U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-KSB/A
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(Mark One)
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934. For the fiscal year ended June 30, 1999.
|_| 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: $ 12,438,688
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 20, 1999 as reported on the Over the Counter Bulletin Board , was
approximately $502,050 This determination of affiliate status is not necessarily
a conclusive determination for other purposes.
As of September 20, 1999, 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 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III.
<PAGE>
Company's Statement Regarding Forward Looking Statements
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 ultrasonic
surgical device. It is also uncertain 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.
Item 1. Description of Business
The section entitled "Description of Business - International Operations"
has been amended to read as follows:
International Operations
The Company's international activities are an important portion of its
business. Approximately 25% and 21% of its sales for fiscal years 1998 and 1999,
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.
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. All references to
full years are to the applicable fiscal year of the Company. This discussion
should be read in conjunction with the financial statements and notes thereto
included elsewhere herein.
Results of Operations
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Net sales. Net sales for fiscal 1999 increased $358,000 or 3.0% over
fiscal 1998. This increase is primarily the result of a full year of operations
in its new headquarters in Newtown, Connecticut. Management estimates that the
Company lost sales of approximately $300,000 due to downtime associated with its
move to Newtown in the fourth quarter of fiscal 1998.
Cost of Sales. Cost of sales increased $70,000 from fiscal 1998 to fiscal
1999, but declined as a percentage of sales from 58.5% to 57.4%.
Selling Expenses. Selling expenses for fiscal 1999 decreased $411,000 or
12.9% over fiscal 1998. As a percentage of net sales these expenses decreased to
24.0% in fiscal 1999 from 28.1% in fiscal 1998. This is in large part the result
of the cost cutting measures implemented by the Company in the first quarter of
fiscal 1999.
General and Administrative Expenses. General and administrative expenses
for fiscal 1999 decreased $160,000 or 10.9% over fiscal 1998. As a percentage of
net sales, these expenses decreased to 10.5% in fiscal 1999 from 12.1% in fiscal
1998. This decrease is the result of higher expenses associated with the
relocation of the Company's headquarters in fiscal 1998, including moving costs
of $62,000. Also in fiscal 1998, the Company paid $83,000 to settle a sales tax
audit by California State Board of Equalization. No such payments were made in
fiscal year 1999.
Research and Development Expenses. Research and development expenses
decreased $177,000 or 32.5% over fiscal 1998. The decrease was primarily due to
a reduction in outside consulting.
Interest Income. Interest income decreased $115,000 or 69.0% in fiscal
1999. In the second quarter of 1997, the Company received approximately $2.0
million of proceeds from the Industrial Revenue Bond issue and invested those
proceeds in short-term investments. The proceeds were eventually used for the
purchase and renovation of the Company's current facilities. Investment income
is expected to decline further in fiscal 2000 due to the utilization of most of
the bond proceeds as of June 30, 1999.
Interest Expense. Total interest expense in fiscal 1999 increased by
$236,000 or 107.5% over fiscal 1998. This is due to increased debt carried by
the Company in connection with the purchase of real property in Newtown,
Connecticut, construction of the new facility, and other capital expenditures.
Income Taxes. In fiscal 1998, the Company established a valuation
allowance of $155,000 to offset the tax benefits of deferred tax assets because
their realization was uncertain. Based on a current review of available
evidence, including the Company's return to profitability in fiscal 1999,
management has reversed the valuation allowance because it is more likely than
not that the tax benefits subject to the allowance will be realized. The Company
does not anticipate any federal tax liability in fiscal 1999 due to the
availability of net operating loss carry forward.
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
<PAGE>
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 $640,000or 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 reflect 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 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 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.
<PAGE>
Liquidity and Capital Resources
Operations of the Company used cash of $20,000 in fiscal 1999, as a result of
increasing inventory and reductions in accounts payable. Reductions in accounts
receivable of $313,000, net income of $316,000 and noncash charges of $315,000
were offsetting factors. In fiscal 1999, the Company invested $282,000 in
furniture and fixtures, and new machinery.
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 covers three outstanding credit facilities,
including (i) a Line of Credit of up to $1,500,000, (ii) a term loan of
$427,000, and (iii) 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.
The Company's principal outside source of working capital is a $1,500,000 bank
credit facility. The Line of Credit bears interest at the Bank's base lending
rate (7.75% at June 30, 1999). 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, 1999 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 outstanding principal amount of the Term Loan at June 30, 1999 is $257,456,
which bears interest at the Bank's base lending rate (7.75% at June 30, 1999).
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 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 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 outstanding
principal amount of the Industrial Revenue Bond at June 30, 1999 was $3,726,447,
which bears interest at a rate of 75% of the Bank's base lending rate (5.81% at
June 30, 1999). The Company's current lender purchased the bonds pursuant to the
credit agreement. The proceeds were used in part to pay existing indebtedness of
approximately $1,343,000. Most of remaining proceeds have been used for the
purchase and preparation of the Company's new facilities, and to purchase new
machinery and equipment. Unapplied funds of $136,000 at June 30, 1999 have been
invested in short-term securities and can be used to repay principal due under
the Bonds. The Bonds are payable in 228 monthly principal installments of
$16,700 plus interest through November 2017. The bondholder, however, may make
written demand for redemption of all or a part of outstanding principal and
accrued interest commencing in December 2000. In connection with the IRB loan,
the Company maintains a compensating balance of $400,000 with the Bank. These
funds are invested in a U. S. Treasury Bond.
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
11/2%. The outstanding principal of the note at June 30, 1999 was $230,500. The
loan is secured by a first lien on the assets of Tooltex and is subject to
various covenants.
The Company instituted cost cutting measures in the form of lay-offs effective
September 25, 1998. In total, the Company has reduced staffing by 11 people or
9% though these lay-offs and attrition, primarily in the manufacturing and sales
departments.
<PAGE>
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 has determined that the
main computer systems that the Company relies upon to manage its operations are
year 2000 compliant. In addition, since the Company's products do not have an
internal date/clock; the year 2000 bug does not affect them. The Company has not
had the need to incur any material costs in preparation 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.
Impact of Inflation
The Company does not believe that inflation significantly affected its
results of operations for the 1999 fiscal year.
Item 7. Financial Statements
The response to this item is submitted in this report under the heading
"Financial Statements" and is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits.
3(i) Certificate of Incorporation of the Registrant, as amended
(incorporated by reference from Exhibit 3.1 of Amendment No. 3
to Registration Statement No. 33-96414).
3(ii) Amended By-laws of the Registrant (incorporated by reference
from Exhibit 3.2 of Registration Statement No. 33-96414).
3(iii) Form of Warrant Agreement between Registrant and Warrant Agent
(incorporated by reference from Exhibit 4.3 of Amendment No. 3
to Registration Statement No. 33-96414).
10(i) Form of Employment Agreement between the Registrant and Robert
S. Soloff (incorporated by reference from Exhibit 10.1 of
Registration Statement No. 33-96414).
10(ii) 1995 Incentive Stock Option Plan and form of Stock Option
Agreement (incorporated by reference from Exhibit 10.3 of
Registration Statement No. 33-96414).
10(iii) Lease between Registrant and Aston Investment Associates
(Aston, PA) (incorporated by reference from Exhibit 10.5 of
Registration Statement No. 33-96414).
10(iv) Amended lease between Registrant and Robert Lenert
(Naperville, IL) (incorporated by reference from Exhibit 10.6
of Amendment No. 4 to Registration Statement No. 33-96414).
10(v) Lease between Registrant and Janine Berger (Gland,
Switzerland) (incorporated by reference from Exhibit 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 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
<PAGE>
undertakes to furnish supplementally a copy of any omitted
schedule and annex to the Commission upon request.
(incorporated by reference from Exhibit 2(a) of the
Registrant's Form 8-K dated July 25, 1997).
10(ix) Agreement of Merger, dated as of July 25, 1997, among the
Registrant, SM Sub, Inc. and Tooltex, Inc. (incorporated by
reference from Exhibit 2(b) of the Registrant's Form 8-K dated
July 25, 1997).
10(x) Credit Agreement, dated September 19, 1997, between Brown
Brothers Harriman & Co. and Registrant ( incorporated by
reference from Exhibit 10(xii) of the Registrant's Form 10KSB
for the year ended June 30, 1997).
10(xi) Term Loan Note of Registrant, dated September 19, 1997,
payable to the order of Brown Brothers Harriman & Co. in the
original principal amount of $427,000 (incorporated by
reference from Exhibit 10(xiii) of the Registrants Form 10KSB
for the year ended June 30, 1997).
10(xii) Line of Credit Note of Registrant, dated September 19, 1997,
payable to the order of Brown Brothers Harriman & Co. in the
original principal amount of $1,500,000 (incorporated by
reference from Exhibit 10(xiv) of the Registrants Form 10KSB
for the year ended June 30, 1997).
10(xiii) Bridge Loan Note of Registrant, dated September 19, 1997,
payable to the order of Brown Brothers Harriman & Co. in the
original principal amount of $1,600,000 (incorporated by
reference from Exhibit 10(xv) of the Registrants Form 10KSB
for the year ended June 30, 1997).
10(xiv) Open-End Mortgage Deed from Registrant to Brown Brothers
Harriman & Co. dated September 19, 1997 (incorporated by
reference from Exhibit 10(xvi) of the Registrants Form 10KSB
for the year ended June 30, 1997).
10(xv) General Security Agreement from Registrant to Brown Brothers
Harriman & Co. dated September 19, 1997 (incorporated by
reference from Exhibit 10(xvii) of the Registrants Form 10KSB
for the year ended June 30, 1997).
10(xvi) Loan Agreement between Connecticut Development Authority and
Sonics & Materials dated December 1, 1997 (incorporated by
reference from Exhibit 10(xvi) of the Registrants Form 10KSB
for the year ended June 30, 1998).
10(xvii) Indenture of Trust between Connecticut Development Authority
and Sonics & Materials, Inc. dated December 1, 1997
(incorporated by reference from Exhibit 10 (xvii) of the
Registrants Form 10KSB for the year ended June 30, 1998).
10(xviii) Tax Regulatory Agreement between Connecticut Development
Authority and Sonics & Materials, Inc., and Brown Brothers
Harriman Trust Company as Trustee dated December 12, 1997
(incorporated by reference from Exhibit 10(xviii) of the
Registrants Form 10KSB for the year ended June 30, 1998).
21 Subsidiaries of the Registrant (incorporated by reference from
Exhibit (21 of the Registrants Form 10KSB for the year ended
June 30, 1998).
27 Financial Data Schedule (filed herewith).
(b) The Company did not file any Current Reports on Form 8-K during fiscal
year 1999. independent auditors.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheets F-3
Statements of Income (Loss) F-4
Statement of Stockholders' Equity F-5
Statements of Cash Flows F-6 - F-7
Notes to Financial Statements F-8 - F-25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Sonics & Materials, Inc.
We have audited the accompanying consolidated balance sheets of Sonics &
Materials, Inc. and subsidiaries as of June 30, 1998 and 1999, and the related
consolidated statements of income (loss), 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 audits 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 subsidiaries as of June 30, 1998 and 1999, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Schneider Ehrlich & Associates LLP
Jericho, New York
September 17, 1999
F-2
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
1998 1999
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 503,305 $ 354,564
Short-term investment, including
restricted funds of $400,000 in 1998 750,000 --
Accounts receivable, net of allowance
for doubtful accounts of $112,000 and
$95,000 in 1998 and 1999 2,370,960 2,057,809
Inventories 4,457,841 4,922,532
Prepaid income taxes and income tax
refunds receivable 96,171 --
Deferred income taxes -- 81,543
Restricted cash from industrial revenue bonds -- 136,000
Other current assets 33,116 85,511
----------- -----------
Total current assets 8,211,393 7,637,959
PROPERTY AND EQUIPMENT - net 4,409,920 4,139,372
GOODWILL - net of accumulated amortization
of $55,503 and $111,005 in 1998 and 1999 1,054,547 999,045
RESTRICTED CASH FROM INDUSTRIAL REVENUE BONDS 309,371 --
MARKETABLE DEBT SECURITY-pledged -- 400,000
OTHER ASSETS - net 692,584 783,822
----------- -----------
Total assets $14,677,815 $13,960,198
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - bank $ 1,465,101 $ 1,465,101
Current maturities of long-term debt 354,978 444,907
Accounts payable 1,004,351 579,766
Customer advances 327,355 204,780
Commissions payable 123,676 141,446
Other accrued expenses and sundry liabilities 600,270 464,812
----------- -----------
Total current liabilities 3,875,731 3,300,812
LONG-TERM DEBT 4,345,700 3,886,487
----------- -----------
Total liabilities 8,221,431 7,187,299
----------- -----------
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, 1998
and 1999 105,603 105,603
Additional paid-in capital 6,575,010 6,575,010
Retained earnings (accumulated deficit) (224,229) 92,286
----------- -----------
Total stockholders' equity 6,456,384 6,772,899
----------- -----------
Total liabilities and stockholders' equity $14,677,815 $13,960,198
=========== ===========
The accompanying notices are an integral part of these
consolidated financial statements.
F-3
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended June 30,
1998 1999
---- ----
Net sales $ 12,080,552 $ 12,438,688
Cost of sales 7,064,259 7,134,412
------------ ------------
Gross profit 5,016,293 5,304,276
------------ ------------
Operating expenses:
Selling 3,396,209 2,985,038
General and administrative 1,464,088 1,304,069
Research and development 544,452 367,407
------------ ------------
Total operating expenses 5,404,749 4,656,514
------------ ------------
Other income (expenses):
Interest expense (219,416) (455,351)
Interest and other income 250,973 80,292
------------ ------------
Total other income (expenses) 31,557 (375,059)
------------ ------------
Income (loss) before income taxes (356,899) 272,703
Provision for income taxes (income tax benefit) 39,570 (43,812)
------------ ------------
Net income (loss) $ (396,469) $ 316,515
============ ============
Basic net income (loss) per share (0.11) 0.09
============ ============
Diluted net income (loss) per share $ (0.11) $ 0.09
============ ============
Shares used in basic per share computation 3,520,100 3,520,100
Incremental shares from issuance of
common stock options and warrants -- 6,798
------------ ------------
Shares used in diluted per share computation 3,520,100 3,526,898
============ ============
The accompanying notices are an integral part of these
consolidated financial statements.
F-4
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1998 and 1999
<TABLE>
<CAPTION>
Common Stock Retained
------------------- Additional Earnings
Par Paid-in (Accumulated Stockholders'
Shares Value Capital Deficit) Equity
------ ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
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
Net income -- -- -- 316,515 316,515
----------- ----------- ----------- ----------- -----------
Balance - June 30, 1999 3,520,100 $ 105,603 $ 6,575,010 $ 92,286 $ 6,772,899
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notices are an integral part of these
consolidated financial statements.
F-5
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
1998 1999
---- ----
Increase (decrease) in cash
Cash flows from operating activities
Net income (loss) $ (396,469) $ 316,515
Adjustments to reconcile net income (loss)
to net cash used in operating activities
Depreciation of property and equipment 323,060 259,442
Amortization of goodwill 55,503 55,502
Deferred income taxes 80,000 (81,543)
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 (325,139) 313,152
Inventories (401,387) (425,250)
Prepaid income taxes 75,669 96,171
Other assets 289,666 110,290
Accounts payable and accrued liabilities (586,123) (542,273)
Customer advances 156,837 (122,575)
----------- ---------
Net cash used in operating activities (707,298) (20,569)
----------- ---------
Cash flows from investing activities, net of
effect of acquisition of Tooltex, Inc.:
Capital expenditures on property and equipment (1,934,481) (282,258)
Proceeds from sale of equipment 2,997 --
Short-term investments 915,470 350,000
Acquisition of Tooltex, Inc.
(net of cash acquired) (176,595) --
----------- ---------
Net cash provided by (used in) investing
activities (1,192,609) 67,742
----------- ---------
Cash flows from financing activities, net of
effect of acquisition of Tooltex, Inc.:
Cash transferred from restricted funds -- 73,109
Payment of note payable - bank (500,000) --
Proceeds from note payable - bank 1,465,101 --
Payment of capital lease obligations (22,401) (35,928)
Payment of long-term debt (628,784) (233,095)
Proceeds from long-term debt 1,817,703 --
----------- ---------
Net cash provided by (used in) financing
activities 2,131,619 (195,914)
----------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 231,712 (148,741)
Cash and cash equivalents at beginning of year 271,593 503,305
----------- ---------
Cash and cash equivalents at end of year $ 503,305 $ 354,564
=========== =========
The accompanying notices are an integral part of these
consolidated financial statements.
F-6
<PAGE>
SONICS & MATERIALS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
1998 1999
---- ----
Supplemental disclosures of cash
flow information:
Cash paid during the year
Interest $ 197,090 $ 457,616
=========== =========
Income taxes (refunded) $ (136,281) $ (83,422)
=========== =========
Supplemental schedule of noncash investing
and financing activities:
Restricted cash from Industrial Revenue Bonds $ 3,810,000 $ 309,371
Repayment of debt (1,343,538) (100,262)
Purchase and preparation of new facility (2,157,091) --
Transfer to unrestricted funds -- (73,109)
----------- ---------
Restricted cash from Industrial
Revenue Bonds -- end of year $ 309,371 $ 136,000
=========== =========
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 $ 95,000
===========
The accompanying notices are an integral part of these
consolidated financial statements.
F-7
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
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
Newton, 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
These financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Tooltex, Inc. and VibraSurge, Inc. 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.
F-8
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
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 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.
Goodwill
Goodwill represents the excess purchase price paid over the fair market value of
the net assets acquired. Goodwill is being amortized on a straight-line basis
over a twenty-year period. Amortization expense for the years ended June 30,
1998 and 1999 was $55,503 and $55,502, respectively.
The carrying value of Goodwill is based on management's current assessment of
recoverability. Management evaluates recoverability using both objective and
subjective factors. Objective factors include management's best estimates or
projected future earnings, cash flows and analysis of historical and recent
sales and earnings trends. Subjective factors include competitive analysis and
the Company's strategic focus.
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.
F-9
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
Income Taxes
The Company accounts for its income taxes using the liability method, which
requires the establishment of a deferred tax asset or liability for the
recognition of future deductible or taxable amounts and operating loss
carryforwards. Deferred tax expense or benefit is recognized as a result of the
changes in the assets and liabilities during the year. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts expected to
be realized.
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
Under SFAS No. 123, "Accounting for Stock-based Compensation", the Company must
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.
Income (loss) 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. 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 using
the treasury stock method. Stock options have not been included in the fiscal
1998 loss per share computation because their inclusion would be anti-dilutive.
F-10
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
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.
F-11
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
Advertising Costs
All costs related to advertising are expensed in the period incurred.
Advertising costs were approximately $267,000 and $121,000 for the years ended
June 30, 1998 and 1999, respectively.
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 other
unresolved contingencies relating to the Tooltex acquisition.
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. 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.
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.
F-12
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
NOTE E - INVENTORIES
Inventories consist of the following:
June 30, June 30,
1998 1999
---- ----
Raw materials $1,104,223 $1,033,821
Work-in-process 2,590,017 2,589,873
Finished goods 763,601 1,298,838
---------- ----------
$4,457,841 $4,922,532
========== ==========
NOTE F - PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
June 30, June 30,
1998 1999
---- ----
Land $ 462,486 $ 462,486
Building 3,212,507 3,212,507
Trade show booth 50,494 50,494
Machinery and equipment 857,241 872,251
Tooling 135,158 140,494
Office furniture and equipment 275,471 310,976
Leasehold improvements 34,851 34,851
Automobiles 60,441 60,441
Data processing equipment 651,661 662,067
---------- ----------
5,740,310 5,806,567
Less: Accumulated depreciation 1,330,390 1,667,195
---------- ----------
$4,409,920 $4,139,372
========== ==========
F-13
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
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).
NOTE G - MARKETABLE DEBT SECURITY-PLEDGED
The investment consists of a U. S. Treasury note bearing interest at 5.5% and
due in March 2000. The Company's lender has a $400,000 lien on the funds. The
lien will be released when the Company's tangible net worth exceeds $5,800,000.
NOTE H - OTHER ASSETS
At June 30, 1998 and 1999, the major components of other assets were:
June 30, June 30,
1998 1999
---- ----
Demonstration equipment - net of
accumulated depreciation of
$360,757 and $438,331 for 1998
and 1999, respectively $ 529,125 $ 628,110
Other 163,459 155,712
---------- ----------
$ 692,584 $ 783,822
========== ==========
Demonstration equipment is carried at cost less accumulated depreciation.
Depreciation is provided for using straight-line and accelerated methods 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.
F-14
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
NOTE I - OTHER ACCRUED EXPENSES AND SUNDRY LIABILITIES
At June 30, 1998 and 1999, the major components of other accrued expenses and
sundry liabilities were:
June 30, June 30,
1998 1999
---- ----
Accrued compensation $242,445 $208,445
Professional fees 28,210 43,949
Other 329,615 212,418
-------- --------
$600,270 $464,812
======== ========
NOTE J - BANK AND OTHER DEBT
Note payable - bank
Outstanding indebtedness against the bank line of credit is evidenced by a note
bearing interest at the bank's base lending rate (7.75% at June 30, 1999).
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.
Long-term debt
June 30, June 30,
1998 1999
---- ----
(a) Industrial Revenue Bonds $ 3,810,000 $ 3,709,737
(b) Bank term loan 343,972 251,177
(c) Bank term loan 355,354 230,500
(d) Capital lease obligations 146,112 110,184
(e) Other loans 45,240 29,796
----------- -----------
4,700,678 4,331,394
Less: Current portion (354,978) (444,907)
----------- -----------
Long-term debt $ 4,345,700 $ 3,886,487
=========== ===========
F-15
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
(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 lender pursuant to the credit agreement
between the parties. Interest on principal balances is payable at the rate
of 75% of the bank's base lending rate. Principal is payable 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 in December 2000.
The proceeds of the bonds were used to refinance construction debt of
$1,344,000 and to fund plant construction and the purchase of new
machinery and equipment. At June 30, 1999, unapplied funds totaled
$136,000. This amount appears as Restricted cash from Industrial Revenue
Bonds on the accompanying fiscal 1999 balance sheet. The Company, with its
lender's consent, is using the funds to repay bond principal.
(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 $6,269, and a final payment of
the remaining principal balance on October 1, 2002. The loan bears
interest at the bank's base lending rate.
(c) Indebtedness in the original amount of $461,000. The loan is payable in
forty-eight month 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.
(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) Equipment loans payable in monthly installments through 2001, secured by
financed assets.
Indebtedness under the Company's line of credit, industrial revenue bonds, and
the term loans are secured by substantially all of the assets of the Company,
including a first mortgage lien on the Company's new manufacturing facility. 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.
F-16
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
The aggregate maturities of long-term debt for the next five fiscal years are as
follows:
Year ending
June 30,
- -----------
2000 $ 444,907
2001 440,041
2002 315,684
2003 247,584
2004 200,526
NOTE K - 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, of which 1,705,000 are outstanding. There are
also 100,000 warrants outstanding to purchase common stock for $.25 per share.
All of the warrants expire in February 2001.
F-17
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
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, 1999, there were 120,500 shares
available for future grant under the Plan.
F-18
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
Nonqualified Stock Options
The Company has also granted nonqualified stock options for 305,366 shares of
common stock at option prices ranging from $.31 to $1.63 per share expiring at
various dates through 2004.
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 1998 and 1999 consistent with the provisions
of SFAS No. 123, the Company's net loss would have increased by approximately
$30,000 and earnings per share would have been reduced by $.01 per share in
1998, and net income would have decreased by approximately $10,000 and earnings
per share reduced by $.01 in 1999.
The weighted average fair value at date of grant for all options granted was
$.79 in 1998 and $.17 in 1999. 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:
1998 1999
---- ----
Expected stock price volatility 46.5% 46.5%
Expected life of options 4 years 4 years
Risk-free interest rate 5.82% 5.25%
Expected dividend yield 0% 0%
F-19
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
For the two years ended June 30, 1999, option activity was as follows:
Incentive options Nonqualified options
----------------- --------------------
Weighted- Weighted-
average average
Number Exercise Number Exercise
of Shares Price of Shares Prices
--------------------------------------------
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
Granted 50,000 $.22-.63 10,000 .63
Exercised
Canceled (8,000) 1.25-5.00
- --------------------------------------------------------------------------------
Outstanding at June 30, 1999 129,500 $ 2.42 305,366 $1.01
================================================================================
The following table summaries information about stock options outstanding at
June 30, 1999:
Options Outstanding Options Exercisable
Weighted
Weighted- average Weighted-
average Remaining average
Range of Number Exercise Contractual Number Exercise
Exercise prices Outstanding Price Life Exercisable Price
- --------------------------------------------------------------------------------
$0.22 - $0.63 70,976 $0.39 4.7 years 10,976 $0.31
1.03 - 1.63 298,390 1.06 4.5 years 282,390 1.043
2.94 - 3.50 12,000 3.03 3.0 years 4,667 3.10
5.00 53,500 5.00 1.7 years 53,500 5.00
------- -------
434,866 351,533
======= =======
F-20
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
NOTE L - 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,
--------
2000 $131,933
2001 128,485
2002 126,711
2003 18,483
--------
$405,612
========
Rental expense for operating leases totaled approximately $379,000 and $207,000
for the years ended June 30, 1998 and 1999, 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 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.
F-21
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
NOTE M - INCOME TAXES
The components of the provision for taxes on income are as follows:
Years ended June 30,
1998 1999
U. S. Federal
Current $(40,430) $ --
Deferred 68,000 (81,543)
-------- --------
27,570 81,453
-------- --------
State
Current -- 37,731
Deferred 12,000 --
-------- --------
12,000 37,731
-------- --------
Total income tax provision
(income tax benefit) $ 39,570 $(43,812)
======== ========
The current portion of the federal income tax benefit in fiscal 1998
reflects refundable taxes from the carryback of net operating losses.
F-22
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
The tax effect of temporary differences which give rise to deferred tax assets
and liabilities are as follows:
June 30, June 30,
1998 1999
---- ----
Deferred tax assets:
Accrued expenses $ 41,640 $ 27,249
Allowance for doubtful accounts 44,800 32,300
Inventories 17,681 16,098
Tax benefit of net operating loss
carryforwards 74,840 20,981
--------- ---------
Total deferred tax assets 178,961 96,628
--------- ---------
Deferred tax liabilities:
Deferred charges 23,665 15,085
--------- ---------
Sub total 155,296 81,543
Valuation allowance (155,296) --
--------- ---------
Net deferred tax asset $ -- $ 81,543
========= =========
In fiscal 1998, the Company established a valuation allowance of $155,296 to
offset the tax benefits of deferred tax assets because their realization was
uncertain. Based on a current review of available evidence, including the
Company's return to profitability in fiscal 1999, management has reversed the
valuation allowance because it is more likely than not that the tax benefits
subject to the allowance will be realized.
The Company and its subsidiaries file federal returns on a consolidated basis
and separate state returns. At June 30, 1999, the Company had net operating
losses of approximately $62,000, which are available to offset future federal
taxable income through 2019.
F-23
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
The following is a reconciliation of the statutory Federal income tax rate to
the effective rate reported in the consolidated financial statements:
Years ended June 30,
1998 1999
---- ----
Provision (benefit) for Federal income
taxes at the statutory rate $(121,346) $ 92,719
State and local taxes, net of
federal income taxes (benefit) (16,118) 19,800
Nondeductible expenses 29,090 31,366
Valuation allowance 155,296 --
Reversal of valuation allowance -- (155,296)
Tax benefit of net operating loss
carryforward -- (23,156)
Other (7,352) (9,245)
--------- ---------
Actual provision for income taxes
(income tax benefit) $ 39,570 $ (43,812)
========= =========
NOTE N - 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 $34,000 and
$33,000 for the years ended June 30, 1998 and 1999, 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 $21,000 for the years ended June 30, 1998 and 1999,
respectively.
F-24
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
NOTE O - 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,
1998 1999
---- ----
United States $ 8,737,000 $ 9,865,000
Europe 1,270,000 1,415,000
Asia/Pacific Rim 1,533,000 662,000
Canada and Mexico 420,000 320,000
Other 121,000 177,000
----------- -----------
$12,081,000 $12,439,000
=========== ===========
NOTE P - 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 and 1999, the Company incurred $86,172 and
$80,575, respectively, 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.
F-25
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
The Company paid $39,545 to a former member of the Board of Directors for
consulting services during the year ended June 30, 1998.
F-26
<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, 1999
SONICS & MATERIALS, INC.
By: /s/ ROBERT S. SOLOFF
------------------------------------
Robert S. Soloff
Chairman and President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ROBERT S. SOLOFF Chairman, President, Treasurer, Chief October 12, 1999
(Robert S. Soloff) Executive and Chief Financial Officer
/s/ LAUREN H. SOLOFF Secretary and Director October 12, 1999
(Lauren H. Soloff)
/s/ Ronald Kalb Director October 12, 1999
(Ronald Kalb)
/s/ JACK T. TYRANSKY Director October 12, 1999
(Jack T. Tyransky)
/s/ MICHAEL ZELNO Accounting Manager October 12, 1999
Principal Accounting Officer
(Michael Zelno)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Location of Exhibit in
No. Description Sequential Numbering System
--- ----------- ---------------------------
<S> <C> <C>
3(i) Certificate of Incorporation of the Registrant, as Incorporated by reference from Exhibit
amended . 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
3(iii) Form of Warrant Agreement between Registrant and Incorporated by reference from Exhibit 4.3 of
Warrant Agent. Amendment No. 3 to Registration Statement
No. 33-96414
10(I) Form of Employment Agreement between the Incorporated by reference from Exhibit
Registrant and Robert S. Soloff. 10.1 of Registration Statement No.
33-96414
10(ii) 1995 Incentive Stock Option Plan and form of Stock Incorporated by reference from Exhibit
Option Agreement. 10.3 of Registration Statement No.
33-96414
10(iii) Lease between Registrant and Aston Investment Incorporated by reference from Exhibit
Associates (Aston, PA). 10.5 of Registration Statement No.
33-96414
10(iv) Amended lease between Registrant and Robert Lenert Incorporated by reference from Exhibit
(Naperville, IL). 10.6 of Amendment No. 4 to
Registration Statement No. 33-96414
10(v) Lease between Registrant and Janine Berger (Gland, Incorporated by reference from 10.7 of
Switzerland). 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 July 25, Incorporated by reference from Exhibit
1997, among the Registrant, SM Sub, Inc., Tooltex, 2(a) of Registrant's Form 8-K dated
Inc., and the persons designated as the July 25, 1997
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, 1997, Incorporated by reference from Exhibit
among the Registrant, SM Sub, Inc. and Tooltex, 2(b) of the Registrant's Form 8-K
Inc. dated July 25, 1997).
10(x) Credit Agreement, dated September 19, 1997, Incorporated by reference from Exhibit
between Brown Brothers Harriman & Co. and 10 (xii) of the Registrant's Form
Registrant 10-KSB for the year ended June 30, 1997
10(xi) Term Loan Note of Registrant, dated September 19, Incorporated by reference from Exhibit
1997, payable to the order of Brown Brothers 10 (xiii) of the Registrant's Form
Harriman & Co. in the original principal amount of 10-KSB for the year ended June 30, 1997
$427,000.
10(xii) Line of Credit Note of Registrant, dated September Incorporated by reference from Exhibit
19, 1997, payable to the order of Brown 10 (xiii) of the Registrant's Form
Brothers Harriman & Co. in the original principal 10-KSB for the year ended June 30, 1997
amount of $1,500,000.
10(xiii) Bridge Loan Note of Registrant, dated September Incorporated by reference from Exhibit
19, 1997, payable to the order of Brown 10 (xv) of the Registrant's Form
Brothers Harriman & Co. in the 10-KSB for the year ended June 30, 1997
original principal amount of $1,600,000.
10(xiv) Open-End Mortgage Deed from Registrant to Brown Incorporated by reference from Exhibit
Brothers Harriman & Co. dated September 19, 1997. 10 (xiv) of the Registrant's Form
10-KSB for the year ended June 30, 1997
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10(xv) General Security Agreement from Registrant to Incorporated by reference from Exhibit
Brown Brothers Harriman & Co. dated September 19, 10 (xvii) of the Registrant's Form
1997. 10-KSB for the year ended June 30, 1997
10(xvi) Loan Agreement between Connecticut Development Incorporated by reference from Exhibit
Authority and Sonics & Materials dated 10(xvi) of the Registrant's Form 10-KSB for the
December 1, 1997 year ended June 30, 1998
10(xvii) Indenture of Trust between Connecticut Development Incorporated by reference from Exhibit
Authority and Sonics & Materials, Inc. dated 10(xvii) of the Registrant's Form
December 1, 1997 10-KSB for the year ended June 30, 1998
10(xviii) Tax Regulatory Agreement between Connecticut Incorporated by reference from Exhibit
Development Authority and Sonics & Materials, 10(xviii) of the Registrant's Form
Inc., and Brown Brothers Harriman Trust Company as 10-KSB for the year ended June 30, 1998
Trustee dated December 12, 1997
21 Subsidiaries of the Registrant Incorporated by reference from 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
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 354,564
<SECURITIES> 0
<RECEIVABLES> 2,152,809
<ALLOWANCES> 95,000
<INVENTORY> 4,922,532
<CURRENT-ASSETS> 7,637,959
<PP&E> 5,806,567
<DEPRECIATION> 1,667,195
<TOTAL-ASSETS> 13,960,198
<CURRENT-LIABILITIES> 3,300,812
<BONDS> 3,709,737
0
0
<COMMON> 105,603
<OTHER-SE> 6,667,296
<TOTAL-LIABILITY-AND-EQUITY> 13,960,198
<SALES> 12,438,688
<TOTAL-REVENUES> 12,438,688
<CGS> 7,134,412
<TOTAL-COSTS> 4,656,514
<OTHER-EXPENSES> (80,292)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 455,351
<INCOME-PRETAX> 272,703
<INCOME-TAX> (43,812)
<INCOME-CONTINUING> 316,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 316,515
<EPS-BASIC> .09
<EPS-DILUTED> .09
</TABLE>
