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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-QSB
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(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 0-20753
SONICS & MATERIALS, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 06-0854713
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
53 CHURCH HILL ROAD
NEWTOWN, CONNECTICUT 06470
(Address of principal executive offices)
TELEPHONE NUMBER (203) 270-4600
(Issuer's telephone number, including area code)
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 [ ]
As of November 14, 2001, there were 3,520,100 shares of the Registrant's
common stock outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
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PAGE
PART I - FINANCIAL INFORMATION NO.
Item 1. Financial Statements *
Consolidated Condensed Balance Sheets -
September 30, 2001 and June 30, 2001..............................3
Consolidated Condensed Statements of Operations -
For the Three Months Ended September 30,
2001 and 2000.....................................................4
Consolidated Condensed Statements of Cash Flows -
For the Three Months Ended September 30,
2001 and 2000.....................................................5
Notes to Consolidated Condensed Financial Statements..................6
Item 2. Management's Discussion and Analysis or Plan of Operations...........8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................10
SIGNATURES....................................................................11
INDEX TO EXHIBITS.............................................................12
* The Balance Sheet at June 30, 2001 has been taken from the audited financial
statements at that date. All other financial statements are unaudited.
SONICS & MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
As of
September 30, June 30,
2001 2001
------------ ------------
(Unaudited) *
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 1,080,715 $ 820,835
Accounts receivable, net of allowance for doubtful
accounts of $53,470 at September 30, 2001 and
June 30, 2001 1,371,228 1,335,861
Inventories 3,834,862 3,961,383
Other current assets 26,975 65,788
------------ ------------
Total current assets 6,313,780 6,183,867
PROPERTY PLANT & EQUIPMENT - NET 586,723 3,754,724
OTHER ASSETS 214,521 618,925
------------ ------------
$ 7,115,024 $ 10,557,516
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Note payable - bank $ 790,000 $ 1,190,000
Current maturities of long-term debt 132,243 186,781
Accounts payable 345,066 347,580
Customer advances 249,731 147,535
Commissions payable 72,994 76,903
Accrued expenses 284,460 452,734
------------ ------------
Total current liabilities 1,874,494 2,401,533
LONG-TERM DEBT 94,322 3,381,460
DEFERRED GAIN ON SALE OF REAL ESTATE 328,317 --
------------ ------------
Total liabilities 2,297,133 5,782,993
STOCKHOLDERS' EQUITY
Common stock - par value $.03 per share; authorized,
10,000,000 shares; issued and outstanding, 3,520,100
shares at September 30, 2001 and June 30, 2001 105,603 105,603
Additional paid in capital 6,575,010 6,575,010
Retained earnings (accumulated deficit) (1,862,722) (1,906,090)
------------ ------------
Total stockholders' equity 4,817,891 4,774,523
------------ ------------
$ 7,115,024 $ 10,557,516
============ ============
* Taken from the audited financial statements at June 30, 2001.
The accompanying notes are an integral part of these statements.
3
SONICS & MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended
September 30,
------------------------------
2001 2000
------------ ------------
Net sales $ 2,128,334 $ 2,803,316
Cost of sales 1,310,893 1,724,145
------------ ------------
Gross profit 817,441 1,079,171
------------ ------------
Operating expenses
Selling expense 388,143 684,740
General and administrative 226,474 282,272
Research and development 95,597 101,655
------------ ------------
Total operating expenses 710,214 1,068,667
------------ ------------
Operating income (loss) 107,227 10,504
Other income (expense)
Gain on sale of real estate 8,418
Interest expense (87,408) (114,046)
Interest and other Income 15,131 11,831
------------ ------------
(63,859) (102,215)
------------ ------------
Income (loss) before provision for
income taxes 43,368 (91,711)
Provision for income taxes -- --
------------ ------------
Net income (loss) $ 43,368 $ (91,711)
============ ============
BASIC INCOME (LOSS) PER SHARE
Net income (loss) per share $ 0.01 $ (.03)
------------ ------------
Weighted average number of shares
outstanding 3,520,100 3,520,100
------------ ------------
4
SONICS & MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
For the Three Months Ended September 30,
2001 2000
------------ ------------
Net cash provided by (used in) operations $ 219,728 $ (98,245)
Net cash provided by (used in) investing activities 3,781,828 (40,525)
Net cash used in financing activities (3,741,676) (87,301)
------------ ------------
Net increase (decrease) in cash for the period 259,880 (226,071)
Cash and cash equivalents - at beginning of period 820,835 719,183
------------ ------------
Cash and cash equivalents - at end of period $ 1,080,715 $ 493,112
============ ============
Cash paid during period for:
Interest $ 66,181 $ 114,046
============ ============
Income taxes $ -- $ --
============ ============
5
SONICS & MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying financial statements for the interim periods are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. These
financial statements should be read in conjunction with the financial statements
and notes thereto, together with the management's discussion and analysis,
contained on Form 10-KSB for the year ended June 30, 2001. The results of
operations for the three months ended September 30, 2001 are not necessarily
indicative of the results for the entire fiscal year ending June 30, 2002.
The accompanying financial statements reflect the consolidated operations of
Sonics & Materials, Inc., and its wholly-owned subsidiary Tooltex, Inc. through
the date of the sale of 90% of the common stock of Tooltex, Inc. on August 21,
2001. All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2: 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 $90,000 and a net loss of approximately $25,000
in the quarter ended September 30, 2001.
NOTE 3: 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 conjunction with the sale, the
Company entered into a triple net lease with Acme for an initial term of ten
years plus two five-year renewal options. The Company recorded a deferred gain
on the sale of $337,000, which will be amortized over the lease term.
Following is a schedule of minimum lease payments due under the operating lease
for the property:
Years ending June 30,
2002 $ 328,292
2003 323,185
2004 316,813
2005 326,522
2006 336,304
thereafter 1,903,843
----------
$3,534,959
----------
6
NOTE 4: NET INCOME PER SHARE
Net income per share is based on the weighted average number of common and
common equivalent shares outstanding during the period, calculated using the
treasury stock method. Stock options are antidilutive for all periods and
accordingly, are not included in the per share computations.
NOTE 5: LOAN COVENANTS
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 and
1.40 on a trailing six-month basis, a minimum tangible net worth of at least
$5,150,000 and a maximum leverage ratio of 1.50. At September 30, 2001, the
Company was in violation of the trailing six-month fixed charge coverage ratio
test and the minimum tangible net worth requirement. The bank has provided a
waiver of these violations as of September 30, 2001.
7
Any statements in this filing that are not statements of historical fact are
forward-looking statements that are subject to a number of important risks and
uncertainties that could cause actual results to differ materially.
Specifically, any forward looking statements in this filing related to the
Company's objectives for future growth, profitability and financial returns are
subject to a number of risks and uncertainties, including, but not limited to,
risks related to a growing market demand for Sonics' existing and new products,
continued growth in sales and market share of Sonics and its Ultra Sonic Seal
line of products, pricing, market acceptance of existing and new products, a
fluctuation in the sales product mix, general economic conditions, competitive
products, and product technology development. There can be no assurance that
such objectives will be achieved.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with the unaudited
financial statements included herein, see Item 1, and the financial information
contained in the Company's latest annual report on Form 10-KSB for the year
ended June 30, 2001.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
During the current fiscal quarter, the Company sold 90% of its wholly-owned
subsidiary, Tooltex, Inc. This transaction affects the comparison of all
components of the income statement since Tooltex, Inc. activity is included in
the first quarter of fiscal 2001 whereas its activity in the current fiscal
quarter is included only through the date of sale which was August 21, 2001.
Tooltex reported sales of approximately $90,000 and a net loss of approximately
$25,000 in the quarter ended September 30, 2001.
NET SALES. Overall, net sales declined 24.1% compared with the first quarter of
fiscal year 2000. The drop in sales was caused by both a weakening economy,
which specifically impacted the plastics welding product line, as well as the
reduction in Tooltex, Inc. revenue due to the sale of that subsidiary in August
2001.
COST OF SALES AND GROSS PROFITS. Gross profits declined $262,000 in the current
quarter. The same factors affecting net sales carried through to resulting gross
profits. Gross profit margins were maintained at the same overall levels as
existed in the first quarter of fiscal year 2001.
SELLING EXPENSES. Selling expenses declined 43.3% in the current fiscal quarter
compared with the the first quarter of fiscal year 2001. Reductions in the sales
force during the prior fiscal year as well as significant reductions in
commissions, advertising and trade show expenses accounted for most of this
decline.
GENERAL & ADMINISTRATIVE EXPENSES.
A decline of $56,000 or 19.8% took place during the current fiscal quarter
compared with the first quarter of fiscal year 2001. Most of this reduction is
due to the sale of the Company's wholly-owned subsidiary, Tooltex, Inc. in
August 2001.
RESEARCH AND DEVELOPMENT EXPENSES. This category of operating expense did not
change significantly between the two reported periods.
OPERATING INCOME. Operating income for the current quarter increased $11,000 in
last year's comparable quarter to $107,000 in the current period. The principal
reason for this improvement was the reduction of expenses which more than offset
the decline in sales.
OTHER INCOME (EXPENSE). Gains in other income resulted from the interest rate
declines (from a prime rate of 9.5% during the first quarter of the prior fiscal
year to 6% by the end of the current quarter) and the elimination of Industrial
Revenue Bond indebtedness relating to the real estate sold in August 2001.
8
LIQUIDITY AND CAPITAL RESOURCES
The benefits resulting from the Company's continuing expense reduction program,
the sale of its manufacturing facility in Newtown, CT, and the sale of Tooltex,
Inc., became more fully realized by the end of the first quarter of fiscal year
2002. Several positive results have been achieved, which are evident in
comparing the September 30, 2001 balance sheet with the balance sheet at the
close of the previous quarter. Specifically, the Company's debt/equity ratio
improved significantly during this quarter, declining from 1.2x at June 30, 2001
to 0.4x at September 30, 2001. In addition, working capital levels increased by
approximately $657,000 raising the current ratio from 2.6x at June 30, 2001 to
3.4x in the current quarter.
The Company's principal outside source of working capital is a $1,500,000 bank
credit facility (the "Line of Credit"). The Line of Credit bears interest at the
bank's base lending rate (6% at September 30, 2001). Advances under the Line of
Credit are at the bank's sole discretion. The entire principal balance of the
Line of Credit, which at September 30, 2001 was $790,000, 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 loan are secured by
substantially all of the assets of the Company. 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,
leverage and fixed charge coverage ratios, as defined.
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, a minimum tangible net worth of at
least $5,150,000 and a maximum leverage ratio of 1.50. At September 30, 2001,
the Company was in violation of the trailing six-month fixed charge coverage
ratio test and the minimum tangible net worth requirement. The bank has provided
a waiver of these violations as of September 30, 2001.
IMPACT OF INFLATION
The Company does not believe that inflation significantly affected its results
of operations for the current fiscal quarter.
MARKET RISK
The Company does not hold or trade derivative instruments. Financial instruments
subject to changes in interest rates consist primarily of floating rate debt.
Due to the repayment in August 2001 of its Industrial Development Bonds, the
Company's exposure to interest rate fluctuations is not material. The Company's
transactions are generally conducted and its accounts are denominated in U.S.
dollars. Consequently, exposure to foreign risk is not significant.
RECENTLY ISSUED PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
addressed the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 141 requires the
purchase method of accounting to be used for business combinations initiated
after June 30, 2001 and eliminates the pooling of interest method. The adoption
of this statement is not expected to have a material impact on the Company's
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addressed the recognition and measurement of goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 also addressed
the initial recognition and measurement of intangible assets acquired outside of
a business combination whether acquired individually or with a group of other
assets. SFAS No. 142 provides that intangible assets with finite useful lives be
amortized and that intangible assets with indefinite lives and goodwill will not
be amortized, but will rather be tested at least annually for impairment.
Although SFAS No. 142 is not required to be adopted by the Company until fiscal
2003, its provisions must be applied to goodwill and other intangible assets
acquired after June 30, 2001. As of September 30, 2001, the Company does not
have any goodwill or other intangible assets relating to business combinations
that were accounted for under APB Opinion No. 16. Accordingly, the adoption of
SFAS No. 142 is not expected to have a material impact on the Company's
financial position or results of operations.
9
Item 6. Exhibits and Reports on Form 8K.
(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).
10(i) Form of Employment Agreement between the Registrant and Robert S.
Soloff (incorporated by reference from Exhibit 10.1 of
Registration Statement No. 33-96414).
10(ii) 1995 Incentive Stock Option Plan and form of Stock Option
Agreement (incorporated by reference from Exhibit 10.3 of
Registration Statement No. 33-96414).
10(iii) Lease between Registrant and Aston Investment Associates
(Aston, PA) (incorporated by reference from Exhibit 10.5 of
Registration Statement No. 33-96414).
10(iv) Lease between Registrant and Janine Berger (Gland, Switzerland)
(incorporated by reference from Exhibit 10.7 of Registration
Statement No. 33-96414).
10(v) Form of Sales Representation Agreement (incorporated by reference
from Exhibit 10.8 of Registration Statement No. 33-96414).
10(vi) Form of Sales Distribution Agreement (incorporated by reference
from Exhibit 10.9 of Registration Statement No. 33-96414).
10(vii) Credit Agreement, dated September 19, 1997, between Brown
Brothers Harriman & Co. and Registrant ( incorporated by
reference from Exhibit 10(xii) of the Registrant's Form 10KSB for
the year ended June 30, 1997).
10(viii) Term Loan Note of Registrant, dated September 19, 1997,
payable to the order of Brown Brothers Harriman & Co. in the
original principal amount of $427,000 (incorporated by reference
from Exhibit 10(xiii) of the Registrants Form 10KSB for the year
ended June 30, 1997).
10(ix) Line of Credit Note of Registrant, dated September 19, 1997,
payable to the order of Brown Brothers Harriman & Co. in the
original principal amount of $1,500,000 (incorporated by
reference from Exhibit 10(xiv) of the Registrants Form 10KSB for
the year ended June 30, 1997).
10(x) General Security Agreement from Registrant to Brown Brothers
Harriman & Co. dated September 19, 1997 (incorporated by
reference from Exhibit 10(xvii) of the Registrants Form 10KSB for
the year ended June 30, 1997).
10(xi) Lease between Registrant and Acme Realty, dated August 30,
2001(incorporated by reference from 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 Registrant's Form 10KSB
for the year ended June 30, 2001).
(b)
On August 27, 2001, the Company filed a Current Report on Form 8-K
announcing the sale of 90% of the Common Stock of Tooltex to PK Spur, Co.
On August 31, 2001, the Company filed a Current Report on Form 8-K
announcing the Sale-Leaseback of the Company's Newtown, Connecticut
Manufacturing Facility.
On September 14, 2001, the Company filed a Current Report on Form
8-K disclosing the disposition of its facility in Newtown, Connecticut.
10
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SONICS & MATERIALS, INC.
Date: November 14, 2001 By /s/ ROBERT S. SOLOFF
----------------- -----------------------------------
Robert S. Soloff
President, Chief Executive Officer,
Chief Financial Officer
11
EXHIBIT INDEX
LOCATION OF EXHIBIT IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL NUMBERING SYSTEM
----------- ----------- ---------------------------
3(i) Certificate of Incorporation of the Registrant, Incorporated by reference from Exhibit 3.1 of
as amended. Amendment No. 3 to Registration Statement No.
33-96414
3(ii) Amended By-laws of the Registrant. Incorporated by reference from Exhibit 3.2 of
Registration Statement No. 33-96414
10(i) Form of Employment Agreement between the Incorporated by reference from Exhibit 10.1 of
Registrant and Robert S. Soloff. Registration Statement No. 33-96414
10(ii) 1995 Incentive Stock Option Plan and form of Incorporated by reference from Exhibit 10.3 of
Stock Option Agreement. Registration Statement No. 33-96414
10(iii) Lease between Registrant and Aston Investment Incorporated by reference from Exhibit 10.5 of
Associates (Aston, PA). Registration Statement No. 33-96414
10(iv) Lease between Registrant and Janine Berger Incorporated by reference from EXHIBIT 10.7 of
(Gland, Switzerland). Registration Statement No. 33-96414
10(v) Form of Sales Representation Agreement. Incorporated by reference from Exhibit 10.8 of
Registration Statement No. 33-96414
10(vi) Form of Sales Distribution Agreement. Incorporated by reference from Exhibit 10.9 of
Registration Statement No. 33-96414
10(vii) Credit Agreement, dated September 19, 1997, Incorporated by reference from Exhibit 10 (xii)
between Brown Brothers Harriman & Co. and of the Registrant's Form 10-KSB for the year
Registrant ended June 30, 1997
10(viii) Term Loan Note of Registrant, dated September Incorporated by reference from Exhibit 10
19, 1997, payable to the order of Brown (xiii) of the Registrant's Form 10-KSB for the
Brothers Harriman & Co. in the original year ended June 30, 1997
principal amount of $427,000.
10(ix) Line of Credit Note of Registrant, dated Incorporated by reference from Exhibit 10
September 19, 1997, payable to the order of (xiii) of the Registrant's Form 10-KSB for the
Brown Brothers Harriman & Co. in the original year ended June 30, 1997
principal amount of $1,500,000.
10(x) General Security Agreement from Registrant to Incorporated by reference from Exhibit 10
Brown Brothers Harriman & Co. dated September (xvii) of the Registrant's Form 10-KSB for the
19, 1997. year ended June 30, 1997
10(xi) Lease between Registrant and Acme Realty dated Incorporated by reference from Registrant's
August 30, 2001. Form 10-KSB for the year ended June 30, 2001.
Incorporated by reference from Registrant's
10(xii) Stock Purchase Agreement by and between PK Spur Form 10-KSB for the year ended June 30, 2001.
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
12