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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-KSB
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934. FOR THE FISCAL YEAR ENDED JUNE 30, 2001.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO .
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COMMISSION FILE NUMBER: 0-20753
SONICS & MATERIALS, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 060854713
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
53 CHURCH HILL ROAD, NEWTOWN, CT 06470
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (203) 270-4600
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
Common Stock, par value $.03 per share
(Title of class)
Warrants to purchase Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for the most recent fiscal year were: $11,347,937
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Company's Common Stock on
September 21, 2001 as reported on the Over the Counter Bulletin Board, was
approximately $474,747. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of September 21, 2001, the issuer had outstanding 3,520,100 shares of Common
Stock, par value $.03 per share.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 2001 Annual Meeting of
Stockholders are incorporated by reference in Part III.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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Sonics & Materials, Inc. (the "Company" or "Sonics") designs,
manufactures and sells (i) ultrasonic bonding equipment for the welding, joining
and fastening of thermoplastic components, textiles and other synthetic
materials, and (ii) ultrasonic liquid processors for dispersing, blending,
cleaning, degassing, atomizing and reducing particles as well as expediting
chemical reactions. To further address the needs of its customers, the Company
also manufactures a spin welder and the vibration welder, both of which are used
for the bonding of thermoplastic components.
The Company was incorporated in New Jersey in April 1969, and was
reincorporated in Delaware in October 1978. Robert S. Soloff, its chairman,
president and founder, invented the ultrasonic plastic welding process early in
his career. He has been granted nine patents in the field of power ultrasonics
and is considered to be a pioneer in the application of ultrasonic technology to
industrial processes. Mr. Soloff has also been issued a patent in the field of
vibration welding. The patents granted to Mr. Soloff in the field of power
ultrasonics have expired and the technology related to them is now in the public
domain and is used in part in the development and manufacture of the Company's
products.
On August 21, 2001, the Company sold 90% of the common stock of its
wholly-owned subsidiary, Tooltex, Inc., to PK Spur Company, whose sole
shareholders are Tooltex's president, Paul Spurgeon, and Kathy Spurgeon. Tooltex
is a manufacturer of automated systems used in the plastics industry. In
exchange for 90% of the Tooltex common stock, the Company received a note from
PK Spur for $125,000 which is payable over a twenty-four month period. In
conjunction with the sale of the stock, Tooltex and Sonics entered into a
representation and distribution agreement whereby Tooltex will continue to act
as a distribution organization for Sonics' welding equipment. Sonics originally
acquired Tooltex from Paul Spurgeon on July 25, 1997.
PRODUCTS
The Company manufactures equipment in the following categories:
ULTRASONIC WELDERS -- Manufactured by the Company since its founding,
this line of ultrasonic devices welds, bonds, fastens, sews and rivets
thermoplastic components and other synthetic materials. As new applications were
requested by industrial customers, the line has expanded over the years. Plastic
welders and related devices are used in a wide variety of industries and
applications. These include the automotive, computer, electronics, packaging,
toy, home entertainment, medical device, textile and garment, and home appliance
industries.
There are certain advantages to ultrasonic bonding in comparison to
more traditional welding techniques. Uniform production is often accomplished
due to the consistency, speed and focusing of the energy applied to the welded
part. The bond created between the components is generally strong and clean.
Because no solvents, adhesives or external heat are involved, adverse
environmental factors are minimized. Materials which may not be easily assembled
or welded by other technologies can be effectively bonded ultrasonically.
Moreover, ultrasonic bonding is generally faster and requires less skilled labor
or training than many other methods.
LIQUID PROCESSORS - Liquid processors, which are sold under the
Company's trade name "Vibra-Cell" or under private label, are ultrasonic devices
that disperse, break up, emulsify, atomize, mix and blend substances in a liquid
or semi-liquid media. Substances affected by liquid processing include
molecules, cells, tissues, fluids, chemicals and particles. These devices are
available in different power configurations for low, medium and high volume
applications with various capacities, features and accessories. Operating
similarly to ultrasonic bonding systems and composed of many of the same
components, liquid processors produce a different result because they are
utilized in liquid, semi-liquid and powdered media.
Liquid processors are utilized in biotechnology by scientists,
biologists, chemists and pharmacologists, primarily in laboratories for research
and testing purposes. The Company has extended the applications for its liquid
processors from the research laboratories to industrial settings. The liquid
processor also functions to process and test materials and substances on the
production line and in vats and tanks. In the manufacture of pharmaceuticals and
in the processing of petroleum products and certain specialty chemicals, they
reduce particle size and facilitate mixing; in the preparation of paint and
dyes, they blend and homogenize materials. In the ink industry, processors
disperse black carbon. In the beverage and other industries, they are used to
de-gas carbonated soda, wine, beer, spirits and solvents. The Company's liquid
processors are also used as high-intensity cleaners. These ultrasonic cleaning
devices are effective in spot cleaning and removing various contaminants, such
as radioactive particles, proteins, rust, blood, and oil from laboratory
equipment.
The Company also manufactures a liquid processor with a spray nozzle
that atomizes fluids by producing ultra-fine sprays in precisely measured
dosages or at extremely low flow rates. Utilized in laboratories and plants,
ultrasonic atomizers can coat, moisten, or deposit micro-droplets of liquid on
glass, fabric, paper, semiconductors, pharmaceuticals, ceramics or tubes. They
are also used to apply silicone and Teflon, disinfect surfaces and lubricate
small parts.
VIBRATION WELDER -- Vibration welders are generally used to weld larger
plastic components together, and have the ability to weld a wider variety of
plastics. In this technology, a non-vibrating part is hydraulically lifted from
below to meet a horizontally-vibrating part. The vibrations cause friction and
heat, melting the plastic, and a bond is effectuated between the plastic parts.
The vibration welder that has been designed and is currently being manufactured
by the Company is computer-controlled and has a power supply, digital display
and other features similar to the Company's ultrasonic welder.
SPIN WELDER -- The Company has developed and currently manufactures
spin welders based on a non-ultrasonic process known as rotary friction welding.
Rotary friction welding is a bonding technology generally used only when
assembling cylindrical or round-shaped thermoplastic parts. It is also better
suited for plastics of a semi-crystalline nature and assemblies requiring
significant tooling relief. In spin welding, one plastic component is spun
against a mating plastic part that is held stationary in a nesting fixture.
Friction generated by the spinning action produces heat which melts the plastic
and fuses the two parts together.
The spin welding system offered by Sonics features, among other things,
a multi-function programmable controller, RPM display, and a two horsepower
electronic drive motor that spins the plastic part. The spin welder is composed
of a steel frame and column with a control box. Other components of the system
include a pneumatic head, an automotive spindle bearing, an air brake and clutch
system, and steel plates.
ULTRASONIC SURGICAL INSTRUMENT - Through a wholly owned subsidiary,
Vibra-Surge Corporation, the Company designed, developed and marketed an
ultrasonic medical device, the Vibra-Surge (TM) System Model VS 2120
("Vibra-Surge"), for the removal of soft tissue in general and reconstructive
and plastic surgery. In May 2000, Sonics' elected to discontinue the Company's
Vibra-Surge operation.
INDUSTRY BACKGROUND
Management believes that in the past twelve months, there has been a
slowdown in market demand for ultrasonic bonding systems, and other plastic
assembly systems.. Although it had appeared that more companies were seeking to
replace metal components with thermoplastics in order to reduce the weight of
products or to capitalize on other special properties of synthetic substances,
the recent slowdown in the economy has affected the growth of this product line.
The market for liquid processors in the past has experienced inconsistent growth
and occasional contractions, however, new and more extensive
applications of such technology in other industries, such as the paint,
chemical, petroleum and beverage industries, and medical industries has provided
for continued growth.
MANUFACTURING AND SUPPLY
Sonics' manufacturing operations, conducted at its facilities located
in Newtown, Connecticut, and Aston, Pennsylvania are run on a batch basis in
which a series of products move irregularly from station to station. The Company
manufactures its products pursuant to historical and projected sales data as
well as specific customer orders.
Most supplies and materials required in the manufacture of the
Company's products are available from many sources. Many of its suppliers are
based in the same general locality as the Company's manufacturing operations. To
date, Sonics has experienced few shortages and delays regarding supplies and
materials. However, it is not certain that such shortages or delays may not have
an adverse impact on Sonics' operations in the future. In fiscal year 2000, one
supplier accounted for more than 5%, but less than 10% of its total purchases
for inventory. In fiscal year 2001, two suppliers accounted for more than 5%,
but less than 10% of its total purchases for inventory. Although management
believes that in all cases alternate sources of supplies can be located, a
certain amount of time would inevitably be required to find substitutes. During
any such interruption in supplies, the Company may have to curtail the
production and sale of its devices and systems for an indefinite period.
Sonics is not a party to any formal written contract regarding the
delivery of its supplies and materials. It generally purchases such items
pursuant to written purchase orders of both the individual and blanket
varieties. Blanket purchase orders usually entail the purchase of larger amounts
of items at fixed prices for delivery and payment on specific dates ranging from
two months to one year.
Sonics has qualified its Connecticut facility to meet the quality
management and assurance standards of an international rating organization (ISO
9001). ISO 9001 certification indicates that the Company has successfully
implemented a quality assurance system that satisfies this standard. Sonics has
also obtained CE approvals, which are now necessary for sales in Europe, for
many models of its ultrasonic welder and liquid processor. It is working towards
CE approvals for its other product lines.
MAINTENANCE AND SERVICE
The Company offers warranties on all its products, including parts and
labor that range from one year to three years depending upon the type of product
concerned. For the fiscal years ended June 30, 2000 and 2001, expenses
attributable to warranties were approximately $59,000, and $71,000 respectively.
Sonics performs repair services on all of its products sold domestically either
at its Connecticut or Pennsylvania facilities or at customer locations.
Servicing of foreign sales is usually handled by distributors abroad or in the
Company's Swiss branch office regarding its devices sold in Europe. These
services are performed upon specific orders without contracts at various rates.
The Company usually charges for the time that its employees expend on the task
and the cost of the materials or parts involved in the repair. For the fiscal
years ended June 30, 2000 and 2001, the Company had income of approximately
$644,000, and $617,000 respectively, for out-of-warranty services performed.
Company devices generally have a long operating life, and Sonics has repaired
machines manufactured by it that are more than 30 years old.
SALES AND MARKETING
Sonics generally markets and sells its products in the United States
and abroad through a network of sales representatives and distributors to end
users and original equipment manufacturers ("OEMs"). In the United States, the
Company and its Ultra Sonic Seal division ("USS") utilize approximately 46 sales
representatives in 48 states throughout the country. In the overseas market, it
relies on approximately 71 distributors and several sales representatives to
distribute its products in 49 countries. The areas covered by these third
parties include North and South America, the Middle and Far East, Europe and
Australia.
SALES REPRESENTATIVES
The Company's relationship with its sales representatives is usually
governed by a written contract which is generally terminable by either party on
30 days prior notice. The contract provides for exclusive territorial and
product representation and commissions payable to them on their sales depending
on whether basic units or accessories are involved and typically covers
ultrasonic bonding systems and liquid processors. OEM sales made by the Company
are excluded from the commission arrangements. Generally, the sales
representatives do not purchase for their own account, but merely sell Sonics'
products on the Company's behalf. They also may represent other manufacturers
but generally not those competitive with the Company's products. In fiscal year
2000, two sales representatives each accounted for more than 5% but less than
15% of Sonics' sales. In fiscal year 2001, no sales representative accounted for
more than 5% of total sales.
USS sells its plastic welder under its division name. USS maintains a
network of sales representatives in the United States different from those for
Sonics' main product lines. The terms of these arrangements with its sales
representatives are similar to the terms Sonics negotiates with its own sales
representatives.
DISTRIBUTORS
Sales of Sonics' products to distributors are also generally made
pursuant to written contracts. Under such contracts, distributors provide repair
service and are prevented from selling devices competitive to the Company's
products. Generally, payments must be made in U.S. dollars within 30 days of
delivery of the product. Distribution arrangements are either exclusive or
non-exclusive and are cancelable upon 30 days notice. The contracts generally
exclude private label sales made by Sonics in the distributor's territory even
if the relationship is of an exclusive type and typically covers sales of both
ultrasonic bonding systems and liquid processor lines. The Company now also
offers both its spin welder and vibration welder to its sales representatives
and distributors. The Company also sells these products directly to end-users or
under private label. The Company usually grants discounts to distributors,
depending on the product and quantity sold. In fiscal year 2000, one distributor
accounted for over 5%, but less than 10%, of sales. In fiscal year 2001, one
distributor accounted for over 10% but less than 15% of sales. The loss of such
distributors in substantial numbers or at key locations could have a material
adverse effect on the Company's business.
The Company promotes the sale of its products through direct mailings,
trade shows, product literature, press releases, advertising in trade magazines
and listings in catalogs. The Company occasionally engages in cooperative
advertising with some of its distributors.
CUSTOMERS
Sonics sells its products, directly or indirectly, to numerous
customers, ranging in size from small companies to large Fortune 100
corporations. Its customers are end-users, original equipment manufacturers,
system integrators and resellers as well as distributors. Many of its customers
are repeat purchasers. None of its customers represented more than 5% of Sonics'
sales for fiscal 2000 or 2001.
INTERNATIONAL OPERATIONS
The Company's international activities are an important portion of its
business. Approximately 22% and 23% of its sales for fiscal years 2000 and 2001,
respectively, are attributable to sales of its products outside the United
States. The Company also operates a branch office in Gland, Switzerland where it
sells and services its ultrasonic devices for the European market except for the
United Kingdom.
Internationally, the Company sells its ultrasonic products under its
own label to end users and distributors or under the trade name of the
distributor. In most cases, Sonics' devices are shipped to foreign distributors
and end users as completed units. However, in certain situations, especially
with regard to distributors of ultrasonic welders located in Asia and South
America, the Company's systems are made available in kit form and assembled
there. Kits frequently contain all components for devices but in some instances
only a portion of the requisite components is provided. For some foreign sales,
no written distribution arrangement exists.
COMPETITION
The Company competes in each of its markets against a variety of other
concerns, many of which are larger and have greater financial, technical,
marketing, distribution and other resources than Sonics. It competes on the
bases of service, performance, reliability, price and delivery.
Prior to making a sale, the Company will expend time and resources
exploring whether it can profitably handle a new application for potential and
existing customers. Generally, the Company receives no compensation for this
pre-sale activity except when special tooling is required and payment for such
services only occurs when and if product sales are consummated. Like nearly all
manufacturers in this industry, the Company invests heavily in this pre-sale
examination of new applications. Such examination represents another area in
which such manufacturers compete, and those with greater resources and manpower
may possess a competitive advantage.
With respect to its ultrasonic bonding equipment, the Company
encounters competition from Branson Ultrasonics Co. ("Branson"), a subsidiary of
Emerson Electric Co., Dukane Corp. ("Dukane"), Herrmann Ultrasonics, Inc.,
Forward Technology Industries, Inc. and other smaller manufacturers. The two
dominant companies in this area are Branson and Dukane. Some of these
competitors also offer spin and vibration devices as well as ultrasonic ones.
In the ultrasonic liquid processor market, the Company's principal
competitors are Branson and Misonix Inc. Management believes that in this market
Sonics has the largest market share.
BACKLOG
As of June 30, 2001, the Company's backlog was approximately $3,623,000
as compared with a backlog of $2,561,567 as of June 30, 2000. No one customer
accounted for more than 10% of such backlog at June 30, 2000, however, two
customers did account for more than 10% of such backlog at June 30, 2001.
Substantially all of the Company's backlog figures are based on written
purchase orders executed by the customer and involve product deliveries and not
engineering services. All orders are subject to cancellation.
RESEARCH AND DEVELOPMENT
The Company maintains an engineering staff responsible for the
improvement of existing products, modification of products to meet customer
needs and the engineering, research and development of new products and
applications. Engineering and research and development expenses were
approximately $408,000 for 2000 and $410,000 for 2001.
INTELLECTUAL PROPERTY
Proprietary information and know-how are important to the Company's
success. Sonics has trademark protection for its "Vibra-Cell" trade name and its
"Vibra-Surge" trade name. There can be no assurance that others have not
developed, or will not develop, independently the same or similar information or
obtain and use proprietary information of the Company. Sonics has obtained
written assurances from its employees, sales representatives and distributors
under confidentiality agreements regarding its proprietary information.
On May 23, 2000, the U.S. Patent and Trademark office issued the
Company a patent for a method of producing fabric covered panels with a
vibration welder. On September 22, 2000, the Company received a Notice of
Allowance and Allowability from the U.S. Patent and Trademark office for the
tooling developed by the Company for producing fabric covered panels. The U.S.
Patent and Trademark office issued the Company a patent on October 12, 1999 for
its ultrasonic surgical device. On August 29, 2000, the Company received Notice
of Allowance and Allowability from the U.S. Patent and Trademark office for an
additional patent related to the Company's ultrasonic surgical device.
GOVERNMENT REGULATION
Sonics' bonding and liquid processor lines generally are not governed
by specific legal rules and laws.
Sonics' sales abroad may make it subject to other U.S. and foreign
laws. The Company and its agents are also governed by the restrictions of the
Foreign Corrupt Practices Act of 1977, as amended (the "FCPA"). The FCPA
prohibits the promise or payments of any money, remuneration or other items of
value to foreign government officials, public office holders, political parties
and others with regard to obtaining or preserving commercial contracts or
orders. Sonics has urged its foreign distributors to comply with the
requirements of the FCPA. All these restrictions may hamper the Company in its
marketing efforts abroad.
In addition, other federal, state and local agencies, including those
in the environmental, fire hazard control, and working conditions areas could
have a material adverse affect upon the Company's ability to do business. Sonics
is not involved in any pending or threatened proceedings that would require
curtailment of, or otherwise restrict, its operations because of such
regulations and compliance with applicable environmental or other regulations.
None of these laws has had a material effect upon its capital expenditures,
financial condition or results of operations.
EMPLOYEES
As of September 25, 2001, the Company had 64 full-time employees
including its officers, of whom 37 were engaged in manufacturing, 3 in repair
services, 5 in administration and financial control,7 in engineering and
research and development, and 12 in marketing and sales.
None of Sonics' employees is covered by a collective bargaining
agreement or represented by a labor union. Sonics considers its relationship
with its employees to be good.
The design and manufacture of the Company's equipment requires
substantial technical capabilities in many disparate disciplines, from mechanics
and computer science to electronics and mathematics. While management believes
that the capability and experience of its technical employees compares favorably
with other similar manufacturers, there can be no assurance that it can retain
existing employees or attract and hire the highly capable technical employees
necessary in the future on favorable terms, if at all.
COMPANY'S STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Any statements in this Annual Report that are not statements of
historical fact are forward-looking statements that are subject to a number of
important risks and uncertainties that could cause actual results to differ
materially. Specifically, any forward looking statements in this Annual Report
related to the Company's objectives of future growth, profitability and
financial returns are subject to a number of risks and uncertainties, including,
but not limited to, risks related to a growing market demand for Sonics'
existing and new products, continued growth in sales and market share of Sonics
and its USS products, pricing, market acceptance of existing and new products, a
fluctuation in the sales product mix, general economic conditions, interest rate
fluctuations, competitive products, and product and technology development.
There can be no assurance that such objectives will be achieved.
ITEM 2. DESCRIPTION OF PROPERTY
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The Company's primary manufacturing and office facility is located in
Newtown, Connecticut in one 64,000 square foot steel and cinder block building
(the "Newtown Property"). This facility is considered adequate for the Company's
current needs, as well as its anticipated future requirements. The facility was
purchased on September 19, 1997. The Company renovated the building and
consolidated all of its former Danbury facilities into the Newtown Property in
May of 1998. The Newtown Property was purchased for $1,265,000 and the cost of
improvements to the property was approximately $2,200,000.
On August 30, 2001, the Company sold the Newtown manufacturing facility
to Acme Realty for $4,000,000. Upon the completion of the sale, Sonics signed a
ten year triple net lease with Acme Realty, with an option to renew the lease
for two additional five year periods. Sonics presently occupies approximately
58,363 square feet of the building. By the beginning of the second year of the
lease, Sonics will reduce the space it occupies to approximately 44,500 square
feet.
Sonics had previously leased 7,200 square feet of the building to an
unrelated third party. This lease has been assigned to Acme Realty.
The Newtown Property is insured against fire and other casualty in an
amount the Company believes to be adequate.
The following table lists the Company's leased offices by location as
of September 25, 2001, and certain other information:
APPROXIMATE TOTAL APPROXIMATE
AREA LEASED IN EXPIRATION DATE CURRENT
SQUARE FOOTAGE OF LEASE ANNUAL RENT
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Newtown, Connecticut...... 58,363 August 30, 2011(2) $393,950
Aston, Pennsylvania....... 4,900 September 30, 2002 40,300(1)
Gland, Switzerland........ 3,000 January 31, 2001(2) 13,800(1)
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(1) Includes proportionate cost of utilities, repairs, cleaning, snow removal,
taxes and insurance.
(2) Contains renewal option as listed below:
Newtown, Connecticut........................5 years
Gland Switzerland...........................1 year
The Company believes that it has adequate insurance coverage for all of
its leased properties. The Company also leases certain automobiles and
equipment.
ITEM 3. LEGAL PROCEEDINGS
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There is no pending or threatened material litigation or proceeding
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
---------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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From February 27, 1996 to July 24, 1998, the Common Stock and Warrants
to Purchase Common Stock of the Company had been traded and quoted through the
National Association of Securities Dealers Inc. ("NASDAQ") National Market
System under the symbols "SIMA" and "SIMAW," respectively. From July 24, 1998 to
April 13, 1999, the Company's Common Stock and Warrants to purchase Common Stock
had been traded and quoted through the NASDAQ SmallCap Market under the same
symbols used on NASDAQ's National Market System. The Company transferred to the
NASDAQ SmallCap Market when its Common Stock and Warrants no longer satisfied
the National Market System minimum maintenance requirements for the market
capitalization of the Common Stock's public float. As of April 14, 1999, the
Company's Common Stock and Warrants to Purchase Common Stock were traded and
quoted through the Over the Counter Bulletin Board ("OTCBB"). The Company
transferred to the OTCBB when its Common Stock and Warrants no longer satisfied
the NASDAQ SmallCap Market's minimum maintenance requirements for the market
capitalization of the Common Stock's public float and the minimum bid price of
the Common Stock. The Company's Warrants expired as of February 27, 2001.
The following table sets forth the range of high and low bids for the
Company's Common Stock and Warrants for the periods indicated as reported by the
NASDAQ SmallCap Market and OTCBB.
Stock Warrants
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QUARTER ENDED High Low High Low
------------------- ------ ------ ------ ------
September 30, 1999 .56 .56 .13 .01
December 31, 1999 .31 .31 .01 .01
March 31, 2000 1.69 1.69 .25 .001
June 30, 2000 1.02 1.02 .14 .04
September 30, 2000 .94 .94 .04 .04
December 31, 2000 .44 .44 .01 .01
March 31, 2001 .44 .44 N/A N/A
June 30, 2001 .51 .51 N/A N/A
The prices presented in the table are bid prices, which represent
prices between broker-dealers and do not include retail mark-ups and mark-downs
or any commission to the dealer. The prices presented may not reflect actual
transactions.
On September 21, 2001, the closing price of the Common Stock of the
Company, as reported by the OTCBB, was $.47 per share. On September 21, 2001,
the Company had 39 stockholders of record. The Company has been informed by its
registrar and transfer agent that these are holders in nominee name. The Company
believes that the number of beneficial holders is greater.
The Company intends to follow a policy of retaining any earnings to
finance the development and growth of its business. Accordingly, it does not
anticipate other payments of cash dividends in the foreseeable future. The
payment of dividends, if any, rests within the discretion of the Board of
Directors and will depend upon, among other things, the Company's earnings, its
capital requirements and its overall financial condition.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
The following discussion and analysis provides information which the
Company's management believes, is relevant to an assessment and understanding of
the Company's results of operations and financial condition. All references to
full years are to the applicable fiscal year of the Company. This discussion
should be read in conjunction with the financial statements and notes thereto
included elsewhere herein.
RESULTS OF OPERATIONS
During Fiscal Year 2001 and in the first quarter of Fiscal Year 2002,
the Company implemented an extensive restructuring program resulting in a
significant reduction in costs, and an improved cash position. As part of the
Company's restructuring program, the Company, in the first quarter of fiscal
year 2002, completed the sale of 90% of the common stock of its wholly-owned
subsidiary, Tooltex, Inc. and entered into a sale and leaseback arrangement for
its Newtown, Connecticut manufacturing facility (see Note Q to the consolidated
financial statements). Also, through layoffs and attrition made throughout the
year, the Company estimates that it has reduced expenses by approximately
$1,800,000 on an annualized basis.
YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000
NET SALES. Net sales in fiscal year 2001 decreased $2,976,000 or 20.8%
compared with sales of the prior fiscal year. This decrease is primarily
attributable to a decline in sales at Tooltex, a wholly owned subsidiary
substantially disposed of in the first quarter of fiscal year 2002, as well as
the plastic welding equipment product line. Other reasons for this decline
include a slowdown in the economy, in general, and a particular softness in the
auto industry, a major user of plastic welding equipment. Despite the decline in
overall sales, the liquid processing product line continued its positive trend,
growing at 5.9% in the current fiscal year. Although the Company anticipates
that the sale of Tooltex will adversely affect its revenue for the fiscal year
2002, the Company believes the sale should have a positive impact on the
Company's cash flow in the future.
COST OF SALES. Corresponding to the sales decline, cost of sales
decreased $1,379,000 in the current fiscal year. This decline was net of a
charge for inventory losses of $755,000 which related to 1) a writedown of
Tooltex inventory to net realizable value in connection with the pending sale
and 2) a Sonics inventory reserve of $441,000 primarily for excess and obsolete
spare parts. After excluding the effect of these inventory charges from cost of
sales, gross profit margins improved slightly in the current year, increasing
from 36.1% in fiscal year 2000 to 38.2% in the current fiscal year.
SELLING EXPENSES. In the current fiscal year, selling expenses
decreased by $459,000 or 15.6%. Declining sales resulted in a significant
decline in commissions paid to manufacturers' representatives. Sales department
expenses such as payroll, advertising and trade show costs were also reduced to
adjust the business to current volume levels.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses in the current fiscal year increased by $165,000 or 14.1% over the
comparable prior year. The principal reason for the increase in this expense
category was higher legal and accounting fees and writedowns of assets
associated with the sale of Tooltex.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
remained at approximately the same level as in the prior fiscal year.
LOSS ON ASSETS HELD FOR SALE. In August, 2001 the Company completed the
sale of 90% of the common stock of Tooltex to PK Spur Co., whose principal
shareholders are Tooltex president, Paul Spurgeon, and Kathy Spurgeon. During
fiscal year 2001, the Company adjusted the net assets of Tooltex, Inc. to their
net realizable values based on the consideration to be paid by the buyer of
$125,000. The loss on assets held for sale of $1,016,000 includes a writedown of
unamortized goodwill of $874,000, a writedown of fixed assets of $115,000, and
estimated transaction costs of approximately $27,000.
INTEREST EXPENSE. Interest expense declined $56,000 or 13.5% compared
with the prior fiscal year. This decline was due both to interest rate
reductions during the year as well as overall debt reduction. All of the
Company's debt is subject to floating interest rates based on LIBOR. In fiscal
year 2002, interest expense will decline significantly as a result of the
pay-off of the Connecticut Industrial Revenue Bonds associated with the sale of
the Company's manufacturing facility.
INTEREST AND OTHER INCOME. Interest and other income in the current
fiscal year declined principally as a result of lower interest income owing to
invested cash being used for other working capital needs.
INCOME TAXES. The Company's effective combined federal and state tax
rate for fiscal 2001 was 4% as compared to 38% in fiscal 2000. At June 30, 2001
management established a valuation allowance on all deferred tax assets due to
uncertainty as to their ultimate realization.
YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999
NET SALES. Net sales for fiscal 2000 increased $1,958,000 or 15.8% over
fiscal 1999. This increase is primarily the result of increased domestic sales
generated by the sale of specialized equipment by Sonics and the Company's
formerly wholly owned subsidiary, Tooltex.
COST OF SALES. Cost of sales increased $2,166,000 from fiscal 1999 to
fiscal 2000, This increase is primarily the result of specialized equipment
generated by Sonics and, Tooltex, which typically has lower margins than the
Company's standard equipment. In fiscal 2000, an increased portion of the
customer base for the Company's ultrasonic liquid processing products purchased
from Company distributors as opposed to the Company's manufacturer
representatives. As a result, cost of goods percentage was effected by volume
distributor discounts.
SELLING EXPENSES. Selling expenses for fiscal 2000 decreased $49,000 or
1.6% over fiscal 1999. As a percentage of net sales these expenses decreased to
20.5% in fiscal 2000 from 24.1% in fiscal 1999. This is due to greater sales to
distributorships as opposed to manufacturer representatives in the Company's
ultrasonic liquid processing line.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for fiscal 2000 decreased $129,000 or 9.9% over fiscal 1999. As a
percentage of net sales, these expenses decreased to 8.2% in fiscal 2000 from
10.5% in fiscal 1999. This decrease is partially the result of lower
professional fees and legal costs.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $40,000 or 10.9% over fiscal 1999. The increase is primarily the
result of a planned expansion of the research and development department, which
included the addition of one research and development technician.
INTEREST AND OTHER INCOME. Interest income decreased $18,000 or 22.9%
in fiscal 2000. This is due to the use of invested funds to repay Tooltex bank
debt of $187,000.
INTEREST EXPENSE. Total interest expense decreased by $39,000 or 8.6%
over fiscal 1999. The impact of rate increases in 2000 was offset in part by
overall debt reduction. In December 1999, the Company's lender approved the
application of approximately $187,000 of restricted cash toward the repayment of
Tooltex bank debt. The lender also lifted restrictions on the balance of the
funds ($213,000) which are available for working capital purposes. Interest
charges are expected to increase in the light of the rising interest rate
environment. All of the Company's outstanding debt is subject to floating rates
based on LIBOR.
INCOME TAXES. The Company's effective federal and state income tax rate
for fiscal 2000 was approximately 38% as compared to 3% in fiscal 1999. During
1999, management determined that the tax benefits of deferred tax assets were
realizable and accordingly, reversed the entire valuation allowance that had
been established in the prior year. There were no such offsetting adjustments to
income tax expense in fiscal 2000. However, federal taxes liabilities are
expected to be lower than the current year's provision due to the availability
of the loss from discontinued operations and net operating loss carryforwards
LIQUIDITY AND CAPITAL RESOURCES
The Company continued to improve its balance sheet in fiscal year 2001,
both in terms of liquidity and in terms of its capital structure. The working
capital ratio rose from 2.46 times at June 30, 2000 to 2.60 times at June 30,
2001. Accounts receivable levels at fiscal year-end 2001 were down significantly
reflecting improved collections performance. Although the nature of the
Company's business necessitates a
heavy investment in inventory, management continues its efforts to minimize
inventory levels to improve liquidity.
The Company's principal outside source of working capital is a
$1,500,000 bank credit facility (the "Line of Credit"). The Line of Credit bears
interest at the Bank's base lending rate (6.75% at June 30, 2001). Advances
under the Line of Credit are at the Bank's sole discretion. The entire principal
balance of the Line of Credit, which at June 30, 2001 was $1,190,000, is due and
payable upon the demand of the Bank. The borrowings under the Line of Credit may
be prepaid in whole or in part, without premium or penalty, at any time.
Indebtedness under the Company's Line of Credit, industrial revenue bonds, and
the term loans are secured by substantially all of the assets of the Company,
including a first mortgage lien on the Company's new manufacturing facility. The
credit agreement also subjects the Company to various covenants, including
restrictions on future borrowings and encumbrances, and the maintenance of
minimum tangible net worth, and leverage and fixed charge coverage ratios, as
defined. In September, 2001 the Company paid the Line of Credit down by
$400,000.
Significant improvement was also made in the capital structure of the
Company. As explained in Note Q to the consolidated financial statements, the
Company, in August 2001, entered into a sale and leaseback arrangement for its
Newtown, Connecticut manufacturing facility. Although not reflected in the June
30, 2001 balance sheet, this transaction will eliminate virtually all of the
Company's long-term debt while adding $483,000 to its cash balances. The Company
expects to significantly improve its debt/equity ratio, declining from
approximately 1 to 1 at June 30, 2000 to an expected 0.5 to 1 in the first
fiscal quarter of 2002.
The Company's credit facility contains a loan covenant that requires it
to maintain a fixed charge coverage ratio of at least 1.10 on a quarterly basis,
at least 1.40 on a trailing six-month basis and minimum tangible net worth of at
least $5,150,000. At June 30, 2001, the Company was in violation of all three
tests. The bank has provided a waiver of these violations as of June 30, 2001
and has agreed to renegotiate these covenants for succeeding periods based on
the significant changes which took place in the business in the first fiscal
quarter of 2002.
IMPACT OF INFLATION
The Company does not believe that inflation significantly affected its
results of operations for the 2001 fiscal year.
MARKET RISK
The Company does not hold or trade derivative instruments. Financial
instruments subject to changes in interest rates consist primarily of floating
rate debt. Due to the repayment in August 2001 of its Industrial Development
Bonds, the Company's exposure to interest rate fluctuations is not material. The
Company's transactions are generally conducted and its accounts are denominated
in U.S. dollars. Consequently, exposure to foreign currency risk is not
significant.
RECENTLY ISSUED PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
which addressed the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 141 requires the
purchase method of accounting to be used for business combinations initiated
after June 30, 2001 and eliminates the pooling of interests method. The adoption
of this statement is not expected to have a material impact on the Company's
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, which addressed the recognition and measurement of goodwill
and other intangible assets subsequent to their
acquisition. SFAS No. 142 also addressed the initial recognition and measurement
of intangible assets acquired outside of a business combination whether acquired
individually or with a group of other assets. SFAS No. 142 provides that
intangible assets with finite useful lives be amortized and that intangible
assets with indefinite lives and goodwill will not be amortized, but will rather
be tested at least annually for impairment. Although SFAS No. 142 is not
required to be adopted by the Company until fiscal 2003, its provisions must be
applied to goodwill and other intangible assets acquired after June 30, 2001. As
of June 30, 2001, the Company does not have any goodwill or other intangible
assets relating to business combinations that were accounted for under APB
Opinion No. 16. Accordingly, the adoption of SFAS No. 142 is not expected to
have a material impact on the Company's financial position or results of
operations.
ITEM 7. FINANCIAL STATEMENTS
--------------------
The response to this item is submitted in this report under the heading
"Financial Statements" and is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------
Information required by this Item 9 is incorporated herein by reference
from the definitive proxy statement of Sonics to be filed with the Securities
and Exchange Commission ("SEC") within 120 days following the end of Sonics'
fiscal year ended June 30, 2001, relating to its 2001 Annual Meeting of
Stockholders.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Information required by this Item 10 is incorporated herein by
reference from the definitive proxy statement of Sonics to be filed with the
Securities and Exchange Commission ("SEC") within 120 days following the end of
Sonics' fiscal year ended June 30, 2001, relating to its 2001 Annual Meeting of
Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information required by this Item 10 is incorporated herein by
reference from the definitive proxy statement of Sonics to be filed with the
Securities and Exchange Commission ("SEC") within 120 days following the end of
Sonics' fiscal year ended June 30, 2001, relating to its 2001 Annual Meeting of
Stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Not applicable.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits.
3(i) Certificate of Incorporation of the Registrant, as amended
(incorporated by reference from Exhibit 3.1 of Amendment No. 3
to Registration Statement No. 33-96414).
3(ii) Amended By-laws of the Registrant (incorporated by reference
from Exhibit 3.2 of Registration Statement No. 33-96414).
3(iii) Form of Warrant Agreement between Registrant and Warrant Agent
(incorporated by reference from Exhibit 4.3 of Amendment No. 3
to Registration Statement No. 33-96414).
10(i) Form of Employment Agreement between the Registrant and Robert
S. Soloff (incorporated by reference from Exhibit 10.1 of
Registration Statement No. 33-96414).
10(ii) 1995 Incentive Stock Option Plan and form of Stock Option
Agreement (incorporated by reference from Exhibit 10.3 of
Registration Statement No. 33-96414).
10(iii) Lease between Registrant and Aston Investment Associates
(Aston, PA) (incorporated by reference from Exhibit 10.5 of
Registration Statement No. 33-96414).
10(iv) Lease between Registrant and Janine Berger (Gland,
Switzerland) (incorporated by reference from Exhibit 10.7 of
Registration Statement No. 33-96414).
10(v) Form of Sales Representation Agreement (incorporated by
reference from Exhibit 10.8 of Registration Statement No.
33-96414).
10(vi) Form of Sales Distribution Agreement (incorporated by
reference from Exhibit 10.9 of Registration Statement No.
33-96414).
10(vii) Credit Agreement, dated September 19, 1997, between Brown
Brothers Harriman & Co. and Registrant ( incorporated by
reference from Exhibit 10(xii) of the Registrant's Form 10KSB
for the year ended June 30, 1997).
10(viii) Term Loan Note of Registrant, dated September 19, 1997,
payable to the order of Brown Brothers Harriman & Co. in the
original principal amount of $427,000 (incorporated by
reference from Exhibit 10(xiii) of the Registrants Form 10KSB
for the year ended June 30, 1997).
10(ix) Line of Credit Note of Registrant, dated September 19, 1997,
payable to the order of Brown Brothers Harriman & Co. in the
original principal amount of $1,500,000 (incorporated by
reference from Exhibit 10(xiv) of the Registrants Form 10KSB
for the year ended June 30, 1997).
10(x) General Security Agreement from Registrant to Brown Brothers
Harriman & Co. dated September 19, 1997 (incorporated by
reference from Exhibit 10(xvii) of the Registrants Form 10KSB
for the year ended June 30, 1997).
10(xi) Lease between Registrant and Acme Realty, dated August 30,
2001(filed herewith).
10(xii) Stock Purchase Agreement by and between PK Spur Co., and
Sonics & Materials, Inc., with Respect to 90% of the Issued
and Outstanding Shares of Common Stock of Tooltex, Inc., dated
August 21, 2001(filed herewith).
21 Subsidiaries of the Registrant (incorporated by reference from
Exhibit (21 of the Registrants Form 10KSB for the year ended
June 30, 1998).
(b)
On August 27, 2001, the Company filed a Current Report on Form 8-K
announcing the sale of 90% of the Common Stock of Tooltex to PK Spur, Co.
On August 31, 2001, the Company filed a Current Report on Form 8-K
announcing the Sale-Leaseback of the Company's Newtown, Connecticut
Manufacturing Facility.
On September 14, 2001, the Company filed a Current Report on Form 8-K
disclosing the disposition of its facility in Newtown, Connecticut.
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 27, 2001
SONICS & MATERIALS, INC.
By: /s/ ROBERT S. SOLOFF
----------------------
ROBERT S. SOLOFF
CHAIRMAN AND PRESIDENT
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ ROBERT S. SOLOFF Chairman, President, Treasurer, September 27, 2001
----------------------- Chief Executive and Chief
(ROBERT S. SOLOFF) Financial Officer
/s/ LAUREN H. SOLOFF Secretary and Director September 27, 2001
-----------------------
(LAUREN H. SOLOFF)
/s/ Ronald Kalb Director September 27, 2001
-----------------------
(RONALD KALB)
/s/ JACK T. TYRANSKY Director September 27, 2001
-----------------------
(JACK T. TYRANSKY)
/s/ STEVEN A. BOWEN Controller September 27, 2001
----------------------- Principal Accounting Officer
(STEVEN A. BOWEN)
EXHIBIT INDEX
EXHIBIT LOCATION OF EXHIBIT IN
NO. DESCRIPTION SEQUENTIAL NUMBERING SYSTEM
------- ----------- ---------------------------
3(i) Certificate of Incorporation of the Registrant, Incorporated by reference from Exhibit 3.1 of
as amended. Amendment No. 3 to Registration Statement No.
33-96414
3(ii) Amended By-laws of the Registrant. Incorporated by reference from Exhibit 3.2 of
Registration Statement No. 33-96414
10(I) Form of Employment Agreement between the Incorporated by reference from Exhibit 10.1 of
Registrant and Robert S. Soloff. Registration Statement No. 33-96414
10(ii) 1995 Incentive Stock Option Plan and form of Incorporated by reference from Exhibit 10.3 of
Stock Option Agreement. Registration Statement No. 33-96414
10(iii) Lease between Registrant and Aston Investment Incorporated by reference from Exhibit 10.5 of
Associates (Aston, PA). Registration Statement No. 33-96414
10(iv) Lease between Registrant and Janine Berger Incorporated by reference from 10.7 of
(Gland, Switzerland). Registration Statement No. 33-96414
10(v) Form of Sales Representation Agreement. Incorporated by reference from Exhibit 10.8 of
Registration Statement No. 33-96414
10(vi) Form of Sales Distribution Agreement. Incorporated by reference from Exhibit 10.9 of
Registration Statement No. 33-96414
10(vii) Credit Agreement, dated September 19, 1997, Incorporated by reference from Exhibit 10(xii)
between Brown Brothers Harriman & Co. and of the Registrant's Form 10-KSB for the year
Registrant ended June 30, 1997
10(viii) Term Loan Note of Registrant, dated September Incorporated by reference from Exhibit 10(xiii)
19, 1997, payable to the order of Brown Brothers of the Registrant's Form 10-KSB for the year
Harriman & Co. in the original principal amount ended June 30, 1997
of $427,000.
10(ix) Line of Credit Note of Registrant, dated Incorporated by reference from Exhibit 10(xiii)
September 19, 1997, payable to the order of of the Registrant's Form 10-KSB for the year
Brown Brothers Harriman & Co. in the original ended June 30, 1997
principal amount of $1,500,000.
10(x) General Security Agreement from Registrant to Incorporated by reference from Exhibit 10(xvii)
Brown Brothers Harriman & Co. dated September of the Registrant's Form 10-KSB for the year
19, 1997. ended June 30, 1997
10(xi) Lease between Registrant and Acme Realty dated Filed herewith.
August 30, 2001.
10(xii) Stock Purchase Agreement by and between PK Spur Filed herewith.
Co., and Sonics & Materials, Inc., with Respect
to 90% of the Issued and Outstanding Shares of
Common Stock of Tooltex, Inc., dated August
21, 2001.
21 Subsidiaries of the Registrant. Incorporated by reference from Exhibit 10(xviii)
of the Registrants Form 10KSB for the year ended
June 30, 1998.
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheets F-3
Statements of Income (Loss) F-4
Statement of Stockholders' Equity F-5
Statements of Cash Flows F-6 - F-7
Notes to Financial Statements F-8 - F-26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Stockholders
Sonics & Materials, Inc.
We have audited the accompanying consolidated balance sheets of Sonics
& Materials, Inc. and its subsidiary as of June 30, 2000 and 2001, and the
related consolidated statements of income (loss), stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sonics &
Materials, Inc. and its subsidiary as of June 30, 2000 and 2001, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Schneider & Associates LLP
Jericho, New York
September 6, 2001
F-2
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
---------------------------------
2000 2001
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 728,993 $ 820,835
Accounts receivable, net of allowance for doubtful
accounts of $88,470 and $53,470 in 2000 and 2001 2,692,786 1,335,861
Inventories 4,489,967 3,961,383
Deferred income taxes 75,048 --
Other current assets 75,865 65,788
----------- -----------
Total current assets 8,062,659 6,183,867
PROPERTY AND EQUIPMENT - net 4,050,052 3,754,724
GOODWILL - net of accumulated amortization of
$166,508 in 2000 929,091 --
OTHER ASSETS 672,215 618,925
----------- -----------
Total assets $13,714,017 $10,557,516
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - bank $ 1,290,000 $ 1,190,000
Current maturities of long-term debt 331,097 186,781
Accounts payable 701,929 347,580
Customer advances 133,816 147,535
Commissions payable 193,356 76,903
Accrued expenses 626,691 452,734
----------- -----------
Total current liabilities 3,276,889 2,401,533
LONG-TERM DEBT 3,584,390 3,381,460
----------- -----------
Total liabilities 6,861,279 5,782,993
COMMITMENTS - see notes
STOCKHOLDERS' EQUITY
Common stock - par value $.03 per share; authorized
10,000,000 shares; issued and outstanding
3,520,100 shares at June 30, 2000 and 2001 105,603 105,603
Additional paid-in capital 6,575,010 6,575,010
Retained earnings (accumulated deficit) 172,125 (1,906,090)
----------- -----------
Total stockholders' equity 6,852,738 4,774,523
----------- -----------
Total liabilities and stockholders' equity $13,714,017 $10,557,516
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended June 30,
-----------------------------
2000 2001
----------- -----------
Net sales $14,323,644 $11,347,937
Cost of sales 9,147,385 7,767,931
----------- -----------
Gross profit 5,176,259 3,580,006
----------- -----------
Operating expenses:
Selling 2,936,169 2,477,305
General and administrative 1,175,433 1,340,930
Research and development 407,525 410,346
Loss on assets held for sale -- 1,016,094
----------- -----------
Total operating expenses 4,519,127 5,244,675
----------- -----------
Operating income (loss) 657,132 (1,664,669)
----------- -----------
Other income (expense):
Interest expense (415,975) (359,715)
Interest and other income 61,943 19,906
----------- -----------
Total other income (expense) (354,032) (339,809)
----------- -----------
Income (loss) before income taxes 303,100 (2,004,478)
Provision for income taxes 116,140 73,737
----------- -----------
Income (loss) from continuing operations 186,960 (2,078,215)
Loss from discontinued operations
(net of income tax benefit of $65,557) (107,121) --
----------- -----------
Net income (loss) $ 79,839 $(2,078,215)
=========== ===========
Per share:
Basic:
Income (loss) from continuing operations $ .05 $ (.59)
Loss from discontinued operations (.03) --
----------- -----------
Net income (loss) $ .02 $ (.59)
=========== ===========
Diluted:
Income (loss) from continuing operations $ .05 $ (.59)
Loss from discontinued operations (.03) --
----------- -----------
Diluted net income (loss) per share $ .02 $ (.59)
=========== ===========
Shares used in basic per share computation 3,520,100 3,520,100
Incremental shares from issuance of common stock
options and warrants 60,375 --
----------- -----------
Shares used in diluted per share computation 3,580,475 3,520,100
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 2000 and 2001
Common Stock Retained
------------------------ Additional Earnings
Par Paid-in (Accumulated Stockholders'
Shares Value Capital Deficit) Equity
--------- -------- ---------- ----------- -----------
Balances - July 1, 1999 3,520,100 $105,603 $6,575,010 $ 92,286 $ 6,772,899
Net income -- -- -- 79,839 79,839
--------- -------- ---------- ----------- -----------
Balances - June 30, 2000 3,520,100 105,603 6,575,010 172,125 6,852,738
Net loss -- -- -- (2,078,215) (2,078,215)
--------- -------- ---------- ----------- -----------
Balances - June 30, 2001 3,520,100 $105,603 6,575,010 $(1,906,090) $ 4,774,523
========= ======== ========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
----------------------------------
2000 2001
----------- -----------
Cash flows from operating activities
Net income (loss) $ 79,839 $(2,078,215)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Net loss from discontinued operations 107,121 --
Depreciation 151,829 162,623
Amortization of goodwill 55,503 55,503
Loss on assets held for sale -- 989,362
Reserves and allowances -- 730,844
Decrease (increase) in:
Accounts receivable (703,839) 1,160,195
Inventories 488,542 (222,237)
Other current assets 9,646 15,229
Prepaid income taxes -- (9,951)
Deferred income taxes (14,065) 75,048
Other assets 59,196 104,540
Increase (decrease) in:
Accounts payable 122,162 (199,840)
Customer advances (70,964) 45,503
Commissions payable 51,910 (117,087)
Income taxes 80,008 --
Accrued expenses 161,879 (113,118)
----------- -----------
Net cash provided by operating activities 578,767 598,399
----------- -----------
Cash provided by discontinued operations 93,943 --
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (95,059) (59,311)
Short-term investments 400,000 --
Restricted cash from industrial revenue bond 136,000 --
----------- -----------
Net cash provided by (used in) investing activities 440,941 (59,311)
----------- -----------
Cash flows from financing activities:
Payments of note payable - bank (175,101) (100,000)
Payments of long-term debt (522,123) (289,932)
Payments of capital lease obligations (38,034) (57,314)
----------- -----------
Net cash used in financing activities (735,258) (447,246)
----------- -----------
Net increase in cash and cash equivalents 378,393 91,842
Cash and cash equivalents at beginning of year 350,600 728,993
----------- -----------
Cash and cash equivalents at end of year $ 728,993 $ 820,835
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
----------------------------------
2000 2001
----------- -----------
Supplemental information:
Cash paid during the period for:
Interest $ 412,017 $ 400,415
=========== ===========
Income taxes $ 49,386 $ 2,595
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
NOTE A - BUSINESS
Sonics & Materials, Inc. (the "Company") is a manufacturer and
distributor of ultrasonic assembly and liquid processing machinery and
equipment. The Company also manufactures automated systems used in the
plastics industry through its subsidiary, Tooltex, Inc., which is
located in Grove City, Ohio. Sales are made throughout the United
States, Europe, Asia, South America and Australia. The Company's
headquarters and principal manufacturing operations are located in
Newtown, Connecticut.
In August 2001, the Company completed the sale of a 90% interest in
Tooltex (see Note Q).
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
These financial statements include the accounts of the Company and its
wholly-owned subsidiary, Tooltex, Inc. All material intercompany
balances and transactions have been eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation using both the
declining-balance and straight-line methods is designed to amortize the
cost of various classes of assets over their estimated useful lives,
ranging generally from five to seven years. The building is being
depreciated on a straight-line basis over 40 years. Leasehold
improvements are amortized over the shorter of the life of the related
asset, or the term of the lease. Expenditures for replacements are
capitalized and the replaced items are retired. Maintenance and repairs
are expensed as incurred.
F-8
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
Use of Estimates
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The more significant
estimates made by management include the allowance for doubtful
accounts receivable and the valuation allowance for deferred tax
assets. Actual amounts could differ from the estimates made. Management
periodically evaluates estimates used in the preparation of the
financial statements for continued reasonableness. Appropriate
adjustments, if any, to the estimates used are made prospectively based
upon such periodic evaluation.
Goodwill
Goodwill represents the excess purchase price paid over the fair market
value of the net assets acquired. Goodwill is being amortized on a
straight-line basis over a twenty-year period. Amortization expense for
the years ended June 30, 2000 and 2001 was $55,503 and $55,503,
respectively.
The carrying value of Goodwill is based on management's current
assessment of recoverability. Management evaluates recoverability using
both objective and subjective factors. Objective factors include
management's best estimates or projected future earnings, cash flows
and analysis of historical and recent sales and earnings trends.
Subjective factors include competitive analysis and the Company's
strategic focus.
Long-lived assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", the
Company records impairment losses on long-lived assets used in
operations, when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those
assets.
F-9
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
Income Taxes
The Company accounts for its income taxes using the liability method,
which requires the establishment of a deferred tax asset or liability
for the recognition of future deductible or taxable amounts and
operating loss carryforwards. Deferred tax expense or benefit is
recognized as a result of the changes in the assets and liabilities
during the year. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts expected to be realized.
Deferred tax assets are reduced by a valuation allowance if, based on
the weight of available evidence, it is more likely than not that all
or some portion of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax asset depends on the Company's
ability to generate sufficient taxable income in the future.
Stock options
Under SFAS No. 123, "Accounting for Stock-based Compensation", the
Company must either recognize in its financial statements costs related
to its employee stock-based compensation plans, such as stock option
plans, using the fair value method, or make pro forma disclosures of
such costs in a footnote to the financial statements. The Company has
elected to continue to use the intrinsic value-based method of APB
Opinion No. 25, as allowed under SFAS No. 123, to account for its
employee stock-based compensation plans, and to include the required
pro forma disclosures based on fair value accounting.
F-10
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
Earnings per share
Basic net income per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period.
Diluted net income per share is calculated by dividing net income by
the weighted-average number of common shares outstanding plus the
weighted-average number of net shares that would be issued upon
exercise of stock options and warrants using the treasury stock method.
Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents at June 30,
2000 and 2001 consisted of money market funds.
Revenue Recognition
Revenue is recognized upon the shipment of finished merchandise to
customers. Allowance for sales returns are recorded as a component of
net sales in the periods in which the related sales are recognized.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "Revenue Recognition" ("SAB 101"),
which provides guidance on the recognition, presentation and disclosure
of revenue in financial statements filed with the SEC. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The
Company adopted SAB 101 during fiscal 2001. Management believes that
the Company's revenue recognition policy complies with the provisions
of SAB 101 and that the adoption of SAB 101 has had no material effect
on the financial position or results of operations of the Company.
F-11
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
Research and Development Costs
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing
products, are expensed as incurred.
Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair value of the
Company's debt approximates the carrying value. Furthermore, the
carrying values of all other financial instruments potentially subject
to valuation risk (principally consisting of cash, cash equivalents,
accounts receivable and accounts payable) also approximate fair value
due to their short-term nature.
Advertising Costs
All costs related to advertising are expensed in the period incurred.
Advertising costs were approximately $175,000 and $112,000 for the
years ended June 30, 2000 and 2001, respectively.
Recently issued pronouncements
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
which addressed the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination. SFAS No.
141 requires the purchase method of accounting to be used for business
combinations initiated after June 30, 2001 and eliminates the pooling
of interests method. The adoption of this statement is not expected to
have a material impact on the Company's financial position or results
of operations.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, which addressed the recognition and measurement of
goodwill and other intangible assets subsequent to their acquisition.
SFAS No. 142 also addressed the initial recognition and measurement of
intangible assets acquired outside of a business combination whether
acquired individually or with a group of other assets. SFAS No. 142
provides that intangible assets with finite useful lives be amortized
and that
F-12
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
intangible assets with indefinite lives and goodwill will not be
amortized, but will rather be tested at least annually for impairment.
Although SFAS No. 142 is not required to be adopted by the Company
until fiscal 2003, its provisions must be applied to goodwill and other
intangible assets acquired after June 30, 2001. As of June 30, 2001,
the Company does not have any goodwill or other intangible assets
relating to business combinations that were accounted for under APB
Opinion No. 16. Accordingly, the adoption of SFAS No. 142 is not
expected to have a material impact on the Company's financial position
or results of operations.
NOTE C - DISCONTINUED OPERATIONS
In May 2000, management and the board of directors elected to
discontinue the Company's VibraSurge operation after reviewing the
marketability of its line of ultrasonic surgical products and its
recurring operating losses. As a result, the Company's balance sheets,
statements of income, and statements of cash flows have been
reclassified to report the net assets and operating results of the
VibraSurge business as discontinued for 2000. As of June 30, 2000,
VibraSurge operations have ceased and remaining net assets, consisting
principally of inventory and accounts receivable, have been written
off.
NOTE D - LOSS ON ASSETS HELD FOR SALE
In connection with the sale of a 90% interest in its Tooltex subsidiary
in August 2001, the Company has adjusted the net assets of Tooltex to
their estimated net realizable values in the current Statement of
Income (Loss). The loss on assets held for sale of $1,016,000 includes
a writedown of unamortized goodwill of $874,000, a writedown of fixed
assets of $115,000, and estimated transaction costs of approximately
$27,000. The Company also recorded in fiscal 2001 a Tooltex inventory
reserve through cost of sales of approximately $314,000 and a bad debt
charge through general and administrative expenses of $35,000.
F-13
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
NOTE E - INVENTORIES
Inventories consist of the following:
June 30, June 30,
2000 2001
---------- ----------
Raw materials $ 967,971 $ 898,284
Work-in-process 2,128,815 1,890,542
Finished goods 1,393,181 1,172,557
---------- ----------
$4,489,967 $3,961,383
========== ==========
During fiscal 2001, the Company established a reserve for excess and
obsolete inventory of $441,000. The charge to operations was recorded
through cost of sales. Inventories at June 30, 2001 are stated net of
the reserve.
NOTE F - PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
June 30, June 30,
2000 2001
---------- ----------
Land $ 462,486 $ 462,486
Building 3,219,205 3,219,205
Trade show booth 50,494 --
Machinery and equipment 1,017,586 943,148
Tooling 147,449 146,482
Office furniture and equipment 319,619 308,663
Leasehold improvements 49,890 --
Transportation equipment 60,441 60,441
Data processing equipment 718,706 618,673
---------- ----------
6,045,876 5,759,098
Less: Accumulated depreciation 1,995,824 2,004,374
---------- ----------
$4,050,052 $3,754,724
========== ==========
Depreciation expense was $151,829 and $162,623 in fiscal 2000 and 2001,
respectively.
F-14
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
On August 31, 2001, the Company sold its Newtown, Connecticut property
(see Note Q).
NOTE G - OTHER ASSETS
At June 30, 2000 and 2001, the major components of other assets were:
June 30, June 30,
2000 2001
---------- ----------
Demonstration equipment - net of
accumulated depreciation of
$122,422 and $99,554 in 2000
and 2001, respectively $ 537,815 $ 364,192
Other 134,400 254,733
---------- ----------
$ 672,215 $ 618,925
========== ==========
Demonstration equipment is carried at cost less accumulated
depreciation. Depreciation is provided for using straight-line and
accelerated methods over the estimated useful life of seven years. The
net book value is used to calculate any gain or loss on sale of the
related demonstration equipment.
NOTE H - ACCRUED EXPENSES
At June 30, 2000 and 2001, the major components of accrued expenses
were:
June 30, June 30,
2000 2001
---------- ----------
Accrued compensation $ 351,832 $ 287,546
Professional fees 42,819 63,542
Other accruals 232,040 101,646
---------- ----------
$ 626,691 $ 452,734
========== ==========
F-15
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
NOTE I - BANK AND OTHER DEBT
Note payable - bank
Outstanding indebtedness against the bank line of credit is evidenced
by a note bearing interest at the bank's base lending rate (6.75% at
June 30, 2001). Advances under the line of credit are at the bank's
sole discretion, are due on demand, and are limited to the lesser of
$1,500,000 or a percentage of the Company's available borrowing base,
as defined.
Long-term debt
June 30, June 30,
2000 2001
---------- ----------
(a) Industrial Revenue Bonds $3,509,211 $3,308,684
(b) Bank term loan 175,824 100,471
(c) Capital lease obligations 216,400 159,086
(d) Other loans 14,052 --
---------- ----------
3,915,487 3,568,241
Less: Current portion (331,097) (186,781)
---------- ----------
Long-term debt $3,584,390 $3,381,460
========== ==========
(a) Industrial Revenue Bonds issued in December 1997 through the
Connecticut Development Authority in the original principal amount
of $3,810,000. The bonds were purchased by the Company's lender
pursuant to the credit agreement between the parties. Interest on
principal balances is payable at the rate of 75% of the bank's base
lending rate. Principal is payable in 228 equal installments of
$16,711 commencing in January 1999. The bondholder, however, may
make written demand for redemption of all or a part of outstanding
principal and accrued interest commencing in December 2000.
The bonds were repaid from the proceeds of the sale of the
Company's Newtown, Connecticut property in August 2001.
(b) Term loan in the original amount of $427,000. The loan, as amended
on July 21, 1998, is payable in nine monthly installments of
$11,861 through July 1, 1998, fifty-one monthly installments of
$6,269, and a final payment of the remaining
F-16
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
principal balance on October 1, 2002. The loan bears interest at
the bank's base lending rate.
(c) The Company has entered into three equipment leases which qualify
for capitalization under applicable accounting guidelines. The
leases expire at various dates through 2005.
(d) Equipment loans payable in monthly installments through 2001,
secured by financed assets.
Indebtedness under the Company's line of credit, industrial revenue
bonds, and the term loans are secured by substantially all of the
assets of the Company, including a first mortgage lien on the
Company's principal manufacturing facility. The credit agreement
also subjects the Company to various covenants, including
restrictions on future borrowings and encumbrances, and the
maintenance of minimum tangible net worth, and leverage and fixed
charge coverage ratios, as defined. At June 30, 2001, the Company
was in violation of its tangible net worth and fixed charge
coverage ratios. The bank has provided a waiver for these
violations.
The aggregate maturities of long-term debt for the next five fiscal
years, adjusted for the repayment of bonds in August 2001, are as
follows:
Year ending
June 30,
-----------
2002 $186,781
2003 43,935
2004 31,642
2005 31,716
2006 --
F-17
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
NOTE J - STOCKHOLDERS' EQUITY
Warrants
In February 2001, all outstanding common stock purchase warrants,
consisting of 1,705,000 warrants exercisable at $6.00 per share and
100,000 warrants exercisable at $.25 per share, expired.
Incentive Stock Option Plan
The Company has reserved a total of 250,000 shares for issuance under
its Incentive Stock Option Plan (the "Plan"). Options may be granted to
officers, directors, and other key Company employees. Options granted
under the Plan are intended to qualify as incentive stock options as
defined in the Internal Revenue Code of 1986, as amended.
The Plan is administered by the Board of Directors and a Committee
presently consisting of two members of the Board that determine which
persons are to receive options, the number of options granted and their
exercise prices. In the event an optionee voluntarily terminates
employment with the Company, the optionee has the right to exercise his
accrued options within thirty (30) days of such termination. However,
the Company may redeem any accrued options held by each optionee by
paying the difference between the option exercise price and the then
fair market value.
All employee options issued to date under the Plan have a five-year
term and vest evenly over the first three years commencing on the date
of grant. Director options vest over a one-year period. At June 30,
2001, there were 189,000 shares available for future grant under the
Plan.
Nonqualified Stock Options
The Company has also granted nonqualified stock options for 285,366
shares of common stock at option prices ranging from $.31 to $1.03 per
share expiring at various dates through 2004.
F-18
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
Summary Information
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation". Accordingly, no compensation
cost has been recognized for the stock options granted to employees and
directors. Had compensation cost been determined based on the fair
value at the grant date for the stock option awards in fiscal 2000 and
2001 consistent with the provisions of SFAS No. 123, net income would
have decreased by approximately $29,000 and $4,800 and earnings per
share reduced by $.01 and $.01 in 2000 and 2001, respectively.
The weighted average fair value at date of grant for all options
granted in fiscal 2000 was $.26. There were no option grants in 2001.
The fair value of each option at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2000
--------
Expected stock price volatility 45.8%
Expected life of options 4 years
Risk-free interest rate 5.91%
Expected dividend yield 0%
F-19
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
For the two years ended June 30, 2001, option activity was as follows:
Weighted-
average
Number Exercise
of Shares Price
---------- ----------
Outstanding at June 30, 1999 434,866 $1.49
Granted 57,000 .60
---------------------------------------------------------------------
Outstanding at June 30, 2000 491,866 1.39
Expired (53,500) 5.00
Canceled (92,000) .87
---------------------------------------------------------------------
Outstanding at June 30, 2001 346,366 $ .97
=====================================================================
The following table summaries information about stock options
outstanding at June 30, 2001:
Options Outstanding Options Exercisable
Weighted
Weighted- average Weighted-
average Remaining average
Range of Number Exercise Contractual Number Exercise
Exercise prices Outstanding Price Life Exercisable Price
--------------- ----------- --------- ----------- ----------- ---------
$.22 - $.63 60,976 $.48 3.0 years 54,309 $.49
1.03 - 1.63 280,390 1.04 2.5 years 279,057 1.04
2.94 5,000 2.94 1.8 years 5,000 2.94
----------- -----------
346,366 $.97 338,366 $.98
=========== ===========
NOTE K - COMMITMENTS
Leases
The Company leases certain facilities and vehicles under lease
agreements that are classified as operating leases and expire in
various years through 2003.
F-20
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
The following is a schedule of future minimum lease payments for
operating leases as of June 30, 2001:
Year ending
June 30,
2002 $142,310
2003 26,337
--------
Total $168,647
========
Rental expense for operating leases totaled approximately $198,000 and
$205,000 for the years ended June 30, 2000 and 2001, respectively.
Employment contracts
In connection with the Tooltex acquisition in July 1997, the Company
entered into five-year employment agreements with the two Tooltex
stockholders. The agreements each provide for initial annual salaries
of $75,000, with annual increases equal to the rate of inflation, up to
5%, and various fringe benefits. The agreements also contain bonus
provisions based on annual sales increases.
Legal settlement
In June 2000, the Company settled a customer lawsuit for $80,000,
payable in four installments of $20,000 plus interest through September
2000. The Company accrued for the settlement in fiscal 1998 as an
adjustment to the Tooltex acquisition price.
F-21
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
NOTE L - INCOME TAXES
The components of the provision for income taxes are as follows:
Years ended June 30,
-------------------------------
2000 2001
---------- ----------
Current
Federal $ 120,839 $ (37,206)
State 9,366 40,289
---------- ----------
130,205 3,083
---------- ----------
Deferred:
Federal (14,065) (590,877)
State -- (66,956)
Less: Valuation allowance -- 728,487
---------- ----------
(14,065) 70,654
---------- ----------
Total tax provision $ 116,140 $ 73,737
========== ==========
The tax effect of temporary differences which give rise to deferred tax
assets and liabilities are as follows:
June 30, June 30,
2000 2001
---------- ----------
Deferred tax assets:
Unrealized loss on Tooltex
investment $ -- $ 468,447
Accrued expenses 36,545 --
Allowance for doubtful accounts 30,080 30,080
Inventories 18,478 229,960
---------- ----------
Total deferred tax assets 85,103 728,487
Deferred tax liabilities:
Deferred charges 10,055 --
---------- ----------
Subtotal 75,048 728,487
Less: Valuation allowance -- (728,487)
---------- ----------
Net deferred tax asset $ 75,048 $ --
========== ==========
F-22
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
During fiscal 2001, management established a valuation allowance to
offset the benefits of significant temporary tax differences due to the
uncertainty of their realization. These deferred tax assets consist
primarily of writedowns related to the subsequent sale of Tooltex,
inventory reserves, and allowances for doubtful accounts.
The following is a reconciliation of the statutory Federal income tax
rate to the effective rate reported in the consolidated financial
statements:
Years ended June 30,
-------------------------------
2000 2001
---------- ----------
Provision for federal income
taxes at the statutory rate $ 103,156 $ (683,776)
State and local taxes, net of
federal tax effect 4,620 17,975
Nondeductible expenses 26,071 11,051
Change in valuation allowance -- 728,487
Tax credits (6,008) --
Other (11,699) --
---------- ----------
Actual provision for income taxes $ 116,140 $ 73,737
========== ==========
NOTE M - 401(k) AND PROFIT SHARING PLANS
The Company has a 401(k) plan for eligible employees. Under provisions
of the plan, eligible employees may elect to contribute up to 15% of
their annual compensation. In addition, the plan provides for the
Company to make additional contributions at its discretion of up to 4%
of each participant's annual compensation. Expenses under the 401(k)
plan were approximately $31,000 and $33,000 for the years ended June
30, 2000 and 2001, respectively.
The Company also has a nonqualified profit sharing plan. Under this
plan, the Company distributes to eligible employees 10% of its pretax
profits, based on a three-month moving average. Expenses under the
profit sharing plan were approximately $14,000 and $-0- for the years
ended June 30, 2000 and 2001, respectively.
F-23
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
NOTE N - CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash,
cash equivalents, and trade accounts receivable. The Company deposits
its cash balances in commercial bank accounts and money market funds.
Commercial bank balances may from time to time exceed federal insurance
limits; money market funds are uninsured.
The Company performs ongoing credit evaluations of its customers in
order to minimize credit losses. Credit risk on receivables is
minimized as a result of the diverse nature of the Company's worldwide
customer base. The Company does not generally require collateral from
its customers.
The Company operates in one business segment. Net sales by geographic
area are as follows:
Year ended June 30,
-------------------------------
2000 2001
----------- -----------
United States $11,063,000 $ 8,760,000
Europe 1,555,000 1,143,000
Asia/Pacific Rim 1,136,000 936,000
Canada and Mexico 363,000 286,000
Other 207,000 223,000
----------- -----------
$14,324,000 $11,348,000
=========== ===========
NOTE O - RELATED PARTY TRANSACTIONS
The Company leases manufacturing facilities in Ohio from an entity
owned by the selling stockholders of Tooltex under a five-year lease
expiring in 2002. During the year ended June 30, 2000 and 2001, the
Company incurred $84,320 and $84,320, respectively, for rental of these
facilities.
F-24
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
NOTE P - UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of
operations for 2000 and 2001:
2000 2001
---------- ----------
1st quarter
Net revenues $3,507,110 $ 2,803,316
Gross profit 1,189,237 1,079,171
Net income (loss) 93,804 (91,711)
Net income (loss) per share $.03 $(.03)
2nd quarter
Net revenues $3,210,804 $ 2,926,626
Gross profit 1,247,462 1,022,756
Net income (loss) 45,622 (255,184)
Net income (loss) per share $.01 $(.07)
3rd quarter
Net revenues $3,665,932 $ 2,791,109
Gross profit 1,370,381 1,101,580
Net income 63,679 15,345
Net income per share $.02 $.01
4th quarter
Net revenues $3,939,798 $ 2,826,886
Gross profit 1,369,179 376,499
Net loss (123,266) (1,746,665)
Net loss per share $(.04) $(.50)
F-25
SONICS & MATERIALS, INC. AND ITS SUBSIDIARY TOOLTEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 2001
----------------------
NOTE Q - SUBSEQUENT EVENTS
Sale of Tooltex stock
On August 21, 2001, the Company sold a 90% interest in the stock of
Tooltex to PK Spur Co. (PK), an Ohio corporation owned by the president
of Tooltex, and his wife. In consideration, PK issued a $125,000
promissory note, payable in 23 installments of $2,000 including
interest at 7% per annum commencing in October 2001, with a final
balloon payment of outstanding principal and accrued interest. The note
is guaranteed by the president and Tooltex, and is secured by a
security interest in certain Tooltex assets. In conjunction with the
sale, the Company and Tooltex entered into a representation and
distribution agreement pursuant to which Tooltex will sell and
distribute the Company's products.
The Company will change the accounting for its investment in Tooltex
from the consolidation to the cost method, effective on the date of
sale. Tooltex reported sales of approximately $2.6 million (unaudited)
and a net loss of approximately $219,000 (unaudited) in fiscal 2001.
Sale of Company facility
On August 31, 2001, the Company sold to Acme Realty (Acme), a New York
general partnership, its manufacturing facility located in Newtown,
Connecticut for $4,000,000 in cash, less estimated expenses of
approximately $240,000. The Company used the proceeds to pay
outstanding Industrial Revenue Bond principal and accrued interest
totaling $3,289,000, and to increase working capital. In conjunction
with the sale, the Company entered into a triple net lease with Acme
for an initial term of ten years plus two five-year renewal options.
F-26