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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
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Commission file number 0-21832
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TURBOSONIC TECHNOLOGIES, INC.
(Formerly Sonic Environmental Systems Inc.)
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(Exact name of registrant as specified in its charter)
Delaware 13-1949528
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 Melanie Lane, Hanover, New Jersey 07936
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 882-9288
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
- -
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of 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]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No
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The number of shares outstanding of the Registrant's common stock is
10,000,000 (as of 11/14/97).
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant is $5,224,300 (as of 11/14/97).
Transitional Small Business Disclosure Format (check one): Yes No [X]
DOCUMENTS INCORPORATED BY REFERENCE
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PART I
ITEM 1. BUSINESS
(a) General Development of Business
TurboSonic Technologies, Inc., formerly known as Sonic Environmental
Systems, Inc. (the "Company"), directly and through subsidiaries, designs and
markets integrated pollution control and industrial gas cooling/conditioning
systems, dust suppression systems and high temperature heat exchanger systems to
ameliorate or abate industrial environmental problems. Certain of the
Company's products and systems incorporate the Company's Sonicore(R) atomizing
nozzle technology, certain of which reduce emissions from industrial sources of
gaseous, particulate and toxic pollutants.
On July 17, 1996, certain of the Company's creditors instituted an
involuntary liquidation proceeding against the Company under Chapter 7 of the
Federal Bankruptcy Code in the United States Bankruptcy Court for the District
of New Jersey (the "Court"). On September 16, 1996, the Court converted this
involuntary proceeding case into a voluntary Chapter 11 reorganization
proceeding, thereby permitting the Company's management to remain in control of
the Company's business operations while attempting to formulate a reorganization
plan that would be acceptable to both creditors and the Court.
Contemporaneously therewith, the Company entered into an agreement with
Turbotak Technologies, Inc. ("Turbotak"), a privately held Canadian company
engaged in the design, manufacture, and servicing of air pollution control
equipment, which, among other matters, provided for Turbotak's acquisition of an
approximately $940,000 secured and unsecured bank claim against the Company and
its advance of $205,000 to the Company for working capital. Such agreement
further provided that the Company would propose a Chapter 11 plan of
reorganization which, among other matters, would provide for a merger of the
Company and Turbotak and the acquisition by Turbotak's shareholders of a
controlling equity interest in the Company. The Company filed such a plan of
reorganization with the Court on March 7, 1997. On or about April 21, 1997, the
Company filed a first amended plan of reorganization with the Court (the plan of
reorganization, as so amended and subsequently modified on June 3, 1997, is
hereinafter referred to as the Plan.").
In April 1997, the Company, having received prior approval of the Court,
sold substantially all of the assets of its industrial refrigerant management
products and systems business, acquired by the Company in July 1994, to an
investment group headed by that business' former general manager for
approximately $402,000 as well as the purchasers' assumption of certain
liabilities.
The Plan was confirmed by the Court on July 3, 1997 following requisite
creditor approval. The Plan provided for the extinguishment of all outstanding
shares of the Company's common stock, as well as all outstanding warrants and
options to purchase the Company's common stock. The Plan further provided that
the Company consolidate with Turbotak (the "Consolidation") to form a company to
be called TurboSonic Technologies, Inc. which would have 10,000,000 shares of
common stock outstanding, of which 8,200,000 shares or 82% would be owned by
Turbotak's present shareholders, and 1,255,700 shares or approximately 12.6%
would be issued to the Company's existing shareholders on a pro-rata basis. The
balance of such 10,000,000 shares would be issued to the Company's existing
creditors and others as described in the Plan. Consummation of the
Consolidation, which also extinguished Turbotak's claims against the Company of
approximately $1,145,000, took place on August 27, 1997 (the "Consolidation
Date").
The Company was incorporated in the State of Delaware in April 1961. The
executive offices of the Company are located at 11 Melanie Lane, Suite 22A, East
Hanover, New Jersey, 07936; its telephone number is (973) 884-4388. Unless the
context indicates to the contrary, references to the Company herein include both
the Company and its majority and wholly-owned subsidiaries and all references to
shares of Common Stock and per share data herein give effect to a 2-for-1 split
of the Company's Common Stock in May 1994.
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(b) Narrative Description of Business
Introduction
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Unless the context indicates to the contrary, all references to the
Company's business refer to those operations conducted by the Company prior to
the Consolidation Date.
The Company's principal customers are engaged in chemical, mining and
metallurgical processing. In addition, certain of the Company's customers,
primarily located outside of the United States, are engaged in the incineration
of sewage sludge and solid, medical (infectious) and hazardous waste. A
majority of the Company's customers have historically purchased individual
products or systems from the Company which, in many instances, operate in
conjunction with products and systems supplied by others. In the last several
years, the Company has emphasized the marketing of custom engineered air
pollution control systems which offer a combination of its own products and
systems as an integrated environmental management solution.
Certain of the Company's products and systems employ the Company's
Sonicore(R) atomizing nozzle technology which utilizes a proprietary nozzle to
deliver a powerful sonic shock wave to a liquid passing through the nozzle,
resulting in the liquid being shattered into fine droplets. Droplet sizes and
liquid flow rates can be modulated by controlling the liquid and gas pressures
applied to the nozzle. Sonicore(R) atomizing nozzles, which have been designed
to reduce the temperature of gases, have been sold by the Company for many
years.
The following table reflects the approximate percentages of the Company's
revenue derived from its principal customer categories during the fiscal years
and fiscal period indicated below:
Year Ended April 30,
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1996 1995
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Sewage Sludge Incineration --% 2%
Medical (Infectious) and
Hazardous Waste Incineration 2 --
Solid Waste Incineration 15 58
Chemical and Mining Processing 23 11
Metallurgical Processing 45 7
Dust Suppression 10 9
Other 5 13
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100% 100%
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The Company is contractually responsible to its customers for all phases of
the design, fabrication and, if included in the scope of the Company's contract,
field installation construction of its products and systems. The Company's
successful completion of its contractual obligation is generally determined by a
performance test which is conducted either by its customer or by a customer-
selected independent testing agency.
The Company performs all process engineering, including but not limited to,
the determination of the size, geometry and structural characteristics of the
particular system needed for gaseous, non-condensate or particulate removal, and
performs the detailed design of, and develops specifications for, all
structural, electrical, mechanical and chemical components of such system. The
Company, historically, has not manufactured or fabricated its own products or
systems. Rather, it purchases steel components and various electrical and other
parts consisting of both off-the-shelf items and items, such as its Sonicore(R)
atomizing nozzle, which are made to its design and specifications by third party
manufacturers and fabricators, enters into subcontracts for field construction,
which it supervises, and manages all technical, physical and commercial aspects
of the performance of its contracts. The Company also does not engage in the
field construction of its systems but relies on field construction
subcontractors operating under the supervision of the Company's own employees.
In February 1995, the Company began to perform metal fabrication for certain of
its products and systems in a newly leased facility in an effort to more
effectively control and reduce
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its production costs. In June 1996, the Company discontinued its own
fabrication efforts and abandoned the leased facility.
Products and Systems
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The Company offers a range of products and systems, incorporating diverse
technologies, to address the industrial processing, air pollution control and
other environmental management needs of its customers. Many of such customers
have historically purchased individual products or systems from the Company
which, in many instances, operate in conjunction with products and systems
supplied by others. In the last several years, the Company has emphasized the
marketing of custom engineered air pollution control systems which may provide
combinations of its own products and systems as an integrated environmental
management solution.
The following table reflects the approximate percentages of the Company's
revenue derived from its principal products and systems during the fiscal years
and fiscal period indicated below:
Year Ended April 30,
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1996 1995
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Evaporative gas cooling
and conditioning systems 27% 14%
Wet electrostatic
precipitator systems 2 62
Refrigerant
management systems (1) 35 4
Wet scrubber systems -- --
Dust control and
suppression systems 4 7
Nozzles 10 4
Other 22 9
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100% 100%
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(1) The assets comprising the Company's refrigerant management systems business
were sold to the business' former general manager and others in April 1997.
The principal products and systems offered by the Company are described
below:
Sonicool(R) Evaporative Gas Cooling and Conditioning Systems
Gases containing particulates and other gaseous pollutants generally
emanate from their sources at extremely high temperatures (approximately 250.F -
2,500.F). The temperature of such gases must be reduced prior to their passage
through air pollution control equipment to enable such equipment to operate
efficiently. The conventional method for reducing the temperature of gases is to
pass them through an evaporative gas cooling tower that typically utilizes
atomizing nozzles to spray a liquid into the gases. However, liquid droplets
which are injected into the hot gases do not always evaporate properly or in a
timely fashion, may cause uneven wetting of particulates or other pollutants and
may not lower the temperature of the gases sufficiently if such liquid droplets
are too large. Any one or more of these problems will adversely affect the
operating efficiency of the air pollution control equipment. The Company's
Sonicool(R) evaporative gas cooling and conditioning systems are designed to
efficiently reduce the temperature of gases by utilizing its Sonicore(R)
atomizing nozzle to produce extremely small liquid droplets.
Since the introduction of the first Sonicool(R) system in 1973, the Company
has sold over 400 of such systems to more than 250 customers. Principal
customers for the Sonicool(R) system include businesses engaged in chemical,
mining and metallurgical processing and solid waste, medical and hazardous waste
and sewage sludge incineration.
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SonicKleen(R) Wet Electrostatic Precipitator Systems
Wet electrostatic precipitators ("WESPs") are one of several methods of
removing particulates from gas streams. WESPs, however, are able to remove much
finer particulates than dry electrostatic precipitators, scrubbers and fabric
filters. In a typical WESP, a gas stream flows into a vertical tube between
discharge and collecting electrodes. Particulates in the flowing gases are
charged as they pass through electrodes and are then attracted to oppositely
charged collection surfaces. In a WESP, particulates are removed from the
collecting surface by an irrigating film of liquid. The Company believes that
its SonicKleen(R) WESP system, which is based upon the use of the Sonicore(R)
atomizing nozzle, is effective due to its design which concentrates the
electrical discharge in specific zones within the collecting tube.
First introduced in 1991, two SonicKleen(R) WESP systems have been
installed in the sewage sludge incinerators of Naugatuck Treatment Company,
located in Naugatuck, Connecticut, for the removal of toxic heavy metals and
submicron particulates. The Company has also installed three additional WESP
systems in sewage sludge incinerators including one at Kodak's Rochester, New
York manufacturing plant. An additional SonicKleen(R) WESP system, installed in
June 1994 at a sulfuric acid production facility operated by Chevron in El
Segundo, California, never functioned at full capacity primarily as a result of
technical problems and difficulties encountered by Chevron with respect to that
facility's operations and is scheduled to be returned to the Company upon
Chevron's anticipated closure of this facility.
The Company has also installed an air pollution control system, utilizing a
SonicKleen(R) WESP, in a hospital in Daytona Beach, Florida, which is intended
to remove toxic heavy metals, submicron particulates and hydrochloric acid from
medical waste. The Company believes that this installation was one of the first
on-site incinerators in the United States to utilize a WESP. Another WESP
system has been installed at a Mead Paper Company manufacturing facility to
control emissions from a waste wood boiler. This is the first installation for
the Company in the pulp and paper industry.
Sonicore(R) Fluidized Vortex Wet Scrubber Systems
Wet scrubber systems are generally used to absorb gaseous pollutants and
particulate matter contained in exhaust gas streams. Unlike dry scrubbers which
employ chemical reagents such as lime to absorb particulates, wet scrubbers are
generally more efficient and, in addition, can absorb volatile and noxious
gases.
Each Sonicore(R) fluidized vortex wet scrubber includes the modular
scrubber unit, associated fans, duct work, piping, pumps and valves and the
control systems required to maintain the concentration of the scrubbing
chemicals in the circulated liquid and to maintain the level of liquid within
the system.
First introduced in 1991, nine Sonicore(R) fluidized vortex wet scrubbers
have been sold to four customers. The purchasers of such systems have been two
hospitals for incineration of their infectious waste, a food processor and a
supplier of equipment for flue gas desulphurization.
Dry Fog(R) Dust Control and Suppression Systems
Dust particles from primary and secondary crushing, screening, transfer and
loading-unloading facilities such as hoppers, feeders, bins, ducts, silos,and
rail and motor vehicles are a major source of atmospheric pollution as well as a
contributing factor towards a reduction in the useful life of operating
machinery components. The Company's Dry Fog(R) dust control and suppression
system utilizes the Sonicore(R) atomizing nozzle to envelop and bring down dust
particles with a dense fog of extremely fine droplets of water that can be
adjusted to approximate the size of such dust particles. The DryFog(R) system is
used primarily by concerns engaged in the handling or processing of sand, lime,
cement and similar aggregates. The Company has sold over 400 Dry Fog(R) systems
to more than 200 customers since its initial commercial introduction in 1977.
Sonicore(R) Atomizing Nozzles
Although the Company does not emphasize the sale of its Sonicore(R)
atomizing nozzles as a stand-alone product, approximately 21,400 of such nozzles
have been sold to approximately 100 customers since May 1, 1990. There are
hundreds of competitors who sell nozzles, some of which compete directly with
the Company's nozzles. Many of these nozzles are sold at lower prices than the
Company's nozzles. In spite of such competition, the Company has been able to
maintain its profit margin on such nozzles without reducing their prices. The
one patent relating to its nozzles, which
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expires in 1997, applies to only one type of nozzle which has a limited market.
The expiration of such patent would not have a material impact on the Company's
sales of nozzles.
Heat Exchangers
Ceramic heat exchangers are generally used to extract thermal energy from
heated air, which can be used in diverse applications to improve fuel
efficiencies and/or industrial processes. Most applications are found in high
temperature ranges (generally above 1800.F) where metal heat exchangers would be
unsuitable due to excessive erosion or decomposition.
The Company, through an 80% owned subsidiary, owns patent rights and
technology relating to the use of ceramic heat exchangers for increased fuel
efficiencies for high temperature industrial manufacturing and chemical
processes. Such heat exchangers, which employ ceramic composite materials in
such a manner as to effectively and efficiently seal and reuse heated process
air, have not as yet been proven to operate successfully in a commercial
environment.
The persons from whom the Company acquired its ceramic heat exchanger
patent rights and technology commenced an adversary proceeding in the Court
against the Company to rescind the transfer of such rights and for damages.
Although such litigation sought to terminate the Company's right to utilize
these patent rights and technology, the Plan provided that any monetary claims
arising out of such litigation were to be treated as unsecured claims and are to
be discharged as provided in the Plan.
Parts, Repair and Refurbishment Services
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The Company provides replacement and spare parts and repair and
refurbishment services for both its industrial processing and air pollution
control systems following the expiration of the Company's warranty. Such
warranty generally ranges from 12 to 18 months depending, respectively, upon
when the system becomes operational or when it is shipped to the
customer.Warranty liabilities have been minimal to date. The Company believes
that in view of the extreme conditions under which industrial process and air
pollution control systems operate, maintenance, repair and rebuilding of these
systems is an ongoing requirement and should create additional demand for the
Company's services and products.
The Company's standard contractual terms with respect to the sale of its
products and systems disclaim any liability for consequential or indirect losses
or damages stemming from any failure of the Company's products or systems or any
component thereof. The Company customarily seeks contractual indemnification
from its subcontractors for any loss, damage or claim arising from the
subcontractor's failure of performance, negligence or malfeasance. It is likely,
however, that a customer's inability to comply with applicable pollution control
laws or regulations stemming from the failure or non-performance of the
Company's products or systems may subject the Company to liability for any fines
imposed upon such customer by governmental regulatory authorities or for damages
asserted to have been incurred by any third party adversely affected thereby.
The following table reflects the approximate percentages of the Company's
revenue derived from original equipment sales and from rehabilitation,
maintenance and spare parts services during the fiscal years indicated below:
Year Ended April 30,
----------------------
1996 1995
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Original equipment 46% 80%
Rehabilitation, maintenance,
spare parts and other 54 20
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100% 100%
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Marketing and Sales
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The Company's marketing efforts are technical in nature and currently
involve its senior management and technical professionals, supported by
independent sales representatives in certain areas of South America, Central
America and the Far East. The Company's contractual arrangements with its
independent sales representatives accord each a defined
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territory within which to sell some or all of the Company's products and
systems, provide for the payment of agreed-upon sales commissions and are
terminable at will by either the Company or the representative upon relatively
short prior notice. None of such representatives, however, have authority to
execute contracts on the Company's behalf. A significant portion of the
Company's domestic sales are made through the recommendation of architectural
and engineering firms, which play a significant role in the design and
manufacture of air pollution control systems and in customers' selection of the
vendors of such systems. The Company has five domestic sales representatives,
each with a defined territory within which to sell some or all of the Company's
products and systems.
The Company's sales representatives, who assist the Company in consummating
sales of its products and services, serve an ongoing liaison function between
the Company and its customers during the installation phase of the Company's
products and systems and address customers' questions or concerns arising
thereafter, are selected by the Company based upon industry reputation, prior
sales performance including number of prospective leads generated and sales
closure rates, and the breadth of territorial coverage, among other criteria.
Technical inquiries received from potential customers are referred to the
Company's engineering personnel. Thereafter, the Company's sales and engineering
personnel jointly prepare either a budget for future planning, a proposal or a
final bid. The period between initial customer contact and issuance of an order
varies widely, but is generally between 6 and 24 months.
Although the Company seeks to obtain repeat business from its customers, it
does not depend upon any single customer to maintain its level of activity from
year to year. As the percentage of the Company's net revenues attributable to
the sale of pollution control systems continues to increase, one or more
different customers may be expected to account for greater than 10% of the
Company's net revenues in any consecutive twelve month period.
Two customers, Mead Paper and Carrier Corporation, accounted for 23% and
15%, respectively, of the Company's net revenues during the fiscal year ended
April 30, 1996. During the fiscal year ended April 30, 1995, two customers, Mead
and Nan-Ya, accounted for 13% and 24%, respectively, of the Company's net
revenues.
Backlog
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At April 30, 1996, the amount of the Company's contract backlog was
approximately $722,000, contrasted with $3,200,000 at April 30, 1995. Backlog
represents work for which the Company has entered into a signed agreement or has
received an order to proceed. All of the Company's April 30, 1996 backlog was
completed prior to April 30, 1997.
Product Development
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The Company has an ongoing program for the development and
commercialization of new industrial processing and air pollution control
products, systems and technologies, and heat exchangers and the enhancement of
existing products and systems.
Proprietary Protection
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The Company owns or has licensed rights to two issued U.S. patents relating
to its ceramic heat exchanger technology. One patent expires in the year 2003
and the other will expire in the year 2015. The Company's ownership of these
rights are the subject of pending litigation (see "- Heat Exchangers"). The
Company owns one patent relating to its Sonicore(R) nozzle, which will expire in
1997. The Company does not regard this latter patent as being of material
importance to its operations and prospects.
The Company has registered servicemarks or trademarks in the United States
and certain foreign countries for several identifying names which it uses with
its products and systems including Sonicool(R), Sonicore(R), SonicKleen(R) and
Dry Fog(R).
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The Company relies on a combination of patents, trade and service marks,
trade secrets and know-how to protect its proprietary technology and rights.
There can be no assurance that the Company's patents will not be infringed upon,
that the Company would have adequate remedies for any such infringement, or that
its trade secrets will not otherwise become known to or independently developed
by competitors. There can also be no assurance that any patents now or
hereafter issued to, licensed by or applied for by the Company will be upheld,
if challenged, or that the protections afforded thereby will not be circumvented
by others. Litigation may be necessary to defend the Company's proprietary
rights, which would result in significant cost to the Company and a diversion of
effort of its personnel (see "- Heat Exchangers").
Suppliers and Subcontractors
- - ----------------------------
Like other companies in the industrial processing and environmental
management control industry, the Company has historically relied on third
parties to manufacture and fabricate its products and to supply parts and
components for its systems in accordance with the Company's specifications. In
February 1995, however, the Company began to perform metal fabrication for
certain of its products and systems. In addition, in cases in which the
Company's scope of work includes installation of equipment, the Company selects
and supervises subcontractors for this work. To date, the Company has not
experienced difficulties either in obtaining fabricated components and other
materials and parts used in any of its products and systems or in obtaining
qualified subcontractors. The Company's vendor sources for various components,
materials and parts used in its systems, including its Sonicore(R) atomizing
nozzle, control switches and electrical and other components, includes more than
50 firms. The Company does not depend on any one of the vendors to a material
extent, and in any event the Company believes that alternative vendors would be
available if needed. With respect to fabricators, the Company has satisfactory
relationships with more than ten fabricators. Similarly, with respect to
subcontractors for installation work, the Company has satisfactory relations
with more than three firms. On the basis of the number of vendors, fabricators
and subcontractors which it utilizes and the availability of alternative
sources, the Company does not believe that the loss of its relationship with any
one firm would have a material adverse effect on its business.
Bonding and Insurance
- - ---------------------
While only one of the contracts performed by the Company to date has
required it to procure bid and performance bonds, such requirements are
prevalent for projects partially or fully funded by federal, state or local
governments, such as municipal solid waste and sewage sludge incineration
projects. A bid bond guarantees that a bidder will execute a contract if it is
awarded the job and a performance bond guarantees performance of the contract.
The Company does not, at the present time, have any ability to provide bid or
performance bonds. This could have an adverse effect on the Company's ability
to obtain certain contracts.
The Company currently maintains different types of insurance, including
general liability and property coverage. The Company, however, does not maintain
any professional liability insurance with respect to the engineering and other
professional services it renders its customers. A successful claim or claims in
an amount in excess of the Company's insurance coverage or for which there is no
coverage could have a material adverse effect on the Company.
Government Regulation
- - ---------------------
Significant environmental laws have been enacted in response to public
concern about the environment. The Company believes that the need to comply with
these laws creates demand for the Company's products and systems. The Federal
Clean Air Act, Federal, state and local regulations which implement it and the
enforcement of these laws and regulations largely determine the level of
expenditures that customers will make to limit emissions from their facilities.
The Federal Clean Air Act, initially adopted in 1970 and extensively
amended in 1990, requires compliance with ambient air quality standards and
empowers the EPA to establish and enforce limits on the emission of various
pollutants from specific types of industrial facilities. The states have primary
responsibility for implementing these standards, and, in some cases, have
adopted standards more stringent than those established by the EPA.
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The 1990 amendments to the Federal Clean Air Act require, among other
matters, the reduction in the United States of the annual emission of sulfur
oxides, believe to be the cause of "acid rain" from approximately 20,000,000
tons to 10,000,000 tons by the year 2000, significant reductions in the emission
of 189 identified hazardous air pollutants and toxic substances and the
installation of equipment and systems which will contain certain named toxic
substances used in industrial processes in the event of sudden,accidental, high-
volume releases. Such amendments also extend regulatory coverage to many
facilities previously exempt due to their small size and require the EPA to
identify those industries which will be required to install the mandated control
technology for the industry to reduce the emission of hazardous air pollutants
from their respective plants and facilities. The Montreal Protocol, adopted in
September 1987, as well as EPA regulations issued in July 1992, call for the
phase-out of CFCs. In addition, regulations promulgated by the EPA in February
1993 further limit the concentration of pollutants, such as hydrogen chloride,
sulfur dioxide, chlorine, heavy metals and hazardous solid substances in the
form of extremely fine dust, from sewage sludge incinerators. Such sewage sludge
facilities were required to comply with these newly adopted regulations by
February 1995.
Legislative proposals introduced in the U.S. Congress seek abolition of
certain environmental laws and regulations, reduced levels of enforcement for
others and cost justification and extended hearings prior to the enactment of
any future such laws and regulations. The enactment into law of any one or more
of such proposals, the likelihood of which cannot be predicted, could have an
adverse effect on the Company's ability to sell its products and systems.
The decision of a political subdivision to bid or contract for a sewage
sludge or solid waste incinerator is a complex process involving public policy
concerns, perception regarding the acceptability, availability and cost of land
filling or alternative waste disposal processes, including recycling, the
availability of an acceptable incinerator site, local citizen support and/or
opposition to incinerators, governmental regulation and the cost of an
incineration facility. In view of these considerations, none of which are within
the control of the Company, there can be no assurances that contracts which the
Company may obtain for the installation of its air pollution control systems in
solid waste or sewage sludge incinerators may not be indefinitely postponed or
delayed.
The materials handling aspect of the Company's business is also dependent
in part upon the regulation under the Federal Occupation and Safety Health Act
of dust concentration to which workers may be exposed in the workplace.
Competition
- - -----------
The Company faces substantial competition in each of its principal markets
from numerous competitors. Most of the Company's competitors are larger and have
greater financial resources than the Company. The Company competes primarily on
the basis of price as well as its engineering and technological expertise, know-
how and quality of its products, systems and service. Additionally, the Company
believes that the successful performance of its installed products and systems
is a key factor in dealing with its customers, which typically prefer to make
significant purchases from a company with a solid performance history.
Virtually all contracts for the Company's products and systems are obtained
through competitive bidding. Although price is an important factor and may in
some cases be the governing factor, it is not always determinative, and
contracts are often awarded on the basis of the efficiency or reliability of
products and the engineering and technical expertise of the bidder.
Employees
- - ---------
As of April 30, 1996, the Company employed approximately 47 persons,
including 5 executive officers, 6 engineers, 10 salespersons, 7 production
persons, 10 service persons and 9 administrative and support persons. As a
consequence of the Company's Chapter 11 reorganization proceeding and the sale
of the Company's refrigerant management systems business, the Company's work
force at April 30, 1997 had been reduced to 9 full time and 2 part time
employees, consisting of 1 executive officer, 2 engineers, 2 salespersons, 2
part-time production persons and 4 administrative support persons.
None of the Company's employees is represented by a labor union. The
Company believes that its relationship with its employees is satisfactory.
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<PAGE>
(d) Financial Information about Foreign and Domestic Operations and Export
Sales
Domestic customers accounted for approximately 82% and 62% of the Company's
sales during the years ended April 30, 1996 and 1995, respectively. South and
Central American sales were concentrated primarily in Chile and Mexico, while
Far East sales included concerns in Japan, Korea, Singapore and Taiwan the
latter being countries in which environmental regulations have been increasingly
enforced by governmental authorities over the past several years. All revenue
derived from export sales is transacted in U.S. dollars.
The following table reflects the approximate percentages of the Company's
revenue derived from United States and foreign sales during the fiscal years
indicated below:
Year Ended April 30,
----------------------
1996 1995
---------- ----------
United States 82% 62%
Europe 5 1
South and Central America 6 4
Far East 1 30
Africa - 1
Other 6 2
---- ----
100% 100%
==== ====
Forward-Looking Statements
- - --------------------------
Forward-looking statements in this Report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned that such forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed therein. Such risks and uncertainties include, among others, the
following:
. Dependence on Environmental Regulation. The market for air pollution
--------------------------------------
control products and systems is directly dependent upon the existence and
enforcement of laws and regulations which limit or prohibit the release of
pollutants into the atmosphere and impose substantial penalties for non-
compliance. Legislative proposals introduced in the current session of the
U.S. Congress seek abolition or reduced enforcement of many previously
enacted environmental laws and regulations and would impose substantial
impediments to the adoption of any additional environmental regulatory
programs. The enactment of any of such proposals into law or any reduction
in the stringency of environmental law enforcement from present levels
could have an adverse effect on the Company's ability to sell its products
and systems and may have a materially adverse effect upon its future
revenues and prospects of profitability.
. Limited Protection of Patents and Proprietary Rights. The Company relies
----------------------------------------------------
on a combination of patents, trade and service marks, trade secrets and
know-how to protect its proprietary technology and rights. There can be no
assurance that the Company's patents will not be infringed upon, that the
Company would have adequate remedies for any such infringement, or that its
trade secrets will not otherwise become known to or independently developed
by competitors. There can also be no assurance that any patents now or
hereafter issued to, licensed by or applied for by the Company will be
upheld, if challenged, or that the protections afforded thereby will not be
circumvented by others. Litigation may be necessary to defend the
Company's proprietary rights, which would result in significant cost to the
Company and a diversion of effort of its personnel.
. Export Sales. Approximately 18% and 38% of the Company's revenues during
--------------
the fiscal years ended April 30, 1996 and 1995, respectively, were derived
from sales made outside of the United States. The Company's profitability
and financial condition are materially dependent, therefore, on the success
of its foreign sales efforts. Foreign sales are subject to certain
inherent risks, including unexpected changes in regulatory and
9
<PAGE>
other legal requirements, tariffs and other trade barriers, greater
difficulty in collection of accounts receivable and potentially adverse tax
consequences. There can be no assurance that these factors will not have an
adverse impact on the Company's future foreign sales and, consequently, on
the Company's operating results. All revenue derived from export sales is
transacted in U.S. dollars.
. Bonding Requirements. While only one of the contracts performed by the
--------------------
Company to date has required it to procure bid and performance bonds, such
requirements are prevalent for projects partially or fully funded by
federal, state or local governments, such as municipal solid waste or
sewage sludge incineration projects. A bid bond guarantees that a bidder
will execute a contract if it is awarded the job and a performance bond
guarantees performance of the contract. The Company's inability to obtain
bonding could have an adverse effect on the Company's future revenues.
. Permitting Delays. All of the Company's domestic projects generally
-----------------
require permits to be issued by one or more governmental agencies prior to
the commencement of both construction and operation. Issuance of such
permits are often delayed by political and other considerations.
Permitting delays could cause extended delay or cancellation of one or more
of the Company's large projects, which would adversely impact the Company's
future revenue.
. Dependence on Manufacturers, Fabricators and Subcontractors. The Company
-----------------------------------------------------------
in most instances does not manufacture or fabricate its own products or
systems, relying instead upon the services of third party manufacturers and
fabricators. The Company also does not engage in the field construction of
its systems but relies on field construction subcontractors operating under
the supervision of the Company's own employees. The unavailability of the
services of, or a substantial increase in pricing by a significant number
of, these manufacturers, fabricators or subcontractors could adversely
affect the Company. Given the number of manufacturers, fabricators and
subcontractors which it utilizes and the availability of alternative
sources, the Company does not believe that the loss of its relationship
with any one firm would have a material adverse effect on its business.
. Competition. Most of the Company's competitors are larger and have
-----------
greater financial and other resources than the Company. The markets for
environmental control products and systems are both characterized by
substantial competition based primarily on engineering and technological
expertise and quality of service. Because virtually all contracts for the
Company's products and systems are obtained through competitive bidding,
price is also a competitive factor and may be the most significant factor
in certain instances. Although the Company believes that it competes on
the basis of its technical expertise and reputation for service, there can
be no assurance that the Company will maintain its competitive position in
its principal markets.
. Fixed Price Contracts. The Company's receipt of a fixed price contract
---------------------
as a consequence of being the lowest competitive bidder carries the
inherent risk that the Company's actual performance costs may exceed the
estimates upon which its bid for such contract was based. To the extent
that contract performance costs exceed projected costs, the Company's
profitability could be materially adversely affected.
. Potential Liability. The Company may become subject to liability claims
-------------------
in connection with the use of its products and systems. The Company does
not carry any product liability insurance nor does it carry any
professional liability insurance with respect to the engineering and other
professional services it renders its customers. Any future inability to
obtain insurance of the type and in the amounts required could impair the
Company's ability to obtain some contracts, which are, in certain
instances, conditioned upon the availability of adequate insurance
coverage.
ITEM 2. PROPERTIES
On September 1, 1997, the Company leased approximately 5,040 square feet of
office and shop space in East Hanover, New Jersey in a new commercial structure.
Such lease is for a term of five years with a renewal option for an additional
five years, and provides for an annual rental of approximately $50,000 with
annual cost of living increases (not to exceed 4% per year) based upon the
Consumer Price Index. Taxes, insurance and utilities are paid separately.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Numerous creditors filed lawsuits against the Company for non-payment of
monies owed to them prior to the institution of the Company's bankruptcy
proceeding. Furthermore, the inventors and/or former owners of the Company's
heat exchanger technology have filed lawsuits against the Company for monetary
damages and challenging the Company's ownership of, and its right to use such
technology. All such creditors' claims, including monetary damages, if any,
attributable to the heat exchanger technology litigation, are dischargeable as
provided in the Plan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on November 8, 1995, at
which the stockholders of the Company elected the directors of the Company for
the ensuing year and ratified the selection of Arthur Andersen LLP as the
Company's independent auditors for the fiscal year ending April 30, 1996. The
number of votes as to each such matter was as follows:
. Election of Directors:
Richard H. Hurd, Richard A. Horgan, and Robert J. Ferb each received
3,815,143 votes in favor.
. Amend Company's Certificate of Incorporation to increase authorized
shares to 30,000,000:
For Against
--- -------
3,648,328 252,630
. Amend Company's 1992 Incentive Stock Option Plan:
For Against
--- -------
3,371,775 510,083
. Ratification of Selection of Arthur Andersen LLP:
For Against
--- -------
3,903,215 26,400
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From June 17, 1993, (the date of the Company's initial public offering of
its equity securities) through April 1996, the Company's Common Stock, Series A
Common Stock Purchase Warrants ("Series A Warrants") and Series B Common Stock
Purchase Warrants ("Series B Warrants") were each quoted on The NASDAQ Small-Cap
Market. Prior thereto, the Company's Common Stock was traded sporadically in
the over-the-counter market (i.e., there was no established public trading
market for the Company's Common Stock).
The following table sets forth the range of the high and low bid quotations
for the Company's securities for the periods indicated, as furnished by National
Quotation Bureau Incorporated and Nasdaq.
Common Stock
----------------
High Low
------ --------
Fiscal Year Ended April 30, 1996:
- - -----------------------------------
First Quarter $1-7/8 $ 1-1/8
Second Quarter 1-1/4 5/8
Third Quarter 3/4 1/2
Fourth Quarter 1/2 1/4
Fiscal Year Ended April 30, 1995:
- - -----------------------------------
First Quarter $6-1/4 $3-15/16
Second Quarter 6-1/4 4-1/2
Third Quarter 5-7/8 4
Fourth Quarter 4-1/4 2-7/8
- - ---------------------------------
The above quotations represent prices between dealers and do not include
retail mark up, markdown or commission. They do not necessarily represent
actual transactions.
The Company's securities were delisted from the NASDAQ Small Cap Market in
April 1996. Subsequent trading took place upon the OTC Bulletin Board until the
Effective Date, consummation of the Consolidation in August 1997, at which time
each of the Common Stock, Series A Warrants and Series B Warrants were
extinguished in accordance with the Plan, resulting in a cessation of trading
activity. The Company's Common Stock is currently quoted in the "pink sheets"
published by National Quotation Bureau Incorporated.
(b) As of October 22, 1997, there were 383 holders of record of the Common
Stock
(c) The Company does not anticipate paying any cash dividends in the
foreseeable future, as it is the current policy of the Company's Board of
Directors to retain any earnings to finance the Company's future operations and
expand its business.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are derived
from the Company's consolidated financial statements. This financial
information should be read in conjunction with Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Item 8.
"Financial Statements and Supplementing Data."
STATEMENT OF OPERATIONS DATA:
(In thousands, except per share information)
Year Ended April 30,
----------------------------
1996 1995 1994
-------- ------- -------
Total revenue $ 2,802 $ 6,671 $ 2,683
Total cost of revenue 2,433 6,467 2,043
Selling, general and
administrative expenses 2,956 4,345 3,347
Interest income (expense) ( 99) ( 52) 23
Net rental income - - 15
Royalty income 44 - 64
-------- ------- -------
Earnings (loss) before
income taxes (benefit) and
(loss) from continuing
operations ( 2,642) (4,193) (2,605)
Income taxes (benefit) - - ( 61)
Loss from operations of ( 885) ( 529)
discontinued segments -
Loss for disposal of
discontinued segments,
including losses during phase ( 657) - -
out period -------- ------- -------
Net income (loss) $ (4,184) $(4,722) $(2,544)
======== ======= =======
13
<PAGE>
Net income (loss) per share
from continuing operations $ (0.37) $(1.17) $( 0.81)
Net loss per share from
operations of discontinued
segments $ (0.13)
Net loss per share from
disposal of discontinued
segments $ (0.09)
Cash dividends per share - - -
Weighted average number of 3,126
shares outstanding(1) 7,025 4,052
14
<PAGE>
BALANCE SHEET DATA:
(in thousands)
April 30,
-------------------------------------
1996 1995 1994
---- ---- ----
Working capital $ ( 255) $ (983) $ 798
Total assets 2,364 4,718 2,612
Long-term debt, less
current portion
of capital lease 21
obligations - 5 (3,176)
Accumulated deficit (12,082) (7,898) 1,487
Stockholders' equity ( 1,409) 1,162
(1) Weighted average number of shares outstanding for all periods have been
adjusted for common shares, warrants and options issued in February 1993,
as these items were issued or are exercisable at prices below the initial
public offering price in June 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended April 30, 1996
Compared with Year Ended April 30, 1995
Original equipment revenue decreased by $4,071,668 (315.2%) to $1,291,781
for the year ended April 30, 1996 from $5,363,449 in fiscal 1995. Approximately
$1,600,000 of this decrease was attributable to the decision by management to
account for certain specific contracts on a completed contract method of
accounting. As described in Note 2 to the Company's Consolidated Financial
Statements, revenue from long-term contracts is recognized using the percentage
of completion method of accounting. For those contracts, however, that utilize a
new technology or require filtration of a material with which the Company has
not had previous experience, the completed contract method is used.
Consequently, the revenues and associated costs for three large air pollution
control contracts were recognized during the fiscal year ended April 30, 1995
using the completed contract method of accounting. No revenues or costs were
recognized under the completed contract method during the fiscal year ended
April 30, 1996. Revenues also decreased approximately $1,800,000 from 1995
levels as a consequence of 1995 equipment sales to a single Taiwanese customer
which were not repeated in fiscal 1996.
Rehabilitation, maintenance, and spare parts revenue increased $202,682
(15.5%) to $1,510,670 for the year ended April 30, 1996 from $1,307,988 for
fiscal 1995. A service contract in fiscal 1996 for a major oil company
attributed approximately $250,000 to this increase.
Cost of original equipment decreased by $4,493,938 (342.4%) to $1,312,439
for the year ended April 30, 1996 from $5,806,377 for fiscal 1995. Cost of
original equipment, as a percentage of original equipment revenue, was 101.6%
for the year ended April 30, 1996 as compared to 108.3% for fiscal 1995. The
negative gross profit percentage for original equipment revenue was attributable
to substantial cost overruns on several of the Company's air pollution control
contracts, caused by increases in material prices that occurred after the
contracts were awarded to the Company and actual
15
<PAGE>
engineering time which exceeded budgeted engineering costs.
Cost of rehabilitation, maintenance and spare parts increased by $459,905
(69.7%) to $1,120,119 for the year ended April 30, 1996 from $660,214 for fiscal
1995. Such cost, as a percentage of rehabilitation, maintenance and spare
parts revenue, was 74.1% for the year ended April 30, 1996 as compared to 50.5%
in fiscal 1995. The percentage increase was due to the fact that rehabilitation
and maintenance, which have higher cost of sales than spare parts, represented a
higher percentage of total rehabilitation, maintenance and spare parts revenue
in fiscal 1996 than in fiscal 1995.
Selling, general and administrative expenses decreased by $1,388,874 (47%)
to $2,956,582 for the year ended April 30, 1996 from $4,348,456 for fiscal 1995.
These expenses, as a percentage of total revenue, were 105.5% for the year ended
April 30, 1996 as compared to 65.1% for fiscal 1995. The decline in selling,
general and administrative expenses as a percentage of total revenues was due to
a general decrease in sales. The overall decline in selling, general and
administrative expenses in fiscal 1996 as compared to the prior fiscal year was
primarily due to the following fiscal 1995 expenses that did not occur in fiscal
1996: (1) the write-off of $205,000 in deferred costs of an unfiled registration
statement: (2) the write-off of $254,000 of deferred costs relating to an
unfinalized contract; (3) operational and other expenses of $378,000 relating
to an unconsolidated subsidiary; (4) an increase of $127,000 in sales
commissions attributable to increased volume; and (5) legal and accounting fees
of $171,000 relating to the Company's acquisitions, patents and intellectual
property. The Company also generally reduced overhead expenses in response to
its substantial losses in fiscal 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a negative cash flow from operating activities of
$1,469,150 for the year ended April 30, 1996 as compared to a negative cash flow
of $3,009,888 for fiscal 1995, a decrease of $1,540,738 primarily caused by
substantial decreases in original equipment costs for several air pollution
control equipment contracts which resulted in losses of approximately $850,000;
the recognition of an anticipated loss of approximately $834,000 on a contract
with a single Taiwanese customer; and a substantial increase in selling, general
and administrative expenses, all as discussed under "Results of Operations"
above. The Company had a negative cash flow from investing activities of $85,456
for the year ended April 30, 1996 as compared to negative cash flow of $422,019
for fiscal 1995, a decrease of $336,553. During fiscal 1995, the Company
acquired its fabricating business and certain patents relating to its
refrigerant management business which accounted for the large negative cash flow
from investing activities.
During July 1994, the Company completed a private placement of 285,000
shares of Common Stock at a price of $3.00 per share for an aggregate
consideration of $855,000. A second private placement in March 1995 of 786,000
units at $2.00 per unit, each comprised of one share of Common Stock and a
warrant exercisable at $4.00 per share to purchase an additional share of Common
Stock, resulted in net proceeds of approximately $1,464,000. In November 1995,
the Company completed a private placement of 3,540,090 shares of Common Stock at
a price of $.30 per share for an aggregate consideration of approximately
$1,047,000. The proceeds of these private placements were utilized to partially
offset the Company's negative cash flow from operations.
At April 30, 1996, the Company had negative working capital of $2,554,732
and $983,222 at April 30, 1996 and 1995, respectively, an increase of
$1,571,510. The Company's current ratio (current assets divided by current
liabilities) was .31 and .72 at April 30, 1996 and April 30, 1995, respectively.
The Company's contracts typically provide for progress payments based upon
the achievement of performance milestones or the passage of time. The Company's
contracts often provide for the Company's customers to retain a portion of the
contract price until the achievement of performance guarantees has been
demonstrated. The Company attempts to have its progress billings exceed its
costs and estimated earnings on uncompleted contracts; however, it is possible,
at any point in time, that costs and estimated earnings can exceed progress
billings on uncompleted contracts, which would negatively impact cash flow and
working capital. At April 30, 1996 and April 30, 1995, "Costs and estimated
earnings in excess of billings on uncompleted contracts" exceeded "Billings in
excess of costs and estimated earnings on uncompleted contracts" by $70,364 and
$593,293, respectively, thereby negatively effecting working capital.
16
<PAGE>
Original equipment revenue from domestic sales continues to be impacted
negatively by delays related to permitting problems and enforcement of existing
environmental regulations. The Company believes that these conditions will
continue to adversely impact its domestic sales for the proximate future.
The Company's $1,000,000 Revolving Credit Agreement ("Agreement") with a
bank expired in September 1995. The bank agreed in October 1995 to extend the
credit agreement until June 30, 1996, but the Company's right to repay and
reborrow hereunder was terminated and principal amounts repaid could not be
reborrowed. The Company made a principal payment to the bank in October 1995 of
$50,000 and further agreed to make monthly principal payments of $10,000 through
March 1996 and monthly principal payments of $20,000 for the months of April,
May and June of 1996. The bank hereupon waived all other default provisions in
the agreement. The Company made payments through March 1996 but was unable to
make the agreed upon subsequent payments. Subsequent to April 30, 1996, Turbotak
purchased the bank's creditor position. Upon the Effective Date, the Note was
extinguished (see Note 17 to the Consolidated Financial Statements).
Due to the substantial and ongoing losses experienced by the Company, the
Company, on September 16, 1996, converted an involuntary Chapter 7 Bankruptcy
case initiated against it by certain of its creditors in July 1996 to a
voluntary Chapter 11 reorganization proceeding under the Federal Bankruptcy
Code. On September 3, 1996, the Company signed an agreement with Turbotak which
contemplated a merger of the two companies. A plan of reorganization, calling
for a consolidation of the Company and Turbotak, was filed with the Bankruptcy
Court by the Company in March 1997 and, in an amended and modified form, was
approved by the Court in July 1997. Such consolidation and the resulting
acquisition by Turbotak's shareholders of an approximately 82% equity interest
in the Company was consummated on August 27, 1997 (see Item 1(a) hereof and
Note 17 to the Consolidated Financial Statements).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages F-1 through F-19 comprising a portion of this
Annual Report on Form 10-KSB.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the Company's two most recent fiscal years and the period subsequent
to April 30, 1996, no independent accountant who was previously engaged as the
principal accountant to audit the Company's financial statements, or an
independent accountant who was previously engaged to audit a significant
subsidiary and on whom the principal accountant expressed reliance in its
report, has resigned (or indicated it has declined to stand for re-election
after the completion of the current audit) or was dismissed.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Prior to the Consolidation Date, the Company's executive officers and
directors were as follows:
NAME AGE POSITIONS AND OFFICES
- - ------------------------- --- --------------------------------------
Richard H. Hurd 60 President, Treasurer and Director
Avery B. Smith 64 Executive Vice President and Director
Harold V. McNamara 49 Vice President - Controller
Robert J. Ferb 52 Secretary and Director
Richard A. Horgan 53 Director
RICHARD H. HURD has served as President of the Company since August 1993,
Treasurer of the Company since April 1994 and as a director of the Company since
February 1993. Mr. Hurd was Vice President -Finance and Corporate Development
of the Company between May 1993 and July 1993, and the Company's director of
finance and corporate development between February 1993 and May 1993. Mr. Hurd
has been President and sole owner of RHB Capital Company, a financial consulting
company since 1987.
AVERY B. SMITH has served as Executive Vice President of the Company since
August 1993, as its Vice President - Marketing and Sales from May 1993 to August
1993 and as a director of the Company since February 1993. Mr. Smith was the
Company's director of marketing and sales between February 1993 and May 1993.
From November 1991 to December 1992, Mr. Smith was a technical director of Day
Environmental, and from January 1988 to October 1991, Mr. Smith was a sales and
technical director of Geotech Resources Corp., a Taiwanese product development
and trading company. Mr. Smith resigned as an officer and director on September
20, 1996.
HAROLD V. MCNAMARA has served as Controller of the Company since March 1993
and as Vice President - Controller since August 1993. From February 1984 until
March 1993, he was Vice President and General Manager of Card Technology
Corporation, a manufacturer of embossing and encoding equipment. Prior to
joining Card Technology Corporation and from 1979, he served as Controller of
the Company. Mr. McNamara resigned on November 15, 1996
ROBERT J. FERB has served as Secretary and a director of the Company since
1988. Mr. Ferb has been a practicing attorney since 1977. Mr. Ferb's law firm
has served and continues to serve as patent and intellectual property counsel to
the Company.
RICHARD A. HORGAN has been retired since October 1993. From September 1967
until September 1993, Mr. Horgan was a practicing attorney with Winthrop,
Stimson, Putnam & Roberts, New York, New York and Stamford, Connecticut,
specializing in commercial civil litigation.
The Company's current executive officers and directors are as follows:
NAME AGE POSITIONS AND OFFICES
- - ------------------------------- --- --------------------------------
Dr. Donald R. Spink, Sr. 74 Chairman of the Board
18
<PAGE>
Edward F. Spink 43 President and Director
Patrick J. Forde 64 Secretary/Treasurer and Director
Richard H. Hurd 60 Director
Robert J. Ferb 52 Director
Richard A. Horgan 54 Director
DR. DONALD R. SPINK, SR. has served as Chairman of the Company since the
Consolidation Date. Prior thereto and from 1976 he was Chairman of Turbotak.
EDWARD F. SPINK has served as President and a Director of the Company since
the Consolidation Date. Prior thereto and from 1995, he was President and a
director of Turbotak. Mr. Spink was Vice President -Operations of Turbotak from
1989 to 1995.
PATRICK J. FORDE has been Secretary/Treasurer of the Company since the
Consolidation Date. Prior thereto and from 1986 he was a director of Turbotak.
Mr. Forde has served as Vice President -Corporate Planning for Turbotak since
1996. He was Chairman and Chief Executive Officer of Borg Textile Corporation
from 1982 to 1995. He is also Chairman and a director of Spicer Corporation, as
well as a director of Waterloo Scientific.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Executive officers are
elected annually by the Board of Directors to hold office until the first
meeting of the Board following the next annual meeting of stockholders or until
their successors are chosen and qualified.
The Audit Committee of the Board is charged with the review of the
activities of the Company's independent auditors including, but not limited to,
fees, services and audit scope. The Audit Committee is comprised of Messrs.
Forde, Hurd and Horgan. The Compensation Committee of the Board is responsible
for oversight and administration of executive compensation. The Compensation
Committee is comprised of Messrs. Spink, Forde and Horgan.
The Company has no standing nominating committee of its Board of Directors,
nor any committees performing similar functions. The Board of Directors as a
whole searches for potential nominees for Board positions and periodically
reviews the compensation of the Company's officers and employees and makes
appropriate adjustments.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of the Company's
Common Stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors and greater
than 10% stockholders are required by the SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no such forms were
required for those persons, the Company believes that during the fiscal year
ended April 30, 1996, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with.
19
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
Set forth below is the aggregate compensation for services rendered in all
capacities to the Company during its fiscal years ended April 30, 1996 and 1995
to its chief executive officer and each of its executive officers whose
compensation exceeded $100,000 during its fiscal year ended April 30, 1996.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------
ANNUAL COMPENSATION AWARDS
------------------- ------------------------
RESTRICTED
NAME AND FISCAL STOCK NUMBER OF OPTIONS
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS AND WARRANTS
- - ------------------------ ---- ----------- ------ ---------- -----------------
<S> <C> <C> <C> <C> <C>
Richard H. Hurd 1996 $107,217 * - - -
President 1995 $ 120,733 - - -
</TABLE>
* $28,840 of this amount was paid for with the Company's common stock @ .30 per
share.
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options or warrants to executive officers
during the year ended April 30, 1996.
AGGREGATED OPTION AND WARRANT EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
Set forth below is further information with respect to unexercised options
and warrants to purchase the Company's Common Stock granted to the Company's
chief executive officer and each of its executive officers whose compensation
exceeded $100,000 during its fiscal year ended April 30, 1996 and prior years.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF EXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AND WARRANTS IN-THE-MONEY OPTIONS AND
ACQUIRED AT APRIL 30, 1996 WARRANTS AT APRIL 30, 1996
ON VALUE -------------------------- ---------------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ----------------- --------- -------- ----------- ------------- ------------------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Hurd - $ - 130,000 - - -
</TABLE>
EMPLOYMENT AGREEMENTS
None of the Company's current executive officers is employed pursuant to an
employment agreement with the Company.
Prior to the Consolidation Date, the Company was a party to five-year
agreements expiring in February 2000 with each of Richard H. Hurd and Avery B.
Smith which provided for annual base salaries of $125,000 and $110,000,
respectively. The Company is also a party to a three-year agreement expiring in
February 1998 with Harold V. McNamara at a base salary of $85,000. Mr. Smith
and Mr. McNamara, whose respective employment agreements were terminated during
the course of the Company's Chapter 11 reorganization proceeding, resigned from
the Company on September 20, 1996 and November 15, 1996, respectively. Mr.
Hurd's employment agreement was also terminated during the course of the
Company's Chapter 11 reorganization proceeding.
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 22, 1997 the shares of the
Company's Common Stock beneficially owned by each person who, to the knowledge
of the Company, is the holder of 5% or more of the Common Stock of the Company,
by each director of the Company, by the Company's chief executive officer and
all executive officers whose compensation currently exceeds $100,000 per annum
and by all of the executive officers and directors of the Company as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF
BENEFICIAL OWNER OR AMOUNT AND NATURE OF APPROXIMATE
IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) PERCENTAGE OF CLASS
- - ---------------------------- --------------------------- --------------------
<S> <C> <C>
Dr. Donald R. Spink, Sr. 3,356,931(1)(2) 32.9%
*
Edward R. Spink 456,338(1) 4.5%
*
Patrick J. Forde 719,159(1)(2) 7.1%
*
Richard H. Hurd 213,938(4) 2.1%
**
Robert J. Ferb 108,437(5) 1.1%
**
Richard A. Horgan 122,227(6) 1.2%
**
Canadian Venture Founders 1,334,979(1) 13.1%
114 Lakeshore Road East
Oakville, Ontario L6J 6N2
Canada
All executive officers
and directors as a
group (6 persons) 4,975,700(1)-(6) 48.9%
</TABLE>
- - -------------------
* 550 Parkside Drive, Suite A-14, Waterloo, Ontario N2L 5V4, Canada.
** 11 Melanie Lane, Hanover, New Jersey 07936.
(1) Represents shares of Sonic Canada Inc., a wholly owned subsidiary of the
Company, which by their terms are convertible at any time into a like
number of shares of Common Stock of the Company ("Sonic Canada Shares").
(2) Includes 3,008,186 Sonic Canada Shares owned by a Canadian numbered
corporation, over which shares Dr. Spink exercises voting control.
(3) Includes 507,642 Sonic Canada Shares owned by the Patrick and Joan Forde
Family Trust.
(4) Includes 1,195 shares owned by Mr. Hurd's spouse, as to which Mr. Hurd
disclaims any beneficial ownership; also includes 100,000 shares issuable
upon exercise of an option expiring in August 1999 at an exercise price of
$1.00 per share, which option was granted pursuant to the Plan.
(5) Includes 50,000 shares issuable upon exercise of an option expiring in
August 1999 at an exercise price of
21
<PAGE>
$1.00 per share, which option was granted pursuant to the Plan.
(6) Includes 930 and 797 shares owned by Mr. Horgan's spouse and daughter,
respectively, as to which Mr. Horgan disclaims any beneficial ownership;
also includes 50,000 shares issuable upon exercise of an option expiring in
August 1999 at an exercise price of $1.00 per share, which option was
granted pursuant to the Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statements Schedules:
(i) Financial Statements Page
Reports of Independent Public Accountants F-1
Consolidated Balance Sheet - April 30, 1996 F-3
Consolidated Statements of Operations for the
years ended April 30, 1996 and 1995 F-4
Consolidated Statement of Changes in Stockholders'
Equity for the years ended April 30, 1996,
and 1995 F-5
Consolidated Statement of Cash Flows for the years
ended April 30, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-8
(ii) Financial Statements Schedules
------------------------------
None
The other financial statement schedules are omitted because the
conditions requiring their filing do not exist or the information required
thereby is included in the financial statements filed, including the notes
thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
2.1 First Amended Plan of Reorganization(1)
2.2 Bankruptcy Court Order dated July 31, 1997, modifying First
Amended Plan of Reorganization(1)
2.3 Asset Purchase Agreement dated March [ ], 1997 between
Registrant and Reftec International Inc.(2)
2.4 Combination Agreement dated as of July 1, 1997 (the "Combination
Agreement") among Registrant, Sonic Canada Inc. and Turbotak(3)
2.5 Plan of Arrangement under Section 182 of the Ontario Business
Corporations Act of Registrant, Sonic Canada and Turbotak
(Exhibit 2.1 to the Combination Agreement)(3)
2.6 Voting and Exchange Trust Agreement dated August 25, 1997 among
Registrant, Sonic Canada and The Trust Company of Bank of
Montreal (Exhibit 2.3 to the Combination Agreement)(3)
2.7 Support Agreement dated August 27, 1997 between Registrant and
Sonic Canada (Exhibit 2.2 to the Combination Agreement)(3)
23
<PAGE>
3.1 Amendment to the Certificate of Incorporation of Registrant(4)
3.2 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional, and other Special Rights and
the Qualifications, Limitations, Restrictions, and other
distinguishing characteristics of Special Voting Preferred
Stock(4)
3.3 By-laws, as amended, of Registrant(4)
4.1 Form of certificate evidencing shares of Common Stock(4)
21.1 Subsidiaries of Registrant
27 Financial Data Schedule
____________
(1) Incorporated by reference to an Exhibit filed as part of Registrant's
Current Report on Form 8-K dated July 29, 1997.
(2) Incorporated by reference to an Exhibit filed as part of Registrant's
Current Report on Form 8-K dated March 31, 1997.
(3) Incorporated by reference to an Exhibit filed as part of Registrant's
Current Report on Form 8-K dated October 1, 1997.
(4) Filed herewith.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 14th day of November, 1997.
TURBOSONIC TECHNOLOGIES, INC.
By:/s/Patrick J. Forde
---------------------------------------
Patrick J. Forde, Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES CAPACITY DATE
---------- -------- ----
Chairman of the Board
/s/Donald R. Spink, Sr. of Directors November 14, 1997
- - --------------------------
Dr. Donald R. Spink, Sr.
President and
Director (Principal
Executive
/s/Edward F. Spink Officer) November 14, 1997
- - --------------------------
Edward F. Spink
Secretary, Treasurer
and Director (Principal
Financial and
/s/Patrick J. Forde Accounting Officer) November 14, 1997
- - --------------------------
Patrick J. Forde
/s/Richard H. Hurd Director November 14, 1997
- - --------------------------
Richard H. Hurd
/s/Robert J. Ferb Director November 14, 1997
- - --------------------------
Robert J. Ferb
Director
- - --------------------------
Richard A. Horgan
<PAGE>
SONIC ENVIRONMENTAL SYSTEMS, INC.
SUBSIDIARIES
------------
NAME STATE OF INCORPORATION % OWNERSHIP
---- ---------------------- -----------
Sonic Fabricating, Inc.* Delaware 100%
Sonic Thermal Systems, Inc.* Delaware 80%
Euthenergy International, Inc.* Delaware 80%
- - ----------------------
* Currently inactive.
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Sonic Environmental Systems, Inc.
We have audited the accompanying consolidated balance sheet of Sonic
Environmental Systems, Inc. (A Delaware corporation) and subsidiaries as of
April 30, 1996, and the related consolidated statements of operations, in
stockholders' deficit and cash flows for each of the two years in the period
ended April 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sonic Environmental Systems,
Inc. and subsidiaries as of April 30, 1996, and the results of their operations
and their cash flows for each of the two years in the period ended April 30,
1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company incurred significant losses
in 1996 and 1995, and at April 30, 1996 had negative tangible net worth, an
accumulated deficit, negative working capital and was in default of the
covenants under its revolving credit agreement. These factors and the need for
additional capital or borrowings during 1997 to meet its working capital
requirements raise substantial doubt about the ability of the Company to
continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
OCTOBER 20, 1997 /s/ ARTHUR ANDERSEN LLP
ROSELAND, NEW JERSEY ARTHUR ANDERSEN LLP
F-1
<PAGE>
SONIC ENVIRONMENTAL SYSTEMS, INC.
---------------------------------
CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1996
-----------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996
- - ------ -----------
<S> <C>
CURRENT ASSETS
Cash $ 27,266
Contract and accounts receivable net of allowance
for doubtful accounts of $75,000 488,994
Costs and estimated earnings in excess of billings on uncompleted contracts 85,996
Inventories 102,915
Other current assets 20,730
Net assets of discontinued operations 392,777
----------
Total current assets $1,118,678
EQUIPMENT AND LEASEHOLD IMPROVEMENT,
at cost, net of accumulated depreciation 227,408
DUE FROM RELATED PARTIES 20,698
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES 10,746
INTANGIBLE ASSETS, less accumulated amortization 770,073
OTHER ASSETS 116,835
----------
Total Assets $2,264,438
==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
CURRENT LIABILITIES:
Notes payable $ 900,000
Current portion of capital lease obligation 6,605
Accounts payable 1,742,861
Accrued expenses 562,557
Billings in excess of costs and estimated earnings on uncompleted contracts 15,632
Provision for loss on disposal of discontinued operations 445,755
----------
Total current liabilities 3,673,410
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, par value $.10 per share, 30,000,000 shares authorized,
9,847,370 shares issued and outstanding 984,737
Additional paid in capital 9,688,122
Accumulated deficit (12,081,831)
-----------
Total stockholders' equity (deficit) (1,408,972)
-----------
Total liabilities and stockholders' equity (deficit) $ 2,264,438
===========
</TABLE>
The accompanying notes to financial statements are
an integral part of this consolidated balance sheet.
F-2
<PAGE>
SONIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED APRIL 30, 1996 AND 1995
-------------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
ORIGINAL EQUIPMENT REVENUE $ 1,291,781 $ 5,363,449
REHABILITATION, MAINTENANCE AND SPARE PARTS REVENUE 1,510,670 1,307,988
------------ ------------
Total revenue 2,802,451 6,671,437
------------ ------------
COST OF ORIGINAL EQUIPMENT 1,312,439 5,806,377
COST OF REHABILITATION, MAINTENANCE AND SPARE PARTS 1,120,119 660,214
------------ ------------
Total costs 2,432,558 6,466,591
------------ ------------
Gross Profit 369,893 204,846
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,956,582 4,345,456
------------ ------------
Loss from operations ( 2,586,689) ( 4,140,610)
INTEREST (EXPENSE), net (98,596) (52,280)
OTHER INCOME 43,569 0
Loss before discontinued operations ($2,641,716) ($4,192,890)
DISCONTINUED OPERATIONS:
Loss from Operation of Discontinued Segments ( 884,753) ( 528,764)
Loss on Disposal of Discontinued Segments, including
provision of $445,755 for operating losses during
phase-out period ( 657,673) 0
------------ ------------
Net Loss ($4,184,142) ($4,721,654)
============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,024,911 4,052,654
============ ============
NET LOSS PER SHARE FROM CONTINUING OPERATIONS ($0.37) ($1.04)
============ ============
NET LOSS PER SHARE FROM OPERATIONS OF DISCONTINUED
OPERATIONS ($0.13) ($0.13)
============ ============
NET LOSS PER SHARE FROM DISPOSAL OF DISCONTINUED
OPERATIONS ($0.09) ($0.00)
============ ============
</TABLE>
The accompanying notes to financial statements are an integral
part of these consolidated statements.
F-3
<PAGE>
SONIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
FOR THE YEARS ENDED APRIL 30, 1996 AND 1995
-------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
Shares Paid In Accumulated
Issued Amount Capital Deficit Total
------------ ---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT APRIL 30, 1994 3,564,660 $356,466 4,306,686 $(3,176,035) $ 1,487,117
Net Loss 0 0 0 (4,721,654) (4,721,654)
Common stock issued in connection with acquisitions 272,209 27,221 1,424,570 0 1,451,791
Common stock issued for cash 1,071,250 107,125 2,212,004 0 2,319,129
Stock options exercised 206,570 20,657 378,024 0 398,681
Stock warrants exercised 85,000 8,500 218,450 0 226,950
--------- -------- --------- ----------- -----------
BALANCE AT APRIL 30, 1995 5,199,689 519,969 8,539,734 (7,897,689) 1,162,014
Net Loss 0 0 0 (4,184,142) (4,184,142)
Common stock issued for cash in connection with
private placement 3,540,087 354,009 693,020 0 1,047,029
Common stock issued for payment of related liabilities 1,107,594 110,759 455,368 0 566,127
--------- -------- --------- ----------- -----------
BALANCE AT APRIL 30, 1996 9,847,370 $984,737 $9,688,122 ($12,081,831) ($1,408,972)
========= ======== ========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
consolidated statements.
F-4
<PAGE>
SONIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
FOR THE YEARS ENDED APRIL 30, 1996 AND 1995
-------------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($4,184,142) ($4,721,654)
Adjustments to reconcile net loss to net
cash used by operating activities-
Depreciations and amortization 294,987 319,954
Provision for loss on realization of patent rights and technology 196,357 0
Provision for uncollectible advances made in connection with
acquisition of patent rights and technology 0 126,833
Provision for loss on disposal of discontinued operations 657,673 0
Bad debt expense 0 121,000
Provision for inventory 194,949 45,500
(Increase) decrease in-
Contracts and accounts receivable 186,610 (96,108)
Costs and estimated earnings in excess of
billings on uncompleted contracts 560,327 (303,993)
Inventories 85,751 (355,780)
Other current assets 14,383 65,996
Other assets (21,451) (20,880)
Due from related parties 29,454 7,752
Investment in unconsolidated subsidiary 0 125,000
Increase (decrease) in-
Accounts payable 387,335 1,525,833
Accrued expenses 166,015 346,446
Billings in excess of costs and estimated
earnings on uncompleted contracts (37,398) (195,787)
---------- -----------
Net cash used by operating activities (1,469,150) (3,009,888)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and
leasehold improvements (85,466) (171,867)
Advances to affiliate made in connection with
acquisition of patent rights and technology 0 (126,833)
Purchase of business, net of cash acquired 0 (123,319)
---------- --------
Net cash used in investing activities (85,466) (422,019)
---------- --------
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $1,047,029 $2,944,760
Net principal proceeds from note payable 316,528 641,692
Principal payments on capital lease obligation (14,184) (12,112)
----------- ----------
Net cash provided by financing activities 1,349,373 3,574,340
----------- ----------
Net increase (decrease) in cash (205,243) 142,433
CASH, beginning of year 232,509 90,076
----------- ----------
CASH, end of year $ 27,266 $ 232,509
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW DATA:
Interest paid $ 101,948 $ 52,280
Income taxes paid $ 0 $ 0
=========== ==========
SUPPLEMENTAL DISCLOSURES NONCASH
TRANSACTIONS:
Issuance of common stock for equipment,
patent rights and technology $ 0 $1,451,791
Issuance of note payable for equipment 0 125,000
Issuance of common stock for accounts payable $ 566,127 $ 0
=========== ==========
</TABLE>
The accompanying notes to financial statements are an integral
part of these consolidated statements.
F-6
<PAGE>
SONIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) BASIS OF PRESENTATION:
----------------------
Sonic Environmental Systems, Inc. and its subsidiaries (collectively, the
"Company"), directly and through subsidiaries, designs and markets integrated
pollution control and cooling systems to ameliorate or abate industrial
environmental problems. Most of the Company's products and systems incorporate
the Company's atomizing nozzle technology.
The Company has experienced liquidity problems, has incurred substantive losses
in each of the last two years, has negative tangible net worth, an accumulated
deficit, negative working capital and was in default of its credit agreements.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Consequently, the consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Subsequent to April 30,1996, the Company filed for relief under Chapter 11 of
the United States Bankruptcy Code. On June 16, 1997, The Company's Plan of
Reorganization was confirmed by the Bankruptcy Court and this enabled the
Company to proceed with its proposed merger with Turbotak Technologies, Inc.
(See Note 17).
The merger with Turbotak will result in a reorganized company that will allow
the Company to continue to operate as a viable entity with a positive net worth
and substantially reduced debt.
(2) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
----------------------------
Use of Estimates-
- - -----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, the estimates may ultimately differ
from actual results.
Principles of Consolidation-
- - ----------------------------
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. Investments in a majority-owned subsidiary
where control is temporary and investments in less than 50%-owned affiliates are
accounted for on the equity method. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company records its
investments in unconsolidated
F-7
<PAGE>
subsidiaries on the equity method. Under the equity method, original investments
are recorded at cost and adjusted by the Company's share of undistributed
earnings or losses of these companies.
Restricted Cash-
- - ----------------
Restricted certificate of deposit of $73,688 is held as collateral for standby
letters of credit and is included in other assets as of April 30, 1996.
Inventories-
- - ------------
Inventories are comprised of raw materials and component parts and are valued at
the lower of cost (first-in, first-out) or market.
Replacement part requirements and needs for ongoing and near-term anticipated
contracts are periodically evaluated and compared to inventory items on hand.
Any obsolete or nonsaleable inventory is disposed of, and any slow-moving
inventory is reserved for. The Company has provided a reserve of $269,949
related to slow-moving component parts as of April 30, 1996.
Intangible Assets-
- - ------------------
Intangible assets, which are comprised of patents and acquired technology, are
stated at the lower of cost or estimated net realizable value.
Patents and acquired technology are evaluated periodically and future potential
revenues (on a discounted basis) to be derived from each specific technology
(and related patents) are estimated to ascertain that unamortized balances may
be recovered against these future revenues. Presently, patents and acquired
technology are being amortized on a straight-line basis over the estimated
useful life of 7 to 10 years.
Equipment and Leasehold Improvements-
- - -------------------------------------
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are calculated on the straight-line method over the estimated
useful lives of the assets or the remaining period of the lease, whichever is
less.
Long-lived Assets-
- - ------------------
State of Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" requires,
among other things, that an entity review its long-lived assets and certain
intangibles for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. As a result of its
review, the Company has written off $196,357 of its related intangibles for the
period ended April 30, 1996.
F-8
<PAGE>
Revenue and Cost Recognition-
- - -----------------------------
Revenue from long-term contracts is recognized using the percentage of
completion method, when estimates of costs to complete and the extent of
progress toward completion are reasonably dependable. Revenues from long-term
contracts that utilize a new technology or require filtration of a material with
which the Company has not had previous experience is recognized using the
completed contract method. Under either method, losses expected to be sustained
are recognized in full in the period in which such losses become evident (see
Note 3). As of April 30, 1996 and 1995, revenues and costs for contracts with a
total contract value of approximately $0 and $3,856,000 were accounted for under
the completed contract method. Because these contracts were in production prior
to the year ended April 30, 1995, a portion of the revenues and costs for these
contracts would have been reflected in the year ended April 30, 1995 if the
contracts were accounted for under the percentage-of-completion method.
Net Loss Per Share-
- - -------------------
Net loss per share is computed on the basis of the weighted average number of
common shares outstanding as the effect of common equivalent shares would be
antidilutive.
Reclassifications-
- - ------------------
Certain amounts in the prior financial statements have been reclassified to
conform with the 1996 financial statement presentation.
(3) COSTS AND ESTIMATED EARNINGS
ON UNCOMPLETED CONTRACTS:
-----------------------------
April 30
1996
----------
Costs incurred on uncompleted contracts $ 74,590
Estimated earnings 107,039
--------
181,629
Less - Billings to date (111,265)
--------
$ 70,364
Included in the accompanying balance sheets under the following captions-
April 30
1996
----------
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 85,996
Billings in excess of costs and estimated
earnings on uncompleted contracts (15,632)
--------
$ 70,364
========
F-9
<PAGE>
(4) EQUIPMENT AND
LEASEHOLD IMPROVEMENTS:
-----------------------
April 30
1996
--------
Equipment $ 607,489
Leasehold improvements 175,967
--------
783,456
Less- Accumulated depreciation and amortization 556,048
--------
$ 227,408
========
As of April 30, 1996, $318,917 of net fixed assets were reclassified to Net
Assets of Discontinued Operations to reflect the discontinuance of the
operations of the Company's wholly owned subsidiaries, Sonic Fabricating, Inc.
and Sonic Environmental Controls, Inc.
(See Note 17).
(5) DUE FROM RELATED PARTIES:
-------------------------
April 30
1996
--------
Due from a 49% owned unconsolidated affiliate $ 2,575
Due from officers 18,123
----------
$ 20,698
(6) INTANGIBLE ASSETS:
April 30
1996
----------
Patents and acquired technology $1,433,419
Less- Accumulated amortization 663,346
----------
$ 770,073
As of April 30, 1996, $261,789 of patents and acquired technology were
reclassified to Net Assets fo Discontinued Operations to reflect the
discontinuance of the operations of the Company's wholly owned subsidiaries,
Sonic Fabrication, Inc. and Sonic Environmental Controls, Inc. (See Note 17).
F-10
<PAGE>
(7) CONCENTRATION OF CREDIT RISK:
-----------------------------
The Company grants credit to substantially all customers, the majority of whom
are engaged in some form of manufacturing. The Company generally does not
require collateral. During fiscal years ended April 30, 1996, and 1995 two
customers accounted for 23% and 15% and 13% and 24% respectively.
(8) NOTES PAYABLE:
--------------
April 30
1996
---------
Note payable to bank $ 900,000
=========
The Company is in default under its $1,000,000 Revolving Credit Agreement
("Agreement") with a bank. Subsequent to April 30, 1996 Turbotak Technologies,
Inc. purchased the banks note and Agreement. (See Note 17).
In connection with the purchase of equipment from Rich Manufacturing, Inc. (see
Note 10), the Company issued a note in the amount of $125,000, to be paid in two
installments. The first installment of $25,000 was payable on April 28, 1995 and
the second installment of $100,000 was payable on February 28, 1996. The Company
failed to make either installment and the note is in default and payable on
demand. The note bears interest at a rate of 7% per annum. The note was
reclassified to "Net assets - discontinued operations" to reflect the
discontinuance of the Company's wholly owned subsidiary, Sonic Fabricating, Inc.
(See Note 17).
In December 1995, the Company's wholly owned subsidiary, Sonic Environmental
Controls, Inc. borrowed approximately $68,000 from a bank in order to finance
the purchase of four service vans. The loan is payable in 36 monthly
installments of $2,188 which includes interest at the rate of 9.9% per annum.
The loan ($58,200 at April 30, 1996) was reclassified to Net Assets-discontinued
operations to reflect the discontinuance of the operations of the Company's
wholly owned subsidiary, Sonic Environmental Controls, Inc.
(See Note 17).
During the years ended April 30, 1996 and 1995, the maximum month-end amounts
outstanding under these notes payable were $1,000,000, and $852,000
respectively. Average monthly amounts outstanding were approximately $954,000,
and $406,000 over the same periods, respectively, and carried weighted average
interest rates of 8.9% and 8.2 %.
(9) INCOME TAXES:
-------------
As of April 30, 1996, the Company has deferred tax assets of approximately
$4,000,000. A valuation allowance of equivalent amounts has been recorded
because of the uncertainty of realization of the deferred tax asset. Temporary
differences result primarily
F-11
<PAGE>
from the use of the reserve method of accounting for uncollectible accounts for
financial statement purposes versus the direct write-off method for tax
purposes, and net operating loss carry forwards.
As of April 30, 1996, the Company has available net operating loss carry
forwards for Federal and state income tax purposes amounting to approximately
$10,000,000 which expire commencing in 2001.
(10) ACQUISITIONS:
-------------
Ceramic Engineering Ltd. (CEL) and
Euthenergy International, Inc. (EII)-
- - -------------------------------------
On April 1, 1994, the Company entered into an agreement which contemplated the
formation of two entities, Ceramic Engineering Ltd. (CEL) and Euthenergy
International, Inc. (EII). Upon their formation, CEL and EII acquired certain
patent rights and technology applicable to ceramic heat transfer and
incineration system. The agreement also requires the payment of patent royalties
if patent revenues exceed certain amounts, as defined. There were no royalties
due for the years ended April 30, 1996 and 1995.
The agreement provided that the Company would acquire and 80% interest in each
entity in exchange for an aggregate of 350,000 shares of common stock. Of such
350,000 shares to be issued, 100,000 shares, valued at $2.50 per share or
$250,000, were issued at closing on April 29, 1994, and the balance of the
shares were placed in escrow.
Under the terms of the escrow agreement, 178,580 shares of common stock would be
released to the minority stockholder, if CEL and EII collectively, shall record
contracts aggregating $5,000,000 subsequent to December 31, 1993; and additional
71,420 shares of common stock would be released if CEL and EII on a combined
basis shall not incur collectively an operating deficit for a period of six
consecutive months. If either or both benchmarks are not achieved by July 31,
1997, the shares remaining in escrow shall be returned to the Company. Not
withstanding the foregoing, although the operating benchmarks were not achieved,
these shares were released from escrow and delivered to the minority owners of
CEL and EII.
The agreement also provides a purchase option which will enable the minority
stockholder to reacquire the Company's 80% interest in EII for the greater of
(1) five times EII's average pre-tax profits or (2) a sum equal to (A) all
indebtedness owed to the Company by EII and (B) the aggregate face value of
EII's firm backlog, both measured as of the date of the exercise of the purchase
option. The option initially becomes exercisable within 30 days after the
release of EII's financial statements for the fiscal year ended April 30, 1997
and annually thereafter upon the release of each successive year's financial
statements.
As a result of the temporary control aspect of the EII acquisition, management
of the Company has not consolidated this subsidiary and is recording its
investment on the equity basis.
Dagar Chiller Components, Inc.-
- - -------------------------------
On June 29, 1994, the Company acquired Dagar Chiller Components, Inc. (Dagar), a
manufacturer and distributor of industrial air conditioning components and
systems for $20,000 and the issuance of 102,758 shares of common stock valued at
$4.375 per share or $449,566. The agreement also requires the payments of
royalties if revenues exceed certain amounts, as defined. There were no
royalties due for the year ended April 30, 1995. During the year ended April 30,
1996, $33,000 of royalties were paid.
The Company issued an option to the former owners to purchase 40,000 shares of
common stock at $4.375 for a period of five years. The options vest each ratably
over four years. At April 30, 1996 no options were exercised.
The Company also entered in an employment agreement with the former owner for a
period of five years at a minimum of $70,000 each year.
Southeastern Refrigerant
Management System, Inc.-
- - ------------------------
In February 1995, the Company acquired a patent and the Refrigerant Management
Systems Technology (RMS Technology) from Southeastern Refrigerant Management
System, Inc. (Southeastern). The consideration paid by the Company for the
patent and technology was 121,951 shares of the Company's common stock, valued
at $3.88 per share or $473,170. Of the 121,951 shares of common stock, 85,366
shares were placed in escrow to be released to Southeastern based on achieving
future sales, as defined. Subsequent to June 1, 2000, all the shares not earned
will be returned to the Company and upon its receipt thereof, the Company
shall assign, transfer and convey all its rights, title and interest in the
patent and the RMS technology to Southeastern. Alternatively the Company has the
option to release the shares in escrow to Southeastern.
Rich Manufacturing Corporation-
- - -------------------------------
In February 1995, the Company acquired fabrication machinery and related
equipment from Rich Manufacturing Corporation (Rich) for a total consideration
of $459,400. The purchase price of $459,400 was paid in cash of $172,000 at
closing, 40,000 shares of Sonic common stock valued at $4.06 per share or
$162,400, and a note for $125,000. The note bears interest at 7% per annum and
is payable $25,000 on April 28, 1995 and the balance of $100,000 on February 28,
1996. The Company was unable to make the $25,000 payment on April 28, 1995 and
since under its terms the note is in default, and the entire balance of $125,000
is due and payable immediately.
In addition, the Company entered into employment agreements with two former
principals of Rich. Under the terms of the agreement the Company will pay
salaries totaling $106,400 for a period of three years.
F-12
<PAGE>
Other-
- - ------
In March 1995, the Company issued 7,500 shares of its common stock for $4.95 per
share or $37,125 for the rights to use the Fabric Filter trade name.
(11) COMMON STOCK:
-------------
During July 1994, the Company received $855,000 from the sale of 285,000 shares
of common stock in a private placement offer.
During March 1995, the Company completed a private placement of 786,250 units at
$2.00 per share, each unit consisting of one share of common stock and one
common stock purchase warrant to purchase one share of common stock at an
initial exercise price of $4.00 per share during the five year period commencing
one year after the initial closing date. Proceeds to the Company from this
offering after legal, accounting and printing costs amounted to $1,464,129.
On October 31, 1995, the Company consummated a private placement of promissory
notes in the aggregate principal amount of $1,053,250 (the "Notes") which, after
legal fees, netted the Company $1,047,029. The Notes, which carried an interest
rate of 10% per annum, were payable in shares of the Company's common stock. The
Notes were due and payable upon the earlier of (I) April 30, 1996 or (ii) the
approval by the Company's stockholders of an amendment to the Company's
Certificate of Incorporation (the "Amendment") increasing the aggregate number
of authorized but unissued shares of Common Stock to that number sufficient to
permit the payment of the Notes in shares of the Company's Common Stock. The
Amendment, increasing the Company's authorized Common Stock from 10,000,000 to
30,000,000 shares, was approved by the Company's stockholders in November 8,
1995, at which time the Notes, inclusive of accrued interest thereon, become due
and payable in accordance with their terms.
During fiscal year 1996, the Company issued an aggregate of approximately
3,540,087 shares of its Common Stock in payment of the Notes. The Company has
issued 1,107,594 shares to satisfy accounts payable of $386,577, accrued
expenses of $72,560, and other current assets representing prepaid rent payments
of $106,990. The number of shares issued were based on the current market price
of the stock on the date of the transactions.
(12) STOCK OPTION PLAN:
------------------
1992 Stock Option Plan-
- - -----------------------
The 1992 Incentive Stock Option Plan was adopted in December 1991. Under this
plan, 80,000 shares of common stock are reserved for issuance. Options are not
exercisable until one year after the date of the grant and thereafter are
exercisable 25% each year for four years.
F-13
<PAGE>
The exercise price of all options under this plan must not be less than the fair
market value of such shares on the date of the grant or, in the case of a 10% or
more holder of the Company's stock, at least 110% of the fair value of the
shares at date of grant.
The following summarizes the transactions under the 1992 Stock Option Plan-
Option Price
Shares Per Share
-------- ---------------
Options outstanding at April 30, 1994 66,500 $1.125 to $2.25
Granted 5,000 $ 4.00
Cancelled (5,500) $1.125
-------
Options outstanding at April 30, 1995 66,000 $1.125 to $4.00
Granted 6,000 $ 4.00
Canceled (11,500) $1.125 to $4.00
-------
Options outstanding at April 30, 1996 60,500
=======
Options exercisable at April 30-
1995 28,500 $1.125
1996 40,500 $1.125 to $2.250
=======
(13) STOCK OPTIONS AND WARRANTS:
---------------------------
On February 1, 1993, the Company issued, to officers of the Company, five year
warrants to purchase 230,000 shares of common stock at $1.00 per share. These
warrants are exercisable to the extent of one-third per year commencing February
1994, 1995 and 1996, respectively. During 1995, 23,333 options were exercised
for $23,333 and 206,667 options remain outstanding at April 30, 1996. During
July and August 1993, the Company issued, to officers of the Company, five year
warrants to purchase 85,000 shares of common stock at prices ranging from $2.00
to $2.125 per share. These warrants are exercisable to the extent of 20% per
year after the first year of employment and remain outstanding at April 30,
1996.
On February 1, 1993, the Company granted options to purchase 6,000 shares of its
common stock, at an exercise price of $1.125 per share, to outside directors of
the Company. During 1995, 2000 options were exercised; 4,000 shares remain
outstanding as of April 30, 1996.
On February 25, 1994, certain officers of the Company were granted options to
acquire 200,000 shares of common stock at $3.25 per share. In addition, outside
directors, financial consultants and legal counsels were granted options to
acquire 30,000, 100,000 and 10,000 shares, respectively, at $3.25 per share.
These options are exercisable through February 24, 1999 and remain outstanding
at April 30, 1996.
On April 1, 1994, the Company granted to certain officers and minority
stockholders of Ceramic Engineering, Ltd. And Euthenergy International, Inc.
options to acquire
F-14
<PAGE>
150,000 shares of common stock at $3.75 per share. In addition, on April 1,
1994, a consultant to Euthenergy International, Inc. was granted an option to
acquire 24,000 shares of common stock of the Company at $3.75 per share. The
option is exercisable to the extent of 6,000 shares per quarter. On June 1,
1994, the Company granted an option to an employee of Euthenergy International,
Inc. to acquire 24,000 shares of common stock at $4.88 per share. The option is
exercisable to the extent of 6,000 shares per quarter, and all options remain
outstanding at April 30, 1996.
On February 22, 1995 certain board members and officers of the Company were
granted five year options to purchase 70,000 shares of common stock at $4.00 per
share. 25,000 shares are exercisable, to the extent of one-third commencing The
remaining 45,000 shares were exercisable immediately. At April 30, 1996 all
options remain outstanding.
In July 1993, as part of the Company's initial public offering, options to
purchase a unit (a unit consists of one share of common stock and half a Series
A Redeemable Warrant and half a Series B Redeemable Warrant) were given to
financial consultants. The total units granted were 181,237 at an exercise price
of $2.06. In December 1994, all the options were exercised at $2.06 or $373,348.
Each series A Redeemable Warrant entitles the holder to purchase two shares of
common stock at a par share exercise price of 133-1/3% of the public offering
price of the Units ($2.00). Each Series B Warrant entitles the holder to
purchase two shares of common stock at a per share exercise price of 166-2/3% of
the initial public offering price of the units ($2.00). The Series A and B
Warrants expire in June 1999. Furthermore, the Series A Redeemable Warrants and
the Series B Warrants are redeemable with the consent of the Underwriter at a
price of $.01 per Redeemable Warrant at any time commencing in June 1994 upon
not less than 30 days prior written notice, provided that the last sales price
per share of common stock equals or exceeds 180% of the exercise price of the
warrants being redeemed for 20 consecutive trading days ending on third day
prior to notice of redemption to the warrant holder.
During 1995, 42,500 Series A Redeemable warrants were exercised resulting in the
issuance of 85,000 shares of common stock at $2.67 per share of $226,950.
At April 30, 1996 there were 950,869 Series A Redeemable Warrants and
993,369 Series B Redeemable Warrants outstanding.
(14) COMMITMENTS AND CONTINGENCIES:
Included among intangible assets in the balance sheet as of April 30, 1996, is a
patent, carried at an amortized cost of $770,073. To date, the Company has been
unable to market products successfully utilizing this patent and, thus, the
ultimate recovery of the carrying amount of this patent is uncertain.
Furthermore, an action has been filed against the Company challenging its rights
to the patent. At this time, the ultimate
F-15
<PAGE>
outcome of this action is uncertain. Accordingly, no provision for any loss that
may result should the carrying amount of the patent not be recovered or from the
outcome of the action has been made to the accompanying consolidated financial
statements.
The Company rents office and warehouse space from a company controlled by a
former director and stockholder. During 1995, the Company entered into a lease
for its Cranbury facility which expires on February 28, 2000. In 1996, the
Company entered into a lease for its Clearwater, Florida facility which expires
on May 31, 1998.
Rent expense to the former director and stockholder and for the years ended
April 30, 1996 and 1995 was $139,152 and $123,246 respectively. Rent expense to
an unrelated party for the year ended April 30, 1996 was $21,186. There was no
rent expense to an unrelated party for the year ended April 30, 1995.
The approximate minimum future rental payments under all leases at April 30,
1996, are as follows:
1997 $171,247
1998 165,469
1999 141,945
2000 115,927
2001 1,100
The Company has entered into employment agreements with certain management.
Amounts due under these agreements at April 30, 1996 are as follows:
1997 $320,000
1998 306,000
1999 235,000
2000 196,000
The Company is required, under certain contracts, to maintain a surety bond. At
April 30, 1996 the Company's current level of surety support is $2,000,000, of
which approximately $300,000 had been committed. However, given the cumulative
effect of receipt of additional contracts prior to the completion of previously
awarded contracts, there can be no assurance that the Company will have an
adequate net worth to support its future bonding requirements.
The Company is involved in certain litigation proceedings which are in the
ordinary course of business activities. While the results of these proceedings
cannot be predicted with certainty, in the opinion of management, the outcome of
these proceedings will not have a material effect on the results of operations
or financial condition of the Company.
F-16
<PAGE>
(15) EXPORT SALES DATA:
The following percentages approximate the amount of total revenue the Company
derives from export sales-
For the Year Ended April 30
---------------------------
1996 1995
---- ----
Europe 5% 1%
South and Central America 6% 4%
Far East 1% 30%
Africa 0% 1%
Canada 5% 2%
Other 1% 0%
-------- -------
18% 38%
-------- -------
(16) RELATED PARTY TRANSACTIONS:
---------------------------
The Company's sales to its 49% owned nonconsolidated affiliate were $7,240 and
$17,290 for the years ended April 30, 1996 and 1995, respectively.
The Company's sales to its 24% owned unconsolidated affiliate were $28,915 and
$16,673 for the years ended April 30, 1996 and 1995, respectively.
At April 30, 1996 and 1995, there was an amount due from officers of $18,370 and
$18,423, respectively.
(17) SUBSEQUENT EVENTS:
------------------
On July 16, 1996, three creditors filed an involuntary Chapter 7 Bankruptcy
petition against the Company. On September 16, 1996, the Company converted the
Chapter 7 involuntary bankruptcy case to a voluntary Chapter 11 reorganization
proceeding under the Federal Bankruptcy Code.
On September 3, 1996, the Company signed an agreement with Turbotak
Technologies, Inc., a privately held Canadian company engaged in the design,
manufacture, and servicing of air pollution control equipment. As provided in
the agreement, Turbotak acquired the approximately $940,000 secured and
unsecured bank claim against the Company (see Note 8). Turbotak also advanced
$205,000 to the Company for working capital. Pursuant to the agreement between
the Company and Turbotak, the Company agreed to propose a Chapter 11
reorganization plan, which would provide for a merger of the two companies.
On March 7, 1997, the Company filed a Plan of Reorganization and Disclosure
Statement with the Federal Bankruptcy Court. On April 25, 1997, the Bankruptcy
Court approved the submittal of the Plan of Reorganization and Disclosure
Statement to the Company's creditors and shareholders for a vote on the proposed
Plan of Reorganization. The
F-17
<PAGE>
Company's creditors and shareholders voted to approve the Plan of
Reorganization and on June 16, 1997, the Plan of Reorganization was confirmed
by the Bankruptcy Court. Consequently, all existing and outstanding shares of
the Company's common stock, as well as all outstanding warrants and options to
purchase the Company's common stock, will be canceled. The Plan of
Reorganization provides that the Company will merge within 60 days of the
Confirmation date with Turbotak to form a company which will be called
TurboSonic Technologies, Inc. The Plan of Reorganization provides that
TurboSonic will have 10,000,000 shares of common stock outstanding following
the merger, of which 8,200,000 shares or 82% will be owned by Turbotak's
present shareholders, and 1,255,700 or approximately 12.6% will be issued to
the Company's existing shareholders on a pro-rata basis. The balance of such
10,000,000 shares will be issued to the Company's existing creditors and others
as described in the Plan of Reorganization. Consummation of the merger will
also extinguish Turbotak's claims against the Company of approximately
$1,145,000. Additionally, liabilities totaling $1,449,519 which relate to the
bankruptcy remain on the accompanying consolidated balance sheet at April 30,
1996. These liabilities are subject to compromise, however, no determination of
this compromise has been made to date.
During May of 1996, the Company adopted a plan to dispose of its entire
fabricating operation, which was carried out by Sonic Fabricating, Inc.,
("Fabricating"), a wholly owned subsidiary. The operation ceased during June
1996. The net loss of this operation prior to April 30, 1996 are included in
the consolidated statements of operations under discontinued operations.
Revenues from such operations were $486,333 for the year ended April 30, 1996.
Fabricating's assets were sold at an auction for $185,000. The proceeds were
used to pay the Rich Manufacturing Note and other liabilities. The Company
retained $146,249 of liabilities which could not be liquidated through the
auction. In addition, $211,918 of assets were written off at April 30, 1996.
This amount represented the remainder of the assets which could not be realized
at the time of disposition, and are included in loss from disposal of
discontinued operations in the accompanying consolidated statements of
operations.
During March of 1997, the Company adopted a plan to dispose of its entire
Refrigerant Management Systems operation, which was carried out by Sonic
Environmental Controls, Inc., ("Controls") a wholly owned subsidiary. The
operation ceased during April 1997. The net losses of this operation prior
to April 30, 1996 are included in the consolidated statements of operations
under discontinued operations. Revenues from such operations were
$1,452,567 for the year ended April 30, 1966. Controls was sold for
$402,000 and the resulting sale required no provision for the disposition
of its net assets. Losses of $445,755 represent operating losses during the
phase-out period and are included in loss from the disposal of discontinued
segments in the accompanying consolidated statements of operations.
F-18
<PAGE>
SONIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
------------------------------------------------------------
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- - ------------------------------------- --------- ---------- -------- -----------
Additions
Balance Charged to Charged Balance at
Beginning Cost and to Other End of
Description of Period Expenses Accounts Deductions Period
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended April 30, 1994
Allowance for doubtful accounts $50,000 $25,000 $0 $0 $ 75,000
Reserve for inventory overstock 29,500 $ 0 $0 $0 $ 29,500
- - -----------------------------------------------------------------------------------------------
Year ended April 30, 1995
Allowance for doubtful accounts $75,000 $121,000 $0 $0 $196,000
Reserve for inventory overstock $29,500 $ 45,500 $0 $0 $ 75,000
- - -----------------------------------------------------------------------------------------------
Year ended April 30, 1996
Allowance for doubtful account $196,000 $0 $0 ($121,000) $ 75,000
Reserve for inventory overstock $ 75,000 $194,949 $0 $0 $269,949
- - -----------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
SONIC ENVIRONMENTAL SYSTEMS, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is:
Sonic Environmental Systems, Inc.
2. The Certificate of Incorporation of the Corporation is hereby amended
by striking out Articles First and Fourth thereof and by substituting in lieu of
said Articles the following new Articles:
FIRST: The name of the Corporation is "TurboSonic Technologies,
Inc."
FOURTH: The total number of shares of all classes of stock which the
Corporation is authorized to issue is thirty one million (31,000,000) shares, of
which thirty million (30,000,000) shares shall be common stock with a par value
of ten cents ($.10) per share, and one million (1,000,000) shares shall be
preferred stock, with no par value. The preferred stock may be issued in
classes or series from time to time with such voting powers, full or limited, or
no voting powers, and such designations, preferences and relative,
participating, optional, or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
certificate of incorporation or any amendment thereto, or in the resolutions or
resolutions providing for the issue of such stock adopted by the board of
directors pursuant to authority expressly vested in it by the provisions of its
certificate of incorporation, and to the full extent permitted by Section 151 of
the General Corporation Law of the State of Delaware.
3. The amendments of the Certificate of Incorporation herein certified
have been duly adopted in accordance with the provisions of Sections 303 and 242
of the General Corporation Law of the State of Delaware.
The undersigned, Richard Hurd, President of the Corporation, does hereby
make, file and record this Certificate of Amendment of Certificate of
Incorporation, amending the Certificate of Incorporation of Sonic Environmental
Systems, Inc. filed on April 14, 1961, as amended, and does hereby certify that
the facts stated herein are true and that provision for the making of this
Certificate of Amendment of Certificate of Incorporation is contained in an
order entered on July 3, 1997 by the United States Bankruptcy Court for the
District of New Jersey pursuant to the
<PAGE>
provisions of Chapter 11 of Title 11 of the United States Code, Confirming
Debtor's First Amended Plan of Reorganization, as modified. The Corporation
consented to the entry of an Order for Relief under Chapter 11 of Title 11 of
the United States Code, 11 U.S.C. (S)(S)101, et seq., on September 16, 1996 and
-- ----
the confirmation date of the Corporation's Plan of Reorganization was July 3,
1997.
Dated: August 27, 1997
/s/Richard H. Hurd
----------------------------------------
Richard H. Hurd
2
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF DESIGNATION, NUMBER, POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL,
AND OTHER SPECIAL RIGHTS AND THE QUALIFICATIONS,
LIMITATIONS, RESTRICTIONS, AND OTHER DISTINGUISHING
CHARACTERISTICS OF SPECIAL VOTING PREFERRED STOCK
OF
TURBOSONIC TECHNOLOGIES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
TurboSonic Technologies, Inc.
2. The Certificate of Incorporation, as amended, of the corporation
authorizes the issuance of one million (1,000,000) shares of Preferred Stock,
without par value, and expressly vests in the Board of Directors of the
Corporation the authority provided therein to issue any or all of said shares in
one or more classes or series and by resolution or resolutions, the designation,
number, full or limited voting powers, or the denial of voting powers,
preferences and relative participating, optional, and other special rights and
the qualifications, limitations, restrictions, and other distinguishing
characteristics of each class or series to be issued.
3. The Board of Directors of the Corporation, pursuant to the authority
expressly vested in it as aforesaid, has adopted the following resolutions
creating one share of Special Voting Preferred Stock (the "Special Voting
Stock"):
RESOLVED, that in accordance with that certain Voting and Exchange
Trust Agreement between Sonic Environmental Systems, Inc., TurboSonic
Canada, Inc. and The Trust Company of Bank of Montreal (the "Voting
Agreement"), the Corporation be, and hereby is, authorized and empowered to
create and issue one share of Special Voting Stock; and be it further
RESOLVED, that the share of Special Voting Stock shall entitle the
holder thereof to consent to or to vote in person or by proxy together with
the holders of common stock of the Corporation, as one class, on any
matter, question or proposition whatsoever that may properly come before
the stockholders of the Corporation for their vote at a meeting of the
holders of comon stock of the Corporation ("Sonic Meeting") or in
connection with a written consent sought from the holders of the common
stock of the Corporation ("Sonic Consent"), such number of votes per share
as is equal to the Current Sonic Common Share Equivalent (as defined in the
Voting Agreement) on the record date established by Sonic or by applicable
law for such Sonic Meeting or Sonic Consent, as the case may be, for each
Exchangeable Share (as defined in the Voting Agreement) owned
<PAGE>
of record by each holder of an Exchangeable Share on such record date in
respect of each matter, question or proposition to be voted on at such
Sonic Meeting or to be consented to in connection with such Sonic Consent;
provided that other than as set forth herein with respect to voting rights
of the Special Voting Stock, the Special Voting Stock shall not be entitled
to any separate voting rights as a class with respect to any matters; and
provided further that the share of Special Voting Stock shall only be voted
as to each Exchangeable Share in accordance with the written instructions
of the holder of such Exchangeable Share in accordance with Section 4.3 of
the Voting Agreement; and be it further
RESOLVED, that the Special Voting Stock shall have no automatic right
to dividends declared and paid upon or set aside for the common stock, when
and if declared by the Board of Directors of the Corporation, nor shall the
holders of Special Voting Stock in the Corporation be entitled to any
preference to dividends in the Corporation when and if declared by the
Corporation and paid upon or set aside for all of the stock of the
Corporation, common and preferred; and be it further
RESOLVED, that the Special Voting Preferred Stock shall not be
entitled to any distribution of assets of the Corporation upon the
dissolution, liquidation or merger of the Corporation;
RESOLVED, that at such time as the holder of an Exchangeable Share
shall exercise the Exchange Right (as defined in the Voting Agreement) or
upon the occurrence of the automatic exchange pursuant to the Automatic
Exchange Rights (as defined in the Voting Agreement), unless in either case
the Corporation shall not have delivered the requisite Sonic Common Shares
(as defined in the Voting Agreement) issuable in exchange therefor to the
Trustee under the Voting Agreement for delivery to the holders of
Exchangeable Shares, or upon the redemption of Exchangeable Shares pursuant
to Article 5 or Article 6 of the Exchangeable Share Provisions set forth in
the Articles of Arrangement filed pursuant to the Ontario Business
Corporation Act (the "Articles of Arrangement"), or upon the effective date
of the liquidation, dissolution or winding-up of Sonic Canada, Inc.
pursuant to Article 4 of the Articles of Arrangement, or upon the purchase
of Exchangeable Shares from the holder pursuant to the exercise by the
Corporation of the Retraction Call Right, Redemption Call Right or the
Liquidation Call Right (all as defined in the Voting Agreement), except
with respect to a Sonic Meeting or Sonic Consent for which the record date
has occurred, all of the rights of a holder of Exchangeable Shares, with
respect to the Holder Votes (as defined in the Voting Agreement)
exercisable in respect of the Exchangeable Shares held by such holder of
Exchangeable Shares, including the right to instruct the Trustee under the
Voting Agreement, as to the voting of or to vote personally such Holder
Votes, shall be deemed to be surrendered by such holder of Exchangeable
Shares, and the voting rights represented thereby and as
2
<PAGE>
may be exercised by the Trustee under the Special Voting Stock shall cease
immediately upon the delivery by such holder of Exchangeable Shares to the
Trustee of the certificates representing such Exchangeable Shares; and be
it further
RESOLVED, that at such time that the Exchangeable Shares shall no
longer be outstanding, the Special Voting Stock shall be deemed no longer
outstanding and shall be redeemed by the Corporation;
FURTHER RESOLVED, that the statements contained in the foregoing
resolutions creating and designating the said preferred stock and fixing
the number of limited powers, preferences and relative, optional,
participating, and other special rights and the qualifications,
limitations, restrictions, and other distinguishing characteristics thereof
shall, upon the effective date of said class, be deemed to be included in
and be a part of the Certificate of Incorporation of the corporation
pursuant to the provisions of Section 104 and 151 of the General
Corporation Law of the State of Delaware.
Signed on August 27, 1997.
/s/Richard H. Hurd
------------------------------------------
Richard H. Hurd, President
3
<PAGE>
EXHIBIT 3.3
BY-LAWS
OF
TURBOSONIC TECHNOLOGIES, INC.
(AS AMENDED THROUGH AUGUST 27, 1997)
ARTICLE I
STOCKHOLDERS
SECTION 1.1 ANNUAL MEETING. Except as otherwise provided in Section 1.9
--------------
of these By-laws, an annual meeting of stockholders of the Corporation for the
election of directors and for the transaction of any other business which may
properly be considered at the annual meeting, shall be held on the second
Wednesday in August in each year, unless such day shall fall on a legal holiday,
in which case such meeting shall be held on the next day thereafter not a legal
holiday. The annual meeting in each year shall be held at such hour on said day
and at such place within or without the State of delaware as may be fixed by the
Board of Directors, or, if not so fixed, at 10:00 a.m. at the then principal
business office of the Corporation.
SECTION 1.2 SPECIAL MEETING. A special meeting of the holders of stock of
---------------
the Corporation entitled to vote on any business to be considered at any such
meeting may be called by the chairman of the Board, if any, or the President,
and shall be called by the chairman of the Board, if any, or the President or
the Secretary when directed to do so by resolution of the Board of Directors or
at the written request of directors representing a majority of the whole Board
or at the written request of the holders of 5% of the outstanding stock entitled
to vote at such meeting. Any such request shall state the purpose or purposes
of the proposed meeting.
SECTION 1.3 NOTICE OF MEETINGS. Whenever stockholders are requested or
------------------
permitted to take any action at a meeting, unless notice is waived in writing by
all Stockholders entitled to vote at the meeting, a written notice of the
meeting shall be given which shall state the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Unless otherwise provided by law, and except as to any stockholder duly
waiving notice, the written notice of any meeting shall be given personally or
by mail, not less than ten nor more than fifty days before the date of the
meeting to each stockholder entitled to vote at such meeting. If mailed, notice
shall be deemed given when deposited in the United States mail, first class
postage, prepaid, directed to the stockholder at his address as it appears on
the records of the Corporation.
<PAGE>
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If, however, the adjournment is for more than thirty days, or
if after the adjournment a new records date is fixed for the adjourned meeting,
a notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
SECTION 1.4 QUORUM. Except as otherwise provided by law in respect of the
------
vote of holders of stock that shall be required for a specified action, at any
meeting of stockholders the holders of a majority of the outstanding stock
entitled to vote thereat, either present or represented by proxy, shall
constitute a quorum for the transaction of any business, but the stockholders
present, although less than a quorum, may adjourn the meeting to another time or
place and, except as provided in the last paragraph of Section 1.3 of these By-
Laws, notice need not be given of the adjourned meeting.
SECTION 1.5 VOTING. Whenever directors are to be elected at a meeting,
-------
they shall be elected by a plurality of the votes cast at the meeting by the
holders of stock entitled to vote thereat. Whenever any corporate action, other
than the election of directors, is to be taken by vote of stockholders at a
meeting, it shall, except as otherwise required by law or by the Certificate of
Incorporation or by these By-Laws, be authorized by a majority of the votes cast
at the meeting by the holders of stock entitled to vote thereat.
Except as otherwise provided by law, each holder of record of stock of the
Corporation entitled to vote on any matter at any meeting of stockholders shall
be entitled to one vote for each share of such stock standing in the name of
such holder on the stock ledger of the Corporation on the record date for the
determination of the stockholders entitled to vote at the meeting.
Upon the demand of any stockholder entitled to vote, the vote for
directors, or the vote upon any question before a meeting, shall be by written
ballot, but otherwise, unless specified by law, the method of voting and the
manner in which votes are counted shall be discretionary with the presiding
officer at the meeting.
SECTION 1.6 PRESIDING OFFICER AND SECRETARY. At every meeting of
--------------------------------
stockholders the Chairman of the Board, or in his absence (or if there be none)
the President, or in his absence a Vice President, or, if none be present, the
appointee of the presiding officer of the meeting, shall preside. The
Secretary, or in his absence an Assistant Secretary, or if none be present, the
appointee of the presiding officer of the meeting, shall act as secretary of the
meeting.
2
<PAGE>
SECTION 1.7 PROXIES. Each stockholder entitled to vote at a meeting of
--------
stockholders or to express consent or dissent to corporate action in writing
without a meeting amy authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. Every proxy shall be
signed by the stockholder or by his duly authorized attorney.
SECTION 1.8 LIST OF STOCKHOLDERS. The officer who has charge of the stock
--------------------
ledger of the Corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole thereof, and may be inspected by any stockholder who is
present.
The stock ledge shall be the only evidence as to who are the stockholders
entitled to examine the stock ledger, the list required by this Section or the
books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
SECTION 1.9 WRITTEN CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Whenever
--------------------------------------------------
any statute or under any provision of the Certificate of Incorporation or these
By-Laws the vote of the holders of stock of the Corporation at a meeting is
required or permitted to be taken for or in connection with an election of
directors or any other corporate action, the meeting and vote of such
stockholders may be dispensed with and such action may be taken with the written
consent of the holders of a majority of the stock outstanding, except that, if
the vote of the holders of more than a majority of the outstanding stock shall
be required by statute or the Certificate of Incorporation or these By-laws for
a specified action, then such action may be taken only with the written consent
of the holders of the minimum percentage of the outstanding stock so required.
If any such action without a meeting is taken by less than unanimous written
consent, the Secretary shall give prompt notice thereof to all holders of
outstanding stock. Any such written consent may be given by one or any number
of substantially concurrent written instruments of substantially similar tenor
signed by such stockholders, in person or by attorney or proxy duly appointed in
writing, and filed with the Secretary or an Assistant Secretary of the
Corporation. Any such written consent shall be effective as of the effective
date thereof as specified therein, provided that such date is not more than
sixty days prior to the date such written consent is filed as aforesaid, or, if
no such date is so specified, on the date such
3
<PAGE>
written consent is filed as aforesaid.
ARTICLE II
DIRECTORS
SECTION 2.1 NUMBER OF DIRECTORS. The Board of Directors shall consist of
-------------------
not less than eight nor more than ten directors, with the actual number to be
established by resolution of the Board of Directors. The number of directors
may be changed at any time and from time to time by the affirmative vote at a
meeting of the holders of a majority of the stock outstanding or by the written
consent of the holders of a majority of such stock or by resolution of the Board
of Directors, adopted by a majority of the whole Board, except that no decrease
shall shorten the term of any incumbent director unless such director is
specifically removed pursuant to Section 2.5 of these By-Laws at the time of
such decrease.
SECTION 2.2 ELECTION AND TERM OF DIRECTORS. Directors shall be elected
------------------------------
annually, by election at the annual meeting of stockholders or by the written
consent of the holders of a majority of the outstanding stock in lieu of such
meeting, and shall hold office until the next annual election. The term of
office of each director shall be from the time of his election and qualification
until the annual election of directors next succeeding his election and until
his successor shall have been elected and shall have qualified. If the annual
election of directors is not held on the date designated therefor, the directors
shall cause such election to be held as soon thereafter as convenient.
SECTION 2.3 VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Vacancies and
-----------------------------------------
newly created directorships resulting from any increase in the authorized number
of directors may be filled by election at a meeting of stockholders or by the
written consent of the holders of a majority of the outstanding stock in lieu of
a meeting. Except as otherwise provided by law, vacancies (except vacancies
arising from the removal of directors) and any newly created directorships
resulting from any increase in the authorized number of directors may be filled
by resolution of the Board of Directors, adopted by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
SECTION 2.4 RESIGNATION. Any director may resign from his office at any
-----------
time either by oral tender of resignation at any meeting of the Board or by oral
tender to the Chairman of the Board, if any, or the President or by giving
written notice to the Secretary of the Corporation. Any such resignation shall
take effect at the time specified therein or, if the time be not specified, upon
receipt thereof, and the acceptance of such resignation, unless required by the
terms thereof, shall not be
4
<PAGE>
necessary to make such resignation effective.
SECTION 2.5 REMOVAL. Any or all of the directors may be removed at any
-------
time, with or without cause, by the affirmative vote at a meeting of the holders
of a majority of the stock outstanding or by the written consent of the holders
of a majority of such stock.
SECTION 2.6 MEETINGS. Meetings of the Board, regular or special, may be
--------
held at any place within or without the State of Delaware. An annual meeting
of the Board for the appointment of officers and the transaction of any other
business shall be held after each annual election of directors. If an annual
meeting of stockholders is held at which such election occurs, the annual
meeting of the Board shall be held at the same place and immediately following
the holding of such meeting of stockholders, and no notice thereof need be
given. If an annual election of directors occurs by written consent in lieu of
the annual meeting of stockholders, the annual meeting of the Board shall take
place as soon after such written consent is duly filed with the Corporation as
is practicable, either at the next regular meeting of the Board or at a special
meeting. The Board may fix times and places for regular meetings of the Board
and no notice of such meetings need be given. A special meeting of the Board
shall be held whenever called by the Chairman of the Board, if any, or by the
President or by at least one-third of the directors for the time being in
office, at such time and place as shall be specified in the notice or waiver
thereof. Notice of each special meeting shall be given by the Secretary or by a
person calling the meeting to each director by mailing the same, first class
postage prepaid, not late than the second day before the meeting, or personally
or by telegraphing or telephoning the same not later than the day before the
meeting.
SECTION 2.7 QUORUM AND VOTING. A majority of the whole Board shall
-----------------
constitute a quorum for the transaction of business, but, if there be less than
a quorum at any meeting of the Board, a majority of the directors present may
adjourn the meeting from time to time, and no further notice thereof need be
given other than announcement at the meeting which shall be so adjourned.
Except as otherwise provided by law or by these By-Laws, the act of a majority
of the whole Board at a meeting at which a quorum is present shall be the act of
the Board of Directors.
SECTION 2.8 WRITTEN CONSENT OF DIRECTORS IN LIEU OF A MEETING. Any action
-------------------------------------------------
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting, if all members of the
Board or of such committee, as the case may be, consent thereto in writing and
the writing or writings are filed with the minutes of proceedings of the Board
or committee.
SECTION 2.9 COMPENSATION. Directors may receive compensation for services
------------
to the Corporation in their capacities as
5
<PAGE>
directors or otherwise in such manner and in such amounts as may be fixed from
time to time by the Board.
SECTION 2.10. ACTION TAKEN BY CONFERENCE TELEPHONE. Members of the Board
------------------------------------
of Directors or any committee thereof may participate in a meeting by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other.
ARTICLE III
OFFICERS, AGENTS AND EMPLOYEES
SECTION 3.1 APPOINTMENT AND QUALIFICATION. The officers of the
-----------------------------
Corporation shall be a President, a Secretary and a Treasurer, and may include a
Chairman of the Board, one or more Vice Presidents, one or more Assistant
Secretaries and one or more Assistant Treasurers, all of whom shall be appointed
by the Board of Directors. Any number of offices may be held by the same
person, but no officer shall execute, acknowledge or verify any instrument in
more than one capacity. Each of the officers shall serve until the annual
meeting of the Board of Directors next succeeding his appointment and until his
successor shall have been chosen and qualified. The Board may appoint, and may
delegate power to appoint, such other officers, agents and employees as it may
deem necessary or proper, who shall hold office for such period, have such
authority and perform such duties as may from time to time be prescribed by the
Board.
SECTION 3.2 REMOVAL OF OFFICER, AGENT OR EMPLOYEE. Any officer, agent or
-------------------------------------
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to officers, agents and employees not appointed by the Board of Directors. Such
removal shall be without prejudice to such person's contract rights, if any, but
the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
SECTION 3.3 COMPENSATION AND BOARD. The compensation of the officers of
- ----------------------
the Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his control. The
Corporation may secure the fidelity of any or all of its officers, agents or
employees by bond.
SECTION 3.4 CHAIRMAN OF THE BOARD. The Chairman of the Board, if there be
---------------------
one, shall preside at all meetings of stockholders and of the Board of
Directors, and shall have such other powers and duties as may be delegated to
him by the Board of Directors.
6
<PAGE>
SECTION 3.5 PRESIDENT. The President shall be the chief executive
---------
officers of the Corporation. In the absence of the Chairman of the Board (or if
there be none), he shall preside at all meetings of the stockholders and of the
Board of Directors. He shall have general charge of the business and affairs of
the Corporation. He may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he may delegate
these powers. The President may vote the stock or other securities of any other
domestic or foreign corporation of any type or kind which may at any time be
owned by the Corporation, may execute any stockholders' or other consents in
respect thereof and may in his discretion delegate such powers by executing
proxies, or otherwise, on behalf of the Corporation. The Board of Directors by
resolution from time to time may confer like powers upon any other person or
persons.
SECTION 3.6 VICE PRESIDENTS. Each Vice President shall have such powers
---------------
and perform such duties as the Board of Directors or the President may from time
to time prescribe. In the absence or inability to act of the President, unless
the Board of Directors shall otherwise provide, the Vice President who has
served in that capacity for the longest time and who shall be present and able
to act, shall perform all the duties and may exercise any of the powers of the
President. The performance of any duty by a Vice President shall, in respect of
any other person dealing with the Corporation, be conclusive evidence of his
power to act.
SECTION 3.7 TREASURER. The Treasurer shall have charge of all funds and
---------
securities of the Corporation, shall endorse the same for deposit or collection
when necessary and deposit the same to the credit of the Corporation in such
banks or depositories as the Board of Directors may authorize. He may endorse
all commercial documents requiring endorsements for or on behalf of the
Corporation and may sign all receipts and vouchers for payments made to the
Corporation. He shall have all such further powers and duties as generally are
incident to the position of Treasurer or as may be assigned to him by the
President or the Board of Directors.
SECTION 3.8 SECRETARY. The Secretary shall record all proceedings of
---------
meetings of the stockholders and directors in a book kept for that purpose and
shall file in such book all written consents of the stockholders or directors to
any action taken without a meeting and shall perform like duties for any
committee of the Board of Directors when required. He shall attend to the
giving and serving of all notices of the Corporation. He shall have custody of
the seal of the Corporation and shall attest the same by his signature whenever
required. He shall have charge of the stock ledger and such other books and
papers as the Board of Directors may direct, but he may delegate responsibility
for maintaining the stock ledger to any transfer agent appointed by the Board.
He shall have all such further powers and duties as generally are incident to
the position of Secretary or as may be assigned to him by the President or the
Board of Directors.
7
<PAGE>
SECTION 3.9 ASSISTANT TREASURERS. In the absence or inability to act of
--------------------
the Treasurer, any Assistant Treasurer may perform all the duties and exercise
all the powers of the Treasurer. The performance of any such duty shall, in
respect of any other person dealing with the Corporation, be conclusive evidence
of his power to act. An Assistant Treasurer shall also perform such other
duties as the Treasurer or the Board of Directors may assign to him.
SECTION 3.10 ASSISTANT SECRETARIES. In the absence or inability to act of
---------------------
the Secretary, any Assistant Secretary may perform all the duties and exercise
all the powers of the Secretary. The performance of any such duty shall, in
respect of any other person dealing with the Corporation, be conclusive evidence
of his power to act. An Assistant Secretary shall also perform such other
duties as the Secretary or the Board of Directors may assign to him.
SECTION 3.11 DELEGATION OF DUTIES. In case of the absence of any officer
--------------------
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any the officer or upon any director.
SECTION 3.12 LOANS TO OFFICERS AND EMPLOYEES; GUARANTY OF OBLIGATIONS OF
-----------------------------------------------------------
OFFICERS AND EMPLOYEES. The Corporation may lend money to, or guarantee any
- - ----------------------
obligation of, or otherwise assist any officer or other employee of the
Corporation or any subsidiary, including any officer or employee who is a
director of the Corporation or any subsidiary, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the Board
of Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation.
ARTICLE IV
CAPITAL STOCK
SECTION 4.1 CERTIFICATES. Certificates for stock of the Corporation shall
------------
be in such form as shall be approved by the Board of Directors and shall be
signed in the name of the Corporation by the Chairman of the Board, if any, or
the President or a Vice President and by the Secretary or an Assistant Secretary
or the Treasurer or an Assistant Treasurer. Such certificates may be sealed
with the seal of the Corporation or a facsimile thereof, and shall contain such
information as is required by law to be stated thereon. If any stock
certificate is countersigned by a transfer agent or registrar other than the
Corporation or its employee, any
8
<PAGE>
other signature on the certificate may be a facsimile. In case any officers,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officers, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
SECTION 4.2 TRANSFERS OF STOCK. Transfers of stock shall be made only
------------------
upon the books of the Corporation by the holder, in person or by duly authorized
attorney, and on the surrender of the certificate or certificates for such stock
properly endorsed. The Board of Directors shall have the power to make all such
rules and regulations, not inconsistent with the Certificate of Incorporation
and these By-Laws, as the Board may deem appropriate concerning the issue,
transfer and registration of certificates for stock of the Corporation. The
Board may appoint one or more transfer agents or registrars of transfers, or
both, and may require all stock certificates to bear the signature of either or
both.
SECTION 4.3 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may
--------------------------------------
issue a new stock certificate in the place of any certificate theretofore issued
by it, alleged to have been lost, stolen or destroyed, and the Corporation may
require the owner of the lost, stolen or destroyed certificate or his legal
representative to give the Corporation a bond sufficient to indemnify it against
any claim that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of any such new certificate.
The Board may require such owner to satisfy other reasonable requirements.
SECTION 4.4 STOCKHOLDER RECORD DATE. In order that the Corporation may
- -----------------------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. Only such stockholders as shall be stockholders of record on the
date so fixed shall be entitled to notice of, and to vote at, such meeting and
any adjournment thereof, or to give such consent, or to receive payment of such
dividend or other distribution, or to exercise such rights in respect of any
such change, conversion or exchange of stock, or to participate in such action,
as the case may be, notwithstanding any transfer of any stock on the books of
the Corporation after any record date so fixed.
If no record date is fixed by the Board of Directors, (1) the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of
9
<PAGE>
business on the day next preceding the date on which notice is given, or, if
notice is waived by all stockholders entitled to vote at the meeting, at the
close of business on the day next preceding the day on which the meeting is
held, (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting shall be at the close
of business on the day next preceding the effective date of such consent as
provided in Section 1.9 of these By-Laws, and (3) the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
A determination of stockholders of record entitled to notice of or to vote at
a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE V
SEAL
SECTION 5.1 SEAL. The seal of the corporation shall be circular in form
----
and shall bear, in addition to any other emblem or device approved by the Board
of Directors the name of the Corporation, the year of its incorporation and the
words "Corporate Seal" and "Delaware". Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE VI
WAIVER OF NOTICE
SECTION 6.1 WAIVER OF NOTICE. Whenever notice is required to be given by
----------------
statute, or under any provision of the Certificate of Incorporation or these By-
Laws, a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
In the case of a stockholder, such waiver of notice may be signed by such
stockholder's attorney or a proxy duly appointed in writing. Attendance of a
stockholder at a meeting of stockholders, or attendance of a director at a
meeting of the Board of Directors or any committee thereof, shall constitute a
waiver of notice of such meeting, except when such stockholder or director, as
the case may be, attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular
10
<PAGE>
or special meeting, of the stockholders or of the directors need be specified in
any written waiver of notice.
ARTICLE VII
CHECKS, NOTES, DRAFTS, ETC.
SECTION 7.1 CHECKS, NOTES, DRAFTS, ETC. Checks, notes, drafts,
--------------------------
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution shall from time to time designate.
ARTICLE VIII
AMENDMENTS
SECTION 8.1 AMENDMENTS. These By-Laws or any of them may be altered or
----------
repealed, and new By-Laws may be adopted, by the affirmative vote at a meeting
of the holders of a majority of the stock outstanding or by the written consent
of the holders of a majority of such stock. The Board of Directors shall also
have power, by a majority vote of the whole Board, to alter or repeal any of
these By-Laws, and to adopt new By-Laws.
11
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