<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF
1934
For the quarterly period ended September 30, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
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Commission File Number 0-21832
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TurboSonic Technologies, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1949528
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Parkside Drive, Suite A-14,
Waterloo, Ontario, Canada N2L 5V4
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
519-885-5513
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the proceeding 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.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN A BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of September 30, 1999, 10,000,000 shares of common stock were outstanding.
<PAGE>
TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
Form 10-QSB
INDEX
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION PAGE
------------------------------ ----
<S> <C>
Item 1.
Consolidated Statements of Operations
(Unaudited) for the Three Months
Ended September 30, 1999 and 1998 3
Consolidated Balance Sheets
at September 30, 1999 (Unaudited) and June 30, 1999 (Audited) 4
Consolidated Statements of Cash Flow
(Unaudited) for the Three Months Ended
September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements
(Unaudited) 6-8
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART 11 - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a
Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature
</TABLE>
<PAGE>
TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
US dollars (Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1999 September 30, 1998
------------------ -------------------
<S> <C> <C>
Nozzle Systems revenue $ 681,576 $ 669,911
Scrubber Systems revenue 345,388 331,974
----------- -----------
Total Revenue 1,026,964 1,001,885
----------- -----------
Cost of Nozzle Systems 478,125 421,717
Cost of Scrubber Systems 227,415 214,004
----------- -----------
Total cost of goods sold 705,540 635,721
----------- -----------
Gross Profit 321,424 366,164
----------- -----------
Selling, general and administrative
expenses 337,513 313,802
Depreciation and amortization 48,259 47,926
----------- -----------
Total Expenses 385,772 361,728
----------- -----------
Gain (Loss) from Operations (64,348) 4,436
Interest Income (Expense) (5,419) (3,067)
----------- -----------
Net Income (Loss) before taxes (69,767) 1,369
----------- -----------
Tax Provision 0 0
----------- -----------
Net Income (Loss) ($69,767) $ 1,369
=========== ===========
Weighted average number of shares
outstanding 10,000,000 10,000,000
Incremental shares using treasury
method 10,500,000 10,200,000
Basic EPS ($0.007) ($0.000)
Diluted EPS ($0.007) ($0.000)
</TABLE>
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<PAGE>
TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(US dollars)
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
(Unaudited) (audited)
----------- -----------
Assets
Current Assets:
<S> <C> <C>
Cash $ 312,652 $ 310,944
Contracts and accounts receivable, net of allowance
for doubtful accounts of $66,764 451,001 475,804
Deferred contract costs and unbilled revenue 248,338 106,275
Inventories 129,826 126,764
Income Tax Receivable 82,857 76,179
Other current assets 69,440 74,600
----------- -----------
Total current assets 1,294,114 1,170,566
Equipment and leasehold improvements,
at cost, net of accumulated depreciation 100,832 89,519
Patents, less accumulated amortization 1 1
Goodwill, net of accumulated amortization 1,163,823 1,202,374
Other assets 20,414 20,414
----------- ----------
Total Assets $ 2,579,184 $2,482,874
=========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable & accrued expenses $ 441,090 $ 544,822
Billings in excess of costs and estimated
earnings on uncompleted contracts 404,468 143,529
----------- ----------
Total Current Liabilities 845,558 688,351
Accrued Expenses 113,206 113,206
Loans from Shareholders [Note 4] 267,252 266,964
Other Loans 20,169 0
----------- ----------
1,246,185 1,068,521
----------- ----------
Stockholders' Equity:
Authorized Share Capital
21,800,000 common shares, par value $0.10 per share
8,200,000 exchangeable common shares, par value
$0.10 per share
Issued Share Capital
1,800,000 common shares - -
8,200,000 exchangeable shares 2,299,096 2,299,096
Additional paid - in capital [Note 4] 1,448,038 1,448,038
----------- ----------
3,747,134 3,747,134
Currency translation adjustments (37,310) (20,936)
Accumulated deficit (2,376,825) (2,311,845)
----------- ----------
Total stockholders' equity 1,332,999 1,414,353
----------- ----------
Total Liabilities and Stockholders' Equity $ 2,579,184 $ 2,482,874
=========== ==========
</TABLE>
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<PAGE>
TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
for the three months ended September 30, 1999 and 1998
(U. S. dollars) (Unaudited)
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ($ 69,767) $ 1,369
Add (deduct) charges to operations not requiring
a current cash payment:
Depreciation and amortization 48,259 47,926
---------- ---------
(21,508) 49,295
Changes in non-cash working capital balances
related to operations:
Decrease (increase) in accounts receivable 24,803 (54,773)
(Increase) decrease in income taxes recoverable (6,678) 1,207
Decrease (increase) in inventories (3,062) 14,031
Decrease (increase) in deferred contract costs
and unbilled revenue (142,063) (133,052)
Decrease (increase) in other current assets 5,159 14,306
Decrease (increase) in other assets 0 0
Increase (decrease) in accounts payable and
accrued charges (103,732) 115,926
Increase (decrease) in unearned revenue and
contract advances 260,939 (52,106)
Increase (decrease) in income taxes payable 0 0
---------- ---------
35,366 (94,461)
---------- ---------
Net cash provided by (applied to) operating activities 13,858 (45,166)
---------- ---------
Cash flows from investing activities:
Purchase of fixed assets (13,361) 0
---------- ---------
Net cash (applied to) provided by investing activities (13,361) 0
---------- ---------
Cash flows from financing activities:
Shareholder loans 288 0
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Net cash provided (used) by financing activities 288 0
---------- ---------
Effect of exchange rate change on cash 923 (5,052)
---------- ---------
Net cash (applied) provided during year 1,708 (50,218)
Cash - beginning of period 310,944 69,277
---------- ---------
Cash - end of period $ 312,652 $ 19,059
========== =========
</TABLE>
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<PAGE>
TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 (Unaudited)
Note 1. Basis of Presentation
TurboSonic Technologies, Inc., formerly known as Sonic Environmental Systems,
Inc. and its subsidiaries (collectively the "Company"), directly and through
subsidiaries, designs and markets integrated pollution control and industrial
gas cooling/conditioning systems including liquid atomization technology and
dust suppression systems to ameliorate or abate industrial environmental
problems. Sonic Environmental Systems, Inc. (Sonic) was consolidated with
Turbotak Technologies Inc. (Turbotak) on August 27, 1997 (the "Consolidation")
pursuant to a Plan of Reorganization that was approved by the Federal Bankruptcy
Court on July 3, 1997 (see Note 3).
The Consolidation was treated for accounting purposes as a purchase by
Turbotak of Sonic in a reverse acquisition. Consequently, the accompanying
consolidated financial statements include the accounts of Turbotak and its
majority-owned subsidiaries. The accounts of Sonic were included with Turbotak's
accounts effective September 1, 1997 and incorporated all adjustments related to
the Plan of Reorganization.
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulations S-X. Accordingly, these financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2000. These consolidated financial statements should be
read in conjunction with the financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-KSB for the year ended June 30, 1999.
- 6 -
<PAGE>
Note 2. Costs and Estimated Earnings on Uncompleted Contracts
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
--------------------- --------------------
<S> <C> <C>
Costs incurred on uncompleted contracts 1,596,554 1,339,702
Estimated earnings 686,006 518,467
--------------------- --------------------
2,282,560 1,858,169
Less: billings to date 2,438,690 1,895,423
--------------------- --------------------
Included in accompanying balance sheets
under the following captions: (156,130) (37,254)
===================== ====================
Costs and estimated earnings in excess of
billings on uncompleted contracts 248,338 106,275
Billings in excess of costs and estimated
earnings on uncompleted contracts (404,468) (143,529)
--------------------- --------------------
(156,130) (37,254)
===================== ====================
</TABLE>
Note 3. Other Events
Contemporaneously with the Company's filing on September 16, 1996 of a
voluntary Chapter 11 reorganization proceeding under the Federal Bankruptcy
Code, 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, proposed a Chapter 11 reorganization plan which would provide for
a merger of the Company and Turbotak. The Company's plan of reorganization
(hereinafter referred to as the "Plan") was confirmed by the Bankruptcy Court on
July 3, 1997 following requisite creditor approval. The Plan provided for the
extinguishments of all of the outstanding shares of 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 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 (82%)
would be owned by Turbotak's shareholders, and 1,255,700 shares or approximately
12.6% would be issued to the existing shareholders on a pro-rata basis. The
balance of such 10,000,000 shares would be issued to the Company's existing
creditors and others as described in the Plan. Consummation of the Consolidation
took place on August 27, 1997 and resulted in the Company's subsequent discharge
from its Chapter 11 Proceeding. Reference is made to the Company's Current
Report on Form 8-K dated July 29, 1997 and the several exhibits thereto for more
detailed information about the Consolidation.
- 7 -
<PAGE>
Note 4. Loans from Shareholders
An officer and director of the Company, together with another shareholder of
the Company, lent an aggregate of Canadian $200,000 (representing $129,400 at
the exchange rate of $0.647 at such date) to the Company on October 21, 1998.
Another officer and director and another shareholder each lent Canadian $100,000
(representing $65,490 and $66,620 at the exchange rates of $0.6549 and $0.6662
at the date of their respective loans) to the Company on January 4, 1999 and
April 9, 1999, respectively. All of these loans are repayable two years from the
date of the loan, bear interest at 10% per annum and are collateralized by a
lien upon and security interest in substantially all of the Company's assets. As
an inducement to advance these sums to the Company, the lenders were granted
detachable warrants to purchase an aggregate of 400,000 common shares of the
Company at an initial exercise price of $0.50 through October 31, 2000,
increasing to $0.75 thereafter through October 31, 2002 and to $1.00 thereafter
through October 31, 2003, respectively. The warrants, whose initial exercise
price was greater than the market price of the Company's common shares on the
date such warrants were granted, expire on the earlier of October 31, 2003 or 30
days after the Company's shares have closed at a price per share above $1.50 for
10 consecutive trading days on the NASDAQ over-the-counter Bulletin Board. In
accordance with APB 14, a portion of the proceeds of the debt securities issued
with detachable stock purchase warrants, which is allocated as the fair-value of
the warrants, has been accounted for as paid-in capital. The related discount on
the debt securities will be amortized over the remaining period to maturity.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Results of Operations
Three Months ended September 30, 1999
-------------------------------------
Compared with Three Months ended September 30, 1998
---------------------------------------------------
Nozzle systems revenue increased by $11,665 (1.7%) to $681,576 for the three
month period ended September 30, 1999 from $669,911 for the same period in 1998.
Scrubber systems revenue increased by $13,414 (4.0%) to $345,388 for the three
month period ended September 30, 1999 from $331,974 for the same period in 1998.
Cost of nozzle systems increased by $56,408 (13.4%) to $478,125 for the three
month period ended September 30, 1999 from $421,717 for the same period in 1998.
As a percentage of nozzle systems revenue, cost of nozzle systems was 70.1% for
the three month period ended September 30, 1999 and 63.0% for the same period in
1998. The increased costs of nozzle systems in this quarter is attributable to
the increased sales volumes discussed above, as well as lower than average gross
margins on one large nozzle system.
Cost of scrubber systems increased by $13,411 (6.3%) to $227,415 for the
period ended September 30, 1999 from $214,004 for the same 1998 period. The
increased costs are primarily the result of the increased volume discussed
above. As a percentage of scrubber systems revenue, the costs were 65.8% for the
three month period ended September 30, 1999 and 64.5% for the same period in
1998.
Selling, general and administrative expenses increased $23,711 (7.6%) to
$337,513 for the three month period ended September 30, 1999 from $313,802 for
the same period in 1998. As a percentage of total revenue, selling, general and
administrative expenses were 32.9% for the quarter ended September 30, 1999 and
31.3% for the same period in 1998. This increase is the result of hiring
additional sales personnel to assist with co-ordination of the Company's
extensive sales agent network.
- 8 -
<PAGE>
Amortization of goodwill, which was created as the result of the merger with
Sonic Environmental Systems, Inc. amounted to $43,996 in the current quarter.
Liquidity and Capital Resources
The Company had a positive cash flow from operating activities of $13,858 for
the three month period ended September 30, 1999 as compared to negative cash
flow of $45,166 for the same period in fiscal 1998, an improvement in cash flow
of $59,024.
At September 30, 1999, the Company had working capital of $448,556 as compared
to working capital as at June 30, 1999 of $482,214, a decrease in working
capital of $33,658. The Company's current ratio (current assets divided by
current liabilities) was 1.53 and 1.70 as at September 30, 1999 and June 30,
1999, 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 September 30, 1999 and June 30, 1999, "Unearned revenue and
contract advances" exceeded "Deferred costs and unbilled revenue" by $156,130
and $37,254 respectively, thereby negatively effecting working capital.
As a result of the loss from operations incurred in the year ended June 30,
1998, the Company depleted its cash resources and had a working capital
deficiency as at June 30, 1998 of $138,435. As a consequence of such
deficiency, Donald R. Spink, Sr. and Patrick J. Forde, officers and directors of
the Company, together with two shareholders of the Company, lent an aggregate of
Canadian $400,000 (representing $261,510 at the exchange rate at the date of
each loan) to the Company (see Note 4 - Loans from Shareholders). These lenders
have indicated their intention to provide financial support to the Company, if
required, to meet working capital needs during the next year.
The Company's backlog as at September 30, 1999 was approximately $1,765,000,
all of which the Company believes will be shipped prior to the end of the
current fiscal year. The Company believes that the projected cash generated from
operations and the proceeds from the above mentioned financing will be
sufficient to meet its cash needs through the end of the fiscal year ended June
30, 2000.
Year 2000
- ---------
The Company is aware of the potential for business disruption due to the Year
2000 issue, and has taken steps to assess and address these issues. The Company
is addressing Y2K compliance in three major areas: internal operating systems,
including sales, purchasing, production, engineering, and finance; products,
including installed base and new products; and third party vendors. Based on
current internal audits, management believes that it has established a Y2K plan
which will address these issues.
- 9 -
<PAGE>
In order to assess Y2K compliance in its internal operating systems, the
Company first took an inventory of all such systems and identified those that
are critical to its operations. All such systems have been tested for Y2K
compliance. Any non-compliant systems have been brought into compliance, either
by upgrades or replacement.
The Company has reviewed all systems and components, both those currently
being shipped as well as its installed base, and have found them to be Y2K
compliant.
The area of Y2K compliance which poses the greatest risk to the Company is its
vendors, because of the Company's lack of control over their products and
operations. In order to assess their compliance, the Company has surveyed all
major vendors and has not encountered any compliance issues.
Costs associated with the Company's Y2K compliance program are not anticipated
to be substantially different than normal, recurring costs, and are not expected
to materially affect financial results.
While management believes that the Company's Y2K compliance program is on plan
for assessing and addressing any Y2K issues, full compliance cannot be assured
until this effort is completed. In particular, despite the Company's best
efforts, it may be unable to establish with certainty the compliance of third
party vendors, including those outside the United States and Canada. It is
possible that the non-compliance of a key vendor could interrupts the Company's
production schedules and adversely impact its ability to make timely deliveries
of its products.
As this program progresses, management will be better able to assess the
Company's Y2K status in all of the areas outlined above, and focus its efforts
on any Y2K issues which become identified. Management will develop contingency
plans to be put into place in the event that any of the Company's corrective
actions fail to fully address the Y2K issues.
Quantitative and Qualitative Information About Market Risk
- ----------------------------------------------------------
The Company does not engage in trading market risk sensitive instruments and
does not purchase hedging instruments or "other than trading" instruments that
are likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. The Company has
purchased no options and entered into no swaps. The Company has no bank
borrowing facility which could subject it to the risk of interest rate
fluctuations.
- 10 -
<PAGE>
Part II - Other Information
- ---------------------------
Item 1. None
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. (a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K;
None
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DATED: November 11, 1999
TURBOSONIC TECHNOLOGIES, INC.
by: /s/ PATRICK FORDE
---------------------
Patrick Forde, Treasurer and
Principal Financial and
Accounting Officer
- 11 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 312,652
<SECURITIES> 0
<RECEIVABLES> 517,765
<ALLOWANCES> 66,764
<INVENTORY> 129,826
<CURRENT-ASSETS> 1,294,114
<PP&E> 100,832
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,579,184
<CURRENT-LIABILITIES> 845,558
<BONDS> 0
0
0
<COMMON> 3,747,134
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,579,184
<SALES> 1,026,964
<TOTAL-REVENUES> 1,026,964
<CGS> 705,540
<TOTAL-COSTS> 1,091,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,419
<INCOME-PRETAX> (69,767)
<INCOME-TAX> 0
<INCOME-CONTINUING> (69,767)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,767)
<EPS-BASIC> .007
<EPS-DILUTED> .007
</TABLE>
