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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
53 CHURCH HILL ROAD
NEWTOWN, CONNECTICUT 06470
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(Address of principal executive offices)
TELEPHONE NUMBER (203) 270-4600
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(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 February 8, 2002, 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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PART I - FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements *
Consolidated Condensed Balance Sheets -
December 31, 2001 and June 30, 2001...................3
Consolidated Condensed Statements of Operations -
For the Three and Six Months Ended
December 31, 2001 and 2000............................4
Consolidated Condensed Statements of Cash Flows -
For the Six Months Ended
December 31, 2001 and 2000............................5
Notes to Consolidated Condensed Financial Statements........6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...........................10
SIGNATURES.................................................................11
* The Balance Sheet at June 30, 2001 has been taken from the audited financial
statements at that date. All other financial statements are unaudited.
2
Sonics & Materials, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
As of
December 31, June 30,
2001 2001
------------ ------------
(Unaudited) *
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,179,488 $ 820,835
Accounts receivable, net of allowance for doubtful
accounts of $35,793 at December 31, 2001 and
$53,470 at June 30, 2001 1,377,764 1,335,861
Inventories 3,649,357 3,961,383
Other current assets 61,844 65,788
------------ ------------
Total current assets 6,268,453 6,183,867
PROPERTY PLANT & EQUIPMENT - NET 488,934 3,754,724
OTHER ASSETS 235,193 618,925
------------ ------------
Total Assets $ 6,992,580 $ 10,557,516
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - bank $490,000 $1,190,000
Current maturities of long-term debt 110,035 186,781
Accounts payable 494,884 347,580
Customer advances 33,267 147,535
Commissions payable 96,455 76,903
Accrued expenses 333,201 452,734
------------ ------------
Total current liabilities 1,557,842 2,401,533
LONG-TERM DEBT 97,855 3,381,460
DEFERRED GAIN ON SALE OF REAL ESTATE 319,898 -
------------ ------------
Total liabilities 1,975,595 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 December 31, 2001
and June 30, 2001 105,603 105,603
Additional paid in capital 6,575,010 6,575,010
Retained earnings (accumulated deficit) (1,663,628) (1,906,090)
------------ ------------
Total stockholders' equity 5,016,985 4,774,523
------------ ------------
Total liabilities and stockholders' equity $ 6,992,580 $ 10,557,516
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* 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 For the Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2001 2000 2001 2000
---------------------------- ----------------------------
Net sales $ 2,596,860 $ 2,926,626 $ 4,725,194 $ 5,729,942
Cost of sales 1,584,167 1,903,870 2,895,060 3,628,015
------------ ------------ ------------ ------------
Gross profit 1,012,693 1,022,756 1,830,134 2,101,927
------------ ------------ ------------ ------------
Operating expenses
Selling expense 463,235 758,448 851,378 1,443,188
General and administrative 211,976 332,379 438,450 614,651
Research and development 104,062 89,430 199,659 191,085
------------ ------------ ------------ ------------
Total operating expenses 779,273 1,180,257 1,489,487 2,248,924
------------ ------------ ------------ ------------
Operating income (loss) 233,420 (157,501) 340,647 (146,997)
Other income (expense)
Gain on sale of real estate 8,419 - 16,837 -
Interest expense (10,349) (103,612) (97,757) (217,658)
Other income (expense) (3,463) 5,929 11,668 17,760
------------ ------------ ------------ ------------
(5,393) (97,683) (69,252) (199,898)
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes 228,027 (255,184) 271,395 (346,895)
Provision for income taxes 28,933 - 28,933 -
------------ ------------ ------------ ------------
Net income (loss) $ 199,094 ($ 255,184) $ 242,462 ($ 346,895)
============ ============ ============ ============
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Net income (loss) per share $0.06 ($0.07) $0.07 ($0.10)
Weighted average number of shares
outstanding 3,520,100 3,520,100 3,520,100 3,520,100
The accompanying notes are an integral part of these statements.
4
Sonics & Materials, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
For the Six Months Ended December 31,
2001 2000
------------ ------------
Net cash provided by operations $ 426,374 $ 33,404
Net cash provided by (used in) investing activities 3,992,629 (49,319)
Net cash used in financing activities (4,060,350) (173,425)
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Net increase (decrease) in cash for the period 358,653 (189,340)
Cash and cash equivalents - at beginning of period 820,835 719,183
------------ ------------
Cash and cash equivalents - at end of period $ 1,179,488 $ 529,843
============ ============
Cash paid during period for:
Interest $ 13,219 $ 217,658
Income taxes - -
5
Sonics & Materials, Inc.
Notes to Consolidated Condensed Financial Statements
December 31, 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 and six months ended December 31, 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, INC. 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 of 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
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$3,534,959
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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 of which approximately 346,000 are
currently outstanding, are antidilutive for all periods and accordingly, are not
included in the per share computations.
NOTE 5: INCOME TAXES
The effective tax rate for the six months ended December 31, 2001 was 10.7% due
to the utilization of regular net operating loss carryovers of $168,000 and
federal tax credits of $6,000. These tax benefits had previously been subject to
deferred tax valuation allowances. The Company also has available capital loss
carryovers to offset the entire capital gain income recognized on the sale of
real estate in the first quarter of 2001. The gain is being amortized for
financial reporting purposes over the term of the related lease, but will be
recognized in full as of the transaction date for income tax purposes.
Future taxable income in fiscal 2002 will be subject to an effective tax rate in
the range of 40%-45%.
The Company did not provide for the tax benefit of net operating losses incurred
during the comparable 2000 period due to uncertainty as to their realization.
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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 objective 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 USS 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 DECEMBER 31, 2001 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 2000.
NET SALES. Net sales for the quarter ended December 31, 2001 decreased $330,000
or 11.3% compared with the same quarter in fiscal year 2001. This decrease
resulted from the elimination of Tooltex, Inc. revenues, which was sold in
August 2001. The decrease in revenues was partially offset by the increase in
plastics assembly product sales.
COST OF SALES AND GROSS PROFITS. Cost of sales decreased from 65.1% in the three
months ended December 31, 2000 to 61.0% for the three months ended December 31,
2001. In spite of the decline in sales, the improvement in cost of sales enabled
gross profits to remain essentially the same, amounting to $1,013,000 in the
current quarter and $1,023,000 in the comparable quarter of the prior fiscal
year. The improvement in gross profit margins resulted from a combination of a
more favorable product mix and the full realization of savings made as a result
of cost cutting measures taken in the second and third quarters of fiscal year
2001.
SELLING EXPENSES. Selling expenses for the second quarter of fiscal 2002
decreased $295,000 or 38.9% compared with the same quarter in fiscal 2001. As a
percentage of net sales, selling expense decreased from 25.9% to 17.8% over the
same period. The improvement in the level of selling expenses was achieved both
on an absolute basis and as a percentage of sales. The principal areas of
selling expense reduction were in payroll, advertising and promotional costs. In
addition, selling expenses decreased as a result of the sale of Tooltex, Inc.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
second quarter of fiscal 2002 decreased $120,000 compared with the second
quarter of the prior fiscal year. The principal reason for the decrease in these
expenses is due to the sale of Tooltex, Inc.
INTEREST EXPENSE. Interest expense decreased by $93,000 compared with the same
period in fiscal year 2001. The savings in interest resulted from the
elimination of Industrial Revenue Bond indebtedness relating to the sale of real
estate in August 2001, as well as a significant decline in interest rates.
INCOME TAXES. The effective tax rate for the three months ended December 31,
2001 was 12.7% due to the utilization of regular net operating loss carryovers
of $120,000 and federal tax credits of $6,000. These tax benefits had previously
been subject to deferred tax valuation allowances. The Company also has
available capital loss carryovers to offset the entire capital gain income
recognized on the sale of real estate in the
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first quarter of 2001. The gain is being amortized for financial reporting
purposes over the term of the related lease, but will be recognized in full as
of the transaction date for income tax purposes.
Future taxable income in fiscal 2002 will be subject to an effective tax rate in
the range of 40%-45%.
The Company did not provide for the tax benefit of net operating losses incurred
during the comparable 2000 period due to uncertainty as to their realization.
SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
2000.
NET SALES. Net sales for six months ended December 31, 2001 decreased $1,005,000
compared to the prior comparable period. The majority of the decline resulted
from the elimination of Tooltex, Inc. revenues as a result of the sale of that
subsidiary in August 2001.
COST OF SALES AND GROSS PROFITS. Cost of sales decreased from 63.3% for the six
months ended December 31, 2000 to 61.3% for the six months ended December 31,
2001. Accordingly, gross margins improved from 36.7% to 38.7%. A decline in the
plastics product line gross margin caused by less favorable product mix was more
than offset by the elimination of the lower-margin Tooltex product line as well
as savings from the full realization of cost cutting measures begun in the
second quarter of fiscal year 2001.
SELLING EXPENSES. Selling expenses decreased $592,000 compared with the same
period of the prior year. This decrease took place in the areas of payroll,
commissions, advertising and promotional costs. In addition, selling expenses
decreased as a result of the sale of Tooltex, Inc.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
six months ended December 31, 2001 decreased $176,000 compared with the
comparable period of the prior fiscal year. The principal reason for this
decline was the elimination of these costs caused by the sale of Tooltex, Inc.
INTEREST EXPENSE. Interest expense decreased $120,000 in the six months ended
December 31, 2001. The savings in interest resulted from the elimination of
Industrial Revenue Bond indebtedness relating to the sale of real estate in
August 2001 and a significant decline in interest rates.
INCOME TAXES. The effective tax rate for the six months ended December 31, 2001
was 10.7% due to the utilization of regular net operating loss carryovers of
$168,000 and federal tax credits of $6,000. These tax benefits had previously
been subject to deferred tax valuation allowances. The Company also has
available capital loss carryovers to offset the entire capital gain income
recognized on the sale of real estate in the first quarter of 2001. The gain is
being amortized for financial reporting purposes over the term of the related
lease, but will be recognized in full as of the transaction date for income tax
purposes.
Future taxable income in fiscal 2002 will be subject to an effective tax rate in
the range of 40%-45%.
The Company did not provide for the tax benefit of net operating losses incurred
during the comparable 2000 period due to uncertainty as to their realization.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet strengthened steadily in the last two quarters.
Contributing to the improved balance sheet is the Company's return to
profitability, in part, due to the cost cutting measures taken beginning in the
second quarter of fiscal year 2001, the sale of the Company's manufacturing
facility in Newtown, CT, and the sale of Tooltex, Inc.
Working capital increased by $928,000 June 30, 2001 and December 31, 2001. Cash
amounted to $1,179,000 at December 31, 2001, an increase of $359,000 over the
fiscal year end close. The note payable to the Company's bank was reduced by
$700,000 during this same period of time.
The Company's debt/equity ratio, during the six months ended December 31, 2001
also improved, declining from 1.2 times to 0.4 times.
9
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 (4.75% at December 31, 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 December 31, 2001 was $490,000, 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 met its covenants as of December 31,
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 December 31, 2001, the Company does not have
any goodwill or other intangible assets relating to business combinations that
were accounted for under APB Opinion No. 16. Accordingly, the adoption of SFAS
No. 142 is not expected to have a material impact on the Company's financial
position or results of operations.
Item 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
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.
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: February 8, 2002 By /s/ Robert S. Soloff
-------------------- ---------------------------
Robert S. Soloff,
President
11