U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(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, 2000.
|_| 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 is 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: $14,447,800
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 25, 2000 as reported on the Over the Counter Bulletin Board , was
approximately $1,261,125. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of September 25, 2000, the issuer had outstanding 3,520,100 shares of Common
Stock, par value $.03 per share, and 1,800,500 Warrants to purchase shares of
Common Stock.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
1
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DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
2
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
Sonics & Materials, Inc. (the "Company" or "Sonics") designs, manufactures
and sells (i) ultrasonic bonding equipment for the welding, joining and
fastening of thermoplastic components, textiles and other synthetic materials,
and (ii) ultrasonic liquid processors for dispersing, blending, cleaning,
degassing, atomizing and reducing particles as well as expediting chemical
reactions. To further address the needs of its customers, the Company also
manufactures a spin welder and the vibration welder, both of which are used for
the bonding of thermoplastic components.
The Company was incorporated in New Jersey in April 1969, and was
reincorporated in Delaware in October 1978. Robert S. Soloff, its chairman,
president and founder, invented the ultrasonic plastic welding process early in
his career. He has been granted nine patents in the field of power ultrasonics
and is considered to be a pioneer in the application of ultrasonic technology to
industrial processes. Howard Deans, general manager of the Company's Ultra Sonic
Seal division, has also invented ultrasonic devices and processes covered by
patents primarily for packaging and sealing. The patents granted to Messrs.
Soloff and Deans have expired and the technology related to them is now in the
public domain and is used in part in the development and manufacture of the
Company's products.
On July 25, 1997, the Company acquired Tooltex, Inc., an Ohio corporation
("Tooltex"), through a merger transaction (the "Merger"). Tooltex is a
manufacturer of automated systems used in the plastics industry. Pursuant to an
Agreement and Plan of Merger, dated July 25, 1997 (the "Plan of Merger"), among
Sonics, SM Sub, Inc., an Ohio corporation and a wholly owned subsidiary of
Sonics ("Sonics Sub"), Tooltex, and the shareholders of Tooltex, Tooltex was
merged with and into Sonics Sub. Sonics Sub then changed its name to Tooltex,
Inc. (the "Surviving Corporation"). Under the Plan of Merger the shareholders of
Tooltex received, in exchange for 100% of the stock of Tooltex, (i) an aggregate
of 70,000 shares of Sonics Common Stock, par value $.03 per share (the "Common
Stock"), (ii) $70,000 and (iii) options to purchase 10,000 shares of Sonics
Common Stock. The former shareholders of Tooltex have surrendered the 70,000
shares of Sonics Common Stock to the Company in satisfaction of certain
indemnification obligations provided in the Plan of Merger.
In September of 1997, the Company also formed a wholly owned subsidiary,
Vibra-Surge Corporation, for the manufacture and sale of its ultrasonic surgical
device. See "Products" below.
Products
The Company manufactures equipment in the following categories:
Ultrasonic Welders -- Manufactured by the Company since its founding, this
line of ultrasonic devices welds, bonds, fastens, sews and rivets thermoplastic
components and other synthetic materials. As new applications were requested by
industrial customers, the line has expanded over the years. Plastic welders and
related devices are used in a wide variety of industries and applications. These
include the automotive, computer, electronics, packaging, toy, home
entertainment, medical device, textile and garment, and home appliance
industries.
There are certain advantages to ultrasonic bonding in comparison to more
traditional welding techniques. Uniform production is often accomplished due to
the consistency, speed and focusing of the energy applied to the welded part.
The bond created between the components is generally strong and clean. Because
no solvents, adhesives or external heat are involved, adverse environmental
factors are minimized. Materials which may not be easily assembled or welded by
other technologies can be effectively bonded ultrasonically. Moreover,
ultrasonic bonding is generally faster and requires less skilled labor or
training than many other methods.
<PAGE>
Liquid Processors - Liquid processors, which are sold under the Company's
trade name "Vibra-Cell" or under private label, are ultrasonic devices that
disperse, break up, emulsify, atomize, mix and blend substances in a liquid or
semi-liquid media. Substances affected by liquid processing include molecules,
cells, tissues, fluids, chemicals and particles. These devices are available in
different power configurations for low, medium and high volume applications with
various capacities, features and accessories. Operating similarly to ultrasonic
bonding systems and composed of many of the same components, liquid processors
produce a different result because they are utilized in liquid, semi-liquid and
powdered media.
Liquid processors are utilized in biotechnology by scientists, biologists,
chemists and pharmacologists, primarily in laboratories for research and testing
purposes. The Company has extended the applications for its liquid processors
from the research laboratories to industrial settings. The liquid processor also
functions to process and test materials and substances on the production line
and in vats and tanks. In the manufacture of pharmaceuticals and in the
processing of petroleum products and certain specialty chemicals, they reduce
particle size and facilitate mixing; in the preparation of paint and dyes, they
blend and homogenize materials. In the ink industry, processors disperse black
carbon. In the beverage and other industries, they are used to de-gas carbonated
soda, wine, beer, spirits and solvents. The Company's liquid processors are also
used as high-intensity cleaners. These ultrasonic cleaning devices are effective
in spot cleaning and removing various contaminants, such as radioactive
particles, proteins, rust, blood, and oil from laboratory equipment.
The Company also manufactures a liquid processor with a spray nozzle that
atomizes fluids by producing ultra-fine sprays in precisely measured dosages or
at extremely low flow rates. Utilized in laboratories and plants, ultrasonic
atomizers can coat, moisten, or deposit micro-droplets of liquid on glass,
fabric, paper, semiconductors, pharmaceuticals, ceramics or tubes. They are also
used to apply silicone and Teflon, disinfect surfaces and lubricate small parts.
Vibration Welder -- Vibration welders are generally used to weld larger
plastic components together, and have the ability to weld a wider variety of
plastics. In this technology, a non-vibrating part is hydraulically lifted from
below to meet a horizontally-vibrating part. The vibrations cause friction and
heat, melting the plastic, and a bond is effectuated between the plastic parts.
The vibration welder that has been designed and is currently being manufactured
by the Company is computer-controlled and has a power supply, digital display
and other features similar to the Company's ultrasonic welder.
Spin Welder -- The Company has developed and currently manufactures spin
welders based on a non-ultrasonic process known as rotary friction welding.
Rotary friction welding is a bonding technology generally used only when
assembling cylindrical or round-shaped thermoplastic parts. It is also better
suited for plastics of a semi-crystalline nature and assemblies requiring
significant tooling relief. In spin welding, one plastic component is spun
against a mating plastic part that is held stationary in a nesting fixture.
Friction generated by the spinning action produces heat which melts the plastic
and fuses the two parts together.
The spin welding system offered by Sonics features, among other things, a
multi-function programmable controller, RPM display, and a two horsepower
electronic drive motor that spins the plastic part. The spin welder is composed
of a steel frame and column with a control box. Other components of the system
include a pneumatic head, an automotive spindle bearing, an air brake and clutch
system, and steel plates.
Ultrasonic Surgical Instrument -- The Company has designed and developed
an ultrasonic medical device, the Vibra-Surge (TM) System Model VS 2120
("Vibra-Surge"), for the removal of soft tissue
<PAGE>
in general and reconstructive and plastic surgery. Sonics filed a patent
application covering Vibra-Surge (TM) with the U.S. Patent and Trademark Office
on May 1, 1997. The Company received a Notice of Allowance and Allowability from
the U.S. Patent and Trademark Office for the remaining patent application on
February 15, 1999. However, the Company cannot be certain that this patent will
offer adequate protection or will not be challenged by the holders of prior or
other patents issued or to be issued for similar purposes. The device received
510(k) clearance from the Food and Drug Administration (the "FDA") on July 25,
1997, which permits Sonics to market the device. In September 1997, Sonics
created a wholly owned subsidiary, Vibra-Surge Corporation ("Vibra-Surge"),
which signed an exclusive distribution agreement with Sonimedix, Inc.
("Sonimedix") on September, 19, 1997. Under the distribution agreement,
Sonimedix served as the exclusive worldwide distributor of Vibra-Surge (TM)
products. On September 25, 1997, Sonics transferred to Vibra-Surge Corporation
all of its rights and obligations under the 510(k) FDA clearance and patent
applications and all of the technology related to Vibra-Surge (TM).
The distribution agreement with Sonimedix expires on September 30, 2000.
During May of fiscal 2000, Sonics' management and Board of Directors elected to
discontinue the Company's Vibra-Surse operation after reviewing the
marketability of its line of ultrasonic products and the recurring operating
losses of Vibra-Surge. As a result, Sonics does not intend to renew the
distribution agreement.
Industry Background
Management believes that in recent years the market for ultrasonic bonding
systems, and other plastic assembly systems has undergone steady and consistent
growth. It appears that more companies are seeking to replace metal components
with thermoplastics in order to reduce the weight of products or to capitalize
on other special properties of synthetic substances. Consequently, ultrasonic
bonding systems and related welding devices have been more extensively utilized
in industrial processing and in new assembly applications. The market for liquid
processors in the past has experienced inconsistent growth and occasional
contractions, however, new and more extensive applications of such technology in
other industries, such as the paint, chemical, petroleum and beverage
industries, and medical industries has provided for continued growth.
Manufacturing and Supply
Sonics' manufacturing operations, conducted at its facilities located in
Newtown, Connecticut, Aston, Pennsylvania, and Grove City, Ohio, are run on a
batch basis in which a series of products move irregularly from station to
station. The Company manufactures its products pursuant to historical and
projected sales data as well as specific customer orders.
Most supplies and materials required in the manufacture of the Company's
products are available from many sources. Many of its suppliers are based in the
same general locality as the Company's manufacturing operations. To date, Sonics
has experienced few shortages and delays regarding supplies and materials.
However, it is not certain that such shortages or delays may not have an adverse
impact on Sonics' operations in the future. In fiscal year 1999, three suppliers
each accounted for more than 5%, but less than 10%, of its total purchases for
inventory. In fiscal year 2000, one supplier accounted for more than 5%, but
less than 10% of its total purchases for inventory. Although management believes
that in all cases alternate sources of supplies can be located, a certain amount
of time would inevitably be required to find substitutes. During any such
interruption in supplies, the Company may have to curtail the production and
sale of its devices and systems for an indefinite period.
<PAGE>
Sonics is not a party to any formal written contract regarding the
delivery of its supplies and materials. It generally purchases such items
pursuant to written purchase orders of both the individual and blanket
varieties. Blanket purchase orders usually entail the purchase of larger amounts
of items at fixed prices for delivery and payment on specific dates ranging from
two months to one year.
Sonics has qualified its Connecticut facility to meet the quality
management and assurance standards of an international rating organization (ISO
9001). ISO 9001 certification indicates that the Company has successfully
implemented a quality assurance system that satisfies this standard. Sonics has
also obtained CE approvals, which are now necessary for sales in Europe, for
many models of its ultrasonic welder and liquid processor. It is working towards
CE approvals for its other product lines.
Maintenance and Service
The Company offers warranties on all its products, including parts and
labor that range from one year to three years depending upon the type of product
concerned. For the fiscal years ended June 30, 1999 and 2000, expenses
attributable to warranties were approximately $46,000, and $59,000,
respectively. Sonics performs repair services on all of its products sold
domestically either at its Connecticut or Pennsylvania facilities or at customer
locations. Servicing of foreign sales is usually handled by distributors abroad
or in the Company's Swiss branch office regarding its devices sold in Europe.
These services are performed upon specific orders without contracts at various
rates. The Company usually charges for the time that its employees expend on the
task and the cost of the materials or parts involved in the repair. For the
fiscal years ended June 30, 1999 and 2000, the Company had income of
approximately $489,000, and $252,000 respectively, for out-of-warranty services
performed. Company devices generally have a long operating life, and Sonics has
repaired machines manufactured by it that are more than 30 years old.
Sales and Marketing
Sonics generally markets and sells its products in the United States and
abroad through a network of sales representatives and distributors to end users
and original equipment manufacturers ("OEMs"). In the United States, the Company
and its Ultra Sonic Seal division ("USS") utilize approximately 46 sales
representatives in 48 states throughout the country. The Company's wholly owned
subsidiary, Tooltex, utilizes two sales representatives throughout the Midwest.
In the overseas market, it relies on approximately 71 distributors and several
sales representatives to distribute its products in 49 countries. The areas
covered by these third parties include North and South America, the Middle and
Far East, Europe and Australia.
Sales Representatives
The Company's relationship with its sales representatives is usually
governed by a written contract which is generally terminable by either party on
30 days prior notice. The contract provides for exclusive territorial and
product representation and commissions payable to them on their sales depending
on whether basic units or accessories are involved and typically covers
ultrasonic bonding systems and liquid processors. OEM sales made by the Company
are excluded from the commission arrangements. Generally, the sales
representatives do not purchase for their own account, but merely sell Sonics'
products on the Company's behalf. They also may represent other manufacturers
but generally not those competitive with the Company's products. One sales
representative accounted for more than 5% of Sonics' sales in fiscal year 1999.
In Fiscal Year 2000, two sales representatives each accounted for more than 5%
but less than 15% of Sonics' sales. The loss of such representatives
representing in the aggregate significant sales may have a material adverse
impact on the Company's business.
<PAGE>
USS sells its plastic welder under its division name. USS maintains a
network of sales representatives in the United States different from those for
Sonics' main product lines. The terms of these arrangements with its sales
representatives are similar to the terms Sonics negotiates with its own sales
representatives.
The Company's wholly owned subsidiary, Tooltex, sells its automated
systems under its corporate name, Tooltex, Inc. Tooltex's sales organization
consists of four direct sales personnel.
Distributors
Sales of Sonics' products to distributors are also generally made pursuant
to written contracts. Under such contracts, distributors provide repair service
and are prevented from selling devices competitive to the Company's products.
Generally, payments must be made in U.S. dollars within 30 days of delivery of
the product. Distribution arrangements are either exclusive or non-exclusive and
are cancelable upon 30 days notice. The contracts generally exclude private
label sales made by Sonics in the distributor's territory even if the
relationship is of an exclusive type and typically covers sales of both
ultrasonic bonding systems and liquid processor lines. The Company now also
offers both its spin welder and vibration welder to its sales representatives
and distributors. The Company also sells these products directly to end-users or
under private label. The Company usually grants discounts to distributors,
depending on the product and quantity sold. In fiscal year 1999 and 2000, one
distributor accounted for over 5%, but less than 10%, of sales. The loss of such
distributors in substantial numbers or at key locations could have a material
adverse effect on the Company's business. USS maintains separate but similar
arrangements with at least three foreign distributors abroad.
The Company promotes the sale of its products through direct mailings,
trade shows, product literature, press releases, advertising in trade magazines
and listings in catalogs. The Company occasionally engages in cooperative
advertising with some of its distributors.
Sonics' wholly owned subsidiary, Vibra-Surge, sold its ultrasonic surgical
device through its exclusive distributor of the product, Sonimedix. The contract
expires on September 30, 2000. Sonics does not intend to renew the contract. See
"Products" above.
Customers
Sonics sells its products, directly or indirectly, to numerous customers,
ranging in size from small companies to large Fortune 100 corporations. Its
customers are end-users, original equipment manufacturers, system integrators
and resellers as well as distributors. Many of its customers are repeat
purchasers. None of its customers represented more than 5% of Sonics' sales for
fiscal 1999 or 2000.
International Operations
The Company's international activities are an important portion of its
business. Approximately 21% and 22% of its sales for fiscal years 1999 and 2000,
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
<PAGE>
regard to distributors of ultrasonic welders located in Asia and South America,
the Company's systems are made available in kit form and assembled there. Kits
frequently contain all components for devices but in some instances only a
portion of the requisite components is provided. For some foreign sales, no
written distribution arrangement exists.
Competition
The Company competes in each of its markets against a variety of other
concerns, many of which are larger and have greater financial, technical,
marketing, distribution and other resources than Sonics. It competes on the
bases of service, performance, reliability, price and delivery.
Prior to making a sale, the Company will expend time and resources
exploring whether it can profitably handle a new application for potential and
existing customers. Generally, the Company receives no compensation for this
pre-sale activity except when special tooling is required and payment for such
services only occurs when and if product sales are consummated. Like nearly all
manufacturers in this industry, the Company invests heavily in this pre-sale
examination of new applications. Such examination represents another area in
which such manufacturers compete, and those with greater resources and manpower
may possess a competitive advantage.
With respect to its ultrasonic bonding equipment, the Company encounters
competition from Branson Ultrasonics Co. ("Branson"), a subsidiary of Emerson
Electric Co., Dukane Corp. ("Dukane"), Herrmann Ultrasonics, Inc., Forward
Technology Industries, Inc. and other smaller manufacturers. The two dominant
companies in this area are Branson and Dukane. Some of these competitors also
offer spin and vibration devices as well as ultrasonic ones.
In the ultrasonic liquid processor market, the Company's principal
competitors are Branson and Misonix Inc. Management believes that in this market
Sonics has the largest market share.
The Company's ultrasonic surgical instrument has three main competitors,
Mentor Corporation, Lysonix Inc., and Misonix, Inc. No one company dominates
this market. However, the Company's three major competitors had entered the
market place prior to Sonics. See "Products" above.
Backlog
As of June 30, 2000, the Company's backlog was approximately $2,561,567 as
compared with a backlog of $2,559,300 as of June 30, 1999. No one customer
accounted for more than 10% of such backlog at June 30, 2000.
Substantially all of the Company's backlog figures are based on written
purchase orders executed by the customer and involve product deliveries and not
engineering services. All orders are subject to cancellation.
Research and Development
The Company maintains an engineering staff responsible for the improvement
of existing products, modification of products to meet customer needs and the
engineering, research and development of new products and applications.
Engineering and research and development expenses were approximately $367,000
for 1999, and $408,000 for 2000.
<PAGE>
Intellectual Property
Proprietary information and know-how are important to the Company's
success. Sonics holds no active patents but has trademark protection for its
"Vibra-Cell" trade name and its "Vibra-Surge" trade name. There can be no
assurance that others have not developed, or will not develop, independently the
same or similar information or obtain and use proprietary information of the
Company. Sonics has obtained written assurances from its employees, sales
representatives and distributors under confidentiality agreements regarding its
proprietary information.
On May 23, 2000, the U.S. Patent and Trademark office issued the Company a
patent for a method of producing fabric covered panels with a vibration welder.
On September 22, 2000, the Company received a Notice of Allowance and
Allowability from the U.S. Patent and Trademark office for the tooling developed
by the Company for producing fabric covered panels. The U.S. Patent and
Trademark office issued the Company a patent on October 12, 1999 for its
ultrasonic surgical device. On August 29, 2000, the Company has also received
Notice of Allowance and Allowability from the U.S. Patent and Trademark office
for an additional patent related to the Company's ultrasonic surgical device.
On September 25, 1997, Sonics transferred the "Vibra-Surge" trade name,
and its rights and obligations under the Vibra-Surge patent application and
preliminary patent application to Vibra-Surge. See "Products" above.
Government Regulation
Sonics' bonding and liquid processor lines generally are not governed by
specific legal rules and laws. The Company's ultrasonic surgical instrument,
however, is subject to a variety of FDA regulations relating to its manufacture
and sale in the United States. The FDA has rules which govern the design,
manufacture, distribution, approval and promotion of medical devices in the
United States.
Various states and foreign countries in which Sonics' products are, or may
be, sold may impose additional regulatory requirements, such as the Medical
Device Directive in the European Common Market.
The Company has obtained 510(k) clearance from the FDA which permits the
Company to market the device for aiding the removal of soft tissue in general
surgery and plastic and reconstructive surgery. Vibra-Surge has signed an
exclusive distribution agreement with Sonimedix for the sale and marketing of
its ultrasonic surgical instrument that expires on September 30, 2000. See
"Products" and "Intellectual Properties" above.
Sonics' sales abroad may make it subject to other U.S. and foreign laws.
The Company and its agents are also governed by the restrictions of the Foreign
Corrupt Practices Act of 1977, as amended (the "FCPA"). The FCPA prohibits the
promise or payments of any money, remuneration or other items of value to
foreign government officials, public office holders, political parties and
others with regard to obtaining or preserving commercial contracts or orders.
Sonics has urged its foreign distributors to comply with the requirements of the
FCPA. All these restrictions may hamper the Company in its marketing efforts
abroad.
In addition, other federal, state and local agencies, including those in
the environmental, fire hazard control, and working conditions areas could have
a material adverse affect upon the Company's ability to do business. Sonics is
not involved in any pending or threatened proceedings which would require
curtailment of, or otherwise restrict, its operations because of such
regulations and compliance
<PAGE>
with applicable environmental or other regulations. None of these laws has had a
material effect upon its capital expenditures, financial condition or results of
operations.
Employees
As of September 25, 2000, the Company, including its subsidiaries, had 107
full-time employees including its officers, of whom 63 were engaged in
manufacturing, 3 in repair services, 11 in administration and financial control,
9 in engineering and research and development, and 21 in marketing and sales.
None of Sonics' employees is covered by a collective bargaining agreement
or represented by a labor union. Sonics considers its relationship with its
employees to be good.
The design and manufacture of the Company's equipment requires substantial
technical capabilities in many disparate disciplines, from mechanics and
computer science to electronics and mathematics. While management believes that
the capability and experience of its technical employees compares favorably with
other similar manufacturers, there can be no assurance that it can retain
existing employees or attract and hire the highly capable technical employees
necessary in the future on favorable terms, if at all.
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, interest rate
fluctuations, competitive products, and product and technology development.
There can be no assurance that such objectives will be achieved. In addition,
the Company's objectives of future growth, profitability, and financial returns
are also subject to the uncertainty of the growth and profitability of its
wholly owned subsidiary, Tooltex.
Item 2. Description of Property
The Company's primary manufacturing and office facility is located in
Newtown, Connecticut in one 62,500 square foot steel and cinder block building
(the "Newtown Property"). This facility is considered adequate for the Company's
current needs, as well as its anticipated future requirements. The facility was
purchased on September 19, 1997. The Company renovated the building and
consolidated all of its former Danbury facilities into the Newtown Property in
May of 1998. The Newtown Property was purchased for $1,265,000 and the cost of
improvements to the property was approximately $2,200,000. The Company has
leased 7,200 square feet of the building to an unrelated third party. However,
the lessee is in breach of the terms of the lease. The Company intends to pursue
legal action against the lessee, as well as attempt to locate a new lessee for
the space. The Newtown Property is insured against fire and other casualty in an
amount the Company believes to be adequate.
The Newtown Property is encumbered by a first mortgage lien in favor of a
bank ("Bank"), which secures two credit facilities dated September 19, 1997: (i)
a revolving line of credit facility in the original principal amount of up to
$1,500,000 (the "Line of Credit"), (ii) a term loan in the original principal
<PAGE>
amount of $427,000 (the "Term Loan"); and (iii) a Bridge Loan in the original
principal amount of $1,600,000. On December 12, 1997, the Company issued
Industrial Revenue Bonds through the Connecticut Development Authority in the
amount of $3,810,000. 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 were used for the purchase and preparation of the Newtown
Property, and the purchase of new machinery and equipment. The Bonds mature in
November 2017 and bear interest at 75% of the Bank's base lending rate (7.125%
at September 25, 2000). The Company began to redeem principal on the Bonds in
228 equal monthly installments of $16,700 in December of 1998. The Company does
not intend to use the proceeds from the Line of Credit or the Term Loan to
acquire or improve the Newtown Property. For information about such borrowings,
see "Management's Discussion and Analysis or Plan of Operations-Liquidity and
Capital Resources."
The following table lists the Company's leased offices by location as of
September 25, 2000, and certain other information:
<TABLE>
<CAPTION>
Approximate Total Approximate
Area Leased in Expiration Date of Current Annual
Square Footage Lease Rent (1)
-------------------- -------------------- ----------------
<S> <C> <C> <C>
Aston, Pennsylvania....................... 4,900 September 30, 2002 $40,300
Naperville, Illinois...................... 2,000 December 31, 2000 14,400
Gland, Switzerland........................ 3,000 January 31, 2001(2) 13,800
Grove City, Ohio(3)....................... 13,600 July 26, 2002(2) 77,900
</TABLE>
--------------------
(1) Includes proportionate cost of utilities, repairs, cleaning, snow removal,
taxes and insurance.
(2) Contains renewal option as listed below:
Gland Switzerland...........................1 year
Grove City, Ohio............................5 years
(3) Lease is with BPT, Limited, the sole partners of which are the former
shareholders and current President and Vice President of Tooltex.
The Company believes that it has adequate insurance coverage for all of
its leased properties. The Company also leases certain automobiles and
equipment.
Item 3. Legal Proceedings
There is no pending or threatened material litigation or proceeding
against the Company.
Item 4. Submission of Matters to a Vote of Security-Holders
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
From February 27, 1996 to July 24, 1998, the Common Stock and Warrants to
Purchase Common Stock of the Company had been traded and quoted through the
National Association of Securities Dealers Inc. ("NASDAQ") National Market
System under the symbols "SIMA" and "SIMAW,"
<PAGE>
respectively. From July 24, 1998 to April 13, 1999, the Company's Common Stock
and Warrants to purchase Common Stock had been traded and quoted through the
NASDAQ SmallCap Market under the same symbols used on NASDAQ's National Market
System. The Company transferred to the NASDAQ SmallCap Market when its Common
Stock and Warrants no longer satisfied the National Market System minimum
maintenance requirements for the market capitalization of the Common Stock's
public float. As of April 14, 1999, the Company's Common Stock and Warrants to
Purchase Common Stock have been traded and quoted through the Over the Counter
Bulletin Board ("OTCBB"). The Company transferred to the OTCBB when its Common
Stock and Warrants no longer satisfied the NASDAQ SmallCap Market's minimum
maintenance requirements for the market capitalization of the Common Stock's
public float and the minimum bid price of the Common Stock.
The following table sets forth the range of high and low bids for the
Company's Common Stock and Warrants for the periods indicated as reported by the
NASDAQ SmallCap Market and OTCBB.
Stock Warrants
--------------------------- -------------------------
Quarter Ended High Low High Low
---------------------- ------------ ------------ ---------- -----------
September 30, 1998 .88 .81 .06 .06
December 31, 1998 .63 .50 .05 .03
March 31, 1999 .63 .63 .01 .01
June 30, 1999 .81 .81 .02 .02
September 30, 1999 .56 .56 .13 .01
December 31, 1999 .31 .31 .01 .01
March 31, 2000 1.69 1.69 .25 .001
June 30, 2000 1.02 1.02 .14 .04
The prices presented in the table are bid prices, which represent prices
between broker-dealers and do not include retail mark-ups and mark-downs or any
commission to the dealer. The prices presented may not reflect actual
transactions.
On September 25, 2000, the closing price of the Common Stock of the
Company, as reported by the OTCBB, was $1.25 per share. On September 25, 2000,
the closing price of the Warrants, as reported by the OTCBB, was $.04 per
Warrant. On September 25, 2000, the Company had 39 stockholders of record and 17
Warrant holders of record. The Company has been informed by its registrar and
transfer agent that these are holders in nominee name. The Company believes that
the number of beneficial holders is greater.
The Company intends to follow a policy of retaining any earnings to
finance the development and growth of its business. Accordingly, it does not
anticipate other payments of cash dividends in the foreseeable future. The
payment of dividends, if any, rests within the discretion of the Board of
Directors and will depend upon, among other things, the Company's earnings, its
capital requirements and its overall financial condition.
In connection with the Company's initial public offering, on June 20, 1996
the Company filed with the Securities and Exchange Commission (the "SEC") a Form
SR reporting the use of proceeds from such offering. Additional Forms SR were
subsequently filed by the Company. As of September 25, 2000,
<PAGE>
the Company has applied proceeds from the offering in the following approximate
amounts to the following categories.
Amount
------
Type of Payments
----------------
Repayment of Indebtedness $ 1,670,000
Acquisition of other business 92,000
Working capital and general corporate use 1,519,000
-----------
Total $ 3,281,000
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
In May 2000 Sonics' management and Board of Directors elected to
discontinue the Company's VibraSurge operation after reviewing the marketability
of its line of ultrasonic surgical products and its recurring operating losses.
As a result, the Company's balance sheets, statements of income, and statements
of cash flows have been reclassified to report the net assets and operating
results of the VibraSurge business as discontinued for 1999 and 2000. As of June
30, 2000, VibraSurge operations have ceased and remaining net assets, consisting
principally of inventory and accounts receivable, have been written off. For
further information, see Note C of the consolidated financial statements.
Year Ended June 30, 2000 Compared to Year Ended June 30, 1999
Net sales. Net sales for fiscal 2000 increased $1,958,000 or 15.8% over
fiscal 1999. This increase is primarily the result of increased sales of
specialized equipment by Sonics.
Cost of Sales. Cost of sales increased $2,166,000 from fiscal 1999 to
fiscal 2000, This is primarily the result of increased sales of specialized
equipment which typically have lower margins than the Company's standard
equipment. In fiscal 2000, an increased portion of the Company's ultrasonic
liquid processing products and vibration welders were purchased by Company
distributors as opposed to being sold through Company representatives. As a
result, cost of goods increased because of discounts given to distributors.
Selling Expenses. Selling expenses for fiscal 2000 decreased $49,000 or
1.6% over fiscal 1999. As a percentage of net sales these expenses decreased to
20.5% in fiscal 2000 from 24.1% in fiscal 1999. This is due to greater sales by
distributorships as opposed to sales through manufacturer representatives in the
Company's Ultrasonic Processing line.
General and Administrative Expenses. General and administrative expenses
for fiscal 2000 decreased $129,000 or 9.9% over fiscal 1999. As a percentage of
net sales, these expenses decreased to 8.2% in fiscal 2000 from 10.5% in fiscal
1999. This decrease is partially the result of lower professional fees and legal
costs.
Research and Development Expenses. Research and development expenses
increased $40,000 or 10.9% over fiscal 1999. The increase is primarily the
result of a planned expansion of the Research and Development department, which
included the addition of one Research and Development technician.
Interest and other Income. Interest income decreased $18,000 or 22.9% in
fiscal 2000. This is due to the use of invested funds to repay Tooltex bank debt
of $187,000, as described below.
Interest Expense. Total interest expense decreased by $39,000 or 8.6% over
fiscal 1999. The impact of rate increases in 2000 was offset in part by overall
debt reduction. In December 1999, the Company's lender approved the application
of approximately $187,000 of restricted cash toward the repayment of Tooltex
bank debt. The lender also lifted restrictions on the balance of the funds
($213,000) which are available for working capital purposes. Interest charges
are expected to increase in the light of the rising interest rate environment.
All of the Company's outstanding debt is subject to floating rates based on
LIBOR.
<PAGE>
Income Taxes. The Company's effective federal and state income tax rate
for fiscal 2000 was approximately 38% as compared to 3% in fiscal 1999. During
1999, management determined that the tax benefits of deferred tax assets were
realizable and accordingly, reversed the entire valuation allowance that had
been established in the prior year. There were no such offsetting adjustments to
income tax expense in fiscal 2000. However, federal tax liabilities are expected
to be lower than the current year's provision due to the availability of the
loss from discontinued operations and net operating loss carryforwards.
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Net sales. Net sales for fiscal 1999 increased $285,000 or 2.3% 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 decreased $83,000 from fiscal 1998 to fiscal
1999; as a percentage of sales it decreased from 58.5% to 56.4%. This decrease
is primarily due to the implementation of production efficiencies.
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 to Newtown, Connecticut, in fiscal
1999, including moving costs of $62,000. Also in fiscal 1998, the Company paid
$83,000 to cover 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 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 realzed. The Company
does not anticipate any federal tax liability in fiscal 1999 due to the
availability of net operating loss carry forwards.
<PAGE>
Liquidity and Capital Resources
Operations of the Company provided cash of $673,000 in fiscal 2000,
primarily as a result of decreasing inventory, and noncash charges, higher
accounts payable and accrued liabilities. In fiscal 2000, the Company invested
$95,000 in property and equipment. The funds for these expenditures were
internally generated .
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 (9.50% at June 30, 2000). 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, 2000 was $1,290,000, is 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, 2000 is
$175,823, which bears interest at the Bank's base lending rate (9.50% at June
30, 2000). 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 the Company 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, 2000 was $3,509,211,
which bears interest at a rate of 7.5% of the Bank's base lending rate (7.125%
at June 30, 2000). 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 the remaining proceeds have
been used exclusively for the purchase and preparation of the Company's new
facilities, and to purchase new machinery and equipment. The Bonds were payable
in 228 monthly payments 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.
On January 3, 2000 the Company's lender approved the application of
approximately $187,000 of the $400,000 in restricted cash toward the repayment
of the Tooltex bank debt. The lender also lifted restrictions on the balance of
the funds, which are now available for working capital purposes. The Company and
its lender have negotiated an amendment to the credit agreement that includes
eligible Tooltex accounts receivable and inventory in the determination of loan
availability under the working capital line. The line of credit has remained at
$1,500,000.
In June 2000, the Company settled a customer lawsuit for $80,000, payable
by the Company in four installments of $20,000 plus interest through September
2000. The Company accrued for the settlement in fiscal 1998 as an adjustment to
the Tooltex acquisition price.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "Revenue Recognition" ("SAB 101"), which
provides guidance on the recognition presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the Company's
revenue recognition policy
<PAGE>
complies with the provision of SAB 101 and that the adoption of SAB 101 will
have no material effect on the financial position or results of operations of
the Company.
Impact of Inflation
The Company does not believe that inflation significantly affected its
results of operations for the 2000 fiscal year.
Item 7. Financial Statements
The response to this item is submitted in this report under the heading
"Financial Statements" and is incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Directors and executive officers and persons who own more than 10%
of the Company's Common Stock or other equity securities to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company on Forms 3, 4 and 5. Officers, Directors and 10% shareholders are
required by SEC regulations to furnish the Company with copies of all Forms 3, 4
and 5 they file. Based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, the Company believes all Section 16(a) filing requirements applicable
to its officers, Directors and 10% beneficial owners were complied with during
the fiscal year ended June 30, 2000.
Information Regarding Each Director
Robert S. Soloff
Age: 61
First Elected Director: 1969
President and Chief Executive Officer of the Company
Member of Stock Option Committee and Audit Committee
Mr. Soloff joined the Company in 1969 and has served as its Chairman,
President and a Director since then. From 1960 to 1961, he was employed as an
Assistant Project Engineer by Kearfott-Singer, Inc. designing ultrasonic oil
burners and investigating the use of ultrasonic energy for various industrial
applications. From 1962 until 1969, Mr. Soloff held a variety of positions with
Branson Sonic Power Company, a major manufacturer of ultrasonic devices. These
positions included laboratory manager for new products and applications, New
York Metro district sales manager and manager of new product development. He is
a 1960 graduate of Cooper Union where he earned a bachelor of science degree in
mechanical engineering.
Jack Tyransky
Age: 55
First Elected Director: 1995
Partner, Allen & Tyransky
Member of Stock Option Committee and Audit Committee
Mr. Tyransky has been a partner in Allen & Tyransky, a Connecticut
certified public accounting firm since 1975. This firm served as the Company's
certified public accountants from 1988 to 1994. He holds a bachelor of science
degree in accounting from the University of Maryland and a masters degree in
science (taxation) from the University of Hartford.
Lauren H. Soloff
Age: 34
First Elected Director: 1995
Vice President of Legal Affairs and Investor Relations of the Company
Secretary of the Company
Ms. Soloff, the daughter of Robert Soloff, joined the Company in early
1995 as Corporate Counsel, Secretary and a Director. In May of 1996, Ms. Soloff
was promoted to Vice President of Legal Affairs and Investor Relations. From
1993 to 1994, she was employed by the Connecticut law firm of Siegel, O'Connor,
Schiff and Zangari as an associate specializing in litigation for labor and
employment matters. From 1991 to 1993, she served as a staff attorney for the
Office of Solicitor of the U.S. Department of Labor where she was responsible
for all aspects of appellate litigation as well as other litigation and
counseling duties. Ms. Soloff is a member of the New York and Connecticut bars.
She has a bachelor of arts degree from Tufts University and a juris doctorate
from the Washington College of Law, American University.
Ronald Kalb
Age: 50
First Elected Director: 1998
Ronald Kalb is the Vice President and a principal owner of the Siegel
Agency, Inc., a Connecticut insurance agency. Mr. Kalb has been with the Siegel
Agency since 1977. Prior to that, he was employed as a civil engineer by Ebasco
Services, Inc. He holds a bachelor of civil engineering degree from the City
College of New York and received his masters in Engineering at the Brooklyn
Polytechnical Institute.
Item 10. Executive Compensation
The following table sets forth, for the fiscal years ended June 30, 2000,
1999, and 1998, the annual and long-term compensation for the Company's Chief
Executive Officer (the "named executive"). This was the only employee officer,
who was serving as such on June 30, 2000 whose annual compensation exceeded
$100,000 for the fiscal year ended June 30, 2000.
Summary Compensation Table
Annual Compensation
Other Annual
Name and Base Compensation
Principal Position Year Salary Bonus (1)
Robert Soloff 2000 $ 114,000 $ 0 $ 18,941
Chairman of the Board, 1999 114,000 0 18,941
President, and CEO 1998 114,000 0 18,273
-----------------
(1) Represents compensation for excess life insurance premium and personal use
of company auto. Includes executive insurance benefits for Mr. Soloff.
Employment Contracts
Effective July 1, 1995, the Company entered into an employment agreement
with Robert S. Soloff, who is serving as the Company's President, for an initial
term that expired on June 30, 1998. The agreement provided for an annual base
salary of $180,000, $198,000 and $218,000 in each of the first three years of
the agreement. On June 30, 1998, the Board of Directors unanimously voted to
extend the term of the contract under the same terms and conditions. For fiscal
year 1998, 1999, and 2000, Mr. Soloff voluntarily reduced his salary to
$114,000. Under the agreement, the base salary may be increased at the
discretion of the Board of Directors through (i) any bonus arrangement provided
by the Company in its discretion and (ii) other compensation or employee benefit
plans and arrangements, if any, provided to other officers and key employees of
the Company. Such bonuses will be determined by the non-employee members of the
Board of Directors who will take into account the performance of Mr. Soloff and
the Company in making such determination. Such bonuses may not exceed 10% of Mr.
Soloff's annual compensation for three years. Mr. Soloff is subject to a
two-year covenant not to compete with the Company that begins upon the
expiration of his contract.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the Company's
Common Stock owned as of September 25, 2000 by (i) each person who is known by
the Company to own beneficially more than 5% of its outstanding Common Stock,
(ii) each director and nominee for director, (iii) each named executive officer,
and (iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
Warrants to Purchase
Common Stock Common Stock
Amount and Amount and
Nature of Nature of
Name and Address of Beneficial Percentage Beneficial Percentage
Beneficial Owner (1) Ownership Owned Ownership Owned
-------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Robert S. Soloff 2,515,000 69.9% 0
Lauren H. Soloff 274,990 (3) 7.1% 0 0
Jack Tyransky 3,000 (2) * 0 0
Ronald Kalb 1,000 (2) * 0 0
All directors and executive officers
as a group (6 people) (2) (4) 2,830,976 74.0% 0 0
</TABLE>
-----------------
* Indicates less than one percent.
1) The address of each such person is c/o Sonics & Materials, Inc., 53 Church
Hill Road, Newtown, Connecticut 06470 and except as otherwise set forth in
the footnotes below, all shares are beneficially owned and the sole voting
and investment power is held by the persons named.
(2) Represents or includes qualified stock options granted under the Company's
Option Plan.
(3) Includes shares of Common Stock issuable upon exercise of currently
exercisable non-qualified stock options granted to Ms. Soloff.
(4) Includes 274,390 shares and 10,976 shares that are issuable upon exercise
of currently-exercisable non-qualified stock options granted to Lauren H.
Soloff and Daniel Grise, respectively, under the Company's Option Plan.
Item 12. Certain Relationships and Related Transactions
In connection with the Company's public offering in February 1996, Monroe
Parker Securities, the underwriter in the public offering, received, among other
things an option to purchase 100,000 shares of Common Stock and 100,000 Warrants
exercisable over a period of four years commencing February 26, 1997 at exercise
prices of $8.25 per share of Common Stock and $.25 per Warrant The Company also
granted to Monroe Parker Securities the right to nominate one person to serve on
its Board of Directors or to function as an observer at meetings of the Board,
subject to the Company's approval. Stephen Drescher was recommended by Monroe
Parker Securities for nomination to the Board. At the 1996 and 1997 Annual
Meetings of Stockholders, Mr. Drescher was elected to the Board. In December
1997, Mr. Drescher resigned as a director and Monroe Parker Securities has not
nominated anyone in place of Mr. Drescher. In fiscal year 1997, Monroe Parker
Securities exercised its option to purchase 100,000 Warrants to purchase Common
Stock.
<PAGE>
Upon the exercise of the Company's Warrants, the Company is obligated to
pay Monroe Parker Securities a fee of 4% of the aggregate exercise price if (i)
the market price of its Common Stock on the date the Warrant is exercised is
greater than the then exercise price of the Warrants; (ii) the exercise of the
Warrants was solicited by a member of NASD; (iii) the Warrant is not held in a
discretionary account; (iv) disclosure of compensation arrangements was made
both at the time of the initial public offering and at the time of exercise of
the Warrants; (v) the solicitation of exercise of the Warrant was not in
violation of Rule 10b-6 promulgated under the Securities Exchange Act of 1934;
and (vi) no fee will be paid on non-solicited exercises.
In January 1998, Monroe Parker Securities withdrew as a broker dealer
registered with the NASD. The Company has not been notified of any assignment by
Monroe Parker Securities of any of the rights it received in connection with the
Company's public offering.
<PAGE>
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
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).
<PAGE>
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
(b) The Company did not file any Current Reports on Form 8-K during fiscal
year 2000 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 F-4
Statement of Stockholders' Equity F-5
Statements of Cash Flows F-6 - F-7
Notes to Financial Statements F-8 - F-23
<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, 1999 and 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1999 and 2000, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Schneider & Associates LLP
Jericho, New York
September 20, 2000
F-2
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
1999 2000
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 350,600 $ 728,993
Accounts receivable, net of allowance for doubtful
accounts of $95,000 and $88,470 in 1999 and 2000 2,023,378 2,692,786
Inventories 4,874,157 4,489,967
Deferred income taxes 60,983 75,048
Restricted cash from industrial revenue bonds 136,000 --
Other current assets 85,511 75,865
Net assets of discontinued operations 107,330 --
----------- -----------
Total current assets 7,637,959 8,062,659
PROPERTY AND EQUIPMENT - net 4,139,372 4,050,052
GOODWILL - net of accumulated amortization of $111,005
and $166,508 in 1999 and 2000 999,045 929,091
MARKETABLE DEBT SECURITY - pledged 400,000 --
OTHER ASSETS 783,822 672,215
----------- -----------
Total assets $13,960,198 $13,714,017
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - bank $ 1,465,101 $ 1,290,000
Current maturities of long-term debt 444,907 331,097
Accounts payable 579,766 701,929
Customer advances 204,780 133,816
Commissions payable 141,446 193,356
Other accrued expenses and sundry liabilities 464,812 626,691
----------- -----------
Total current liabilities 3,300,812 3,276,889
LONG-TERM DEBT 3,886,487 3,584,390
----------- -----------
Total liabilities 7,187,299 6,861,279
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, 1999 and 2000 105,603 105,603
Additional paid-in capital 6,575,010 6,575,010
Retained earnings 92,286 172,125
----------- -----------
Total stockholders' equity 6,772,899 6,852,738
----------- -----------
Total liabilities and stockholders' equity $13,960,198 $13,714,017
=========== ===========
</TABLE>
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
<TABLE>
<CAPTION>
Years ended June 30,
1999 2000
---- ----
<S> <C> <C>
Net sales $ 12,365,838 $ 14,323,644
Cost of sales 6,981,383 9,147,385
------------ ------------
Gross profit 5,384,455 5,176,259
------------ ------------
Operating expenses:
Selling 2,985,038 2,936,169
General and administrative 1,304,069 1,175,433
Research and development 367,407 407,525
------------ ------------
Total operating expenses 4,656,514 4,519,127
------------ ------------
Other income (expense):
Interest expense (455,351) (415,975)
Interest and other income 80,292 61,943
------------ ------------
Total other income (expense) (375,059) (354,032)
------------ ------------
Income before income taxes 352,882 303,100
Provision for income taxes 11,225 116,140
------------ ------------
Income from continuing operations 341,657 186,960
Loss from discontinued operations (net of income
tax benefit of $55,037 and $65,557, respectively) (25,142) (107,121)
------------ ------------
Net income $ 316,515 $ 79,839
============ ============
Per share:
Basic:
Income from continuing operations $ 0.10 $ 0.05
Loss from discontinued operations (0.01) (0.03)
------------ ------------
Net income $ 0.09 $ 0.02
============ ============
Diluted:
Income from continuing operations $ 0.10 $ 0.05
Loss from discontinued operations (0.01) (0.03)
------------ ------------
Diluted net income per share $ 0.09 $ 0.02
============ ============
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 60,375
------------ ------------
Shares used in diluted per share computation 3,526,898 3,580,475
============ ============
</TABLE>
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, 1999 and 2000
<TABLE>
<CAPTION>
Common Stock Retained
------------ Additional Earnings
Par Paid-in (Accumulated Stockholders'
Shares Value Capital Deficit) Equity
------ ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balances - June 30, 1998 3,520,100 $ 105,603 $6,575,010 $ (224,229) $6,456,384
Net income -- -- -- 316,515 316,515
--------- ---------- --------- ---------- ----------
Balances - June 30, 1999 3,520,100 105,603 6,575,010 92,286 6,772,899
Net income -- -- -- 79,839 79,839
--------- ---------- --------- ---------- ----------
Balances - June 30, 2000 3,520,100 $ 105,603 6,575,010 $ 172,125 $6,852,738
========= ========== ========= ========== ==========
</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
<TABLE>
<CAPTION>
Years ended June 30,
1999 2000
---- ----
<S> <C> <C>
Operating activities
Net income $ 316,515 $ 79,839
Adjustments to reconcile net income to net cash
provided (used in) operating activities
Net loss from discontinued operations 25,142 107,121
Depreciation 259,442 151,829
Amortization of goodwill 55,503 55,503
Income taxes 55,037 80,008
Deferred income taxes (60,983) (14,065)
Changes in operating assets and liabilities:
Accounts receivable 347,582 (703,839)
Inventories (376,875) 488,542
Prepaid income taxes 96,171 --
Other current assets (52,395) 9,646
Other assets 162,685 59,196
Accounts payable (424,585) 122,162
Customer advances (122,575) (70,964)
Commissions payable 17,770 51,910
Other accrued expenses (135,458) 161,879
Net assets of discontinued operations (107,330) 107,330
Net cash used for discontinued operations (80,179) (13,387)
--------- ---------
Net cash (used in) provided by operating activities (24,533) 672,710
--------- ---------
Investing activities
Purchase of property and equipment (282,258) (95,059)
Short-term investments 350,000 400,000
Restricted cash from industrial revenue bond -- 136,000
--------- ---------
Net cash provided by investing activities 67,742 440,941
--------- ---------
Financing activities
Payment of note payable - bank -- (175,101)
Payment of long-term debt -- (522,123)
Payment of capital lease obligations (35,928) (38,034)
Payment of long-term debt (233,095) --
Cash transferred from restricted funds 73,109 --
--------- ---------
Net cash used in financing activities (195,914) (735,258)
--------- ---------
Cash and cash equivalents at beginning of year 503,305 350,600
Net (decrease) increase in cash and cash equivalents (152,705) 378,393
--------- ---------
Cash and cash equivalents at end of year $ 350,600 $ 728,993
========= =========
</TABLE>
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
<TABLE>
<CAPTION>
Years ended June 30,
1999 2000
---- ----
<S> <C> <C>
Supplemental information:
Cash paid (provided by) during the period for:
Interest $ 457,616 $ 412,017
========= =========
Income taxes (refunded) $ (83,422) $ 49,386
========= =========
Supplemental schedule of noncash investing and financing activities:
Proceeds from Industrial Revenue Bond $ 309,371 $ --
Repayment of debt (100,262) --
Transfer to unrestricted funds (73,109) --
--------- ---------
Restricted cash from Industrial Revenue Bond $ 136,000 $ --
========= =========
Equipment financed by capital lease obligation $ -- $ 144,250
========= =========
</TABLE>
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, 1999 AND 2000
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.
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, 1999 AND 2000
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, 1999 and 2000 was $55,502 and
$55,503, 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
F-9
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
undiscounted cash flows estimated to be generated by those assets
are less than the carrying amounts of those assets.
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.
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. Diluted net income per share is calculated by dividing net
income by the
F-10
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
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.
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 $121,000 and $175,000
for the years ended June 30, 1999 and 2000, respectively.
F-11
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
Recently issued pronouncement
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 "Revenue Recognition" ("SAB
101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC.
SAB 101 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosures related to revenue
recognition policies. Management believes that the Company's revenue
recognition policy complies with the provisions of SAB 101 and that
the adoption of SAB 101 will have no material effect on the
financial position or results of operations of the Company.
NOTE C - DISCONTINUED OPERATIONS
In May 2000, management and the board of directors elected to
discontinue the Company's VibraSurge operation after reviewing the
marketability of its line of ultrasonic surgical products and its
recurring operating losses. As a result, the Company's balance
sheets, statements of income, and statements of cash flows have been
reclassified to report the net assets and operating results of the
VibraSurge business as discontinued for 1999 and 2000. As of June
30, 2000, VibraSurge operations have ceased and remaining net
assets, consisting principally of inventory and accounts receivable,
have been written off.
NOTE D - INVENTORIES
Inventories consist of the following:
June 30, June 30,
1999 2000
---- ----
Raw materials $1,033,821 $ 967,971
Work-in-process 2,589,873 2,128,815
Finished goods 1,250,463 1,393,181
---------- ----------
$4,874,157 $4,489,967
========== ==========
F-12
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
NOTE E - PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
June 30, June 30,
1999 2000
---- ----
Land $ 462,486 $ 462,486
Building 3,212,507 3,219,205
Trade show booth 50,494 50,494
Machinery and equipment 872,251 1,017,586
Tooling 140,494 147,449
Office furniture and equipment 310,976 319,619
Leasehold improvements 34,851 49,890
Transportation equipment 60,441 60,441
Data processing equipment 662,067 718,706
---------- ----------
5,806,567 6,045,876
Less: Accumulated depreciation 1,667,195 1,995,824
---------- ----------
$4,139,372 $4,050,052
========== ==========
NOTE F - MARKETABLE DEBT SECURITY - PLEDGED
The investment consisted of a U. S. Treasury note bearing interest
at 5.5% and maturing in March 2000. During fiscal 2000, the
Company's lender released its $400,000 lien on the investment to
enable the Company to repay a term loan with another lender and
increase working capital.
F-13
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
NOTE G - OTHER ASSETS
At June 30, 1999 and 2000, the major components of other assets
were:
June 30, June 30,
1999 2000
---- ----
Demonstration equipment - net of
accumulated depreciation of
$438,331 and $122,422 in 1999
and 2000, respectively $628,110 $537,815
Other 155,712 134,400
-------- --------
$783,822 $672,215
======== ========
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.
NOTE H - OTHER ACCRUED EXPENSES AND SUNDRY LIABILITIES
At June 30, 1999 and 2000, the major components of other accrued
expenses and sundry liabilities were:
June 30, June 30,
1999 2000
---- ----
Accrued compensation $208,445 $351,832
Professional fees 43,949 42,819
Other 212,418 232,040
-------- --------
$464,812 $626,691
======== ========
F-14
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
NOTE I - 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
(9.5% at June 30, 2000). 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,
1999 2000
---- ----
(a) Industrial Revenue Bonds $ 3,709,737 $ 3,509,211
(b) Bank term loan 251,177 175,824
(c) Bank term loan 230,500 --
(d) Capital lease obligations 110,184 216,400
(e) Other loans 29,796 14,052
----------- -----------
4,331,394 3,915,487
Less: Current portion (444,907) (331,097)
----------- -----------
Long-term debt $ 3,886,487 $ 3,584,390
=========== ===========
(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.
F-15
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
(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) Bank term loan, secured by Tooltex assets; repaid in fiscal
2000.
(d) The Company has entered into three equipment leases which
qualify for capitalization under applicable accounting
guidelines. The leases expire at various dates through 2005.
(e) Equipment loans payable in monthly installments through 2003,
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. During fiscal 2000, the
Company's lender added Tooltex's assets to the Company's available
borrowing base and obtained a first lien on substantially all
Tooltex assets. 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 aggregate maturities of long-term debt for the next five fiscal
years are as follows:
Year ending
June 30,
--------
2001 $ 331,097
2002 329,767
2003 268,579
2004 232,168
2005 232,242
F-16
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
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, 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.
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, 2000, there were 63,500 shares available for future grant under
the Plan.
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.
F-17
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
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 1999 and 2000 consistent with the provisions of
SFAS No. 123, net income would have decreased by approximately
$10,000 and $29,000 and earnings per share reduced by $.01 and $.01
in 1999 and 2000, respectively.
The weighted average fair value at date of grant for all options
granted was $.17 in 1999 and $.26 in 2000. 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:
1999 2000
---- ----
Expected stock price volatility 46.5% 45.8%
Expected life of options 4 years 4 years
Risk-free interest rate 5.25% 5.91%
Expected dividend yield 0% 0%
F-18
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
For the two years ended June 30, 2000, option activity was as
follows:
Weighted-
average
Number Exercise
of Shares Price
--------- -----
Outstanding at June 30, 1998 382,866 $1.02 - 4.04
Granted 60,000 .22 - .63
Exercised
Canceled (8,000) 1.25 - 5.00
--------------------------------------------------------------------
Outstanding at June 30, 1999 434,866 $1.49
Granted 57,000 .60
--------------------------------------------------------------------
Outstanding at June 30, 2000 491,866 1.39
====================================================================
The following table summaries information about stock options
outstanding at June 30, 2000:
<TABLE>
<CAPTION>
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
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.22 - $0.63 125,976 $0.47 4.1 years 30,976 $0.37
1.03 - 1.63 300,390 1.06 3.5 years 290,390 1.05
2.94 - 3.50 12,000 3.03 2.0 years 9,333 3.10
5.00 53,500 5.00 .7 years 53,500 5.00
------- -------
491,866 384,199
======= =======
</TABLE>
F-19
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
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, 2000:
Year ending
June 30,
--------
2001 $143,704
2002 142,310
2003 26,337
--------
Total $312,351
========
Rental expense for operating leases totaled approximately $207,000
and $198,000 for the years ended June 30, 1999 and 2000,
respectively.
Employment contracts
In connection with the Tooltex acquisition in July 1997, 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.
Legal settlement
In June 2000, the Company settled a customer lawsuit for $80,000,
payable in four installments of $20,000 plus interest through
September 2000. The Company accrued for the settlement in fiscal
1998 as an adjustment to the Tooltex acquisition price.
F-20
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
NOTE L - INCOME TAXES
The components of the provision for income taxes are as follows:
Years ended June 30,
1999 2000
---- ----
Federal
Current $ 27,261 $ 120,839
Deferred (60,983) (14,065)
--------- ---------
(33,722) 106,774
--------- ---------
State
Current 44,947 9,366
Deferred -- --
--------- ---------
44,947 9,366
--------- ---------
Total income tax provision $ 11,225 $ 116,140
========= =========
The tax effect of temporary differences which give rise to
deferred tax assets and liabilities are as follows:
June 30, June 30,
1999 2000
---- ----
Deferred tax assets:
Accrued expenses $27,670 $36,545
Allowance for doubtful accounts 32,300 30,080
Inventories 16,098 18,478
------- -------
Total deferred tax assets 76,068 85,103
Deferred tax liabilities:
Deferred charges 15,085 10,055
------- -------
Net deferred tax asset $60,983 $75,048
======= =======
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
F-21
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
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 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,
1999 2000
---- ----
Provision for federal income
taxes at the statutory rate $ 119,980 $ 103,156
State and local taxes, net of
federal tax effect 24,420 4,620
Nondeductible expenses 31,366 26,071
Reversal of valuation allowance (155,296) --
Tax credits -- (6,008)
Other (9,245) (11,699)
--------- ---------
Actual provision for income taxes $ 11,225 $ 116,140
========= =========
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 $33,000 and
$31,000 for the years ended June 30, 1999 and 2000, 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 $14,000
for the years ended June 30, 1999 and 2000, respectively.
F-22
<PAGE>
SONICS & MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
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.
The Company operates in one business segment. Net sales by
geographic area are as follows:
Year ended June 30,
1999 2000
---- ----
United States $ 9,865,000 $11,063,000
Europe 1,415,000 1,555,000
Asia/Pacific Rim 662,000 1,136,000
Canada and Mexico 320,000 363,000
Other 177,000 207,000
----------- -----------
$12,439,000 $14,324,000
=========== ===========
NOTE O - RELATED PARTY TRANSACTIONS
The Company leases 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, 1999 and 2000, the
Company incurred $80,575 and $84,320, respectively, for rental of
these facilities.
F-23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 28, 2000
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, September 28, 2000
(Robert S. Soloff) Chief Executive and
Chief Financial Officer
/s/ LAUREN H. SOLOFF Secretary and Director September 28, 2000
(Lauren H. Soloff)
/s/ Ronald Kalb Director September 28, 2000
(Ronald Kalb)
Director September 28, 2000
(Jack T. Tyransky)
/s/ MICHAEL ZELNO Controller September 28, 2000
(Michael Zelno) 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 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 Incorporated by reference from Exhibit 4.3 of
Agent. Amendment No. 3 to Registration Statement No.
33-96414
10(I) Form of Employment Agreement between the Registrant and Incorporated by reference from Exhibit 10.1 of
Robert S. Soloff. Registration Statement No. 33-96414
10(ii) 1995 Incentive Stock Option Plan and form of Stock Option Incorporated by reference from Exhibit 10.3 of
Agreement. Registration Statement No. 33-96414
10(iii) Lease between Registrant and Aston Investment Associates Incorporated by reference from Exhibit 10.5 of
(Aston, PA). Registration Statement No. 33-96414
10(iv) Amended lease between Registrant and Robert Lenert Incorporated by reference from Exhibit 10.6 of
(Naperville, IL). 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, 1997, Incorporated by reference from Exhibit 2(a) of
among the Registrant, SM Sub, Inc., Tooltex, Inc., and the Registrant's Form 8-K dated July 25, 1997
persons designated as the shareholders thereon (excluding
schedules and annexes). A list of omitted schedules and
annexes appears on pages iv and v of the Agreement and Plan
of Merger. The Registrant hereby undertakes to furnish
supplementally a copy of any omitted schedule and annex to
the Commission upon request. .
10(ix) Agreement of Merger, dated as of July 25, 1997, among the Incorporated by reference from Exhibit 2(b) of
Registrant, SM Sub, Inc. and Tooltex, Inc. the Registrant's Form 8-K dated July 25, 1997).
10(x) Credit Agreement, dated September 19, 1997, between Brown Incorporated by reference from Exhibit 10 (xii)
Brothers Harriman & Co. and Registrant of the Registrant's Form 10-KSB for the year
ended June 30, 1997
10(xi) Term Loan Note of Registrant, dated September 19, 1997, Incorporated by reference from Exhibit 10
payable to the order of Brown Brothers Harriman & Co. in the (xiii) of 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 September 19, 1997, Incorporated by reference from Exhibit 10
payable to the order of Brown Brothers Harriman & Co. in the (xiii) of 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 September 19, 1997, Incorporated by reference from Exhibit 10 (xv)
payable to the order of Brown Brothers Harriman & Co. in the of the Registrant's Form 10-KSB for the year
original principal amount of $1,600,000. ended June 30, 1997
10(xiv) Open-End Mortgage Deed from Registrant to Brown Brothers Incorporated by reference from Exhibit 10 (xiv)
Harriman & Co. dated September 19, 1997. of the Registrant's Form 10-KSB for the year
ended June 30, 1997
10(xv) General Security Agreement from Registrant to Brown Brothers Incorporated by reference from Exhibit 10
Harriman & Co. dated September 19, 1997. (xvii) of the Registrant's Form 10-KSB for the
year ended June 30, 1997
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10(xvi) Loan Agreement between Connecticut Development Authority Incorporated by reference from Exhibit 10(xvi)
and Sonics & Materials dated December 1, 1997 of the Registrants Form 10KSB for the year
ended June 30, 1998.
10(xvii) Indenture of Trust between Connecticut Development Authority Incorporated by reference from Exhibit 10(xvii)
and Sonics & Materials, Inc. dated December 1, 1997 of the Registrants Form 10KSB for the year
ended June 30, 1998.
10(xviii) Tax Regulatory Agreement between Connecticut Development Incorporated by reference from Exhibit
Authority and Sonics & Materials, Inc., and Brown Brothers 10(xviii) of the Registrants Form 10KSB for the
Harriman Trust Company as Trustee dated December 12, 1997 year ended June 30, 1998.
21 Subsidiaries of the Registrant (filed herewith). Incorporated by reference from Exhibit
10(xviii) of the Registrants Form 10KSB for the
year ended June 30, 1998.
27 Financial Data Schedule. Filed herewith.
</TABLE>
