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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-KSB
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(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934. For the fiscal year ended June 30, 1996.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the period from ____________ to _________.
Commission File Number: 0-20753
SONICS & MATERIALS, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 060854713
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation Or organization) Identification No.)
4 West Kenosia Avenue, Danbury, CT 06810
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (203) 744-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock par value $.03
(Title of class)
Warrants to purchase Common Stock
(Title of class)
Check whether the Company (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for the most recent fiscal year was: $9,376,170
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Company's Common Stock on
September 18, 1996, as reported on the Nasdaq National Market System, was
approximately $13,125,000. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of September 18, 1996, Issuer had outstanding 3,500,100 shares of Common
Stock, par value $.03 per share and 1,725,000 Warrants to purchase shares of
Common Stock.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 1996 Annual Meeting of
Shareholders are incorporated in Part III.
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PART I
Item 1. DESCRIPTION OF BUSINESS
Sonics & Materials, Inc. (the "Company" or "Sonics") designs,
manufactures and sells (i) ultrasonic bonding equipment for the welding, joining
and fastening of thermoplastic components, textiles and other synthetic
materials, and (ii) ultrasonic liquid processors for dispersing, blending,
cleaning, degassing, atomizing and reducing particles as well as expediting
chemical reactions. To further address the needs of its customers, the Company
introduced two new product lines in fiscal year 1996, the spin welder and the
vibration welder, both of which are used for the bonding of thermoplastic
components.
The Company was incorporated in New Jersey in April 1969, and was
reincorporated in Delaware in October 1978. Robert S. Soloff, its chairman,
president and founder, invented the ultrasonic plastic welding process early in
his career. He has been granted nine patents in the field of power ultrasonics
and is considered to be a pioneer in the application of ultrasonic technology to
industrial processes. Howard Deans, general manager of the Company's Ultra Sonic
Seal division, has also invented ultrasonic devices and processes covered by
patents primarily for packaging and sealing. The patents granted to Messrs.
Soloff and Deans have expired and the technology related to them is now in the
public domain and is used in part in the development and manufacture of the
Company's products.
Products
The Company is primarily a manufacturer of equipment in the following
categories:
Ultrasonic Welders -- Manufactured by the Company since its founding,
this line of ultrasonic devices welds, bonds, fastens, sews and rivets
thermoplastic components and other synthetic materials. As new applications were
requested by industrial customers, the line has expanded over the years. Plastic
welders and related devices are used in a wide variety of industries and
applications. These include the automotive, computer, electronics, packaging,
toy, home entertainment, medical device, textile and garment, and home appliance
industries.
There are certain advantages to ultrasonic bonding in comparison to
more traditional welding techniques. Uniform production is often accomplished
due to the consistency, speed and focusing of the energy applied to the welded
part. The bond created between the components is generally strong and clean.
Because no solvents, adhesives or external heat are involved, adverse
environmental factors are minimized. Materials which may not be easily assembled
or welded by other technologies can be effectively bonded ultrasonically.
Moreover, ultrasonic bonding is generally faster and requires less skilled labor
or training than many other methods.
Liquid Processors - Liquid processors, which are sold under the
Company's trade name "Vibra-Cell" or under private label, are ultrasonic devices
that disperse, break up, emulsify, atomize, mix and blend substances in a liquid
or semi-liquid media. Substances affected by liquid processing include
molecules, cells, tissues, fluids, chemicals and particles. These devices are
available in different power configurations for low, medium and high volume
applications with various capacities, features and accessories. Operating
similarly to ultrasonic bonding systems and composed of many of the same
components, liquid processors produce a different result because they are
utilized in liquid, semi-liquid and powdered media.
Liquid processors are utilized in biotechnology by scientists,
biologists, chemists and pharmacologists, primarily in laboratories for research
and testing purposes. The Company has extended the applications for its liquid
processors from the research laboratories to industrial settings. The liquid
processor also functions to process and test materials and substances on the
production line and in vats and tanks. In the manufacture of pharmaceuticals and
in the processing of petroleum products and certain specialty chemicals, they
reduce particle size and facilitate mixing; in the preparation of paint and
dyes, they blend and homogenize materials. In the ink industry, processors
disperse black carbon. In the beverage and other industries, they are used to
de-gas carbonated soda, wine, beer, spirits and solvents. The Company's liquid
processors are also used as high-intensity cleaners. These ultrasonic cleaning
devices are effective in spot cleaning and removing various contaminants, such
as radioactive particles, proteins, rust, blood, and oil from laboratory
equipment.
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The Company recently began to manufacture a liquid processor with a
spray nozzle that atomizes fluids by producing ultra-fine sprays in precisely
measured dosage or at extremely low flow rates. Utilized in laboratories and
plants, ultrasonic atomizers can coat, moisten, or deposit micro-droplets of
liquid on glass, fabric, paper, semiconductors, pharmaceuticals, ceramics or
tubes. They are also used to apply silicone and Teflon, disinfect surfaces and
lubricate small parts.
New Products
In Fiscal 1996, the Company expanded its product line to include both a
vibration welder and a spin welder. Each of these products provides customers
with an alternative method of bonding plastics, neither of which utilizes
ultrasonic technology.
Vibration Welder -- Vibration welders are generally used to weld larger
plastic components together, and have the ability to weld a wider variety of
plastics. In this technology, a non-vibrating part is hydraulically lifted from
below to meet a horizontally-vibrating part. The vibrations cause friction and
heat, melting the plastic, and a bond is effectuated between the plastic parts.
The vibration welder that has been designed and is currently being manufactured
by the Company is computer-controlled and has a power supply, digital display
and other features similar to the Company's ultrasonic welder.
Spin Welder -- The Company has developed and currently manufactures
spin welders based on a non-ultrasonic process known as rotary friction welding.
Rotary friction welding is a bonding technology generally used only when
assembling cylindrical or round-shaped thermoplastic parts. It is also better
suited for plastics of a semi-crystalline nature and assemblies requiring
significant tooling relief. In spin welding, one plastic component is spun
against a mating plastic part that is held stationary in a nesting fixture.
Friction generated by the spinning action produces heat which melts the plastic
and fuses the two parts together.
The spin welding system offered by Sonics features, among other things,
a multi-function programmable controller, RPM display, and a two horsepower
electronic drive motor that spins the plastic part. The spin welder is composed
of a steel frame and column with a control box. Other components of the system
include a pneumatic head, an automotive spindle bearing, an air brake and clutch
system, and steel plates.
Ultrasonic Surgical Instruments
The Company has designed and developed an ultrasonic medical device for
surgical liposuction procedures which dissolves and liquefies fat in humans and
then suctions the remaining substance from the body by a vacuum pump.
The Company's device differs from traditional liposuction devices in that it
ultrasonically assists in the removal of fatty tissue. Instead of tearing and
sucking the tissue away, the ultrasonic probe liquefies much of the fat which is
extracted from the body.
This device has not been qualified under Food and Drug Administration
("FDA") regulations for general sale or use in the United States. The Company is
presently attempting to locate another party to assist it in obtaining FDA
approval of the device, as well as to assist with distribution of the device.
Consequently, management estimates that if a suitable party is located and
FDA approval is obtained, it could be at least three years before full-scale
marketing commences. If another party is not located by the Company to
participate in this endeavor, the Company will reevaluate the feasibility of its
entry into this field.
Sonics intends to file a patent application covering its new ultrasonic
surgical instrument with the U.S. Patent and Trademark Office. It is not certain
whether a patent for this application will be issued or, if issued, that such
patent will offer adequate protection or will not be challenged by the holders
of prior or other patents issued or to be issued for similar purposes. It is
also not certain that FDA approval for such a device will be obtained.
Industry Background
Management believes that in recent years the market for ultrasonic
bonding systems has undergone steady and consistent growth. It appears that more
companies are seeking to replace metal components with thermoplastics in order
to
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reduce the weight of products or to capitalize on other special properties of
synthetic substances. Consequently, ultrasonic bonding systems and related
welding devices have been more extensively utilized in industrial processing and
in new assembly applications. In contrast, management believes that the market
for liquid processors in the past has experienced inconsistent growth and
occasional contractions. One of the major reasons for this inconsistent growth
appears to be the decrease in Federal government spending on research and
development. These budget cutbacks have adversely affected expenditures for new
testing equipment, including liquid processors, by university, and medical and
industrial laboratories. To a certain extent, the past decline in sales of
liquid processors in the research laboratory area has been offset by new and
more extensive applications of such technology in other industries, such as the
paint, chemical, petroleum and beverage industries, and medical industries. The
market for liquid processors has only recently stabilized and appears to have
resumed its growth.
Manufacturing and Supply
Sonics' manufacturing operations, conducted at its facilities located in
Danbury, Connecticut and Aston, Pennsylvania, are run on a batch basis in which
a series of products move irregularly from station to station. The Company
manufactures its products pursuant to historical and projected sales data as
well as specific customer orders.
Most supplies and materials required in the manufacture of the Company's
products are available from many sources. Many of its suppliers are based in the
same general locality as the Company's manufacturing operations. To date, Sonics
has experienced few shortages and delays regarding supplies and materials.
However, it is not certain that such shortages or delays may not have an adverse
impact on Sonics operations in the future. No one supplier accounted for more
than 5% of its total purchases for inventory made in fiscal years 1995 or 1996.
Although management believes that in all cases alternate sources of supplies can
be located, a certain amount of time would inevitably be required to find
substitutes. During any such interruption in supplies, the Company may have to
curtail the production and sale of its devices and systems for an indefinite
period.
Sonics is not a party to any formal written contract regarding the
delivery of its supplies and materials. It generally purchases such items
pursuant to written purchase orders of both the individual and blanket
varieties. Blanket purchase orders usually entail the purchase of larger amounts
of items at fixed prices for delivery and payment on specific dates ranging from
two months to one year.
Sonics has qualified its Connecticut facility to meet the quality
management and assurance standards of an international rating organization (ISO
9001). ISO 9001 certification indicates that the Company has successfully
implemented a quality assurance system that satisfies this standard.
Sonics has also obtained CE approvals, which are now necessary for sales in
Europe, for many models of its ultrasonic welder and liquid processor.
It is working towards CE approvals for its other product lines.
Maintenance and Service
The Company offers warranties on all its products, including parts and
labor, that range from one year to three years depending upon the type of
product concerned. For fiscal years ended June 30, 1995 and 1996, expenses
attributable to warranties were approximately $78,000 and $63,000, respectively.
Sonics performs repair services on all of its products sold domestically either
at its Connecticut or Pennsylvania facilities or at customer locations.
Servicing of foreign sales are usually handled by distributors abroad or in the
Company's Swiss branch office regarding its devices sold in Europe. These
services are performed upon specific order without contracts at various rates.
The Company usually charges for the time that its employees expend on the task
and the cost of the materials or parts involved in the repair. For fiscal years
ended June 30, 1995 and 1996, the Company had income of approximately $321,000
and $358,000, respectively, for out-of-warranty services performed. Company
devices generally have a long operating life, and Sonics has repaired machines
manufactured by it that are more than 25 years old.
Sales and Marketing
Sonics generally markets and sells its products in the United States and
abroad through a network of sales representatives and distributors to end users
and original equipment manufacturers ("OEMs"). In the United States, the Company
and its Ultra Sonic Seal division utilize approximately 50 sales representatives
in 48 states throughout the country.
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In the overseas market, it relies on approximately 66 distributors and several
sales representatives to distribute its products in 49 countries. The areas
covered by these third parties include North and South America, the Middle and
Far East, Europe and Australia.
Sales Representatives
The Company's relationship with its sales representatives is usually
governed by a written contract which is generally terminable by either party on
30 days prior notice. The contract provides for exclusive territorial and
product representation and commissions payable to them on their sales depending
on whether basic units or accessories are involved and typically covers
ultrasonic bonding systems and liquid processors. OEM sales made by the Company
are excluded from the commission arrangements. Generally, the sales
representatives do not purchase for their own account, but merely sell Sonics'
products on the Company's behalf. They also may represent other manufacturers
but generally not those competitive with the Company's products. Except for one
sales representative which accounted for 10.1% in fiscal 1996, no one sales
representative accounted for more than 5% of Sonics' sales for fiscal years 1995
and 1996. The loss of such representatives representing in the aggregate
significant sales may have a material adverse impact on the Company's business.
The Company's Ultra Sonic Seal division ("USS") sells its plastic welder
under its division name. USS maintains a network of sales representatives in the
United States different from those for Sonics' main product lines. The terms of
these arrangements with its sales representatives are similar.
Distributors
Sales of Sonics' products to distributors are also generally made
pursuant to written contracts. Under such contracts, distributors are prevented
from selling devices competitive to the Company's products and provide repair
service. Generally, payments must be made in U.S. dollars within 30 days of
delivery of the product. Distribution arrangements are either exclusive or
non-exclusive and are cancelable upon 30 days notice. The contracts generally
exclude private label sales made by Sonics in the distributor's territory even
if the relationship is of an exclusive type and typically covers sales of both
ultrasonic bonding systems and liquid processor lines. The Company now also
offers both its spin welder and vibration welder to its sales representatives
and distributors. The Company also sells these products directly to end-users or
under private label. The Company usually grants discounts to distributors,
depending on the product and quantity sold. No one distributor accounted for
more than 5% of Sonics' sales in fiscal years 1995 and 1996. The loss of such
distributors in substantial numbers or at key locations could have a material
adverse effect on the Company's business. USS maintains separate but similar
arrangements with at least three foreign distributors abroad.
The Company promotes the sale of its products through direct mailings,
trade shows, product literature, press releases, advertising in trade magazines
and listings in catalogs. The Company occasionally engages in cooperative
advertising with some of its distributors.
Customers
Sonics sells its products, directly or indirectly, to numerous
customers, ranging in size from small companies to large Fortune 100
corporations. Its customers are end-users, original equipment manufacturers,
system integrators and resellers as well as distributors. Many of its customers
are repeat purchasers. None of its customers represented more than 5% of Sonics'
sales for fiscal 1995 or 1996.
International Operations
The Company's international activities are an important portion of its
business. Approximately 34%, and 33% of its sales for fiscal years 1995 and
1996, respectively, are attributable to sales of its products outside the United
States. The Company also operates a branch office in Gland, Switzerland where it
sells and services its ultrasonic devices for the European market except for the
United Kingdom.
Internationally, the Company sells its ultrasonic products under its own
label to end users and distributors or under the trade name of the distributor.
In most cases, Sonics' devices are shipped to foreign distributors and end users
as
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completed units. However, in certain situations, especially with regard to
distributors of ultrasonic welders located in Asia and, South America, the
Company's systems are made available in kit form and assembled there. Kits
frequently contain all components for devices but in some instances only a
portion of the requisite components are provided. For some foreign sales, no
written distribution arrangement exists.
Competition
The Company competes in each of its markets against a variety of other
concerns, many of which are larger and have greater financial, technical,
marketing, distribution and other resources than Sonics. It competes on the
bases of service, performance, reliability, price and delivery.
Prior to making a sale, the Company will expend time and resources
exploring whether it can profitably handle a new application for potential and
existing customers. Generally, the Company receives no compensation for this
pre-sale activity except when special tooling is required and payment for such
services only occurs when and if product sales are consummated. Like nearly all
manufacturers in this industry, the Company invests heavily in this pre-sale
examination of new applications. Such examination represents another area in
which such manufacturers compete, and those with greater resources and manpower
may possess a competitive advantage.
With respect to its ultrasonic bonding equipment, the Company encounters
competition from Branson Ultrasonics Co.("Branson"), a subsidiary of Emerson
Electric Co., Dukane Corp. ("Dukane"), Herrmann Ultrasonics, Inc., Forward
Technology Industries, Inc. and other smaller manufacturers. The two dominant
companies in this area are Branson and Dukane. Some of these competitors also
offer spin and vibration devices as well as ultrasonic ones.
In the ultrasonic liquid processor market, the Company's principal
competitors are Branson and Misonix Inc. Management believes that in this market
Sonics has the largest market share.
Backlog
As of June 30, 1996, the Company's backlog was approximately $1,466,147
as compared with a backlog of $970,025 as of June 30, 1995. No one customer
accounted for more than 10% of such backlog at June 30, 1996.
Substantially all of the Company's backlog figures are based on written
purchase orders executed by the customer and involve product deliveries and not
engineering services. All orders are subject to cancellation.
Research and Development
The Company maintains an engineering staff responsible for the
improvement of existing products, modification of products to meet customer
needs and the engineering, research and development of new products and
applications. Engineering and research and development expenses were
approximately $349,000 for fiscal 1995 and $372,000 for fiscal 1996.
Intellectual Property
Proprietary information and know-how are important to the Company's
success. Sonics holds no active patents but has trademark protection for its
"Vibra-Cell" trade name. There can be no assurance that others have not
developed, or will not develop, independently the same or similar information or
obtain and use proprietary information of the Company. Sonics has obtained
written assurances from its employees, sales representatives and distributors
under confidentiality agreements regarding its proprietary information.
On February 23, 1996, the Company filed a patent application with the
U.S. Patent and Trademark office for one of its bonding machines. The Company
intends to file a patent application with the U.S. Patent and Trademark Office
covering its new ultrasonic surgical instrument. The Company cannot predict
whether a patent will be granted or the extent of protection offered by such
patent, if granted.
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Government Regulation
Sonics' bonding and liquid processor lines generally are not governed by
specific legal rules and laws. The Company's ultrasonic surgical instrument,
however, is subject to a variety of FDA regulations before it can be
manufactured or sold in the United States. The FDA has rules which govern the
design, manufacture, distribution, approval and promotion of medical devices in
the United States. Full FDA approvals may often take a number of years and
involves the expenditure of substantial resources.
Various states and foreign countries in which Sonics' products are, or
may be, sold may impose additional regulatory requirements, such as the Medical
Device Directive in the European Common Market.
Sonics intends to file a patent application for its liposuction device.
The Company is also seeking a another party to assist it in obtaining FDA
approval for the use and marketing of its ultrasonic surgical instrument, as
well as for assistance in the distribution of the device. Obtaining FDA approval
for the device's use and marketing requires the implementation of two separate
procedures. First, a 510(k) notification for the use of its product as a general
surgical removal device would have to be submitted with the FDA. Second, it
would require the pursuit of regulatory approval from the FDA for the specific
application of its device to liposuction procedures through the filing of a
pre-market approval application ("PMA") or through reclassification. No
assurance can be given that any FDA approval application procedure would be
successful, if such an application if filed. Further, if another party is not
located by the Company to participate in this endeavor, the Company will
reevaluate the feasibility of its entry into this field.
Sonics' sales abroad may make it subject to other U.S. and foreign laws.
The Company and its agents are also governed by the restrictions of the Foreign
Corrupt Practices Act of 1977, as amended (the "FCPA"). FCPA prohibits the
promise or payments of any money, remuneration or other items of value to
foreign government officials, public office holders, political parties and
others with regard to the obtaining or preserving commercial contracts or
orders. Sonics has urged its foreign distributors to comply with the
requirements of FCPA. All these restrictions may hamper the Company in its
marketing efforts abroad.
In addition, other federal, state and local agencies, including those in
the environmental, fire hazard control, and working conditions areas could have
a material adverse affect upon the Company's ability to do business. Sonics is
not involved in any pending or threatened proceedings which would require
curtailment of, or otherwise restrict, its operations because of such
regulations and compliance with applicable environmental or other regulations.
None of these laws has had a material effect upon its capital expenditures,
financial condition or results of operations.
Employees
As of September 18, 1996, the Company had 101 full-time employees
including its officers, of whom 63 were engaged in manufacturing, three in
repair services, seven in administration and financial control, nine in
engineering and research and development, and 19 in marketing and sales.
None of Sonics' employees is covered by a collective bargaining
agreement or represented by a labor union. Sonics considers its relationship
with its employees to be good.
The design and manufacture of the Company's equipment requires
substantial technical capabilities in many disparate disciplines, from mechanics
and computer science to electronics and mathematics. While management believes
that the capability and experience of its technical employees compares favorably
with other similar manufacturers, there can be no assurance that it can retain
existing employees or attract and hire the highly capable technical employees
necessary in the future on favorable terms, if at all.
Any statements in this Annual Report that are not statements of
historical fact are forward-looking statements that are subject to a number of
important risks and uncertainties that could cause actual results to differ
materially. Specifically, any forward looking statements in this Annual Report
related to the Company's objectives of future growth, profitability and
financial returns are subject to a number of risks and uncertainties, including,
but not limited to, risks related to a growing market demand for Sonics'
existing and new products, continued growth in sales and market share of Sonics
and its Ultra
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Sonic Seal division's products, pricing, market acceptance of existing
and new products, a fluctuation in the sales product mix, general economic
conditions, competitive products, and product and technology development.
There can be no assurance that such objectives will be achieved. In addition,
the Company's objectives of future growth, profitability and financial
returns are also subject to the uncertainty of the Company being able to locate
another party willing to assist Sonics in obtaining FDA approval for its
ultrasonic surgical device and in developing a distribution network for this
product. It is also uncertain whether a patent will be granted for the Company's
ultrasonic surgical device.
Item 2. Description of Property
The Company's primary manufacturing and office facility is located in
Danbury, Connecticut in four separate steel and cinder block buildings, three of
which are on the same parcel of land. These facilities are considered adequate
for its current needs, but may not be suitable for Sonics' anticipated
requirements. In management's opinion, appropriate space for its long-term needs
is available in the Danbury area on terms comparable to those of its existing
facility. In the future, Sonics may lease or purchase larger facilities for its
headquarters.
As of September 18, 1996, the following table lists the Company's
offices by location, all of which are leased, and certain other information:
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Approximate
Total Area Approximate
Leased in Square Expiration Date of Current Annual
Footage Lease Rent (1)
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Kenosia Ave., Danbury, Connecticut 23,000 October 31, 1996 (2) $159,000
Shelter Rock Road, Danbury,
Connecticut 10,000 February 14, 1998 (2) 45,000
Aston, Pennsylvania 4,900 September 30, 1997 39,200
Naperville, Illinois 2,000 December 31, 1996 12,500
Gland, Switzerland 3,000 January 31. 1997 (2) 14,400
</TABLE>
(1) Includes proportionate cost of utilities, repairs, cleaning, snow
removal, taxes and insurance.
(2) Contains renewal option as listed below:
Kenosia Ave., Danbury, CT 6 months
Shelter Rock Rd., Danbury, CT 6 months
Gland Switzerland 1 year
The Company believes that it has adequate insurance coverage for all
of its leased properties. The Company also leases certain automobiles and
equipment.
Item 3. Legal Proceedings
On October 3, 1995, the Company commenced an action in the United States
District Court in Connecticut for declaratory judgments against Sonique Surgical
Systems, Inc. ("Sonique"), and Mentor Corp. ("Mentor") on issues involving
alleged infringement of their patent rights and alleged violations of certain
confidentiality arrangements. Subsequently, Sonics moved to amend its complaint
in this action in order to add another cause of action against the defendants,
for breach of a confidentiality contract. On or about November 14, 1995, Sonique
and Mentor answered Sonics' complaint denying certain of its allegations and
admitting others and counterclaiming against it for patent infringement and
breach of confidential information obligations in such suit. In their
counterclaims, defendants sought unspecified damages, injunctions, attorneys'
fees and other costs. In May of 1996, the Company, Sonique and Mentor reached an
agreement settling all outstanding claims and counterclaims among the three
companies.
There are no other pending or threatened material litigation or
proceedings against the Company.
Item 4. Submission of Matters to a Vote of Security-Holders
Not applicable.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Since February 27, 1996, the Common Stock and Warrants to purchase
Common Stock of the Company have been traded and quoted through the National
Association of Securities Dealers Inc. National Market System ("NASDAQ") under
the symbols "SIMA" and "SIMAW", respectively. The following table sets forth the
range of high and low bids for the Company's Common Stock and Warrants for the
periods indicated as reported by NASDAQ.
<TABLE>
<CAPTION>
Stock Warrants
------------------------------- ------------------------------
Quarter Ended High Low High Low
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<S> <C> <C> <C> <C>
March 31, 1996 11 1/4 6 3/4 5 3/4
June 30, 1996 13 11 7/8 6 5/8 4
</TABLE>
The prices presented in the table are bid prices, which represent prices
between broker-dealers and do not include retail mark-ups and mark-downs or any
commission to the dealer. The prices presented may not reflect actual
transactions.
On September 18, 1996, the closing price of the Common Stock of the
Company, as reported by NASDAQ, was 13 1/8 per share, and the closing price of
the Warrants, as reported by NASDAQ was $6 per warrant. On September 18,1996,
the Company had eight stockholders of record and two warrant holders of record.
The Company has been informed by its registrar and transfer agent that these are
holders in nominee name. The Company believes that the number of beneficial
holders is greater.
The Company intends to follow a policy of retaining any earnings to
finance the development and growth of its business. Accordingly, it does
anticipate other payments of cash dividends in the foreseeable future. The
payment of dividends, if any, rests within the discretion of the Board of
Directors and will depend upon, among other things, on the Company's earnings,
its capital requirements and its overall financial condition.
Item 6. Management's Discussion and Analysis or Plan of Operation
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. All references to
full years are to the applicable fiscal year of the Company. This discussion
should be read in conjunction with the financial statements and notes thereto
included elsewhere herein.
Results of Operations
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
Net Sales. Net sales for the year ended June 30, 1996 increased $801,000
or 9.3% over the prior year. This is primarily the result of increased sales
volume for the liquid processor product line, as well as increased sales volume
generated by the Company's ultrasonic bonding product line. In addition, the
Company implemented a limited price increase for some of its products during the
current fiscal year.
Cost of Sales. Cost of sales for the period increased from $4,228,000 in
fiscal 1995 to $5,092,000 in fiscal 1996. This represents an increase of
approximately 20.4%. As a percentage of sales, cost of sales increased from
49.3% in fiscal 1995 to 54.3% in fiscal 1996. A substantial portion of this
increase is attributable to increased sales. The remaining increase is primarily
attributable to the introduction of two new product lines as well as the
introduction of the new generation of ultrasonic welders, in fiscal 1996.
Initial costs associated with the startup of the Spin Welder line and the
Vibration Welder line caused the cost of these products, as a percentage of
their net sales during the start-up period, to be higher than the Company has
experienced with other product lines. The Company was not able to pass these
increased costs on to the customer. Management does not expect these increased
costs to continue once these product lines are established. A
8
<PAGE>
<PAGE>
fluctuation in the sales product mix also contributed to the increase. Since not
all products have the same markup due to market considerations, the cost of
sales may fluctuate depending on the actual sales mix for the period.
Selling Expenses. Selling expenses for the year ended June 30, 1996
increased $382,000 or 15.6% over the prior year. A substantial portion of the
increase is attributable to increased sales. The primary factor contributing to
the remaining portion of the increase is the costs associated with two new
product lines, the vibration welder and the spin welder. These costs of
approximately $141,000 include the design and printing of product literature, as
well as associated personnel expenses. The Company also incurred an additional
expense relating to the design and printing of a new brochure for its ultrasonic
welders. The increase is also attributable to $56,000 of increased travel
expenses, including travel associated with the Company's international sales
meeting held in November of 1995, and expenses related to the Company's liaison
to the Korean marketplace.
General and Administrative Expenses. General and administrative expenses
for the year ended June 30, 1996 decreased by approximately $87,000 or 12.9%
from the prior year. In fiscal 1995, the Company paid its shareholder
approximately $160,000 to cover his personal tax liability resulting from the
Company's sub-chapter S status. No such payments were made in fiscal year 1996.
Offsetting the elimination of the bonus was an increase of approximately $80,000
in professional fees. This increase is primarily attributable to legal fees
associated with the litigation related to the Company's dispute with Sonique and
Mentor which has been settled.
Research and Development Expenses. Research and development expenses
increased by approximately $23,000 in fiscal 1996. This represents an increase
of approximately 6.6%. The increase is primarily attributable to expenses of
approximately $46,000 incurred in fiscal year 1996 relating to CE testing of
Sonics'existing ultrasonic equipment. CE approval is required for all equipment
shipped into countries belonging to the European Community. The increase
resulting from the CE testing was partially offset by a decrease in research and
development materials.
Total Operating Expenses. Total operating expenses for fiscal 1996
increased $211,000 or 5.9% over fiscal 1995. This increase is a result of the
factors discussed above offset by a one-time charge to compensation expense in
fiscal 1995 resulting from the repurchase and cancellation of stock options
formerly held by two officers of the Company.
Interest Expense. Total interest expense for fiscal 1996 increased
$87,000 or 680%. This is due to increased borrowings on the Company's line of
credit with its bank. In fiscal 1995 the average daily balance under this line
of credit was approximately $141,000, compared to approximately $661,000 in
fiscal 1996. The Company intends to reduce borrowings on its line of credit by
utilizing proceeds from the initial public offering.
Income Taxes. Income taxes decreased by $53,000 or 117.8% due to the
Company recording an income tax benefit of $91,000 for the recognition of
Federal deferred tax asset upon conversion of the Company from an S-corporation
to a C-corporation due to the completion of the initial public offering. This
amount has been offset by an income tax provision of $50,000 based on the income
earned by the Company from the date of the offering.
Year Ended June 30, 1995 Compared to Year Ended June 30, 1994
Net Sales. Net sales increased from $7,537,000 for fiscal 1994 to
$8,575,000 for fiscal 1995, an increase of 13.8%. The increase in net sales was
primarily attributable to increased sales of plastic welding equipment and
expanded foreign markets for plastic bonding and liquid processor equipment. As
a percentage of net sales, plastic welding equipment increased from 65.6% for
fiscal 1994 to 70.7% for fiscal 1995.
Cost of Sales. Cost of sales increased by $486,000 in fiscal 1995 from
the previous fiscal year. However, as a percentage of net sales, these expenses
remained relatively constant, decreasing from 49.7% in fiscal 1994 to 49.3% for
the same period in 1995. This small decrease is attributable to the sales mix.
Selling Expenses. Selling expenses for fiscal 1995 increased $226,000 or
10.2% over fiscal 1994. The increase in selling expenses is primarily
attributable to increased participation in foreign trade shows, costs associated
with opening a new sales office, increased foreign shipping costs and other
sales expenditures. As a percentage of net sales over the periods, these
expenses remained relatively consistent at 28.6% for fiscal 1995 and 29.5% for
fiscal 1994.
9
<PAGE>
<PAGE>
General and Administrative Expenses. General and administrative expenses
for fiscal 1995 decreased $129,000 or 16.1% when compared to the same period in
1994. This decrease was primarily due to lower amounts paid to Mr. Soloff, the
Company's then sole stockholder, during fiscal 1995 to cover his income tax
liability for S-corporation income. As a percentage of net sales, these expenses
decreased to 7.9% in fiscal 1995 from 10.7% in fiscal 1994.
Research and Development Expenses. Research and development expenses for
fiscal 1995 increased $14,000 or 4.1% in comparison with the same period in
1994. This increase is due to the addition of a new engineering position in
research and development and the Company's continuing efforts to improve
existing products as well as to develop future products. Additional in-house
engineering permitted decreases in expenditures to outside consultants.
Total Operating Expenses. Total operating expenses for fiscal 1995
increased $217,000 or 6.4% over the same period in 1994. This increase was due,
in part, to the Company's repurchase of two stock options held by officers of
the Company. A one-time charge of $106,000 in operating expense reflects the
compensation expense relating to the repurchase of these options.
Liquidity and Capital Resources
As of June 30, 1996, the Company's working capital had increased to
$6,010,000 from $2,184,000 at the end of fiscal 1995. This represents an
increase of approximately 175%. This increase is primarily attributable to
increases in short term investments, due to the initial public offering, and
inventory.
Through an initial public offering of common stock, the Company raised
approximately $3,833,000, net of expenses associated with the offering. The
Company paid down $670,000 on the line of credit with its bank. The Company
subsequently borrowed an additional $820,000. The Company used approximately
$427,000 in operating activities. An additional $3,028,000 was invested in short
term U.S. Government securities, and $150,000 in new equipment. In addition,
prior to the completion of the initial public offering of common stock the
Company made a distribution to its sole shareholder of approximately $496,000
for income taxes on personal income taxes on S-corporation earnings.
Impact of Inflation
The Company does not believe that inflation significantly affected its
results of operations for the 1996 fiscal year.
Item 7. Financial Statements
The response to this item is submitted in this report under the heading
"Financial Statements" and is incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Information required by this Item 9 is incorporated herein by reference
from the definitive proxy statement of Sonics to be filed with the Securities
and Exchange Commission ("SEC") within 120 days following the end of Sonics'
fiscal year ended June 30, 1996, or October 28, 1996, relating to its 1996
Annual Meeting of Stockholders.
Item 10. Executive Compensation
10
<PAGE>
<PAGE>
Information required by this Item 10 is incorporated herein by reference
from the definitive proxy statement of Sonics to be filed with the SEC within
120 days following the end of Sonics' fiscal year ended June 30, 1996, or
October 28, 1996, relating to its 1996 Annual Meeting of Stockholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item 11 is incorporated herein by reference
from the definitive proxy statement of Sonics to be filed with the SEC within
120 days following the end of Sonics' fiscal year ended June 30, 1996, or
October 28, 1996, relating to 1996 Annual Meeting of Stockholders.
Item 12. Certain Relationships and Related Transactions
Information required by this Item 12 is incorporated herein by reference
from the definitive proxy statement of Sonics to be filed with the SEC within
120 days following the end of Sonics' fiscal year ended June 30, 1996, or
October 28, 1996, relating to its 1996 Annual Meeting of Stockholders.
.
Item 13. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits.
<S> <C>
3(i) Certificate of Incorporation of the Registrant, as amended (incorporated by
reference from Exhibit 3.1 of Amendment No. 3 to Registration Statement No.
33-96414).
3(ii) Amended By-laws of the Registrant (incorporated by reference from Exhibit 3.2
of Registration Statement No. 33-96414).
10(i) Form of Employment Agreement between the Registrant and Robert
S. Soloff (incorporated by reference from Exhibit 10.1 of
Registration Statement No. 33-96414).
10(ii) 1995 Incentive Stock Option Plan and form of Stock Option Agreement (incorporated
by reference from Exhibit 10.3 of Registration Statement No. 33-96414).
10(iii) Original Office Lease and Amendments between the Registrant and Nicholas R.
DiNapoli, Jr. DBA DiNapoli Holding Co. (Danbury, CT) (incorporated by reference
from Exhibit 10.4 of Registration Statement No. 33-96414).
10(iv) Lease between Registrant and Aston Investment Associates (Aston, PA) (incorporated
by reference from Exhibit 10.5 of Registration Statement No. 33-96414).
10(v) Amended lease between Registrant and Robert Lenert (Naperville, IL) (incorporated
by reference from Exhibit 10.6 of Amendment No. 4 to Registration Statement No.
33-96414).
10(vi) Lease between Registrant and Janine Berger (Gland, Switzerland) (incorporated by
reference from Exhibit 10.7 of Registration Statement No. 33-96414).
10(vii) Form of Sales Representation Agreement (incorporated by reference from Exhibit 10.8
of Registration Statement No. 33-96414).
10(viii) Form of Sales Distribution Agreement (incorporated by reference from Exhibit 10.9
of Registration Statement No. 33-96414).
10(ix) Consulting Agreement dated October 17, 1995 between the Registrant and Alan
Broadwin (incorporated by reference from Exhibit 10.10 of Amendment No. 3 of
Registration Statement No. 33-96414).
27 Financial Data Schedule (filed herewith)
(b) The Company did not file a Form 8-K during the fourth quarter of fiscal
year 1996.
</TABLE>
11
<PAGE>
<PAGE>
Financial Statements
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets F-3
Statements of Income F-4
Statement of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholder
Sonics & Materials, Inc.
We have audited the accompanying balance sheets of Sonics & Materials, Inc. as
of June 30, 1995 and 1996, and the related statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sonics & Materials, Inc. as of
June 30, 1995 and 1996, and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
/s/ Grant Thornton LLP
New York, New York
August 20, 1996
F-2
<PAGE>
<PAGE>
Sonics & Materials, Inc.
BALANCE SHEETS
June 30,
<TABLE>
<CAPTION>
ASSETS 1995 1996
--------- -------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Note B-4) $ 187,490 $ 73,129
Short-term investments (Note C) 3,028,032
Accounts receivable, net of allowance for doubtful
accounts of $45,000 in 1995 and 1996 (Note K) 1,949,958 1,953,941
Inventories (Notes B-1 and D) 2,058,307 3,248,782
Prepaid income taxes 30,465
Deferred income taxes (Note L) 80,000
Other current assets 89,741 111,327
----------- ------------
Total current assets 4,285,496 8,525,676
PROPERTY AND EQUIPMENT - NET (Notes B-2 and E) 277,807 301,706
OTHER ASSETS - NET (Note B-6) 422,102 353,124
---------- ----------
$4,985,405 $9,180,506
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (Note F) $ 650,000 $ 832,813
Demand note payable (Note G) 500,000 500,000
Accounts payable 537,625 767,620
Commissions payable 152,812 160,081
Other accrued expenses and sundry liabilities (Note B-7) 261,201 254,677
---------- ----------
Total current liabilities 2,101,638 2,515,191
COMMITMENTS (Note H)
STOCKHOLDERS' EQUITY (Note I)
Common stock - par value $.03 per share; authorized, 10,000,000 shares;
issued and outstanding, 1,350,000 shares at
June 30, 1995 and 3,500,100 shares at June 30, 1996 40,500 105,003
Additional paid-in capital 139,237 6,417,126
Retained earnings 2,704,030 143,186
---------- ----------
2,883,767 6,665,315
---------- ----------
$4,985,405 $9,180,506
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<PAGE>
Sonics & Materials, Inc.
STATEMENTS OF INCOME
Year ended June 30,
<TABLE>
<CAPTION>
1995 1996
----------- ---------
<S> <C> <C>
Net sales $8,574,845 $9,376,170
Cost of sales 4,228,024 5,091,789
--------- ---------
Gross profit 4,346,821 4,284,381
Operating expenses
Selling 2,450,438 2,832,251
General and administrative 676,239 588,923
Research and development 349,360 372,087
Compensation expense - stock options 106,000 -
---------- ---------
Total operating expenses 3,582,037 3,793,261
Other income (expense)
Interest expense (12,817) (100,011)
Other 27,751 45,201
----------- -----------
14,934 (54,810)
Income before income taxes 779,718 436,310
Provision for income taxes (Note L) 45,000 (8,000)
----------- ------------
NET INCOME $ 734,718 $ 444,310
=========== ===========
Pro forma data (Note P)
Historical income before taxes $ 779,718 $ 436,310
Subchapter S stockholders' tax distribution recorded as salary 160,000 -
----------- -----------
Income before provision for income taxes 939,718 436,310
Provision for income taxes 375,887 174,524
----------- -----------
NET INCOME $ 563,831 $ 261,786
=========== ===========
Primary income per share
Net income per share $.22 $.09
=========== ===========
Weighted average common shares outstanding 2,624,000 3,409,303
=========== ===========
Fully diluted income per share
Net income per share $.22 $.08
=========== ===========
Weighted average common shares outstanding 2,624,000 3,440,770
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<PAGE>
Sonics & Materials, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock
-------------------- Additional
Par paid-in Retained Stockholders'
Shares value capital earnings equity
-------- ------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance - June 30, 1994 455,555 $ 45,556 $ 210,181 $2,524,312 $2,780,049
Purchase of options (76,000) (76,000)
transactions
Distribution to stockholder (555,000) (555,000)
2.96-for-1 stock split 894,445 (5,056) 5,056
Net income 734,718 734,718
--------- --------- ---------- ---------- ---------
Balance - June 30, 1995 1,350,000 40,500 139,237 2,704,030 2,883,767
1.85-for-1 stock split 1,150,000 34,500 (34,500)
Distribution to stockholder (495,730) (495,730)
Capital contribution from
S-corporation earnings 2,509,424 (2,509,424)
Issuance of common stock 1,000,100 30,003 3,802,965 3,832,968
Net income 444,310 444,310
--------- --------- ---------- ---------- ---------
Balance - June 30, 1996 3,500,100 $105,003 $6,417,126 $ 143,186 $6,665,315
========= ======== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
<PAGE>
Sonics & Materials, Inc.
STATEMENTS OF CASH FLOWS
Year ended June 30,
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income $ 734,718 $ 444,310
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation of equipment and leasehold improvements 203,425 236,105
Deferred income taxes (80,000)
Compensation expense - stock options 106,000
Gain on sale of equipment (2,500)
Increase (decrease) in cash flows from changes in
operating assets and liabilities
Accounts receivable (715,587) (3,983)
Inventory (165,867) (1,190,475)
Prepaid income taxes (30,465)
Other assets (169,351) (43,901)
Accounts payable and accrued liabilities 62,721 244,354
---------- ----------
Net cash provided by (used in) operating activities 56,059 (426,555)
---------- ----------
Cash flows from investing activities
Capital expenditures on equipment and leasehold
improvements (148,595) (149,512)
Proceeds from sale of equipment 2,500
Short-term investments (3,028,032)
----------- ----------
Net cash used in investing activities (148,595) (3,175,044)
----------- ----------
Cash flows from financing activities
Distribution to stockholder (555,000) (495,730)
Cash paid for stock options (182,000)
Proceeds from note payable, net 525,000 150,000
Proceeds from demand note payable 500,000
Deferred registration costs (70,000)
Proceeds from issuance of common stock 3,832,968
---------- ----------
Net cash provided by financing activities 218,000 3,487,238
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 125,464 (114,361)
Cash and cash equivalents at beginning of year 62,026 187,490
---------- ----------
Cash and cash equivalents at end of year $ 187,490 $ 73,129
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 9,400 $ 94,000
========== ==========
Income taxes $ 32,000 $ 150,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30, 1995 and 1996
NOTE A - BUSINESS
Sonics & Materials, Inc.'s (the "Company") primary business is the
manufacturing and distribution of ultrasonic assembly and liquid processing
machinery and equipment. Sales are made throughout the United States,
Europe, Asia, South America and Australia. The Company's primary location of
operations is Danbury, Connecticut.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
2. Equipment and Leasehold Improvements
Equipment and leasehold improvements are carried at cost less
accumulated depreciation and amortization. Depreciation using both the
declining-balance and straight-line methods is designed to amortize the
cost of various classes of assets over their estimated useful lives,
which range from five to seven years. Leasehold improvements are
amortized over the shorter of the life of the related asset or the term
of the lease. Expenditures for replacements are capitalized and the
replaced items are retired. Maintenance and repairs are expensed as
incurred.
3. Taxes
In 1989, the Company elected to be treated as an S Corporation for
Federal income tax reporting. An S Corporation is generally treated like
a partnership, and is exempt from Federal income taxes with certain
exceptions. Accordingly, no provision or liability for Federal income
taxes was reflected in the accompanying statements during the period the
Company was treated as an S Corporation. Instead, the stockholder
reported his pro rata share of corporate taxable income or loss on his
respective individual income tax returns. A provision for state income
taxes was made for those states not recognizing S Corporation status.
On February 26, 1996, the Company's S Corporation status terminated with
the completion of the Offering as described in Note I. Upon termination
of its S Corporation status, the Company uses the liability method for
both Federal and state income tax purposes. The effect of the change in
status is reflected in income from continuing operations. Such change in
status resulted in an increase in deferred tax assets at February 26,
1996 by approximately $91,000 and earnings by the same amount.
4. Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
F-7
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995 and 1996
NOTE B (continued)
5. Revenue Recognition
Revenue is recognized upon the shipment of finished merchandise to
customers. Allowances for sales returns are recorded as a component of
net sales in the periods in which the related sales are recognized.
6. Other Assets
Demonstration equipment is carried at cost less accumulated
depreciation. Depreciation is provided for using the declining-balance
method over the estimated useful life of seven years. The net book value
is used to calculate any gain or loss on sale of the related
demonstration equipment.
At June 30, 1995 and 1996, the major components of other assets were:
<TABLE>
<CAPTION>
June 30, June 30,
1995 1996
-------- --------
<S> <C> <C>
Demonstration equipment - net of accumulated
depreciation of $150,557 and $196,973 for
1995 and 1996, respectively $247,960 $270,863
Deferred registration costs 70,000
Other 104,142 82,261
-------- --------
$422,102 $353,124
======== ========
</TABLE>
7. Other Accrued Expenses and Sundry Liabilities
At June 30, 1995 and 1996, the major components of other accrued
expenses and sundry liabilities were:
<TABLE>
<CAPTION>
June 30, June 30,
1995 1996
-------- --------
<S> <C> <C>
Accrued payroll $ 81,100 $ 76,120
Accrued vacation pay 54,808 59,477
Other 125,293 119,080
-------- --------
$261,201 $254,677
======== ========
</TABLE>
8. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F-8
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995 and 1996
NOTE B (continued)
9. Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair value of the Company's
short-term debt approximates the carrying value. Furthermore, the
carrying values of all other financial instruments potentially subject
to valuation risk (principally consisting of cash, accounts receivable
and accounts payable) also approximate fair value.
10. Net Income Per Share
Net income per share is based on the weighted average number of common
and common equivalent shares (warrants and options) outstanding during
the period, calculated using the modified treasury stock method in
fiscal 1996 and the treasury stock method in fiscal 1995 (see Note P).
The modified treasury stock method limits the assumed purchase of
treasury shares to 20% of the outstanding common shares.
In connection with the initial public offering (see Note I), the Company
paid down $670,000 of outstanding debt. If this transaction had occurred
as of July 1, 1995, the net income per share would have been the same as
the reported net income per share.
11. Advertising Costs
All costs related to advertising are expensed in the period incurred.
Advertising costs were approximately $221,000 and $180,000 for the years
ended June 30, 1996 and 1995, respectively.
NOTE C - SHORT-TERM INVESTMENT
The Company has a short-term investment comprised of a U.S. Government
agency issue. This investment is classified as available-for-sale and is
reported at fair value on the Company's balance sheet. Quoted market prices
have been used in determining the fair value of this investment.
NOTE D - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1995 1996
-------- --------
<S> <C> <C>
Raw materials $ 615,462 $ 975,332
Work-in-process 1,086,773 1,501,716
Finished goods 356,072 771,734
---------- ----------
$2,058,307 $3,248,782
========== ==========
</TABLE>
F-9
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995 and 1996
NOTE E - PROPERTY AND EQUIPMENT
A summary of equipment and leasehold improvements follows:
<TABLE>
<CAPTION>
June 30, June 30,
1995 1996
-------- --------
<S> <C> <C>
Trade show booth $ 50,494 $ 50,494
Machinery and equipment 518,029 586,063
Tooling 103,173 103,762
Office furniture and equipment 133,498 143,235
Leasehold improvements 159,688 174,081
Automobiles 32,408 32,408
Data processing equipment 301,280 365,240
----------- -----------
1,298,570 1,455,283
Less accumulated depreciation 1,020,763 1,153,577
----------- -----------
$ 277,807 $ 301,706
=========== ===========
</TABLE>
NOTE F - NOTES PAYABLE
a. Bank Line of Credit
The loan agreement with the Village Bank & Trust Company provides for a
$800,000 collateralized line of credit at one half percent (1/2%) above
the prime rate. Notes payable under the loan agreement are
collateralized by a security interest in all of the Company's tangible
and intangible assets. The President/shareholder of the Company and his
wife have personally guaranteed repayment of any notes. The Company must
also meet certain covenants to comply with the loan agreement, the most
important of which are: (a) the Company must maintain its stockholders'
equity at a sum at least equal to 75% of the outstanding principal
balance of the note, and (b) the President/shareholder must be
continuously and actively engaged in the Company business.
b. Note Payable to President/Shareholder
In connection with the initial public offering (see Note I), the Company
paid $45,730 in cash and issued a $450,000 noninterest-bearing note
payable to the President and major shareholder as a dividend for the
amount of taxes due by him personally for the earnings of the Company
from January 1, 1995 through February 26, 1996, a period through which
the Company was an S Corporation (see Note B-3). As of June 30, 1996, a
balance of $32,813 is due.
NOTE G - DEMAND NOTE PAYABLE
The Company has a demand note payable from Village Bank & Trust Company
bearing interest at one-half percent (1/2%) above the prime rate (8.25% at
June 30, 1996).
F-10
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995 and 1996
NOTE H - COMMITMENTS
Leases
The Company leases certain facilities and automobiles under lease
agreements that are classified as operating leases and expire in various
years through 1998.
The following is a schedule of future minimum lease payments for
operating leases as of June 30, 1996:
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
1997 $232,000
1998 84,000
--------
$316,000
========
</TABLE>
Rental expense for operating leases totalled approximately $236,000 and
$229,000 for the years ended June 30, 1995 and 1996, respectively.
NOTE I - STOCKHOLDERS' EQUITY
1. Initial Public Offering
On February 26, 1996, the Company successfully completed an initial
public offering of 1,000,100 shares of common stock of the Company at an
initial offering price of $5.00 per share, and 1,725,000 warrants to
purchase 1,725,000 shares of common stock at an exercise price of $6.00
per share with an offering price of $.15 per warrant. The proceeds from
the offering were approximately $3,833,000, net of $1,426,000 of costs
associated with the offering.
In connection with the offering, the Company granted to the underwriter
an option to purchase 100,000 shares of common stock at an exercise
price of $8.25 per share and an option to purchase 100,000 warrants at
an exercise price of $8.25 per warrant over a period of four years
commencing on February 26, 1997.
2. Stock Splits
In August 1995, the Company's Board of Directors approved a 2.96-for-1
split of the Company's common stock. A total of 894,445 shares of common
stock were issued in connection with the split. The stated par value of
each share was changed for $.10 to $.03. A total of $5,056 was
reclassified from the Company's common stock account to the Company's
additional paid-in capital account.
F-11
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995 and 1996
NOTE I (continued)
In February 1996, the Company's Board of Directors approved a 1.85-for-1
split of the Company's common stock. A total of 1,150,000 shares of
common stock were issued in connection with the split. The stated par
value of each share remained at $.03. A total of $34,500 was
reclassified from the Company's additional paid-in capital account to
the Company's common stock account.
All share and per share amounts in the financial statements have been
restated to retroactively reflect the above stock splits.
3. Distribution to Stockholder
During the period from July 1, 1995, through the termination of the S
Corporation status, the Company distributed approximately $496,000,
including an adjustable note payable to the stockholder of $450,000, to
cover estimated taxes on S Corporation income (see Note F).
4. Capital Contribution
As of February 26, 1996, undistributed S Corporation retained earnings
of approximately $2,509,000 have been reclassified as additional paid-in
capital as if the earnings had been distributed to the stockholder and
then contributed to the Company.
5. Stock Options
a. Incentive Stock Option Plan
Under the Company's Incentive Stock Option Plan (the "Plan"), options
to purchase a maximum of 250,000 shares of its common stock may be
granted to officers, directors and other key employees of Sonics.
Options granted under the Plan are intended to qualify as incentive
stock options as defined in the Internal Revenue Code of 1986, as
amended.
The Plan is administered by the Board of Directors and a Committee
presently consisting of two members of the Board that determine which
persons are to receive options, the number of options granted and
their exercise prices. In the event an optionee voluntarily
terminates their employment with the Company, the optionee has the
right to exercise their accrued options within thirty (30) days of
such termination. However, the Company may redeem any accrued option
held by each optionee by paying them the difference between the
option exercise price and the then fair market value.
On February 11, 1996, the Board of Directors approved a plan to grant
options for 80,000 shares of common stock of the Company at the
initial offering price of $5.00 per share. Subsequently, the approval
to grant options to acquire 10,500 shares of the common stock was
rescinded by the Board of Directors. As of June 30, 1996, options to
purchase 69,500 shares of common stock were granted to 26 officers,
directors and key employees of the Company. The options will expire
on February 11, 2006.
F-12
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995 and 1996
NOTE I (continued)
b. Nonqualified Stock Options
The Company has also granted a nonqualified stock option for 10,976
shares of common stock to an officer at an option price of $.31 per
share. In January 1994, the Company granted a nonqualified stock
option for 274,390 shares of common stock to an officer at an option
price of $1.03 per share. These options expire on January 1, 2004.
For the two years ended June 30, 1996, option activity was as
follows:
<TABLE>
<CAPTION>
Incentive options Nonqualified options
------------------------ -------------------------
Number Option Number Option
of shares prices of shares prices
--------- ------ --------- -------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1994
Granted 285,366 $0.31 - $1.03
Exercised
Cancelled
-------
Outstanding at June 30, 1995
Granted 69,500 $5.00 285,366 0.31 - 1.03
Exercised
Cancelled
------ -------
Outstanding at June 30,
1996 69,500 $5.00 285,366 $0.31 - 1.03
====== =======
</TABLE>
NOTE J - 401(k) PLAN
The Company has a 401(k) plan for eligible employees. The 401(k) plan
provides for eligible employees to elect to contribute to the plan up to 15%
of their annual compensation. In addition, the 401(k) plan provides for the
Company to make additional distributions at its discretion up to 4% of the
participant's annual compensation. Expenses under the plan totalled
approximately $90,000 and $64,000 for the years ended June 30, 1995 and
1996, respectively, which have been allocated to cost of sales, selling,
general and administrative, and research and development expenses.
F-13
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995 and 1996
NOTE K - CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of accounts receivable. Credit risk on
receivables is minimized as a result of the diverse nature of the Company's
worldwide customer base. The Company generally requires no collateral from
its customers.
Net sales by geographic area for the periods ended are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1995 1996
---------- -----------
<S> <C> <C>
United States $5,699,000 $6,320,000
Europe 1,279,000 1,376,000
Asia/Pacific Rim 1,159,000 967,000
Canada and Mexico 269,000 396,000
Other 169,000 317,000
---------- ----------
$8,575,000 $9,376,000
========== ==========
</TABLE>
NOTE L - INCOME TAXES
Prior to the completion of the initial public offering, the Company had,
since 1989, elected to be treated as an S Corporation for Federal income tax
reporting purposes. An S Corporation is generally treated like a
partnership, and is exempt from Federal income taxes with certain
exceptions. The S Corporation stockholder reported his pro rata share of
corporate taxable income or loss on his individual income tax returns. A
provision for state income taxes was made for those states not recognizing S
Corporation status. The Company's S Corporation status terminated with the
completion of the initial public offering described in Note I-1.
Subsequent to the initial public offering, the Company accounts for income
taxes using the liability method under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
F-14
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995 and 1996
NOTE L (continued)
The components of the provision for taxes on income are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------
1995 1996
-------- ----------
<S> <C> <C>
U.S. Federal
Current tax provision $ 50,000
Deferred tax benefit (68,000)
--------
(18,000)
--------
State
Current tax provision $45,000 22,000
Deferred tax benefit (12,000)
------- -------
45,000 10,000
------- -------
Total income tax provision (benefit) $45,000 $(8,000)
======= =======
</TABLE>
The tax effect of temporary differences which give rise to deferred tax
assets and liabilities at June 30, 1996 are as follows:
<TABLE>
<S> <C>
Accrued expenses $22,000
Allowance for doubtful accounts 17,000
Inventory 41,000
-------
Net deferred tax asset $80,000
=======
</TABLE>
F-15
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995 and 1996
NOTE L (continued)
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the financial statements:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------
1995 1996
--------------------------- ----------------------------
Percent of Percent of
Amount income Amount income
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Provision for Federal income
taxes at the statutory rate $148,000 34.0%
State and local taxes, net of
Federal income tax benefit $45,000 5.8% 15,000 3.4
Tax effect of S Corporation
earnings during the year (99,000) (22.8)
Deferred tax benefit from
the effect of conversion to
C Corporation status (91,000) (20.9)
Nondeductible expenses 7,000 1.6
Other 12,000 2.8
------- ---- -------- ------
Actual provision (benefit) for
income taxes $45,000 5.8% $ (8,000) (1.9)%
======= === ========= ======
</TABLE>
NOTE M - EMPLOYMENT AGREEMENT
Effective July 1, 1995, the Company entered into an employment agreement
with its President for an initial term expiring in three years at an initial
annual base salary of $180,000, $198,000 and $218,000 in each of the three
years, respectively. Such base salary may be increased at the discretion of
the Board of Directors as follows: (i) any bonus arrangement provided by the
Company in its discretion and (ii) other compensation or employee benefit
plans and arrangements, if any, provided to other officers and key employees
of the Company.
NOTE N - FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If the sum of the expected future cash flows
(undiscounted) is less than the carrying amount of the asset, an impairment
loss is recognized. Measurement of that loss would be based on the fair
value of the assets.
F-16
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995 and 1996
NOTE N (continued)
SFAS No. 121 also generally requires long-lived assets and certain
identifiable intangibles to be disposed of to been reported at the lower of
the carrying amount or the fair value less cost to sell. Effective July 1,
1996, the Company adopted SFAS No. 121 and no impairment losses have been
required.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." SFAS No. 123 defines a fair value based method of
accounting for an employee stock option. Fair value of the stock option is
determined considering factors such as the exercise price, the expected life
of the option, the current price of the underlying stock and its volatility,
expected dividends on the stock, and the risk-free interest rate for the
expected term of the option. Under the fair value based method, compensation
cost is measured at the grant date based on the fair value of the award and
is recognized over the service period. A company may elect to adopt SFAS No.
123 or elect to continue accounting for its stock option or similar equity
awards using the intrinsic method, where compensation cost is measured at
the date of grant based on the excess of the market value of the underlying
stock over the exercise price. If a company elects not to adopt SFAS No.
123, then it must provide pro forma disclosure of net income and earnings
per share, as if the fair value based method has been applied.
SFAS No. 123 is effective for the fiscal year beginning on July 1, 1996.
Pro forma disclosures for entities that elect to continue to measure
compensation cost under the old method must include the effects of all
awards granted in fiscal years that begin after December 15, 1994. Effective
July 1, 1996, the Company has elected to account for stock-based
compensation plans under the intrinsic method.
NOTE O - RELATED PARTY TRANSACTIONS
The Company paid $22,000 to a member of the Board of Directors for
consulting services during the year ended June 30, 1996.
NOTE P - PRO FORMA INFORMATION
a. Pro Forma Statements of Income
Pro forma adjustments in the statements of income for the years ended
June 30, 1995 and 1996 reflect: (1) a provision for income taxes based
upon pro forma pretax income as if the Company had been subject to
Federal and additional state and local taxes for the full periods; (2)
adjustments for distribution of additional salary for the
President/stockholder, representing the estimated personal income tax
owed on the S Corporation income.
b. Pro Forma Income Taxes
As discussed in Note B-3, the Company elected to be taxed as an S
Corporation pursuant to the Internal Revenue Code. In connection with the
Offering, the Company terminated its S election and became subject to
Federal and additional state and local income tax. The pro forma provision
for income taxes represents the income tax provisions that would have been
reported had the
F-17
<PAGE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995 and 1996
NOTE P (continued)
Company been subject to Federal and additional state and local income
taxes for the years ended June 30, 1995 and 1996.
The pro forma income tax provision has been prepared in accordance with
SFAS No. 109. The pro forma provision for income taxes, after giving
effect to the Federal statutory rate of 34% and state and local taxes, a
net effective rate of 6%, consists of the following:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------
1995 1996
-------- --------
<S> <C> <C>
Federal $291,312 $135,256
State and local 84,575 39,268
-------- --------
$375,887 $174,524
======== ========
</TABLE>
c. Pro Forma Net Income
Represents the historical amounts after the pro forma adjustments
discussed above.
d. Pro Forma Net Income Per Share
Represents net income per share including the weighted average number of
shares outstanding immediately prior to the closing of the offering,
after giving effect to a 2.96-for-1 stock split and a second stock split
of 1.85-for-1 and shares issued in the Offering (see Note I). The
calculations also reflect the dilutive effect of shares issuable for
common stock equivalents.
F-18
<PAGE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: September 23, 1996
SONICS & MATERIALS, INC.
By: /s/ ROBERT S. SOLOFF
-------------------------------
Robert S. Soloff
Chairman and President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ROBERT S. SOLOFF Chairman, President, Treasurer, September 23, 1996
.............................. Chief Executive and Chief Financial
(Robert S. Soloff) Officer
/s/ LAUREN H. SOLOFF Secretary and Director September 23, 1996
..............................
(Lauren H. Soloff)
/s/ CAROLE SOLOFF Director September 23, 1996
..............................
(Carole Soloff)
/s/ JACK T. TYRANSKY Director September 23, 1996
..............................
(Jack T. Tyransky)
/s/ ALAN BROADWIN Director September 23, 1996
..............................
(Alan Broadwin)
/s/ CHRISTOPHER S. ANDRADE Accounting Manager September 23, 1996
.............................. Principal Accounting Officer
(Christopher S. Andrade)
</TABLE>
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT LOCATION OF EXHIBIT IN
NO. DESCRIPTION SEQUENTIAL NUMBERING SYSTEM
---- ----------- ---------------------------
<S> <C> <C>
3(i) Certificate of Incorporation of the Registrant, as amended. Previously filed as Exhibit 3.1 of Amendment
No. 3 to Registration Statement No. 33-96414
3(ii) Amended By-laws of the Registrant . Previously filed Exhibit 3.2 of Registration
Statement No. 33-96414
10(i) Form of Employment Agreement between the Registrant and Previously filed Exhibit 10.1 of Registration
Robert S. Soloff. Statement No. 33-96414
10(ii) 1995 Incentive Stock Option Plan and form of Stock Option Previously filed as Exhibit 10.3 of Registration
Agreement. Statement No. 33-96414
10(iii) Original Office Lease and Amendments between the Registrant Previously filed as Exhibit 10.4 of Registration
and Nicholas R. Dinapoli, Jr. DBA Dinapoli Holding Co. Statement No. 33-96414
(Danbury, CT) .
10(iv) Lease between Registrant and Aston Investment Associates Previously filed as Exhibit 10.5 of Registration
(Aston, PA). Statement No. 33-96414
10(v) Amended lease between Registrant and Robert Lenert Previously filed as Exhibit 10.6 of Amendment
(Naperville, IL). No. 4 to Registration Statement No. 33-96414
10(vi) Lease between Registrant and Janine Berger (Gland, Previously filed as Exhibit 10.7 of Registration
Switzerland). Statement No. 33-96414
10(vii) Form of Sales Representation Agreement. Previously filed as Exhibit 10.8 of Registration
Statement No. 33-96414
10(viii) Form of Sales Distribution Agreement. Previously filed as Exhibit 10.9 of Registration
Statement No. 33-96414
10(ix) Consulting Agreement dated October 17, 1995 between the Previously filed as Exhibit 10.10 of
Registrant and Alan Broadwin. Amendment No. 3 of Registration Statement
No. 33-96414
27 Financial Data Schedule. Filed Herewith
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 73,129
<SECURITIES> 3,028,032
<RECEIVABLES> 1,953,941
<ALLOWANCES> 0
<INVENTORY> 3,248,782
<CURRENT-ASSETS> 8,525,676
<PP&E> 301,706
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,180,506
<CURRENT-LIABILITIES> 2,515,191
<BONDS> 0
0
0
<COMMON> 105,003
<OTHER-SE> 6,560,312
<TOTAL-LIABILITY-AND-EQUITY> 9,180,506
<SALES> 9,376,170
<TOTAL-REVENUES> 9,376,170
<CGS> 5,091,789
<TOTAL-COSTS> 3,793,261
<OTHER-EXPENSES> (45,201)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100,011
<INCOME-PRETAX> 436,310
<INCOME-TAX> (8,000)
<INCOME-CONTINUING> 444,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 444,310
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
