10-Q 1 0001.txt QUARTERLY REPORT FOR QUARTER ENDED AUGUST 31, 2000 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: August 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No.: 0-16035 SONO-TEK CORPORATION (Exact name of registrant as specified in its charter) New York 14-1568099 (State or other jurisdiction of ( IRS Employer incorporation or organization) Identification No.) 2012 Rt. 9W, Milton, NY 12547 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone no., including area code: (845) 795-2020 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 preceding 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 CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Outstanding as of Class October 10, 2000 Common Stock, par value $.01 per share 8,954,855 SONO-TEK CORPORATION INDEX Part I - Financial Information Page Item 1 - Financial Statements: Consolidated Balance Sheets - August 31, 2000 (Unaudited) and February 29, 2000 1 Consolidated Statements of Operations - Six Months and Three Months Ended August 31, 2000 and 1999 (Unaudited) 2 Consolidated Statements of Cash Flows - Six Months Ended August 31, 2000 and 1999 (Unaudited) 3 Notes to Consolidated Financial Statements (Unaudited) 4 - 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12 Item 3 - Quantitative and Qualitative Disclosure About Market Risk 12 Part II - Other Information 12 - 13 Signatures 14 SONO-TEK CORPORATION CONSOLIDATED BALANCE SHEETS
ASSETS August 31, February 29, 2000 2000 Current Assets Unaudited ------------------------------ Cash and cash equivalents $ 92,713 $ 8,176 Accounts receivable (less allowance of $51,997 and $39,997 at August 31 and February 29, respectively) 1,336,501 1,619,639 Inventories (Note 4) 983,057 1,224,380 Prepaid expenses and other current assets 99,645 74,308 ---------- ---------- Total current assets 2,511,916 2,926,503 Equipment, furnishings and leasehold improvements (less accumulated depreciation of $507,041 and $469,011 at August 31 and February 29, respectively) 322,714 256,994 Intangible assets, net: Goodwill (Note 1) 1,189,823 1,232,571 Patents and patents pending (Note 1) 28,642 31,642 Deferred financing fees 29,011 32,563 ---------- ---------- Total intangible assets 1,247,476 1,296,776 Long-term equity investment (Note 5) 0 19,310 Other assets 11,341 14,542 ---------- ---------- TOTAL ASSETS $4,093,447 $4,514,125 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $1,066,224 $847,135 Deferred revenue 22,251 725,491 Accrued expenses 669,182 437,342 Revolving line of credit 350,000 334,307 Short term loans-related parties (Note 6) 248,084 239,084 Current maturities of long term debt (Note 7) 248,564 220,532 Short term convertible loan 0 100,000 ---------- ---------- Total current liabilities 2,604,305 2,903,891 Subordinated mezzanine debt 392,932 382,060 Long term debt, less current maturities (Note 7) 187,293 273,544 Subordinated convertible loans-related parties 150,000 150,000 ---------- ---------- Total liabilities 3,334,530 3,709,495 ---------- ---------- Commitments and Contingencies - - Put Warrants 77,000 77,000 Stockholders' Equity Common stock, $.01 par value; 25,000,000 shares authorized, 8,954,855 and 8,886,612 outstanding at August 31 and February 29, respectively 89,549 88,666 Additional paid-in capital 5,844,042 5,711,800 Accumulated deficit (5,251,674) (5,072,836) ----------- ---------- Total stockholders' equity 681,917 727,630 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,093,447 $4,514,125 ========== ==========
See notes to consolidated financial statements. SONO-TEK CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended August 31, Three Months Ended August 31, Unaudited Unaudited 2000 1999 2000 1999 ---------------------------- ---------------------------- Net Sales $4,293,984 $2,108,428 $2,320,951 $1,303,099 Cost of Goods Sold 2,584,325 986,544 1,357,247 640,973 ---------- ---------- ---------- ---------- Gross Profit 1,709,659 1,121,884 963,704 662,126 ---------- ---------- ---------- ---------- Operating Expenses Research and product development costs 469,636 259,356 232,504 148,108 Marketing and selling expenses 745,273 484,696 341,575 267,591 General and administrative costs 448,144 290,854 237,601 174,655 ---------- ---------- ---------- --------- Total Operating Expenses 1,663,053 1,034,906 811,680 590,354 ---------- ---------- ---------- --------- Operating Income 46,606 86,978 152,024 71,772 Interest Expense (177,364) (129,037) (52,119) (16,269) Interest and Other (Loss) Income (48,080) 12,568 (15,013) 6,099 ---------- ---------- ---------- --------- (Loss) Income Before Income Taxes (178,838) (29,491) 84,892 61,602 Income Tax Expense 0 0 0 0 ---------- ---------- ---------- --------- Net (Loss) Income $(178,838) $(29,491) $84,892 $61,602 ========== ========== ========== ========= Basic (Loss) Earnings Per Share $(0.02) $(0.00) $0.01 $0.01 ======= ======= ===== ===== Diluted (Loss) Earnings Per Share $(0.02) $(0.00) $0.01 $0.01 ======= ======= ===== ===== Weighted Average Shares - Basic 8,954,006 6,594,581 8,954,855 6,907,494 ========= ========= ========= ========= Weighted Average Shares - Diluted 8,954,006 6,594,581 11,373,814 8,197,809 ========= ========= ========== =========
See notes to consolidated financial statements. SONO-TEK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended August 31, Unaudited 2000 1999 ---------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(178,838) $(29,491) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Non-cash charge for issuance of warrants 75,831 102,626 Accrued interest-short term loans-related parties 20,079 9,399 Imputed interest expense on subordinated mezzanine debt 10,872 0 Loss on equity investment 19,310 0 Depreciation and amortization 87,329 34,318 Provision for doubtful accounts 12,000 915 (Increase) decrease in: Accounts receivable 271,138 (506,718) Inventories 241,323 14,019 Prepaid expenses and other current assets (22,138) 15,732 Increase (decrease) in: Accounts payable and accrued expenses 227,604 266,970 Customer deposits203,250 31,847 Deferred revenue (703,240) 0 Non-current rent payable 0 499 --------- -------- Net Cash Provided by (Used in) Operating Activities 264,520 (59,884) --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition costs net of cash received 0 (315,518) Purchase of equipment and furnishings (103,750) (6,469) --------- -------- Net Cash Used in Investing Activities (103,750) (321,987) --------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit 15,693 100,000 Proceeds from bank loan for production equipment 78,859 0 Proceeds from short term loans-related party 135,000 127,000 Proceeds from issuance of stock 0 222,000 Proceeds from exercise of warrants 55,692 0 Proceeds from exercise of stock options 1,602 0 Financing costs paid 0 (10,000) Repayments of short term loans-related party (126,000) (50,000) Repayments of short term borrowings (100,000) 0 Repayments of note payable and equipment loans (137,079) (19,083) --------- -------- Net Cash (Used in) Provided by Financing Activities (76,233) 369,917 --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 84,537 (11,954) CASH AND CASH EQUIVALENTS Beginning of period 8,176 70,051 --------- -------- End of period $92,713 $58,097 ========= ======== SUPPLEMENTAL DISCLOSURE: Interest paid $ 36,019 $ 12,846 ========= ========= Non-cash exchange of accrued bonuses for common stock $0 $ 17,188 == =========
See notes to consolidated financial statements. SONO-TEK CORPORATION Notes to Consolidated Financial Statements (Unaudited) August 31, 2000 and 1999 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation - The accompanying consolidated financial statements of Sono-Tek Corporation, a New York Corporation (the "Company"), include the accounts of the Company and its wholly owned subsidiary, Sono-Tek Cleaning Systems, Inc. ("SCS"), formerly known as S&K Products International, Inc., a New Jersey Corporation ("S&K"), which the Company acquired on August 3, 1999 (the "Acquisition"). All significant intercompany accounts and transactions are eliminated in consolidation. The inclusion of SCS's results since August 23, 1999 has an effect on the comparison of the Company's fiscal year 2001 results to prior periods. Interim Reporting - The attached summary consolidated financial information does not include all disclosures required to be included in a complete set of financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Such disclosures were included with the financial statements of the Company at February 29, 2000, and included in its report on Form 10-K. Such statements should be read in conjunction with the data herein. The financial information reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The results for such interim periods are not necessarily indicative of the results to be expected for the year. Goodwill - Goodwill is being amortized on a straight-line basis over 15 years. Patent and Patent Pending Costs - Cost of patent applications are deferred and charged to operations over seventeen years for domestic patents and twelve years for foreign patents. However, if it appears that such costs are related to products which are not expected to be developed for commercial application within the foreseeable future, or are applicable to geographic areas where the Company no longer requires patent protection, they are written off to operations. The accumulated amortization was $83,053 and $80,053 at August 31, 2000 and February 29, 2000, respectively. Reclassifications - Certain February 29, 2000 balances have been reclassified to conform with the current period presentation. Adoption of Financial Accounting Standards - In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement establishes standards for the accounting and reporting for derivative instruments and for hedging activities and requires the recognition of all derivatives as assets or liabilities measured at their fair value. Gains or losses resulting from changes in the fair value of derivatives would be recognized in earnings in the period of change unless certain hedging criteria are met. The Company does not expect SFAS 133 to have a material impact on the consolidated financial statements. The FASB issued SFAS Nos. 137 and 138, which deferred the effective date of implementation of SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. Revenue Recognition in Financial Statements - In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principals to revenue recognition in financial statements. On June 26, 2000, the SEC issued SAB 101B to defer the effective date of implementation of SAB 101 until no later than the fourth quarter of fiscal years beginning after December 31, 1999. The Company is required to adopt SAB 101 by February 28, 2001. The Company does not expect the adoption of SAB 101 to have a material impact on the consolidated financial statements. NOTE 2: SEGMENT INFORMATION The Company has two reportable segments: spraying products and cleaning and drying systems. The spraying products segment is primarily engaged in the business of developing, manufacturing, selling, installing and servicing ultrasonic spray equipment. The cleaning and drying systems segment is engaged in the business of developing, manufacturing, selling, installing and servicing cleaning and drying systems for the semiconductor, disk drive and precision cleaning industries. Summary financial information concerning the Company's reportable segments is shown in the following table:
Six Months Ended August 31, 2000 Spraying Cleaning Products Systems Total -------- ------- ----- Sales $2,170,821 $2,123,163 $4,293,984 Net Income (Loss) 137,140 (315,978) (178,838) Capital Expenditures 98,308 5,442 103,750 Depreciation and Amortization Expense 33,896 53,433 87,329 Identifiable Net Assets at August 31, 2000 267,556 491,361 758,918 Three months Ended August 31, 2000 Spraying Cleaning Products Systems Total -------- ------- ----- Sales $1,203,816 $1,117,135 $2,320,951 Net Income (Loss) 173,649 (88,757) 84,892 Capital Expenditures 24,524 5,442 29,966 Depreciation and Amortization Expense 17,240 29,214 46,454
The Company operated in a single reportable segment for the period from March 1, 1999 through August 3, 1999. Segment information for the period August 4, 1999 to August 31, 1999, as a result of the Acquisition (Note 3) on August 3, 1999, is not materially different than if the Company only operated in a single segment and is therefore omitted. NOTE 3: ACQUISITION On August 3, 1999 the Company purchased all the outstanding stock of S&K, a supplier of cleaning and drying systems for the semiconductor, disk drive and precision cleaning industries. In June 2000, the Company changed S&K's name to SCS. The following unaudited proforma information presents a summary of the consolidated results of operations of Sono-Tek Corporation and SCS as if the acquisition had occurred on March 1, 1999. Proforma Consolidated Statement of Operations Six month period ended August 31, 1999 Net Sales $2,667,655 Cost of Goods Sold 1,222,607 --------- Gross Profit 1,445,048 Operating Expenses 1,555,081 --------- Net Loss (110,033) Interest Expense (160,122) Interest & Misc. Income 28,970 --------- Net Loss $(241,185) ========= These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as additional amortization expense as a result of goodwill and the elimination of extraordinary items associated with the SCS acquisition. They do not purport to be indicative of the results of operations that actually would have resulted had the combination occurred on March 1, 1999, or of future results of operations of the consolidated entities. NOTE 4: INVENTORY Inventories at August 31, 2000 are comprised of: Finished goods $191,966 Work in process 200,868 Consignment 13,090 Raw materials and subassemblies 766,733 --------- Total 1,172,657 Less: Allowance (189,600) --------- Net inventories $ 983,057 ========= NOTE 5: LONG-TERM EQUITY INVESTMENT - NET In January 2000, in connection with the formation of PNR America, LLC, a Delaware limited liability company ("PNR America"), the Company invested $19,600 in PNR America for a 49% ownership interest. Flowtech Srl, an Italian company ("Flowtech"), a pressure nozzle manufacturer, owns the remaining 51%. In August 2000, the Company and Flowtech pledged an additional investment of $9,800 and $10,200, respectively in PNR America, thereby maintaining each's proportional share. PNR America was formed to market and sell nozzles imported from Flowtech in the U.S. The PNR America product line compliments the Company's existing business as there are certain basic nozzle properties common to both product lines and capitalizes on the Company's existing relationships with its customers. Prior to the formation of PNR America, the Company had conducted business with Flowtech as a U.S. distributor. Certain of the Company's officers and directors are also officers and directors of PNR America, however, PNR America's board of directors is controlled by Flowtech. The Company does not control PNR America and it is therefore not consolidated for reporting purposes. The Company shares its facilities and personnel with PNR America. The Company allocated costs of $24,620 and $57,230 to PNR America for the three and six month periods ended August 31, 2000, respectively, and $13,967 for the period of inception through February 29, 2000. Balances due from PNR America of $46,684 and $13,967 at August 31, 2000 and February 29, 2000, respectively, are expected to be repaid out of PNR America's fiscal year 2000 operating cash flows. PNR America's year end is December 31, however, for financial reporting purposes the Company will reflect its proportionate share of the operating results of PNR America on a monthly basis, as the records are compiled by the Company. The Company's cumulative recorded equity loss in PNR America at August 31, 2000 was $46,684. The Company recognized, during the six and three month period ended August 31, 2000 and the period from inception to February 29, 2000, $18,023, $34,004 and $14,257, respectively as its estimate of the proportionate share of the net loss of PNR America. The Company, for financial reporting purposes, has netted the cumulative equity loss in PNR America with the intercompany balances due from PNR America. The Company did not record $1,088 of its proportional equity loss in PNR America for the quarter and six months ended August 31, 2000. At August 31, 2000, the Company had accumulated unrecorded equity losses in PNR America of $1,088. The Company will not record equity income from its investment in PNR America until such time as the accumulated unrecorded losses are recovered. The condensed financial information of PNR America as of August 31, 2000 and for the three month period ended August 31, 2000 is as follows: Net loss-three months ended August 31, 2000 $(39,002) Net loss-six months ended August 31, 2000 $(108,398) Total assets - current $37,400 ======= Due to Sono-Tek $46,684 Due to Flowtech 76,017 Accrued Expenses 12,194 ------- Liabilities 134,895 Stockholders' deficiency (97,495) Total liabilities and stockholders' deficiency $37,400 ======= NOTE 6: SHORT TERM LOANS - RELATED PARTIES From time to time the Company has required short-term loans to meet its payment obligations. All of these loans, which are payable on demand, have been provided by certain officers and directors of the Company at an interest rate of prime plus 2% at the date of the loan (9.75% to 11.5% at August 31, 2000). As of August 31, 2000 the amount of these loans outstanding was $248,084. Interest expense for the six month period ended and three month period ended August 31, 2000 was $9,276 and $4,510, respectively. Accrued interest was $20,079 and $13,165 at August 31, 2000 and February 29, 2000, respectively. NOTE 7: LONG TERM DEBT On June 29, 2000, the Company entered into a collateralized loan agreement with a bank to purchase production equipment. The five year loan for $33,500 carries an interest rate of prime plus 2%, which was 11.5% at the date of inception. The loan will be repaid in equal monthly installments of $558 plus interest. NOTE 8: EARNINGS PER SHARE Basic earnings per share ("EPS") and loss per share ("LPS") are computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS and LPS reflect the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock. Stock options granted but not yet exercised under the Company's stock option plans are included for Diluted EPS and LPS calculations under the treasury stock method. The computation of basic and diluted earnings (loss) per share are set forth on the following table:
Six Months Ended Three Months Ended August 31, August 31, 2000 1999 2000 1999 ---- ---- ---- ---- Numerator- Numerator for basic and diluted earnings (loss) per share $(178,838) $(29,491) $84,892 $61,602 ========== ========= ======= ======= Denominator: Denominator for basic earnings (loss) per share - weighted average shares 8,954,006 6,594,581 8,954,855 6,907,494 Effects of dilutive securities: Stock warrants 0* 0* 1,932,821 800,000 Stock options for employees, directors and outside consultants 0* 0* 486,138 490,315 --------- --------- ---------- --------- Denominator for diluted earnings (loss) per share 8,954,006** 6,594,581** 11,373,814 8,197,809 ========= ========= ========== =========
*Stock options and warrants for employees, directors and outside consultants are antidilutive as a result of the net loss and therefore are not considered in the Diluted LPS calculation. **The effect of considering the detachable warrants related to the convertible secured subordinated promissory notes which were converted on February 26, 1999, are antidilutive and therefore not considered for the Diluted LPS calculations. Under the assumption that stock options, warrants and convertible long term loans were not antidilutive as described in * and **, the denominator for Diluted LPS would be 11,199,372 and 8,197,809 weighted average shares at August 31, 2000 and 1999 respectively. NOTE 9: SUBSEQUENT EVENTS Intellectual property purchase - On September 21, 2000, the Company acquired certain intellectual property and intangible assets of Serec Corporation, a Rhode Island company which manufactured and sold solvent based cleaning systems. In exchange for $100,000 cash the Company received the rights to seven patents, one registered trademark, purchase orders, engineering designs and various other intangible assets. Letter of intent - On May 16, 2000, the Company signed a letter of intent to purchase all the outstanding stock of a corporation to further expand the Company's product base. Although this letter of intent has expired by its terms, the Company is continuing discussions with the selling shareholders to determine if there is a satisfactory way for this transaction to proceed. SONO-TEK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements made in this report may constitute "forward-looking statements" within the meaning of the Federal Securities Laws. Such forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions; political, regulatory, competitive and technological developments affecting the Company's operations or the demand for its products; timely development and market acceptance of new products; adequacy of financing; capacity additions; and ability to enforce patents. The Company undertakes no obligation to update publicly any forward-looking statements. Liquidity and Capital Resources The Company's working capital decreased $128,968 to a working capital deficiency of $(92,389) at August 31, 2000 from $36,579 at February 29, 2000. The decrease in working capital was primarily a result of an decrease in accounts receivable and inventories of $524,461 that was offset by an increase in accounts payable and accrued expenses of $450,929. The Company's stockholders' equity decreased $45,713 from $727,630 on February 29, 2000 to $681,917 on August 31, 2000. The decrease in stockholders' equity was the result of the loss of $179,926 for the six months ended August 31, 2000 that was offset by an increase in paid in capital of $132,242 for the exercise of warrants and options. During Fiscal Year 2000, the Company entered into an agreement with a Small Business Investment Corporation, Norwood Venture Corporation ("Norwood"), pursuant to which the Company obtained a five-year loan in the principal amount of $450,000. The terms of the loan require interest payments only for the first two years followed by monthly payments of $12,500 plus interest through September 30, 2004. The Company also granted Norwood a warrant to purchase 1,100,000 shares of the Company's common stock which can be put to the Company. Such warrants were valued at $77,000 which is accounted for as a discount and will be imputed as additional interest expense over the term of the loan. The Company currently has a $350,000 line of credit with a bank. The loan is collateralized by accounts receivable, inventory and all other personal property of the Company and is guaranteed by the CEO of the Company. As of August 31, 2000 the outstanding balance was $350,000. Due to the losses incurred during Fiscal Years 2000 and 1999, the Company has borrowed on a short term basis from officers and directors. As of August 31, 2000, the balance owed these officers and directors was $248,084. Although there can be no assurances, management believes that the continued sales and expanding markets for its spray products, and the sales of cleaning and drying equipment will lead to broader markets and increases in sales and profits. These factors, and the anticipated success of PNR America, should allow the Company to meet its current obligations as they become due. The consolidated backlog at August 31, 2000 gives the Company a reason to anticipate increased sales in Fiscal Year 2001. Results of Operations The Company's sales increased $2,185,556 from $2,108,428 for the six months ended August 31, 1999 to $4,293,984 for the six months ended August 31, 2000. The increase was a result of sales of cleaning and drying systems of $1,919,506 and an increase in sales of SonoFlux Systems of $445,980 that were offset by a decrease in MCS Infinity and Accu Mist Systems of $193,770. The Company's sales increased $1,017,852 from $1,303,099 for the three months ended August 31, 1999 to $2,320,951 for the three months ended August 31, 2000. The increase was a result of sales of cleaning and drying systems of $914,464 and an increase in sales of SonoFlux Systems of $302,209 that were offset by a decrease in MCS Infinity and Accu Mist Systems of $165,251 and a decrease in nozzle sales of $43,675. Gross profit increased $587,775 from $1,121,884 for the six month period ended August 31, 1999 to $1,709,659 for the six month period ended August 31, 2000. Gross profit increased $274,578 from $662,126 for the three months ended August 31, 1999 to $963,704 for the three months ended August 31, 2000. For both the three and six month periods the increase was primarily a result of increased sales of the Company's products that were offset by the related material and labor costs. The gross profit margin was 40% and 53% for the six month period ended August 31, 2000 and 1999, respectively. The gross profit margin was 42% and 51% for the three month period ended August 31, 2000 and 1999, respectively. For both the three and six month periods the decrease in gross profit margins was a result of lower margins on the sale of newly developed cleaning and drying systems and the required startup and commissioning costs of the equipment. Research and product development costs increased $210,280 from $259,356 for the six months ended August 31, 1999 to $469,636 for the six months ended August 31, 2000. The increase was a result of increased compensation due to a larger engineering staff, additional new product development costs and additional costs associated with SCS. Research and product development costs increased $84,396 from $148,108 for the three months ended August 31, 1999 to $232,504 for the three months ended August 31, 2000. The increase was a result higher personnel costs and the additional costs associated with SCS. Marketing and selling costs increased $260,577 from $484,696 for the six months ended August 31, 1999 to $745,273 for the six months ended August 31, 2000. Marketing and selling costs increased $73,984 from $267,591 for the three months ended August 31, 1999 to $341,575 for the three months ended August 31, 2000. The increases were primarily a result of additional commissions related to increased sales, increased trade show expenses and additional costs associated with SCS. General and administrative costs increased $157,290 from $290,854 for the six month period ended August 31, 1999 to $448,144 for the six month period ended August 31, 2000. General and administrative costs increased $62,946 from $174,655 for the three month period ended August 31, 1999 to $237,601 for the three month period ended August 31, 2000. For both periods the increase is a result of additional SCS costs. Interest expense increased $48,327 from $129,037 for the six month period ended August 31, 1999 to $177,364 for the six months ended August 31, 2000. Interest expense increased $35,850 from $16,269 for the three month period ended August 31, 1999 to $52,119 for the three months ended August 31, 2000. The increase is primarily due to an increase in interest costs associated with the addition of the SCS and Norwood loan interest and new equipment loans from the bank. For the six months ended August 31, 2000 the Company had a net loss of $178,838 or $(0.02) per share as compared to a net loss of $29,491 or $(0.00) per share for the six months ended August 31, 1999. For the three months ended August 31, 2000, the Company had earnings of $84,892 or $0.01 per share as compared to earnings of $61,602 or $.01 per share for the three months ended August 31, 1999. SONO-TEK CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to changes in interest rates. The interest rate on the Company's debt is based on fluctuations in the prime rates. If the prime rate increased by 1 percentage point from the levels at February 29, 2000, the negative effect on the Company's results of operations would approximate $1,200 for the quarter ended August 31, 2000 and $2,200 for the six months ended August 31, 2000. PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The following matters were voted upon at the Company's annual meeting of shareholders held on August 24, 2000. 1. The election of three (3) directors of the Company to serve until the Company's 2002 annual meeting of shareholders. For Withheld James L. Kehoe 7,379,159 332,630 Samuel Schwartz 7,379,159 332,630 J. Duncan Urquhart 7,379,159 332,630 2. Ratify the appointment of Deloitte & Touche LLP as the Company's independent auditors for the fiscal year ending February 28, 2001. For Against Abstained 7,445,689 33,500 307,600 There were no broker non-votes. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 4.1 27. Financial Data Schedule - EDGAR filing only (b) Reports on Form 8-K Filed August 13, 1999 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: October 16, 2000 SONO-TEK CORPORATION (Registrant) By: /s/ James L. Kehoe James L. Kehoe Chief Executive Officer By: /s/ Kathleen N. Martin Kathleen N. Martin Chief Financial Officer