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 DECEMBER 31, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
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Commission File Number 0-21832
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TurboSonic Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-1949528
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Parkside Drive, Suite A-14, Waterloo, Ontario Canada N2L 5V4
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(Address of principal executive offices) (Zip Code)
519-885-5513
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(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 December 31, 1998 10,000,000 shares of common stock
were outstanding.
TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
Form 10-QSB
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
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Item 1.
Consolidated Statements of Operations
(Unaudited) for the Three Months and the Six Months
Ended December 31, 1998 and 1997 3
Consolidated Balance Sheets
at December 31, 1998 (Unaudited) and June 30, 1998 (Audited) 4
Consolidated Statements of Cash Flow
(Unaudited) for the Six Months Ended
December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements
(Unaudited) 6-8
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8-11
PART 11 - OTHER INFORMATION
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Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a
Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature
TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
US dollars
(Unaudited)
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
December 31, 1998 December 31, 1997 December 31, 1998 December 31, 1997
----------------- ---------------- ----------------- -----------------
Original equipment revenue $ 592,222 $ 765,754 $ 932,279 $1,256,335
Rehabilitation, maintenance and
spare parts revenue 424,199 342,881 1,068,021 575,509
----------- --------- --------- ---------
Total Revenue 1,016,421 1,108,635 2,000,300 1,831,844
----------- --------- --------- ---------
Cost of Original Equipment 354,182 609,408 567,536 900,498
Cost of rehabilitation, maintenance
and spare parts 261,263 173,083 683,628 317,910
----------- --------- --------- ---------
Total cost of goods sold 615,445 782,491 1,251,164 1,218,408
----------- --------- --------- ---------
Gross Profit 400,976 326,144 749,136 613,436
Selling, general and administrative
expenses 248,400 430,413 594,146 768,192
Depreciation and amortization 49,253 50,042 97,179 96,106
Debt Conversion Inducement Expense 0 94,675 0 94,675
----------- --------- --------- ---------
Total Expenses 347,653 575,130 691,375 958,973
----------- --------- --------- ---------
Gain (Loss) from Operations 53,323 (248,986) 57,761 (345,537)
Interest Income (Expense) (6,440) 9,595 (9,507) 12,669 (a)
----------- --------- --------- ---------
Net Income (Loss) before taxes 46,883 (239,391) 48,254 (332,868)
----------- --------- --------- ---------
Tax Provision 0 2,055 0 2,055
----------- --------- --------- ---------
Net Income (Loss) after taxes $46,883 ($241,446) $48,254 ($334,923)
=========== ========= ========== =========
Weighted average number of shares 10,000,000 6,299,906 10,000,000 6,299,906
outstanding
Incremental shares using treasury
method 10,400,000 6,299,906(b) 10,400,000 6,299,906 (b)
Basic EPS $0.005 ($0.038) $0.005 ($0.053)
Diluted EPS $0.005 ($0.038) $0.005 ($0.053)
(a) restated to reflect impact of DVF interest forgiveness on equity rather
than income;
(b) no incremental shares related to options are included due to the loss in
the 1st and 2nd quarters of fiscal '97.
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TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(US dollars)
December 31, 1998 June 30, 1998
Assets (Unaudited) (audited)
----------------- --------------
Current Assets:
Cash $ 235,303 $ 69,277
Contracts and accounts receivable, net of allowance
for doubtful accounts of $57,046 and $101,941 436,321 491,137
Deferred contract costs and unbilled revenue 191,430 52,764
Inventories 123,701 137,388
Income Tax Receivable 27,890 29,135
Other current assets 92,117 111,286
----------- -----------
Total current assets 1,106,762 890,987
Equipment and leasehold improvements,
at cost, net of accumulated depreciation 99,065 113,489
Investment in unconsolidated subsidiaries 10,755 10,746
Patents, less accumulated amortization 1 1
Goodwill 1,324,747 1,395,943
Other assets 9,660 9,660
----------- -----------
Total Assets $2,550,990 $2,420,826
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable & accrued expenses $ 859,026 $ 865,670
Billings in excess of costs and estimated
earnings on uncompleted contracts 149,954 163,752
----------- -----------
1,008,980 1,029,422
----------- -----------
Accrued Expenses 124,817 152,262
Loans from Shareholders [Note 4] 126,625 -
----------- -----------
1,260,422 1,181,684
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Stockholders' Equity:
Authorized Share Capital
21,800,000 common shares $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 [Note 4] 1,443,746 1,439,586
----------- -----------
3,691,080 3,686,920
Currency translation adjustments (19,373) (18,384)
Accumulated deficit (2,381,139) (2,429,394)
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Total stockholders' equity 1,290,568 1,239,142
----------- -----------
Total Liabilities and Stockholders' Equity $2,550,990 $2,420,826
=========== ===========
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TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
for the six months ended December 31, 1998 and 1997
(U. S. dollars) (Unaudited)
December 31, 1998 December 31, 1997
----------------- -----------------
Cash flows from operating activities
Net income (loss) $ 48,254 ($ 334,923)
Add (deduct) charges to operations not requiring
a current cash payment
Depreciation and amortization 97,179 96,106
Debt conversion expense 0 94,675
---------- ------------
145,433 144,142)
Changes in non-cash working capital balances related to operations:
Decrease (increase) in accounts receivable 54,816 77,903
(Increase) decrease in income taxes recoverable 1,245 (15,097)
Decrease (increase) in inventories 13,687 235
Decrease (increase) in deferred contract costs
and unbilled revenue (138,666) 197,001
Decrease (increase) in other current assets 19,169 (28,128)
Decrease (increase) in other assets 0 13,937
Increase (decrease) in accounts payable and
accrued charges (34,089) (262,898)
Increase (decrease) in unearned revenue and
contract advances 13,798) (135,064)
Increase (decrease) in income taxes payable 0 (12,703)
---------- ------------
(97,636) (164,814)
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Net cash provided by (applied to) operating activities 47,797 (308,956)
---------- ------------
Cash flows from investing activities:
Purchase of fixed assets (11,650) (35,598)
Deposit and prepaid costs 0 (118,391)
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Net cash (applied to) provided by investing activities (11,650 (153,989)
---------- ------------
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)
Shareholder loans 130,783 0
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Net cash provided (used) by financing activities 130,783 102,185
---------- ------------
Effect of exchange rate change on cash (904) (2,005)
---------- ------------
Net cash (applied) provided during year 166,026 (392,765)
Cash - beginning of period 69,277 406,847
Cash acquired on reverse acquisition 0 174,786
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Cash - end of period $235,303 $218,868
========== ============
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TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 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
(the "Consolidation") pursuant to a Plan of Reorganization that was approved by
the Federal Bankruptcy Court on July 3, 1997 (see Note 3).
The Consolidation was treated for accounting purposes as a purchase by Turbotak
of Sonic in a reverse acquisition. Consequently, the accompanying consolidated
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 six month period ended December 31, 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.
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Note 2. Costs and Estimated Earnings on Uncompleted Contracts
December 31, 1998 June 30, 1998
----------------- -------------
Costs incurred on uncompleted contracts 969,686 2,246,434
Estimated earnings 348,128 723,150
----------------- -------------
1,317,814 2,969,584
Less: billings to date 1,276,338 3,080,572
----------------- -------------
Included in accompanying balance sheets
under the following captions: 41,476 (110,988)
================= =============
Costs and estimated earnings in excess of
billings on uncompleted contracts 191,430 52,764
Billings in excess of costs and estimated
earnings on uncompleted contracts (149,954) (163,752)
----------------- -------------
41,476 (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 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 present shareholders on a pro-rata basis. The balance
of 10,000,000 shares
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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.
Note 4. Loans from Shareholders
An officer and director of the Company, together with another shareholder of the
Company, have 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 lenders were granted detachable 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 accordance with APB 14, a portion of the proceeds of the debt
securities issued with detachable stock purchase warrants, which is allocated as
the fair-value of the warrants, has been accounted for as paid-in capital. The
related discount on the debt securities will be amortized over the remaining
period to maturity.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Three Months ended December 31, 1998 Compared with Three Months ended December
31, 1997
Original equipment revenue decreased by $173,532 (22.7%) to $592,222 for the
three month period ended December 31, 1998 from $765,754 for the same period in
1997. The decrease in revenues for the three month period ended December 31,
1998 was primarily due to a decreased need by our customer base for systems-type
projects in this period, and a greater focus on replacing componetry as
reflected in our increased results in the rehabilitation, maintenance and spare
parts segment. 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 $81,318 (23.7%)
to $424,199 for the three month period ended December 31, 1998 from $342,881 for
the same period in 1997. This increase reflects a return to a more normal volume
of this segment for this particular period of the year.
Cost of original equipment decreased by $255,226 (41.9%) to $354,182 for the
three month period ended December 31, 1998 from $609,408 for the same period in
1997. As a percentage of original equipment revenue, cost of original equipment
was 59.8% for the three month period ended December 31, 1998 and 79.6% for the
same period in 1997. The decreased percentage in costs for original equipment in
the December 1998 quarter reflects a return to historical gross margins.
- 8 -
Cost of rehabilitation, maintenance and spare parts increased by $88,180 (50.9%)
to $261,263 for the period ended December 31, 1998 from $173,083 for the same
1997 period. The increased costs are primarily the result of the increased
volume reported above. As a percentage of rehabilitation, maintenance and spare
parts revenue, the costs were 61.6% for the three month period ended December
31, 1998 and 50.5% for the same period in 1997. The increased percentage
reflects a return to historical gross margins.
Selling, general and administrative expenses decreased $227,477 (39.6%) to
$347,653 for the three month period ended December 31, 1998 from the same period
in 1997. As a percentage of total revenue, selling, general and administrative
expenses were 34.2% for the quarter ended December 31, 1998 and 51.9% for the
same period in 1997. This reduction was the result of increased engineering
absorption in the current quarter, together with the non-recurrence of a charge
against income in 1997 for Debt Conversion Inducement expense. Amortization of
goodwill which was created as the result of the merger with Sonic Environmental
amounted to $38,337 in the current quarter.
Interest expense of $6,440 was recorded for the three months ended December 31,
1998 from interest income of $9,595 for the same period in 1997, a decrease of
$16,035. The decrease is the result of interest on shareholder loans in this
period compared to the same period a year earlier.
Results of Operations
Six Months ended December 31, 1998
Compared with Six Months ended December 31, 1997
Original equipment revenue decreased by $324,056 (25.6%) to $932,279 for the six
month period ended December 31, 1998 from $1,256,335 for the same period in
1997. The decrease in revenues for the six month period ended December 31, 1998
was primarily due to a decreased need by our customer base for systems-type
projects in this period, and a greater focus on replacing componetry as
reflected in our increased results in the rehabilitation, maintenance and spare
parts segment.
Rehabilitation, maintenance and spare parts revenue increased by $492,512
(85.6%) to $1,068,021 for the six month period ended December 31, 1998 from
$575,509 for the same period in 1997. This increase reflects a return to a more
normal volume of this segment for this particular period of the year.
Cost of original equipment decreased by $332,962 (37.0%) to $567,536 for the six
month period ended December 31, 1998 from $900,498 for the same period in 1997.
As a percentage of original equipment revenue, cost of original equipment was
60.9% for the six month period ended December 31, 1998 and 71.7% for the same
period in 1997. The decreased percentage in costs for original equipment in the
December 1998 quarter reflects a return to historical gross margins.
Cost of rehabilitation, maintenance and spare parts increased by $365,718
(115.0%) to $683,628 for the period ended December 31, 1998 from $317,910 for
the same 1997 period. The increased costs are primarily the result of the
increased volume reported above. As a percentage of rehabilitation, maintenance
and spare parts revenue, the costs were 64.0% for the six month period ended
December 31, 1998 and 55.2% for the same period in 1997. The increased
percentage reflects a return to historical gross margins.
Selling, general and administrative expenses decreased $267,598 (27.9%) to
$691,375 for the six month period ended December 31, 1998 from the same period
in 1997. As a percentage of total revenue, selling, general and administrative
expenses were 34.6% for the half year ended December 31, 1998 and 52.4% for the
same period
- 9 -
in 1997. This reduction was the result of increased engineering absorption in
the current quarter, together with the non-recurrence of a charge against income
in 1997 for Debt Conversion Inducement expense. Amortization of goodwill which
was created as the result of the merger with Sonic Environmental amounted to
$78,087 in the six month period.
Interest expense of $9,507 was recorded for the six months ended December 31,
1998 from interest income of $12,669 for the same period in 1997, a decrease of
$22,176. The decrease is the result of interest on shareholder loans in this
period compared to the same period in 1997.
Liquidity and Capital Resources
The Company had a positive cash flow from operating activities of $47,797 for
the six month period ended December 31, 1998 as compared to negative cash flow
of $308,956 for the same period in 1997, an increase of $356,753.
At December 31, 1998, the Company had working capital of $97,782 as compared to
negative working capital as at June 30, 1998 of $138,435, an increase in working
capital of $236,217. The Company's current ratio (current assets divided by
current liabilities) was 1.10 and 0.87 as at December 31, 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 has 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 December 31, 1998, "Deferred costs and unbilled revenue"
exceeded "Unearned revenue and contract advances", by $41,476 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 $138,435. 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
detachable warrants to purchase as 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
until October 21, 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
accordance with APB 14, a portion of the proceeds of the debt securities issued
with detachable stock purchase warrants, which is allocated as the fair-market
value of the warrants, has been accounted for as paid-in capital. The related
discount on the debt securities will be amortized over the remaining period to
maturity.
- 10 -
In addition, Patrick J. Forde, an officer and director of the Company, has
provided a further loan of Canadian $100,000 on 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 December 31, 1998 was approximately $796,000, 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.
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.
- 11 -
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
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: February 8, 1999
TURBOSONIC TECHNOLOGIES, INC.
by: /s/ PATRICK FORDE
-------------------
Patrick Forde, Treasurer and
Principal Financial and
Accounting Officer
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