UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION
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13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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For
the fiscal year ended June
30, 2006
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OR
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TRANSITION REPORT PURSUANT
TO
SECTION |
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13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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For
the transition period from ______
to
______
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Commission
file number: 1-10986
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MISONIX,
INC.
(Exact
name of registrant as specified in its
charter)
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New
York
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11-2148932
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S.
Employer
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1938 New Highway, Farmingdale, New York
(Address
of principal executive offices)
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11735
(Zip
Code)
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Registrant’s telephone number, including area
code: (631)
694-9555 |
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Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $.01 par value
(Title
of
class)
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
o
Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
o
Yes x No
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. x
Yes o No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check
one):
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes
x
No
The
aggregate market value of the voting stock held by non-affiliates of the
registrant on December 31, 2005 (computed by reference to the average bid and
asked prices of such stock on such date) was approximately
$29,761,632.
There
were 6,900,369 shares of Common Stock outstanding at September 22,
2006.
DOCUMENTS
INCORPORATED BY REFERENCE
None
This
Annual Report on Form 10-K, and the Company’s other periodic reports and other
documents incorporated by reference or incorporated herein as exhibits, may
contain forward-looking statements that are made pursuant to the Safe Harbor
Provisions of the Private Securities Litigation Reform Act of 1995. These
statements are based on management’s current expectations and are subject to
uncertainty and changes in circumstances. In particular, the Company may not
be
successful in its efforts with respect to strategic opportunities for its
Laboratory and Scientific Division and the affect this activity may have on
the
other businesses within the Company. Investors are cautioned that
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from the statements made. These factors
include general economic conditions, delays and risks associated with the
performance of contracts, uncertainties as a result of research and development,
potential acquisitions, consumer and industry acceptance, litigation and/or
court proceedings, including the timing and monetary requirements of such
activities, regulatory risks including approval of pending and/or contemplated
510(k) filings, the ability to achieve and maintain profitability in the
Company’s business lines, and other factors discussed in this Annual Report on
Form 10-K.
PART
I
Item
1.
Business.
Overview
Misonix,
Inc. (“Misonix” or the "Company") is a New York corporation which, through its
predecessors, was first organized in 1959. The Company designs, manufac-tures
and markets ultrasonic medical devices. The Company also develops and markets
ultrasonic equipment for use in the scientific and industrial markets, ductless
fume enclosures for filtration of gaseous contaminates, and environmen-tal
control products for the abatement of air pollution.
The
Company’s operations outside the United States consist of a 100% ownership in
Labcaire Systems, Ltd. (“Labcaire”), which is based in North Somerset, England.
This business consists of designing, manufacturing, servicing and marketing
air-handling systems for the protection of personnel, products and the
environment from airborne hazards. The
Company also has a 60% ownership in UKHIFU, located in Bristol, England. UKHIFU
is in the business of distributing and servicing equipment for the ablation
of
cancerous tissue of the prostate.
The
Company's 90% owned subsidiary, Acoustic Marketing Research, Inc. doing business
as Sonora Medical Systems, Inc. (“Sonora”), located in Longmont, Colorado, is an
ISO 9001 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.
The
Company’s 100% owned subsidiary, Hearing Innovations, Inc. (“Hearing
Innovations”), is a development company with patented HiSonic ultrasonic
technology for the treatment of profound deafness and tinnitus.
In
fiscal
2006, approximately 37% of the Company's net sales were to foreign markets.
Labcaire, which manufactures and sells the Company’s fume enclosure line as well
as its own range of laboratory and medical environmental control products,
represents approximately 76% of the Company’s net sales to foreign markets.
Labcaire also distributes the Company’s ultrasonic equipment for use in
scientific and industrial markets, predominately in the United Kingdom. Sales
by
the Company in other major industrial countries are made primarily through
distributors. There are no additional risks for products sold by Labcaire as
compared to other products marketed and sold by Misonix in the United States.
Labcaire experiences minimal currency exposure since the major portion of its
revenues are from the United Kingdom. Labcaire revenues outside the United
Kingdom are remitted in British Pounds.
Misonix
represents approximately 18% of the net sales to foreign markets. These sales
have no additional risks as most sales are secured by letters of credit and
are
remitted to Misonix in U.S. currency.
Sonora
represents approximately 11% of the net sales to foreign markets. These sales
have additional risks as most sales are not secured by letters of credit or
have
a long term relationship where credit risk is minimal. These sales are remitted
to Sonora in U.S. currency.
In
July
2005, the Company retained Think Equity Partners LLC to advise and assist
Misonix in identifying and evaluating strategic opportunities for its Laboratory
and Scientific Products segment. In August, 2006, the Company terminated its
relationship with Think Equity. The Company continues to look at all its
strategic opportunities.
Medical
Devices
The
Company’s medical device products are subject to the regulatory requirements of
the Food and Drug Administration (“FDA”). A medical device as defined by the FDA
is an instrument, apparatus, implement, machine, contrivance, implant, in vitro
reagent, or other similar or related article, including a component, part,
or
accessory which is recognized in the official National Formulary or the United
States Pharmacopoeia, or any supplement to such listings, intended for use
in
the diagnosis of disease or other conditions, or in the cure, mitigation,
treatment, or prevention of disease, in man or animals, or intended to affect
the structure or any function of the body of man or animals, and which does
not
achieve any of its primary intended purposes through chemical action within
or
on the body of man or animals and which is not dependent upon being metabolized
for the achievement of any of its primary intended purposes (a “Medical
Device”). The Company’s products that are subject to FDA regulations for product
labeling and promotion comply with all applicable regulations. The Company
is
listed with the FDA as a Medical Device manufacturer and has the appropriate
FDA
Establishment Numbers in place. The Company has a post-market monitoring system
in place such as Complaint Handling and Medical Device Reporting procedures.
All
current devices manufactured and sold by the Company have all the necessary
regulatory approvals. The Company is not aware of any situations which would
be
materially adverse at this time and neither has the FDA sought legal remedies
available, nor have there been any violations of its regulations alleged,
against the Company at present.
In
October 1996, the Company entered into a twenty-year license agreement (the
“USS
License”) with United States Surgical Corporation (“USS”) covering the further
development 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 worldwide
marketing and sales rights for this technology and device. The Company received
$100,000 under the option agreement preceding the USS License. Under the USS
License, the Company sells such device to USS. In addition to receiving payment
from USS for its orders of the device, the Company has received aggregate
licensing fees of $475,000 and receives royalties based upon USS net sales
of
such device. Licensing fees from the USS License are amortized over the term
of
the USS License. In November 1997, the Company began manufacturing this device
for USS and recognized its first revenues for this product. Total sales of
this
device were approximately $4,461,000, $5,778,000 and $7,198,000 for the fiscal
years ended June 30, 2006, 2005 and 2004, respectively. Total royalties from
sales of this device were approximately $810,000, $940,000 and $1,402,000 for
the fiscal years ended June 30, 2006, 2005 and 2004, respectively.
In
June
2002, the Company entered into a ten-year worldwide, royalty-free, distribution
agreement with Byron Medical, Inc. (“Byron”) for the sale, marketing and
distribution of the Lysonix soft tissue aspirator used for cosmetic surgery.
This agreement is a standard agreement for such distribution in that it
specifies the product to be distributed, the terms of the agreement and the
price to be paid for product covered under the agreement. Total sales of this
device were approximately $1,195,000, $2,375,000 and $1,732,000 for the fiscal
years ended June 30, 2006, 2005 and 2004, respectively. Included in litigation
(recovery) settlement expenses in fiscal 2004 is $344,435 which represents
the
sale of Lysonix 2000 units by Byron that were received by Byron from LySonix,
Inc. (“LySonix”) in connection with inventory received under the settlement
agreement with LySonix. This inventory was previously reserved for in the fiscal
year ended June 30, 2002, as its saleability was uncertain.
Fibra
Sonics, Inc.
On
February 8, 2001, the Company acquired certain assets and liabilities of Fibra
Sonics, Inc. (“Fibra Sonics”), a Chicago-based, privately held producer and
marketer of ultrasonic medical devices for approximately $1,900,000. This
acquisition gave the Company access to three important new medical markets,
namely, neurology with its Neuro Aspirator product, urology and ophthalmology.
Subsequent to the acquisition, the Company relocated the assets of Fibra Sonics
to the Company’s Farmingdale facility. The acquisition was accounted for under
the purchase method of accounting. Accordingly, the acquired assets and
liabilities have been initially recorded at their estimated fair values at
the
date of acquisition. The excess of the cost of the acquisition ($1,723,208
plus
acquisition costs of $144,696, which includes a broker fee of $100,716) over
the
fair value of net assets acquired was $1,814,025 and is being treated as
goodwill.
Focus
Surgery, Inc.
On
May 3, 1999, the Company entered into an agreement with Focus Surgery, Inc.
(“Focus”) to obtain a 20% equity position in Focus for $3,050,000 and
representation on its Board of Directors. Additionally, the Company has options
and warrants to purchase an additional 5% of the equity of Focus. Focus is
located in Indianapolis, Indiana. The agreement provides for a series of
development and manufacturing agreements whereby the Company would upgrade
existing Focus products, currently the Sonablateâ
500, 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 right to utilize HIFU technology for the treatment of both
benign and cancerous tumors of the breast, liver and kidney and the right of
first refusal to purchase 51% of the equity of Focus. In February 2001, the
Company exercised its right to start research and development for the treatment
of kidney and liver tumors utilizing HIFU technology. The Company has
subcontracted Focus to perform research and development activities for which
the
Company paid $165,000, $452,000 and $155,000, respectively to Focus and which
is
recorded as research and development expenses. During
fiscal 2005, Focus entered into an exclusive agreement with the Company to
distribute the Sonoblate 500 in the European market.
On
November 7, 2000, the Company purchased a $300,000, 5.1% Secured Cumulative
Convertible Debenture from Focus, due December 22, 2002 (the “5.1% Focus
Debenture”). The 5.1% Focus Debenture was convertible into 250 shares of Focus
preferred stock at the option of the Company at any time after December 22,
2000
for two years at a conversion price of $1,200 per share, if the 5.1% Focus
Debenture is not retired by Focus. Interest accrues and is payable at maturity
or is convertible on the same terms as the Focus Debenture’s principal amount.
The 5.1% Focus Debenture is secured by a lien on all of Focus’ 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 5.1% Focus Debenture. The Company recorded an allowance against
the entire balance of principal and accrued interest due in fiscal 2001. The
related expense has been included in loss on impairment of investment in the
accompanying consolidated statement of income. The 5.1% Focus Debenture is
currently in default and the Company is negotiating an extended due date and
conversion right. The Company believes the loan is impaired since the Company
does not anticipate the 5.1% Focus Debenture will be satisfied in accordance
with the contractual terms of the loan agreement.
On
April
12, 2001, the Company purchased a $300,000, 6% Secured Cumulative Convertible
Debenture from Focus, due May 25, 2003 (the “6% Focus Debenture”). The 6% Focus
Debenture was convertible into 250 shares of Focus preferred stock at the option
of the Company at any time after May 25, 2003 for two years at a conversion
price of $1,200 per share, if the 6% Focus Debenture is not retired by Focus.
Interest accrues and is payable at maturity, or is convertible on the same
terms
as the 6% Focus Debenture’s principal amount. The 6% Focus Debenture is secured
by a lien on all of Focus’ 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 6% Focus
Debenture. The Company recorded an allowance against the entire balance of
principal and accrued interest due in fiscal 2001. The related expense has
been
included in loss on impairment of investment in the accompanying consolidated
statement of income. The 6% Focus Debenture is currently in default and the
Company is negotiating an extended due date and conversion right. The Company
believes the loan is impaired since the Company does not anticipate the 6%
Focus
Debenture will be satisfied in accordance with the contractual terms of the
loan
agreement.
On
July
31, 2001, the Company purchased a second $300,000, 6% Secured Cumulative
Convertible Debenture from Focus, due May 25, 2003 (the “Focus Debenture”). The
Focus Debenture was convertible into 250 shares of Focus preferred stock at
the
option of the Company at any time after the due date for two years at a
conversion price of $1,200 per share. The Focus Debenture also contains
warrants, which are deemed nominal in value, to purchase an additional 125
shares to be exercised at the option of the Company. 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’
right, title and interest in accounts receivable, inventory, property, plant
and
equipment and process of specified products whether now existing or arising
after the date of the Focus Debenture. The Company recorded an allowance against
the entire balance of principal and accrued interest due in fiscal 2002. The
related expense has been included in loss on impairment of investment in the
accompanying consolidated statement of income. The Focus Debenture is currently
in default and the Company is negotiating an extended due date and conversion
right. The Company believes the Focus Debenture is impaired since the Company
does not anticipate that the Focus Debenture will be paid in accordance with
the
contractual terms of the loan agreement.
During
fiscal 2002, the Company entered into a loan agreement whereby Focus borrowed
$60,000 from the Company. This loan matured on May 30, 2002 and was extended
to
December 31, 2002. The loan bears interest at 6% per annum and contains warrants
to acquire additional shares. These
warrants are deemed nominal in value. The
loan
was secured by a lien on all of Focus’ right, title and interest in accounts
receivable, inventory, property, plant and equipment and processes of specified
products whether now existing or arising after the date of the loan. The Company
recorded an allowance against the entire balance of principal and accrued
interest due in fiscal 2002. The related expense has been included in loss
on
impairment of investment in the accompanying consolidated statement of income.
The loan has been extended until May 30, 2006. The Company believes that this
loan is impaired since the Company does not anticipate that this loan will
be
paid in accordance with the contractual terms of the loan agreement. The Company
sent a notice of default to Focus Surgery demanding payment of the note in
June
2006.
In
May
2004, the Company’s ownership was reduced to 13% due to additional preferred
stock issued by Focus.
If
the
Company were to convert the 5.1% Focus Debenture, 6% Focus Debenture and Focus
Debenture and exercise all warrants, the Company would hold an interest in
Focus
of approximately 18%.
The
Company’s portion of the net losses of Focus were recorded since the date of
acquisition in accordance with the equity method of accounting. During fiscal
2001, the Company evaluated the investment with respect to the financial
performance and the achievement of specific targets and goals and determined
that the equity investment was impaired and therefore the Company recorded
an
impairment loss in the amount of $1,916,398. The net carrying value of the
investment at June 30, 2005 is $0. Under the equity method of accounting, if
the
equity investment was ever deemed not impaired, the Company would have to record
its share of Focus’ losses since 2001 before the Company can record income from
Focus. Focus’ unaudited net income in fiscal year 2006 was $7,000. The Company
will start to record its share of Focus’ income when Focus’ income is greater
than the losses from fiscal year 2002 through fiscal 2006 which aggregated
to
approximately $1,900,000.
Hearing
Innovations, Inc.
On
October 18, 1999, the Company and Hearing Innovations completed the agreement
whereby the Company invested an additional $350,000 and cancelled notes
receivable aggregating $400,000 in exchange for a 7% equity interest in Hearing
Innovations and representation on its Board of Directors. Warrants
to
acquire
388,680 shares of Hearing Innovations common stock were also part of the
agreement.
Upon exercise of the warrants, the Company had the right to manufacture Hearing
Innovations’ ultrasonic products and also had 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 the
investment was $784,000 ($750,000 plus acquisition costs of $34,000). Hearing
Innovations is located in Farmingdale, New York. Hearing Innovations is focusing
on multiple applications for its patented supersonic
bone
conduction hearing technology. The HiSonicâ
is a
510(k) approved (FDA approved) non-invasive hearing device that processes
audible sounds into supersonic vibrations that can be heard and understood
as
speech through bone conduction. For the profoundly deaf, the HiSonic is the
only
known available alternative therapy to cochlear implant surgery. HiSonic is
completely non-invasive and may cost 80% less than surgery. Hearing Innovations
has also received 510(k) approval from the FDA for the Tinnitus product, Hisonix
TRD. Tinnitus is characterized by constant sound in the ear that can range
from
a metallic ringing, buzzing, popping or nonrhythmic beating.
On
September 11, 2000, the Company loaned $108,000 to Hearing Innovations, which
together with the then-outstanding loans aggregating approximately $192,000
(with accrued interest) was exchanged for a $300,000, 7% Secured Convertible
Debenture due August 27, 2002 and extended to November 30, 2003 (the “Hearing
Debenture”). The Company recorded an allowance against the entire balance of
principal and accrued interest due in fiscal 2001. The Company believes the
Hearing Debenture is impaired since the Company does not anticipate such
Debenture will be satisfied in accordance with the contractual terms of the
loan
agreement.
During
fiscal 2001, the Company entered into fourteen loan agreements whereby Hearing
Innovations was required to pay the Company an aggregate amount of $397,678
due
May 30, 2002. The Company recorded an allowance against the entire balance
and
interest due in fiscal 2001. The Company believes the loans and the related
interest were impaired since the Company does not anticipate these loans would
be paid in accordance with the contractual terms of the loan
agreements.
During
fiscal 2002, the Company entered into fifteen loan agreements whereby Hearing
Innovations was required to pay the Company an aggregate amount of $322,679
due
May 30, 2002, extended to November 30, 2003, and $151,230 due November 30,
2003.
The Company recorded an allowance against the entire balance and accrued
interest due in fiscal 2002. The Company believes the loans and related interest
were impaired since the Company does not anticipate that these loans would
be
paid in accordance with the contractual terms of the loan
agreements.
During
fiscal 2003, the Company entered into sixteen loan agreements whereby Hearing
Innovations is required to pay the Company an aggregate amount of $274,991
due
November 30, 2003. The Company recorded an allowance against the entire balance
and accrued interest due in fiscal 2003. The Company believes the loans and
related interest were impaired since the Company does not anticipate that these
loans would be paid in accordance with the contractual terms of the loan
agreements.
During
fiscal 2004, the Company entered into eight loan agreements whereby Hearing
Innovations is required to pay the Company an aggregate amount of $199,255
of
which $455 was in the fourth quarter of fiscal 2004 and was eliminated in
consolidation. The Company recorded an allowance against amounts loaned prior
to
April 1, 2004, which totaled $198,800. The related expense has been included
in
loss on impairment of Hearing Innovations in the accompanying consolidated
statements of income. The Company believes the loans and related interest were
impaired since the Company did not anticipate that these loans will be paid
in
accordance with the contractual terms of the loan agreements and Hearing
Innovations has no predictable cash flows from its product revenue.
The
Company previously made the decision not to continue funding Hearing
Innovations’ operations, however, the Company loaned Hearing Innovations
$199,255 to enable Hearing Innovations to reduce a substantial portion of its
long-term debt to certain third parties. At June 30, 2004, the above loans
were
currently in default. The Company continues to believe that Hearing Innovations’
technology could provide a benefit to patients but the products require more
improvement and market development. All equity investments and debt in Hearing
Innovations have been fully reserved for and currently have a zero basis.
In
connection with the adoption of FASB Interpretation 46 “Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46), the
Company consolidated Hearing Innovations in its March 31, 2004 balance sheet
as
the entity was determined to be a variable interest entity (“VIE”) as the
Company is its primary beneficiary. The
Company elected to record the adoption of FIN 46 as a cumulative effect of
an
accounting change. Consolidating Hearing Innovations did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
On
July
14, 2004, Hearing Innovations sent all shareholders and creditors a plan for
reorganization and disclosure statement. The Company committed to fund Hearing
Innovations up to $150,000 for the reorganization plan. Hearing Innovations
filed for relief under Chapter 11 of the U.S. Bankruptcy Code in September
2004.
The Plan of Reorganization of Hearing Innovations was confirmed by the court
on
January 13, 2005. Based upon the final decree, and the approval by the court
of
the Bankruptcy Plan, the Company owns 100% of the equity in Hearing
Innovations.
Sonora
Medical Systems, Inc.
On
November 16, 1999, the Company acquired a 51% interest in Sonora for
approximately $1,400,000. Sonora authorized and issued new common stock for
the
51% interest. Sonora utilized 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 of Sonora on February 25, 2000, for
$208,000, bringing the acquired interest to 55.7%. The principals of Sonora
sold
an additional 34.3% to Misonix on June 1, 2000 for approximately $1,407,000,
bringing the acquired interest to 90%. Sonora has developed the First Call
2000,
a device that provides objective data necessary to periodically test transducers
for performance variances. The acquisition of Sonora was accounted for under
the
purchase method of accounting. 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
($2,957,000 plus acquisition costs of $101,000, which includes a broker fee
of
$72,000) over the fair value of net assets acquired was $1,622,845 and is being
treated as goodwill.
On
July
27, 2000, Sonora acquired 100% of the assets of CraMar Technologies, Inc.
(“CraMar”), an ultrasound equipment servicer for approximately $311,000. 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
under the purchase method of accounting. Accordingly, acquired assets have
been
recorded at their estimated fair values at the date of acquisition. The excess
of the cost of the acquisition ($272,908 plus acquisition costs of $37,898,
which includes a broker fee of $25,000) over the fair value of net assets
acquired was $257,899 and is being treated as goodwill.
On
October 12, 2000, Sonora acquired the assets of Sonic Technologies Laboratory
Services (“Sonic Technologies”), an ultrasound acoustic measurement and testing
laboratory, for approximately $320,000. 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 under the purchase method of accounting. Accordingly, 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 ($270,000 plus
acquisition costs of $51,219, which includes a broker fee of $25,000) over
the
fair value of net assets acquired was $301,219 and is being treated as
goodwill.
Laboratory
and Scientific Products
The
Company’s other revenue producing activities consist of the manufacture and sale
of Sonicator® ultrasonic liquid processors and cell disruptors, Aura™ ductless
fume hood products and Mystaire® scrubbers for the abatement of air pollution
and Guardian autoscope reprocessing disinfecting and rinsing
equipment.
Since
1959, the Sonicator line of products has been at the leading edge of ultrasound
technology for the laboratory. Misonix has developed the application of
sonication as it is currently used in research laboratories to disrupt cells
and
bacteria, accelerate chemical reactions in the extraction of proteins from
cells, in genomic and proteomic research. Over the years our engineering staff
has greatly improved the design and performance of the instrument to include
a
variety of ultrasonic generators, horns and probe accessories to handle
virtually any laboratory application and the term Sonicator has become
synonymous with ultrasonic liquid processing.
The
Aura
ductless fume hood products offers 40 years of experience in providing safe
work
environments to medical, pharmaceutical, biotech, semiconductor, law
enforcement, federal and local government laboratories. We manufacture a
complete line of ductless fume enclosures to control and eliminate hazardous
vapors, noxious odors and particulates in the laboratory. All fume enclosure
products utilize either activated carbon or HEPA filters to capture contaminants
and are a cost effective alternative to standard laboratory fume hoods that
require expensive ductwork to vent contaminants to the outside. Misonix also
offers laminar airflow stations and PCR enclosures. Misonix Ductless Fume Hoods
meet or exceed applicable OSHA, ANSI, NFPA, SEFA and ASHRAE standards for
ductless fume hoods.
School
Demonstration Ductless Fume Hoods have proven to be a valuable addition to
hundreds of high school science laboratories. Multiple application filters
allow
for the use of a variety of chemicals and a clear back panel enables students
to
view demonstrations from all sides.
The
technology used in the Aura ductless fume enclosures has also been adapted
for
specific uses in crime laboratories. The Forensic Evidence Cabinet protects
wet
evidence from contamination while it is drying and simultaneously protects
law
enforcement personnel from evidence that can be noxious and hazardous. The
Cyanoacrylate (liquid glue) Fuming Chamber is used by fingerprinting experts
to
develop fingerprints on non-porous surfaces while providing protection from
hazardous cyanoacrylate fumes.
In
June
1992, the Company initially acquired an 81.4% interest in Labcaire for $545,169.
The total acquisition cost exceeded the fair value of the net assets acquired
by
$241,299, which is being treated as goodwill. The balance of the capital stock
of Labcaire was owned by three executives and one retired executive of Labcaire,
who, under a purchase agreement (the “Labcaire Agreement”), sold one-seventh of
their total holdings of Labcaire shares to the Company in each of seven
consecutive years, commencing with the fiscal year ended June 30, 1996. As
of
June 30, 2003 the Company owned 100% of Labcaire. Under the Labcaire Agreement,
the Company purchased such shares at a price equal to one-seventh of each
executive’s prorata share of 8.5 times Labcaire’s earnings before interest,
taxes, and management charges for the preceding fiscal year, which amount is
being treated as goodwill. Total goodwill associated with Labcaire is $1,214,808
of which $1,063,294 remains at June 30, 2006.
Labcaire's
business consists of designing, manufac-turing, servicing and marketing air
handling systems for the protection of personnel, products and the environment
from airborne hazards. These systems are similar to the Aura fume enclosures
in
that they extract noxious fumes through a series of filters to introduce clean
air back into the environment, but have expanded their applications. There
are
no additional risks for products sold by Labcaire as compared to other products
marketed and sold by the Company in the United States. Labcaire experiences
minimal currency exposure since a major portion of its revenues are from the
United Kingdom. Revenues outside the United Kingdom are remitted in British
Pounds. Labcaire is also the European distributor of the Company's ultrasonic
laboratory and scientific products. Labcaire manufactures class 100 biohazard
safety enclosures used in laboratories to provide sterile environments and
to
protect lab technicians from airborne con-taminants, and class 100 laminar
flow
enclosures. Labcaire also manufactures the Company's ductless fume enclosures
for the European market and sells the enclosures under its trade name. Labcaire
has developed and now manufactures and sells an automatic endoscope disinfection
system (“Autoscope”), which is used predominantly in hospitals. The Autoscope
disinfects and rinses several endoscopes while abating the noxious disinfectant
fumes produced by the cleaning process. In fiscal 2002, Labcaire introduced
the
Autoscope Guardian version to incorporate a number of enhancements in line
with
UK guidelines. This model has now been further developed with features designed
to increase Labcaire’s compliance with the latest interpretation of these UK
guidelines.
The
Company’s products are proprietary in that they primarily utilize ultrasound as
a technology base to solve laboratory and scientific and medical issues. The
Company has technical expertise in ultrasound and utilizes ultrasound in many
applications, which management believes makes the Company unique. The Company’s
ultrasound technology is the core surrounding its business model.
The
Mystaire pre-engineered scrubbing system is an air pollution abatement system
which removes difficult airborne contaminants emitted from laboratory and
industrial processes at the source. The Mystaire scrubber systems utilize a
wide
variety of technologies to operate on a broad range of contaminants and is
particularly effective on gaseous contaminants such as acid gases, mists,
particulate matter, aerosol, and odor removal. The Company also manufactures
a
range of "point of use" scrubbers for the microelectronics industry. This
equipment eliminates toxic and noxious contaminants arising from silicon wafer
production.
Market
and Customers
Medical
Devices
The
Company relies on its licensee, USS, a significant customer,
for marketing its ultrasonic surgical device. The Company relies on distributors
such as Medline Industries, Inc., Byron, Aesculap, Inc. and ACMI Corporation
and
independent distributors for the marketing of its other medical
products.
Sonora
relies on direct salespersons and distributors for the marketing of its
ultrasonic medical devices.
Focus is
utilizing the Company, in an exclusive agreement, to distribute the Sonablate
500 in the European market and Russia, which allows the Company to sell directly
to end users such as doctors and hospitals and distributors. The Company sells
the neuroaspirator medical device directly to end users and distributors
internationally.
In
June
2002, the Company entered into a ten-year worldwide, royalty-free, distribution
agreement with Mentor for the sale, marketing and distribution of the Lysonix
2000/3000 soft tissue aspirator used for cosmetic surgery.
Laboratory
and Scientific Products
The
Company relies on direct salespersons, distributors, manufacturing
representatives and catalog listings for the marketing of its laboratory and
scientific products. The Company currently sells its products through five
manufacturers’ representative firms, twenty distributors in the United States
and fourteen internationally. The Company currently employs direct sales persons
who operate outside the Company's offices and conduct direct marketing on a
regional basis.
The
market for the Company's ductless fume enclosures includes laboratory or
scientific environments in which workers may be exposed to noxious fumes or
vapors. The products are suited to laboratories in which personnel perform
functions which release noxious fumes or vapors (including hospital and medical
laboratories), industrial processing (particularly involving the use of
solvents) and soldering, and other general chemical processes. The products
are
particularly suited to users in the phar-maceutical, semiconductor,
biotechnology, and forensic industries.
The
largest market for the Company's Sonicator includes research and clinical
laboratories worldwide. In addition, the Company has expanded its sales of
the
ultrasonic processor into industrial markets such as paint, pigment, ceramic
and
pharmaceutical manufacturers.
In
fiscal
2006, approximately 37% of the Company's net sales were to foreign markets.
Labcaire, a subsidiary of the Company, acts as the European distributor of
the
Company's laboratory and scientific products and manufactures and sells the
Company’s fume enclosure line as well as its own range of laboratory and
hospital environmental control products, such as the Guardian endoscope cleaning
device. Sales by the Company in other major industrial countries are made
through distributors.
The
Company views a wide range of industries as prospec-tive customers for its
pollution abatement scrubbers. Scrubbers are usable in any industry or
environment in which airborne contaminants are created, in particular, the
semiconductor manufacturing, chemical processing and pharmaceuticals industries.
The Company sells wet scrubbers directly to end users.
Manufacturing
and Supply
Medical
Devices
The
Company manufactures and assembles its medical devices and Focus Surgery and
Hearing Innovations products at its production facility located in Farmingdale,
New York. The Company's products include components manufactured by other
companies in the United States. The Company is not dependent upon any single
source of supply and has no long-term supply agreements. The Company believes
that it will not encounter difficulty in obtaining materials, supplies and
components adequate for its anticipated short-term needs.
Sonora
manufactures and refurbishes its products at its facility in Longmont, Colorado.
Sonora is not dependent upon any single source of supply and has no long-term
supply agreements. The Company does not believe that Sonora will encounter
difficulty in obtaining materials, supplies and components adequate for its
anticipated short-term needs.
Laboratory
and Scientific Products
The
Company manufactures and assembles the majority of its laboratory and scientific
products at its production facility located in Farmingdale, New York. The
Company's products include components manufactured by other companies in the
United States. The Company believes that it will not encounter difficulty in
obtaining materials, supplies and components adequate for its anticipated
short-term needs. The Company is not dependent upon any single source of supply
and has no long-term supply agreements.
Labcaire
manufactures and assembles its products at its facility located in North
Somerset, England. The Company does not believe that Labcaire will encounter
difficulty in obtaining materials, supplies and components adequate for its
anticipated short-term needs. Labcaire is not dependent upon any single source
of supply and has no long-term supply agreements.
Competition
Medical
Devices
Competition
in the medical devices and the medical repair and refurbishment industry is
rigorous with many companies having significant capital resources, large
research laboratories and extensive distribution systems in excess of the
Company’s. Some of the Company’s major competitors are Johnson & Johnson,
Inc., Valley Lab, a division of Tyco Healthcare, Integra Life Sciences, Inc.,
EDAP, TMS S.A., Ambassador Medical, a subsidiary of GE Medical, Philips and
Siemens.
Laboratory
and Scientific Products
Competitors
in the ultrasonic industry for laboratory and scientific products range from
large corporations with greater production and marketing capabilities to smaller
firms specializing in single products. The Company believes that its significant
competitors in the manufacturing and distribution of industrial ultrasonic
devices are Branson Ultrasonics, a division of Emerson Electric Co., and Sonics
& Materials, Inc. It is possible that other companies in the industry are
currently developing products with the same capabilities as those of the
Company. The Company believes that the features of its Sonicator and the
Company's customer assistance in connection with particular applications give
the Sonicator a competitive advantage over comparable products.
Competitors
in the air pollution abatement industry include large, multi-national
corporations with greater production and marketing capabilities whose financial
resources are substantially greater and, in many cases, whose share of the
air
pollution abatement market is significant as well as small firms specializing
in
single products. The Company believes that specific advantages of its scrubbers
include efficiency, price and customer assistance and that specific advantages
of its fume enclosures include efficiency and other product features, such
as
durability and ease of operation. Ductless fume enclosure advantages are the
quality of the product and versatility of applications. The Company believes
that its principal competitors in the manufacturing and distribution of
scrubbers are Ceilcote, a division of ITEQ, Inc., and Duall Division, a division
of Met-Pro Corporation. The principal competitors for the ductless fume
enclosure are Captair, Inc., Astec/Air Science Technologies, Air Cleaning
Systems, Inc. and Lancer UK Ltd.
Regulatory
Requirements
The
Company’s medical device products are subject to the regulatory requirements of
the FDA. A medical device as defined by the FDA is an instrument, apparatus,
implement, machine, contrivance, implant, in vitro reagent, or other similar
or
related article, including a component, part, or accessory which is recognized
in the official National Formulary or the United States Pharmacopoeia, or any
supplement to such listings, intended for use in the diagnosis of disease or
other conditions, or in the cure, mitigation, treatment, or prevention of
disease, in man or animals, or intended to affect the structure or any function
of the body of man or animals, and which does not achieve any of its primary
intended purposes through chemical action within or on the body of man or
animals and which is not dependent upon being metabolized for the achievement
of
any of its primary intended purposes (a “Medical Device”). The Company’s
products that are subject to FDA regulations for product labeling and promotion
comply with all applicable regulations. The Company is listed with the FDA
as a
Medical Device manufacturer and has the appropriate FDA Establishment Numbers
in
place. The Company has a post-market monitoring system in place such as
Complaint Handling and Medical Device Reporting procedures. All current devices
manufactured and sold by the Company have all the necessary regulatory
approvals. The Company is not aware of any situations which would be materially
adverse at this time and neither has the FDA sought legal remedies available,
nor have there been any violations of its regulations alleged, against the
Company at present.
Patents,
Trademarks, Trade Secrets and Licenses
Pursuant
to a royalty free license agreement with an unaffiliated third party, the
Company has the right to use the trademark "Sonicator" in the United States.
The
Company also owns trademark registrations for Mystaire in both England and
Germany.
The
following is a list of the U.S. patents which have been issued to the
Company:
Number
|
Description
|
Issue
Date
|
Expiration
Date
|
4,920,954
|
Cavitation
Device - relating to the Alliger System for applying ultrasonic arteries
using a generator, transducer and titanium wire.
|
05/01/1990
|
08/05/2008
|
|
|
|
|
5,026,167
|
Fluid
Processing - relating to the Company's environmental control product
line
for introducing ozone and liquid into the cavitation zone for an
ultrasonic probe.
|
06/25/1991
|
10/19/2009
|
|
|
|
|
5,032,027
|
Fluid
processing - relating to the Company's environmental control product
line
for the intimate mixing of ozone and contaminated water for the purpose
of
purification.
|
07/16/1991
|
10/19/2009
|
|
|
|
|
5,248,296
|
Wire
with sheath - relating to the Company's Alliger System for reducing
transverse motion in its catheters.
|
09/23/1993
|
12/24/2010
|
|
|
|
|
5,306,261
|
Guidewire
guides - relating to the Company's Alliger System for a catheter
with
collapsible wire guide.
|
04/26/1994
|
01/22/2013
|
|
|
|
|
5,443,456
|
Guidewire
guides - relating to the Company's Alliger System for a catheter
with
collapsible wire guide.
|
08/22/1995
|
02/10/2014
|
|
|
|
|
5,371,429*
|
Flow-thru
transducer - relating to the Company's liposuction system and its
ultrasonic laboratory and scientific products for an electromechanical
transducer device.
|
12/06/1994
|
09/28/2013
|
|
|
|
|
5,397,293
|
Catheter
sheath - relating to the Company's Alliger System for an ultrasonic
device
with sheath and transverse motion damping.
|
03/14/1995
|
11/25/2012
|
|
|
|
|
5,419,761*
|
Liposuction
- relating to the Company's liposuction apparatus and associated
method.
|
05/30/1995
|
08/03/2013
|
Number
|
Description
|
Issue
Date
|
Expiration
Date
|
5,465,468
|
Flow-thru
transducer - relating to the method of making
an electromechanical transducer device to be used in conjunction
with the
Company’s soft tissue aspiration system and ultrasonic laboratory
and scientific products.
|
11/14/1995
|
12/06/2014
|
|
|
|
|
5,516,043
|
Atomizer
horn - relating to an ultrasonic atomizing device, which is used
in the
Company’s laboratory and scientific products.
|
05/14/1996
|
06/30/2014
|
|
|
|
|
5,527,273*
|
Ultrasonic
probes - relating to an ultrasonic lipectomy
probe to be used with the Company’s soft tissue aspiration technology.
|
06/18/1996
|
10/6/2014
|
|
|
|
|
5,769,211
|
Autoclavable
switch - relating to a medical handpiece with autoclavable rotary
switch
to be used in medical procedures.
|
06/23/1998
|
01/21/2017
|
|
|
|
|
5,072,426
|
Shock
wave hydrophone with self-monitoring feature.
|
12/10/1991
|
02/08/2011
|
|
|
|
|
4,741,731
|
Vented
ultrasonic transducer for surgical handpiece.
|
05/03/1988
|
02/14/2006
|
|
|
|
|
5,151,083
|
Apparatus
for eliminating air bubbles in an ultrasonic surgical
device.
|
09/29/1992
|
07/29/2011
|
|
|
|
|
5,151,084
|
Ultrasonic
needle with sleeve that includes a baffle.
|
09/29/1992
|
07/29/2011
|
|
|
|
|
5,486,162
|
Bubble
control device for an ultrasonic surgical probe.
|
01/23/1996
|
01/11/2015
|
|
|
|
|
5,562,609
|
Ultrasonic
surgical probe.
|
10/08/1996
|
10/07/2014
|
|
|
|
|
5,562,610
|
Needle
for ultrasonic surgical probe.
|
10/08/1996
|
10/07/2014
|
|
|
|
|
5,904,669
|
Magnetic
ball valves and control module.
|
05/18/1999
|
10/25/2016
|
|
|
|
|
6,033,375
|
Ultrasonic
probe with isolated and teflon coated outer cannula.
|
03/07/2000
|
12/23/2017
|
|
|
|
|
6,270,471
|
Ultrasonic
probe with isolated outer cannula.
|
08/07/2001
|
12/23/2017
|
|
|
|
|
6,443,969
|
Ultrasonic
blade with cooling.
|
09/03/2002
|
08/15/2020
|
|
|
|
|
6,379,371
|
Ultrasonic
blade with cooling.
|
04/30/2002
|
11/15/2019
|
|
|
|
|
6,375,648
|
Infiltration
cannula with teflon coated outer surface.
|
04/23/2002
|
10/02/2018
|
|
|
|
|
6,326,039
|
Skinless
sausage or frankfurter manufacturing method and apparatus utilizing
reusable deformable support.
|
12/04/2001
|
10/31/2020
|
Number
|
Description
|
Issue
Date
|
Expiration
Date
|
6,322,832
|
Manufacturing
method and apparatus utilizing reusable deformable
support.
|
11/27/2001
|
10/31/2020
|
|
|
|
|
6,146,674
|
Method
and device for manufacturing hot dogs using high power
ultrasound.
|
11/14/2000
|
5/27/2019
|
|
|
|
|
6,063,050
|
Ultrasonic
dissection and coagulation system.
|
05/16/2000
|
10/16/2017
|
|
|
|
|
6,036,667
|
Ultrasonic
dissection and coagulation system.
|
03/14/2000
|
08/14/2017
|
|
|
|
|
6,582,440
|
Non-clogging
catheter for lithotrity.
|
06/24/2003
|
12/26/2016
|
|
|
|
|
6,578,659
|
Ultrasonic
horn assembly.
|
06/17/2003
|
12/01/2020
|
|
|
|
|
6,454,730
|
Thermal
film ultrasonic dose indicator.
|
09/24/2002
|
04/02/2019
|
|
|
|
|
6,613,056
|
Ultrasonic
probe with low-friction bushings.
|
09/02/2003
|
02/17/2019
|
|
|
|
|
6,648,839
|
Ultrasonic
medical treatment device for RF cauterization and related
method.
|
11/18/2003
|
05/08/2022
|
|
|
|
|
6,660,054
|
Fingerprint
processing chamber with airborne contaminant containment and
adsorption.
|
12/09/2003
|
09/10/2021
|
|
|
|
|
6,736,814
|
Ultrasonic
medical treatment device for bipolar RF cauterization and related
method.
|
05/18/2004
|
02/28/2022
|
|
|
|
|
6,799,729
|
Ultrasonic
cleaning probe.
|
10/05/2004
|
10/05/2021
|
|
|
|
|
6,869,439
|
Ultrasonic
dissector.
|
03/22/2005
|
03/22/2022
|
|
|
|
|
6,902,536
|
RF
cauterization and ultrasonic ablation.
|
06/07/2005
|
06/07/2022
|
|
|
|
|
7,004,282
|
Ultrasonic
horn
|
02/28/2006
|
10/28/2022
|
*
Patents
valid also in Japan, Europe and Canada.
The
following is a list of the U.S. trademarks which have been issued to the
Company:
Registration
Number
|
Registration
Date
|
Mark
|
Goods
|
Renewal
Date
|
2,611,532
|
08/27/2002
|
Mystaire
|
Scrubbers
Employing Fine Sprays Passing Through Mesh for Eliminating Fumes
and Odors
from Gases.
|
08/27/2012
|
|
|
|
|
|
1,219,008
|
12/07/1982
|
Sonimist
|
Ultrasonic
and Sonic Spray Nozzle for Vaporizing Fluid for Commercial, Industrial
and
Laboratory Use.
|
03/22/2013
|
|
|
|
|
|
1,200,359
|
04/03/2002
|
Water
Web
|
Lamination
of Screens to Provide Mesh to be Inserted in Fluid Stream for Mixing
or
Filtering of Fluids.
|
04/03/2013
|
|
|
|
|
|
2,051,093
|
03/27/2003
|
Misonix
|
Anti-Pollution
Wet Scrubbers; Ultrasonic Cleaners; Spray Nozzles for Ultrasonic
Cleaners.
|
03/27/2009
|
Registration
Number
|
Registration
Date
|
Mark
|
Goods
|
Renewal
Date
|
2,051,092
|
02/13/2003
|
Misonix
|
Ultrasonic
Liquid Processors; Ultrasonic Biological Cell Disrupters; Ultrasonic
Cleaners.
|
02/13/2009
|
|
|
|
|
|
2,320,805
|
02/22/2000
|
Aura
|
Ductless
Fume Enclosures
|
02/22/2010
|
|
|
|
|
|
2,812,718
|
02/10/2004
|
Misonix
|
Ultrasonic
medical devices, namely, ultrasonic surgical aspirators, ultrasonic
lithotripters, ultrasonic phacoemulsifiers.
|
02/10/2014
|
|
|
|
|
|
1,195,570
|
07/14/2002
|
Astrason
|
Portable
Ultrasonic Cleaners featuring Microscopic Shock Waves.
|
07/14/2012
|
Backlog
As
of
June 30, 2006, the Company's backlog (firm orders that have not yet been
shipped) was $8,300,000, as compared to approximately $7,900,000 as of June
30,
2005. The Company’s backlog relating to laboratory and scientific products,
including Labcaire, was approximately $3,100,000 at June 30, 2006, as compared
to $3,100,000 as of June 30, 2005. The Company’s backlog relating to medical
devices, including Sonora, was approximately $5,200,000 at June 30, 2006, as
compared to approximately $4,800,000 at June 30, 2005.
Employees
As
of
September 15, 2006, the Company, including Labcaire and Sonora, employed a
total
of 207 full-time employees, including 48 in management and supervisory
positions. The Company considers its relationship with its employees to be
good.
Business
Segments
The
following table provides a breakdown of net sales by business segment for the
periods indicated:
|
|
Fiscal
year ended
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Medical
devices
|
|
$
|
20,732,052
|
|
$
|
24,842,549
|
|
$
|
21,350,846
|
|
Laboratory
and
scientific
products
|
|
|
18,335,241
|
|
|
21,064,035
|
|
|
17,708,220
|
|
Net
sales
|
|
$
|
39,067,293
|
|
$
|
45,906,584
|
|
$
|
39,059,066
|
|
The
following table provides a breakdown of foreign sales by geographic area during
the periods indicated:
|
|
Fiscal
year ended
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
and Mexico
|
|
$
|
640,009
|
|
$
|
864,878
|
|
$
|
795,475
|
|
United
Kingdom
|
|
|
9,256,592
|
|
|
11,293,506
|
|
|
9,509,301
|
|
Europe
|
|
|
2,210,668
|
|
|
2,823,169
|
|
|
1,502,776
|
|
Asia
|
|
|
1,268,799
|
|
|
899,274
|
|
|
1,037,553
|
|
Middle
East
|
|
|
307,810
|
|
|
279,514
|
|
|
325,365
|
|
Other
|
|
|
618,203
|
|
|
692,149
|
|
|
627,437
|
|
|
|
$
|
14,302,081
|
|
$
|
16,852,490
|
|
$
|
13,797,907
|
|
Website
Access Disclosure
The
Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K are available free of charge on the Company’s
website at www.MISONIX.COM
as soon
as reasonably practicable after such material is electronically filed with
or
furnished to the Securities and Exchange Commission (the “SEC”).
Also,
copies of the Company’s annual report will be made available, free of charge,
upon written request.
Item
1A. Risk
Factors
In
addition to the other information contained in this Form 10-K and the exhibits
hereto, the following risk factors should be considered carefully in evaluating
our business. Our business, financial condition or results of operations could
be materially adversely affected by any of these risks. This section contains
forward-looking statements. You should refer to the explanation of the
qualifications and limitations on forward-looking statements set forth
immediately prior to the beginning of Item 1 of this Annual Report on Form
10-K.
Additional risks not presently known to us or that we currently deem immaterial
may also adversely affect our business, financial condition or results of
operations.
Risks
Related to Our Business
We
are subject to extensive medical device regulation which may impede or hinder
the approval process for our products and, in some cases, may not ultimately
result in approval or may result in the recall or seizure of previously approved
products.
Our
products, development activities and manufacturing processes are subject to
extensive and rigorous regulation by the FDA pursuant to the Federal Food,
Drug,
and Cosmetic Act (the FDC Act), by comparable agencies in foreign countries,
and
by other regulatory agencies and governing bodies. Under the FDC Act, medical
devices must receive FDA clearance or approval before they can be commercially
marketed in the U.S. In addition, most major markets for medical devices outside
the U.S. require clearance, approval or compliance with certain standards before
a product can be commercially marketed. The process of obtaining marketing
approval or clearance from the FDA for new products, or with respect to
enhancements or modifications to existing products, could:
§ |
take
a significant period of time;
|
§ |
require
the expenditure of substantial
resources;
|
§ |
involve
rigorous pre-clinical and clinical
testing;
|
§ |
require
changes to the products; and
|
§ |
result
in limitations on the indicated uses of the
products.
|
Even
after products have received marketing approval or clearance, product approvals
and clearances by the FDA can be withdrawn due to failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
approval. There can be no assurance that we will receive the required clearances
from the FDA for new products or modifications to existing products on a timely
basis or that any FDA approval will not be subsequently withdrawn. Later
discovery of previously unknown problems with a product or manufacturer could
result in fines, delays or suspensions of regulatory clearances, seizures or
recalls of products, operating restrictions and/or criminal prosecution. The
failure to receive product approval clearance on a timely basis, suspensions
of
regulatory clearances, seizures or recalls of products or the withdrawal of
product approval by the FDA could have a material adverse effect on our
business, financial condition or results of operations.
We
may not meet regulatory quality standards applicable to our manufacturing and
quality processes, which could have an adverse effect on our business, financial
condition or results of operations.
As
a
device manufacturer, w are required to register with the FDA and are subject
to
periodic inspection by the FDA for compliance with the FDA’s Quality System
Regulation (QSR) requirements, which require manufacturers of medical devices
to
adhere to certain regulations, including testing, quality control and
documentation procedures. In addition, the federal Medical Device Reporting
regulations require us to provide information to the FDA whenever there is
evidence that reasonably suggests that a device may have caused or contributed
to a death or serious injury or, if a malfunction were to occur, could cause
or
contribute to a death or serious injury. Compliance with applicable regulatory
requirements is subject to continual review and is rigorously monitored through
periodic inspections by the FDA. In the European Community, we are required
to
maintain certain ISO certifications in order to sell our products and must
undergo periodic inspections by notified bodies to obtain and maintain these
certifications.
Future
intellectual property litigation could be costly and disruptive to
us.
We
operate in an industry that is susceptible to significant intellectual property
litigation and, in recent years, it has been common for companies in the medical
device field to aggressively challenge the patent rights of other companies
in
order to prevent the marketing of new devices. Intellectual property litigation
is expensive, complex and lengthy and its outcome is difficult to predict.
Future patent litigation may result in significant royalty or other payments
or
injunctions that can prevent the sale of products and may significantly divert
the attention of our technical and management personnel. In the event that
our
right to market any of our products is successfully challenged, and if we fail
to obtain a required license or are unable to design around a patent, our
business, financial condition or results of operations could be materially
adversely affected.
We
may not be able effectively to protect our intellectual property rights which
could have an adverse effect on our business, financial condition or results
of
operations.
Patents
and other proprietary rights are and will be essential to our business, and
our
ability to compete effectively with other companies will be dependent upon
the
proprietary nature of our technologies. We rely upon trade secrets, know-how,
continuing technological innovations, strategic alliances and licensing
opportunities to develop, maintain and strengthen our competitive position.
We
pursue a policy of generally obtaining patent protection in both the U.S. and
abroad for patentable subject matter in our proprietary devices and also attempt
to review third-party patents and patent applications to the extent publicly
available to develop an effective patent strategy, avoid infringement of
third-party patents, identify licensing opportunities and monitor the patent
claims of others. We currently own numerous U.S. and foreign patents. We also
are party to various license agreements pursuant to which patent rights have
been obtained or granted in consideration for cash or royalty payments. No
assurance can be made that any pending or future patent applications will result
in issued patents, that any current or future patents issued to, or licensed
by,
us will not be challenged or circumvented by our competitors, or that our
patents will not be found invalid.
In
addition, we may have to take legal action in the future to protect our patents,
trade secrets or know-how or to assert them against claimed infringement by
others. Any legal action of that type could be costly and time consuming to
us
and no assurances can be made that any lawsuit will be successful.
The
invalidation of key patents or proprietary rights that we own, or an
unsuccessful outcome in lawsuits to protect our intellectual property, could
have a material adverse effect on our business, financial position or results
of
operations.
Future
product liability claims and other litigation, including private securities
litigation and shareholder derivative suits, may adversely affect our business,
reputation and ability to attract and retain
customers.
The
design, manufacture and marketing of medical devices of the types that we
produce entail and inherent risk of product liability claims. A number of
factors could results in an unsafe condition or injury to, or death of, a
patient with respect to these or other products that we manufacture or sell,
including component failures, manufacturing flaws, design defects or inadequate
disclosure of product-related risks or product-related information. These
factors could result in product liability claims, a recall of one or more of
our
products or a safety alert relating to one or more of our products. Product
liability claims may be brought by individuals or by groups seeking to represent
a class.
We
may not be successful in our strategic initiatives to become primarily a medical
device company.
Our
strategic initiatives intend to further expand our ability to offer customers
effective, quality medical devices that satisfy their needs, as well as focus
the Company on our medical device platform. If we are unsuccessful in our
strategic initiatives, we may be unable to continue to grow our business
significantly or may record asset impairment charges in the future.
Our
future growth is dependent upon the development of new products, which requires
significant research and development, clinical trials and regulatory approvals,
all of which are very expensive and time-consuming and may not result in a
commercially viable product.
In
order
to develop new products and improve current product offerings, we focus our
research and development programs largely on the development of next-generation
and novel technology offerings across multiple programs and opportunities.
We
expect to launch our bone cutter product for laminectomies during the first
calendar quarter 2007. We currently are performing clinicals on the product.
We
are also performing clinicals for kidney cancer treatment in
Europe.
Further,
we anticipate continuing our increased focus and spending on areas such as
HIFU
technologies for the kidney, liver and breast. However, given their early stage
of development, there can be no assurance that these and other technologies
will
achieve technological feasibility, obtain regulatory approval or gain market
acceptance. A delay in the development or approval of these technologies or
our
decision to reduce funding of these projects may adversely impact the
contribution of these technologies to our future growth.
As
a part
of the regulatory process of obtaining marketing clearance from the FDA for
new
products, we conduct and participate in numerous clinical trials with a variety
of study designs, patient populations and trial endpoints. Unfavorable or
inconsistent clinical data from existing or future clinical trials conducted
by
us, by our competitors or by third parties, or the market’s perception of this
clinical data, may adversely impact our ability to obtain product approvals
from
the FDA, our position in, and share of, the markets in which we participate
and
our business, financial condition, results of operations or future
prospects.
We
face intense competition and may not be able to keep pace with the rapid
technological changes in the medical devices industry, which could have an
adverse effect on our business, financial condition or results of
operations.
The
medical device market is highly competitive. We encounter significant
competition across our product lines and in each market in which our products
are sold from various medical device companies, some of which may have greater
financial and marketing resources than we do.
Additionally,
the medical device market is characterized by extensive research and
development, and rapid technological change. Developments by other companies
of
new or improved products, processes or technologies, in particular in the cancer
treatment market, may make our products or proposed products obsolete or less
competitive and may negatively impact our revenues. We are required to devote
continued efforts and financial resources to develop or acquire scientifically
advanced technologies and products, apply our technologies cost-effectively
across product lines and markets, attract and retain skilled development
personnel, obtain patent and other protection for our technologies and products,
obtain required regulatory and reimbursement approvals and successfully
manufacture and market our products. Failure to develop new products or enhance
existing products could have a material adverse effect on our business,
financial condition or results of operations.
Because
we derive a significant amount of our revenues from international operations
and
a significant percentage of our growth is expected to come from international
operations, changes in international economic or regulatory conditions could
have a material impact on our business, financial condition or results of
operations.
Sales
outside the U.S. accounted for approximately 37% of our net sales in Fiscal
2006. Additionally, a significant percentage of our future growth is expected
to
come from international operations. As a result, our profitability from our
international operations may be limited by risks and uncertainties related
to
economic conditions in these regions, foreign currency fluctuations, regulatory
and reimbursement approvals, competitive offerings, infrastructure development,
rights to intellectual property and our ability to implement our overall
business strategy. Further, international markets are also being affected by
economic pressure to contain reimbursement levels and healthcare costs. The
trend in countries around the world, including Japan, toward more stringent
regulatory requirements for product clearance, changing reimbursement models
and
more rigorous inspection and enforcement activities has generally caused or
may
cause medical device manufacturers to experience more uncertainty, delay, risk
and expense.
Consolidation
in the healthcare industry could lead to demands for price concessions or the
exclusion of some suppliers from certain of our significant market segments,
which could have an adverse effect on our business, financial condition or
results of operations.
The
cost
of healthcare has risen significantly over the past decade and numerous
initiatives and reforms initiated by legislators, regulators and third-party
payers to curb these costs have resulted in a consolidation trend in the
healthcare industry, including hospitals. This in turn has resulted in greater
pricing pressures and the exclusion of certain suppliers from important market
segments as group purchasing organizations, independent delivery networks and
large single accounts continue to consolidate purchasing decisions for some
of
our hospital customers. We expect that market demand, government regulation,
third-party reimbursement policies and societal pressures will continue to
change the worldwide healthcare industry, resulting in further business
consolidations and alliances among our customers and competitors, which may
reduce competition, exert further downward pressure on the prices of our
products and may adversely impact our business, financial condition or results
of operations.
Item
2. Properties.
The
Company occupies approximately 45,500 square feet at 1938 New Highway,
Farmingdale, New York under a lease which expires on June 30, 2010. The rental
amount, which is approximately $40,000 per month and includes a pro rata share
of real estate taxes, water and sewer charges, and other charges which are
assessed on the leased premises or the land upon which the leased premises
are
situated. Labcaire owns a 20,000 square foot facility in North Somerset,
England, which was purchased in fiscal 1999, for which there is a mortgage
loan.
Sonora occupies approximately 29,000 square feet in Longmont, Colorado under
a
lease expiring in November 2011. The rental amount is approximately $21,000
per
month and includes a pro rata share of real estate taxes, water and sewer
charges, and other charges which are assessed on the leased premises or the
land
upon which the leased premises are situated. The Company believes that the
leased facilities are adequate for its present needs.
Item
3. Legal
Proceedings.
A
jury in
the District Court of Boulder County, Colorado has returned a verdict against
Sonora Medical Systems during the Company’s Fiscal 2005 fourth quarter in the
amount of $419,000. The case involved royalties claimed on recoating of
transesophogeal probes, which is a process by Sonora. Approximately 80% of
the
judgment was based on the jury’s estimate of royalties for potential sales of
the product in the future. Sonora has moved for judgment notwithstanding the
verdict based on, among other things, the award of damages for future royalties.
Sonora has also moved for a new trial in the case.
Item
4. Submission
of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of the Company's security holders during the
last quarter of the fiscal year ended June 30, 2006.
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
(a) |
The
Company's common stock, $.01 par value (“Common Stock”), is listed on the
NASDAQ National Market (“NMS”) under the symbol "MSON".
|
The
following table sets forth the high and low bid prices for the Common Stock
during the periods indicated as reported by the NMS. The prices reported reflect
inter-dealer quotations, may not represent actual transactions, and do not
include retail mark-ups, mark-downs or commissions.
Fiscal
2006:
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
8.85
|
|
$
|
5.80
|
|
Second
Quarter
|
|
|
7.34
|
|
|
4.25
|
|
Third
Quarter
|
|
|
7.57
|
|
|
4.07
|
|
Fourth
Quarter
|
|
|
6.94
|
|
|
4.45
|
|
|
|
|
|
|
|
|
|
Fiscal
2005:
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
8.00
|
|
$
|
4.78
|
|
Second
Quarter
|
|
|
7.24
|
|
|
5.08
|
|
Third
Quarter
|
|
|
6.86
|
|
|
5.71
|
|
Fourth
Quarter
|
|
|
6.23
|
|
|
5.16
|
|
(b)
As
of
September 22, 2006, the Company had 6,900,369 shares
of
Common Stock outstanding and 105 shareholders of record. This does not take
into
account shareholders whose shares are held in “street name” by brokerage houses.
(c)
The
Company has not paid any dividends since its inception. The Company currently
does not intend to pay any cash dividends in the foreseeable future, but intends
to retain all earnings, if any, for use in its business operations.
Equity
Compensation Plan Information:
Plan
category
|
a)
Number of
securities
to be
issued
upon the
exercise
of
outstanding
options
|
b)
Weighted
average
exercise
price
of the
outstanding
options
|
c)
Number of
securities
remaining
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column a)
|
Equity
compensation plans approved by security holders.
|
|
|
|
I. 1991
Plan
|
30,000
|
$7.38
|
-
|
II. 1996
Director’s Plan
|
250,000
|
3.96
|
-
|
III. 1996
Plan
|
311,150
|
6.14
|
-
|
IV. 1998
Plan
|
422,525
|
6.66
|
24,627
|
V. 2001
Plan
|
824,298
|
5.56
|
47,396
|
VI. 2005
Employee
Equity
Incentive Plan
|
0
|
0
|
500,000
|
VII. 2005
Non-Employee
Director
Stock Option Plan
|
0
|
0
|
200,000
|
Equity
compensation
plans
not approved
by
security holders
|
-
|
-
|
-
|
Total
|
1,837,973
|
$5.72
|
772,578
|
Item
6. Selected
Financial Data.
Selected
income statement data:
|
|
Year
Ended June 30,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Net
sales
|
|
$
|
39,067,293
|
|
$
|
45,906,584
|
|
$
|
39,059,066
|
|
$
|
34,858,751
|
|
$
|
29,590,453
|
|
Net
income (loss)
|
|
|
(3,759,437
|
)
|
|
935,705
|
|
|
1,718,945
|
|
|
967,575
|
|
|
176,661
|
|
Net
income (loss) per share-
Basic
|
|
$
|
(.55
|
)
|
$
|
.14
|
|
$
|
.26
|
|
$
|
.15
|
|
$
|
.03
|
|
Net
income (loss) per share-
Diluted
|
|
$
|
(.55
|
)
|
$
|
.13
|
|
$
|
.25
|
|
$
|
.15
|
|
$
|
.03
|
|
Selected
balance sheet data:
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Total
assets
|
|
$
|
34,512,565
|
|
$
|
38,085,936
|
|
$
|
34,241,112
|
|
$
|
29,794,589
|
|
$
|
26,964,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
and
capital lease
obligations
|
|
|
1,145,279
|
|
|
1,240,324
|
|
|
1,264,480
|
|
|
1,235,362
|
|
|
1,050,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’
equity
|
|
|
22,254,806
|
|
|
25,094,160
|
|
|
23,743,176
|
|
|
21,342,663
|
|
|
19,688,828
|
|
Item
7. Management's
Discussion and Analysis of Financial Condition and Results of
Operation.
Results
of Operation:
The
following table sets forth, for the three most recent fiscal years, the
percentage relationship to net sales of principal items in the Company's
Consolidated Statements of Operations:
|
Fiscal
year ended
June
30,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
Net
sales
|
100%
|
|
100%
|
|
100%
|
Cost
of goods sold
|
63.5
|
|
58.5
|
|
57.7
|
|
|
|
|
|
|
Gross
profit
|
36.5
|
|
41.5
|
|
42.3
|
|
|
|
|
|
|
Selling
expenses
|
17.9
|
|
13.3
|
|
11.9
|
|
|
|
|
|
|
General
and administrative expenses
|
26.1
|
|
18.4
|
|
19.6
|
|
|
|
|
|
|
Research
and development expenses
|
9.3
|
|
7.6
|
|
6.2
|
|
|
|
|
|
|
Litigation
expenses (recovery)
|
-
|
|
1.0
|
|
-
|
|
|
|
|
|
|
Total
operating expenses
|
53.3
|
|
40.3
|
|
37.7
|
|
|
|
|
|
|
(Loss)
Income from operations
|
(16.8)
|
|
1.2
|
|
4.6
|
|
|
|
|
|
|
Other
income
|
1.4
|
|
1.5
|
|
2.7
|
|
|
|
|
|
|
(Loss)
Income before minority interest and
income
taxes
|
(15.4)
|
|
2.7
|
|
7.3
|
|
|
|
|
|
|
Minority
interest in net income of
consolidated
subsidiaries
|
-
|
|
-
|
|
.2
|
|
|
|
|
|
|
(Loss)
Income before provision for income
taxes
|
(15.4)
|
|
2.7
|
|
7.1
|
|
|
|
|
|
|
Income
tax (benefit) provision
|
(5.8)
|
|
.6
|
|
2.7
|
|
|
|
|
|
|
Net
(loss) income
|
(9.6%)
|
|
2.1%
|
|
4.4%
|
The
following discussion and analysis provides information which the Company’s
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein.
All
of
the Company's sales to date have been derived from the sale of medical devices,
which include manufacture and distribution of ultrasonic medical devices, and
laboratory and scientific products, which include ultrasonic equipment for
scientific and industrial purposes, ductless fume enclosures for filtration
of
gaseous emissions in laboratories and environmen-tal control equipment for
the
abatement of air pollution.
Fiscal
years ended June 30, 2006 and 2005
Net
sales.
Net
sales of the Company's medical devices and laboratory and scientific products
decreased $6,839,291 to $39,067,293 in fiscal 2006 from $45,906,584 in fiscal
2005. This difference in net sales is due to a decrease in sales of medical
devices of $4,110,497 to $20,732,052 in fiscal 2006 from $24,842,549 in fiscal
2005. This difference in net sales is also due to a decrease in laboratory
and
scientific product sales of $2,728,794 to $18,335,241 in fiscal 2006 from
$21,064,035 in fiscal 2005. The decrease in sales of medical devices is due
to a
decrease in sales of therapeutic medical devices of $4,393,445 partially offset
by an increase of $282,948 in sales of diagnostic medical devices. The increase
in sales of diagnostic medical devices was not attributable to a single
customer, distributor or any other specific factor, but an increase in customer
demand for several products. The decrease in sales of therapeutic medical
devices was mostly attributable to a decrease in sales to Byron of the Lysonix
3000 device, the Autosonics device sold to USS and a decrease in sales of the
Sonoblate 500 in Europe. Sales are not recorded as revenue until the total
earnings process is complete. The decrease in sales of laboratory and scientific
products is due to a decrease in Labcaire sales of $1,848,404, an increase
in
sales of ultrasonic laboratory products of $649,834, a decrease in wet scrubber
sales of $1,015,299 and a decrease in ductless fume enclosure and related
product sales of $514,925. The decrease in Labcaire sales of $1,848,404 is
primarily due to the decrease in sales of the Guardian (endoscope cleaning)
product in the amount of $1,342,685 and the weakening of the English Pound
of
approximately $505,719. This reduction in sales is due to less funding available
from the National Health System. The increase in scientific ultrasonic sales
is
due to an increase in customer demand for the ultrasonic sonicator product.
The
decrease in fume enclosure sales is due to lower customer demand for these
type
products. Export sales from the United States are remitted in U.S. Dollars
and
export sales for Labcaire are remitted in English Pounds. During fiscal 2006
and
fiscal 2005, the Company had foreign net sales of $14,302,081 and $16,852,490,
respectively, representing 37% of net sales for each year, respectively.
Approximately 26% of the Company’s revenues for fiscal year 2006 were received
in English Pounds. 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 weighted average rates of 1.78 and 1.86 for the years ended
June 30, 2006 and 2005, respectively. A strengthening of the English Pound,
in
relation to the U.S. Dollar, will have the effect of increasing reported
revenues and profits, while a weakening of the English Pound will have the
opposite effect. Since the Company’s operations in England generally set prices
and bids for contracts in English Pounds, a strengthening of the English Pound,
while increasing the value of its UK assets, might place the Company at a
pricing disadvantage in bidding for work from manufacturers based overseas.
The
Company collects its receivables in the currency the subsidiary resides in.
The
Company has not engaged in foreign currency hedging transactions, which include
forward exchange agreements.
The
Company’s revenues are generated from various geographic regions. The following
is an analysis of net sales by geographic region for the year ending June
30:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
United
States
|
|
$
|
24,765,213
|
|
$
|
29,054,094
|
|
Canada
and Mexico
|
|
|
640,009
|
|
|
864,878
|
|
United
Kingdom
|
|
|
9,256,592
|
|
|
11,293,506
|
|
Europe
|
|
|
2,210,668
|
|
|
2,823,169
|
|
Asia
|
|
|
1,268,799
|
|
|
899,274
|
|
Middle
East
|
|
|
307,810
|
|
|
279,514
|
|
Other
|
|
|
618,202
|
|
|
692,149
|
|
|
|
$
|
39,067,293
|
|
$
|
45,906,584
|
|
Summarized
financial information for each of the segments for the years ended June 30,
2006
and 2005 are as follows:
For
the
year ended June 30, 2006:
|
|
Medical
Devices
|
|
Laboratory
and
Scientific
Products
|
|
Corporate
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
20,732,052
|
|
$
|
18,335,241
|
|
$
|
-
|
|
$
|
39,067,293
|
|
Cost
of goods sold
|
|
|
12,456,746
|
|
|
12,337,537
|
|
|
-
|
|
|
24,794,283
|
|
Gross
profit
|
|
|
8,275,306
|
|
|
5,997,704
|
|
|
-
|
|
|
14,273,010
|
|
Selling
expenses
|
|
|
4,543,079
|
|
|
2,465,076
|
|
|
-
|
|
|
7,008,155
|
|
Research
and development
|
|
|
2,200,380
|
|
|
1,427,022
|
|
|
-
|
|
|
3,627,402
|
|
General
and administrative |
|
|
- |
|
|
- |
|
|
10,211,492 |
|
|
10,211,492 |
|
Total
operating expenses
|
|
|
6,743,459
|
|
|
3,892,098
|
|
|
10,211,492
|
|
|
20,847,049
|
|
Income
(loss) from operations
|
|
$
|
1,531,847
|
|
$
|
2,105,606
|
|
$
|
(10,211,492
|
)
|
$
|
(6,574,039
|
)
|
For
the
year ended June 30, 2005:
|
|
Medical
Devices
|
|
Laboratory
and
Scientific
Products
|
|
Corporate
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
24,842,549
|
|
$
|
21,064,035
|
|
$
|
-
|
|
$
|
45,906,584
|
|
Cost
of goods sold
|
|
|
13,787,186
|
|
|
13,082,050
|
|
|
-
|
|
|
26,869,236
|
|
Gross
profit
|
|
|
11,055,363
|
|
|
7,981,985
|
|
|
-
|
|
|
19,037,348
|
|
Selling
expenses
|
|
|
3,164,535
|
|
|
2,946,181
|
|
|
-
|
|
|
6,110,716
|
|
Research
and development
|
|
|
2,437,466
|
|
|
1,048,597
|
|
|
-
|
|
|
3,486,063
|
|
General
and administrative |
|
|
- |
|
|
- |
|
|
8,881,228 |
|
|
8,881,228 |
|
Total
operating expenses
|
|
|
5,602,001
|
|
|
3,994,778
|
|
|
8,881,228
|
|
|
18,478,007
|
|
Income
from operations
|
|
$
|
5,453,362
|
|
$
|
3,987,207
|
|
$
|
(8,881,228
|
)
|
$
|
559,341
|
|
Net
sales
for the three months ended June 30, 2006 were $9,517,557 compared to $13,889,699
for the three months ended June 30, 2005. This decrease of $4,372,142 for the
three months ended June 30, 2006 is due to a decrease in sales of medical
devices of $2,319,693 and a decrease in laboratory and scientific products
sales
of $2,052,449. The decrease in sales of medical devices is due to a decrease
in
sales of diagnostic medical devices of $322,989 and a decrease of $1,996,704
in
sales of therapeutic medical devices. The decrease in sales of diagnostic
medical devices was not attributable to a single customer, distributor or any
other specific factor. The decrease in sales of therapeutic medical devices
was
mostly attributable to a decrease in sales to USS of approximately $223,600,
sales to Byron of approximately $1,189,844 and sales of the Sonablate 500 units
in Europe in the amount of approximately $575,000. The decrease in laboratory
and scientific products sales is due to increased ultrasonics sales of $50,218,
offset by a decrease in ductless fume enclosure sales of $21,999, a decrease
in
wet scrubber sales of $1,006,822 and a decrease in Labcaire sales of $1,073,846.
The decrease in Labcaire sales is primarily due to a decrease in sales of the
Guardian (endoscopic cleaning) product of approximately $1,059,512 and a
weakening of the English Pound in the amount of $14,333.
Summarized
financial information for each of the segments for the three months ended June
30, 2006 and 2005 are as follows:
For
the
three months ended June 30, 2006:
|
|
Medical
Devices
|
|
Laboratory
and
Scientific
Products
|
|
Corporate
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
5,205,055
|
|
$
|
4,312,502
|
|
$
|
-
|
|
$
|
9,517,557
|
|
Cost
of goods sold
|
|
|
3,489,264
|
|
|
3,008,337
|
|
|
-
|
|
|
6,497,601
|
|
Gross
profit
|
|
|
1,715,791
|
|
|
1,304,165
|
|
|
-
|
|
|
3,019,956
|
|
Selling
expenses
|
|
|
1,415,241
|
|
|
578,804
|
|
|
-
|
|
|
1,994,045
|
|
Research
and development
|
|
|
513,847
|
|
|
374,512
|
|
|
-
|
|
|
888,359
|
|
General
and administrative |
|
|
- |
|
|
- |
|
|
2,683,324 |
|
|
2,683,324 |
|
Total
operating expenses
|
|
|
1,929,088
|
|
|
953,316
|
|
|
2,683,324
|
|
|
5,565,728
|
|
Income
(loss) from operations
|
|
$
|
(213,297
|
)
|
$
|
350,849
|
|
$
|
(2,683,324
|
)
|
$
|
(2,545,772
|
)
|
For
the
three months ended June 30, 2005:
|
|
Medical
Devices
|
|
Laboratory
and
Scientific
Products
|
|
Corporate
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
7,524,748
|
|
$
|
6,364,951
|
|
$
|
-
|
|
$
|
13,889,699
|
|
Cost
of goods sold
|
|
|
4,165,287
|
|
|
4,093,612
|
|
|
-
|
|
|
8,258,899
|
|
Gross
profit
|
|
|
3,359,461
|
|
|
2,271,339
|
|
|
-
|
|
|
5,630,800
|
|
Selling
expenses
|
|
|
880,152
|
|
|
823,013
|
|
|
-
|
|
|
1,703,165
|
|
Research
and development
|
|
|
621,213
|
|
|
324,780
|
|
|
-
|
|
|
945,993
|
|
General
and administrative |
|
|
- |
|
|
- |
|
|
2,854,317 |
|
|
2,854,317 |
|
Total
operating expenses
|
|
|
1,501,365
|
|
|
1,147,793
|
|
|
2,854,317
|
|
|
5,503,475
|
|
Income
from operations
|
|
$
|
1,858,096
|
|
$
|
1,123,546
|
|
$
|
(2,854,317
|
)
|
$
|
127,325
|
|
Gross
profit.
Gross
profit decreased to 36.5% in fiscal 2006 from 41.5% in fiscal 2005. Gross profit
for medical devices decreased to 39.9% in fiscal 2006 from 44.5% in fiscal
2005.
Gross profit for laboratory and scientific products decreased to 32.7% in fiscal
2006 from 37.9% in fiscal 2005. Gross profit for medical devices was impacted
by
an unfavorable order mix of therapeutic medical devices, partially to lower
gross margins on sales to USS, partially offset by a favorable mix of diagnostic
medical device orders. The decrease in gross profit for laboratory and
scientific products is due to lower gross profit for wet scrubbers, fume
enclosure products and Labcaire products. Gross profit decreased to 31.7% of
sales in the three months ended June 30, 2006 from 40.5% of sales in the three
months ended June 30, 2005. Gross profit for laboratory and scientific products
decreased to 30.2% of sales in the three months ended June 30, 2006 from 35.7%
in the three months ended June 30, 2005. Gross profit for medical devices
decreased from 44.6% of sales in the three months ended June 30, 2005 to 33%
of
sales in the three months ended June 30, 2006. The decrease in gross profit
for
laboratory and scientific products was impacted by the unfavorable order mix
for
sales of ultrasonic products, fume enclosures, wet scrubbers and Labcaire sales.
The decrease in gross profit for medical devices was impacted by an unfavorable
order mix for sales of therapeutic medical devices, partially offset by a
favorable order mix of diagnostic medical devices. The Company manufactures
and
sells both medical devices and laboratory and scientific products with a wide
range of product costs and gross margin dollars as a percentage of
revenues.
Selling
expenses.
Selling
expenses increased $897,439 or 14.7% to $7,008,155 (17.9% of net sales) in
fiscal 2006 from $6,110,716 (13.3% of net sales) in fiscal 2005. Medical devices
selling expenses increased $1,378,544 due both to additional sales and marketing
efforts for diagnostic medical devices and therapeutic medical devices. The
increase in therapeutic medical devices selling expenses of $854,948 is
primarily due to an increase in sales and marketing efforts relating to European
distribution of our Sonoblate 500 product for prostate cancer and clinical
trials for the Sonic One wound debrider product, which was launched in the
fourth quarter fiscal 2006 and the ultrasonic bone cutter. Laboratory and
scientific products selling expenses decreased $481,105 predominantly due to
a
reduction in marketing expenses in all product areas. Selling expenses increased
$290,880 or 17.1% to $1,994,045 (21.0% of net sales) in the three months ended
June 30, 2006 from $1,703,165 (12.3% of net sales) in the three months ended
June 30, 2005. Medical devices selling expenses increased $535,089 due to
additional sales and marketing efforts for therapeutic medical products.
Laboratory and scientific products selling expenses decreased $244,209
predominantly due to a decrease in all product areas, due primarily to reduction
in personnel.
General
and administrative expenses.
Total
corporate and unallocated expenses increased $1,330,264 to $10,211,496 in fiscal
year 2006 from $8,881,228 in fiscal 2005. General and administrative expenses
which are included in corporate and unallocated expenses increased $1,749,264
or
21.0% to $10,211,492 in fiscal 2006 from $8,462,228 in fiscal 2005. The increase
is predominantly due to recording stock-based compensation expense of $508,657
related to the adoption of FAS 123R and an increase in corporate general and
administrative expenses relating to corporate insurance, accounting fees, legal
fees, other accrued corporate expenses and an increase in administrative staff
at Sonora Medical Systems. Total corporate and unallocated expenses decreased
$170,993 to $2,683,324 in the three months ended June 30, 2006 from $2,854,317
in the three months ended June 30, 2005. General and administrative
expenses which are included in corporate and unallocated expenses increased
$248,007 from $2,435,317 in the three months ended June 30, 2005 to $2,683,324
in the three months ended June 30, 2006. The increase is predominantly due
to
items indicated above for the full year. Corporate and unallocated expenses
also
include litigation expenses of $419,000 in the year and three months ended
June
30, 2005.
Research
and development expenses.
Research
and development expenses increased $141,339 or 4.1% to $3,627,402 in fiscal
2006
from $3,486,063 in fiscal 2005. Research and development expenses related to
medical devices decreased $237,086 and research and development expenses related
to laboratory and scientific products increased $378,425. Research and
development expenses related to medical devices decreased predominantly due
to
efforts for therapeutic medical devices and a decrease in amounts paid to Focus
Surgery in fiscal 2006 for the development work performed for the Company for
the treatment of kidney and liver tumors utilizing HIFU
and the reduced efforts related to the digital upgrade project on all our
ultrasonic platform technology as compared to fiscal 2005.
The
increase in research and development expenses relating to laboratory and
scientific products increased efforts in research and development efforts for
the ISIS product at Labcaire. ISIS is the new development project designed
to be
fully compliant with the new United Kingdom regulations for the handling,
cleaning and disinfecting of endoscopes. Research and development expenses
decreased $57,634 or 6.1% for the three months ended June 30, 2006 from $945,993
to $888,359 for the three months ended June 30, 2005. Research and development
expenses related to medical devices decreased $107,366 and research and
development expenses related to laboratory and scientific products increased
$49,732. Research and development expenses related to medical devices decreased
predominantly due to reduced efforts for therapeutic medical devices in the
three months ended June 30, 2006 for the development of products for the
treatment of kidney and liver tumors utilizing HIFU
and the efforts related to the digital upgrade project on all our ultrasonic
platform technology as compared to the three months ended June 30,
2005.
The
increase in laboratory and scientific products is primarily due to increased
research and development efforts for the Labcaire ISIS project.
Litigation
expenses. The
Company recorded a litigation expense for the fiscal year 2005 of $419,000
as
compared to $0 for the fiscal year 2006. The Company recorded the litigation
expense for the three months ended June 30, 2005 of $419,000 as compared to
$0
for the three months ended June 30, 2006. Litigation expense relates to the
jury
verdict against Sonora in the District Court of Boulder County Colorado for
royalties owed and future royalties on recoating transesophogeal probes which
is
a process performed by Sonora Medical Systems.
Other
income (expense).
Other
income was $552,849 in fiscal 2006 as compared to $682,233 in fiscal 2005.
The
decrease of $129,384 for the fiscal year was primarily due to a decrease in
royalty income of $132,214 from USS. Other income was $94,515 in the three
months ended June 30, 2006 as compared to $133,229 in the three months ended
June 30, 2005. The decrease of $38,714 for the three months ended June 30,
2006
was primarily due to a decrease in royalty income from USS.
Income
taxes.
The
effective tax rate is 37.7% for the fiscal year ended June 30, 2006 as compared
to an effective tax rate of 23.8% for the fiscal year ended June 30, 2005.
The
effective rate for fiscal 2006 was impacted predominantly by a reduction in
valuation allowances for bad debt expenses and the tax effect of implementation
of FAS 123R with respect to incentive stock options.
Fiscal
years ended June 30, 2005 and 2004
Net
sales.
Net
sales of the Company's medical devices and laboratory and scientific products
increased $6,847,518 to $45,906,584 in fiscal 2005 from $39,059,066 in fiscal
2004. This difference in net sales is due to an increase in sales of medical
devices of $3,491,703 to $24,842,549 in fiscal 2005 from $21,350,846 in fiscal
2004. This difference in net sales is also due to an increase in laboratory
and
scientific product sales of $3,355,815 to $21,064,035 in fiscal 2005 from
$17,708,220 in fiscal 2004. The increase in sales of medical devices is due
to
an increase in sales of therapeutic medical devices of $1,549,867 and an
increase of $1,941,836 in sales of diagnostic medical devices, both due to
increased customer demand for several diagnostic and therapeutic medical
products. The increase in sales of diagnostic medical devices was not
attributable to a single customer, distributor or any other specific factor.
The
increase in sales of therapeutic medical devices was mostly attributable to
an
increase in sales to Byron of the Lysonix 3000 device, the Neuroaspirator device
sold to Aesculap and an increase in sales of the Sonoblate 500, due to sales
of
the device in Europe. Sales are not recorded as revenue until the total earnings
process is complete. The increase in sales of laboratory and scientific products
is due to an increase in Labcaire sales of $1,308,166, an increase in sales
of
ultrasonic laboratory products of $78,628, an increase in wet scrubber sales
of
$1,464,693 and an increase in ductless fume enclosure and related product sales
of $504,328. The increase in Labcaire sales is partially due to the
strengthening of the English Pound of approximately $711,454 and an increase
in
sales of the Guardian (endoscopic cleaning) product of approximately $596,712.
The increase in laboratory and scientific ultrasonic sales is due to an increase
in customer demand for the ultrasonic sonicator product and wet scrubber
product. The increase in fume enclosure sales is due to higher customer demand
for several laboratory and scientific products. Export sales from the United
States are remitted in U.S. Dollars and export sales for Labcaire are remitted
in English Pounds. During fiscal 2005 and fiscal 2004, the Company had foreign
net sales of $16,852,490 and $13,797,907, respectively, representing 37% and
35%
of net sales for such periods, respectively. The increase in foreign sales
in
fiscal 2005 as compared to fiscal 2004 is substantially due to an increase
in
Labcaire sales due to the strengthening of the English Pound of approximately
$711,454 as well as an increase in foreign diagnostic and therapeutic medical
device sales as the Company started to sell the ultrasonic neuro-aspirator
and
the Sonoblate 500 to distributors in Europe. Labcaire represented 71% and 76%
of
foreign net sales during fiscal 2005 and 2004, respectively. The remaining
29%
and 24% represents net foreign sales remitted in U.S. Dollars during fiscal
2005
and 2004, respectively. Approximately 26% of the Company’s revenues for fiscal
year 2005 were received in English Pounds. 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 weighted average rates of 1.86
and 1.77 for the years ended June 30, 2005 and 2004, respectively. A
strengthening of the English Pound, in relation to the U.S. Dollar, will have
the effect of increasing reported revenues and profits, while a weakening of
the
English Pound will have the opposite effect. Since the Company’s operations in
England generally set prices and bids for contracts in English Pounds, a
strengthening of the English Pound, while increasing the value of its UK assets,
might place the Company at a pricing disadvantage in bidding for work from
manufacturers based overseas. The Company collects its receivables in the
currency the subsidiary resides in. The Company has not engaged in foreign
currency hedging transactions, which include forward exchange
agreements.
The
Company’s revenues are generated from various geographic regions. The following
is an analysis of net sales by geographic region for the year ending June
30:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
United
States
|
|
$
|
29,054,094
|
|
$
|
25,261,159
|
|
Canada/Mexico
|
|
|
864,878
|
|
|
795,475
|
|
United
Kingdom
|
|
|
11,293,506
|
|
|
9,509,301
|
|
Europe
|
|
|
2,823,169
|
|
|
1,502,776
|
|
Asia
|
|
|
899,274
|
|
|
1,037,553
|
|
Middle
East
|
|
|
279,514
|
|
|
325,365
|
|
Other
|
|
|
692,149
|
|
|
627,437
|
|
|
|
$
|
45,906,584
|
|
$
|
39,059,066
|
|
Summarized
financial information for each of the segments for the years ended June 30,
2005
and 2004 are as follows:
For
the
year ended June 30, 2005:
|
|
Medical
Devices
|
|
Laboratory
and
Scientific
Products
|
|
Corporate
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
24,842,549
|
|
$
|
21,064,035
|
|
$
|
-
|
|
$
|
45,906,584
|
|
Cost
of goods sold
|
|
|
13,787,186
|
|
|
13,082,050
|
|
|
-
|
|
|
26,869,236
|
|
Gross
profit
|
|
|
11,055,363
|
|
|
7,981,985
|
|
|
-
|
|
|
19,037,348
|
|
Selling
expenses
|
|
|
3,164,535
|
|
|
2,946,181
|
|
|
-
|
|
|
6,110,716
|
|
Research
and development
|
|
|
2,437,466
|
|
|
1,048,597
|
|
|
-
|
|
|
3,486,063
|
|
General
and administrative |
|
|
- |
|
|
- |
|
|
8,881,228 |
|
|
8,881,228 |
|
Total
operating expenses
|
|
|
5,602,001
|
|
|
3,994,778
|
|
|
8,881,228
|
|
|
18,478,007
|
|
Income
from operations
|
|
$
|
5,453,362
|
|
$
|
3,987,207
|
|
$
|
(8,881,228
|
)
|
$
|
559,341
|
|
For
the
year ended June 30, 2004:
|
|
Medical
Devices
|
|
Laboratory
and
Scientific
Products
|
|
Corporate
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
21,350,846
|
|
$
|
17,708,220
|
|
$
|
-
|
|
$
|
39,059,066
|
|
Cost
of goods sold
|
|
|
11,879,237
|
|
|
10,663,226
|
|
|
-
|
|
|
22,542,463
|
|
Gross
profit
|
|
|
9,471,609
|
|
|
7,044,994
|
|
|
-
|
|
|
16,516,603
|
|
Selling
expenses
|
|
|
2,150,482
|
|
|
2,511,524
|
|
|
-
|
|
|
4,662,006
|
|
Research
and development
|
|
|
1,580,909
|
|
|
856,843
|
|
|
-
|
|
|
2,437,752
|
|
General
and administrative |
|
|
- |
|
|
- |
|
|
7,633,930 |
|
|
7,633,930 |
|
Total
operating expenses
|
|
|
3,731,391
|
|
|
3,368,367
|
|
|
7,633,930
|
|
|
14,733,688
|
|
Income
from operations
|
|
$
|
5,740,218
|
|
$
|
3,676,627
|
|
$
|
(7,633,930
|
)
|
$
|
1,782,915
|
|
Net
sales
for the three months ended June 30, 2005 were $13,889,699 compared to
$10,796,810 for the three months ended June 30, 2004. This increase of
$3,092,889 for the three months ended June 30, 2005 is due to an increase in
sales of medical devices of $1,945,078 and an increase in laboratory and
scientific products sales of $1,147,811. The increase in sales of medical
devices is due to an increase in sales of diagnostic medical devices of $672,995
and an increase of $1,272,083 in sales of therapeutic medical devices. The
increase in diagnostic medical devices is due to increased customer demand
for
several diagnostic medical devices. The increase in sales for diagnostic medical
devices was not attributable to a single customer, distributor or any other
specific factor. The increase in sales for therapeutic medical devices was
mostly attributable to an increase in sales to Byron and sales of the Sonablate
500 units in Europe. The increase in laboratory and scientific products sales
is
due to increased ultrasonics sales of $131,869, an increase in ductless fume
enclosure sales of $120,474 and an increase in wet scrubber sales of $900,567,
partially offset by a decrease in Labcaire sales of $5,099. The decrease in
Labcaire sales is primarily due to a decrease in sales of the Guardian
(endoscopic cleaning) product of approximately $116,592, partially offset by
a
strengthening of the English Pound. The increase in laboratory and scientific
ultrasonic sales is due to an increase in customer demand for several ultrasonic
products, wet scrubber products and ductless fume enclosures and related
products.
Summarized
financial information for each of the segments for the three months ended June
30, 2005 and 2004 are as follows:
For
the
three months ended June 30, 2005:
|
|
Medical
Devices
|
|
Laboratory
and
Scientific
Products
|
|
Corporate
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
7,524,748
|
|
$
|
6,364,951
|
|
$
|
-
|
|
$
|
13,889,699
|
|
Cost
of goods sold
|
|
|
4,165,287
|
|
|
4,093,612
|
|
|
-
|
|
|
8,258,899
|
|
Gross
profit
|
|
|
3,359,461
|
|
|
2,271,339
|
|
|
-
|
|
|
5,630,800
|
|
Selling
expenses
|
|
|
880,152
|
|
|
823,013
|
|
|
-
|
|
|
1,703,165
|
|
Research
and development
|
|
|
621,213
|
|
|
324,780
|
|
|
-
|
|
|
945,993
|
|
General
and administrative |
|
|
- |
|
|
- |
|
|
2,854,317 |
|
|
2,854,317 |
|
Total
operating expenses
|
|
|
1,501,365
|
|
|
1,147,793
|
|
|
2,854,317
|
|
|
5,503,475
|
|
Income
from operations
|
|
$
|
1,858,096
|
|
$
|
1,123,546
|
|
$
|
(2,854,317
|
)
|
$
|
127,325
|
|
For
the
three months ended June 30, 2004:
|
|
Medical
Devices
|
|
Laboratory
and
Scientific
Products
|
|
Corporate
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
5,579,670
|
|
$
|
5,217,140
|
|
$
|
-
|
|
$
|
10,796,810
|
|
Cost
of goods sold
|
|
|
3,178,910
|
|
|
3,199,399
|
|
|
-
|
|
|
6,378,309
|
|
Gross
profit
|
|
|
2,400,760
|
|
|
2,017,741
|
|
|
-
|
|
|
4,418,501
|
|
Selling
expenses
|
|
|
735,341
|
|
|
644,353
|
|
|
-
|
|
|
1,379,694
|
|
Research
and development
|
|
|
461,314
|
|
|
258,560
|
|
|
-
|
|
|
719,874
|
|
General
and administrative |
|
|
- |
|
|
- |
|
|
1,930,290 |
|
|
1,930,290 |
|
Total
operating expenses
|
|
|
1,196,655
|
|
|
902,913
|
|
|
1,930,290
|
|
|
4,029,858
|
|
Income
from operations
|
|
$
|
1,204,105
|
|
$
|
1,114,828
|
|
$
|
(1,930,290
|
)
|
$
|
388,643
|
|
Gross
profit.
Gross
profit decreased to 41.5% in fiscal 2005 from 42.3% in fiscal 2004. Gross profit
for medical devices increased to 44.5% in fiscal 2005 from 44.4% in fiscal
2004.
Gross profit for laboratory and scientific products decreased to 37.9% in fiscal
2005 from 39.8% in fiscal 2004. Gross profit for medical devices was impacted
by
the favorable order mix for sales of diagnostic medical devices. This increase
was offset by an unfavorable order mix of therapeutic medical devices, partially
to lower gross margins on sales to USS. The decrease in gross profit for
laboratory and scientific products is due to lower gross profit for wet
scrubber, ultrasonics and fume enclosure products, partially offset by an
increase in gross profit for Labcaire products. Gross profit decreased to 40.5%
of sales in the three months ended June 30, 2005 from 40.9% of sales in the
three months ended June 30, 2004. Gross profit for laboratory and scientific
products decreased to 35.7% of sales in the three months ended June 30, 2005
from 38.7% of sales in the three months ended June 30, 2004. Gross profit for
medical devices increased from 43.0% of sales in the three months ended June
30,
2004 to 44.6% of sales in the three months ended June 30, 2005. The decrease
in
gross profit for laboratory and scientific products was impacted by the
unfavorable order mix for sales of ultrasonic products, fume enclosures and
wet
scrubber sales partially offset by an increase in gross profit of Labcaire
sales. The increase in gross profit for medical devices was impacted by the
favorable order mix for sales of therapeutic medical devices offset by an
unfavorable order mix of diagnostic medical devices. The Company manufactures
and sells both medical devices and laboratory and scientific products with
a
wide range of product costs and gross margin dollars as a percentage of
revenues.
Selling
expenses.
Selling
expenses increased $1,448,710 or 31.1% to $6,110,716 (13.3% of sales) in fiscal
2005 from $4,662,006 (11.9% of sales) in fiscal 2004. Medical devices selling
expenses increased $1,014,053 due both to additional sales and marketing efforts
for diagnostic medical devices and therapeutic medical devices. The increase
in
therapeutic medical devices selling expenses of $546,123 is due to an increase
in sales and marketing efforts relating to European distribution. Laboratory
and
scientific products selling expenses increased $434,657 predominantly due to
an
increase in fume enclosure and ultrasonic marketing expenses and by the
strengthening of the English Pound. Selling expenses increased $323,471 or
23.4%
to $1,703,165 (12.3% of sales) in the three months ended June 30, 2005 from
$1,379,694 (12.8% of sales) in the three months ended June 30, 2004. Medical
devices selling expenses increased $144,811 due to additional sales and
marketing efforts for diagnostic medical products. Laboratory and scientific
products selling expenses increased $178,660 predominantly due to an increase
in
fume enclosure, wet scrubber and ultrasonic commissions and marketing expenses
and by the strengthening of the English Pound for Labcaire selling
expenses.
General
and administrative expenses.
General
and administrative expenses increased $828,298 or 10.9% to $8,462,228 in fiscal
2005 from $7,633,930 in fiscal 2004. The increase is predominantly due to an
increase in corporate general and administrative expenses relating to corporate
insurance, accounting fees, legal fees, other accrued corporate expenses and
an
increase in administrative staff at Sonora. The remaining increase is
attributable to the strengthening of the English Pound at Labcaire. General
and
administrative expenses increased $924,027 or 47.9% from $1,930,290 in the
three
months ended June 30, 2004 to $2,854,317 in the three months ended June 30,
2005. The increase is predominantly due to an increase in general and
administrative expenses relating to corporate insurance, legal expenses,
accounting fees and an increase in administrative staff at Sonora. Corporate
and
unallocated expenses also include litigation expenses of $419,000.
Research
and development expenses.
Research
and development expenses increased $1,048,311 or 43.0% to $3,486,063 in fiscal
2005 from $2,437,752 in fiscal 2004. Research and development expenses related
to medical devices increased $856,557 and research and development expenses
related to laboratory and scientific products increased $191,754. Research
and
development expenses related to medical devices increased predominantly due
to
efforts for therapeutic medical devices and an increase in amounts paid to
Focus
Surgery in fiscal 2005 for the development work performed for the Company for
the treatment of kidney and liver tumors utilizing HIFU
and the increase in efforts related to the digital upgrade project on all our
ultrasonic platform technology as compared to fiscal 2004.
The
increase in research and development expenses relating to laboratory and
scientific products is due to increased efforts in research and development
efforts for Labcaire, strengthening of the English Pound and increased Guardian
product redesign, both at Labcaire. Research and development expenses increased
$226,119 or 31.4% to $945,993 for the three months ended June 30, 2005 from
$719,874 for the three months ended June 30, 2004. Research and development
expenses related to medical devices increased $159,899 and research and
development expenses related to laboratory and scientific products increased
$66,220. Research and development expenses related to medical devices increased
predominantly due to increased efforts for therapeutic medical devices in the
three months ended June 30, 2005 for the development of products for the
treatment of kidney and liver tumors utilizing HIFU
and the efforts related to the digital upgrade project on all our ultrasonic
platform technology as compared to the three months ended June 30,
2004.
The
increase in laboratory and scientific products is primarily due to increased
research and development efforts for the redesign of the Guardian product and
the strengthening of the English Pound, both at Labcaire.
Litigation
expenses. The
Company recorded a litigation expense for the fiscal year 2005 of $419,000
as
compared to $0 for the fiscal year 2004. The Company recorded the litigation
expense for the three months ended June 30, 2005 of $419,000 as compared to
$0
for the three months ended June 30, 2004. Litigation expense relates to the
jury
verdict against Sonora in the District Court of Boulder County Colorado for
royalties owed and future royalties on recoating transesophogeal probes which
is
a process performed by Sonora Medical Systems.
Other
income (expense).
Other
income was $682,233 in fiscal 2005 as compared to $1,057,191 in fiscal 2004.
The
decrease of $374,958 for the fiscal year was primarily due to a decrease in
royalty income of $486,885. The Company received an additional royalty payment
in the first quarter of fiscal 2004 of approximately $410,000, which was based
upon a review of USS’ records that determined that royalties were due for prior
years. The review showed that USS owed (and subsequently paid in the first
quarter) royalties due on a product that was not included in the original
royalty computation. The decrease was partially offset by the consolidation
of
Hearing Innovations in accordance with FIN 46 which resulted in no impairment
loss compared with $198,800 of such loss in fiscal 2004. Other income was
$127,381 in the three months ended June 30, 2005 as compared to $296,947 in
the
three months ended June 30, 2004. The decrease of $169,566 for the three months
ended June 30, 2005 was primarily due to the increased sales of the Lysonix
3000
in the fourth quarter of fiscal 2005 for which the Company is required to pay
royalties to the owners of the patent.
Income
taxes.
The
effective tax rate is 23.8% for the fiscal year ended June 30, 2005 as compared
to an effective tax rate of 38.3% for the fiscal year ended June 30, 2004.
The
current effective income tax rate of 23.8% was favorably impacted by the
increase in permanent tax items, such as R&D credit, and the
extraterritorial income exclusion.
Critical
Accounting Policies:
General:
Financial Reporting Release No. 60, which was released by the SEC in December
2001, requires all companies to include a discussion of critical accounting
policies or methods used in the preparation of the financial statements. Note
1
of the Notes to Consolidated Financial Statements included in the Company’s
Annual Report on Form 10-K for the year ended June 30, 2005 includes a summary
of the Company’s significant accounting policies and methods used in the
preparation of its financial statements. The Company’s discussion and analysis
of its financial condition and results of operations are based upon the
Company’s financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses. On an on-going basis, management evaluates its estimates and
judgments, including those related to bad debts, inventories, goodwill,
property, plant and equipment and income taxes. Management bases its estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form
the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from
these estimates under different assumptions or conditions. The Company considers
certain accounting policies related to accounts receivable, inventories,
property, plant and equipment, revenue recognition, goodwill, income taxes
and
stock-based compensation to be critical policies due to the estimation process
involved in each.
Accounts
Receivable:
Accounts receivable, principally trade, are generally due within 30 to 90 days
and are stated at amounts due from customers, net of an allowance for doubtful
accounts. The Company performs ongoing credit evaluations and adjusts credit
limits based upon payment history and the customer’s current credit worthiness,
as determined by a review of their current credit information. The Company
continuously monitors aging reports, collections and payments from customers
and
maintains a provision for estimated credit losses based upon historical
experience and any specific customer collection issues that have been
identified. While such credit losses have historically been within expectations
and the provisions established, the Company cannot guarantee the same credit
loss rates will be experienced in the future. The Company writes off accounts
receivable when they become uncollectible.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market
and
consist of raw materials, work-in-process and finished goods. Management
evaluates the need to record adjustments for impairments of inventory on a
quarterly basis. The Company’s policy is to assess the valuation of all
inventories, including raw materials, work-in-process and finished goods.
Inventory items used for demonstration purposes, rentals or on consignment
are
classified in property, plant and equipment.
Property,
Plant and Equipment:
Property,
plant and equipment are recorded at cost. The Company capitalizes items in
excess of $500. Minor replacements and maintenance and repair expenses are
charged to expense as incurred. Depreciation of property and equipment is
provided using the straight-line method over estimated useful lives ranging
from
1 to 8 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. The Company’s policy is to periodically
evaluate the appropriateness of the lives assigned to property, plant and
equipment and to adjust if necessary. Inventory items included in property,
plant and equipment are depreciated using the straight line method over
estimated useful lives of 3 to 8 years.
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. Fees
from
exclusive license agreements are recognized ratably over the terms of the
respective agreements. Service contracts and royalty income is recognized when
earned.
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 the common
stock of Labcaire, 90% of the common stock of Sonora and the acquisitions of
Fibra Sonics, Inc. (“Fibra Sonics”), Sonic Technologies Laboratory Services
(“Sonic Technologies”) and CraMar Technologies, Inc. (“CraMar”).
In
July
2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) Nos.
141 (“SFAS 141”) and 142 (“SFAS 142”), "Business Combinations" and "Goodwill and
Other Intangible Assets," respectively. SFAS 141 replaced Accounting Principles
Board (“APB”) Opinion 16 “Business Combinations” and requires the use of the
purchase method for all business combinations initiated after June 30, 2001.
SFAS 142 requires goodwill and intangible assets with indefinite useful lives
to
no longer be amortized, but instead be tested for impairment at least annually
and whenever events or circumstances occur that indicate goodwill might be
impaired. With the adoption of SFAS 142, as of July 1, 2001, the Company
reassessed the useful lives and residual values of all acquired intangible
assets to make any necessary amortization period adjustments. Based on that
assessment, only goodwill was determined to have an indefinite useful life
and
no adjustments were made to the amortization period or residual values of other
intangible assets. The Company completed its annual goodwill impairment tests
for fiscal 2006 and 2005 in the respective fourth quarter. There were no
indicators that goodwill recorded was impaired.
Income
Taxes:
Income
taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income
Taxes” (“SFAS No. 109”). Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in
income in the period that includes the enactment date.
Stock-Based
Compensation:
Prior
to July 1, 2005, the Company accounted for stock option plans under Statement
of
Financial Accounting Standards (SFAS”) No. 123 (“SFAS No. 123”). As permitted
under this standard, compensation cost was recognized using the intrinsic value
method described in Accounting Principles Board Opinion No. 25 (APB 25”).
Effective July 1, 2005, the Company adopted the fair-value recognition
provisions of SFAS No. 123R (“SFAS No. 123R”) and Securities and Exchange
Commission Staff Accounting Bulletin No. 107 using the modified-prospective
transition method; therefore, prior periods have not been restated. See Note
9
for additional information regarding stock-based compensation.
Liquidity
and Capital Resources:
Working
capital at June 30, 2006 and June 30, 2005 was $12,103,001 and $15,905,225,
respectively. For the fiscal year 2006, cash used in operations totaled
$344,004. The decrease in the cash used in operations is predominantly due
to a
decrease in net income offset by a decrease in accounts receivable. For the
fiscal year 2006, cash used in investing activities was $1,090,598, which
primarily consisted of the purchase of property, plant and equipment during
the
regular course of business and the acquisition of UKHIFU for $200,000. For
the
fiscal year 2006, cash used in financing activities was $374,285, primarily
consisting of net payments of short-term borrowings and principal payments
on
capital lease obligations.
Revolving
Credit Facilities
Labcaire
has a debt purchase agreement with Lloyds TSB Commercial Finance. The amount
of
this facility bears interest at the bank’s base rate (4.5% and 5.25% at June 30,
2006 and 2005, respectively) plus 1.75% and a service charge of .15% of sales
invoice value and fluctuates based upon the outstanding United Kingdom and
European receivables. The agreement expires on September 30, 2006 and covers
all
United Kingdom and European sales. At June 30, 2006, the balance outstanding
under this credit facility was $921,898 and Labcaire is not in violation of
financial covenants.
Labcaire
has an overdraft facility with Lloyds TSB Commercial Finance. The amount of
this
facility bears interest at the bank base rate of 4.5% at June 30, 2006 plus
3%.
The agreement expires September 30, 2006. At June 30, 2006, the balance
outstanding under this overdraft facility was $411,436 and Labcaire is not
in
violation of financial covenants.
The
Company has its revolving credit facility with Bank of America. The revolving
credit facility has variable interest rate based on prime plus 2%. The facility
has been reduced from $6 million to $2 million. This facility is secured by
the
assets of the Company. The terms provide for the repayment of the debt in full
on its maturity date. The Company has $0 available on its line of credit. The
Company was not in compliance with loan covenants at June 30, 2006 and received
a waiver from Bank of American for such non-compliance.
Commitments
The
Company has commitments under a revolving credit, facility, note payable,
mortgage and capital and operating leases that will be funded from operating
sources. At June 30, 2006, the Company’s contractual cash obligations and
commitments relating to the revolving note payable, facility debt and capital
and operating leases are as follows:
Commitment
|
|
|
|
1-3
years
|
|
4-5
years
|
|
|
|
Total
|
|
Revolving
credit facility
|
|
$
|
1,333,334
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,333,334
|
|
Mortgage
|
|
|
59,938
|
|
|
132,589
|
|
|
148,937
|
|
|
654,462
|
|
|
995,926
|
|
Note
payable
|
|
|
238,708
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
238,708
|
|
Capital
leases
|
|
|
354,000
|
|
|
236,000
|
|
|
14,000
|
|
|
-
|
|
|
604,000
|
|
Operating
leases
|
|
|
812,000
|
|
|
1,680,000
|
|
|
1,209,000
|
|
|
-
|
|
|
3,701,000
|
|
|
|
$
|
2,797,980
|
|
$
|
2,048,589
|
|
$
|
1,371,937
|
|
$
|
654,462
|
|
$
|
6,872,968
|
|
Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on the Company’s financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to the
Company.
Other
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.
The Company expects future cash flow from operations to fund all ongoing cash
flow needs.
In
the
opinion of management, inflation has not had a material effect on the operations
of the Company.
Item
7A. 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.
Foreign
Exchange Rates:
Approximately
37% of the Company’s revenues in fiscal 2006 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 weighted average rates of 1.78 and 1.86 for the fiscal year ended
June 30, 2006 and 2005, 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 its receivables in the currency the subsidiary resides in.
The
Company has not engaged in foreign currency hedging transactions, which include
forward exchange agreements.
Item
8. Financial
Statements and Supplemental Data.
The
independent registered public accounting firm report and consolidated financial
statements listed in the accompanying index is filed as part of this report.
See
“Index to Consolidated Financial Statements” on page 49.
QUARTERLY
RESULTS OF OPERATIONS
The
following table presents selected financial data for each quarter of fiscal
2006, 2005 and 2004. Although unaudited, this information has been prepared
on a
basis consistent with the Company’s audited consolidated financial statements
and, in the opinion of the Company’s management, reflects all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of this information in accordance with
accounting principles generally accepted in the United States. Such quarterly
results are not necessarily indicative of future results of operations and
should be read in conjunction with the audited consolidated financial statements
of the Company and the notes thereto.
QUARTERLY
FINANCIAL DATA:
|
|
FISCAL
2006
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
YEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
9,111,572
|
|
$
|
10,268,386
|
|
$
|
10,169,778
|
|
$
|
9,517,557
|
|
$
|
39,067,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,436,531
|
|
|
3,863,521
|
|
|
3,953,002
|
|
|
3,019,956
|
|
|
14,273,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
5,213,236
|
|
|
4,824,513
|
|
|
5,243,572
|
|
|
5,565,728
|
|
|
20,847,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,776,705
|
)
|
|
(960,992
|
)
|
|
(1,290,570
|
)
|
|
(2,545,772
|
)
|
|
(6,574,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
174,859
|
|
|
139,332
|
|
|
144,143
|
|
|
94,515
|
|
|
552,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in net income
(loss)
of consolidated subsidiaries
|
|
|
16,339
|
|
|
2,785
|
|
|
(6,465
|
)
|
|
(113
|
)
|
|
12,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) provision
|
|
|
(312,822
|
)
|
|
(317,340
|
)
|
|
(310,844
|
)
|
|
(1,333,293
|
)
|
|
(2,274,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
($1,305,363
|
)
|
|
($507,105
|
)
|
|
($829,118
|
)
|
$
|
(1,117,851
|
)
|
$
|
(3,759,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share-Basic
|
|
|
($
.19
|
)
|
|
($
.07
|
)
|
|
($
.12
|
)
|
|
($
.16
|
)
|
|
($
.55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share -Diluted
|
|
|
($
.19
|
)
|
|
($
.07
|
)
|
|
($
.12
|
)
|
|
($
.16
|
)
|
|
($
.55
|
)
|
|
|
FISCAL
2005
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
YEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
10,500,066
|
|
$
|
10,637,212
|
|
$
|
10,879,607
|
|
$
|
13,889,699
|
|
$
|
45,906,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,410,740
|
|
|
4,446,658
|
|
|
4,549,150
|
|
|
5,630,800
|
|
|
19,037,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
3,922,471
|
|
|
4,372,927
|
|
|
4,679,134
|
|
|
5,503,475
|
|
|
18,478,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
488,269
|
|
|
73,731
|
|
|
(129,984
|
)
|
|
127,325
|
|
|
559,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
203,339
|
|
|
150,554
|
|
|
195,111
|
|
|
133,229
|
|
|
682,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in net income (loss)
of
consolidated subsidiaries
|
|
|
15,439
|
|
|
11,807
|
|
|
29,083
|
|
|
(43,199
|
)
|
|
13,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
|
259,902
|
|
|
34,142
|
|
|
32,683
|
|
|
(33,988
|
)
|
|
292,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
416,267
|
|
$
|
178,336
|
|
$
|
3,361
|
|
$
|
337,741
|
|
$
|
935,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share-Basic
|
|
$
|
.06
|
|
$
|
.03
|
|
$
|
.00
|
|
$
|
.05
|
|
$
|
.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share -Diluted
|
|
$
|
.06
|
|
$
|
.03
|
|
$
|
.00
|
|
$
|
.05
|
|
$
|
.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL
2004
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
YEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
8,619,898
|
|
$
|
9,296,109
|
|
$
|
10,346,249
|
|
$
|
10,796,810
|
|
$
|
39,059,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,665,695
|
|
|
3,978,218
|
|
|
4,454,189
|
|
|
4,418,501
|
|
|
16,516,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
3,500,781
|
|
|
3,531,403
|
|
|
3,671,646
|
|
|
4,029,858
|
|
|
14,733,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
164,914
|
|
|
446,815
|
|
|
782,543
|
|
|
388,643
|
|
|
1,782,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
511,949
|
|
|
246,066
|
|
|
2,229
|
|
|
296,947
|
|
|
1,057,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in net income of consolidated subsidiaries
|
|
|
14,026
|
|
|
14,125
|
|
|
7,790
|
|
|
16,564
|
|
|
52,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
269,095
|
|
|
289,470
|
|
|
388,933
|
|
|
121,158
|
|
|
1,068,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
393,742
|
|
$
|
389,286
|
|
$
|
388,049
|
|
$
|
547,868
|
|
$
|
1,718,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share-Basic
|
|
$
|
.06
|
|
$
|
.06
|
|
$
|
.06
|
|
$
|
.08
|
|
$
|
.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share -Diluted
|
|
$
|
.06
|
|
$
|
.06
|
|
$
|
.06
|
|
$
|
.08
|
|
$
|
.25
|
|
Item
9. Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
On
November 14, 2005, Ernst & Young LLP (“E&Y”) informed Misonix that it
was resigning as Misonix’s independent auditor.
The
reports of E&Y on Misonix’s financial statements as of and for each of the
fiscal years ended June 30, 2005 and 2004 did not contain an adverse opinion
or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During
the fiscal years ended June 30, 2005 and 2004 and through the date of E&Y's
resignation, there were no disagreements with E&Y on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to E&Y’s satisfaction, would have
caused E&Y to make reference to the subject matter of the disagreement in
connection with its report on Misonix’s financial statements for such
years.
On
January 23, 2006, Misonix engaged Grant Thornton LLP (“Grant Thornton”) to act
as its independent registered public accounting firm as successor to E&Y.
The Audit Committee of Misonix’s Board of Directors approved the appointment of
Grant Thornton as Misonix’s independent registered public accounting
firm.
Item
9A. Controls
and Procedures.
Our
management, with the participation of the our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”))
as of
the end of the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer have concluded that,
as
of the end of the period covered by this report, our disclosure controls and
procedures were effective in enabling us to record, process, summarize, and
report information required to be included in our periodic SEC
filings
within the required time period.
There
were no changes in our internal controls over financial reporting (as such
term
is defined in Rule 13a-15(f)
and 15d-15(f) under the Exchange Act)
during
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
Item
9B. Other
Information.
None.
PART
III
Item
10. Directors
and Executive Officers of the Registrant.
The
Company currently has six Directors. Their term expires at the Annual Meeting
of
Shareholders. The following table contains information regarding all Directors
and executive officers of the Company:
Name
|
|
Age
|
|
Principal
Occupation
|
|
Director
Since
|
|
|
|
|
|
|
|
John
Gildea
|
|
63
|
|
Director
|
|
2004
|
|
|
|
|
|
|
|
Howard
Alliger
|
|
79
|
|
Director
|
|
1971
|
|
|
|
|
|
|
|
Dr.
Charles Miner III
|
|
55
|
|
Director
|
|
2005
|
|
|
|
|
|
|
|
T.
Guy Minetti
|
|
55
|
|
Director
|
|
2003
|
|
|
|
|
|
|
|
Thomas
F. O’Neill
|
|
60
|
|
Director
|
|
2003
|
|
|
|
|
|
|
|
Michael
A. McManus, Jr.
|
|
63
|
|
Director,
President and
|
|
1998
|
|
|
|
|
Chief
Executive Officer
|
|
|
Richard
Zaremba
|
|
51
|
|
Senior
Vice President, Chief
|
|
|
|
|
|
|
Financial
Officer, Secretary and Treasurer
|
|
|
|
|
|
|
|
|
|
Dr.
W. Paul Constantine
|
|
35
|
|
Senior
Vice President, Strategic Planning And
New Product Development
|
|
|
|
|
|
|
|
|
|
Dan
Voic
|
|
44
|
|
Vice
President of Research and Development and
Engineering -
|
|
--
|
|
|
|
|
|
|
|
Ronald
Manna
|
|
52
|
|
Vice
President of New Product Development and
Regulatory Affairs
|
|
--
|
The
following is a brief account of the business experience for the past five years
of the Company’s Directors and executive officers:
John
W. Gildea is
the
founding principal of Gildea Management Co., a management company of special
situations with middle market companies in the United States and Central Europe.
From 2000 to 2003 Gildea Management Co. formed a joint venture with J.O. Hambro
Capital Management Co. to manage accounts targeting high yield debt and small
capitalization equities. From 1996 to 2000 Gildea Management Co. formed and
founded Latona Europe, a joint venture between Latona U.S., Lazard Co., and
Gildea Management Co. to restructure several Czech Republic companies. Before
forming Gildea Management Co. in 1990, Mr. Gildea managed the Corporate Series
Group at Donaldson, Lufkin and Jenrette, an investment banking firm. Mr. Gildea
is a graduate of the University of Pittsburgh.
Howard
Alliger
founded
the Company’s predecessor in 1955 and the Company was a sole proprietorship
until 1960. The Company name then was Heat Systems-Ultrasonics. Mr. Alliger
was
President of the Company until 1982 and Chairman of the Board until 1996. In
1996 Mr. Alliger stepped down as Chairman and ceased to be a corporate officer.
He has been awarded 23 patents and has published various papers on ultrasonic
technology. For three years, ending in 1991, Mr. Alliger was the President
of
the Ultrasonic Industry Association. Mr. Alliger holds a B.A. degree in
economics from Allegheny College and also attended Cornell University School
of
Engineering for four years. He has also established, and is President of, two
privately held entities which are engaged in pharmaceutical research and
development.
Dr.
Charles Miner III
currently practices internal medicine in Darien, Connecticut. Dr. Miner is
on
staff at Stamford and Newark Hospitals and retains a teaching position at
Columbia Presbyterian Hospital from 1982. Dr. Miner received his M.D. from
the
University of Cincinnati College of Medicine in 1979 and received a Bachelor
of
Science from Lehigh University in 1974.
T.
Guy Minetti, Founder
and Managing Director of Senior Resource Advisors LLC, a management consulting
firm. Prior to being Managing Director of Senior Resource Advisors LLC, Mr.
Minetti served as the Vice Chairman of the Board of Directors of
1-800-Flowers.Com, a publicly-held specialty gift retailer based in Westbury,
New York. Before joining 1-800-Flowers.Com in 2000, Mr. Minetti was the Managing
Director of Bayberry Advisors, an investment-banking boutique he founded in
1989
to provide corporate finance advisory services to small-to-medium-sized
businesses. From 1981 through 1989, Mr. Minetti was a Managing Director of
the
investment banking firm, Kidder, Peabody & Company. While at Kidder,
Peabody, Mr. Minetti worked in the investment banking and high yield bond
departments. Mr. Minetti is a graduate of St. Michael’s College.
Thomas
F. O’Neill,
a
founding principal of Sandler O’Neill & Partners L.P., an investment banking
firm, began his Wall Street career at L.F. Rothschild. Mr. O’Neill specialized
in working with financial institutions in Rothschild’s Bank Service Group from
1972. He was appointed Managing Director of the Bank Service Group, a group
consisting of fifty-five professionals, in 1984. In 1985, he became a Bear
Stearns Managing Director and Co-Manager of the Group. Mr. O’Neill serves on the
Board of Directors of Archer-Daniels-Midland Company and the Nasdaq Stock
Market, Inc. Mr. O’Neill is a graduate of New York University and a veteran of
the United States Air Force.
Michael
A. McManus, Jr. became
President and Chief Executive Officer of the Company in November 1999. From
November 1991 to March 1999, Mr. McManus was President and Chief
Executive Officer
of New York Bancorp, Inc. Prior to New York Bancorp, Inc., Mr. McManus held
senior positions with Jamcor Pharmaceutical, Inc., Pfizer, Inc. and Revlon
Corp.
Mr. McManus also spent several years as an Assistant to President Reagan. Mr.
McManus serves on the Board of Directors of the following publicly traded
companies: American Home Mortgage Holdings, Inc.; Liquid Audio, Inc.; and
Novavax, Inc. Mr. McManus holds a B.A. degree in Economics from the University
of Notre Dame and a Juris Doctorate from Georgetown University Law
Center.
Richard
Zaremba
became
Senior Vice President in 2004. He became Vice President and Chief Financial
Officer in February 1999. From March 1995 to February 1999, he was the Vice
President and Chief Financial Officer of Converse Information Systems, Inc.,
a
manufacturer of digital voice recording systems. Previously, Mr. Zaremba was
Vice President and Chief Financial Officer of Miltope Group, Inc., a
manufacturer of electronic equipment. Mr. Zaremba is a licensed certified public
accountant in the state of New York and holds BBA and MBA degrees in Accounting
from Hofstra University.
Dr.
W. Paul Constantine became
Senior Vice President of Strategic Planning and New Product Development in
September 2005. Dr. Constantine’s entire career has focused on the development
and management of world-class marketing and sales programs for global medical
device companies. Earlier, Dr. Constantine held product development and
marketing strategy positions with leading medical products suppliers, including
units of and/or entities later acquired by Aesculap-B. Braun, Boston Scientific,
Medtronic, and Smith & Nephew. He graduated from Samuel Merritt College with
a doctorate degree after completing undergraduate studies at Loma Linda
University.
Dan
Voic
became
Vice President of Research and Development and Engineering in January 2002.
Prior thereto, he served as Engineering Manager and Director of Engineering
with
the Company. Mr. Voic has approximately 14 years experience in both medical
and
laboratory and scientific products development. Mr. Voic holds a M.S. degree
in
mechanical engineering from Polytechnic University “Traian Vuia” of Timisoara,
Romania and a MS degree in applied mechanics from Polytechnic University of
New
York.
Ronald
Manna
became
Vice President of New Product Development and Regulatory Affairs of the Company
in January 2002. Prior thereto, Mr. Manna served as Vice President of Research
and Development and Engineering, Vice President of Operations and Director
of
Engineering of the Company. Mr. Manna holds a B.S. degree in mechanical
engineering from Hofstra University.
Executive
officers are elected annually by, and serve at the discretion of, the board
of
directors.
Each
non-employee Director receives an annual fee of $15,000. For the fiscal year
ended June 30, 2006, options to purchase 15,000 shares of Common Stock were
granted to Dr. Charles Miner. Each non-employee Director is also reimbursed
for
reasonable expenses incurred while traveling to attend meetings of the Board
of
Directors or while traveling in furtherance of the business of the
Company.
Compliance
with Section 16 (a) of the Securities Exchange Act
Section
16(a) of the Exchange Act requires the Company's executive officers, Directors
and persons who own more than 10% of a registered class of the Company's equity
securities ("Reporting Persons") to file reports of ownership and changes in
ownership on Forms 3, 4, and 5 with the SEC and the National Association of
Securities Dealers, Inc. (the "NASD"). These Reporting Persons are required
by
SEC regulation to furnish the Company with copies of all Forms 3, 4 and 5 they
file with the SEC and NASD. Based solely on the Company's review of the copies
of the forms it has received, the Company believes that all Reporting Persons
complied on a timely basis with all filing requirements applicable to them
with
respect to transactions during fiscal year 2006.
Code
of Ethics
The
Company has adopted a code of ethics that applies to all of its directors,
officers (including its chief executive officer, chief financial officer,
controller and any person performing similar functions) and employees. The
Company has filed a copy of this Code of Ethics as Exhibit 14 to this Form
10-K.
The Company has also made the Code of Ethics available on its website at
www.MISONIX.COM.
Audit
Committee
The
Company has a separately-designated standing audit committee established in
accordance with section 3(a)(58)(A) of the Exchange Act. The members of the
Audit Committee are Messrs. Gildea, Miner, Minetti and O’Neill. The Board of
Directors has determined that each member of the Audit Committee is
“independent” not only under the Qualitative Listing Requirements of the Nasdaq
Stock Market but also within the definition contained in a final rule of the
SEC. Furthermore, the Board of Directors has determined that Messrs. Gildea,
Minetti and O’Neill are “audit committee financial experts” within the
definition contained in a final rule adopted by the SEC.
Item
11. Executive
Compensation.
The
following table sets forth for the fiscal years indicated the compensation
paid
by the Company to its Chief Executive Officer and any other executive officers
with annual compensation exceeding $100,000.
Summary
Compensation Table
|
|
Annual
Compensation
|
|
Long
Term
Compensation
|
|
|
|
|
|
Name
and Principal
Position
|
|
Fiscal
Year
Ended
June 30,
|
|
Salary
($)
|
|
Bonus
($)
|
|
Securities
Underlying
Options
Granted (#)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
A. McManus, Jr.
|
|
2006
|
|
$275,000
|
|
−
|
|
−
|
President
and Chief
|
|
2005
|
|
275,000
|
|
250,000
|
|
125,000
|
Executive
Officer
|
|
2004
|
|
275,000
|
|
250,000
|
|
125,000
|
|
|
|
|
|
|
|
|
|
Richard
Zaremba
|
|
2006
|
|
178,437
|
|
28,000
|
|
12,000
|
Senior
Vice President,
|
|
2005
|
|
170,740
|
|
33,000
|
|
18,000
|
Chief
Financial Officer,
|
|
2004
|
|
157,878
|
|
30,000
|
|
30,000
|
Secretary
and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
W. Paul Constantine
|
|
2006
|
|
153,601
|
|
−
|
|
16,000
|
Sr.
Vice President, Strategic
|
|
2005
|
|
−
|
|
−
|
|
−
|
Planning
& New Product
|
|
2004
|
|
−
|
|
−
|
|
−
|
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth
Coviello*
|
|
2006
|
|
54,933
|
|
18,000
|
|
−
|
Vice
President of Medical
|
|
2005
|
|
159,900
|
|
35,000
|
|
20,000
|
Products
|
|
2004
|
|
141,095
|
|
30,000
|
|
30,000
|
|
|
|
|
|
|
|
|
|
Dan
Voic
|
|
2006
|
|
123,224
|
|
20,000
|
|
7,500
|
Vice
President of
|
|
2005
|
|
119,600
|
|
22,000
|
|
12,000
|
Research
and Development and
|
|
2004
|
|
121,141
|
|
25,000
|
|
15,000
|
Engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernhard
Berger*
|
|
2006
|
|
13,906
|
|
−
|
|
−
|
Vice
President of
|
|
2005
|
|
112,517
|
|
8,000
|
|
5,000
|
Laboratory
/Scientific Products
|
|
2004
|
|
110,692
|
|
2,000
|
|
10,000
|
|
|
|
|
|
|
|
|
|
Ronald
Manna
|
|
2006
|
|
108,099
|
|
5,000
|
|
3,000
|
Vice
President of
|
|
2005
|
|
104,948
|
|
4,000
|
|
4,000
|
New
Product Development and
|
|
2004
|
|
102,522
|
|
2,000
|
|
5,000
|
Regulatory
Affairs
|
|
|
|
|
|
|
|
|
*These
individuals are no longer employed by the Company.
Employment
Agreements
In
October 2005, the Company entered into an employment agreement with its
President and Chief Executive Officer which expires on October 31, 2006 and
is
automatically renewable for one-year periods unless notice is given by the
Company or Mr. McManus that it or he declines to renew the agreement. This
agreement provides for an annual base compensation of $275,000 and a Company
provided automobile. The agreement also provides for a discretionary bonus
based
on the Company’s pre-tax operating earnings, based on a calendar
year.
In
conformity with the Company's policy, all of its Directors, officers and
employees execute confidentiality and nondisclosure agreements upon the
commencement of employment with the Company. The agreements generally provide
that all inventions or discoveries by the employee related to the Company's
business and all confidential information developed or made known to the
employee during the term of employment shall be the exclusive property of the
Company and shall not be disclosed to third parties without the prior approval
of the Company. Mr. Manna has an agreement with the Company which provides
for
the payment of six months’ severance upon his termination for any reason.
Messrs. McManus and Zaremba have agreements for the payment of six months’
annual base salary upon a change in control of the Company. The Company's
employment agreement with Mr. McManus also contains non-competition provisions
that preclude him from competing with the Company for a period of 18 months
from
the date of his termination of employment.
Option
Grants in Last Fiscal Year
The
following table contains information concerning options granted to executive
officers named in the Summary Compensation Table during fiscal year ended June
30, 2006:
Name
|
|
Number
of Securities Underlying Options
Granted
(#)
|
|
%
of Total Options
Granted
to Employees
in
Fiscal
Year
|
|
Exercise
Price
($/sh)
|
|
Expiration
Date
|
|
(a)
Grant Date
Present
Value
($)
|
Michael
A. McManus, Jr.
|
|
−
|
|
−
|
|
−
|
|
−
|
|
−
|
Richard
Zaremba
|
|
8,000
|
|
20%
|
|
$7.60
|
|
9/26/15
|
|
30,800
|
|
|
4,000
|
|
19.5%
|
|
$5.82
|
|
2/07/16
|
|
14,880
|
Dr.
W. Paul Constantine
|
|
12,000
|
|
30%
|
|
$7.60
|
|
9/26/15
|
|
46,200
|
|
|
4,000
|
|
19.5%
|
|
$5.82
|
|
2/07/16
|
|
14,880
|
Dan
Voic
|
|
5,000
|
|
12.5%
|
|
$7.60
|
|
9/26/15
|
|
19,250
|
|
|
2,500
|
|
12%
|
|
$5.82
|
|
2/07/16
|
|
9,300
|
Ronald
Manna
|
|
2,000
|
|
5%
|
|
$7.60
|
|
9/26/15
|
|
7,700
|
|
|
1,000
|
|
5%
|
|
$5.82
|
|
2/07/16
|
|
3,720
|
Bernhard
Berger
|
|
−
|
|
−
|
|
−
|
|
−
|
|
−
|
Kenneth
Coviello
|
|
−
|
|
−
|
|
−
|
|
−
|
|
−
|
(a)
The
fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rates of 2.5%-2.58%; no dividend yields; volatility factor of the
expected market price of the Common Stock of 100%, and a weighted-average
expected life of the options of five years.
Option
Exercises in Last Fiscal Year and Fiscal Year-end Values
The
following table contains information concerning the number and value, at June
30, 2006, of exercised options and unexercised options held by executive
officers named in the Summary Compensation Table:
Name
|
|
Shares
Acquired
On Exercise (#)
|
|
Value
Realized
($)
|
|
Number
of Securities Underlying
Unexercised
Options at
Fiscal
Year End (#) Exercisable/
Unexercisable
|
|
Value
of
Unexercised
In-
the-Money
Options
at
Fiscal Year End
($)
Exercisable/
Unexercisable
|
Michael
A. McManus, Jr.
|
|
0
|
|
0
|
|
1,040,000/0
|
|
$450,700/$0
|
Richard
Zaremba
|
|
0
|
|
0
|
|
70,000/70,000
|
|
19,900/4,650
|
Dr.
W. Paul Constantine
|
|
0
|
|
0
|
|
0/16,000
|
|
0/0
|
Dan
Voic
|
|
0
|
|
0
|
|
37,910/20,500
|
|
12,851/4,650
|
Ronald
Manna
|
|
0
|
|
0
|
|
87,834/6,666
|
|
35,833/1,677
|
Bernhard
Berger
|
|
−
|
|
−
|
|
−
|
|
−
|
Kenneth
Coviello
|
|
−
|
|
−
|
|
−
|
|
−
|
(1) |
Fair
market value of underlying securities (the closing price of the Common
Stock on the NASD Automated Quotation System) at June 30, 2006, minus
the
exercise price.
|
Stock
Options
In
September 1991, in order to attract and retain persons necessary for the success
of the Company, the Company adopted a stock option plan (the "1991 Plan") which
covers up to 375,000 shares of Common Stock. Pursuant to the 1991 Plan,
officers, Directors, consultants and key employees of the Company are eligible
to receive incentive and/or non-incentive stock options. At June 30, 2006,
options to purchase 30,000 shares were outstanding under the 1991 Plan at an
exercise price of $7.38 per share with a vesting period of two years, options
to
purchase 327,750 shares had been exercised and options to purchase 47,250 shares
have been forfeited (of which options to purchase 30,000 shares have been
reissued).
In
March
1996, the Board of Directors adopted and, in February 1997, the shareholders
approved the 1996 Employee Incentive Stock Option Plan covering an aggregate
of
450,000 shares (the “1996 Plan”) and the 1996 Non-Employee Director Stock Option
Plan (the “1996 Directors Plan”) covering an aggregate of 1,125,000 shares of
Common Stock. At June 30, 2006, options to purchase 311,150 shares were
outstanding at exercise prices ranging from $3.07 to $18.50 per share with
a
vesting period of immediate to three years under the 1996 Plan and options
to
acquire 250,000 shares were outstanding at exercise prices ranging from $.73
to
$7.60 per share with a vesting period of immediate to three years under the
1996
Directors Plan. At June 30, 2006, options to purchase 138,295 shares under
the
1996 Plan have been exercised and options to purchase 183,500 shares have been
forfeited (of which options to purchase 182,945 shares have been reissued).
At
June 30, 2006, options to purchase 733,500 shares under the 1996 Directors
Plan
have been exercised, options to purchase 90,000 shares have been forfeited
(of
which none have been reissued) and there are no shares available for future
granting.
In
October 1998, the Board of Directors adopted and, in January 1999, the
shareholders approved the 1998 Employee Stock Option Plan (the “1998 Plan”)
covering an aggregate of 500,000 shares of Common Stock. At June 30, 2006,
options to purchase 422,525 shares were outstanding under the 1998 Plan at
exercise prices ranging from $3.07 to $7.60 per share with a vesting period
of
immediate to three years. At June 30, 2006, options to purchase 52,848 shares
under the 1998 Plan have been exercised and options to purchase 96,552 shares
under the 1998 Plan have been forfeited (of which options to purchase 71,925
shares have been reissued).
In
October 2000, the Board of Directors adopted and, in February 2001, the
shareholders approved the 2001 Employee Stock Option Plan (the “2001 Plan”)
covering an aggregate of 1,000,000 shares of Common Stock. At June 30, 2006,
options to purchase 824,298 shares were outstanding under the 2001 Plan at
exercise prices ranging from $4.66 to $8.00 per share with a vesting period
of
one to four years. At June 30, 2006, options to purchase 128,306 shares under
the 2001 Plan have been exercised and options to purchase 151,902 shares under
the 2001 Plan have been forfeited (of which 104,506 options have been
reissued).
In
September 2005, the Board of Directors adopted, and in December 2005, the
shareholders approved, the 2005 Employee Equity Incentive Plan covering an
aggregate of 500,000 shares of Common Stock and the 2005 Non-Employee Director
Stock Option Plan covering an aggregate of 200,000 shares of Common Stock.
At
June 30, 2006, there were no options to purchase shares outstanding under either
such plan.
The
selection of participants, allotments of shares and determination of price
and
other conditions relating to options are determined by the Board of Directors
or
a committee thereof, depending on the Plan, and in accordance with Rule 4350(c)
of the Qualitative Listing Requirements of the Nasdaq Stock Market. Incentive
stock options granted under the plans are exercisable for a period of up to
ten
years from the date of grant at an exercise price which is not less than the
fair market value of the Common Stock on the date of the grant, except that
the
term of an incentive stock option granted under the plans to a shareholder
owning more than 10% of the outstanding Common Stock may not exceed five years
and its exercise price may not be less than 110% of the fair market value of
the
Common Stock on the date of grant. Options shall become exercisable at such
time
and in such installments as provided in the terms of each individual option
agreement.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The
following table sets forth as of September 15, 2006, certain information with
regard to the ownership of the Company's Common Stock by (i) each beneficial
owner of 5% or more of the Company's Common Stock; (ii) each Director; (iii)
each executive officer named in the "Summary Compensation Table" above; and
(iv)
all executive officers and Directors of the Company as a group. Unless otherwise
stated, the persons named in the table have sole voting and investment power
with respect to all Common Stock shown as beneficially owned by
them.
Name
and
Address (1) |
|
|
Common
Stock
Beneficially
Owned
|
|
Percent
of
Class
|
|
|
|
|
|
|
|
|
|
Michael
A. McManus, Jr
|
|
|
1,198,251
|
(2)
|
|
13.9
|
|
Gary
Gelman
|
|
|
458,947
|
|
|
6.6
|
|
Bonanza
Capital Ltd. 300 Crescent Court Dallas, TX 75201
|
|
|
411,600
|
|
|
6.0
|
|
Howard
Alliger
|
|
|
520,608
|
(3)
|
|
6.1
|
|
Ronald
Manna
|
|
|
111,728
|
(4)
|
|
1.4
|
|
Richard
Zaremba
|
|
|
74,500
|
(5)
|
|
1.0
|
|
Dan
Voic
|
|
|
37,910
|
(6)
|
|
*
|
|
W.
Paul Constantine
|
|
|
¾
|
|
|
|
|
T.
Guy Minetti
|
|
|
52,000
|
(7)
|
|
*
|
|
Thomas
F. O’Neill
|
|
|
52,000
|
(8)
|
|
*
|
|
John
W. Gildea
|
|
|
15,000
|
(9)
|
|
*
|
|
Charles
Miner
|
|
|
¾
|
|
|
|
|
Kenneth
Coviello
|
|
|
¾
|
|
|
|
|
Bernhard
Berger
|
|
|
¾
|
|
|
|
|
All
executive officers and Directors
as a group (twelve
people)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,061,997
|
(10)
|
|
32.8
|
|
*Less
than 1%
|
|
|
|
|
|
|
|
|
(1) |
Except
as otherwise noted, the business address of each of the named individuals
in this table is c/o MISONIX, INC., 1938 New Highway, Farmingdale,
New
York 11735.
|
|
(2) |
Includes
1,040,000 shares which Mr. McManus has the right to acquire upon
exercise
of stock options which are currently
exercisable.
|
|
(3) |
Includes
130,000 shares which Mr. Alliger has the right to acquire upon exercise
of
stock options which are currently
exercisable.
|
|
(4) |
Includes
87,834 shares which Mr. Manna has the right to acquire upon exercise
of
stock options which are currently
exercisable.
|
|
(5) |
Includes
70,000 shares which Mr. Zaremba has the right to acquire upon exercise
of
stock options which are currently
exercisable.
|
|
(6) |
Includes
37,910 shares which Mr. Voic has the right to acquire upon exercise
of
stock options which are currently
exercisable.
|
|
(7) |
Includes
45,000 shares which Mr. Minetti has the right to acquire upon exercise
of
stock options which are currently
exercisable.
|
|
(8) |
Represents
45,000 shares which Mr. O’Neill has the right to acquire upon exercise of
stock options which are currently exercisable.
|
|
(9) |
Includes
15,000 shares which Mr. Gildea has the right to acquire upon exercise
of
stock options which are currently
exercisable.
|
|
(10) |
Includes
the shares indicated in notes (2), (3), (4), (5), (6), (7), (8) and
(9).
|
Item
13. Certain
Relationships and Related Transactions.
None.
Item
14. Principal
Accountant Fees and Services.
Audit
Fees:
Grant
Thornton LLP billed the Company and has been approved by the Company’s Audit
Committee in the amounts of $84,240 and $241,603 in the aggregate for services
rendered for the audit of the Company’s 2006 and 2005 fiscal years and the
review of the Company’s interim financial statements included in the Company’s
Quarterly Reports on Form 10-Q for the Company’s 2006 and 2005 fiscal
years.
Audit-Related
Fees:
Grant
Thornton LLP did not render any audit-related services, as defined by the SEC,
to Misonix for the fiscal year ended June 30, 2006.
Tax
Fees:
Grant
Thornton billed the Company and has been approved by the Company’s Audit
Committee in the amount of $38,019 in the aggregate for professional services
for tax compliance, tax advice and the planning for the Company’s 2006 fiscal
year.
All
Other
Fees:
Grant
Thornton LLP did not render any professional services for other services other
than those covered in the section captioned “Audit Fees” for the Company’s 2006
fiscal year.
Policy
on
Pre-approval of Independent Registered Public Accounting Firm
Services:
The
charter of the Audit Committee provides for the pre-approval of all auditing
services and all permitted non-auditing services to be performed for Misonix
by
the independent registered public accounting firm, subject to the requirements
of applicable law. The procedures for pre-approving all audit and non-audit
services provided by the independent registered public accounting firm include
the Audit Committee reviewing audit-related services, tax services, and other
services. The Audit Committee periodically monitors the services rendered by
and
actual fees paid to the independent registered public accounting firm to ensure
that such services are within the parameters approved by the Committee. All
the
services described in Tax Fees, above, were approved by the Audit Committee
in
accordance with its pre-approval policies and procedures.
PART
IV
Item
15. Exhibits
and Financial Statement Schedules.
(a) |
1. |
The
response to this portion of Item 15 is submitted as a separate section
of
this report.
|
|
2. |
Financial Statement Schedules
|
|
|
Schedule II - Valuation and Qualifying
Accounts and Reserves. |
|
3(a)
|
|
Restated
Certificate of Incorporation of the Company. (1)
|
|
|
|
|
|
|
|
By-laws
of the Company. (1)
|
|
|
|
|
|
10(a)
|
|
Lease
extension and modification agreement dated October 31, 1992.
(3)
|
|
|
|
|
|
10(b)
|
|
Stock
Option Plan. (1)
|
|
|
|
|
|
10(g)
|
|
Settlement
and License Agreement dated March 12, 1984 between the Company
and Mettler
Electronics Corporation. (1)
|
|
|
|
|
|
10(j)
|
|
Assignment
Agreement between the Company and Robert Ginsburg. (2)
|
|
|
|
|
|
10(k)
|
|
Subscription
Agreement between the Company and Labcaire. (2)
|
|
|
|
|
|
10(l)
|
|
Option
Agreements between the Company and each of Graham Kear, Geoffrey
Spear,
John Haugh, Martin Keeshan and David Stanley. (2)
|
|
|
|
|
|
10(n)
|
|
Form
of Director's Indemnification Agreement. (2)
|
|
|
|
|
|
10(s)
|
|
Severance
Agreement between the Company and Ronald Manna. (4)
|
|
|
|
|
|
10(u)
|
|
Option
Agreement dated September 11, 1995 between the Company and Medical
Device
Alliance, Inc. (4)
|
|
|
|
|
|
10(w)
|
|
Amendment
to agreement with principal shareholders of Labcaire Systems Ltd.
(5)
|
|
|
|
|
|
10(y)
|
|
Development
and Option Agreement dated August 27, 1996 between the
Company and United States Surgical Corporation. (6)
|
|
|
|
|
|
10(z)
|
|
License
Agreement dated October 16, 1996 between the Company and United
States
Surgical Corporation. (6)
|
|
|
|
|
|
10(aa)
|
|
Amendment
No. 1 dated January 23, 1997 to Underwriters’ Warrant Agreement.
(6)
|
|
|
|
|
|
10(bb)
|
|
1996
Non-Employee Director Stock Option Plan. (7)
|
|
|
|
|
|
10(cc)
|
|
1996
Employee Incentive Stock Option Plan. (7)
|
|
|
|
|
|
10(ee)
|
|
1999
Employee Stock Option Plan. (8)
|
|
|
|
|
|
10(ff)
|
|
Investment
Agreement, dated as of May 3, 1999, by and between the Company,
and Focus
Surgery, Inc. (10)
|
|
|
|
|
|
|
|
Investment
Agreement dated October 14, 1999 by and between the Company
and Hearing Innovations, Inc. (10) |
|
10(ii)
|
|
Exclusive
License Agreement dated as of February, 2001 between the
Company and Medical Device Alliance, Inc. (10)
|
|
|
|
|
|
10(jj)
|
|
Stock
Purchase Agreement dated as of November 4, 1999 between the
Company and Acoustic Marketing Research, Inc. d/b/a
Sonora Medical Systems. (10)
|
|
|
|
|
|
10(kk)
|
|
6%
Secured Convertible Debenture, dated April 12, 2001, by Focus
Surgery,
Inc. payable to the Company. (9)
|
|
|
|
|
|
10(ll)
|
|
Asset
Purchase Agreement dated January 16, 2001, by and among the Company,
Fibra-Sonics, Inc., Mary Anne Kirchschlager, James Kirchschlager
and James Conrad Kirchschlager. (9)
|
|
|
|
|
|
10(mm)
|
|
Purchase
and Sale Agreement, dated July 28, 2000, by and between
CraMar Technologies, Inc., Acoustic Marketing Research, Inc.
and
Randy Muelot. (9)
|
|
|
|
|
|
10(oo)
|
|
5.1%
Secured Convertible Debenture, dated November 7, 2000, by Focus
Surgery,
Inc. payable to the Company. (9)
|
|
|
|
|
|
10(pp)
|
|
Asset
Purchase Agreement by and between Perceptron, Inc. and Acoustic
Market
Research, Inc. d/b/a Sonora Medical Systems. (9)
|
|
|
|
|
|
10(qq)
|
|
First
Amendment to Employment Agreement, dated October 13, 2000, by
and between
the Company and Michael A. McManus, Jr. (9)
|
|
|
|
|
|
10(ss)
|
|
6
%
Secured Convertible Debenture, dated July 31, 2001, by Focus
Surgery, Inc.
payable to the Company. (11)
|
|
|
|
|
|
10(tt)
|
|
Second
Amendment to Employment Agreement dated October 31, 2002 by and
between
the Company and Michael A. McManus, Jr. (12)
|
|
|
|
|
|
10(uu)
|
|
Amendment
No. 4 to the Loan and Security Agreement. (14)
|
|
|
|
|
|
10(vv)
|
|
Letter
Agreement dated as of February 13, 2006. (15)
|
|
|
|
|
|
10(ww)
|
|
Amendment
No. 5 to the Loan and Security Agreement. (15)
|
|
|
|
|
|
10(xx)
|
|
Letter
Agreement dated as of May 12, 2006. (16)
|
|
|
|
|
|
10(yy)
|
|
Amendment
No. 6 to the Loan and Security Agreement. (16)
|
|
|
|
|
|
10(zz)
|
|
2005
Employee Equity Incentive Plan (17)
|
|
|
|
|
|
10(aaa)
|
|
2005
Non-Employee Director Stock Option Plan (17)
|
|
|
|
|
|
14
|
|
Code
of Ethics (13)
|
|
|
|
|
|
21
|
|
Subsidiaries
of the Company.
|
|
|
|
|
|
23.1
|
|
Consent
of Grant Thornton LLP.
|
|
|
|
|
|
23.2
|
|
Consent
of Ernst & Young LLP.
|
|
|
|
|
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification.
|
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification.
|
|
|
|
|
|
32.1
|
|
Section
1350 Certification.
|
|
|
|
|
|
32.2
|
|
Section
1350 Certification.
|
|
(1)
|
Incorporated
by reference from the Company’s Registration Statement on Form S-1 (Reg.
No. 33-43585).
|
|
(2)
|
Incorporated
by reference from the Company’s Annual Report on Form 10-K for the fiscal
year 1992.
|
|
(3)
|
Incorporated
by reference from the Company’s Annual Report on Form 10-KSB for the
fiscal year 1993.
|
|
(4)
|
Incorporated
by reference from the Company’s Annual Report on Form 10-KSB for the
fiscal year 1995.
|
|
(5)
|
Incorporated
by reference from the Company’s Annual Report on Form 10-KSB for the
fiscal year 1996.
|
|
(6)
|
Incorporated
by reference from the Company’s Annual Report on Form 10-KSB for the
fiscal year 1997.
|
|
(7)
|
Incorporated
by reference from the Company’s definitive proxy statement for the Annual
Meeting of Shareholders held on February 19,
1997.
|
|
(8)
|
Incorporated
by reference from the Company’s Registration Statement on Form S-8 (Reg.
No. 333-78795).
|
|
(9)
|
Incorporated
by reference from the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended March 31,
2001.
|
|
(10)
|
Incorporated
by reference from the Company’s Annual Report on Form 10-K/A for the
fiscal year 2001.
|
|
(11)
|
Incorporated
by reference from the Company’s Annual Report on Form 10-K/A for the
fiscal year 2002.
|
|
(12)
|
Incorporated
by reference from the Company’s Annual Report on Form 10-K for the fiscal
year 2003.
|
|
(13)
|
Incorporated
by reference from the Company’s Annual Report on Form 10-K for the fiscal
year 2004.
|
|
(14)
|
Incorporated
by reference from the Company’s current report on Form 8-k filed on
September 30, 2005
|
|
(15)
|
Incorporated
by reference from the Company’s current report on Form 8-k filed on
February 17, 2006
|
|
(16)
|
Incorporated
by reference from the Company’s current report on Form 8-k filed on May
18, 2006
|
|
(17)
|
Incorporated
by reference from the Company’s definitive proxy statement for the Annual
Meeting of Stockholders held on December 14,
2005.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
|
|
MISONIX, INC. |
|
|
|
|
By: |
/s/ Michael A. McManus, Jr. |
|
Michael
A. McManus, Jr. |
|
President
and
Chief
Executive Officer
|
Date:
September 28, 2006
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.
Signature
|
|
Title
|
|
|
|
|
|
|
|
/s/
Michael A. McManus, Jr. |
|
President,
Chief Executive
|
|
September
28, 2006
|
Michael
A. McManus, Jr.
|
|
Officer,
and Director
|
|
|
|
|
(principal
executive officer)
|
|
|
|
|
|
|
|
/s/ Richard
Zaremba |
|
Senior
Vice President, Chief
|
|
September
28, 2006
|
Richard
Zaremba
|
|
Financial
Officer, Treasurer and Secretary
|
|
|
|
|
(principal
financial and accounting officer)
|
|
|
|
|
|
|
|
/s/ Howard
Alliger |
|
Director
|
|
September
28, 2006
|
Howard
Alliger
|
|
|
|
|
|
|
|
|
|
/s/ T.
Guy Minetti |
|
Director
|
|
September
28, 2006
|
T.
Guy Minetti
|
|
|
|
|
|
|
|
|
|
/s/ Thomas
F. O’Neill |
|
Director
|
|
September
28, 2006
|
Thomas
F. O’Neill
|
|
|
|
|
|
|
|
|
|
/s/ John
Gildea |
|
Director
|
|
September
28, 2006
|
John
Gildea
|
|
|
|
|
|
|
|
|
|
/s/ Charles
Miner III |
|
Director
|
|
September
28, 2006
|
Charles
Miner III
|
|
|
|
|
Item
15(a)
INDEX
TO
CONSOLIDATED FINANCIAL STATEMENTS
MISONIX,
INC. and Subsidiaries
Year
Ended June 30, 2006
|
Page
|
Reports
of Independent Registered Public Accounting Firm
|
50-51
|
|
|
Consolidated
Balance Sheets—June 30, 2006 and 2005
|
52
|
|
|
Consolidated
Statements of Operations—Years Ended June
30, 2006, 2005 and 2004
|
53
|
|
|
Consolidated
Statements of Stockholders’ Equity—Years Ended June
30, 2006, 2005 and 2004
|
54
|
|
|
Consolidated
Statements of Cash Flows—Years Ended June
30, 2006, 2005 and 2004
|
55
- 56
|
|
|
Notes
to Consolidated Financial Statements
|
57
- 80
|
The
following consolidated financial statement schedule is included
in Item
15(a)
|
|
|
|
Schedule
II-Valuation and Qualifying Accounts
|
|
|
|
All
other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not
required under the related instructions or are inapplicable and
therefore
have been omitted.
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Misonix,
Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheet of Misonix, Inc. and
Subsidiaries (the “Company”) as of June 30, 2006, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the year then
ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (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. The Company is not required
to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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
as of
June 30, 2006 and the consolidated results of their operations and their
cash
flows for the year
then
ended
in
conformity with accounting principles generally accepted in the United
States of
America.
As
discussed in Note
9 to
the
consolidated financial
statements, the Company changed its method of accounting for share-based
payments as of July 1, 2005.
Our
audit
was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The financial statement schedule, Schedule
II, Valuation and Qualifying Accounts, is presented for purposes of additional
analysis and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in
the audit
of the basic financial statements and, in our opinion, is fairly stated
in all
material respects in relation to the basic financial statements taken as
a
whole.
Melville,
New York
September
22, 2006
Report
of
Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders of MISONIX, INC.
We
have
audited the accompanying consolidated balance sheet of MISONIX, INC. (the
Company) and subsidiaries as of June 30, 2005, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
two
years in the period ended June 30, 2005. Our audit also included the financial
statement schedule listed in the index at Item 15(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 based
on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (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. We were not engaged to perform
an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a
basis
for designing audit procedures that are appropriate in the circumstances,
but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that
our
audit provides 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 the Company and
subsidiaries at June 30, 2005, and the consolidated results of their operations
and their cash flows for each of the two years in the period ended June 30,
2005, in conformity with U.S. generally accepted accounting principles. 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
26, 2005
Misonix,
Inc. and Subsidiaries
Consolidated
Balance Sheets
|
|
June
30,
|
|
Assets
|
|
2006
|
|
2005
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
675,400
|
|
$
|
2,484,534
|
|
Accounts
receivable, less allowance for doubtful accounts of $256,309
and
$405,998,
respectively
|
|
|
6,530,598
|
|
|
11,757,827
|
|
Inventories
|
|
|
11,307,226
|
|
|
9,780,501
|
|
Income
tax receivable
|
|
|
786,654
|
|
|
224,734
|
|
Deferred
income taxes
|
|
|
1,419,949
|
|
|
964,426
|
|
Prepaid
expenses and other current assets
|
|
|
1,070,903
|
|
|
1,336,104
|
|
Total
current assets
|
|
|
21,790,730
|
|
|
26,548,126
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
6,495,854
|
|
|
6,409,835
|
|
Deferred
income taxes
|
|
|
1,039,824
|
|
|
244,769
|
|
Goodwill
|
|
|
4,673,713
|
|
|
4,473,713
|
|
Other
assets
|
|
|
512,444
|
|
|
409,493
|
|
Total
assets
|
|
$
|
34,512,565
|
|
$
|
38,085,936
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Revolving
credit facilities and note payable
|
|
$
|
1,572,042
|
|
$
|
1,883,193
|
|
Accounts
payable
|
|
|
4,784,102
|
|
|
5,482,313
|
|
Accrued
expenses and other current liabilities
|
|
|
2,963,762
|
|
|
2,901,247
|
|
Current
maturities of long-term debt and capital lease obligations
|
|
|
367,823
|
|
|
376,148
|
|
Total
current liabilities
|
|
|
9,687,729
|
|
|
10,642,901
|
|
|
|
|
|
|
|
|
|
Long-term
debt and capital lease obligations
|
|
|
1,145,279
|
|
|
1,240,324
|
|
Deferred
lease liability
|
|
|
378,031
|
|
|
-
|
|
Deferred
income taxes
|
|
|
282,455
|
|
|
270,884
|
|
Deferred
income
|
|
|
422,634
|
|
|
508,582
|
|
Total
Liabilities
|
|
|
11,916,128
|
|
|
12,662,691
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
341,631
|
|
|
329,085
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value—shares authorized 10,000,000; 6,978,169 and
6,902,752
issued,
and
6,900,369 and 6,824,952 outstanding, respectively
|
|
|
69,782
|
|
|
69,028
|
|
Additional
paid-in capital
|
|
|
24,548,536
|
|
|
23,619,281
|
|
(Accumulated
deficit) retained earnings
|
|
|
(2,158,271
|
)
|
|
1,601,166
|
|
Accumulated
other comprehensive income
|
|
|
207,183
|
|
|
217,109
|
|
Treasury
stock, 77,800 shares
|
|
|
(412,424
|
)
|
|
(412,424
|
)
|
Total
stockholders’ equity
|
|
|
22,254,806
|
|
|
25,094,160
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
34,512,565
|
|
$
|
38,085,936
|
|
See
Accompanying Notes to Consolidated Financial Statements.
Misonix,
Inc. and Subsidiaries
Consolidated
Statements of Operations
|
|
Year
ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
39,067,293
|
|
$
|
45,906,584
|
|
$
|
39,059,066
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
24,794,283
|
|
|
26,869,236
|
|
|
22,542,463
|
|
Gross
profit
|
|
|
14,273,010
|
|
|
19,037,348
|
|
|
16,516,603
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
7,008,155
|
|
|
6,110,716
|
|
|
4,662,006
|
|
General
and administrative expenses
|
|
|
10,211,492
|
|
|
8,462,228
|
|
|
7,633,930
|
|
Research
and development expenses
|
|
|
3,627,402
|
|
|
3,486,063
|
|
|
2,437,752
|
|
Litigation
expense
|
|
|
−
|
|
|
419,000
|
|
|
-
|
|
Total
operating expenses
|
|
|
20,847,049
|
|
|
18,478,007
|
|
|
14,733,688
|
|
(Loss)
income from operations
|
|
|
(6,574,039
|
)
|
|
559,341
|
|
|
1,782,915
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
77,257
|
|
|
62,101
|
|
|
49,119
|
|
Interest
expense
|
|
|
(233,852
|
)
|
|
(231,566
|
)
|
|
(164,985
|
)
|
Royalty
income and license fees, net of royalty expense of
$109,727,
$106,906 and $82,362, respectively
|
|
|
724,082
|
|
|
858,721
|
|
|
1,345,451
|
|
(Loss)
on impairment of Hearing Innovations, Inc.
|
|
|
−
|
|
|
-
|
|
|
(198,800
|
)
|
Other
|
|
|
(14,638
|
)
|
|
(7,023
|
)
|
|
26,406
|
|
Total
other income
|
|
|
552,849
|
|
|
682,233
|
|
|
1,057,191
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before minority interest and income taxes
|
|
|
(6,021,190
|
)
|
|
1,241,574
|
|
|
2,840,106
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in net income of consolidated subsidiaries
|
|
|
12,546
|
|
|
13,130
|
|
|
52,505
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before provision for income taxes
|
|
|
(6,033,736
|
)
|
|
1,228,444
|
|
|
2,787,601
|
|
Income
tax (benefit) provision
|
|
|
(2,274,299
|
)
|
|
292,739
|
|
|
1,068,656
|
|
Net
(loss) income
|
|
|
($3,759,437
|
)
|
$
|
935,705
|
|
$
|
1,718,945
|
|
Net
(loss) income per share - Basic
|
|
|
($
.55
|
)
|
$
|
0.14
|
|
$
|
.26
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share - Diluted
|
|
|
($
.55
|
)
|
$
|
0.13
|
|
$
|
.25
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding -Basic
|
|
|
6,868,535
|
|
|
6,788,341
|
|
|
6,667,615
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - Diluted
|
|
|
6,868,535
|
|
|
6,983,699
|
|
|
6,849,845
|
|
See
Accompanying Notes to Consolidated Financial Statements.
Misonix,
Inc. and Subsidiaries
Consolidated
Statements of Stockholders’ Equity
Years
Ended June 30, 2006, 2005 and 2004
|
|
Common
Stock
$.01
Par Value
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
Amount
|
|
Number
of
Shares
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
Accumulated
Other
Comprehensive
Income
|
|
Total
Stockholders’
Equity
|
|
Balance,
June 30, 2003
|
|
|
6,733,665
|
|
$
|
67,337
|
|
|
(77,800
|
)
|
$
|
(412,424
|
)
|
$
|
22,712,511
|
|
$
|
(1,053,484
|
)
|
$
|
28,723
|
|
$
|
21,342,663
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,718,945
|
|
|
-
|
|
|
1,718,945
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
276,651
|
|
|
276,651
|
|
Comprehensive
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,995,596
|
|
Exercise
of employee options
|
|
|
82,588
|
|
|
826
|
|
|
-
|
|
|
-
|
|
|
404,091
|
|
|
-
|
|
|
-
|
|
|
404,917
|
|
Balance,
June 30, 2004
|
|
|
6,816,253
|
|
$
|
68,163
|
|
|
(77,800
|
)
|
$
|
(412,424
|
)
|
$
|
23,116,602
|
|
$
|
665,461
|
|
$
|
305,374
|
|
$
|
23,743,176
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
935,705
|
|
|
-
|
|
|
935,705
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(88,265
|
)
|
|
(88,265
|
)
|
Comprehensive
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
847,440
|
|
Exercise
of employee options
|
|
|
86,499
|
|
|
865
|
|
|
-
|
|
|
-
|
|
|
502,679
|
|
|
-
|
|
|
-
|
|
|
503,544
|
|
Balance,
June 30, 2005
|
|
|
6,902,752
|
|
$
|
69,028
|
|
|
(77,800
|
)
|
$
|
(412,424
|
)
|
$
|
23,619,281
|
|
$
|
1,601,166
|
|
$
|
217,109
|
|
$
|
25,094,160
|
|
Net
(loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,759,437
|
)
|
|
-
|
|
|
(3,759,437
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(9,926
|
)
|
|
(9,926
|
)
|
Comprehensive
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,769,363
|
)
|
Exercise
of employee options
|
|
|
75,417
|
|
|
754
|
|
|
-
|
|
|
-
|
|
|
420,598
|
|
|
-
|
|
|
-
|
|
|
421,352
|
|
Stock-based
compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
508,657
|
|
|
-
|
|
|
-
|
|
|
508,657
|
|
Balance,
June 30, 2006
|
|
|
6,978,169
|
|
$
|
69,782
|
|
|
(77,800
|
)
|
$
|
(412,424
|
)
|
$
|
24,548,536
|
|
$
|
(2,158,271
|
)
|
$
|
207,183
|
|
$
|
22,254,806
|
|
See
Accompanying Notes to Consolidated Financial Statements.
Misonix,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
Year
ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
($3,759,437
|
)
|
$
|
935,705
|
|
$
|
1,718,945
|
|
Adjustments
to reconcile net (loss) income to net cash
(used
in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Bad
debt expense (recovery)
|
|
|
112,633
|
|
|
25,171
|
|
|
(112,420
|
)
|
Litigation
expense
|
|
|
-
|
|
|
419,000
|
|
|
-
|
|
Deferred
income tax (benefit) expense
|
|
|
(1,207,113
|
)
|
|
119,271
|
|
|
282,688
|
|
Depreciation
and amortization
|
|
|
1,323,936
|
|
|
1,083,471
|
|
|
732,755
|
|
Loss
on disposal of equipment
|
|
|
254,796
|
|
|
173,906
|
|
|
123,955
|
|
Deferred
income (loss)
|
|
|
(85,948
|
)
|
|
(260,451
|
)
|
|
412,957
|
|
Deferred
leasehold costs
|
|
|
174,233
|
|
|
7,023
|
|
|
(26,406
|
)
|
Minority
interest in net income of subsidiaries
|
|
|
12,546
|
|
|
13,130
|
|
|
52,505
|
|
Stock-based
compensation
|
|
|
508,657
|
|
|
-
|
|
|
-
|
|
Loss
on impairment of Hearing Innovations, Inc.
|
|
|
-
|
|
|
-
|
|
|
198,800
|
|
Other
|
|
|
6,131
|
|
|
-
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
4,974,705
|
|
|
(4,234,591
|
)
|
|
496,662
|
|
Inventories
|
|
|
(1,624,197
|
)
|
|
(221,052
|
)
|
|
(1,082,361
|
)
|
Income
tax receivable
|
|
|
(561,920
|
)
|
|
(320,560
|
)
|
|
44,204
|
|
Prepaid
expenses and other current assets
|
|
|
265,100
|
|
|
(237,838
|
)
|
|
(51,798
|
)
|
Other
assets
|
|
|
(143,472
|
)
|
|
(116,151
|
)
|
|
(40,136
|
)
|
Accounts
payable and accrued expenses
|
|
|
(594,654
|
)
|
|
1,573,782
|
|
|
444,565
|
|
Income
taxes payable
|
|
|
-
|
|
|
(12,199
|
)
|
|
8,038
|
|
Net
cash (used in) provided by operating activities
|
|
|
(344,004
|
)
|
|
(1,052,383
|
)
|
|
3,202,953
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment
|
|
|
(890,598
|
)
|
|
(1,941,792
|
)
|
|
(1,106,530
|
)
|
Purchase
of UKHIFU stock
|
|
|
(200,000
|
)
|
|
-
|
|
|
-
|
|
Loans
to Hearing Innovations, Inc., net
|
|
|
-
|
|
|
-
|
|
|
(198,800
|
)
|
Cash
acquired from consolidation of variable interest entity
|
|
|
-
|
|
|
-
|
|
|
236
|
|
Net
cash used in investing activities
|
|
|
(1,090,598
|
)
|
|
(1,941,792
|
)
|
|
(1,305,094
|
)
|
(continued
on next page)
Misonix,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (Continued)
|
|
Year
ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Financing
activities
|
|
|
|
|
|
|
|
Proceeds
from short-term borrowings
|
|
$
|
1,059,956
|
|
$
|
929,040
|
|
$
|
1,243,226
|
|
Payments
of short-term borrowings
|
|
|
(1,371,441
|
)
|
|
(398,221
|
)
|
|
(627,479
|
)
|
Principal
payments on capital lease obligations
|
|
|
(424,545
|
)
|
|
(338,533
|
)
|
|
(349,054
|
)
|
Payment
of long-term debt
|
|
|
(59,607
|
)
|
|
(57,384
|
)
|
|
(55,481
|
)
|
Proceeds
from exercise of stock options
|
|
|
381,513
|
|
|
503,544
|
|
|
404,917
|
|
Income
tax benefit - stock options
|
|
|
39,839
|
|
|
-
|
|
|
-
|
|
Net
cash (used in) provided by financing activities
|
|
|
(374,285
|
)
|
|
638,446
|
|
|
616,129
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(247
|
)
|
|
397
|
|
|
46,009
|
|
Net
(decrease) increase in cash
|
|
|
(1,809,134
|
)
|
|
(2,355,332
|
)
|
|
2,559,997
|
|
Cash
at beginning of year
|
|
|
2,484,534
|
|
|
4,839,866
|
|
|
2,279,869
|
|
Cash
at end of year
|
|
$
|
675,400
|
|
$
|
2,484,534
|
|
$
|
4,839,866
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for (received from):
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
237,103
|
|
$
|
228,018
|
|
$
|
164,985
|
|
Income
taxes
|
|
$
|
(585,407
|
)
|
$
|
351,798
|
|
$
|
539,185
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
Capital
lease additions
|
|
$ |
372,424 |
|
$ |
453,986 |
|
$ |
321,440 |
|
See
Accompanying Notes to Consolidated Financial Statements.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
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 100% owned subsidiary, Labcaire Systems,
Ltd. (“Labcaire”), its 90% owned subsidiary, Acoustic Marketing Research, Inc.
doing business as Sonora Medical Systems, Inc. (“Sonora”), and its 100% owned
subsidiary, Misonix, Ltd. As of March 31, 2004, the Company consolidated its
100% owned subsidiary Hearing Innovations, Inc. (“Hearing Innovations”) in
accordance with FIN 46, Variable Interest Entities, as the Company determined
it
was a variable interest (See Note 2). Hearing Innovations filed for relief
under
Chapter 11 of the U.S. Bankruptcy Code during fiscal 2005 and as part of the
Bankruptcy Plan the Company acquired 100% of the outstanding common stock of
Hearing Innovations. Prior to March 31, 2004, the Company reported its
investment in Hearing Innovations using the equity method of accounting. The
Company’s investment in Focus Surgery, Inc. (“Focus”) (See Note 2) is reported
using the equity method of accounting. All significant intercompany balances
and
transactions have been eliminated.
Organization
and Business
Misonix
was incorporated under the laws of the State of New York on July 31, 1967 and
its principal revenue producing activities, from 1967 to date, have been the
manufacture and distribution of proprietary ultrasound equipment for scientific
and industrial purposes and environmental control equipment for the abatement
of
air pollution. Misonix’s products are sold worldwide. In October 1996, the
Company entered into licensing agreements to further develop one of its medical
devices (see Note 13).
The
Company’s operations outside the United States consist of a 100% ownership in
Labcaire Systems, Ltd. (“Labcaire”), which is based in North Somerset, England.
This business consists of designing, manufacturing, servicing and marketing
air-handling systems for the protection of personnel, products and the
environment from airborne hazards. The
Company also has a 60% ownership in UKHIFU, located in Bristol, England.
UKHIFU
is in the business of distributing and servicing equipment for the ablation
of
cancerous tissue of the prostate.
The
Company's 90% owned subsidiary, Acoustic Marketing Research, Inc. doing business
as Sonora Medical Systems, Inc. (“Sonora”), located in Longmont, Colorado, is an
ISO 9001 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.
The
Company’s 100% owned subsidiary, Hearing Innovations, Inc. (“Hearing
Innovations”), is a development company with patented HiSonic ultrasonic
technology for the treatment of profound deafness and tinnitus.
In
fiscal
2006, approximately 37% of the Company's net sales were to foreign markets.
Labcaire, which manufactures and sells the Company’s fume enclosure line as well
as its own range of laboratory and medical environmental control products,
represents approximately 76% of the Company’s net sales to foreign markets.
Labcaire also distributes the Company’s ultrasonic equipment for use in
scientific and industrial markets, predominately in the United Kingdom. Sales
by
the Company in other major industrial countries are made primarily through
distributors.
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, net (loss) income and total assets related
to
Labcaire as of and for the years ended June 30, 2006, 2005 and 2004 were
approximately $9,994,000, $(1,054,000) and $9,863,000, respectively;
$11,842,000, $172,000 and $11,335,000, respectively; $10,530,000, $160,000
and
$9,414,000, respectively.
The
following is an analysis of assets related to Labcaire:
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Current
assets
|
|
$
|
5,676,000
|
|
$
|
7,124,000
|
|
$
|
5,788,000
|
|
Long
- lived assets
|
|
|
4,187,000
|
|
|
4,211,000
|
|
|
3,626,000
|
|
Total
assets
|
|
$
|
9,863,000
|
|
$
|
11,335,000
|
|
$
|
9,414,000
|
|
Sonora,
which was acquired in November 1999 and is located in Longmont, Colorado, is
an
ISO 9001 certified refurbisher of high-performance ultrasound systems and
replacement transducers for the medical diagnostic ultrasound industry. Net
sales, net (loss) income and total assets related to Sonora as of and for the
years ended June 30, 2006, 2005 and 2004 were approximately $11,350,000,
$(235,000) and $7,353,000, respectively; $11,067,000, $131,000 and $7,241,000,
respectively; $9,126,000, $574,000 and $5,376,000, respectively.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
Hearing
Innovations is located in Farmingdale, New York. Net sales, net (loss) income
and total assets related to Hearing Innovations as of and for the years ended
June 30, 2006 and 2005 and the three months ended June 30, 2004 were
approximately $0, ($51,000) and $73,000 respectively, $0, ($112,000) and
$101,000, respectively and $4,000, $1,000 and $100,000,
respectively.
Misonix,
Ltd. was incorporated in the United Kingdom on July 19, 1993 and its operations
since inception have been insignificant to the Company.
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. There were no cash equivalents
at June 30, 2006 and 2005. Cash balances outside the United States totaled
$51,446 and $11,977 at June 30, 2006 and 2005, respectively.
Major
Customers and Concentration of Credit Risk
Included
in sales of medical devices, sales to United States Surgical Corporation (“USS”)
in 2006, 2005 and 2004 were approximately $4,461,000, $5,778,000 and $7,198,000,
respectively. Total royalties from USS related to their sales of this device
were approximately $810,000, $940,000 and $1,402,000 during the fiscal years
ended June 30, 2006, 2005 and 2004, respectively. Accounts receivable from
this
customer were approximately $849,000 and $1,247,000 at June 30, 2006 and 2005,
respectively. At June 30, 2006 and 2005, the Company’s accounts receivable with
customers outside the United States were approximately $2,264,000 and
$5,656,000, respectively, of which $1,776,000 and $3,781,000, respectively,
related to its Labcaire operations. The Company utilizes letters of credit
on
foreign or export sales where appropriate.
Accounts
Receivable
Accounts
receivable, principally trade, are generally due within 30 to 90 days and are
stated at amounts due from customers, net of an allowance for doubtful accounts.
The Company performs ongoing credit evaluations and adjusts credit limits based
upon payment history and the customer’s current credit worthiness, as determined
by a review of their current credit information. The Company continuously
monitors aging reports, collections and payments from customers and maintains
a
provision for estimated credit losses based upon historical experience and
any
specific customer collection issues that have been identified. While such credit
losses have historically been within expectations and the provisions
established, the Company cannot guarantee the same credit loss rates will be
experienced in the future. The Company writes off accounts receivable when
they
become uncollectible.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or market and consist
of
raw materials, work-in-process and finished goods. Management evaluates the
need
to record adjustments for impairments of inventory on a quarterly basis. The
Company’s policy is to assess the valuation of all inventories, including raw
materials, work-in-process and finished goods. Inventory items used for
demonstration purposes, rentals or on consignment are classified in property,
plant and equipment.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. The Company capitalizes items in
excess of $500. Minor replacements and maintenance and repair expenses are
charged to expense as incurred. Depreciation of property and equipment is
provided using the straight-line method over estimated useful lives ranging
from
1 to 8 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. The Company’s policy is to periodically
evaluate the appropriateness of the lives assigned to property, plant and
equipment and to adjust if necessary. Inventory items included in property,
plant and equipment are depreciated using the straight line method over
estimated useful lives of 3 to 8 years.
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 variable
interest rates based on prime or other similar benchmark 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. Fees
from
exclusive license agreements are recognized ratably over the terms of the
respective agreements. Service contracts and royalty income is recognized when
earned.
Long-Lived
Assets
The
carrying values of intangible and other long-lived assets, excluding goodwill,
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,
2006 and 2005.
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 the common
stock of Labcaire, 90% of the common stock of Sonora and the acquisitions of
Fibra Sonics, Inc. (“Fibra Sonics”), Sonic Technologies Laboratory Services
(“Sonic Technologies”) and CraMar Technologies, Inc. (“CraMar”).
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
In
July
2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) Nos.
141 (“SFAS 141”) and 142 (“SFAS 142”), "Business Combinations" and "Goodwill and
Other Intangible Assets," respectively. SFAS 141 replaced Accounting Principles
Board (“APB”) Opinion 16 “Business Combinations” and requires the use of the
purchase method for all business combinations initiated after June 30, 2001.
SFAS 142 requires goodwill and intangible assets with indefinite useful lives
to
no longer be amortized, but instead be tested for impairment at least annually
and whenever events or circumstances occur that indicate goodwill might be
impaired. With the adoption of SFAS 142, as of July 1, 2001, the Company
reassessed the useful lives and residual values of all acquired intangible
assets to make any necessary amortization period adjustments. Based on that
assessment, only goodwill was determined to have an indefinite useful life
and
no adjustments were made to the amortization period or residual values of other
intangible assets. The Company completed its annual goodwill impairment tests
for fiscal 2006 and 2005 in the respective fourth quarter. There were no
indicators that goodwill recorded was impaired.
Other
Assets
The
cost
of acquiring or processing patents, trademarks, and other intellectual
properties is 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
Income
taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income
Taxes”. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date.
Net
(loss) Income Per Share
Basic
(loss) income per common share excludes any dilution. It is based upon the
weighted average number of common shares outstanding during the period. Dilutive
(loss) income per share reflects the potential dilution that would occur if
options to purchase common stock were exercised. The following table sets forth
the reconciliation of weighted average shares outstanding and diluted weighted
average shares outstanding:
|
|
2006
|
|
2005
|
|
2004
|
|
Weighted
average common shares
outstanding
|
|
|
6,868,535
|
|
|
6,788,341
|
|
|
6,667,615
|
|
Dilutive
effect of stock options
|
|
|
¾
|
|
|
195,358
|
|
|
182,230
|
|
Diluted
weighted average common shares
outstanding
|
|
|
6,868,535
|
|
|
6,983,699
|
|
|
6,849,845
|
|
Employee
stock options covering 1,043,256, 838,195 and 25,000 shares, respectively,
for
the years ended June 30, 2006, 2005 and 2004 were not included in the diluted
net income per share calculation because their effect would have been
anti-dilutive.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
Comprehensive
(Loss) Income
The
components of the Company’s comprehensive (loss) income are net (loss) income
and foreign currency translation adjustments. The foreign currency translation
adjustments included in comprehensive (loss) income have not been tax effected
as investments in foreign affiliates are deemed to be permanent.
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.
Advertising
Expense
The
cost
of advertising is expensed as of the first showing. The Company incurred
approximately $424,000, $524,000 and $474,000 in advertising costs during the
years ended June 30, 2006, 2005 and 2004, respectively.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and judgments 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Shipping
and Handling Costs
The
Company includes all shipping and handling income and expenses incurred as
a
component of selling expenses. Shipping and handling income for the years ended
June 30, 2006, 2005 and 2004 was approximately $420,000, $476,000 and $412,000,
respectively. Shipping and handling expenses for the years ended June 30, 2006,
2005 and 2004 were approximately $575,000, $607,000 and $555,000,
respectively.
Stock-Based
Compensation
Prior
to
July 1, 2005, the Company accounted for stock option plans under Statement
of
Financial Accounting Standards (SFAS”) No. 123 (“SFAS No. 123”). As permitted
under this standard, compensation cost was recognized using the intrinsic value
method described in Accounting Principles Board Opinion No. 25 (APB 25”).
Effective July 1, 2005, the Company adopted the fair-value recognition
provisions of SFAS No. 123R (“SFAS No. 123R”) and Securities and Exchange
Commission Staff Accounting Bulletin No. 107 using the modified-prospective
transition method; therefore, prior periods have not been restated. See Note
9
for additional information regarding stock-based compensation.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
Recent
Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, an amendment of
APB No. 43, Chapter 4 (“SFAS 151”). The amendments made by SFAS No. 151 will
improve financial reporting by clarifying that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage) should be
recognized as current-period charges and by requiring the allocation of fixed
production overhead to inventory based on the normal capacity of the production
facilities. SFAS No. 151 was effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company adopted SFAS No. 151
effective July 1, 2005, the adoption of which did not have a material impact
on
the Company’s financial condition or results of operations.
In
December 2004, the FASB issued Financial Staff Position No. 109-2, “Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004,” (FSP No. 109-2”). FSP No. 109-2
provides accounting guidance for the one-time tax deduction of 85% of certain
foreign earnings that are repatriated, under a plan for reinvestment in the
U.S., from controlled foreign subsidiaries in excess of a base amount as defined
in the American Jobs Creation Act of 2004 (AJCA”). The AJCA was enacted on
October 22, 2004. FSP No. 109-2 allowed additional time for companies to
evaluate the effects of the AJCA on any plan for reinvestment or repatriation
of
foreign earnings for purposes of applying FASB Statement No. 109. The Company
does not believe the adoption of FSP No. 109-2 will have a material impact
on
its financial condition or results of operations.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes”, an interpretation of FASB Statement No. 109, (“FIN 48”). FIN 48
clarifies the accounting for uncertainties in income taxes recognized in an
enterprise’s financial statements. The Interpretation requires that the Company
determine whether it is more likely than not that a tax position will be
sustained upon examination by the appropriate taxing authority. If a tax
position meets the more likely than not recognition criteria, FIN 48 requires
the tax position be measured at the largest amount of benefit greater than
50
percent likely of being realized upon ultimate settlement. This accounting
standard is effective for fiscal years beginning after December 15, 2006. The
effect, if any, of adopting FIN 48 on the Company’s financial position and
results of operations has not been determined.
2.
Acquisitions
Hearing
Innovations, Inc.
On
October 18, 1999, the Company and Hearing Innovations completed the agreement
whereby the Company invested an additional $350,000 and cancelled notes
receivable aggregating $400,000 in exchange for a 7% equity interest in Hearing
Innovations and representation on its Board of Directors. Warrants
to
acquire
388,680 shares of Hearing Innovations common stock were also part of the
agreement.
Upon
exercise of the warrants, the Company had the right to manufacture Hearing
Innovations’ ultrasonic products and also had 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 the
investment was $784,000 ($750,000 plus acquisition costs of $34,000). The
Company’s portion of the net losses of Hearing Innovations were recorded since
the date of acquisition in accordance with the equity method of accounting.
During fiscal 2001, the Company evaluated the investment with respect to the
financial performance and the achievement of specific targets and goals and
determined that the equity investment was impaired and therefore the Company
recorded an impairment loss in the amount of $579,069.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
On
September 11, 2000, the Company loaned $108,000 to Hearing Innovations, which
together with the then-outstanding loans aggregating $192,000 (with accrued
interest) was exchanged for a $300,000, 7% Secured Convertible Debenture due
August 27, 2002 and extended to November 30, 2003 (the “Hearing Debenture”). The
Company recorded an allowance against the entire balance of principal and
accrued interest due in fiscal 2001. The Company believed the Hearing Debenture
was impaired since the Company did not anticipate such Debenture to be satisfied
in accordance with the contractual terms of the loan agreement.
During
fiscal 2001, the Company entered into fourteen loan agreements whereby Hearing
Innovations was required to pay the Company an aggregate amount of $397,678
due
May 30, 2002. The Company recorded an allowance against the entire balance
due
in fiscal 2001. The Company believed the loans were impaired since the Company
did not anticipate that these loans would be paid in accordance with the
contractual terms of the loan agreements.
During
fiscal 2002, the Company entered into fifteen loan agreements whereby Hearing
Innovations was required to pay the Company an aggregate amount of $322,679
due
May 30, 2002, extended to November 30, 2003, and $151,230 due November 30,
2003.
The Company recorded an allowance against the entire balance due in fiscal
2002.
The Company believed the loans and related interest were impaired since the
Company did not anticipate that these loans would be paid in accordance with
the
contractual terms of the loan agreements.
During
fiscal 2003, the Company entered into sixteen loan agreements whereby Hearing
Innovations is required to pay the Company an aggregate amount of $274,991
due
November 30, 2003. The Company recorded an allowance against the entire balance
of $274,991 for the above loans as well as accrued interest of $23,241 during
fiscal 2003. The Company believed the loans and related interest were impaired
since the Company did not anticipate that these loans would be paid in
accordance with the contractual terms of the loan agreements. In November 2002,
the Company signed a management agreement with Hearing Innovations whereby
the
Company earns $17,000 per month for those services. These amounts have been
fully reserved by the Company, as the collectibility of these amounts was
uncertain.
During
fiscal 2004, the Company entered into eight loan agreements whereby Hearing
Innovations is required to pay the Company an aggregate amount of $199,255,
of
which $455 was in the fourth quarter and was eliminated in consolidation. The
Company recorded an allowance against amounts loaned prior to April 1, 2004,
which totaled $198,800. The related expense has been included in loss on
impairment of Hearing Innovations in the accompanying consolidated statements
of
income. The Company believed the loans and related interest were impaired since
the Company did not anticipate that these loans would be paid in accordance
with
the contractual terms of the loan agreements and Hearing Innovations has no
predictable cash flows from its product revenue.
The
Company previously made the decision not to continue funding Hearing
Innovations’ operations, however, during fiscal 2004, the Company loaned Hearing
Innovations $199,255 to enable Hearing Innovations to reduce a substantial
portion of its long-term debt to certain third parties. The Company continued
to
believe that Hearing Innovations’ technology could provide a benefit to patients
but the products require more improvement and market development. All equity
investments and debt in Hearing Innovations were fully reserved for and had
a
zero basis.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
In
connection with the adoption of FIN 46, the Company consolidated Hearing
Innovations in its March 31, 2004 balance sheet as the entity was determined
to
be a variable interest entity and the Company is its primary
beneficiary. The
Company elected to record the adoption of FIN 46 as a cumulative effect of
an
accounting change. Consolidating Hearing Innovations did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
On
July
14, 2004, Hearing Innovations sent all shareholders and creditors a plan for
reorganization and disclosure statement. The Company funded Hearing Innovations
up to $150,000 for the reorganization plan. Hearing Innovations filed for relief
under Chapter 11 of the U.S. Bankruptcy Code in September 2004. The petition
was
approved and the Company now owns 100% of the outstanding common stock in
Hearing Innovations.
Focus
Surgery, Inc.
On
May 3,
1999, the Company invested $3,050,000 to obtain an approximately 20% equity
interest in Focus, a privately-held technology company and representation on
its
Board of Directors. Additionally, the Company has options and warrants to
purchase an additional 5% of the equity of Focus. 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 treatment of both benign
and cancerous tumors of the breast, liver and kidney and the right of first
refusal to purchase 51% of the equity of Focus. The Company’s portion of the net
losses of Focus were recorded since the date of acquisition. During fiscal
2001,
the Company evaluated the investment with respect to the financial performance
and the achievement of specific targets and goals and determined that the equity
investment was impaired and therefore the Company recorded an impairment loss
in
the amount of $1,916,398. The net carrying value of the investment at June
30,
2006 and 2005 is $0. Under the equity method of accounting, if the equity
investment was ever deemed not impaired, the Company would have to record its
share of Focus’ losses since 2001 before the Company can record income from
Focus. Focus’ unaudited net loss in fiscal year 2006 was $44,000. The Company
will start to record its share of Focus’ income when Focus’ income is greater
than the net losses from fiscal year 2002 through fiscal 2005, which aggregated
to approximately $1,949,000.
On
November 7, 2000, the Company purchased a $300,000, 5.1% Secured Cumulative
Convertible Debenture from Focus, due December 22, 2002 (the “5.1% Focus
Debenture”). The 5.1% Focus Debenture is convertible into 250 shares of Focus
preferred stock at the option of the Company at any time after December 22,
2000
for two years at a conversion price of $1,200 per share, if the 5.1% Focus
Debenture is not retired by Focus. Interest accrues and is payable at maturity
or is convertible on the same terms as the 5.1% Focus Debenture’s principal
amount. The 5.1% Focus Debenture is secured by a lien on all of Focus’ 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 5.1% Focus Debenture. The Company recorded an
allowance against the entire balance of principal and accrued interest due
in
fiscal 2001. The 5.1% Focus Debenture is currently in default and the Company
is
negotiating an extended due date and conversion right. The Company believes
the
loan is impaired since the Company does not anticipate the 5.1% Focus Debenture
will be satisfied in accordance with the contractual terms of the loan
agreement.
On
April
12, 2001, the Company purchased a $300,000, 6% Secured Cumulative Convertible
Debenture from Focus, due May 25, 2003 (the “6% Focus Debenture”). The 6% Focus
Debenture is convertible into 250 shares of Focus preferred stock at the option
of the Company at any time after May 25, 2003 for two years at a conversion
price of $1,200 per share, if the 6% Focus Debenture is not retired by Focus.
Interest accrues and is payable at maturity, or is convertible on the same
terms
as the 6% Focus Debenture’s principal amount. The 6% Focus Debenture is secured
by a lien on all of Focus’ 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 6% Focus
Debenture. The Company recorded an allowance against the entire balance of
principal and accrued interest due in fiscal 2001. The 6% Focus Debenture is
currently in default and the Company is negotiating an extended due date and
conversion right. The Company believes the loan is impaired since the Company
does not anticipate the 6% Focus Debenture will be satisfied in accordance
with
the contractual terms of the loan agreement.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
On
July
31, 2001, the Company purchased a second $300,000, 6% Secured Cumulative
Convertible Debenture from Focus, due May 25, 2003 (the “Focus Debenture”). The
Focus Debenture is convertible into 250 shares of Focus preferred stock at
the
option of the Company at any time after the due date for two years at a
conversion price of $1,200 per share. The Focus Debenture also contains
warrants, deemed nominal in value, to purchase an additional 125 shares to
be
exercised at the option of the Company. 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’ right, title
and interest in accounts receivable, inventory, property, plant and equipment
and processes of specified products whether now existing or arising after the
date of the Focus Debenture. The Company recorded an allowance against the
entire balance of principal and accrued interest due in fiscal 2002. The Focus
Debenture is currently in default and the Company is negotiating an extended
due
date and conversion right. The Company believes the loan is impaired since
the
Company does not anticipate the Focus Debenture will be satisfied in accordance
with the contractual terms of the loan agreement.
During
fiscal 2002, the Company entered into a loan agreement whereby Focus borrowed
$60,000 from the Company. This loan matured on May 30, 2002 and was extended
to
December 31, 2002. The loan bears interest at 6% per annum and contains
warrants, which are deemed nominal in value, to acquire additional shares.
The
loan is secured by a lien on all of Focus’ right, title and interest in accounts
receivable, inventory, property, plant and equipment and processes of specified
products whether now existing or arising after the date of the loan. The Company
recorded an allowance against the entire balance at June 30, 2004 and 2003.
The
loan is currently in default and the Company is negotiating an extended due
date. The Company believes that this loan is impaired since the Company does
not
anticipate that this loan will be paid in accordance with the contractual terms
of the loan agreement.
In
May
2004, the Company’s ownership was reduced to 13% due to additional preferred
stock issued by Focus.
If
the
Company were to convert the 5.1% Focus Debenture, 6% Focus Debenture and Focus
Debenture, and exercise all warrants, the Company would hold an interest in
Focus of approximately 18%.
The
Company has subcontracted Focus to perform research and development activities
for which the Company paid $165,000, $452,000 and $155,000 to Focus in fiscal
2006, 2005 and 2004, respectively, which is recorded as research and development
expenses in the accompanying statement of operations. During
fiscal 2004, Focus entered into an exclusive agreement with the Company to
distribute the Sonoblate® 500 in the European market. The Company has purchased
approximately $830,000, $715,000 and $199,000 of product from Focus during
fiscal 2006, 2005, and 2004 respectively. Total sales to Focus were
approximately $459,000, $702,000 and $1,151,000 for the fiscal years ended
June
30, 2006, 2005 and 2004, respectively. Trade accounts receivable due from Focus
at June 30, 2006 and 2005 were approximately $56,000 and $188,000, respectively.
Accounts payable to Focus Surgery totaled $91,000 at June 30, 2006 and $280,000
at June 30, 2005.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
Summarized
unaudited financial information of Focus are as follows:
Condensed
Statement of Operations Information
|
|
Year
ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Sales
|
|
$
|
3,509,000
|
|
$
|
3,006,000
|
|
$
|
3,298,000
|
|
Gross
profit
|
|
|
2,080,000
|
|
|
1,991,000
|
|
|
2,115,000
|
|
Net
(loss)
|
|
$
|
(44,000
|
)
|
$
|
(188,000
|
)
|
$
|
(34,000
|
)
|
Condensed
Balance Sheet Information
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
Current
assets
|
|
$
|
1,253,000
|
|
$
|
853,000
|
|
Non-current
assets
|
|
|
487,000
|
|
|
412,000
|
|
Current
liabilities
|
|
|
1,432,000
|
|
|
3,341,000
|
|
Non-current
liabilities
|
|
|
4,186,000
|
|
|
1,791,000
|
|
Preferred
stock
|
|
|
4,039,000
|
|
|
4,039,000
|
|
Common
stockholders’ deficit
|
|
$
|
(7,917,000
|
)
|
$
|
(7,873,000
|
)
|
3.
Inventories
Inventories
are summarized as follows:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
Raw
materials
|
|
$
|
5,702,171
|
|
$
|
5,303,581
|
|
Work-in-process
|
|
|
2,250,826
|
|
|
1,643,835
|
|
Finished
goods
|
|
|
5,456,684
|
|
|
4,767,603
|
|
|
|
$
|
13,409,681
|
|
$
|
11,715,019
|
|
Less:
valuation reserve
|
|
|
2,102,455
|
|
|
1,934,518
|
|
|
|
$
|
11,307,226
|
|
$
|
9,780,501
|
|
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
4.
Property, Plant and Equipment
Property,
plant and equipment consist of the following:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
Buildings
|
|
$
|
1,986,947
|
|
$
|
1,974,366
|
|
Machinery
and equipment
|
|
|
4,637,864
|
|
|
3,404,385
|
|
Furniture
and fixtures
|
|
|
1,560,662
|
|
|
1,401,301
|
|
Automobiles
|
|
|
1,047,718
|
|
|
1,114,408
|
|
Leasehold
improvements
|
|
|
784,097
|
|
|
396,930
|
|
Demonstration
and consignment inventory
|
|
|
1,929,725
|
|
|
2,965,112
|
|
|
|
|
11,947,013 |
|
|
11,256,502 |
|
Less:
accumulated depreciation and
amortization
|
|
|
5,451,159
|
|
|
4,846,667
|
|
|
|
$
|
6,495,854
|
|
$
|
6,409,835
|
|
Included
in machinery and equipment and furniture and fixtures at June 30, 2006 and
2005
are approximately $167,000 and $171,000, respectively, of data processing
equipment and telephone equipment under capital leases with related accumulated
amortization of approximately $130,000 and $68,000, respectively. Also, included
in automobiles are approximately $823,000 and $798,000, respectively, of
automobiles under capital leases with accumulated amortization of approximately
$233,000 and $196,000, respectively. The Company leased approximately $517,000,
$454,000 and $321,000 of automobiles and equipment under capital lease
arrangements during the years ended June 30, 2006, 2005 and 2004,
respectively.
Depreciation
and amortization of property, plant and equipment amounted to $1,283,747,
$795,288 and $699,811 for the years ended June 30, 2006, 2005 and 2004,
respectively.
5.
Revolving Credit Facilities
Labcaire
has a debt purchase agreement with Lloyds TSB Commercial Finance. The amount
of
this facility bears interest at the bank’s base rate (4.5% and 5.25% at June 30,
2006 and 2005, respectively) plus 1.75% and a service charge of .15% of sales
invoice value and fluctuates based upon the outstanding United Kingdom and
European receivables. The agreement expires on September 30, 2006 and covers
all
United Kingdom and European sales. At June 30, 2006, the balance outstanding
under this loan facility was approximately $1,333,000 and Labcaire was in
compliance with all financial covenants.
The
Company renewed and increased its revolving credit facility with Bank of America
in February, 2005 from $5 million to $6 million to support future working
capital needs. The credit line was decreased to $2.5 million in May 2006 and
$2.0 million in September 2006. The revolving credit facility has variable
rate based on prime plus 2.0%. This facility is secured by the assets of the
Company. The terms provide for the repayment of the debt in full on its maturity
date. The Company was not in compliance with loan covenants at June 30, 2006
and
received a waiver from Bank of America for such non-compliance.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
6.
Debt
On
January 22, 1999, Labcaire purchased a manufacturing facility in North Somerset,
England to house its operations. The purchase price was approximately $2,100,000
and was partially financed with a mortgage loan of $1,283,256. On July 1, 2002,
Labcaire transferred its mortgage loan on their facility to Lloyds TSB from
HSBC
Bank plc. The property loan of £670,000 is repayable over 180 months with
interest at base rate (4.50% at June 30, 2006) plus 1.75% and is collateralized
by a security interest in certain assets of Labcaire. As of June 30, 2006 and
2005, $995,926 and $1,050,108 were outstanding on this loan,
respectively.
At
June
30, 2006, future principal maturities of long-term debt are as
follows:
2007
|
$
59,938
|
2008
|
63,570
|
2009
|
69,019
|
2010
|
72,652
|
2011
|
76,285
|
Thereafter
|
654,462
|
|
$995,926
|
7.
Accrued Expenses and Other Current Liabilities
The
following summarizes accrued expenses and other current
liabilities:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Accrued
payroll and vacation
|
|
$
|
549,933
|
|
$
|
356,850
|
|
Accrued
VAT and sales tax
|
|
|
94,813
|
|
|
246,170
|
|
Accrued
commissions and bonuses
|
|
|
446,165
|
|
|
255,400
|
|
Customer
deposits and current deferred contracts
|
|
|
870,760
|
|
|
1,121,741
|
|
Accrued
professional and legal fees
|
|
|
208,650
|
|
|
226,235
|
|
Litigation
expense
|
|
|
419,000
|
|
|
419,000
|
|
Other
|
|
|
374,441
|
|
|
275,851
|
|
|
|
$
|
2,963,762
|
|
$
|
2,901,247
|
|
8.
Leases
Misonix
has entered into several noncancellable operating leases for the rental of
certain office space, equipment and automobiles expiring in various years
through 2011. The principal leases for office space provide for a monthly rental
amount of approximately $65,000. The Company also leases certain office
equipment and automobiles under capital leases expiring through fiscal
2009.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
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, 2006:
|
|
Capital
|
|
Operating
|
|
|
|
Leases
|
|
Leases
|
|
2007
|
|
$
|
354,000
|
|
$
|
812,000
|
|
2008
|
|
|
193,000
|
|
|
835,000
|
|
2009
|
|
|
43,000
|
|
|
845,000
|
|
2010
|
|
|
14,000
|
|
|
859,000
|
|
2011
|
|
|
¾
|
|
|
350,000
|
|
Total
minimum lease payments
|
|
|
604,000
|
|
$
|
3,701,000
|
|
|
|
|
|
|
|
|
|
Amounts
representing interest
|
|
|
(87,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Present
value of net minimum lease payments
|
|
|
|
|
|
|
|
(including
current portion of $308,000)
|
|
$
|
517,000
|
|
|
|
|
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 $1,148,000, $882,000 and $788,000 for the years ended June 30,
2006, 2005 and 2004, respectively.
9.
Stock Based Compensation Plans
Prior
to
July 1, 2005, the Company accounted for stock option plans under Statement
of
Financial Accounting Standards (SFAS”) No. 123 (“SFAS No. 123”). As permitted
under this standard, compensation cost was recognized using the intrinsic value
method described in Accounting Principles Board Opinion No. 25 (APB 25”).
Effective July 1, 2005, the Company adopted the fair-value recognition
provisions of SFAS No. 123R (“SFAS No. 123R”) and Securities and Exchange
Commission Staff Accounting Bulletin No. 107 using the modified-prospective
transition method; therefore, prior periods have not been restated. Compensation
cost recognized in the year ended June 30, 2006 includes compensation cost
for
all share-based payments granted prior to, but not yet vested as of, July 1,
2005, based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123R.
Stock
options are granted with exercise prices not less than the fair market value
of
our common stock at the time of the grant, with an exercise term (as determined
by the Committee administering the applicable option plan (the “Committee”)) not
to exceed 10 years. The Committee determines the vesting period for the
Company’s stock options. Generally, such stock options have vesting periods of
immediate to four years. Certain option awards provide for accelerated vesting
upon meeting specific retirement, death or disability criteria, and upon change
of control During the years ended June 30, 2006 and 2005, the Company granted
options to purchase 89,560 and 293,500 share of the Company’s common stock,
respectively.
No
stock-based compensation cost related to stock options was recognized in the
statements of operations for the years ended June 30, 2005 and 2004 as all
options granted in these periods had an exercise price equal to the market
price
at the date of grant. As a result of adopting SFAS No. 123R, the Company’s loss
before income taxes and net loss for the year ended June 30, 2006 were
approximately $509,000 and $413,000 higher, respectively, than if we had
continued to account for stock-based compensation under APB No. 25. Compensation
expense is recognized in the general and administrative expenses line item
of
the Company’s statements of operations on a straight-line basis over the vesting
periods. There are no capitalized stock-based compensation costs at June 30,
2006 and 2005. Basic and dilutive loss per share for the year ended June 30,
2006 would have been ($.48) if the Company had not adopted SFAS No. 123R,
compared to the reported basic and dilutive loss per share of ($.55). As of
June
30, 2006, there was approximately $267,000 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements to be
recognized over a weighted-average period of 2.5 years.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
The
total
cash received from the exercise of stock options was $381,513 and $349,117
for
the years ended June 30, 2006 and 2005, respectively, and are classified as
financing cash flows. SFAS No. 123R required that cash flows from tax benefits
attributable to tax deductions in excess of the compensation cost recognized
for
those options (excess tax benefits) be classified as financing cash
flows.
The
table
below presents the pro-forma effect on net income and basic and diluted loss
per
share if the Company had applied the fair value recognition provision to options
granted under its stock option plans for the years ended June 30, 2005 and
2004.
For purposes of this pro forma disclosure, the value of the options is estimated
using the Black-Scholes option-pricing model and amortized to expense over
the
options’ vesting periods.
|
|
2005
|
|
2004
|
|
Net
income - As reported:
|
|
$
|
935,705
|
|
$
|
1,718,945
|
|
Stock
based compensation
determined
under SFAS 123
|
|
|
(1,163,462
|
)
|
|
(635,024
|
)
|
Net
(loss) income - Pro forma:
|
|
$
|
(227,757
|
)
|
$
|
1,083,921
|
|
Net
income (loss) per share -
Basic:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
.14
|
|
$
|
.26
|
|
Pro
forma
|
|
$
|
(.03
|
)
|
$
|
.16
|
|
Net
income (loss) per share -
Diluted:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
.13
|
|
$
|
.25
|
|
Pro
forma
|
|
$
|
(.03
|
)
|
$
|
.16
|
|
The
weighted average fair value at date of grant for options granted during the
years ended June 30, 2006, 2005 and 2004 was $3.82, $3.56 and $2.64 per option,
respectively. The fair value of options at date of grant was estimated using
the
Black-Scholes option-pricing model utilizing the following
assumptions:
|
|
2006
|
|
2005
|
|
2004
|
|
Risk-free
interest rates |
|
|
4.43 |
|
|
3.50%
- 4.04 |
% |
|
2.50%
- 2.58 |
% |
Expected
option
life
in years |
|
|
5-7 |
|
|
5 |
|
|
5 |
|
Expected
stock price volatility |
|
|
54.7 |
% |
|
73-100 |
% |
|
100 |
% |
Expected
dividend yield |
|
|
-0- |
|
|
-0- |
|
|
-0- |
|
During
fiscal 2005, the Company accelerated the vesting of all unvested stock options
awarded to employees and officers which had an exercise price greater than
$8.00
per share. Options to purchase 101,000 shares became exercisable immediately
as
a result of the vesting acceleration. The Company sought to balance the benefit
of eliminating the requirement to recognize compensation expense in future
periods with the need to continue to motivate employee performance through
previously issued, but currently unvested, stock option grants. With those
factors being considered, management determined it to be appropriate to
accelerate only those unvested stock options where the strike price was
reasonably in excess of the Company’s then current stock price.
The
effect of the acceleration was an increase in pro-forma stock based employee
compensation expense for the year ended June 30, 2005 of approximately $300,000,
net of taxes ($.04 per basic and diluted share). As the Company adopted SFAS
123R, “Share-Based Payment,” in the first quarter of fiscal 2006, the decision
to accelerate the identified stock options reduced the Company’s share-based
compensation, net of taxes by approximately $137,000 in fiscal 2006 and fiscal
2007 and $16,000 in fiscal 2008.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
In
September 1991, in order to attract and retain persons necessary for the
success
of the Company, the Company adopted a stock option plan (the "1991 Plan")
which
covers up to 375,000 shares of Common Stock. Pursuant to the 1991 Plan,
officers, Directors, consultants and key employees of the Company are eligible
to receive incentive and/or non-incentive stock options. At June 30, 2006,
options to purchase 30,000 shares were outstanding under the 1991 Plan
at an
exercise price of $7.38 per share with a vesting period of two years, options
to
purchase 327,750 shares had been exercised and options to purchase 47,250
shares
have been forfeited (of which options to purchase 30,000 shares were reissued)
prior to July 1, 2005 and no shares remain available for future
granting.
In
March
1996, the Board of Directors adopted and, in February 1997, the shareholders
approved the 1996 Employee Incentive Stock Option Plan covering an aggregate
of
450,000 shares (the “1996 Plan”) and the 1996 Non-Employee Director Stock Option
Plan (the “1996 Directors Plan”) covering an aggregate of 1,125,000 shares of
Common Stock. At June 30, 2006, options to purchase 311,150 shares were
outstanding at exercise prices ranging from $3.07 to $18.50 per share with
a
vesting period of immediate to two years under the 1996 Plan and options to
acquire 250,000 shares were outstanding at exercise prices ranging from $.73
to
$7.60 per share with a vesting period of immediate to three years under the
1996
Directors Plan. At June 30, 2006, options to purchase 138,295 shares under
the
1996 Plan have been exercised and 183,500 shares have been forfeited (of which
options to purchase 182,945 shares have been reissued). At June 30, 2006,
options to purchase 733,500 shares under the 1996 Directors Plan have been
exercised, options to purchase 90,000 shares have been forfeited (of which
none
have been reissued) and no shares remain available for future
granting.
In
October 1998, the Board of Directors adopted and, in January 1999, the
shareholders approved the 1998 Employee Stock Option Plan (the “1998 Plan”)
covering an aggregate of 500,000 shares of Common Stock. At June 30, 2006,
options to purchase 422,525 shares were outstanding under the 1998 Plan at
exercise prices ranging from $3.07 to $7.60 per share with a vesting period
of
immediate to three years. At June 30, 2006, options to purchase 52,848 shares
under the 1998 Plan have been exercised and options to purchase 96,552 shares
under the 1998 Plan have been forfeited (of which options to purchase 71,925
shares have been reissued).
In
October 2000, the Board of Directors adopted and, in February 2001, the
shareholders approved the 2001 Employee Stock Option Plan (the “2001 Plan”)
covering an aggregate of 1,000,000 shares of Common Stock. At June 30, 2006,
options to purchase 824,298 shares were outstanding under the 2001 Plan at
exercise prices ranging from $4.66 to $8.00 per share with a vesting period
of
one to four years. At June 30, 2006, options to purchase 128,306 shares under
the 2001 Plan have been exercised and options to purchase 151,902 shares under
the 2001 Plan have been forfeited (of which 104,506 options have been
reissued).
In
September 2005, the Board of Directors adopted and in December, 2005, the
shareholders approved the 2005 Employee Equity Incentive Plan covering an
aggregate of 500,000 shares of Common Stock and the 2005 Non-Employee Director
Option Plan covering an aggregate of 200,000 shares of Common Stock. At June
30,
2006, there were no options to purchase shares outstanding. The selection of
participants, allotments of shares and determination of price and other
conditions relating to options are determined by the Board of Directors or
a
committee thereof, depending on the Plan, and in accordance with Rule 4350(c)
of
the Qualitative Listing Requirements of the Nasdaq Stock Market. Incentive
stock
options granted under the plans are exercisable for a period of up to ten years
from the date of grant at an exercise price which is not less than the fair
market value of the Common Stock on the date of the grant, except that the term
of an incentive stock option granted under the plans to a shareholder owning
more than 10% of the outstanding Common Stock may not exceed five years and
its
exercise price may not be less than 110% of the fair market value of the Common
Stock on the date of grant. Options shall become exercisable at such time and
in
such installments as provided in the terms of each individual option
agreement.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
The
following table summarizes information about stock options outstanding at June
30, 2006, 2005 and 2004:
|
|
|
|
|
|
Options
|
|
|
|
Shares
|
|
Weighted
Avg.
Exercise
Price
|
|
Weighted
Avg. Remaining Contractual Life in Years
|
|
June
30, 2003
|
|
|
1,609,511
|
|
$
|
5.65
|
|
|
|
|
Granted
|
|
|
295,000
|
|
|
4.73
|
|
|
|
|
Exercised
|
|
|
(82,588
|
)
|
|
4.90
|
|
|
|
|
Forfeited
|
|
|
(31,683
|
)
|
|
5.91
|
|
|
|
|
June
30, 2004
|
|
|
1,790,240
|
|
$
|
5.53
|
|
|
|
|
Granted
|
|
|
293,500
|
|
|
6.37
|
|
|
|
|
Exercised
|
|
|
(86,499
|
)
|
|
4.04
|
|
|
|
|
Forfeited
|
|
|
(89,166
|
)
|
|
6.75
|
|
|
|
|
June
30, 2005
|
|
|
1,908,075
|
|
$
|
5.66
|
|
|
|
|
Granted
|
|
|
89,560
|
|
|
7.19
|
|
|
|
|
Exercised
|
|
|
(75,417
|
)
|
|
5.06
|
|
|
|
|
Forfeited
|
|
|
(84,245
|
)
|
|
6.62
|
|
|
|
|
June
30, 2006
|
|
|
1,837,973
|
|
$
|
5.72
|
|
|
5.7
|
|
Options
exercisable at June
30, 2006
|
|
|
1,694,869
|
|
$
|
5.63
|
|
|
4.9
|
|
The
following table summarizes information about stock options outstanding at June
30, 2006:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of
Exercise
Price
|
|
Number
|
|
Contractual
Life (Yrs)
|
|
Weighted
Average
Exercise
Price
|
|
Number
|
|
Weighted
Average
Exercise
Price
|
|
$
.73
|
|
|
75,000
|
|
|
1
|
|
$
|
.73
|
|
|
75,000
|
|
$
|
.73
|
|
$
3.07 - 4.99
|
|
|
313,500
|
|
|
7
|
|
$
|
4.26
|
|
|
286,833
|
|
$
|
4.22
|
|
$
5.06 - 8.00
|
|
|
1,424,473
|
|
|
10
|
|
$
|
6.15
|
|
|
1,308,036
|
|
$
|
6.05
|
|
$
12.33 - 18.50
|
|
|
25,000
|
|
|
1
|
|
$
|
14.80
|
|
|
25,000
|
|
$
|
14.80
|
|
|
|
|
1,837,973
|
|
|
|
|
$
|
5.72
|
|
|
1,694,869
|
|
$
|
5.63
|
|
As
of
June 30, 2006 and 2005, 1,837,973 and 1,908,075 shares are reserved for issuance
under outstanding options and 772,578 and 219,393 shares are reserved for the
granting of additional options, respectively. All outstanding options expire
between July 2006 and January 2014 and vest immediately or over periods of
up to
four years.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
10.
Commitments and
Contingencies
Legal
Proceedings
A
jury in
the District Court of Boulder County, Colorado has returned a verdict against
Sonora Medical Systems in the amount of $419,000 which was recorded by the
Company during the fourth quarter of fiscal 2005. The case involved royalties
claimed on recoating of transesophogeal probes, which is a process performed
by
Sonora. Approximately 80% of the judgment was based on the jury estimate of
royalties for potential sales of the product in the future. Sonora has moved
for
judgment notwithstanding the verdict based on, among other things, the award
of
damages for future royalties. Sonora has also moved for a new trial in the
case.
The
Company is a defendant in claims and lawsuits arising in the ordinary course
of
business. The Company believes that it has meritorious defenses to such claims
and lawsuits and is vigorously contesting them. Although the outcome of
litigation cannot be predicted with certainty, the Company believes that these
actions will not have a material adverse effect on the Company’s consolidated
financial position or results of operations.
Employment
Agreement
In
October 2004, the Company entered into an employment agreement with its
President and Chief Executive Officer which expires on October 31, 2005 and
is
automatically renewable for one-year periods unless notice is given by the
Company or Mr. McManus that it or he declines to renew the agreement. This
agreement provides for an annual base compensation of $275,000 and a Company
provided automobile. The agreement also provides for a discretionary bonus
based
on the Company’s pre-tax operating earnings, based on a calendar
year.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
11.
Business Segments
The
Company operates in two business segments which are organized by product types:
laboratory and scientific products and medical devices. Laboratory and
scientific products include the Sonicator ultrasonic liquid processor, Aura
ductless fume enclosure, the Labcaire Autoscope and Guardian endoscope
disinfectant systems and the Mystaire wet scrubber. Medical devices include
the
Auto Sonix ultrasonic cutting and coagulatory system, refurbishing revenues
of
high-performance ultrasound systems and replacement transducers for the medical
diagnostic ultrasound industry, ultrasonic lithotriptor, ultrasonic
neuroaspirator (used for neurosurgery) and soft tissue aspirator (used primarily
for the cosmetic surgery market). The
Company evaluates the performance of the segments based upon income from
operations less general and administrative expenses and litigation (recovery)
settlement expenses, which are maintained at the corporate headquarters
(corporate). The Company does not allocate assets by segment as such information
is not provided to the chief operating decision maker. Summarized financial
information for each of the segments for the years ended June 30, 2006, 2005
and
2004 are as follows:
For
the
year ended June 30, 2006:
|
|
Medical
Devices
|
|
Laboratory
and
Scientific
Products
|
|
Corporate
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
20,732,052
|
|
$
|
18,335,241
|
|
$
|
-
|
|
$
|
39,067,293
|
|
Cost
of goods sold
|
|
|
12,456,746
|
|
|
12,337,537
|
|
|
-
|
|
|
24,794,283
|
|
Gross
profit
|
|
|
8,275,306
|
|
|
5,997,704
|
|
|
-
|
|
|
14,273,010
|
|
Selling
expenses
|
|
|
4,543,079
|
|
|
2,465,076
|
|
|
-
|
|
|
7,008,155
|
|
Research
and development
|
|
|
2,200,380
|
|
|
1,427,022
|
|
|
-
|
|
|
3,627,402
|
|
General
and administrative
|
|
|
-
|
|
|
-
|
|
|
10,211,492
|
|
|
10,211,492
|
|
Total
operating expenses
|
|
|
6,743,459
|
|
|
3,892,098
|
|
|
10,211,492
|
|
|
20,847,049
|
|
Income
(loss) from operations
|
|
$
|
1,531,847
|
|
$
|
2,105,606
|
|
$
|
(10,211,492
|
)
|
|
($6,574,039
|
)
|
For
the
year ended June 30, 2005:
|
|
Medical
Devices
|
|
Laboratory
and
Scientific
Products
|
|
Corporate
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
24,842,549
|
|
$
|
21,064,035
|
|
$
|
-
|
|
$
|
45,906,584
|
|
Cost
of goods sold
|
|
|
13,787,186
|
|
|
13,082,050
|
|
|
-
|
|
|
26,869,236
|
|
Gross
profit
|
|
|
11,055,363
|
|
|
7,981,985
|
|
|
-
|
|
|
19,037,348
|
|
Selling
expenses
|
|
|
3,164,535
|
|
|
2,946,181
|
|
|
-
|
|
|
6,110,716
|
|
Research
and development
|
|
|
2,437,466
|
|
|
1,048,597
|
|
|
-
|
|
|
3,486,063
|
|
General
and administrative
|
|
|
-
|
|
|
-
|
|
|
8,881,228
|
|
|
8,881,228
|
|
Total
operating expenses
|
|
|
5,602,001
|
|
|
3,994,778
|
|
|
8,881,228
|
|
|
18,478,007
|
|
Income
from operations
|
|
$
|
5,453,362
|
|
$
|
3,987,207
|
|
$
|
(8,881,228
|
)
|
$
|
559,341
|
|
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
For
the
year ended June 30, 2004:
|
|
Medical
Devices
|
|
Laboratory
and
Scientific
Products
|
|
Corporate
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
21,350,846
|
|
$
|
17,708,220
|
|
$
|
-
|
|
$
|
39,059,066
|
|
Cost
of goods sold
|
|
|
11,879,237
|
|
|
10,663,226
|
|
|
-
|
|
|
22,542,463
|
|
Gross
profit
|
|
|
9,471,609
|
|
|
7,044,994
|
|
|
-
|
|
|
16,516,603
|
|
Selling
expenses
|
|
|
2,150,482
|
|
|
2,511,524
|
|
|
-
|
|
|
4,662,006
|
|
Research
and development
|
|
|
1,580,909
|
|
|
856,843
|
|
|
-
|
|
|
2,437,752
|
|
General
and administrative
|
|
|
-
|
|
|
-
|
|
|
7,633,930
|
|
|
7,633,930
|
|
Total
operating expenses
|
|
|
3,731,391
|
|
|
3,368,367
|
|
|
7,633,930
|
|
|
14,733,688
|
|
Income
from operations
|
|
$
|
5,740,218
|
|
$
|
3,676,627
|
|
$
|
(7,633,930
|
)
|
$
|
1,782,915
|
|
There
are
two major customers for medical devices. Sales to USS were approximately
$4,461,000, $5,778,000 and $7,198,000 for the years ended June 30, 2006, 2005
and 2004, respectively. Sales to Byron Medical were approximately $1,195,000,
$2,375,000 and $1,732,000 during the fiscal years ended June 30, 2006, 2005
and
2004, respectively. There were no significant concentrations of sales or
accounts receivable for laboratory and scientific products for the years ended
June 30, 2006, 2005 and 2004, respectively.
The
Company’s revenues are generated from various geographic regions. The following
is an analysis of net sales by geographic region:
|
|
Year
ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
24,765,213
|
|
$
|
29,054,094
|
|
$
|
25,261,159
|
|
Canada
and Mexico
|
|
|
640,009
|
|
|
864,878
|
|
|
795,475
|
|
United
Kingdom
|
|
|
9,256,592
|
|
|
11,293,506
|
|
|
9,509,301
|
|
Europe
|
|
|
2,210,668
|
|
|
2,823,169
|
|
|
1,502,776
|
|
Asia
|
|
|
1,268,799
|
|
|
899,274
|
|
|
1,037,553
|
|
Middle
East
|
|
|
307,810
|
|
|
279,514
|
|
|
325,365
|
|
Other
|
|
|
618,202
|
|
|
692,149
|
|
|
627,437
|
|
|
|
$
|
39,067,293
|
|
$
|
45,906,584
|
|
$
|
39,059,066
|
|
Total
assets, by geographic area, at June 30, are as follows:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
United
States
|
|
$
|
24,255,981
|
|
$
|
26,750,834
|
|
United
Kingdom
|
|
|
10,256,584
|
|
|
11,335,102
|
|
|
|
$
|
34,512,565
|
|
$
|
38,085,936
|
|
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
12.
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.
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and liabilities are presented below:
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
(282,455
|
)
|
$
|
(270,884
|
)
|
Total
deferred tax liabilities
|
|
|
(282,455
|
)
|
|
(270,884
|
)
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Bad
debt reserves
|
|
|
85,417
|
|
|
129,297
|
|
Accruals
and allowances
|
|
|
202,142
|
|
|
14,311
|
|
Inventory
valuation
|
|
|
691,171
|
|
|
666,019
|
|
License
fee income
|
|
|
85,958
|
|
|
106,665
|
|
Investments
|
|
|
1,697,856
|
|
|
2,587,622
|
|
Stock-based
compensation
|
|
|
258,570
|
|
|
183,105
|
|
Litigation
|
|
|
149,164
|
|
|
150,840
|
|
Tax
Credits and net operating loss
carry
forwards
|
|
|
2,278,855
|
|
|
159,962
|
|
Deferred
lease liability
|
|
|
72,888
|
|
|
-
|
|
Other
|
|
|
9,684
|
|
|
3,958
|
|
Total
deferred tax assets
|
|
|
5,531,705
|
|
|
4,001,779
|
|
Valuation
allowance
|
|
|
(3,071,932
|
)
|
|
(2,792,584
|
)
|
Net
deferred tax asset
|
|
$
|
2,177,318
|
|
$
|
938,311
|
|
|
|
|
|
|
|
|
|
Recorded
as:
|
|
|
|
|
|
|
|
Current
deferred tax asset
|
|
$
|
1,419,949
|
|
$
|
964,426
|
|
Non-current
deferred tax asset
|
|
|
1,039,824
|
|
|
244,769
|
|
Non-current
deferred tax liability
|
|
|
(282,455
|
)
|
|
(270,884
|
)
|
|
|
$
|
2,177,318
|
|
$
|
938,311
|
|
As
of
June 30, 2006, the valuation allowance was determined by estimating the
recoverability of the deferred tax assets. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. In
making this assessment, the ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income and tax planning
strategies in making this assessment. Based on the level of historical income
and projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences, net
of
the existing valuation allowances at June 30, 2006. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term
if
estimates of future taxable income during the carryforward periods are not
realized.
At
June
30, 2006, the Company had a net operating loss carryforward (“NOL”) of
approximately $9,100,000 available to reduce future New York state taxable
income. This NOL begins to expire in fiscal year 2022.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
In
prior
years, the Company recorded a deferred tax asset in connection with the
loss on
impairment of equity investments which included the carrying value of the
investments and related notes and debentures. The deferred tax asset related
to
this impairment of equity investments totaled $1,697,856 and $2,587,622
at June
30, 2006 and 2005, respectively. In addition, during fiscal 2006, the Company
recorded a deferred tax asset related to operating loss carryovers incurred
by
its wholly-owned subsidiary Hearing Innovations in the amount of $1,337,743.
The
Company recorded a full valuation allowance against these assets in accordance
with the provisions of SFAS No. 109. Based upon the capital nature of the
deferred tax asset and the Company’s projections for future capital gains in
which the deferred tax asset would be deductible, management did not deem
it
more likely than not that the asset would be recoverable at June 30, 2006
and
2005.
Significant
components of the income tax expense (benefit) attributable to operations for
the years ended June 30 are as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,112,327
|
)
|
$
|
185,410
|
|
$
|
801,297
|
|
State
|
|
|
10,000
|
|
|
46,000
|
|
|
27,635
|
|
Foreign
|
|
|
35,131
|
|
|
(57,942
|
)
|
|
(42,964
|
)
|
Total
current
|
|
|
(1,067,196
|
)
|
|
173,468
|
|
|
785,968
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(816,918
|
)
|
|
74,487
|
|
|
206,307
|
|
State
|
|
|
(7,472
|
)
|
|
21,006
|
|
|
76,381
|
|
Foreign
|
|
|
(382,713
|
)
|
|
23,778
|
|
|
-
|
|
Total
deferred
|
|
|
(1,207,103
|
)
|
|
119,271
|
|
|
282,688
|
|
|
|
$
|
(2,274,299
|
)
|
$
|
292,739
|
|
$
|
1,068,656
|
|
The
reconciliation of income tax expense (benefit) computed at the Federal statutory
tax rates to income tax expense (benefit) for the periods ended June 30 is
as
follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Tax
at Federal statutory rates
|
|
$
|
(2,047,205
|
)
|
$
|
422,135
|
|
$
|
965,636
|
|
State
income taxes, net of
|
|
|
|
|
|
|
|
|
|
|
Federal
benefit
|
|
|
(872
|
)
|
|
30,360
|
|
|
68,651
|
|
Research
credit
|
|
|
(5,877
|
)
|
|
(116,000
|
)
|
|
-
|
|
Extraterritorial
income exclusion
|
|
|
25,149
|
|
|
(61,540
|
)
|
|
-
|
|
Foreign
taxes
|
|
|
125,130
|
|
|
(30,181
|
)
|
|
(20,760
|
)
|
Stock-based
compensation
|
|
|
74,270
|
|
|
-
|
|
|
-
|
|
State
rate adjustment
|
|
|
53,918
|
|
|
-
|
|
|
-
|
|
Valuation
allowance
|
|
|
(629,560
|
)
|
|
-
|
|
|
8,862
|
|
Travel
and entertainment
|
|
|
18,199
|
|
|
6,971
|
|
|
6,524
|
|
Other
|
|
|
112,549
|
|
|
40,994
|
|
|
39,743
|
|
|
|
$
|
(2,274,299
|
)
|
$
|
292,739
|
|
$
|
1,068,656
|
|
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
13.
Licensing Agreements for Medical Technology
In
October 1996, the Company entered into a License Agreement (the “USS License”)
with 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 worldwide 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. Total royalties from sales of this device
were
approximately $810,000 and $940,000 for the fiscal years ended June 30, 2006
and
2005, respectively. Also as part of the USS License, the Company was reimbursed
for certain product development expenditures (as defined in the USS License).
The amount of reimbursement was $20,000 for the year ended June 30, 2004. There
was no reimbursement for the year ended June 30, 2006 and 2005.
In
June
2002, the Company entered into a ten-year worldwide, royalty-free, distribution
agreement with Byron Medical, Inc. for the sale, marketing and distribution
of
the Lysonix 2000 soft tissue aspirator used for cosmetic surgery. This agreement
is a standard agreement for such distribution in that it specifies the product
to be distributed, the terms of the agreement and the price to be paid for
product covered under the agreement.
14.
Employee Profit Sharing Plan
The
Company sponsors a retirement plan pursuant to Section 401(k) of the Internal
Revenue Code of 1986, as amended, for all full time employees. Participants
may
contribute a percentage of compensation not to exceed the maximum allowed under
the Code, which was $14,000 or $18,000 if the employee was over 50 years of
age
for the year ended June 30, 2006. The plan provides for a matching contribution
by the Company of 10%-25% of annual eligible compensation contributed by the
participants based on years of service, which amounted to $109,757, $104,904
and
$90,785 for the years ended June 30, 2006, 2005 and 2004,
respectively.
Misonix,
Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
June
30,
2006 and 2005
15. |
Quarterly
Results (unaudited)
|
|
|
FISCAL
2006
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
YEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
9,111,572
|
|
$
|
10,268,386
|
|
$
|
10,169,778
|
|
$
|
9,517,557
|
|
$
|
39,067,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,436,531
|
|
|
3,863,521
|
|
|
3,953,002
|
|
|
3,019,956
|
|
|
14,273,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
5,213,236
|
|
|
4,824,513
|
|
|
5,243,572
|
|
|
5,565,728
|
|
|
20,847,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,776,705
|
)
|
|
(960,992
|
)
|
|
(1,290,570
|
)
|
|
(2,545,772
|
)
|
|
(6,574,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
174,859
|
|
|
139,332
|
|
|
144,143
|
|
|
94,515
|
|
|
552,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in net income (loss) of consolidated subsidiaries
|
|
|
16,339
|
|
|
2,785
|
|
|
(6,465
|
)
|
|
(113
|
)
|
|
12,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) provision
|
|
|
(312,822
|
)
|
|
(317,340
|
)
|
|
(310,844
|
)
|
|
(1,333,293
|
)
|
|
(2,274,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
($1,305,363
|
)
|
|
($507,105
|
)
|
|
($829,118
|
)
|
$
|
(1,117,851
|
)
|
$
|
(3,759,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share-Basic
|
|
|
($
.19
|
)
|
|
($
.07
|
)
|
|
($
.12
|
)
|
|
($
.16
|
)
|
|
($
.55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share -Diluted
|
|
|
($
.19
|
)
|
|
($
.07
|
)
|
|
($
.12
|
)
|
|
($
.16
|
)
|
|
($
.55
|
)
|
|
|
FISCAL
2005
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
YEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
10,500,066
|
|
$
|
10,637,212
|
|
$
|
10,879,607
|
|
$
|
13,889,699
|
|
$
|
45,906,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,410,740
|
|
|
4,446,658
|
|
|
4,549,150
|
|
|
5,630,800
|
|
|
19,037,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
3,922,471
|
|
|
4,372,927
|
|
|
4,679,134
|
|
|
5,503,475
|
|
|
18,478,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
488,269
|
|
|
73,731
|
|
|
(129,984
|
)
|
|
127,325
|
|
|
559,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
203,339
|
|
|
150,554
|
|
|
195,111
|
|
|
133,229
|
|
|
682,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in net income (loss) of consolidated subsidiaries
|
|
|
15,439
|
|
|
11,807
|
|
|
29,083
|
|
|
(43,199
|
)
|
|
13,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
|
259,902
|
|
|
34,142
|
|
|
32,683
|
|
|
(33,988
|
)
|
|
292,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
416,267
|
|
$
|
178,336
|
|
$
|
3,361
|
|
$
|
337,741
|
|
$
|
935,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share-Basic
|
|
$
|
.06
|
|
$
|
.03
|
|
$
|
.00
|
|
$
|
.05
|
|
$
|
.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share -Diluted
|
|
$
|
.06
|
|
$
|
.03
|
|
$
|
.00
|
|
$
|
.05
|
|
$
|
.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule
II
MISONIX,
INC.
Valuation
and Qualifying Accounts
Years
ended June 30, 2006, 2005 and 2004
Column
A
Description
|
|
Column
B
Balance
at
Beginning
of
period
|
|
Column
C
Additions
(Recoveries) Charged (Credited)
to
cost and
expenses
|
|
Column
D
Additions
(deductions)-
describe
|
|
Column
E
Balance
at
end
of
period
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for
doubtful
accounts:
Year
ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
405,998
|
|
$
|
112,633
|
|
$
|
(262,322)
(A
|
)
|
$
|
256,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
457,016
|
|
$
|
25,171
|
|
$
|
(76,189)
(A
|
)
|
$
|
405,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
644,157
|
|
$
|
(112,420
|
)
|
$
|
(74,721)
(A
|
)
|
$
|
457,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance for deferred taxes:
Year
ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
2,792,584
|
|
$
|
1,337,743
|
|
$
|
(1,058,395)
(B
|
)
|
$
|
3,071,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
2,608,293
|
|
$
|
184,291
|
|
|
-
|
|
$
|
2,792,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
2,582,225
|
|
$
|
77,709
|
|
$
|
(51,641)
(B
|
)
|
$
|
2,608,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
Reduction
in allowance for doubtful accounts due to write-off of accounts receivable
balance.
|
(B) |
Reduction
in valuation allowance for deferred taxes with respect to the loss
on
impairment of equity investments and non-cash compensation as the
Company
expects to realize these tax
benefits.
|