UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30,2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to______
Commission file number: 1-10986
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MISONIX, INC.
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(Exact name of registrant as specified in its charter)
New York 11-2148932
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1938 New Highway, Farmingdale, New York 11735
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-9555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec.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 an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 15, 2003 (computed by reference to the average bid and
asked prices of such stock on such date) was approximately $28,886,454.
There were 6,655,865 shares of Common Stock outstanding at September 15, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
None
This Report on Form 10-K, and the Company's other periodic reports and other
documents incorporated by reference or incorporated herein as exhibits, may
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, general economic conditions, competition, technological
advances, claims or lawsuits, and the market's acceptance or non-acceptance of
the Company's products.
PART I
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ITEM 1. BUSINESS
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OVERVIEW
MISONIX, INC. ("Misonix" or the "Company") is a New York corporation, which,
through its predecessors, was first organized in 1959. The Company designs,
manufactures and markets ultrasonic medical devices. The Company also develops
and markets ultrasonic equipment for use in the scientific and industrial
markets, ductless fume enclosures for filtration of gaseous contaminates, and
environmental control products for the abatement of air pollution.
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 and marketing
air-handling systems for the protection of personnel, products and the
environment from airborne hazards.
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.
In fiscal 2003, approximately 35% of the Company's net sales were to foreign
markets. Labcaire, which acts as the European distributor of the Company's
industrial products and manufactures and sells the Company's fume enclosure line
as well as its own range of laboratory environmental control products,
represents approximately 82% of the Company's net sales to foreign markets.
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 portions of its revenues
are from the United Kingdom. Labcaire revenues outside the United Kingdom are
remitted in British Pounds.
Sonora represents approximately 4% 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 Sonora in U.S. currency.
Misonix represents approximately 14% 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.
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 adverse at this time nor has the FDA sought legal
remedies available, or have there been any violations of its regulations
alleged, against the Company.
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 $6,205,000, $4,060,000
and $7,685,000 during the fiscal years ended June 30, 2003, 2002 and 2001,
respectively. Total royalties from sales of this device were approximately
$664,000, $824,000 and $665,000 during the fiscal years ended June 30, 2003,
2002 and 2001, respectively.
In June 2002, the Company entered into a ten-year worldwide, royalty-free,
distribution agreement with Mentor Corporation ("Mentor") 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 $536,000, $97,000 and $66,000 during the
fiscal years ended June 30, 2003, 2002 and 2001, respectively. Included in
litigation (recovery) settlement expenses is $254,606 which represents the sale
of Lysonix 2000 units by Mentor that were received by Mentor from LySonix, Inc.
("LySonix") in connection with inventory received under the settlement agreement
with LySonix. This inventory was previously reserved for in fiscal year June
30, 2002, as its salability was uncertain. See Item 3. Legal Proceedings.
Fibra Sonics, Inc.
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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. In fiscal year 2002, the Company re-evaluated fixed assets
acquired from Fibra Sonics and reclassified approximately $54,000 from property,
plant and equipment to goodwill.
Focus Surgery, Inc.
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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 7% of Focus. Focus is located in
Indianapolis, Indiana. The agreement provides for a series of development and
manufacturing agreements whereby Misonix would upgrade existing Focus products,
currently the Sonablate(R) 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 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 and in
fiscal 2003 funded $100,000 to Focus, which is recorded as research and
development expenses.
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There have been over 1,500 patients successfully treated for Benign Prostatic
Hyperplasia ("BPH") outside the U.S. utilizing the HIFU technology. Focus has
signed a three-year distribution agreement with Endocare, Inc. to distribute the
Sonablate 500 in Europe. There have been 106 people successfully treated for
prostate cancer in Europe. Endocare, Inc. did not meet the minimum requirements
in accordance with the distribution agreement so therefore the agreement became
non-exclusive. In the U.S., the Sonablate 200 completed Phase III clinical
trials for the non-invasive treatment of BPH, commonly known as enlarged
prostate. The results of the trials have been returned to Focus due to missing
data elements which should be incorporated and submitted back to the FDA during
the third or fourth calendar quarter of 2003. Focus is also utilizing HIFU
technology to clinically treat prostate cancer in Japan where there have been
180 people successfully treated.
In December 2000, Focus Surgery received Investigational Device Exemption
("IDE") from the FDA to treat 40 patients for prostate cancer; these comprise 20
patients who have never been treated and 20 patients who have been
unsuccessfully treated by another modality. The IDE will be conducted at
Indiana University Medical Center and Case Western Reserve Medical Center. To
date, Focus has treated 40 patients for prostate cancer, 20 of whom have never
been treated previously and 4 of whom have been unsuccessfully treated by
another modality.
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 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 at June 30,
2003 and 2002. The related expense has been included in loss on impairment of
investment in the accompanying consolidated statements of operations. 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 to 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 at June 30, 2003. The related expense has
been included in loss on impairment of investment in the accompanying
consolidated statements of operations. The 6% Focus Debenture is currently in
default and the Company is negotiating an extended due date. The Company
believes the loan is impaired since the Company does not anticipate the 6% Focus
Debenture to 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 is convertible into 250 shares of Focus preferred stock at the
option of the Company at any time up until 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
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against the entire balance of principal and accrued interest due at June 30,
2003. The related expense has been included in loss on impairment of
investment in the accompanying consolidated statements of operations. The Focus
Debenture is currently in default and the Company is negotiating an extended due
date. 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.
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 27%.
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 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
of principal and accrued interest due at June 30, 2003. The related expense has
been included in loss on impairment of investment in the accompanying
consolidated statements of operations. 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.
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, 2003 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 Surgery's losses since 2001 before the Company can
record income from Focus.
Hearing Innovations, Inc.
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On October 18, 1999, the Company and Hearing Innovations, Inc. ("Hearing
Innovations") completed the agreement whereby the Company invested an additional
$350,000 and cancelled 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 with exercise prices ranging from $1.25 to $2.25 per share were also part
of this agreement. These warrants, which are deemed nominal in value, expire in
October 2005. Upon exercise of the warrants, the Company has the right to
manufacture Hearing Innovations' ultrasonic products and also has the right to
create a joint venture with Hearing Innovations for the marketing and sale of
its ultrasonic tinnitus masker device. As of the date of the acquisition, the
cost of 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 HiSonic(R) 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. Tinnitus is characterized by
constant sound in the ear that can range from a metallic ringing, buzzing,
popping or nonrhythmic beating. Currently, it is estimated that 50 million
people worldwide suffer from Tinnitus, of which approximately 2 million cases
are considered severe. There are currently no cures but only temporary relief.
Hearing Innovations started to test market the device in the Northeast of the
United States to develop marketing data for ultimately a product launch. Hearing
Innovations is still collecting data and has not drawn any conclusions for such.
Hearing Innovations has also received 510(k) approval from the FDA for the
Tinnitus product, Hisonic TRD.
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) were exchanged for a $300,000, 7% Secured Convertible
Debenture due August 27, 2002 and extended to November 30, 2003 (the "Hearing
Debenture"). The Hearing Debenture contains, in the aggregate, warrants to
acquire 250,000 shares of Hearing Innovations common stock, at the option of the
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Company, for a purchase price of $2.25 per share. These warrants, which are
deemed nominal in value, expire in October 2005. Interest accrues and is
payable at maturity, or is convertible on the same terms as the Hearing
Debenture's principal amount. The Company recorded an allowance against the
entire balance of principal and accrued interest due at June 30, 2003. The
related expense has been included in loss on impairment of investment in the
accompanying consolidated statements of operations. The Company believes the
Hearing Debenture is impaired since the Company does 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 maturity date was extended to November 30, 2003.
All notes bear interest at 8% per annum. The notes are secured by a lien on all
of Hearing Innovations' right, title and interest in accounts receivable,
inventory, property, plant and equipment and processes of specified products
whether now existing or hereafter arising after the date of these agreements.
The loan agreements contain, in the aggregate, warrants to acquire 1,045,664
shares of Hearing Innovations common stock, at the option of the Company, at a
cost that ranges from $2.00 to $2.25 per share. These warrants, which are
deemed nominal in value, expire in October 2005. The Company recorded an
allowance against the entire balance and interest due at June 30, 2003. The
related expense has been included in loss on impairment of investment in the
accompanying consolidated statements of operations. The Company believes the
loans and the related interest are impaired since the Company does not
anticipate these loans will 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. All notes bear interest at 8% per annum. The notes are
secured by a lien on all of Hearing Innovations' right, title and interest in
accounts receivable, inventory, property, plant and equipment and processes of
specified products whether now existing or arising after the date of these
agreements. The loan agreements contain, in the aggregate, warrants to acquire
548,329 shares of Hearing Innovations common stock, at the option of the
Company, at a cost that ranges from $.01 to $2.00 per share. These warrants,
which are deemed nominal in value, expire in October 2005. The Company recorded
an allowance against the entire balance and accrued interest due at June 30,
2003. The related expense has been included in loss on impairment of loans to
affiliated entities in the accompanying consolidated statement of operations.
The Company believes the loans and related interest are impaired since the
Company does not anticipate that these loans will 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. All notes bear interest at 8% per annum. The
notes are secured by a lien on all of Hearing Innovations' right, title and
interest in accounts receivable, inventory, property, plant and equipment and
processes of specified products whether now existing or arising after the date
of these agreements. The loan agreements contain, in the aggregate, warrants to
acquire 274,991 shares of Hearing Innovations common stock, at the option of the
Company, at a cost of $.10 to $1.00 per share. These warrants, which are deemed
nominal in value, expire in October 2005. The Company recorded an allowance
against the entire balance of $274,991 for the above loans as well as accrued
interest of $23,241 for the above loans and debentures. The related expense
has been included in loss on impairment of Hearing Innovations in the
accompanying consolidated statements of operations. The Company believes the
loans and related interest are impaired since the Company does not anticipate
that these loans will 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 is uncertain.
If the Company were to exercise all warrants associated with the above loans,
exercise the warrants associated with the Hearing Debenture and the original
investment and include the original investment ownership, the Company would hold
an interest in Hearing Innovations of approximately 44%.
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
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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. The net carrying
value of the investment at June 30, 2003 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 Hearing Innovations' losses since 2001 before
the Company can record income from Hearing Innovations.
In August 2002, the President of Hearing Innovations resigned and the Board of
Directors of Hearing Innovations named Kenneth Coviello Chief Executive Officer
and a board member of Hearing Innovations. This appointment has not been
ratified by the stockholders of Hearing Innovations. Kenneth Coviello is the
Vice President of Medical Devices of the Company.
In March 2003, the Board of Directors of Hearing Innovations assigned Richard
Zaremba a temporary board position. This appointment has not been ratified by
the stockholders of Hearing Innovations. Richard Zaremba is the Vice President
and Chief Financial Officer of the Company.
The current ability of companies such as Hearing Innovations to access capital
markets or incur third party debt is very limited and is likely to remain so for
the foreseeable future. In light of this fact, the Company continues to review
strategic options available to it and Hearing Innovations due to Hearing
Innovations' continuing need for financial support.
Sonora Medical Systems, Inc.
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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 statements of operations
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.
INDUSTRIAL PRODUCTS
The Company's other revenue producing activities consist of the manufacture and
sale of the Sonicator(R) ultrasonic liquid processor and cell disrupter, the
distribution of other ultrasonic equipment for scientific and industrial
purposes, the manufacture and sale of Aura ductless fume enclosures for
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filtration of gaseous contaminants and the manufacture and sale of Mystaire
scrubbers for the abatement of air pollution.
The Sonicator device is used to disrupt cells and bacteria. Similar procedures
are used in biotechnology in the production of medications and chemicals. The
Sonicator is also used in the acceleration of chemical reactions and the
extraction of proteins from cells such as Ecoli and yeast. Sonication can strip
away the outer coating of a virus and fragment DNA for immunological studies.
It is also widely applied in manufacturing pharmaceuticals, homogenizing
pigments and dyes and improving the quality and consistency of these products.
All these processes are accomplished through the use of ultrasound, which
creates a reaction called cavitation.
The Aura fume enclosures are ductless filtration and containment hoods which are
portable and easy to install. They work through forcing contaminated air
through a filter process that extracts the contaminants and introduces clean air
back into the environment. They eliminate the ductwork that is otherwise
necessary for exhausting to the outside air. The enclosures are sold to
clinical, research, educational and industrial laboratories for various
industrial purposes. Laboratory applications include working with organic
solvents and radioisotopes, chemical storage, chemical dispensing, pathology and
histology. Industrial markets for the product line include the pharmaceutical,
semiconductor manufacturing and asbestos containment industries. The fume
enclosures are a general purpose recirculating system with activated carbon
filters that purify air and remove airborne fumes, odors and particulates.
The technology used in the Aura ductless fume enclosures has 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 the
highly 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. Currently, the
Company owns a 100% interest in Labcaire. The balance of the capital stock of
Labcaire was owned by three executives and one retired executive of Labcaire,
who have, under a purchase agreement (the "Labcaire Agreement"), agreed to sell
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.
Under the Labcaire Agreement, the Company was required to repurchase such shares
at a price equal to one-seventh of each executive's prorata share of 8.5 times
Labcaire's earnings before interest, taxes, and management charges for the
preceding fiscal year, which amount is being treated as goodwill. Pursuant to
the Labcaire Agreement, 9,284 shares (2.65%) of Labcaire common stock were
purchased by the Company for approximately $102,000 in October 1996 for the year
ended June 30, 1997, 9,286 shares (2.65%) were purchased by the Company for
approximately $119,000 in October 1997 for the year ended June 30, 1998, 9,286
shares (2.65%) were purchased by the Company for approximately $129,000 in
October 1998 for the year ended June 30, 1999, 9,286 shares (2.65%) were
purchased by the Company for approximately $174,000 in October 1999 for the year
ended June 30, 2000, 9,286 shares (2.65%) were purchased by the Company for
approximately $117,000 in October 2000 for the year ended June 30, 2001, 9,286
shares (2.65%) were purchased by the Company for approximately $100,000 in
October 2001 for the year ended June 30, 2002 and the remaining 9,286 shares
(2.7%) were purchased by the Company for approximately $232,394 in October 2002
for the year ended June 30, 2003. Total goodwill associated with Labcaire is
$1,214,808 of which $1,063,294 remains at June 30, 2003.
Labcaire's business consists of designing, manufacturing, 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 disinfectant fumes through a series of filters to
introduce clean air back into the environment. 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 industrial products.
7
Labcaire manufactures class 100 biosafety hazard enclosures used in laboratories
to provide sterile environments and to protect lab technicians from airborne
contaminants, and class 100 laminar flow enclosures. Labcaire also manufactures
the Company's ductless fume enclosures for the European market and sells the
enclosures under its trade name. Labcaire has developed and now manufactures
and sells an automatic endoscope disinfection system ("Autoscope"), 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 Guardian endoscope cleaner,
which incorporates many of the UK standards into its endoscopic cleaner and is
working toward being fully compliant with UK standards.
The Company's products are proprietary in that they primarily utilize ultrasound
as a technology base to solve both industrial 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 scrubber is an air pollution abatement system which removes
difficult airborne contaminants emitted from laboratory and industrial
processes. The contaminants are emulsified in a liquid and cleansed through a
series of filtered material. The scrubber operates on a broad range of
contaminants and is particularly effective on gaseous contaminants such as acid
gases, mists, particulate matter, negative gases and sulfur oxides. The Company
also manufactures a range of "point of use" scrubbers for the microelectronics
industry. This equipment eliminates low levels of toxic and noxious
contaminants arising from silicon wafer production.
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 direct salespersons and
distributors such as Mentor, 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 Surgery plans to sell and market its products
for BPH, once approved by the FDA, through a distribution partner in the U.S.
Focus is utilizing an international distribution partner, Endocare, Inc., in a
non-exclusive agreement, to distribute the Sonablate 500 in the European market.
Hearing Innovations plans on marketing and selling its products through
audiologists and otolaryngologists.
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 soft tissue aspirator used for cosmetic surgery.
Industrial Products
The Company relies on direct salespersons, distributors, manufacturing
representatives and catalog listings for the marketing of its industrial
products. The Company currently sells its products through three manufacturing
representatives and twenty distributors in the United States. The Company
currently employs direct sales persons who operate outside the Company's offices
and conducts direct marketing on a regional basis.
The market for the Company's ductless fume enclosures includes laboratory or
industrial environments in which workers may be exposed to noxious fumes or
vapors. The products are suited to laboratories in which personnel perform
functions which release noxious fumes or vapors (including hospital and medical
laboratories), industrial processing (particularly involving the use of
solvents) and soldering, and other general chemical processes. The products are
particularly suited to users in the pharmaceutical, 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.
8
In fiscal 2003, approximately 35% 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 industrial 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 prospective 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.
MANUFACTURING AND SUPPLY
Medical Devices
The Company manufactures and assembles its medical devices and Focus 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.
Industrial Products
The Company manufactures and assembles the majority of its industrial products
at its production facility located in Farmingdale, New York. The Company's
products include components manufactured by other companies in the United
States. The Company believes that it will not encounter difficulty in obtaining
materials, supplies and components adequate for its anticipated short-term
needs. The Company is not dependent upon any single source of supply and has no
long-term supply agreements.
Labcaire manufactures and assembles its products at its facility located in
North Somerset, England. 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 and medical device industry is rigorous with many
companies having significant capital resources, large research laboratories and
extensive distribution systems in excess of the Company's. Some of the
Company's major competitors for our medical products are Johnson & Johnson,
Inc., Valley Lab, a division of Tyco Healthcare, Integra Life Sciences, Inc.,
Ambassador Medical, a subsidiary of GE Medical, and Pyramid Medical.
Industrial Products
Competitors in the ultrasonic industry for industrial products include 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
9
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 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.
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.
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 adverse at
this time nor has the FDA sought legal remedies available, or have there been
any violations of its regulations alleged, against the Company.
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 05/01/1990 08/05/2008
System for applying ultrasonic arteries using a
generator, transducer and titanium wire.
5,026,167 Fluid Processing - relating to the Company's 06/25/1991 10/19/2009
environmental control product line for
introducing ozone and liquid into the cavitation
zone for an ultrasonic probe.
5,032,027 Fluid processing - relating to the Company's 07/16/1991 10/19/2009
environmental control product line for the
intimate mixing of ozone and contaminated
water for the purpose of purification.
10
5,248,296 Wire with sheath - relating to the Company's 09/23/1993 12/24/2010
Alliger System for reducing transverse motion in
its catheters.
5,306,261 Guidewire guides - relating to the Company's 04/26/1994 01/22/2013
Alliger System for a catheter with collapsible
wire guide.
5,443,456 Guidewire guides - relating to the Company's 08/22/1995 02/10/2014
Alliger System for a catheter with collapsible
wire guide.
5,371,429* Flow-thru transducer - relating to the Company's 12/06/1994 09/28/2013
liposuction system and its ultrasonic industrial
products for an electromechanical transducer
device.
5,397,293 Catheter sheath -relating to the Company's 03/14/1995 11/25/2012
Alliger System for an ultrasonic device with
sheath and transverse motion damping.
5,419,761* Liposuction - relating to the Company's 05/30/1995 08/03/2013
liposuction apparatus and associated method.
5,465,468 Flow-thru transducer - relating to the method of 11/14/1995 12/06/2014
making an electromechanical transducer device
to be used in conjunction with the Company's
soft tissue aspiration system and ultrasonic
industrial products.
5,516,043 Atomizer horn - relating to an ultrasonic 05/14/1996 06/30/2014
atomizing device, which is used in the
Company's industrial products.
Number Description Issue Date Expiration Date
- ---------- ------------------------------------------------ ---------- ---------------
5,527,273* Ultrasonic probes - relating to an ultrasonic 06/18/1996 10/6/2014
lipectomy probe to be used with the Company's
soft tissue aspiration technology.
5,769,211 Autoclavable switch - relating to a medical 06/23/1998 01/21/2017
handpiece with autoclavable rotary switch to be
used in medical procedures.
5,072,426 Shock wave hydrophone with self-monitoring 12/10/1991 02/08/2011
feature.
4,660,573 Ultrasonic lithotriptor probe. 04/28/1987 05/08/2005
4,741,731 Vented ultrasonic transducer for surgical 05/03/1988 02/14/2006
handpiece.
5,151,083 Apparatus for eliminating air bubbles in an 09/29/1992 07/29/2011
ultrasonic surgical device.
5,151,084 Ultrasonic needle with sleeve that includes a 09/29/1992 07/29/2011
baffle.
11
5,486,162 Bubble control device for an ultrasonic surgical 01/23/1996 01/11/2015
probe.
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 03/07/2000 12/23/2017
outer cannula.
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 04/23/2002 10/02/2018
surface.
6,326,039 Skinless sausage or frankfurter manufacturing 12/04/2001 10/31/2020
method and apparatus utilizing reusable
deformable support.
6,322,832 Manufacturing method and apparatus utilizing 11/27/2001 10/31/2020
reusable deformable support.
6,146,674 Method and device for manufacturing hot dogs 11/14/2000 5/27/2019
using high power ultrasound.
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
* 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 Registration
Number Date Mark Goods Renewal Date
- ------------ ------------ --------- ---------------------------------- ------------
2,611,532 08/27/2002 Mystaire Scrubbers Employing Fine Sprays 08/27/2012
Passing Through Mesh for
Eliminating Fumes and Odors from
Gases.
1,219,008 12/07/1982 Sonimist Ultrasonic and Sonic Spray Nozzle 03/22/2013
for Vaporizing Fluid for
Commercial, Industrial and
Laboratory Use.
12
1,200,359 04/03/2002 Water Web Lamination of Screens to Provide 04/03/2013
Mesh to be Inserted in Fluid
Stream for Mixing or Filtering of
Fluids.
2,051,093 03/27/2003 Misonix Anti-Pollution Wet Scrubbers; 03/27/2009
Ultrasonic Cleaners; Spray Nozzles
for Ultrasonic Cleaners.
2,051,092 02/13/2003 Misonix Ultrasonic Liquid Processors; 02/13/2009
Ultrasonic Biological Cell
Disrupters; Ultrasonic Cleaners.
2,320,805 02/22/2000 Aura Ductless Fume Enclosures. 02/22/2006
1,195,570 07/14/2002 Astrason Portable Ultrasonic Cleaners 07/14/2012
featuring Microscopic Shock
Waves.
BACKLOG
As of June 30, 2003, the Company's backlog (firm orders that have not yet been
shipped) was $5,600,000, as compared to approximately $5,100,000 as of June 30,
2002. The Company's backlog relating to industrial products, including
Labcaire, was approximately $2,600,000 at June 30, 2003, as compared to
$2,300,000 as of June 30, 2002. The Company's backlog relating to medical
devices, including Sonora, was approximately $3,000,000 at June 30, 2003, as
compared to approximately $2,800,000 at June 30, 2002.
EMPLOYEES
As of September 15, 2003, the Company, including Labcaire and Sonora, employed a
total of 201 full-time employees, including 25 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,
2003 2002 2001
----------- ----------- -----------
Medical devices $17,504,978 $11,695,761 $13,022,541
Industrial products 17,353,773 17,894,692 17,734,978
----------- ----------- -----------
Net sales $34,858,751 $29,590,453 $30,757,519
=========== =========== ===========
The following table provides a breakdown of foreign sales by geographic area
during the periods indicated:
Fiscal year ended
June 30,
2003 2002 2001
----------- ----------- -----------
Canada $ 446,307 $ 230,567 $ 162,526
Mexico 6,230 13,000 2,000
United Kingdom 8,767,304 7,526,478 5,646,655
13
Europe 1,357,245 980,633 966,349
Asia 1,193,294 890,621 771,805
Middle East 139,501 146,387 138,898
Other 345,643 530,097 201,193
----------- ----------- ----------
$12,255,524 $10,317,783 $7,889,426
=========== =========== ==========
ITEM 2. PROPERTIES.
- -------- -----------
The Company occupies approximately 45,500 square feet at 1938 New Highway,
Farmingdale, New York under a lease expiring on June 30, 2005. The Company has
the right to extend the lease to June 30, 2010. The rental amount, which is
approximately $38,000 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 14,000 square feet in Longmont, Colorado under a lease
expiring in July 2005. The rental amount is approximately $17,000 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.
- -------- -------------------
The Company, Medical Device Alliance, Inc. ("MDA") and MDA's wholly-owned
subsidiary, LySonix, were defendants in an action alleging patent infringement
filed by Mentor. On June 10, 1999, the United States District Court, Central
District of California, found for the defendants that there was no infringement
upon Mentor's patent. Mentor subsequently filed an appeal. The issue
concerned whether Mentor's patent is enforceable against the Company and does
not govern whether the Company's patent in reference is invalid. On April 11,
2001, the United States Court of Appeals for the Federal Circuit Court issued a
decision reversing in large part the decision of the trial court and granting
the motion by Mentor against MDA, LySonix and the Company for violation of
Mentor's U.S. Patent No. 4,886,491. This patent covers Mentor's license for
ultrasonic assisted liposuction. Damages were awarded in favor of Mentor of
approximately $4,900,000 and $688,000 for interest. The Court also granted a
permanent injunction enjoining further sales of the LySonix 2000 in the United
States for the use of liposuction. The Court affirmed that the lower court did
not have the ability to increase damages or award attorneys' fees. Each
defendant was jointly and severally liable as each defendant infringed
proportionally. Mentor requested further relief in the trial court for
additional damages. Accordingly, the Company accrued an aggregate of $6,176,000
for damages, interest and other costs during fiscal year 2001.
On April 24, 2002, the Company resolved all issues related to the lawsuit
brought by Mentor. Under the terms of the settlement, the Company paid Mentor
$2,700,000 for its share of the $5,600,000 settlement with Mentor in exchange
for a complete release from any monetary liability in connection with the
lawsuit and judgment. In connection with this litigation settlement, the
Company paid $1,000,000 and forgave accounts receivable of $455,500 in exchange
for certain assets from MDA/LySonix, which the Company expects to utilize in the
future. The net realizable value of those assets was $295,751. In addition,
the Company paid $228,960 of other accrued costs during fiscal 2002, leaving an
unpaid accrued balance of $174,332 as of June 30, 2002. The Company paid
$4,332 of other accrued costs during fiscal 2003. The Company also recorded an
additional reserve for net assets received in fiscal 2002 in connection with the
settlement of $80,171 during fiscal year 2003. In addition, the Company
recorded a reversal of the litigation settlement for unpaid professional fees
during the fourth quarter of fiscal 2003 of $170,000.
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 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. The agreement was not conditional upon execution
of the court settlement noted above.
14
The Company's revenues derived from sales of the LySonix soft tissue aspirator
and accessories were approximately $536,000, $97,000 and $66,000 during its
fiscal year ended June 30, 2003, 2002 and 2001, respectively, comprising
approximately 1.5%, 0% and 0%, respectively, of gross revenues. Included in
litigation (recovery) settlement expenses is $254,606 which represents the sale
of Lysonix 2000 units by Mentor that were received by Mentor from LySonix in
connection with inventory received under the settlement agreement with LySonix.
This inventory was previously reserved for in fiscal year June 30, 2002, as its
salability was uncertain.
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, 2003.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------- ----------------------------------------------------------------------
(a) The Company's common stock, $.01 par value ("Common Stock"), is listed on
the NASDAQ National Market ("NMS") under the symbol "MSON".
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 2003: High Low
- ------------ ----- -----
First Quarter . . . . . . $6.25 $5.05
Second Quarter . . . . . . 5.40 3.55
Third Quarter . . . . . . 3.77 2.38
Fourth Quarter . . . . . . 4.14 2.35
Fiscal 2002: High Low
- ------------ ----- -----
First Quarter . . . . . . $7.57 $5.71
Second Quarter . . . . . . 9.98 5.84
Third Quarter . . . . . . 9.89 6.30
Fourth Quarter . . . . . . 8.82 6.00
(b) As of September 15, 2003, the Company had 6,655,865 shares of Common Stock
outstanding and 117 shareholders of record. This does not take into account
shareholders whose shares are held in "street name" by brokerage houses.
(c) The Company has not paid any dividends since its inception. The Company
currently does not intend to pay any cash dividends in the foreseeable future,
but intends to retain all earnings, if any, in its business operations.
15
EQUITY COMPENSATION PLAN INFORMATION:
- -------------------------------------
c) NUMBER OF SECURITIES
b) WEIGHTED REMAINING FOR FUTURE
a) NUMBER OF AVERAGE EXERCISE ISSUANCE UNDER EQUITY
SECURITIES TO BE ISSUED PRICE OF THE COMPENSATION PLANS
UPON THE EXERCISE OF OUTSTANDING (EXCLUDING SECURITIES
PLAN CATEGORY OUTSTANDING OPTIONS OPTIONS REFLECTED IN COLUMN a)
- ----------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders.
- ----------------------------------------------------------------------------------------------
I. 1991 Plan 30,000 $ 7.38 17,250
II. 1996 Director's Plan 210,000 $ 3.69 211,500
III. 1996 Plan 312,207 $ 5.90 40,598
IV. 1998 Plan 462,225 $ 6.37 30,025
V. 2001 Plan 595,079 $ 5.56 404,921
- ----------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders - - -
- ----------------------------------------------------------------------------------------------
Total 1,609,511 $ 5.65 704,294
==============================================================================================
ITEM 6. SELECTED FINANCIAL DATA.
- -------- --------------------------
Selected income statement data:
Year Ended June 30,
2003 2002 2001 2000 1999
----------- ----------- ------------ ----------- -----------
Net sales $34,858,751 $29,590,453 $30,757,519 $29,042,872 $24,767,163
Net income (loss) 967,575 176,661 (4,492,290) 2,520,896 1,964,758
Net income (loss) per share-
Basic $ .15 $ .03 $ (.75) $ .42 $ .34
Net income (loss) per share-
Diluted $ .15 $ .03 $ (.75) $ .39 $ .30
Selected balance sheet data:
June 30,
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Total assets $29,794,589 $26,964,452 $33,220,788 $31,163,622 $28,779,090
Long-term debt
and capital lease
obligations $ 1,235,362 $ 1,050,254 $ 1,027,921 $ 1,274,738 $ 1,271,814
Total stockholders'
equity $21,342,663 $19,688,828 $19,106,818 $23,882,188 $21,542,385
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:
16
Fiscal year ended
June 30,
2003 2002 2001
------ ------ -------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 58.4 60.6 51.3
------ ------ -------
Gross profit 41.6 39.4 48.7
------ ------ -------
Selling expenses 11.9 15.2 13.2
General and administrative expenses 20.1 21.9 21.2
Research and development expenses 6.1 7.1 5.9
Litigation (recovery) settlement expenses (1.0) (6.5) 20.1
------ ------ -------
Total operating expenses 37.1 37.7 60.4
------ ------ -------
Income (loss) from operations 4.5 1.7 (11.7)
Other income (expense) .9 .2 (10.9)
------ ------ -------
Income (loss) before minority interest and income taxes 5.4 1.9 (22.6)
Minority interest in net (income) loss of
consolidated subsidiaries (.1) - .1
------ ------ -------
Income (loss) before provision for income
taxes 5.3 1.9 (22.5)
Income tax provision (benefit) 2.5 1.3 (7.9)
------ ------ -------
Net income (loss) 2.8% .6% (14.6)%
====== ====== =======
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 Industrial Products which include, ultrasonic equipment for
scientific and industrial purposes, ductless fume enclosures for filtration of
gaseous emissions in laboratories and environmental control equipment for the
abatement of air pollution.
Fiscal years ended June 30, 2003 and 2002
- ------------------------------------------------
Net sales. Net sales of the Company's medical devices and industrial products
- -----------
increased $5,268,298 to $34,858,751 in fiscal 2003 from $29,590,453 in fiscal
2002. This difference in net sales is due to an increase in sales of medical
devices of $5,809,217 to $17,504,978 in fiscal 2003 from $11,695,761 in fiscal
2002. This increase is offset by lower industrial product sales of $540,919 to
$17,353,773 in fiscal 2003 from $17,894,692 in fiscal 2002. The increase in
17
sales of medical devices is due to an increase in sales of diagnostic medical
devices of $2,613,214 and an increase of $3,196,003 in sales of therapeutic
medical devices, both due to increased customer demand for several diagnostic
and therapeutic medical products. 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 USS of approximately $2,145,000.
The remaining increase in therapeutic medical devices is due to increased demand
for all products. The decrease in industrial products is due to decreased wet
scrubber sales of $1,227,154 and a decrease in ductless fume enclosure sales of
$616,769 primarily offset by an increase in Labcaire sales of $1,130,075 and
ultrasonic sales of $172,929. Wet scrubber sales continue to be adversely
affected by the downturn of the semi-conductor market. The decrease in fume
enclosure sales is due to lower customer demand for several industrial products
and current economic conditions for such products. The increase in Labcaire
sales is primarily due to the demand for the new Guardian (endoscopic cleaning)
product introduced in December 2001. Export sales from the United States are
remitted in U.S. Dollars and export sales for Labcaire are remitted in British
Pounds. During fiscal 2003 and fiscal 2002, the Company had foreign net sales
of $12,255,524 and $10,317,783, respectively, representing 35.2% and 34.9% of
net sales for such years, respectively. The increase in foreign sales in fiscal
2003 as compared to fiscal 2002 is substantially due to an increase in Labcaire
sales of $1,130,075. Labcaire represented 82% and 85% of foreign net sales
during fiscal 2003 and fiscal 2002, respectively. Approximately 29% of the
Company's revenues in the year ended June 30, 2003 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 1.59 and 1.44 for the year ended
June 30, 2003 and 2002, 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:
2003 2002
----------- -----------
United States $22,603,227 $19,272,670
Canada 446,307 230,567
Mexico 6,230 13,000
United Kingdom 8,767,304 7,526,478
Europe 1,357,245 980,633
Asia 1,193,294 890,621
Middle East 139,501 146,387
Other 345,643 530,097
----------- -----------
$34,858,751 $29,590,453
=========== ===========
Summarized financial information for each of the segments for the years ended
June 30, 2003 and 2002 are as follows:
For the year ended June 30, 2003:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
-------------- ------------- --------------- --------------
Net sales $ 17,504,978 $ 17,353,773 $ - $ 34,858,751
Cost of goods sold 9,725,617 10,628,941 - 20,354,558
-------------- ------------- --------------
Gross profit 7,779,361 6,724,832 - 14,504,193
Selling expenses 1,406,543 2,725,534 - 4,132,077
Research and development 1,400,336 708,976 - 2,109,312
-------------- ------------- --------------
Total operating expenses 2,806,879 3,434,510 6,678,653 12,920,042
-------------- ------------- --------------- --------------
Income from operations $ 4,972,482 $ 3,290,322 $ (6,678,653) $ 1,584,151
============== ============= =============== ==============
18
For the year ended June 30, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
------------- ----------- --------------- --------------
Net sales $ 11,695,761 $17,894,692 $ - $ 29,590,453
Cost of goods sold 7,233,535 10,698,339 - 17,931,874
------------- ----------- --------------
Gross profit 4,462,226 7,196,353 - 11,658,579
Selling expenses 1,218,583 3,283,590 - 4,502,173
Research and development 1,554,438 549,263 - 2,103,701
------------- ----------- --------------
Total operating expenses 2,773,021 3,832,853 4,556,745 11,162,619
------------- ----------- --------------- --------------
Income from operations $ 1,689,205 $ 3,363,500 $ (4,556,745) $ 495,960
============= =========== =============== ==============
(a) Amount represents general and administrative and litigation settlement
(recovery) expenses.
Net sales for the three months ended June 30, 2003 were $10,926,239 compared to
$7,893,175 for the same period in fiscal 2002. This increase of $3,033,064 for
the three months ended June 30, 2003 is due to an increase in sales of medical
devices of $2,179,077 and an increase in industrial products sales of $853,987.
The increase in sales of medical devices is due to an increase in sales of
diagnostic medical devices of $818,761 and an increase of $1,360,316 in sales of
therapeutic medical devices, both due to increased customer demand for several
diagnostic and therapeutic medical products. 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 USS of
approximately $950,000. The increase in industrial products sales is due to
increased Labcaire sales of $639,455, an increase in ultrasonic sales of
$226,483 and an increase in wet scrubber sales of $109,399 primarily offset by
a decrease in ductless fume enclosure sales of $121,350. The increase in
Labcaire sales is primarily due to the demand for the new Guardian (endoscopic
cleaning) product introduced in December 2001. The decrease in fume enclosure
sales is due to lower customer demand for several industrial products and
current economic conditions for such products.
Summarized financial information for each of the segments for the three months
ended June 30, 2003 and 2002 are as follows:
For the three months ended June 30, 2003:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
----------- -------------- --------------- -------------
Net sales $ 5,735,495 $ 5,190,744 $ - $ 10,926,239
Cost of goods sold 3,254,408 3,369,032 - 6,623,440
----------- -------------- -------------
Gross profit 2,481,087 1,821,712 - 4,302,799
Selling expenses 369,461 639,391 - 1,008,852
Research and development 320,514 189,032 - 509,546
----------- -------------- -------------
Total operating expenses 689,975 828,423 1,913,059 3,431,457
----------- -------------- --------------- -------------
Income from operations $ 1,791,112 $ 993,289 $ (1,913,059) $ 871,342
=========== ============== =============== =============
For the three months ended June 30, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
-------------- ------------- --------------- --------------
Net sales $ 3,556,418 $ 4,336,757 $ - $ 7,893,175
Cost of goods sold 2,641,767 3,151,304 - 5,793,071
-------------- ------------- --------------
Gross profit 914,651 1,185,453 - 2,100,104
Selling expenses 405,777 874,621 - 1,280,398
Research and development 348,754 143,642 - 492,396
-------------- ------------- --------------
Total operating expenses 754,531 1,018,263 (204) 1,772,590
-------------- ------------- --------------- --------------
Income from operations $ 160,120 $ 167,190 $ 204 $ 327,514
============== ============= =============== ==============
(a) Amount represents general and administrative and litigation settlement
(recovery) expenses.
19
Gross profit. Gross profit increased to 41.6% in fiscal 2003 from 39.4% in
- --------------
fiscal 2002. Gross profit for medical devices increased to 44.4% in fiscal
2003 from 38.2% in fiscal 2002. Gross profit for industrial products decreased
to 38.8% in fiscal 2003 from 40.2% in fiscal 2002. For fiscal year 2003,
gross profit was positively impacted by the favorable order mix for sales of
therapeutic and diagnostic medical devices; Mystaire scrubber sales had a
significant increase in gross margin on all of its products, predominately due
to the implementation of cost reduction efforts; and increased sales by
Labcaire, whose products traditionally carry lower gross margins. Gross profit
increased to 39.4% of sales in the three months ended June 30, 2003 from 26.6%
of sales in the three months ended June 30, 2002. Gross profit for medical
devices increased to 43.3% of sales in the three months ended June 30, 2003 from
25.7% of sales in the three months ended June 30, 2002. Gross profit for
industrial products increased to 35.1% of sales in the three months ended June
30, 2003 from 27.3% of sales in the three months ended June 30, 2002. For the
three months ended June 30, 2003, gross profit was positively impacted by the
favorable order mix for sales of therapeutic and diagnostic medical devices;
Mystaire scrubber and fume enclosure sales had a significant increase in gross
margin on all of its products, predominately due to the implementation of cost
reduction efforts; the above were offset by an increase in sales by Labcaire,
whose products traditionally carry lower gross margins. The Company
manufactures and sells both medical devices and industrial products with a wide
range of product costs and gross margin dollars as a percentage of revenues.
Selling expenses. Selling expenses decreased $370,096 or 8.2% to $4,132,077
- -----------------
(11.9% of sales) in fiscal 2003 from $4,502,173 (15.2% of sales) in fiscal 2002.
Medical device selling expenses increased $187,960 predominantly due to
additional sales and marketing efforts of diagnostic medical devices. Industrial
selling expenses decreased $558,056 predominantly due to a decrease in fume
enclosure and industrial ultrasonic commissions and wet scrubber employees, due
to the reduction of staff, marketing expenses and a decrease in Labcaire sales
personnel. Selling expenses decreased $271,546 or 21.2% from $1,280,398 (16.2%
of sales) in the three months ended June 30, 2002 to $1,008,852 (9.2% of sales)
in the three months ended June 30, 2003. Industrial selling expenses decreased
$235,230 predominantly due to decreased sales commissions for the wet scrubber
products and a transfer of salaries of two Labcaire employees to general and
administrative expenses from selling expenses. Medical device selling expenses
decreased $36,316 predominantly due to less sales and marketing efforts for
therapeutic medical devices partially offset by additional sales and marketing
efforts of diagnostic medical devices.
General and administrative expenses. General and administrative expenses
- --------------------------------------
increased $553,384 or 8.6% to $7,023,088 in fiscal 2003 from $6,469,704 in
fiscal 2002. The increase is predominantly due to an increase in general and
administrative expenses relating to severance costs and a transfer of two
employees from selling expenses, all attributable to Labcaire. General and
administrative expenses increased $143,633 or 7.5% to $2,056,388 in the three
months ended June 30, 2003 from $1,912,755 in the three months ended June 30,
2002. The increase is predominantly due to an increase in general and
administrative expenses relating to severance costs and an increase in
administrative staff, all attributable to Labcaire.
Research and development expenses. Research and development expenses increased
- ----------------------------------
$5,611 or .3% to $2,109,312 in fiscal 2003 from $2,103,701 in fiscal 2002.
Research and development expense related to medical devices decreased $154,103
and research and development expensed related to industrial products increased
$159,714. During fiscal year 2003, the Company funded $100,000 to Focus Surgery
to start research and development for the treatment of kidney and liver tumors
utilizing high intensity focused ultrasound technology. The Company has the
right to the technology if the Company funds the development. The Company has
exercised its right and started to fund the development of treatment of kidney
and liver tumors. During fiscal year 2003, three customers reimbursed the
Company, in the amount of approximately $260,000, for certain product
development expenditures incurred. Research and development expenses increased
$17,150 or 3.5% from $492,396 in the three months ended June 30, 2002 to
$509,546 in the three months ended June 30, 2003.
20
Litigation (recovery) settlement expenses. The Company recorded a reversal of
- ---------------------------------------------
the litigation settlement for fiscal 2003 of $344,435. This reversal represents
the following: the sale of $254,606 of Lysonix 2000 units by Mentor that were
received by Mentor from LySonix in connection with inventory received under the
settlement agreement with LySonix (this inventory was previously reserved for in
fiscal year June 30, 2002, as its salability was uncertain) and the reversal of
an accrual of $170,000 for unpaid professional fees offset by an additional
reserve for net assets received in connection with the settlement of $80,171. In
fiscal year 2002, the Company recorded a reversal of the litigation settlement
during the fourth quarter of fiscal 2002 of $1,912,959. The Company recorded a
litigation settlement charge of $6,176,000 during fiscal 2001. On April 11,
2001, the United States Court of Appeals for the Federal Circuit Court issued a
decision reversing in large part the decision of the trial court and granting
the motion by Mentor against MDA, LySonix and the Company for violation of
Mentor's U.S. Patent No. 4,886,491. This patent covers Mentor's license for
ultrasonic assisted liposuction. Damages were awarded in favor of Mentor of
approximately $4,900,000 and $688,000 for interest. The Court also granted a
permanent injunction enjoining further sales of the LySonix 2000 in the United
States for the use of liposuction. The Court affirmed that the lower court did
not have the ability to increase damages or award attorneys' fees. Each
defendant was jointly and severally liable as each defendant infringed
proportionally. Mentor requested further relief in the trial court for
additional damages. Accordingly, the Company accrued an aggregate of $6,176,000
for damages, attorneys' fees, interest and other costs during the third quarter
and fourth quarter of fiscal year 2001. On April 24, 2002, the Company resolved
all issues related to the lawsuit brought by Mentor. Under the terms of the
settlement, the Company paid Mentor $2,700,000 for its share of the $5,600,000
settlement with Mentor in exchange for a complete release from any monetary
liability in connection with the lawsuit and judgment. In connection with this
litigation settlement, the Company paid $1,000,000 and forgave accounts
receivable of $455,500 in exchange for certain assets from MDA/LySonix, which
the Company expects to utilize in the future. The net realizable value of those
assets was $295,751. In addition, the Company paid $228,960 of other accrued
costs during fiscal 2002.
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 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.
Other income (expense). Other income was $292,701 in fiscal 2003 as compared to
- ------------------------
$47,317 in fiscal 2002. Other income was $218,927 in the three months ended
June 30, 2003 as compared to $36,402 in the three months ended June 30, 2002.
The increase of $245,384 for the fiscal year was primarily due to a decrease in
loss on impairment of investments of Focus Surgery of $396,975 and Hearing
Innovations of $243,965, offset by lower royalty income of $159,928 and lower
interest income of $207,548. The decrease in impairment of Focus Surgery and
Hearing Innovations is a direct result of current period loans to Focus Surgery
and Hearing Innovations being less than in the prior period. Royalties
decreased since the first six months of fiscal 2002 included additional royalty
payments of approximately $150,000, which was based upon an audit of USS'
records for prior years' royalties. The audit showed that USS owed (and
subsequently paid) royalties due on prior year sales that were not included in
the original royalty computation. The decrease in interest income is due to
less cash on hand and lower interest yields during the year as compared to the
prior year.
Income taxes. The effective tax rate is 47.8% for the fiscal year ended June 30,
- ------------
2003 as compared to an effective tax rate of 68.5% for the fiscal year ended
June 30, 2002. The current effective tax rate of 47.8% was impacted by no
corresponding income tax benefit from the loss of the impairment of Hearing
Innovations and Focus Surgery by $311,957 plus the standard consolidated tax
rate of approximately 35%. The loss on impairment of investments is recorded
with no corresponding tax benefit since these transactions are capital losses.
The benefit for such losses are only utilized to the extent the Company has the
ability to generate capital gains. During the first quarter of fiscal year 2001,
the Company recorded a reduction of the valuation allowance applied against
deferred tax assets in accordance with the provisions of SFAS No.109 "Accounting
for Income Taxes" which provided a one-time income tax benefit of $1,681,502.
The valuation allowance was established in fiscal year 1997 because the future
tax benefit of certain below market stock option grants issued at that time
could not be reasonably assured. The Company continually reviews the adequacy
of the valuation allowance and recognized the income tax benefit during the
quarter due to the reasonable expectation that such tax benefit will be realized
21
due to the fiscal strength of the Company. During the fourth quarter of fiscal
2003, the Company recorded a valuation allowance of $96,642 against the deferred
tax asset related to the non-cash compensation charge due to the recent decline
in the Company's stock price. With this valuation, management believes that it
will generate taxable income sufficient to realize the tax benefit associated
with future deductible temporary differences.
Fiscal years ended June 30, 2002 and 2001
- -----------------------------------------
Net sales. Net sales of the Company's medical devices and industrial products
- -----------
decreased $1,167,066 to $29,590,453 in fiscal 2002 from $30,757,519 in fiscal
2001. This difference in net sales is due to an increase in industrial products
of $159,714 to $17,894,692 in fiscal 2002 from $17,734,978 in fiscal 2001. This
increase is offset by lower medical device sales of $1,326,780 to $11,695,761
for the year ended June 30, 2002 from $13,022,541 for the year ended June 30,
2001. The increase in industrial products is predominantly due to an increase
in fume enclosure sales of $566,272 and Labcaire sales of $2,116,323 offset by
lower wet scrubber sales of $2,253,747 and ultrasonic sales of $269,134. The
increase in fume enclosure sales is due to customer demand. The increase in
Labcaire sales is due to the new Guardian product introduced in fiscal 2002.
The decrease in wet scrubber sales is due to the decrease in growth of the
semi-conductor market. The decrease in medical devices is due to decreased
sales of therapeutic medical devices of $2,828,318 offset by an increase in
sales of diagnostic medical devices of $1,501,538, both driven by customer
demand.
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:
2002 2001
----------- -----------
United States $19,272,670 $22,868,093
Canada 230,567 162,526
Mexico 13,000 2,000
United Kingdom 7,526,478 5,646,655
Europe 980,633 966,349
Asia 890,621 771,805
Middle East 146,387 138,898
Other 530,097 201,193
----------- -----------
$29,590,453 $30,757,519
=========== ===========
Summarized financial information for each of the segments for the years ended
June 30, 2002 and 2001 is as follows:
For the year ended June 30, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
----------- ----------- --------------- --------------
Net sales $11,695,761 $17,894,692 $ - $ 29,590,453
Cost of goods sold 7,233,535 10,698,339 - 17,931,874
----------- ----------- --------------
Gross profit 4,462,226 7,196,353 - 11,658,579
Selling expenses 1,218,583 3,283,590 - 4,502,173
Research and development 1,554,438 549,263 - 2,103,701
----------- ----------- --------------
Total operating expenses 2,773,021 3,832,853 4,556,745 11,162,619
----------- ----------- --------------- --------------
Income from operations $ 1,689,205 $ 3,363,500 $ (4,556,745) $ 495,960
=========== =========== =============== ==============
For the year ended June 30, 2001:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
----------- ------------- --------------- --------------
Net sales $13,022,541 $ 17,734,978 $ - $ 30,757,519
Cost of goods sold 6,632,524 9,150,216 - 15,782,740
----------- ------------- --------------
Gross profit 6,390,017 8,584,762 - 14,974,779
Selling expenses 842,805 3,227,320 - 4,070,125
Research and development 1,143,391 683,213 - 1,826,604
----------- ------------- --------------
Total operating expenses 1,986,196 3,910,533 12,687,402 18,584,131
----------- ------------- --------------- --------------
Income (loss) from operations $ 4,403,821 $ 4,674,229 $ (12,687,402) $ (3,609,352)
=========== ============= =============== ==============
(a) Amount represents general and administrative and litigation settlement
(recovery) expenses.
22
Net sales for the three month period ended June 30, 2002 were $7,893,175
compared to $8,945,114 for the same period in fiscal 2001. This decrease for
the quarter ended June 30, 2002 is due to a decrease in industrial products
sales of $603,660 and medical devices of $448,279. The decrease in industrial
products sales consists of a decrease in wet scrubber sales of $805,762, a
decrease in fume enclosure product sales of $286,845, and a decrease in
ultrasonic sales of $234,123 offset by an increase in Labcaire sales of
$723,070. The decrease in medical device sales is due to decreased sales of
therapeutic medical devices of $1,339,239 offset by an increase in diagnostic
medical device sales of $890,960.
Export sales from the United States are remitted in U.S. Dollars and export
sales for Labcaire are remitted in British Pounds. During fiscal 2002 and
fiscal 2001, the Company had foreign net sales of $10,317,783 and $7,889,426,
respectively, representing 35.2% and 34.9% of net sales for such years,
respectively. The increase in foreign sales in fiscal 2002 as compared to
fiscal 2001 is substantially due to an increase in Labcaire sales of $1,130,075.
Labcaire represented 85% of foreign net sales during fiscal 2002 and fiscal
2001. 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 1.44 and 1.43 for the fiscal year ended
June 30, 2002 and 2001, 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.
Gross profit. Gross profit decreased to 39.4% in fiscal 2002 from 48.7% in
- --------------
fiscal 2001. Gross profit decreased to 26.6% of sales in the three months ended
June 30, 2002 from 39.7% of sales in the three months ended June 30, 2001. The
decrease in gross profit is predominantly due to the unfavorable mix of high and
low margin product deliveries caused by the following: gross profit was
negatively impacted by the unfavorable order mix for sales of therapeutic
medical devices; Mystaire scrubber sales had a significant decrease in gross
margin on all of its products, predominately due to reduced volume; and
increased sales of diagnostic medical devices and sales by Labcaire, whose
products traditionally carry lower gross margins. The Company manufactures and
sells both medical devices and industrial products with a wide range of product
costs and gross margin dollars as a percentage of revenues. An unfavorable mix
of high and low gross margin product deliveries is a direct result of the ratio
of high gross margin product shipments to total shipments versus low gross
margin product shipments to the same total shipments. In both the medical
devices and industrial products segments, there are wide variations on gross
margin percentages to revenues dependent upon the product. The variation in
gross margin percentage based upon product mix is described as either a
"favorable" or "unfavorable" mix of high and low margin product deliveries.
Selling expenses. Selling expenses increased $432,048 or 10.6% from $4,070,125
- -----------------
(13.2% of sales) in fiscal 2001 to $4,502,173 (15.2% of sales) in fiscal 2002.
Medical device selling expenses increased $375,778 predominantly due to
additional sales and marketing efforts of diagnostic medical devices. Industrial
selling expenses increased $56,270 predominantly due to increased marketing
efforts, advertising initiatives and personnel additions. Selling expenses
increased $114,439 or 9.8% from $1,165,959 (13% of sales) in the three months
ended June 30, 2001 to $1,280,398 (16.2% of sales) in the three months ended
June 30, 2002. Medical device selling expenses increased $184,039 predominantly
due to additional sales and marketing efforts of diagnostic medical devices.
Industrial selling expenses decreased $69,600 predominantly due to decreased
sales commissions for the wet scrubber products.
23
General and administrative expenses. General and administrative expenses
- --------------------------------------
decreased $41,698 or .6% to $6,469,704 in fiscal 2002 from $6,511,402 in fiscal
2001. The decrease is predominantly due to increased accounting and legal fees
and facility and administration costs in Longmont, Colorado, offset by lower
bonus and salary expense and the effect of the adoption in the first quarter of
fiscal 2002 of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). In accordance with SFAS 142, the Company is no longer amortizing
goodwill. Amortization of goodwill for the comparable period in fiscal 2001 was
$525,567. General and administrative expenses decreased $19,969 or 1% from
$1,932,723 in the three months ended June 30, 2001 to $1,912,755 in the three
months ended June 30, 2002. The decrease is predominantly due to increased
administration costs in Longmont, Colorado, offset by lower bonus and salary
expense and the effect of the adoption in the first quarter of fiscal 2002 of
SFAS 142. In accordance with SFAS 142, the Company is no longer amortizing
goodwill. Amortization of goodwill for the comparable period in fiscal 2001 was
$232,408.
Research and development expenses. Research and development expenses increased
- ----------------------------------
$277,097 or 15.2% from $1,826,604 in fiscal 2001 to $2,103,701 in fiscal 2002.
The increase is due to increased research and development on medical device
products in the amount of $411,047 partially offset by reduced efforts for
industrial products in the amount of $133,950. Research and development
expenses increased $41,808 or 9.3% from $450,588 in the three months ended June
30, 2001 to $492,396 in the three months ended June 30, 2002. The increase is
due to increased research and development on medical device products in the
amount of $55,613 partially offset by reduced efforts for industrial products in
the amount of $13,805. The increase in research and development on medical
device products is due to the new Neuroaspirator product.
Litigation settlement (recovery) expenses. The Company recorded a reversal of
- ---------------------------------------------
the litigation settlement during the fourth quarter of fiscal 2002 of
$1,912,959. The Company recorded a litigation settlement charge of $6,176,000
during fiscal 2001. On April 11, 2001, the United States Court of Appeals for
the Federal Circuit Court issued a decision reversing in large part the decision
of the trial court and granting the motion by Mentor against MDA, LySonix and
the Company for violation of Mentor's U.S. Patent No. 4,886,491. This patent
covers Mentor's license for ultrasonic assisted liposuction. Damages were
awarded in favor of Mentor of approximately $4,900,000 and $688,000 for
interest. The Court also granted a permanent injunction enjoining further sales
of the LySonix 2000 in the United States for the use of liposuction. The Court
affirmed that the lower court did not have the ability to increase damages or
award attorneys' fees. Each defendant was jointly and severally liable as each
defendant infringed proportionally. Mentor requested further relief in the
trial court for additional damages. Accordingly, the Company accrued an
aggregate of $6,176,000 for damages, attorneys' fees, interest and other costs
during the third quarter and fourth quarter of fiscal year 2001. On April 24,
2002, the Company resolved all issues related to the lawsuit brought by Mentor.
Under the terms of the settlement, the Company paid Mentor $2,700,000 for its
share of the $5,600,000 settlement with Mentor in exchange for a complete
release from any monetary liability in connection with the lawsuit and judgment.
In connection with this litigation settlement, the Company paid $1,000,000 and
forgave accounts receivable of $455,500 in exchange for certain assets from
MDA/LySonix, which the Company expects to utilize in the future. The net
realizable value of those assets was $295,751. In addition, the Company paid
$228,960 of other accrued costs during fiscal 2002. Accordingly, the Company
recorded a reversal of the litigation settlement during the fourth quarter of
fiscal 2002 of $1,912,959.
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 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.
Other income (expense). Other income was $47,317 in fiscal 2002 as compared to
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other expense of $3,337,631 in fiscal 2001. Other income was $36,402 in the
three months ended June 30, 2002 as compared to other expense of $3,744,955 in
the three months ended June 30, 2001. This increase was principally due to the
following: an increase in royalty income; a decrease in interest income due to
less cash and investments; the prior year included the write-down of investments
in Focus and Hearing Innovations and of related notes of $3,822,428 for fiscal
year 2001 as compared to $952,897 for fiscal year 2002. The Company is no
longer amortizing the investments or recording the equity in loss for its
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investments in Focus and Hearing Innovations for the fiscal year 2002 since the
investments were written down to zero at June 30, 2001, accordingly amortization
of the investments for the comparable period in fiscal 2001 was $230,900 and the
equity in loss on the investments was $365,259. 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 of $473,909 and accrued interest of $16,230
for the above loans. During fiscal 2002, the Company purchased a second
$300,000, 6% Secured Cumulative Convertible Debenture from Focus, due May 25,
2003. The Company recorded an allowance against the entire balance of $300,000
and accrued interest of $16,500 for the above loans. The Company entered into a
loan agreement whereby Focus borrowed $60,000 from the Company. The Company
recorded an allowance against the entire balance of $60,000 and accrued interest
of $900 for the above loan. In addition to the current loans, included in
other income and expense was accrued interest of $33,300 due from Focus Surgery
and $52,058 due from Hearing Innovations for loans and debentures issued in
prior years.
Income taxes. The effective tax rate was 68.5% for the fiscal year ended June
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30, 2002 as compared to an effective tax rate of 35.0% for the fiscal year ended
June 30, 2001. The current effective tax rate of 68.5% was impacted by no
corresponding income tax benefit from the loss of the impairment of Hearing
Innovations and Focus Surgery by $333,406 plus the standard consolidated tax
rate of approximately 35%. The loss on impairment of investments is recorded
with no corresponding tax benefit since these transactions are capital losses.
The benefit for such losses are only utilized to the extent the Company has the
ability to generate capital gains.
CRITICAL ACCOUNTING POLICIES:
General: Financial Reporting Release No. 60, which was released by the
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Securities and Exchange Commission 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, 2003 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 allowance for doubtful accounts, inventories, property, plant and
equipment, goodwill and income taxes to be critical policies due to the
estimation process involved in each.
Allowance for Doubtful Accounts: The Company's policy is to review its
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customers' financial condition prior to extending credit and, generally,
collateral is not required. The Company utilizes letters of credit on foreign
or export sales where appropriate.
Inventories: Inventories are stated at the lower of cost (first-in, first-out)
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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.
Property, Plant and Equipment: Property, plant and equipment are recorded at
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