UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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
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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1938 New Highway, Farmingdale, NY 11735
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 631-694-9555
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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 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. [ ]
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.
Forward Looking Statements: This Report contains, or incorporates by
reference, certain statements that may be deemed "forward looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. All statements, other than statements of historical facts, that
address activities, events or developments that the Company intends, expects,
projects, believes or anticipates will or may occur in the future are
forward-looking statements. Such statements are based on certain assumptions and
assessments made by management of the Company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes to be appropriate. The
forward-looking statements included in this Report are also subject to a number
of material risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, services and prices, and other factors discussed in the
Company's filings under the Securities Act and the Exchange Act. Stockholders
and prospective investors are cautioned that such forward-looking statements are
not guarantees of future performance and that actual results, developments and
business decisions may differ from those envisaged by such forward-looking
statements.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE.
MISONIX, INC. (the "Company") hereby amends its Report on Form 10-K for the
year ended June 30, 2000, as filed with the Securities and Exchange Commission
on September 26, 2000, as follows:
To amend "ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K." by (i) refiling the Consolidated Financial
Statements for the year ended June 30, 2000 in their entirety and (ii)
adding the following exhibits:
Exhibit
No. Description
------- -----------
10(ff) Investment Agreement dated as of May 3, 1999 by and between
the Company and Focus Surgery, Inc.
10(gg) Investment Agreement dated October 14, 1999 by and between the
Company and Hearing Innovations Incorporated.
10(hh) Stock Purchase Agreement dated as of November 4, 1999 between
the Company and Acoustic Marketing Research Inc., (d/b/a
Sonora Medical Systems).
10(ii) Exclusive License Agreement dated as of February, 2000 between
the Company and MDA, Inc.
21 Subsidiaries of the Company.
23 Consent of independent public accountant to inclusion of
report in Form S-8 Registration Statement.
27 Financial Data Schedule.
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.
Date: June 14, 2001 MISONIX, INC.
(Registrant)
By: /s/ Michael A. McManus
-----------------------
Michael A. McManus, Jr.
President and Chief
Executive Officer
Pursuant to the requirements of the 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:
Signatures Title Date
- ---------- ----- ----
/s/ Michael A. McManus, Jr. President and Chief
- --------------------------- Executive Officer June 14, 2001
Michael A. McManus, Jr.
/s/ Richard Zaremba Vice President, Chief
- ------------------- Financial Officer,
Richard Zaremba Treasurer and Secretary June 14, 2001
/s/ Gary Gelman
- ---------------
Gary Gelman Chairman of the Board
and Director June 14, 2001
- -----------------------
Howard Alliger Director
/s/ Arthur Gerstenfeld June 14, 2001
- ----------------------
Arthur Gerstenfeld Director
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.......50
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.
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
Misonix, Inc. and Subsidiaries
Consolidated Balance Sheets
JUNE 30,
----------------------------
ASSETS 2000 1999
----------------------------
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
============================
See Notes to Consolidated Financial Statements.
29
Misonix, Inc. and Subsidiaries
Consolidated Statements of Income
YEAR ENDED JUNE 30
2000 1999 1998
--------------------------------------------
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.
30
Misonix, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
COMMON STOCK
$.01 PAR VALUE TREASURY STOCK
-------------- --------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
-----------------------------------------------------------
Balance, June 30, 1997 5,672,154 $ 56,722 -- $ --
Net income -- -- -- --
Foreign currency
translation
Adjustment -- -- -- --
Comprehensive income -- -- -- --
Exercise of employee 2,250 22 -- --
options
Exercise of warrants 93,276 933 -- --
-----------------------------------------------------------
Balance, June 30, 1998 5,767,680 57,677 -- --
Net income -- -- -- --
Foreign currency
translation
Adjustment -- -- -- --
Comprehensive income -- -- -- --
Exercise of employee 159,750 1,598 -- --
options
Exercise of warrants 40 -- -- --
Non-cash compensation charge -- -- -- --
-----------------------------------------------------------
BALANCE, JUNE 30, 1999 5,927,470 59,275 -- --
NET INCOME -- -- -- --
FOREIGN CURRENCY
TRANSLATION
ADJUSTMENT -- -- -- --
COMPREHENSIVE INCOME -- -- -- --
EXERCISE OF EMPLOYEE 40,347 403 -- --
OPTIONS
PURCHASE OF TREASURY STOCK -- -- (42,900) (219,006)
NON-CASH COMPENSATION -- -- -- --
CHARGE
-----------------------------------------------------------
BALANCE, JUNE 30, 2000 5,967,817 $ 59,678 (42,900) $ (219,006)
===========================================================
ACCUMULATED
ADDITIONAL RETAINED OTHER TOTAL
PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
CAPITAL (DEFICIT) INCOME (LOSS) EQUITY
---------------------------------------------------------------
Balance, June 30, 1997 $ 21,370,945 $ (7,519,465) $ (1,130) $ 13,907,072
Net income -- 5,328,381 -- 5,328,381
Foreign currency
translation
Adjustment -- -- 3,473 3,473
------------
Comprehensive income -- -- -- 5,331,854
------------
Exercise of employee 13,479 -- -- 13,501
options
Exercise of warrants (933) -- -- --
---------------------------------------------------------------
Balance, June 30, 1998 21,383,491 (2,191,084) 2,343 19,252,427
Net income -- 1,964,758 -- 1,964,758
Foreign currency
translation
Adjustment -- -- (12,460) (12,460)
------------
Comprehensive income -- -- -- 1,952,298
------------
Exercise of employee 314,527 -- -- 316,125
options
Exercise of warrants -- -- -- --
Non-cash compensation charge 21,535 -- -- 21,535
---------------------------------------------------------------
BALANCE, JUNE 30, 1999 21,719,553 (226,326) (10,117) 21,542,385
NET INCOME -- 2,520,896 -- 2,520,896
FOREIGN CURRENCY
TRANSLATION
ADJUSTMENT -- -- (44,906) (44,906)
------------
COMPREHENSIVE INCOME -- -- -- 2,475,990
------------
EXERCISE OF EMPLOYEE 71,648 -- -- 72,051
OPTIONS
PURCHASE OF TREASURY STOCK -- -- -- (219,006)
NON-CASH COMPENSATION 10,768 -- -- 10,768
CHARGE
---------------------------------------------------------------
BALANCE, JUNE 30, 2000 $ 21,801,969 $ 2,294,570 $ (55,023) $ 23,882,188
===============================================================
See Notes to Consolidated Financial Statements.
31
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED JUNE 30
2000 1999 1998
--------------------------------------------
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) operating 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. (384,000) -- --
Cash paid for investment in Focus Surgery, Inc. -- (3,050,000) --
Loans to Hearing Innovations, Inc., net (261,867) (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)
--------------------------------------------
32
Misonix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
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
=========================================
NON-CASH INVESTING ACTIVITIES:
Conversion of notes receivable from Hearing Innovations $ 400,000 -- --
To common stock
=========================================
See Notes to Consolidated Financial Statements.
33
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
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
The Company records revenue upon shipment for products shipped F.O.B. shipping
point. Products shipped F.O.B. destination point are recorded as revenue when
received at the point of destination. Shipments under agreements with
distributors are not subject to return, and payment for these shipments is not
contingent on sales by the distributor. The Company recognizes revenue on
shipments to distributors in the same manner as with other customers.
LONG-LIVED ASSETS
The carrying values of intangible and other long-lived assets are periodically
reviewed to determine if any impairment indicators are present. If it is
determined that such indicators are present and the review indicates that the
assets will not be fully recoverable, based on undiscounted estimated cash flows
over the remaining amortization and depreciation period, their carrying values
are reduced to estimated fair value. Impairment indicators include, among other
conditions, cash flow deficits, an historic or anticipated decline in revenue or
operating profit, adverse legal or regulatory developments, accumulation of
costs significantly in excess of amounts originally expected to acquire the
asset and a material decrease in the fair value of some or all of the assets.
Assets are grouped at the lowest level for which there are identifiable cash
flows that are largely independent of the cash flows generated by other asset
groups. No such impairment existed at June 30, 2000.
35
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
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:
2000 1999 1998
---- ---- ----
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
========= ========= =========
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.
36
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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
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,
37
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 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.
38
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
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.
Summarized financial information of Focus Surgery, Inc. as of and for the year
ended June 30, 2000 is as follows:
Condensed Income Statement Information Fiscal 2000
-------------------------------------- -----------
Sales $ 300,016
Gross profit $ 215,409
Net earnings $(2,108,913)
Condensed Balance Sheet Information Fiscal 2000
----------------------------------- -----------
Current assets $ 1,120,071
Non Current assets $ 626,947
Current liabilities $ 433,487
Non Current Liabilities $ 1,390,106
Preferred stock $ 4,038,707
3. INVENTORIES
Inventories are summarized as follows:
39
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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:
JUNE 30,
2000 1999
----------- -----------
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
=========== ===========
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
40
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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
==========
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
41
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
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
42
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 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:
2000 1999 1998
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 Reported .42 .34 .94
Pro Forma .32 .22 .71
Diluted EPS: As Reported .39 .30 .81
Pro Forma .26 .18 .56
As required by Statement 123, the fair value method of accounting has not been
applied to options granted prior to July 1, 1996. As a result, the pro forma
compensation 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:
OPTIONS WARRANTS
---------------------------------------------------------------------------
WEIGHTED AVG. WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------------------------------------------------------------------------
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
43
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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
The following table summarizes information about stock options outstanding at
June 30, 2000:
Weighted Average
Options Options Remaining
Exercise Price Outstanding Exercisable Contractual Life (Yrs)
- --------------------------------------------------------------------------------
$ .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
========= =========
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:
44
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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
=============================================
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
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:
2000 1999 1998
-----------------------------------------
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
=========================================
16. LICENSING AGREEMENTS FOR MEDICAL TECHNOLOGY
46
Misonix, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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. 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.
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
Schedule II
- -----------
Misonix, Inc.
Valuation and Qualifying Accounts and Reserves
Years ended June 30, 2000, 1999 and 1998
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:
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
(1) Uncollectible accounts written off, net of recoveries.
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10(ff) Investment Agreement dated as of May 3, 1999 by and between
the Company and Focus Surgery, Inc.
10(gg) Investment Agreement dated October 14, 1999 by and between the
Company and Hearing Innovations Incorporated.
10(hh) Stock Purchase Agreement dated as of November 4, 1999 between
the Company and Acoustic Marketing Research Inc., (d/b/a
Sonora Medical Systems).
10(ii) Exclusive License Agreement dated as of February, 2000 between
the Company and MDA, Inc.
21 Subsidiaries of the Company.
23 Consent of independent public accountant to inclusion of
report in Form S-8 Registration Statement.
27 Financial Data Schedule.