FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission file number: 1-10986
MISONIX, INC.
---------------------------------------------------------
(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
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(631) 694-9555
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate 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 February 1, 2001
--------------------- ----------------
$.01 par value 6,079,015
MISONIX, INC.
Index
Part I - FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Consolidated Balance Sheets as of
December 31, 2000 (Unaudited) and June 30, 2000 3
Consolidated Statements of Operations
Six Months Ended December 31, 2000
and 1999 (Unaudited) 4
Consolidated Statements of Operations
Three Months Ended December 31, 2000
and 1999 (Unaudited) 5
Consolidated Statements of Cash Flows
Six months ended December 31, 2000
and 1999 (Unaudited) 6-7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition 11-14
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II - OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
Part 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
MISONIX, INC.
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2000 2000
(UNAUDITED)
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 3,723,981 $ 7,069,502
Investments held to maturity 4,106,544 3,021,268
Accounts receivable, net of allowance for
doubtful accounts of $178,023 and $200,429,
respectively 7,386,455 7,277,242
Inventories 6,958,651 4,273,223
Deferred income taxes 268,161 167,238
Prepaid expenses and other current assets 675,343 794,473
------------ ------------
Total current assets 23,119,135 22,602,946
Property, plant and equipment, net 2,997,263 3,111,112
Deferred income taxes 1,787,384 286,297
Goodwill, less accumulated amortization
of $380,101 and $211,516, respectively 2,243,109 2,007,151
Investment in Focus Surgery, Inc. and
Hearing Innovations, Inc. less accumulated
amortization of $348,901 and $233,450 and
cumulative equity in losses of $723,787 and
$531,014, respectively 2,783,403 3,069,536
Convertible Debentures - Hearing Innovations, Inc. 306,125 -
Convertible Debentures - Focus Surgery, Inc. 301,341 -
Other assets 158,280 86,580
------------ ------------
Total assets $ 33,696,040 $ 31,163,622
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 631,708 $ 473,050
Accounts payable 2,348,594 2,053,192
Accrued expenses and other current 837,301 1,323,114
liabilities
Income taxes payable 797,529 1,283,554
Current maturities of long-term debt
and capital lease obligations 235,615 189,632
------------ ------------
Total current liabilities 4,850,747 5,322,542
Long-term debt and capital lease obligations 1,162,597 1,274,738
Deferred income 501,414 395,060
Minority interest 262,851 289,094
Stockholders' equity:
Common stock, $.01 par value-shares authorized
10,000,000; 6,121,817 and 5,967,817 issued,
respectively 61,218 59,678
Additional paid-in capital 21,924,449 21,801,969
Retained earnings 5,390,573 2,294,570
Treasury stock, 42,900 shares (219,006) (219,006)
Accumulated other comprehensive loss (238,803) (55,023)
------------ ------------
Total stockholders' equity 26,918,431 23,882,188
------------ ------------
Total liabilities and stockholders' equity $ 33,696,040 $ 31,163,622
============ ============
See accompanying Notes to Consolidated Financial Statements
3
MISONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the six months ended
December 31,
--------------------------
2000 1999
---- ----
Net sales $ 14,407,849 $13,767,105
Cost of goods sold 6,856,453 7,448,995
------------ -----------
Gross profit 7,551,396 6,318,110
Operating expenses:
Selling expenses 1,782,307 1,399,691
General and administrative expenses 3,044,558 2,402,743
Research and development expenses 823,517 592,504
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Total operating expenses 5,650,382 4,394,938
------------ -----------
Income from operations 1,901,014 1,923,172
Other income (expense):
Interest income 329,784 328,538
Interest expense (74,854) (77,713)
License fees 12,156 12,156
Royalty income 407,680 310,297
Amortization of investments (115,450) (92,583)
Foreign exchange gain (loss) 3,312 (1,678)
Miscellaneous income 720 6,033
------------ -----------
Income before equity in loss of Focus Surgery,
Inc., equity in loss of Hearing Innovations, Inc.,
minority interest and income taxes 2,464,362 2,408,222
Equity in loss of Focus Surgery, Inc. (171,187) (201,928)
Equity in loss of Hearing Innovations, Inc. (21,586) (16,774)
Minority interest in net loss (income)
of consolidated subsidiaries 26,243 (41,266)
------------ -----------
Income before income taxes 2,297,832 2,148,254
Income tax benefit (provision) 798,172 (832,352)
------------ -----------
Net income $ 3,096,004 $ 1,315,902
============ ===========
Net income per share - Basic $ .52 $ .22
============ ===========
Net income per share - Diluted $ .47 $ .20
============ ===========
Weighted average common shares outstanding - Basic 5,947,129 5,954,671
============ ===========
Weighted average common shares outstanding - Diluted 6,518,734 6,461,533
============ ===========
See accompanying Notes to Consolidated Financial Statements
4
MISONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended
December 31,
--------------------------
2000 1999
---- ----
Net sales $ 7,616,531 $ 7,284,134
Cost of goods sold 3,646,533 3,783,311
------------ -----------
Gross profit 3,969,998 3,500,823
Operating expenses:
Selling expenses 960,845 845,281
General and administrative expenses 1,504,733 1,250,697
Research and development expenses 476,659 329,860
------------ -----------
Total operating expenses 2,942,237 2,425,838
------------ -----------
Income from operations 1,027,761 1,074,985
Other income (expense):
Interest income 157,524 174,243
Interest expense (39,981) (34,174)
License fees 6,078 6,078
Royalty income 237,982 209,985
Amortization of investments (57,725) (54,458)
Foreign exchange loss (1,584) (6,474)
Miscellaneous income 720 1,408
------------ -----------
Income before equity in loss of Focus Surgery,
Inc., equity in loss of Hearing Innovations,
Inc., minority interest and income taxes 1,330,775 1,371,593
Equity in loss of Focus Surgery, Inc. (87,837) (118,748)
Equity in loss of Hearing Innovations, Inc. (5,586) (16,774)
Minority interest in net loss (income)
of consolidated subsidiaries 30,566 (38,289)
------------ -----------
Income before income taxes 1,267,918 1,197,782
Income tax provision (506,074) (487,208)
------------ -----------
Net income $ 761,844 $ 710,574
============ ===========
Net income per share - Basic $ .13 $ .12
============ ===========
Net income per share - Diluted $ .12 $ .11
============ ===========
Weighted average common shares outstanding - Basic 5,969,213 5,951,872
============ ===========
Weighted average common shares outstanding - Diluted 6,521,315 6,451,480
============ ===========
See accompanying Notes to Consolidated Financial Statements
5
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended
December 30,
------------------------------------
2000 1999
---- ----
Operating activities:
Net income $ 3,096,004 $ 1,315,902
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense (32,198) 40,095
Deferred income tax (benefit) expense (1,602,010) 1,356
Depreciation and amortization 504,750 323,484
Loss on disposal of equipment - 71,758
Non-cash compensation charge - 10,768
Deferred income 106,354 (12,156)
Foreign currency gain (3,312) 1,678
Minority interest in net (loss) income of subsidiaries (26,243) 41,266
Equity in loss of Focus Surgery, Inc. 171,187 201,928
Equity in loss of Hearing Innovations, Inc. 21,586 16,774
Change in operating assets and liabilities:
Accounts receivable (106,436) 1,063,366
Inventories (2,443,917) (179,677)
Prepaid expenses and other current assets (6,871) (41,691)
Other assets (36,877) (7,564)
Accounts payable and accrued expenses (165,896) (2,523,916)
Income taxes payable (513,887) 801,839
-------------- ------------
Net cash (used in) provided by operating activities (1,037,766) 1,125,210
-------------- ------------
Investing activities:
Acquisition of property, plant and equipment (172,227) (219,573)
Redemption of investments held to maturity 88,276 904,739
Purchase of investments held to maturity (1,173,552) -
Purchase of Labcaire stock (117,349) (173,777)
Cash paid for acquisition of Sonic Technologies
Laboratory Services (307,194) -
Cash paid for acquisition of CraMar Technologies, Inc. (299,592) -
Purchase of Convertible Debentures - Focus Surgery, Inc. (301,341) -
Purchase of Convertible Debentures - Hearing
Innovations, Inc. (194,258) (534,000)
Cash paid for acquisition of Sonora Medical Systems,
Inc., net of cash acquired (19,232)
-
-------------- ------------
Net cash used by investing activities (2,477,237) (41,843)
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6
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Financing activities:
Proceeds from short-term borrowings, net 158,459 58,234
Principal payments on capital lease obligations (86,165) (104,393)
Proceeds from exercise of stock options 124,020 28,800
Purchase of treasury stock - (138,997)
Payment of long-term debt (20,904) (26,334)
------------ ------------
Net cash provided by (used in) financing activities 175,410 (182,690)
------------ ------------
Effect of exchange rates on cash and cash equivalents (5,928) (22,747)
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,345,521) 877,930
Cash and cash equivalents at beginning of period 7,069,502 8,361,231
------------ ------------
Cash and cash equivalents at end of period $ 3,723,981 $ 9,239,161
------------ ------------
Supplemental disclosure of cash flow information:
Interest paid $ 74,854 $ 77,713
============ ============
Income taxes paid $ 1,299,088 $ 186,350
============ ============
Non-cash investing activities:
Conversion of Notes Receivable from Hearing
Innovations, Inc. to Convertible Debentures $ 192,250 $ 400,000
============ ============
See accompanying Notes to Consolidated Financial Statements
7
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of the management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended
December 31, 2000 are not necessarily indicative of the results that
may be expected for the year ending June 30, 2001.
The balance sheet at June 30, 2000 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended June 30, 2000.
Due to the change in the Company's accountants made on February 6,
2001, the review of this Report on Form 10-Q is not complete.
2. Acquisitions
Focus Surgery, Inc.
On November 7, 2000, the Company purchased a $300,000, 5.1% Secured
Convertible Debenture from Focus Surgery, Inc. ("Focus Surgery"), due
December 22, 2002 (the "Focus Debenture"). The Focus Debenture is
convertible at the option of the Company at any time after December
22, 2002 into shares of common stock of Focus Surgery at a conversion
rate of $1,200 per share, if the Focus Debenture is not retired by
Focus Surgery. Interest accrues and is payable at maturity, or is
convertible on the same terms as the Focus Debenture's principal
amount. The Focus Debenture is secured by a lien on all of Focus
Surgery's right, title and interest in accounts receivable, inventory,
property, plant and equipment and processes of specified products
whether now existing or hereafter arising after the date of the Focus
Debenture. The principal and accrued interest of the Focus Debenture
is $301,341 at December 31, 2000.
Labcaire Systems Ltd.
On November 1, 2000, under the terms of the revised purchase agreement
(the "Labcaire Agreement") with Labcaire (as discussed in the Form
10-K for the year ended June 30, 2000), the Company paid $117,349 for
9,286 shares (2.65%) of the outstanding common stock of Labcaire
bringing the acquired interest to 94.65%. This represents the fiscal
2001 buy-back portion, as defined in the Labcaire Agreement.
Sonic Technologies Laboratory Services
On October 12, 2000, the Company's subsidiary, Sonora, acquired the
assets of Sonic Technologies Laboratory Services ("Sonic
Technologies"), an ultrasound acoustic measurement and testing
laboratory. The assets of the Hatboro, Pennsylvania-based operations
of privately-held Sonic Technologies were relocated to Sonora's
facility in Longmont, Colorado. The acquisition was accounted for as a
purchase. Accordingly, acquired assets and liabilities have been
recorded at their estimated fair value at the date of acquisition. The
excess of the cost of the acquisition ($270,000 plus acquisition costs
of $34,611, which includes a broker fee of $25,000) over the fair
value of net assets acquired is being amortized on a straight-line
basis over a period of 10 years.
8
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
Hearing Innovations, Inc.
During the fourth quarter of fiscal 2000, the Company entered into four loan
agreements whereby Hearing Innovations, Inc. ("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 of Hearing Innovations' right, title and
interest in accounts receivable, inventory, property, plant and equipment
and processes of specified products whether now existing or hereafter
arising after the date of these agreements. 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 (the "Hearing Debenture") and warrants to
acquire 66,667 shares of Hearing Innovations common stock at $2.25 per
share. The Hearing Debenture is convertible at the option of the Company at
any time into shares of common stock of Hearing Innovations at a conversion
rate of $2.25 per share. Interest accrues and is payable at maturity, or is
convertible on the same terms as the Hearing Debenture's principal amount.
The warrants expire August 27, 2002. If the Company were to convert the
Hearing Debenture and exercise all warrants, including those previously
outstanding, the Company would hold a 20% interest in Hearing Innovations.
The principal and accrued interest of the Hearing Debenture is $306,125 at
December 31, 2000.
CraMar Technologies, Inc.
On July 27, 2000, the Company's subsidiary, Sonora, acquired 100% of the
assets of CraMar Technologies, Inc. ("CraMar"), an ultrasound equipment
servicer. The assets of the Colorado-based, privately-held operations of
CraMar were relocated to Sonora's facility in Longmont, Colorado. The
acquisition was accounted for as a purchase. Accordingly, acquired assets
have been recorded at their estimated fair value at the date of acquisition.
The cost of the acquisition ($272,908 plus acquisition costs of $26,684,
which includes a broker fee of $25,000) approximates the fair value of net
assets acquired.
3. Inventories
Inventories are summarized as follows:
December 31, 2000 June 30, 2000
----------------- -------------
Raw materials $ 3,524,098 $2,321,828
Work-in-process 934,915 362,664
Finished goods 2,499, 638 1,588,731
------------ -------------
$ 6,958,651 $ 4,273,223
============ ==============
9
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
4. Income Taxes
The Company recorded a reduction of the valuation allowance applied
against deferred tax assets in accordance with the provisions of FASB
statement No.109 "Accounting for Income Taxes" which provided a
one-time income tax benefit of $1,681,502. The valuation allowance was
established in fiscal year 1997 because the future tax benefit of
certain below market stock option grants issued at that time could not
be reasonably assured. The Company continually reviews the adequacy of
the valuation allowance and recognized the income tax benefit during
the quarter due to the reasonable expectation that such tax benefit
will be realized due to the fiscal strength of the Company. Management
believes that it will generate taxable income sufficient to realize the
tax benefit associated with future deductible temporary differences
and, therefore, the Company reduced the valuation allowance to zero at
December 31, 2000.
5. Accrued Expenses and Other Current Liabilities
The following summarizes accrued expenses and other current
liabilities:
December 31, 2000 June 30, 2000
------------------ -------------
Accrued payroll and vacation $ 124,143 $ 111,764
Accrued sales tax 13,633 29,638
Accrued commissions and bonuses 138,634 413,292
Customer deposits 141,976 278,635
Professional fees 52,210 117,640
Warranty 304,815 309,766
Other 61,890 62,379
---------- ----------
$ 837,301 $1,323,114
========== ==========
6. Commitments and Contingencies
Employment Agreement
The Company has entered into an employee agreement with its chief
executive officer and president, which expires on October 31, 2002.
This agreement provides an annual base compensation $275,000 with an
annual bonus at the discretion of the Board of Directors if certain
objectives are achieved. The agreement also provides for a guaranteed
initial bonus of $250,000, which is to be paid in December 2001.
7. Subsequent Event
On February 8, 2001, the Company acquired the assets of Fibra Sonics,
Inc. ("Fibra Sonics"), a Chicago-based, privately-held producer and
marketer of ultrasonic medical devices for approximately $1.8 million.
The acquisition gives the Company immediate access to three medical
markets - neurosurgery, urology and ophthalmology and is expected to
strengthen the Company's presence in cosmetic surgery. The assets of
Fibra Sonics will be relocated to the Company's Farmingdale facility.
10
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.
Six months and Three months ended December 31, 2000 and 1999.
Net sales: Net sales of the Company's medical, scientific and industrial
products increased $640,744 (4.7%) from $13,767,105 for the six months ended
December 31, 1999 to $14,407,849 for the six months ended December 31, 2000.
This increase is due to the inclusion of the revenues of Sonora of $1,738,750
and an increase in ultrasonic industrial instrument sales of $125,217 offset by
lower medical instrument sales of $501,207, Labcaire product sales of $403,865
and fume enclosure sales of $322,794. Lower medical sales were a result of
reduced shipments of certain medical devices in order to allow for engineering
design and manufacturing process changes and the introduction of the LySonix
3000. The weakening of the English Pound represents approximately $322,000 of
the decrease in Labcaire product sales.
Net sales of the Company's medical, scientific and industrial products increased
$332,397 (4.6%) from $7,284,134 for the three months ended December 31, 1999 to
$7,616,531 for the three months ended December 31, 2000. This increase is due to
the inclusion of the revenues of Sonora of $723,988, an increase in ultrasonic
industrial instrument sales by $78,328 and an increase in medical instrument
sales by $142,238 offset by lower wet scrubber (Mystaire) sales of $131,482,
Labcaire product sales of $346,778 and fume enclosure sales of $133,398. Lower
medical sales were a result of reduced shipments of certain medical devices in
order to allow for engineering design and manufacturing process changes and the
introduction of the LySonix 3000. The weakening of the English Pound represents
approximately $161,000 of the decrease in Labcaire product sales.
The Company's backlog of unfilled orders increased from $8,211,945 at December
31, 1999 to $9,705,694 at December 31, 2000. This increase is primarily due to
an increase in medical orders.
Gross profit: Gross profit increased to 52.4% of sales in the six months ended
December 31, 2000 from 45.9% of sales in the six months ended December 31, 2000.
Gross profit increased to 52.1% of sales in the three months ended December 31,
2000 from 48% of sales in the three months ended December 31, 2000. The
increases in gross profit for the periods are due to the product mix.
Selling expense: Selling expense increased $382,616 or 27.3% from $1,399,691
(10.1% of sales) in the six months ended December 31, 1999 to $1,782,307 (12.4%
of sales) in the six months ended December 31, 2000, due primarily to the
inclusion of Sonora of $263,760 and increased sales and marketing efforts in all
products. Selling expense increased $115,564 or 13.4% from $845,281 (11.6% of
sales) in the three months ended December 31, 1999 to $960,845 (12.7% of sales)
in the three months ended December 31, 2000, primarily due to the inclusion of
Sonora of $137,416.
General and administrative expenses: General and administrative expenses
increased $641,805 or 21.1% from $2,402,753 in the six months ended December 31,
1999 to $3,044,558 in the six months ended December 31, 2000. The increases are
primarily due to the inclusion of the consolidated results of Sonora of
$290,739, increased expenditures for investor relations activities of
approximately $78,000 and amortization of Sonora and Labcaire goodwill of
approximately $140,000. General and administrative expenses increased $254,036
or 20.3% from $1,250,697 in the three months ended December 31, 1999 to
$1,504,733 in the three months ended December 31, 2000. The increases are
primarily due to the inclusion of the consolidated results of Sonora of $149,332
and amortization of Sonora and Labcaire goodwill of approximately $61,000.
11
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Research and development expenses: Research and development expenses increased
from $592,504 in the six months ended December 31, 1999 to $823,517 in the six
months ended December 31, 2000. The increases are primarily due to the inclusion
of Sonora of $115,555 and increased development costs associated with certain
medical and industrial products. Research and development expenses increased
from $329,860 in the three months ended December 31, 1999 to $476,659 in the
three months ended December 31, 2000. The increases are primarily due to the
inclusion of Sonora of $69,882 and due to development costs associated with
certain medical and industrial products.
Income taxes: For the six months ended December 31, 2000 there was a tax
provision of $883,330 or 38.4% offset by a reduction in the deferred tax
valuation allowance of $1,681,502, resulting in a benefit of $798,172 as
compared to a tax provision of $832,352 or 38.7% at December 31, 1999. For the
three months ended December 31, 2000 there was a tax provision of $506,074 or
39.9% as compared to a tax provision of $487,208 or 40.6% at December 31, 1999.
The current period and quarter ending December 31, 2000 is consistent with the
prior period and quarter ending December 31, 1999.
The Company recorded a reduction of the valuation allowance applied against
deferred tax assets in accordance with the provisions of FASB statement No.109
"Accounting for Income Taxes" which provided a one-time income tax benefit of
$1,681,502. The valuation allowance was established in fiscal year 1997 because
the future tax benefit of certain below market stock option grants issued at
that time could not be reasonably assured. The Company continually reviews the
adequacy of the valuation allowance and recognized the income tax benefit during
the quarter due to the reasonable expectation that such tax benefit will be
realized due to the fiscal strength of the Company. Management believes it will
generate taxable income sufficient to realize the tax benefit associated with
future deductible temporary differences and, therefore, the Company reduced the
valuation allowance to zero at December 31, 2000.
Other income (expense): Other income during the six months ended December 31,
2000 was $563,348. During the six months ended December 31, 1999, other income
was $485,050. This increase was principally due to increased royalty income
received from the Company's licensees on the sales of medical devices offset by
amortization of the investment in capital stock of Focus Surgery, Inc. and
Hearing Innovations, Inc. Other income during the three months ended December
31, 2000 was $303,014. During the six months ended December 31, 1999, other
income was $296,608.
Liquidity and Capital Resources:
Working capital at December 31, 2000 and June 30, 2000 was $18,268,388 and
$17,280,404, respectively. The increase in working capital is due to the buildup
of inventory, primarily at Sonora, and by the payments of accrued expenses and
income taxes.
The Company believes that its existing capital resources will enable it to
maintain its current and planned operations for at least 18 months from the date
hereof.
On February 8, 2001, the Company acquired the assets of Fibra Sonics, Inc.
("Fibra Sonics"), a Chicago-based, privately-held producer and marketer of
ultrasonic medical devices for approximately $1.8 million. The acquisition gives
the Company immediate access to three medical markets - neurosurgery, urology
and ophthalmology and is expected to strengthen the Company's presence in
cosmetic surgery. The assets of Fibra Sonics will be relocated to the Company's
Farmingdale facility.
12
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On November 7, 2000, the Company purchased a $300,000, 5.1% Secured Convertible
Debenture from Focus Surgery, Inc.("Focus Surgery"), due December 22, 2002 (the
"Focus Debenture"). The Focus Debenture is convertible at the option of the
Company at any time after December 22, 2002 into shares of common stock of Focus
Surgery at a conversion rate of $1,200 per share, if the Focus Debenture is not
retired by Focus Surgery. Interest accrues and is payable at maturity, or is
convertible on the same terms as the Focus Debenture's principal amount. The
Focus Debenture is secured by a lien on all of Focus Surgery's right, title and
interest in accounts receivable, inventory, property, plant and equipment and
processes of specified products whether now existing or hereafter arising after
the date of the Focus Debenture. The principal and accrued interest of the Focus
Debenture is $301,341 at December 31, 2000.
On November 1, 2000, under the terms of the revised purchase agreement (the
"Labcaire Agreement") with Labcaire (as discussed in the Form 10-K for the year
ended June 30, 2000), the Company paid $117,349 for 9,286 shares (2.65%) of the
outstanding common stock of Labcaire bringing the acquired interest to 94.65%.
This represents the fiscal 2001 buy-back portion, as defined in the Labcaire
Agreement.
On October 12, 2000, the Company's subsidiary, Sonora, acquired the assets Sonic
Technologies Laboratory Services ("Sonic Technologies"), an ultrasound acoustic
measurement and testing laboratory. The assets of the Hatboro,
Pennsylvania-based operations of privately-held Sonic Technologies were
relocated to Sonora's facility in Longmont, Colorado. The acquisition was
accounted for as a purchase. Accordingly, acquired assets and liabilities have
been recorded at their estimated fair value at the date of acquisition. The
excess of the cost of the acquisition ($270,000 plus acquisition costs of
$34,611, which includes a broker fee of $25,000) over the fair value of net
assets acquired is being amortized on a straight-line basis over a period of 10
years.
During the fourth quarter of fiscal 2000, the Company entered into four loan
agreements whereby Hearing Innovations, Inc. ("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 of Hearing Innovations' right, title and interest in accounts
receivable, inventory, property, plant and equipment and processes of specified
products whether now existing or hereafter arising after the date of these
agreements. 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 (the "Hearing Debenture")
and warrants to acquire 66,667 shares of Hearing Innovations common stock at
$2.25 per share. The Hearing Debenture is convertible at the option of the
Company at any time into shares of common stock of Hearing Innovations at a
conversion rate of $2.25 per share. Interest accrues and is payable at maturity,
or is convertible on the same terms as the Hearing Debenture's principal amount.
The warrants expire August 27, 2002. If the Company were to convert the Hearing
Debenture and exercise all warrants, including those previously outstanding, the
Company would hold a 20% interest in Hearing Innovations. The principal and
accrued interest of the Hearing Debenture is $306,125 at December 31, 2000.
13
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On July 27, 2000, the Company's subsidiary, Sonora, acquired 100% of the assets
of CraMar Technologies, Inc. ("CraMar"), an ultrasound equipment servicer. The
assets of the Colorado-based, privately-held operations of CraMar were relocated
to Sonora's facility in Longmont, Colorado. The acquisition was accounted for as
a purchase. Accordingly, acquired assets have been recorded at their estimated
fair value at the date of acquisition. The cost of the acquisition ($272,908
plus acquisition costs of $26,684, which includes a broker fee of $25,000)
approximates the fair value of net assets acquired.
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 will adopt SAB 101, as
required, 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
and financial position.
Derivatives
In June 1998, the Financial Accounting Standards Board ("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 activities related to those instruments as well as other
hedging activities. The Company adopted these statements during the 1st quarter
of 2001. There is no material impact from the adoption of these statements on
its consolidated financial statements and on the Company's operating results and
financial position.
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 investments in related entities,
future economic, competitive and market conditions, the outcome of legal
proceedings, particularly those including patent litigation with Mentor
Corporation, as well as management business decisions.
14
MISONIX, INC.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk:
The principal market risks (i.e. the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed are interest rates
on short-term investments and foreign exchange rates, which generate translation
gains and losses due to the English Pound to U.S. Dollar conversion of Labcaire.
Interest Rates:
The Company's short-term investments, which approximated $4.1 million at
December 31, 2000, are made up entirely of held to maturity investments.
Assuming investment levels remained the same, a one-point change in interest
rates would not have a material impact on the Company's interest income.
Foreign Exchange Rates:
Approximately 22% of the Company's revenues in fiscal 2001 were received in
English Pounds currency. To the extent that the Company's revenues are generated
in English Pounds, its operating results are translated for reporting purposes
into U.S. Dollars using rates of 1.46 and 1.61 for the six months ended December
31, 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 sets prices
and bids for contracts in English Pounds, a strengthening of the English Pound,
while increasing the value of its UK assets, might place the Company at a
pricing disadvantage in bidding for work from manufacturers based overseas. The
Company collects their receivables in the currency the subsidiary resides in.
The Company has not engaged in foreign currency hedging transactions.
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 effected 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 transactions, which
commenced in 1999. The Company anticipates that the cost of such modifications
should not have a material effect on its consolidated results of operations or
liquidity.
15
MISONIX, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company, Medical Device Alliance, Inc. ("MDA") and MDA's
wholly-owned subsidiary, LySonix, Inc., were defendants in an action
alleging patent infringement for U.S. Patent No. 4,886,491 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. On October 4, 2000, all parties appeared for oral arguments and
are awaiting the Court's decision. 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.
(a)Exhibits:
Exhibit 11 - Computation of Net Earnings Per Share
(b)There were no reports on Form 8-K filed during the quarter ended
December 31, 2000.
16
SIGNATURES
Pursuant to the requirements 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.
Date: February 20, 2001
MISONIX, INC.
-------------------------------------------
(Registrant)
By: /s/ Michael A. McManus, Jr.
---------------------------------------
Michael A. McManus, Jr.
President and Chief Executive Officer
By: /s/ Richard Zaremba
---------------------------------------
Richard Zaremba
Vice President,
Chief Financial Officer,
Treasurer and Secretary
17