10QSB/A 1 august10qsba.txt FROM 10-QSB/A AUGUST 31, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: August 31, 2001 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 9, 2001 Common Stock, par value $.01 per share 9,092,354 SONO-TEK CORPORATION INDEX Part I - Financial Information Page Item 1-Consolidated Financial Statements: Consolidated Balance Sheets - August 31, 2001 (Unaudited) and February 28, 2001 1 Consolidated Statements of Operations - Six Months and Three Months Ended August 31, 2001 and 2000 (Unaudited) 2 Consolidated Statements of Cash Flows - Six Months and Three Months Ended August 31, 2001 and 2000 (Unaudited) 3 Notes to Consolidated Financial Statements 4 - 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 15 Item 3 - Quantitative and Qualitative Disclosure About Market Risk 15 Part II - Other Information 16 Signatures 17 12 SONO-TEK CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS August 31, February 28, 2001 2001 Current Assets Unaudited Audited Cash and cash equivalents $ 155,350 $ 3,232 Accounts receivable (less allowance of $34,484 and $116,581 at August 31 and February 28, respectively) 526,766 593,605 Inventories (Note 4) 652,761 796,696 Prepaid expenses and other current assets 82,807 97,093 --------- --------- Total current assets 1,417,684 1,490,626 --------- --------- Equipment, furnishings and leasehold improvements (less accumulated depreciation of $511,007 and $508,928 at August 31 and February 28, respectively) 173,504 209,675 Intangible assets, net: Patents and patents pending (Note 1) 22,914 25,640 Deferred financing fees 21,907 25,459 --------- --------- Total intangible assets 44,821 51,099 Net assets of discontinued operations (Note 3) - 452,462 Net investment in affiliate - 8,068 Other assets 6,666 100 --------- --------- TOTAL ASSETS $1,642,675 $2,212,030 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Accounts payable $427,962 $841,267 Accrued expenses 390,472 369,386 Revolving Line of Credit 344,000 350,000 Short term loans-related parties (Notes 6) 286,084 459,605 Current maturities of long term debt 22,484 21,777 Current maturities of subordinated convertible loans 60,000 - Current maturities of subordinated mezzanine debt (Note 7) 259,732 76,390 --------- --------- Total current liabilities 1,790,734 2,118,425 Subordinated mezzanine debt 475,874 411,547 Long term debt, less current maturities 31,847 43,311 Subordinated convertible loans 90,000 150,000 Estimated future costs of discontinued operations (Note 3) 479,037 --------- --------- Total liabilities 2,867,492 2,723,283 --------- --------- Commitments and Contingencies - - Put Warrants (Note 7) 174,778 94,111 Stockholders' Equity Common stock, $.01 par value; 25,000,000 shares authorized, 9,092,354 shares issued and outstanding at August 31 and February 28, respectively 90,924 90,924 Additional paid-in capital 6,008,834 6,007,037 Accumulated deficit (7,499,354) (6,703,325) ----------- ----------- Total stockholders' deficiency (1,399,595) (605,364) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $1,642,675 $2,212,030 ========== ========== See notes to consolidated financialstatements. SONO-TEK CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Ended Three Months Ended August 31, August 31, Unaudited Unaudited 2001 2000 2001 2000 --------------------- --------------------- Net Sales $1,674,331 $2,170,821 $970,046 $1,203,816 Cost of Goods Sold 672,578 988,619 352,398 555,632 --------- --------- -------- --------- Gross Profit 1,001,753 1,182,202 617,648 648,184 --------- --------- -------- --------- Operating Expenses Research and product development costs 185,452 175,375 99,916 71,092 Marketing and selling expenses 328,825 406,213 150,681 205,106 General and administrative costs 292,373 260,720 155,014 144,405 -------- --------- ------- -------- Total Operating Expenses 806,650 842,308 405,611 420,603 -------- --------- ------- -------- Operating Income 195,103 339,894 212,037 227,581 Interest Expense (115,021) (155,335) (71,592) (38,911) Loss from Affiliate (9,858) (52,027) - (18,023) Interest and Other Income 2,976 4,609 1,504 3,002 -------- -------- -------- -------- Income from Continuing Operations Before Income Taxes 73,200 137,141 141,949 173,649 Income Tax Expense 0 0 0 0 -------- -------- ------- ------- Income from Continuing Operations 73,200 137,141 141,949 173,649 Loss from Discontinued Operations (869,229) (315,978) (87,904) (88,757) -------- -------- -------- -------- Net (Loss) Income $(796,029) $(178,837) $54,045 $84,892 ========= ========= ======= ======= Basic (Loss) Earnings Per Share Earnings from continuing operations $ 0.01 $ 0.02 $0.02 $0.02 Loss from discontinued operations (0.10) (0.04) (0.01) (0.01) ------ ------- -------- ------ Net (Loss) Earnings $(0.09) $(0.02) $0.01 $0.01 ======= ======= ===== ===== Diluted (Loss) Earnings Per Share Earnings from continuing operations $ 0.01 $ 0.02 $0.02 $0.02 Loss from discontinued operations (0.10) (0.04) (0.01) (0.01) ------ ------- ------ ------ Net (Loss) Earnings $(0.09) $(0.02) $0.01 $0.01 ======= ======= ===== ===== Weighted Average Shares - Basic 9,092,354 8,954,006 9,092,354 8,954,855 ========= ========= ========= ========= Weighted Average Shares - Diluted 9,092,354 8,954,006 9,092,354 11,373,814 ========= ========= ========= ========== See notes to consolidated financial statements. SONO-TEK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended August 31, Unaudited 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $(796,029) $(178,837) Adjustments to reconcile net income to net Cash provided by (used in) operating activities: Non-cash charge for issuance of warrants 1,797 75,831 Imputed interest expense on subordinated mezzanine debt 28,336 10,872 Loss on equity investment 0 19,310 Depreciation and amortization 8,357 33,896 Provision for doubtful accounts (82,097) 6,000 Decrease (Increase) in: Accounts receivable 148,936 142,091 Inventories 143,935 (29,006) Prepaid expenses and other current assets 15,787 (43,135) (Increase) Decrease in: Accounts payable and accrued expenses (392,216) 263,899 --------- --------- Net Cash (Used In) Provided by Continuing Operations (923,194) 300,921 Net Cash Provided By (Used In) Discontinued Operations 1,096,568 (51,982) --------- ---------- Net Cash Provided By Operating Activities 173,374 248,939 ---------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Sale (Purchase) of equipment and furnishings 34,092 (98,323) --------- -------- Net Cash Provided By (Used In) Investing Activities 34,092 (98,323) --------- --------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from bank loan for production equipment 0 58,784 Proceeds from short term loans - related parties 0 135,000 Proceeds from subordinated mezzanine debt 300,000 0 Proceeds from exercise of warrants 0 55,692 Proceeds from stock options 0 1,602 Repayments of short term loans - related parties (173,521) (226,000) Repayments of note payable and equipment loans (16,758) (5,349) ---------- --------- Net Cash Provided By Continuing Operations 109,721 19,729 Net Cash Used In Discontinued Operations (165,069) (87,145) ---------- --------- Net Cash Used In Financing Activities (55,348) (67,416) ---------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 152,118 83,200 CASH AND CASH EQUIVALENTS Beginning of period 3,232 6,131 -------- ---------- End of period $155,350 $ 89,331 ======== ========== SUPPLEMENTAL DISCLOSURE: Interest paid $88,973 $ 36,019 ======= ========== See notes to consolidated financial statements. SONO-TEK CORPORATION Notes to Consolidated Financial Statements Six Months and Three Months Ended August 31, 2001 and 2000 NOTE 1: 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., a New Jersey Corporation ("SCS"), which the Company acquired on August 3, 1999 (the "Acquisition"). On April 23, 2001, the Company adopted a plan to discontinue the operations of the cleaning and drying systems segment, which includes SCS and Serec. These operations were discontinued and were classified as discontinued operations. All significant intercompany accounts and transactions are eliminated in consolidation. 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 28, 2001, 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. 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 reasonably 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 is $88,782 and $86,056 at August 31, 2001 and February 28, 2001, respectively. Reclassifications - Certain February 28, 2001 balances have been reclassified to conform with the current period presentation. NOTE 2: FINANCIAL CONSIDERATIONS AND MANAGEMENT'S PLANS Both the Company and its wholly owned subsidiary, SCS, incurred losses in Fiscal Year 2000 and 2001. These losses led to an increase in the Company's debt and negative cash flow. During Fiscal Year 2001, the Company increased its borrowing from a bank, an investment banker, and officers and directors of the Company. At February 28, 2001, the Company was late on its payments to various vendors and in default on its subordinated mezzanine debt with Norwood Venture Corp. ("Norwood") for failure to make interest payments when due. The Company subsequently paid the interest and the default was cured. In addition, during the three months ended May 31, 2001, SCS was in default on a bank note for failure to make interest and principal payments when due. This default was cured in July 2001 when SCS brought all its payments up to date. During Fiscal Year 2001, the Company received additional cash from the sale of common stock and the exercise of warrants. These influxes of cash were not able to provide the Company with adequate amounts to pay its debts. The Company continues to have difficulty paying vendors and purchasing necessary raw materials. During the six months ended August 31, 2001, the Company took actions to limit its losses and reduce negative cash flow. The spraying systems segment was downsized to reflect the decline in market demand, and the sales force was refocused to increase nozzle sales instead of fluxer sales. The cleaning and drying segment, represented by SCS, terminated production of capital equipment. By decreasing operating costs and terminating thirty-two employees, the Company achieved positive cash flow beginning in the second quarter of Fiscal Year 2002. Although there can be no assurances, it is anticipated that continued cash flow improvements will be sufficient to cover current operating costs, and will permit partial payments to vendors and payment of the required principal payments on all debt. During the first quarter of Fiscal Year 2002, the Company received additional financing from Norwood, directors, an officer and an affiliate of the Company. The Company may not have access to adequate funds to meet its operating and financial needs and to repay its past due vendor obligations, creditors may take legal action for the repayment of past due indebtedness, and the Company may not be able to restructure its past due obligations. In order to decrease its losses, the Company adopted a plan to discontinue operations of cleaning and drying systems segment during the first quarter of Fiscal 2002 (see Note 3). The Company is refocusing on the sales of ultrasonic nozzles and attempting to increase sales through diversifying the product line while decreasing the reliance on the electronics industry. Although the results of these actions cannot be predicted, the Company believes that these steps are appropriate and will help the Company return to profitability in Fiscal Year 2002. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing and refinancing as may be required, and to timely dispose or sell off assets related to its discontinued operating segment. NOTE 3: DISCONTINUED OPERATIONS In order to decrease its losses, on April 23, 2001, the Company adopted a plan to discontinue the operations of cleaning and drying systems segment. We anticipate that the orderly liquidation of the disposed assets and liabilities will be completed within the fiscal year ending February 28, 2002. The accompanying statements of operations have been reclassified so that the results for the cleaning and drying systems segment are classified as discontinued operations for all periods presented. The assets and liabilities of the discontinued operations have been reclassified in the August 31, 2001 and February 28, 2001 balance sheets as "net assets of discontinued operations" and "estimated future costs of discontinued operations". The statements of cash flows and related notes to the consolidated financial statements have also been reclassified to conform to the discontinued operations presentation. Summary operating results of the discontinued operations for each of the periods presented are as follows: Six Months Six Months Three Months Three Months August 31, August 31, August 31, August 31, 2001 2000 2001 2000 -------------- ------------ ------------ ------------ Revenues $1,041,419 $2,123,163 $149,754 $1,117,135 Expenses 1,910,648 2,439,141 237,658 1,205,892 --------- --------- ------- --------- Loss from discontinued operations $ (869,229) $ (315,978) $(87,904) $ (88,757) ========== ========== ========= =========== The Company wrote off goodwill in the amount of $477,377 during the six month period ended August 31, 2001. This goodwill is related to the acquisition of its discontinued operations and was deemed to be impaired as the Company estimated that it would not likely realize positive future cash flows from the residual assets and uncompleted orders of this business. Additionally, the Company wrote off impaired accounts receivable of $30,000, impaired inventory of $81,057 and impaired fixed assets of $10,050. The Company does not expect that there will be any additional estimated future costs of discontinuance for the orderly liquidation of the disposed assets and liabilities. A summary of the net assets of the discontinued operations is as follows: August 31, February 28, 2001 2001 Assets Cash $(1,499) $ 183 Accounts Receivable, net 72,762 551,028 Inventory, net 85,809 631,970 Prepaid Expenses 484 783 ---------- ---------- Total current assets 157,556 1,183,964 Goodwill 10,000 487,377 Equipment and furnishings, net 64,287 87,935 ---------- ---------- Total assets $231,843 $1,759,276 ======== ========== Liabilities Current Liabilities Notes payable $ 89,365 $238,917 Accounts payable 381,507 603,146 Accrued expenses 202,926 239,200 Customer deposits 9,988 182,940 --------- --------- Total current liabilities 683,786 1,264,203 Long term debt 27,094 42,611 -------- --------- Total liabilities 710,880 1,306,814 ------- --------- Net (liabilities) assets $(479,037) $452,462 ========== ======== NOTE 4: INVENTORIES Inventories at August 31, 2001 are comprised of: Finished goods $221,339 Work in process 44,570 Consignment 9,037 Raw materials and subassemblies 586,456 --------- Total 858,401 Less: Allowance (205,640) -------- Net inventories $652,761 ======== NOTE 5: LONG-TERM EQUITY INVESTMENT - NET The Company had a 49% ownership interest in PNR America, LLC, a Delaware limited liability company. During the six month period ended August 31, 2001, PNR America incurred a loss of $20,119 and the Company recorded its share of this loss in the amount of $9,858. The Company sold of its share of equity in PNR America during the three months ended August 31, 2001 for the book value of such interest. NOTE 6: RELATED PARTY TRANSACTIONS Short term loans - related parties - From time to time the Company has required short term loans to meet its cash requirements. All of these loans have been provided by officers and directors of the Company, at the fixed rate of prime plus 2% at the date of the loans (9.75% to 11.50% at August 31, 2001). Accrued interest on these short term loans was $47,373 and $37,075 at August 31, 2001 and February 28, 2001, respectively. Interest expense for the six and three months ended August 31, 2001 was $13,090 and $6,915, respectively. On April 30, 2001, in order to induce the advance of the additional $300,000 by Norwood, certain of the Company's directors, an officer and an affiliate of the Company participated in the amount of $216,750 in the additional subordinated mezzanine financing (see Note 7). See subsequent event, footnote 11 for additional related party transactions. NOTE 7: SUBORDINATED MEZZANINE DEBT On April 30, 2001, Norwood amended the Norwood Note and Warrant Purchase Agreement to increase the Note to $850,000 and the Warrant shares to 2,077,777. The monthly principal payments to commence in October 2001 are increased to $23,612 per month accordingly, and the balance sheet reflects this monthly rate in reporting the related current maturities. The additional 733,333 Warrant shares are valued at $80,667 which is accounted for as a discount and is being imputed as additional interest expense over the term of the loan. Certain of the Company's directors, an officer and an affiliate are participants with Norwood in its subordinated mezzanine financing (see Note 6). NOTE 8: SETTLEMENT OF LITIGATION During August 2001 the Company settled its threatened litigation with Essex Products International. This settlement did not have a material impact on the financial statements. NOTE 9: 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, 2001 2000 2001 2000 ---- ---- ---- ---- Numerator- Numerator for basic and diluted earnings (loss) per share $(178,838) $(29,491) $54,045 $84,892 ========== ========= ======= ======= Denominator: Denominator for basic earnings (loss)per share - weighted average shares 9,092,354 8,954,006 9,092,354 8,954,855 Effects of dilutive securities: Stock warrants 0* 0* 0** 1,932,821 Stock options for employees, directors and outside consultants 0* 0* 0** 486,138 --------- ---------- ---------- --------- Denominator for diluted earnings(loss) per share 9,092,354 8,954,006 9,092,354 11,373,814 ========= ========= ========= ========== *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. **Stock options and warrants are antidilutive based on the exercise price as compared to the ending market price of the Company's stock and therefore are not considered in the Diluted earnings per share calculation. 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 9,480,139 and 11,199,372 weighted average shares at August 31, 2001 and 2000 respectively. NOTE 10: NEW ACCOUNTING DEVELOPMENTS In June 2001, the FASB issued SFAS No. 141, "Business Combination", SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 143, "Accounting for Asset Retirement Obligations", SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. It also requires that the Company recognize acquired intangible assets apart from goodwill. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost, which will be effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 141, SFAS No. 142 and SFAS No. 143 is not expected to have a material effect on the Company's financial position, results of operations and cash flows. Note 11: SUBSEQUENT EVENT On September 14, 2001 the Company sold the intellectual property of Serec Corporation, consisting of patents, trademarks and drawings, for $35,000 to an officer of the Company and another individual. The intellectual property was purchased during fiscal year 2001 for $100,000 plus closing costs. At February 28, 2001 these assets were written down to $10,000 due to impairment. The gain realized on disposition will be included in discontinued operations. SONO-TEK CORPORATION ITEM 2 - 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: - The Company's access to adequate funds to meet the Company's operating and financial needs and to repay its past due debt, and the Company's ability to continue as a going concern if it is unable to access adequate financing; - The possibility that the Company's creditors may take legal action for the repayment of past due indebtedness and the ability of the Company to continue as a going concern if any such action is taken; - The Company's ability to restructure its debt; - The possibility of additional impairment write downs of assets; - The Company's ability to respond to competition in its markets; - General economic conditions in the Company's markets; - The risk that the Company's analyses of these risks could be incorrect and/or the strategies developed to address them could be unsuccessful; and - Various other factors discussed in the Annual Report on Form 10-K. The Company undertakes no obligation to update publicly any forward-looking statement. Liquidity and Capital Resources The Company's working capital deficiency decreased $254,749 from a working capital deficiency of $627,799 at February 28, 2001 to $373,050 at August 31, 2001. The decrease in working capital deficiency was a result of an increase in cash of $152,000, decreases in net accounts receivable of $67,000, decrease in inventory of $144,000, offset by reductions in accounts payable and accrued expenses of $392,000, decrease in related party loans of $174,000 and increases in the current maturities of convertible loans of $60,000 and the current maturities of subordinated mezzanine debt of $183,000. The stockholders' deficiency increased $794,231 from $605,364 at February 28, 2001 to $1,399,595 at August 31, 2001. The decrease in stockholders' equity was the result of the loss of $796,000 for the six months ended August 31, 2001. Accounts receivable at August 31, 2001 decreased 148,936 or 21% from February 28, 2001 due to better collection efforts in the six months ended August 31, 2001. The allowance for doubtful accounts was reduced $82,097 from February 28, 2001 due to collection of one foreign customer whose payment was remitted during the second quarter of this fiscal year. Inventory decreased $143,935 or 18% as the result of reduced purchasing in the six months ended August 31, 2001. This reduction was based upon the order level for the Company's principal product, solder flux application products ("fluxers") during the six months ended August 31, 2001. This reduction in the sale of fluxers was due to the slowdown in the manufacture of printed circuit boards. Accounts payable decreased $413,000 as compared to February 28,2001 due to the reduced purchasing activity noted above and payments made to vendors during the six months ended August 31, 2001. On April 30, 2001, the Company amended its agreement with Norwood pursuant to which the Company increased its five year loan in the principal amount of $300,000 of which $216,750 was loaned by certain of the Company's directors, an officer and an affiliate of the Company. The terms of the loan require interest payments only through September 2001 followed by monthly payments of $23,612 plus interest through September 30, 2004. The Company was also required to grant a warrant to purchase 733,333 shares of the Company's common stock at an exercise price of $0.10 per share, which can be put to the Company. Such warrants were valued at $80,667, 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 James Kehoe, former Chief Executive Officer of the Company and is subject to certain priority liens on SCS assets. As of August 31, 2001 the outstanding balance was $344,000 Due to the consolidated Company losses incurred during Fiscal Years 2001, 2000 and 1999, the Company was required to borrow on a short term basis from officers and directors of the Company. During the three month period ended May 31, 2001 $173,521 plus interest was repaid. As of May 31, 2001, the balance owed the officers and directors was $286,084 plus accrued interest of $47,373. During the first quarter of Fiscal Year 2002, SCS received a default notice regarding its bank loan. This default was cured in July 2001 when SCS brought all its payments up to date. Due to the limited operations of SCS, the cash generated may not be sufficient to complete the monthly principal and interest payments through January 2002, when the loan matures. It is anticipated that future cash flows may not allow the Company to repay its current debt and trade creditors in a timely manner. During the first quarter of Fiscal Year 2002, the Company discontinued the production of capital equipment in the cleaning and drying systems segment and began to focus on its original product lines, specifically the sales of ultrasonic nozzles. Although there can be no assurances, management believes that by taking these steps the Company will be able to return to profitability in the remaining quarters of Fiscal Year 2002. Results of Continuing Operations The continuing operations of Sono-Tek reflect good operating margins and the Company has reduced its payroll and operating expenses during the quarters ended May 31, 2001 and August 31, 2001 in order to provide positive cash flow from continuing operations. This was accomplished by downsizing the spraying systems business through layoffs, salary reductions, and cutbacks in employee benefits. The Company expects to save additional costs by changing outside professionals and other service providers. For the six months ended August 31, 2001, the Company's sales decreased $496,490 to $1,674,331 as compared to $2,170,821 for the six months ended August 31, 2000. The decrease was a result of a decrease in fluxer sales of $841,000 offset by an increase in nozzle sales of $248,000 and MCS and special sales of $89,000. The sales decrease was caused by the slowdown in the consumer electronics markets that uses the company's solder flux spraying systems. For the three months ended August 31, 2001, the Company's sales decreased $233,770 to $970,046 as compared to $1,203,816 for the three months ended August 31, 2000. The decrease was a result of a decrease in fluxer sales of $536,000 offset by an increase in nozzle sales of $248,000 and MCS and special sales of $54,000. The sales decrease was caused by the slowdown in the consumer electronics markets that uses the company's solder flux spraying systems. The Company's gross profit decreased $180,449 to $1,001,753 for the six months ended August 31, 2001 from $1,182,202 for the six months ended August 31, 2000. The decrease was primarily a result of decreased sales of the Company's products that were offset by the related material costs and labor. The change in the mix of the company's products sold improved the gross margin percentage from 54% for the six months ended August 31, 2000 to 60% for the six months ended August 31, 2001. The Company's gross profit decreased $30,536 to $617,648 for the three months ended August 31, 2001 from $648,184 for the three months ended August 31, 2000. The decrease was primarily a result of decreased sales of the Company's products that were offset by the related material costs and labor. The change in the mix of the company's products sold improved the gross margin percentage from 54% for the three months ended August 31, 2000 to 64% for the three months ended August 31, 2001. Research and product development costs increased $10,077 to $185,452 for the six months ended August 31, 2001 from $175,375 for the three months ended August 31, 2000. The increase was a result of product development costs on the Microfluxer (which is a new product) and continued work on the CVD (chemical vapor deposition) product line. Research and product development costs increased $28,824 to $99,916 for the three months ended August 31, 2001 from $71,092 for the three months ended August 31, 2000. The increase was a result of product development costs on the Microfluxer (which is a new product) and continued work on the CVD (chemical vapor deposition) product line. Marketing and selling costs decreased $77,388 to $328,825 for the six months ended August 31, 2001 from $406,213 for the six months ended August 31, 2000. The decrease was a result of decreased marketing expense of $24,000, sales commissions of $32,000, trade show expense of $24,000, professional fees of $13,000and travel expense of $3,000, that were offset by increased personnel costs of $25,000. Marketing and selling costs decreased $54,425 to $150,681 for the three months ended August 31, 2001 from $205,106 for the three months ended August 31, 2000. The decrease was a result of decreased marketing expenses of $22,000, sales commissions of $31,000, travel expenses of $8,000 and professional fees of $6,000 that were offset by increased sales personnel costs of $3,000. General and administrative costs increased $31,653 to $292,373 for the six months ended August 31, 2001 from $260,720 for the six months ended August 31, 2000. The increase was primarily attributable to increased personnel and travel costs of $42,000, increased professional fees of $4,000, increased banks fees of $9,000, increased facility & utility costs of $9,000 and increased insurance costs of $5,000, offset by reduced consulting expense of $29,000, reduced licensing fees of $3,000, and reduced corporate expenses of $8,000. General and administrative costs increased $10,609 to $155,014 for the three months ended August 31, 2001 from $144,405 for the three months ended August 31, 2000. The increase was primarily attributable to increased personnel costs of $32,000, increased professional fees of $3,000, increased banks fees of $5,000, increased facility & utility costs of $6,000, offset by reduced consulting expense of $24,000, reduced licensing fees of $3,000, and reduced corporate expenses of $6,000. Interest expense decreased $40,314 to $115,021 for the six months ended August 31, 2001 from $155,335 for the six months ended August 31, 2000. The decrease is primarily due to a non-recurring, non-cash charge of $64,033 reflecting the value of warrants issued in the quarter ended May 31, 2000, offset by $44,000 of additional interest of the Norwood financing in the six months ended August 31, 2001. Interest expense increased $32,681 to $71,592 for the three months ended August 31, 2001 from $38,911 for the three months ended August 31, 2000. The increase is primarily due to the Norwood financing of $26,000. The Company's loss from affiliate was eliminated in the three months ended August 31, 2001 with the sale of the Company's interest in this affiliate. During the six and three month periods ended August 31, 2000, the Company's share of the loss of this affiliate was $52,027 and $18,023, respectively. The Company's income from continuing operations decreased $31,700 from $173,649 or $0.02 per share for the six months ended August 31, 2000 to $141,949 or $.02 per share for the six months ended August 31, 2001. The Company's income from continuing operations decreased $63,941 from $137,141 or $0.02 per share for the three months ended August 31, 2000 to $73,200 or $.01 per share for the three months ended August 31, 2001. Results of Discontinued Operations The Company's loss from discontinued operations increased by $553,251 from a loss of $315,978 for the six months ended August 31, 2000 to a loss of $869,229 for the six months ended August 31, 2001. At February 28, 2001 the discontinued operation had residual goodwill of $477,377. This goodwill was based on the residual profits of open contracts at February 28, 2001, the assumed value of residual spares business and the value that was assumed could be realized from the sale of the business. During the quarter ended May 31, 2001, one major customer canceled the balance of his order, it was determined that the business could not be sold and the value of the spares business was deemed to be overstated. accordingly, the goodwill was considered impaired and was written off. The increase in the loss was due to the impairment of goodwill of $477,377, an increase in the inventory reserves $81,000, increase in allowance for bad debts of $30,000 and impairment of fixed assets of $10,000 plus the lack of sales to support the necessary amount of overhead. SONO-TEK CORPORATION ITEM 3 - 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 $2,000 and $1,000 for the six and three months ended August 31, 2001. PART II - OTHER INFORMATION Item 1. Legal Proceedings During August 2001 the Company settled its threatened litigation with Essex Products International. Item 2. Changes in Securities and Use of Proceeds. Item 3. Defaults Upon Senior Securities None 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 23, 2001. 1. The election of three (3) directors of the Company to serve until the Company's 2004 annual meeting of shareholders. For Withheld Harvey L. Berger 6,628,743 353,730 Christopher L. Coccio 6,955,868 26,605 Jeffrey O. Spiegel 6,955,693 26,780 2. Ratify the appointment of Radin Glass & Co. as the Company's independent auditors for the fiscal year ended February 28, 2002. For 6,930,572 Against 50,201 Abstained 1,700 There were no broker non-votes. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K On July 6, 2001, the Company filed a Current Report on Form 8-K announcing that the Company had engaged Radin, Glass & Co., LLP to audit the Company's February 28, 2002 financial statements, and filed as an exhibit to such Current Report a letter from Deloitte & Touche LLP confirming the cessation of the Company's client-auditor relationship with Deloitte & Touche LLP. 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: January 22, 2002 SONO-TEK CORPORATION (Registrant) /s/ Christopher L. Coccio By: ____________________________________ Christopher L. Coccio Chief Executive Officer and President /s/ Duncan Urquhart By: ____________________________________ Duncan Urquhart Treasurer