UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 2000
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[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file no. 1-10986
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MISONIX, INC.
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(Exact name of registrant as specified in its charter)
New York 11-2148932
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1938 NEW HIGHWAY, FARMINGDALE, NEW YORK 11735
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-9555
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value Nasdaq Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Issuer's revenues for its most recent fiscal year. $29,042,872
The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 15, 2000 (computed by reference to the average bid and
asked prices of such stock on such date) was approximately $51,843,024.
There were 5,924,917 shares of Common Stock outstanding at September 15, 2000.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
None
This Report on Form 10-K, and the Company's other periodic reports and
other documents incorporated by reference or incorporated herein as exhibits,
may contain forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, general economic conditions, competition, technological
advances, claims or lawsuits, and the market's acceptance or non-acceptance of
the Company's products.
<PAGE>
PART I
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ITEM 1. BUSINESS.
Misonix, Inc. (the "Company") is a New York corporation which, through
its predecessors, was first organized in 1959. The Company designs, manufactures
and markets ultrasonic medical devices. The Company also develops and markets
ultrasonic equipment for use in the scientific and industrial markets, ductless
fume enclosures for filtration of gaseous contaminates, and environmental
control products for the abatement of air pollution.
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 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 USS License. Under the USS License, the Company
sells such device to USS. In addition to receiving payment from USS for its
orders of the device, the Company has received aggregate licensing fees of
$475,000 and receives royalties based upon USS net sales of such device.
Licensing fees from the USS License are amortized over the term of the USS
License. Also as part of the USS License, the Company was reimbursed for certain
product development expenditures. The amount of reimbursement (which began in
February 1997) was $53,563, $61,800 and $278,231 in the fiscal years ended June
30, 2000, 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 $7,849,000, $8,743,000
and $6,500,000 during the fiscal years ended June 30, 2000, 1999 and 1998,
respectively.
On May 3, 1999, the Company entered into an agreement with Focus
Surgery, Inc. ("Focus") to obtain a 20% equity position in Focus for $3,050,000.
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.
On October 18, 1999, the Company entered into an agreement with Hearing
Innovations, Inc. ("Hearing Innovations") to obtain a 7% equity position in
Hearing Innovations for $784,000. Warrants to purchase additional shares that
would bring the Company's interest in Hearing Innovations to over 15% were also
a part of this agreement. Upon exercise of the warrants, the Company has the
right to manufacture Hearing Innovations' ultrasonic products and also has the
right to create a joint venture with Hearing Innovations for the marketing and
sale of its ultrasonic tinnitus masker device. On September 11, 2000, the
Company loaned an additional $108,000 to Hearing Innovations, which together
with the then outstanding loans aggregating $192,000 (with accrued interest)
were exchanged for a $300,000 7% Secured Convertible Debenture due August 27,
2002, and warrants to acquire 66,667 shares of common stock at $2.25 per share.
The debenture is convertible at the option of the Company at any time into
shares of common stock of Hearing Innovations at a conversion rate of $2.25 per
share. Interest accrues and is payable at maturity, or is convertible on the
same terms as the debenture's principal amount. The warrants expire August 27,
2002. Were the Company to convert the debenture and exercise all warrants,
including those previously outstanding, the Company would hold a 20% interest in
Hearing Innovations.
On November 16, 1999, the Company acquired a 51% stake in Acoustic
Marketing Research Inc., doing business as Sonora Medical Systems, Inc.
("Sonora"), for $1,400,000. Sonora authorized and issued new common stock for
the 51% stake. Sonora is utilizing the proceeds of such sale to increase
inventory and expand marketing, sales and research and development efforts. An
additional 4.7% was acquired from the principals on February 25, 2000, for
$208,000, bringing the acquired interest to 55.7%. The principals sold an
additional 34.3% to Misonix on June 1, 2000, for approximately $1,237,000,
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<PAGE>
bringing the acquired interest to 90%. Sonora, located in Longmont, Colorado, is
an ISO 9002 certified refurbisher of high-performance ultrasound systems and
replacement transducers for the medical diagnostic ultrasound industry. Sonora
also offers a full range of aftermarket products and services such as its own
ultrasound probes and transducers, and other services that can extend the useful
life of its customers' ultrasound imaging systems beyond the usual five to seven
years. Sonora also has developed a three dimensional real time plug and play
device in conjunction with BioMedcom, LTD. The acquisition of Sonora was
accounted for as a purchase. Accordingly, results of operations for Sonora are
included in the consolidated statement of income from the date of acquisition
and acquired assets and liabilities have been recorded at their estimated fair
values at the date of acquisition. The excess of the cost of the acquisition
($2,787,000 plus acquisition costs of $101,000, which includes a broker fee of
$72,000) over the fair value of net assets acquired is being amortized on a
straight-line basis over a period of 5 years.
On March 30, 2000, the Company, Medical Device Alliance, Inc. ("MDA")
and LySonix, Inc. ("LySonix"), a subsidiary of MDA, signed a new ten-year
Exclusive License Agreement ("MDA Agreement") for the worldwide marketing of the
soft tissue aspirator for aesthetic and cosmetic surgery applications. The MDA
Agreement calls for LySonix to purchase the soft tissue aspirators from Misonix
and exclusively represent the Company's products for the fragmentation and
aspiration of soft tissue.
A competitor, Mentor Corporation ("Mentor"), instituted an action
against the Company, MDA and LySonix, alleging patent infringement. On June 10,
1999, the court found the Company did not infringe on the Mentor patent (see
"Legal Proceedings" for a further discussion of this matter).
SCIENTIFIC AND INDUSTRIAL PRODUCTS
The Company's other revenue-producing activities consist of the
manufacture and sale of the Sonicator(R) ultrasonic liquid processor and cell
disrupter, the distribution of other ultrasonic equipment for scientific and
industrial purposes, the manufacture and sale of Aura and Mystaire(R) ductless
fume enclosures for filtration of gaseous contaminants and the manufacture and
sale of Mystaire scrubbers for the abatement of air pollution.
The Sonicator is to disrupt cells and bacteria. Similar procedures are
used in biotechnology in the production of medications and chemicals. The
Sonicator is also used in the acceleration of chemical reactions and the
extraction of proteins from cells such as Ecoli and Yeast. Sonication can strip
away the outer coating of a virus and fragment DNA for immunological studies. It
is also widely applied in manufacturing pharmaceuticals, homogenizing pigments
and dyes and improving the quality and consistency of these products. 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(R), and distributes
ultrasonic cleaners. 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 Aura and Mystaire fume enclosures are ductless filtration and
containment hoods which are portable and easy to install. They eliminate the
ductwork that is otherwise necessary for exhausting to the outside air. The
enclosures are 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 fume enclosures are a general purpose recirculating system with activated
carbon filters that purify air and remove airborne fumes, odors and particulate.
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The Mystaire scrubber is an air pollution abatement system which
removes difficult airborne contaminants emitted from laboratory and industrial
processes. The scrubber operates on a broad range of contaminants and is
particularly effective on gaseous contaminants such as acid gases, mists,
particulate matter, negative gases and sulfur oxides. The Company also
manufactures a range of "point of use" scrubbers for the microelectronics
industry. This equipment eliminates low levels of toxic and noxious contaminants
arising from silicon wafer production.
The Company owns a 92% 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 approximately $129,000 in
October 1998 for the year ended June 30, 1999, 9,286 shares (2.65%) were
purchased by the Company for approximately $174,000 in October 1999 for the year
ended June 30, 2000 and 9,286 shares (2.65%) will be purchased by the Company
for approximately $120,000 for the year ending June 30, 2001. The effective date
of this transaction is expected to be October 2000.
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 direct salespersons, distributors, manufacturing
representatives and catalog listings for the marketing of its scientific and
industrial products. The Company currently sells through five manufacturing
representatives and more than seven 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 2000, approximately 37% 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. 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 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
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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 its licensees, MDA/LySonix, for marketing its
ultrasonic soft tissue aspiration medical device.
Sonora relies on direct sales persons and distributors for the
marketing of its ultrasonic medical devices.
Focus plans to sell and market its products for BPH ("Benign Prostate
Hyperplasia"), once approved by the Federal Drug Administration, through a
distribution partner. The product is in phase 3 of clinical trials.
Hearing Innovations plans on marketing and selling its products to the
profoundly deaf through distributors.
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 and in particular the
semiconductor manufacturing, chemical processing and pharmaceuticals industries.
MANUFACTURING AND SUPPLY
The Company manufactures and assembles the majority of its medical
devices, scientific and industrial products at its production facility located
in Farmingdale, New York. The Company's products include components manufactured
by other companies in the United States. The Company believes that it will not
encounter difficulty in obtaining materials, supplies and components adequate
for its anticipated short-term needs. The Company is not dependent upon any
single source of supply and has no long-term supply agreements.
Labcaire manufactures and assembles its products at its facility
located in North Somerset, England. It is not dependent upon any single source
of supply and has no long-term supply agreements.
Sonora manufactures and refurbishes its products at its facility in
Longmont, Colorado. 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. 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.
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<PAGE>
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 Ceilcote, a division of ITEQ, Inc., and Duall Division, a division
of Met-Pro Corporation. The principal competitors for the ductless fume
enclosure are Captair, Inc., Astec Mircaflow Ltd., and Air Cleaning Systems,
Inc. The Company believes that specific advantages of its scrubbers include
efficiency, price and customer assistance and that specific advantages of its
fume enclosures include efficiency and other product features, such as
durability and ease of operation.
PATENTS, TRADEMARKS, TRADE SECRETS AND LICENSES
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
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.
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.
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NUMBER AND ISSUE DATE DESCRIPTION
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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.
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.
5,769,211 (June 1998) Autoclavable switch - relating to a medical handpiece
with autoclavable rotary switch to be used in
medical procedures.
BACKLOG
As of June 30, 2000, the Company's backlog, including Labcaire,
relating to industrial products was approximately $2,300,000 as compared with
approximately $3,700,000 as of June 30, 1999. The Company's backlog relating to
medical products, including Sonora, was approximately $6,700,000 at June 30,
2000, and approximately $4,500,000 at June 30, 1999. The Company's total backlog
was $9,000,000 as of June 30, 2000, compared to approximately $8,200,000 as of
June 30, 1999.
EMPLOYEES
As of September 15, 2000, the Company, including Labcaire and Sonora,
employed a total of 177 full-time employees, including 29 in management and
supervisory positions. The Company considers its relationship with its employees
to be good.
ITEM 2. PROPERTIES.
The Company occupies approximately 45,500 square feet at 1938 New
Highway, Farmingdale, New York under a lease expiring on June 30, 2005. The
rental amount, which is approximately $31,000 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. Labcaire owns a 20,000 square foot facility in North Somerset, England
which was purchased in fiscal 1999, for which there is a mortgage loan. Sonora
occupies approximately 14,000 square feet in Longmont, Colorado under a lease
expiring on July 2005. The rental amount is approximately $11,000 per month. The
Company believes that the leased facilities are adequate for its present needs.
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ITEM 3. LEGAL PROCEEDINGS.
The Company, MDA and 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.
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, 2000.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's common stock, $.01 par value ("Common Stock"), is
listed on the NASDAQ National Market ("NMS") under the symbol "MSON".
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 the NMS. The prices
reported reflect inter-dealer quotations, may not represent actual transactions,
and do not include retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
FISCAL 2000: HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter........................ $ 6.44 $ 4.88
Second Quarter....................... 5.75 4.69
Third Quarter........................ 11.94 5.13
Fourth Quarter....................... 10.00 7.00
FISCAL 1999: HIGH LOW
----------- ---- ---
First Quarter........................ $ 7.94 $ 5.25
Second Quarter....................... 6.38 4.81
Third Quarter........................ 5.88 3.00
Fourth Quarter....................... 6.75 3.06
</TABLE>
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(b) As of September 15, 2000, the Company had 5,924,917 shares of
Common Stock outstanding and 130 shareholders of record. This does not take into
account shareholders whose shares are held in "street name" by brokerage houses.
(c) The Company has not paid any dividends since its inception. The
Company currently does not intend to pay any cash dividends in the foreseeable
future, but intends to retain all earnings, if any, in its business operations.
ITEM 6. SELECTED FINANCIAL DATA.
Selected income statement data:
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $29,042,872 $ 24,767,163 $26,764,332 $ 17,560,041 $9,913,136
Net income 2,520,896 1,964,758 5,328,381 117,125 389,427
Net income per
common share-Diluted $ .42 $ .34 $ .94 $ .04 $ .09
Net income per
common share-Diluted $ .39 $ .30 $ .81 $ .03 $ .09
Selected balance sheet data:
June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Total assets $ 31,163,622 $ 28,779,090 $ 25,328,956 $ 18,737,057 $ 6,074,957
Long-term debt
and capital lease
obligations $ 1,274,730 $ 1,271,814 $ 105,230 $ 135,195 $ 81,763
Total stockholders'
equity $ 23,882,188 $ 21,542,385 $ 19,252,427 $ 13,907,072 $ 3,397,648
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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.
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RESULTS OF OPERATIONS:
The following table sets forth, for the three most recent fiscal years,
the percentage relationship to net sales of principal items in the Company's
Consolidated Statements of Income:
<TABLE>
<CAPTION>
Fiscal year ended
June 30
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales ...................................... 100.0% 100.0% 100.0%
Cost of goods sold ............................. 54.3 51.1 45.7
----- ------ -----
Gross profit ................................... 45.7 48.9 54.3
----- ------ -----
Selling, general and administrative expenses ... 29.7 30.0 26.9
Research and development expenses............... 4.7 4.0 3.2
Bad debt (recovery) expense..................... (1.3) 8.6 .8
----- ------ ------
Total operating expenses........................ 33.1 42.6 30.9
----- ------ ------
Income from operations.......................... 12.6 6.3 23.4
Other income ................................... 3.3 6.1 4.3
----- ------ ------
Income before equity in losses of investments,
minority interest and income taxes......... 15.9 12.4 27.7
Equity in losses of investments................. (1.6) (.3) 0
Minority interest .............................. 0 (.1) (.1)
----- ------ ------
Income before income taxes...................... 14.3 12.0 27.6
Income tax provision............................ 5.6 4.1 7.7
----- ----- ------
Net income...................................... 8.7% 7.9% 19.9%
===== ===== ======
</TABLE>
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The following table provides a breakdown of net sales by major category for the
periods indicated:
<TABLE>
<CAPTION>
Fiscal year ended
June 30
-------
2000 1999 1998
---- ---- -----
(in thousands)
<S> <C> <C> <C>
Ultrasonic therapeutic medical devices.......... $ 9,050 $ 8,743 $11,500
Ultrasonic products ............................ 3,116 3,003 3,431
Ultrasonic diagnostic medical devices........... 2,532 - -
Scrubbers ...................................... 4,446 2,451 3,760
Ductless fume enclosures ....................... 2,896 3,441 2,116
Other laboratory and hospital equipment......... 7,003 7,129 5,957
------- ------- -------
Net sales ...................................... $29,043 $24,767 $26,764
======= ======= =======
</TABLE>
The following table provides a breakdown of foreign sales by geographic
area during the periods indicated:
<TABLE>
<CAPTION>
Fiscal year ended
June 30
2000 1999 1998
---- ---- -----
(in thousands)
<S> <C> <C> <C>
Canada and Mexico .............................. $ 2,773 $ 429 $ 265
Europe ......................................... 6,729 6,927 5,883
Asia ........................................... 653 633 786
Middle East .................................... 334 167 180
Other ......................................... 231 160 185
------- ------- -------
$10,720 $ 8,316 $ 7,299
======= ======= =======
</TABLE>
FISCAL YEARS ENDED JUNE 30, 2000 AND 1999
NET SALES. Net sales increased by 17.3% between the fiscal year ended
June 30, 1999 and the fiscal year ended June 30, 2000 from $24,767,163 to
$29,042,872. The increase for the period is due to an increase in therapeutic
medical device sales including shipments of the soft tissue aspirator, the
consolidated revenues of Sonora, and increased revenues of wet scrubbers
(Mystaire), partially offset by lower domestic fume enclosure and Labcaire
shipments. Revenues for the three-month period ended June 30, 2000 were
$8,455,546 compared to $7,523,095 for the same period in fiscal 1999. This
increase for the quarter ended June 30, 2000 is due to an increase in
therapeutic medical devices including shipments of the soft tissue aspirator,
the consolidated revenues of Sonora, and ultrasonic industrial sales, partially
offset by lower Labcaire and domestic fume enclosure sales. The foreign currency
exchange rates had an adverse effect on revenues for Labcaire in fiscal year
2000 as compared to fiscal year 1999.
During fiscal 2000 and fiscal 1999, the Company had foreign net sales
of $10,719,509 and $8,316,068, respectively, representing 36.9% and 33.6% of net
sales for such years, respectively. This increase in foreign sales from fiscal
1999 to fiscal 2000 is due to the shipment of a large wet scrubber (Mystaire)
contract.
12
<PAGE>
GROSS PROFIT. There was a decrease in overall gross profit margin to
45.7% in fiscal 2000 from 48.9% in fiscal 1999. The decrease is due to an
unfavorable mix of high and low margin product deliveries.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. There was a 16.2%
increase, from $7,427,449 to $8,627,690, in selling, general and administrative
expenses from fiscal 1999 to fiscal 2000. The increase for the period is
primarily due to the consolidated results for Sonora as well as increased
expenditures for investor relations activities.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $1,372,763 in fiscal 2000 and $1,002,084 in fiscal 1999. The increased
development costs are associated with an increase in additional products under
development and outside clinical costs.
BAD DEBT (RECOVERY) EXPENSE. Bad debt (recovery) expense decreased from
an expense of $2,131,218 for the period ended June 30, 1999 to a recovery of
$366,612 for the period ended June 30, 2000. On October 22, 1998, the Company
reserved $1,700,000 against accounts receivable due and owing by MDA and its
wholly owned subsidiary, LySonix, as licensees for the Misonix ultrasonic soft
tissue aspirator. In December 1998, an additional reserve was taken against all
remaining receivables from MDA and LySonix totaling $369,903. On June 30, 1999,
the MDA and LySonix accounts receivable of $2,069,903 was written off against
the bad debt reserve.
On March 30, 2000, the Company, MDA and LySonix signed the MDA
Agreement for the marketing of the soft tissue aspirator for aesthetic and
cosmetic surgery applications. The MDA Agreement calls for LySonix to purchase
the soft tissue aspirators from Misonix and exclusively represent the Company's
products for the fragmentation and aspiration of soft tissue. The Company was
paid in full for the amounts due and owing by the return of inventory by MDA and
LySonix, which is in accordance with the MDA Agreement. The Company recorded the
receipt of inventory at the lower of cost or market, thereby a recovery of bad
debt expense of $462,000 was recorded during the third quarter of fiscal 2000.
OTHER INCOME (EXPENSE) Other income was $954,375 in fiscal 2000 and
$1,504,965 in fiscal 1999. This decrease for the period was principally due to
decreased option/license fees recognized, from the termination of the prior
agreement with MDA in January 1999 (approximately $357,000). The new ten-year
Exclusive License agreement discussed on page 15 did not have an up front
license fee. The decrease in other income is also due to an increase in
amortization of the investments in capital stock of Focus Surgery, Inc. ("Focus
Surgery") and Hearing Innovations, Inc. ("Hearing Innovations").
NET INCOME. For the fiscal year ended June 30, 2000, the Company
recorded a 28.3% increase in net income to $2,520,896, or $.39 diluted earnings
per share, from $1,964,758, or $.30 diluted earnings per share, for the year
ended June 30, 1999.
FISCAL YEARS ENDED JUNE 30, 1999 AND 1998
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 were delivered in fiscal 2000. This
decrease was 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.
13
<PAGE>
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.
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
was transmitted by the Company declaring 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 approximately $357,000 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, 2000 and 1999 was $17,280,404 and
$16,722,006, respectively. The increase is due to cash flow from operations,
partially offset by the acquisition of treasury stock and fixed assets and the
investments in Labcaire, Sonora and Hearing Innovations.
On March 10, 1999, the Company entered into a bridge loan agreement
with Hearing Innovations, whereby Hearing Innovations was required to pay to the
Company, on or before March 10, 2000, the principal amount of $250,000. The loan
was entered into in anticipation of the upcoming agreement for a 7% equity
investment in Hearing Innovations by the Company. During the first quarter of
fiscal year 2000, the Company entered into four additional secured loan
agreements whereby Hearing Innovations was 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. These notes bore
interest at 8% per annum.
On October 18, 1999, the Company and Hearing Innovations completed the
agreement whereby the Company invested an additional $350,000 and cancelled the
notes receivable aggregating $400,000 in exchange for a 7% equity investment in
Hearing Innovations. Warrants to purchase additional shares that would bring the
Company's interest in Hearing Innovations to over 15% were also part of this
14
<PAGE>
agreement. Upon exercise of the warrants, the Company has the right to
manufacture Hearing Innovations' ultrasonic products and also has the right to
create a joint venture with Hearing Innovations for the marketing and sale of
its ultrasonic tinnitus masker device. At the date of the acquisition, the cost
of the investment ($750,000 plus the acquisition costs of $34,000) is being
amortized on a straight-line basis over its estimated life of 10 years. The
Company's portion of the net losses of Hearing Innovations were recorded since
the date of acquisition in accordance with the equity method of accounting.
During the fourth quarter of fiscal 2000, the Company entered into four
loan agreements whereby Hearing Innovations was required to pay the Company
amounts of $24,000 due July 1, 2000, $45,000 due July 15, 2000, $29,000 due July
15, 2000, and $13,000 due July 15, 2000. During the first quarter of fiscal
2001, the Company entered into an additional four loan agreements whereby
Hearing Innovations was required to pay the Company the total principal amounts
of $39,000, $13,000, $13,000 and $13,000 due September 15, 2000. All notes bore
interest at 8% per annum. The notes were secured by a lien on all Hearing
Innovations' rights, titles and interests in accounts receivable, inventory,
property, plant and equipment and processes of specified products whether now
existing or hereafter arising after the date of these agreements. On September
11, 2000, the Company loaned an additional $108,000 to Hearing Innovations,
which together with the then outstanding loans aggregating $192,000 (with
accrued interest) described above were exchanged for a $300,000 7% Secured
Convertible Debenture due August 27, 2002, and warrants to acquire 66,667 shares
of common stock at $2.25 per share. The debenture is convertible at the option
of the Company at any time into shares of common stock of Hearing Innovations at
a conversion rate of $2.25 per share. Interest accrues and is payable at
maturity, or is convertible on the same terms as the debenture's principal
amount. The warrants expire August 27, 2002. Were the Company to convert the
debenture and exercise all warrants, including those previously outstanding,
the Company would hold a 20% interest in Hearing Innovations.
In October 1999, under the terms of the revised purchase agreement (the
"Labcaire Agreement") with Labcaire, the Company paid approximately $174,000 for
9,286 shares (2.65%) of the outstanding common stock of Labcaire bringing the
acquired interest to 92%. This represents the fiscal 2000 buy-back portion, as
defined in the Labcaire Agreement.
On November 16, 1999, the Company acquired a 51% stake in Sonora for
$1,400,000. Sonora authorized and issued new common stock for the 51% stake.
Sonora is utilizing the proceeds on such sale to increase inventory and expand
marketing, sales and research and development efforts. An additional 4.7% was
acquired from the principals on February 25, 2000, for $208,000, bringing the
acquired interest to 55.7%. The principals sold an additional 34.3% to Misonix
on June 1, 2000, for approximately $1,237,000, bringing the acquired interest to
90%. Sonora, located in Longmont, Colorado, is an ISO 9002 certified refurbisher
of high-performance ultrasound systems and replacement transducers for the
medical diagnostic ultrasound industry. Sonora also offers a full range of
aftermarket products and services such as its own ultrasound probes and
transducers, and other services that can extend the useful life of its
customers' ultrasound imaging systems beyond the usual five to seven years.
Sonora also has developed a three dimensional real time plug and play device in
conjunction with BioMedcom, LTD. The acquisition of Sonora was accounted for as
a purchase. Accordingly, results of operations for Sonora are included in the
consolidated statement of income from the date of acquisition and acquired
assets and liabilities have been recorded at their estimated fair values at the
date of acquisition. The excess of the cost of the acquisition ($2,787,000 plus
acquisition costs of $101,000, which includes a broker fee of $72,000) over the
fair value of net assets acquired is being amortized on a straight-line basis
over a period of 5 years. The results of operations of Sonora prior to the
acquisition are not material to the consolidated statements of income for the
fiscal years ended June 30, 2000, 1999 and 1998.
On March 30, 2000, the Company, MDA and LySonix signed the MDA
Agreement for the marketing of the soft tissue aspirator for aesthetic and
cosmetic surgery applications. The MDA Agreement calls for LySonix to purchase
the soft tissue aspirators and exclusively represent the Company's products for
the fragmentation and aspiration of soft tissue worldwide. The Company was paid
in full for the amounts due and owing by the return of inventory by MDA and
LySonix, which is in accordance with the MDA Agreement. The Company recorded the
receipt of inventory at the lower of its original cost or
15
<PAGE>
market. As a result, a recovery of bad debt of $462,000 was recorded during the
third quarter of fiscal 2000.
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.
YEAR 2000 COMPLIANCE:
The Company has not had any material operational problems for its
internal information systems and products or external service suppliers with
respect to year 2000. The Company is monitoring any possible problems of systems
or any external service suppliers' operational problems, of which none has been
detected.
OTHER:
In the opinion of management, inflation has not had a material effect
on the operations of the Company.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
CURRENCY RISK:
Approximately 24% of the Company's revenues in fiscal 2000 were
received in English Pounds Sterling currency. To the extent that the Company's
revenues are generated in English Pounds, its operating results are converted
into U.S. Dollars using rates of 1.59 and 1.64 for the years ended June 30, 2000
and 1999, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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 27.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected financial data for each quarter
of fiscal 2000. Although unaudited, this information has been prepared on a
basis consistent with the Company's audited consolidated financial statements
and, in the opinion of the Company's management, reflects all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of this information in accordance with
generally accepted accounting principles. Such quarterly results are not
necessarily indicative of future results of operations and should be read in
conjunction with the audited consolidated financial statements of the Company
and the notes thereto.
16
<PAGE>
QUARTERLY STATEMENTS OF INCOME:
<TABLE>
<CAPTION>
FISCAL 2000
Q1 Q2 Q3 Q4 YEAR
<S> <C> <C> <C> <C> <C>
Net sales................................. $6,482,971 $7,284,134 $6,820,221 $8,455,546 $29,042,872
Cost of sales............................. 3,665,684 3,783,311 3,540,543 4,768,391 15,757,929
---------- ---------- ---------- ---------- -----------
Gross profit.............................. 2,817,287 3,500,823 3,279,678 3,687,155 13,284,943
Selling, general and administration....... 1,686,161 2,076,178 2,296,777 2,568,574 8,627,690
Research and development.................. 262,644 329,860 479,260 300,999 1,372,763
Bad debt (recovery) expense............... 20,295 19,800 (441,941) 35,234 (366,612)
---------- ---------- ---------- ----------- -----------
Income from operations.................... 848,187 1,074,985 945,582 782,348 3,651,102
Other (income) expense 188,442 296,608 217,896 251,429 954,375
---------- ---------- ---------- ---------- ----------
Income before equity in loss of Focus
Surgery, Inc., Equity in loss of Hearing
Innovations, Inc., minority interest and
income of investments................... 1,036,629 1,371,593 1,163,478 1,033,777 4,605,477
Minority interest in net income of
consolidate subsidiaries and equity in
loss of investments..................... (86,157) (173,811) (113,485) (80,167) (453,620)
Income tax provision...................... (345,144) (487,208) (480,578) (318,031) (1,630,961)
---------- ---------- ---------- ---------- ----------
Net Income................................ $ 605,328 $ 710,574 $ 569,415 $ 635,579 $ 2,520,896
========= ========== ========== ========== ===========
Net income per common share - Basic $ .10 $ .12 $ .10 $ .11 $ .42
Net income per common share - Diluted $ .09 $ .11 $ .09 $ .10 $ .39
Weighted average common hares
outstanding............................... 5,957,470 5,951,872 5,918,271 5,923,127 5,937,685
Diluted weighted average common
shares outstanding........................ 6,734,140 6,451,480 6,545,527 6,566,474 6,516,387
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<TABLE>
<CAPTION>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company currently has four Directors. Their term expires at the
Annual Meeting of shareholders. The following table contains information
regarding all Directors and executive officers of the Company:
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
---- --- -------------------- -----
<S> <C> <C>
Gary Gelman 53 Chairman of the Board 1995
of Directors
Michael McManus, Jr. 57 President and Chief 1998
Executive Officer
Richard Zaremba 45 Vice President, Chief Financial Officer, --
Secretary and Treasurer
17
<PAGE>
Ronald Manna 46 Vice President of Operations --
Gregory Homison 53 Vice President - Industrial Products --
Christopher Thomas 38 Vice President of Mystaire Products --
Howard Alliger 73 Director 1971
Arthur Gerstenfeld 72 Director 1992
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 degrees from
Massachusetts Institute of Technology (Sloan School of Management). He has
edited and authored seven books and approximately forty articles focusing on
innovation and productivity. Dr. Gerstenfeld's industrial experience has been 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 Executive Officer of New York Bancorp, Inc. Prior to New
York Bancorp, Inc., Mr. McManus held senior positions with Jamcor
Pharmaceutical, Inc., Pfizer, Inc. and Revlon Corp. Mr. McManus also spent
several years as an Assistant to President Reagan. Mr. McManus holds a B.A.
degree in Economics from University of Notre Dame and a J.D. from Georgetown
University Law Center.
RICHARD ZAREMBA became Vice President and Chief Financial Officer in
February 1999. From March 1995 to February 1999, he was the Vice President and
Chief Financial Officer of Converse Information Systems, Inc., a manufacturer of
digital voice recording systems. Previously, Mr. Zaremba was Vice President and
Chief Financial Officer of Miltope Group, Inc., a manufacturer of electronic
equipment. Mr. Zaremba is a licensed certified public accountant in the state of
New York and holds BBA and MBA degrees in Accounting from Hofstra University.
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.
18
<PAGE>
GREGORY HOMISON, PH.D. became Vice President of Industrial/Scientific
Products in August 1999. Prior to joining Misonix, he spent 11 years in the
Biomedical Division of Pall Corporation where he advanced from an entry-level
position to Divisional Senior Vice President for Sales and Marketing. Dr.
Homison received his doctoral degree, as well as his bachelors and masters
degrees, from Columbia University in the field of Molecular Biology.
CHRISTOPHER THOMAS became Vice President of Mystaire Products in
January 1999. For three years prior thereto, he served as Director of Air
Pollution Technology. Prior to his employment with the Company, Mr. Thomas was
an account representative for the Business Imaging Systems Division of Eastman
Kodak Company. Mr. Thomas holds a B.S. degree in General Science from Villanova
University.
Executive officers are elected by and serve at the discretion of the board of
directors.
COMPLIANCE WITH SECTION 16 (A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers, Directors and persons who own more
than 10% of a registered class of the Company's equity securities ("Reporting
Persons") to file reports of ownership and changes in ownership on Forms 3, 4,
and 5 with the Securities and Exchange Commission (the "SEC") and the National
Association of Securities Dealers, Inc. (the "NASD"). These Reporting Persons
are required by SEC regulation to furnish the Company with copies of all Forms
3, 4 and 5 they file with the SEC and NASD. Based solely on the Company's review
of the copies of the forms it has received, the Company believes that all
Reporting Persons complied on a timely basis with all filing requirements
applicable to them with respect to transactions during fiscal year 2000.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth for the fiscal years indicated the
compensation paid by the Company to its Chief Executive Officer and any other
executive officers with annual compensation exceeding $100,000:
SUMMARY COMPENSATION TABLE
--------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
NAME AND PRINCIPAL FISCAL SECURITIES UNDERLYING
POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#)
----------------------- ----- ---------- --------- ---------------------
Michael McManus, Jr. 2000 250,000 250,000 -0-
President and Chief 1999 166,667 -0- 300,000
Executive Officer 1998 -0- -0- -0-
Richard Zaremba 2000 129,096 5,000 -0-
Vice President, 1999 46,875 -0- 15,000
Chief Financial Officer, 1998 -0- -0- -0-
Secretary and Treasurer
Ronald Manna 2000 113,808 15,000 -0-
Vice President of 1999 107,481 -0- 20,000
Operations 1998 102,383 -0- 25,000
Christopher Thomas 2000 87,348 10,000 -0-
Vice President of 1999 111,013 -0- 15,000
Mystaire Products 1998 119,816 -0- -0-
</TABLE>
19
<PAGE>
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 at the discretion of the Board of Directors, of
$250,000, to be paid in January 2001. Mr. McManus receives additional benefits
that are generally provided to other employees of the Company.
In conformity with the Company's policy, all of its Directors, officers
and employees execute confidentiality and nondisclosure agreements upon the
commencement of employment with the Company. The agreements generally provide
that all inventions or discoveries by the employee related to the Company's
business and all confidential information developed or made known to the
employee during the term of employment shall be the exclusive property of the
Company and shall not be disclosed to third parties without prior approval of
the Company. Mr. Manna has an agreement with the Company which provides for the
payment of six months' severance upon his termination for any reason. Messrs.
McManus and Zaremba have agreements for the payment of six months' annual base
salary upon a change in control of the Company. The Company's employment
agreement with Mr. McManus also contains non-competition provisions that
preclude him from competing with the Company for a period of 18 months from the
date of his termination of employment.
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to the executive officers named in the Summary
Compensation Table during the fiscal year ended June 30, 2000.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
No options were exercised by any executive officer named in the Summary
Compensation Table during the fiscal year ended June 30, 2000. The following
table contains information concerning the number and value, at June 30, 2000, of
unexercised options held by executive officers named in the Summary Compensation
Table:
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES UNEXERCISED IN-THE-MONEY
UNDERLYING UNEXERCISED UNEXERCIED IN
OPTIONS AT OPTIONS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
--------------- ----------------------------------------------------------
<S> <C> <C>
Michael McManus, Jr. 300,000/- $960,500/-
Richard Zaremba 7,500/7,500 $ 36,450/$36,450
Ronald Manna 17,500/35,000 $ 72,000/$42,525
Christopher Thomas 19,500/7,500 $ 59,610/$36,450
-------
</TABLE>
(1) Fair market value of underlying securities (the closing price of the
Common Stock on the NAS Automated Quotation System) at June 30, 2000,
minus the exercise price.
EXECUTIVE COMPENSATION COMMITTEE REPORT
COMPENSATION POLICIES. The principal goal of our compensation program
as administered by the Board of Directors is to help us attract, motivate and
retain the executive talent required to develop and
20
<PAGE>
achieve our strategic and operating goals with a view to maximizing shareholder
value. The key elements of this program and the objectives of each element are
as follows:
BASE SALARY. Base salaries paid to our executive officers are intended
to be competitive with those paid to executives holding comparable positions in
the marketplace. Individual performance and our performance are considered when
setting salaries within the range for each position. Annual reviews are held and
adjustments are made based on attainment of individual goals in a manner
consistent with operating and financial performance.
BONUSES. Annual cash bonuses are intended to motivate performance by
creating potential to earn annual incentive awards that are contingent upon
personal and business performance. We set goals of revenue and profitability for
each group.
CEO'S COMPENSATION. As discussed in the Executive Compensation Table,
Mr. McManus received a base salary of $250,000 for fiscal 2000 and received a
bonus of $250,000. The factors involved in determining our CEO's compensation
are our revenues and profits, his lengthy experience and business acumen, his
responsibilities, and the efforts exerted by him in performance of his duties.
Reported upon by the Board of Directors:
Gary Gelman Howard Alliger
Michael McManus, Jr. Arthur Gerstenfeld
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,
2000, options to purchase 40,500 shares of Common Stock were outstanding under
the 1991 Plan at exercise prices ranging from $2.17 to $6.78 per share and
options to purchase 334,500 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, 2000, options to purchase 336,020 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, 2000, options to purchase 224,325 shares of Common
Stock under the 1996 Plan have been exercised or canceled. At June 30, 2000, no
options to purchase shares of Common Stock under the 1996 Directors 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,
2000, options to purchase 154,000 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, 2000, 4,000 options granted under the 1998 Plan have been 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
22
<PAGE>
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of July 31, 2000, 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.
PERCENT
COMMON STOCK OF
NAME AND ADDRESS (1) BENEFICIALLY OWNED CLASS
-------------------- ------------------ -----
Howard Alliger...................... 786,208 (2) 13.0
Gary Gelman ........................ 703,500 (3) 10.5
Michael McManus, Jr................. 358,950 (4) 5.7
Ronald Manna ....................... 70,394 (5) 1.2
Arthur Gerstenfeld.................. 61,750 (6) 1.0
Richard Zaremba .................... 26,370 (7) *
Christopher Thomas.................. 21,262 (8) *
All executive officers and
Directors as a group
(eight people).................. 2,033,434 (9) 28.5
*Less than 1%
(1) The business address of each of the named individuals in this table is c/o
Misonix, Inc., 1938 New Highway, Farmingdale, New York 11735.
(2) Includes 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 300,000 shares which Mr. McManus has the right to acquire upon
exercise of stock options which are currently exercisable
(5) Includes 17,500 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 7,500 shares which Mr. Zaremba has the right to acquire upon
exercise of stock options which are currently exercisable.
(8) Includes 19,500 shares which Mr. Thomas has the right to acquire upon
exercise of stock options which are currently exercisable.
(9) Includes (i) the shares indicated in notes (2), (3), (4), (5), (6), (7) and
(8) and (ii) 5,000 stock options of which anofficer of the Company has a
right to acquire upon exercise of stock options which are currently
exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
22
<PAGE>
a. (1) and (2) - The response to this portion of Item 14 is submitted as a
separate section of this report.
3. Exhibits
3(a) Restated Certificate of Incorporation of the Company. (1)
3(b) By-laws of the Company. (1)
10(a) Lease extension and modification agreement dated October 31,
1992. (3)
10(b) Stock Option Plan. (1)
10(g) Settlement and License Agreement dated March 12, 1984
between the Company and Mettler Electronics Corporation. (1)
10(j) Assignment Agreement between the Company and Robert
Ginsburg. (2)
10(k) Subscription Agreement between the Company and Labcaire. (2)
10(l) Option Agreements between the Company and each of Graham
Kear, Geoffrey Spear, John Haugh, Martin Keeshan and David
Stanley. (2)
10(m) Stock Option Contract between the Company and Michael
Juliano. (2)
10(n) Form of Director's Indemnification Agreement. (2)
10(o) Stock Option Contract between the Company and Ronald Manna.
(4)
10(s) Severance Agreement between the Company and Ronald Manna.
(4)
10(u) Option Agreement dated September 11, 1995 between the
Company and Medical Device Alliance Inc. (4)
10(w) Amendment to agreement with principal shareholders of
Labcaire Systems Ltd. (5)
10(y) Development and Option Agreement dated August 27, 1996
between the Company and United States Surgical Corporation.
(6)
10(z) License Agreement dated October 16, 1996 between the Company
and United States Surgical Corporation. (6)
10(aa) Amendment No. 1 dated January 23, 1997 to Underwriters'
Warrant Agreement. (6)
10(bb) 1996 Non-Employee Director Stock Option Plan. (7)
10(cc) 1996 Employee Incentive Stock Option Plan. (7)
10(ee) 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.
21 Subsidiaries of the Company.
23
<PAGE>
23 Consent of independent public accountants to inclusion of
report in Form S-8 Registration Statement.
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, 2000.
c. Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
d. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Misonix, Inc.
By:------------------------
Michael McManus, Jr.
President and Chief
Executive Officer
Date: September 26, 2000
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
---------------------- Chairman of the Board, September 26, 2000
Gary Gelman Director
---------------------- President, Chief Executive September 26, 2000
Michael McManus, Jr. Officer, and Director
(principal executive officer)
---------------------- Vice President, Chief Financial September 26, 2000
Richard Zaremba Officer, Treasurer and Secretary
(principal financial and accounting
officer)
Director September 26, 2000
----------------------
Howard Alliger
Director September 26, 2000
----------------------
Arthur Gerstenfeld
25
<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 9, 2000, with respect to the consolidated financial statements of
Misonix, Inc. included in its Annual Report (Form 10-K) for the year ended June
30, 2000.
/s/ Ernst & Young LLP
Melville, New York
September 26, 2000
26
<PAGE>
ITEM 14A
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Misonix, Inc. and Subsidiaries
Year Ended June 30, 2000
PAGE
Report of Independent Auditors................................................28
Consolidated Balance Sheets--June 30, 2000 and 1999...........................29
Consolidated Statements of Income--Years Ended
June 30, 2000, 1999 and 1998................................................30
Consolidated Statements of Stockholders' Equity--Years Ended
June 30, 2000, 1999 and 1998................................................31
Consolidated Statements of Cash Flows--Years Ended
June 30, 2000, 1999 and 1998.............................................32-33
Notes to Consolidated Financial Statements....................................34
The following consolidated financial statement schedule is included in
Item 14(d).
Schedule II-Valuation and Qualifying Accounts and Reserves...................49
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
27
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Misonix, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Misonix, Inc.
and Subsidiaries (the "Company") as of June 30, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 2000. Our audits also included
the financial statement schedule listed in the index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Misonix, Inc. and
Subsidiaries at June 30, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Melville, New York
August 9, 2000
28
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------
ASSETS 2000 1999
---------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,069,502 $ 8,361,231
Investments held to maturity 3,021,268 3,987,309
Accounts receivable, less allowance for doubtful accounts of $200,429 and
$88,757, respectively 7,277,242 6,073,919
Inventories 4,273,223 2,936,960
Deferred income taxes 167,238 131,788
Prepaid expenses and other current assets 794,473 611,818
---------------------------------------
Total current assets 22,602,946 22,103,025
Property, plant and equipment, net 3,111,112 2,964,778
Deferred income taxes 286,297 181,484
Goodwill, net of accumulated amortization of $211,516 and $89,463, respectively 2,007,151 502,295
Investment in Focus Surgery, Inc. and Hearing Innovations, Inc. less accumulated
amortization of $233,450 and $25,417 and cumulative equity in losses of
$531,014 and $68,880, respectively 3,069,536 2,955,703
Other assets 86,580 71,805
---------------------------------------
Total assets $31,163,622 $28,779,090
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 473,050 $ 499,398
Accounts payable 2,053,192 2,356,877
Accrued expenses and other current liabilities 1,323,114 2,089,231
Income taxes payable 1,283,554 272,814
Current maturities of long-term debt and capital lease obligations 189,632 162,699
---------------------------------------
Total current liabilities 5,322,542 5,381,019
Long-term debt and capital lease obligations 1,274,738 1,271,814
Deferred income 395,060 445,620
Minority interest 289,094 138,252
Commitments and contingencies (NOTES 2, 9 AND 12)
Stockholders' equity:
Common stock, $.01 par value--shares authorized 10,000,000;
5,967,817 and 5,927,470 issued 59,678 59,275
Additional paid-in capital 21,801,969 21,719,553
Retained earnings (deficit) 2,294,570 (226,326)
Treasury stock, 42,900 shares in 2000 (219,006) -
Accumulated other comprehensive loss (55,023) (10,117)
---------------------------------------
Total stockholders' equity 23,882,188 21,542,385
---------------------------------------
Total liabilities and stockholders' equity $ 31,163,622 $28,779,090
=======================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
2000 1999 1998
-------------------------------------------
<S> <C> <C> <C>
Net sales................................................... $29,042,872 $24,767,163 $26,764,332
Cost of goods sold ......................................... 15,757,929 12,649,496 12,236,393
------------ ----------- -----------
Gross profit ............................................... 13,284,943 12,117,667 14,527,939
Operating expenses:
Selling, general and administrative expenses ........... 8,627,690 7,427,449 7,205,742
Research and development expenses ...................... 1,372,763 1,002,084 859,419
Bad debt (recovery) expense ............................ (366,612) 2,131,218 201,296
------------ ------------ ------------
Total operating expenses ................................... 9,633,841 10,560,751 8,266,457
Income from operations .................................... 3,651,102 1,556,916 6,261,482
Other income (expense):
Interest income ......................................... 660,002 601,685 519,727
Interest expense ........................................ (154,341) (107,793) (75,870)
Option/license fees ..................................... 24,312 405,510 73,613
Royalty income .......................................... 636,657 627,063 630,971
Amortization of investments ............................. (208,033) (25,417) --
Foreign currency exchange (loss) gain ................... (10,255) 3,382 (1,873)
Miscellaneous income (loss) ............................. 6,033 535 (3,374)
----------- ------------ ------------
Income before equity in loss of Focus Surgery,
Inc., equity in loss of Hearing Innovations, Inc.,
Minority interest and income taxes ..................... 4,605,477 3,061,881 7,404,676
Equity in loss of Focus Surgery, Inc. ...................... (421,785) (68,880) --
Equity in loss of Hearing Innovations, Inc. ................ (40,349) -- --
Minority interest in net income of consolidated subsidiaries 8,514 (17,130) (14,159)
------------ ------------ ------------
Income before income taxes ................................. 4,151,857 2,975,871 7,390,517
Income tax provision ....................................... 1,630,961 1,011,113 2,062,136
Net income ................................................. 2,520,896 $ 1,964,758 $ 5,328,381
=========== =========== ============
Net income per common share - Basic ........................ $ .42 $ .34 $ .94
=========== =========== ============
Net income per common share - Diluted ...................... $ .39 $ .30 $ .81
=========== =========== ============
Weighted average common shares outstanding ................. 5,937,685 5,862,445 5,690,160
=========== =========== ============
Diluted weighted average common shares outstanding ......... 6,516,387 6,624,009 6,562,157
=========== =========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
30
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK,
$0.1 PAR SHARE $0.1 PAR SHARE
ACCUMULATED
ADDITIONAL RETAINED OTHER TOTAL
NUMBER NUMBER PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) EQUITY
--------------------------------------------------------------------------------------------------------
<S> <C> <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
Adjustment - - - - - - 3,473 3,473
-----------
Comprehensive income - - - - - - - 5,331,854
-----------
Exercise of employee 2,250 22 - - 13,479 - - 13,501
options
Exercise of warrants 93,276 933 - - (933) - - -
-----------------------------------------------------------------------------------------------------
Balance, 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
Adjustment - - - - - - (12,460) (12,460)
-----------
Comprehensive income - - - - - - - 1,952,298
-----------
Exercise of employee 159,750 1,598 - - 314,527 - - 316,125
options
Exercise of warrants 40 - - - - - - -
Non-cash compensation - - - - 21,535 - - 21,535
charge
-----------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 5,927,470 59,275 - - 21,719,553 (226,326) (10,117) 21,542,385
NET INCOME - - - - - 2,520,896 - 2,520,896
FOREIGN CURRENCY
ADJUSTMENT - - - - - - (44,906) (44,906)
-----------
COMPREHENSIVE INCOME - - - - - - - 2,475,990
-----------
EXERCISE OF EMPLOYEE 40,347 403 - - 71,648 - - 72,051
OPTIONS
PURCHASE OF TREASURY STOCK - - (42,900) (219,006) - - - (219,006)
NON-CASH COMPENSATION - - - - 10,768 - - 10,768
CHARGE
-----------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000
5,967,817 $ 59,678 $(42,900) (219,006) $21,801,969 $ 2,294,570 $(55,023) $23,882,188
========================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
31
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
2000 1999 1998
-----------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ......................................... $2,520,896 $1,964,758 $ 5,328,381
Adjustments to reconcile net income to net cash
Provided by (used in)oerating activities:
Bad debt (recovery) expense ................... (366,612) 2,131,218 201,296
Deferred income tax (benefit) expense ......... (140,263) 215,740 (439,012)
Depreciation and amortization ................. 793,205 409,893 289,130
Loss on disposal of equipment ................. 58,289 -- --
Non-cash compensation charge .................. 10,768 21,535 --
Deferred income ............................... (50,560) (381,288) 79,857
Foreign currency loss (gain) .................. 10,255 (3,382) 1,873
Minority interest in net income of subsidiaries (8,514) 17,130 14,159
Equity in loss of Focus Surgery, Inc. ......... 421,785 68,880 --
Equity in loss of Hearing Innovations, Inc. ... 40,349 --
Change in operating assets and liabilities:
Accounts receivable ........................ (579,502) (43,598) (6,054,994)
Inventories ................................ (724,510) 74,953 (705,774)
Prepaid expenses and other current assets .. (330,587) 533,033 102,881
Other assets ............................... (16,065) 12,196 5,286
Accounts payable and accrued expenses ...... (1,670,172) 1,660,364 (526,472)
Income taxes payable ....................... 1,010,740 (1,305,975) 1,594,041
-----------------------------------------
Net cash provided by (used in) operating activities 979,502 5,375,457 (109,348)
-----------------------------------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (317,667) (1,976,842) (392,834)
Proceeds from sale of equipment 110,617 -- --
Purchases of investments held to maturity (3,004,064) (15,804,837) (9,904,461)
Redemption of investments held to maturity 3,970,105 18,225,000 9,864,584
Purchase of Labcaire stock (173,777) (129,172) (119,187)
Cash paid for investment in Hearing Innovations, Inc. (784,000) -- --
Cash paid for investment in Focus Surgery, Inc. -- (3,050,000) --
Payments from (loan to) Hearing Innovations, Inc., net 138,133 (250,000) --
Cash paid for acquisition of Sonora MedicaL Systems Inc.,
Net of cash acquired (1,463,789) -- --
-----------------------------------------
Net cash used in investing activities (1,524,442) (2,985,851) (551,898)
-----------------------------------------
</TABLE>
32
<PAGE>
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCING ACTIVITIES
(Payments of) proceeds from short-term borrowings, net (26,348) (35,488) 33,387
Payment of revolving line of credit (222,388) -- --
Principal payments on capital lease obligations (243,119) (148,713) (200,841)
Proceeds from long-term debt -- 1,283,256 --
Payment of long-term debt (52,818) (27,388) --
Proceeds from exercise of stock options 72,051 316,125 13,501
Purchase of treasury stock (219,006) -- --
--------- --------- --------
Net cash (used in) provided by financing activities (691,628) 1,387,792 (153,953)
--------- --------- --------
Effect of exchange rate changes on cash and cash
equivalents (55,161) (9,078) (1,720)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (1,291,729) 3,768,320 (816,919)
Cash and cash equivalents at beginning of year 8,361,231 4,592,911 5,409,830
--------- --------- ---------
Cash and cash equivalents at end of year $7,069,502 $8,361,231 $4,592,911
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 154,341 $ 99,750 $ 75,870
========= ========= =========
Income taxes paid $ 931,437 $1,962,872 $ 928,361
========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
<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" or the
"Company") include the accounts of Misonix, its 92% owned subsidiary, Labcaire
Systems, Ltd. ("Labcaire"), its 90% owned subsidiary, Sonora Medical Systems,
Inc. ("Sonora"), 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. The Company operates as one segment.
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 and March 2000, the Company entered into licensing agreements to further
develop two of its medical devices (see Note 16).
Labcaire, which began operations in February 1992, is located in the United
Kingdom, and its core business is the innovation, design, manufacture, and
marketing of air handling systems for the protection of personnel, products and
the environment from airborne hazards. Net sales to unaffiliated customers, net
income and total assets related to Labcaire as of and for the years ended June
30, 2000, 1999 and 1998 were approximately $7,003,000, $381,000 and $5,031,000,
$7,129,000, $386,000 and $5,010,000, $5,957,000, $236,000 and $2,870,000,
respectively.
Acoustic Marketing Research Inc., doing business as Sonora Medical Systems, Inc.
("Sonora"), which was acquired in November 1999 and is located in Longmont,
Colorado, is an ISO 9002 certified refurbisher of high-performance ultrasound
systems and replacement transducers for the medical diagnostic ultrasound
industry.
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 August 2001,
consist of commercial paper, 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, 2000, 1999 and 1998 unrealized
gains on held-to-maturity marketable securities were immaterial.
34
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company's operations are located in Farmingdale, New York, North Somerset,
England and Longmont, Colorado. 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
2000 and 1999, were approximately $7,849,000 and $8,743,000 and to two customers
in 1998, were approximately $11,500,000 ($6,500,000 and $5,000,000). Accounts
receivable from these customers were approximately $2,612,000, $2,400,000 and
$4,961,000 ($3,147,000 and $1,814,000) at June 30, 2000, 1999 and 1998,
respectively. At June 30, 2000 and 1999 the Company's accounts receivable with
customers outside the United States were approximately $1,919,000 and
$2,586,000, respectively, of which $1,427,000 and $1,638,000, respectively,
related to its Labcaire operations. The Company utilizes letters of credit on
foreign or export sales where appropriate. Credit losses relating to both
domestic and foreign customers have historically been minimal and within
management's expectations except as related to Medical Device Alliance ("MDA")
(see Note 14).
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 cash, accounts receivable, accounts payable, and accrued
liabilities approximate their fair values principally because of the short-term
nature of these instruments. The carrying value of the Company's debt
approximates its fair value due to their variable interest rates.
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 intangible and other
long-lived assets in determining the ultimate recoverability of their
unamortized values using future undiscounted cash flow analyses. Such a review
has been performed by management and does not indicate an impairment of such
assets.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in connection with the Company's acquisitions of 92% of the
common stock of Labcaire and 90% of the common stock of Sonora. The goodwill is
being amortized by the straight-line method over its estimated useful lives of
25 years for Labcaire and 5 years for Sonora.
35
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
OTHER ASSETS
The cost of acquiring or processing patents, trademarks, and other intellectual
properties are capitalized at cost. This amount is being amortized using the
straight-line method over the estimated useful lives of the underlying assets,
which is approximately 17 years.
INCOME TAXES
The Company accounts for income taxes under the liability method in accordance
with FASB Statement No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
NET INCOME PER SHARE
Basic and diluted earnings per share are calculated in accordance with FASB
Statement No. 128, "Earnings Per Share." The following table sets forth the
reconciliation of weighted average shares outstanding and diluted weighted
average shares outstanding:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Weighted average common shares outstanding ....... 5,937,685 5,862,445 5,690,160
Dilutive effect of stock options ................. 578,702 761,564 871,997
--------- --------- ---------
Diluted weighted average common shares outstanding 6,516,387 6,624,009 6,562,157
========= ========= =========
</TABLE>
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 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 the Company's comprehensive income are net income
and foreign currency translation adjustments. The adoption of FASB Statement No.
130 had no effect on the Company's consolidated results of operations and
financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is expected to adopt
SAB 101 during the fourth quarter of fiscal 2001. The Company is currently
assessing the impact of SAB 101 on its consolidated financial statements and
believes that the effect will not be material to the Company's operating
results.
DERIVATIVES
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and on June 15, 2000, issued Statement No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment to FASB Statement No. 133." These statements establish
methods of accounting for derivative financial instruments and hedging
36
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
activities related to those instruments as well as other hedging activities. The
Company is required to adopt these statements for the year ending June 30, 2001.
The Company is currently assessing the impact of these statements on its
consolidated financial statements and believes that the effect will not be
material to the Company's operating results.
FOREIGN CURRENCY TRANSLATION
The Company follows the policies prescribed by FASB Statement No. 52, "Foreign
Currency Translation," for translation of the financial results of its foreign
subsidiaries. Accordingly, assets and liabilities are translated at the foreign
currency exchange rate in effect at the balance sheet date. Resulting
translation adjustments due to fluctuations in the exchange rates are recorded
as other comprehensive income. Results of operations are translated using the
weighted average of the prevailing foreign currency rates during the fiscal
year. Stockholders' equity accounts are translated at historical exchange rates.
Gains and losses on foreign currency transactions are recorded in other income
and expense.
RESEARCH AND DEVELOPMENT
All research and development expenses are expensed as incurred and are included
in operating expenses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans in accordance with
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 generally set equal to
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
2. ACQUISITIONS
SONORA MEDICAL SYSTEMS, INC.
On November 16, 1999, the Company acquired a 51% stake in Sonora, for
$1,400,000. Sonora authorized and issued new common stock for the 51% stake.
Sonora is utilizing the proceeds of such sale to increase inventory and expand
marketing, sales and research and development efforts. An additional 4.7% was
acquired from the principals on February 25, 2000, for $208,000, bringing the
acquired interest to 55.7%. The principals sold an additional 34.3% to Misonix
on June 1, 2000, for approximately $1,237,000, bringing the acquired interest to
90%. Sonora, located in Longmont, Colorado, is an ISO 9002 certified refurbisher
of high-performance ultrasound systems and replacement transducers for the
medical diagnostic ultrasound industry. Sonora also offers a full range of
aftermarket products and services such as its own ultrasound probes and
transducers, and other services that can extend the useful life of its
customers' ultrasound imaging systems beyond the usual five to seven years.
Sonora also has developed a three dimensional real time plug and play device in
conjunction with BioMedcom, LTD. The acquisition of Sonora was accounted for as
a purchase. Accordingly, results of operations for Sonora are included in the
consolidated statement of income
37
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
from the date of acquisition and acquired assets and liabilities have been
recorded at their estimated fair values at the date of acquisition. The excess
of the cost of the acquisition ($2,787,000 plus acquisition costs of $101,000,
which includes a broker fee of $72,000) over the fair value of net assets
acquired is being amortized on a straight-line basis over a period of 5 years.
The results of operations of Sonora prior to the acquisition are not material to
the consolidated statements of income for the years ended June 30, 2000, 1999,
and 1998.
HEARING INNOVATIONS, INC.
On October 18, 1999, the Company and Hearing Innovations, Inc. ("Hearing
Innovations") completed the agreement whereby the Company invested an additional
$350,000 and cancelled the notes receivable aggregating $400,000 in exchange for
a 7% equity interest in Hearing Innovations and representation on its Board of
Directors. Warrants to purchase additional shares that would bring the Company's
interest in Hearing Innovations to over 15% were also a part of this agreement.
Upon exercise of the warrants, the Company has the right to manufacture Hearing
Innovations' ultrasonic products and also has the right to create a joint
venture with Hearing Innovations for the marketing and sale of its ultrasonic
tinnitus masker device. As of the date of the acquisition, the cost of
investment ($750,000 plus acquisition costs of $34,000) is being amortized on a
straight-line basis over its estimated life of 10 years.
The Company's portion of the net losses of Hearing Innovations were recorded
since the date of acquisition in accordance with the equity method of
accounting. The net carrying value of the investment at June 30, 2000 is
$688,118.
During the fourth quarter of fiscal 2000, the Company entered into four loan
agreements whereby Hearing Innovations was required to pay the Company amounts
of $24,000 due July 1, 2000, $45,000 due July 15, 2000, $29,000 due July 15,
2000, and $13,000 due July 15, 2000. During the first quarter of fiscal 2001,
the Company entered into an additional four loan agreements whereby Hearing
Innovations was required to pay the Company the total principal amounts of
$39,000, $13,000, $13,000 and $13,000 due September 15, 2000. All notes bore
interest at 8% per annum. The notes were secured by a lien on all Hearing
Innovations' rights, titles and interests in accounts receivable, inventory,
property, plant and equipment and processes of specified products whether now
existing or hereafter arising after the date of these agreements. On September
11, 2000, the Company loaned an additional $108,000 to Hearing Innovations,
which together with the then outstanding loans aggregating $192,000 (with
accrued interest) described above were exchanged for a $300,000 7% Secured
Convertible Debenture due August 27, 2002, and warrants to acquire 66,667 shares
of common stock at $2.25 per share. The debenture is convertible at the option
of the Company at any time into shares of common stock of Hearing Innovations at
a conversion rate of $2.25 per share. Interest accrues and is payable at
maturity, or is convertible on the same terms as the debenture's principal
amount. The warrants expire August 27, 2002. Were the Company to convert the
debenture and exercise all warrants, including those previously outstanding,
the Company would hold a 20% interest in Hearing Innovations.
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 "Labcaire
Agreement"), to require the Company to repurchase such shares at a price equal
to its pro rata share of 8.5 times Labcaire's earnings before interest, taxes
and management charges for the preceding fiscal year.
38
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In June 1996, this Labcaire 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 Labcaire Agreement. Pursuant to the Labcaire
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, 9,286 shares (2.65%) were
purchased by the Company, in October 1999, for approximately $174,000,
representing the fiscal 2000 buy-back portion and 9,286 shares (2.65%) will be
purchased by the Company, in October 2000, for approximately $120,000. The cost
of these purchases of Labcaire common stock has been recorded as goodwill.
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. The
Company has the optional rights to market and sell several other high potential
HIFU applications for the breast, liver, and kidney for both benign and
cancerous tumors. The 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, 2000 and 1999 is $2,381,418 and $2,955,703, respectively.
3. INVENTORIES
Inventories are summarized as follows:
JUNE 30,
2000 1999
---- ----
Raw materials $2,321,828 $2,111,270
Work-in-process 362,664 331,744
Finished goods 1,588,731 493,946
---------- ----------
$4,273,223 $2,936,960
========== ==========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Buildings $ 1,789,051 $1,789,051
Machinery and equipment 1,567,888 1,994,619
Furniture and fixtures 472,932 605,430
Automobiles 417,778 391,330
Leasehold improvements 52,588 269,414
----------- ----------
4,300,237 5,049,844
Less: Accumulated depreciation and amortization (1,189,125) (2,085,066)
----------- ----------
$ 3,111,112 $2,964,778
=========== ==========
</TABLE>
39
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Included in machinery and equipment at June 30, 2000 and 1999, is approximately
$325,000 and $297,000 of data processing equipment and telephone equipment under
capital leases with related accumulated amortization of approximately $200,000
and $168,000, respectively. Also, included in automobiles is approximately
$418,000 and $391,000, respectively, under capital leases with accumulated
amortization of approximately $58,000 and $118,000. The Company leased
approximately $325,000, $95,000 and $171,000 of automobiles and equipment under
capital lease arrangements during the years ended June 30, 2000, 1999 and 1998,
respectively.
5. REVOLVING NOTE PAYABLE
Labcaire has an overdraft facility with a United Kingdom bank. As of June 30,
2000, the amount of this facility is $581,000 and bears interest at the bank's
base rate (6% at June 30, 2000) plus 2%. This facility is secured by the assets
of Labcaire.
The facility is renewable on an annual basis beginning in September 1999. The
terms also stipulate that Labcaire's accounts receivable must be at least 175%
of the outstanding balance of the facility at all times, and that Labcaire must
show an after tax profit of at least $166,000 for the prior four quarters. At
June 30, 2000 and 1999, the balance outstanding under this overdraft facility
was $473,050 and $499,398, respectively, and Labcaire was in compliance with all
covenants.
6. REVOLVING LINE OF CREDIT
On April 24, 1999, Sonora (see Note 2 for Sonora acquisition) entered into a
credit facility with Northwest Bank Colorado, National Association that provided
Sonora with a $250,000 revolving line of credit for working capital
requirements. The terms provide for the repayment of the debt in full on its
maturity date. Sonora elected to pay down the revolving line of credit on March
10, 2000. The term of this agreement was for approximately one year. The
revolving line of credit matured and was cancelled on May 15, 2000.
7. DEBT
On January 22, 1999, Labcaire purchased a manufacturing facility in North
Somerset, England to house its 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 (6% at June 30, 2000) 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 1999. There is a
1% prepayment penalty for early retirement of the loan. As of June 30, 2000 and
1999, $1,203,050 and $1,255,867 was outstanding on this loan, respectively.
At June 30, 2000, future principal maturities of long-term debt are as follows:
2001 $ 45,519
2002 57,452
2003 61,926
2004 66,735
2005 71,925
Thereafter 899,493
-----------
$ 1,203,050
===========
40
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following summarizes accrued expenses and other current liabilities:
JUNE 30
2000 1999
---- ----
Accrued payroll and vacation $111,764 $169,367
Accrued sales tax 29,638 113,696
Accrued commissions and bonuses 413,292 419,833
Customer deposits 278,635 942,119
Accrued professional fees 117,640 169,963
Warranty 309,766 88,670
Other 62,379 185,583
--------- ---------
$1,323,114 $2,089,231
========= =========
9. LEASES
Misonix has entered into several noncancellable operating leases for the rental
of certain office space, equipment and automobiles expiring in various years
through 2005. The principal lease for office space provides for a monthly rental
amount of approximately $31,000. The Company also leases certain office
equipment and automobiles under capital 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, 2000:
Capital Operating
Leases Leases
--------- ---------
2001 $ 159,992 $ 544,390
2002 110,450 597,704
2003 21,523 602,157
2004 - 592,123
2005 - 593,664
--------- ----------
Total minimum lease payments 291,965 $2,930,038
==========
Amounts representing interest (30,645)
---------
Present value of net minimum lease payments
(including current portion of $144,113.) $ 261,320
=========
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 $417,000, $317,000 and $321,000 for the years ended June 30, 2000,
1999 and 1998, respectively.
41
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. STOCKHOLDERS' EQUITY
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.
11. 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 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 aggregating more than 10% of the voting rights
of 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
42
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Company's common stock of 87%, 88% and 100%; and a weighted-average expected
life of the options of five years for the years ended June 30, 2000, 1999 and
1998, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
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:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Net Income: As Reported $2,520,896 $1,964,758 $ 5,328,381
Pro Forma 1,908,019 1,313,964 4,040,160
Basic EPS: As .42 .34 .94
Reported
Pro Forma .32 .22 .71
Diluted EPS: As Reported .39 .30 .81
Pro Forma .26 .18 .56
</TABLE>
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 expense may not be representative of that to be expected in future
years.
The following table summarizes information about stock options and warrants
outstanding at June 30, 2000, 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 -
---------- ------ --------- -----
Granted 48,695 6.91 - -
Exercised (40,347) 1.79 - -
Canceled (66,378) 8.10 - -
June 30, 2000 1,354,020 $ 2.62 $ -
========= ====== ========== =====
2000 1999 1998
---- ---- ----
Weighted average fair value of options granted $ 4.97 $ 3.02 $ 11.47
</TABLE>
43
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding at
June 30, 2000:
<TABLE>
<CAPTION>
Weighted Average
Options Options Remaining
Exercise Price Outstanding Exercisable Contractual Life (Yrs)
------------------- -------------- --------------------- ------------------------
<S> <C> <C> <C>
$ .73 778,500 778,500 7
$ 2.17 - 5.31 444,250 398,000 8
$ 5.50 - 7.57 106,270 102,010 5
$ 12.33 18.50 25,000 25,000 7
--------- ---------
1,354,020 1,303,510
========= =========
</TABLE>
As of June 30, 2000 and 1999, 1,354,020 and 1,412,050 shares of common stock are
reserved for issuance under outstanding options and 680,633 and 662,950 shares
of common stock are reserved for the granting of additional options,
respectively. All outstanding options expire between February 2002 and August
2009 and vest immediately or over periods of one or two years.
12. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company, Medical Device Alliance, Inc. ("MDA") and MDA's wholly-owned
subsidiary, LySonix, Inc. ("LySonix"), were defendants in an action alleging
patent infringement filed by Mentor Corporation. 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.
13. 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,
2000 1999 1998
---------------------------------------------
United States $18,323,363 $16,451,095 $19,465,196
Canada and Mexico 2,772,413 428,777 265,474
Europe 6,729,398 6,927,140 5,883,431
Asia 652,841 633,422 785,520
Middle East 333,904 167,042 179,911
Other 230,953 159,687 184,800
----------- ----------- -----------
$29,042,872 $24,767,163 $26,764,332
=========== =========== ===========
44
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14. 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 was transmitted by the Company pursuant to
which the license agreement was terminated on January 11, 1999.
On March 30, 2000, the Company and MDA's subsidiary, LySonix, signed a new
ten-year Exclusive License Agreement ("MDA Agreement") for the marketing of the
soft tissue aspirator for aesthetic and cosmetic surgery applications. The MDA
Agreement calls for LySonix to purchase the soft tissue aspirators and
exclusively represent the Company's products for the fragmentation and
aspiration of soft tissue. The Company was paid in full for the amounts due and
owing by the return of inventory by MDA and LySonix, which is in accordance with
the MDA Agreement. The Company recorded the receipt of inventory at the lower of
its original cost or market, thereby a recovery of bad debt expense of
approximately $462,000 was recorded during the third quarter of fiscal 2000 (See
Note 16).
15. 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 and liabilitlies at
June 30 are as follows:
2000 1999
-------------- --------------
Deferred tax assets:
Bad debt reserves $ 46,757 $ 32,840
Inventory valuation 89,016 98,948
License fee income 146,172 155,168
Investments 157,126 -
Non-cash compensation charge 1,681,502 1,681,502
Other 31,465 32,216
-------------- --------------
Total deferred tax assets 2,152,038 2,000,674
Valuation allowance (1,681,502) (1,681,502)
Deferred tax liabilities:
Depreciation (17,001) (5,900)
-------------- --------------
Net deferred tax asset $453,535 $ 313,272
============== ==============
45
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Significant components of the income tax expense (benefit) attributable to
operations for the years ended June 30 are as follows:
2000 1999 1998
--------------- ----------------- -----------------
Current:
Federal $ 1,527,297 $ 616,540 $2,079,837
State 218,911 88,928 353,042
Foreign 25,016 89,905 68,269
----------- ---------- ----------
Total current 1,771,224 795,373 2,501,148
Deferred:
Federal (128,890) 166,120 (339,237)
State (11,373) 49,620 (99,775)
----------- ---------- ----------
Total deferred (140,263) 215,740 (439,012)
----------- ---------- ----------
$ 1,630,961 $1,011,113 $2,062,136
=========== ========== ==========
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:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- --------------- --------------
<S> <C> <C> <C>
Tax at statutory rates $1,411,631 $1,011,796 $2,512,776
State income taxes, net
of federal benefit 144,481 91,442 167,182
Foreign tax rate differential (54,534) (55,000) (36,500)
Valuation allowance - - (943,900)
Goodwill 41,480 9,623 7,609
Travel and entertainment 4,787 8,339 37,100
Other 83,116 (55,087) 317,869
---------- ---------- ----------
$1,630,961 $1,011,113 $2,062,136
========== ========== ==========
</TABLE>
16. LICENSING AGREEMENTS FOR MEDICAL TECHNOLOGY
On March 30, 2000, the Company and MDA and LySonix signed a the MDA Agreement
for the marketing of the soft tissue aspirator for aesthetic and cosmetic
surgery applications. The MDA Agreement calls for LySonix to purchase the soft
tissue aspirators and exclusively represent the Company's products for the
fragmentation and aspiration of soft tissue. In January 1999, the Company had
terminated its previous license agreement with MDA and LySonix 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 1999.
46
<PAGE>
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In October 1996, the Company entered into a License Agreement (the USS License")
with United States Surgical Corporation ("USS"), for a twenty-year period,
covering the further development and commercial exploitation of the Company's
medical technology relating to ultrasonic cutting, which uses high frequency
sound waves to coagulate and divide tissue for both open and laproscopic
surgery. The USS License gives USS exclusive world-wide marketing and sales
rights for this technology. The Company received $100,000 under the option
agreement preceding the USS License. This amount was recorded into income in
fiscal 1997. Under the USS License, the Company has received $475,000 in
licensing fees (which are being recorded as income over the term of the USS
License), plus royalties based upon net sales of such products. Also as part of
the USS License, the Company was reimbursed for certain product development
expenditures (as defined in the USS License) the amount of which was $53,563,
$61,800 and $278,231 in the years ended June 30, 2000, 1999 and 1998,
respectively.
17. EMPLOYEE PROFIT SHARING PLAN
The Company sponsors a retirement plan pursuant to Section 401(k) of the Code
for all full time employees. Participants may contribute a percentage of
compensation not to exceed the maximum allowed under the Code. The Plan provides
for a matching contribution by the Company which amounted to $30,515, $27,300
and $15,855 for the years ended June 30, 2000, 1999 and 1998, respectively.
47
<PAGE>
Schedule II
..............
Misonix, Inc.
Valuation and Qualifying Accounts and Reserves
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Balance at Additions Charged Additions Balance at
Beginning to cost and (deductions)- end of
Description of period expenses describe period
------------------------- ----------------- --------------------- -------------------- ------------------
Allowance for
doubtful accounts:
Year ended June 30:
<S> <C> <C> <C> <C> <C>
2000 $ 88,757 $ (366,612) $ 478,284 $ 200,429
1999 $ 240,911 $ 2,131,218 $ (2,283,372)(1) $ 88,757
1998 $ 65,876 $ 201,296 $ (26,261)(1) $ 240,911
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
