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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1997
-----------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from___________________ to ___________________________
Commission file number 0-21832
-----------
TURBOSONIC TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 13-1949528
- ----------------------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11 Melanie Lane, Unit 22A, East Hanover, New Jersey 07936
- ----------------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(973) 884-4388
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
- ------------------------------------ -----------------------------------------
Securities registered pursuant to
Section 12(g) of the Exchange Act:
Common Stock
- -------------------------------------------------------------------------------
(Title of Class)
Check 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....
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B 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.
Yes ...X... No ......
Issuer's revenues for its most recent fiscal year: $2,060,000
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant has filed all documents and reports required to
be filed by Section 12, 12 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 .....
The number of shares outstanding of the Issuer's common stock is 10,000,000 as
of 4/30 /98.
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 reorganization plan
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.
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The Plan was confirmed by the Bankruptcy Court on July 3, 1997 following
requisite creditor approval. The Plan provided for the extinguishment of all of
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 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 this 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.
(b) Financial Information About Industry Segments
Not Applicable.
(c) Narrative Description of Business
Introduction
------------
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 inside 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
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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
indicated below:
Year Ended April 30,
---------------------------
1997 1996
---- ----
Hazardous Waste Incineration 2% 2%
Solid Waste Incineration 17 15
Chemical and Mining Processing 20 23
Metallurgical Processing 46 45
Dust Suppression 11 10
Other 4 5
--- ---
100% 100%
==== ====
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 its production
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costs. In June 1996, the Company determined that it would again utilize the
services of third party manufacturers and fabricators, whereupon it discontinued
its own metal fabrication efforts and abandoned the leased facility.
Products and Systems
- --------------------
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
indicated below:
Year Ended April 30,
---------------------------
1997 1996
---- ----
Evaporative gas cooling
and conditioning systems 57% 27%
Wet electrostatic
precipitator systems - 2
Refrigerant
management systems (1) - 35
Wet scrubber systems - -
Dust control and
suppression systems 27 15
Nozzles 16 10
Other - 11
---- ---
100% 100%
==== ===
(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
Degrees F -2,500 Degrees F). The temperature of
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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.
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.
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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 23,000 of such nozzles
have been sold to
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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.
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 Degrees 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 operated successfully in some, but not all, commercial environments.
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
- ----------------------------------------
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
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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,
---------------------------
1997 1996
---- ----
Original equipment 43% 46%
Rehabilitation, maintenance,
spare parts and other 57 54
---- ----
100% 100%
==== ====
Marketing and Sales
- -------------------
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 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.
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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. However, 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, Israel Electric Company and Mexicana De Cobre Corporation,
accounted for 14% and 10%, respectively, of the Company's net revenues during
the fiscal year ended April 30, 1997. During the fiscal year ended April 30,
1996, two customers, Mead Paper and Carrier Corporation, accounted for 23% and
15%, respectively, of the Company's net revenues.
Backlog
- -------
At April 30, 1997, the amount of the Company's contract backlog was
approximately $524,000, contrasted with $722,000 at April 30, 1996. Backlog
represents work for which the Company has entered into a signed agreement or has
received an order to proceed. Completion of all of the Company's April 30, 1997
backlog is anticipated to occur prior to April 30, 1998.
Product Development
- -------------------
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
- ----------------------
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 2115. The Company's ownership of these
rights are subject of pending litigation (see "- Heat Exchangers").
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
those instances 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.
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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.
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
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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
although the EPA has since extended the time by which these facilities must be
in compliance.
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
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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, 1997, the Company employed 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 are represented by a labor union. The
Company believes that its relationship with its employees is satisfactory.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales
Domestic customers accounted for approximately 34% and 82% of the Company's
sales during the years ended April 30, 1997 and 1996, respectively. South and
Central American sales were concentrated primarily in Chile, Peru 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,
-------------------------
1997 1996
---- ----
United States 34% 82%
Canada 4 5
Europe 6 5
South and Central America 31 6
Far East 6 1
Middle East 13 1
Africa 6 -
-- --
100% 100%
==== ====
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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 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 66% and 18% of the Company's revenues
------------
during the fiscal years ended April 30, 1997 and 1996, respectively, were
derived from sales made outside of the United States. The Company's
profitability and financial condition are materially dependent, therefore,
14
<PAGE>
on the success of its foreign sales efforts. Foreign sales are subject to
certain inherent risks, including unexpected changes in regulatory and
other legal requirements, tariffs and other trade barriers, great
difficulty in collection of accounts receivable and potentially adverse tax
consequences. There can be no assurance that these factors will not have
any 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
will guarantee 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 case extended delay or cancellation of one or more
of the Company's large projects, which would adversely impact the Company's
future revenues.
. 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
15
<PAGE>
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.
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 right to use the technology. All such
creditors' claims, including monetary damages, if any,
16
<PAGE>
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
No matters were submitted for a vote to Registrant's security holders
during the fourth quarter of Registrant's fiscal year ended April 30, 1997.
17
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) 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(1) Low(1)
------- ------
Fiscal Year Ended
April 30, 1997:
First Quarter $ 5/16 $ 1/16
Second Quarter 1/4 1/16
Third Quarter 1/16 1/32
Fourth Quarter 1/16 1/32
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
(1) 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
Consolidation Date at which time all of the Company's then outstanding
securities were extinguished, resulting in a cessation of trading activity. The
Company's Common Stock resumed trading on the OTC Bulletin Board on December 23,
1997. Prior to that date and subsequent to the Consolidation Date, the Common
Stock was quoted in the "pink sheets" published by National Quotation Bureau
Incorporated.
(b) As of April 30, 1998, 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.
18
<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)
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total Revenue $2,060 $2,802 $6,671
Total cost of revenue 1,125 2,433 6,467
Selling general and
administrative expenses 1,384 2,956 4,345
Interest income (expense) ( 43) ( 99) ( 52)
Net rental income - - -
Royalty income 33 44 -
----------- ----------- -----------
Earnings (loss) from continuing
operations before income taxes (benefit) ( 459) ( 2,642) ( 4,193)
Income taxes (benefit) - -
Loss from operations of
discontinued segments - ( 885) ( 529)
Loss for disposal of
discontinued segments, including losses - ( 657) -
during phase out period
Net income (loss) $ ( 459) $(4,184) $( 4,722)
Net income (loss) per share
from continuing operations $( 0.05) $(0.37) $( 1.17)
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
shares outstanding (1) 9,848 7,025 4,052
</TABLE>
19
<PAGE>
BALANCE SHEET DATA:
(in thousands)
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Working capital $ (2,910) $ (2,555) $ ( 983)
Total assets 1,861 2,264 4,718
Long-term debt, less
current portion
of capital lease
obligations - - 5
Accumulated deficit (12,541) (12,082) ( 7,898)
(Net capital deficiency),
Stockholders' equity (1,868) ( 1,409) 1,162
</TABLE>
(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.
20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Year Ended April 30, 1997
Compared with Year Ended April 30, 1996
Original equipment revenue decreased by $400,745 (31%) to $891,036 for the
year ended April 30, 1997 from $1,291,781 in fiscal 1996. Management believes
that such decrease is primarily attributable to the reluctance of both existing
and potential customers to purchase the Company's products and systems given the
uncertainty during fiscal 1997 of the Company's emergence from its then pending
Chapter 11 reorganization proceeding under the Federal Bankruptcy Code.
Rehabilitation, maintenance and spare parts revenue decreased by $342,178
(22.7%) to $1,168,492 for the year ended April 30, 1997 from $1,510,670 for
fiscal 1996, reflecting the impact of a one time $250,000 service contract in
fiscal 1996 for a major oil company.
Cost of original equipment decreased by $710,930 (54.2%) to $601,509 for
the year ended April 30, 1997 from $1,312,439 for fiscal 1996. Such cost,
expressed as a percentage of original equipment revenue, was 67.5% for the year
ended April 30, 1997 and 101.6% for fiscal 1996. The fiscal 1997 improvement was
attributable to the fact that unlike fiscal 1997, fiscal 1996 included several
air pollution control contracts which had substantial cost overruns caused by
increases in material prices that occurred after the contracts were awarded and
the incurrence of actual engineering time which exceeded budgeted engineering
costs.
Cost of rehabilitation, maintenance and spare parts decreased by $596,740
(53.3%) to $523,379 for the year ended April 30, 1997 from $1,120,119 for fiscal
1996. Such cost, expressed as a percentage was 44.8% for the year ended April
30,1997 and 74.1% for fiscal 1996. The lower fiscal 1997 percentage when
compared to that of fiscal 1996 was attributable to the fact that the major oil
company service contract, noted above, which had a higher cost of sales than
spare parts, represented a disproportionately higher percentage of total
rehabilitation, maintenance and spare parts revenue in fiscal 1996 when
contrasted with the Company's historical experience.
Selling, general and administrative expenses decreased by $1,572,899
(53.2%) to $1,383,683 for the year ended April 30, 1997 from $2,956,582 for
fiscal 1996. These expenses, as a percentage of total revenue, were 67.2% for
the year ended April 30, 1997 as compared to 105.5% for fiscal 1996. Due to the
Company's substantial and ongoing losses over the last several years and its
decision to convert to a voluntary Chapter 11
21
<PAGE>
reorganization proceeding under the Federal Bankruptcy Code, the Company further
reduced selling, general and administrative expenses by laying off additional
personnel and by not incurring any expenses unless they were absolutely
necessary to keep the Company functioning during the reorganization period.
Liquidity and Capital Resources
- -------------------------------
The Company had a positive cash flow from operating activities of $127,172
for the year ended April 30, 1997 as compared to a negative cash flow of
$1,469,150 for the same period in 1996, an increase of $1,602,981. The Company
had a negative cash flow from investing activities of $72,626 for the year ended
April 30, 1997 as compared to negative cash flow of $85,466 for fiscal 1996, a
decrease of $12,840.
The Company had a positive cash flow from financing activities of $138,713
for the year ended April 30, 1997 as compared to a positive cash flow of
$1,349,373 for the same period in 1996, a decrease of $1,210,660. 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 this private placement was utilized to
partially offset the Company's negative cash flow from operations.
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 had negative working capital of $2,909,949 and $2,554,732 at
April 30, 1997 and 1996, respectively, an increase of $355,217. The Company's
current ratio (current assets divided by current liabilities) was .22 and .31 at
April 30, 1997 and April 30, 1996, 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, 1997 and 1996, "Costs and estimated earnings in
excess of billings on uncompleted contracts" exceeded "Billings in excess of
costs and estimated earnings on uncompleted contracts" by $127,726 and $70,364,
respectively, thereby negatively effecting working capital.
22
<PAGE>
Due to the substantial and ongoing losses experienced by the Company, on
September 16, 1996 the Company, 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
Reference is made to Registrant's Current Report on Form 8-K dated February
16, 1998 (filed February 20, 1998), the contents of which are incorporated
herein by reference, for information relating to Registrant's dismissal of
Arthur Andersen LLP as its independent auditors and its subsequent retention of
Ernst & Young as its independent auditors.
23
<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
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 Inc., a
financial consulting company since 1987.
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
Edward F. Spink 43 President and Director
Patrick J. Forde 64 Secretary/Treasurer
and Director
Richard H. Hurd 60 Director
24
<PAGE>
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.
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.
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 president and owner of Glencree Investments, Inc.,
chairman of the board of Waterloo Scientific, Inc. and serves on the board of
several other companies.
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. Donald 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.
25
<PAGE>
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, 1997, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with.
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, 1997 and 1996
to its chief executive officer and each of its executive officers whose
compensation exceeded $100,000 during its fiscal year ended April 30, 1997 (the
"Named Officers"):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS
------------------- ----------------------
NAME AND RESTRICTED NUMBER OF
PRINCIPAL FISCAL STOCK OPTIONS AND
POSITION YEAR SALARY BONUS AWARDS WARRANTS
- ----------- ---- ------ ----- ---------- -----------
<S> <C> <C> <C> <C> <C>
Richard H. Hurd 1997 $ 30,894 - - -
President 1996 $107,217(1) - - -
</TABLE>
(1) Includes $28,840 paid in shares of the Company's Common Stock valued at
$0.30 per share.
Option Grants in Last Fiscal Year
There were no grants of stock options and warrants during the year ended
April 30, 1997.
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 Named
Officers in the fiscal year ended April 30, 1997 and prior years.
26
<PAGE>
<TABLE>
<CAPTION>
Number of Number of Exercised Value of Unexercised
Shares Options and Warrants In-the-Money Options and
Acquired at April 30, 1997 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(1) - - -
</TABLE>
(1) These options were extinguished on the Consolidation Date in accordance with
the terms and conditions of the Plan.
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 was 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 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of April 30, 1998 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 Named Officers and by all of the
executive officers and directors of the Company as a group:
Amount and
Name of Nature of Approximate
Beneficial Owner or Beneficial Percentage
Identity of Group Ownership(1) of Class
- --------------------------- ----------------- ------------
Dr. Donald R. Spink, Sr. 3,356,931(1)(2) 32.9%
*
Edward F. Spink 456,338(1) 4.5%
*
Patrick J. Forde 719,159(1)(3) 7.1%
*
27
<PAGE>
Richard H. Hurd 213,938(1)(4) 2.1%
**
Robert J. Ferb 108,437(1)(5) 1.1%
**
Richard A. Horgan 122,227(1)(6) 1.2%
**
Canadian Venture Founders 1,334,979(1) 13.1%
114 Lakeshore Road East
Oakville, Ontario L6J 6N2
Canada
All executive officers 4,975,700(1)-(6) 48.9%
and directors as a
group (6 persons)
* 550 Parkside Drive, Suite A-14, Waterloo, Ontario N2L 5V4, Canada.
** 11 Melanie Lane, Unit 22A, East Hanover, NJ 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 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 the exercise of an option expiring in
August 1999 at an exercise price of$1.00 per share, which option was
granted 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
Edward F. Spink is Dr. Donald R. Spink, Sr.'s son.
28
<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
Auditors and Accountants F-1 - F-2
Consolidated Balance Sheet -
April 30, 1997 F-3
Consolidated Statements of
Operations for the years ended
April 30, 1997 and 1996 F-4
Consolidated Statement of
Changes in Stockholders'
Equity (Net Capital Deficiency)
for the years ended
April 30, 1997, and 1996 F-5
Consolidated Statement of Cash
Flows for the years ended
April 30, 1997 and 1996 F-6 - F-7
Notes to Consolidated Financial
Statements F-8 - F18
(ii) Financial Statements Schedules
------------------------------
Schedule II - Valuation and
Qualifying Accounts
and Reserves F-19
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
29
<PAGE>
(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)
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)
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
- -------------------
I. Incorporated by reference to an Exhibit filed as part of Registrant's
Current Report on Form 8-K dated July 29, 1997.
II. Incorporated by reference to an Exhibit filed as part of Registrant's
Current Report on Form 8-K dated March 31, 1997.
III. Incorporated by reference to an Exhibit filed as part of Registrant's
Current Report on Form 8-K dated October 1, 1997.
IV. Incorporated by reference to an Exhibit filed as part of Registrant's
Annual Report on Form 10-K for its fiscal year ended April 30, 1996.
30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TURBOSONIC TECHNOLOGIES, INC.
By: /s/Patrick J. Forde
----------------------------------
Patrick J. Forde,
Secretary, Treasurer
Dated: April , 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signatures Capacity Date
- -------------------------- --------------------- -----------
Chairman of
/s/Donald R. Spink, Sr. the Board
- -------------------------- of Directors May , 1998
Dr. Donald R. Spink, Sr.
President and
/s/Edward F. Spink Director (Principal
- -------------------------- Executive Officer) May , 1998
Edward F. Spink
Secretary, Treasurer
and Director
(Principal Financial
/s/Patrick J. Forde and Accounting
- -------------------------- Officer) May , 1998
Patrick J. Forde
/s/Richard H. Hurd Director, Assistant
- -------------------------- Secretary May , 1998
Richard H. Hurd
/s/Robert J. Ferb
- ------------------------ Director May , 1998
Robert J. Ferb
/s/Richard A. Horgan
- ------------------------ Director May , 1998
Richard A. Horgan
31
<PAGE>
SONIC ENVIRONMENTAL SYSTEMS, INC.
SUBSIDIARIES
------------
State of
Name Incorporation % Ownership
---- ------------- -----------
Sonic Fabricating, Inc. Delaware 100%
Sonic Thermal Systems, Inc. Delaware 80%
Euthenergy International, Inc. Delaware 80%
32
<PAGE>
REPORT OF INDEPENDENT PUBLIC AUDITORS
-------------------------------------
To the Board of Directors and Stockholders of
Sonic Environmental Systems, Inc.
We have audited the accompanying consolidated balance sheet of Sonic
Environmental Systems, Inc. and subsidiaries as of April 30, 1997, and the
related consolidated statements of operations, changes in stockholders'
deficiency and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sonic
Environmental Systems, Inc. and subsidiaries as of April 30, 1997, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States.
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 1997, and at April 30, 1997 had negative tangible net worth, an accumulated
deficit, a negative working capital and was in default of the covenants under
its revolving credit agreement. These factors and the need for additional
capital or borrowing during 1998 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 amounts and classification of liabilities that might result should the
Company be unable to continue as a going concern.
ERNST & YOUNG
Kitchener, Canada
December 3, 1997
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Sonic Environmental Systems, Inc.
We have audited the consolidated statements of operations and changes in
stockholders' deficit and cash flows of Sonic Environmental Systems, Inc. (a
Delaware corporation) and subsidiaries for the year 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 on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Sonic
Environmental Systems, Inc. and subsidiaries for the year 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 at April 30, 1996 had negative tangible net worth, an accumulated
deficit, a negative working capital and was in default of the covenants under
its revolving credit agreement. These factors and the need for additional
capital or borrowing 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.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
October 20, 1997
F-2
<PAGE>
SONIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1997
-----------------------------------------------
See Basis of Presentation - Note 1
<TABLE>
<CAPTION>
ASSETS 1997
------ -----
CURRENT ASSETS:
<S> <C>
Cash $ 220,525
Contract and accounts receivable, net of allowance
for doubtful accounts of $36,611 345,189
Costs and estimated earnings in excess of billings on uncompleted contracts 156,037
Inventories 94,808
Other current assets 3,060
-------
Total current assets 819,619
EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
net of accumulated depreciation 78,495
INTANGIBLE ASSETS, net of accumulated amortization 673,931
Restricted funds 137,312
Promissory notes receivable 141,157
Investment in subsidiaries 10,755
-------
Total assets $ 1,861,269
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
CURRENT LIABILITIES:
Notes payable $ 1,040,000
Accounts payable 1,773,977
Accrued salaries and payroll taxes 450,630
Accrued professional fees 240,170
Other accrued expenses 196,480
Billings in excess of costs and estimated earnings on uncompleted contracts 28,311
------------
Total current liabilities 3,729,568
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
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 (12,541,158)
------------
Total net capital deficiency (1,868,299)
------------
Total liabilities and stockholders' equity (deficiency) 1,861,269
============
</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 OPERATIONS
-------------------------------------
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
-------------------------------------------
See Basis of Presentation - Note 1
<TABLE>
1997 1996
---- ----
<S> <C> <C>
ORIGINAL EQUIPMENT REVENUE $ 891,036 $ 1,291,781
REHABILITATION, MAINTENANCE AND SPARE PARTS REVENUE 1,168,492 1,510,670
---------- ---------
Total revenue 2,059,528 2,802,451
--------- ---------
COST OF ORIGINAL EQUIPMENT 601,509 1,312,439
COST OF REHABILITATION, MAINTENANCE AND SPARE PARTS 523,379 1,120,119
--------- -----------
Total costs 1,124,888 2,432,558
--------- -----------
Gross profit 934,640 369,893
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,383,683 2,956,582
--------- -----------
Loss from operations (449,043) ( 2,586,689)
INTEREST EXPENSE (43,715) (98,596)
OTHER INCOME 33,431 43,569
--------- -----------
Loss from continuing operations (459,327) ( 2,641,716)
DISCONTINUED OPERATIONS:
Loss from Operation of Discontinued Segments - ( 884,753)
Loss on Disposal of Discontinued Segments, including provision
of $445,755 for operating losses during phase-out period - ( 657,673)
---------- ------------
Net loss ($ 459,327) ($4,184,142)
========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 9,847,737 7,024,911
========== ===========
LOSS PER SHARE FROM CONTINUING OPERATIONS ($0.05) ($0.37)
========== ===========
LOSS PER SHARE FROM OPERATIONS OF DISCONTINUED
OPERATIONS ($0.00) ($0.13)
========== ===========
LOSS PER SHARE FROM DISPOSAL OF DISCONTINUED
OPERATIONS ($0.00) ($0.09)
========== ===========
NET LOSS PER SHARE ($0.05) ($0.59)
========== ===========
</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 STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
------------------------------------------------------------------------
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
-------------------------------------------
See Basis of Presentation - Note 1
<TABLE>
<CAPTION>
Common Stock
---------------- Total
Stockholders'
Additional Equity
Shares Paid In Accumulated (Net Capital
Issued Amount Capital Deficit Deficiency)
------- ------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT APRIL 30, 1995 5,199,689 $519,969 $8,539,734 ($7,897,689) $ 1,162,014
Net Loss - - - (4,184,142) (4,184,142)
Common stock issued for
cash in connection with
private placement 3,540,087 354,009 693,020 - 1,047,029
Common stock issued for payment
of related liabilities 1,107,594 110,759 455,368 - 566,127
--------- -------- --------- ---------- ----------
BALANCE AT APRIL 30, 1996 9,847,370 984,737 9,688,122 ( 12,081,831) ( 1,408,972)
Net Loss - - - ( 459,327) ( 459,327)
--------- --------- ---------- ------------ -----------
BALANCE AT APRIL 30, 1997 9,847,370 $984,737 $9,688,122 ($12,541,158) ($1,868,299)
========= ======== ========== ============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
consolidated statements.
F - 5
<PAGE>
SONIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
-------------------------------------------
See Basis of Presentation - Note 1
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($459,327) ($4,184,142)
Adjustments to reconcile net loss to net
cash used by operating activities-
Depreciation and amortization 159,856 294,987
Provision for loss on realization of patents and acquired technology rights - 196,357
Provision for loss on sale of fixed assets 20,513 -
Provision for loss on disposal of discontinued operations - 657,673
Bad debt expense 2,777 -
Provision for inventory (44,924) 194,949
(Increase) decrease in-
Contract and accounts receivable 182,194 186,610
Costs and estimated earnings in excess of
billings on uncompleted contracts (70,041) 560,327
Inventories 53,031 85,751
Other current assets 17,670 14,383
Other assets 116,826 (21,451)
Due from related parties 20,698 29,454
Increase (decrease) in-
Accounts payable 31,116 387,335
Accrued expenses 319,405 166,015
Billings in excess of costs and estimated
earnings on uncompleted contracts 12,679 (37,398)
--------- -----------
Net cash provided by (used in) operating activities 362,473 ( 1,469,150)
Net cash (used in) discontinued operations (235,301) -
--------- -----------
Net cash provided by (used in) operating activities 127,172 (1,469,150)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and
leasehold improvements - (85,466)
Proceeds from sale of equipment 64,686 -
Restricted funds (137,312) -
--------- -----------
Net cash used in investing activities (72,626) (85,466)
--------- -----------
</TABLE>
F - 6
<PAGE>
<TABLE>
1997 1996
------------------- -------------------
<S> ` <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - $1,047,029
Principal proceeds from note payable 140,000 316,528
Principal payments on capital lease obligation (1,287) (14,184)
---------------- ----------------
Net cash provided by financing activities 138,713 1,349,373
---------------- ----------------
Net increase (decrease) in cash 193,259 (205,243)
CASH, beginning of year 27,266 232,509
---------------- ----------------
CASH, end of year $ 220,525 $ 27,266
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW DATA:
Interest paid $ 2,196 $ 101,948
Income taxes paid $ - $ -
================ ================
SUPPLEMENTAL DISCLOSURES NONCASH
TRANSACTIONS:
Issuance of promissory notes receivable $ 182,323 $ -
Issuance of common stock for accounts payable $ - $ 566,127
================ ================
</TABLE>
The accompanying notes to financial statements are an integral
part of these consolidated statements.
F - 7
<PAGE>
SONIC ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
APRIL 30, 1997
--------------
(1) BASIS OF PRESENTATION:
----------------------
Sonic Environmental Systems, Inc. and its subsidiaries (collectively, the
"Company"), directly and through subsidiaries, design and market 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.
These consolidated financial statements have been prepared by management on
the going concern basis, which assumes that assets will be realized and
liabilities will be discharged in the normal course of business. The
Company has experienced liquidity problems, has incurred significant losses
and has an accumulated stockholders' deficiency. Accordingly, there is
substantial doubt about the ability of the Company to continue as a going
concern. As discussed in note 17, 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.
The Company is proceeding with a proposed reorganization involving Turbotak
Technologies Inc. ["Turbotak"] as described in note 17.
Management believes that the reorganization will enable the Company to
continue to operate as a viable entity. Consequently, these consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
(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. Significant estimates include allowance for
doubtful accounts, inventory obsolescence, provision for losses on
discontinued operations and profitability on long-term contracts. 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. All significant intercompany accounts
and transactions have been eliminated in consolidation. Investments in
a majority-owned subsidiary where
F-8
<PAGE>
control is temporary and investments in less than 50%-owned affiliates are
accounted for 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-
----------------
A restricted certificate of deposit of $37,312 is held as collateral for
standby letters of credit as of April 30, 1997. A cash amount of $100,000
is held in trust for the creditors' committee as of April 30, 1997.
Inventories-
------------
Inventories are comprised of raw materials and component parts and are
valued at the lower of cost (first-in, first-out) and net realizable value.
Net realizable value is defined as selling price less estimated selling
costs.
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 $225,045 related to slow-moving component parts as of April 30,
1997.
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 an undiscounted 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.
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 determinable. Revenues from
long-term contracts that utilize a new technology or involve significant
uncertainty are recognized using the completed contract method. Under
either method, losses expected to be sustained are recognized in
F-9
<PAGE>
full in the period in which such losses become evident. Other revenues are
recorded when products are shipped or services are performed.
Advertising costs -
-----------------
All costs associated with advertising and promoting products are expensed
as incurred. Advertising and promotion expense was $390 in 1997 [$20,188
in 1996].
Stock-based compensation -
------------------------
The Company grants stock options and warrants to employees, directors and
officers. The Company accounts for warrant and option grants in accordance
with APB Opinion No. 25, Accounting for Stock Issues to Employees, and,
based on calculations whereby the exercise price approximates the share
value, recognizes no compensation expense for the warrant grants or stock
options.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-based Compensation, which provides
an alternative to APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for stock-based compensation issued to employees.
The Statement allows for a fair value based method of accounting for
employee stock options and similar equity instruments. However, for
companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, Statement No. 123 requires disclosure of
the pro forma effect on net income and earnings per share of its fair value
based accounting for those arrangement. All of the Company's options and
similar equity instruments were cancelled (see not 12 and 13); accordingly,
no pro forma information has been disclosed.
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.
Financial Instruments-
----------------------
Financial instruments of the Company consist mainly of cash, contract and
accounts receivable, notes receivable, accounts payable and a note payable.
As at April 30, 1997, there are no significant differences between the
carrying amounts of cash, accounts receivable and notes receivable and
their estimated fair values due to the short term maturity of these
instruments. The possible extinguishment of certain accounts payable and
the note payable is discussed in note 17.
Impact of recently issued accounting standards -
----------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded.
F-10
<PAGE>
The Company has not yet determined what the impact of Statement 128 will be
on the calculation of earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosures about Segments of an Enterprise and Related Information,
which is required to be adopted for the Company's financial statements for
the year ended June 30, 1999. Under the new requirements, financial
information about operating segments should be reported on the basis that
is used internally by the Company for evaluating operating segments and
resource allocation decisions. The Company has not determined the effect,
if any, of this pronouncement on the segmented disclosures on its
consolidated financial statements.
(3) COSTS AND ESTIMATED EARNINGS
ON UNCOMPLETED CONTRACTS:
-----------------------------
April 30
1997
----------------
Costs incurred on uncompleted contracts $ 767,406
Estimated earnings 413,937
----------------
1,181,343
Less billings to date ( 1,053,617)
----------------
$ 127,726
================
Included in the accompanying balance sheet under the following captions-
April 30
1997
----------------
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 156,037
Billings in excess of costs and estimated
earnings on uncompleted contracts (28,311)
----------------
$ 127,726
================
(4) EQUIPMENT AND
LEASEHOLD IMPROVEMENTS:
-----------------------
April 30
1997
----------------
Office furniture, fixtures and equipment $ 522,289
Leasehold improvements 175,967
----------------
698,256
Less accumulated depreciation and amortization ( 619,761)
----------------
$ 78,495
================
F-11
<PAGE>
(5 ) INTANGIBLE ASSETS:
------------------
April 30
1997
----------------
Patents and acquired technology rights $1,147,787
Less accumulated amortization ( 473,856)
------------
$ 673,931
============
Certain of the patents and acquired technology rights are subject to
litigation as disclosed in note 14. The outcome of the litigation is
indeterminable at the date of these financial statements. It is possible
that the carrying value of the patents and acquired technology rights could
be impaired by a material amount depending on the outcome of the
litigation.
(6) 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.
The Company as at April 30, 1997 had two customers that individually
comprised 20% of its total trade receivable balance.
The Company had two customers that comprised 24% of its total revenue for
the year ended April 30, 1997.
Substantially all of the Company's cash balances are held at one financial
institution.
(7) NOTES PAYABLE:
--------------
April 30
1997
------------------
Note payable to Turbotak Technologies, Inc. (a) $ 940,000
Note payable to Turbotak Technologies, Inc. (b) 100,000
-----------
$1,040,000
===========
(a) The Company was in default under its $1,000,000 Revolving Credit Agreement
("Agreement") with a bank. During the year ended April 30, 1997, Turbotak
Technologies, Inc. purchased the bank's note and Agreement. Subsequent to
April 30, 1997, the note was extinguished. (See Note 17). For the period
this note was outstanding to the bank, the weighted average interest rate
was 8.9%. For the period the note was outstanding to Turbotak Technologies,
Inc., it was non-interest-bearing.
(b) The note payable to Turbotak Technologies, Inc. in the amount of $100,000
is non- interest bearing and has no specific terms of repayment.
F-12
<PAGE>
(8) INCOME TAXES:
-------------
As of April 30, 1997, the Company has deferred income tax assets of
approximately $4,200,000. A valuation allowance of an equivalent amount
has been recorded because of the uncertainty of realization of the deferred
tax asset. Temporary differences result primarily from net operating loss
carry forwards.
As of April 30, 1997, the Company has available net operating loss carry
forwards for Federal and state income tax purposes amounting to
approximately $10,450,000 which expire commencing in 2001.
(9) DISCONTINUED OPERATIONS AND DISPOSAL OF BUSINESS SEGMENT:
---------------------------------------------------------
The Company has adopted formal plans for disposal for Sonic Fabricating,
Inc., and Sonic Environmental Controls, Inc., both wholly-owned
subsidiaries. The net assets and results of operations including a
provision for disposal costs yet to be incurred are included in the
accompanying financial statements as discontinued operations. Provision
was made for anticipated losses in the financial statements for the year
ended April 30, 1996.
The assets of Sonic Fabricating, Inc. have been liquidated for cash
proceeds of $185,000 resulting in a loss on disposal of $211,918. An
amount of $113,343 with respect to outstanding liabilities is included in
accounts payable and accrued charges.
The net assets of Sonic Environmental Controls, Inc. were sold to RefTec
International, Inc. in April 1997 for consideration of $386,772 after
closing adjustments. Consideration consisted of cash of $204,449 and two
promissory notes in the amounts of $100,000 and $82,323. The first note
bears interest at 10% and is payable in April 1998. The second note bears
interest at the prime rate of a specific financial institution and is
payable in equal successive monthly installments over a 6 year period
beginning in May 1997. The promissory notes are included in other assets
in the accompanying balance sheet. The total consideration of $386,772 was
allocated between Sonic Environmental Systems, Inc. and Turbotak
Technologies, Inc. as to $371,646 and $15,126 respectively. The net
consideration of $371,646 was equal to the net book value.
Operating losses during the phase-out period in the amount of $445,755 were
included in the loss on disposal of discontinued segments in the
accompanying statement of operations.
(10) NON CONSOLIDATED SUBSIDIARY:
----------------------------
In 1994, the Company acquired an 80% interest in Euthenergy International,
Inc. (EII).The agreement 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
F-13
<PAGE>
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.
(11) COMMON STOCK:
-------------
During fiscal year 1996, the Company issued an aggregate of approximately
3,540,087 shares of its Common Stock in payment of the promissory notes.
Also in 1996, 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.
During fiscal year 1997, the Company issued no Common Stock.
(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 for five years and are not exercisable until one year after the
date of the grant and thereafter are exercisable 25% each year for four
years.
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, 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 $1.125 to $4.00
Canceled 3,500 $2.00 and $4.00
-------
Options outstanding at April 30, 1997 57,000 $1.125 to $2.25
=======
Options exercisable at April 30:
1996 40,500 $1.125
1997 54,000 $1.125 to $2.25
=======
F-14
<PAGE>
Options for 46,000, 8,000 and 3,000 shares expires in the fiscal years
ended April 30, 1998, 1999, and 2001, respectively. As a result of the
Company's Plan of Reorganization filed with the Federal Bankruptcy Court,
as disclosed in note 17, all options were cancelled.
(13) STOCK OPTIONS AND WARRANTS:
---------------------------
On February 1, 1993, the Company issued, to officers of the Company, five
year options to purchase 230,000 shares of common stock at $1.00 per share.
These options 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. Options for 126,667 shares were
canceled during fiscal 1997 so that options for 80,000 shares were
outstanding at April 30, 1997. During July and August 1993, the Company
issued, to officers of the Company, five year options to purchase 85,000
shares of common stock at prices ranging from $2.00 to $2.125 per share.
These options are exercisable to the extent of 20% per year after the first
year of employment. These options were canceled during the fiscal year
ending April 30, 1997.
On February 1, 1993, the Company granted five year 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. As at April 30, 1997, options to purchase 4,000 shares remain
outstanding.
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, 1997.
On April 1, 1994, the Company granted to certain officers and minority
stockholders of Ceramic Engineering, Ltd. and Euthenergy International,
Inc. five year options to acquire 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 a five year 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 a five year 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.
All of the preceding options remain outstanding at April 30, 1997.
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. An option to acquire 25,000 shares is exercisable, to
the extent of one-third commencing immediately and one-third each
subsequent year provided the holder is still a director. The remaining
45,000 shares were exercisable immediately. At April 30, 1997 all options
remain outstanding.
F-15
<PAGE>
On November 8, 1995, the Company granted to certain employees five year
options to acquire 230,000 shares of common stock at $.75 per share. In
addition, on December 15, 1995, a consultant to Sonic Environmental
Controls, Inc. was granted a five year option to acquire 40,000 shares of
common stock of the Company at $.75 per share. All of these options were
outstanding at April 30, 1997.
As part of the public offering in June 1993, 902,750 Series A Redeemable
Warrants and 902,750 Series B Redeemable Warrants were issued. 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
exercisable 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 per 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 Redeemable 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 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.
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 for
$226,950.
At April 30, 1997 there were 950,869 Series A Redeemable Warrants, 993,369
Series B Redeemable Warrants and 786,250 common stock purchase warrants
outstanding.
As a result of the Company's Plan of Re-organization filed with the Federal
Bankruptcy Court as disclosed in note 17, all Redeemable Warrants and
common stock purchase warrants were cancelled.
(14) COMMITMENTS AND CONTINGENCIES:
------------------------------
In 1994, two 80% owned subsidiaries of the Company acquired certain patents
and technology rights relating to industrial incineration and a high
temperature ceramic heat exchanger. One of the inventors from whom the
Company obtained certain of its ceramic heat exchanger patent rights has
initiated legal action against the Company and its 80%
F-16
<PAGE>
owned subsidiary to rescind the transfer of his patent rights and to
recover consulting fees. Another inventor from whom the Company obtained
certain other of its heat exchanger patent rights has commenced an
adversary proceeding in the Bankruptcy Court against the Company to rescind
the transfer of his patent rights and for consulting fees. Although the
litigation seeks to terminate the Company's right to utilize the
intellectual property, any monetary claims by the litigants arising out of
the litigation will be treated in the Plan of Reorganization discussed in
note 17 as unsecured claims and discharged as provided in the Plan. Since
the outcome of this litigation is indeterminable as at the date of these
financial statements, no provision has been made for possible losses
arising from the litigation.
The Company has entered into operating leases for office equipment and
premises. The Company entered into the premises lease subsequent to the
year end. The rental expense for premises was $47,000 and $160,338 in 1997
and 1996 respectively.
The approximate minimum future rental payments under all leases at
April 30, 1997, are as follows: $
$
------
1998 33,160
1999 49,470
2000 49,470
2001 49,470
2002 49,470
The Company has entered into employment agreements with certain management.
As the result of the re-organization plan filed with the Federal Bankruptcy
Court as disclosed in note 17, all employment agreements have been
extinguished.
(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
-------------------------------
1997 1996
---- ----
Europe 6% 5%
South and Central America 31% 6%
Far East 6% 1%
Africa 6% 0%
Canada 4% 5%
Other 13% 1%
--- ---
66% 18%
=== ===
(16) RELATED PARTY TRANSACTIONS:
---------------------------
The Company's sales to its 49% owned nonconsolidated affiliate were $12,246
and $7,240 for the years ended April 30, 1997 and 1996, respectively.
F-17
<PAGE>
(17) REORGANIZATION AND SUBSEQUENT EVENTS:
-------------------------------------
During the fiscal year 1997, the Company entered into certain transactions
and agreements involving Turbotak Technologies, Inc. ["Turbotak"], a
Canadian corporation, that resulted in the stockholders of Turbotak
acquiring a controlling interest in the Company subsequent to April 30,
1997.
On September 16, 1996, the Company consented to the entry of an Order for
Relief under Chapter 11 of the United States Bankruptcy Code. On July 3,
1997 the Bankruptcy Court confirmed the Debtor's First Amended Plan of
Reorganization ["Plan"]. Subsequent to the approval, the Plan was modified
and a Combination Agreement was drawn up between the Company and Turbotak
which was approved by the stockholders of Turbotak on August 25, 1997.
Pursuant to the Plan and Combination Agreement, effective August 27, 1997,
the transaction date, the Company amended its certificate of incorporation
to change its name to TurboSonic Technologies, Inc. ["TurboSonic"]. All
existing and outstanding stock, warrants and options of the Company were
terminated and cancelled. TurboSonic has authorized share capital of
30,000,000 common shares. TurboSonic incorporated a subsidiary corporation
[TurboSonic Canada] in the Province of Ontario, Canada which was authorized
to issue Class A and Class B common shares. TurboSonic subscribed for 100%
of TurboSonic Canada's Class A shares in exchange for a nominal capital
contribution.
Also on August 27, 1997, the stockholders of Turbotak exchanged their
shares for TurboSonic Canada's Class B shares, which were distributed to
each stockholder of Turbotak on a pro rata basis. As a result of this
exchange, Turbotak became a wholly-owned subsidiary of TurboSonic Canada.
The Class B shares of TurboSonic Canada are exchangeable, at the election
of the holders of such shares, into an equivalent number of such shares of
TurboSonic.
The exchangeable shares of TurboSonic Canada represent approximately 82% of
the outstanding shares of TurboSonic. Approximately 13% of the shares of
TurboSonic were issued to the existing stockholders of the Company and the
balance were issued in accordance with the Plan to unsecured creditors and
other identified interests.
Turbotak acquired a note payable to the Company's bank which amounted to
$940,000 at April 30, 1997 including accrued interest. In accordance with
the Plan, the note payable was extinguished. In fiscal 1997, Turbotak
advanced $100,000 to the Company on a non-interest bearing basis. This
amount was not extinguished.
In accordance with the terms of the Plan, accounts payable in the amount of
approximately $1,713,000 were extinguished. This amount is net of the
promissory note of $100,000 and the cash held in trust of $100,000 which
was assigned to the creditors' committee. The unsecured creditors, as
consideration for the extinguishment of debt, received approximately 5% of
the outstanding shares of TurboSonic.
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
Year ended April 30, 1997
Allowance for doubtful
account $ 75,000 $ 2,777 $0 $0 $ 77,777
Reserve for inventory
overstock $269,949 $0 $0 ($49,904) ($225,045)
</TABLE>
F-19
