Registration No. 33-96414
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
Registration Statement
Under The
Securities Act of 1933
(Post-Effective Amendment No. 3)
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SONICS & MATERIALS, INC.
(Name of Small Business Issuer in Its Charter)
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Delaware 3662-723 06-0854713
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number Identification No.)
Sonics & Materials, Inc.
West Kenosia Avenue
Danbury, CT 06810
(203) 744-4400
(Address and Telephone Number of Principal Executive Offices)
Address of Principal Place of Business or Intended Principal Place of Business)
Robert S. Soloff, President
c/o Sonics & Materials, Inc.
West Kenosia Avenue
Danbury, CT 06810
(203) 744-4400
(Name, Address and Telephone Number of Agent for Service)
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Please address a copy of all correspondence to:
Jon T. Hirschoff
Kathleen A. Maher
Tyler Cooper & Alcorn
205 Church Street
New Haven, CT 06510
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Approximate Date of Proposed Sale to the Public: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SONICS & MATERIALS, INC.
Cross Reference Sheet
<TABLE>
Form SB-2 Post Effective Amendment Caption in Prospectus
Item Number & Caption
<S> <C>
1. Front of Registration Statement and Outside Front Cover Page
Cover of Prospectus...................................
2. Inside Front and Outside Back Cover Pages of Cover Page, Outside Back Cover
Prospectus ........................................... Page, Reports to Stockholders,
Additional Information
3. Summary Information and Risk Factors............. Prospectus Summary, Risk Factors,
Business
4. Use of Proceeds ................................. Risk Factors, Use of Proceeds,
Business
5. Determination of Offering Price ................. *
6. Dilution......................................... Risk Factors
7. Selling Security Holders......................... Concurrent Offering
8. Plan of Distribution............................. Prospectus Summary, Concurrent
Offering, Certain Relationships and
Related Transactions, Warrant
Solicitation Fee
9. Legal Proceedings ............................... Business
10. Directors, Executive Officers, Promoters and Management
Control Persons.......................................
11. Security Ownership of Certain Beneficial Owners Security Ownership of Certain
and Management........................................ Beneficial Owners
12. Description of Securities........................ Description of Securities
13. Interest of Named Experts and Counsel ........... *
14. Disclosure of Commission Position on
Indemnification For Securities Act Liabilities..... Description of Securities
15. Organization Within Last Five Years.............. *
16. Description of Business.......................... Prospectus Summary, Risk Factors,
Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and
Operation ............................................ Analysis of Financial Condition and
Results of Operations
18. Description of Property.......................... Business; Properties and Facilities
19. Certain Relationships and Related Transactions .. Certain Relationships and Related
Transactions
20. Market For Common Equity and Related Stockholder Prospectus Summary, Risk Factors,
Matters............................................... Description of Securities, Market
for Company's Common Equity and
Related Stockholder Matters
21. Executive Compensation........................... Management
22. Financial Statements............................. Financial Statements
23. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................ *
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* Not Applicable
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Post-Effective Amendment No. Three to Registration Statement No.
33-96414 covers the registration of (i) up to 1,725,000 shares of Common Stock,
par value $.03 per share (the "Common Stock"), underlying the exercise of
certain outstanding Class A Redeemable Common Stock Purchase Warrants (the
"Warrants") issued by the Company in its initial public offering effective on
February 26, 1996, pursuant to a Prospectus dated February 26, 1996, and (ii) an
additional 100,000 Options to Purchase Shares of Common Stock and Warrants (the
"Selling Securityholder Options"), 100,000 shares of Common Stock underlying the
exercise of the Selling Securityholder Options, 100,000 Warrants which were
issued upon partial exercise of the Selling Securityholder Options (the "Selling
Securityholder Warrants"), and 100,000 shares of Common Stock underlying the
exercise of the Selling Securityholder Warrants, hereinafter referred
collectively to as the "Selling Securityholder Common Stock"), for resale from
time to time by the Selling Securityholders. Since February 26, 1997 (the date
the Warrants could first be exercised), 20,000 Warrants have been exercised.
<PAGE>
Prospectus
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
SONICS & MATERIALS, INC.
1,705,000 Shares of Common Stock
(Underlying the Exercise of Outstanding Warrants)
100,000 Options to Purchase Shares of Common Stock and Warrants
100,000 Shares of Common Stock
(Underlying the Exercise of the Options)
100,000 Warrants to Purchase Common Stock
(Issued Upon Exercise of the Options)
100,000 Shares of Common Stock
(Underlying the Exercise of the Warrants)
This Prospectus is being delivered to the holders of 1,705,000 Class A
Redeemable Common Stock Purchase Warrants (the "Warrants") that were issued by
Sonics & Materials, Inc., a Delaware corporation ("Sonics" or the "Company"), in
its initial public offering that was effective on February 26, 1996 (the
"Initial Offering"). Each Warrant entitles the registered holder thereof to
purchase one share of Common Stock at a price of $6.00 per share, subject to
adjustment, for four years commencing February 26, 1997 (the "Offering"). The
Warrants are subject to redemption by the Company under certain circumstances at
a price of $.05 per Warrant. The Company originally issued 1,725,000 Warrants in
the Initial Offering. Since February 26, 1997, 20,000 Warrants have been
exercised. See "Description of Securities."
The Common Stock and the Warrants are included in the Nasdaq National
Market System under the symbols "SIMA" and "SIMAW," respectively.
Concurrently with the Initial Offering, the Company registered for resale
by certain affiliates (the "Selling Securityholders") of Monroe Parker
Securities, Inc., the underwriters for the Company in the Initial Offering
("Monroe Parker"), 100,000 Options to Purchase Shares of Common Stock and
Warrants (the "Selling Securityholder Options"), 100,000 shares of Common Stock
underlying the exercise of the Selling Securityholder Options, 100,000 Warrants
(the "Selling Securityholder Warrants") underlying the exercise of the Selling
Securityholder Options, and 100,000 shares of Common Stock underlying the
exercise of the Selling Securityholder Warrants (which together with the 100,000
shares of Common Stock underlying the exercise of the Selling Securityholder
Options are hereinafter collectively referred to as the "Selling Securityholder
Common Stock"), for resale from time to time by the Selling Securityholders. On
March 20, 1997, the Selling Securityholders partially exercised the Selling
Securityholder Options with respect to the Selling Securityholder Warrants and
received upon such exercise 100,000 Warrants. The Selling Securityholder
Options, Selling Securityholder Warrants and, Selling Securityholder Common
Stock are sometimes collectively referred to herein as the "Selling
Securityholder Securities."
The Selling Securityholder Securities may be sold from time to time by the
Selling Securityholders or by their transferees (the "Concurrent Offering"). The
distribution of the Selling Securityholder Securities offered hereby by the
Selling Securityholders may be effected in one or more transactions that may
take place on the over-the-counter market, including ordinary brokers'
transactions, in privately negotiated transactions or through sales to one or
more dealers for resale of such securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling Securityholders. See
"Concurrent Offering."
The Selling Securityholders, and intermediaries through whom such
securities are sold, may be deemed underwriters within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Company has agreed to indemnify the
Selling Securityholders against certain liabilities, including liabilities under
the Securities Act.
Sales of the Selling Securityholder Securities, or the potential of such sales,
may have an adverse effect on the market price of the securities offered hereby.
The Company will not receive any proceeds from the sale of any of the Selling
Securityholder Securities. See "Risk Factors."
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THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS" ON PAGE 5 OF THIS PROSPECTUS FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------
Underwriting
Price to Discounts Proceeds to
Warrantholder and Commissions Company (3)
(1) (2)
----------------- ------------------ ----------------
Per Share... $6.00 $.24 $5.76
Total (4)... $10,350,000 $414,000 $9,936,000
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(1)There is no assurance that the market value of the shares of Common Stock
underlying the Warrants will at any time after exercise thereof exceed the
exercise price paid therefor.
(2)Pursuant to an Underwriting Agreement entered into between the Company and
Monroe Parker on February 26, 1996 in connection with the Company's Initial
Offering, the Company has agreed to pay Monroe Parker a warrant solicitation
fee of 4% of the exercise price of any of the Warrants exercised if the
market price of the Company's Common Stock on the date the Warrant is
exercised is greater than the exercise price of the Warrant, and certain
other conditions are met. See "Warrant Solicitation Fee." The Company cannot
presently estimate to what extent any such warrant solicitation fee will be
paid.
(3)Assumes exercise of all of the presently outstanding Warrants (excluding the
Selling Securityholder Warrants). All funds received from the exercise of the
Warrants will be retained by the Company with the exception of (i) expenses
incurred in connection with the preparation of this Prospectus, including
printing and professional fees, estimated at $22,000, and (ii) a 4% warrant
solicitation fee which may be paid to Monroe Parker upon the exercise of
Warrants. See "Warrant Solicitation Fee." Does not include additional
proceeds to be received by the Company upon the exercise by the Selling
Securityholders of the Selling Securityholder Options and Selling
Securityholder Warrants.
(4)Includes 20,000 shares of Common Stock issued by the Company upon exercise
of 20,000 Warrants since February 26, 1997 (the date the Warrants could first
be exercised).
----------------------
The date of this Prospectus is December ____, 1997
<PAGE>
34
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus: (i) gives effect
to a 2.96 for 1 split of the Common Stock effective August, 1995 (the "First
Stock Split") and (ii) gives effect to a 1.85 for 1 split of Common Stock
effective February, 1996 (the "Second Stock Split"; together the "Stock
Splits"). The information in this Prospectus, however, does not give effect to
the exercise of (x) the Warrants, (y) the Selling Securityholder Options issued
in connection with the Offering, and (z) options to purchase shares of Common
Stock reserved for issuance under the Company's Incentive Stock Option Plan and
certain outstanding non-qualified stock options. See "Description of
Securities," "Management--Option and Stock Appreciation Rights" and "Security
Ownership of Certain Beneficial Owners."
The Company
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.
Robert S. Soloff, the Company's 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.
On July 25, 1997, the Company acquired Tooltex, Inc., an Ohio corporation
("Tooltex"), through a merger transaction (the "Merger"). Tooltex is a
manufacturer of automated systems used in the plastics industry. See "Business."
The Company has also formed a wholly owned subsidiary, Vibra-Surge Corporation,
for the manufacture and sale of its ultrasonic surgical device. See
"Business--Products" below.
The Company was incorporated in New Jersey in April 1969, and was
reincorporated in Delaware in October 1978. Its principal executive offices are
located at West Kenosia Avenue, Danbury, Connecticut 06810. Its telephone number
is (203) 744-4400.
2
<PAGE>
The Offering
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<S> <C>
Securities Offered...........................1,705,000 shares of Common Stock underlying
the exercise of 1,705,000 Warrants issued in
the Company's initial public offering that
was effective on February 26, 1996 (the
"Initial Offering"). Each Warrant entitles
the holder to purchase one share of Common
Stock at an exercise price of $6.00, subject
to adjustment, at any time commencing
February 26, 1997 and ending February 26,
2001. The Warrants are subject to
redemption in certain circumstances. See
"Description of Securities."
Securities Offered Concurrently
by Selling Securityholders 100,000 Options to
Purchase Shares of Common Stock and
Warrants (the "Selling
Securityholder Options"), 100,000
shares of Common Stock underlying
the exercise of the Selling
Securityholder Options, 100,000
Warrants (the "Selling
Securityholder Warrants") that were
issued upon partial exercise of the
Selling Securityholder Options, and
100,000 shares of Common Stock
underlying the exercise of the
Selling Securityholder Warrants
(which together with the 100,000
shares of Common Stock underlying
the exercise of the Selling
Securityholder Options are
hereinafter collectively referred
to as the "Selling Securityholder
Common Stock"). See "Concurrent
Offering."
Shares Outstanding Prior to Offering (1).....3,500,100 shares
Shares Outstanding After Offering (1)(2).....5,295,100 shares
Use of Proceeds..............................The net proceeds which may be realized by
the Company upon the exercise of all of the
Company's Warrants (assuming no exercise of
the Selling Securityholder Options), before
the possible payment of a warrant
solicitation fee of 4% (see "Warrant
Solicitation Fee") and after the deduction
of expenses of this Offering, are estimated
to be $9,914,000. Any net proceeds received
from the exercise of the Warrants are
intended to be used for working capital,
expansion of domestic and international
marketing activities, research and
development and reduction of debt. See "Use
of Proceeds." The Company will not receive
any proceeds from the sale of securities
offered concurrently by the Selling
Securityholders. See "Concurrent Offering."
Nasdaq Symbols...............................Common Stock - SIMA
Warrants - SIMAW
Risk Factors.................................An investment in the securities offered
hereby involves a high degree of risk and
immediate substantial dilution to public
investors. See "Risk Factors."
</TABLE>
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(1)The Offering commenced February 26, 1997. Does not include 250,000 shares
reserved for issuance under the Company's Incentive Stock Option Plan,
285,366 shares reserved for issuance under certain outstanding non-qualified
stock options or an aggregate of 200,000 shares which may be issued upon the
exercise in full of the Selling Securityholder Securities. On December ____,
1997, the Company had 3,590,100 shares of Common Stock outstanding which
includes (i) 20,000 shares issued to Warrantholders upon exercise
of 20,000 Warrants and (ii) 70,000 shares issued in connection with the
acquisition of Tooltex, Inc. See "Management--Option and Stock Appreciation
Rights," "Certain Relationships and Related Transactions" and "Concurrent
Offering."
(2)Assumes exercise of all the Warrants. Does not include an aggregate of
200,000 shares which may be issued upon the exercise of the Selling
Securityholder Options and the Selling Securityholder Warrants. Inasmuch as
the Company has received no firm commitments therefor, there can be no
assurance, however, as to the number of Warrants that will be exercised. See
"Risk Factors."
3
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION
Year Ended Three Months Ended
June 30, September 30,
<S> <C> <C> <C> <C> <C>
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1995 1996 1997 1996 1997
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Statement of Income Data
Net sales........................ $8,575,000 $9,376,000 $10,828,000 $2,536,238 $3,116,804
Gross profit..................... 4,347,000 4,284,000 4,417,000 1,205,834 1,289,145
Operating income................. 765,000 491,000 18,000 199,644 98,724
Income before income taxes....... 780,000 436,000 48,000 169,345 71,428
Income taxes (benefit)........... 45,000 (8,000) 19,000 67,738 15,915
--------- --------- ---------- --------- ---------
Net income....................... $ 735,000 $ 444,000 $ 29,000 $ 101,607 $ 55,513
========= ========= ========== ========= =========
Pro Forma Statement of Income Data (1):
Income before income taxes....... $ 940,000 $ 436,000
Provision for income taxes....... 376,000 175,000
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Net income....................... $ 564,000 $ 262,000
========= =========
Primary net income per share..... $.22 $.09 $.01 $.02 $.01
========= ========= ========= ========= =========
Weighted average number of shares
outstanding................... 2,624,000 3,409,000 4,247,000 4,775,870 3,769,393
========= ========= ========= ========= =========
Fully diluted net income per share $.22 $.08 $.01 $.02 $.01
========= ========= ========= ========= =========
Weighted average number of shares
outstanding................... 2,624,000 3,441,000 4,247,000 4,775,870 3,769,393
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
June 30, September 30,
----------- ----------- ------------ --------
1995 1996 1997 1997
----------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital..................... $2,184,000 $6,010,000 $5,942,000 $4,359,077
Total assets........................ 4,985,000 9,181,000 9,159,000 11,807,577
Total liabilities................... 2,101,000 2,515,000 2,342,000 4,705,224
Stockholders' equity................ 2,884,000 6,665,000 6,817,000 7,102,353
</TABLE>
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(1)Pro forma statement of income data reflects (i) Common Stock expected to be
outstanding immediately prior to the exercise of any of the Warrants after
giving effect to the First and Second Stock Splits; (ii) adjustments for
payment of additional salary to Mr. Soloff representing the personal income
tax owed on the S corporation income; and (iii) federal, state and local
taxes as if the Company had been a C corporation based on rates that would
have been in effect. See "Management--Executive Compensation."
4
<PAGE>
RISK FACTORS
Prospective investors should give careful attention to these risk factors,
as well as to the other information described elsewhere in this Prospectus,
including the financial statements and notes thereto, in evaluating the Company,
its business and management before making a decision to exercise the Warrants or
purchase the Selling Securityholder Securities.
Importance of Foreign Sales
For the fiscal years ended June 30, 1995, 1996 and 1997 and for the three
months ended September 30, 1996 and 1997, the Company derived approximately 34%,
33%, 37%, 41% and 29% of its total sales, respectively, from foreign markets.
Sonics expects that foreign sales will continue to represent a significant
portion of its future revenues. Foreign sales are subject to numerous risks,
including political and economic instability in foreign markets, restrictive
trade policies of foreign governments, inconsistent product regulation by
foreign agencies or governments, currency valuation variations, exchange control
problems, the imposition of product tariffs and the burdens of complying with a
wide variety of international and U.S. export laws and differing regulatory
requirements. To date, the Company's foreign sales have usually been transacted
in U.S. dollars and payments have been at times supported by letters of credit.
To the extent, however, that any foreign sales are transacted in a foreign
currency or not supported by letters of credit, Sonics would also be subject to
possible losses due to foreign currency fluctuations and difficulties associated
with collection of accounts receivable abroad. See "Business--Sales and
Marketing," "--International Operations" and "--Government Regulation."
Technological Obsolescence or Responsiveness
The markets served by the Company are characterized by rapid technological
advances, changes in customer requirements and frequent new product
introductions and enhancements. Sonics' business requires substantial ongoing
research and development efforts and expenditures, and its future success will
depend on its ability to enhance its current products and develop and introduce
new products that keep pace with technological developments in response to
evolving customer requirements. The Company's failure to anticipate or respond
adequately to technological developments and changing customer requirements or
the occurrence of significant delays in new product development or introduction
or the technological failures of its products or the systems in which they are
incorporated, could result in a material loss or failure to realize revenues and
seriously impair its competitiveness. See "Business--Competition" and
"--Research and Development."
New Product Development
Sonics may introduce products that fail to gain market acceptability due
to a variety of factors. Accordingly, it is uncertain whether new products or
enhancements of existing products can be successfully marketed and sold by the
Company. See "Business--New Products," "--Sales and Marketing" and "--Research
and Development."
Competition
The Company competes with a variety of manufacturers, foreign and
domestic, many of which are larger, better known and have more resources in
finance, technology, manufacturing and marketing. Sonics competes on the basis
of price, performance, delivery and quality. See "Business--Industrial
Background" and "--Competition."
Dependence Upon Key Personnel
The Company is highly dependent on the services of Robert S. Soloff, its
Chairman, President and Chief Executive Officer. On June 30, 1995, Sonics
entered into a three-year employment contract with him containing a
non-competition clause and other provisions. The Company has obtained "key-man"
term insurance in the amount of $1,700,000 on Mr. Soloff's life of which
$1,000,000 would go to Sonics in the event of his death. The loss of his
services to the Company would materially and adversely affect its business
operations. Moreover, Mr. Soloff also serves as Sonics' Chief Financial Officer
and Treasurer and has no formal training in accounting or financial matters.
Although Sonics has an Accounting Manager who joined it in 1990 and has served
in that capacity since 1992, there may be an adverse impact on the internal
controls of the Company due to the concentration of many important functions in
Mr. Soloff. See "Management."
5
<PAGE>
Reliance on Sub-Contractors and Suppliers
The Company subcontracts the fabrication of its sheet metal and castings
to a few third party manufacturers. It purchases certain other components for
its equipment from sole sources both in the U.S. and abroad. Management believes
that the loss of any of its sole source suppliers would not have a material
adverse effect on Sonics' business. It does not have written agreements with any
of these subcontractors or suppliers. This reliance on subcontractors, sole
sources and other suppliers can result in some delays in deliveries as well as
quality control and production problems. Moreover, the discontinuation of a
necessary component by a subcontractor or supplier can also be a significant
negative development for the Company. In addition, interference, suspension or
termination of such fabrication or supply sources will cause greater delays due
to the difficulties and time required to find suitable replacements or
substitute sources and may have a material adverse impact on the Company's
business. However, Sonics continues to refine its technology and seeks to
procure more advanced components from varied domestic sources. See
"Business--Manufacturing and Supply."
Possible Product Liability
The Company's products may malfunction and cause loss of man hours, damage
to or destruction of equipment or products, injury, death or delays. Sonics may
be subject to product liability claims if such malfunctions, damage, destruction
or delays occur. Since the Company has been in business, no material product
liability or other claims have been filed against it. While Sonics presently
maintains product liability insurance of $1,000,000, it cannot be certain that
such coverage will be adequate to satisfy future claims, if any.
Sonics' wholly owned subsidiary, Vibra-Surge Corporation, maintains
product liability insurance of $5,000,000. Sonics cannot be certain that such
coverage will be adequate to satisfy future claims related to the sale of Vibra
Surge's ultrasonic surgical instrument. See "Business--Products."
Continued Control by Management
Robert S. Soloff, the Company's Chairman, President and Chief Executive
Officer and, prior to the Company's Initial Offering, its sole stockholder,
beneficially owns 69.6% of the Company's voting shares and thereby retains
effective voting control of Sonics Common Stock. The Company's stockholders do
not have the right to cumulative voting in the election of directors.
Consequently, Mr. Soloff is able to elect all of the members of the Board of
Directors and effectively controls the Company. In the event of the exercise of
currently outstanding and exercisable Warrants and options, including the
Selling Securityholder Options, the Soloff family would own in excess of 48.4%
of the current total outstanding shares of Common Stock. See "Security Ownership
of Certain Beneficial Owners" and "Description of Securities."
Dependence on Intellectual Property
Sonics' ability to compete effectively with other companies may depend, in
part, on its ability to maintain the proprietary nature of its technologies.
Sonics intends to rely substantially on unpatented proprietary information and
know how, and there can be no assurance that others will not develop such
information and know how independently or otherwise obtain access to and use its
technology. Also, it is uncertain that the Company's proprietary technology will
not infringe patents or other rights owned by others and that, as a result, it
may not be in a position to license such technology at a reasonable cost.
Moreover, the Company is aware that there are two existing patents applicable to
ultrasonic surgical liposuction devices. Management believes that all principal
patents by others relating to ultrasonic bonding and liquid processor lines have
expired. See "Business--Products," "Business--Intellectual Property" and
"--Legal Proceedings."
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. On May 1, 1997, the
Company filed a patent application and a preliminary patent application with the
U.S. Patent and Trademark Office covering its new ultrasonic surgical
instrument. The Company cannot predict whether patents will be granted or the
extent of protection which would be offered by a patent, if granted.
6
<PAGE>
Lack of Dividends
The Company has made payments to its former sole stockholder in the form
of additional compensation in order to pay personal taxes due from S corporation
earnings and an additional payment as a distribution relating to previously
taxed accumulated earnings. During the period from July 1, 1995 through the
termination of the Company's S corporation status, the Company made
distributions to Mr. Soloff of approximately $496,000, including an adjustable
note payable to Mr. Soloff of $450,000, to cover estimated personal income taxes
on the Company's S corporation income. The Company currently does not anticipate
paying any other cash dividends on its Common Stock. See "Description of
Securities."
There will be immediate substantial dilution to purchasers of the shares
offered hereby, since the net tangible book value of the Company's securities
after the Offering will be substantially less than the public offering price.
Selling Securityholder Options
The Company sold the Selling Securityholder Options to affiliates of
Monroe Parker at an aggregate price of $100. The Selling Securityholder Options
enable the holders thereof to purchase 100,000 shares of Common Stock and
100,000 Warrants to purchase Common Stock. On March 20, 1997, the Selling
Securityholders partially exercised their rights under the Selling
Securityholder Options to purchase 100,000 Warrants at an exercise price of $.25
per Warrant. The Selling Securityholder Options are exercisable for a four-year
period commencing February 26, 1997 at an exercise price equal to $8.25 per
share of Common Stock.
For the life of the Selling Securityholder Options, the holders thereof
are given the opportunity to profit from a rise in the market price of the
Common Stock, which may result in a dilution of the interests of other
stockholders. As a result, the Company may find it more difficult to raise
additional equity capital if it should be needed for its business while the
Selling Securityholder Options are outstanding. See "Concurrent Offering--Plan
of Distribution."
Potential Adverse Effect of Redemption of the Warrants
The Warrants may be redeemed by the Company at any time until February 26,
2001 at a redemption price of $.05 per Warrant upon 30 days' prior written
notice provided the average closing bid price of the Common Stock on Nasdaq (or
the closing sale price of the Common Stock if traded on another national
securities exchange) for 20 consecutive trading days ending within 10 days of
the notice of redemption equals or exceeds $8.00 per share, subject to
adjustment. Redemption of the Warrants could force the holders to exercise the
Warrants and pay the exercise price at a time when it may be disadvantageous for
the holders to do so, to sell the Warrants at the then current market price when
they might otherwise wish to hold the Warrants, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. See "Description of Securities--Warrants."
Market Making Activities
Regulation M under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), makes it unlawful for a distribution participant or an
affiliated purchaser of such person, directly or indirectly, to bid for,
purchase, or attempt to induce any person to bid for or purchase, a covered
security (any security that is the subject of a distribution or, generally, any
security that is convertible or exchangeable into such security) during the
applicable restricted period. Though there are exceptions to this general rule
which may apply to Monroe Parker, Regulation M may prevent Monroe Parker from
providing a market for the Company's securities during certain periods while the
Warrants are exercisable. The possibility that there will be no other market
maker for the Company's securities during any periods when Monroe Parker is
unable to trade in those securities may adversely affect the market price and
liquidity of the securities offered hereby. Therefore, purchasers of the
securities offered hereby may suffer a lack of liquidity in their investment or
a material diminution of the value of their investments. See "Warrant
Solicitation Fee" and "Concurrent Offering--Selling Securityholders' Plan of
Distribution."
7
<PAGE>
Qualifications and Maintenance Requirements for Nasdaq National Market Listings;
Market Volatility
The Company's Common Stock and Warrants are listed for trading on the
Nasdaq National Market System ("Nasdaq"). The continued trading of these
securities on Nasdaq is conditioned upon the Company meeting certain tests. If
the Company fails to meet any of these tests, such securities could be delisted
from trading on Nasdaq, which could materially affect the trading market for
them. See "Description of Securities."
The Nasdaq National Market System has experienced, and is likely to
experience, significant price and volume fluctuations in the future, which could
adversely affect the market price of the Common Stock and Warrants without
regard to the operating performance of the Company. Sonics considers that
factors such as quarterly fluctuations in financial results and developments in
its industry could contribute to the volatility of the prices of its Common
Stock and Warrants causing the value of these securities to fluctuate
significantly. These factors, as well as general economic conditions such as
increasing inflation, recessions or high interest rates, may adversely affect
the market prices of the Common Stock and Warrants. In addition, if the bid
price of the Common Stock falls below the minimum bid price required to be
maintained for inclusion in the Nasdaq National Market System ($1 per share) the
Common Stock could be delisted from the Nasdaq National Market System. If the
Common Stock is delisted and is not eligible for trading on any other approved
national securities exchange, any broker or dealer effecting a purchase or sale
of unlisted Common Stock would be required to comply with the "penny stock"
rules set forth in Section 15(g) of the Exchange Act, and the regulations
promulgated thereunder, unless the transaction is otherwise exempt pursuant to
specified exemptions contained in such rules. The "penny stock" rules require
that, prior to the transaction, the broker or dealer has (i) approved the
prospective investor's account for the transaction in "penny stock" in
accordance with specified procedures and (ii) received from the investor a
written agreement related to the transaction setting forth the identity and
quantity of the "penny stock" to be purchased. These requirements, if imposed,
may further adversely affect the liquidity of and market for the Company's
securities.
Current Prospectus and State Registration Required to Exercise Warrants
The Warrants and Selling Securityholder Securities have been registered
pursuant to a Registration Statement, as amended, filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the
"Securities Act"), of which this Prospectus is a part. Unless the Company
continues to keep such Registration Statement current and continues to take
measures to qualify or keep qualified such securities in certain states, holders
of the Warrants and the Selling Securityholder Options will not be able to
exercise the Warrants or Options, although they may be immediately exercisable,
or sell the underlying shares of Common Stock issuable upon exercise of the
Warrants or Selling Securityholder Securities in the public market. In
connection with the Initial Offering, the Company agreed to use its best efforts
to qualify and maintain a current registration statement covering such Warrants,
Options and shares of Common Stock. There can be no assurance, however, that
Sonics will be able to maintain a current registration statement or to effect
appropriate qualifications under applicable state securities laws, the failure
of which may result in the exercise of the Warrants and Options and the resale
or other disposition of Common Stock issued, upon such exercise, being unlawful.
See "Description of Securities--Warrants" and "Concurrent Offering--Selling
Securityholder Options."
Possible Issuances of Preferred Stock
Shares of Preferred Stock of the Company may be issued by the Board of
Directors, without stockholder approval, on such terms as the Board may
determine. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. Moreover, although the ability to issue Preferred
Stock may provide flexibility in connection with possible acquisitions and other
corporate purposes, such issuance may make it more difficult for a third party
to acquire, or may discourage a third party from acquiring, a majority of the
voting stock of the Company. This result could prevent an increase in the market
price of Sonics' Common Stock or cause a decline in such price. Sonics has no
current plans to issue any shares of Preferred Stock. See "Description of
Securities--Preferred Stock."
Shares Eligible for Future Sale
Future sales of Common Stock by existing stockholders pursuant to Rule 144
under the Securities Act, pursuant to the Concurrent Offering or otherwise,
could have an adverse effect on the price of the Company's securities. Robert
Soloff, an officer and director of the Company, holds 2,500,000 shares of Common
Stock. In connection with the Initial Offering, Mr. Soloff agreed not to
publicly offer, sell or otherwise dispose of any such shares until February 26,
1998 without the prior written consent of Monroe Parker. In connection with the
Concurrent Offering, 100,000 Selling Securityholder Options, 100,000 shares of
Selling Securityholder Common Stock, and 100,000 Selling Securityholder Warrants
and the securities underlying such Warrants were registered for resale
concurrently with this Offering. Monroe Parker has "demand" and "piggy-back"
registration rights covering the securities underlying the Selling
Securityholder Options. Future sales of Common Stock, or the possibility of such
sales in the public
8
<PAGE>
market, may adversely affect the market price of the securities offered hereby.
See "Description of Securities" and "Concurrent Offering."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Any statements in this Prospectus 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 Prospectus 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 Sonic Seal
division 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. The Company's objectives of future growth,
profitability and financial returns are also subject to the uncertainty of
Vibra-Surge Corporation being able to successfully market its ultrasonic
surgical device. It is also uncertain whether a patent will be granted for the
Company's ultrasonic surgical device, or whether any related patent litigation
may hinder the Company's ability to market the device. In addition, the
Company's objectives of future growth, profitability, and financial returns are
also subject to the uncertainty of the growth and profitability of its wholly
owned subsidiary, Tooltex. See "Business" and "--Products." Factors that could
cause actual results to differ materially include, but are not limited to, those
discussed herein under "Risk Factors." The Company undertakes no obligation to
release publicly the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
9
<PAGE>
MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Since February 26, 1996, the Common Stock and Warrants to purchase Common
Stock of the Company have been traded and quoted through Nasdaq under the
symbols "SIMA" and "SIMAW," respectively. Prior to that date, the Company's
equity was not traded on any public market. 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.
Stock Warrants
-------------------------- --------------------------
Quarter Ended High Low High Low
- ---------------- ------------ ------------ ------------ ------------
March 31, 1996 11 1/4 6 3/4 5 3/4
June 30, 1996 13 11 7/8 6 5/8 4
September 30, 1996 14 1/2 10 13/16 7 1/4 4 1/4
December 31, 1996 13 1/2 3 3/4 6 1/4 1/2
March 31, 1997 8 1/2 4 2 1/2 11/16
June 30, 1997 6 1/4 2 7/8 1 11/16 3/8
September 30, 1997 3 3/4 2 1/2 7/8 1/4
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 December 2, 1997, the closing price of the Common Stock of the Company,
as reported by Nasdaq, was $1 3/4 per share, and the closing price of the
Warrants, as reported by Nasdaq was $3/8 per Warrant. On December 2, 1997, the
Company had 26 stockholders of record and 13 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.
USE OF PROCEEDS
The net proceeds which may be realized by the Company upon the exercise of
all of the Company's Warrants (assuming no exercise of the Selling
Securityholder Options), after deduction of expenses of this Offering and before
provision for the possible payment of a warrant solicitation fee of 4% (see
"Warrant Solicitation Fee"), are estimated to be $9,914,000. Inasmuch as the
Company has received no firm commitments for the exercise of the Warrants, no
assurance can be given that all of the Warrants will be exercised.
Any net proceeds received from the exercise of the Warrants are intended
to be used for working capital expansion of domestic and international marketing
activities, research and development and reduction of existing debt.
DIVIDEND POLICY
Sonics has made payments in the form of additional compensation to its
former sole stockholder, Mr. Soloff, to pay taxes due during its S corporation
status and on June 29, 1995 made an additional $500,000 payment to Mr. Soloff as
a distribution relating to previously taxed accumulated earnings. In addition,
the Company distributed, in the form of a dividend to Mr. Soloff upon the
effective date of the Company's Initial Offering, approximately 43% of the
earnings of the Company from January 1, 1995 until February 26, 1996, or
$496,000, which equals approximately the amounts Mr. Soloff would be expected to
pay personally for income taxes based on such earnings. The distribution
included an adjustable note payable to Mr. Soloff of $450,000 to cover the
estimated personal income taxes on the Company's S corporation income. Such
distribution to its former sole stockholder for purposes of tax payments has
been charged to Sonics' retained earnings and does not affect its statement of
income.
The Company intends to follow a policy of retaining any earnings to
finance the development and growth of its business. Accordingly, it does not
anticipate other payments of cash or other dividends in the foreseeable future.
See "Risk Factors--Lack of Dividends." The payment of dividends, if any, rests
within the discretion of the Board of Directors and will depend upon, among
other things, the Company's earnings, its capital requirements and its overall
financial condition. See "Description of Securities."
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997 (see "Concurrent Offering"). See also "Use of Proceeds." This
table should be read in conjunction with the Financial Statements and notes
thereto included elsewhere in this Prospectus.
September 30,
1997
----------------
(unaudited)
Indebtedness:
Short-term debt, including current portion
of long-term debt (1)................... $ 2,451,203
Long-term debt, net of current portion.... 664,156
Stockholders' equity:
Common stock, par value $.03 per share;
10,000,000 shares authorized; 3,520,100
shares issued and outstanding at June 30, 1997;
3,590,100 shares issued and outstanding
at September 30, 1997................... 107,703
Additional paid-in capital................ 6,766,897
Retained earnings......................... 227,753
------------------
Total stockholders' equity.............. $7,102,353
==================
- ----------------------
(1) Includes current portion of a $500,000 term note.
(2) Does not include (i) 250,000 shares of Common Stock reserved for issuance
under the Company's incentive stock option plan, (ii) 285,366 shares of
Common Stock reserved for issuance under certain non-qualified stock
options, (iii) up to 200,000 shares of Common Stock issuable upon the
exercise of the Selling Securityholder Options and Selling Securityholder
Warrants and (iv) 70,000 shares of Common Stock issued in connection with
the acquisition of Tooltex on July 25, 1997. See "Management--Option and
Stock Appreciation Rights," "Certain Relationships and Related
Transactions," "Description of Securities," and "Concurrent Offering."
11
<PAGE>
SELECTED FINANCIAL DATA
The financial information set forth below for the years ended June 30,
1995, 1996 and 1997 and the three months ended September 30, 1996 and 1997
summarizes certain selected financial data which should be read in conjunction
with the Company's audited financial statements and related notes thereto and
with Management's Discussion and Analysis of Financial Condition and Results of
Operations, all of which are included elsewhere in this Prospectus. The
information as of and for the three months ended September 30, 1996 and 1997 is
unaudited, but includes all adjustments, consisting of only normal recurring
accruals, considered necessary for a fair presentation of financial positions
and results of operations.
<TABLE>
Three Months Ended
Year Ended June 30, September 30,
<S> <C> <C> <C> <C> <C>
---------- ---------- ----------- ---------- -----------
1995 1996 1997 1996 1997
---------- ---------- ----------- ---------- ----------
Statement of Income Data
Net sales.......................... $8,574,845 $9,376,170 $10,827,525 $2,536,238 $3,116,804
Cost of sales...................... 4,228,024 5,091,789 6,410,584 1,330,404 1,827,658
--------- --------- ---------- --------- ---------
Gross profit....................... 4,346,821 4,284,381 4,416,941 1,205,834 1,289,145
Operating expenses................. 3,582,037 3,793,261 4,399,425 1,006,190 1,190,421
--------- --------- ---------- --------- ---------
Income from operations............. 764,784 491,120 17,516 199,644 98,724
Other income (expense).............
Other income................... 27,751 45,201 110,471 2,250 7,282
Interest, net................... (12,817) (100,011) (79,565) (32,549) (34,578)
--------- --------- ---------- --------- ---------
Income before income taxes......... 779,718 436,310 48,422 169,345 71,428
Income taxes (benefit)............. 45,000 (8,000) 19,368 67,738 15,915
--------- --------- ---------- --------- ---------
Net income......................... $ 734,718 $ 444,310 $ 29,054 $ 101,607 $ 55,513
========= ========= ========== ========= =========
Pro Forma Statement of Income
Data(1)
Income before income taxes......... $ 940,000 $ 436,000
Provision for income taxes......... 376,000 174,000
--------- ---------
Net income......................... $ 564,000 $ 262,000
========= =========
Net income per share............... $ .22 $ .09 $ .01 $ .02 $ .01
========= ========= ========= ========== =========
Weighted average number of shares
outstanding..................... 2,624,000 3,409,000 4,247,000 4,775,820 3,769,893
========= ========= ========= ========== =========
Fully diluted net income per share. $ .22 $ .08 $ .01 $ .02 $ .01
========= ========= ========= ========== =========
Weighted average number of shares
outstanding..................... 2,624,000 3,441,000 4,247,000 4,775,870 3,769,393
</TABLE>
<TABLE>
<CAPTION>
June 30, September 30,
1995 1996 1997 1996 1997
--------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents.......... $ 187,490 $ 73,129 $ 271,593 $ 89,111 $ 243,347
Working capital.................... 2,183,858 6,010,485 5,942,288 6,119,611 4,359,077
Total assets....................... 4,985,405 9,180,506 9,159,117 9,205,748 11,807,577
Long-term obligations, less current - - 406,911 - 664,156
portion.........................
Stockholders' equity............... 2,883,767 6,665,315 6,817,440 6,766,922 7,102,353
- ----------------------
</TABLE>
(1)Pro forma statement of income data reflects (i) Common Stock expected to be
outstanding immediately prior to the exercise of any of the Warrants after
giving effect to the First and Second Stock Splits; (ii) adjustments for
payment of additional salary to Mr. Soloff representing the personal income
tax owed on the S corporation income totaling $160,000, and $0 for the years
ended June 30, 1995 and 1996, respectively; and (iii) federal, state and
local taxes as if the Company had been a C corporation based on rates that
would have been in effect. See "Management--Executive Compensation."
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company relates to the fiscal years ended June 30, 1995, 1996
and 1997 and the three months ended September 30, 1996 and 1997 and should be
read in conjunction with the preceding Selected Financial Data and the Company's
Financial Statements and notes thereto included elsewhere in this Prospectus.
All references to full years are to the applicable fiscal year of the Company.
Until February 26, 1996, the effective date of the Company's Initial
Offering, the Company was an S corporation under the Federal Internal Revenue
Code. In lieu of federal income taxes on the corporation's income, the
stockholders of an S corporation are taxed on their proportionate share of the
corporation's net income. No provision or liability for Federal income taxes has
been included, therefore, in the Company's financial statements or below for
fiscal year 1995. However, adjustments for federal income taxes as if the
Company were a C corporation on a pro forma basis have been made. See "Selected
Financial Data" and "Financial Statements."
Results of Operations
Recent Financial Developments
The following table sets forth, for the three most recent fiscal years and
for the three months ended September 30, 1996 and 1997, the percentage
relationship to net sales of principal items in the Company's Statement of
Income.
Statement of Income as Percent of Sales
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
---------------------------- ----------------------
1995 1996 1997 1996 1997
-------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 49.3 54.3 59.2 52.5 58.6
-------- --------- --------- ---------- -----------
Gross profit....................... 50.7 45.7 40.8 47.5 41.4
Operating expenses.................
Selling......................... 28.5 30.2 29.2 27.1 23.5
General and administrative...... 7.9 6.3 7.6 8.7 9.9
Research and development........ 4.1 4.0 3.9 3.9 4.8
Compensation expense - stock
options......................... 1.2 - - - -
-------- --------- --------- ---------- -----------
Total operating expense......... 41.7 40.5 40.7 39.7 38.2
-------- --------- --------- ---------- -----------
Other income (expense).............
Interest, net................... (.2) (1.1) (.7) (1.2) (1.1)
Other income (expense).......... .3 .5 1.0 .1 .2
-------- --------- --------- ---------- -----------
Total other income
(expense)....................... .1 (.6) .3 (1.1) (.9)
-------- --------- --------- ---------- -----------
Income before income taxes......... 9.1 4.6 .4 6.7 2.3
Income taxes (benefit)............. .5 (.1) .2 2.7 .5
-------- --------- --------- ---------- -----------
Net income......................... 8.6% 4.7% .2% 4.0% 1.8%
======== ========= ========= ========== ===========
</TABLE>
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996.
Net Sales. Net sales for the quarter ended September 30, 1997 increased
$581,000 or 22.9% over the same period in fiscal 1997. This increase is the
result of the effect of the acquisition and consolidation of Tooltex, combined
with slight increased volume in domestic markets for the Company's ultrasonic
welding equipment
Cost of Sales. Cost of sales increased from 52.5% of sales for the three
months ended September 30, 1996 to 58.6% of sales for the three months ended
September 30, 1997. This increase in the cost of sales percentage is partially
attributable to the acquisition and consolidation of Tooltex. In addition, cost
of sales for the quarter ended September 30, 1997 was 56.6% of sales, excluding
the
13
<PAGE>
effect of Tooltex, compared to 52.5% for the same quarter last year. This
increase is attributable to increased costs associated with the manufacture of
the vibration welder in connection with the introduction of the product to the
market which was recognized in the first quarter combined with the effect of the
product mix in the first quarter.
Selling Expenses. Selling expenses for the first quarter of fiscal 1998
increased $46,000 or 6.7% over the same period in fiscal 1997. As a percentage
of net sales, selling expenses decreased from 27.1% to 23.5% over the same
periods. This decrease in selling expenses as a percentage of net sales is a
result of the Company increasing its net sales through the acquisition and
consolidation of Tooltex, with only a slight corresponding increase in selling
expenses. Excluding the effect of Tooltex, expenses also decreased from 27.1% of
sales in the first quarter of fiscal 1997 to 25.7% of sales in the first quarter
of fiscal 1998.
General and Administrative Expenses. General and administrative expenses
for the first quarter of fiscal 1998 increased $88,000 or 39.9% over the first
quarter of fiscal 1997. As a percentage of net sales, these expenses increased
to 9.9% from 8.7% over the same period in fiscal 1997. This increase is
primarily attributable to regular increases in salaries.
Research and Development Expenses. Research and development expenses
increased $51,000 or 50.8% over the same period in fiscal 1997. The increase was
primarily due to that department's increased use of outside consulting services
for several development projects.
Interest Expense. Interest expense for the three months ended September
30, 1997 increased by approximately $2,000 or 6.2% over the three months ended
September 30, 1996. This slight increase is due to slightly higher average
borrowings on the Company's line of credit in the first quarter of fiscal 1998.
The Company expects interest expense to increase in future quarters due to the
new credit facilities discussed in "Liquidity and Capital Resources" below.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Net Sales. Net sales for the year ended June 30, 1997 increased
$1,451,000, or 15.5% over the prior year. This is primarily the result of
increased sales volume for the vibration welder product line. The Company also
experienced increased volume for the ultrasonic welder product line. The Company
implemented a slight price increase of between three and five percent in the
ultrasonic welder line in March, 1997 and in the liquid processor product line
in April, 1997
Cost of Sales. Cost of sales increased approximately $1,319,000 or 25.9%
over the prior year. As a percentage of sales, cost of sales increased from
54.3% to 59.2%. This increase in cost of sales is primarily attributable to
increased costs associated with the vibration welder in the first year of
production. Initial costs associated with the startup of the vibration welder
line caused the cost of these products, as a percentage of their net sales
during this 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. The impact of the vibration welder upon cost of sales was most
significant in the fourth quarter. If the Company had not made any sales of
vibration welders during the 1997 fiscal year, cost of sales would be only 55.6%
of sales, only slightly higher than the prior year.
Selling Expenses. Selling expenses for the year ended June 30, 1997
increased by approximately $325,000 or 11.5% over fiscal 1996. This increase is
primarily attributable to the increase in sales. As a percentage of sales,
selling expense decreased slightly from 30.2% in fiscal 1996 to 29.2% in fiscal
1997.
General and Administrative Expenses. General and administrative expenses
for the year ended June 30, 1997 increased by approximately $235,000 or 39.9%
from the prior year. This increase can be primarily attributed to increased
expenses associated with being a publicly traded company, such as professional
fees, investor relations, printing, and directors' and officers' insurance
expenses.
Research and Development Expenses. Research and development expenses
increased by approximately $46,000 in fiscal 1997. This represents an increase
of approximately 12.5%. The primary factor that contributed to this increase was
the planned addition of one research and development engineer, as part of the
expansion of research and development efforts.
Interest Expense. Total interest expense for fiscal 1997 decreased $20,000
or 20.4%. This is, in large part, due to decreased borrowings on the Company's
line of credit with its bank. In fiscal 1996, the average daily balance under
this line of credit was approximately $661,000, compared to approximately
$355,000 in fiscal 1997. In the second quarter of fiscal 1997, the Company
reduced borrowings on its line of credit by utilizing a portion of the proceeds
from its initial public offering.
14
<PAGE>
Income Taxes. Income taxes increased by $27,000 or 342.1% due to the
Company recording an income tax benefit of $91,000 in fiscal 1996. This tax
benefit resulted from the recognition of a 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 resulted in an increase in
fiscal 1997 that was offset by lower taxes resulting from lower earnings in the
current fiscal year.
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
1996 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. A 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 subchapter 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
Surgical Systems, Inc. ("Sonique") and Mentor Corp. ("Mentor"), which has been
settled. See "Business--Legal Proceedings."
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 has reduced borrowings on its line of credit by utilizing
proceeds from its Initial 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 a
Federal deferred tax asset upon conversion of the Company from an S corporation
to a C corporation due to the completion of the Initial 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 Initial Offering.
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Liquidity and Capital Resources
Operations of the Company used approximately $277,000 during the three
months ended September 30, 1997 as a result of increasing inventory while paying
down accounts payable balances. During the first quarter of fiscal 1998, the
Company invested approximately $16,000 in new capital equipment and leasehold
improvements and $1,289,000 in land and a building that will be used to
consolidate the Company's manufacturing and office facilities. As of June 30,
1997, the Company's working capital was $5,942,000. As of September 30, 1997,
the Company's working capital had decreased to $4,359,000 representing a
decrease of approximately 26.6%. This decrease is the result of increased short
term debt resulting from increased borrowings under the Company's line of credit
by approximately $505,000 and a short term bridge loan in the amount of
$1,151,000 that will be repaid with proceeds from a bond issue.
The Company's principal credit line is a $1,500,000 bank credit facility.
On September 19, 1997, the Company entered into three facilities with a
bank (the "Bank"), each of which is secured by a first mortgage lien on the
Newtown Property (as defined under "Properties and Facilities"): (i) a
Bridge Loan in the original principal amount of $1,600,000; (ii) a Line of
Credit in the original principal amount of up to $1,500,000; and (iii) a Term
Loan in the original principal amount of $427,000.
The Bridge Loan bears interest at the Bank's base lending rate plus
one-half percent. The principal balance of the Bridge Loan, which at December 2,
1997 was $1,239,390, will mature and be due and payable upon the earliest to
occur of (i) the written demand of the Bank, (ii) the consummation of the
IRB Loan (as hereinafter defined), or (iii) December 31, 1997. Subject to
certain terms and conditions, the Bank has agreed to make a tax-exempt
industrial development loan (the "IRB Loan") in the aggregate principal amount
of up to $4,000,000 to be issued through the Connecticut Development Authority,
the proceeds of which will be used to refinance the Bridge Loan, pay any
remaining costs of preparing the Newtown Property for Sonics' use and occupancy
and for purchasing manufacturing equipment. Sonics expect to close the IRB Loan
on or before December 31, 1997. The principal of the Bridge Loan may be prepaid
in whole or in part, without premium or penalty, at any time.
The Line of Credit is used by the Company for working capital. The Line of
Credit bears interest, at Sonics' option, at the Bank's base lending rate or
LIBOR plus 2.5%. Advances under the Line of Credit are at the Bank's sole
discretion. The entire principal balance of the Line of Credit, which at
December 2, 1997 was $1,005,101, will mature and be due and payable upon the
demand of the Bank. The borrowings under the Line of Credit have been used to
repay a line of credit with another bank in the amount of $992,000. The line of
credit with the other bank bore interest at such bank's loan pricing rate of
interest plus one-half percent. The principal of the Line of Credit may be
prepaid in whole or in part, without premium or penalty, at any time. In the
event of the prepayment of any portion of the Line of Credit during any period
in which the Line of Credit bears interest at a LIBOR rate, Sonics will be
obligated to pay the Bank a breakage fee relating to the LIBOR interest
component. The Line of Credit is also secured by all of the Company's assets.
The proceeds of the Term Loan were used to pay in full a term loan with
another bank with interest and principal totaling $427,000. The term loan with
the other bank bore interest at such bank's loan pricing rate of interest plus
one-half percent. The outstanding principal amount of the Term Loan at December
2, 1997 was $403,278, which bears interest, at Sonics' option, at the Bank's
base lending rate or LIBOR plus 2.5%. The principal of the Term Loan must be
paid in 36 equal monthly installments of $11,861.11, commencing on November 1,
1997, and the entire remaining principal balance will mature and be due and
payable on October 1, 2000. The terms and conditions under which Sonics may
prepay all or any portion of the Term Loan are the same as for the Line of
Credit discussed above. The Term Loan is also secured by all of the Company's
assets.
Impact of Inflation
The Company does not believe that inflation significantly affected its
results of operations for the 1997 fiscal year.
Future Effect of Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which
is effective for financial statements for both interim and annual periods ending
after December 1997. Early adoption of the new standard is not permitted. The
new standard eliminates primary and fully diluted earnings per share
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and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The pro forma effect of
adopting the new standard would be basic earnings per share of $.09 and $.01 for
the years ended June 30, 1996 and 1997, respectively, and $.03 and $.01 for the
three months ended September 30, 1996 and 1997, and diluted earnings per share
of $.08 and $.01 for the years ended June 30, 1996 and 1997, respectively, and
$.02 and $.01 for the three months ended September 30, 1996 and 1997,
respectively.
In addition, in June 1997, FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). The Company will implement SFAS
130 and SFAS 131 as required in fiscal 1999, which require the Company to report
and display certain information related to comprehensive income and operating
segments, respectively. Adoption of SFAS 130 and SFAS 131 will not impact the
Company's financial position or results of operations.
BUSINESS
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 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.
On July 25, 1997, the Company acquired Tooltex, Inc., an Ohio corporation
("Tooltex"), through a merger transaction (the "Merger"). Tooltex is a
manufacturer of automated systems used in the plastics industry. Pursuant to an
Agreement and Plan of Merger, dated July 25, 1997 (the "Plan of Merger"), among
Sonics, SM Sub, Inc., an Ohio corporation and a wholly owned subsidiary of
Sonics ("Sonics Sub"), Tooltex, and the shareholders of Tooltex, Tooltex was
merged with and into Sonics Sub. Sonics Sub then changed its name to Tooltex,
Inc. (the "Surviving Corporation"). Under the Plan of Merger, the shareholders
of Tooltex received, in exchange for 100% of the stock of Tooltex, (i) an
aggregate of 70,000 shares of Sonics Common Stock, (ii) $70,000 and (iii)
options to purchase 10,000 shares of Sonics Common Stock. See the financial
statements of Tooltex elsewhere in this Prospectus.
In connection with the Merger, the former two shareholders of Tooltex, who
had also been the President and Vice President of Tooltex, entered into
employment agreements with the Surviving Corporation and non-competition
agreements and confidentiality agreements with the Surviving Corporation and
Sonics.
The Company has also formed a wholly owned subsidiary, Vibra-Surge
Corporation, for the manufacture and sale of its ultrasonic surgical device. See
"Products" below.
Products
The Company manufactures 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
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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.
The Company also manufactures 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.
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 Instrument -- The Company has designed and developed
an ultrasonic medical device, the Vibra-Surge(TM) System Model VS 2120
("Vibra-Surge"), for the removal of soft tissue in general and reconstructive
and plastic surgery. Sonics filed a patent application and a preliminary patent
application covering Vibra-Surge (TM) with the U.S. Patent and Trademark Office
on May 1, 1997. It is not certain whether patents for this application will be
issued or, if issued, that such patents 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. The device received 510(k) clearance from the Food
and Drug Administration (the "FDA") on July 25, 1997 which permits Sonics to
market the device. In September 1997, Sonics created a wholly owned subsidiary,
Vibra-Surge Corporation, which signed an exclusive distribution agreement with
Sonimedix, Inc. ("Sonimedix") on September, 19, 1997. Under the distribution
agreement, Sonimedix serves as the exclusive worldwide distributor of
Vibra-Surge (TM). On September 25, 1997, Sonics transferred to Vibra-Surge
Corporation all of its rights and obligations under the 510(k) FDA clearance and
patent applications and all of the technology related to Vibra-Surge (TM).
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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 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, Aston, Pennsylvania, and Grove City, Ohio, 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 Sonics' total purchases for inventory made in fiscal years 1996 or
1997. 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 the fiscal years ended June 30, 1996 and 1997, and for
the three months ended September 30, 1996 and 1997, expenses attributable to
warranties were approximately $63,000, $77,000, $15,360 and $15,360,
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 is 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 the
fiscal years ended June 30, 1996 and 1997, and for the three months ended
September 30, 1996 and 1997, the Company had income of approximately $358,000,
$398,000, $88,000 and $131,000, 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 26 years old.
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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 ("USS") utilize approximately 50 sales
representatives in 48 states throughout the country. The Company's wholly owned
subsidiary, Tooltex, utilizes two sales representatives throughout the Midwest.
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
Tooltex, which accounted for 10.1% and 6.0% in fiscal 1996 and fiscal 1997,
respectively, no one sales representative accounted for more than 5% of Sonics'
sales in either fiscal year 1996 or 1997. Tooltex was acquired by the Company on
July 25, 1997. The loss of such representatives representing in the aggregate
significant sales may have a material adverse impact on the Company's business.
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 to the terms Sonics negotiates with its own sales
representatives.
The Company's wholly owned subsidiary, Tooltex, sells its automated
systems under its corporate name, Tooltex, Inc. Tooltex's sales organization
consists of two direct sales personnel, as well as two sales representatives.
Distributors
Sales of Sonics' products to distributors are also generally made pursuant
to written contracts. Under such contracts, distributors provide repair service
and are prevented from selling devices competitive to the Company's products.
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 either fiscal year 1996 or 1997 or for the
three months ended September 30, 1996 or 1997. 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.
Sonics' wholly owned subsidiary, Vibra-Surge Corporation, will sell its
ultrasonic surgical device through its exclusive distributor of the product,
Sonimedix. Under the distribution contract, Sonimedix is prevented from selling
devices competitive to the ultrasonic surgical instrument. Payment must be made
within 60 days of receipt of the product by the end user. The contract may be
canceled by either party if certain terms and conditions are not satisfied.
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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 1996 or 1997 or for the three months ended September 30, 1996 or 1997.
International Operations
The Company's international activities are an important portion of its
business. Approximately 33%, 37%, 41% and 29% of its sales for fiscal years 1996
and 1997, and for the three months ended September 30, 1996 and 1997,
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 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 is 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.
The Company's ultrasonic surgical instrument has three main competitors:
Mentor Corporation, Lysonix Inc., and Wells-Johnson Corporation. No one company
dominates this market. However, the Company's three major competitors have
entered the market prior to Sonics.
Backlog
As of September 30, 1997, the Company's backlog was $1,311,000 as compared
with a backlog of $1,256,000 as of September 30, 1996. No one customer accounted
for more than 10% of such backlog at September 30, 1997.
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.
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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 $372,000
for fiscal 1996, and $418,000 for fiscal 1997, and $100,000 and $151,000 for the
three months ended September 30, 1996 and 1997, respectively.
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 and its "Vibra-Surge" 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. On May 1, 1997, the
Company filed a patent application and a preliminary patent application with the
U.S. Patent and Trademark Office covering its new ultrasonic surgical
instrument. The Company cannot predict whether patents will be granted or the
extent of protection which would be offered by a patent, if granted.
On September 25, 1997, Sonics transferred to its wholly owned subsidiary,
Vibra-Surge Corporation, the "Vibra-Surge" trade name, and its rights and
obligations under the Vibra-Surge patent application and preliminary patent
application. See "Products" above.
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 relating to its manufacture
and sale in the United States. The FDA has rules which govern the design,
manufacture, distribution, approval and promotion of medical devices in the
United States.
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.
On May 1, 1997, Sonics filed a patent application and a preliminary patent
application for its ultrasonic surgical instrument, Vibra-Surge. The Company has
obtained 510(k) clearance from the FDA which permits the Company to market the
device for aiding the removal of soft tissue in general surgery and plastic and
reconstructive surgery. Vibra-Surge has signed an exclusive distribution
agreement with Sonimedix for the sale and marketing of its ultrasonic surgical
instrument.
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"). The 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 obtaining or preserving commercial contracts or orders.
Sonics has urged its foreign distributors to comply with the requirements of the
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 November 17, 1997, the Company, including its subsidiaries, had 117
full-time employees including its officers, of whom 68 were engaged in
manufacturing, three in repair services, eight in administration and financial
control, 16 in engineering and research and development, and 22 in marketing and
sales.
22
<PAGE>
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.
Properties and Facilities
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 Sonics has determined that the facilities are not
suitable for Sonics' anticipated requirements. As a result, on September 19,
1997, Sonics purchased a 63,000 square foot cement and cinder block building
located at 55A Church Hill Road, Newtown, Connecticut (the "Newtown Property")
for $1,265,000. The Company plans to renovate the building and consolidate its
four Connecticut facilities in the Newtown Property which will serve as the
Company's primary manufacturing facility and corporate headquarters. The Company
anticipates that the cost of the improvements to the property will be
approximately $1.9 million. The Company intends to move into the Newtown
Property by May 1, 1998. Sonics may lease 7,000 square feet in the Newtown
Property to an unrelated third party. Although no party has yet been identified,
the Company believes it will be able to find a lessee, if it chooses to lease
the property, because there is minimal competition in Newtown for similar space.
The Newtown Property is presently insured against fire and other casualty in an
amount the Company believes to be adequate.
The Newtown Property is encumbered by a first mortgage lien in favor of
the Bank, which secures three credit facilities, each dated September 19, 1997:
(i) a bridge loan in the original principal amount of $1,600,000 (the
"Bridge Loan"); (ii) a revolving line of credit facility in the original
principal amount of up to $1,500,000 (the "Line of Credit"); and (iii) a term
loan in the original principal amount of $427,000 (the "Term Loan"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Bridge Loan bears interest at the Bank's base lending rate plus
one-half percent. The principal balance of the Bridge Loan, which at December 2,
1997 was $1,239,390, will mature and be due and payable upon the earliest to
occur of (i) the written demand of the Bank, (ii) the consummation of the
IRB Loan, or (iii) December 31, 1997. Subject to certain terms and conditions,
the Bank has agreed to make an IRB Loan in the aggregate principal amount of up
to $4,000,000 to be issued through the Connecticut Development Authority, the
proceeds of which will be used to refinance the Bridge Loan, pay any remaining
costs of preparing the Newtown Property for Sonics' use and occupancy and for
purchasing manufacturing equipment. Sonics expects to close the IRB Loan on or
before December 31, 1997. The principal of the Bridge Loan may be prepaid in
whole or in part, without premium or penalty, at any time.
The Company does not intend to use the proceeds from the Line of Credit or
the Term Loan to acquire or improve the Newtown Property. For information about
such borrowings, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company does not have a policy with
respect to investments in real estate, interests in real estate, real estate
mortgages or securities of or interests in persons primarily engaged in real
estate activities. The Company does not intend to make any investments in real
estate other than the Newtown Property.
23
<PAGE>
The following table lists the Company's offices by location as of December
2, 1997, all of which are leased, and certain other information:
Approximate Approximate
Total Area Expiration Date Current Annual
Leased in of Lease Rent (1)
Square Footage
-------------------------------------------------
Kenosia Ave., Danbury, 23,000 April 30, 1998 $156,500
Connecticut
Shelter Rock Road, Danbury, 10,000 April 30, 1998 45,000
Connecticut
Aston, Pennsylvania 4,900 September 30, 2002 40,300
Naperville, Illinois 2,000 December 31, 1997 14,400
Gland, Switzerland 3,000 January 31, 1998 (2) 13,800
Grove City, Ohio(3) 13,600 July 26, 2002 (2) 77,900
- ---------------------------
(1)Includes proportionate cost of utilities, repairs, cleaning, snow removal,
taxes and insurance.
(2) Contains renewal option as listed below:
Gland Switzerland.............1 year
Grove City, Ohio .............5 years
(3)Lease is with BPT, Limited, the sole partners of which are the former
shareholders and current President and Vice President of Tooltex.
The Company believes that it has adequate insurance coverage for all of
its leased properties. The Company also leases certain automobiles and
equipment.
Legal Proceedings
There is no pending or threatened material litigation or proceeding
against the Company.
<TABLE>
<CAPTION>
MANAGEMENT
Name Age Title
---- --- -----
<S> <C> <C>
Robert S. Soloff (1)(2)........... 58 Chairman, Chief Executive Officer,
President, Treasurer and Director
Richard H. Berger................. 54 Vice President of Sales and
Marketing
Daniel Grise...................... 39 Vice President of Operations
Lauren H. Soloff.................. 32 Secretary, Vice President of Legal
Affairs and Investor Relations and
Director
Alan Broadwin (1)................. 62 Director
Stephen J. Drescher............... 34 Director
Jack T. Tyransky (1)(2)........... 52 Director
--------------------
</TABLE>
(1) Member of Audit Committee.
(2) Member of Stock Option Committee.
All directors hold office until the next annual meeting of stockholders or
until their successors are elected and qualify. Executive officers hold office
until their successors are chosen and qualify, subject to earlier removal by the
Board of Directors.
Robert S. Soloff
Robert S. Soloff founded the Company in 1969 and has served as its
Chairman, President and a director since then. From 1960 to 1961, he was
employed as an Assistant Project Engineer by Kearfott-Singer, Inc. designing
ultrasonic oil burners and investigating the use of ultrasonic energy for
various industrial applications. From 1962 until 1969, Mr. Soloff held a variety
of
24
<PAGE>
positions with Branson Sonic Power Company, a major manufacturer of
ultrasonic devices. These positions included laboratory manager for new products
and applications, New York Metro district sales manager and manager of new
product development. Mr. Soloff is currently serving as a director of the
Ultrasonic Industry Association. He is a 1960 graduate of Cooper Union where he
earned a bachelor of science degree in mechanical engineering. Mr. Soloff has
served as a director of the Company since 1969.
Richard H. Berger
Richard H. Berger joined the Company in 1983 as Product Manager and in
1984 became Vice President of Sales and Marketing and has continued in that
capacity since that date. From 1972 to 1983, he was employed by Branson Sonic
Power Company in a variety of positions, including Product Specialist, Product
Manager and Marketing Director for Fabric and Film Sealing, and Marketing
Director for Packaging and Textile Equipment. Mr. Berger holds bachelor of arts
and masters degrees in business administration from the University of New Haven.
Daniel Grise
Daniel Grise joined the Company in 1977 as an electronics technician.
During his tenure with the Company, Mr. Grise has held a variety of positions,
including production supervisor, research and development engineer, quality
control manager, and director of operations. In 1989, Mr. Grise was promoted to,
and continues to serve as, Vice President of Operations. In this position, Mr.
Grise is responsible for overseeing the manufacturing department, quality
control, manufacturing engineering, materials handling, building maintenance,
the machine shop, purchasing, drafting, customer specials and converter design.
He is also the management representative for the Company's ISO 9001 quality
standards program. Mr. Grise received his associates degree in electrical
engineering from the Bridgeport Engineering Institute in 1988.
Lauren H. Soloff
Lauren H. Soloff, the daughter of Robert [and Carole] Soloff, joined the
Company in early 1995 as Corporate Counsel, Secretary and a director. In May of
1996, Ms. Soloff was promoted to Vice President of Legal Affairs and Investor
Relations. From 1993 to 1994, she was employed by the Connecticut law firm of
Siegel, O'Connor, Schiff and Zangari as an associate specializing in litigation
for labor and employment matters. From 1991 to 1993, she served as a staff
attorney for the Office of Solicitor of the U.S. Department of Labor where she
was responsible for all aspects of appellate litigation as well as other
litigation and counseling duties. Ms. Soloff is a member of the New York and
Connecticut bars. She has a bachelor of arts degree from Tufts University and a
juris doctorate from the Washington College of Law, American University. Ms.
Soloff has served as a director of the Company since 1995.
Alan Broadwin
Alan Broadwin has acted as an independent consultant in the medical device
field from 1993 to date. He also currently serves the Company as a consultant on
medical products, focusing on its ultrasonic surgical instruments. In 1988, he
joined Valleylab, Inc. and continued in its employ until 1993 holding various
positions, including director of ultrasonic technology and director of
engineering. Mr. Broadwin holds both bachelor of arts and bachelor of science
(mechanical engineering) degrees from Columbia University and a masters degree
in science (industrial engineering) degree from the Stevens Institute of
Technology. Mr. Broadwin has served as a director of the Company since 1995.
Stephen J. Drescher
Stephen J. Drescher is presently the Director of Corporate Finance for
Monroe Parker Securities. From 1993 to 1996, he was the President and Chief
Executive Officer of Judicate, Inc. (a diversified company). He holds a bachelor
of arts degree and his juris doctorate from the University of Miami. Mr.
Drescher has served as a director of the Company since 1996.
Jack T. Tyransky
Jack T. Tyransky, who has served as a director of the Company since 1995,
has been a partner in Allen & Tyransky, a Connecticut certified public
accounting firm, since 1975. This firm served as the Company's certified public
accountants from 1988 to 1994. He holds a bachelor of science degree in
accounting from the University of Maryland and a masters degree in science
(taxation) from the University of Hartford.
25
<PAGE>
Executive Compensation
The following table sets forth, for the fiscal years ended June 30, 1995,
1996 and 1997, the annual and long-term compensation for the Company's chief
executive officer and its vice president of marketing (the "named executives").
These were the only employees whose annual compensation exceeded $100,000 for
the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------------------------ ---------------
Name and Principal Year Base Other Annual Securities Underlying All Other
Position Salary Bonus Compensation(1) Options/SARs Compensation
- ---------------------- ---- ------ ----- ------------ --------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert S. Soloff...... 1997 $198,000 $18,000 $11,809 $ 0 $ 0
Chairman of the Board, 1996 180,000 0 15,111 0 0
President and Chief 1995 150,000 35,000 20,200 0 160,000 (2)
Executive Officer
- ------------------------
Richard H. Berger..... 1997 89,333 28,384 3,407 0 0
Vice President, 1996 87,000 58,766 5,878 10,000 0
Marketing............. 1995 83,600 36,900 6,000 0 150,000 (3)
</TABLE>
- ----------------------
(1) Represents compensation for excess life insurance premium and personal use
of company autos. Includes executive insurance benefits for Mr. Soloff and
profit sharing awards for Mr. Berger.
(2) Represents amounts paid to stockholder for taxes due on S corporation
income. This practice is now discontinued based on the Company's status as
a C corporation.
(3) Represents amounts paid by the Company to repurchase non-qualified stock
options for 50,000 shares of the Company's Common Stock.
The Company's non-employee directors are paid a fee of $300 for attendance
at each of its Board of Directors meetings plus related expenses. In addition,
directors Alan Broadwin and Jack Tyransky were granted in fiscal 1996 qualified
stock options under the Company's Stock Option Plan, as hereinafter defined, for
1,000 shares of Common Stock. Mr. Broadwin also received compensation from the
Company in fiscal 1996 and fiscal 1997 for his work as an independent consultant
in the medical device field. Monroe Parker assigned to Mr. Drescher 10,000
Selling Securityholder Options to purchase 10,000 shares of the Company's Common
Stock and 10,000 Warrants. See "Certain Relationships and Related Transactions"
and "Concurrent Offering--Selling Securityholders."
Employment Contract
Effective July 1, 1995, the Company entered into an employment agreement
with Robert S. Soloff, who is serving as the Company's President, for an initial
term expiring June 30, 1998 at an 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. Such bonuses will be determined
by the non-employee members of the Board of Directors who will take into account
the performance of Mr. Soloff and the Company in making such determination. Such
bonuses may not exceed 10% of Mr. Soloff's annual compensation for three years.
Mr. Soloff is subject to a two-year covenant not to compete with the Company
that begins July 19, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the Company's bank line of credit, Robert Soloff and Carole Soloff,
a former director of the Company and wife of Mr. Soloff, had personally
guaranteed all amounts outstanding under such line of credit. Upon the
successful completion of the Company's initial public offering in February 1996,
such personal guarantees were terminated.
On June 29, 1995, Sonics made a distribution of $500,000 to Mr. Soloff,
representing a portion of retained earnings accumulated by the Company while an
S corporation. Such $500,000 was used by Mr. Soloff to purchase a certificate of
deposit from
26
<PAGE>
the Company's bank. The certificate of deposit was pledged by Mr.
Soloff to the bank as additional security for the Company's $500,000 demand
note. Upon completion of the Company's initial public offering, such certificate
no longer served as security for the Company's borrowings. Upon completion of
the initial public offering, the remainder of the S corporation retained
earnings, approximately $2,509,000, was reclassified as paid-in capital as if
the earnings had been distributed to Mr. Soloff and then contributed to the
Company.
During the period July 1, 1995 through the termination of the Company's S
corporation status, the Company made distributions to Mr. Soloff of
approximately $496,000, including an adjustable note payable to Mr. Soloff of
$450,000, to cover estimated personal income taxes on the Company's S
corporation income.
Stephen Drescher, a director of the Company, is a director of Corporate
Finance for Monroe Parker, which served as the underwriter for the Company's
Initial Offering in February 1996. In February 1996, Monroe Parker granted to
Mr. Drescher 10,000 Selling Securityholder Options. The Selling Securityholder
Options held by Mr. Drescher are subject to the same terms and conditions as
Monroe Parker's Options discussed below. In fiscal 1997, Mr. Drescher personally
exercised the Selling Securityholder Options to purchase 10,000 Selling
Securityholder Warrants.
In connection with the Initial Offering, Monroe Parker received (i) an
underwriting discount of $.50 per share and $.015 per Warrant, or $525,925, (ii)
Selling Securityholder Options to purchase 100,000 shares of Common Stock and
100,000 Warrants exercisable over a period of four years commencing February 26,
1997, at exercise prices of $8.25 per share of Common Stock and $.25 per
Warrant, (iii) a 3% non-accountable expense allowance of $157,778, and (iv) a
two-year consulting agreement pursuant to which Monroe Parker received fees
aggregating $100,000, together with possible finder's fees on certain future
transactions. The Company also granted to Monroe Parker the right to appoint one
person to serve on its Board of Directors or to function as an observer at
meetings of the Board, subject to the Company's approval. Mr. Drescher was
recommended by Monroe Parker for election to the Board. At the 1996 Annual
Meeting of Stockholders, Mr. Drescher was elected to the Board. In addition, the
Company and the underwriter agreed to indemnify each other against certain
liabilities under the Securities Act of 1933. On March 20, 1997, the Selling
Securityholders partially exercised the Selling Securityholder Options to
purchase 100,000 Selling Securityholder Warrants
Upon the exercise of the Company's Warrants (except for Warrants exercised
by Monroe Parker), the Company will pay Monroe Parker a fee of 4% of the
aggregate exercise price if certain conditions are met. See Warrant Solicitation
Fee."
The Company paid $73,959 and $29,279 for the year ended June 30, 1997 and
for the three months ended September 30, 1997, respectively, to Alan Broadwin, a
member of the Board of Directors, for consulting services.
27
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the Company's
Common Stock owned as of December 2, 1997 by (i) each person who is known by the
Company to own beneficially more than 5% of its outstanding Common Stock, (ii)
each director, (iii) each named executive officer, and (iv) all executive
officers and directors as a group.
Warrants to Purchase
Common Stock Common Stock
------------------------ --------------------------
Amount and Amount and
Nature of Nature of
Name and Address of Beneficial Percentage Beneficial Percentage
Beneficial Owner (1) Ownership Owned Ownership Owned
- ---------------------- ---------- ---------- ---------- ----------
Robert S. Soloff 2,500,000 69.6% 0 *
Richard H. Berger 10,000 (2) * 0 *
Lauren H. Soloff 274,390 (3) 7.1% 0 *
Jack T. Tyransky 2,000 (2) * 0 *
Alan Broadwin 1,100 (2) * 0 *
Stephen J. Drescher 10,000 (4) * 10,000 (5) *
All executive officers
and directors as a group 2,830,466 73.7% 10,000 *
(9 persons) (2) (6)
- ---------------------------
* Indicates less than one percent.
(1) The address of each such person is c/o Sonics & Materials, Inc., W.
Kenosia Avenue, Danbury CT 06810 and except as otherwise set forth in the
footnotes below, all shares are beneficially owned and the sole voting and
investment power is held by the persons named.
(2) Represents or includes qualified stock options granted under the Company's
Stock Option Plan.
(3) Represents shares of Common Stock issuable upon exercise of currently
exercisable non-qualified stock options granted to Ms. Soloff.
(4) Represents 10,000 Selling Securityholder Options to purchase 10,000 shares
of Common Stock. See "Certain Relationships and Related Transactions."
(5) Represents 10,000 Selling Securityholder Warrants received upon partial
exercise of the Selling Securityholder Options. Such options were
exercised by Mr. Drescher with respect to the Selling Securityholder
Warrants on March 20, 1997.
(6) Includes 274,390 shares and 10,976 shares which are issuable upon exercise
of currently-exercisable non-qualified stock options granted to Lauren H.
Soloff and Daniel Grise, respectively, under the Company's Stock Option
Plan.
DESCRIPTION OF SECURITIES
General
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, par value $.03 per share, and 2,000,000 shares of Preferred
Stock, par value $.01 per share. As of December 2, 3,590,100 shares of Common
Stock are outstanding and 2,271,866 shares are reserved for issuance pursuant to
the Warrants, the Company's Stock Option Plan, non-qualified options, the
Selling Securityholder Options and options issued in connection with the Tooltex
acquisition. No shares of Preferred Stock have been issued or are outstanding.
The following statements are summaries of certain provisions of the Company's
Certificate of Incorporation, as amended, By-laws, as amended, and the General
Corporation Law of the State of Delaware. These summaries do not purport to be
complete and are qualified in their entirety by reference to the full
Certificate of Incorporation and By-laws which have been filed as exhibits to
the Company's Registration Statement of which this Prospectus is a part.
28
<PAGE>
Common Stock
Holders of Common Stock possess exclusive voting power for the election of
directors and for all other purposes and are entitled to one vote for each share
of Common Stock held of record. The Common Stock does not have cumulative voting
rights. Holders of Common Stock are entitled to share ratably in all the assets
of the Company available for distribution to holders of Common Stock upon
liquidation, dissolution or winding up of its affairs. The holders of the Common
Stock have no preemptive rights with respect to offerings of such shares.
The outstanding shares of Common Stock are validly issued, fully paid and
non-assessable, and the shares of Common Stock offered hereby, when issued in
accordance with the terms of the Warrants, will be validly issued, fully paid
and non-assessable.
Dividends may be paid on Common Stock out of funds legally available for
such purposes and when declared by the Board of Directors. Except for certain
payments to Mr. Soloff, its former sole stockholder, for tax and other purposes,
the Company has not paid any dividends on its Common Stock. The Company intends
to follow a policy of retaining any earnings to finance the development and
growth of its business. Accordingly, it does not anticipate other payments of
dividends in the foreseeable future. See "Risk Factors--Lack of Dividends." The
payment of dividends, if any rests within the discretion of the Board of
Directors and will depend upon, among other things, the Company's earnings, its
capital requirements and its overall financial condition.
Preferred Stock
Sonics is authorized to issue up to 2,000,000 shares of Preferred Stock,
par value $.01 per share. The Company has no plans to issue or sell shares of
Preferred Stock in the foreseeable future. When and if such shares of Preferred
Stock are issued, the holders of such stock will have certain preferences over
the holders of Common Stock, including the satisfaction of dividends on any
outstanding Preferred Stock. The Board of Directors has the authority to
determine the dividend rights, dividend rates, conversion rights, voting rights,
rights and terms of redemption and liquidation preferences, and sinking fund
terms of any series of Preferred Stock, the number of shares constituting any
such series and the designation thereof.
Such Preferred Stock could also be used to delay, defer or prevent a
change in control of the Company or be used to resist takeover offers opposed by
Management of the Company. Under certain circumstances, the Board of Directors
could create impediments to, or frustrate persons seeking to effect, a takeover
or otherwise gain control of the Company by causing shares of Preferred Stock
with voting or conversion rights to be issued to a holder or holders who might
side with the Board of Directors in opposing a takeover bid that the Board of
Directors determines not to be in the best interest of Sonics and its
shareholders. In addition, the Company's ability to issue such shares of
Preferred Stock with voting or conversion rights could dilute the stock
ownership of such person or entity.
Warrants
The Company has authorized the issuance of Warrants ("Warrants") to
purchase an aggregate of 1,725,000 shares of Common Stock (exclusive of 100,000
Warrants pursuant to the Selling Securityholder Options) and has reserved an
equivalent number of shares for issuance upon exercise of such Warrants. Each
Warrant represents the right to purchase one share of Common Stock, commencing
February 26, 1997 and expiring February 26, 2001, at an exercise price of $6.00
subject to adjustment. After the expiration date, the Warrants will be void and
of no value. Since February 26, 1997, 20,000 Warrants have been exercised. In
addition, the Company authorized the issuance of 100,000 Selling Securityholder
Options to purchase 100,000 shares of Common Stock and 100,000 Selling
Securityholder Warrants. On March 20, 1997, the Selling Securityholders
partially exercised the Selling Securityholder Options with respect to the
Warrants and received 100,000 Selling Securityholder Warrants. Consequently, the
Selling Securityholder Options are only exerciseable for shares of Common Stock.
The Selling Securityholder Warrants received upon exercise of the Selling
Securityholder Options have the same terms and conditions as the Warrants. See
"Certain Relationships and Related Transactions."
Until the close of business on February 26, 2001, the Warrants are subject
to earlier redemption as follows: If the average of the closing bid prices of
the Common Stock (if the Common Stock is then traded in the over-the-counter
market) or the average of the closing prices of the Common Stock (if the Common
Stock is then traded on a national securities exchange or the Nasdaq National
Market or Small Cap System) exceeds $8.00 for any consecutive 20 trading days,
then upon at least 10 days prior written notice, the Company will be able to
call all (but not less than all) of the Warrants for redemption at a price of
$.05 per Warrant.
The Warrants were issued pursuant to a Warrant Agreement (the "Warrant
Agreement") between the Company and American Stock Transfer & Trust Company, as
warrant agent (the "Warrant Agent"), and are evidenced by warrant certificates
in
29
<PAGE>
registered form. The Warrants contain provisions that protect the holders
thereof against dilution by adjustment of the exercise price and number of
shares issuable upon exercise on the occurrence of certain events, such as stock
dividends or certain other changes in the number of outstanding shares except
for shares issued pursuant to any Company stock option plans for the benefit of
its employees, directors and agents, the Warrants issued in the Company's
Initial Offering, the Selling Securityholder Options, and any equity securities
for which adequate consideration is received. The Company is not required to
issue fractional shares. In lieu of the issuance of such fractional shares, the
Company will pay cash to such holders of the Warrants. In computing the cash
payable to such holders, a share of Common Stock will be valued at its price
immediately prior to the close of business on the expiration date. The holder of
a Warrant will not possess any rights as a stockholder of the Company unless he
exercises his Warrant.
The exercise prices of the Warrants were determined by negotiation between
the Company and Monroe Parker and should not be construed to predict or imply
that any price increases will occur in the Company's securities.
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date (or earlier redemption date) of such Warrants at
the offices of the Warrant Agent with the Subscription Form on the reverse side
of the Warrant certificate completed and executed as indicated, accompanied by
payment of the full exercise price (by official bank or certified check payable
to Sonics & Materials, Inc.)
for the number of Warrants being exercised.
The description above is subject to the provisions of the Warrant
Agreement, which has been filed as an exhibit to the Registration Statement, a
copy of which this Prospectus forms a part, and reference is made to such
exhibit for a detailed description thereof.
Listing on Nasdaq National Market System
The Common Stock and Warrants are quoted on Nasdaq under the symbols
"SIMA" and "SIMAW," respectively.
No assurance can be given that the Company will continue to meet certain
minimum standards for continued listing. If those standards are not met, the
Company's listed securities will consequently be delisted, and their price will
no longer be quoted in the National Market System. Such result may make it
extremely difficult to sell or trade the Company's securities. See "Risk
Factors--Qualification and Maintenance Requirements for Nasdaq National Market
Listings; Market Volatility" and "Market for Company's Common Equity and Related
Stockholder Matters."
Transfer/Warrant Agent and Registrar
American Stock Transfer & Trust Company is the transfer and warrant agent
and registrar for the securities of the Company.
Liability and Indemnification of Directors and Officers
The Company's Certificate of Incorporation eliminates the liability of its
directors and officers for monetary damages for breach of duty in such
capacities, subject to certain exceptions. In addition, the Certificate of
Incorporation provides for Sonics to indemnify, under certain conditions,
directors, officers, employees and agents of the Company against all expenses,
liabilities and losses reasonably incurred by such persons in this connection.
The foregoing provisions may reduce the likelihood of derivative litigation
against directors and officers and may discourage or deter stockholders or
management from suing directors for breaches of their duty of care, even though
such actions might benefit the Company and its stockholders.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Certain Anti-Takeover Devices
Section 203 of the Delaware General Corporation Law ("Section 203")
applies to Delaware corporations with a class of voting stock listed on a
national securities exchange, authorized for quotation on the Nasdaq Stock
Market or held of record by 2,000 or more persons and which do not elect not to
have Section 203 apply. In general, Section 203 prevents an "interested
stockholder" (defined generally as any person owning, or who is an affiliate or
associate of the corporation and has owned in the preceding three years, 15% or
more of a corporation's outstanding voting stock and affiliates and associates
of such person) from engaging in a "business combination" (as defined) with a
Delaware corporation for three years following the date such person became an
interested
30
<PAGE>
stockholder unless (1) before such person became an interested
stockholder, the Board of Directors of the corporation approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder; (2) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (3) on or subsequent to the date such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of two-thirds of the outstanding voting stock of the
corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the corporation's directors.
Section 203 could have the effect of delaying, deferring or preventing a
change of control of the Company.
The Commission has indicated that the use of authorized unissued shares of
voting stock could have an anti-takeover effect. In such cases, various specific
disclosures to the stockholders are required. It has not been Management's
intent to install an anti-takeover device nor is it expected that the Company's
authorized but unissued shares of Common Stock would be used for that purpose.
In addition, it is not Sonics' intent to rely on any provisions of the Delaware
General Corporation Law, including Section 203, for their anti-takeover effects.
Any business combination, as that term is used in Section 203, would be reviewed
by the Company's Board of Directors solely for its impact on Sonics.
CERTAIN TAX CONSIDERATIONS
The following discussion is a summary of certain anticipated tax
consequences of an investment in or, as applicable, the exercise of, the
Warrants, the Selling Securityholder Securities, and the Common Stock under
United States Federal income tax law. The discussion does not deal with all
possible tax consequences of any such investment or exercise. In particular, the
discussion does not address applicable state and local tax laws, the laws of any
country other than the United States, or the rules applicable to foreign
nationals. Accordingly, each investor should consult his or her tax advisor
regarding an investment in or the exercise of the Warrants, the Selling
Securityholder Options, the Selling Securityholder Warrants, or the Common
Stock. The discussion is based upon laws and relevant interpretations thereof in
effect as of the date of this Prospectus, all of which are subject to change.
Taxation of Purchasers of Warrants, Selling Securityholder Options, and Selling
Securityholder Warrants
Upon a sale or exchange of a Warrant, Selling Securityholder Option or
Selling Securityholder Warrant (collectively "the Exercisable Securities" and
individually an "Exercisable Security"), a holder who is not a securities dealer
will recognize capital gain or loss equal to the difference between the amount
realized upon the sale or exchange and the amount paid by the holder for such
Exercisable Security. Such gain or loss will be long-term if, at the time of the
sale or exchange, the Exercisable Security was held for more than 18 months.
Long-term capital gains of non-corporate taxpayers are generally taxed at more
favorable rates than ordinary income or short-term capital gains. Capital assets
that were held for more than 12 months but less than 18 months also qualify for
a more favorable tax rate than ordinary income but less favorable than the rate
on long-term capital gains. Adjustments to the exercise price or conversion
ratio, or the failure to make adjustments, may result in the receipt of a
constructive dividend by the holder.
Upon the exercise of an Exercisable Security, a holder's tax basis in the
interest acquired will be equal to his tax basis in the Exercisable Security
plus the exercise price of the Exercisable Security. For an investor who
purchased a Warrant directly from the underwriters in the Company's Initial
Offering and who exercises such Warrant, the tax basis in each share of Common
Stock will equal $.15, the price paid for the Warrant, plus $6, the exercise
price thereof, or a total of $6.15. In the case of the exercise of a Selling
Securityholder Option, such basis must be allocated between the Common Stock and
the Selling Securityholder Warrant received in proportion to their relative fair
market values on the date of exercise. The holding period with respect to the
securities received upon exercise of Exercisable Securities will commence on the
day after the date of exercise. If an Exercisable Security expires without being
exercised, the holder will have a capital loss equal to his tax basis in the
Exercisable Security.
31
<PAGE>
Taxation of Purchasers of Common Stock
An investor receiving a distribution on the Common Stock generally will be
required to include such distribution in gross income as a taxable dividend to
the extent such distribution is paid from the current or accumulated earnings
and profits of the Company (determined under United States Federal income tax
principles). Distributions in excess of the earnings and profits of the Company
generally will first be treated as a nontaxable return of capital to the extent
of the investor's tax basis in the Common Stock and any excess as capital gain.
Dividends received on the Common Stock by United States corporate shareholders
will be eligible for the corporate dividends received deduction.
With certain exceptions, gain or loss on the sale or exchange of the
Common Stock will be treated as capital gain or loss. Such capital gain or loss
will be long-term capital gain or loss if the investor has held the Common Stock
for more than one year at the time of the sale or exchange.
The foregoing discussion of certain United States Federal tax consequences
is not tax advice. Each person considering the purchase or exercise of the
Exercisable Securities or the Common Stock should consult his or her own tax
advisor with respect to the tax consequences to him or her of the purchase,
exercise, ownership and disposition of the foregoing Securities, including the
applicability and effect of State and local tax laws, the laws of any country
other than the United States, or the effect of any of the foregoing on a foreign
national, and of changes in applicable tax laws.
WARRANT SOLICITATION FEE
In connection with the Initial Offering, the Company agreed to pay Monroe
Parker a warrant solicitation fee of 4% of the exercise price of any of the
Warrants exercised beginning February 26, 1997 (not including Warrants exercised
by Monroe Parker) if (i) the market price of the Common Stock on the date the
Warrant is exercised is greater than the exercise price of the Warrant, (ii) the
exercise of the Warrant was solicited by Monroe Parker and the holder of the
Warrant designates Monroe Parker in writing as having solicited such Warrant,
(iii) the Warrant is not held in a discretionary account, (iv) disclosure of the
compensation arrangement is made upon the sale and exercise of the Warrants, (v)
soliciting the exercise is not in violation of Rule 10b-6 under the Exchange
Act, and (vi) solicitation of the exercise is in compliance with the rules of
the National Association of Securities Dealers, Inc. No warrant solicitation fee
has yet been paid. Regulation M under the Exchange Act may prohibit Monroe
Parker from engaging in any market making activities with regard to the
Company's securities for certain periods of time. See "Risk Factors--Market
Making Activities."
CONCURRENT OFFERING
Selling Securityholder Options
In connection with the Company's Initial Offering, the Company agreed to
sell the Selling Securityholder Options to Monroe Parker at a price of $.001 per
Warrant for each share of Common Stock covered by the Selling Securityholder
Options, or a total purchase price of $100. On February 26, 1996, in connection
with the Initial Offering, Monroe Parker assigned its rights to purchase the
Selling Securityholder Options to the Selling Securityholders, each of whom is
an affiliate of Monroe Parker. The Selling Securityholder Options entitle the
Selling Securityholders to purchase, in whole or in part, an aggregate of
100,000 shares of Common Stock and an aggregate of 100,000 Warrants. The shares
of Common Stock and Warrants subject to the Selling Securityholder Options are
in all respects identical to the shares of Common Stock and Warrants sold in the
Initial Offering as more fully described under "Description of Securities." The
Selling Securityholder Options are exercisable for a four-year period which
commenced February 26, 1997, at a per share exercise price equal to $8.25 per
share of Common Stock and $.25 per Warrant. On March 20, 1997, the Selling
Securityholders partially exercised the Selling Securityholder Options with
respect to the Warrants and received 100,000 Selling Securityholder Warrants.
In connection with the Company's Initial Offering, the Company agreed to
file, at its expense, during the period beginning February 26, 1997 and ending
February 26, 2001, on no more than one occasion at the request of the holders of
a majority of the Selling Securityholder Options and the underlying shares of
Common Stock and Warrants, and to use its best efforts to cause to become
effective, a post-effective amendment to the Registration Statement or a new
registration statement under the Securities Act, as required to permit the
public sale of the shares of the Common Stock issued or issuable upon exercise
of the Selling Securityholder Options. In addition, the Company agreed to give
advance notice to holders of the Selling Securityholder Options of its intention
to file certain registration statements commencing February 26, 1997 and ending
February 26, 2001, and in such cases, holders of such Selling Securityholder
Options or underlying shares of Common Stock and Warrants shall have the right
to require the Company to include all or part of such shares and Warrants
underlying such Selling Securityholder Options in such registration statement at
the Company's expense. The Selling Securityholders exercised their right to have
included in the Post-Effective Amendment of which
32
<PAGE>
this Prospectus forms a part
the Selling Securityholder Securities to permit their public sale. Consequently,
this Prospectus is also being used by the Selling Securityholders to offer and
sell the Selling Securityholder Securities.
For the life of the Selling Securityholder Options, the holders thereof
are given the opportunity to profit from a rise in the market price of the
shares of Common Stock and Warrants, which may result in a dilution of the
interests of other stockholders. As a result, the Company may find it more
difficult to raise additional equity capital if it should be needed for the
business of the Company while the Selling Securityholder Options are
outstanding. The holders of the Selling Securityholder Options might be expected
to exercise them at a time when the Company would, in all likelihood, be able to
obtain additional equity capital on terms more favorable to the Company than
those provided by the Selling Securityholder Options. Any profit realized on the
sale of the shares of the Common Stock issuable upon the exercise of the Selling
Securityholder Options may be deemed additional underwriting compensation.
Selling Securityholders
The Selling Securityholders may offer for resale, from time to time,
100,000 Selling Securityholder Options to purchase Common Stock, 100,000 shares
of Common Stock underlying the exercise of the Selling Securityholder Options,
100,000 Selling Securityholder Warrants received upon partial exercise of the
Selling Securityholder Options and 100,000 shares of Common Stock underlying the
exercise of the Selling Securityholder Warrants. .
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering the Selling
Securityholder Securities for exercise and/or resale to the public. The Company
will not receive any of the proceeds from the sale of such securities. Each of
the Selling Securityholders is an affiliate of Monroe Parker, the underwriter
for the Company's securities in the Initial Offering, and received the Selling
Securityholder Securities on February 26, 1996 in connection with the Company's
Initial Offering. Stephen J. Drescher is a director of the Company. None of the
Selling Securityholders beneficially owns more than 1% of the Company's
outstanding Common Stock. See "Management," "Certain Relationships and Related
Transactions," "Warrant Solicitation Fee" and "Concurrent Offering--Selling
Securityholder Options."
Number of Selling
Selling Securityholder
Securityholders Options Beneficially
Owned (1)
--------------- ---------------------
Bryan Herman 40,000
Alan Lipsky 40,000
John Clancy 10,000
Stephen J. Drescher 10,000
-------
Total: 100,000
=======
- ----------------------
(1) Each Selling Securityholder Option originally entitled the holder thereof
to purchase one share of Common Stock and one Warrant to purchase one
share of Common Stock. Since the Selling Securityholder Options were
partially exercised with respect to the Warrants, each Selling
Securityholder Option entitles the holder thereof to purchase one share of
Common Stock. Such shares and the Selling Securityholder Warrants (and the
shares of Common Stock underlying exercise of the Selling Securityholder
Warrants) are separately tradable.
Selling Securityholders' Plan of Distribution
The sale of the Selling Securityholder Securities by the Selling
Securityholders may be effected from time to time in transactions (which may
include block transactions by or for the amount of the Selling Securityholders)
in the over-the-counter market or in negotiated transactions, through the
writing of options on the securities, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices.
The Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer may
exceed customary commissions).
33
<PAGE>
Under applicable rules and regulations under the Exchange Act, any person
participating in the distribution of the Selling Securityholder Options may not
simultaneously engage in market making activities with respect to any securities
of the Company for a period of at least five business days prior to the
determination of the offering price or such time that a person becomes a
distribution participant, and ending upon such person's completion of
participation in the distribution. Accordingly, in the event that Monroe Parker,
the underwriter of the Company's Initial Offering, is engaged in a distribution
of the Selling Securityholder Options such firm will not be able to make a
market in the Company's securities during the applicable restrictive period.
However, Monroe Parker has not agreed to nor is it obliged to act as
broker/dealer in the sale of the Selling Securityholder Options and the Selling
Securityholders may be required, and in the event Monroe Parker is a market
maker, will likely be required, to sell such securities through another
broker/dealer. In addition, each Selling Securityholder desiring to sell Selling
Securityholder Securities will be subject to the applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation, Regulation M, the rules of which may limit the timing of the
purchases and sales of shares of the Company's securities by such Selling
Securityholders. See "Risk Factors."
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sale might be deemed to be underwriters within the meaning
of Section 2(11) of the Securities Act and any commission received by them and
any profit on the resale of the securities might be deemed to be underwriting
discounts and commissions under the Securities Act.
LEGAL MATTERS
The validity of the Common Stock and the Selling Securityholder Warrants
offered hereby has been passed upon for the Company by Tyler Cooper & Alcorn,
LLP, New Haven, Connecticut.
EXPERTS
The financial statements of the Company and the financial statements of
Tooltex at June 30, 1996 and 1997 appearing in this Prospectus and Registration
Statement, as amended, of which this Prospectus is a part, to the extent
indicated in their report have been included herein and in the Registration
Statement, as amended, in reliance upon the report of Grant Thornton LLP,
independent certified public accountants, and upon the authority of said firm as
experts in accounting and auditing.
REPORTS TO STOCKHOLDERS
The Company is subject to the information requirements of the Exchange
Act, and, in accordance therewith, files reports and other information with the
Securities and Exchange Commission at 450 Fifth Avenue, N.W., Washington, D.C.
20549. Copies of such material can be obtained at prescribed rates from the
public reference section of the Commission, at that address and at certain of
the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. The Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the
Commission. The Company furnishes its stockholders with annual reports
containing financial statements audited by independent auditors and distributes
quarterly reports for its first three quarters of each year containing unaudited
interim financial information. The Company's Common Stock and Warrants are
traded on the Nasdaq National Market System. Information concerning the Company
can also be inspected at the offices of the National Association of Securities
Dealers, Inc., at 1735 K Street, N.W., Washington, D.C. 20006.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement, as amended, on Form SB-2 under the
Securities Act relating to the Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement
including the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to such Registration Statement,
including the exhibits and schedules thereto. The Registration Statement, as
amended, including exhibits and schedules thereto may be inspected without
charge at the Commission's principal office at 450 Fifth Avenue, Washington,
D.C. 20549 or at certain of the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, upon payment of the fees prescribed
by the Commission.
34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants........................F-2
Financial Statements of the Company
Consolidated Balance Sheets............................................F-3
Consolidated Statements of Income......................................F-4
Consolidated Statement of Stockholders' Equity.........................F-5
Consolidated Statements of Cash Flows..................................F-6
Notes to Consolidated Financial Statements......................F-7 - F-23
Report of Independent Certified Public Accountants.......................F-25
Financial Statements of Tooltex
Balance Sheet.........................................................F-26
Statements of Operations and Accumulated Deficit......................F-27
Statements of Cash Flows..............................................F-28
Notes to Financial Statements..................................F-29 - F-33
Unaudited Pro Forma Consolidated Condensed Financial Statements..........F-34
Pro Forma Consolidated Condensed Balance Sheet.................F-35 - F-36
Pro Forma Consolidated Condensed Statement of Operations..............F-37
Notes to Pro Forma Consolidated Condensed Financial Statements.F-38 - F-39
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Sonics & Materials, Inc.
We have audited the accompanying balance sheets of Sonics & Materials, Inc. as
of June 30, 1996 and 1997, 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, 1996 and 1997, 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 28, 1997
F-2
<PAGE>
Sonics & Materials, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1996 1997 1997
--------------------- -------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 73,129 $ 271,593 $ 243,347
Short-term investments 3,028,032 1,665,470 1,665,470
Accounts receivable, net of allowance for
doubtfulaccounts of $45,000 at June 30,
1996 and 1997 and $97,000 at
September 30, 1997 1,953,941 1,854,118 2,147,896
Inventories 3,248,782 3,718,250 3,874,432
Prepaid income taxes 30,465 150,061 147,630
Deferred income taxes 80,000 80,000 80,000
Other current assets 111,327 137,562 246,805
--------- --------- ---------
Total current assets 8,525,676 7,877,054 8,405,580
PROPERTY AND EQUIPMENT - NET 301,706 364,354 1,776,888
GOODWILL - NET 1,044,020
OTHER ASSETS - NET 353,124 917,709 581,089
--------- --------- ---------
$9,180,506 $9,159,117 $11,807,577
========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 832,813 $ 500,000 $1,005,101
Demand note payable 500,000 1,151,488
Current maturities of long-term debt 116,600 294,614
Accounts payable 767,620 804,653 730,711
Commissions payable 160,081 235,203 197,019
Other accrued expenses and sundry liabilities 254,677 278,310 662,135
--------- --------- ---------
Total current liabilities 2,515,191 1,934,766 4,041,068
LONG-TERM DEBT 406,911 664,156
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock - par value $.03 per share;
authorized, 10,000,000 shares; issued and
outstanding, 3,500,100, 3,520,100 and
3,590,100 shares at June 30, 1996, June 30,
1997 and September 30, 1997, respectively 105,003 105,603 107,703
Additional paid-in capital 6,417,126 6,539,597 6,766,897
Retained earnings 143,186 172,240 227,753
--------- --------- ---------
6,665,315 6,817,440 7,102,353
--------- --------- ---------
$9,180,506 $9,159,117 $11,807,577
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-3
<PAGE>
Sonics & Materials, Inc.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30, Three Months Ended
September 30,
1996 1997 1996 1997
-------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales $9,376,170 $10,827,525 $2,536,238 $3,116,804
Cost of sales 5,091,789 6,410,584 1,330,404 1,827,658
--------- ---------- --------- ---------
Gross profit 4,284,381 4,416,941 1,205,834 1,289,145
Operating expenses
Selling expenses 2,832,251 3,157,193 686,395 732,173
General and administrative 588,923 823,767 219,987 307,747
Research and development 372,087 418,465 99,808 150,502
--------- ---------- --------- ---------
Total operating expenses 3,793,261 4,399,425 1,006,190 1,190,421
Other income (expense)
Interest expense (100,011) (79,565) (32,549) (34,578)
Other 45,201 110,471 2,250 7,282
--------- ---------- --------- ---------
(54,810) 30,906 (30,299) (27,296)
Income before provision for
income taxes 436,310 48,422 169,345 71,428
Provision for income taxes (8,000) 19,368 67,738 15,915
--------- ---------- --------- ---------
NET INCOME $ 444,310 $ 29,054 $ 101,607 $ 55,513
========= ========== ========= =========
Pro forma data
Historical income before taxes $ 436,310
Provision for income taxes 174,524
---------
NET INCOME $ 261,786
==========
Primary income per share
Net income per share $.09 $.01 $.02 $.01
=== === === ===
Weighted average common shares
outstanding 3,409,303 4,247,104 4,775,870 3,769,393
Fully diluted income per share
Net income per share $.08 $.01 $.02 $.01
=== === === ===
Weighted average common shares
outstanding 3,440,770 4,247,104 4,775,870 3,769,393
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-4
<PAGE>
Sonics & Materials, Inc.
CONSOLIDATED 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, 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
Exercise of warrants for
stock 20,000 600 97,471 98,071
Exercise of options for
warrants 25,000 25,000
Net income 29,054 29,054
--------- -------- --------- --------- ---------
Balance - June 30, 1997 3,520,100 105,603 6,539,597 172,240 6,817,440
Stock granted in Tooltex
acquisition (unaudited) 70,000 2,100 208,700 205,809
Fair value of options
granted in Tooltex
acquisition (unaudited) 23,600 23,600
Net income (unaudited) 55,513 55,513
--------- -------- --------- --------- ---------
Balance
September 30, 1997
(unaudited) 3,590,100 $ 107,703 $6,766,897 $ 227,753 $7,102,353
========= ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-5
<PAGE>
Sonics & Materials, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Year ended June 30, September 30,
1996 1997 1996 1997
------------------- ----------------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 444,310 $ 29,054 $ 101,607 $ 55,513
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation of equipment and
leasehold improvements 236,105 141,308 38,430 56,688
Deferred income taxes (80,000)
Gain on sale of equipment (2,500)
Increase (decrease) in cash flows from
changes in operating assets and
liabilities, net of acquisition
Accounts receivable (3,983) 99,823 (27,786) (87,075)
Inventory (1,190,475) (469,468) (348,794) 182,022
Prepaid income taxes (30,465) (119,596) 16,916
Other assets (43,901) (590,820) 56,301 227,628
Accounts payable and accrued
liabilities 244,354 135,788 (270,365) (728,537)
--------- -------- -------- --------
Net cash used in operating activities (426,555) (773,911) (450,607) (276,845)
--------- -------- -------- --------
Cash flows from investing activities
Capital expenditures on equipment and
leasehold improvements (149,512) (125,632) (27,411) (15,689)
Capital expenditures on land & building (1,289,339)
Proceeds from sale of equipment 2,500
Cash paid for acquisition, net of cash
received (77,220)
Short-term investments (3,028,032) 1,362,562 - -
--------- -------- -------- --------
Net cash (used in) provided by
investing activities (3,175,044) 1,236,930 (27,411) (1,382,248)
--------- -------- -------- --------
Cash flows from financing activities
Short term investments 300,000
Distribution to stockholder (495,730) -
Payment of capital lease obligation (18,504) (2,742)
Repayment of long-term obligations (450,000)
Proceeds from long-term debt, net 888,000
Proceeds from note payable, net 150,000 130,878 194,000 44,101
Payment of demand note payable (500,000)
Proceeds from Bridge Loan 1,151,488
Proceeds from issuance of options
and warrants 3,832,968 123,071 - -
--------- -------- -------- --------
Net cash provided by (used in)
financing activities 3,487,238 (264,555) 494,000 1,630,847
--------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (114,361) 198,464 15,982 (28,246)
Cash and cash equivalents at beginning
of period 187,490 73,129 73,129 271,593
--------- -------- -------- --------
Cash and cash equivalents at end
of period $ 73,129 $ 271,593 $ 89,111 $ 243,347
======== ======== ======== ========
Supplemental disclosures of cash
flow information:
Cash paid during the period for
Interest $ 94,000 $ 122,000 $ 31,516 $ 32,000
======== ======== ======== ========
Income taxes $ 150,000 $ 149,000 $ 20,500 $ -
======== ======== ======== ========
</TABLE>
For the year ended June 30, 1997, a capital lease obligation of $78,324
was incurred when the Company entered into a lease for new equipment.
The accompanying notes are an integral part of these financial
statements.
F-6
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
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. Principles of Consolidation
Beginning July 25, 1997, after completing the Tooltex Acquisition, (See
Note K), the Consolidated Financial Statements include the accounts of the
Company and Subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
2. Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
3. Building, Equipment and Leasehold Improvements
Building, 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 forty 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.
4. 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 J. Upon termination of
its S Corporation status, the Company
F-7
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE B (continued)
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.
5. 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.
6. 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.
7. 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, 1996 and 1997 and September 30, 1997, the major components of
other assets were:
<TABLE>
<CAPTION>
June 30, June 30, September 30,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Demonstration equipment - net of
accumulated depreciation of $196,973,
$242,525 and 246,465 for June 30,
1996 and 1997 and September 30,
1997, respectively $270,863 $338,024 $364,124
Other accounts receivable 254,185 94,194
Security deposits 142,298 28,098
Other 82,261 183,202 94,673
------- ------- -------
$353,124 $917,709 $581,089
======= ======= =======
</TABLE>
F-8
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE B (continued)
8. Other Accrued Expenses and Sundry Liabilities
At June 30, 1996 and 1997 and September 30, 1997, the major components of
other accrued expenses and sundry liabilities were:
<TABLE>
<CAPTION>
June 30, June 30, September 30,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Accrued Compensation $135,597 $143,975 $210,267
Professional fees 43,088 63,637 193,282
Other 75,992 70,698 258,586
------- ------- -------
$254,67 $278,310 $662,135
====== ======= =======
</TABLE>
9. 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.
10. 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 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.
11. 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
F-9
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE B (continued)
stock method in fiscal 1997 and for the three months ended September 30,
1996 and 1997 (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 J), 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 for the year ended June 30, 1996.
12. Advertising Costs
All costs related to advertising are expensed in the period incurred.
Advertising costs were approximately $220,000, $217,000, $23,000 and
$40,000 for the years ended June 30, 1996 and 1997, and the three months
ended September 30, 1996 and 1997, respectively.
13. Unaudited Condensed Financial Information
The information as of and for the three months ended September 31,
1996 and 1997 is unaudited, but includes all adjustments consisting of
only normal recurring accruals, considered necessary for a fair
presentation of financial positions and results of operations.
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:
June 30, June 30, September 30,
1996 1997 1997
----------- ----------- -----------
Raw materials $ 975,332 $ 956,073 $ 996,232
Work-in-process 1,501,716 1,909,256 1,989,453
Finished goods 771,734 852,921 888,747
---------- ---------- ---------
$3,248,782 $3,718,250 $3,874,432
========= ========= =========
F-10
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE E - PROPERTY AND EQUIPMENT
A summary of equipment and leasehold improvements follows:
June 30, June 30, September 30,
1996 1997 1997
----------- ------------- -------------
Land $ 462,486
Building 826,853
Trade show booth $ 50,494 $ 50,494 51,258
Machinery and equipment 586,063 675,409 731,486
Tooling 103,762 105,453 105,514
Office furniture and equipment 143,235 152,830 163,353
Leasehold improvements 174,081 186,851 220,425
Automobiles 32,408 32,408 32,408
Data processing equipment 365,240 455,794 521,430
--------- ---------- ---------
1,455,283 1,659,239 3,115,244
Less accumulated depreciation 1,153,577 1,294,885 1,338,356
--------- ---------- ---------
$ 301,706 $ 364,354 $1,776,888
========= ========== =========
NOTE F - NOTES PAYABLE
On September 19, 1997, the Company entered into three facilities with a bank
(the "Bank"), each of which is secured by a first mortgage lien on property the
Company acquired in Newtown, CT: (i) a Bridge Loan in the original principal
amount of $1,600,000; (ii) a Line of Credit in the original principal amount of
up to $1,500,000; and (iii) a Term Loan in the original principal amount of
$427,000.
The Bridge Loan bears interest at the Bank's base lending rate plus one-half
percent. The principal balance of the Bridge Loan, which at September 30, 1997
was $1,151,488, will mature and be due and payable upon the earliest to occur of
(i) the written demand of the Bank, (ii) the consummation of the IRB Loan, or
(iii) December 31, 1997. Subject to certain terms and conditions, the Bank has
agreed to make an IRB Loan in the aggregate principal amount of up to $4,000,000
to be issued through the Connecticut Development Authority, the proceeds of
which will be used to refinance the Bridge Loan, pay any remaining costs on the
Newtown Property for Sonics' use and occupancy and for purchasing or
manufacturing equipment. Sonics expects to close the IRB Loan on or before
December 31, 1997. The principal of the Bridge Loan may be repaid in whole or in
part, without premium or penalty, at any time.
F-11
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
The Line of Credit replaced a line of credit with another bank, and is used by
the Company for working capital. The Line of Credit bears interest, at Sonics'
option, at the Bank's base lending rate or LIBOR plus 2.5%. Advances under the
Line of Credit are at the Bank's sole discretion. The entire principal balance
of the Line of Credit, which at September 30, 1997 was $1,005,101, will mature
and be due and payable upon the demand of the Bank. The borrowings under the
Line of Credit may be prepaid in whole or in part, without premium or penalty,
at any time. In the event of the prepayment of any portion of the Line of Credit
during any period in which the Line of Credit bears interest at a LIBOR rate,
Sonics will be obligated to pay the Bank a breakage fee relating to the LIBOR
interest component. The Line of Credit is also secured by all of the Company's
assets.
The proceeds of the Term Loan were used to pay in full a term loan with another
bank with interest and principal totaling $427,000 (see Note G). The term loan
with the other bank bore interest at such bank's loan pricing rate of interest
plus one-half percent. The current outstanding principal amount of the Term Loan
is $427,000, which bears interest, at Sonics' option, at the Bank's base lending
rate of LIBOR plus 2.5%. The principal of the Term Loan must be paid in 36 equal
monthly installments of $11,861.11, commencing on November 1, 1997 and the
entire remaining principal balance will mature and be due and payable on October
1, 2000. The terms and conditions under which Sonics may prepay all or any
portion of the Term Loan are the same as for the Line of Credit discussed above.
The Term Loan is also secured by all of the Company's assets.
F-12
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE F (continued)
b. Note Payable to President/Shareholder
In connection with the initial public offering (see Note J), 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 was due. The amount was paid in full during the year
ended June 30, 1997.
NOTE G - LONG-TERM DEBT
a. Term Loan
On December 3, 1996, the Company entered into a $500,000 term loan
agreement with Village Bank & Trust Company at one-half percent (1/2%)
above the prime rate (9% at June 30, 1997). The loan is unsecured and is
due in equal annual installments through December 3, 2001 (see Note F).
b. Capital Lease Obligations
During the year ended June 30, 1997, the Company entered into two
five-year lease agreements for new equipment.
The aggregate maturities of long-term debt at June 30, 1997 are as
follows:
Year ending June 30,
1998 $116,600
1999 118,384
2000 117,930
2001 112,266
2002 58,331
-------
$523,511
=======
F-13
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE H - DEMAND NOTE PAYABLE
The Company had 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). The note was converted to a long-term note in December 1996
(see Note G).
NOTE I - COMMITMENTS
Leases
The Company leases certain facilities and automobiles under lease agreements
that are classified as operating leases and expire in various years through
2002.
The following is a schedule of future minimum lease payments for operating
leases as of June 30, 1997:
Year ending June 30,
1998 $194,700
1999 32,800
2000 33,800
2001 35,000
2002 36,200
Subsequent to 2002 9,100
-------
$341,600
=======
Rental expense for operating leases totaled approximately $229,000, $279,000,
$63,000 and $92,000 for the years ended June 30, 1996 and 1997 and for the
three months ended September 30, 1996 and 1997, respectively.
NOTE J - 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. For the year ended June 30, 1997, 20,000 warrants were
exercised.
F-14
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE J (continued)
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 to purchase
100,000 shares of common stock at an exercise price of $6.00 at a price of
$.25 per warrant over a period of four years commencing on February 26,
1997. On March 20, 1997, the underwriter exercised its option to purchase
the 100,000 warrants. Proceeds to the Company totaled $25,000.
At June 30, 1997, a total of 1,805,000 warrants at an exercise price of
$6.00 were issued and outstanding.
2. Stock Splits
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 split.
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).
F-15
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE J (continued)
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. Employee 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. These options will expire on
February 11, 2001. Subsequently, the approval to grant options to
acquire 10,500 shares of the common stock was rescinded by the Board of
Directors. On May 5, 1997, 2,000 options were granted at an exercise
price of $3.50 per share, which will expire on May 5, 2002. As of
September 30, 1997, options to purchase 71,500 shares of common stock
were granted to 26 officers, directors and key employees of the
Company.
F-16
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE J (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.
c. Summary Information
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation." Accordingly, no compensation
cost has been recognized for the stock options granted to employees and
directors. Had compensation cost been determined based on the fair
value at the grant date for the stock options awards in fiscal 1996
consistent with the provisions of SFAS No. 123, the Company's net
income would have been decreased by approximately $10,000 and earnings
per share would have remained unchanged. In fiscal 1997, net income
would have decreased by approximately $29,000 and earnings per share
would have been reduced by $.01 per share. During the initial phase-in
period of SFAS No. 123, such compensation may not be representative of
the future effects of applying this statement.
The weighted average fair value at date of grant for options granted
was $1.41 per option. The fair value of each option at date of grant
was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions:
Expected stock price volatility 17%
Expected life of options 5 years
Risk-free interest rate 5.55%
Expected dividend yield 0%
F-17
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE J (continued)
For the two years ended June 30, 1997 and the three months ended
September 30, 1997, employee option activity was as follows:
<TABLE>
<CAPTION>
Incentive options Nonqualified options
-------------------- ------------------------------
Weighted- Weighted-
average average
Number exercise Number exercise
of shares price of shares price
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at June 30,
1995
Granted 69,500 $5.00 285,366 $1.00
Exercised
Canceled
------ -------
Outstanding at June 30,
1996 69,500 $5.00 285,366 $1.00
Granted 2,000 $3.50
Exercised
Canceled
------ -------
Outstanding at June 30,
1997 71,500 $4.96 285,366 $1.00
Granted 10,000 2.94
------ -------
Outstanding at
September 30, 1997 71,500 $4.96 295,366 $1.07
====== =======
</TABLE>
The following table summarizes information about stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Weighted-
average Weighted- Weighted-
remaining average average
Range of Number contractual exercise Number exercise
exercise outstanding life price exercisable price
prices
- --------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.31 10,976 6.5 years $0.31 10,976 $0.31
1.03 274,390 6.5 years 1.03 274,390 1.03
2.94 10,000 4.8 years 2.94 - -
3.50-5.00 71,500 3.7 years 4.96 21,667 5.00
------- -------
366,866 307,033
======= =======
</TABLE>
F-18
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE K - 401(k) AND PROFIT SHARING PLANS
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 contributions at its discretion up to 4% of the
participant's annual compensation. Expenses under the 401(k) plan were
approximately $21,000 and $30,000 for the years ended June 30, 1996 and 1997,
respectively and $8,000 and $7,000 for the three months ended September 30,
1996 and 1997, respectively.
The Company also has a nonqualified profit sharing plan. Under this plan, the
Company distributes to eligible employees 10% of its pretax profits, based on
a three-month moving average. Expenses under the profit sharing plan were
approximately $65,000 and $42,000 for the years ended June 30, 1996 and 1997,
respectively and $13,000 and $5,000 for the three months ended September 30,
1996 and 1997.
NOTE L - 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, Three months ended September 30,
--------------------------- -------------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $6,320,000 $6,826,000 $1,501,000 $2,198,000
Europe 1,376,000 1,408,000 342,000 318,000
Asia/Pacific Rim 967,000 1,869,000 561,000 494,000
Canada and Mexico 396,000 509,000 103,000 91,000
Other 317,000 216,000 30,000 16,000
--------- --------- --------- ---------
$9,376,000 $10,828,000 $2,536,000 $3,117,000
========= ========== ========= =========
</TABLE>
F-19
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE M - 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 J-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."
The components of the provision for taxes on income are as follows:
<TABLE>
<CAPTION>
Year ended June 30, Three Months Ended September 30,
------------------- --------------------------------
1996 1997 1996 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
U.S. Federal
Current tax provision $50,000 $16,463 $57,577 $12,712
Deferred tax benefit (68,000)
------ ------ ------ ------
(18,000) 16,463 57,577 12,712
------ ------ ------ ------
State
Current tax provision 22,000 2,905 10,161 3,203
Deferred tax benefit (12,000)
------ ------ ------ ------
10,000 2,905 10,161 3,203
------ ------ ------ ------
Total income tax
provision (benefit) $(8,000) $19,368 $67,738 $15,915
====== ====== ====== ======
</TABLE>
F-20
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE M (continued)
The tax effect of temporary differences which give rise to deferred tax
assets and liabilities are as follows:
June 30, September 30,
1996 1997 1997
--------- ---------- --------------
Accrued expenses $22,000 $22,000 $22,000
Allowance for doubtful accounts 17,000 17,000 17,000
Inventory 41,000 41,000 41,000
------ ------ ------
Net deferred tax asset $80,000 $80,000 $80,000
====== ====== ======
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, Three Months Ended September 30,
-------------------------- ---------------------------------
1996 1997 1996 1997
-------------- ---------- --------------- --------------
Percent Percent Percent Percent
of of of of
Amount income Amount income Amount income Amount Income
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Provision for
Federal income
taxes at the
statutory rate $148,000 34.0% $16,000 34.0% $58,000 34.0% $24,200 34.0%
State and local
taxes, net of
Federal income tax
benefit 15,000 3.4 2,000 4.0 7,000 4.0 2,000 2.8
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)
Net Operating loss
carry forward (13,000)(18.2)
Nondeductible expenses 7,000 1.6
Other 12,000 2.8 1,368 2.0 2,738 2.0 2,715 3.7
------- --- ------ ---- ------ ---- ------ ----
Actual provision
(benefit) for
income taxes $(8,000) (1.9)% $19,368 40.0% $67,738 40.0% $15,915 22.3%
======= ===== ====== ===== ====== ===== ====== =====
</TABLE>
F-21
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE N - 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 O - RELATED PARTY TRANSACTIONS
The Company paid $73,959, $9,422 and $29,279 to a member of the Board of
Directors for consulting services during the year ended June 30, 1997 and the
three months ended September 30, 1996 and 1997, respectively.
NOTE P - PRO FORMA INFORMATION
a. 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 Company been subject to Federal and additional state and
local income taxes for the year ended June 30, 1996.
The pro forma income tax provision has been prepared in accordance with
SFAS No. 109. The pro forma provision for income taxes for the year ended
June 30, 1996 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:
F-22
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE P (continued)
Federal $135,256
State and local 39,268
-------
$174,524
=======
b. Pro Forma Net Income
Represents the historical amounts after the pro forma adjustment discussed
above.
c. 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 stock split of 1.85-for-1 and shares issued in the
Offering (see Note J). The calculations also reflect the dilutive effect
of shares issuable for common stock equivalents.
NOTE Q - FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
which is effective for financial statements for both interim and annual
periods ending after December 1997. Early adoption of the new standard is not
permitted. The new standard eliminates primary and fully diluted earnings per
share and requires presentation of basic and diluted earnings per share
together with disclosure of how the per share amounts were computed. The pro
forma effect of adopting the new standard would be basic earnings per share
of $.09 and $.01 and diluted earnings per share of $.08 and $.01 for the
years ended June 30, 1996 and 1997, respectively, and basic earnings per
share of $.03 and $.01 and dilated earnings per share of $.02 and $.01 for
the three months ended September 30, 1996 and 1997 respectively. In June
1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130),
and Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). The Company
will implement SFAS 130 and SFAS 131 as required in fiscal 1999, which
require the Company to report and display certain information related to
comprehensive income and operating segments, respectively. Adoption of SFAS
130 and SFAS 131 will not impact the Company's financial position or results
of operations..
F-23
<PAGE>
Sonics & Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997 and September 30, 1996 and 1997
(Information pertaining to September 30, 1996 and 1997 is unaudited)
NOTE R - ACQUISITION
On July 25, 1997, the Company acquired, through a newly formed wholly-owned
subsidiary, 100% of the stock of Tooltex, Inc. ("Tooltex"). Tooltex is a
manufacturer of automated systems used in the plastics industry. The
shareholders received, in exchange for 100% of the stock of Tooltex, (i) an
aggregate of 70,000 shares of the Company's common stock, par value $.03 per
share, (ii) $70,000 and (iii) options to purchase 10,000 shares of the Company's
common stock. The purchase price was allocated to the assets acquired based on
their estimated fair value. The excess total acquisition costs over the fair
value of the net assets acquired of approximately $1,057,000 is to be amortized
on a straight line basis over 20 years. For the three months ended September 30,
1996, the Company had sales to Tooltex of approximately $28,000. At the time of
the acquisition, the Company had a receivable of approximately $254,000 from
Tooltex. The sales and results of operations of Tooltex for the period from July
1, 1997, to July 25, 1997 were not material.
The following unaudited pro forma consolidation for the three months ended
September 30, 1996, shows the results of operations, assuming that the purchase
had occurred on July 1, 1996. The unaudited pro forma results are not
necessarily indicative of what actually would have occurred if the acquisition
had been in effect for the entire period. In addition, they are not intended to
be a projection of future results.
Revenues 3,231,861
Net Loss from operations 56,365
Net Loss per share $.02
F-24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Stockholders
Tooltex, Inc.
We have audited the accompanying balance sheet of Tooltex, Inc. as of June 30,
1997, and the related statements of operations and accumulated deficit, and cash
flows for the years ended June 30, 1997 and 1996. 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 Tooltex, Inc. as of June 30,
1997, and the results of its operations and its cash flows for the years ended
June 30, 1997 and 1996 in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
/s/GRANT THORNTON LLP
- ---------------------
New York, New York
October 5, 1997
F-25
<PAGE>
Tooltex, Inc.
BALANCE SHEET
June 30, 1997
ASSETS
CURRENT ASSETS
Cash $ 2,170
Accounts receivable - trade (net of allowance for
doubtful accounts of $52,000) 131,451
Other receivables 75,252
Inventory 338,204
Refundable income taxes 14,485
--------
Total current assets 561,562
FURNITURE AND EQUIPMENT - AT COST
Machinery and equipment $ 141,382
Computer and office equipment 100,768
Furniture and fixtures 18,584
Leasehold improvements 34,135
--------
294,869
Less accumulated depreciation (143,890) 150,979
--------
OTHER ASSETS 252
--------
$ 712,793
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - bank $ 461,000
Accounts payable 711,265
Accrued expenses 106,224
Customer advances 83,374
--------
Total current liabilities 1,361,863
STOCKHOLDERS' DEFICIT
Common stock - no par value;
750 shares authorized;
187 issued and 181 outstanding $ 2,125
Accumulated deficit (649,359)
--------
(647,234)
Less 6 shares of common stock
held in treasury, at cost (1,836) 649,070)
--------- --------
cost
$ 712,793
========
The accompanying notes are an integral part of this statement.
F-26
<PAGE>
Tooltex, Inc.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
Year ended June 30,
1997 1996
--------- -------
Net sales $1,944,170 $2,036,478
Cost of goods sold 1,732,327 1,578,732
--------- ---------
Gross profit 211,843 457,746
Selling, general and administrative 508,300 411,712
--------- ---------
Operating (loss) income (296,457) 46,034
Other income (expense)
Interest expense (63,047) (44,076)
Interest income 1,802
Loss on disposal of furniture and equipment (11,114)
Other 33,813 (7,302)
--------- ---------
(38,546) (51,378)
--------- ---------
Loss before income taxes (335,003) (5,344)
Income tax benefit (expense) 14,485 (10,378)
--------- ---------
NET LOSS (320,518) (15,722)
Accumulated deficit at beginning of year (328,841) (313,119)
--------- ---------
Accumulated deficit at end of year $ (649,359) $ (328,841)
========== ==========
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
Tooltex, Inc.
STATEMENTS OF CASH FLOWS
Year ended June 30,
1997 1996
------- -------
Cash flows from operating activities
Net loss $(320,518) $ (15,722)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation 43,741 17,476
Loss on disposal of furniture and equipment 11,114
Increase (decrease) in cash due to changes in
assets and liabilities
Accounts and other receivables 204,256 76,690
Inventory 59,692 (370,759)
Refundable income taxes and other asset (17,956)
Accounts payable 90,982 251,730
Accrued expenses 57,078 (30,533)
Customer advances (103,941) 37,745
--------- --------
Net cash provided by (used in) operating
activities 24,448 (33,373)
--------- --------
Cash flows from investing activities
Purchase of furniture and equipment (82,853) (67,024)
Proceeds from sale of furniture and equipment 4,050 2,300
--------- --------
Net cash used in investing activities (78,803) (64,724)
--------- --------
Cash flows from financing activities
Net proceeds from notes payable - bank 38,910 115,712
--------- --------
NET (DECREASE) INCREASE IN CASH (15,445) 17,615
Cash at beginning of year 17,615
Cash at end of year $ 2,170 $ 17,615
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 37,143 $ 44,076
========= ========
Income taxes $ 7,484 $ 10,375
========= ========
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
Tooltex, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Nature of Operations
Tooltex, Inc. (the "Company"), located in Grove City, Ohio, is a manufacturer
of various types of custom-order machines, which primarily include
heat-stamping machines. The Company supplies its machines to various
commercial customers located throughout the U.S. A summary of significant
accounting policies applied in the preparation of the accompanying financial
statements follows:
1. Inventory Valuation
Inventory is stated at the lower of cost or market; cost is determined
using the first-in, first-out method.
2. Depreciation and Amortization
Depreciation and amortization are provided in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service
lives, principally using accelerated methods.
3. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures 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.
4. Revenue Recognition
The Company recognizes revenue when goods are shipped to the customer.
Prepayments on significant machine sales are recorded as a liability until
the goods are shipped and are reflected as customer advances in the
accompanying balance sheet.
F-29
<PAGE>
Tooltex, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1997 and 1996
NOTE B - INVENTORY
The components of inventories at June 30, 1997 are as follows:
Finished goods $ 31,746
Work in process 278,626
Raw materials 121,532
Valuation reserve (93,700)
--------
$ 338,204
========
NOTE C - DEBT
In April 1997, all existing debt was refinanced into one 60-day note in the
principal amount of $461,000, with a maturity date of June 30, 1997. The note
accrues interest at 10% and was extended orally by the bank to July 31, 1997.
At July 31, 1997, the debt was renegotiated into a four-year term note with
the bank by the acquiring company (Note G). The renegotiated agreement
provides for interest at the prime rate plus three quarters of one percent.
The acquiring company has guaranteed the loan.
The original debt agreement contained financial covenants specifying minimum
net worth and a total debt to net worth ratio. The Company was in violation
of these covenants at June 30, 1997. The debt was collateralized by
substantially all of the assets of the Company. The original debt was
personally guaranteed by the two stockholders.
NOTE D - 401(k) PLAN
The Company sponsors a 401(k) plan covering all eligible employees. Under
provisions of the plan, eligible employees are those who have been with the
Company for at least ninety days and are at least 18 years old. The plan
provides for matching Company contributions up to 25% of the employee
contribution to a maximum of 4% of total employee compensation. The employees
are
F-30
<PAGE>
Tooltex, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1997 and 1996
NOTE D (continued)
100% vested in their contributions. Contributions made to the plan by the
Company are vested according to the following schedule:
Vested
Years of service percentage
---------------- ----------
2 20%
3 40
4 60
5 80
6 100
The Company contributed a matching amount of $4,000 and $6,000 for the years
ended June 30, 1997 and 1996, respectively.
NOTE E - INCOME TAXES
At June 30, 1997, the Company had a gross deferred tax asset of approximately
$188,000. This asset arises from the use of reserves for accounts receivable
and inventory, and a net operating loss carryforward. Because of the
uncertainty of the realization of this asset, a full valuation allowance has
been recorded against the tax benefit. Therefore, no deferred tax asset has
been recognized in the accompanying financial statements.
The Company has a net operating loss carryforward of $408,000 at June 30,
1997. The Internal Revenue Code, however, places a limitation on the
utilization of carryforwards when an ownership change, as defined in the tax
law, occurs. As a result of the acquisition of the Company (Note G), the
utilization of the net operating loss carryforward will be limited.
F-31
<PAGE>
Tooltex, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1997 and 1996
NOTE F - RELATED PARTY MATTERS
Building Lease
During the years ended June 30, 1996 and 1995, the Company had advanced a
total of $54,000 to its current landlord (a company owned by two of the
Company's stockholders) for the purpose of constructing a new building. The
Company occupied the building in October, 1996 and leases these premises from
the landlord in accordance with a five-year noncancellable operating lease
that commenced on July 25, 1997 and that expires on July 24, 2002. The
original lease for this building with the landlord had commenced in October,
1996 and was subsequently revised to reflect the terms above and provided for
future minimum rental payments at June 30, 1997 as follows:
Amount
Fiscal year ending --------
1998 $ 78,654
1999 84,320
2000 84,320
2001 84,320
2002 84,320
Thereafter 5,734
--------
$ 421,668
========
Rent expense was $62,000 and $21,000 in 1997 and 1996, respectively.
Approximately $57,000 of the 1997 rent expense was paid to the landlord.
At June 30, 1997, $25,000 of the funds advanced to the landlord were
outstanding and included in other receivables in the accompanying balance
sheet. Included in accounts payable at June 30, 1997 was rent payable to the
landlord of $12,700.
Trade Purchases
During the years ended June 30, 1997 and 1996, the Company had purchases of
approximately $83,000 and $292,600, respectively, from a vendor that
subsequently purchased all of the outstanding stock of the Company on July
25, 1997 (Note G).
F-32
<PAGE>
Tooltex, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1997 and 1996
NOTE G - SUBSEQUENT EVENTS
On July 25, 1997, the stock of the Company was purchased by a vendor which is
publicly held. The Company has a receivable from this vendor of $35,000 at
June 30, 1997, and payables to the vendor of $254,000 and $245,000 at June
30, 1997 and 1996, respectively.
F-33
<PAGE>
Sonics & Materials, Inc.
and Tooltex, Inc.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
The following unaudited pro forma consolidated condensed balance sheet has been
prepared by taking the June 30, 1997 balance sheets of Sonics & Materials, Inc.
(the "Company") and Tooltex, Inc. ("Tooltex") and giving effect to the
acquisition of the stock of Tooltex by the Company as if it occurred as of June
30, 1997. The pro forma combined condensed balance sheet has been prepared for
information purposes only and does not purport to be indicative of the financial
condition that necessarily would have resulted had this transaction taken place
at June 30, 1997.
The following unaudited pro forma consolidated condensed statement of operations
has been prepared by taking the statements of operations for the year ended June
30, 1997 of the Company and Tooltex and giving effect to the acquisition of the
stock of Tooltex as if it occurred as of the beginning of the year. The revenues
and results of operations included in the unaudited pro forma consolidated
condensed statement of operations for the year ended June 30, 1997 are not
considered necessarily to be indicative of anticipated results of operations for
periods subsequent to the transaction, nor are they considered necessarily to be
indicative of the results of operations for the periods specified had the
transaction actually been completed at the beginning of the year.
These financial statements should be read in conjunction with the notes to the
unaudited pro forma consolidated condensed financial statements, the financial
statements of the Company and related notes thereto (as previously filed on Form
10-KSB), and the financial statements of Tooltex and related notes thereto,
included herein.
F-34
<PAGE>
Sonics & Materials, Inc.
and Tooltex, Inc.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
As of June 30, 1997
<TABLE>
<CAPTION>
Sonics
Sonics Tooltex Pro forma pro
ASSETS historical historical adjustments forma
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 271,593 $ 2,170 $ (70,000)(a) $ 203,763
Short-term investments 1,665,470 1,665,470
Accounts receivable, net of
allowance for doubtful
accounts 1,854,118 131,451 1,985,569
Other receivables 75,252 (25,002)(b) 50,250
Inventories 3,718,250 338,204 4,056,454
Prepaid income taxes 150,061 14,485 164,546
Deferred income taxes 80,000 80,000
Other current assets 137,562 137,562
--------- --------- --------- ---------
Total current assets 7,877,054 561,562 (95,002) 8,343,614
PROPERTY AND EQUIPMENT, NET 364,354 150,979 515,333
GOODWILL 1,048,470 (c) 1,048,470
OTHER ASSETS, NET 917,709 252 (229,183)(d) 688,778
--------- --------- --------- ---------
$9,159,117 $ 712,793 $ 724,285 $10,596,195
========= ========= ========= ==========
</TABLE>
F-35
<PAGE>
Sonics & Materials, Inc.
and Tooltex, Inc.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
As of June 30, 1997
<TABLE>
<CAPTION>
Sonics
LIABILITIES AND Sonics Tooltex Pro forma pro
STOCKHOLDERS' EQUITY historical historical adjustments forma
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of
long-term debt $ 116,600 $ 116,600
Notes payable 500,000 $ 461,000 961,000
Accounts payable 804,653 711,265 $(154,185) (e) 1,361,733
Commissions payable 235,203 235,203
Customer advance 83,374 83,374
Other accrued expenses and
sundry liabilities 278,310 106,224 384,534
--------- --------- --------- ---------
Total current liabilities 1,934,766 1,361,863 (154,185) 3,142,444
LONG-TERM DEBT 406,911 406,911
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock 105,603 2,125 (25) (f) 107,703
Additional paid-in capital 6,539,597 227,300 (f) 6,766,897
Retained earnings (deficit) 172,240 (649,359) 649,359 (f) 172,240
Treasury stock (1,836) 1,836 (f)
--------- --------- --------- ---------
6,817,440 (649,070) 878,470 7,046,840
--------- --------- --------- ---------
$9,159,117 $ 712,793 $ 724,285 $10,596,195
========= ========= ========= ==========
</TABLE>
F-36
<PAGE>
Sonics & Materials, Inc.
and Tooltex, Inc.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
For the year ended June 30, 1997
<TABLE>
<CAPTION>
Sonics
Sonics Tooltex Pro forma pro
historical historical adjustments forma
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $10,827,525 $1,944,170 $ (83,172)(g) $12,688,523
Cost of sales 6,410,584 1,732,327 (83,172)(g) 8,059,739
---------- --------- -------- ----------
Gross profit 4,416,941 211,843 - 4,628,784
---------- --------- -------- ----------
Operating expenses
Selling, general and
administrative 3,980,960 508,300 59,653(h) 4,548,913
Research and development 418,465 418,465
---------- --------- -------- ----------
4,399,425 508,300 59,653 4,967,378
---------- --------- -------- ----------
Other income (expense)
Interest expense (79,565) (63,047) (142,612)
Other 110,471 24,501 134,972
---------- --------- -------- ----------
30,906 (38,546) (7,640)
---------- --------- -------- ----------
Income (loss) before 48,422 (335,003) (59,653) (346,234)
income taxes
Provision (benefit) for income taxes 19,368 (14,485) (116,946)(i) (112,063)
---------- --------- -------- ----------
NET INCOME (LOSS) $ 29,054 $ (320,518) $ 57,293 $ (234,171)
========== ========= ======== ==========
Net income (loss) per share $.01 $(.07)
=== ====
Weighted average shares
outstanding, including
dilutive securities 4,247,104 3,575,383
========= =========
</TABLE>
F-37
<PAGE>
Sonics & Materials, Inc.
and Tooltex, Inc.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
The accompanying unaudited pro forma consolidated condensed balance sheet and
statement of operations present the financial position and results of operations
of Sonics & Materials, Inc. (the "Company") giving effect to the acquisition on
July 25, 1997 of 100% of the outstanding common stock of Tooltex, Inc.
("Tooltex")
At closing, the Company paid the Tooltex shareholders $70,000 in cash. The
balance of the purchase price consisted of: (i) 70,000 shares of the Company's
common stock, par value $.03 (valued at $205,800) and (ii) options to purchase
10,000 shares of the Company's common stock (valued at $23,600). The pro forma
financial statements reflect these amounts tendered at the closing.
The 70,000 shares of common stock are held in escrow as indemnification of the
Company against any and all losses, costs, damages and expenses which the
Company may sustain resulting from, arising out of, relating to or caused by:
(a) noncompliance by either shareholder with any of his obligations hereunder or
nonperformance by either shareholder of any covenant contained in the merger
agreement, (b) any inaccuracy in or breach of any representation or warranty
made by the shareholders in the merger agreement or transaction, or (c) any
personal injury claims relating to any product sold by Tooltex prior to July 25,
1997 (the "Closing Date").
The adjustments below were prepared based on data currently available and in
some cases are based on estimates or approximations. It is possible that the
actual amounts to be recorded may have an impact on the results of operations
and the balance sheet different from that reflected in the accompanying
unaudited pro forma consolidated condensed financial statements. It is therefore
possible that the entries presented below will not be the amounts actually
recorded at the closing date.
Balance sheet at June 30, 1997:
(a) Cash and cash equivalents
Consideration paid for Tooltex common stock $ (70,000)
(b) Accounts receivable
Conversion of balance due from BPT, a related
party to Tooltex, to note receivable (25,002)
(c) Goodwill
Additional cost in excess of net assets acquired 1,048,470
F-38
<PAGE>
Sonics & Materials, Inc.
and Tooltex, Inc.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS (continued)
Balance sheet at June 30, 1997 (continued):
(d) Other assets
Forgiveness of other accounts receivable, as
consideration paid $ (254,185)
Promissory note from BPT, a related party to Tooltex 25,002
----------
$ (229,183)
==========
(e) Accounts payable
Forgiveness of accounts payable, as consideration
received $ (254,185)
Acquisition-related fees 100,000
----------
$ (154,185)
==========
(f) Stockholders' equity
To eliminate common stock, deficit and treasury
stock of Tooltex $ 649,070
To record issuance of options in connection with the
acquisition 23,600
To record issuance of common stock in connection with
the acquisition 205,800
----------
$ 878,470
==========
Statement of operations for the year ended June 30, 1997:
(g) Net sales and cost of sales
To eliminate intercompany sales and purchases $ (83,172)
==========
(h) General and administrative expenses
To record compensation of Tooltex shareholders based
on employment agreement in excess of amount
currently being paid $ 24,704
To amortize goodwill based on a thirty-year life 34,949
----------
$ 59,653
==========
(i) Provision (benefit) for income taxes
To adjust tax provision (benefit) on a consolidated
basis $ (116,946)
==========
F-39
<PAGE>
===============================================================================
No dealer, salesperson, or any other person has been authorized to give any
information or to make any representations or projections of future performance
other than those contained in this Prospectus, any such other information,
projections or representations, if given or made, must not be relied upon as
having been so authorized. The delivery of this prospectus or any sale hereunder
at any time does not imply that the information herein is correct as of any time
subsequent to its date. This Prospectus does not constitute an offer to sell or
a solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation.
------------------------
TABLE OF CONTENTS
Page
Prospectus Summary................. 2
Summary Financial Information...... 4
Risk Factors....................... 5
Cautionary Statement Regarding
Forward-Looking Information...... 9
Market for Company's Common Equity
and Related Stockholder Matters.. 10
Use of Proceeds.................... 10
Dividend Policy.................... 10
Capitalization..................... 11
Selected Financial Data............ 12
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 13
Business........................... 17
Management......................... 24
Certain Relationships and Related
Transactions....................... 26
Security Ownership of Certain
Beneficial Owners.................. 28
Description of Securities.......... 28
Certain Tax Considerations......... 31
Warrant Solicitation Fee........... 32
Concurrent Offering................ 32
Legal Matters...................... 34
Experts............................ 34
Reports to Stockholders............ 34
Additional Information............. 34
Index to Financial Statements...... F-1
===============================================================================
===============================================================================
1,705,000 Shares
of
Common Stock
(Underlying the Exercise of Outstanding Warrants)
100,000 Options to Purchase Shares of
Common Stock and Warrants
100,000 Shares of Common Stock
(Underlying the Exercise of the Options)
100,000 Warrants to Purchase Common Stock
(Issued Upon Exercise of the Options)
100,000 Shares of Common Stock
(Underlying the Exercise of the Warrants)
SONICS & MATERIALS, INC.
------------------------
PROSPECTUS
------------------------
December ____, 1997
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Registrant's Board of Directors has authorized it to provide a general
indemnification to its officers, directors, employees and agents regarding any
claims or liabilities incurred in the course of their employment. In addition,
its certificate of incorporation and by-laws provide for such indemnification.
The Delaware General Corporation Law ("DGCL") provides that each officer,
director, employee and agent of the Company shall be indemnified by the
Registrant against certain costs, expenses and liabilities which he or she may
incur in his or her capacity as such.
Section 145 of DGCL - "Indemnification of Officers, Directors, Employees
and Agents; Insurance" provides:
"(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and , with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create of presumption that the person did not act in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that such
person's conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit if such person acted in good faith
in a manner such person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the present or
former director or officer is proper in the circumstances because such person
has met the applicable standard of conduct set forth on subsections (a) and (b)
of this section. Such determination shall be made, with respect to a person who
is a director or officer at the time of such determination, (1) by a majority
vote of the directors who are not parties to such action, suit or proceeding
even though less than a quorum, or (2) by a committee of such directors
designated by majority vote of such directors, even though less than a quorum,
or
II-1
<PAGE>
(3) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the corporation deems
appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent or another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under this action.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation of
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees)."
II-2
<PAGE>
Item 25. Other Expenses of Issuance and Distribution(1)(2)
Registration fee.........................$ 0
NASD filing fee.......................... 0
Blue sky fees and expenses............... 3,000
Legal fees and expenses..................10,000
Accounting fees and expenses............. 3,000
Warrant Agent Fees....................... 1,000
Printing and engraving................... 3,000
Miscellaneous............................ 2,000
-----
Total....................................22,000
======
- ----------------------
(1) Expenses incurred in connection with the proposed offering hereunder.
(2) All expenses will be paid by the Company and are estimated.
Item 26. Recent Sale of Unregistered Securities
On July 25, 1997, the Company acquired Tooltex, Inc., an Ohio corporation
("Tooltex"), through a merger transaction (the "Merger"). Pursuant to an
Agreement and Plan of Merger, dated July 25, 1997 (the "Plan of Merger"), among
the Company, SM Sub, Inc., an Ohio corporation and a wholly owned subsidiary of
Sonics ("Sonics Sub"), Tooltex, and the shareholders of Tooltex (the "Tooltex
Shareholders"), Tooltex was merged with and into Sonics Sub. Under the Plan of
Merger, the shareholders of Tooltex received, in exchange for 100% of the stock
of Tooltex, (i) an aggregate of 70,000 shares of Sonics Common Stock,
par value $.03 per share (the "Common Stock"), (ii) $70,000 and (iii) options to
purchase 10,000 shares of Sonics Common Stock (the "Options"). There were no
underwriters involved in the transaction and no underwriting commissions were
paid. The Tooltex Shareholders receiving the Sonics' Common Stock and Options
were Paul Spurgeon and Benjamin Egelhoff, both residents of the State of Ohio,
the sole shareholders of Tooltex and the President and Vice-President of
Tooltex, respectively.
In selling the Common Stock and the Options, the Company relied upon
Section 4(2) of the Securities Act of 1933, as amended. In relying upon such
exemption, the Company considered the limited number of offerees and purchasers
of the securities (two), the private nature of the transaction, the level of
negotiation between the parties, the delivery to the Tooltex Shareholders of all
documents filed by the Company under the Securities Exchange Act of 1934, as
amended, the availability of the officers of Sonics to the Tooltex Shareholders,
limitations on transfer placed by the Company on the Common Stock and Options,
and certain investment representations of the Tooltex Shareholders made in the
Plan of Merger.
Each Tooltex Shareholder received an Option to purchase 5,000 shares of
Common Stock. Such Options are exercisable commencing two years after the Merger
(and in certain circumstances prior to this date) and terminating 10 years after
the Merger at an exercise price equal to $2.94, which is the last closing price
of the Company's Common Stock on the date of the Merger as reported on Nasdaq.
Under certain circumstances, these Options may terminate prior to their
expiration date.
Item 27. Exhibits
The following is a list of exhibits filed as part of this Registration
Statement:
Exhibit
Number Description of Document Method of Filing
- ------ ----------------------- ----------------
1.1 Underwriting Agreement (3)
1.2 Selected Dealer Agreement (3)
1.3 Financial Consulting Agreement (3)
1.5 Form of Underwriter's Options to purchase Shares (3)
and Warrants
<PAGE>
Exhibit
Number Description of Document Method of Filing
- ------ ----------------------- ----------------
3.1 Certificate of Incorporation of the Registrant,
as amended (3)
3.2 Amended By-laws of the Registrant (2)
4.1 Specimen Common Stock Certificate of Registrant (2)
4.2 Specimen Warrant Certificate of Registrant (3)
4.3 Form of Warrant Agreement between Registrant (3)
and Warrant Agent
5.1 Opinion re: legality (9)
10.1 Form of Employment Agreement between the
Registrant and Robert S. Soloff (1)
10.2 1995 Incentive Stock Option Plan and form of
Stock Option Agreement (1)
10.3 Original Office Lease and Amendments between the
Registrant and Nicholas R. Dinapoli, Jr. DBA
Dinapoli Holding Co. (Danbury, CT)
10.4 Lease between Registrant and Aston Investment
Associates (Aston, PA) (1)
10.5 Amended Lease between Registrant and Robert
Lenert (Naperville, IL) (5)
10.6 Lease between Registrant and Janine Berger
(Gland, Switzerland) (1)
10.7 Form of Sales Representative Agreement (1)
10.8 Form of Sales Distribution Agreement (1)
10.9 Consulting Agreement dated October 17, 1995
between the Registrant and Alan Broadwin (3)
10.10 Agreement and Plan of Merger, dated as of July 25, 1997,
among the Registrant, SM Sub, Inc., Tooltex, Inc., and the
persons designated as the shareholders thereon (excluding
schedules and annexes). A list of omitted schedules and
annexes appears on pages iv and v of the Agreement and Plan of
Merger. The Registrant hereby undertakes to furnish
supplementally a copy of any omitted schedule or annex to the
Commission upon request. (7)
10.11 Agreement of Merger, dated as of July 25, 1997,
among the Registrant, SM Sub, Inc. and
Tooltex, Inc. (7)
10.12 Form of Credit Agreement between Brown
Brothers Harriman & Co. and Registrant (8)
10.13 Form of Term Loan Note of Registrant
payable to the order of Brown Brothers
Harriman & Co. in the original principal amount
of $427,000 (8)
10.14 Form of Line of Credit Note of Registrant
payable to the order of Brown Brothers
Harriman & Co in the original principal amount
of $1,500,000. (8)
10.15 Form of Bridge Loan Note of Registrant
payable to the order of Brown Brothers
Harriman & Co. in the original principal amount
of $1,600,000. (8)
10.16 Form of Open-End Mortgage Deed from Registrant
to Brown Brothers Harriman & Co. (8)
10.17 Form of General Security Agreement from
Registrant to Brown Brothers Harriman & Co. (8)
16.1 Change of Accountants' Letter (1)
21 Subsidiaries of the Registrant. (8)
<PAGE>
Exhibit
Number Description of Document Method of Filing
- ------ ----------------------- ----------------
23.1 Consent of Independent Certified Public
Accountants Filed herewith
23.2 Consent of Independent Public Accountants (1)
23.3 Consent of Company Counsel (included in its
opinion filed as Exhibit 5.1) (9)
24.1 Power of Attorney (6)
27.1 Financial Data Schedule Filed herewith
- ----------------------
(1)Previously filed with Registration Statement No. 33-96414.
(2)Previously filed with Amendment No. 1 to Registration Statement No. 33-96414.
(3)Previously filed with Amendment No. 2 to Registration Statement No. 33-96414.
(4)Previously filed with Amendment No. 3 to Registration Statement No. 33-96414.
(5)Previously filed with Amendment No. 4 to Registration Statement No. 33-96414.
(6)Previously filed with Post-Effective Amendment No. 1 to Registration
Statement No. 33-96414.
(7)Previously filed with the Registrant's Form 8-K dated July 25, 1997.
(8)Previously filed with the Registrant's Form 10-K dated September 25, 1997.
(9)Previously filed with Post-Effective Amendment No. 2 to Registration
Statement No. 33-96414.
Item 28. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, post-effective amendments to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information, set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered,
<PAGE>
the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and has authorized this
Post-Effective Amendment No. 3 to the Registration Statement to be signed on its
behalf by the undersigned, in the City of Danbury, State of Connecticut on
December 3, 1997.
SONICS & MATERIALS, INC.
By: /s/ ROBERT S. SOLOFF
-----------------------
Robert S. Soloff
Chairman and President
<PAGE>
In accordance with the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 3 to the Registration Statement was signed by the
following persons in the capacities and on the dates stated:
Signature Title Date
* Chairman, President, December 3, 1997
......................... Treasurer, Chief Executive
(Robert S. Soloff) Officer and Chief Financial
Officer
/s/ LAUREN H. SOLOFF Secretary and Director December 3, 1997
.........................
(Lauren H. Soloff)
* Director December 3, 1997
.........................
(Jack T. Tyransky)
* Director December 3, 1997
.........................
(Alan Broadwin)
* Accounting Manager; Principal December 3, 1997
......................... Accounting Officer;
(Christopher S. Andrade) Principal Accounting
Officer
* Director December 3, 1997
.........................
(Stephen J. Drescher)
*/s/ LAUREN H. SOLOFF December 3, 1997
.........................
By Lauren H. Soloff
as attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document Method of Filing
- ------ ----------------------- ----------------
1.1 Underwriting Agreement (3)
1.2 Selected Dealer Agreement (3)
1.3 Financial Consulting Agreement (3)
1.5 Form of Underwriter's Options to purchase Shares (3)
and Warrants
Exhibit
Number Description of Document Method of Filing
3.1 Certificate of Incorporation of the Registrant,
as amended (3)
3.2 Amended By-laws of the Registrant (2)
4.1 Specimen Common Stock Certificate of Registrant (2)
4.2 Specimen Warrant Certificate of Registrant (3)
4.3 Form of Warrant Agreement between Registrant (3)
and Warrant Agent
5.1 Opinion re: legality (9)
10.1 Form of Employment Agreement between the
Registrant and Robert S. Soloff (1)
10.2 1995 Incentive Stock Option Plan and form of
Stock Option Agreement (1)
10.3 Original Office Lease and Amendments between the
Registrant and Nicholas R. Dinapoli, Jr. DBA
Dinapoli Holding Co. (Danbury, CT)
10.4 Lease between Registrant and Aston Investment
Associates (Aston, PA) (1)
10.5 Amended Lease between Registrant and Robert
Lenert (Naperville, IL) (5)
10.6 Lease between Registrant and Janine Berger
(Gland, Switzerland) (1)
10.7 Form of Sales Representative Agreement (1)
10.8 Form of Sales Distribution Agreement (1)
10.9 Consulting Agreement dated October 17, 1995
between the Registrant and Alan Broadwin (3)
10.10 Agreement and Plan of Merger, dated as of July 25, 1997,
among the Registrant, SM Sub, Inc., Tooltex, Inc., and the
persons designated as the shareholders thereon (excluding
schedules and annexes). A list of omitted schedules and
annexes appears on pages iv and v of the Agreement and Plan of
Merger. The Registrant hereby undertakes to furnish
supplementally a copy of any omitted schedule or annex to the
Commission upon request. (7)
10.11 Agreement of Merger, dated as of July 25, 1997,
among the Registrant, SM Sub, Inc. and
Tooltex, Inc. (7)
10.12 Form of Credit Agreement between Brown
Brothers Harriman & Co. and Registrant (8)
10.13 Form of Term Loan Note of Registrant
payable to the order of Brown Brothers
Harriman & Co. in the original principal amount
of $427,000 (8)
10.14 Form of Line of Credit Note of Registrant
payable to the order of Brown Brothers
Harriman & Co in the original principal amount
of $1,500,000. (8)
10.15 Form of Bridge Loan Note of Registrant
<PAGE>
Exhibit
Number Description of Document Method of Filing
- ------ ----------------------- ----------------
payable to the order of Brown Brothers
Harriman & Co. in the original principal amount
of $1,600,000. (8)
10.16 Form of Open-End Mortgage Deed from Registrant
to Brown Brothers Harriman & Co. (8)
10.17 Form of General Security Agreement from
Registrant to Brown Brothers Harriman & Co. (8)
16.1 Change of Accountants' Letter (1)
21 Subsidiaries of the Registrant. (8)
23.1 Consent of Independent Certified Public
Accountants Filed herewith
23.2 Consent of Independent Public Accountants (1)
23.3 Consent of Company Counsel (included in its
opinion filed as Exhibit 5.1) (9)
24.1 Power of Attorney (6)
27.1 Financial Data Schedule Filed herewith
- ----------------------
(1)Previously filed with Registration Statement No. 33-96414.
(2)Previously filed with Amendment No. 1 to Registration Statement No. 33-96414.
(3)Previously filed with Amendment No. 2 to Registration Statement No. 33-96414.
(4)Previously filed with Amendment No. 3 to Registration Statement No. 33-96414.
(5)Previously filed with Amendment No. 4 to Registration Statement No. 33-96414.
(6)Previously filed with Post-Effective Amendment No. 1 to Registration
Statement No. 33-96414.
(7)Previously filed with the Registrant's Form 8-K dated July 25, 1997.
(8)Previously filed with the Registrant's Form 10-K dated September 25, 1997.
(9)Previously filed with Post-Effective Amendment No. 2 to Registration
Statement No. 33-96414.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated August 28, 1997 and October 5, 1997,
accompanying the financial statements of Sonics & Materials, Inc. and Tooltex,
Inc., respectively, contained in the Registration Statement and Prospectus. We
consent to the use of the aforementioned reports in the Registration Statement
and Prospectus, and to the use of our name as it appears under the caption
"Experts."
GRANT THORNTON LLP
/s/GRANT THORNTON LLP
New York, New York
December 2, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 243,347
<SECURITIES> 1,665,470
<RECEIVABLES> 2,147,896
<ALLOWANCES> 97,000
<INVENTORY> 3,874,432
<CURRENT-ASSETS> 8,405,580
<PP&E> 1,776,888
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,807,577
<CURRENT-LIABILITIES> 4,041,068
<BONDS> 0
0
0
<COMMON> 107,703
<OTHER-SE> 6,994,650
<TOTAL-LIABILITY-AND-EQUITY> 11,807,577
<SALES> 3,116,804
<TOTAL-REVENUES> 3,116,804
<CGS> 1,827,658
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,578
<INCOME-PRETAX> 71,428
<INCOME-TAX> 15,915
<INCOME-CONTINUING> 55,513
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