<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------
FORM 10-QSB
----------------------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number:
SONICS & MATERIALS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 06-0854713
(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)
Telephone Number (203) 744-4400
(Issuer's telephone number, including area code)
Check whether the issuer (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 [ ] No [X]
As of April 26, 1996, there were 3,500,100 shares of the Registrant's
Common Stock outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements *
Condensed Balance Sheets -
<S> <C>
March 31, 1996 and June 30, 1995..................................3
Condensed Statements of Income -
For the Nine Months Ended
March 31, 1996 and 1995...........................................4
For the Three Months Ended
March 31, 1996 and 1995...........................................4
Condensed Statements of Cash Flows -
For the Nine Months Ended
March 31, 1996 and 1995...........................................5
Notes to Financial Statements........................................6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................9-11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................12
Signatures.............................................................................13
Index to Exhibits......................................................................14
Exhibit 27 - Financial Data Schedule...................................................15
</TABLE>
* The Balance Sheet at June 30, 1995 has been taken from the audited financial
statements at that date. All other financial statements are unaudited.
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Sonics & Materials, Inc.
CONDENSED BALANCE SHEETS
As of
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
(unaudited) *
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,544,670 $ 187,490
Accounts receivable, net of allowance
for doubtful accounts of $45,000 2,010,722 1,949,958
Inventories 2,715,330 2,058,307
Other current assets 245,127 89,741
------------- ------------
Total current assets 8,515,849 4,285,496
PROPERTY PLANT & EQUIPMENT - NET 285,994 277,807
OTHER ASSETS 370,697 422,102
------------- ------------
$ 9,172,540 $ 4,985,405
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable, bank - line of credit $ 350,000 $ 650,000
Demand note payable 500,000 500,000
Accounts payable 576,606 537,625
Note to stockholder for S-Corp taxes 450,000 -
Public offering costs accrued 152,840 -
Other accrued expenses and sundry liabilities 466,298 414,013
------------- ------------
Total current liabilities 2,495,744 2,101,638
LONG TERM PORTION OF CAPITAL LEASE 11,835 -
------------- ------------
Total liabilities 2,507,579 2,101,638
------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock - 2,000,000 shares authorized,
no shares outstanding at March 31, 1996
or June 30, 1995 - -
Common stock - 10,000,000 shares
authorized, 3,500,100 shares
issued and outstanding at March 31, 1996
2,500,000 shares issued and outstanding at
June 30, 1995, par value $.03 per share 105,003 75,000
Additional paid in capital 6,409,737 104,737
Retained earnings 150,221 2,704,030
------------- ------------
Total stockholders' equity 6,664,961 2,883,767
------------- ------------
$ 9,172,540 $ 4,985,405
============= ============
</TABLE>
* Taken from the audited financial statements at June 30, 1995.
The accompanying notes are an integral part of these statements.
3
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Sonics & Materials, Inc.
CONDENSED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
March 31, March 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 6,972,066 $ 6,063,049 $ 2,579,909 $ 2,394,700
Cost of sales 3,569,941 3,220,747 1,376,013 1,105,076
-------------- --------------- --------------- ---------------
Gross profit 3,402,125 2,842,302 1,203,896 1,289,624
Operating expenses
Selling expense 2,179,791 1,797,588 750,455 586,314
General and administrative 450,502 561,572 152,973 184,440
Research and development 315,166 262,163 123,391 93,923
Compensation expense -
stock options - 106,000 - 26,000
-------------- --------------- --------------- ---------------
Total operating expenses 2,945,429 2,727,323 1,026,819 890,677
Other income (expense)
Interest expense (68,441) (4,656) (21,923) (3,613)
Other 36,469 903 26,420 75
-------------- --------------- --------------- ---------------
(31,972) (3,753) 4,497 (3,538)
--------------- ---------------- --------------- ----------------
Income before provision for
income taxes 424,724 111,226 181,574 395,409
Provision (benefit) for income taxes (19,331) 18,691 (41,000) 18,691
--------------- --------------- ---------------- ---------------
Net Income $ 444,055 $ 92,535 $ 222,574 $ 376,718
============== =============== =============== ===============
PRO FORMA DATA
Historical income before taxes $ 424,724 $ 111,226 $ 181,574 $ 395,409
Subchapter S stockholder's tax
distributions recorded as salary - 160,000 - 75,000
-------------- --------------- --------------- ---------------
Income before taxes 424,724 271,226 181,574 470,409
Provision for income taxes 169,890 108,490 72,630 188,164
-------------- --------------- --------------- ---------------
Net Income $ 254,834 $ 162,736 $ 108,944 $ 282,245
============== =============== =============== ===============
Primary income per share
Net income per share $ 0.09 $ 0.06 $ 0.03 $ 0.10
====== ====== ====== ======
Weighted average number of common and
common equivalent shares outstanding
2,899,000 2,696,000 3,239,000 2,696,000
========= ========= ========= =========
Fully diluted income per share
Net income per share $ 0.09 $ 0.06 $ 0.03 $ 0.10
====== ====== ====== ======
Weighted average number of common and
common equivalent shares outstanding
2,977,000 2,696,000 3,422,000 2,696,000
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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Sonics & Materials, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended March 31,
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operations $ 349,609 $ 297,324
Net cash used in investing activities (116,353) (121,788)
Net cash provided by (used in) financing activities 3,123,924 (187,000)
------------ -------------
Net increase (decrease) in cash for the period 3,357,180 (11,464)
Cash and cash equivalents - at beginning of period 187,490 62,026
------------ ------------
Cash and cash equivalents - at end of period $ 3,544,670 $ 50,562
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
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Sonics & Materials, Inc.
Notes to Financial Statements
March 31, 1996 and 1995
NOTE 1: Basis of Presentation
The accompanying financial statements for the interim periods are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. These
financial statements should be read in conjunction with the financial statements
and notes thereto, together with the management's discussion and analysis,
contained in Amendment No. 4 to a Registration Statement on Form SB-2 which the
Company filed with the Securities and Exchange Commission on February 15, 1996.
The results of operations for the three months ended March 31, 1996, and for the
nine months ended March 31, 1996 are not necessarily indicative of the results
for the entire fiscal year ending June 30, 1996.
NOTE 2: Initial Public Offering
On March 1, 1996 the Company successfully completed an initial public offering
of 1,000,100 shares of Common Stock in 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 $3,832,900, net of
$1,426,400 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 $.25 per warrant. The
warrants purchased through this option have an exercise price of $8.25 per
share.
NOTE 3: Stockholders' Equity
During the period from July 1, 1995, through the termination of the S
Corporation status, the Company distributed $495,730, including an adjustable
note payable to the stockholder of $450,000, to cover estimated taxes on S
Corporation income. As of March 31, 1996, undistributed S Corporation retained
earnings of $2,502,135 have been reclassified as additional paid in capital as
if the earnings had been distributed to the stockholder and then contributed to
the Company.
NOTE 4: Income Taxes
Prior to the completion of the initial public offering, 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. Instead, the 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 has
terminated, however, with the completion of the offering as described in Note 2.
Upon termination of the 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. The effect
increased deferred tax assets by approximately $91,000 and earnings by the same
amount in the three months and nine months ended March 31, 1996.
The pro forma provision for income taxes represents the income tax provision
that would have been reported had the Company been subject to Federal and
additional state and local income taxes as a C corporation for all periods
presented.
6
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NOTE 5: 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.
The weighted average number of shares outstanding for the periods presented is
as follows:
<TABLE>
<CAPTION>
Primary Weighted Shares Outstanding
Nine months ended Three months ended
March 31, March 31.
--------- ---------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 2,628,000 2,500,000 2,884,000 2,500,000
Dilution (warrants and options) 271,000 196,000 355,000 196,000
--------- --------- --------- ---------
Weighted average number of common and
common equivalent shares
2,899,000 2,696,000 3,239,000 2,696,000
========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Fully Diluted Weighted Shares Outstanding
Nine months ended Three months ended
March 31. March 31,
--------- ---------
1996 1995 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 2,628,000 2,500,000 2,885,000 2,500,000
Dilution (warrants and options) 349,000 196,000 537,000 196,000
--------- --------- --------- ---------
Weighted average number of common and
common equivalent shares 2,977,000 2,696,000 3,422,000 2,696,000
========== ========== ========== =========
</TABLE>
Supplemental Net Income Per Share
The Company used a portion of the net proceeds from the offering (Note 2) to
retire $670,000 of debt. There would have been no material impact on net income
per share for the nine months ended March 31, 1996 had the sale of 134,000
shares of Common Stock taken place to retire $670,000 at July 1, 1995.
NOTE 6: Stock Option Plan
The Company has implemented an incentive Stock Option Plan (the "Plan") to
officers, directors, and key employees of the Company. The Plan provides for
options to acquire up to 250,000 shares of Common Stock. On February 11, 1996,
the Board of Directors approved a plan to grant options for 80,000 shares of
Common Stock of the Company, par value $.03 (the "Common Stock") at $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 March 31, 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.
7
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NOTE 7: 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 through (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 8: Contingencies.
The Company is currently under audit by the California State Board of
Equalization for Sales and Use Tax. The Company cannot presently estimate the
amount of tax, if any, that may be assessed.
8
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Item 2 MANAGEMENT`S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with the
unaudited financial statements included herein. See Item 1.
RESULTS OF OPERATIONS
Nine months ended March 31, 1996 compared to nine months ended March 31, 1995
Net sales. Net sales for the nine month period ended March 31, 1996,
increased $909,017 or 15% over the same period in fiscal 1995. This is primarily
the result of an increase in sales volume from the Company's Danbury,
Connecticut headquarters, as well as an increase in sales from the Company's
division in Pennsylvania and its Swiss Branch office. This increase in sales is
also the result of the expansion of the Company's sales and marketing
department.
Cost of Sales. The cost of sales for the nine month period ended March
31, 1996, increased $349,194 or 10.8% over the same period in fiscal 1995. As a
percentage of net sales, the cost of sales decreased to 51.2% for the nine month
period ended March 31, 1996, from 53.1% for the same period in fiscal 1995. This
decrease is primarily attributable to the sales mix. As sales volume increases,
the fixed costs associated with production are anticipated to be absorbed by a
broader range of sales.
Selling Expenses. Selling expenses for the nine month period ended
March 31, 1996, increased $382,173 or 21.3% over the same period in fiscal 1995.
The increase was attributable to the addition of the Company's vibration welding
product manager, increased expenses in the Company's Swiss branch office
consistent with increased sales generated by that office, expenses associated
with the Company's Mid-Western Regional Technical Office, as well as the
Company's development of its sales capabilities in the Asian market. The
increase is also related to increases in advertising and promotional expenses
for the 1996 period. As a percentage of net sales, selling expenses increased
only slightly to 31.3% for the nine month period as compared to 29.7% for the
prior year's nine month period.
General and Administrative Expenses. General and administrative
expenses for the nine month period ended March 31, 1996, decreased $111,070 or
19.8% over the same period in fiscal 1995. This decrease in expenses is due to
the absence of a salary in lieu of income tax distribution for tax payment in
the nine month period ended March 31, 1996. Prior to the Company's initial
public offering, the Company held S Corporation status. This required the
shareholder to recognize a portion of the Company's tax liability as his
personal income, resulting in an increase in personal tax liability. The Company
offset this increased liability for the shareholder by paying in the form of a
bonus to the shareholder the appropriate amount to cover the increased personal
tax liability The Company does not anticipate that its general and
administrative expenses will continue to decrease now that the Company , as a
result of its initial public offering, is no longer an S Corporation.
Research and Development Expenses. Research and development expenses
for the nine month period ended March 31, 1996 increased $53,003 or 20.2% over
the same period in fiscal 1995. This increase is due primarily to ongoing
expenses relating to obtaining CE certification of the Company's products. CE
certification is necessary for marketing in the European Community. The CE
certification process involves testing of the products at certification labs and
the redesigning of product components when necessary.
Three months ended March 31, 1996 compared to three months ended March 31, 1995.
Net sales. Net sales for the third quarter ended March 31, 1996,
increased $185,000 or 7.7% over the same period in fiscal 1995. This is a normal
increase in sales volume associated with the growth of the Company.
Cost of Sales. Cost of sales increased from 46.1% of sales for the
three months ended March 31, 1995 to 53.3% of sales for the three months ended
March 31, 1996. This increase is associated with the
9
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change in product mix as well as costs associated with the new Spin Welding line
the Company has introduced. At present the Company believes that in the future,
cost of sales, as a percent of total sales, will more closely approximate the
results of the three months ended March 31, 1996, than those of the three months
ended March 31, 1995.
Selling Expenses. Selling expenses for the third quarter of fiscal
1996, increased $164,000 or 28% over the same period in fiscal 1995. As a
percentage of net sales these expenses increased to 29% from 24.5% over the same
periods. This increase in selling expenses was due primarily to the increased
costs associated with the expansion of the Company's sales and marketing
department, as well as an increase in advertising and trade show expenses. Sales
and marketing expenses are expected to continue to increase, although they may
vary as a percentage of revenues.
General and Administrative Expenses. General and administrative
expenses for the third quarter of fiscal 1996, decreased $31,467 or 17% over the
third quarter of fiscal 1995. As a percentage of net sales, these expenses
decreased to 5.9% from 7.7% over the same period in fiscal 1995. This decrease
in expenses is due to the absence of a salary in lieu of income tax distribution
for tax payment in the current quarter. Prior to the Company's initial public
offering, the Company held S Corporation status. This required the shareholder
to recognize a portion of the Company's tax liability as his personal income,
resulting in an increase in personal tax liability. The Company offset this
increased liability for the shareholder by paying in the form of a bonus to the
shareholder the appropriate amount to cover the increased personal tax
liability. The Company does not anticipate that its general and administrative
expenses will continue to decrease now that the Company , as a result of its
initial public offering, is no longer an S Corporation.
Research and Development Expenses. Research and development expenses
increased $29,468 or 31.4% over the same period in fiscal 1995. The increase is
attributable to ongoing projects relating to the CE certification process, and
ongoing product development projects.
LIQUIDITY AND CAPITAL RESOURCES
The company's operations were financed principally by cash flows from operations
and the public sale of equity securities. As of June 30, 1995, the Company's
working capital was $2,184,000. As of March 31, 1996, the Company's working
capital had increased to $6,020,000 representing an increase of approximately
175.6%. The increase in working capital is primarily attributable to an increase
in cash and cash equivalents of approximately $3,357,000 from June 30, 1995 to
March 31, 1996.
Operations of the Company provided approximately $350,000 during the nine months
ended March 31, 1996. Of this amount the Company invested approximately $116,000
in new capital equipment and leasehold improvements.
Through an initial public offering of common stock the Company raised
approximately $3,833,000, net of expenses associated with the offering. Of these
funds, $670,000 was used to pay down the Company's line of credit with its bank.
The Company subsequently borrowed $370,000 against the same line of credit for a
net decrease of $300,000.
Prior to the public offering of the Company's Common Stock, it was registered
with the IRS as a Subchapter "S" Corporation. As such, the shareholder would
recognize a proportionate share of the Company's net income in his personal
income, and in turn the Company would owe no federal income tax. To offset this
additional tax liability for the shareholder, the Company had made distributions
to the shareholder in order to pay these taxes. Upon the completion of the
public offering the Company lost its "S" status and is now liable for federal
income taxes on earnings generated after the effective date of the initial
offering. The Company has, however, made a distribution to the shareholder prior
to the offering, to cover the federal tax liability that was incurred by the
shareholder on earnings prior to the offering. Prior to the offering the Company
had distributed $45,730 and issued an adjustable note payable to the officer for
an additional $450,000. As of March 31, 1996 no payments against this note had
been made.
10
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The Company's principal credit line is a $1,000,000 bank credit facility bearing
interest at one-half of one percent above the prime rate. This credit
arrangement matures on February 28, 1997.
11
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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 No. 33-96414).
27 Financial Data Schedule (filed herewith)
(b) none
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SONICS & MATERIALS, INC.
Date: _____________________ By ___________________________________
Robert S. Soloff
President, Chief Executive Officer,
Chief Financial Officer
13
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
<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 No. 33-96414).
27 Financial Data Schedule (filed herewith)
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,544,670
<SECURITIES> 0
<RECEIVABLES> 2,055,722
<ALLOWANCES> 45,000
<INVENTORY> 2,715,330
<CURRENT-ASSETS> 8,515,849
<PP&E> 285,994
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,172,540
<CURRENT-LIABILITIES> 2,495,744
<BONDS> 0
0
0
<COMMON> 105,003
<OTHER-SE> 6,559,958
<TOTAL-LIABILITY-AND-EQUITY> 9,172,540
<SALES> 6,972,066
<TOTAL-REVENUES> 6,972,066
<CGS> 3,569,941
<TOTAL-COSTS> 3,569,941
<OTHER-EXPENSES> (36,469)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,441
<INCOME-PRETAX> 424,724
<INCOME-TAX> (19,331)
<INCOME-CONTINUING> 444,055
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
