U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- - --------------------------------------------------------------------------------
FORM 10-KSB/A
- - --------------------------------------------------------------------------------
(Mark One)
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934. For the fiscal year ended June 30, 1998.
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934. For the transition period from _________ to ________.
Commission File Number: 0-20753
SONICS & MATERIALS, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 060854713
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
53 Church Hill Road, Newtown, CT 06470
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (203) 270-4600
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.03 per share
(Title of class)
Warrants to purchase Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
The issuer's revenues for the most recent fiscal year were: $12,080,522
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Company's Common Stock on
September 24, 1998, as reported on the Nasdaq SmallCap Market, was
approximately $819,081. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of September 24, 1998, the issuer had outstanding 3,520,100 shares of Common
Stock, par value $.03 per share, and 1,805,000 Warrants to purchase shares of
Common Stock.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III.
<PAGE>
Any statements in this Annual Report that are not statements of historical fact
are forward-looking statements that are subject to a number of important risks
and uncertainties that could cause actual results to differ materially.
Specifically, any forward looking statements in this Annual Report related to
the Company's objectives of future growth, profitability and financial returns
are subject to a number of risks and uncertainties, including, but not limited
to, risks related to a growing market demand for Sonics' existing and new
products, continued growth in sales and market share of Sonics and its USS
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 ultra-sonic
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 wholly owned subsidiary, Tooltex. It is also uncertain
whether the Company's recent cost cutting measures will result in increased
profitability.
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. All references to
full years are to the applicable fiscal year of the Company. This discussion
should be read in conjunction with the financial statements and notes thereto
included elsewhere herein.
Results of Operations
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
Net sales. Net sales for fiscal 1998 increased $1,253,000 or 11.6% over
fiscal 1997. This increase is primarily the result of the acquisition and
consolidation of Tooltex. If it were not for the effect of the acquisition and
consolidation of Tooltex, sales would have decreased $268,000 or 2.5%. This is
the result of decreased foreign sales to Asia and the Pacific Rim as a result of
the economic crisis in the region, offset by increased domestic sales volume. In
addition, the Company estimates lost sales of approximately $300,000 due to
downtime associated with the move to its new headquarters in Newtown,
Connecticut.
Cost of Sales. Cost of sales increased $653,675, from 59.2% of sales for
the year ended June 30, 1997 to 58.5% of sales for the year ended June 30, 1998.
This increase is partially attributable to the acquisition and consolidation of
Tooltex. Excluding the effect of the consolidation of Tooltex, cost of sales for
the year ended June 30, 1998 was 57.0% of sales, compared to 59.2% for fiscal
1997. This decrease is primarily due to increased efficiencies in the assembly
of the Vibration Welder.
Selling Expenses. Selling expenses for fiscal 1998 increased $239,000, or
7.6% over fiscal 1997. As a percentage of net sales these expenses decreased to
28.1% in fiscal 1998 from 29.2% in fiscal 1997. This decrease in selling
expenses as a percentage of net sales is a result of the Company maintaining
fixed costs while increasing sales.
General and Administrative Expenses. General and administrative expenses
for fiscal 1998 increased $640,000, or 77.7% over fiscal 1997. As a percentage
of net sales, these expenses increased to 12.1% in fiscal 1998 from 7.6% in
fiscal 1997. This increase is partly the result of the acquisition and
consolidation of Tooltex. The Company began consolidating the financial results
of Tooltex as of July 1, 1997. As such, fiscal 1998 reflects consolidated
results, whereas fiscal 1997 does not . In addition, the Company incurred
approximately $62,000 of moving expenses relating to the move to its new
headquarters in Newtown, Connecticut. The Company also incurred approximately
$83,000 in expenses relating to a sales tax audit by the California State Board
of Equalization. The audit pertained to sales made from April 1, 1986 to
December 31, 1995.
Research and Development Expenses. Research and development expenses
increased $126,000 or 30.1% over fiscal 1997. The increase was primarily due to
increased use of outside consulting services for several development projects.
The Company intends to reduce the use of outside consulting services in fiscal
1999 as compared with fiscal 1998.
Interest Income. Interest income increased approximately $45,000 or 37.4%
fiscal 1997. This is mainly the result of the investment of the Industrial
Revenue Bond proceeds awaiting disbursement. See Liquidity and Capital
Resources.
Interest Expense. Total interest expense increased by $139,900 or 175.8%.
This is due to increased debt carried by the Company in connection with the
purchase of real property in Newtown, Connecticut. A more detailed explanation
of the new credit facilities can be found under Liquidity and Capital Resources.
The Company also had higher average borrowings on its line of credit than in
fiscal 1997. The Company expects interest expense to increase in fiscal 1999 as
a result of changes in its credit agreement with the Bank. See Liquidity and
Capital Resources.
Other Income. Other income for the year ended June 30, 1998 increased by
$95,000 or 878.9% over fiscal 1997. This is primarily the result of the
acquisition and consolidation of Tooltex. Tooltex
<PAGE>
recognized approximately $62,000 resulting from the forgiveness of debts by its
vendors. In addition, Sonics recognized a gain of approximately $23,000 on the
sale of U.S. Treasury Bonds in fiscal 1998.
Income Taxes Total income tax expense for the year ended June 30, 1998
increased $20,000 or 104.3% compared to the year ended June 30, 1997. The higher
provision is primarily the result of an increase in non-deductible expenses,
namely, amortization of goodwill arising from the acquisition of Tooltex as well
as the elimination of a deferred tax asset offset by a decrease in income before
taxes.
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. In March
1997, 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.
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.
<PAGE>
Liquidity and Capital Resources
Operations of the Company used approximately $707,000 in fiscal 1998, as a
result of increasing inventory and accounts receivable, while accounts payable
decreased. In fiscal 1998, the Company invested $1,934,000 in its new
headquarters in Newtown, Connecticut, including land, building, furniture and
fixtures, and new machinery. The Company also used proceeds of $2,157,000 from
its industrial revenue bonds for capital expenditures. In addition the Company
invested approximately $177,000 in its new subsidiary, Tooltex, Inc. The Company
was able to raise the funds necessary for these expenditures through the sale of
certain short term investments and the financing activities described below.
On September 19, 1997, the Company entered into a new credit arrangement with a
bank and repaid loans outstanding with its previous lender. The agreement, as
amended on October 13, 1998, provides for four credit facilities, including (i)
a Bridge Loan in the original principal amount of $1,600,000, (ii) a Line of
Credit of up to $1,500,000, (iii) a term loan of $427,000, and (iv) a
tax-exempt industrial development loan in the aggregate amount of $3,810,000.
The loans are secured by substantially all of the assets of the Company,
including a first mortgage lien on the Company's new manufacturing facility in
Newtown, CT. The credit agreement also subjects the Company to various
covenants, including restrictions on future borrowings and encumbrances, and the
maintenance of minimum tangible net worth and a fixed charge coverage ratio, as
defined. At June 30, 1998, the Company was in violation of certain covenants.
The lender subsequently provided irrevocable waiver of default with respect to
the credit facilities, and agreed to modify the financial covenant in order to
enable the Company to remain in compliance with the conditions of the credit
agreement as of June 30, 1998.
The Bridge Loan which bore interest at the Bank's base lending rate plus
one-half percent was repaid in full in December 1997.
The Company's principal outside source of working capital is a $1,500,000 bank
credit facility. The Line of Credit bears interest, as amended, at the Bank's
base lending rate (8.5% at June 30, 1998). Advances under the Line of Credit are
at the Bank's sole discretion. The entire principal balance of the Line of
Credit, which at June 30, 1998 was $1,465,101, 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.
The proceeds of the Term Loan refinanced 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 June 30, 1998 is $343,972,
which bears interest, as amended, at the Bank's base lending rate (8.5% at June
30, 1998). The principal of the Term Loan was to be paid in 36 equal monthly
installments of $11,861,which commenced on November 1, 1997 and the entire
remaining principal balance was to mature and be due and payable on October 1,
2000. In July of 1998, however, the Company renegotiated the terms of the Term
Loan. Beginning August 1, 1998, the remaining balance of $320,250 is to be paid
in 51 monthly installments of $6,279, and the entire remaining principal balance
will mature and be due and payable on October 1, 2002. The terms and conditions
under which Sonics may
<PAGE>
prepay all or any portion of the Term Loan are the same as for the Line of
Credit discussed above.
In December 1997, the Company issued Industrial Revenue Bonds through the
Connecticut Development Authority in the amount of $3,810,000. The bonds were
purchased by the Company's current lender pursuant to the credit agreement. The
proceeds were used in part to pay in full the outstanding interest and principal
due on the Bridge loan discussed above. The remaining proceeds are to be used
exclusively for the purchase and preparation of the Company's new facilities,
and to purchase new machinery and equipment. The Company has used a total of
$2,157,000 of the proceeds for these purposes through June 30, 1998. Unapplied
funds have been invested in short-term securities and are to be used to repay
interest and principal due under the Industrial Revenue Bond. The Bonds, held by
the Bank, mature in November 2017, and bear interest at 75% of the Bank's base
lending rate (6.4 % at June 30, 1998). The Company is to begin to redeem the
principal in 228 equal monthly installments of $16,700 beginning January 1999.
The bondholder, however, may make written demand for redemption of all or a part
of outstanding principal and accrued interest commencing in December 2000, as
amended. In connection with the IRB loan, the Company maintains a compensating
balance of $400,000 with the Bank. These funds are invested in U. S. Treasury
Bonds.
At June 30, 1998, the Company was in technical default of certain loan
covenants. In the October 13, 1998 amendment to the Credit Agreement, the Bank
waived any event of default arising from the breach of certain financial
covenants at or prior to June 30, 1998, and modified those covenants to enable
the Company to achieve compliance in subsequent periods.
Tooltex's principal credit facility is a term note in the original principal
amount of $461,000, and is guaranteed by the Company. The loan is payable in
forty-eight monthly installments of $9,604 plus interest at the prime rate plus
1 1/2%. The loan is secured by a first lien on the assets of Tooltex and is
subject to various covenants. At June 30, 1998, the Company was in technical
default of certain loan covenants with respect to the Tooltex term loan. On
October 13, 1998, The Company and its lender entered into an amendment to the
credit agreement. In that amendment, the lender waived any events of default
arising from the breach of certain financial covenants at or prior to June 30,
1998, and modified those covenants to enable the Company to achieve compliance
in subsequent periods.
The Company has instituted cost cutting measures in the form of lay-offs
effective September 25, 1998. In total, the Company has reduced staffing by 11
people through these lay-offs and attrition. Through these staffing cuts and
other cost saving measures to be put in place by Tooltex in the second quarter
of fiscal 1999, the Company expects to save approximately $643,000 annually. The
Company does not expect to see the full benefit of these cost savings until the
second quarter of fiscal 1999.
Management has initiated a company-wide program to prepare the Company's
computer systems and applications for the year 2000, as well as identify
critical third parties which the Company relies upon to operate its business to
assess their readiness for the year 2000. Management cannot presently estimate
the cost of this program; however such costs are not currently expected to be
material to the Company's operations or financial condition. There can be no
assurance that the systems of other companies which the Company's systems rely
upon will be timely converted, or that such failure to convert by another
company would not have a material adverse effect on the Company's systems and
results of operations.
In June 1997, SFAS 130, "Reporting Comprehensive Income," and SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information," were
issued. SFAS 130 addresses standards for reporting and display of comprehensive
income and its components, and SFAS 131 requires disclosure of reportable
operating segments. In February 1998, SFAS 132, "Employers' Disclosures About
Pensions and Other Post-retirement Plans" was issued. SFAS 132 standardizes
pension disclosures. These statements are effective in fiscal 1999. The Company
will be reviewing these pronouncements to determine their applicability, if any.
Impact of Inflation
The Company does not believe that inflation significantly affected its
results of operations for the 1998 fiscal year.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2 - F-3
Consolidated Financial Statements
Balance Sheets F-4
Statements of Income (Loss) F-5
Statement of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-9 - F-24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Sonics & Materials, Inc.
We have audited the accompanying consolidated balance sheet of Sonics &
Materials, Inc. and its subsidiary as of June 30, 1998, and the related
consolidated statements of loss, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sonics & Materials,
Inc. and its subsidiary as of June 30, 1998, and the results of their operations
and their cash flows for the year, then ended, in conformity with generally
accepted accounting principles.
SCHNEIDER EHRLICH & WENGROVER LLP
Woodbury, New York
September 15, 1998, except for Note P,
as to which the date is October 13, 1998.
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Sonics & Materials, Inc.
We have audited the accompanying balance sheet of Sonics & Materials, Inc. as of
June 30, 1997, and the related statements of income, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
August 28, 1997
F-3
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 271,593 $ 503,305
Short-term investments, including restricted funds of
$400,000 at June 30, 1998 1,665,470 750,000
Accounts receivable, net of allowance for doubtful accounts of
$45,000 and $112,000 in 1997 and 1998 1,854,118 2,370,960
Inventories 3,718,250 4,457,841
Prepaid income taxes and income tax refunds receivable 150,061 96,171
Deferred income taxes 80,000
Other current assets 137,562 33,116
------------ ------------
Total current assets 7,877,054 8,211,393
PROPERTY AND EQUIPMENT - NET 364,354 4,409,920
GOODWILL - net of accumulated amortization of $55,503 1,054,547
RESTRICTED CASH FROM INDUSTRIAL REVENUE BOND 309,371
OTHER ASSETS - NET 917,709 692,584
------------ ------------
Total assets $ 9,159,117 $ 14,677,815
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - bank $ 500,000 $ 1,465,101
Current maturities of long-term debt 116,600 354,978
Accounts payable 717,509 1,004,351
Customer advances 87,144 327,355
Commissions payable 235,203 123,676
Other accrued expenses and sundry liabilities 278,310 600,270
------------ ------------
Total current liabilities 1,934,766 3,875,731
LONG-TERM DEBT 406,911 4,345,700
------------ ------------
Total liabilities 2,341,677 8,221,431
COMMITMENTS - See Notes
STOCKHOLDERS' EQUITY
Common stock - par value $.03 per share; authorized 10,000,000
shares; issued and outstanding 3,520,100 shares at June 30,
1997 and 1998 105,603 105,603
Additional paid-in capital 6,539,597 6,575,010
Retained earnings (accumulated deficit) 172,240 (224,229)
------------ ------------
Total stockholders' equity 6,817,440 6,456,384
------------ ------------
Total liabilities and stockholders' equity $ 9,159,117 $ 14,677,815
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-4
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended June 30,
1997 1998
------------ ------------
Net Sales $ 10,827,525 $ 12,080,552
Cost of sales 6,410,584 7,064,259
------------ ------------
Gross Profit 4,416,941 5,016,293
Operating expenses:
Selling 3,157,193 3,396,209
General and administrative 823,767 1,464,088
Research and development 418,465 544,452
------------ ------------
Total operating expenses 4,399,425 5,404,749
------------ ------------
Other income (expenses):
Interest expense (79,565) (219,416)
Interest and other income 110,471 250,973
------------ ------------
Total other income (expenses) 30,906 31,557
------------ ------------
Income (loss) before income taxes 48,422 (356,899)
Provision for income taxes 19,368 39,570
------------ ------------
Net income (loss) $ 29,054 $ (396,469)
============ ============
Basic net income (loss) per share $ 0.01 $ (0.11)
============ ============
Diluted net income (loss) per share $ 0.01 $ (0.11)
============ ============
Shares used in basic per share computation 3,505,383 3,520,100
Incremental shares from issuance of common
stock options and warrants 627,904 --
------------ ------------
Shares used in diluted per share computation 4,133,287 3,520,100
============ ============
The accompanying notes are an integral part of these consolidated
financial statements
F-5
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended June 30, 1997 and 1998
Common Stock
---------------------- Additional Retained Earnings
Par Paid-in (Accumulated Stockholders'
Shares Value Capital Deficit) Equity
--------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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
Issuance of common stock options 23,600 23,600
Conversion of note payable to capital 11,813 11,813
Net loss (396,469) (396,469)
--------- ---------- ------------- ------------- -------------
Balance - June 30, 1998 3,520,100 $ 105,603 $ 6,575,010 $ (224,229) $ 6,456,384
========= ========== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-6
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 29,054 $ (396,469)
Adjustments to reconcile net income (loss) to net cash used in
operating activities
Depreciation of property and equipment 141,308 323,060
Amortization of goodwill 55,503
Deferred income taxes 80,000
Bad debt expense 15,000
Loss on sale of equipment 6,085
Increase (decrease) in cash flows from changes in operating assets and
liabilities, net of effect of acquisition of Tooltex, Inc.:
Accounts receivable 99,823 (325,139)
Inventory (469,468) (401,387)
Prepaid income taxes (119,596) 75,669
Other assets (590,820) 289,666
Accounts payable and accrued liabilities 135,788 (586,123)
Customer advances 156,837
---------- ----------
Net cash used in operating activities (773,911) (707,298)
---------- ----------
Cashflows from investing activities, net of effect of acquisition of Tooltex,
Inc.:
Capital expenditures on property and equipment (125,632) (1,934,481)
Proceeds from sale of equipment 2,997
Short-term investments 1,362,562 915,470
Acquisition of Tooltex, Inc. (net of cash acquired) (176,595)
---------- ----------
Net cash provided by (used in) investing activities 1,236,930 (1,192,609)
---------- ----------
Cashflows from financing activities, net of effect of acquisition of Tooltex,
Inc.:
Payment of note payable - bank (500,000)
Proceeds from note payable - bank 1,465,101
Payment of capital lease obligations (18,504) (22,401)
Payment of long-term debt (628,784)
Proceeds from long-term debt 130,878 1,817,703
Payment of demand note payable (500,000)
Proceeds from exercise of options and warrants 123,071
---------- ----------
Net cash provided by (used in) financing activities (264,555) 2,131,619
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 198,464 231,712
Cash and cash equivalents at beginning of year 73,129 271,593
---------- ----------
Cash and cash equivalents at end of year $ 271,593 $ 503,305
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during year
Interest $ 122,000 $ 197,090
========== ===========
Income taxes (refunded) $ 149,000 $ (136,281)
========== ===========
Supplemental schedule of noncash investing and financing activities:
Proceeds from Industrial Revenue Bond $ 3,810,000
Repayment of Bridge Loan (1,343,538)
Purchase and preparation of new facility (2,157,091)
===========
Restricted cash from Industrial Revenue Bond $ 309,371
===========
Conversion of note payable to capital $ 11,813
===========
Value of common stock options issued in Tooltex, Inc. acquisition $ 23,600
===========
Value of capital assets acquired through capital lease obligations $ 78,324 $ 95,000
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-8
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE A - BUSINESS
Sonics & Materials, Inc. (the "Company") is a manufacturer and
distributor 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 headquarters and
principal manufacturing operations are located in Newtown,
Connecticut.
In July 1997, the Company acquired all of the issued and outstanding
stock of Tooltex, Inc. ("Tooltex"), a manufacturer of automated
systems used in the plastics industry. Tooltex is located in Grove
City, Ohio (See Note C).
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The Tooltex acquisition has been accounted for as a purchase, and
accordingly, the operations of Tooltex are included in the
accompanying financial statements as of the beginning of fiscal
1998. (The sales and operations of Tooltex for the period from July
1, 1997 to July 25, 1997, the closing date, were not significant).
All material intercompany balances and transactions have been
eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market.
Property and Equipment
Property and equipment 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, ranging generally from five to seven years. The building is
being depreciated on a straight-line basis over 40 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.
Use of Estimates
Preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management 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 and the reported
amounts of revenues and expenses during the reporting period. The
more significant estimates made by management include the allowance
for doubtful accounts receivable, warranty reserves, and the
valuation allowance for deferred tax assets. Actual amounts could
differ from the estimates made. Management periodically evaluates
estimates used in the preparation of the financial statements for
continued reasonableness. Appropriate adjustments, if any, to the
estimates used are made prospectively based upon such periodic
evaluation.
F-9
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
Amortization of Goodwill
Goodwill related to the acquisition of Tooltex is amortized using
the straight-line method over a 20 year period. Amortization expense
was $55,503 for the year ended June 30, 1998.
Long-lived assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", the
Company records impairment losses on long-lived assets used in
operations, when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of
those assets.
Income Taxes
The Company uses the liability method to determine its income tax
expense as required under Statement of Financial Accounting
Standards No. 109 (SFAS 109). Under SFAS 109, deferred tax assets
and liabilities are computed based on differences between financial
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance if, based
on the weight of available evidence, it is more likely than not that
all or some portion of the deferred tax assets will not be realized.
The ultimate realization of the deferred tax asset depends on the
Company's ability to generate sufficient taxable income in the
future.
Stock options
In fiscal 1997, the Company adopted the provisions of SFAS No. 123,
"Accounting for Stock-based Compensation". SFAS No. 123 requires
that the Company either recognize in its financial statements costs
related to its employee stock-based compensation plans, such as
stock option plans, using the fair value method, or make pro forma
disclosures of such costs in a footnote to the financial statements.
The Company has elected to continue to use the intrinsic value-based
method of APB Opinion No. 25, as allowed under SFAS No. 123, to
account for its employee stock-based compensation plans, and to
include the required pro forma disclosures based on fair value
accounting. The adoption of SFAS No. 123 has not had a material
effect on the Company's financial position or results of operations.
Income (loss) per share
Effective June 30, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." Basic net income per share is calculated by dividing net
income by the weighted-average number of common shares outstanding
during the period.
F-10
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
Diluted net income per share is calculated by dividing net income by
the weighted-average number of common shares outstanding plus the
weighted-average number of net shares that would be issued upon
exercise of stock options and warrants using the treasury stock
method. Common stock options and warrants have not been included in
the fiscal 1998 loss per share computation because their inclusion
would be anti-dilutive. Earnings per share data for fiscal 1997 have
been restated to conform with the provisions of SFAS No. 128. The
impact of the change was immaterial.
Recently Issued Accounting Pronouncements
In June 1997, SFAS 130, "Reporting Comprehensive Income," and SFAS
131, "Disclosures About Segments of an Enterprise and Related
Information," were issued. SFAS 130 addresses standards for
reporting and display of comprehensive income and its components,
and SFAS 131 requires disclosure of reportable operating segments.
In February 1998, SFAS 132, "Employers' Disclosures About Pensions
and Other Post-retirement Plans" was issued. SFAS 132 standardizes
pension disclosures. These statements are effective in fiscal 1999.
The Company will be reviewing these pronouncements to determine
their applicability, if any.
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.
Revenue Recognition
Revenue is recognized upon the shipment of finished merchandise to
customers. Allowance for sales returns are recorded as a component
of net sales in the periods in which the related sales are
recognized.
Research and Development Costs
Expenditures relating to the development of new products and
processes, including significant improvements and refinements to
existing products, are expensed as incurred.
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.
Advertising Costs
All costs related to advertising are expensed in the period
incurred. Advertising costs were approximately $217,000 and $267,000
for the years ended June 30, 1997 and 1998, respectively.
F-11
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
Reclassification
Certain items in the 1997 financial statements have been
reclassified to conform with the current year's presentation.
NOTE C - ACQUISITION OF TOOLTEX
On July 25, 1997, the Company acquired, through a newly formed
wholly-owned subsidiary, 100% of the stock of Tooltex. The
stockholders received, in exchange for their Tooltex shares, (i) an
aggregate of 70,000 shares of the Company's common stock, (ii)
$70,000 in cash, and (iii) options to purchase 10,000 shares of the
Company's common stock.
Subsequent to closing, certain preacquisition contingencies relating
to open Tooltex work orders were resolved at a net cost of
approximately $259,000. In accordance with the terms of the merger
agreement, the Tooltex selling stockholders agreed to indemnify the
Company for these and any subsequent claims by surrendering the
70,000 shares of common stock issued as consideration. The shares
were valued at $205,800 at the time of issuance and had remained in
escrow since the closing. The Company does not believe there are any
significant unresolved contingencies relating to the Tooltex
acquisition as of June 30, 1998.
In connection with the acquisition, the Company also entered into a
five-year triple net lease with BPT, Limited ("BPT), an entity owned
by the Tooltex stockholders, for the use of Tooltex's present
facility at an annual rent of $77,900. The Company also received a
promissory note from BPT for $25,000, as modified, representing
amounts owed by BPT to Tooltex. The note is being repaid in 48 equal
installments of $535 per month, including interest at 2% per annum.
The balance of $19,529 at June 30, 1998 is included in Other Assets.
For the year ended June 30, 1997, the Company had sales to Tooltex
of approximately $83,000 and at June 30, 1997 had a receivable
balance from Tooltex of approximately $254,000, which was forgiven
at closing. The following unaudited pro forma consolidated
information reflects the results of operations of the Company as if
the acquisition of Tooltex had occurred as of the beginning of
fiscal 1997:
Net Sales $ 12,688,523
Loss before income taxes $ (346,707)
Net loss $ (242,644)
Basic and diluted net loss per share $ (.07)
F-12
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE D - SHORT-TERM INVESTMENT
At June 30, 1998, the Company owned a $750,000 U.S. Treasury note
bearing interest at 5.5% per annum and maturing in February 1999.
Under terms of its bank credit agreement, as amended, the Company is
required to maintain a total of $400,000 in marketable securities
with its lender.
At June 30, 1997, the short-term investment was comprised of a U.S.
Government agency issue. The investments are classified as
available-for-sale and reported at fair value on the Company's
balance sheets. Quoted market prices have been used to determine
fair value of the investments.
NOTE E - INVENTORIES
Inventories consist of the following:
June 30,
1997 1998
------------ ------------
Raw materials $ 956,073 $ 1,104,223
Work-in-process 1,909,256 2,590,017
Finished goods 852,921 763,601
------------ ------------
$ 3,718,250 $ 4,457,841
============ ============
F-13
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE F - PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
June 30,
1997 1998
------------ ------------
Land $ - $ 462,486
Building - 3,212,507
Trade show booth 50,494 50,494
Machinery and equipment 675,409 857,241
Tooling 105,453 135,158
Office furniture and equipment 152,830 275,471
Leasehold improvements 186,851 34,851
Automobiles 32,408 60,441
Data processing equipment 455,794 651,661
------------ ------------
1,659,239 5,740,310
Less: Accumulated depreciation 1,294,885 1,330,390
------------ ------------
$ 364,354 $ 4,409,920
============ ============
In September 1997, the Company closed on the purchase of commercial
property located in Newton, Connecticut, to be used for a new
manufacturing facility and corporate headquarters. The Company paid
a cash price of $1,265,000, which was financed principally from
loans provided under a new bank credit facility. The credit facility
is also financing improvements to the property (see Note I).
F-14
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE G - OTHER ASSETS
At June 30, 1997 and 1998, the major components of other assets
were:
June 30,
1997 1998
---------- ----------
Demonstration equipment - net of accumulated
depreciation of $242,525 and $360,757
for 1997 and 1998, respectively $ 338,024 $ 529,125
Other accounts receivable 254,185 19,529
Security deposits 142,298 13,348
Other 183,202 130,582
---------- ----------
$ 917,709 $ 692,584
========== ==========
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.
NOTE H - OTHER ACCRUED EXPENSES AND SUNDRY LIABILITIES
At June 30, 1997 and 1998, the major components of other accrued
expenses and sundry liabilities were:
June 30,
1997 1998
---------- ----------
Accrued compensation $ 143,975 $ 242,445
Professional fees 63,637 28,210
Other 70,698 329,615
----------- ----------
$ 278,310 $ 600,270
=========== ==========
NOTE I - BANK AND OTHER DEBT
On September 19, 1997, the Company entered into a new credit
arrangement with a bank and repaid loans outstanding with its
previous lender. The agreement, as amended on December 12, 1997,
provides for four credit facilities, including (i) a Line of Credit
of up to $1,500,000, (ii) a Bridge Loan of up to $1,600,000, (iii) a
term loan of $427,000, and (iv) a tax-exempt industrial development
loan in the aggregate amount of $3,810,000.
The loans are secured by substantially all of the assets of the
Company, including a first mortgage lien on the Company's new
manufacturing facility in Newtown, CT. The credit agreement also
subjects the Company to various covenants, including restrictions on
future borrowings and encumbrances, and the maintenance of minimum
tangible net worth and a fixed charge coverage
F-15
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
ratio, as defined. At June 30, 1998, the Company was in violation of
certain covenants. The lender subsequently waived any events of
default under the credit agreement and the bond indenture arising
from the violations (see Note P).
Notes payable - bank
Outstanding indebtedness against the bank line of credit is
evidenced by a note bearing interest, at the Company's option, at
either the bank's base lending rate (8.5% at June 30, 1998) or LIBOR
(5.625% at June 30, 1998) plus 2.25%. Advances under the line of
credit are at the bank's sole discretion, are due on demand, and are
limited to the lesser of $1,500,000 or a percentage of the Company's
available borrowing base, as defined. This facility refinanced a
$1,000,000 working capital loan with another lender. Outstanding
borrowings under the former line of credit were evidenced by notes
payable bearing interest at prime rate plus 1/2%.
Long-term debt
June 30,
1997 1998
------------ -----------
(a) Industrial Revenue Bond $ - $ 3,810,000
(b) Bank term loan 343,972
(c) Bank term loan 355,354
(d) Capital lease obligations 73,511 146,112
(e) Bank term loan 450,000
(f) Other loans 45,240
------------ -----------
523,511 4,700,678
Less: Current portion (116,600) (354,978)
------------ -----------
Long-term debt $ 406,911 $ 4,345,700
============ ===========
(a) Industrial Revenue Bonds issued in December 1997 through the
Connecticut Development Authority in the principal amount of
$3,810,000. The bonds were purchased by the Company's current
lender pursuant to the credit agreement. Interest on principal
balances is payable at the rate of 75% of the bank's base
lending rate. Principal will be repaid in 228 equal
installments of $16,711 commencing in January 1999. The
bondholder, however, may make written demand for redemption of
all or a part of outstanding principal and accrued interest
commencing on December 31, 2002.
The proceeds were used in part to refinance $1,343,538 of the
outstanding balance of the Bridge Loan in the original amount
of $1,600,000. The Bridge Loan had been provided for the
purpose of financing the acquisition and construction of the
Company's new manufacturing facility, and carried interest at
the Bank's base lending rate plus 1/2%. The
F-16
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
remaining proceeds from the bonds are to be used exclusively
for the construction of the Company's new plant, and to
purchase new machinery and equipment. The Company has used a
total of $2,157,091 for these purposes through June 30, 1998.
Unapplied funds are invested in short-term securities and
recorded as restricted cash in the accompanying consolidated
balance sheet at June 30, 1998.
(b) Term loan in the original amount of $427,000. The loan, as
amended on July 21, 1998, is payable in nine monthly
installments of $11,861 through July 1, 1998, fifty-one
monthly installments of $6,279, and a final payment of the
remaining principal balance on October 1, 2002. The loan bears
interest, at the Company's option, at either the bank's base
lending rate or LIBOR plus 2.25%. Proceeds were used to
refinance outstanding indebtedness to the Company's previous
lender.
(c) Indebtedness of Tooltex in the original amount of $461,000,
guaranteed by the Company. The loan is payable in forty-eight
monthly installments of $9,604 plus interest at the prime rate
plus 3/4%. The loan is secured by a first lien on the assets
of Tooltex and is subject to various covenants. At June 30,
1998, the Company was in violation of the loan covenants and
requested a waiver from the lender. The lender subsequently
issued a waiver of default with respect to the loan
(see Note P).
(d) The Company has entered into four equipment leases which
qualify for capitalization under applicable accounting
guidelines. The leases expire at various dates through 2003.
(e) Term loan provided by the Company's previous lender, payable
in sixty equal installments plus interest at the prime rate
plus 1/2%. The loan was repaid in September 1997 out of the
proceeds of the Company's new term loan.
(f) Equipment loans payable in thirty-six equal installments,
secured by financed assets.
The aggregate maturities of long-term debt for the next five fiscal
years are as follows:
Year ending
June 30,
-----------
1999 $ 354,978
2000 451,869
2001 440,041
2002 315,684
2003 247,584
NOTE J - STOCKHOLDERS' EQUITY
Warrants
In connection with its initial public offering in 1996, the Company
issued common stock purchase warrants to purchase 1,725,000 shares
of its common stock at an exercise price of $6.00. A total of 20,000
warrants were exercised during the year ended June 30, 1997.
F-17
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
Also in fiscal 1997, the Company's Underwriter exercised an option
to purchase 100,000 common stock purchase warrants for $.25 per
warrant. The warrants have the same terms as those issued in the
public offering.
At June 30, 1998, there were 1,805,000 warrants outstanding, all of
which expire in February 2001.
Capital contribution
During the year ended June 30, 1998, the Company's President and
principal stockholder contributed $11,813 to permanent capital,
representing the balance of a note payable due to him.
Paid-in Capital
The Company has valued certain stock options issued during fiscal
1998 at $23,600, which amount has been credited to additional
paid-in capital.
Incentive Stock Option Plan
The Company has reserved a total of 250,000 shares for issuance
under its Incentive Stock Option Plan (the "Plan"). Options may be
granted to officers, directors, and other key Company employees.
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 employment with the Company, the optionee has the right
to exercise his accrued options within thirty (30) days of such
termination. However, the Company may redeem any accrued options
held by each optionee by paying the difference between the option
exercise price and the then fair market value.
All employee options issued to date under the Plan have a five-year
term and vest evenly over the first three years commencing on the
date of grant. Director options vest over a one-year period. At June
30, 1998, there were 162,500 shares available for future grant under
the Plan.
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, and a nonqualified stock option to another officer for
274,390 shares of common stock at an option price of $1.03 per
share. These options expire on January 1, 2004.
F-18
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
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 option
awards in fiscal 1997 and 1998 consistent with the provisions of
SFAS No. 123, the Company's net income would have decreased by
approximately $29,000 and earnings per share would have been reduced
by $.01 per share in 1997, and the net loss would have increased by
approximately $30,000 and earnings per share would have been reduced
by $.01 per share in 1998. 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 all options
granted was $1.41 per option in 1997 and $.79 in 1998. 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:
1997 1998
------ -------
Expected stock price volatility 17.0% 46.5%
Expected life of options 5 years 4 years
Risk-free interest rate 5.55% 5.82%
Expected dividend yield 0% 0%
For the two years ended June 30, 1998, option activity was as
follows:
<TABLE>
<CAPTION>
Incentive Options Nonqualified Options
----------------------------- -----------------------------
Weighted-average
Number of Weighted-average Number of Exercise
Shares Exercise Price Shares Price
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
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 26,000 1.88 10,000 1.63
Exercised
Canceled (10,000) 5.00
--------- ---------------- --------- ----------------
Outstanding at June 30, 1998 87,500 $4.04 295,366 $1.02
========= ================ ========= ================
</TABLE>
F-19
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
The following table summaries information about stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- -------------------------------
Weighted-
average
Range of Remaining
Exercise Number Weighted-average Contractual Number Weighted-average
Prices Outstanding Exercise Price Life Exercisable Exercise Price
----------- ----------- ---------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.031 10,976 $0.31 5.5 years 10,976 $0.31
1.03 - 1.63 300,390 1.06 5.5 years 274,390 1.03
2.94 - 3.50 12,000 3.50 4.0 years 666 3.03
3.50 - 5.00 59,500 5.00 2.7 years 39,667 5.00
----------- -----------
382,866 325,699
=========== ===========
</TABLE>
NOTE K - COMMITMENTS
Leases
The Company leases certain facilities and vehicles under lease
agreements that are classified as operating leases and expire
in various years through 2003.
The following is a schedule of future minimum lease payments
for operating leases as of June 30, 1998:
Year ending
June 30,
-----------
1999 $ 150,491
2000 116,701
2001 113,253
2002 114,091
2003 15,616
-----------
$ 510,152
===========
Rental expense for operating leases totaled approximately $279,000
and $378,691 for the years ended June 30, 1997 and 1998,
respectively.
Employment contracts
In connection with the Tooltex acquisition, the Company entered into
five-year employment agreements with the two Tooltex stockholders.
The agreements each provide for initial annual
F-20
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
salaries of $75,000, with annual increases equal to the rate of
inflation, up to 5%, and various fringe benefits. The agreements
also contain bonus provisions based on annual sales increases.
The Company has a three-year employment agreement with its
President, which was scheduled to expire at the end of fiscal 1998.
The Company's board of directors approved a three-year contract
extension prior to expiration. Pending approval of new terms, the
officer will continue to serve as President under the same terms and
conditions in effect on June 30, 1998.
NOTE L - INCOME TAXES
The components of the provision for taxes on income are as follows:
Year ended June 30,
-----------------------
1997 1998
------- --------
U.S. Federal
Current $16,463 $(40,430)
Deferred - 68,000
------- --------
16,463 27,570
------- --------
State
Current 2,905 -
Deferred - 12,000
------- --------
2,905 12,000
------- --------
Total income tax provision $19,368 $ 39,570
======= ========
The current portion of the federal income tax benefit reflects
refundable taxes from the carryback of net operating losses.
F-21
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
The tax effect of temporary differences which give rise to
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 22,000 $ 41,640
Allowance for doubtful accounts 17,000 44,800
Inventories 41,000 17,681
Tax benefit of operating loss carryforwards 74,840
---------- ----------
Tax deferred assets 80,000 178,961
---------- ----------
Deferred tax liabilities:
Deferred charges 23,665
---------- ----------
Sub Total 80,000 155,296
Valuation Allowance (155,296)
---------- ----------
Net deferred tax asset $ 80,000 $ -
========== ==========
</TABLE>
Based on its review of available evidence, management has
established a valuation allowance to offset the benefits of the
Company's net deferred tax assets because their realization is
uncertain.
The Company and Tooltex will file federal returns on a consolidated
basis from the date of the Tooltex acquisition, and separate state
returns. At June 30, 1998, the Company had net operating losses of
approximately $181,000, which are available to offset future federal
taxable income through 2018.
The following is a reconciliation of the statutory Federal income
tax rate to the effective rate reported in the consolidated
financial statements:
Year ended June 30,
1997 1998
---------- ----------
Provision (benefit) for Federal income
taxes at the statutory rate $ 16,000 $(121,346)
State and local taxes, net of federal
income taxes (benefit) 2,000 (16,118)
Nondeductible expenses 29,090
Valuation allowance 155,296
Other 1,368 (7,352)
---------- ----------
Actual provision for income taxes $ 19,368 $ 39,570
========== =========
F-22
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE M - 401(k) AND PROFIT SHARING PLANS
The Company has a 401(k) plan for eligible employees. Under
provisions of the plan, eligible employees may elect to contribute
up to 15% of their annual compensation. In addition, the plan
provides for the Company to make additional contributions at its
discretion of up to 4% of each participant's annual compensation.
Expenses under the 401(k) plan were approximately $30,000 and
$34,000 for the years ended June 30, 1997 and 1998, 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 $21,000 and $3,357
for the years ended June 30, 1997 and 1998, respectively.
NOTE N - CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash, cash equivalents, and trade accounts receivable. The Company
deposits its cash balances in commercial bank accounts and money
market funds. Commercial bank balances may from time to time exceed
federal insurance limits; money market funds are uninsured.
The Company performs ongoing credit evaluations of its customers in
order to minimize credit losses. Credit risk on receivables is
minimized as a result of the diverse nature of the Company's
worldwide customer base. The Company does not generally require
collateral from its customers.
Net sales by geographic area for the periods ended are as follows:
Year ended June 30,
1997 1998
------------- -------------
United States $ 6,826,000 $ 8,737,000
Europe 1,408,000 1,270,000
Asia/Pacific Rim 1,869,000 1,533,000
Canada and Mexico 509,000 420,000
Other 216,000 121,000
------------- -------------
$ 10,828,000 $ 12,081,000
============= =============
F-23
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY
(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE O - RELATED PARTY TRANSACTIONS
The Company is leasing manufacturing facilities in Ohio from an
entity owned by the selling stockholders of Tooltex under a
five-year lease expiring in 2002. During the year ended June 30,
1998, the Company incurred $86,172 for rental of these facilities.
In fiscal 1998, the Company's President and principal stockholder
contributed the balance of a note payable to him in the amount of
$11,813 to permanent capital.
The Company paid $73,959 and $39,545 to a member of the Board of
Directors for consulting services during the years ended June 30,
1997 and 1998, respectively. The individual left the Board in
December 1997, and is continuing to serve as a consultant to the
Company.
NOTE P - SUBSEQUENT EVENT
On October 13, 1998, the Company and its lender entered into the
third amendment to the credit agreement. The amendment includes an
irrevocable waiver of any events of default arising from the breach
of certain financial covenants during any period through June 30,
1998, and modifies those covenants to enable the Company to achieve
compliance in subsequent periods. The amendment also sets the
interest rate on all term loan and line of credit indebtedness at
the bank's base lending rate, and accelerates the lender's put
option on the Industrial Revenue Bonds to December 31, 2000. The
lender, in its capacity as trustee under the Industrial Revenue Bond
indenture, also provided an irrevocable waiver of default with
respect to the bond.
On October 13, 1998, Tooltex and its lender entered into an
amendment to the credit agreement. The amendment includes an
irrevocable waiver of any events of default arising from the breach
of certain loan covenants during any period through June 30, 1998,
and modifies those covenants to enable the Company to achieve
compliance in subsequent periods. The amendment also sets the
interest rate on the term loan to the prime lending rate plus
1 1/2%, effected November 1 1998.
F-24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: October 12, 1998
SONICS & MATERIALS, INC.
By: /s/ ROBERT S. SOLOFF
----------------------------------
Robert S. Soloff
Chairman and President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ ROBERT S. SOLOFF Chairman, President, Treasurer, October 12, 1998
(Robert S. Soloff) Chief Executive and Chief
Financial Officer
/s/ LAUREN H. SOLOFF Secretary and Director October 12, 1998
(Lauren H. Soloff)
/s/ Ronald Kalb Director October 12, 1998
(Ronald Kalb)
/s/ JACK T. TYRANSKY Director October 12, 1998
(Jack T. Tyransky)
/s/ CHRISTOPHER S. ANDRADE Accounting Manager October 12, 1998
(Christopher S. Andrade) Principal Accounting Officer
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Location of Exhibit in
No. Description Sequential Numbering System
--- ----------- ---------------------------
<S> <C> <C>
3(i) Certificate of Incorporation of the Incorporated by reference from
Registrant, as amended. Exhibit 3.1 of Amendment No. 3
to Registration Statement No.
33-96414
3(ii) Amended By-laws of the Registrant. Incorporated by reference from
Exhibit 3.2 of Registration
Statement No. 33-96414
10(I) Form of Employment Agreement between the Incorporated by reference from
Registrant and Robert S. Soloff. Exhibit 10.1 of Registration
Statement No. 33-96414
10(ii) 1995 Incentive Stock Option Plan and form Incorporated by reference from
of Stock Option Agreement. Exhibit 10.3 of Registration
Statement No. 33-96414
10(iii) Lease between Registrant and Aston Incorporated by reference from
Investment Associates (Aston, PA). Exhibit 10.5 of Registration
Statement No. 33-96414
10(iv) Amended lease between Registrant and Incorporated by reference from
Robert Lenert (Naperville, IL). Exhibit 10.6 of Amendment No. 4
to Registration Statement No.
33-96414
10(v) Lease between Registrant and Janine Berger Incorporated by reference from
(Gland, Switzerland). 10.7 of Registration Statement
No. 33-96414
10(vi) Form of Sales Representation Agreement. Incorporated by reference from
Exhibit 10.8 of Registration
Statement No. 33-96414
10(vii) Form of Sales Distribution Agreement. Incorporated by reference from
Exhibit 10.9 of Registration
Statement No. 33-96414
10(viii) Agreement and Plan of Merger, dated as of Incorporated by reference from
July 25, 1997, among the Registrant, SM Exhibit 2(a) of Registrant's
Sub, Inc., Tooltex, Inc., and the persons Form 8-K dated July 25, 1997
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 and annex to
the Commission upon request.
10(ix) Agreement of Merger, dated as of July 25, Incorporated by reference from
1997, among the Registrant, SM Sub, Inc. Exhibit 2(b) of the Registrant's
and Tooltex, Inc. Form 8-K dated July 25, 1997).
10(x) Credit Agreement, dated September 19, Incorporated by reference from
1997, between Brown Brothers Harriman & Exhibit 10 (xii) of the
Co. and Registrant. Registrant's Form 10-KSB for the
year ended June 30, 1997
10(xi) Term Loan Note of Registrant, dated Incorporated by reference from
September 19, 1997, payable to the order of Exhibit 10 (xiii) of the
Brown Brothers Harriman & Co. in the Registrant's Form 10-KSB for the
original principal amount of $427,000. year ended June 30, 1997
10(xii) Line of Credit Note of Registrant, dated Incorporated by reference from
September 19, 1997, payable to the order of Exhibit 10 (xiii) of the
Brown Brothers Harriman & Co. in the Registrant's Form 10-KSB for the
original principal amount of $1,500,000. year ended June 30, 1997
10(xiii) Bridge Loan Note of Registrant, dated Incorporated by reference from
September 19, 1997, payable to the order of Exhibit 10 (xv) of the
Brown Brothers Harriman & Co. in the Registrant's Form 10-KSB for the
original principal amount of $1,600,000. year ended June 30, 1997
10(xiv) Open-End Mortgage Deed from Registrant to Incorporated by reference from
Brown Brothers Harriman & Co. dated Exhibit 10 (xiv) of the
September 19, 1997. Registrant's Form 10-KSB for the
year ended June 30, 1997
10(xv) General Security Agreement from Registrant Incorporated by reference from
to Brown Brothers Harriman & Co. dated Exhibit 10 (xvii) of the
September 19, 1997. Registrant's Form 10-KSB for the
year ended June 30, 1997
10(xvi) Loan Agreement between Connecticut Incorporated by reference from
Development Authority and Sonics & Exhibit 10(xvi) of the Registrant's
Materials dated December 1, 1997 Form 10-KSB for the year
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
ended June 30, 1998
10(xvii) Indenture of Trust between Connecticut Incorporated by reference from
Development Authority and Sonics & Exhibit 10(xvii) of the Registrant's
Materials, Inc. dated December 1, 1997 Form 10-KSB for the year ended
June 30, 1998
10(xviii) Tax Regulatory Agreement between Incorporated by reference from
Connecticut Development Authority and Exhibit 10(xviii) of the Registrant's Form
Sonics & Materials, Inc., and Brown 10-KSB for the year ended June 30,
Brothers Harriman Trust Company as Trustee 1998
dated December 12, 1997
21 Subsidiaries of the Registrant (filed Incorporated by reference from
herewith). Exhibit 21 of the Registrant's Form
10-KSB for the year ended June 30, 1998
27 Financial Data Schedule. Filed herewith
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements of Sonics & Materials, Inc. as of and for the 12 months ended June
30, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 503,305
<SECURITIES> 750,000
<RECEIVABLES> 2,370,960
<ALLOWANCES> 112,000
<INVENTORY> 4,457,841
<CURRENT-ASSETS> 8,211,393
<PP&E> 4,409,920
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,677,815
<CURRENT-LIABILITIES> 3,875,731
<BONDS> 0
0
0
<COMMON> 105,603
<OTHER-SE> 6,350,781
<TOTAL-LIABILITY-AND-EQUITY> 14,677,815
<SALES> 12,080,552
<TOTAL-REVENUES> 12,080,552
<CGS> 7,064,259
<TOTAL-COSTS> 5,404,749
<OTHER-EXPENSES> (250,973)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 219,416
<INCOME-PRETAX> (356,899)
<INCOME-TAX> 39,570
<INCOME-CONTINUING> (396,469)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (396,469)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
