================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: October 1, 1997
TURBOSONIC TECHNOLOGIES, INC.
------------------------------------------------------------------
(Exact name of Registrant as specified in charter)
Delaware 0-21832 13-1949528
--------------- -------------------- ---------------------
(State or other (Commission File No.) (IRS Employer
jurisdiction of Identification
incorporation) Number
11 Melanie Lane, East Hanover, New Jersey 07936
- -------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 884-4388
--------------
Sonic Environmental Systems, Inc.
141 New Road, Parsippany, New Jersey 07054
- -------------------------------------------------------------------
(Former name or former address, if changed since last report)
================================================================================
Item 3. Bankruptcy or Receivership
As reported in Registrant's Current Report on Form 8-K, dated July 29,
1997, on July 3, 1997 the United States Bankruptcy Court for the District of New
Jersey confirmed Registrant's first amended plan of reorganization, as modified
(the "Plan").
The Plan, among other matters, called for Registrant's consolidation
(the "Consolidation") with Turbotak Technologies, Inc. ("Turbotak"), a
privately-owned Canadian company engaged in the design, manufacture and
servicing of air pollution control equipment, to form a company to be called
TurboSonic Technologies, Inc. ("TurboSonic").
The Consolidation was consummated on August 27, 1997 following the
approval by Turbotak's shareholders of a plan of arrangement under Section 182
of the Ontario Business Corporations Act among Registrant, Registrant's wholly
owned subsidiary, Sonic Canada, Inc. ("Sonic Canada") and Turbotak. Such
approval was required by the terms of a Combination Agreement dated as of July
1, 1997 among Registrant, Sonic Canada and Turbotak.
Upon the effectiveness of the Combination, Registrant changed its name
to "TurboSonic Technologies, Inc." and all then outstanding shares of
Registrant's Common Stock, as well as all then outstanding options and warrants
to purchase shares of Registrant's Common Stock, were extinguished. The holders
of then outstanding shares of Registrant's Common Stock thereupon became
entitled to receive approximately 0.1328 of a share of TurboSonic Common Stock
for each one share of Registrant's Common Stock held immediately prior to the
effectiveness of the Combination.
Following consummation of the Combination, Turbotak's shareholders,
collectively, beneficially owned 82% of Registrant's then issued and outstanding
shares of Common Stock, Registrant's former stockholders, collectively,
beneficially owned approximately 12.6% of such outstanding Common Stock and
creditors and others, collectively, beneficially owned the remainder of such
Common Stock.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements
(i) Report of Ernst & Young, Chartered Accountants
(ii) Consolidated Balance Sheets of Turbotak Technologies Inc.
as at June 30, 1997 and 1996
(iii) Consolidated Statements of Operations and Deficit of
Turbotak Technologies Inc. for the years ended June 30,
1997, 1996 and 1995
(iv) Consolidated Statements of Cash Flows of Turbotak
Technologies Inc. for the years ended June 30, 1997, 1996
and 1995
(v) Notes to Consolidated Financial Statements of Turbotak
Technologies Inc.
(b) Pro Forma Financial Information
(i) Pro Forma Consolidated Balance Sheet (unaudited)
(ii) Pro Forma Consolidated Statements of Operations
(unaudited)
(iii) Notes to Pro Forma Consolidated Financial Statements
(unaudited)
(c) Exhibits
2.1 Combination Agreement dated as of July 1, 1997 (the
"Combination Agreement") among Registrant, Sonic Canada
and Turbotak*.
2.2 Plan of Arrangement under Section 182 of the Ontario
Business Corporations Act of Registrant, Sonic Canada
and Turbotak (Exhibit 2.1 to the Combination
Agreement)*.
2.3 Voting and Exchange Trust Agreement dated August 25,
1997 among Registrant, Sonic Canada and The Trust
Company of Bank of Montreal (Exhibit 2.2 to the
Combination Agreement)*.
2.4 Support Agreement dated August 27, 1997 between
Registrant and Sonic Canada (Exhibit 2.3 to the
Combination Agreement).
3.1 Certificate of Amendment to Registrant's Certificate of
Incorporation*.
___________________________
* Denotes previously filed Exhibit
3
CONSOLIDATED FINANCIAL STATEMENTS
TURBOTAK TECHNOLOGIES INC.
[Expressed in United States dollars]
June 30, 1997
AUDITORS' REPORT
To the Board of Directors of
TURBOTAK TECHNOLOGIES INC.
We have audited the consolidated balance sheets of TURBOTAK TECHNOLOGIES INC. as
at June 30, 1997 and 1996 and the consolidated statements of operations and
deficit and cash flows for each of the three years in the period ended June 30,
1997. These 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 Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at June 30, 1997 and
1996 and the results of its operations and the changes in its cash flows for
each of the three years in the period ended June 30, 1997 in accordance with
accounting principles generally accepted in the United States.
We have reported, without reservation, to the shareholders under date of August
15, 1997 on the financial statements of the Company for the same periods
prepared in accordance with accounting principles generally accepted in Canada.
The significant differences in the accompanying financial statements arising
from the application of accounting principles generally accepted in the United
States as compared to those in Canada are: accounting for income taxes,
calculation of earnings per share and the accounting for stock-based
compensation.
Kitchener, Canada,
August 15, 1997 (except as to note 7 /s/ Ernst & Young
which is as of August 29, 1997). Chartered Accountants
F-1
TURBOTAK TECHNOLOGIES INC.
[Incorporated under the laws of Ontario, Canada]
CONSOLIDATED BALANCE SHEETS
As at June 30 Expressed in United States dollars
1997 1996
$ $
- -------------------------------------------------------------------------------
ASSETS
CURRENT
Cash 406,847 137,406
Accounts receivable [note 2] 681,529 340,125
Advances to Sonic Environmental Systems, Inc. [note 13] 97,954 --
Income taxes recoverable -- 46,886
Inventories [note 3] 79,066 84,156
Deferred contract costs and unbilled revenue 275,273 63,610
Other current assets 102,750 14,066
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,643,419 686,249
- -------------------------------------------------------------------------------
Cash held in trust [note 7] 69,229 --
Fixed assets [note 4] 70,217 74,277
Deposit and prepaid costs [note 5] 362,811 --
- -------------------------------------------------------------------------------
TOTAL ASSETS 2,145,676 760,526
===============================================================================
F-2
1997 1996
$ $
- ---------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued charges 552,832 912,661
Accrued commissions 59,483 28,836
Accrued professional fees 80,668 --
Deposit on common share offering [note 7] 112,278 --
Interest payable on convertible debenture [note 6] 51,927 52,567
Income taxes payable 12,703 --
Unearned revenue and contract advances 250,679 92,781
- ---------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,120,570 1,086,845
- ---------------------------------------------------------------------------------------
Convertible debt [note 6] 724,375 733,299
- ---------------------------------------------------------------------------------------
COMMITMENTS [notes 11 and 13]
SHAREHOLDERS' EQUITY
Share capital [note 7]
Authorized
Unlimited common shares
200,000 Class B, non-voting,
non-cumulative, special shares
redeemable for $0.01 per share
Issued
1,509,913 common shares 1,383,371 338,613
[968,010 in 1996 Issued ]
(500) treasury shares (715) (715)
[500 in 1996]
66,600 Class B shares -- --
[22,000 in 1996]
- ---------------------------------------------------------------------------------------
1,382,656 337,898
Additional paid-in capital 354,607 --
(Deficit) (1,439,261) (1,398,460)
Currency translation adjustments 2,729 944
- ---------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 300,731 (1,059,618)
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2,145,676 760,526
=======================================================================================
See accompanying notes
F-3
TURBOTAK TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND DEFICIT
Year ended June 30 Expressed in United States dollars
1997 1996 1995
$ $ $
- ---------------------------------------------------------------------------------------------
CONTRACT REVENUE AND SALES 4,149,912 2,711,029 1,940,611
Contract costs and cost of sales 2,600,389 1,770,769 1,419,630
- ---------------------------------------------------------------------------------------------
GROSS MARGIN 1,549,523 940,260 520,981
- ---------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative 813,633 645,189 551,739
Research and development [note 8] 161,837 26,955 93,362
Engineering 211,222 129,763 114,478
Stock-based compensation 354,607 -- --
- ---------------------------------------------------------------------------------------------
1,541,299 801,907 759,579
- ---------------------------------------------------------------------------------------------
Income (loss) from operations 8,224 138,353 (238,598)
- ---------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 9,529 16,896 10,945
Interest expense -- (8,036) (87,519)
- ---------------------------------------------------------------------------------------------
9,529 8,860 (76,574)
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes 17,753 147,213 (315,172)
Provision for (recovery of) income taxes [note 9] 58,554 5,583 (435)
- ---------------------------------------------------------------------------------------------
NET (LOSS) INCOME (40,801) 141,630 (314,737)
(Deficit), beginning of year (1,398,460) (1,540,090) (1,225,353)
- ---------------------------------------------------------------------------------------------
(DEFICIT), END OF YEAR (1,439,261) (1,398,460) (1,540,090)
=============================================================================================
(LOSS) EARNINGS PER SHARE: [note 10]
Primary $(0.03) $0.14 $(0.33)
Fully diluted $(0.03) $0.11 $(0.33)
- ---------------------------------------------------------------------------------------------
See accompanying notes
F-4
TURBOTAK TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30 Expressed in United States dollars
1997 1996 1995
$ $ $
- -----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net (loss) income (40,801) 141,630 (314,737)
Add (deduct) charges to operations not requiring a
current cash payment
Depreciation 20,260 11,022 8,203
(Gain) on sale of fixed assets (366) (147) --
Stock-based compensation 354,607 -- --
- -----------------------------------------------------------------------------------------
333,700 152,505 (306,534)
Changes in non-cash working capital balances
related to operations
(Increase) decrease in accounts receivable (349,142) 377,267 (354,824)
Decrease in income taxes recoverable 46,798 49,420 (46,240)
Decrease (increase) in inventories 4,108 (26,190) 12,856
(Increase) decrease in deferred contract costs and
unbilled revenue (214,651) (59,250) 212,064
(Increase) in other current assets (89,782) (7,533) (2,623)
(Decrease) increase in accounts payable and
accrued charges (352,357) (209,693) 410,833
Increase (decrease) in accrued commissions 31,321 (16,010) 2,610
Interest payable on convertible debenture -- -- 47,155
Increase in income taxes payable 12,836 -- --
Increase (decrease) in unearned revenue and
contract advances 160,684 (67,772) 4,922
- -----------------------------------------------------------------------------------------
CASH (APPLIED TO) PROVIDED BY OPERATING ACTIVITIES (334,977) 192,744 (19,781)
- -----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of fixed assets (17,071) (44,565) (1,593)
Proceeds on disposal of fixed assets 366 147 --
Deposit and prepaid costs (366,582) -- --
Advances to Sonic Environmental Systems, Inc. (98,972) -- --
- -----------------------------------------------------------------------------------------
CASH (APPLIED TO) INVESTING ACTIVITIES (482,259) (44,418) (1,593)
- -----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (repayment) borrowing under line of credit -- (222,222) 20,690
Issue (repurchase) of common shares 1,044,758 (715) --
Cash held in trust (69,229) -- --
Deposit on common share offering 112,278 -- --
- -----------------------------------------------------------------------------------------
CASH PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES 1,087,807 (222,937) 20,690
- -----------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,130) (403) (8,166)
- -----------------------------------------------------------------------------------------
NET CASH PROVIDED (APPLIED) DURING YEAR 269,441 (75,014) (8,850)
Cash, beginning of year 137,406 212,420 221,270
- -----------------------------------------------------------------------------------------
CASH, END OF YEAR 406,847 137,406 212,420
=========================================================================================
See accompanying notes
F-5
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Canadian based Company designs and markets air pollution control systems
including scrubber and spray nozzle systems. The scrubber systems are mainly
targetted to the North America pulp and paper industry and other industrial
manufacturers. The main markets for the nozzle systems are the cement and steel
industries. The Company allocates resources to research and development to
enhance the current product lines and their applications. Information on export
sales is included in note 12.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and are within the
framework of the significant accounting policies summarized below:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
the following 100% owned Canadian based subsidiaries. Significant inter-company
accounts and transactions have been eliminated in consolidation:
Turbotak Inc.
Turbotak Canada Inc.
Turbotak FGD Inc.
Turbotak U.S.A. Inc.
Turbotak VOC Inc.
Turbotak (Poland) Inc.
Turbosonic Inc.
Turbotak Technologies (Chile) Inc.
INVENTORIES
Raw materials are valued at the lower of actual cost and replacement cost on a
first-in, first-out basis.
Finished goods are valued at the lower of cost and net realizable value on a
first-in, first-out basis. Net realizable value is defined as selling price
less estimated selling costs.
F-6
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
1. SIGNIFICANT ACCOUNTING POLICIES CONT'D
FIXED ASSETS AND DEPRECIATION
Fixed assets are recorded at cost and are amortized over their estimated useful
lives on the declining balance basis at the following rates:
Vehicles 30%
Office equipment 20%
Other equipment 10%
Full depreciation is taken in the year of acquisition and none in the year of
disposal.
ACCOUNTING FOR REVENUES AND LONG-TERM CONTRACTS
The Company derives revenue from long-term contracts which require performance
[i.e. design, construction and performance testing] over a time span which may
extend one or more accounting periods. Generally, the percentage-of-completion
method is used to account for long-term contracts. For contracts involving
significant uncertainty, such as the use of new technology, the completed
contract method is used. Other revenues are recorded when products are shipped
to the customer or services are performed.
The percentage-of-completion is determined by best available engineering
estimates. When the current estimated costs to complete indicate a loss, such
losses are recognized immediately for accounting purposes.
Contract revenues recorded under the percentage-of-completion method in excess
of amounts billed are classified as deferred contract costs and unbilled
revenue. Amounts billed in excess of revenue earned and work-in-process
balances are classified as unearned revenue and contract advances.
GOVERNMENT GRANTS
Government grants are recorded when qualifying expenditures are incurred or the
specific terms of grant contracts are fulfilled. Grants received in advance of
the incurrence of qualifying expenditures are recorded as deferred grant
revenue. Grants received to finance specific expenses are included in the
statement of income as a reduction of these expenses. Grants received to
finance capital expenditures are applied to reduce the cost of the related
capital assets.
F-7
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
1. SIGNIFICANT ACCOUNTING POLICIES CONT'D
INVESTMENT TAX CREDITS
Investment tax credits are accrued when qualifying expenditures are made and
there is reasonable assurance that the credits will be realized. Investment tax
credits earned with respect to current expenditures for qualified research and
development activities are included in the statement of income as a reduction of
expenses. Tax credits earned with respect to capital expenditures are applied to
reduce the cost of the related fixed assets.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research costs are expensed as incurred. Development costs [other than capital
expenditures] are expensed as incurred. Expenditures are reduced by any related
investment tax credits and government grants.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" (SFAS 109). SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. A valuation allowance against the deferred tax assets may be
provided when it is more likely than not that a portion or all of a deferred tax
asset will not be realized.
ADVERTISING COSTS
All costs associated with advertising and promoting products are expensed as
incurred. Advertising and promotion expense was $24,596 in 1997 [$14,013 in 1996
and $28,201 in 1995].
STOCK-BASED COMPENSATION
The Company grants subscription warrants for a fixed number of Class B shares to
employees and options to employees and certain directors for common shares. The
Company accounts for the warrant and option grants in accordance with APD
Opinion No. 25, Accounting for Stock Issues to Employees, and, based on
calculations whereby the exercise price approximates the share value, recognizes
no compensation expense for the subscription warrant grants in 1996. For fiscal
1997 $354,607 was recognized in the period as compensation.
F-8
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
1. SIGNIFICANT ACCOUNTING POLICIES CONT'D
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, which provides an alternative to
APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for
stock-based compensation issued to employees. The Statement allows for a fair
value based method of accounting for employee stock options and similar equity
instruments. However, for companies that continue to account for stock-based
compensation arrangements under Opinion No. 25, Statement No. 123 requires
disclosure of the pro forma effect on net income and earnings per share of its
fair value based accounting for those arrangements.
EARNINGS PER SHARE
Earnings per share is based on the average number of common and Class B shares
outstanding during each year and non-dilutive common share equivalents. Fully
diluted earnings per share assumes that the convertible debenture was converted
at the beginning of the year unless the effect is anti-dilutive.
FOREIGN CURRENCY TRANSLATION
The Company maintains its accounts in Canadian dollars, the Company's functional
currency. The financial statements have been translated into U.S. dollars in
accordance with FASB Statement No. 52, Foreign Currency Translation. All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. Income statement amounts have been translated using
the average exchange rate for the year. The gains and losses resulting from the
changes in exchange rates from year to year have been reported separately as a
component of shareholders' equity.
FOREIGN CURRENCY TRANSACTIONS
Monetary assets and liabilities are translated to the Company's functional
currency equivalent at the year-end exchange rate. Revenues and expenses are
translated to the Company's functional currency using the average exchange rate
for each month. Non-monetary items are translated at their historical rate of
exchange.
F-9
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
1. SIGNIFICANT ACCOUNTING POLICIES CONT'D
RISKS AND UNCERTAINTIES
In preparing these consolidated financial statements in accordance with
generally accepted accounting principles in the United States, management was
required to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Significant
estimates include allowance for doubtful accounts, inventory obsolescence,
investment tax credits and profitability on long-term contracts. Actual results
could differ from those estimates.
Financial instruments that potentially subject the Company to credit risk
consist principally of trade accounts receivable. The Company designs and sells
environmental scrubbers and nozzles. Sales are made to end users of all sizes
located primarily in North America. Receivables are unsecured. The Company
provides an allowance for doubtful accounts equal to the estimated losses
expected to be incurred in the collection of accounts receivable. Allowances
recorded up to June 30, 1997 have not been material.
As of June 30, 1997 the Company had no customers that comprised more than 10% of
the total trade receivable balance, [three customers that comprised 35% as at
June 30, 1996]. For the year ended June 30, 1997, the Company had one customer
that comprised 42% of total revenue.
Trade accounts receivable and trade accounts payable are received or paid in
either U.S. or Canadian dollars. Accordingly, the Company is at risk of a loss
for decreases in the value of the Canadian dollars relative to the U.S. dollar
for trade accounts receivable and increases in the value of the Canadian dollar
relative to the U.S. dollar for trade accounts payable. The Company does not use
financial instruments to mitigate the foreign exchange.
The Company's cash balances are maintained in one Canadian chartered bank which
is a AA rated financial institution.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. The Company has not yet determined what the
impact of Statement 128 will be on the calculation of earnings per share.
F-10
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
1. SIGNIFICANT ACCOUNTING POLICIES CONT'D
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
required to be adopted for the Company's financial statements for the year ended
June 30, 1999. Under the new requirements, financial information about
operating segments should be reported on the basis that is used internally by
the Company for evaluating operating segments and resource allocation decisions.
The Company has not determined the effect, if any, of this pronouncement on the
segmented disclosures on its consolidated financial statements.
2. ACCOUNTS RECEIVABLE
1997 1996
$ $
- ------------------------------------------------------------------------
Trade accounts receivable 679,643 337,208
Other receivables 36,050 30,942
Allowance for doubtful accounts (34,164) (28,025)
- ------------------------------------------------------------------------
681,529 340,125
- ------------------------------------------------------------------------
Bad debt expense was $10,650 in 1997 [$33,431 in 1996 and $3,715 in 1995].
3. INVENTORIES
1997 1996
$ $
- ------------------------------------------------------------------------
Raw materials 47,816 35,778
Finished goods 85,054 78,060
Provision for inventory obsolescence (53,804) (29,682)
- ------------------------------------------------------------------------
79,066 84,156
========================================================================
F-11
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
4. FIXED ASSETS
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
1997 $ $ $
- ----------------------------------------------------------------
Vehicles -- -- --
Office equipment 141,547 108,215 33,332
Other equipment 62,963 26,078 36,885
- ----------------------------------------------------------------
204,510 134,293 70,217
===============================================================
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
1996 $ $ $
- ----------------------------------------------------------------
Vehicles 13,997 13,997 --
Office equipment 133,139 99,954 33,185
Other equipment 56,788 15,696 41,092
- ----------------------------------------------------------------
203,924 129,647 74,277
================================================================
5. DEPOSIT AND PREPAID COSTS
1997 1996
$ $
- ----------------------------------------------------------------
Purchase of bank claim 245,436 --
Professional fees 117,375 --
- ----------------------------------------------------------------
362,811 --
================================================================
In connection with the proposed acquisition disclosed in note 13, the Company
acquired a bank claim against Sonic Environmental Systems, Inc. ["Sonic"] and
certain subsidiaries in the amount of $940,000. The amount includes $900,000 of
principal and $40,000 of accrued interest. The purchase price was $250,000. If
the acquisition is completed, the debt will be extinguished and accordingly it
has been recorded as a deposit towards the acquisition of Sonic. Professional
fees include legal and other costs incurred to June 30, 1997 related to the
proposed acquisition.
F-12
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
6. CONVERTIBLE DEBT
The convertible debt, with a face value of $1,000,000 Cdn, bears interest at
bank prime rate plus 1% per annum. The principal is repayable in annual amounts
beginning December 31, 1994 until December 31, 1998 and interest is payable
monthly. The debenture holder waived entitlement to interest for the period July
1, 1995 to June 30, 1997. The debenture holder may convert, at any time, up to
100% of the debt into common shares at a price of $3.98 [$5.50 Cdn] per share.
If less than 100% of the debt is converted, the Company has the right to pay out
the entire amount and not issue the shares. If the Company accepts a partial
conversion, the outstanding debt will bear interest at prime plus 1% and the
principal will be repaid on an adjusted balance over the period until maturity.
A price adjustment mechanism exists which could change the conversion price of
$3.98 [$5.50 Cdn] per share to a range of $3.26 to $5.43 [$4.50 Cdn to $7.50
Cdn] based on the financial performance of the Company. As collateral for the
convertible debt, the Company has provided a general security agreement covering
all assets that subordinated to bank debt less than $579,500 [$800,000 Cdn].
Weighted average bank prime was 5.14% for the year ended June 30, 1997 [7.41% -
1996].
The required principal repayments are as follows:
$
- --------------------------------
1995 72,438
1996 108,656
1997 144,875
1998 181,094
1999 217,312
- --------------------------------
724,375
================================
As at June 30, 1997 and 1996 the Company was in default of certain provisions of
the debenture agreement including principal and interest payment requirements.
As at June 30, 1997 the delinquent principal and interest payments, not waived,
amounted to $724,375 and $51,927 respectively. As a result, the debenture holder
may demand repayment of the outstanding balance.
During fiscal 1997, the debenture holder and the Company agreed to amend the
debenture agreement, provided that certain events occur and conditions are met
as specified by documentation exchanged between the two parties. The
significant events and conditions relate to the acquisition and private
placement referred to in note 13. The amendments provided for the conversion of
debenture principal and unpaid interest to common shares of the Company at
conversion rates of $3.26 and $2.54 [$4.50 Cdn and $3.50 Cdn] per share
respectively and the granting to the debenture holder of an option to acquire up
to 25,000 common shares of the Company at a price of $0.72 [$1 Cdn] per share
for five years. Subsequent to the year-end, the debenture holder and the
Company have agreed to a further amendment to the debenture agreement whereby
the accrued interest of $51,927 will be waived and 290,562 common shares will be
issued on the conversion of the $724,375 [$1,000,000 Cdn] principal amount.
On August 29, 1997, the debenture holder converted the principal amount as
disclosed above. Accordingly, the debenture has been classified as a long-term
liability in the accompanying financial statements. This will result in an
expense of approximately $95,000 in 1998 that will be applied against income and
paid-in capital.
Interest paid is as follows:
$
- ----------------------------------------------------------
1995 20,082
1996 --
1997 --
- ----------------------------------------------------------
20,082
==========================================================
7. SHARE CAPITAL
Common Shares
Two directors of the Company were granted options in fiscal 1995 to purchase
50,000 common shares each, at an exercise price of $0.72 [$1.00 Cdn] per share.
As at June 30, 1997, all of the options were exercised for cash consideration of
$72,966. In addition, on May 26, 1995, a director of the Company was granted an
option to acquire 20,000 common shares for no additional consideration in
respect of past services. As at June 30, 1997, the option was exercised.
F-13
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
7. SHARE CAPITAL CONT'D
An option was granted during fiscal 1997 allowing all shareholders of record as
at May 26, 1995, other than employees of the Company, to purchase one common
share for every five common shares in the capital of the Company at an exercise
price of $1.45 [$2.00 Cdn] per share. The option is to be exercised on or
before the effective date of the Combination Agreement disclosed in note 13. As
at June 30, 1997, 36,300 common shares were issued for a cash consideration of
$53,447.
During fiscal 1997, employees of the Company were granted options to purchase
common shares at an exercise price of $1.09 [$1.50 Cdn] per share. As a result,
100,000 common shares were issued for total cash consideration of $109,021.
There are no further entitlements under this arrangement.
During fiscal 1997, the Company converted debt totalling $211,024 related to
royalties, consulting fees and legal fees, into 62,655 common shares as payment.
An option was granted to an officer of Sonic Environmental Systems, Inc. during
fiscal 1997 to purchase 50,000 common shares at an aggregate price of $0.72
[$1.00 Cdn]. This option was exercised before June 30, 1997.
A private placement of common shares was offered to selected parties for prices
ranging from $2.90 to $3.62 [$4.00 Cdn to $5.00 Cdn] per share. The total
number of common shares issued was 172,948 for total consideration of $598,299.
An amount of $69,229 is being held in trust to fund the working capital
requirements of Sonic Environmental Systems, Inc. pending completion of the
acquisition disclosed in note 13. In anticipation of an offering of common
shares, certain groups gave funds amounting to $112,278 to the Company during
fiscal 1997.
The changes in issued common shares are as follows:
# $
- ------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 968,010 338,613
Repurchase of shares (500) (715)
- ------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 967,510 337,898
Director options exercised 120,000 72,966
Shareholder options exercised 36,300 53,447
Employee options exercises 100,000 109,021
Conversion of debt 62,655 211,024
Private placement 172,948 598,299
Officer option exercised 50,000 1
- ------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 1,509,413 1,382,656
- --------------------------------------------------------------------------------
The Company entered into an agreement with the debenture holder that resulted in
the conversion of the debenture principal to common shares as disclosed in note
6.
Redeemable Class B Special Shares
The Company is entitled to redeem any or all of the special shares issued to
employees at any time or times in the event that any holder of the special
shares, prior to such shares being vested, dies, voluntarily leaves employment
of the company, withdraws employee services for at least twelve months due to
medical reasons, is subject to an order under the Family Law Act or is adjudged
by a Court to be unable to manage the special shareholder's own affairs.
The special shares will become vested and no longer subject to redemption by the
Company upon resolution of the Board of Directors of the Company.
On the liquidation, dissolution or winding up of the Corporation, the holders of
the common shares and special shares shall be entitled to receive, pro rata, the
assets of the Company.
F-14
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
7. SHARE CAPITAL CONT'D
In prior years, as part of its discretionary incentive plan, the Company issued
subscription warrants to employees which, upon becoming vested, may be redeemed
for Class B shares at a price of $0.001. In the past, the vesting period ranged
from one day to three years upon the discretion of the President of the Company.
As a result of a resolution of the Board of Directors, the outstanding warrants
may now be exercised at the earliest of the original vesting date, the effective
date of the Combination Agreement discussed in note 13 or the date the Company
goes public. The warrants expire five years after they are vested. The number
of subscription warrants issued is determined by the President of the Company up
to an accumulated total of 200,000.
The changes in subscription warrants are as follows:
#
- -------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 69,400
Warrants issued 9,000
Warrants exercised (22,000)
- -------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 56,400
Warrants exercised (44,600)
- -------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 11,800
- -------------------------------------------------------------------------------
Stock-based Compensation
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee and director stock options and subscription warrants under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions; risk-free interest rate of 6.44% [7.97% in 1996],
dividend yield of 0%, volatility factor of the expected market price of the
Company's common stock of .5 and a weighted-average expected life of the options
of one month [three years in 1996].
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option value models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and director stock options and subscription warrants have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
and director stock options and subscription warrants.
F-15
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
7. SHARE CAPITAL CONT'D
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1997 1996
$ $
- -------------------------------------------------------------------------------
Pro forma net (loss) income (41,541) 141,623
Pro forma (loss) earnings per share
Primary (0.03) 0.14
Fully diluted (0.03) 0.11
8. RESEARCH AND DEVELOPMENT EXPENSES
1997 1996 1995
$ $ $
- -------------------------------------------------------------------------------
Expenses incurred 169,156 168,803 300,312
Investment tax credits -- (3,652) (45,385)
Government grants (7,319) (138,196) (161,565)
- --------------------------------------------------------------------------------
161,837 26,955 93,362
================================================================================
F-16
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
9. INCOME TAXES
1997 1996 1995
$ % $ % $ %
- ------------------------------------------------------------------------------------------------------
Provision for income taxes based
on basic Canadian federal
income tax rates 5,167 29.12 42,606 29.12 (91,351) (29.08)
Provision for income taxes based
on basic Canadian provincial
income tax rates 2,750 15.50 22,772 15.50 (48,575) (15.50)
Increase (decrease) resulting from -
Stock-based compensation 158,226 892.74 -- -- -- --
Small business deduction (32,204) (181.50) -- -- -- --
Realization of loss carryforwards
from prior years (147,529) (831.45) (59,795) (40.83) -- --
Benefits of loss carryforwards not
recognized 72,144 406.58 -- -- 139,491 44.72
- ------------------------------------------------------------------------------------------------------
58,554 330.99 5,583 3.79 (435) (0.14)
======================================================================================================
The Company is eligible for investment tax credits with respect to qualifying
scientific research and experimental development expenditures. An amount of
approximately $4,000 relating to investment tax credits for the 1996 year and
approximately $45,000 for the 1995 year is included in income taxes recoverable
on the balance sheet as at June 30, 1997 and is subject to review and audit by
Revenue Canada. As a result of uncertainty related to Revenue Canada's current
assessing practices regarding claims for scientific research and experimental
development expenditures, no amount has been accrued for potential investment
tax credits in 1997. Although the Company has used its best judgement and
understanding of the related income tax legislation in determining this amount
it is possible that the amounts could change by a material amount dependent on
the review and audit by Revenue Canada.
The Company has filed additional claims for investment tax credits related to
prior years. The benefit of these claims, if any, will be recognized in the
Company's accounts following audit and approval by Revenue Canada. It is
possible that the amount could be material.
F-17
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
9. INCOME TAXES CONT'D
The Company and its subsidiaries have unutilized, non-capital losses at June 30,
1997 available of approximately $695,000 for Canadian income tax purposes to
carry forward to future years, which expire in the years 1999 through 2004. If
claims for investment tax credits related to prior years are successful, the
amount of non-capital losses may be reduced. In addition, the Company has
unclaimed scientific research and experimental expenditures for Canadian tax
purposes of approximately $82,000 that may be carried forward indefinitely to
reduce taxable income in future years. The benefit of the above amounts has not
been recognized in the accompanying financial statements.
Deferred tax liabilities and assets are comprised of the following as at June
30:
1997 1996 1995
$ $ $
- ---------------------------------------------------------------------------------------
Margin inclusion on % complete contracts -- 19,387 16,252
- ---------------------------------------------------------------------------------------
TOTAL CURRENT DEFERRED TAX LIABILITIES 19,387 16,252
Scientific research and development expenditures -- 9,036 3,618
Net operating loss carryforward -- 10,351 12,634
- ---------------------------------------------------------------------------------------
TOTAL CURRENT DEFERRED TAX ASSETS -- 19,387 16,252
Valuation allowance for deferred tax assets -- -- --
- ---------------------------------------------------------------------------------------
NET CURRENT DEFERRED TAX LIABILITY (ASSET) -- -- --
=======================================================================================
Book over tax depreciation 262 738 339
Net operating loss carryforward 325,046 245,668 337,095
- ---------------------------------------------------------------------------------------
TOTAL NON-CURRENT DEFERRED TAX ASSETS 325,308 246,406 337,434
Valuation allowance for deferred tax assets (325,308) (246,406) (337,434)
- ---------------------------------------------------------------------------------------
NET NON-CURRENT DEFERRED TAX LIABILITY (ASSET) -- -- --
=======================================================================================
F-18
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
10. EARNINGS PER SHARE
The weighted average number of shares outstanding for fiscal 1997 was 1,306,261
[1,037,744 in 1996].
Primary loss per share is $(0.03). Primary earnings per share was $0.14 in 1996
after giving effect to the common shares to be issued pursuant to the warrant
options and the convertible debt holder option.
Fully diluted loss per share is $(0.03). Fully diluted earnings per share was
$0.11 in 1996 after giving effect to the common shares to be issued pursuant to
the convertible debt agreement.
11. COMMITMENTS
The Company has entered into operating leases for office equipment and premises.
Minimum annual payments under these leases for years after June 30, 1997 are as
follows:
$
- -------------------------------------------------------------------------------
1998 37,584
1999 11,192
2000 6,845
2001 2,608
2002 2,608
- --------------------------------------------------------------------------------
60,837
================================================================================
Rental expense for office equipment and premises was $57,284 in 1997 [$52,544 in
1996 and $62,121 in 1995].
F-19
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
12. EXPORT SALES
1997 1996 1995
$ $ $
- --------------------------------------------------------------------------------
Domestic 812,348 804,843 733,018
USA 3,243,092 1,666,185 844,029
Chile 14,881 48,427 20,551
Dominican Republic 25,875 181,229 301,523
Australia 41,207 10,345 --
Spain 12,509 -- --
Mexico -- -- 34,523
Taiwan -- -- 6,967
13. PROPOSED ACQUISITION
During fiscal 1997, the Company entered into certain transactions and agreements
involving Sonic Environmental Systems, Inc. ["Sonic"], a U.S. public
corporation, that are intended to result in the shareholders of the Company
acquiring control of Sonic.
The Company acquired a bank claim, including accrued interest, against Sonic and
certain subsidiaries in the amount of $940,000 for consideration of $250,000.
The Company also advanced Sonic approximately $200,000 of which approximately
$100,000 has been repaid.
On September 16, 1996, Sonic consented to the entry of an Order for Relief under
Chapter 11 of the United States Bankruptcy Code. On July 3, 1997 the Bankruptcy
Court confirmed the Debtors' First Amended Plan of Reorganization ["Plan"].
Subsequent to the approval, the Plan was modified and a Combination Agreement
was drawn up between the Company and Sonic to be approved by the shareholders of
the Company.
Pursuant to the Plan and Combination Agreement, upon the effective transaction
date, which is to be determined following approval by the Company's
shareholders, Sonic will amend its certificate of incorporation to change its
name to TurboSonic Technologies, Inc. ["TurboSonic"]. TurboSonic will
incorporate a subsidiary corporation ["TurboSonic Canada"] in the Province of
Ontario, Canada which will be authorized to issue Class A and Class B common
shares. TurboSonic will subscribe for 100% of TurboSonic Canada's Class A
shares in exchange for a nominal capital contribution.
F-20
TURBOTAK TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 Expressed in United States dollars
13. PROPOSED ACQUISITION CONT'D
Also, on the effective transaction date, the holders of the common and Class B
shares of the Company, will exchange their shares for TurboSonic Canada's Class
B shares, which will be distributed to each shareholder of the Company on a pro
rata basis in accordance with their respective equity interest in the Company.
As a result of this exchange, the Company will become a wholly-owned subsidiary
of TurboSonic Canada. The Class B shares of TurboSonic Canada shall be
exchangeable, at the election of the holders of such shares, into an equivalent
number of such shares of TurboSonic.
The exchangeable shares of TurboSonic Canada will represent 82% of the
outstanding shares of TurboSonic. Approximately 13% of the shares of TurboSonic
will be issued to the existing shareholders of Sonic and the balance will be
issued in accordance with the Plan to unsecured creditors and other identified
interests.
The bank claim purchased by the Company, will be extinguished on the effective
date.
In connection with the above acquisition, the holder of the convertible debt has
agreed to amend the debenture agreement and has indicated its intention to
convert the principal amount to share capital as disclosed in note 6.
The acquisition, if completed, will be accounted for as a reverse takeover in
accordance with accounting principles generally accepted in the United States
whereby the Company will be considered to be the acquirer. In the accompanying
financial statements, the costs incurred by the Company to date have been
recorded as disclosed in note 5.
F-21
TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
(PRO FORMA CONSOLIDATED BALANCE SHEET)
(Unaudited - Expressed in United States Dollars)
Sonic Turbotak
Environmental Technologies pro forma
Systems, Inc. Inc. adjustments Pro forma
------------- ------------ ------------ ------------
Assets
Current Assets:
Cash $ 174,786 $ 406,847 $ 69,229 a $ 650,862
Cash held in trust 0 69,229 (69,229)a 0
Contract and accounts receivable, net of
allowance for doubtful accounts of $101,941 187,214 681,529 32,583 g 901,326
Advances to Sonic Environmental Systems, Inc. 97,954 (97,954)e 0
Costs and estimated earnings in excess of
billings on uncompleted contracts 35,662 275,273 310,935
Inventories 79,159 79,066 158,225
Other current assets 5,090 102,750 107,840
------------ ------------ ----------- ------------
481,911 1,712,648 (65,371) 2,129,188
Equipment and leasehold improvements,
at cost, net of accumulated depreciation 71,386 70,217 141,603
Reorganization costs 0 362,811 121,502 a 0
(484,313)a
Investment in unconsolidated subsidiaries 10,746 0 10,746
Goodwill 0 0 1,589,893 a 1,589,893
Other assets 88,562 0 88,563
------------ ------------ ----------- ------------
Total assets $ 652,605 $ 2,145,676 $ 1,161,711 $ 3,959,993
============ ============ =========== ============
Liabilities and Stockholders' Equity
Current Liabilities:
Note Payable $ 100,000 $ 0 ($100,000)e $ 0
Accounts payable - trade 199,416 489,509 688,925
Accrued expenses 438,024 367,679 121,502 a
(112,278)f 763,000
(51,927)d
Income taxes payable 0 12,703 12,703
Billings in excess of costs and estimated
earnings on uncompleted contracts 30,432 250,679 281,111
------------ ------------ ----------- ------------
767,872 1,120,570 (142,703) 1,745,740
Convertible debt 0 724,375 (724,375)d 0
------------ ------------ ----------- ------------
767,872 1,844,945 (867,078) 1,745,740
------------ ------------ ----------- ------------
Stockholders' Equity
Share Capital 984,737 1,382,656 (984,737)a 3,294,132
776,311 d
32,583 g
112,278 f
990,304 a
Capital in excess of par value 9,688,122 354,607 (9,688,122)a 354,607
Accumulated deficit (10,788,126) (1,439,261) 10,788,126 a (1,439,261)
Currency translation adjustments 2,729 2,046 4,775
------------ ------------ ----------- ------------
Total Stockholders' Equity (115,267) 300,731 2,028,789 2,214,253
------------ ------------ ----------- ------------
Total Liabilities and Stockholder Equity $ 652,605 $ 2,145,676 $ 1,161,711 $ 3,959,993
============ ============ =========== ============
F-22
TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited-Expressed in United States Dollars)
Sonic Turbotak
Environmental Technologies Pro forma
Systems, Inc. Inc. adjustments Pro forma
Original equipment revenue $ 891,036 $ 2,992,215 $ 0 $ 3,883,251
Rehabilitation, maintenance and 1,168,492 1,157,697 0 2,326,189
spare parts revenue
-------------- -------------- ----------- -------------
Total revenue 2,059,528 4,149,912 0 6,209,440
-------------- -------------- ----------- -------------
Cost of original equipment 601,509 1,871,007 0 2,472,516
Cost of rehabilitation, maintenance and 523,379 729,382 0 1,252,761
spare parts
-------------- -------------- ----------- -------------
Total costs 1,124,888 2,600,389 0 3,725,277
-------------- -------------- ----------- -------------
Gross profit 934,640 1,549,523 0 2,484,163
Selling, general and administrative 1,223,827 1,166,432 (250,141)b 2,140,118
Depreciation & amortization 159,856 20,260 158,989 c 339,105
Stock-based compensation 0 354,607 (354,607)h 0
------------- -------------- ----------- -------------
Gain (loss) from operations (449,043) 8,224 (445,759) 4,940
Interest income (expense) (43,715) 9,529 0 (34,186)
Other income 33,431 0 0 33,431
-------------- -------------- ----------- -------------
Net income (loss) from continuing
operations before income taxes (459,327) 17,753 (445,759) 4,185
Income taxes 0 58,554 0 58,554
-------------- -------------- ----------- -------------
Net Income (Loss) ($459,327) ($40,801) ($445,759) ($54,369)
============== ============== =========== =============
F-23
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN UNITED STATES DOLLARS)
1. BASIS OF PRESENTATION
The accompanying pro forma financial information has been prepared by management
of TurboSonic Technologies, Inc. ["TurboSonic"] for inclusion in an 8-K filing
to the Security and Exchange Commission and gives effect to the reorganization
and merger of Turbotak Technologies Inc. ["Turbotak"] and Sonic Environmental
Systems, Inc. ["Sonic"].
The pro forma balance sheet is based on the historical financial positions of
Turbotak and Sonic as at June 30, 1997 and August 27, 1997 respectively,
adjusted to reflect the proposed reorganization disclosed in note 3, assuming
the transactions had occurred on June 30, 1997. The proforma statement of income
assumes the proposed reorganization occurred at the beginning of the respective
1997 fiscal years of Turbotak and Sonic.
The pro forma financial information has been compiled from the audited balance
sheet of Turbotak as at June 30, 1997 and the unaudited balance sheet of Sonic
as at August 27, 1997 and the audited statements of income of Sonic for the year
ended April 30, 1997 and of Turbotak for the year ended June 30, 1997. The pro
forma adjustments explained in note 3 include the following adjustments:
i) Allocation of the purchase price to the individual assets and liabilities
of Sonic.
ii) The elimination of intercompany transactions.
iii) The extinguishment of debt arising from the reorganization and the Sonic
bankruptcy proceedings.
iv) The elimination of expenses related to the bankruptcy proceedings.
v) The elimination of amortization of intangible assets (patents) and the
recording of amortization of goodwill arising from the purchase price
allocation.
vi) The conversion to share capital of the convertible debt payable by
Turbotak.
The pro forma financial information should be read in conjunction with the
audited Turbotak financial statements as at June 30, 1997 included with the 8-K
filing and Sonic's 10-KSB filing as at April 30, 1997.
F-24
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN UNITED STATES DOLLARS)
1. BASIS OF PRESENTATION CONT'D
The pro forma financial information presented in these pro forma financial
statements results from the application of certain assumptions to historical
financial data. It is not intended to represent future financial conditions or
operating results.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of the pro forma
consolidated balance sheet and the pro forma consolidated statement of income
are described in notes 1 and 2 respectively to the financial statements of
Turbotak and Sonic and include the following additional policy:
GOODWILL
Goodwill represents the excess of the purchase price over values attributed
to the underlying net identifiable assets of Sonic and will be amortized on
a straight-line basis over 10 years.
3. PRO FORMA TRANSACTIONS
The pro forma consolidated balance sheet and pro forma consolidated statement of
income give effect to the reorganization that is outlined in the audited
Turbotak financial statements as at June 30, 1997 and the Sonic 10-KSB and
audited financial statements as at April 30, 1997.
In accordance with the Plan of Reorganization [the Plan] as approved by the
Bankruptcy Court, the former shareholders of Turbotak have effectively acquired
approximately 82% of the outstanding common shares of Sonic through ownership of
exchangeable shares of a wholly-owned Canadian subsidiary of Sonic. The
transactions are accounted for as a reverse acquisition whereby Turbotak is
considered to be the acquirer. For purposes of these pro forma financial
statements, the purchase price consists of the reorganization costs incurred by
Turbotak, the amount paid by Turbotak to acquire the bank note payable by Sonic
and the value attributed to the shares of Turbotak deemed to be exchanged for
18% of Sonic shares as summarized below. A value of $0.73 per share has been
attributed to the Turbotak shares (after conversion at the rate of one Turbotak
share to 4.2303 Sonic shares) on the basis of recent share transactions.
F-25
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN UNITED STATES DOLLARS)
3. PRO FORMA TRANSACTIONS CONT'D
Management has made an allocation of the purchase price among the individual
assets and liabilities of Sonic as follows:
Current assets $ 481,911
Capital assets 71,386
Other assets 99,308
----------
652,605
Current liabilities 767,881
----------
(115,276)
Goodwill 1,589,893
----------
Total Acquisition Cost $1,474,617
==========
The above allocation is based on management's best estimates.
Pro forma adjustments are as follows:
a) to record the acquisition of Sonic.
b) to eliminate the expenses of the bankruptcy proceedings.
c) to record the amortization of goodwill.
d) to record the conversion of the convertible debenture and unpaid interest.
e) to eliminate intercompany transactions.
f) to record at merger the issuance of 31,000 shares for which cash had
previously been advanced.
g) to record an additional sale of 4,000 common shares subsequent to June 30,
1997 and the exercise of option for 25,000 common shares.
h) to eliminate charge for stock-based compensation related to the
reorganization.
F-26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 23, 1998 TURBOSONIC TECHNOLOGIES, INC.
(registrant)
By: /s/Patrick Forde
--------------------------------
Patrick Forde
Secretary
4