SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-10986
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, N.Y. 11375
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code... (516) 694-9555
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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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
Indicate by the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Outstanding at
Class of Common Stock November 1, 1999
--------------------- ----------------
$.01 par value 5,957,470
Transitional small business disclosure format (check one):
YES /X/ NO / /
MISONIX, INC.
Index
Item 1. FINANCIAL INFORMATION Page
Consolidated Financial Statements:
Consolidated Balance Sheets as of
September 30, 1999 (Unaudited) and June 30, 1999 3
Consolidated Statements of Operations
Three Months Ended September 30, 1999
and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows
Three months ended September 30, 1999
and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Item 2. OTHER INFORMATION
Item 1. Legal Proceeding 12
Item 6: Exhibits and Reports on Form 8-K
(a) Exibits - (11) Computation of net earnings per share 14
(b) Reports on Form 8-K-None 12
Signatures 13
2
MISONIX, INC.
CONSOLIDATED BALANCE SHEETS
====================================
September 30,
1999 June 30,
Assets (UNAUDITED) 1999
------------ ------------
Current assets
Cash and cash equivalents $ 9,163,685 $ 8,361,231
Investments held to maturity 3,039,400 3,987,309
Accounts receivable, net of allowance for
doubtful accounts of $108,557 and $88,757 5,023,838 6,073,919
Inventories 3,195,109 2,936,960
Deferred income taxes 160,690 131,788
Prepaid expenses and other current assets 792,877 611,818
------------ ------------
Total current assets 21,375,599 22,103,025
Property, plant and equipment, net 3,063,007 2,964,778
Deferred income taxes 147,020 181,484
Goodwill, less accumulated amortization
of 95,380 and $89,463 496,378 502,295
Investment in Focus Surgery, Inc. 2,834,398 2,955,703
Other assets 74,697 71,805
------------ ------------
Total assets $ 27,991,099 $ 28,779,090
============ ============
Liabilities and stockholders' equity
Current liabilities
Notes payable $ 520,726 $ 499,398
Accounts payable 1,747,969 2,356,877
Accrued expenses and other current liabilities 653,070 2,089,231
Income taxes payable 747,955 272,814
Current maturities of long term debt
and capital lease obligations 217,389 162,699
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Total current liabilities 3,887,109 5,381,019
Long-term debt and capital lease obligations 1,347,725 1,271,814
Deferred income 439,542 445,620
Minority interest 141,229 138,252
Stockholders' equity
Common stock, $.01 par value-shares authorized
10,000,000, issued and outstanding
5,957,470 and 5,927,470 59,575 59,275
Additional paid-in capital 21,756,129 21,719,553
Retained earnings (deficit) 379,002 (226,326)
Accumulated other comprehensive income (19,212) (10,117)
------------ ------------
Total stockholders' equity 22,175,494 21,542,385
------------ ------------
Total liabilities and stockholders' equity $ 27,991,099 $ 28,779,090
============ ============
See accompanying Notes to Consolidated Financial Statements.
3
MISONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
=====================================
For the three months ended
September 30,
-----------------------------
1999 1998
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Net Sales $ 6,482,971 $ 5,563,216
Cost of goods sold 3,665,684 2,758,466
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Gross Profit 2,817,287 2,804,750
Operating Expenses:
Selling, general and administrative expenses 1,686,161 1,664,977
Research and development 262,644 253,898
Bad debt expense 20,295 1,715,000
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Total operating expenses 1,969,100 3,633,875
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Income (loss) from operations 848,187 (829,125)
Other income (expense):
Interest income 154,295 178,870
Interest expense (43,539) (16,545)
Option/license fees 6,078 18,964
Royalty income 100,312 188,991
Amortization of investment (38,125) --
Foreign exchange gain (loss) 4,796 (15,592)
Miscellaneous income (expense) 4,625 (1,276)
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Income (loss) before equity in loss of Focus Surgery,
Inc., minority interest and income taxes 1,036,629 (475,713)
Equity in loss of Focus Surgery, Inc. (83,180) --
Minority interest in net income of consolidated subsidiary (2,977) (12,091)
----------- -----------
Income (loss) before income taxes 950,472 (487,804)
Income tax (provision) benefit (345,144) 208,157
----------- -----------
Net income (loss) $ 605,328 $ (279,647)
=========== ===========
Net income (loss) per share - Basic $ .10 $ (.05)
=========== ===========
Net income (loss) per share - Diluted $ .09 $ (.05)
=========== ===========
Weighted average common shares 5,957,470 5,767,700
=========== ===========
Diluted weighted average common shares outstanding 6,734,140 5,767,700
=========== ===========
See accompanying Notes to Consolidated Financial Statements
4
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
=====================================
For the three months ended
September 30,
-----------------------------
1999 1998
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Operating activities:
Net income (loss) 605,328 $ (279,647)
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 20,295 1,715,000
Deferred income tax expense 5,562 --
Depreciation and amortization 143,476 92,183
Loss on disposal of equipment 71,185 --
Non-cash compensation charge 8,076 --
Deferred income (6,078) (18,965)
Foreign currency (gain) loss (4,796) 15,592
Minority interest in net income of subsidiary 2,977 12,091
Equity in loss of Focus Surgery, Inc. 83,180 --
Change in operating assets and liabilities:
Accounts receivable 1,029,786 2,940,885
Inventories (258,149) 18,131
Prepaid expenses and other current assets (31,803) 30,940
Other assets (3,515) (9,712)
Accounts payable and accrued expenses (2,045,069) (557,672)
Income taxes payable 475,141 (1,147,806)
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Net cash provided by operating activities 95,596 2,811,020
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Investing activities
Acquisition of property, plant and equipment (64,846) (72,181)
Purchase of investments held to maturity -- (7,940,008)
Sales of investments held to maturity 947,909 3,400,000
Loans to Hearing Innovations (151,885) --
----------- -----------
Net cash provided by (used in) investing activities 731,178 (4,612,189)
----------- -----------
Financing activities
Proceeds from short-term borrowings, net 21,328 33,875
Principal payments on capital lease obligations (58,074) (14,699)
Proceeds from exercise of stock options 28,800 --
Payment of long-term debt (12,076) --
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Net cash (used in) provided by financing activities (20,022) 19,176
----------- -----------
Effect of exchange rates on cash and cash equivalents (4,298) 3,414
----------- -----------
Net increase (decrease) in cash and cash equivalents 802,454 (1,778,579)
Cash and cash equivalents at beginning of period 8,361,231 4,592,911
----------- -----------
Cash and cash equivalents at end of period $ 9,163,685 $ 2,814,332
=========== ===========
Supplemental disclosure of cash flow information
Interest paid 43,539 16,545
Income taxes paid -- 941,613
See accompanying Notes to Consolidated Financial Statements
5
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited)
=========================================================
1. Basis of Presentation
The consolidated balance sheet as of September 30, 1999, the consolidated
statements of operations for the three months ended September 30, 1999
and, 1998 the consolidated statements of cash flows for the three months
ended September 30, 1999 and September 30, 1998 have been prepared by the
Company and are unaudited. In the opinion of management, all adjustments
(which included only normal recurring adjustments) have been made which
are necessary to present fairly the financial position, results of
operations and cash flows (unaudited) at September 30, 1999 and for all
periods presented.
For information concerning the Company's significant accounting policies,
reference is made to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1999. While the Company believes that the disclosures
presented are adequate to make the information contained herein not
misleading, it is suggested that these statements be read in conjunction
with the consolidated financial statements and notes included in the Form
10-KSB. Results of operations for the period ended September 30, 1999 are
not necessarily indicative of the operating results to be expected for the
full year.
2. Inventories
Inventories are summarized as follows:
September 30, 1999 June 30, 1999
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Raw materials $1,991,989 $2,111,270
Work-in-process 579,926 331,744
Finished goods 623,194 493,946
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$3,195,109 $2,936,960
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3. Accrued Expenses and Other Current Liabilities
The following summarizes accrued expenses and other current liabilities:
September 30, 1999 June 30, 1999
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Accrued payroll and vacation $ 91,421 $ 169,367
Accrued sales tax 2,846 113,696
Accrued commissions and bonuses 186,853 419,833
Customer deposits 7,266 942,119
Professional fees 32,550 169,963
Other 332,134 274,253
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$ 653,070 $2,089,231
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6
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
4. Acquisitions
Hearing Innovations, Inc.
On March 10, 1999, the Company entered into a bridge loan agreement with
Hearing Innovations, Inc., ("Hearing Innovations") whereby Hearing
Innovations is required to pay to the Company, on or before March 10,
2000, the principal amount of $250,000. The loan was entered into in
anticipation of the upcoming agreement in principle for a 7% equity
investment in Hearing Innovations by the Company. This amount bears no
interest. The note is secured by a lien on all Hearing Innovation's
rights, titles and interests in accounts receivable, inventory, property,
plant and equipment and processes of specified products whether now
existing or here after arising or acquired after the date of the
agreement.
On May 11, 1999, the Company and Hearing Innovations jointly announced an
agreement in principle whereby the Company will invest $750,000 to obtain
an approximately 7% equity position in Hearing Innovations. The agreement
further provides for the issuance of warrants that, if exercised, would
give the Company an approximate 15% interest in Hearing Innovations. Upon
exercise of the warrants, the Company would have the right to manufacture
Hearing Innovations ultrasonic products and also has the right to create a
joint venture for the marketing and sale of Hearing Innovations'
ultrasonic tinnitus masker device.
During the first quarter of 2000, the Company entered into four additional
secured loan agreements whereby Hearing Innovations is required to pay the
Company the total principal amounts of $30,000 due October 10, 1999,
$50,000 due June 29, 2000, $50,000 due July 29, 2000, and $20,000 due
August 30, 2000. The notes bear interest at 8% per annum. The notes are
secured by a lien on all Hearing Innovation's rights, titles and interests
in accounts receivable, inventory, property, plant, and equipment and
processes of specified products whether now existing or here after
acquired after the date of these agreements. (See Note 5).
5. Subsequent Events
Acquisitions
Hearing Innovations, Inc.
On October 18, 1999, the Company and Hearing Innovations completed
the agreement in principle 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 agreement.
Labcaire Systems Ltd.
In October 1999, under the terms of the revised purchase agreement
(the "Agreement") with Labcaire (as discussed in the Form 10-KSB at
June 30, 1999), the Company paid (approximately $173,000) for 9,286
shares (2.65%) of the outstanding common stock of Labcaire. This
represents the fiscal 2000 buy-back portion, as defined in the
Agreement.
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MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
The Company,on January 11, 1999,terminated its license agreement with
Medical Device Alliance, Inc. ("MDA") and LySonix, Inc. ("LySonix") due to
default by MDA for non-payment for product shipments and royalties owed.
In May 1999, the Company began an action against such licencees seeking
collection of indebtedness and security interest against the inventory in
their possession.
On October 22, 1999, the Company executed a letter of intent with the
judicially appointed receiver for the former licensees of its soft tissue
aspirator, MDA and LySonix, laying the groundwork of the parties dispute.
This letter of intent is subject to court approval. The letter of intent
provides among other things, that the Company is to be paid in full for
amounts due and owing by the return of inventory by MDA and LySonix and
that the parties will attempt to negotiate a new license agreement
covering these products.
8
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three months ended September 30, 1999 and 1998
Net Sales: Net sales of the Company's medical, scientific and industrial
products, increased $919,755 (16.5%) from $5,563,216 in the three months ended
September 30, 1998 to $6,482,971 in the three months ended September 30, 1999.
The increase is due to an increase in medical instrument and wet scrubber
(Mystaire) sales partially offset by lower ultrasonic industrial and fume
enclosure sales. The Company's backlog of unfilled orders increased from
$5,789,988 at September 30, 1998 to $6,151,533 at September 30, 1999. This
increase is primarily due to an increase in ultrasonic and Mystaire orders.
Gross Profit: Gross profit decreased from 50.4% of sales in the three months
ended September 30, 1998 to 43.5% of sales in the three months ended September
30, 1999 due to an unfavorable mix of high and low margin product deliveries.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 1% from $1,664,977 (29.9% of sales) in the
three months ended September 30, 1998 to $1,686,161 (26% of sales) in the three
months ended September 30, 1999, due to increased sales and marketing efforts in
Mystaire and Labcaire subsidiary products.
Research and Development Expenses: Research and development expenses increased
from $253,898 in the three months ended September 30, 1998 to $262,644. The
increase is predominately due to development costs associated with the Company's
fume enclosure and ultrasound products.
Bad Debt Expense: Bad debt expense decreased from $1,715,000 for the three
months ended September 30, 1998 to $20,295 for the three months ended September
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.
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.
9
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Other Income (Expense): Other income during the three months ended September 30,
1998 was $353,412. During the three months ended September 30, 1999, other
income was $188,442. This decrease was principally due to decreased royalty
income received from the Company's licensees on the sales of medical devices, a
decrease in interest income on investments due to a lower amount of interest
bearing cash and investments, an increase in interest expense due to additional
borrowings related to the purchase of the new Labcaire facility and amortization
of the investment in capital stock of Focus Surgery, Inc.
Income Taxes: For the three months ended September 30, 1999 there was a tax
provision of $345,144 as compared to a tax benefit of $208,157 at September 30,
1998 due to the fact that the Company had an operating loss for the three months
ended September 30, 1998.
Liquidity and Capital Resources:
Working capital at September 30, 1999 and June 30, 1999 was $17,488,490 and
$16,722,006, respectively. The increase is due to increased cash flow from
operations and investing activities.
On March 10, 1999, the Company entered into an agreement in principle with
Hearing Innovations Inc. ("Hearing Innovations") whereby the Company loaned
Hearing Innovations $250,000 to be repaid to the Company on or before March 10,
2000. The loan was entered into in anticipation of the upcoming agreement in
principle for a 7% equity investment in Hearing Innovations by the Company. This
amount bears no interest. The loan was secured by a lien on all of Hearing
Innovation's rights, title and interest in accounts receivable, inventory,
property, plant and equipment and processes of specified products whether now
existing or hereafter arising or acquired. On May 11, 1999, the Company and
Hearing Innovations announced an agreement in principle which was completed on
October 18, 1999, whereby the Company invested $750,000 to obtain an
approximately 7% equity position in Hearing Innovations.
In October 1999, under the terms of the revised purchase agreement (the
"Agreement") with Labcaire (as discussed in the Form 10-KSB at June 30, 1999),
the Company paid (approximately $173,000) for 9,286 shares (2.65%) of the
outstanding common stock of Labcaire. This represents the fiscal 2000 buy-back
portion, as defined in the Agreement.
The Company, MDA, and MDA's wholly-owned subsidiary, 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.
The Company, on January 11, 1999, terminated its license agreement with MDA and
LySonix due to default by MDA for non-payment for product shipment and royalties
owed. In May 1999, the Company began an action against such licencees seeking
collection of indebtedness and security interest against the inventory in their
possession.
On October 22, 1999, the Company executed a letter of intent with the judicially
appointed receiver for the former licensees of its soft tissue aspirator, MDA
and LySonix laying the groundwork of the parties dispute. This letter of intent
is subject to court approval. The letter of intent provides, among other things,
that the Company is to be paid in full for amounts due and owing by the return
of inventory by MDA
10
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
and LySonix and that the parties will attempt to negotiate a new license
agreement covering these products.
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:
During the first quarter of fiscal 1998, the Company commenced a Year 2000 data
conversion project to address necessary changes, testing and implementation with
respect to its internal computer systems. The project was completed on June 1,
1999. The cost of this project has not been material to the Company's
consolidated results of operations and liquidity.
The Company's applicable products are Year 2000 compliant.
The Company is currently seeking information regarding Year 2000 compliance by
its vendors, customers and manufacturers. The project was completed in the 1st
quarter of fiscal year 2000. However, given the reliance on third-party
information as it relates to their compliance programs and the difficulty of
determining potential errors on the part of the external service suppliers, no
assurance can be given that the Company's information systems or operations will
not be affected by mistakes, if any, of third parties or third-party failures to
complete the Year 2000 project on a timely basis. There can be no assurance that
the systems of other companies on which the Company's systems rely will be
timely converted or that any such failures to convert by another company would
not have an material adverse effect on the Company's systems.
The cost of the Company's Year 2000 project regarding compliance by its vendors,
customers, and manufacturers has not been material to the Company's consolidated
results of operations and liquidity. The Company presently believes that the
Year 2000 issue will not pose significant operational problems for its internal
information systems and products. The Company does not currently have any
contingency plans in place to address the failure of timely conversion of its
and/or third-party systems with respect to the Year 2000 issue.
Forward Looking Statements: This report contains certain forward looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, which are intended to be covered by the safe harbors
created thereby. Although the Company believes that the assumptions underlying
the forward looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward looking statements contained in this report will prove to be
accurate. Factors that could cause actual results to differ from the results
specifically discussed in the forward looking statements include, but are not
limited to, the absence of anticipated contracts, higher than historical costs
incurred in performance of contracts or in conducting other activities, product
mix in sales, results of joint venture and investment in related entities,
future economic, competitive and market conditions, the outcome of legal
proceedings, particularly those including patent litigation with Mentor Corp.
and the efforts at resolving the existing disputes with MDA and LySonix as well
as management business decisions.
11
MISONIX, INC.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
On October 22, 1999, the Company executed a letter of intent with
the judicially appointed receiver for the former licensees of its
soft tissue aspirator, MDA and LySonix, laying the groundwork for a
resolution of the parties dispute. This letter of intent is subject
to court approval. This letter of intent provides, among other
things, that the Company is to be paid in full for amounts due and
owing by the return of inventory by MDA and LySonix and that the
parties will attempt to negotiate a new license agreement covering
these products.
The Company, MDA, and MDA's wholly-owned subsidiary, 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.
Item 6: Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 1999.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: November 15, 1999
MISONIX, INC.
--------------------------------------
(Registrant)
By:
----------------------------------
Michael A. McManus, Jr.
President, Chief Executive Officer
By:
----------------------------------
Richard Zaremba
Vice President
Chief Financial Officer,
Treasurer and Secretary
13