owing by MDA and its wholly-owned subsidiary,
Lysonix, as licensees for the Misonix ultrasonic soft tissue aspirator. In
December 1998, an additional reserve of $369,903 was provided for all remaining
receivables from MDA and Lysonix, to bring the total reserve to $2,069,903. A
notice of default on the license agreement with these parties has been
transmitted by the Company which declared the license agreement terminated on
January 11, 1999 due to a default by MDA for non-payment for product shipments
and royalties owed. In May 1999, the Company began an action against such
licensees seeking collection of indebtedness and enforcement of security
interests against the inventory in their possession.
Interest expense. Interest expense was $107,793 in fiscal 1999
and $75,870 in fiscal 1998. This increase was due to Labcaire's bank borrowings
for automobile leases and long-term debt associated with the purchase of
Labcaire's building.
Option/license Fees. Option and license fee income increased
from $73,613 in fiscal 1998 to $405,510 in fiscal 1999. This increase is due to
the termination of the MDA licensing agreement on January 11, 1999 which
resulted in the acceleration of the recognition of the deferred license fee
revenue.
Net income. For the fiscal year ended June 30, 1999, the
Company recorded net income of $1,964,758, or $.30 diluted earnings per share,
compared to net income of $5,328,381, or $.81 diluted earnings per share, for
the year ended June 30, 1998.
Liquidity and Capital Resources:
Working capital at June 30, 1999 and 1998 was $16,722,006 and
$18,045,417, respectively. The decrease is due to the investment in Focus
Surgery, Inc. of $3,050,000, the purchase of a manufacturing facility in North
Somerset, England, and the additional investment in Labcaire, offset, in part,
by increased cash flow from operations.
On January 22, 1999, Labcaire purchased a manufacturing
facility in North Somerset, England to house their operations. The transaction,
totaling approximately $2,100,000, consisted of a purchase price of $1,660,000,
closing costs of $117,860 and refundable value added tax (VAT) of $290,500. The
purchase was financed by a mortgage loan of $1,294,800 from Midland Bank plc.
Borrowings under the facility bears interest at base rate (5% at June 30, 1999)
plus 2% and are collateralized by a security interest in all of the assets of
Labcaire. The loan is payable in monthly installments of $12,876 including
interest, over a term of fifteen years starting in February 1999. There is a 1%
prepayment penalty for early retirement of the loan. As of June 30, 1999, the
outstanding balance of this loan was $1,255,867.
As a result of the mortgage loan described above, Midland Bank
plc revised their line of credit with Labcaire. The revised agreement, dated
December 4, 1998, reduced the available credit from $871,500 to $581,000 and
required Labcaire to pay the existing loan balance down to $581,000 by January
31, 1999. On December 11, 1998, the Company transferred $335,900 to Labcaire to
satisfy this requirement. During the third quarter of fiscal 1999, the line of
credit was temporarily increased by $290,500 to pay refundable sales taxes on
the new facility. As of June 30, 1999, $499,398 was outstanding under this
facility.
On March 10, 1999, the Company entered into an agreement in
principle with Hearing Innovations Inc. ("Hearing Innovations") whereby the
Company loaned Hearing Innovations $250,000 to be repaid to the Company on or
before March 10, 2000. This amount bears no interest. The loan is secured by a
lien on all of Hearing Innovation's rights, title and interest in accounts
receivable, inventory, property, plant and equipment proceeds of specified
products whether now existing or hereafter arising or acquired. On May 11, 1999,
the Company and Hearing Innovations announced an agreement in principle whereby
the Company will invest $750,000 to obtain an
11
<PAGE>
approximately 7% equity position in Hearing Innovations. The $750,000 investment
will be provided from an additional cash investment of $500,000 and the
conversion of the $250,000 note into equity. This agreement further provides for
the issuance of warrants that would give the Company the right to purchase an
additional equity interest in Hearing Innovations. If the warrants are
exercised, it would bring the Company's equity position to approximately 15%.
In addition, subsequent to June 30, 1999, the Company loaned an additional
$150,000 under similar terms and conditions.
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 29% of the Company's revenues in fiscal 1999
were received in English Pounds Sterling currency. To the extent that the
Company's revenues are generated in English Pounds for purposes of the Company
reporting its financial position, its operating results are converted into U.S.
Dollars using rates of 1.64 and 1.65 for the years ended June 30, 1999 and 1998,
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.
Euro Conversion: The January 1, 1999 adoption of the Euro
created a single-currency market in much of Europe. For a transition period from
January 1, 1999 through January 1, 2002, the existing local currencies are
anticipated to remain legal tender as denominations of the Euro. The Company
does not anticipate that its operations will be materially adversely affected by
the conversion to the Euro. The Company has analyzed the impact of conversion to
the Euro on its existing systems and operations and implemented modifications to
its systems to enable the Company to handle Euro invoicing for the transactions
which commenced in 1999. The Company anticipates that the cost of such
modifications should not have a material adverse effect on its consolidated
results of operations or liquidity.
Year 2000 Compliance:
During the first quarter of Fiscal 1998, the Company commenced
a Year 2000 data conversion project to address necessary changes, testing and
implementation with respect to its internal computer systems. The project was
completed on June 1, 1999. The cost of this project has not been material to the
Company's consolidated results of operations and liquidity.
The Company's applicable products are Year 2000 compliant.
The Company is currently seeking information regarding Year
2000 compliance by its vendors, customers and manufacturers. Project completion
for this phase is planned for the 1st quarter of fiscal year 2000. However,
given the reliance on third-party information as it relates to their compliance
programs and the difficulty of determining potential errors on the part of the
external service suppliers, no assurance can be given that the Company's
information systems or operations will not be affected by mistakes, if any, of
third parties or third-party failures to complete the Year 2000 project on a
timely basis. There can be no assurance that the systems of other companies on
which the Company's systems rely will be timely converted or that any such
failures to convert by another company would not have an material adverse effect
on the Company's systems.
The cost of the Company's Year 2000 project regarding
compliance by its vendors, customers, and manufacturers and the date on which
the Company believes it will complete the necessary modifications are based on
the Company's estimates, which were derived utilizing numerous assumptions of
future events, including the continued availability of resources, third party
modification plans and other factors. The Company presently believes that the
Year 2000 issue will not pose significant operational problems for its internal
information systems and products. The Company does not currently have any
contingency plans in place to address the failure of timely conversion of its
and/or third-party systems with respect to Year 2000 issue.
12
<PAGE>
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.
See "Index to Consolidated Financial Statements" on page F-1.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
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 of shareholders. The following table contains information
regarding all Directors and executive officers of the Company:
Director
Name Age Principal Occupation Since
- ---- --- -------------------- -----
Gary Gelman 52 Chairman of the Board 1995
of Directors
Michael McManus, Jr. 56 President and Chief 1998
Executive Officer
Richard Zaremba 44 Vice President, --
Chief Financial Officer,
Secretary and Treasurer
Ronald Manna 45 Vice President of Operations --
Christopher Thomas 37 Vice President of Mystaire Products --
Howard Alliger 72 Director 1971
Arthur Gerstenfeld 71 Director 1992
13
<PAGE>
The following is a brief account of the business experience for the past five
years of the Company's Directors and executive officers:
Gary Gelman, the founder of American Claims Evaluation, Inc., a
publicly traded company engaged in auditing hospital bills and providing
vocational rehabilitational counseling, has been Chairman of the Board and a
Director of that company for more than ten years. Since 1973, Mr. Gelman has
also been Chief Executive Officer of American Para Professional Systems, Inc., a
privately held entity, which provides nurses who perform physical examinations
of applicants for life and/or health insurance for insurance companies. He
received a B.A. Degree from Queens College. Mr. Gelman became Chairman of the
Board of the Company in March 1996.
Howard Alliger founded the Company's predecessor in 1955 and the
Company was a sole proprietorship until 1960. The Company name then was Heat
Systems-Ultrasonics. Mr. Alliger was President of the Company until 1982 and
Chairman of the Board until 1996. 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.
Michael McManus, Jr. became President and Chief Executive Officer of
the Company in November 1998. From November 1991 to March 1998, Mr. McManus was
President and Chief and Executive Officer of New York Bancorp, Inc. Prior to New
York Bancorp, Inc., Mr. McManus held senior positions with Jamcor
Pharmaceutical, Inc., Pfizer, Inc. and Revlon Corp. Mr. McManus also spent
several years as Assistant to President Reagan. Mr. McManus holds a B.A. degree
in Economics from University of Notre Dame and a J.D. from Georgetown University
Law Center.
Richard Zaremba became Vice President and Chief Financial Officer in
February, 1999. From March 1995 to February 1999, he was the Vice President and
Chief Financial Officer of Comverse Information Systems, Inc., a manufacturer of
digital voice recording systems. Previously, Mr. Zaremba was Vice President and
Chief Financial Officer of Miltope Group, Inc. a manufacturer of electronic
equipment. Mr. Zaremba is a licensed certified public accountant in the state of
New York and holds BBA and MBA degrees in Accounting from Hofstra University.
Ronald Manna became Vice President - Operations of the Company in
September 1989. 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.
Christopher Thomas became Vice President of Mystaire Products in
January 1999. For three years prior thereto, he served as Director of Air
Pollution Technology. Prior to his employment with the Company, Mr. Thomas was a
account representative for the Business Imaging Systems Division of Eastman
Kodak Company. Mr. Thomas holds a B.S. degree in General Science from Villanova
University.
14
<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 ($)
- ------------------ ---- ---------- ---------
Michael McManus, Jr. 1999 166,667 -0-
President and Chief
Executive Officer
Ronald Manna 1999 107,481 -0-
Vice President of
Operations
Christopher Thomas 1999 111,013 -0-
Vice President of
Mystaire Products
Employment Agreements
The Company has entered into an employment agreement with Mr.
McManus, who is employed pursuant thereto as President and Chief Executive
Officer. The agreement expires on October 31, 2000. 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 of $250,000 plus a Company
provided automobile and bonus of $225,000 to be paid in January 2000. Mr.
McManus receives additional benefits that are generally provided to other
employees of the Company.
In conformity with the Company's policy, all of its Directors,
officers and employees execute confidentiality and nondisclosure agreements upon
the commencement of employment with the Company. The agreements generally
provide that all inventions or discoveries by the employee related to the
Company's business and all confidential information developed or made known to
the employee during the term of employment shall be the exclusive property of
the Company and shall not be disclosed to third parties without prior approval
of the Company. Mr. Manna has an agreement with the Company which provides for
the payment of six months' severance upon his termination for any reason.
Messrs. McManus and Zaremba have agreements for payment of six months' annual
base salary upon a change in control of the Company. The Company's employment
agreement with Mr. McManus also contains non-competition provisions that
preclude him from competing with the Company for a period of 18 months from the
date of his termination of employment.
Option Exercises in Last Fiscal Year and Year-end Values
No options were exercised by any executive officer named in the
Summary Compensation Table during the fiscal year ended June 30, 1999. The
following table contains information concerning the number and value, at June
30, 1999, of unexercised options held by executive officers named in the Summary
Compensation Table:
15
<PAGE>
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised
Underlying Unexercised In-the-Money
Options/ at Options/ at
Fiscal Year End (#) Fiscal Year End ($)
Name (Exercisable/Unexercisable) (Exercisable/Unexercisable)(1)
<S> <C> <C>
Michael McManus, Jr. 130,746/169,254 $196,785/$316,715
Ronald Manna 11,124/41,376 $27,699/$45,851
Christopher Thomas 14,466/12,534 $13,590/$42,240
</TABLE>
- ---------------
(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, 1999, 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, 1999, options to purchase 70,500 shares of Common Stock
were outstanding under the 1991 Plan at exercise prices ranging from $.96 to
$6.78 per share and options to purchase 304,500 shares of Common Stock had been
exercised or canceled.
In March 1996, the Board of Directors approved the 1996
Employee Incentive Stock Option Plan covering an aggregate of 450,000 shares of
Common Stock (the "1996 Plan") and the 1996 Non-Employee Director Stock Option
Plan (the "1996 Directors Plan") covering an aggregate of 1,125,000 shares of
Common Stock of the Company. At June 30, 1999, options to purchase 374,050
shares of Common Stock were outstanding at exercise prices ranging from $3.07 to
$18.50 under the 1996 Plan and options to acquire 823,500 shares of Common Stock
were outstanding at exercise prices ranging from $.73 to $3.07 under the 1996
Directors Plan. At June 30, 1999, options to purchase 151,600 shares of Common
Stock under the 1996 Plan have been exercised or canceled.
In October 1998, the Board of Directors adopted and, in
January 1999, the shareholders approved the 1998 Employee Stock Option Plan (the
"1998 Plan") covering an aggregate of 500,000 shares of Common Stock the
Company. At June 30, 1999, options to purchase 144,000 shares of Common Stock
were outstanding under the 1998 Plan at exercise prices ranging from $3.07 to
$5.50 per share. At June 30, 1999, no options granted under the 1998 Plan have
been exercised or canceled.
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.
16
<PAGE>
Compliance with Section 16 (a) of the Securities Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934, as
amended, requires the Company's executive officers, Directors and persons who
own more than 10% of a registered class of the Company's equity securities
("Reporting Persons") to file reports of ownership and changes in ownership on
Forms 3, 4, and 5 with the Securities and Exchange Commission (the "SEC"), 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 1999.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of September 1, 1999,
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.
Common Stock Percent
Name and Address (1) Beneficially Owned of
-------------------- ------------------ Class
-----
Howard Alliger.......................... 922,608 (2) 15.3
Gary Gelman ............................ 766,000 (3) 11.5
Michael McManus, Jr..................... 178,196 (4) 2.9
Ronald Manna............................ 64,018 (5) 1.1
Arthur Gerstenfeld...................... 71,350 (6) 1.2
Christopher Thomas...................... 16,353 (7) *
All executive officers and Directors
as a group (seven persons)........... 2,037,941 (8) 29.4
- -----------
*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 90,000 shares which Mr. Alliger has the right to acquire upon
exercise of stock options which are currently exercisable.
(3) Includes 703,500 shares which Mr. Gelman has the right to acquire upon
exercise of stock options which are currently exercisable.
(4) Includes 130,746 shares which Mr. McManus has the right to acquire upon
exercise of stock options which are currently exercisable.
(5) Includes 11,124 shares which Mr. Manna has the right to acquire upon
exercise of stock options which are currently exercisable.
(6) Includes 33,000 shares which Mr. Gerstenfeld has the right to acquire
upon exercise of stock options which are currently exercisable.
(7) Includes 14,466 shares which Mr. Thomas has the right to acquire upon
exercise of stock options which are currently exercisable.
(8) Includes (i) the shares indicated in notes (2), (3),(4), (5),(6) and (7)
and (ii) 19,416 shares which are beneficially owned by an executive
officer of the Company (2,466 of which he has a right to acquire upon
exercise of stock options which are currently exercisable).
17
<PAGE>
Item 12. Certain Relationships and Related Transactions.
None.
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(j) Assignment Agreement between the Company and Robert
Ginsburg. (2)
10(k) Subscription Agreement between the Company and Labcaire.
(2)
10(l) Option Agreements between the Company and each of Graham
Kear, Geoffrey Spear, John Haugh, Martin Keeshan and
David Stanley. (2)
10(m) Stock Option Contract between the Company and Michael
Juliano. (2)
10(n) Form of Director's Indemnification Agreement. (2)
10(o) Stock Option Contract between the Company and Ronald
Manna. (4)
10(s) Severance Agreement between the Company and Ronald
Manna. (4)
10(u) Option Agreement dated September 11, 1995 between the
Company and Medical Device Alliance Inc. (4)
10(w) Amendment to agreement with principal shareholders of
Labcaire Systems Ltd. (5)
10(y) Development and Option Agreement dated August 27, 1996
between the Company and United States Surgical
Corporation. (6)
10(z) License Agreement dated October 16, 1996 between the
Company and United States Surgical Corporation. (6)
10(aa) Amendment No. 1 dated January 23, 1997 to Underwriters'
Warrant Agreement. (6)
10(bb) 1996 Non-Employee Director Stock Option Plan. (7)
10(cc) 1996 Employee Incentive Stock Option Plan. (7)
10(ee) 1998 Employee Stock Option Plan. (8)
10(ff) Investment Agreement, dated as of May 3, 1999, by and
between the Company, and Focus Surgery, Inc.
18
<PAGE>
22 Subsidiaries of the Company. (2)
23 Consent of independent public accountants to inclusion
of report in Form S-8 Registration Statement. (6)
27 Financial Data Schedule
---------------
(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.
(8) Incorporated by reference from the Company's
Registration Statement on Form S-8 (file no.
333-78795).
b. No reports on Form 8-K were filed by the registrant during the fiscal
quarter ended June 30, 1999.
19
<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/ Michael McManus, Jr.
------------------------------
Michael McManus, Jr.
President and Chief
Executive Officer
Date: September 23, 1999
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
- --------- ----- ----
Chairman of the Board, September __, 1999
- ----------------------- Director
Gary Gelman
/s/ Michael McManus, Jr. President, Chief Executive September 23, 1999
- ----------------------- Officer, and Director
Michael McManus, Jr. (principal executive
officer)
/s/ Richard Zaremba Vice President, Chief September 23, 1999
- ----------------------- Financial Officer, Treasurer
Richard Zaremba and Secretary (principal
financial and accounting
officer)
Director September __, 1999
- -----------------------
Howard Alliger
Director September __, 1999
- -----------------------
Arthur Gerstenfeld
20
<PAGE>
Item 7
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Misonix, Inc. and Subsidiaries
Year Ended June 30, 1999
Page
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheet--June 30, 1999............................... F-3
Consolidated Statements of Income--Years Ended
June 30, 1999 and 1998............................................... F-4
Consolidated Statements of Stockholders' Equity--Years Ended
June 30, 1999 and 1998............................................... F-5
Consolidated Statements of Cash Flows--Years Ended
June 30, 1999 and 1998............................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
F-1
<PAGE>
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, 1999, 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, 1999, 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 13, 1999, except for Note 17,
as to which the date is September 10, 1999
F-2
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 1999
Assets
Current assets:
Cash and cash equivalents $ 8,361,231
Investments held to maturity 3,987,309
Accounts receivable, less allowance for
doubtful accounts of $88,757 6,073,919
Inventories 2,936,960
Deferred income taxes 131,788
Prepaid expenses and other current assets 611,818
-----------
Total current assets 22,103,025
Property, plant and equipment, net 2,964,778
Deferred income taxes 181,484
Goodwill, net of accumulated amortization of $89,463 502,295
Investment in Focus Surgery, Inc. 2,955,703
Other assets 71,805
-----------
Total assets $28,779,090
===========
Liabilities and stockholders' equity
Current liabilities:
Notes payable $ 499,398
Accounts payable 2,356,877
Accrued expenses and other current liabilities 2,089,231
Income taxes payable 272,814
Current maturities of long-term debt and capital
lease obligations 162,699
-----------
Total current liabilities 5,381,019
Long-term debt and capital lease obligations 1,271,814
Deferred income 445,620
Minority interest 138,252
Commitments and contingencies (Notes 2, 8 and 11)
Stockholders' equity:
Common stock, $.01 par value--shares authorized
10,000,000; issued and outstanding 5,927,470 59,275
Additional paid-in capital 21,719,553
Deficit (226,326)
Accumulated other comprehensive income (10,117)
-----------
Total stockholders' equity 21,542,385
-----------
Total liabilities and stockholders' equity $28,779,090
===========
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended June 30
1999 1998
----------------------------------
<S> <C> <C>
Net sales $24,767,163 $26,764,332
Cost of goods sold 12,649,496 12,236,393
----------------------------------
Gross profit 12,117,667 14,527,939
Operating expenses:
Selling, general and administrative expenses 7,427,449 7,205,742
Research and development expenses 1,002,084 859,419
Bad debt expense 2,131,218 201,296
----------------------------------
Total operating expenses 10,560,751 8,266,457
----------------------------------
Income from operations 1,556,916 6,261,482
----------------------------------
Other income (expense):
Interest income 601,685 519,727
Interest expense (107,793) (75,870)
Option/license fees 405,510 73,613
Royalty income 627,063 630,971
Amortization of investment (25,417) -
Foreign currency exchange gain (loss) 3,382 (1,873)
Miscellaneous 535 (3,374)
----------------------------------
Income before equity in loss of Focus Surgery,
Inc., minority interest and income taxes 3,061,881 7,404,676
Equity in loss of Focus Surgery, Inc. (68,880) -
Minority interest in net income of consolidated subsidiary (17,130) (14,159)
----------------------------------
Income before income taxes 2,975,871 7,390,517
Income taxes 1,011,113 2,062,136
----------------------------------
Net income $ 1,964,758 $ 5,328,381
==================================
Net income per share - Basic $ .34 $ .94
==================================
Net income per share - Diluted $ .30 $ .81
==================================
Weighted average common shares 5,862,445 5,690,160
==================================
Diluted weighted average common shares outstanding 6,624,009 6,562,157
==================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
$.01 Par Value Accumulated
-------------- Additional Other Total
Number Paid-in Comprehensive Stockholders'
of Shares Amount Capital Deficit Income Equity
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997: 5,672,154 $ 56,722 $ 21,370,945 $ (7,519,465) $ (1,130) $13,907,072
Net income - - - 5,328,381 - 5,328,381
Foreign currency translation
adjustment - - - - 3,473 3,473
--------------
Comprehensive income - - - - - 5,331,854
--------------
Exercise of employee options 2,250 22 13,479 - - 13,501
Exercise of warrants 93,276 933 (933) - - -
----------------------------------------------------------------------------------------------
Balance at June 30, 1998: 5,767,680 57,677 $ 21,383,491 $ (2,191,084) $ 2,343 $19,252,427
Net income - - - 1,964,758 - 1,964,758
Foreign currency translation
adjustment - - - - (12,460) (12,460)
==============
Comprehensive Income 1,952,298
--------------
Exercise of employee options 159,750 1,598 314,527 - - 316,125
Exercise of warrants 40 - - - - -
Non-cash compensation charge - - 21,535 - - 21,535
----------------------------------------------------------------------------------------------
Balance at June 30, 1999 5,927,470 $59,275 $ 21,719,553 $ (226,326) (10,117) $21,542,385
==============================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30
1999 1998
----------------------------------
<S> <C> <C>
Operating activities
Net Income $ 1,964,758 $5,328,381
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense 2,131,218 201,296
Deferred income tax expense (benefit) 215,740 (439,012)
Depreciation and amortization 409,893 289,130
Non-cash compensation charge 21,535 -
Deferred income (381,288) 79,857
Foreign currency (gain) loss (3,382) 1,873
Minority interest in net income of subsidiary 17,130 14,159
Equity in loss of Focus Surgery, Inc. 68,880 -
Change in Operating assets and liabilities:
Accounts receivable (43,598) (6,054,994)
Inventories 74,953 (705,774)
Prepaid expenses and other current assets 533,033 102,881
Other assets 12,196 5,286
Accounts payable and accrued expenses 1,660,364 (526,472)
Income taxes payable (1,305,975) 1,594,041
----------------------------------
Net cash provided by (used in) operating activities 5,375,457 (109,348)
----------------------------------
Investing activities
Acquisition of property, plant and equipment (1,976,842) (392,834)
Purchases of investments held to maturity (15,804,837) (9,904,461)
Sales of investments held to maturity 18,225,000 9,864,584
Purchase of Labcaire stock (129,172) (119,187)
Investment in Focus Surgery, Inc. (3,050,000) -
Loan to Hearing Innovations (250,000) -
----------------------------------
Net cash used in investing activities (2,985,851) (551,898)
----------------------------------
Financing activities
(Payments of) proceeds from short-term borrowings, net (35,488) 33,387
Principal payments on capital lease obligations (148,713) (200,841)
Proceeds from exercise of stock options 316,125 13,501
Proceeds from long-term debt 1,283,256 -
Payment of long-term debt (27,388) -
----------------------------------
Net cash provided by (used in) financing activities 1,387,792 (153,953)
----------------------------------
Effect of exchange rate changes on cash and cash equivalents (9,078) (1,720)
----------------------------------
Net increase (decrease) in cash and cash equivalents 3,768,320 (816,919)
Cash and cash equivalents at beginning of year 4,592,911 5,409,830
----------------------------------
Cash and cash equivalents at end of year $ 8,361,231 $4,592,911
==================================
Supplemental disclosure of cash flow information
Interest paid $ 99,750 $ 75,870
==================================
Income taxes paid $ 1,962,872 $ 928,361
==================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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 89.35% owned subsidiary, Labcaire Systems, Ltd.
("Labcaire"), and its 100% owned subsidiary, Misonix, Ltd. (collectively, the
"Company"). Investments in affiliates which are not majority owned are reported
using the equity method. 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 October
1996, the Company entered into licensing agreements to further develop two of
its medical devices (see Note 15).
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, 1999 were approximately $7,129,000, $386,000 and $5,010,000, respectively.
For the year ended June 30, 1998, these amounts were approximately $5,957,000,
$236,000 and $2,870,000, 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 March 2000, consist
of commercial paper and 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 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,
1999 and 1998, 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 North Somerset, 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 primarily to one customer in 1999 and two customers in
1998 were approximately $8,743,000 and $11,500,000 ($6,500,000 and $5,000,000)
during the years ended June 30, 1999 and 1998, respectively. Accounts receivable
from these customers were approximately $2,400,000 and $4,961,000 ($3,147,000
and $1,814,000) at June 30, 1999 and 1998, respectively. At June 30, 1999, the
Company's accounts receivable with customers outside the United States was
approximately
F-7
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
$2,586,000 of which $1,638,000 related to its Labcaire operations. The Company
utilizes letters of credit on foreign or export sales where appropriate. Credit
losses relating to both domestic and foreign customers have historically been
minimal and within management's expectations except as related to Medical Device
Alliance (see Note 13).
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives ranging from 1 to 5 years. Depreciation of the Labcaire building is
provided using the straight-line method over the estimated useful life of 50
years. Leasehold improvements are amortized over the life of the lease or the
useful life of the related asset, whichever is shorter.
Fair Value of Financial Instruments
The book values of the cash, accounts receivable, accounts payable, and accrued
liabilities approximate their fair values principally because of the short-term
maturities of these instruments. The carrying value of the Company's debt
approximates its fair value due to the variable rate nature thereof.
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
discounted 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 89.35% 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 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.
F-8
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Net Income Per Share
Basic and diluted earnings per share are calculated in accordance with
Statement No. 128, "Earnings Per Share".
The following table sets forth the reconciliation of weighted average shares
outstanding and diluted weighted average shares outstanding:
1999 1998
---- ----
Weighted average shares outstanding 5,862,445 5,690,160
Dilutive effect of stock options 761,564 871,997
--------- --------
Diluted weighted average shares outstanding 6,624,009 6,562,157
========= =========
Recent Accounting Pronouncements
Comprehensive Income
In June 1997, the FASB issued Statement No. 130 (SFAS 130), "Reporting
Comprehensive Income", which the Company adopted during the first quarter of
1999. The statement establishes rules for the reporting of comprehensive income
and its components. The components of comprehensive income are net income and
foreign currency translation adjustments. The effect of such adoption had no
effect of the Company's consolidated results of operations and financial
position. Prior year financial statements have been reclassified to conform to
SFAS 130 requirements.
Segment Disclosure
In 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which the Company adopted in Fiscal 1999.
The adoption of this pronouncement had no effect on the Company's consolidated
results of operations or financial position.
Foreign Currency Translation
The Company follows the policies prescribed by 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. Resulting translation adjustments due to fluctuations in
the exchange rates are recorded as other comprehensive income. Results of
operations are translated using the weighted average of the prevailing foreign
currency rates during the fiscal year. Stockholders' equity accounts are
translated at historical exchange rates. Gains and losses on foreign currency
transactions are recorded in other income and expense.
Research and Development
All research and development expenses related to the Company's products are
expended 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.
F-9
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Stock-Based Compensation
The Company accounts for its stock-based compensation plans in accordance with
the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. Under APB 25, because the
exercise price of the Company's employee stock options is set equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Reclassification
Certain amounts in the 1998 financial statements have been reclassified to
conform with the 1999 presentation.
2. Acquisitions
Focus Surgery, Inc.
On May 3, 1999, the Company invested $3 million to obtain an approximately 20%
equity interest in Focus Surgery, Inc. ("Focus"), a privately-held technology
company. The agreement provides for a series of development and manufacturing
agreements whereby the Company would upgrade existing Focus products and create
new products based on high intensity focused ultrasound (HIFU) technology for
the non-invasive treatment of tissue for certain medical applications. At June
30, 1999, the excess of the cost of the investment ($3,000,000 plus acquisition
costs of $50,000) is being amortized on a straight-line basis over its estimated
life of 20 years. The Company's portion of the net losses of Focus were recorded
since the date of acquisition. The net carrying value of the investment at June
30, 1999 is $2,955,703.
Hearing Innovations, Inc.
On March 10, 1999, the Company entered into a bridge loan agreement with Hearing
Innovations, Inc., ("Hearing Innovations") whereby Hearing Innovations is
required to pay to the Company, on or before March 10, 2000, the principal
amount of $250,000. This amount bears no interest. The note is secured by a lien
on all Hearing Innovation's rights, titles and interests in accounts receivable,
inventory, property, plant and equipment and processes of specified products
whether now existing or here after arising or acquired after the date of the
agreement.
On May 11, 1999, the Company and Hearing Innovations jointly announced an
agreement in principle whereby the Company will invest $750,000 to obtain an
approximately 7% equity position in Hearing Innovations. The $750,000 investment
will be provided from an additional cash investment of $500,000 and the
conversion of the $250,000 note receivable into equity. The agreement further
provides for the issuance of warrants that, if exercised, would give the Company
an approximate 15% interest in Hearing Innovations. The Company would have the
right to manufacture Hearing Innovations ultrasonic products and also has the
right to create a joint venture for the marketing and sale of Hearing
Innovations' ultrasonic tinnitus masker device (See Note 17).
Labcaire Systems, Ltd.
In June 1992, the Company acquired an 81.4% interest in Labcaire Systems, Ltd.,
a U.K. company, for $545,169. The total acquisition cost exceeded the fair value
of the net assets acquired by $241,299, which is being amortized over 25 years.
The balance of the capital stock of Labcaire is owned by four executives of
Labcaire who had the right, under the original purchase agreement (the
"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.
F-10
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 approximately $102,000 representing the fiscal 1997 buy-back portion, 9,286
shares (2.65%) of Labcaire common stock were purchased by the Company, in
October 1997, for approximately $119,000 representing the fiscal 1998 buy- back
portion, 9,286 shares (2.65%) were purchased by the Company in October 1998, for
approximately $129,000 representing the fiscal 1999 buy-back portion and 9286
shares (2.65%) will be purchased by the Company in October 1999 for
approximately $163,000. The cost of these purchases of Labcaire common stock has
been recorded as goodwill.
3. Inventories
Inventories are summarized as follows:
June 30, 1999
----------------
Raw materials $2,111,270
Work-in-process 331,744
Finished goods 493,946
----------------
$2,936,960
================
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
June 30, 1999
-------------
Buildings $1,789,051
Machinery and equipment 1,994,619
Furniture and fixtures 605,430
Automobiles 391,330
Leasehold improvements 269,414
-----------
5,049,844
Less: Accumulated depreciation and amortization (2,085,066)
-----------
$2,964,778
==========
Included in machinery and equipment at June 30, 1999 is approximately $297,000
of data processing equipment and telephone equipment under capital leases with
related accumulated amortization of approximately $168,000. Also, included in
automobiles is approximately $391,000 under capital leases with accumulated
amortization of approximately $118,000. The Company purchased approximately
$95,000 and $171,000 of equipment under capital lease arrangements during the
years ended June 30, 1999 and 1998, respectively.
F-11
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Revolving Note Payable
Since October 1992, Labcaire has had an overdraft facility with a United Kingdom
bank. As of June 30, 1999, the amount of this facility is $581,000 and bears
interest at the bank's base rate (5% at June 30, 1999) plus 2%. This facility is
secured by the assets of Labcaire. The facility is renewable on a annual basis
beginning in September 1999. The new terms also stipulate that Labcaire's
accounts receivable must be at least 175% of the outstanding balance of the
facility at all times, and that Labcaire must show an after tax profit of at
least $166,000 for the prior four quarters. At June 30, 1999, the balance
outstanding under this overdraft facility was $499,398 and Labcaire was in
compliance with all covenants.
6. Debt
On January 22, 1999, Labcaire purchased a manufacturing facility in North
Somerset, England to house their operations. The transaction approximated
$2,100,000 and was partially financed with a mortgage loan of $1,283,256 from
the same bank that provides the overdraft facility. Borrowings under the
facility bear interest at the bank's base rate (5% at June 30, 1999) plus 2% and
are collateralized by a security interest in all of the assets of Labcaire. The
loan is payable in monthly installments of $12,876 per month, including
interest, over a term of fifteen years which began in February of 1999. There is
a 1% prepayment penalty for early retirement of the loan. As of June 30, 1999,
$1,255,867 was outstanding on this loan.
At June 30, 1999, future principal maturities on long-term debt are as follows:
2000 $ 55,878
2001 60,493
2002 68,493
2003 102,738
Thereafter 968,265
----------
$1,255,867
==========
7. Accrued Expenses and Other Current Liabilities
The following summarizes accrued expenses and other current liabilities:
June 30, 1999
Accrued payroll and vacation $169,367
Accrued sales tax 113,696
Accrued commissions and bonuses 419,833
Customer deposits 942,119
Professional fees 169,963
Other 274,253
----------
$2,089,231
==========
8. Leases
Misonix has entered into several noncancellable operating leases for the rental
of certain office space, equipment and automobiles expiring in various years
through 2004. The principal lease for office space provides for a monthly rental
amount of approximately $24,000. The Company also leases certain office
equipment and automobiles under capital
F-12
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
leases expiring through fiscal 2003.
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, 1999:
Capital Operating
Leases Leases
----------------- ---------------
2000 $121,893 $159,451
2001 50,147 98,586
2002 23,051 16,741
2003 12,555 21,149
2004 - 17,861
----------------- ---------------
Total minimum lease payments 207,646 $313,788
===============
Amounts representing interest (29,000)
-----------------
Present value of net minimum lease
payments (Including current portion
of $106,822) $178,646
=================
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 $317,000 and $321,000 for the years ended June 30, 1999 and 1998,
respectively.
9. 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 connection with its 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 at an exercise price of $8.58 per share.
In January 1997, this arrangement was modified and, in lieu of the foregoing,
the 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, exercisable 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.
10. 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 Non-Employee Director 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
F-13
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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
Non-Employee Director 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.
On October 7, 1998, the Board of Directors adopted, and on January 13, 1999, the
shareholders approved the 1998 Employee Stock Option Plan covering an aggregate
of 500,000 common shares of the Company. The Board granted 250,000 options to
the Chief Executive Officer, 85,000 under this plan and 165,000 under the 1996
Employee Incentive Stock Option Plan.
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 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.
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 88% and 99.6%; and a
weighted-average expected life of the options of five years at June 30, 1999 and
1998.
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:
1999 1998
Net Income: As Reported $1,964,758 $ 5,328,381
Pro Forma 1,313,964 4,040,160
Basic EPS: As Reported .34 .94
Pro Forma .22 .71
Diluted EPS: As Reported .30 .81
Pro Forma .18 .56
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-14
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes information about stock options and warrants
outstanding at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Options Warrants
Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Canceled (37,500) 4.33 (146,684) 4.00
-------------------------------------------------------------------------
June 30, 1998 1,184,000 $2.72 40 4.00
Granted 469,650 4.20 - -
Exercised (159,750) 1.98 (40) 4.00
Canceled (81,850) 14.06 - -
-------------------------------------------------------------------------
June 30, 1999 1,412,050 $2.70 - -
=========================================================================
</TABLE>
1999 1998
---- ----
Weighted average fair value of options granted $ 3.02 $ 11.47
The following table summarizes information about stock options outstanding at
June 30, 1999:
Weighted Average
Options Options Remaining
Exercise Price Outstanding Exercisable Contractual Life (Yrs)
- ------------------------------------------------------------------------------
$ .73 - .96 808,500 808,500 8
$ 2.17 - 6.78 553,550 281,740 9
$ 12.33 - 18.50 50,000 - 8
--------- ---------
1,412,050 1,090,240
========= =========
As of June 30, 1999, 1,412,050 shares of common stock are reserved for issuance
under outstanding options and 662,950 shares of common stock are reserved for
the granting of additional options. All outstanding options expire between
February 2002 and March 2009 and vest immediately or over periods of one or two
years.
F-15
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Commitments and Contingencies
Employment Agreements
The Company has entered into an employment agreement with its Chief Executive
Officer which expires on October 31, 2000. This agreement provides for an annual
base compensation of $250,000 with an annual bonus at the discretion of the
Board of Directors. This agreement also provides for a guaranteed initial bonus
of $225,000 to be paid in January 2000.
Legal Proceedings
The Company, Medical Device Alliance, Inc. ("MDA"), and MDA's wholly-owned
subsidiary, Lysonix, Inc., were defendants in an action alleging patent
infringement filed by Mentor Corporation . On June 10, 1999, the United States
District Court, Central District of California, found for the defendants that
there was no infringement upon Mentor's patent. Mentor has subsequently filed an
appeal. Based upon the current status of the matters, management believes the
outcome of this appeal will not have a material adverse effect on the Company's
consolidated financial position and results of operations.
12. 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
1999 1998
--------------------------------
United States $16,451,095 $19,465,196
Canada and Mexico 428,777 265,474
Europe 6,927,140 5,883,431
Asia 633,422 785,520
Middle East 167,042 179,911
Other 159,687 184,800
----------- -----------
$24,767,163 $26,764,332
=========== ===========
13. Bad Debt Expense
During fiscal 1999, the Company incurred bad debt expense of $2,069,903 against
accounts receivable due and owing by MDA and Lysonix, as licensees for the
Misonix ultrasonic soft tissue aspirator relating to unpaid shipments and
royalties. The write-off relates to product shipments and royalties, in the
amounts of $1,592,235 and $477,668, respectively. A notice of default on the
license agreement with these parties has been transmitted by the Company
pursuant to which the license agreement was terminated on January 11, 1999 (See
Notes 11 and 15).
F-16
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14. 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:
1999 1998
------------------------------
Deferred tax assets:
[S] [C] [C]
Depreciation $ - $ 45,068
Bad debt reserves 32,840 67,044
Inventory valuation 98,948 65,139
License fee income 155,168 330,763
Other 32,216 20,998
------------------------------
Total deferred tax assets 319,172 529,012
Deferred tax liabilities: -
Depreciation (5,900) -
------------------------------
Net deferred tax asset $ 313,272 $ 529,012
==============================
Significant components of the provision for income taxes attributable to
operations for the years ended June 30 are as follows:
1999 1998
------------------------------
Current:
Federal $ 616,540 $2,079,837
State 88,928 353,042
Foreign 89,905 68,269
------------------------------
Total current 795,373 2,501,148
Deferred:
Federal 166,120 (339,237)
State 49,620 (99,775)
------------------------------
Total deferred 215,740 (439,012)
------------------------------
$1,011,113 $2,062,136
==============================
Effective July 1, 1997, the Company changed its year end for tax purposes from
December 31 to June 30.
F-17
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The reconciliation of income tax expense computed at the federal statutory tax
rates to income tax expense for the periods ended June 30 is as follows:
1999 1998
-------------------------------
Tax at statutory rates $1,011,796 $ 2,512,776
State income taxes, net
of federal benefit 91,442 167,182
Foreign tax rate differential (55,000) (36,500)
Valuation allowance - (943,900)
Travel and entertainment 8,339 37,100
Other (45,464) 325,478
-------------------------------
$1,011,113 $ 2,062,136
===============================
15. Licensing Agreements For Medical Technology
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 which was $61,800 and $278,231 in the
fiscal years ended June 30, 1999 and 1998, respectively.
In December 1995, the Company entered into a licensing agreement with MDA, for a
ten-year period, covering the further development and commercial exploitation of
the Company's medical technology relating to soft tissue removal. The licensing
agreement gave 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 was
being recorded as income over the term of the agreement) and received royalties
based upon net sales of such products. In January 1999, the Company terminated
the license agreement due to a default by MDA for non-payment for product
shipments and royalties owed. Therefore, the remaining portion of the deferred
licensing fee of approximately $357,000 was recognized as income during the
fourth quarter of fiscal 1999.
16. Employee Profit Sharing Plan
The Company sponsors a retirement plan pursuant to section 401(k) of the
Internal Revenue Code (the "Code") for all full time employees. Participants may
contribute a percentage of compensation not to exceed the maximum allowed under
the Code. The Plan provides for a matching contribution by the Company which
amounted to $27,300 and $15,855 for the years ended June 30, 1999 and 1998,
respectively.
17. Subsequent Event
During the first quarter of fiscal 2000, the Company entered into four loan
agreements whereby Hearing Innovations is required to pay the Company the total
principal amounts of $30,000 due October 10, 1999, $50,000 due June 29, 2000,
$50,000 due July 29, 2000 and $20,000 due August 30, 2000. The notes bear
interest at 8% per annum. The notes are secured by a lien on all Hearing
Innovation's rights, titles and interests in accounts receivable, inventory,
property, plant and equipment and processes of specified products whether now
existing or here after acquired after the date of these agreements.
F-18
<PAGE>
INVESTMENT AGREEMENT
BETWEEN
FOCUS SURGERY, INC.
AND
MISONIX, INC.
MAY 3, 1999
<PAGE>
INVESTMENT AGREEMENT
This Investment Agreement ("Agreement") is entered into as of the 3rd day
of May, 1999 by and between FOCUS SURGERY, INC, a Delaware corporation (the
"Company"), and MISONIX, INC., a New York corporation ("Misonix").
PRELIMINARY STATEMENTS
The Company is principally engaged in the business, among other things, of
developing and commercializing products which accomplish prostate therapy and
general surgical applications using High Intensity Focused Ultrasound ("HIFU").
The Company and Misonix mutually recognize that potential business opportunities
exist in the field of HIFU, including investment by Misonix in the equity
securities of the Company and certain agreements regarding development,
commercialization and production of HIFU products. Capitalized terms not
otherwise defined herein have the meanings ascribed to them in Article IX.
TERMS AND CONDITIONS
In consideration of the mutual covenants, agreements, representations, and
warranties contained in this Agreement and intending to be legally bound, the
Company and Misonix agree as follows:
ARTICLE I.
PURCHASE OF CONVERTIBLE SERIES M PREFERRED STOCK
Section 1.1. Purchase and Sale. Subject to the terms and conditions of this
Agreement, Misonix agrees to purchase from the Company and the Company agrees to
sell, convey and deliver to Misonix Two Thousand Five Hundred (2,500) shares of
the 4% Convertible Series M Preferred Stock, without par value, of the Company
("Preferred Stock"), representing 20% of the issued and outstanding capital
stock (of all classes) of the Company, calculated on a fully diluted and
converted basis as provided in Schedule 1.1 hereof at a purchase price of One
Thousand Two Hundred Dollars ($1,200.00) per share, for an aggregate amount of
Three Million Dollars ($3,000,000.00) ("Purchase Price").
The Company agrees that all Preferred Stock issued to Misonix pursuant to
this Agreement shall be validly issued, fully paid, and nonassessable and all
Preferred Stock shall be issued to Misonix free and clear of all liens,
encumbrances, equitable rights of third parties, options, claims, pledges, and
other limitations on the ownership, voting, convertibility, or transferability
of the Preferred Stock, except as contemplated by this Agreement. The terms of
the Preferred Stock shall be as set forth in the Restated Certificate of
Incorporation of the Company, a copy of which is annexed hereto as Exhibit 1.1.
<PAGE>
Section 1.2. Subsequent Purchase and Sale of Additional Preferred Stock.
Subject to the terms and conditions of this Agreement, and so long as the
Company is not in default in any material respect of this Agreement (after the
Company has had a reasonable opportunity to cure such default following notice
from Misonix) or the agreements incident thereto, Misonix agrees to purchase
from the Company and the Company agrees to sell to Misonix Eight Hundred Ninety-
Three (893) additional shares (the "Additional Shares") of the Company's Series
M Preferred Stock at a purchase price of One Thousand Six Hundred Eighty Dollars
($1,680.00) per share, for an aggregate amount of One Million Five Hundred
Thousand Two Hundred Forty Dollars ($1,500,240.00) (the "Additional Purchase
Price"). The purchase and sale of the Additional Shares shall be completed
within thirty (30) days after Misonix has received written notice from the
Company certifying satisfaction of both of the following conditions: (a) the
Company has received a Pre-Market Approval from the United States Food and Drug
Administration with respect to use of the Company's Sonablate(TM) product for
Benign Prostatic Hyperplasia treatment in the United States; and (b) the Company
has publicly announced, with the concurrence of Misonix which shall not be
unreasonably withheld, that the "next generation" of the Company's Sonablate
200(TM) platform (SBX) has been developed to the point that it is ready for
manufacturing. The Company's representations and covenants in connection with
such sale shall be substantially as set forth in this Agreement, including
applicability of all conversion and anti-dilution provisions contained herein
and in the documents incident thereto, including applicability to the
description of these conversion terms.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
As a material inducement to Misonix to enter into and consummate the
transactions contemplated by this Agreement, the Company represents and warrants
to Misonix as follows:
Section 2.1. Organization, Good Standing and Qualification of the Company.
The Company is duly incorporated, validly existing, and in good standing under
the laws of the State of Delaware, without limitation on the duration of its
corporate existence, and has filed all reports that it is required to file with
the Secretary of State of the State of Delaware and all other governmental
authorities as required to maintain its corporate existence. The Company has all
requisite corporate power and authority to own, lease, and operate its
properties and to carry on its business as it is now conducted. The Company has
full corporate power and authority to enter into and perform its obligations
under this Agreement. The Company is duly qualified as a foreign corporation and
is in good standing in each state or jurisdiction where such qualification is
necessary because of the nature of the assets and properties it owns, leases, or
operates or because of the nature of the business it conducts, except to the
extent failure to be so qualified would not have a material adverse effect on
the Company. The Company is delivering to Misonix copies of its Restated
Certificate of Incorporation and Amended and Restated Bylaws at Closing
certified as true, complete and correct by the Secretary of the Company. The
Company is not in violation of its Restated Certificate of Incorporation or its
Amended and Restated Bylaws.
-2-
<PAGE>
Section 2.2. Capital Structure of the Company. The authorized
capitalization of the Company and the number of shares of each class or series
of the Company's capital stock which are issued and outstanding is set forth in
Section 2.2(a) of the Disclosure Schedule previously delivered by the Company to
Misonix (the "Disclosure Schedule"). All of the issued and outstanding shares of
Common Stock were duly and validly issued, are fully paid and nonassessable,
free of preemptive rights and were issued by the Company in compliance with all
applicable Laws. Any Preferred Stock, and any Common Stock issuable upon
conversion of the Preferred Stock, issued to Misonix pursuant to this Agreement
will, when issued, be duly and validly issued, fully paid and nonassessable, and
issued in compliance with all applicable Laws (assuming the accuracy of the
representations of Misonix in Article V), and will be free of any Liens other
than those created by or imposed upon the holders through no action of the
Company; provided, however, that those shares may be subject to restrictions on
transfer (a) under state and/or federal securities laws as set forth in this
Agreement and as may be required by future changes in those laws, or (b) under
the Shareholders' Agreement. The owners of record of the outstanding Common
Stock and the owners known to the Company of options or warrants to acquire
Common Stock including the number of shares owned or subject to option or to a
warrant, are set forth in Schedule 2.2(b) of the Disclosure Schedule. The
Company has no treasury stock. Except as set forth in Section 2.2(c) of the
Disclosure Schedule, the Company has no outstanding subscription right, options,
warrants, conversion rights, agreements, or commitments for the purchase,
issuance, transfer, or sale of any security of the Company, and except as set
forth in this Agreement or in the Shareholders' Agreement, the Company knows of
no restrictive stock transfer, voting trust, or other agreement or commitment
relating to the transfer or voting of any equity security of the Company. The
Company has granted no registration rights or preemptive rights with respect to
any of the Company's securities, except as contemplated by this Agreement and
the Shareholders' Agreement. There are no stock appreciation rights, phantom
stock, or similar rights in existence with respect to the Company.
Section 2.3. Title to Shares. The Company has full right, power and
authority to sell, transfer and deliver the Preferred Stock and Additional
Shares, and upon delivery of the certificates therefor as contemplated in this
Agreement, the Company will transfer to Misonix valid and marketable title to
such shares, including all voting and other rights to such shares, free and
clear of all pledges, liens, security interests, options, rights of any third
party, or other encumbrances except for any which are the result of any act of
Misonix.
Section 2.4. Compliance with Securities Laws. Assuming the accuracy of the
representations of Misonix in Article V, the transactions contemplated by this
Agreement, including but not limited to the issuance of the Preferred Stock and
the issuance of Conversion Stock, are exempt from the registration and
prospectus delivery requirements of the Securities Act and any securities
registration or prospectus delivery requirements under applicable state or other
securities laws, and the Company has complied with and shall comply with all
requirements of the exemptions from registration and prospectus delivery under
federal, state, or other securities laws upon which the Company is relying.
-3-
<PAGE>
Section 2.5. Authority. The execution and delivery of this Agreement and
each of the other agreements and documents executed and delivered by the Company
in connection with this Agreement (the "Investment Documents") and the
consummation of the transactions contemplated by the Investment Documents have
been duly authorized by all necessary corporate action of the Board of Directors
and the shareholders of the Company.
Section 2.6. Validity; No Violation.
(a) The Investment Documents represent or will represent valid and binding
obligations of the Company enforceable against the Company in accordance with
their respective terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting enforcement of creditors' rights generally, and (ii) as limited by
laws relating to the availability of specific performance, injunctive relief, or
other equitable remedies.
(b) Except as set forth in Section 2.6 of the Disclosure Schedule, neither
the execution and delivery of each of the Investment Documents by the Company
nor the consummation by the Company of the transactions contemplated by any of
the Investment Documents will:
(i) conflict with or result in a breach of any provision of the
Amended and Restated Certificate of Incorporation or the Amended and
Restated Bylaws of the Company;
(ii) constitute a default (or event which, with notice or lapse of
time, or both, would constitute a default), or trigger any right of
termination, cancellation, or acceleration under any of the terms,
conditions, or provisions of any note, lien, bond, mortgage, indenture,
license, lease, agreement, or other instrument or obligation to which the
Company is a party, or by which the Company or any of its properties or
assets is bound;
(iii) violate any Law, judgment, order, writ, injunction, or decree of
any court, arbitrator, administrative agency, or governmental body
applicable to the Company or any of its properties, assets, or outstanding
debt or equity securities; or
(iv) to the knowledge of the Company, cause, or give any person
grounds to cause (with or without notice, the passage of time, or both),
the maturity of any material liability or obligation of the Company to be
accelerated or increased.
(c) Other than the filing of the Restated Certificate of Incorporation
or as may be set forth on Section 2.6(c) of the Disclosure Schedules, no consent
or approval by, and no filing or registration with, any governmental authority
or any other person or entity is required in connection with the execution and
delivery of each of the Investment Documents or the consummation by the Company
of the transactions contemplated by the Investment Documents, including but not
limited to the issuance of Preferred Stock or the Conversion Stock by the
Company to each of the Investors.
-4-
<PAGE>
Section 2.7. Financial Statements. Audited balance sheets of the Company
and related statements of income and cash flows, together with the auditors'
report thereon as at June 30, 1997 and June 30, 1998 (collectively, the "Audited
Financial Statements") and internally prepared unaudited balance sheets and
income statements of the Company for the six month period ended December 31,
1998 (the "Interim Financial Statements") have been delivered to Misonix and are
set forth in Section 2.7 of the Disclosure Schedule. The Audited Financial
Statements and the Interim Financial Statements (collectively, the "Financial
Statements"), including any related schedules and notes, are true, correct, and
complete in all material respects, have been prepared from the books and records
of the Company in accordance with GAAP that were, except as otherwise stated in
the Financial Statements, consistently followed throughout the periods involved,
and present fairly the financial position and results of operations of the
Company on the dates and for the periods indicated (subject to the lack of
footnote disclosure and changes resulting from normal year-end adjustments).
Without limiting the generality of the foregoing, the balance sheets included in
the Financial Statements disclose all of the material debts, liabilities, and
monetary obligations of any nature (whether absolute, accrued, or contingent and
whether due or to become due) of the Company as of their respective dates that,
in accordance with GAAP, are required to be disclosed in the balance sheets or
notes thereto.
Section 2.8. No Undisclosed or Contingent Liabilities. Except as and to the
extent set forth in Section 2.8 of the Disclosure Schedule, the Company does not
have reason to know of, after due inquiry, any liabilities or obligations of any
material nature (whether absolute, accrued, contingent or otherwise and whether
due or to become due) which are not fully reflected or reserved against in the
Interim Financial Statements, except for liabilities and obligations incurred in
the ordinary course of business and consistent with past practice since the date
thereof or for liabilities and obligations that in accordance with GAAP are not
required to be disclosed in the Interim Financial Statements. In the reasonable
judgment of the Company: (a) the reserves for such liabilities and obligations
reflected in the Interim Financial Statements are adequate, appropriate and
reasonable; and (b) there is no basis for the assertion against the Company of
any liability or obligation of any nature whatsoever not fully reflected or
reserved against in the Interim Financial Statements or incurred in the ordinary
course of business and consistent with past practice since the date thereof.
Section 2.9. No Material Adverse Change. Since the date of the Interim
Financial Statements, there has been no material adverse change in the assets,
properties, business, opera tions or condition (financial or otherwise) of the
Company, nor, to the Company's knowledge, has there been any event which
reasonably can be expected to have a materially adverse effect on any of the
foregoing.
Section 2.10. Tax Matters.
(a) "Tax" or "Taxes" means any and all taxes, charges, fees, levies, duties
or other assessments whether federal, state, local or foreign, based upon or
measured by income, capital, net worth or gain and any other tax including
without limitation, recapture, gross receipts, profits, sales, use, occupation,
use and occupancy, value added, ad valorem, customers, transfer, franchise,
shares,
-5-
<PAGE>
withholding, payroll, employment, excise, or property taxes with respect
to the Company, together with any interest, fines, penalties and additions to
tax imposed with respect thereto.
(b) The Company is not presently under, nor has it received notice of, nor
to its knowledge is it under, any investigation or audit by the Internal Revenue
Service or any foreign or state agency concerning any fiscal year or period
ended prior to the date hereof.
(c) As of the date hereof, the Company has timely filed, (i) all Tax
returns, other than Tax returns, the Tax liability with respect to which, would
not have a material adverse effect on the Company taken as a whole, which are
required to be filed on or prior to the date hereof, taking into account any
extensions of the filing deadlines which have been validly granted to the
Company; and (ii) all such returns are true and correct in all material
respects.
(d) The Company has paid all Taxes of the Company that have become or are
due with respect to any period ended on or prior to the date hereof, and has
established an adequate reserve therefor on the Interim Financial Statements for
those Taxes not yet due and payable, except for any Taxes which do not have a
material and adverse affect on the Company taken as a whole.
(e) The Company has not at any time consented under Section 336(e) or
Section 341(f)(1) of the Internal Revenue Code of 1986, as amended (the "Code")
to have the provisions of Section 336(e) or Section 341(f)(2) of the Code,
respectively, apply to any sale of its stock.
(f) All Taxes required to be withheld on or prior to the date hereof from
employees for income Taxes, social security Taxes, unemployment Taxes and other
similar withholding taxes have been properly withheld and, if required on or
prior to the date hereof, have been deposited with the appropriate governmental
agency.
Section 2.11. Intellectual Property.
(a) Section 2.11(a) of the Disclosure Schedule contain a list and
description of:
(i) all patents, copyrights, trademarks, service marks, and trade
names, and the registrations and applications therefor, owned by or
licensed to the Company which the Company believes to be material to its
operations; and
(ii) all licenses and license agreements related to the Intellectual
Property to which the Company is a party and which the Company believes to
be material to its operations.
(b) Except as set forth in Section 2.11(b) of the Disclosure Schedule and
except to the extent not material to the Company's operations:
(i) the Company owns or has the right to use all of the Intellectual
Property and registrations and applications therefor;
-6-
<PAGE>
(ii) all Intellectual Property and applications and registrations
therefor are duly authorized and issued, valid, and have not been canceled,
amended, or modified, and the Company is not aware of any facts that would
invalidate or render any of them unenforceable;
(iii) all personnel who have participated in the development of
proprietary works for the Company either have been party to a work for-hire
relationship or have assigned or licensed to the Company all title in or
right to use such proprietary works;
(iv) no Person has given notice to the Company that such Person
asserts any royalty claim or other claim whatsoever, including but not
limited to claims of ownership, direct or indirect, in respect of the
Intellectual Property, in respect of which or by reason of which the
Company is indebted to any person or his or her heirs or assigns; and
(v) the Company has not received any notice alleging that it is
infringing upon, likely to infringe upon, or otherwise acting adversely to
any known right or claimed right of any person under or with respect to the
Intellectual Property.
(vi) The Company, to its knowledge, does not infringe upon or
unlawfully use any patent, trademark, tradename, service mark, copyright or
trade secret owned or claimed by another.
(vii) The Company's license agreements pertaining to the use of
Intellectual Property are valid and in full force and effect and binding
upon the parties thereto and the Company is not in default under any of
such agreements.
Section 2.12. Litigation. Except as set forth in Section 2.12 of the
Disclosure Schedule:
(a) there are no actions, suits, legal or administrative proceedings,
investigations, or claims pending or, to the knowledge of the Company,
threatened against the Company involving or affecting any of its assets or
properties, whether at law or in equity, whether civil or criminal in nature or
whether before or by a federal, state, municipal, or other governmental
department, commission, board, bureau, agency, or instrumentality, domestic or
foreign;
(b) neither the Company nor any of its assets is subject to any judicial or
administrative order, judgment, injunction, restriction, or decree;
(c) the Company has not received notice of any violation or investigation
of any violation of any Laws;
(d) the designation in Section 2.12(d) of the Disclosure Schedule of
whether a claim is insured or uninsured is true and correct; and
-7-
<PAGE>
(e) the Company has no action, suit, or proceeding currently pending
against another party in which the Company is the plaintiff, nor does the
Company currently intend to initiate such an action, suit, or proceeding.
Section 2.13. Compliance: Governmental Authorization. Except as set forth
in Section 2.13 of the Disclosure Schedule, the Company:
(a) has complied in all material respects with, is not in default or
violation in any material respect under, any and all Laws that apply to the
Company and its operations, properties and business;
(b) has not received any or been made the subject of any claims, charges,
or investigations, or threats of claims, charges, or investigations alleging the
failure of the Company to comply with any Laws;
(c) has duly filed all reports and returns required to be filed by it with
governmental authorities and has all Permits necessary for conducting its
business and those Permits are in full force and effect, no violations have been
recorded in respect of those Permits, and no proceeding is pending or threatened
to revoke or limit any of those Permits; and
(d) has complied with all orders, writs, injunctions, and decrees
applicable to the Company or to any of the Company's operations, assets, or
properties.
Section 2.14. Insurance. The assets, properties and operations of the
Company are insured under various policies of general liability and other forms
of insurance as set forth on Section 2.14 of the Disclosure Schedule. All such
policies are in full force and effect in accordance with their terms, no notice
of cancellation has been received, and there is no existing default by the
Company or, to the Company's knowledge, event which, with the giving of notice
or lapse of time or both, would constitute a default by the Company thereunder.
All premiums to date have been paid in full.
Section 2.15. Labor Matters. No employee of the Company is covered by any
collective bargaining agreement. The Company has complied, and is currently in
compliance, in all material respects with applicable Laws relating to the
employment of labor, including without limitation those relating to wages,
hours, unfair labor practices, discrimination and payment of social security and
similar taxes.
Section 2.16. Company Benefit Plans and Arrangements. A true and complete
list and copy of all employee benefit plans (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974 ("ERISA")), and any trust or
other funding agency created thereunder maintained or contributed to by the
Company for the benefit of employees of the Company and all other deferred
compensation or fringe benefit plans, arrangements or practices of the Company,
including without limitation, severance pay, stock options and similar plans or
arrangements and other benefit obligations of the Company, whether oral or
written, to any of its employees (the "Company Benefit
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<PAGE>
Plans"), is set forth in Section 2.16 of the Disclosure Statement. The Company
Benefit Plans are the only Company Benefit Plans maintained by or contributed to
by the Company for the benefit of its shareholders, officers, directors,
employees or former employees which are related to the assets of the Company or
the business. Each such Company Benefit Plan, which is subject to ERISA and the
Code, is and always has been in compliance, in all material respects, with the
provisions of ERISA and the Code, and they, and all other such Company Benefit
Plans are in compliance with all other Laws applicable thereto. The Company
maintains no plan or program that provides post-retirement medical or death
benefits or other post-retirement health or welfare benefits. The Company has
never contributed to nor been obligated to contribute to any multi-employer plan
as said term is defined in Section 4001(a)(3) of ERISA.
Section 2.17. Environmental Laws. The Company and all its properties and
operations are and have been in compliance, in all material respects, with, and
are not and have not been in material violation of, any Federal, state, or local
statutes, laws, orders, ordinances, rules, regulations, policies or other
requirements of any governmental agency or authority regulating, relating to or
imposing liability or standards of conduct concerning any Hazardous Materials
(as defined below), including without limitation, the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), the Superfund Amendment and Reauthorization Act of 1986 ("SARA"), the
Federal Water Pollution Control Act, and any state counterparts thereof (all of
the foregoing being herein referred to herein as "Environmental Laws"). As used
herein the term "Hazardous Materials" means any hazardous, toxic or dangerous
waste, substance or material defined as such in (or for purposes of) CERCLA,
SARA, RCRA or any other Environmental Laws as now in effect. The Company has not
engaged in or permitted the generation, use, treatment, storage, discharge or
disposal of any Hazardous Materials and has not caused or permitted a release of
Hazardous Materials onto, at, in, or under the real property located at 3940
Pendleton Way, Indianapolis, Indiana in violation of any Environmental Laws. The
Company has never received notice of any violation or noncompliance with any
Environmental Law.
Section 2.18. Transactions with Affiliates. Except as set forth in Section
2.18 of the Disclosure Schedule, no shareholder, director, officer or employee
of the Company, or any member of his or her immediate family or any other of
its, his or her affiliates, owns or has a 5% or more ownership interest in any
corporation or other entity that is or was during the last three years a party
to any material contract, agreement or understanding, business arrangement or
relationship with the Company.
Section 2.19. Contracts and Other Agreements. Section 2.19 of the
Disclosure Schedule sets forth all of the following contracts and other
agreements to which the Company is a party or by or to which assets or
properties are bound or subject: (i) contracts and other agreements with any
current or former officer, director, employee, consultant, agent or other
representative requiring payments of more than $50,000 in any one year; (ii)
contracts and other agreements relating to the licensing, protection or use of
intellectual property; (iii) contracts and other agreements for the purchase or
sale of materials, supplies, equipment, merchandise or services calling for a
purchase
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<PAGE>
price in any one year of more than $25,000 in any one case or in the aggregate
for executory contracts with a single entity; (iv) contracts and other
agreements for the sale of any of its assets or properties other than in the
ordinary course of business or for the grant to any person of any preferential
rights to purchase any of its assets or properties; (v) contracts and other
agreements requiring the payment to any person of an override or similar
commission or fee (other than sales agreements entered into in the ordinary
course of business); (vi) contracts and other agreements relating to the
borrowing of money; or (vii) any other contract or agreement calling for the
payment in any one year of more than $50,000, whether or not made in the
ordinary course of business. There have been made available to Misonix true and
complete copies of all of the contracts and other agreements set forth in
Section 2.19 of the Disclosure Schedule or in any other section of the
Disclosure Schedule. Except as set forth in Schedule 2.19 of the Disclosure
Schedule, all of such contracts and other agreements are valid and in full force
and effect and binding upon the parties thereto in accordance with their terms,
and the Company has paid in full or accrued all amounts due by it thereunder and
has satisfied in full or provided for all of its liabilities and obligations
thereunder, and is not in default under any of them, nor, to the knowledge of
the Company, is any other party to any such contract or other agreement in
default thereunder or does any condition exist that with notice or lapse of time
or both would constitute a default thereunder. Except as separately identified
in Section 2.19 of the Disclosure Schedule, the Company is not a party to or
bound by any contract or other agreement that either individually or in the
aggregate materially adversely affects the assets, properties, business,
operations or condition (financial or otherwise) of the Company, or that was
entered into other than in the ordinary course of business.
Section 2.20. Full Disclosure. All documents, instruments and other
materials delivered or to be delivered by or on behalf of the Company in
connection with this Agreement and the transactions contemplated hereby are true
and complete in all material respects. The information furnished by or on behalf
of the Company to Misonix in connection with this Agreement and the transactions
contemplated hereby does not and shall not contain any untrue statement of
material fact and does not and shall not omit to state any material fact
required to be stated therein or necessary to make the statements contained
therein not false or misleading. There is no fact which the Company has not
disclosed which materially adversely affects or, shall materially adversely
affect, the assets, properties, operations, business, financial condition or
prospects of the Company.
ARTICLE III.
COVENANTS OF THE COMPANY
Unless otherwise agreed in writing by the Company and Misonix, the Company
shall comply with each of the following covenants:
Section 3.1. Reservation of Stock. The Company shall at all times reserve
and keep available out of its authorized but unissued shares of (i) Series M
Preferred Stock, solely for the purpose of allowing Misonix to purchase the
Additional Shares, on the terms and subject to the conditions set forth in this
Agreement, that number of shares of Series M Preferred Stock issuable upon such
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purchase of the Additional Shares; and (ii) Series M Common Stock, solely for
the purpose of issuance upon the conversion of Series M Preferred Stock, that
number of shares of Series M Common Stock issuable upon conversion of all
outstanding Series M Preferred Stock (subject to adjustment as provided by the
terms thereof).
Section 3.2. Board of Directors. Effective as of the Closing Date, Michael
A. McManus, Jr. shall be elected as a fully voting member of the Board of
Directors of the Company (the "Board of Directors"), as the representative of
the Series M Preferred Stock and Series M Common Stock. If Michael A. McManus,
Jr. ceases to be a director for any reason whatsoever, Misonix shall be entitled
to nominate a successor, and the Company agrees that in submitting to the
Company's shareholders or Board of Directors the name of any Misonix nominee for
election as a director or in filling interim vacancies relating to any nominee,
the Company will use its best efforts to cause the person so nominated by
Misonix to be elected as director of the Company. Such Misonix nominee shall be
permitted, at his option, to serve on all committees of the Board, including the
Executive Committee.
Section 3.3. Labeco Waiver. After the Closing, the Company shall attempt,
in good faith, to obtain, and deliver to Misonix, a waiver signed by Laboratory
Equipment Corp. ("Labeco") pursuant to which Labeco shall agree to waive its
rights under that certain Manufacturing OEM Supply and Services Agreement
between Labeco and the Company dated July 31, 1996, to the extent that such
rights pertain to the manufacture of the Company's SBX platform.
Section 3.4. Use of Proceeds. The Company agrees that the net proceeds from
the sale of the Preferred Stock shall be used solely for the purposes described
in Exhibit 3.4 attached hereto and substantially in accordance with the dollar
amounts set forth in said Exhibit.
ARTICLE IV.
MUTUAL COVENANTS
The Company and Misonix mutually acknowledge and agree that
contemporaneously with the execution and delivery of this Agreement they will
enter into the following agreements:
Section 4.1. SBX Engineering Development Agreement. The Company and Misonix
will enter into an SBX Engineering Development Agreement pursuant to which the
Company shall agree to obtain its requirements of engineering and testing
development services relating to the Company's SBX platform from Misonix.
Section 4.2. Research and Development Agreement. The Company and Misonix
will enter into a Research and Development Agreement pursuant to which Misonix
will receive the first option to license the Company's HIFU technology for the
breast, liver and kidney applications. The Research and Development Agreement
further provides that if Misonix furnishes additional funding for the
development of any such applications of the HIFU technology, then the Company
and Misonix will enter into an agreement whereby Misonix will receive certain
rights to such technology to be mutually
-11-
<PAGE>
determined by the parties, contingent upon payment of mutually agreeable
royalties and other fees within the then currently accepted terms for such an
agreement.
ARTICLE V.
REPRESENTATIONS AND COVENANTS OF MISONIX
Section 5.1. Purchase for Investment. Misonix represents and warrants that
it is acquiring the Preferred Stock, including any Additional Shares, and any
Conversion Stock pursuant to the terms and conditions of this Agreement for
investment only, for its own account, and not with a present view to the
distribution or resale thereof. Misonix understands that the Preferred Stock and
any Conversion Stock may not be sold or transferred unless they are subsequently
registered under the Securities Act and any applicable state or other securities
laws, or unless exemptions from registration under such laws are available.
Misonix understands that no public market now exists for any of the Company's
securities and that the Company has not given any assurance that a public market
will ever exist for its securities. Misonix represents and warrants that: (i) it
is an "accredited investor" as that term is defined in Regulation D of the
Securities and Exchange Commission (Rule 501(a)) and all applicable state
securities laws; (ii) the Company has given Misonix the opportunity to ask
questions and receive answers concerning the Company and the Preferred Stock;
(iii) the Company has made available to Misonix the opportunity to conduct such
investigations and reviews as Misonix has requested to conduct and all of those
investigations and reviews have been completed; and (iv) the Company did not
offer the Preferred Stock to Misonix by any form of general solicitation or
general advertising, including, but not limited to, any advertisement, article,
notice, or similar media or broadcast over television or radio, or any seminar
or meeting whose attendees were invited by any general solicitation or general
advertising.
Section 5.2. Transfer Legends and Restrictions. Misonix hereby acknowledges
that the Preferred Stock and any Conversion Stock issued to it shall be
imprinted with a conspicuous legend in substantially the following form (unless
otherwise permitted under this Agreement):
THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE OR OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED,
SOLD, TRANSFERRED, OR ASSIGNED EXCEPT (i) PURSUANT TO REGISTRATIONS UNDER
APPLICABLE SECURITIES LAWS, OR (ii) IF, IN THE OPINION OF COUNSEL
REASONABLY ACCEPTABLE TO THE COMPANY, THE PROPOSED TRANSFER MAY BE EFFECTED
IN COMPLIANCE WITH APPLICABLE SECURITIES LAWS WITHOUT REGISTRATION.
Upon the request of a holder of any Preferred Stock or any Conversion
Stock, accompanied by an opinion of Ice Miller Donadio & Ryan or other counsel
selected by the holder, which opinion and other counsel are reasonably
satisfactory to the Company, to the effect that a transfer by the holder will
not violate the Securities Act or applicable state or other securities laws, the
Company
-12-
<PAGE>
shall remove the legend from the Preferred Stock or any Conversion Stock held by
the holder or shall issue to the holder a new certificate for the Preferred
Stock or Conversion Stock without the transfer legend.
Section 5.3. Authority; Validity; Organization. Misonix represents and
warrants to the Company that:
(a) the execution and delivery of each of the Investment Documents to which
Misonix is a party and the consummation by Misonix of the transactions
contemplated by the Investment Documents have been duly authorized by all
necessary action of the Board of Directors of Misonix;
(b) the Investment Documents executed and delivered by Misonix represent
valid and binding obligations of Misonix enforceable against Misonix in
accordance with their respective terms except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, and (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies;
(c) the execution and delivery of each of the Investment Documents to which
Misonix is a party and the consummation by Misonix of the transactions
contemplated by such Investment Documents will not conflict with or violate any
provision of the Articles of Incorporation or Bylaws of Misonix or any other
agreement to which Misonix is a party or violate any law, regulation, judgment,
order, writ, injunction, or decree of any court, administrative agency, or
governmental body applicable to Misonix or the properties or assets of Misonix;
and
(d) Misonix is duly organized, validly existing, and in good standing under
the laws of the State of New York and has filed all reports that it is required
to file with the Secretary of State of New York and all other governmental
authorities as required to maintain the corporate status and existence of
Misonix.
ARTICLE VI.
CLOSING AND DELIVERIES
Section 6.1. Closing. The closing of the transactions contemplated by this
Agreement and the other Investment Documents ("Closing") is being held
simultaneously with the execution and delivery of this Agreement in the offices
of Ice Miller Donadio & Ryan, counsel to the Company, on May 3, 1999 (the
"Closing Date"). All of the agreements, documents, certificates, and instruments
delivered by each party at the Closing are hereby deemed and acknowledged by the
parties to have been delivered simultaneously.
Section 6.2. Items Delivered by the Company at Closing. The Company hereby
delivers, or causes to be delivered, to Misonix the following:
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<PAGE>
(a) certificate evidencing the Preferred Stock;
(b) an opinion of Ice Miller Donadio & Ryan, counsel of the Company, in the
form attached hereto as Exhibit 6.2;
(c) a Compliance Certificate of the Company signed by the Company's
president and chief executive officer;
(d) Restated Certificate of Incorporation of the Company, as described in
Section 1.1, certified as true, complete and correct by the Secretary of the
Company;
(e) Amended and Restated By-laws of the Company, as provided in Section
2.1, certified as true, complete and correct by the Secretary of the Company;
(f) SBX Engineering Development Agreement, as provided in Section 4.1;
(g) Research and Development Agreement, as provided in Section 4.2; and
(h) Second Amended and Restated Shareholders' Agreement signed by the
Company and the Company's other shareholders.
Section 6.3. Items Delivered by Misonix at Closing. Misonix hereby
delivers, or causes to be delivered, to the Company the following:
(a) the Purchase Price by wire transfer of funds to the account designated
in writing by the Company;
(b) an opinion letter of Hartman & Craven LLP, counsel to Misonix, in the
form of Exhibit 6.3;
(c) a Compliance Certificate of Misonix signed by Misonix's president and
chief executive officer;
(d) SBX Engineering Development Agreement;
(e) Research and Development Agreement; and
(f) Second Amended and Restated Shareholder's Agreement, signed by Misonix.
Section 6.4. Other Documents. The parties to this Agreement shall in good
faith execute and deliver such other and further instruments, assignments, or
documents and take such other actions as may be reasonably requested from time
to time by the other party hereto as may be necessary or advisable to carry out
the transactions contemplated by this Agreement.
-14-
<PAGE>
ARTICLE VII.
INDEMNIFICATION
Section 7.1. Indemnification Obligation of the Company. From and after the
date hereof and until the end of the statute of limitations applicable to such
claim, the Company hereby agrees to indemnify, defend and hold harmless Misonix
and its successors and assigns (a "Misonix Indemnified Party") from and against
and in respect of any and all actions, suits, claims, damages, losses,
deficiencies, liabilities, costs and expenses (including reasonable legal fees
and expenses) incurred or suffered by any Misonix Indemnified Party that result
from, relate to or arise out of:
(i) any and all actions, suits, claims, or legal, administrative,
arbitration, governmental or other proceedings or investigations against
any Misonix Indemnified Party that relate to the Company in which the
principal event giving rise thereto occurred prior to the date hereof or
which result from or arise out of any action or inaction prior to the date
hereof of the Company or any director, officer, employee, agent, or
representative of the Company; and
(ii) any misrepresentation, breach of warranty or nonfulfillment of
any agreement or covenant on the part of the Company under this Agreement.
Section 7.2. Indemnification Obligation of Misonix. From and after the date
hereof and until the end of the statute of limitations applicable to such claim,
Misonix hereby agrees to indemnify, defend and hold harmless the Company and its
successors and assigns (a "Company Indemnified Party") from and against and in
respect of any and all actions, suits, claims, damages, losses, deficiencies,
costs and expenses (including reasonable legal fees and expenses) incurred or
suffered by any Company Indemnified Party that result from, relate to or arise
out of, any inaccuracy or breach of any of the following representations: (i)
the representations set forth in Section 5.1, excluding those contained in
subsections (ii), (iii) and (iv) thereof; and (ii) the representations contained
in Sections 5.2 and 5.3.
Section 7.3. Method of Asserting Claims, Etc. In case any claim, demand or
assessment is asserted or suit, action or proceeding (collectively a "Claim")
commenced against a Misonix or Company Indemnified Party (collectively the
"Indemnified Party") and it notifies the Company or Misonix, as the case may be
(collectively the "Indemnitor") of the commencement thereof, if the Indemnitor
acknowledges its indemnification obligations therefor hereunder, then, the
Indemnitor shall be entitled to participate therein, and, to the extent that it
may wish, to assume the defense, conduct or settlement thereof, with counsel
satisfactory to the Indemnified Party, whose consent to the selection of counsel
shall not be unreasonably withheld. After notice from the Indemnitor to the
Indemnified Party of its election so to assume the defense, conduct or
settlement thereof, the Indemnitor shall not be liable to the Indemnified Party
for any legal or other expenses subsequently incurred by the Indemnified Party
in connection with the defense, conduct or settlement thereof;
-15-
<PAGE>
provided, however, that if the Indemnified Party has any separate defenses from
those of the Indemnitor, the Indemnified Party shall have the right to be
represented by its own counsel at the Indemnitor's expense. The Indemnified
Party shall have the right in any event to participate in any such defense with
its own counsel at its own expense. The Indemnified Party will cooperate with
the Indemnitor in connection with any such Claim and make personnel, books and
records relevant to the Claim available to the Indemnitor at the Indemnitor's
expense. In the event that the Indemnitor fails timely to defend, contest or
otherwise protect against any such Claim, the Indemnified Party shall have the
right to defend, contest or otherwise protect against the same and make any
compromise or settlement thereof and recover the entire cost thereof from the
Indemnitor, including, without limitation, reasonable attorneys' fees,
disbursements and all amounts paid as a result of such Claim or compromise or
settlement thereof.
Section 7.4. Basket; Cap. Neither Indemnitor shall be liable to the
Indemnified Party for any Claim (except if the Claim is based on a breach of the
representations set forth in Sections 2.3 or 5.1, excluding those contained in
subsections (ii), (iii) and (iv) of Section 5.1), unless and until the total of
all damages or losses incurred with respect to all such Claims exceeds $25,000.
Notwithstanding anything herein to the contrary, neither Indemnitor shall be
liable to the Indemnified Party under this Agreement for more than the aggregate
Purchase Price (together with the Additional Purchase Price if paid as
contemplated under this Agreement), less an offset equal to the aggregate of any
cash dividends paid on the Preferred Stock and the Additional Shares.
Section 7.5. Expiration of Representations, Warranties and Indemnities.
Notwithstanding anything in this Agreement to the contrary, the representations
and warranties in Section 2.10 shall survive the Closing and expire upon the
expiration of the statute of limitations with respect to the matters underlying
such representations and warranties, and the Company shall have no
indemnification or other obligation with respect to any such Claim based on
those representations or warranties unless written notice thereof is given prior
to the expiration of the applicable statute of limitations. The representations
and warranties in Section 2.3 shall survive the Closing indefinitely. All other
representations, warranties, covenants and agreements shall survive the Closing
and expire on the third anniversary of the Closing Date and the Indemnitor shall
have no indemnification or other obligation with respect to any Claim based on a
breach of any of those representations, warranties, covenants or agreements
unless written notice of a Claim therefor is received prior to the expiration of
the third anniversary of the Closing.
ARTICLE VIII.
MISCELLANEOUS
Section 8.1. Amendment and Certain Waivers. This Agreement may be amended
or modified only by a written agreement executed by the Company and Misonix.
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<PAGE>
Section 8.2. Benefit of Parties; Assignability. All of the terms and
conditions of this Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and assigns.
Section 8.3. Confidentiality. Misonix shall use all best efforts to keep
confidential all information provided to it under the terms and conditions of
this Agreement and which is not in the public domain. No party to this Agreement
shall make any public announcement of the transactions contemplated by this
Agreement unless the form and substance of the announcement is mutually agreed
upon by all parties, which agreement shall not be unreasonably withheld or
delayed, or unless public disclosure is required by law.
Section 8.4. Cooperation. The parties agree that after the Closing they
will from time to time, upon the request of any other party and without further
consideration, execute, acknowledge, and deliver in proper form any further
instruments and take such other action as any other party may reasonably require
to carry out effectively the transactions contemplated by the Investment
Documents.
Section 8.5. Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 8.6. Entire Agreement. This Agreement, including any Exhibits and
the Disclosure Schedule, and the other Investment Documents contain the entire
understanding of the parties with respect to the subject matter in the
Investment Documents. There are no representations, promises, warranties,
covenants, or undertakings other than those expressly set forth or provided for
in each of the Investment Documents. This Agreement and the other Investment
Documents supersede all prior agreements and understandings between the parties
with respect to the transactions contemplated by this Agreement and the other
Investment Documents.
Section 8.7. Governing Law and Choice of Forum. All questions concerning
the relative rights of the Company and its shareholders shall be governed by the
laws of the State of Delaware.
Section 8.8. Interpretation. The terms and conditions of this Agreement
represent the results of bargaining and negotiations among the parties, each of
which has been represented by counsel of its own selection, and none of which
has acted under duress or compulsion, whether legal, economic or otherwise, and
represent the results of a combined draftsmanship effort. Consequently, the
terms and conditions hereof shall be interpreted and construed in accordance
with their usual and customary meanings and the parties hereby expressly waive
and disclaim in connection with the interpretation and construction hereof any
rule of law or procedures requiring otherwise, specifically including but not
limited to any rule of law to the effect that ambiguous or conflicting terms or
conditions contained herein shall be interpreted or construed against the party
whose counsel prepared this Agreement or any earlier draft hereof.
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<PAGE>
Section 8.9. Disclosure. Any material set forth in this Agreement or any of
the Disclosure Schedule sections shall be deemed to be repeated and set forth in
any other appropriate place in this Agreement or the Disclosure Schedule without
the necessity of such material being set forth in each such place.
Section 8.10. Notices. All notices, requests, demands, or other
communications that are required or may be given pursuant to the terms of this
Agreement shall be in writing and delivery shall be deemed sufficient in all
respects and to have been duly given on the date of service if delivered
personally or by facsimile transmission if receipt is confirmed by the party
giving notice or on the third day after mailing if mailed by first-class mail,
return receipt requested, postage prepaid, and properly addressed as follows:
If to the Company, to: Focus Surgery, Inc.
3940 Pendleton Way
Indianapolis, Indiana 46226
Attention: David P. Quigley
Facsimile: (317)541 - 1581
Copy to: Ice Miller Donadio & Ryan
One American Square, Box 82001
Indianapolis, Indiana 46282-0002
Attention: Richard J. Thrapp
Facsimile: (317)236-2219
If to Misonix to: Misonix, Inc.
1938 New Highway
Farmingdale, New York 11735
Attention: Michael A. McManus, Jr.
Facsimile: (516)694-9412
Copy to: Hartman & Craven LLP
460 Park Avenue
New York, New York 10022
Attention: Edward I. Tishelman
Facsimile: (212)688-2870
or to any other address as may be specified in writing by any of the above.
Section 8.11. Table of Contents and Captions. The Table of Contents and
captions of the Articles and Sections of this Agreement are solely for
convenient reference and shall not be deemed to affect the meaning or
interpretation of any provision of this Agreement.
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<PAGE>
Section 8.12. Validity of Provisions. Whenever possible, each provision of
this Agreement shall be interpreted in such a manner as to be effective and
valid under applicable law. Should any part of this Agreement for any reason be
declared by any court of competent jurisdiction to be invalid, that decision
shall not affect the validity of the remaining portion, which shall continue in
full force and effect as if this Agreement had been executed with the invalid
portion eliminated, it being the intent of the parties that they would have
executed the remaining portion of the Agreement without including any part or
portion that may for any reason be declared invalid.
Section 8.13. Waiver of Breach. Neither any waiver of any breach of, nor
any failure to enforce any term or condition of, this Agreement shall operate as
a waiver of any other breach of any term or condition, nor constitute nor be
deemed a waiver or release of any other rights, in law or at equity, or claims
that any party may have against any other party for anything arising out of,
connected with, or based upon this Agreement. No waiver shall be enforceable
against any party hereto unless set forth in a written instrument or agreement
signed by that party. No waiver shall be deemed to occur as a result of the
failure of any party to enforce any term or condition of this Agreement.
Section 8.14. Brokers' and Finders' Fees. Each of the Company and Misonix
represent that it has not used or retained any broker or finder in connection
with the transactions contemplated hereby, other than McDonald & Company
Securities, Inc., the fees of which shall be paid by the Company.
ARTICLE IX.
DEFINITIONS
As used herein, the following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Affiliate" or "Affiliates" means any Person that directly or
indirectly controls, or is under common control with, or is controlled by
another Person or a subsidiary of another Person. As used in this definition,
"control" (including its correlative meanings "controlled by" and "under common
control with") means possession, directly or indirectly, of power to direct or
cause the direction of management or policies of any other Person (whether
through ownership of securities or partnership or other ownership interest, by
contract or otherwise); provided, however, any Person that owns, directly or
indirectly, any general partnership interest in another Person that is a general
partnership or 50% or more of the securities having ordinary voting power for
the election of directors, managers, or other governing body of any other Person
shall be deemed to control the other Person.
"Agreement" means this Investment Agreement as from time to time amended in
accordance with the provisions hereof
"Audited Financial Statements" has the meaning specified in Section 2.7.
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"Board of Directors" has the meaning specified in Section 3.2.
"Closing" has the meaning specified in Section 6.1.
"Closing Date" has the meaning specified in Section 6.1.
"Code" means the Internal Revenue Code of 1986, as amended, any successor
federal statute and the rules and regulations issued thereunder as from time to
time in effect.
"Commission" means the United States Securities and Exchange Commission (or
any other Federal agency at that time administering the Securities Act).
"Common Stock" means the common stock, without par value, of the Company.
"Company" means Focus Surgery, Inc.
"Conversion Stock" means the issuance of Series M Common Stock upon the
conversion of Series M Preferred Stock.
"Disclosure Schedule" means the books, records, Financial Statements, other
financial and accounting records and reports, documents and other written
materials concerning the Company and its business, operations, finances and
affairs prepared by the Company and forming an integral part of this Agreement.
"Financial Statements" has the meaning specified in Section 2.7.
"GAAP" means generally accepted accounting principles set forth in opinions
and pronouncements of the Accounting Principles Board of the American Institute
of Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting profession,
in each case as the same are applicable to the circumstances as of the date of
determination. Unless otherwise specifically stated herein, use of the term
"GAAP" means that such principles are applied and maintained on a consistent
basis for the Company throughout the period indicated and consistent with the
prior financial practices of the Company as reflected on the Financial
Statements so as to properly reflect the financial condition, and the results of
operations and cash flow of the Company (subject to the lack of footnote
disclosure and changes resulting from normal year-end adjustments).
"HIFU" means High Intensity Focused Ultrasound.
"Intellectual Property," collectively includes patents, trade secrets,
copyrights, trademarks, service marks, trade names, trade dress and technical
data, whether patentable or not, and all other
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<PAGE>
intellectual property which the Company believes is necessary to carry on its
business as it is presently conducted.
"Interim Financial Statements" has the meaning specified in Section 2.7.
"Investment Documents" means this Agreement, the Shareholders' Agreement
and all other agreements, instruments, documents, or certificates necessary to
effectuate the transactions contemplated therein.
"IRS" means the United States Department of Treasury, Internal Revenue
Service and any successor thereto.
"Laws" means all federal, state, local and foreign laws, regulations,
ordinances and orders, including without limitation those relating to
environmental protection, conservation, occupational safety and health,
securities, and equal employment opportunity.
"Permits" means all federal, state, local and foreign governmental
licenses, franchises, consents, approvals and permits.
"Person" means individually a corporation, partnership, joint venture,
association, limited liability company, joint-stock company, trust, or
unincorporated organization, or any governmental agency, officer, department,
commission, board, bureau, or instrumentality thereof.
"Preferred Stock" has the meaning specified in Section 1.1.
"Purchase Price" has the meaning specified in Section 1.1.
"Securities Act" means the Securities Act of 1933, as amended, and any
similar or successor federal statute and the rules and regulations of the
Commission thereunder.
"Shareholders' Agreement" means the Second Amended and Restated
Shareholders' Agreement dated as of the date hereof among the Company and its
shareholders.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the date first written above.
FOCUS SURGERY, INC.
By:
----------------------------------
Name:
----------------------------
Title:
----------------------------
MISONIX, INC.
By:
----------------------------------
Name:
-----------------------------
Title:
----------------------------
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INDEX OF SCHEDULES AND EXHIBITS
Number Description
- ------ -----------
Schedule 1.1 Preferred Stock calculation
Exhibit 1.1 Restated Certificate of Incorporation of the Company
Exhibit 3.4 Use of Proceeds
Exhibit 6.2 Opinion letter of Ice Miller Donadio & Ryan
Exhibit 6.3 Opinion letter of Hartman & Craven LLP
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<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-73924) pertaining to the 1991 Employee Incentive Stock Option Plan,
in the Registration Statement (Form S-8 No. 333-18907) pertaining to the 1996
Employee Incentive Stock Option Plan and the 1996 Non-Employee Director Stock
Option Plan and in the Registration Statement (Form S-8 No. 333-78795)
pertaining to the 1998 Employee Incentive Stock Option Plan of our report dated
August 13, 1999, (except for Note 17, as to which the date is September 10,
1999), with respect to the consolidated financial statements of Misonix, Inc.
included in its Annual Report (Form 10-KSB) for the year ended June 30, 1999,
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Melville, New York
September 22, 1999
21
<PAGE>
MISONIX, INC.
COMPUTATION OF EPS-TREASURY STOCK METHOD
THREE MONTH CALCULATION
06/30/99
---------------------------------------------------------------------
Avg. number of common shares o/s 5,927,470
Net income for the period $1,214,111
---------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Diluted EPS AVERAGE
Average # of shares under options PRICE
outstanding 1,274,500 COMMON
STOCK
Option price per share $0.50 - $6.50
Proceeds upon exercise of options $2,529,500 04/30/99 3.31
05/31/99 6.22
Market price of stock: 06/30/99 6.15
------------------
Average $5.23
Total 15.68
==================
Treasury shares that could be
repurchased with proceeds Average 5.23
==================
(proceeds/avg. price) 483,652 MP @ 6/30 6.44
===================
(proceeds/closing price)
------------------
Excess of shares under option over
treasury shares that could be
repurchased 790,848
===================
Common stock equivalent shares
(incremental shares) 790,848
Average number of common shares
outstanding 5,927,470
----------------
Total average number of common
and common equivalent shares 6,718,318
================
EPS $0.181
===================
<CAPTION>
% of Assumed
Granted Period o/s Wghtd Avg Exercise $ Proceeds
------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Orignal A. GERSTENFELD 3,000 100% 3,000 $2.17 $6,510
Orignal R. LEE 30,000 100% 30,000 $0.96 $28,800
Non-Employee G. GELMAN 688,500 100% 688,500 $0.73 $502,605
Non-Employee H. ALLIGER 75,000 100% 75,000 $0.73 $54,750
Non-Employee A. GERSTENFELD 15,000 100% 15,000 $0.73 $10,950
Non-Employee G. GELMAN 15,000 100% 15,000 $3.07 $46,050
Non-Employee H. ALLIGER 15,000 100% 15,000 $3.07 $46,050
Non-Employee A. GERSTENFELD 15,000 100% 15,000 $3.07 $46,050
1996 M. McMANUS 165,000 100% 165,000 $5.06 $834,900
1996 R. ZAREMBA 15,000 100% 15,000 $3.07 $46,050
1996 R. MANNA 7,500 100% 7,500 $4.00 $30,000
1996 R. MANNA 15,000 100% 15,000 $3.07 $46,050
1996 R. LEE 15,000 100% 15,000 $3.07 $46,050
1996 C. THOMAS 15,000 100% 15,000 $3.07 $46,050
1996 D. NG 6,000 100% 6,000 $3.07 $18,420
1996 T. NOVAK 6,000 100% 6,000 $3.07 $18,420
1996 D. VOIC 7,500 100% 7,500 $3.07 $23,025
1996 TOP EMPLOYEES 5000 OR LESS 31,000 100% 31,000 $3.07 $95,170
1998 M. McMANUS 85,000 100% 85,000 $5.06 $430,100
1998 M. McMANUS 50,000 100% 50,000 $3.07 $153,500
-------------- ------------ ---------------
TOTALS 1,274,500 1,274,500 2,529,500
============== ============ ===============
</TABLE>
<PAGE>
MISONIX, INC.
COMPUTATION OF EPS-TREASURY STOCK METHOD
TWELVE MONTH CALCULATION
06/30/99
<TABLE>
<S> <C> <C>
-----------------------------------------------------------------------
Avg. number of common shares o/s 5,862,445
Net income for the period $1,964,758 DATE AVERAGE
----------------------------------------------------------------------- ---- PRICE
COMMON
Diluted EPS STOCK
Average # of shares under options/ ------
warrants outstanding 1,127,181
07/31/98 7.00
Option price per share $0.50 - $6.00 08/31/98 5.25
09/30/98 5.88
Proceeds upon exercise of options $1,912,179 10/31/98 5.06
11/30/98 5.75
Market price of stock: 12/31/98 5.88
Average $5.23 MP AT 6/30/99 01/31/99 5.43
-----------------
02/28/99 3.27
Treasury shares that could be 03/31/99 3.58
repurchased with proceeds 4/31/99 3.31
(proceeds/avg. price) 365,617 5/30/99 6.22
===================================
(proceeds/closing price) 6/30/99 6.15
Excess of shares under option over Total 62.78
treasury shares that could be ===========
repurchased 761,564 Average 5.23
=================================== ============
Common stock equivalent shares
(incremental shares) 761,564
Average number of common shares
outstanding 5,862,445
-----------------
Total average number of common
and common equivalent shares 6,624,009
=================
Diluted EPS $0.2966
===================================
<CAPTION>
% of Assumed
Granted Period o/s Wghtd Avg Exercise $ Proceeds
------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Orignal A. GERSTENFELD 3,000 100% 3,000 $2.17 $6,510
Orignal J. LABRIZZI 90,000 25% 22,685 $0.50 $11,343
Orignal R. LEE 30,000 100% 30,000 $0.96 $28,800
Orignal B. SWEEZY 2,250 73% 1,646 $0.50 $823
Non-Employee G. GELMAN 688,500 100% 688,500 $0.73 $502,605
Non-Employee H. ALLIGER 75,000 100% 75,000 $0.73 $54,750
Non-Employee A. GERSTENFELD 15,000 100% 15,000 $0.73 $10,950
Non-Employee G. GELMAN 15,000 33% 4,932 $3.07 $15,141
Non-Employee H. ALLIGER 15,000 33% 4,932 $3.07 $15,141
Non-Employee A. GERSTENFELD 15,000 33% 4,932 $3.07 $15,141
1996 J. LABRIZZI 60,000 50% 30,247 $4.00 $120,988
1996 P. GERSTHEIMER 7,500 42% 3,144 $4.00 $12,576
1996 M. McMANUS 165,000 73% 120,699 $5.06 $610,737
1996 R. ZAREMBA 15,000 33% 4,932 $3.07 $15,141
1996 R. MANNA 7,500 100% 7,500 $4.00 $30,000
1996 R. MANNA 15,000 33% 4,932 $3.07 $15,141
1996 R. LEE 15,000 33% 4,932 $3.07 $15,141
1996 C. THOMAS 15,000 33% 4,932 $3.07 $15,141
1996 D. NG 6,000 33% 1,973 $3.07 $6,057
1996 T. NOVAK 6,000 33% 1,989 $3.07 $6,106
1996 D. VOIC 7,500 33% 2,466 $3.07 $7,571
1996 Top Emploees 31,000 33% 10,192 $3.07 $31,289
1998 M. McMANUS 85,000 73% 62,178 $5.06 $314,621
1998 M. McMANUS 50,000 33% 16,438 $3.07 $50,465
------------------ ------------------ ------------------
TOTALS 1,434,250 1,127,181 1,912,179
================== ================== ==================
</TABLE>
<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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 8,361,231
<SECURITIES> 3,987,309
<RECEIVABLES> 6,162,676
<ALLOWANCES> 88,757
<INVENTORY> 2,936,960
<CURRENT-ASSETS> 22,103,025
<PP&E> 5,049,844
<DEPRECIATION> 2,085,066
<TOTAL-ASSETS> 28,779,090
<CURRENT-LIABILITIES> 5,381,019
<BONDS> 0
0
0
<COMMON> 59,275
<OTHER-SE> 21,483,110
<TOTAL-LIABILITY-AND-EQUITY> 28,779,090
<SALES> 24,767,163
<TOTAL-REVENUES> 24,767,163
<CGS> 12,649,496
<TOTAL-COSTS> 23,210,247
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107,793
<INCOME-PRETAX> 2,975,871
<INCOME-TAX> 1,011,113
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,964,758
<EPS-BASIC> .34
<EPS-DILUTED> .30
</TABLE>
