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 ACT
OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
__________________________________________________
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________________________________________
Commission File Number 0-21832
_________________________________________________________
TurboSonic Technologies, Inc.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 13-1949528
________________________________________________________________________________
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
550 Parkside Drive, Suite A-14, Waterloo, Ontario Canada N2L 5V4
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
519-885-5513
________________________________________________________________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the proceeding 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN A BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of September 30, 1998 10,000,000 shares of common stock were outstanding.
TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
Form 10-QSB
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1.
Consolidated Statements of Operations
(Unaudited) for the Three Months and the Nine Months
Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets
at September 30, 1998 (Unaudited) and June 30, 1998 4
Consolidated Statements of Cash Flow
(Unaudited) for the Three Months Ended
September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements
(Unaudited) 6-7
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8-10
PART 11 - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a
Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature
TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
US dollar
(Unaudited)
For the Three Months For the Three Months
Ended Ended
September 30, 1998 September, 1997
--------------------- ---------------------------
(restated - see (a) below)
Original equipment revenue $ 340,057 $ 490,581
Rehabilitation, maintenance and 643,822 232,628
spare parts revenue ---------- ---------
Total Revenue 983,879 723,209
---------- ---------
Cost of Original Equipment 213,354 291,090
Cost of rehabilitation, maintenance
and spare parts 422,365 144,827
---------- ---------
Total cost of goods sold
635,719 435,917
---------- ---------
Gross Profit 348,160 287,292
Selling, general and administrative 295,796 337,779
Depreciation and Amortization 47,926 46,064
---------- ---------
Total Expenses 343,722 383,843
---------- ---------
Gain (Loss) from Operation 4,438 (96,551)
Interest Income (Expense) (3,067) 3,074 (a)
---------- ---------
Net Income (Loss) $ 1,371 $ (93,477)
========== =========
10,000,000 4,441,122
Weighted average number of shares outstanding ========== =========
Incremental shares using treasury method 10,200,000 4,441,122 (b)
========== =========
Basic EPS $ 0.00 $ (0.02)
========== =========
Diluted EPS $ 0.00 $ (0.02)
========== =========
(a) restated to reflect treatment of CVF
interest forgiveness as a credit to equity
rather than income;
(b) no incremental shares related to options
are included due to the loss in the 1st
quarter fiscal '97.
- 3 -
TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(US dollars)
September 30, 1998 June 30, 1998
Assets (Unaudited) (audited)
------------------ -------------
Current Assets:
Cash $ 19,059 $ 69,277
Contracts and accounts receivable, net of allowance
for doubtful accounts of $109,116 and $101,941 545,910 491,137
Deferred contract costs and unbilled revenue 185,816 52,764
Inventories 123,357 137,388
Income Tax Receivable 27,928 29,135
Other current assets 96,980 111,286
-------------- -------------
Total current assets 999,050 890,987
Equipment and leasehold improvements,
at cost, net of accumulated depreciation 101,953 113,489
Investment in unconsolidated subsidiaries 10,746 10,746
Patents, less accumulated amortization 1 0
Goodwill 1,363,703 1,395,943
Other assets 9,660 9,660
-------------- -------------
Total Assets $ 2,485,113 $ 2,420,826
============== =============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable & accrued expenses 991,113 865,670
Billings in excess of costs and estimated
earnings on uncompleted contracts 111,646 163,752
-------------- -------------
Total current liabilities 1,102,759 1,029,422
Accrued expenses 142,746 152,262
-------------- -------------
Total Liabilities 1,245,505 1,181,684
-------------- -------------
Stockholders' Equity:
Authorized Share Capital
21,800,000 common shares par value $0.10 per share
8,200,000 exchangeable common shares par value
$0.10 per share
Issued Share Capital
1,800,000 common shares - -
8,200,000 exchangeable shares 2,247,334 2,247,334
Additional paid - in capital 1,439,586 1,439,586
-------------- -------------
3,686,920 3,686,920
Currency translation adjustments (19,290) (16,384)
Accumulated deficit (2,428,022) (2,429,394)
-------------- -------------
Total stockholders' equity 1,239,608 1,239,142
-------------- -------------
Total Liabilities and Stockholders' Equity $ 2,485,113 $ 2,420,826
============== =============
- 4-
TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
for the three months ended September 30, 1998 and 1997
(U. S. dollars) (Unaudited)
September 30, 1998 September 30, 1997
------------------ ------------------
Cash flows from operating activities
Net income (loss) $ 1,371 ($93,477)
Add (deduct) charges to operations not requiring
a current cash payment
Depreciation and amortization 43,776 46,064
----------------- ----------------
45,147 (47,413)
Changes in non-cash working capital balances
related to operations:
Decrease (increase in accounts receivable (54,773) 454,610
(Increase) decrease in income taxes recoverable 1,207 0
Decrease (increase) in inventories 14,031 2,753
Decrease (increase) in deferred contract costs
and unbilled revenue (133,052) 4,352
Decrease (increase) in other current assets 14,306 (3,964)
Decrease (increase) in other assets 0 10,812
Increase (decrease) in accounts payable and
accrued charges 115,926 (271,724)
Increase (decrease) in unearned revenue and
contract advances (52,106) 9,274
Increase (decrease) in income taxes payable 0 (12,703)
--------- ---------
(94,461) 193,410
--------- ---------
Cash (applied to) operating activities (49,314) 145,997
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets 0 (28,479)
Deposit and prepaid costs 0 (118,391)
--------- ---------
Net cash (applied to) provided by investing activities 0 (146,870)
--------- ---------
Cash flows from financing activities
Proceeds from issuance of common stock 0 144,113
Cash held in trust 0 67,427
Deposit on common share offering 0 (109,355)
--------- ---------
Net cash provided (used) by financing activities 0 102,185
--------- ---------
Effect of exchange rate change on cash (904) (2,005)
--------- ---------
Net cash (applied) provided during year (50,218) 99,307
Cash - beginning of period 69,277 406,847
Cash acquired on reverse acquisition 0 174,786
--------- ---------
Cash - end of period $ 19,059 $ 680,940
========= =========
- 5 -
TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
Note 1. Basis of Presentation
TurboSonic Technologies, Inc., formerly known as Sonic Environmental Systems,
Inc. and its subsidiaries (collectively the "Company"), directly and through
subsidiaries, designs and markets integrated pollution control and industrial
gas cooling/conditioning systems including liquid atomization technology, dust
suppression systems and ceramic heat exchanger systems to ameliorate or abate
industrial environmental problems. Sonic Environmental Systems, Inc. (Sonic)
was consolidated with Turbotak Technologies, Inc. (Turbotak) on August 27, 1997
pursuant to a Plan of Reorganization that was approved by the Federal Bankruptcy
Court on July 3, 1997 (see Note 3).
The merger was treated for accounting purposes as a purchase by Turbotak of
Sonic in a reverse merger. Consequently, the accompanying consolidated
condensed financial statements include the accounts of Turbotak and its
majority-owned subsidiaries. The accounts of Sonic were included with
Turbotak's accounts effective September 1, 1997 and incorporated all adjustments
related to the Plan of Reorganization.
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulations S-X. Accordingly, these financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending June 30, 1999. These consolidated financial statements should be read in
conjunction with the financial statements and footnotes thereto included in the
Company's annual report on form 10-KSB for the year ended June 30, 1998.
- 6 -
Note 2. Costs and Estimated Earnings on Uncompleted Contracts
------------------------------------------------------
September 30, 1998 June 30, 1998
------------------ -------------
Costs incurred on uncompleted contracts 952,012 2,246,434
Estimated earnings 327,899 723,150
1,279,911 2,969,584
Less: billings to date 1,204,934 3,080,572
------------------ -------------
Included in accompanying balance sheets
under the following captions: 74,170 (110,988)
================== =============
Cost and estimated earnings in excess of 185,816 52,764
billings on uncompleted contracts
Billings in excess of costs and estimated (111,646) (163,752)
earnings on uncompleted contracts ------------------ -------------
74,170 (110,988)
================== =============
Note 3. Other Events
------------
On July 17, 1996, certain of Sonic's creditors instituted an involuntary
liquidation proceeding against Sonic under Chapter 7 of the Federal Bankruptcy
Code. On September 16, 1996, the Court converted this involuntary proceeding
into a voluntary Chapter 11 reorganization proceeding. Contemporaneously
therewith, Sonic entered into an agreement with Turbotak, a privately held
Canadian company engaged in the design, manufacture, and servicing of air
pollution control equipment, which, among other matters, provided for Turbotak's
acquisition of an approximately $940,000 secured and unsecured bank claim
against Sonic and its advance of $205,000 to Sonic for working capital. Such
agreement further provided that Sonic would propose a Chapter 11 Plan of
Reorganization which, among other matters, would provide for a merger of Sonic
and Turbotak and the acquisition by Turbotak's shareholders of a controlling
equity interest in the merged company, TurboSonic Technologies, Inc.
The Plan of Reorganization was confirmed by the Court on July 3, 1997 following
requisite creditor approval. The Plan provided for the extinguishment of all
outstanding shares of the Company's common stock, as well as all outstanding
warrants and options to purchase the Company's common stock. The Plan further
provided that the Company consolidate with Turbotak (the "Consolidation") to
form a company to be called TurboSonic Technologies, Inc. which would have
10,000,000 shares of common stock outstanding, of which 8,200,000 shares or 82%
would be owned by Turbotak's present shareholders, and 1,255,700 shares or
approximately 12.6% would be issued to Sonic's existing shareholders on a pro-
rata basis. The balance of 10,000,000 shares would be issued to Sonic's
creditors and others as described in the Plan of Reorganization. Consummation of
the Consolidation, which also extinguished Turbotak's claims against Sonic, took
place on August 27, 1997.
- 7 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended September 30, 1998
Compared with Three Months Ended September 30, 1997
- ---------------------------------------------------
Original equipment revenue decreased by $150,524 (30.7%) to $340,057 for the
three month period ended September 30, 1998 from $490,581 for the same period in
1997. This decrease was primarily due to a change in product mix, with a
decrease in system sales, offset by increased replacement of componetry in
existing systems as reflected in an increase in revenues from rehabilitation,
maintenance and spare parts, noted below. The new EPA "cluster rules", adopted
in early 1998 by the U.S. Government, have generated an increase in requests for
quotations for the Company's equipment which the Company hopes will result in
increased orders.
Rehabilitation, maintenance and spare parts revenue increased by $411,194
(176.8%) to $643,822 for the three month period ended September 30, 1998 from
$232,628 for the same period in 1997. This increase reflects a return to
historical levels of seasonal volume, as well as the effect of a full three
months of operation for the Company's New Jersey operation (formerly conducted
by Sonic) rather than only one month in the previous year due to the
Consolidation being effective August 27, 1997.
Cost of original equipment decreased by $77,736 (26.7%) to $213,354 for the
three month period ended September 30, 1998 from $291,090 for the same period of
1997. Expressed as a percentage of original equipment revenue, cost of original
equipment was 62.7% for the three month period ended September 30, 1998 and
59.3% for the same period of 1997. This increase is attributable to lower gross
margins on two key projects.
Cost of rehabilitation, maintenance and spare parts increased by $277,538
(191.6%) to $422,365 for the period ended September 30, 1998 from $144,827 for
the same 1997 period. The increase is primarily the result of the increased
volume noted above. Expressed as a percentage of rehabilitation, maintenance
and spare parts revenue, such cost was 65.6% for the three month period ended
September 30, 1998 and 62.3% for the same period in 1997. The increased
percentage is the result of a reduction in selling prices for certain product
lines.
Selling, general and administrative expenses decreased $41,983 (12.4%) to
$295,796 for the three month period ended September 30, 1998 from the same
period in 1997. Expressed as a percentage of total revenue, selling, general
and administrative expenses were 30.1% for the quarter ended September 30, 1998
and 46.7% for the same period in 1997. This decrease was primarily the result
of increased engineering absorption in the current quarter. Amortization of
goodwill created by the Consolidation amounted to $39,750 in the current
quarter.
- 8 -
Liquidity and Capital Resources
- -------------------------------
The Company had a negative cash flow from operating activities of $49,314 for
the three month period ended September 30, 1998 as compared to a positive cash
flow of $145,997 for the same period in 1997, a decrease of $195,311.
At September 30, 1998, the Company had negative working capital of $103,708 as
compared to negative working capital as at June 30, 1998 of $138,435, an
increase in working capital of $34,567. The Company's current ratio (current
assets divided by current liabilities) was 0.91 and 0.87 as at September 30,
1998 and June 30, 1998, respectively.
The Company's contracts typically provide for progress payments based upon the
achievement of performance milestones or the passage of time. The Company's
contracts often provide for the Company's customers to retain a portion of the
contract price until the achievement of performance guarantees have been
demonstrated. The Company attempts to have its progress billings exceed its
costs and estimated earnings on uncompleted contracts; however, it is possible,
at any point in time, that costs and estimated earnings can exceed progress
billings on uncompleted contracts, which would negatively impact cash flow and
working capital. At September 30, 1998, "Deferred costs and unbilled revenue"
exceeded "Unearned revenue and contract advances", by $74,170, thereby
positively effecting working capital. At June 30, 1998, "Deferred costs and
unbilled revenue" were exceeded by "Unearned revenue and contract advances", by
$110,988, thereby negatively effecting working capital.
As a result of the loss from operations incurred in the year ended June 30,
1998, the Company depleted its cash resources and had a working capital
deficiency as at June 30, 1998 of $138,434. As a consequence of such
deficiency, Donald R. Spink, Sr., an officer and director of the Company,
together with another shareholder of the Company, lent an aggregate of Canadian
$200,000 (representing $129,400 at the exchange rate of $0.647 at such date) to
the Company on October 21, 1998. These loans bear interest at 10% per annum,
are repayable on October 21, 2000, and are collateralized by a lien upon and
security interest in substantially all of the Company's assets. As an
inducement to advance these sums to the Company, the several lenders were
granted warrants to purchase an aggregate of 200,000 common shares of the
Company at an initial exercise price of $0.50 through October 31, 2000,
increasing to $0.75 thereafter through October 31, 2002 and to $1.00 thereafter
through October 31, 2003, respectively. The warrants, whose initial exercise
price was greater than the market price of the Company's common shares on the
date such warrants were granted, expire on the earlier of October 31, 2003 or 30
days after the Company's shares have closed at a price per share above $1.50 for
10 consecutive trading days on the NASDAQ over-the-counter Bulletin Board.
In addition, Patrick J. Forde, an officer and director of the Company, has
provided a memorandum of intent to provide a further loan of Canadian $100,000
prior to January 4, 1999 with identical terms to the above loans.
The aforementioned shareholders have indicated their intention to provide
financial support to the Company, if required, to meet working capital needs
during the next year.
The Company's backlog as at September 30, 1998 was approximately $960,000, all
of which the Company believes will be shipped prior to the end of the current
fiscal year. The Company believes that the projected cash generated from
operations and the proceeds from the above mentioned financing will be
sufficient to meet its cash needs through the end of the fiscal year ended June
30, 1999.
- 9 -
Year 2000
- ---------
The Company has performed a review of its Year 2000 preparedness relative to
its products and systems, its accounting software and its computer hardware.
The Company believes that it will not incur material costs in connection with
becoming Year 2000 compliant. In addition, the Company has received
communications from its significant third party vendors and service providers
stating that they are generally on target to become Year 2000 compliant in 1999
if they have not already done so. There can be no assurance that these third
party vendors and service providers will complete their own Year 2000 compliant
projects in a timely manner and that failure to do so would not have an adverse
impact on the Company's business.
Quantitative and Qualitative Information About Market Risk
- ----------------------------------------------------------
The Company does not engage in trading market risk sensitive instruments and
does not purchase hedging instruments or "other than trading" instruments that
are likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. The Company has
purchased no options and entered into no swaps. The Company has no bank
borrowing facility which could subject it to the risk of interest rate
fluctuations.
- 10 -
Part II - Other Information
- ---------------------------
Item 1. None
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. (a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K;
None
-11-
Signature
---------
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 hereunto duly authorized.
DATED: December 1, 1998
TURBOSONIC TECHNOLOGIES, INC.
by: /s/ PATRICK FORDE
---------------------
Patrick Forde, Treasurer and
Principal Financial and
Accounting Officer
-12-