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 MARCH 31, 1997. 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. (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.) 4 WEST KENOSIA AVENUE DANBURY, CT 06810 (Address of principal executive offices) TELEPHONE NUMBER (203) 744-4400 (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 May 8, 1996, there were 3,520,100 shares of the Registrant's Common Stock outstanding. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] PART I - FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements * Condensed Balance Sheets - March 31, 1997 and June 30, 1996.....................3 Condensed Statements of Income - For the Three and Nine Months Ended March 31, 1997 and 1996..............................4 Condensed Statements of Cash Flows - For the Nine Months Ended March 31, 1997 and 1996..............................5 Notes to 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 INDEX TO EXHIBITS.....................................................12 EXHIBIT 27 - FINANCIAL DATA SCHEDULE..................................13 * The Balance Sheet at June 30, 1996 has been taken from the audited financial statements at that date. All other financial statements are unaudited. Sonics & Materials, Inc. CONDENSED BALANCE SHEETS As of March 31, June 30, 1997 1996 ---- ---- (unaudited) * ASSETS CURRENT ASSETS Cash and cash equivalents $ 159,294 $ 73,129 Short-term investments 1,846,558 3,028,032 Accounts receivable, net of allowance for doubtful accounts of $45,000 1,698,732 1,953,941 Inventories 3,989,777 3,248,782 Prepaid income taxes 31,075 30,465 Deferred taxes 80,000 80,000 Other current assets 210,306 111,327 ---------- ---------- Total current assets 8,015,742 8,525,676 PROPERTY PLANT & EQUIPMENT - NET 279,518 301,706 OTHER ASSETS 396,773 353,124 ---------- ---------- $8,692,033 $9,180,506 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 200,000 $ 832,813 Demand note payable -- 500,000 Current maturities of long-term debt 100,000 -- Accounts payable 488,844 767,620 Commissions payable 191,757 160,081 Other accrued expenses and sundry liabilities 310,326 254,677 ---------- ---------- Total current liabilities 1,290,927 2,515,191 LONG TERM DEBT, NET OF CURRENT PORTION 375,000 -- CONTINGENCIES -- -- STOCKHOLDERS' EQUITY Preferred stock - 2,000,000 shares authorized, no shares outstanding at March 31, 1996 or June 30, 1996 -- -- Common stock - 10,000,000 shares authorized, 3,520,100 shares issued and outstanding at March 31, 1996 and 3,500,100 shares issued and outstanding at June 30, 1996 105,603 105,003 Additional paid in capital 6,561,526 6,417,126 Retained earnings 358,977 143,186 ---------- ---------- Total stockholders' equity 7,026,106 6,665,315 ---------- ---------- $8,692,033 $9,180,506 ========== ========== * Taken from the audited financial statements at June 30, 1996. The accompanying notes are an integral part of these statements. 3 Sonics & Materials, Inc. CONDENSED STATEMENTS OF INCOME (unaudited) For the Three Months Ended For the Nine Months Ended March 31, March 31, ------------------------------ ------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Net sales $ 2,483,067 $ 2,579,909 $ 7,764,822 $ 6,972,066 Cost of sales 1,285,710 1,376,013 4,015,449 3,569,941 ----------- ----------- ----------- ----------- Gross profit 1,197,357 1,203,896 3,749,373 3,402,125 Operating expenses Selling expense 790,256 750,455 2,350,366 2,179,761 General and 205,926 152,973 717,697 450,502 administrative Research and development 131,444 123,391 381,181 315,166 ----------- ----------- ----------- ----------- Total operating expenses 1,127,626 1,026,819 3,449,244 2,945,429 Other income (expense) Interest, net 34,394 (21,923) 58,542 (68,441) Other 2,169 26,420 981 36,469 ----------- ----------- ----------- ----------- 36,563 4,497 59,523 (31,972) Income before provision 106,294 181,574 359,652 424,724 for income taxes Provision for income taxes 42,518 (41,000) 143,861 (19,331) ----------- ----------- ----------- ----------- Net Income $ 63,776 $ 222,574 $ 215,791 $ 444,055 =========== =========== =========== =========== PRO FORMA DATA Income before taxes 106,294 181,574 359,652 424,724 Provision for income taxes 42,518 72,630 143,861 169,890 ----------- ----------- ----------- ----------- Net Income 63,775 108,944 215,791 254,834 PRIMARY INCOME PER SHARE Net income per share .02 .03 .05 .09 =========== =========== =========== =========== Weighted average number of common and common equivalent shares outstanding 3,829,839 3,239,000 4,455,342 2,899,000 =========== =========== =========== =========== FULLY DILUTED INCOME PER SHARE Net income per share .02 .03 .05 .09 =========== =========== =========== =========== Weighted average number of common and common equivalent shares outstanding 3,886,923 3,422,000 4,455,342 2,977,000 =========== =========== =========== =========== The accompanying notes are an integral part of these statements. 4 Sonics & Materials, Inc. CONDENSED STATEMENTS OF CASH FLOWS (unaudited) For the Nine Months Ended March 31, 1997 1996 ---- ---- Net cash (used in) provided by operations ($532,272) $349,609 Net cash used in investing activities (83,037) (116,353) Net cash provided by financing activities 701,474 3,123,924 -------- ---------- Net increase in cash for the period 86,165 3,123,924 Cash and cash equivalents - at beginning of period 73,129 187,490 -------- ---------- Cash and cash equivalents - at end of period $159,294 $3,544,670 ======== ========== The accompanying notes are an integral part of these statements. 5 Sonics & Materials, Inc. Notes to Financial Statements March 31, 1996 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, 1996. The results of operations for the nine months ended March 31, 1997 are not necessarily indicative of the results for the entire fiscal year ending June 30, 1997. NOTE 2: Net Income Per Share Net income per share is based on the weighted average number of common and common equivalent shares (warrants and options) outstanding during the period, calculated using the treasury stock method for fiscal 1997 and the modified treasury stock method for fiscal 1996. The weighted average number of shares outstanding for the periods presented is as follows: Primary Weighted Shares Outstanding ---------------------------------------------------------- Nine months ended March 31, Three months ended March 31, 1997 1996 1997 1996 ---- ---- ---- ---- Weighted average number of common shares outstanding 3,500,472 2,628,000 3,501,233 2,884,000 Dilution (warrants and options) 954,869 271,000 328,606 355,000 --------- --------- --------- --------- Weighted average number of common and common equivalent shares 4,455,342 2,899,000 3,829,839 3,239,000 ========= ========= ========= ========= Fully Diluted Weighted Shares Outstanding ---------------------------------------------------------- Nine months ended March 31, Three months ended March 31, 1997 1996 1997 1996 ---- ---- ---- ---- Weighted average number of common shares outstanding 3,500,472 2,628,000 3,501,233 2,885,000 Dilution (warrants and options) 954,869 349,000 385,690 537,000 --------- --------- --------- --------- Weighted average number of common and common equivalent shares 4,455,342 2,977,000 3,886,923 3,422,000 ========= ========= ========= ========= NOTE 3: Contingencies. In March 1997, the Company received notice that the California State Board of Equalization for Sales and Use has determined, upon audit, that the Company was in error in collection of sales tax in California from 1986 to 1995. The Company is disputing the assessment of $118,900, including $60,190 of interest. The outcome of this dispute cannot be determined at this time. NOTE 4: Subsequent Events a) On April 25, 1997, the Company announced that it had signed a letter of intent to acquire 100% of the stock of Tooltex, Inc., a privately held manufacturer of automated systems used in the plastics industry. The Company expects to consumate the transaction in the first quarter of fiscal year 1998. 6 b) On April 28, 1997, Sonics & Materials submitted a 510K application to the Food and Drug Administration for approval of its VibraSurge'tm' system, model VS2120 ultrasonic surgical instrument to aid in the removal of soft tissue in general, plastic, and reconstructive surgery. NOTE 5: New Accounting Pronouncement In February 1997, the Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE, which is effective for financial statements for both interim and annual periods ending after December 1997. Early adoption of the new standard is not permitted. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. The pro forma effect of adopting the new standard would be basic earnings per share of $.02 and $.04, and diluted earnings per share of $.02 and $.03 for the quarters ended March 31, 1997 and 1996, respectively. 7 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, 1996. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 Net sales. Net sales for the quarter ended March 31, 1997 decreased $97,000 or 3.8% over the same period in fiscal 1996. This is primarily due to a slight decrease in sales volume. Cost of Sales. Cost of sales decreased from 53.3% of sales for the three months ended March 31, 1996 to 51.8% of sales for the three months ended March 31, 1997. This slight decrease is primarily attributable to a variation in the sales product mix. Selling Expenses. Selling expenses for the third quarter of fiscal 1997 increased $40,000 or 5.3% over the same period in fiscal 1996. As a percentage of net sales these expenses increased from 29.1% to 31.8% over the same period. This increase primarily relates to expenses incurred in connection with design and implementation of new product literature, an updated seminar package, and development of the Company's web sites, as well as normal increases in salaries. General and Administrative Expenses. General and administrative expenses for the third quarter of fiscal 1997 increased $53,000 or 34.6% over the third quarter of fiscal 1996. As a percentage of net sales, these expenses increased to 8.3% from 5.9.% over the same period in fiscal 1996. This increase is primarily attributable to increased costs associated with the Company's obligations as a new public company, including professional fees, and directors' and officers' insurance, as well as normal annual increases in salaries. Research and Development Expenses. Research and development expenses increased $8,000 or 6.5% over the same period in fiscal 1996. This is primarily the result of the addition of one research and development engineer. The addition was part of the planned expansion of the Research and Development department. Interest Income, net. Total interest income net of interest expense increased by $56,000 or 256.9% for the three months ended March 31, 1997. This is primarily due to the investment of the net proceeds from the Company's initial public offering, which was partially used to paydown existing debt. Income Taxes. Income taxes increased by $84,000 or 203.7%. This is primarily the result of the change in the Company's filing status in regards to federal income taxes. Prior to the Company's initial public offering, Sonics was a Subchapter-S Corporation and as such was not subject to federal income tax. Concurrent with the stock offering, the Company revoked it's S-Corp election. In addition to being subject to federal income tax for the entire fiscal year 1997, as opposed to only a portion of fiscal 1996, the Company also recognized a deferred tax asset at the time of the S-Corp revocation. NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31,1996. Net sales. Net sales for the nine months ended March 31, 1997 increased $793,000 or 11.4% over the same period in fiscal 1996. This increase is a result of the Company's increased penetration into the Asian and Pacific Rim markets due to the expansion of the Company's sales efforts in that region, as well as initial sales of the Company's new vibration and spin welder products. 8 Cost of Sales. Cost of sales remained relatively constant at 51.7% of sales for the nine months ended March 31, 1997, compared to 51.2% of sales for the nine months ended March 31, 1996. Selling Expenses. Selling expenses for the first nine months of fiscal 1997 increased $171,000 or 7.8% over the same period in fiscal 1996. As a percentage of net sales these expenses decreased to 30.3% from 31.3% over the same period in fiscal 1996. This decrease in selling expenses as a percentage of net sales is a result of the Company maintaining fixed costs while increasing sales. General and Administrative Expenses. General and administrative expenses for the first nine months of fiscal 1997 increased $267,000 or 59.3% over the same period in fiscal 1996. As a percentage of net sales, these expenses increased to 9.2% from 6.5% over the same period in fiscal 1996. This increase is primarily attributable to increased costs associated with the Company's obligations as a new public company, including professional fees and directors' and officers' insurance, as well as normal annual increases in salaries and bonuses. Research and Development Expenses. Research and development expenses increased $66,000 or 21.0% over the same period in fiscal 1996. The largest factor contributing to this increase was the planned expansion of the Research and Development department's technical staff. Interest Income, net. Total interest income net of interest expense increased by $127,000 or 185.5% for the nine months ended March 31, 1997. This is primarily due to the investment of the net proceeds from the Company's initial public offering, which was partially used to paydown existing debt. Income Taxes. Income taxes increased by $163,000 or 844.2%. This is primarily the result of the change in the Company's filing status in regards to federal income taxes. Prior to the Company's initial public offering, Sonics was a Subchapter-S Corporation and as such was not subject to federal income tax. Concurrent with the stock offering, the Company revoked it's S-Corp election. In addition to being subject to federal income tax for the entire fiscal year 1997, as opposed to only a portion of fiscal 1996, the Company also recognized a deferred tax asset at the time of the S-Corp revocation. LIQUIDITY AND CAPITAL RESOURCES Operations of the Company used cash of approximately $532,000 during the nine months ended March 31, 1997 as a result of increasing inventory while paying down accounts payable balances. During the first three quarters of fiscal 1997, the Company invested approximately $83,000 in new capital equipment and leasehold improvements. As of June 30, 1996, the Company's working capital was $6,010,000. As of March 31, 1997, the Company's working capital had increased to $6,725,000 representing an increase of approximately 11.9%. During the third quarter of fiscal 1997, the Company increased its borrowings under its line of credit by $200,000. The Company's principal credit line is a $1,000,000 bank credit facility bearing interest at one-half of one percent above the prime rate. This credit arrangement matures on February 28, 1998. During the third quarter of fiscal 1997, the Company converted a $500,000 short term demand note payable to a five year term note maturing on December 3, 2001 with an interest rate of one-half point above prime. 9 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 3(i) Certificate of Incorporation of the Registrant, as amended . (Previously filed as Exhibit 3.1 of Amendment No. 3 to Registration Statement No. 33-96414) 3(ii) Amended By-laws of the Registrant . (Previously filed as Exhibit 3.2 of Registration Statement No. 33-96414) 10(i) Form of Employment Agreement between the Registrant and Robert S. Soloff. (Previously filed as Exhibit 10.1 of Registration Statement No. 33-96414) 10(ii) 1995 Incentive Stock Option Plan and form of Stock Option Agreement. (Previously filed as Exhibit 10.3 of Registration Statement No. 33-96414) 10(iii) Original Office Lease and Amendments between the Registrant and Nicholas R. DiNapoli, Jr. DBA DiNapoli Holding Co. (Danbury, CT). (Previously filed as Exhibit 10.4 of Registration Statement No. 33-96414) 10(iv) Lease between Registrant and Aston Investment Associates (Aston, PA). (Previously filed as Exhibit 10.5 of Registration Statement No. 33-96414) 10(v) Amended lease between Registrant and Robert Lenert (Naperville, IL). (Previously filed as Exhibit 10.6 of Amendment No. 4 to Registration Statement No. 33-96414) 10(vi) Lease between Registrant and Janine Berger (Gland, Switzerland). (Previously filed as Exhibit 10.7 of Registration Statement No. 33-96414) 10(vii) Form of Sales Representation Agreement. (Previously filed as Exhibit 10.8 of Registration Statement No. 33-96414) 10(viii) Form of Sales Distribution Agreement. (Previously filed as Exhibit 10.9 of Registration Statement No. 33-96414) 10(ix) Consulting Agreement dated October 17, 1995 between the Registrant and Alan Broadwin. (Previously filed as Exhibit 10.10 of Amendment No. 3 of Registration Statement No. 33-96414) 27 Financial Data Schedule. (Filed Herewith) (b) none 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: May 15, 1997 By /s/ ROBERT S. SOLOFF ------------------------------ ------------------------------- Robert S. Soloff President, Chief Executive Officer, Chief Financial Officer 11 EXHIBIT INDEX EXHIBIT LOCATION OF EXHIBIT IN NO. DESCRIPTION SEQUENTIAL NUMBERING SYSTEM 3(i) Certificate of Incorporation of the Registrant, Previously filed as Exhibit 3.1 of as amended. Amendment No. 3 to Registration Statement No. 33-96414 3(ii) Amended By-laws of the Registrant. Previously filed as Exhibit 3.2 of Registration Statement No. 33-96414 10(i) Form of Employment Agreement between the Previously filed as Exhibit 10.1 of Registrant and Robert S. Soloff. Registration Statement No. 33-96414 10(ii) 1995 Incentive Stock Option Plan and form of Stock Previously filed as Exhibit 10.3 of Option Agreement. Registration Statement No. 33-96414 10(iii) Original Office Lease and Amendments between the Previously filed as Exhibit 10.4 of Registrant and Nicholas R. DiNapoli, Jr. DBA Registration Statement No. 33-96414 (Dapoli Holding Co. (Danbury, CT). 10(iv) (Lease between Registrant and Aston Investment Previously filed as Exhibit 10.5 of Associates (Aston, PA). Registration Statement No. 33-96414 10(v) Amended lease between Registrant and Robert Previously filed as Exhibit 10.6 of Lenert (Naperville, IL). Amendment No. 4 to Registration Statement No. 33-96414 10(vi) Lease between Registrant and Janine Berger (Gland, Previously filed as Exhibit 10.7 of Switzerland). Registration Statement No. 33-96414 10(vii) Form of Sales Representation Agreement. Previously filed as Exhibit 10.8 of Registration Statement No. 33-96414 10(viii)Form of Sales Distribution Agreement. Previously filed as Exhibit 10.9 of Registration Statement No. 33-96414 10(ix) Consulting Agreement dated October 17, 1995 Previously filed as Exhibit 10.10 of between the Registrant and Alan Broadwin. Amendment No. 3 of Registration Statement No. 33-96414 27 Financial Data Schedule. Filed Herewith 12 STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as................ 'tm'