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U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2002.
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
Commission file number: 0-20753
SONICS & MATERIALS, INC.
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(Name of small business issuer in its charter)
DELAWARE 060854713
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
53 CHURCH HILL ROAD, NEWTOWN, CT 06470
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (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 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: $9,274,227
The aggregate market value of the common stock held by non-affiliates computed
by reference to the price at which the common equity was sold, or the average
bid and asked price of such common stock as of September 24, 2002 as reported on
the Over the Counter Bulletin Board was approximately $520,243. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of September 24, 2002, the issuer had outstanding 3,520,100 shares of Common
Stock, par value $.03 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 2002 Annual Meeting of
Stockholders are incorporated by reference in Part III.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
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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 a 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 two patents in the field
of vibration welding.
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 distributor 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
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the applications for its liquid processors from 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, liquid processors reduce particle size and
facilitate mixing; in the preparation of paints and dyes, they blend and
homogenize materials. In the ink industry, processors disperse black carbon. In
the beverage and other industries, liquid processors 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 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.
2
INDUSTRY BACKGROUND
Management believes that in the past twelve months, there has been minimal
growth 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 impacted 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, beverage
and medical industries may provide for continued growth. Management believes,
however, that the slowdown in the economy has also had a negative affect on the
growth of this product line of the Company.
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 with respect to supplies and materials.
However, it is not certain that the occurrence of shortages or delays would not
have an adverse impact on Sonics' operations in the future. In fiscal years 2001
and 2002, two suppliers, B&R Machine, Inc., and AB Electronics, Inc., accounted
for more than 5%, but less than 10% of Sonics' 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 such
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 the Company's ultrasonic welder and liquid processor. Sonics 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, 2001 and 2002, expenses
attributable to warranties were approximately $71,000 and $151,760 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 (with respect to its devices sold in Europe).
These services are performed upon specific orders without contracts at various
rates. The Company usually charges for the
3
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, 2001 and 2002,
the Company had income of approximately $617,000 and $486,362 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 39 sales
representatives in 48 states. Sonics relies on approximately 80 distributors and
several sales representatives to distribute its products in 49 foreign
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
upon 30 days prior notice. The contract provides for exclusive territorial and
product representation and commissions payable to the sales representative 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 each of the fiscal years 2001 and 2002, 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 by either party 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 cover sales of both
ultrasonic bonding systems and liquid processor lines. 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 2001, one distributor accounted for over 10% but less than 15% of
sales. In fiscal year 2002, one distributor accounted for over 5% but less than
10% of sales. The loss of such distributors in substantial numbers or at key
locations could have a material adverse effect on the Company's business.
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.
4
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, OEMs, 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 year 2001 or fiscal year
2002.
INTERNATIONAL OPERATIONS
The Company's international operations are an important portion of its
business. Approximately 23% and 27% of its sales for fiscal years 2001 and 2002,
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 (other than
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 respect 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 based on
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 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 the ultrasonics market are Branson and
Dukane. Some of these competitors also offer spin and vibration devices in
addition to ultrasonic devices.
In the ultrasonic liquid processor market, the Company's principal
competitors are Branson and Misonix Inc. Management believes that Sonics has the
largest share of this market.
BACKLOG
As of June 30, 2002, the Company's backlog was approximately $1,330,725, as
compared with a backlog of $3,623,000 as of June 30, 2001. No one customer
accounted for more than 10% of such backlog
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at June 30, 2002. However, two customers did account for more than 10% of such
backlog at June 30, 2001. The decrease in the backlog from fiscal year end 2001
to fiscal year end 2002 is primarily the result of an order which was to be
released over a period of three years. By the end of fiscal year 2002 such order
had been substantially completed.
The Company's backlog figures are based on written purchase orders executed
by customers 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 $410,000
for the fiscal year ended June 30, 2001, and $402,000 for fiscal year ended June
30, 2002.
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 (which business has been discontinued). There can
be no assurance that others have not developed, or will not develop, the same or
similar information or obtain and use proprietary information of the Company.
Sonics has obtained written assurances regarding its proprietary information
from its employees, sales representatives and distributors under confidentiality
agreements.
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.
This patent expires on June 24, 2018. In addition, on May 5, 2001, U.S. Patent
and Trademark Office issued the Company a patent for the tooling developed by
the Company for producing fabric covered panels with a vibration welder. This
patent expires on February 7, 2020. On April 2, 2002, the Company was issued
another patent relating to its vibration welder. This patent was specifically
for the mechanism developed for measuring the frequency of the vibration welder
tooling. The patent expires on June 5, 2020. The U.S. Patent and Trademark
Office had previously issued the Company a patent on October 19, 1999 and
December 12, 2000 for its ultrasonic surgical device. Those patents expire on
May 1, 2017, and December 10, 2018.
GOVERNMENT REGULATION
Sonics' bonding and liquid processor lines generally are not governed by
specific laws and regulations.
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. 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 effect 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 the failure to comply with
applicable
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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 24, 2002, the Company had 58 full-time employees including
its officers, of whom 32 were engaged in manufacturing, 3 in repair services, 4
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 on favorable terms, if at all.
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. The Company believes
the Newtown Property to be in good condition.
On August 30, 2001, the Company sold the Newtown Property 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 (for Sonics) to renew the lease for
two additional five-year periods.
Pursuant to the terms of the lease, Sonics has committed in the second year
of the term of the lease to reduce the space it occupies from 58,363 square feet
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 casualties in an
amount the Company believes to be adequate.
The following table lists the Company's leased offices by location as of
September 24, 2002, and certain other information:
APPROXIMATE TOTAL AREA APPROXIMATE CURRENT
LEASED IN SQUARE FOOTAGE EXPIRATION DATE OF LEASE ANNUAL RENT
------------------------ ------------------------ -------------------
Newtown, Connecticut........ 44,500 August 30, 2011(2) $309,000
Aston, Pennsylvania......... 2,475 November 1, 2006 24,000(1)
Gland, Switzerland.......... 3,000 January 31, 2001(2) 13,800(1)
(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
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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's
securities 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
----------------- -----------------
QUARTER ENDED High Low High Low
-------------------- -------- ------- -------- -------
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
September 30, 2001 .46 .46 N/A N/A
December 31, 2001 .38 .38 N/A N/A
March 31, 2002 .43 .43 N/A N/A
June 30, 2002 .51 .51 N/A N/A
8
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 24, 2002, the closing price of the Common Stock of the
Company, as reported by the OTCBB, was $.51 per share. On September 24, 2002,
the Company had 41 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. The Company has never paid dividends
and does not anticipate 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.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note B to the
financial statements included in Item 13 of this Annual Report on Form 10-KSB.
INVENTORY - Estimates for inventory obsolescence reserves are developed
using inventory aging reports for finished goods, work-in-process and raw
materials, combined with historical and forecasted usage. As trends in these
variables change, valuation reserves are updated.
ACCOUNTS RECEIVABLE - The $24,322 estimate of allowance for doubtful
accounts is comprised of two parts, a specific account analysis and a general
reserve. Accounts where specific information indicates a potential loss may
exist are reviewed and a specific reserve against amounts due is recorded. As
additional information becomes available such specific account reserves are
updated. Additionally, a general reserve is applied to the aging categories
based on historical collection and write-off experience. As trends in historical
collection and write-off experience change, the estimates are updated.
REALIZATION OF LONG-LIVED ASSETS - The Company evaluates the recoverability
of property and equipment and intangible or other assets if facts and
circumstances indicate that any of those assets might be impaired. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is necessary.
REVENUE RECOGNITION - Revenue is recognized upon the shipment of finished
merchandise to customers. 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
9
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.
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.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2002 ("fiscal 2002") COMPARED TO YEAR ENDED JUNE 30, 2001
("fiscal 2001")
On August 21, 2001, the Company completed the sale of 90% of the common
stock of its wholly-owned subsidiary, Tooltex, Inc., at which time the
consolidation of Tooltex operations ceased.
NET SALES. Net sales decreased by $2,074,000 in fiscal 2002. However,
excluding Tooltex sales, net sales increased by $68,000 or 0.8% compared with
the prior fiscal year.
COST OF SALES AND GROSS PROFIT. Gross profits totaled $3,580,000 in fiscal
2001 and $3,589,000 in fiscal 2002 resulting in gross margins of 31.5% and
38.7%, respectively. After excluding Tooltex gross profits, Sonics alone
achieved gross profits of $3,439,000 in fiscal 2001 and $3,563,000 in fiscal
2002 resulting in gross margins of 37.7% and 38.8%, respectively.
SELLING EXPENSES. Selling expenses declined by $642,000 in fiscal 2002.
After excluding Tooltex expenses incurred in fiscal 2001 and fiscal 2002,
selling expenses decreased by $380,000. The primary causes for this decrease
were the continuing effects of prior year reductions in payroll and benefit
costs associated with sales personnel, a decrease in promotional costs, and a
decline in commission expenses as a result of an increase in the ratio of sales
made to distributors versus sales made through manufacturers' representatives.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $418,000 in fiscal 2002. After excluding Tooltex expenses incurred in
fiscal 2001 and fiscal 2002, general and administrative expenses decreased
$35,000 or 3.8%. This decrease resulted from lower legal and accounting costs
and was partially offset by higher payroll costs.
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 2001, the Company adjusted the net assets of Tooltex, Inc. to
10
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 $238,000 or 66.2% compared with
the prior fiscal year. There were several reasons for this decline. The most
significant factor was the reduction in interest expense resulting from the
pay-off of Connecticut Industrial Revenue Bonds out of the proceeds of the sale
of the Newtown Property in August 2001. Interest also decreased due to the pay
down of $1,000,000 of the Company's Line of Credit facility (as defined below)
during fiscal 2002. The downward trend in interest rates in the current fiscal
year afforded the Company additional interest savings. While interest expense
has decreased, the Company now has the added expense of lease payments as a
result of the sale-leaseback of the Newtown Property.
INTEREST AND OTHER INCOME. Interest and other income increased $46,000 in
the current fiscal year. This increase was primarily a result of the
amortization, over a ten year period, of the deferred gain of $337,000 realized
on the sale of the Newtown Property. The ten-year amortization period
corresponds to the ten-year term of the initial lease the Company entered into
with the buyer of the property.
PROVISION FOR INCOME TAXES. 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 consisted primarily of writedowns related to the subsequent sale of
Tooltex, inventory reserves, and allowances for doubtful accounts. During fiscal
2002, based on the Company's return to profitability, management reversed a
portion of the valuation allowance, but maintained the reserve on the Company's
capital loss carryforward resulting in a $112,000 income tax benefit.
YEAR ENDED JUNE 30, 2001 ("fiscal 2001") COMPARED TO YEAR ENDED JUNE 30, 2000
("fiscal 2000")
NET SALES. Net sales in fiscal 2001 decreased $2,976,000 or 20.8% compared
with sales of the prior fiscal year. This decrease was primarily attributable to
a decline in sales at Tooltex, a wholly owned subsidiary substantially disposed
of in the first quarter of fiscal 2002, as well as the plastic welding equipment
product line. Other reasons for this decline included 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% during
such fiscal year.
COST OF SALES. Corresponding to the sales decline, cost of sales decreased
$1,379,000 in fiscal 2001. After excluding the effect of a $755,000 inventory
charge in cost of sales for fiscal 2001, gross profit margins increased from
36.1% in fiscal 2000 to 38.2% in fiscal 2001.
SELLING EXPENSES. In fiscal 2001, 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 the
then current volume levels.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
fiscal 2001 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,
Inc.
11
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, Inc. to PK Spur Co., whose principal
shareholders are Tooltex president, Paul Spurgeon, and Kathy Spurgeon. During
fiscal 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
transaction costs of $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
during this fiscal year was subject to floating interest rates based on LIBOR.
INTEREST AND OTHER INCOME. Interest and other income in fiscal 2001
declined principally as a result of cash being used for other working capital
needs.
PROVISION FOR 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company continued to improve its balance sheet in fiscal 2002, both in
terms of liquidity and in terms of its capital structure. Its working capital
ratio rose from 2.57 at June 30, 2001 to 4.38 at June 30, 2002. This improvement
resulted primarily from a $1,000,000 reduction in the Company's Line of Credit
facility and an increase in its cash position by $428,000. The principal reasons
for the improvement in liquidity stemmed from the sale of Tooltex and the sale
of the Company's manufacturing facility both of which took place in the early
part of the current fiscal year.
The Company's principal outside source of working capital is a $1,500,000
bank credit facility (the "Line of Credit") with Brown Brothers Harriman & Co.
(the "Bank"). The Line of Credit bears interest at the Bank's base lending rate
(4.75% at June 30, 2002). 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, 2002 was $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
and the term loans are secured by substantially all of the assets of the
Company. The credit agreement governing the Line of Credit 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.
Significant improvement was also made in the capital structure of the
Company. In August 2001, the Company entered into a sale and leaseback
arrangement for the Newtown Property, which allowed the Company to eliminate
virtually all of the its long-term debt while adding $483,000 to its cash
balances. This was a primary reason for the significant improvement in the
Company's debt/equity ratio, declining from approximately 1.2 at June 30, 2001
to 0.3 at June 30, 2002.
12
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, 2002, the Company met all such covenants.
IMPACT OF INFLATION
The Company does not believe that inflation significantly affected its
results of operations for fiscal year 2002.
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 Revenue 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 ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
and Disposal of Long-Lived Assets". SFAS 144, which establishes accounting and
reporting requirements for the impairment and disposal of long-lived assets, is
required to be adopted for fiscal years beginning after December 15, 2001.
Because earlier adoption is permissible, the Company effectively adopted the
standard as of July 1, 2001. The Company was already in compliance with SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", which was superseded by SFAS 144; consequently, the
adoption of SFAS 144 did not have a material impact on the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44
and 64, Amendment of SFAS Statement No. 13, and Technical Corrections." This
statement rescinds the following statement of SFAS 4, "Reporting Gains and
Losses from Extinguishment of Debt," and its amendment SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking Fund Requirements," as well as,
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." The statement
also amends SFAS No. 13, "Accounting for Leases", by eliminating an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. Management does not
believe that this statement will have a material impact on the results of
operations or financial conditions of the Company at the time of adoption.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This statement
supercedes the guidance provided by Emerging Issues Task Force 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 is
required to be adopted for exit or disposal activities initiated after December
31, 2002. The Company does not expect the adoption of SFAS 146 to have a
material impact on its financial statements.
13
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.
COMPANY'S STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-KSB that are not
historical fact, as well as certain information incorporated herein by
reference, constitute "forward-looking statements" made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve risks and uncertainties and often depend on
assumptions, data or methods that may be incorrect or imprecise. The Company's
future operating results may differ materially from the results discussed in, or
implied by, forward-looking statements made by the Company. Factors that may
cause such differences include, but are not limited to, those discussed below
and the other risks detailed in the Company's other reports filed with the
Securities and Exchange Commission.
Forward-looking statements give our current expectations or forecasts of
future events. You can usually identify these statements by the fact that they
do not relate strictly to historical or current facts. They often use words such
as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe,"
and other words and terms of similar meaning in connection with any discussion
of future operating or financial performance. In particular, these include
statements relating to future actions, future performance or results of current
and anticipated products, sales efforts, expenses, and financial results.
Any or all of our forward-looking statements in this Annual Report on Form
10-KSB and information incorporated by reference may turn out to be wrong. They
can be affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Many factors mentioned in this discussion - for
example, product competition and the competitive environment - will be important
in determining future results. Consequently, no forward-looking statement can be
guaranteed. Actual future results may vary materially. The Company undertakes no
obligation to revise any of these forward-looking statements to reflect events
or circumstances after the date hereof.
Other Factors That May Affect Future Results
- changes in governmental laws, regulations and accounting standards and the
enforcement thereof that may be adverse to us
- other legal factors including environmental concerns
- agency or government actions or investigations affecting the industry in
general or us in particular
- risks associated with maintaining international operations
- changes in business strategy or development plans
- business acquisitions, dispositions, discontinuations or restructurings
- availability, terms and deployment of capital
- economic factors over which we have no control, including changes in inflation
and interest rates
- the developing nature of the market for our products and technological change
- intensifying competition in the ultrasonic bonding equipment industry, and the
ultrasonic liquid processing industry
14
- success of operating initiatives
- operating costs
- advertising and promotional efforts
- the existence or absence of adverse publicity
- the possibility that adequate insurance coverage and reimbursement levels for
our products will not be available
- our dependence on outside suppliers and manufacturers
- the ability to retain management
- business abilities and judgment of personnel
- availability of qualified personnel
- labor and employee benefit costs
- unanticipated economic impacts of the September 11, 2001 terrorist attack on
the United States, any subsequent terrorists acts or of any related military
action.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
15
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 SEC within 120 days
following the end of Sonics' fiscal year ended June 30, 2002, relating to its
2002 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 SEC within 120
days following the end of Sonics' fiscal year ended June 30, 2002, relating to
its 2002 Annual Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information required by this Item 11 is incorporated herein by reference from
the definitive proxy statement of Sonics to be filed with the SEC within 120
days following the end of Sonics' fiscal year ended June 30, 2002, relating to
its 2002 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).
4(i) 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).
16
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
10-KSB 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
10-KSB 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
10-KSB 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
10-KSB for the year ended June 30, 1997).
10(xi) Lease between Registrant and Acme Realty, dated August 30,
2001 (incorporated by reference from Exhibit 10(xi) of the
Registrant's Form 10-KSB for the year ended June 30, 2001).
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(incorporated by reference from Exhibit
10(xii) of the Registrant's Form 10-KSB for the year ended
June 30, 2001).
21 Subsidiaries of the Registrant (incorporated by reference
from Exhibit (21 of the Registrants Form 10-KSB for the year
ended June 30, 1998).
b) The Company did not file any Current Reports on Form 8-K during the
quarter ended June 30, 2002.
ITEM 14. CONTROLS AND PROCEDURES
-----------------------
We currently have in place systems relating to internal controls and
procedures with respect to our financial information. Our management
periodically reviews and evaluates these internal control systems with our
independent accountants. We have completed such a review and evaluation in
connection with the preparation of this Annual Report. We have determined that
there have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to our most
recent evaluation. While we believe our internal controls and procedures are
effective, we understand that the SEC may be promulgating additional rules
relating to internal controls. We cannot provide assurance that our current
internal controls will not change in the future to reflect potential new rules
of the SEC.
17
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 30, 2002
SONICS & MATERIALS, INC.
By: /s/ ROBERT S. SOLOFF
--------------------------------------
ROBERT S. SOLOFF
CHIEF EXECUTIVE OFFICER 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, Treasurer, Chief September 30, 2002
------------------------ Executive Officer
(ROBERT S. SOLOFF)
/s/ LAUREN H. SOLOFF Secretary, Director, September 30, 2002
------------------------ Vice President
(LAUREN H. SOLOFF)
/s/ RONALD KALB Director September 30, 2002
------------------------
(RONALD KALB)
/s/ JACK T. TYRANSKY Director September 30, 2002
------------------------
(JACK T. TYRANSKY)
/s/ STEVEN A. BOWEN Chief Financial Officer September 30, 2002
------------------------
(STEVEN A. BOWEN)
18
CERTIFICATION
I, Robert S. Soloff, certify that:
1. I have reviewed this annual report on Form 10-KSB of Sonics &
Materials, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 30, 2002.
/s/ Robert S. Soloff
--------------------------
Robert S. Soloff
Chief Executive Officer
CERTIFICATION
I, Steven A. Bowen, certify that:
1. I have reviewed this annual report on Form 10-KSB of Sonics &
Materials, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 30, 2002.
/s/ Steven A. Bowen
--------------------------
Steven A. Bowen
Chief Financial Officer
19
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 Amendment No. 3
as amended . 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
4(i) Form of Warrant Agreement between Registrant and Incorporated by reference from Exhibit 4.3 of Amendment No. 3
Warrant Agent to Registration Statement No. 33-96414
10(i) Form of Employment Agreement between the Registrant Incorporated by reference from Exhibit 10.1 of Registration
and Robert S. Soloff. Statement No. 33-96414
10(ii) 1995 Incentive Stock Option Plan and form of Stock Incorporated by reference from Exhibit 10.3 of Registration
Option Agreement. Statement No. 33-96414
10(iii) Lease between Registrant and Aston Investment Incorporated by reference from Exhibit 10.5 of Registration
Associates (Aston, PA). Statement No. 33-96414
10(iv) Lease between Registrant and Janine Berger Incorporated by reference from 10.7 of Registration Statement
(Gland, Switzerland). 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 Incorporated by reference from Exhibit 10 (xii) of the
Brown Brothers Harriman & Co. and Registrant Registrant's Form 10-KSB for the year ended June 30, 1997
10(viii) Term Loan Note of Registrant, dated September 19, Incorporated by reference from Exhibit 10 (xiii) of the
1997, payable to the order of Brown Brothers Harriman Registrant's Form 10-KSB for the year ended June 30, 1997
& Co. in the original principal amount of $427,000.
10(ix) Line of Credit Note of Registrant, dated September 19, Incorporated by reference from Exhibit 10 (xiii) of the
1997, payable to the order of Brown Brothers Harriman Registrant's Form 10-KSB for the year ended June 30, 1997
& Co. in the original principal amount of $1,500,000.
10(x) General Security Agreement from Registrant to Brown Incorporated by reference from Exhibit 10 (xvii) of the
Brothers Harriman & Co. dated September 19, 1997. Registrant's Form 10-KSB for the year ended June 30, 1997
10(xi) Lease between Registrant and Acme Realty dated Incorporated by reference from Exhibit (xi) of the
August 30, 2001. Registrant's Form 10-KSB for the year ended June 30, 2001
10(xii) Stock Purchase Agreement by and between PK Spur co., Incorporated by reference from Exhibit (xii) of the
and Sonics & Materials, Inc., with Respect to 90% of Registrant's Form 10-KSB for the year ended June 30, 2001.
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 10-KSB for the year ended June 30, 1998.
20
INDEX TO FINANCIAL STATEMENTS
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 Flow F-6
Notes to Financial Statements F-7 to F-20
F-1
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 subsidiary as of June 30, 2001 and 2002, and the related
consolidated statements of income (loss), stockholders' equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 subsidiary as of June 30, 2001 and 2002, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
Schneider & Associates LLP
Jericho, New York
September 23, 2002
F-2
SONICS & MATERIALS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30,
---------------------------------
2001 2002
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 820,835 $ 1,249,245
Accounts receivable, net of allowance for doubtful
accounts of $53,470 and $24,322 in 2001 and 2002,
respectively 1,335,861 1,299,144
Inventories 3,961,383 3,675,727
Other current assets 65,788 148,780
------------ ------------
Total current assets 6,183,867 6,372,896
PROPERTY AND EQUIPMENT - net 3,754,724 251,274
OTHER ASSETS 618,925 454,126
------------ ------------
Total assets $ 10,557,516 $ 7,078,296
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - bank $ 1,190,000 $ 190,000
Current maturities of long-term debt 186,781 69,277
Accounts payable 347,580 594,354
Customer advances 147,535 168,581
Commissions payable 76,903 88,996
Accrued expenses 452,734 342,616
------------ ------------
Total current liabilities 2,401,533 1,453,824
------------ ------------
NON-CURRENT LIABILITIES
Long-term debt 3,381,460 60,967
Deferred gain on sale of real estate -- 303,061
------------ ------------
Total non-current liabilities 3,381,460 364,028
------------ ------------
Total liabilities 5,782,993 1,817,852
------------ ------------
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, 2001 and 2002 105,603 105,603
Additional paid-in capital 6,575,010 6,575,010
Accumulated deficit (1,906,090) (1,420,169)
------------ ------------
Total stockholders' equity 4,774,523 5,260,444
------------ ------------
Total liabilities and stockholders' equity $ 10,557,516 $ 7,078,296
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SONICS & MATERIALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended June 30,
---------------------------------
2001 2002
------------ ------------
Net sales $ 11,347,937 $ 9,274,227
Cost of sales 7,767,931 5,684,741
------------ ------------
Gross profit 3,580,006 3,589,486
------------ ------------
Operating expenses:
Selling 2,477,305 1,835,052
General and administrative 1,340,930 923,050
Research and development 410,346 402,041
Loss on assets held for sale 1,016,094 --
------------ ------------
Total operating expenses 5,244,675 3,160,143
------------ ------------
Operating income (loss) (1,664,669) 429,343
------------ ------------
Other income (expense):
Interest expense (359,715) (121,623)
Interest and other income 19,906 66,201
------------ ------------
Total other income (expense) (339,809) (55,422)
------------ ------------
Income (loss) before income taxes (2,004,478) 373,921
Income tax expense (benefit) 73,737 (112,000)
------------ ------------
Net income (loss) $ (2,078,215) $ 485,921
============ ============
Per share:
Basic and diluted:
Net income (loss) $ (.59) $ .14
============ ============
Shares used in basic and diluted per share computations 3,520,100 3,520,100
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SONICS & MATERIALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended June 30, 2001 and 2002
Common Stock
Additional
Par Paid-in Accumulated Stockholders'
Shares Value Capital Deficit Equity
------ ----- ------- ------- ------
Balances - July 1, 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
Net income -- -- -- 485,921 485,921
----------- ----------- ----------- ----------- -----------
Balances - June 30, 2002 3,520,100 $ 105,603 $ 6,575,010 $(1,420,169) $ 5,260,444
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SONICS & MATERIALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
-------------------------------
Increase (decrease) in cash and cash equivalents 2001 2002
----------- -----------
Cash flows from operating activities
Net income (loss) $(2,078,215) $ 485,921
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation 162,623 80,616
Amortization of goodwill 55,503 --
Loss on assets held for sale 989,362 --
Reserves and allowances 730,844 (185,202)
Gain on sale of real estate -- (33,674)
Decrease (increase) in:
Accounts receivable 1,160,195 65,865
Inventories (222,237) 733,500
Other current assets 15,229 (82,992)
Prepaid income taxes (9,951) --
Deferred income taxes 75,048 --
Other assets 104,540 (66,744)
Increase (decrease) in:
Accounts payable (199,840) 246,773
Customer advances 45,503 21,046
Commissions payable (117,087) 12,093
Accrued expenses (113,118) (110,118)
----------- -----------
Net cash provided by operating activities 598,399 1,167,084
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (59,311) (56,201)
Sale of property and equipment -- 3,755,523
----------- -----------
Net cash provided by (used in) investing activities (59,311) 3,699,322
----------- -----------
Cash flows from financing activities:
Payments of note payable - bank (100,000) (1,000,000)
Payments of long-term debt (289,932) (3,384,037)
Payments of capital lease obligations (57,314) (53,959)
----------- -----------
Net cash used in financing activities (447,246) (4,437,996)
----------- -----------
Net increase in cash and cash equivalents 91,842 428,410
Cash and cash equivalents at beginning of year 728,993 820,835
----------- -----------
Cash and cash equivalents at end of year $ 820,835 $ 1,249,245
=========== ===========
Supplemental information:
Cash paid during the period for:
Interest $ 400,415 $ 143,574
=========== ===========
Income taxes $ 2,595 $ 16,003
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
NOTE A - BUSINESS
Sonics & Materials, Inc. (the "Company") is a manufacturer and
distributor of ultrasonic assembly and liquid processing machinery
and equipment. Sales are made throughout the United States, Europe,
Asia, South America and Australia. The Company's headquarters and
principal manufacturing operations are located in Newtown,
Connecticut. The Company operates in one business segment.
The Company also manufactured automated systems used in the plastics
industry through its subsidiary, Tooltex, Inc. which is located in
Grove City, Ohio. In August 2001, the Company completed the sale of
a 90% interest in Tooltex, Inc. (see Note C).
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
These financial statements include the accounts of the Company for
the entire year and Tooltex, Inc. through August 21, 2001. 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 the straight-line
method is designed to amortize the cost of various classes of assets
over their estimated useful lives, ranging generally from five to
seven years. Expenditures for replacements are capitalized and the
replaced items are retired. Maintenance and repairs are expensed as
incurred.
F-7
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
Use of Estimates
Preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States
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,
inventory reserves 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.
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.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other
Intangible Assets". SFAS 142 eliminates goodwill amortization,
provides guidance and requirements for periodic impairment testing
of goodwill and discusses the treatment of other intangible assets.
Adoption of the standard is required for fiscal years beginning
after December 15, 2001. However, because earlier adoption is
permissible, the Company adopted the standard effective July 1,
2001. During the fourth quarter of fiscal 2001, the Company recorded
impairment charges of $874,000 for unamortized goodwill and $115,000
for undepreciated fixed assets. The charges were based on the
anticipated selling price of 90% of the Company's interest in its
Tooltex, Inc. subsidiary (see Note C).
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.
F-8
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
Deferred tax assets are reduced by a valuation allowance if, based
on the weight of available evidence, it is more likely than not that
all or some portion of the deferred tax assets will not be realized.
The ultimate realization of the deferred tax asset depends on the
Company's ability to generate sufficient taxable income in the
future.
Stock options
Under SFAS No. 123, "Accounting for Stock-based Compensation", the
Company must either recognize in its financial statements costs
related to its employee stock-based compensation plans, such as
stock option plans, using the fair value method, or make pro forma
disclosures of such costs in a footnote to the financial statements.
The Company has elected to continue to use the intrinsic value-based
method of APB Opinion No. 25, as allowed under SFAS No. 123, to
account for its employee stock-based compensation plans, and to
include the required pro forma disclosures based on fair value
accounting.
Earnings per share
Basic net income per share is calculated by dividing net income by
the weighted-average number of common shares outstanding during the
period. Diluted net income per share is calculated by dividing net
income by the weighted-average number of common shares outstanding
plus the weighted-average number of net shares that would be issued
upon exercise of stock options using the treasury stock method.
The following securities have been excluded from the dilutive per
share computation as they are antidilutive:
Years ended June 30,
2001 2002
---- ----
Stock options 346,366 331,366
======= =======
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, 2001 and 2002 consisted of money market funds.
F-9
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
Revenue Recognition
Revenue is recognized upon the shipment of finished merchandise to
customers.
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.
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 $112,000 and $83,000
for the years ended June 30, 2001 and 2002, respectively.
New Accounting Pronouncements
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets". SFAS 144, which
establishes accounting and reporting requirements for the impairment
and disposal of long-lived assets, is required to be adopted for
fiscal years beginning after December 15, 2001. Because earlier
adoption is permissible, the Company effectively adopted the
standard as of July 1, 2001. The Company was already in compliance
with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of", which was superseded
by SFAS 144; consequently, the adoption of SFAS 144 did not have a
material impact on the Company.
F-10
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No.
4, 44 and 64, Amendment of SFAS Statement No. 13, and Technical
Corrections." This statement rescinds the following statement of
SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt,"
and its amendment SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking Fund Requirements," as well as, SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." The statement
also amends SFAS No. 13, "Accounting for Leases", by eliminating an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002. Management does not believe that
this statement will have a material impact on the results of
operations or financial condition of the Company at the time of
adoption.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This statement supercedes
the guidance provided by Emerging Issues Task Force 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS 146 is required to be adopted for exit or
disposal activities initiated after December 31, 2002. The Company
does not expect the adoption of SFAS 146 to have a material impact
on its financial statements.
NOTE C - 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 changed 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 $90,000 (unaudited) during fiscal 2001 and 2002,
respectively; and a net loss of approximately $219,000 (unaudited)
and $25,000 (unaudited) during fiscal 2001 and fiscal 2002,
respectively.
F-11
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
In connection with the sale of Tooltex, the Company adjusted the net
assets of Tooltex to their estimated net realizable values in
the fiscal 2001 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 writedown through cost
of sales of approximately $314,000 and a bad debt charge through
general and administrative expenses of $35,000.
NOTE D - INVENTORIES
Inventories consist of the following:
June 30,
----------------------------
2001 2002
---------- ----------
Raw materials $ 898,284 $ 739,144
Work-in-process 1,890,542 1,647,536
Finished goods 1,172,557 1,289,047
---------- ----------
$3,961,383 $3,675,727
========== ==========
Inventories at June 30, 2001 and 2002 are stated net of reserves for
excess and obsolete inventory, of $441,000 and $137,000,
respectively. Reserve activity is recorded through cost of sales.
NOTE E - PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
June 30,
----------------------------
2001 2002
---------- ----------
Land $ 462,486 $ --
Building 3,219,205 --
Machinery and equipment 943,148 948,082
Tooling 146,482 153,632
Office furniture and equipment 308,663 310,271
Transportation equipment 60,441 60,441
Data processing equipment 618,673 654,027
---------- ----------
5,759,098 2,126,453
Less: Accumulated depreciation 2,004,374 1,875,179
---------- ----------
$3,754,724 $ 251,274
========== ==========
Depreciation expense was $162,623 and $80,616 in fiscal 2001 and
2002, respectively.
F-12
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
On August 31, 2001, the Company sold its Newtown, Connecticut
property (see Note F).
NOTE F - 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 expenses of
$244,000. 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 connection 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. The
Company recorded a deferred gain on the sale of $337,000, which is
being amortized over the lease term. Amortization totaled $33,674 in
fiscal 2002.
NOTE G - OTHER ASSETS
At June 30, 2001 and 2002, the major components of Other Assets
were:
June 30,
-----------------------
2001 2002
-------- --------
Demonstration equipment - net of
accumulated depreciation of $99,554
and $138,171 in 2001 and 2002,
respectively $364,192 $178,828
Other 254,733 275,298
-------- --------
$618,925 $454,126
======== ========
Demonstration equipment is carried at cost less accumulated
depreciation. Depreciation is provided for using the straight-line
method 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, 2001 and 2002, the major components of accrued expenses
were:
June 30,
------------------------
2001 2002
-------- --------
Accrued compensation $287,546 $234,851
Professional fees 63,542 35,500
Other accruals 101,646 72,265
-------- --------
$452,734 $342,616
======== ========
F-13
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
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
(4.75% at June 30, 2002). 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,
-------------------------------
2001 2002
----------- -----------
(a) Industrial Revenue Bonds $ 3,308,684 $ --
(b) Bank term loan 100,471 25,117
(c) Capital lease obligations 159,086 105,127
----------- -----------
3,568,241 130,244
Less: Current portion (186,781) (69,277)
----------- -----------
Long-term debt $ 3,381,460 $ 60,967
=========== ===========
(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 was payable at the rate of 75% of
the bank's base lending rate. Principal was payable in 228 equal
installments of $16,711 commencing in January 1999. The bonds
were repaid from the proceeds of the sale of the Company's
Newtown, Connecticut property in August 2001 (see Note F).
(b) Term loan in the original amount of $427,000. The loan, as
amended on July 21, 1998, is payable in nine monthly
installments of $11,861 through July 1, 1998, fifty-one monthly
installments of $6,269, and a final payment of the remaining
principal balance on October 1, 2002. The loan bears interest at
the bank's base lending rate (4.75% at June 30, 2002).
(c) The Company has entered into two equipment leases which qualify
for capitalization under applicable accounting guidelines. The
leases expire at various dates through 2005.
F-14
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
Indebtedness under the Company's line of credit and the term loans
are secured by substantially all of the assets of the Company. A
first mortgage lien on the Company's Newtown, CT property was
released in August 2001 when the property was sold. 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.
The aggregate maturities of long-term debt are as follows:
Year ending
June 30,
--------
2003 $ 69,277
2004 31,889
2005 29,078
--------
$130,244
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, 2002, there were 204,000 shares available for future grant under
the Plan.
F-15
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
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.
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 consistent with the provisions of SFAS No. 123, net (loss)
income would have (increased) decreased by approximately $(4,800)
and $3,300, in fiscal 2001 and 2002, respectively, with no material
impact on income (loss) per share in either period.
There were no option grants in 2001 and 2002.
For the two years ended June 30, 2002, option activity was as
follows:
Weighted-
Average
Number Exercise
of Shares Price
--------- -----
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
Canceled (15,000) 1.35
-------------------------------------------------------------
Outstanding at June 30, 2002 331,366 $ .95
=============================================================
F-16
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
The following table summaries information about stock options
outstanding at June 30, 2002:
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 50,976 $ .46 2.0 years 44,309 $ .48
1.03 - 1.44 280,390 1.04 2.5 years 279,057 1.04
------- -------
331,366 $ .95 323,366 $ .92
======= =======
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 2011.
The following is a schedule of future minimum lease payments for
operating leases as of June 30, 2002:
Year ending
June 30,
--------
2003 $ 343,033
2004 316,816
2005 326,522
2006 336,302
2007 346,452
Thereafter 1,557,388
----------
Total $3,226,513
==========
Rental expense for operating leases totaled approximately $205,000
and $463,506 for the years ended June 30, 2001 and 2002,
respectively.
F-17
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
NOTE L - INCOME TAXES
The components of the provision for income taxes (income tax
benefit) are as follows:
Years ended June 30,
---------------------------
2001 2002
--------- ---------
Current
Federal $ (37,206) $ --
State 40,289 24,000
--------- ---------
3,083 24,000
--------- ---------
Deferred:
Federal 70,654 (136,000)
State -- --
--------- ---------
70,654 (136,000)
--------- ---------
Total tax provision (income
tax benefit) $ 73,737 $(112,000)
========= =========
The tax effect of temporary differences which give rise to deferred
tax assets and liabilities are as follows:
June 30,
----------------------
2001 2002
--------- ---------
Deferred tax assets:
Capital loss on Tooltex disposition $ 468,447 $ 370,215
Deferred gain on real estate -- 103,041
Accrued expenses -- 12,446
Allowance for doubtful accounts 30,080 8,269
Inventories 229,960 52,374
--------- ---------
Total deferred tax assets 728,487 546,345
Deferred tax liabilities:
Accumulated depreciation -- 40,130
--------- ---------
Subtotal 728,487 506,215
Less: Valuation allowance (728,487) (370,215)
--------- ---------
Net deferred tax assets $ -- $ 136,000
========= =========
F-18
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
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
consisted primarily of writedowns related to the subsequent sale of
Tooltex, inventory reserves, and allowances for doubtful accounts.
During fiscal 2002, based on the Company's return to profitability,
management reversed a portion of the valuation allowance, but
maintained the reserve on the Company's capital loss carryforward
resulting in a $112,000 income tax benefit.
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,
--------------------------
2001 2002
--------- ---------
Provision for federal income
taxes at the statutory rate $(683,776) $ 126,960
State and local taxes, net of
federal tax effect 17,975 33,936
Nondeductible expenses 11,051 6,650
Valuation allowance 728,487 (280,070)
Other -- 524
--------- ---------
Actual provision for income taxes
(income tax benefit) $ 73,737 $(112,000)
========= =========
NOTE M - 401(k) AND PROFIT SHARING PLANS
The Company has a 401(k) plan for eligible employees. Under
provisions of the plan, eligible employees may elect to contribute
up to 15% of their annual compensation. In addition, the plan
provides for the Company to make additional contributions at its
discretion of up to 4% of each participant's annual compensation.
Expenses under the 401(k) plan were approximately $33,000 and
$20,693 for the years ended June 30, 2001 and 2002, 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 $4,226 and $58,080
for the years ended June 30, 2001 and 2002, respectively.
F-19
SONICS & MATERIALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
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.
Net sales by geographic area are as follows:
Years ended June 30,
--------------------------------
2001 2002
----------- -----------
United States $ 8,761,000 $ 6,781,000
Europe 1,143,000 812,000
Asia/Pacific Rim 936,000 1,056,000
Canada and Mexico 286,000 411,000
Other 222,000 214,000
----------- -----------
$11,348,000 $ 9,274,000
=========== ===========
Foreign sales are generally denominated in U. S. dollars. Currency
gains and losses were immaterial in fiscal 2001 and 2002.
NOTE O - RELATED PARTY TRANSACTIONS
Prior to the disposition of Tooltex in August 2001, the Company
leased manufacturing facilities in Ohio from an entity owned by
Tooltex stockholders. During the years ended June 30, 2001 and 2002,
the Company incurred rent expense on this property of $84,320 and
$7,027, respectively.
NOTE P - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Charged to Deduction Balance
beginning costs and from at end of
of period expenses reserve period
------- -------- ------- ------
Year ended June 30, 2002 53,470 24,242 53,390 (a) 24,322
Year ended June 30, 2001 88,470 21,939 21,939 (a) 53,470
35,000 (b)
(a) Amounts represent uncollectible accounts charged off.
(b) Amount represents reversal of Tooltex reserve upon disposition.
F-20