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: November 30, 19992000

                                       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, Bldg. 3, Milton, NY 12547
               (Address of Principal Executive Offices) (Zip Code)

         Registrant's telephone no., including area code: (914)(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                                             January 14, 200016, 2001

Common Stock, par value $.01 per share                         8,355,6289,092,355

                              SONO-TEK CORPORATION


                                      INDEX



Part I - Financial Information                                        Page


Item 1 - Financial Statements:                                        1 - 3


Consolidated Balance Sheets -
         November 30, 19992000 (Unaudited) and February 28, 199929, 2000            1


Consolidated Statements of Operations - Nine Months and Three Months
         Ended November 30, 19992000 and 19981999 (Unaudited)                   2


Consolidated Statements of Cash Flows - Nine Months Ended
         November 30, 19992000 and 19981999 (Unaudited)                         3


Notes to Consolidated Financial Statements                            4 - 109


Item 2 - Management's Discussion and Analysis of Financial
         Condition and Results of Operations                         1110 - 14


Part II - Other Information                                          14 - 1512


Item 3 - Quantitative and Qualitative Disclosure About Market Risk      12


Part II - Not ApplicableOther Information                                             13


Signatures                                                              1714

                              SONO-TEK CORPORATION
                           CONSOLIDATED BALANCE SHEETS
ASSETS
ASSETS November 30, February 28, 1999 199929, 2000 2000 Current Assets Unaudited ------------------------------ Cash and cash equivalents $ 140,41443,720 $ 70,0518,176 Accounts receivable (less allowance of $9,915$36,997 and $6,000$39,997 at November 30 and February 28,29, respectively) 887,687 264,2171,155,788 1,619,639 Inventories (Note 5) 908,382 787,2001,240,232 1,224,380 Prepaid expenses and other current assets 82,592 42,039131,300 74,308 ------------ ------------ Total current assets 2,019,075 1,163,5072,571,040 2,926,503 Equipment, furnishings and furnishingsleasehold improvements (less accumulated depreciation of $447,696$532,913 and $407,486$469,011 at November 30 and February 28,29, respectively) 181,552 127,892320,095 256,994 Intangible assets, net: Goodwill (Note 3) 1,219,325 01,275,084 1,232,571 Patents, patents pending and copyrights (Note 1) 33,313 38,33327,142 31,642 Deferred financing fees (Note 7) 34,339 0 -----------27,235 32,563 ------------- ----------- Total intangible assets, net 1,286,977 38,3331,329,461 1,296,776 Long-term equity investments (Note 6) 16,686 19,310 Other assets 22,072 5,917 ------------ --------------11,342 14,542 ------------- ------------- TOTAL ASSETS $3,509,675 $1,335,649$4,248,624 $4,514,125 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 975,647 $ 847,135 Deferred revenue 0 725,491 Accrued expenses 736,738 437,342 Revolving line of credit 350,000 334,307 Short term loans-related parties (Note 7) 302,084 239,084 Current maturities of long term debt (Note 8) $192,002 $10,503253,611 220,532 Short term loans-related parties (Note 6) 165,000 88,000 Revolving line of credit 299,948 199,948 Accounts payable 458,408 324,192 Accrued expenses 396,804 267,948 ----------convertible loan 0 100,000 ---------------- ---------- Total current liabilities 1,512,162 890,5912,618,080 2,903,891 ---------- ------------------- Subordinated mezzanine debt 398,368 382,060 Long term debt, less current maturities (Note 8) 279,513 37,293121,737 273,544 Subordinated mezzanine debt (Note 7 ) 374,812 0 Subordinated long termconvertible loans-related parties (Note 6) 150,000 0 Noncurrent rent payable 9,832 9,083 ------------ -----------150,000 ---------- ------- Total liabilities 2,326,319 936,9673,288,185 3,709,495 Commitments and Contingencies Put Warrants 77,000 077,000 Stockholders' Equity Common stock, $.01 par value; 25,000,000 shares authorized, 8,355,628 issued9,092,355 and 8,866,612 outstanding at November 30 and 12,000,000 shares authorized, 6,281,667 issued and outstanding at February 28 83,556 62,81729, respectively 90,924 88,666 Additional paid-in capital 5,454,049 4,735,9755,980,167 5,711,800 Accumulated deficit (4,431,249) (4,400,110)(5,187,652) (5,072,836) ----------- ---------- Total stockholders' equity 1,106,356 398,682883,439 727,630 ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,509,675 $1,335,649$4,248,624 $4,514,125 ========== ==========
See notes to consolidated financial statements. SONO-TEK CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended November 30, Three Months Ended November 30, Unaudited Unaudited 2000 1999 19982000 1999 1998 ---------------------------- ---------------------------- Net Sales $6,274,904 $3,660,200 $2,395,727$1,980,921 $1,551,772 $679,428 Cost of Goods Sold 3,608,736 1,726,067 1,291,9401,024,411 739,523 382,953 ---------- --------- --------- --------- Gross Profit 2,666,168 1,934,133 1,103,787956,510 812,249 296,475 ---------- --------- --------- --------- Operating Expenses Research and product development costs 687,693 430,068 370,572218,058 170,712 107,906 Marketing and selling expenses 1,108,465 787,757 548,563363,191 303,061 177,946 General and administrative costs 691,249 591,840 353,682243,105 300,986 114,808 --------- ---------- --------- --------- Total Operating Expenses 1,809,666 1,272,8172,487,407 1,809,665 824,354 774,759 400,660 --------- --------- --------- --------- Operating Income 178,761 124,468 132,156 37,490 Other (Loss) 124,468 (169,030) 37,490 (104,185)Income: Interest Expenseexpense (230,765) (167,587) (42,775)(53,402) (38,550) (14,925) MiscellaneousEquity loss in PNR (Note 6) (70,585) 0 (18,558) 0 Interest income and other (loss) income 7,773 11,980 3,826 (588) ---------- --------- -------- ---------- Total Other (Loss) Income and (Expense) 9,854 8,137 (800) 8,137 Interest and Other(293,577) (155,607) (68,134) (39,138) (Loss) Income 2,126 2,615 212 1,083 ---------- ------------ ------- ---------- Loss Before Income Taxes (31,140)) (201,053)(114,816) (31,139) 64,022 (1,648) (109,890) Income Tax Expense (Note 9) 0 0 0 0 ------------- ------------ ----------- ---------------------- --------- -------- --------- Net Loss $(31,140) $(201,053)(Loss) Income $(114,816) $(31,139) $64,022 $(1,648) $(109,890)========= ========= ======== ========== ======== ================= Basic (Loss) Earnings Per Share $(0.01) $(0.00) $(0.05)$ 0.01 $(0.00) $(0.03) ======= ======= ============= ======= Diluted (Loss) Earnings Per Share $(0.01) $(0.00) $(0.05)$ 0.01 $(0.00) $(0.03) ======= ======= ============= ======= Weighted Average Shares - Basic 8,984,787 7,155,467 4,375,7209,047,025 8,289,566 4,378,387 ========= ========= ========= ========= Weighted Average Shares - Diluted 8,984,787 7,155,467 4,375,72010,987,648 8,289,566 4,378,387 ========= ========= =================== =========
See notes to consolidated financial statements. SONO-TEK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended November 30, Unaudited 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: 2000 1999 ------------------------------ Net Loss $(31,140) $(201,053)$(114,816) $(31,139) Adjustments to reconcile net loss to net cash used inprovided by (used in) operating activities: Non-cash charge for issuance of warrants 75,831 102,626 Accrued interest-short term loans-related parties 27,337 13,293 Imputed interest expense on subordinated mezzanine debt 16,308 3,624 Loss on equity investment 2,624 0 Depreciation and amortization 141,529 75,937 33,162 Provision(Benefit) provision for doubtful accounts (3,000) 3,915 9,000 (Increase) decrease in: Accounts receivable 466,851 (421,013) 441,134 Inventories (15,852) (36,919) (220,646) Prepaid expenses and other current assets (53,792) (10,423) (9,035) Increase (decrease) in: Accounts payable and accrued expenses 277 (179,287)219,176 (16,640) Customer depositdeposits181,396 (16,000) Deferred revenue (725,491) 0 Non-current rent payable 0 749 744 ------------------ ---------- Net Cash Used inProvided by (Used in) Operating Activities (331,991) (125,981) ----------218,101 (331,990) -------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition costs net of cash received (102,813) (315,518) 0 Purchase of equipment and furnishings (127,003) (46,424) (19,757) --------- -------------------- Net Cash Used in Investing Activities (229,816) (361,942) (19,757)--------- --------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit 15,693 100,000 99,948Proceeds from bank loan for production equipment 78,859 0 Proceeds from short term loans-related parties 204,000 127,000 Proceeds from subordinated mezzanine debt 0 450,000 Proceeds from issuance of stock 130,000 287,000 1,320 Proceeds from subordinated mezzanine debt 450,000exercise of warrants 55,692 0 Proceeds from exercise of stock options 1,602 0 Deferred financing fees 0 (35,523) 0 Repayments of short term loans-related party (141,000) (100,000) Repayments of short term borrowings (100,000) 0 Repayments of long term debt (64,181) (6,760) Repayments of note payable bank 0 (46,253) ---------and equipment loans (197,587) (64,181) -------- -------- Net Cash Provided by Financing Activities 47,259 764,296 48,255 --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 70,363 (97,483)35,544 70,364 CASH AND CASH EQUIVALENTS Beginning of period 8,176 70,051 113,759 --------------- -------- End of period $140,414 $ 16,276 ========$43,720 $140,415 ======= ======== SUPPLEMENTAL DISCLOSURE: Interest paid $39,179$34,859 $ 13,42439,179 ======= ======== Common stock issued in connection with purchase of SEREC assets $7,500 $0 ====== == Non-cash equity contribution in PNR $9,800 $0 ====== == Non-cash exchange of accrued bonuses for common stock $0 $17,188 $ 0== ======= ====
See notes to consolidated financial statements. SONO-TEK CORPORATION Notes to Consolidated Financial Statements November 30, 19992000 and 19981999 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"), a New Jersey Corporation formerly known as S&K Products International, Inc., a New Jersey Corporation ("S&K"), which the Company acquired on August 3, 1999 (the "S&K Acquisition see Note 3)"Acquisition"). All significant intercompany accounts and transactions are eliminated in consolidation. The inclusion of S&K'sSCS's results since August 3, 1999 has an effect on the comparison of the Company's Fiscal Year 20002001 results to prior periodsperiods. 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 accounting principles.in the United States of America. Such disclosures were included with the financial statements of the Company at February 28, 1999,29, 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. Patent and Patent Pending Costs - Costs 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 $83,717$84,554 and $78,697$80,053 at November 30 and February 29, 2000, respectively. Reclassifications - Certain February 29, 2000 balances have been reclassified to conform with the current period presentations. 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 and amended SFAS 133, respectively. 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 accounting principles generally accepted in the United States of America 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, 1999, respectively.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 adopted the Statement of Financial Accounting Standard No 131 ("SFAS 131") "Disclosures About Segments of an Enterprise and Related 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:
Nine Months Ended November 30, 19992000 Spraying Cleaning Products Systems Total Net Sales $3,056,832 $603,368 $3,660,200$3,361,438 $2,913,466 $6,274,904 Net Income (Loss) 7,777 (38,917) (31,140) Identifiable Assets 148,290 39,262 181,552370,566 (485,382) (114,816) Capital Expenditures 42,134 4,290 46,424121,561 5,442 127,003 Depreciation and Amortization Expense 35,752 40,185 75,93757,225 84,305 141,530
Three Months Ended November 30, 19992000 Spraying Cleaning Products Systems Total Net Sales $1,036,179 $515,593 $1,551,772$1,190,617 $790,303 $1,980,921 Net Income (Loss) 9,051 (10,699) (1,648) Identifiable Assets 148,290 39,262 181,552233,426 (169,404) 64,022 Capital Expenditures 35,665 4,290 39,95523,253 0 23,253 Depreciation and Amortization Expense 14,437 27,184 41,62123,329 30,871 54,201
The Company operated in a single reportable segment for the nine months and three months ended November 30, 1998.period from March 1, 1999 through August 3, 1999. NOTE 3: ACQUISITION OF SCS 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. S&K is a wholly owned subsidiary of the Company. The aggregate consideration tendered byIn June 2000, the Company in respectchanged S&K's name to the acquisition described above was $5,000 of cash and 810,000 shares of the Company's common stock with a valuation of $0.30 per share. Also at the time of the closing, two stock grants for a total of 250,000 shares of the Company's common stock were made to two directors of the Company and 200,000 warrants were issued to a non-employee director of the Company as an acknowledgment of their services in consummating the acquisition. The value of the stock issued and warrants granted to the non-employee director were accounted for as additional purchase price. Professional fees of $101,345 associated with the acquisition were also accounted for as additional purchase price. The fair value of net assets acquired were: Cash $26,648 Accounts Receivable 206,372 Inventory 84,263 Equipment & Furnishings 47,447 Other Assets 46,285 Accounts Payable (142,977) Accrued Expenses (153,007) Long Term Debt (687,901) -------- Net Liabilities Assumed (572,870) Acquisition Costs (674,166) -------- Goodwill $1,247,036 ========== The aggregate purchase price exceeded the fair value of net assets acquired resulting in goodwill that will be amortized on the straight-line basis over 15 years. Accumulated amortization of goodwill at November 30, 1999 was $27,711.SCS. The following unaudited proforma information presents a summary of the consolidated results of operations of Sono-Tekthe Company and S&KSCS as if the acquisition had occurred on March 1, 1998.1999.
Proforma Consolidated Statement of Operations Nine months ended November 30, 1999 1998 ---- ---- Net Sales $4,219,427 $3,653,584 Cost of Goods Sold 1,962,130 1,883,253--------- Gross Profit 2,257,297 1,770,331 Operating Expenses 2,329,840 1,978,471--------- Operating Loss (72,543) (208,140) ---------- ---------- Interest Expense (198,672) (95,973) Interest & Misc. Income 28,382 (432) ---------- ------------------- Net Loss $(242,833) $(304,545) ========== ===================
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 S&K reorganization.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, 1998,1999, or of future results of operations of the consolidated entities. NOTE 4: PRIVATE PLACEMENTACQUISITION OF SEREC ASSETS On May 5, 1999,September 21, 2000, the Company issuedacquired certain intellectual property and intangible assets of Serec Corporation, a Private Placement MemorandumRhode Island corporation which manufactured and sold solvent based cleaning systems. In exchange for $100,000 cash, the Company received the rights to raise upseven patents, one registered trademark, unfulfilled purchase orders, engineering designs and certain other intangible assets. Professional fees and other costs of $10,313, $7,500 of which, was attributed to $500,000 by offering 1,666,667 sharesthe issuance of common stock, at $0.30 per share (the "Private Placement"). During the third quarterwere capitalized as additional purchase price. The aggregate purchase price of Fiscal Year 2000 the Company completed the sale of an additional 216,667 shares of common stock for a total of 956,667 shares of common stock sold pursuant$110,313 is recorded as goodwill due to the Private Placement. Ofinability to specifically identify the total shares sold, 385,000 were purchased by directors of the Company, including 75,000 shares of common stock purchased in the third quarter. The gross proceeds from the Private Placement were used to pay certain costsvalues associated with the acquisitionvarious intangible assets acquired. The goodwill will be amortized on the straight-line basis over 5 years. Accumulated amortization of S&K and for working capital. The Company continued to offer an additional 210,000 shares pursuant to the Private Placement (Note 12).goodwill at November 30, 2000 was $3,678. NOTE 5: INVENTORY Inventories at November 30, 19992000 are comprised of: Finished goods $186,257$440,492 Work in process 92,676135,188 Raw materials and subassemblies 629,449 --------860,152 ---------- Total 1,435,832 Less: Allowance (195,600) ---------- Net total inventories $908,382 ========$1,240,232 NOTE 6: 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 ("Flowtech"), an Italian 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. On November 30, 2000 the Company made its $9,800 contribution by decreasing the amount owed to the Company by PNR America. 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 been a U.S. distributor of Flowtech products. 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 $21,438 and $78,668 to PNR America for the three and nine month periods ended November 30, 2000, respectively, and $13,967 for the period of inception through February 29, 2000. Balances due from PNR America of $58,161 and $13,967 at November 30, 2000 and February 29, 2000, respectively, are expected to be repaid out of PNR America's fiscal year 2001 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 November 30, 2000 was $55,442. The Company recognized, during the nine and three month period ended November 30, 2000 and the period from inception to February 29, 2000, $70,585, $18,558 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 condensed financial information of PNR America as of November 30, 2000 and for the three month period ended November 30, 2000 is as follows: Net loss-three months ended November 30, 2000 $(35,654) ========= Net loss-nine months ended November 30, 2000 $(144,048) ========= Total assets - current $91,622 ======= Due to Sono-Tek $72,128 Due to Flowtech 137,087 Accrued Expenses 5,756 -------- Liabilities 214,971 Stockholders' deficiency (123,49) -------- Total liabilities and stockholders' deficiency $91,622 ======= Note 6:7: SHORT TERM LOANS RELATED PARTY LOANS Short term loans -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% computed at the time of the loan. The interest rate on such short term loans was 10.50%loan (9.75% to 11.5% at November 30, 1999.2000). As of November 30, 1999 and February 28, 19992000 the amount of these loans outstanding was $165,000 and $88,000, respectively.$302,084. Interest expense for the nine month period and three month period ended November 30, 19992000 was $11,972$16,657 and $4,508,$7,381, respectively. Accrued interest was $13,292$27,337 and $1,320$13,165 at November 30, 19992000 and February 28, 1999,29, 2000, respectively. Long term loans - Two convertible subordinated notes, issued to the former S&K shareholders or members of their immediate family, for an aggregate principal amount of $150,000 were converted from S&K debt to Company debt on August 3, 1999, the date of the S&K Acquisition (the "S&K Notes"). The S&K Notes are subordinate to the long-term debt with S&K's bank. The S&K Notes are payable August 3, 2002 with interest accruing at a rate of 6% per annum. The unpaid principal balance on the S&K Notes is convertible into common stock at $1.00 per share. Interest expense for the nine month period and three month period ended November 30, 1999 was $3,000 and $2,225, respectively. Accrued interest was $3,000 at November 30, 1999. NOTE 7: SUBORDINATED MEZZANINE DEBT8: COMMITMENTS AND CONTINGENCIES On September 30, 1999,October 1, 2000, the Company entered into a Note and Warrant Purchase Agreement with a Small Business Investment Corporation (the "SBIC Note") pursuant tolease agreement for additional production space in Milton, NY. The lease, which the Company obtained a loan, subordinated to the note payable, bank (see Note 8), in the principal amount of $450,000 with an interest rate of 12%. The five year loan requires interest only payments for the first two years, followed by monthly principal payments of $12,500 and interest for years three to five. The SBIC Note is collateralized by certain assets of the Company, equity interests in S&K and assigned life insurance policies on two directors of the Company. The SBIC Note, among other things, restricts the payment of dividends. In addition, the SBIC Note was issued with a detachable stock purchase warrant (the "Put Warrants") to purchase 1,100,000 shares of the Company's common stock at a price of $.30, the fair market value of the Company's common stock on September 30, 1999. The fair market value, as subsequently determined by an independent appraisal, of the Put Warrants was determined to be $0.07, and is accounted for as a discount to the SBIC Note and will be amortized over the principal repayment term of the agreement. The unamortized discount atterminates November 30, 1999 is $75,188. The Put Warrants can be put to the Company from May 29, 2006 to May 29, 2007 as otherwise defined by the agreement and they expire on September 30, 2010, and have certain put options as defined by the agreement. The deferred financing fees incurred to acquire the SBIC Note will be amortized over the life2002, has an annual rent of the loan. Accumulated amortization of the deferred financing fees was $1,184 at November 30, 1999. NOTE 8. LONG TERM DEBT Long term debt consists of the following:
November 30 February 28 ----------- ----------- Equipment loan, bank, collateralized by related production equipment, payable in monthly installments of $1,225, including interest at 2% over the bank's prime rate (10.50% and 9.75% at November 30 and February 28, 1999, respectively). $40,124 $47,796 Note payable, bank, collateralized by all assets of S&K, personally guaranteed by two officers of S&K, payable in monthly installments of $17,852, including interest at 9.5% 431,391 0 ------- ------- Total long term debt 471,515 47,796 Due within one year (192,002) (10,503) --------- -------- Due after one year $279,513 $37,293 ======== ======= At November 30, 1999, long term debt is payable as follows: November 30, 2000 $192,002 November 30, 2001 211,347 November 30, 2002 64,842 November 30, 2003 3,324 ----- $471,515
NOTE 9: INCOME TAXES$18,000. The Company has the option to renew the lease for a net operating loss carryforward, therefore no income tax expense is recorded for the nine months andperiod of three months ended November 30, 1999 and 1998. For income tax purposes, the Company had available operating loss carryforwards of approximately $3,632,000 at February 28, 1999. A valuation allowance has been reported in an amount equal to the net deferred tax assets due to the Company's inability to estimate it's ability to recover such amounts.years after expiration. NOTE 10: LOSS9. EARNINGS (LOSS) 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 would reflect, if applicable, 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 would be included for Diluted EPS calculations, if applicable, under the treasury stock method. The computation of basic and diluted (loss) per share are set forth on the following table:
Nine Months Ended Three Months Ended November 30, November 30, 2000 1999 19982000 1999 1998 ---- ---- ---- ---- Numerator- Numerator for basic and diluted earnings (loss) per share $(31,140) $(201,053)$(114,816) $(31,139) $64,022 $(1,648) $(109,890)========== ========= ================= ======== ========== Denominator: Denominator for basic earnings (loss) per share - weighted average shares 8,984,787 7,155,467 4,375,720 8,289,566 4,378,3879,047,025 8,289,467 Effects of dilutive securities: Stock warrants for directors 0* 0* 0*1,526,483 0* Stock options for employees, directors and outside consultants 0* 0* 0*414,140 0* -------------- --------------- -------------------------- -------------- Denominator for diluted earnings (loss) per share 8,984,787* 7,155,467** 4,375,720** 8,289,566** 4,378,387** 10,987,648* 8,289,566 ========= ========= =================== =========
*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 a) the detachable warrants related to $530,000 of convertible secured subordinated promissory notes which were converted to equity as of February 26, 1999 and b) the detachable Put Warrants (see Note 7) and c) the convertible long term loans-related parties (Note 6) are antidilutive and therefore not considered in the Diluted EPS and LPS per share calculations. Under the assumption that stock options, warrants and convertible long term loans were not antidilutive as described in * and **,above, the denominator for Diluted LPS would be 9,408,66711,234,771 and 5,701,8119,408,667 weighted average shares for the nine month period at November 30, 19992000 and 1998,1999, respectively and 11,340,411 and 5,704,478 weighted average shares for the three month period at November 30, 1999 and 1998, respectively.1999. On October 22, 1999,9, 2000, the Board of Directors of the Company granted options to acquire 262,50072,500 shares of common stock to qualified employees of the Company which are exercisable at the fair market value on the date of grant, under the Company's 1993 Stock Incentive Plan, as amended. NOTE 11: OPERATING LEASES The Company leases an office and manufacturing facility in Milton, NY under a lease that expired in January 1997. The lease provided for a five-year renewal option at annual rentals varying from $65,000 to $78,000, but that option was not exercised. The Company is making payments on a month-to-month basis equal to the amount that would have been required per month if the option had been exercised. Subsequent to November 30, 1999, the Company entered into a new lease for its existing facility in Milton, NY (see Note 12). The Company leases an office and warehouse facility in Chestnut Ridge, NY pursuant to a one year lease executed on August 3, 1999. The annual base rent for the Company's Chestnut Ridge, NY facility is $92,000. The building is owned by an officer of S&K. The rent expense under this agreement was $9,000 for the period from August 3,1999 (see Note 3) to November 30, 1999. NOTE 12:10: SUBSEQUENT EVENTS Operating Leases-On December 1, 1999 the Company entered into a lease agreement for an additional 3,500 square feetLetter of space in Milton, NY. The space will be used for additional offices necessitated by the relocation of a substantial portion of S&K's operations to the Company's Milton, NY location. In addition, the new space will also house additional production and testing areas.intent - On January 1,May 16, 2000, the Company entered into two lease agreements. The first lease is forsigned a letter of intent to purchase all the outstanding stock of a corporation to further expand the Company's existing facility in Milton, NY.product base. This lease terminates November 30, 2002letter of intent has expired by its terms and has an annual rent of $78,000. In addition, a 2000 square foot warehouse has been leased through November 30, 2002 with an annual rent of $9,000. Pursuant to the operating leases subsequent to November 30, 1999, the Company hasis no longer pursing the following future annual minimum payments through the endpurchase. Short term loans - related parties - During December 2000, a director of the three year lease renewals: Fiscal year ending February 2000 $ 19,000 2001 105,000 2002 105,000 2003 78,750 ------ $307,750 Equipment Loan-On December 30, 1999Company loaned the Company entered into a loan agreement with a bank for $73,000 for$20,000 at the construction of a cleanroom to be used in testing S&K equipment. The five year loan has an interestfixed rate of prime9%, convertible at $1.00 per share into the Company's common stock. Subordinated mezzanine debt - During December 2000, the note was increased by $100,000. If the $100,000 plus 2%, which was 10.5 % on December 30, 1999,interest is not repaid by March 22, 2001, the scheduled principal payments will increase to $15,278 per month and is secured by the cleanroom. The loana replacement Warrant will be repaid in sixty equal monthly installments of principal and interest. Private Placement-On January 11, 2000, the Company completed the sale of 210,000issued for 1,344,444 shares of the Company's common stock for $63,000. This completes the Private Placement offered by the Company on May 5, 1999.stock. 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 increased $233,997decreased $69,652 from $272,916$22,612 at February 28, 199929, 2000 to $506,913a working capital deficiency of $(47,040) at November 30, 1999.2000. The increasedecrease in working capital was primarily a result of an increasea decrease in cash, accounts receivable and inventories of $855,000$466,851 that was offset by an increasea decrease in short term loansdeferred revenue of $725,491 and current liabilitiesincreases in accrued expenses of $621,000. The increase in cash was derived from the Private Placement Memorandum$219,176 and the SBIC Note.customer deposits of $181,396. The Company's stockholders' equity increased $707,674$155,809 from $398,382$727,630 on February 28, 199929, 2000 to $1,106,346$883,439 on November 30, 1999. Of this increase, $287,000$137,500 was due to the sale of 956,667137,500 shares of common stock through thea Private Placement, Memorandum dated May 5, 1999, $102,626$132,242 was due to the issuanceexercise of 600,000 warrants $332,000 was due to the issuance of 960,000 shares of common stock and 200,000 warrants to purchase common stock related to the acquisition of S&K and $17,000 was due to the conversion of accrued expenses into 57,294 shares of common stock, all of whichoptions that were partially offset by the $31,140loss$114,816 loss for the nine months ended November 30, 1999.2000. 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 $300,000$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 Chairman and CEO of the Company. As of November 30, 19992000 the outstanding balance was $299,948.$350,000. Due to losses incurred during Fiscal YearYears 2000 and 1999, the Company was required to borrowhas borrowed on a short-term basis from certain directors of the Company.officers and directors. As of November 30, 19992000 the balance owed thethese officers and directors was $165,000. A $150,000 related party loan to S&K was assumed on August 3, 1999 and converted into subordinated convertible debt, payable on August 3, 2002. On September 30, 1999, the Company obtained a $450,000, five-year term loan from a Small Business Investment Corporation . The Company also issued a warrant to the Small Business Investment Corporation to purchase 1,100,000 shares of the Company's common stock with certain put features as defined in the agreement. The proceeds of this loan were used for (i) professional fees incurred in connection with the loan, (ii) the S&K Acquisition, (iii) paying loans, salaries and accrued expenses of certain officers, (iv) the reduction of trade payables, (v) acquiring certain fixed assets, and (vi) general working capital and other corporate purposes of the Company and its subsidiaries.$302,084. Although there can be no assurances, management believes that theits current backlog of orders and continued success ofsales and expanding markets for its new products along with the improvement in the market for the SonoFlux Systems will lead to broader markets and increases in salesprofits. These factors, and profits. Management also believes that the acquisitionanticipated success of S&K will lead to increased sales while at the same time realizing significant efficiencies by integrating the operations of the two companies. With the increase in sales and savings from the combined operation of both companies, management believesPNR America, should allow the Company will be able to meet its current obligations as they become due. Results of Operations The Company's sales increased $1,264,473$2,614,704 from $2,395,727 for the nine months ended November 30, 1998 to $3,660,200 for the nine months ended November 30, 1999.1999 to $6,274,904 for the nine months ended November 30, 2000. The increase was due to $603,000an increase in SCS sales attributable to S&K,of $2,310,100, increased sales of the SonoFlux System of $173,000, MCS Infinity and AccuMist Systems of $191,000, pressure nozzles of $79,000 and special orders of $166,000$609,948, that were offset by a decrease in nozzlesnozzle and liquid delivery sales of $65,000.$107,657. The Company's sales increased $872,344$429,149 from $679,428$1,551,772 for the three months ended November 30, 1999 to $1,551,772$1,980,921 for the three months ended November 30, 1999.2000. The increase was due to $515,000$274,710 in sales attributable to S&K,SCS, increased sales of the SonoFlux System of $261,000, MCS Infinity$109,084, MCSoInfinity and AccuMist SystemsAccuMistoSystems of $35,000, pressure nozzles of $49,000 and special orders of $36,000$163,673, that were offset by a decrease in nozzlesnozzle and liquid delivery sales of $25,000.$68,918. Gross profit increased $830,346$732,035 from $1,103,787 for the nine-month period ended November 30, 1998 to $1,934,133 for the nine-month period ended November 30, 1999.1999 to $2,666,168 for the nine-month period ended November 30, 2000. The increase in gross profit is due to the increase in sales that was offset by increases in personnel costs of $607,175, service travel of $135,651 and warranty expense of $75,314. The Company's gross profit increased $515,774$144,261 from $296,475 for the three months ended November 30, 1998 to $812,249 for the three months ended November 30, 1999.1999 to $956,510 for the three months ended November 30, 2000. The increase in gross profit is due to the increase in sales that was offset by increases in personnel costs of $89,627, service travel of $45,899 and warranty expense of $19,922. The gross profit was 52%42% and 46%53% of sales for the nine month period ending November 30, 19992000 and 1998,1999, respectively. The gross profit was 52%48% and 44%52% of sales for the three month period ending November 30, 19992000 and 1998,1999, respectively. For both the three and nine month periods the increasedecrease in the Company's gross profit was primarily a result of increased sales of the Company's products combined with decreases in labor costs and warranty costs.lower profit margins. Research and product development costs increased $59,496$257,625 from $370,572 for the nine months ended November 30, 1998 to $430,068 for the nine months ended November 30, 1999.1999 to $687,693 for the nine months ended November 30, 2000. Research and product development costs increased $62,806$47,346 from $107,906 for the three months ended November 30, 1998 to $170,712 for the three months ended November 30, 1999.1999 to $218,058 for the three months ended November 30, 2000. For both the three and nine month periods, the increase in the Company's research and product development costs was a result of increased compensation and rent expense resulting from a larger engineering staff and additionaltravel costs associated with S&K.new products for SCS. Marketing and selling costs increased $239,194$320,708 from $548,563 for the nine months ended November 30, 1998 to $787,757 for the nine months ended November 30, 1999.1999 to $1,108,465 for the nine months ended November 30, 2000. The increase was a result of increased sales commissions and additional commissionsales personnel that totaled $236,312 and labor costsincreased marketing expenses of $50,000, expenses related to start up costs associated with the sale of pressure nozzles of $44,000, trade shows and travel of $27,000, and costs associated with S&K.$25,030. Marketing and selling costs increased $125,115$60,130 from $177,946 for the three months ended November 30, 1998 to $303,061 for the three months ended November 30, 1999.1999 to $363,191 for the three months ended November 30, 2000. The increase was a result of additional commission and laborcommissions of $118,707 that were offset by decreases in personnel costs of $95,000, trade shows$15,623, travel costs of $11,471 and travelmarketing costs of $22,000, and the costs associated with S&K.$23,899. General and administrative costs increased $238,158$99,409 from $353,682 for the nine month period ended November 30, 1998 to $591,840 for the nine month period ended November 30, 1999.1999 to $691,249 for the nine month period ended November 30, 2000. The increase was due to increases in compensation of $122,000, goodwill amortization of $28,000, professional and consulting fees of approximately $24,000, travel$128,817 plus goodwill and deferred financing amortization of $20,000 and additional S&K costs.$44,232 that were offset by a decrease in personnel costs of $58,929. General and administrative costs increased $186,178decreased $57,881 from $114,808 for the three month period ended November 30, 1998 to $300,986 for the three month period ended November 30, 1999.1999 to $243,105 for the three month period ended November 30, 2000. The increasedecrease was due to increases in compensation of $100,000, professional and consulting fees of approximately $27,000, goodwill amortization$45,758 that were offset by decreased personnel costs of $21,000, travel of $10,000, and additional S&K costs.$81,313. Interest expense increased $124,812$63,178 from $42,775$167,587 for the nine month period ended November 30, 19981999 to $167,587$230,765 for the nine months ended November 30, 1999. The increase is primarily due to a non-cash charge of $102,626 for the costs associated with 600,000 warrants that were issued on May 13, 1999 and to interest expense on the S&K debt and the additional debt incurred on September 30, 1999.2000. Interest expense increased $23,625$14,852 from $14,925$38,550 for the three month period ended November 30, 19981999 to $38,550$53,402 for the three months ended November 30, 1999.2000. The increase is a resultprimarily due to an increase in interest costs associated with the addition of SCS and Norwood loan interest expense onand new equipment loans from the S&K debt and the additional debt incurred on September 30, 1999.bank. For the nine months ended November 30, 19992000 the Company had a net loss of $31,140$114,816 or $(0.00)$(0.01) per share as compared to a net loss of $201,053$31,139 or $(0.05)$(0.00) per share for the nine months ended November 30, 1998. The decrease in net loss was primarily a result of an increase in the Company's sales offset by the non-cash charge of $102,626 for the warrants issued May 13, 1999. For the three months ended November 30, 1999,2000 the Company had a net income of $64,022 or $0.01 per share as compared to a net loss of $1,648 or $(0.00) per share as compared to a net loss of $109,890 or $(0.03) per share for the three months ended November 30, 1998. The decrease in net loss for the three month period was result of the increase in sales, offset by higher costs due to interest, goodwill amortization and costs associated with S&K. Year 2000 Compliance1999. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has assessed its readiness for the Year 2000 (Y2K). This assessment identified areas that neededis exposed to be modified, and resultedmarket risk related to changes in the Company upgrading both hardware and software used internally. As part of its assessment, the Company evaluated its phone, security and manufacturing machinery and determined that all of these systems are Y2K compliant.interest rates. The Company also evaluated the software and hardware used in its products and determined that they are Y2K compliant. The Company has surveyed its major suppliers for their Y2K readiness. Because all major components and materials used by the Company in the manufacture of its products are readily available from several suppliers, management considers this area to be of minimal risk. At the present time, a contingency plan has not been developed. The Company will continue to monitor the need for a contingency plan. The Company has incurred internal staff costs, as well as the expense to purchase additional hardware and software of approximately $28,000. Despite its efforts to survey its customers, suppliers and service providers, the Company cannot be certain as to the actual Y2K readiness of these third parties or the impact that any non-compliance on their part may haveinterest rate on the Company's business,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 or financial condition. This is a Yearwould approximate $1,300 for the quarter ended November 30, 2000 readiness disclosure entitled to protection as provided inand $3,500 for the Year 2000 Information and Readiness Disclosure Act. As of January 14, 2000, the Company has not, nor to its knowledge, has any of the Company's customers, suppliers, financial institutions, vendors, and distributors, experienced any material Y2K complications. However, there can be no absolute assurances that the Company and the Company's external agents will not experience some complications resulting from Y2K problems in the future.nine months ended November 30, 2000. PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults on 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 September 30, 1999. 1. The election of three (3) directors of the Company to serve until the Company's 2001 annual meeting of shareholders. For Withheld John J. Antretter 6,665,545 351,330 Harvey L. Berger 6,665,545 351,330 Christopher L. Coccio 6,665,545 351,330 2. The election of one (1) director of the Company to serve until the Company's 2000 annual meeting of shareholders. For Withheld Kevin Schumacher 6,665,545 351,330 3. To increase the number of authorized shares of the Company's common stock from 12,000,000 shares to 25,000,000 shares. For Against Abstained 6,111,760 826,178 78,937 4. To increase the number of shares of common stock issuable under the 1993 Stock Incentive Plan (the "1993 Plan") from 750,000 shares to 1,500,000 shares and to expand the 1993 Plan to cover all employees of the Company and its subsidiaries, and, in the case of Non-Qualified Stock Options, employees of affiliates of the Company. For Against Abstained 5,107,225 804,512 81,687 5 Ratify the appointment of Deloitte & Touche LLP as the Company's independent auditors for the fiscal year ending February 29, 2000. For Against Abstained 6,944,989 53,201 18,685 There were no broker non-votes.None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 3.1.1 Certificate of Amendment of the3(d) Restated Certificate of Incorporation dated September 30, 1999 4.11 Note and Warrant Purchase Agreement10(g) Lease for the Company's facilities in Milton, NY dated September 29, 1999 by and between the Company and Norwood Venture Corp. 4.11(a) Note issued by the Company, dated September 29, 1999, in the principal sum of $450,000. 4.11(b) Common Stock Purchase Warrant, dated September 29, 1999,issued by the Company to Norwood Venture Corp 4.11(c) General Security Agreement, dated September 29, 1999, issued by the Company in favor of Norwood Venture Corp. 27. Financial Data Schedule - EDGAR filing only2000 (b) Reports on Form 8-K/A Filed October 18, 19998-K None 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 14, 200016, 2001 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 Exhibit 3.1.1 CERTIFICATE OF AMENDMENT OF THE3(d) CERTIFICATE OF INCORPORATION OF SONO-TEK CORPORATION UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW * * * * * 1.Under Section 402 of the business Corporation Law IT IS HEREBY CERTIFIED THAT: (1) The name of the proposed corporation is: SONO-TEK CORPORATION (2) The purpose or purposes for which this corporation is SONO-TEK CORPORATION. 2. The certificateformed, are as follows, to wit: To engage in the business of incorporationmanufacturing, designing, creating, compounding, developing, formulating, investing, patenting, owning, acquiring, producing, processing, constructing, storing, applying, assembling, adapting, conducting, operating, using, preparing for market, exhibiting, distributing, installing, buying, selling, disposing, leasing, renting, mortgaging, exploiting, licensing, exchanging, reconstructing, repairing, importing, exporting and generally dealing in and with household and industrial fuel combustion systems including but not limited to all kinds of said corporation was filed by the Departmentburners, furnaces, fuel atomizers, stoves, boilers, engines, fuel delivery systems, heating devices, lighting devices, refrigerating devices, devices for producing and furnishing gases, heat, light, cold, power, or electricity, and all other kinds of State on the 21st daymechanical and electrical machines, devices, and appliances, and all kinds of March, 1975. 3. (a) The certificate of incorporation is amended to increase the number of authorized sharesmaterials, supplies, accessories, equipment, devices or other things used for any of the corporation. (b)foregoing, or in any other way thereto relating, and any and all other kinds of machinery, appliances, device, supplies and articles. To effectacquire such property, real and personal, as may be necessary to the foregoing, Article Fourconduct of thesuch business. The powers, rights and privileges provided in this Certificate of Incorporation are not to be deemed to be in limitation of similar, other, or additional powers, rights and privileges granted or permitted to a corporation by the Business Corporation Law, it being intended that this Corporation shall have the right to engage in such similar activities as like corporations may lawfully engage in under the Business Corporation Law of the State of New York, as now in effect, or as hereafter promulgated. To do everything necessary, suitable or proper for the accomplishment, attainment or furtherance of, to do every other act or thing incidental to, appurtenant to, growing out of or connected with, the purposes, objects or powers set forth in this Certificate of Incorporation, whether alone or in association with others, to possess all the rights, powers and privileges now or hereafter conferred by the laws of the State of New York upon a corporation organized under the laws of the State of New York and, in general, to carry on any of the activities and to do any of the things herein set forth to the same extent and as fully as a natural person or partnership might or could do; provided, that nothing herein set forth shall be construed as authorizing the Corporation to possess any purpose, object or power, or to do any act or thing forbidden by law to a Corporation organized under the laws of the State of New York. (3) The office of the Corporation is amended to read as follows:be located in the Town of Milton, County of Ulster, State of New York. (4) The aggregate number of shares of all classes which the Corporation shall have authority to issue is twenty-five million (25,000,000) common shares, par value $0.01 per share. No holder of any share of the Corporation shall, because of his ownership of shares, have a pre-emptive or other right to purchase, subscribe for, or take any part of any shares or any part of theany notes, debentures, bonds, or other securities convertible into or carrying options or warrants to purchase shares of the Corporation issued, optioned or sold by the Corporation. (5) The Secretary of State is designated as agent of the corporation upon whom process against it may be served. The post office address to which the Secretary of State shall mail a copy of any process against the Corporation 4.served upon him is c/o Sono-Tek Corporation 2012 Route 9W, Building 3 Milton, New York 12547 (6) The amendment was authorizedCorporation may, to the fullest extent permitted by Sections 721 through 726 of the Business Corporation Law of New York, indemnify any and all directors and officers whom it shall have power to indemnify under the said Sections from and against any and all of the expenses, liabilities or other matters referred to in or covered by such sections, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which the persons so indemnified may be entitled under any By-law, agreement, vote of allshareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity by holding such office, and shall continue as a person who has ceased to be a director or officer and shall inure to the directorsbenefit of the heirs, executors and administrators of such a person. (7) No director of the Corporation followedshall be personally liable to the Corporation or shareholders for damages for any breach of duty as a director; provided that this Article (7) shall neither eliminate nor limit liability: (a) if a judgment or other final adjudication adverse to such director establishes that his or her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled or that his or her acts violated Section 719 of the Business Corporation law; or (b) for any act or omission prior to the effectiveness of this Article (7). Any repeal or any modification to the provisions of this Article (7) shall not adversely affect any right or protection of a director of the Corporation existing pursuant to this Article (7) immediately prior to such repeal or modification. (8) The business of the Corporation shall be managed under the direction of a Board of Directors in accordance with the following: (a) The Board shall consist of six directors, unless and until otherwise determined by vote of a majority of the entire board of directors (whether or not there exist any vacancies in previously authorized directorships at the time such resolution is presented to the Board for adoption). (b) The directors shall be divided into two classes, designated Class I and Class II. All classes shall be as nearly equal in number as possible, and no class shall include less than three directors. The terms of office of the directors initially classified shall be as follows: at the 1989 annual meeting of shareholders, Class I directors shall be elected for a one year term expiring at the next annual meeting of shareholders and Class II directors for a two year term expiring at the second succeeding annual meeting of shareholders. At each annual meeting of shareholders after such initial classification, directors to replace those whose terms expire at such annual meeting shall be elected to hold office until the second succeeding annual meeting. Each director shall hold office until the expiration of his term and until his successor is elected and qualified or until his earlier death, resignation or removal. (c) A director elected to fill a vacancy shall be elected to hold office for a term expiring at the next meeting of shareholders at which the election of directors is in the regular order of business and until his successor has been elected and qualified. (d) If the number of directors is changed, (1) any newly created directorships or any decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as possible; and (2) when the number of directors is increased by the Board and any newly created directorships are filled by the Board, there shall be no classification of the additional directors until the next annual meeting of shareholders. (e) Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board for any reason may be filled only by vote of the Board. If the number of directors then in office is less than a quorum, such newly created directorships and vacancies may be filled by a majority of the directors then in office. (f) Any director may be removed for cause by action of the Board. Any director may also be removed for cause (but not without cause) by the affirmative vote of the holders of a majorityat least two-thirds of the outstanding shares entitled to vote on an amendmentthereon. (g) The provisions of this Article (8) may be altered, amended or repealed, and any provision inconsistent herewith may be adopted, only by the affirmative vote of the holders of at least two-thirds of the outstanding shares entitled to vote thereon. The undersigned incorporator is of the age of eighteen years or over. IN WITNESS WHEREOF, this certificate has been subscribed this 21st day of March, 1975 by the undersigned who affirms that the statements made herein are true under penalties of perjury. Exhibit 10(a) LEASE LEASE MADE THIS 29th DAY OF September, 2000 BETWEEN Jean K. Woodward, owner, as may be represented by William Woodward (William Woodward Enterprises) residing at 50 Riverview Drive, Marlboro, New York 12542-5310 herein referred to as Lessor, AND Sono-Tek Corporation, having it's principal place of business at 2012 Route 9-W, Milton Industrial Park, Milton, New York 12547, herein referred to as Lessee. RECITALS: 1: Lessor is the sole owner of the premises described below and desires to lease the premises to a suitable Lessee for business purposes. 2: Lessee desires to lease the premises for the purpose of conducting a business of light manufacturing, electronics and related machinery and equipment. 3: The parties desire to enter a lease agreement defining their rights, duties and liabilities relating to the Certificatepremises. In consideration of Incorporation at the annual meeting of shareholders on September 30, 1999. s/s James L. Kehoe Name: James Kehoe Title: Chief Executive Officer Exhibit 4.11 NOTEmutual covenants contained herein, the parties agree as follows: I. SUBJECT AND WARRANT PURCHASE AGREEMENT SONO-TEK CORPORATION $450,000 Principal Amount 12% Note Due September 30, 2004 and Warrant for 1,100,000 Shares of $0.01 Par Value Common Stock September 29, 1999 SONO-TEK CORPORATION,PURPOSES: Lessor leases a corporation organized and existing under the lawsportion of the building known as Phase I, Building 1, in the Milton Industrial Park, in the County of Ulster, State of New York (the "Company") and NORWOOD VENTURE CORP.more particularly described as follows: Approximately 4,200 square feet of space located adjacent to the SonoTek existing facilities containing a separate electric meter, gas meter, bathroom , small office and one drive-in overhead door. II. TERM AND RENT: Lessor demises the above premises for a corporation organizedterm of two (2) Years and existing undertwo (2) months, commencing October 1, 2000 and terminating on November 30, 2002 at five o'clock P.M., or sooner as provided herein, at the lawsannual rental of Eighteen Thousand Dollars ($18,000.00) or proportioned thereof.. Such sums are payable in advance on October first for the first year and on the anniversary date for each succeeding year. However and provided the lessee is not otherwise in default, the lessee for convenience and with the consent of the Statelessor may pay such annual rent in equal monthly installments of Delaware ("NVC") hereby agreeOneThousand Five Hundred Dollars ($1,500.00) in advance on the first day of each month for that month's rental, during the term of this lease. All rental payments shall be made to Lessor at the address specified above. Lessee shall pay the rent as follows: Article 1. PURCHASE AND SALE 1.1 Purchasespecified herein and Salein Section Three hereof. III. ADDITIONAL RENT: All taxes, charges, costs, and expenses that Lessee assumes or agrees to pay hereunder, together with all interest and penalties that may accrue thereon in the event of Notethe failure of Lessee to pay those items, and Warrant; Payments. Uponall other damages, costs, expenses, and sums that Lessor may suffer or incur, or that may become due by reason of any default of Lessee or failure by Lessee to comply with the terms and conditions of this lease shall be deemed to be additional rent, and, in the event of nonpayment, lessor shall have all the rights and remedies as herein provided for failure to pay rent. IV. UTILITIES NOT FURNISHED BY LESSOR - ENTIRE RESPONSIBILITY OF LESSEE: Lessee shall initiate, contract for, and obtain, in its name, electric, natural gas, and telephone utility services as required on the demised premises. Lessee shall indemnify and hold harmless lessor from any claims whatsoever arising out of lessee's failure to pay for utility services and/or the charges therefor. Lessee shall pay Lessor's attorney's fees arising out of any claims against Lessor arising out of charges for Lessee's utility services. Except in the case of acts of negligence committed by Lessor, Lessor shall not be liable for any personal injury or property damage resulting form the negligent operation or faulty installation of utility services provided for use on the demised premises, nor shall Lessor be liable for any injury or damage suffered by lessee as a result of the failure to make necessary repairs to the utility facilities. Lessee shall be liable for any injury or damages to the equipment of service lines of the utility suppliers that are located on the demised premises, resulting from the negligent or deliberate acts of lessee, or the agents or employees of lessee. V. BROKERS COMMISSION: There is no Broaker's Commission payable or due from either the Lessor or the Lessee. VI. IMPROVEMENTS TO BE MADE TO PREMISES: Lessee shall make the following improvements to the premises: Install access from the existing rental space into the new rental spacethrough a common wall area as located and type of materials approved by the lessor. The above improvements shall be at the direction of Sono-Tek Corporation and completed no later than January 1, 2001. The above improvements shall be subject to the provisions of paragraph VII. VII: ALTERATIONS, ADDITIONS AND IMPROVEMENTS: 1. Subject to the limitation that no portion of the building on the demised premises shall be demolished or removed by Lessee without the prior written consent of Lessor, and , if necessary, of any mortgagee. Lessee may at any time during the lease term subject to the conditions set forth below and at his own expense, make alterations, additions, or improvements in and to the demised premisses and the building. Alterations shall be performed in a workmanlike manner and shall not weaken or impair the structural strength, or lessen the value, of this Agreement, the Company agrees to issue and sell to NVC, and NVC agrees to purchase, by check or wire transfer in immediately available funds to one or more accounts designated in writing by the Company, from the Company,building on the date onpremises, or change the purposes for which this Agreement is executedthe building, or any pert thereof, may be used. 2. Conditions with respect to alterations, additions or improvements are as follows: 1. Before commencement of any work all plans and delivered (the "Closing Date") (a) at par, a 12% Note of the Company due September 30, 2004 in the principal amount of $450,000 (the "Note") and (b) for $100, a Warrant for the purchase of 1,100,000 shares of the Company's $0.01 par value Common Stock ("Common Stock"). The shares issued or issuable on exercise of the Warrant are hereinafter referred to as "Warrant Shares". The Notespecifications shall be in substantially the form of Exhibit A heretofiled with the blanks completed in conformity herewith. The Warrantand approved by all governmental departments or authorities having jurisdiction and any public utility company having an interest therein, and all work shall be in substantially the form of Exhibit B hereto with the blanks completed in conformity herewith. The Company shall apply $12,500.00 to the prepayment of the principal amount of the Note on the last business day of each month, commencing in the month of October, 2001 and continuing to and including the month of August, 2004, and shall pay the remaining outstanding principal amount of the Note and any interest accrued and unpaid thereon at the scheduled maturity of the Note. 1.2 Issuance of Stock on Exercise of Warrant; Participation Rights. The Company agreesdone in accordance with the termsrequirements of local regulations. The plans and under the circumstances set forth in, the Warrant, to issuespecifications of any alterations shall be submitted to the holder thereof the number (subjectLessor for written approval prior to adjustment as provided in the Warrant) of shares of Common Stock for which the Warrant is then exercisable in accordance with the terms of the Warrant. The Company shallcommencing work. Said approval not issue or agree to issue any equity securities or securities with an equity feature unless either (a) it has given NVC at least 20 days' prior written notice thereof and afforded NVC a reasonable opportunity during such 20 day period to acquire up to eight and one-half percent (8 1/2%) of the securities to be issued (or rights to be granted) on the best terms on which they are to be issued to any other person or entity (except that NVCunreasonably withheld. . The lessee shall have the right to pay in cashinstall one identification sign at the fair market value, as reasonably determined by the Company's Board of Director's, of any non-cash consideration involved) or (b) Common Stock is to be issuedand the cash consideration to be received by the Company for the issuance thereof exceeds $0.50 per share. Notwithstanding the foregoing, NVC shall have no such rights of participation with respectmain entrance to the issuance of (a) any securities to satisfy any conversion, option, subscription or similar right outstanding on the date hereof or theretofore granted by the Company in compliance with this Section 1.2, (b) up to 250,000 shares of Common Stock issued to employees pursuant to the Company's employee stock option plan and (c) up to 500,000 shares of Common Stock issued pursuant to private placements in all material respects consistent with the terms provided in the private placement memorandum dated May 5, 1999 a true copy of which has been furnished to NVC by the Company (any such private placement being hereinafter referred to as a "Company Private Placement"). 1.3 Note Collateral. As collateral security for the due and punctual payment and performance of the Note, (a) the Company is, on the date hereof (i) executing and delivering to and in favor of NVC a General Security Agreement and UCC-1 financing statements pursuant to which certain of the assets of the Company are pledged to NVC to secure the Company's liabilities under the Note and this Agreement (together, the "Security Agreement") and (ii) delivering to NVC all evidences of its equity interest in, and debt securities issued to it by, S&K Products International, Inc., a New Jersey Corporation ("S&K") together with stock and bond powers executed in blank and (b) the Companydemised premises. Such sign shall within 30 days of the Closing Date, deliver to NVC original policies insuring the lives of James L. Kehoe and Kevin Schumacher each in the amount of at least $450,000, together with instruments assigning such policies and the proceeds thereof to NVC to secure the Company's liabilities under the Note and this Agreement, each of which shall be satisfactory to NVC in NVC's reasonable discretion (such policies and instruments of assignment being together referred to herein as the "Insurance Assignment"; the Security Agreement and the Insurance Assignment being hereinafter referred to collectively as the "Security Agreements").. ARTICLE 2 PUT; MANDATORY WARRANT EXERCISE 2.1 NVC's Put.not violate local building codes. At any time commencing on the delivery by the Company of the Company's audited financial statements for the Company's fiscal year ending February 28, 2006 and terminating one year thereafter (such period, the "Put Period"), NVC shall have the right (once, but not more than once), on written notice to the Company (which notice shall be irrevocable), specifying a closing date (the "Put Date") not less than 90 days from the date of such notice, to sell to the Company, and to require the Company to purchase from it, on the Put Date, the Warrant (to the extent not theretofore exercised) and all (but not less than all) of the Warrant Shares then owned by NVC at a price (the "Put Price") equal to the result obtained by subtracting the aggregate exercise price of the Warrant to the extent then remaining unexercised from the product of the greatest of: (a) the Fair Market Value of the Company as determined by an Independent Appraiser as at the end of the Company's fiscal year ended February 28, 2006 (the "Company's 2006 Fiscal Year")term of this lease the lessee shall at the option of lessor remove such alterations as are designated by lessor. 2. Prior to commencement of any work Lessee shall pay the amount of any increase in premiums on insurance policies provided for herein because of endorsements to be made covering the risk during the course of work. 1. 3. Alterations, additions and improvements on or in the demised premises may commence upon the signing of this agreement. All additions and improvements that may be erected or installed prior to or during the term, shall become part of the demised premises and the sole property of Lessor, except that all movable trade fixtures, and a modular Class 100 clean room if installed by lessee shall be and remain the property of Lessee. VIII. TAXES AND OTHER CHARGES: Lessor shall pay and discharge when due all state, municipal and local real estate taxes, inheritance, succession and , (b) five times EBITDA forassessments, levies and other charges, general and special, ordinary and extraordinary, of whatever name, nature and kind that are or may be during the Company's 2006 Fiscal Yearterm hereof or if higher, average EBITDA for such year andany renewal, beginning with the fiscal year of2000, levied, assessed, imposed or charged on the Company immediately priorland or the premises hereby demised or on the (building or buildings) and improvements now thereon or hereafter to such year,be built or (c) the book value of the Company as at the end of the Company's 2006 Fiscal Year,made thereon, and a fraction (the "Put Fraction") the numeratorall of which ismay be levied, assessed, imposed or charged on or against the total number of shares of Common Stock which would then be owned by NVC if all then issuedleasehold estate hereby created and outstanding options, warrants and rights (together, "Rights") to acquire Common Stock on conversion, exchange, subscriptionthe reversionary estate in the demised premises during the term hereof or otherwise, whether or notany renewal. If at any time during the time exercisable, had been exercised in full and the denominator of which is the number (the "Full Dilution Number") of shares of Common Stock which would be outstanding if all Rights to acquire Common Stock were exercisable and exercised in full. For purposesterm of this Agreement, (v) "EBITDA" meanslease, the consolidated net incomepresent method of taxation or assessment should be changed so that the Company and its Subsidiaries plus (adding back)whole or any deductions for income taxes, interest expense, depreciation and amortization of intangible assets (including amortization of goodwill) for such period, (w) EBITDA, book value, net income, income taxes, interest expense, depreciation and such amortization shall each be as set forth in the Company's audited financial statements prepared in accordance with Section 6.2 of this Agreement, (x) "Subsidiary" means each Person (as hereinafter defined) which the Company or another Subsidiary shall control or own more than 50% of the capital or equity, (y) "Independent Appraiser" means the independent investment banking firm located in New York City designated in writing by the Company or NVC to the other unless within 30 days after such designation the other objects thereto in writing, in which case, if the Company and NVC are unable to agree upon such an investment banker, then such firm shall be the New York City office of a nationally recognized firm of investment bankers to be chosen by the President of the American Arbitration Association (the "AAA") and (z) "Fair Market Value" of the Company means the highest purchase price which one could reasonably expect would be paid for all of the business and assets of the Company and its ownership interest in its Subsidiaries in a sale of the Company as a going concern in an arm's-length sale transaction between an informed, willing and strategically motivated buyer under no compulsion to buy, and an informed and willing seller under no compulsion to sell, assuming that, at the time of the sale, the purchase price is paid entirely in cash. NVC shall pay one-half, and the Company shall pay one-half, of all fees and expenses charged by the Independent Appraiser for determining the Fair Market Value of the Company. Payment of the Put Price pursuant to this Section 2.1 shall be made by transfer of good funds on the Put Date in an amount equal to one-third of the Put Price and delivery of a note (the "Put Note") for the balance of the Put Price. The Put Note shall (i) be payable in thirty-six equal monthly installments due on the last business day of each month following the month in which the Put Date occurs, each such installment to consist of a portion of the balance of the Put Price and interest on the unpaid balance at an annual rate of 12% per annum, (ii) become, by its terms, immediately payable in full upon the occurrence of an Event of Default (as hereinafter defined) or payable on default (if unwaived) in any payment thereon after ten days' notice by the holder of the Put Note of such payment default (if such payment is not made within such period) and (iii) shall otherwise be in substantially in the form of the Note. Section 2.2 Termination of Put Rights. NVC's rights to sell to the Company (or cause the Company to purchase) the Warrant and/or Warrant Shares pursuant to Section 2.1 shall terminate if (a) (i) Common Stock has for 90 consecutive trading days been listed and traded on the NASDAQ small cap market at a price of at least $1.50 per share (appropriately adjusted for any change in the Company's equity capitalization) (such event being hereinafter referred to as a "Liquity Condition") and (ii) the Company causes to be registered for sale, and NVC sells, at least 300,000 Warrant Shares and receives net sale proceeds therefrom of at least $1.50 per Warrant Share after subtracting the exercise price paid by NVC to acquire such Warrant Shares pursuant to the Warrant (the occurrence of (i) and (ii) being hereinafter referred to as a "Liquidity Event") or (b) the Company receives net proceeds of at least $5,000,000 from the sale of its Common Stock in a registered public offering which places a valuation (prior to such sale of Common Stock) on the Company of at least $15,000,000 (the events described in (b) being hereinafter referred to as a "Qualified Public Offering"). Section 2.3 Mandatory Warrant Exercise. At the request of the Company, NVC shall, upon the occurrence of a Liquidity Condition, exercise the Warrant and cooperate with the Company (in the manner described in Article 10) in the registration and sale of at least 300,000 Warrant Shares if the resulting sale would create a Liquidity Event. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to NVC that: 3.1 Organization; Good Standing. The Company is a corporation duly organized and validly existing under the laws of the State of its incorporation and has all requisite corporate power and authority to own, operate and lease its properties, to carry on its business as now being conducted and to enter into this Agreement and perform its obligations hereunder and under each of the other documents entered into by it in connection herewith (including the Note and Warrant), which documents are listed on the List of Closing Documents attached hereto as Exhibit C (such other documents, together with this Agreement, being collectively referred to as the "Transaction Documents"). The Company is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified would have a material adverse effect upon its business or assets. The jurisdictions in which the Company is qualified to do business are set forth on Schedule 3.1 hereto. 3.2 Authorization. The execution, delivery and performance by the Company of each Transaction Document to be executed by the Company (including this Agreement, the Note, the Warrant and the Security Agreements) listed on Exhibit C) has been duly authorized by all requisite corporate action on the part of the Company. No consent, license, approval, authorization, registration, filingtaxes, assessments, levies or similar requirement ("Permit") is necessary in connection therewith except as set forthcharges now levied, assessed or imposed on Schedule 3.2 hereto; there are,the real estate hereby demised and improvements thereon, shall be transferred to the Company's knowledge, no pending or threatened investigations or legal proceedings ("Actions") which questionrentals received from such real estate, lessee shall pay such proportionate share of taxes and assessments levied and assessed on such rentals as shall proportionately relieve the transactions contemplated thereby;taxes and none ofassessments on such transactions will conflict with or result in any violation of or constitute a breach of or default underreal estate, it being the certificate of incorporation or by-lawsintent of the Companyparties hereto that lessor shall receive the rents reserved herein with deduction of taxes (except gift, estate, inheritance, succession and income taxes on the interest of lessor), assessments levies or any applicable laws, rules, regulations, agreements with governmental authorities (together, "Laws"), orders, injunctions, judgments, awards or decrees (together, "Orders") or, except as set forth on Schedule 3.2 hereto, other agreements, understandings, deeds, notes, mortgages or licenses (together, "Contracts") binding upon the Company or its assets or will resultcharges in the creation of any lien, charge or encumbrance (together, "Liens") (except the Lien created by the Security Agreements) upon any of the assets of the Company pursuant to any Contracts. Each such Transaction Document has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights or by general equitable principles. 3.3 Capitalization. On the Closing Date, after consummation of the transactions contemplated hereby, the Company's authorized capital stock will consist solely of those shares identified under the heading "Authorized Capital Stock" on Schedule 3.3. Of such shares, only those shares identified under the heading "Outstanding Common Shares and Ownership Thereof" on Schedule 3.3 are outstanding and such shares are held of record and,respect to the knowledge ofreal estate and improvements thereon, but that lessee shall not be obligated to pay full taxes and assessments on such real estate and improvements and also on such rentals. IX. REPAIRS: Lessee shall, at all times during the Company, beneficially as indicated under such heading except as set forth on Schedule 3.3. No person, corporation, association or other entity ("Person") haslease and at his own cost and expense, repair, replace and maintain in good, safe and substantial condition, all buildings and any Right issued by the Company entitling such Person to acquire shares of the Company's capital stock or any other securities (whether or not authorized or outstandingimprovements, additions, and alterations on the date of this Agreement) which are convertible intodemised premises, and shall use all reasonable precaution to prevent waste, damage or exchangeable for such shares except as indicated on Schedule 3.3 under the heading "Rights". The shares of the Company's Common Stock purchasable on the exercise of the Warrant have been duly reserved for issuance, and when issued upon the valid exercise of the Warrant, will be validly issued, fully paid and non-assessable shares of the Company's Common Stock. No Person is entitled to any preemptive or other rights to subscribe for the Warrant Shares. Except as set forth under the heading "Liabilities Owed to or by Affiliates" on Schedule 3.3, there is no outstanding indebtedness of the Company owed to any Person (or any close relative of such Person) who owns directly or indirectly 5% or more of any class of the outstanding securities of the Company or of which the Company owns 5% or more of the equity or capital or to any officer or director of the Company or any of their close relatives (any Person with such an ownership or other relationship with the Company described in this sentence being hereinafter referred to as an "Affiliate") or any indebtedness of any Affiliateinjury to the Company. Other than as described on Schedule 3.3 under the heading "Management or Control", theredemised premises. It is intended that this clause refers to non-structural repairs, unless structural repairs are no agreements or other instruments of any kind which relate to the voting of the capital stock or other securities of the Company or the management or control of the Company other than the certificate of incorporation and by-laws of the Company. Except pursuant to Article 10 of this Agreement, or those agreements listed on Schedule 3.3 under the heading "Registration Rights", there are no agreements or other instruments providing registration rights to holders of any security issued or issuablenecessitated by the Company. 3.4 Equity Investments. The Company does not own, beneficially or of record, any capital stock or other equity securities of, or direct or indirect equity interest in, any other Person or enterprise except as indicated on Schedule 3.4. 3.5 Litigation. To the Company's knowledge, except as set forth on Schedule 3.5, there are no Actions which would, if adversely determined, severally or in the aggregate, materially and adversely affect the business, operations, assets or financial or other condition (together, the "Financial Condition") of the Company or the transactions contemplated by the Transaction Documents. 3.6 Compliance; Permits. To the Company's knowledge, except as set forth on Schedule 3.6, there is no failure by the Company to comply with or any default or violation by the Company under, any Laws, Orders, Permits or Contracts applicable to its business which failure, violation or default could have a material adverse effect on the Company's Financial Condition and the Company has not received notice of any claim to the contrary. To the Company's knowledge, the Company has all material Permits necessary for the conduct of lessee, its business,agents or assigns. In such case, lessee shall be responsible for structural repairs. Lessor shall maintain the building exterior, lawn and landscaping. Lessor shall be responsible for snow removal, and grounds cleaning. Lessor shall replace all shrubs to the property which have died. Lessee shall remove snow and debris from walkways and in front of which material Permits are listed on Schedule 3.6. 3.7 Material Contracts. Exceptdoors.. Lessee shall be responsible for office cleaning, window cleaning, refuse removal, maintenance of light fixtures, bi-annual service of heating and air condition equipment, and to maintain all plumbing fixtures against leaks and water wasting. X. SECURITY DEPOSIT: Lessee shall deposit No Money with lessor upon the signing here of for the Contracts described on Schedule 3.7, true copiespurposes of which have been furnished to NVC,a security deposit. XI. INSURANCE: 1. In the Company is not bound by any contracts with employees or Affiliates, collective bargaining, pension, retirement, profit-sharing or similar agreements, or Contracts which are material to the businessterm of the Company. 3.8 Financial Statements. True copieslease and for any further time that Lessee shall hold the demised premises, Lessee shall obtain and maintain at his expense the following types and mounts of the financial statementsinsurance: Personal Injury and other information identified on Schedule 3.8 have been furnished to NVC by the Company. Except as describedProperty Damage Insurance. Insurance against liability for bodily injury and property damage in the next sentence, such statementssum of Two Million Dollars ($2,000,000.00) per claimant and information present fairly the financial condition and the results of operations of the Company as at the dates thereof and for the periods covered thereby including contingent liabilities. Such financial statements were prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved except that such financial statements with respect to periods other than full fiscal years of the Company are subject to normal year-end adjustments and may lack footnotes and other presentation items. The Company has no material obligations or liabilities, contingent or otherwise, except (a) as set forth on Schedule 3.5 or Schedule 3.8, (b) as reflected on such financial statements and (c) those obligations and liabilities incurred in the ordinary coursesum of the Company's business since the date of the latest financial statements identified on Schedule 3.8 and, exceptFive Million Dollars ($5,000,000.00) per occurrence. 2. All insurance provided by Lessee as may be set forth on Schedule 3.8, there has been no material adverse change in the Financial Condition of the Company since the date of the most recently dated balance sheet of the Company included in such financial statements (the "Most Recent Balance Sheet"). 3.9 Pro Forma Balance Sheet. Set forth on Schedule 3.9 is the Company's pro forma opening balance sheet reflecting the Most Recent Balance Sheet, but giving effect to the transactions contemplatedrequired by this Agreement and the acquisition by the Company of S&K as if such transactions had occurred on the date of the Most Recent Balance Sheet pursuant to the Stock Purchase Agreement (the "S&K Agreement") between the Company and S&K dated as of August 3, 1999 (a true copy of which Agreement has been furnished by the Company to NVC). If the Closing Date and the consummation of the Company's acquisition of S&K had occurred on the date of the Most Recent Balance Sheet, such pro forma opening balance sheet would present fairly, on a pro forma basis, the financial condition of the Company as at such date. 3.10 Projections. Except as described on Schedule 3.10, in light of all material facts known to the Company on the date hereof and based upon the assumptions that underlie the Company's projections (which assumptions the Company believes in good faith are reasonable), the Company has no reason, in good faith, to believe that its prospects are not at least as favorable as indicated in the projections concerning the Company included in Exhibit D attached hereto. 3.11 Capital Changes. Except as set forth on Schedule 3.11, and other than pursuant to the terms of the Transaction Documents, since the date of the Most Recent Balance Sheet, (i) no dividend has been declared or paid by the Company, (ii) the Company has not issued, acquired or redeemed or agreed to acquire or redeem any of its securities and (iii) no capital stock of the Company has been split or otherwise subdivided. 3.12 Taxes. Except as set forth on Schedule 3.12, to the Company's knowledge, the Company has filed all tax returns required tosection shall be filed, and has paid all taxes shown to be payable thereon or which are otherwise due and payable by it or as to which claim for payment has been made. 3.13 Indebtedness. The Company has no liability for borrowed money or any other liability evidenced by bonds, debentures, notes or similar instruments (together, "Indebtedness for Borrowed Money") except as disclosed on the Most Recent Balance Sheet or set forth on Schedule 3.13. 3.14 Title; Operating Condition; Insurance. The Company has good title to, or a valid leasehold interest in, all its assets subject only to the Liens described on Schedule 3.14. All plant and equipment owned or leased by the Company is operating satisfactorily in all material respects and the Company has no reason to believe that it will not continue to do so subject to normal maintenance, repair, deterioration and obsolescence. Insurance is in effect to such extent and covering such risks as is required by law and as is customary for companies engaged in similar businesses. Such insurance is described on Schedule 3.14 and is considered adequate by management. 3.15 Patents, Copyrights, etc. Except as set forth on Schedule 3.15, the Company owns or possesses adequate licenses or other rights to use all patents, processes, trademarks, trade names or copyrights necessary to the conduct of its business as now conducted or presently intended to be conducted (together, "Proprietary Rights") and the Company has no reason to believe that any such Proprietary Rights conflict or will conflict with the rights of others. 3.16 Security Interest. Upon the consummation of the purchase of the Note by NVC, the execution and delivery of the Security Agreements and the filing of the UCC-1 financing statements in the jurisdictions set forth on Schedule 3.16 will be effective to createcarried in favor of NVC a legal, valid, enforceable, fully perfected security interest in the collateral described therein (to the extent perfection of such LienLessor and Lessee as their respective interests may be obtained by such filing under Article 9 of the Uniform Commercial Code).superior in right to any Liens, existing or future, which any Person other than NVC may have against such collateral, subject only to the superior right of those Liens described on Schedule 3.14. 3.17 ERISA. The Company is in compliance in all material respects with the Employee Retirement Income Security Act of 1974 ("ERISA") and all rules and regulations thereunder. The Company has no unfunded vested liability under any plan described in Section 4021(a) of ERISA ("Plan") and no reportable event described in Section 4043(b) of ERISA has occurred or is continuing with respect to any Plan. 3.18 Investment Company Act. The Company is not an "investment company", or a company "controlled by an investment company", within the meaning of the Investment Company Act of 1940, as amended. 3.19 Flood Hazard. The Company will not use the proceeds from the sale of the Note or Warrant to construct or acquire property to be located within the boundaries of a special flood hazard area so designated by the United States Federal Emergency Management Administration. 3.20 Hazardous Wastes. To the best of the Company's knowledge, none of the Company's assets has ever been used by it or others, nor has the Company taken any action, to dispose of, produce, store, handle, treat, release or transport any hazardous waste or substance except in a manner which would have complied in all material respects with all Laws applicable to such activities if taken on the date hereof, nor has the Company been notified of any claim to the contrary. 3.21 Full Disclosure. To the Company's knowledge, this Agreement and all of the Exhibits and other written material delivered by the Company to NVC in connection with the transactions contemplated hereby do not contain any statement that is false or misleading with respect to any material fact and do not omit to state a material fact necessary in order to make the statements therein not false or misleading. There is no additional fact (other than facts generally known to the public or in the Company's industry) of which the Company is aware that has not been disclosed in writing to NVC that materially affects adversely or, so far as the Company can reasonably foresee on the date hereof, will materially affect adversely the Company's Financial Condition. 3.22 Representation as to Subsidiaries. To the Company's best knowledge, each of the representations set forth in Sections 3.1 through 3.21 (other than Section 3.16) would be true if made by each Subsidiary if such Subsidiary were the Company referred to therein, provided that this representation and warranty is qualified in its entirety by the matters disclosed in the S&K Agreement (including its schedules and exhibits). ARTICLE 4 AFFIRMATIVE COVENANTS Until the date (the "Covenant Termination Date") on which either (a) the Note and any Put Note has been paid in full and NVC ceases to hold at least 20% of the Common Stock or Rights to acquire the same which are purchased hereunder or (b) the Note has been paid in full and there has been a Qualified Public Offering, or, in the case of Section 4.4 and Section 4.7, until the Note is paid in full, the Company shall,: 4.1 Compliance with Applicable Law. Comply with all Laws, Orders and Permits, except for such non-compliance that does not have a material adverse effect on the Financial Condition of the Company and its Subsidiaries taken as a whole; 4.2 Maintenance of Corporate Existence and Properties. Maintain its corporate existence, maintain its qualification and good standing in all jurisdictions where failure to maintain qualification or good standing would have a material adverse effect on the conduct of its business and the ownership of its assets, keep its material physical assets in reasonably good repair and make all necessary replacements, additions and improvements to such assets; 4.3 Accounting Methods and Fiscal Year. (i) Maintain a system of accounting and keep such books, records and accounts (which shall be true and complete in all material respects) as may be required to permit the preparation of the financial statements required by this Agreement, and (ii) make no change in its fiscal year, unless it gives prior notice to NVC and appropriate changes are made to this Agreement, satisfactory to NVC, to adjust the fiscal periods referred to herein; 4.4 Use of Proceeds. Use the proceeds received by it from the sale of the Note pursuant to this Agreement for the purposes indicated on Exhibit E; 4.5 Insurance. Maintain insurance with financially sound and reputable insurance companies to such extent and covering such risks as shall be required by applicable Laws and such additional insurance (consistent with the insurance presently maintained by the Company) as is customary for companies engaged in the same or a similar business or as may be reasonably requested by NVC; 4.6 Visits and Inspections. Permit representatives designated by NVC, from time to time, as often as may be reasonably requested, but only during normal business hours and on at least five (5) days' prior written notice, to (a) visit and inspect any properties in which the Company might have an interest, (b) inspect and make extracts from the Company's books and records, including but not limited to management letters prepared by its independent accountants, and (c) discuss with the Company's principal officers and its independent accountants the Company's Financial Condition; 4.7 Continuation in Present Fields of Business. Engage substantially in the areas of business ("Permitted Fields") heretofore and most recently conducted by it and conduct its business, without substantial change, in accordance with past practice; and 4.8 Subsidiaries. Cause each Subsidiary to comply with each of the covenants set forth in Article 4 (which covenants shall, for purposes of this Section 4.8, apply to each such Subsidiary as if it were the Company referred to therein). ARTICLE 5 NEGATIVE COVENANTS Until the Covenant Termination Date (but in the case of Sections 5.1, 5.2, 5.3, 5.4, 5.5, 5.7 and 5.10 only until the Note shall have been paid in full), the Company shall not directly or indirectly: 5.1 Indebtedness. Create, assume, incur or otherwise become or remain obligated in respect of any Indebtedness for Borrowed Money (not including purchase money indebtedness) except as set forth on Schedule 5.1 (it being understood that trade debt incurred in the ordinary course of business is not deemed to be Indebtedness for Borrowed Money) or repay indebtedness to James L. Kehoe or Samuel Schwartz listed on Schedule 3.3 other than pursuant to the limitations described in such Schedule; 5.2 Guaranties. Become or remain liable with respect to any obligation of any other Person, except by endorsement of negotiable instruments for deposit or collection in the ordinary course of business and except as set forth on Schedule 5.2; 5.3 Liens. Create, assume, incur, permit, or suffer to exist any Lien upon or with respect to any of its assets, whether now owned or hereafter acquired, or upon any income or profits therefrom except Liens (a) in favor of NVC, (b) for taxes and other governmental charges, (c) of materialmen, mechanics, carriers, warehousemen or landlords or similar liens incurred in the ordinary course of business, (d) incidental to either the ordinary and normal conduct of its business or the acquisition or ownership of any of its assets, (d) securing purchase money indebtedness or (e) set forth on Schedule 5.3; provided that in the case of (b) or (c), payment is not yet due or is being contested by appropriate proceedingsappear, and in the case of (d),insurance against damage to the Liens dodemised premises by fire and other casualty, shall provide that loss, if any, shall be adjusted with and be payable to Lessor. If required by Lessor, any insurance against fire or other casualty shall provide that loss shall be payable to the holder under a standard mortgage clause. Rent insurance and the proceeds are hereby assigned to lessor to be held by Lessor as security for the payment of the rent and any additional rent hereunder until restoration of the premises. All insurance shall be written with responsible companies that Lessor shall approve, and the policies shall be held by lessor, or when appropriate, by the holder of any mortgage in which case copies of the policies or certificates of insurance shall be delivered by Lessee to Lessor. All policies shall require 30 days notice by registered mail to Lessor of any cancellation or change affecting any interest of Lessor. XII. UNLAWFUL OR DANGEROUS ACTIVITY: Lessee shall neither use nor occupy the demised premises or any part thereof for any unlawful, disreputable or ultra hazardous business purpose nor operate or conduct his business in a manner constituting a nuisance of any kind. Lessee shall immediately, on discovery of any unlawful, disreputable or ultra hazardous use, take action to halt such activity and keep such premises environmentally clean and safe. XIII. DEFAULT OR BREACH: Each of the following events shall constitute a default or breach of this lease by Lessee: 1. If Lessee, or any successor or assignee of Lessee while in possession, shall file a petition in bankruptcy or insolvency or for reorganization under any bankruptcy act, or shall voluntarily take advantage of any such act by answer or otherwise, or shall make an assignment fo the benefit of creditors. 2. If involuntary proceedings under any bankruptcy law or insolvency act shall be institute against Lessee, or if a receiver or trustee shall be appointed of all or substantially all of the property of Lessee, and such proceedings shall not materially impairbe dismissed or the Company's usereceivership or trusteeship vacated within 20 days after the institution or appointment. 3. If Lessee shall fail to pay Lessor any rent owed or additional rent when the rent shall become due within five days after written notice of assetssuch failure to lessee at the address above given. Lessee shall pay as additional rent the sum of $300.00. If such rent is not received on or before the 1st day of the month and lessor sends such written notice of default. Lessor shall extend to lessee, a five (5) day grace period relative to such rent payment. 4. If lessee shall fail to perform or comply with any of the conditions of this lease and if the nonperformance shall continue for a period of 10 days after notice thereof by Lessor to Lessee or, if the performance cannot be reasonably had within the 10 day period, Lessee shall not in its business; 5.4 Acquisitionsgood faith have commenced performance within the 10 day period and Investments. Exceptshall not diligently proceed to completion of performance. 5. If this lease or the estate of Lessee hereunder shall be transferred to or shall pass to or devolve on any other person or party, except in the manner herein permitted. 6. If Lessee fails to take possession of the demised premises on the term commencement date, or within 10 days after notice that the demised premises are available for occupancy, if the term commencement date is not fixed herein or shall be deferred as herein provided. XIV. EFFECT OF DEFAULT: In the event of any default hereunder, as set forth on Schedule 5.4, purchase or acquire (a) assets constitutingin Section I, the business or a division or operating unitrights of any Person or (b)Lessor shall be as follows: 1. Lessor shall have the stock, securities or obligationsright to cancel and terminate this lease, as well as all of any Person except (i) current tradethe right, title and customer accounts receivable for goods sold or services renderedinterest of lessee hereunder, by giving to lessee not less than 10 days notice of the cancellation and termination. On expiration of the time fixed in the ordinary coursenotice; this lease and the right, title and interest of business and payable in accordance with customary trade terms, (ii) notes acceptedlessee hereunder, shall terminate in the ordinary course of business evidencing overdue tradesame manner and customer accounts receivable arisingwith the same force and effect, except as to lessee's liability, as if the date fixed in the ordinary coursenotice of business, (iii) direct obligationscancellation and termination were the end of the United Statesterm cancellation and termination were the end of Americathe term herein originally determined. 2. Lessor may elect, but shall not be obligated to make any payment required by lessee herein or comply with a maturity of not more than 365 days, (iv) deposits insured by the FDIC, and (v) investments in open-end regulated investment companies which invest in money market and other debt securities with maturities generally not exceeding one year; 5.5 Loans. Except as set forth on Schedule 5.5, lend moneyany agreement, term or extend credit, or make or permitcondition required hereby to be outstanding loansperformed by Lessee, and the lessor shall have the right to enter the demised premises for the purpose of correcting or advances,remedying any such default and to any Person, except, inremain until the ordinary course of business, loans or advances (a) in the nature of prepayments to subcontractors and suppliers, (b) as contemplated by Section 5.4(b)(i) and (ii), and (c) to employees for travel, relocation or other similar allowances not exceeding (for the Company and its Subsidiaries together) $20,000 in the aggregate at any one time outstanding, and except for loans or advances to Subsidiaries which are directly or indirectly wholly-owned by the Company; 5.6 Restricted Payments. Until the Notedefault has been paid in full and a Qualified Public Offeringcorrected or Liquidity Event has taken place, except as set forth on Schedule 5.6 or required by Section 2.1, declare, pay or makeremedied, but any dividend or other distribution on any shares of the Company's capital stock or redeem, retire, purchase or acquire directly or indirectly any shares of its capital stock now or hereafter outstanding or return any capital to its stockholders; 5.7 Merger, Consolidation and Sale of Assets. Except as set forth on Schedule 5.7, merge or consolidate with any other Person, liquidate, wind up or reorganize its business, or sell, lease, transfer or otherwise dispose of (a) any of its assets with a fair market value in excess of $50,000, other than in the ordinary course of the Company's business, or (b) in a single transaction or a series of related transactions, all or a substantial portion of its assets outside the ordinary course of business (not including dispositions of worn out or obsolete assets); 5.8 Transactions with Affiliates. Permit any income or profits of the Company to be divertedexpenditure for the direct or indirect benefit of any director, officer, employee or shareholder or effect any transaction with, or on behalf of, any Affiliate (a) not in the ordinary course of the Company's business or (b) on a basis less favorable to the Company than would be the case if such transaction had been effected with a Person who is not an Affiliate or make any transfer or payment to or directly or indirectly for the benefit of any Affiliate without receiving full value therefor or make any transfer or cash or non-cash payment (including any such payment in the form of salary or fringe benefits such as personal use of Company facilities or resources) to or directly or indirectly for the benefit of any Affiliate in respect of any services, except as described on Schedule 5.8; 5.9 ERISA Plans. (i) Terminate any Plan so as to result in any material liability to the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (the "PBGC"), (ii) engage in or permit any Person to engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended) involving any Plan which would subject the Company to any material tax, penalty or other liability, (iii) incur or suffer to exist any material "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, involving any Plan, or (iv) allow or suffer to exist any event or condition, which presents a material risk of incurring a material liability to the PBGCcorrection by reason of termination of any Plan; 5.10 Sale or Discount of Receivables. Sell with recourse, or discount or otherwise sell for less than the face value thereof, any substantial portion of its notes or accounts receivable (provided that this Section 5.10lessor shall not be deemed to restrictwaive or release the Company from granting discountsdefault of lessee or the right of lessor to customerstake any action as may be other wise permissible hereunder in the normal coursecase of its business); 5.11 Charterany default. 3. Lessor may re-enter the premises immediately and By-Laws. Amend its certificateremove the property and personnel of incorporation (other thanlessee, and store the property in a public warehouse or at a place selected by lessor, at the expense of lessee. After re-entry lessor may terminate the lease on giving 10 days written notice of termination to increaselessee. Without the numbernotice, re-entry will not terminate the lease. On termination, the lessor may recover from lessee all damages proximately resulting from the breach, including the costs recovering the premises, and the present worth of the Company's authorized shares to 25,000,000)balance of this lease over the present worth of the reasonable rental value of the premises for the remainder of the lease term, which sum shall be immediately due lessor from lessee. 4. After re-entry, lessor may relet the premises or By-Laws. 5.12 Transfer of Shares. Suffer or permitany part thereof for any term without terminating the transfer or registration of transferlease, at the rent and on the booksterms as lessor may choose. Lessor may make alterations and repairs to the premises. The duties and liabilities of the Company any shares of Common Stock of anyparties if the premises are relet as provided herein shall be as follows: a. In addition to lessee's liability to lessor for breach of the persons identified on Schedule 5.12 (the "Principals") orlease, lessee shall be liable for all expenses of persons to whom their sharesthe reletting, for the alterations and repairs made, and for the difference between the rent received by lessor under the new lease agreement and the rent installments that are transferred pursuant todue for the same period under this Section 5.12 if NVC has not been afforded a reasonable opportunity to transfer (or has waivedlease. b. Lessor shall have the right, but shall not be required, to transfer), onapply the same terms (except thatrent received from the reletting for the premises (1) to reduce the indebtedness of lessee to lessor under the lease, not including indebtedness for rent, (2) to expenses of the reletting and alterations and repairs made, (3) to rent due under this lease, or (4) to payment of future rent under this lease as it shall receive cash equalbecomes due. If the new lessee does not pay a rent installment promptly to lessor, and the rent installment has been credited in advance of payment to the fair market valueindebtedness of lessee other than rent, or if rentals from the new lessee have been otherwise applied by Lessor as provided for herein and during any non-cash consideration involvedrent installment period are less than the rent payable for the corresponding installment period under this lease, lessee shall pay lessor the deficiency, separately for each rent installment deficiency period, and before the end of that period. Lessor may at any time after a reletting terminate the lease for the breach on which lessor had based the re-entry and subsequently relet the premises. 5. After re-entry, lessor may procure the appointment of a receiver to take possession and collect rents and profits of the business of lessee, and, if necessary to collect the rents and profits. The receiver may take possession of the personal property used in such terms),the business of lessee, including inventory, trade fixtures, and furnishings, and use them in the business without compensating lessee. Proceedings for appointment of a receiver by lessor, or the appointment of a receiver, shall not terminate and forfeit this lease unless lessor has given written notice of termination to lessee as provided herein. XV. CONDEMNATION: Rights and duties in the event of condemnation are as follows: 1. If the whole of the demised premises shall be taken or condemned by any public, or quasi-public use or purpose, this lease shall cease and terminate as of the date on which title shall vest thereby in that authority, and the rent reserved hereunder shall be apportioned and paid up to that date. 2 .If only a portion of the Warrant Shares which is equal todemised premises shall be taken or condemned, this lease and the percentage of the Common Stock of such transferor which is being transferred. This Section 5.12terms hereof shall not be deemed to prohibitcease of terminate, but the transfer of shares of Common Stock by a Principal to members of his immediate family or to a trust for the benefit of such Principal or members of his immediate family. 5.13 Observation Rights. Take any action pursuant to resolutions adopted by the Board of Directors of the Company, or any committee thereof unless a representative of NVC has been afforded the same opportunity to attend a meeting at which such resolutions are adopted or to review the written consent pursuant to which such resolutions are adopted which such representative would have been required to have been afforded if such representative had been a member of such Board of Directors or committee. 5.14 Subsidiaries. Permit any Subsidiary to violate any of the covenants set forth in this Article 5 (which covenants shall for purposes of this Section 5.13 apply to each Subsidiary as if it were the Company referred to therein), provided that this Section 5.13 shall not prohibit a Subsidiary wholly-owned by the Company from making payments which would otherwise violate Section 5.6. ARTICLE 6 CERTAIN INFORMATION COVENANTS Until the Covenant Termination Date, the Company shall furnish to NVC: 6.1 Monthly Financial Statements. As soon as available, and in any event within 45 days after the end of each calendar month, consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of such month and the related consolidated and consolidating statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such month all in reasonable detail, and setting forth in each case in comparative form the corresponding figures for the Company and its Subsidiaries for the corresponding period of the previous fiscal year accompanied by (i) an analysis of the variations from the budget (referred to in Section 6.4) for such month and for the portion of the Company's fiscal year then ended, and (ii) a certificate of the President or chief financial officer of the Company to the effect that such statements fairly present the financial condition of the Company and its Subsidiaries as of the balance sheet date and results of the operations of the Company and its Subsidiaries for the period then ended, subject to normal year-end adjustments and the absence of footnotes. 6.2 Audited Year-End Statements. As soon as available, and in any event within 90 days after the end of each fiscal year of the Company, the consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of such fiscal year and the related consolidated and consolidating statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such fiscal year, setting forth in comparative form the corresponding figures for the Company and its Subsidiaries as at the end of and for the previous fiscal year, in each case audited by independent certified public accountants reasonably acceptable to NVC and who shall have authorized the Company to deliver such financial statements and audit thereof to NVC pursuant to this Agreement. 6.3 Officer's Certificate. So long as the Note has not been paid in full, at the time financial statements are furnished pursuant to Section 6.1 or 6.2, a certificate of the President or chief financial officer of the Company stating that, based on an examination sufficient to enable him to make an informed statement, to his knowledge no event described in Article 7 (an "Event of Default") or any event which with the giving of notice and/or lapse of time would constitute an Event of Default (a "Default") exists or, if such is not the case, specifying such Default or Event of Default and its nature, when it occurred, whether it is continuing and the action being taken with respect thereto. 6.4 Budgets. Prior to each March 1, a budget setting forth projections of the consolidated income statements and cash flow statements of the Company and its Subsidiaries for the Company's following fiscal year and projections of the income statements and cash flow statements of the Company and its Subsidiaries for each quarter of such fiscal year, which budget shall be prepared in form consistent with the form of the financial statements furnished pursuant to Sections 6.l and 6.2 and shall include an explanation of the assumptions made by the Company with respect thereto and such other information as NVC may reasonably request. 6.5 Additional Information. (i) Promptly upon receipt thereof, copies of all reports, if any, submitted to the Board of Directors of the Company by its independent public accountants, including without limitation any management or audit report; (ii) promptly, upon receipt thereof, all amendments to the terms of the Company's Indebtedness for Borrowed Money (not including rate adjustments made automatically pursuant to the terms of any such indebtedness) and all communications received from or on behalf of the holders thereof relating to defaults or waivers thereof; (iii) as soon as practicable, copies of all such financial statements and reports as the Company shall send to its stockholders and of all registration statements and all regular or periodic reports which the Company shall file, or may be required to file, with the SEC or any successor commission; (iv) promptly upon submission thereof, copies of all such financial statements, financial projections, reports and other written communications as shall be submitted to the Directors of the Company in their capacity as such; and (v) from time to time and promptly upon the reasonable request of NVC, such additional data, certificates, reports, statements, documents or further information regarding this Agreement, the Note, the Warrant, the Warrant Shares or the Financial Condition of the Company or any Subsidiary as NVC may reasonably request, including without limitation such information as NVC shall reasonably require to show that the Company has carried out its obligations under Section 4.4 or to furnish information which NVC must, in turn, supply to the United States Small Business Administration. 6.6 Notice of Defaults, Litigation and Other Matters. Prompt notice of: (a) any Default or Event of Default; (b) any amendment of the certificate of incorporation or by-Laws of the Company or any Subsidiary; (c) any event described in Section 4043 of ERISA and any proposed termination, partial termination or merger of a Plan of the Company or of a Subsidiary or any proposed transfer of such a Plan's assets; (d) any Action which could if adversely determined and if no insurance were in effect have a material adverse effect on the Financial Condition of the Company and its Subsidiaries taken as a whole; or (e) (i) any material change since the date of this Agreement in the Financial Condition of the Company or any Subsidiary of the Company or (ii) the occurrence or non-occurrence, since such date, of any event of which the Company has knowledge, in either case, that has had or is reasonably likely to have a materially adverse effect on the Financial Condition of the Company and its Subsidiaries taken as a whole. ARTICLE 7 EVENTS OF DEFAULT Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of Laws or Orders: 7.1 Payment Defaults. The Company shall fail to make within ten days after the date when due any payment of principal or interest on the Note or shall fail to make for a period of more than five daysrent payable after the date on which it is due and after receipt of written notice from NVC any other paymentlessee shall be required to surrender possession of such portion shall be madereduced in proportion to NVC hereunder;the decreased use suffered by lessee as the parties may agree or 7.2 Misrepresentations. Any representation or warranty made in or pursuant to this Agreement or in any document delivered to NVC at the closing of the transactions contemplated hereby shall at any time prove to have been incorrect or misleading in any material respect when made; or 7.3 Covenant Defaults. The Company shall cease to maintain its legal existence or shall default in any material respect in the performance or observance of (a) any term, covenant, condition or agreement contained in (i) Article 5 or (ii) Sections 4.4, 4.7 or 6.6 and, if such default can be remedied, such default continues unremedied for a period of thirty consecutive (30) days during which the Company diligently attempts to remedy such Default; or (b) any term, covenant, condition or agreement contained in this Agreement (other than a term, covenant, condition or agreement, a default in the performance or observance of which is elsewhere in Section 7.1 or 7.2 or in this Section 7.3 specifically dealt with), and such default shall continue unremedied for a period of 30 days after notice from NVC, or, in the case of defaults which can be remedied, for such longer period after notice from NVC as shall be reasonably required to remedy such default, provided that such grace period shall terminate if and whendetermined by arbitration. 3. In the Company shall cease to diligently attempt to remedy such default; or 7.4 Cross-Default with Other Indebtedness. The Company shall fail to pay, in accordance with its terms and when due and payable, and after the expiration of all applicable cure periods, the principal of or interest on any Indebtedness for Borrowed Money which aggregates at least $50,000, or the maturityevent of any such Indebtedness shall have been acceleratedtaking or been required to be prepaid prior to the stated maturity thereof or any event shall have occurred and be continuing which, with the passage of time or the giving of notice or both, would permit the acceleration of such maturity and the Company shall not have obtained a waiver of default with respect thereto from the applicable creditor; or 7.5 Cross-Default with Material Contracts. The Company shall defaultcondemnation in the payment when due,whole or in part, the performance or observance,entire resulting award of consequential damages shall belong to lessor without any obligation or condition of any Contract, unlessdeduction therefrom for the Company has obtained a waiver of such default from the other party to such Contract, or unless such default, together with all other such defaults, has not had and will not have a materially adverse effect on the Financial Conditionvalue of the Company and its Subsidiaries taken as a whole;unexpired term of this lease or 7.6 Bankruptcy, etc. (a) The Company, or any Subsidiary shall (i) commence a voluntary case under Federal bankruptcy laws, (ii) file a petition seeking to take advantage offor any other Laws relating to bankruptcy, insolvency, reorganization, winding upestate or composition or adjustment of debts ("Bankruptcy"), (iii) consent to or fail to contest in a timely and appropriate manner any petition filed against it in any involuntary case under such Bankruptcy laws or such other Laws, (iv) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator or the like ("Receiver") of itself or of a substantial part of its property, (v) admit in writing its inability to pay, or generally not be paying, its debts as they become due, (vi) make a general assignment for the benefit of creditors, or (vii) take any corporate action for the purpose of effecting any of the foregoing; or (b) a case or other proceeding shall be commenced against the Company or any Subsidiary in any court of competent jurisdiction seeking (i) relief under Federal bankruptcy laws or under any other Laws relating to Bankruptcy, (ii) the appointment of a Receiver of the Company or any Subsidiary or of all or any substantial part of the assets of the Company or any Subsidiary and such case or proceeding shall continue undismissed or unstayed for a period of 60 consecutive calendar days, or an order granting the relief requested in such case or proceeding against the Company or any Subsidiary (including, but not limited to, an order for relief under Bankruptcy laws) shall be entered; or 7.7 Judgments. A judgment or order for the payment of money shall be entered and become final against the Company or any Subsidiary which, together with all other outstanding undischarged or unstayed judgments against the Company and its Subsidiaries, exceeds $100,000 in the aggregate, and such judgment or order shall continue undischarged or unstayed for 60 days; or 7.8 Noncompliance with ERISA. Any event occurs with respect to a Plan of the Company or any Subsidiary of a type described in Section 4043(b) of ERISA or any accumulated funding deficiency (as defined in Section 302 of ERISA), whether or not waived, exists with respect to any such Plan or any proceedings are instituted by the PBGC, or any other event or condition with respect to any such Plan occurs which, in each case, in the reasonable opinion of NVC, is likely to cause a material adverse change in the Financial Condition of the Company and its Subsidiaries taken as a whole; or 7.9 Failure to Replace Executives. James L. Kehoe shall cease to be or function as the chief executive officer of the Company and a successor chief executive officer reasonably satisfactory to NVC shall not have been appointed within 120 days of such cessation on terms reasonably satisfactory to NVC; or 7.10 Default as to Warrant or Security Agreements. (a) The Company defaults in the performance of any term, covenant or condition set forth in (i)Section 1.2 or (ii) the Warrant, or (b) the provisions of the Note, the Warrant or any of the Security Agreements shall be or become or shall be claimed to be or to have become in any material respect invalid or unenforceable or (c) NVC shall at any time cease to have a valid, fully perfected security interest in the collateral referreddemised premises now or later vested in lessee. Lessee assigns to lessor all his right, title and interest in the Security Agreements in each case subject to no prior Liens other than any which may be specifically permitted pursuantand all such awards. If a separate award is made for moving expenses, business interruption and fixtures then such award of moving expenses, business interruption and fixtures shall belong to the terms of this Agreement or the Security Agreements; or ARTICLE 8 REMEDIES Upon the occurrence of any Event of Default described in Section 7.6(a) or Section 7.6(b), the entire unpaid principal amount of the Note and any interest accrued and unpaid thereon shall automatically be due and payable. Upon the occurrence and during the continuance of any other Event of Default, NVC shall have the right, by written notice to the Company, to declare due and payable the principal of, and interest on, the Note, whereupon the same shall be due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. No right or remedy herein conferred is intended to be exclusive of any other rights or remedies and each and every right or remedy shall be cumulative and shall be in addition to every other right or remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission in the exercise of any right or power accruing upon the occurrence of any Default or Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Default or Event of Default or an acquiescence therein. Every power and remedy given by this Article 8 may be exercised from time to time and as often as may be deemed expedient by NVC. ARTICLE 9 CONSENTS Any provision in this Agreement to the contrary notwithstanding, with the written consent of NVC, the Company may be relieved from the effect of any Event of Default or from performance of such obligations. Unless otherwise specified in a written waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. ARTICLE 10 REGISTRATION RIGHTS 10.1 Piggyback Registration. The Company shall give at least 20 days' prior written notice to NVC of its filing of any registration statement under the Securities Act of 1933 (the "Securities Act") that is to be on a form of the Securities and Exchange Commission pursuant to which there is to be sold Common Stock (other than (a) the Common Stock owned by Kevin Schumacher, Justine Schumacher or members of their immediate families on the date hereof, (b) Common Stock issued to persons other than officers or directors of the Company pursuant to a Company Private Placement or (c) Common Stock issued to employees who are not officers or directors of the Company pursuant to the Company's stock option plan) which is at the time already outstanding or which is subject to issuance pursuant to then outstanding Rights and in each case is to be registered by existing holders of Common Stock or Rights. NVC shall have an opportunity to elect within 15 days after receipt thereof to include in such filing (if permitted by the applicable form) any shares of Common Stock which are owned by NVC or may be acquired on exercise of the Warrant to the extent that, in the reasonable opinion of the underwriter, such inclusion shall not adversely affect the proposed offering by the Company (but in any case NVC shall be entitled to include in such filing the percentage of the shares of Common Stock owned by, or that may on exercise of the Warrant be acquired by, NVC which is equal to 100% of the highest percentage of the shares of Common Stock owned and/or subject to acquisition by any other Person which are included in such filing). NVC may assign or transfer its right to include a given number of shares of Common Stock in a filing to any person to whom NVC transfers Common Stock or Warrants. 10.2 Registration Procedure. To include shares of Common Stock in any registration, NVC shall (i) cooperate with the Company in preparing such registration and execute all such agreements as the underwriter thereof may reasonably deem to be necessary in favor of such underwriter, (ii) promptly supply the Company with all information, documents, representations and agreements as such underwriter may reasonably deem to be necessary in connection with such registration and (iii) agree in writing not to sell or transfer any Common Stock not included in such registration for such periods, not to exceed 180 days, as the underwriter may require, but NVC shall not be required to take the actions described in this Section 10.2 unless the holders of all other shares of Common Stock included in any offering covered by such registration shall similarly take such actions. 10.3 Expenses. The costs and expenses (other than underwriting discounts or commissions) of all registrations and qualifications under the Securities Act, and of all other actions, that the Company is required to take or effect pursuant to this Article 10 shall be paid by the Company (including, without limitation, all registration and filing fees, printing expenses, costs of special audits incident to or required by any such registration, and fees and disbursements of counsel for the Company and the reasonable fees and disbursements of counsel for NVC). 10.4 Indemnification. (a)lessee. 4. In the event of a registration of Common Stock pursuantpartial taking, lessor shall promptly proceed to restore the Securities Act, the Company shall (1) indemnify and hold harmless NVC and each Person, if any, who controls NVC within the meaningremainder of the Securities Act, against any losses, claims, damages, expenses (including attorneys' fees), or liabilities (or actions in respect thereof) underbuilding on the Securities Act or otherwise, that arise out of or are based upon any untrue statement or alleged untrue statementdemised premises to a self-contained architectural unit. 5. In case of any material fact containedgovernmental action not resulting in the taking or condemnation of any such registration statement, any preliminary prospectusportion of the demised premises but creating a right to compensation therefor, or final prospectus,if less than a fee title to all or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any other violation of law by the Company with respect thereto, and (2) reimburse NVC and each such controlling Person for any legal or other expenses reasonably incurred by NVC or such controlling Person in connection with defending against any such loss, claim, damage, expense, liability or action (together, "Losses"); provided, however, that the Company shall not be liable to NVC or to any Person who controls NVC within the meaningportion of the Securities Act in any such case to the extent that any such Loss arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such registration statement, preliminary prospectus or final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by or on behalf of NVC or such controlling Person expressly for use in the preparation thereof. (b) In the event of a registration of Common Stock pursuant to this Agreement, NVC shall (1) indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any such registration statement, and any Person who controls the Company within the meaning of the Securities Act, against any Losses to which the Company or any such director, officer or controlling Person may become subject, under the Securities Act or otherwise, insofar as such Losses arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in any such registration statement, preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any other violation of law by NVC with respect thereto, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in such registration statement, preliminary prospectus or final prospectus, or amendment or supplement, in reliance upon and in conformity with written information furnished by or on behalf of NVC for use in such disclosure documents, and (2) reimburse the Company or any such director, officer or controlling Person for any legal or other expenses reasonably incurred by it or him in connection with defending against any such Loss. (c) Promptly after receipt by an indemnified party under this Section 10.4 of notice of the commencement of any action which may involve a Loss indemnified hereunder, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under this Section 10.4, notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability that it may have to any indemnified party except, and then only, to the extent such indemnifying party is prejudiced by such omission. (d) In case any Action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying partydemised premises shall be entitled to participate in and, to the extent that it may wish, jointly withtaken or condemned by any other indemnifying party similarly notified, assume the defense thereof (in which event, it shall do so diligently), with counsel reasonably satisfactory to such indemnified party. In the event the indemnifying party gives notice to the indemnified partygovernmental authority for temporary use of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party underoccupancy, this Section 10.4 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof subsequent to the date of such notice. ARTICLE 11 INVESTMENT REPRESENTATIONS NVC hereby represents and warrants that it is an "accredited investor" within the meaning of Regulation D under the Securities Act and is acquiring the Note and Warrant issued to it under this Agreement for purposes of investment and with no present intent to sell or view to distribute the same. NVC understands that neither the Note, the Warrant nor the Warrant Shares have been registered under the Securities Act, in reliance upon exemptions from registration and qualification thereunder, and that such exemptions are in part dependent on the representations made herein. NVC represents and warrants that it has such knowledge and experience that it is capable of evaluating the merits and risks of this investment and protecting its own interest in connection with this investment and that its Financial Condition is such that it is in a financial position to hold the Note, the Warrant and the Warrant Shares to be held by it for an indefinite period of time and to bear the economic risk of, and withstand a complete loss of, the investment represented thereby. ARTICLE 12 MISCELLANEOUS 12.1 Transferees; Additional Shareholders. (a) Upon any transfer or assignment by NVC of any interest in the Note, the Warrant or the Warrant Shares, as the case may be, the term "NVC" shall, with respect to the interest so transferred or assigned, thereafter include such transferee or assignee. (b) On surrender of any document representing all or part of the Note or the Warrant for such purpose, one or more new Notes or Warrants, as the case may be, shall be issued with appropriate revisions to reflect, in the aggregate, the obligations of the Company under the Note or the Warrant so surrendered. 12.2 Fees and Expenses. The Company is paying to NVC simultaneously herewith, to the extent not already paid, a financing fee of $20,000, which fee shall cover all costs incurred by NVC through and including the Closing Date in effecting the transaction contemplated hereby and which the Company has agreed to pay (including any fees or disbursements of NVC's counsel) in connection with the negotiation, execution and delivery of the Transaction Documents. The Company shall pay all reasonable costs of NVC (including any fees or disbursements of NVC's counsel) incurred after the date hereof in connection with the amendment or the enforcement of any Transaction Document. 12.3 Brokerage Fees. The Company agrees to indemnify NVC against all brokers', finders' or similar fees that may be payable to any Person in connection with the purchase of the Note and Warrant hereunder and against all losses, claims, damages and liabilities and related expenses, including counsel fees and expenses incurred by NVC in connection with such fees in each case arising out of the actions of the Company. The Company represents and warrants that no such fees are or will be payable except as set forth on Schedule 12.3. NVC represents and warrants to the Company that it has not dealt with any broker, finder or third party in connection with its purchase of the Note and Warrant under any circumstances that could give rise to a claim for brokers', finders' or similar fees. 12.4 Effectiveness. All representations and warranties made in this Agreement shall survive the execution and delivery of this Agreement and the purchase hereunder of the Note and the Warrant. Except as otherwise provided herein, the covenants contained in this Agreementlease shall continue in full force and effect until such date as the Note, any Put Note, the Warrantwithout reduction or abatement of rent, and the Warrant Shares no longerrights of the parties shall be unaffected by the other provisions of this section, but shall be governed by applicable law. XVI. DESTRUCTION OF PREMISES: In the event of a partial destruction of the premises (not caused by lessee and/or its' agents and/or independent contractors) by fire or other cause for which lessee has provided insurance payable to lessor under paragraph XIII or condemnation during the term, lessor shall forth with repair the same, provided the repairs can be made within 30 days of receipt of such insurance or governmental authorities. Any partial destruction shall neither annul nor void this lease. If the repairs cannot be made in the specified time, lessor may, at lessor's option, make repairs within a reasonable time, this lease continuing in full force and effect and the rent to be proportionately rebated. In the event that lessor does not elect to make repairs that cannot be made in the specified time, or those repairs cannot be made under the laws and regulations of the applicable governmental authorities, this lease may be terminated at the option of either party. Should the building in which the demised premises are situated be destroyed as set forth herein or condemned to the extent of not less than 75 percent (75%) of the replacement cost thereof, this lease shall be terminated. XVII. SUBORDINATION: This lease and all rights of lessee hereunder shall be subject and subordinate to the lien of any and all mortgages that may now or hereafter affect the demised premises, or any part thereof, and to any and all renewals, modifications or extensions of any such mortgages. Lessee shall on demand execute, acknowledge and deliver to lessor, without expense to lessor, any and all instruments that may be necessary or proper to subordinate this lease and all rights therein to the lien of any such mortgage or mortgages and each renewal, modification or extension, and if lessee shall fail at any time to execute, acknowledge and deliver any such subordination instrument, lessor in addition to any other remedies available in consequence thereof, may execute, acknowledge and deliver the same as lessee's attorney in fact and in lessee's name. Lessee hereby irrevocably makes, constitutes and appoints lessor, its successors and assigns, his attorney in fact for that purpose. Lessor hereby covenants and warrants that, subject to Section XVIII, he is owner of the demised premises and that lessee, on payment of the rents herein provided for and the performance of the provisions hereof on its part to be performed, shall and may peacefully possess and enjoy the demised premises during the term hereof without any interruption or disturbance. XVIII. ACCESS TO PREMISES; SIGNS POSTED BY LESSOR: Lessee shall permit lessor or its agents to enter the demised premises at all reasonable hours to inspect the premises or make repairs that lessee may neglect or refuse to make in accordance with the provisions of this lease, and also to show the premises to prospective buyers. At any time within one year prior to expiration of the term, lessor may show the premises to persons prior to expiration of the term, permit the usual notices of "For Rent" and "For Sale" to be place on the demised premises and to remain outstanding. 12.5 Accuracythereon without hindrance and molestation. XIX. EASEMENTS, AGREEMENTS OR ENCUMBRANCES: The parties shall be bound by all existing easements, agreements and encumbrances of Information. All data, certificates, reports, statements, opinionsrecord relating to the demised premises, and lessor shall not be liable to lessee for any damages resulting from any action taken by a holder of counsel, documentsan interest pursuant to the rights of that holder thereunder. XX. LIABILITY OF LESSOR: Lessee shall be in exclusive control and other information furnishedpossession of the demised premises, and lessor (except for acts of negligence of lessor) shall not be liable for any injury or damages to any property or to any person on or about the demised premises nor for any injury to any property of lessee. The provisions herein permitting lessor to enter and inspect the demised premises are made to insure that lessee is in compliance with the terms and conditions hereof and makes repairs that lessee has failed to make. Lessor shall not be liable to lessee for any entry on the premises for inspection purposes (except for acts of negligence of Lessor). XXI. RENT ABATEMENT: No abatement, diminution or reduction of rent shall be claimed or allowed to lessee or any person claiming under him under any circumstances, whether for inconvenience, discomfort, interruption of business or otherwise, arising from and during the restoration of the demised premises after the date hereof to NVCdestruction or damage thereof by fire or other cause or the taking or condemnation of a portion only of the demised premises. XXII. STORAGE OF TOXIC MATERIALS, EXPLOSIVES AND FLAMMABLES PROHIBITED: Lessee shall not, at anytime whatsoever, keep for use on the demised premises any toxic materials, explosives or inflammable substances. XXIII. REPRESENTATIONS BY LESSOR: At the commencement of the term lessee shall accept the buildings and improvements and any equipment in their existing condition and state of repair and lessee agrees that no representations, statements or warranties, express or implied, have been made by or on behalf of or at the request of the Company pursuant to this Agreement orlessor in connection with or pursuant to any amendment or modification of, or waiver under, this Agreement shall, at the time the same are so furnished, be complete and correctrespect thereto except as contained in all material respects to the extent necessary to give NVC true and accurate knowledge of the subject matter thereof, not contain any untrue statement of a material fact known to the Person furnishing the same, or omit to state a material fact known to the Person furnishing the same which fact is necessary to be stated therein in order to make the statements contained therein not misleading, and the furnishing of the same to NVC shall constitute a representation and warranty by the Company to that effect. Notwithstanding the foregoing, any financial statements shall be deemed to comply with the provisions of this Section 12.5 if such financial statements comply with generally accepted accounting principles. 12.6 Notices.lease. XXIV. WAIVERS: The failure of lessor to insist on a strict performance of any of the terms and conditions hereof shall be deemed a waiver of the rights or remedies that lessor may have regarding that specific instance only, and shall not be deemed a waiver of any subsequent breach or default in any terms and conditions. XXV. NOTICE: All notices and other communications underto be given with respect to this Agreementlease shall (a) be in writing, (b)writing. Each notice shall be sent by registered or certified mail, postage prepaid and return receipt requested, delivered by handto the party to be notified at the address set forth herein or by nationally recognized overnight courier or sent by facsimile machine transmission (with facsimile machine verification and hard copy delivered by one of theat such other methods permitted under this Section 12.6) and (c)address as either party may from time to time designate in writing. Every notice shall be deemed to have been given at the following respective addresses: If to the Company, totime it at: 2012 Route 9W, Building 3 Milton, New York 12547 Facsimile No.: (914) 795-2720; with a copy to: D'Ancona & Pflaum LLC 111 E. Wacker Drive Suite 2800 Chicago, Illinois 60601 Attention: Paul L. Applebaum, Esq. Facsimile No.: (312) 602-3072 If to NVC, to it at: Suite 1607 1430 Broadway New York, New York 10018 Facsimile No.: (212) 869-5331 with a copy to: DeForest & Duer 90 Broad Street New York, New York 10004 Attn.: Arthur A. Lane, Esq. Facsimile No.: (212) 425-7581. The address of any party may be changed by such party by a notice to the other parties specifically captioned "Notice of Change of Address Pursuant to Section 12.6". All notices and other communications shall be effective (i) if given by mail, on the third business day after such communication is deposited in the mail, addressed as above provided, (ii)United States mails in the manner prescribed herein. Nothing contained herein shall be construed to preclude personal service of a summons or other legal process. XXVI. ASSIGNMENT, MORTGAGE OR SUBLEASE: Neither lessee nor his successors or assigns shall assign, mortgage, pledge or encumber this lease or sublet the demised premises in whole or in part, or permit the premises to be used or occupied by others, nor shall this lease be assigned or transferred by operation of law, without the prior consent in writing of lessor in each instance. Exception to this would be legal subsidiaries of lessee. After two years such consent is not to be unreasonably withheld. If this lease is assigned or transferred, or if given by hand deliveryall or overnight courier, when left at the addressany part of the addresseedemised premises is sublet or occupied by anybody other than lessee, lessor may, after default by lessee, collect rent from the assignee, transferee, subtenant, or occupant, and apply the net amount collected to the rent reserved herein, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any agreement or condition hereof , or the acceptance of the assignee, transferee, subtenant or occupant as above provided,lessee. Lessee shall continue to be liable hereunder in accordance with the terms and (iii) if given by facsimile machine transmission, upon facsimile machine verificationconditions of receipt, except that notices of a change of addressthis lease and shall not be effective until received. Noreleased from the performance of the terms and conditions hereof. The consent by lessor to an assignment, mortgage, pledge or transfer shall not be construed to relieve lessee from obtaining the express written consent of lessor to any future transfer of interest. XXVII. OPTION TO RENEW: Lessor grants to lessee an option to renew this lease for a period of Three (3) years after expiration of the term of this lease. The rental rate shall be increased an amount equal to the Consumer Price Index (CPI) as noted for New York and area, each year of the renewal. All other methodterms and condition of givingthis renewal lease to be the same as those herein. To exercise this option, lessee must give lessor written notice is hereby precluded. 12.7 Counterparts. This Agreementof the intention to do so at least six (6) months before this lease expires. XXVIII. SURRENDER OF POSSESSION: Lessee shall, on the last day of the term, or on earlier termination and forfeiture of the lease, peaceably and quietly surrender and deliver the demised premises to lessor free of subtenancies, including all buildings, additions and improvements constructed or placed thereon by lessee, except moveable trade fixtures, all in good condition and repair subject to reasonable wear and tear (except to the extent provided for under paragraph XI, and XVI herein. Any trade fixtures or personal property not used in connection with the operation of the demised premises and belonging to Lessee, if not removed at the termination of default, and if lessor shall so elect, shall be deemed abandoned and become the property of lessor without any payment or offset therefor. Lessor may be executedremove such fixtures or property from the demised premises and store them at the risk and expense of lessee if lessor shall not so elect. Lessee shall repair and restore all damage to the demised premises caused by the removal of equipment, trade fixtures and personal property. XXIX. REMEDIES OF LESSOR: A. In the event of a breach or a threatened breach by lessee of any of the terms or conditions hereof, lessor shall have the right of injunction to restrain lessee and the right to invoke any remedy allowed by law or in any numberequity, as if the specific remedies of counterparts, eachindemnity or reimbursements were not provided herein. B. The rights and remedies given to lessor in this lease are distinct, separate and cumulative and no one of whichthem, whether or not exercised by lessor, shall be deemed to be an original and all of which together shall constitute one instrument. 12.8 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 12.9 GAAP. Financial terms used and not otherwise defined herein shall be interpreted, and calculations, to the extent not otherwise specified, shall be made, in accordance with generally accepted accounting principles and terminology. 12.10 Judicial Proceedings. (a) Consent to Jurisdiction. The Company irrevocably submits to the non-exclusive jurisdictionexclusion of any New York State or Federal court sitting in the City of New York over any Action arising out of or relating to this Agreement, the Note, the Warrant, the Warrant Shares, any Transaction Document or any aspect of the transactions contemplated thereby. To the fullest extent it may effectively do so under applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such Action brought in any such court and any claim that any such Action brought in any such court has been brought in an inconvenient forum. (b) Enforcement of Judgments. The Company agrees, to the fullest extent it may effectively do so under applicable law, that a judgment in any Action of the nature referred to in subsection (a) above brought in any such court shall, subject to such rights of appeal on issues other than jurisdiction as may be available to it, be conclusive and binding upon it and may be enforced in the courts of the United States of America or the State of New York (or any other courts to the jurisdiction of which it is or may be subject) by a suit upon such judgment. (c) Service of Process. The Company consents to process being served in any Action of the nature referred to in subsection (a) above by mailing a copy thereof by registered or certified air mail, postage prepaid, return receipt requested, to the address of the Company specified in or designated pursuant to Section 12.6. The Company agrees that such service (i) shall be deemed in every respect effective service of process upon it in any such Action and (ii) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon and personal delivery to it. (d) No Limitation on Service or Suit. Nothing in this Section 12.10 shall affect the right of NVC to serve process in any manner permittedothers herein, by law, or limitby equity provided. C. In all cases hereunder, and in any right that NVC may have to bring any Action against the Company in the courtssuit, action or proceeding of any jurisdictionkind between the parties, it shall be presumptive evidence of the fact of the existence of a charge being due if lessor shall produce a bill, notice or certificate of any public official entitled to enforcegive that notice to the effect that such charge appears of record on the books in his office and has not been paid. D. No receipt of money by lessor from lessee after default or cancellation of this lease in any lawful manner shall (1) reinstate, continue or extend the term or affect any notice given to lessee, (2) operated as a judgment obtained in one jurisdictionwaiver of the right of lessor to enforce the payment of rent and additional rent then due or falling due, or (3) operated as a waiver of the right of lessor to recover possession of the demised premises by proper suit, action, proceeding or other remedy. After (1) service of notice of termination and forfeiture as herein provided and the expiration of the time specified therein (2) the commencement of any suit, action, proceeding or other remedy, or (3) final order or judgement for possession of the monies due, without in any other jurisdiction. (e) Waiver of Trial by Jury. The Company hereby waives trial by jury in any Actionmanner affecting such notice, order or judgement. Any and all such monies so collected shall be deemed to be payment on account of the nature referred to in subsection (a) above, whether brought by ituse and occupation of the demised premises or NVC. 12.11 Assignability.at the election of lessor, on account of the liability of lessee hereunder. XXX. TOTAL AGREEMENT; APPLICABLE TO SUCCESSORS: This Agreement shall inure tolease contains the benefit of and be binding uponentire agreement between the parties hereto and their respectivecannot be changed to terminated except by a written instrument subsequently executed by the parties hereto. This lease and the terms and conditions hereof apply to and are binding on the heirs, legal representatives, successors and assigns except thatof both parties. XXXI. INDEMNIFICATION - LIABILITIES AND LOSSES: Lessee shall, at all times prior to the Company may not assigntermination of this lease and to the delivery to a lessor possession of the demised premises and all improvements thereon, indemnify lessor against all liability, loss, cost, damage or transferexpense sustained by lessor, including attorney's fees and other expenses of litigation arising prior to termination of the lease term and delivery to lessor of possession of the premises: 1. On account of or through the use of the demised premises or improvements or any part thereof or by any other reason for any purpose inconsistent with the provisions of its rightsthis lease. 2. Arising out of, or directly or indirectly due to, any failure of lessee in any respect promptly and faithfully to satisfy his obligations under this Agreementlease. 3. Arising out of, or subject this Agreementdirectly or its rights hereunderindirectly due to, any lienaccident or securityother occurrence causing injury to any person or persons or property resulting from the use of the demised premises and improvements or any part thereof. 4. For which the demised premises and improvements or any part thereof or the lessor as owner thereof or interested therein may hereafter without fault by lessor become liable, and especially, but not exclusively, any such liability, loss, cost, damage or expense that may arise under any statute, ordinance or regulation except such requirements as to which compliance is related to the improvements on the demised premises (other than improvements made by Lessee) and are not caused by use and occupancy of lessee. It is not intended by this clause that Lessee shall be responsible for liabilities imposed by the acts of others committed prior to the date of this lease. Lessee also shall, at all times prior to termination of the lease term and delivery to lessor of possession of the premises, indemnify lessor against all liens and charges of any and every nature that may at any time be established against the premises or any improvements thereon or any part thereof as a consequence, direct or indirect, of any act or omission of lessee or as a consequence, direct or indirect, of the existence of lessee's interest under this lease. XXXII. NOTICE BY LESSEE OF LITIGATION - PAYMENT OF ATTORNEY'S FEES AND COSTS: Within five days after lessee has knowledge of any material litigation or other proceeding that shall be instituted against lessee, against the demised premises to secure or recover possession thereof, or that may affect the title to or the interest of any kind whateverlessor in the demised premises, lessee shall give written notice thereof to lessor. Lessee shall pay all reasonable attorney's fees and any such assignmentcosts on behalf of lessor if (a) lessor institutes litigation against lessee for a breach of the terms and conditions of this lease, (b) lessor institutes litigation against lessee for an unlawful detainer of the demised premises, or (c) lessor is made a part to litigation against lessee instituted by a third party, relating to the Companydemised premises, wherein lessor is not at fault. The reasonable attorney's fees and any such lien or security interestcosts incurred by lessor herein shall be absolutely voidpaid by lessee whether litigation is prosecuted to judgement or not. The payment of all attorney's fees and unenforceablecourt costs required hereby shall be made to lessor as against NVC. 12.12 Governing Law.additional rental and shall be due in full on the next regular date for a rental payment. This Agreementadditional rental shall be subject to an interest charge of eighteen (18%) per cent per annum, and lessor may enforce the payment by using any remedy available at law or under this lease of the collection of past due rent. XXXIII. APPLICABLE LAW: This agreement shall be governed by and construed in accordance with the laws of the State of New York excluding choice of law rules 12.13 Confidentiality. For the longest period permitted under applicable law, NVC shall hold in strictest confidence all Confidential Information, shall not use any Confidential Information, and shall not disclose any Confidential Information to any person or entity; provided that such use and disclosure may be made to the extent reasonably required in the proper exercise of NVC's rights and performance of its obligations under this Agreement or to the extent required pursuant to applicable law, and NVC may disclose Confidential Information to its agents and representatives, or its permitted assigns, who reasonably require the same for purposes permitted under this Section (and who agree in writing for the benefit of the Company to be bound by the requirements of this Section). "Confidential Information" means any and all confidential and/or proprietary information of the Company or its Subsidiaries, including without limitation, customer lists, marketing information, pricing information, budgeting information, personnel information, financial information, research, business plans and strategies or other information concerning the business or affairs of the Company (including information obtained under Section 5.13), except to the extent such information is or becomes generally known to the public other than as a result of acts or omissions by NVC (or its agents or representatives) in violation of this Agreement. The provisions of this Section shall survive termination of this Agreement for the longest time permitted under applicable law.York. IN WITNESS WHEREOF, the parties hereto have causedexecuted this Note and Warrant Purchase Agreement to be executed by their duly authorized representatives aslease in the State of New York the day and year first above written. SONO-TEK CORPORATION/s/ Jean K. Woodward Jean K. Woodward, Lessor By: s/s/s/ James L. Kehoe James L. Kehoe, Chairman and Chief Executive Officer NORWOOD VENTURE CORP. By: s/s Mark R. Littell Mark R. Littell, President Exhibit 4.11(a) EXHIBIT A FORM OF NOTE THIS NOTE MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED OTHER THAN (i) PURSUANT TO AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933 ("THE SECURITIES ACT") OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT AND (ii) UPON RECEIPT BY THE ISSUER OF EVIDENCE SATISFACTORY TO IT OF COMPLIANCE WITH THE SECURITIES ACT AND THE APPLICABLE SECURITIES LAWS OF ANY OTHER JURISDICTION. SONO-TEK CORPORATION 12% Note $ New York, New York [Date] FOR VALUE RECEIVED, the undersigned, SONO-TEK CORPORATION, a New York corporation (the "Company"), hereby promises to pay to the order of at its office located at , the principal sum of ($ ) in lawful money of the United States of America on or before September 30, 2004 and to pay interest that shall accrue on the unpaid principal amount hereof from the date hereof until such principal amount is paid in full, at the rate of twelve percent (12%) per annum, which rate shall be calculated on the basis of a 360-day year and actual days elapsed. Overdue principal and (to the extent permitted by law) overdue interest shall bear interest at the rate of fourteen percent (14%) per annum, calculated in the same manner, payable on demand. Nothing herein shall at any time require the Company to pay interest at a rate in excess of the maximum rate permitted by applicable law. In the event that the interest specified in this Note is deemed to be in excess of the maximum rate permitted by applicable law, the interest payable hereunder shall be the maximum rate so permitted. Interest shall be payable on the last business day of each month until the entire principal amount hereof is paid in full and on each other date on which a payment of principal is made. This Note was issued pursuant to the Note and Warrant Purchase Agreement dated September 29, 1999 (the "Purchase Agreement") between the Company and Norwood Venture Corp. The Purchase Agreement requires the making of scheduled payments of the principal amount of this Note prior to its final maturity date and provides, among other things, for the acceleration of the maturity of this Note upon the happening of certain events as set forth in the Purchase Agreement. This Note is collateralized by a General Security Agreement executed by the Company. The Company shall have the right at any time or from time to time, on 30 days' prior written notice, to make prepayments (in addition to the scheduled payments) of this Note in whole or in part, without premium or penalty, provided that each partial prepayment shall be in an amount which is not less than $50,000 and is an integral multiple thereof. Any such prepayment shall be applied first to accrued and unpaid interest and then, in chronologically inverse order, to the scheduled payments of principal required to be made on this Note by the Purchase Agreement. Presentment, demand, protest and notice of dishonor are hereby waived by the Company. This Note shall be construed in accordance with and governed by the laws of the State of New York. SONO-TEK CORPORATION By: Name: Title: Chairman Exhibit 4.11(b) EXHIBIT B FORM OF WARRANT THIS WARRANT AND THE SECURITIES ISSUABLE ON EXERCISE THEREOF MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED OTHER THAN (i) PURSUANT TO AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR AN EXEMPTION THEREFROM AND (ii) UPON RECEIPT BY THE ISSUER OF EVIDENCE SATISFACTORY TO IT OF COMPLIANCE WITH THE SECURITIES ACT AND THE APPLICABLE SECURITIES LAWS OF ANY OTHER JUSRIDCITION. SONO-TEK CORPORATION Common Stock Purchase Warrant This certifies that, for value received, or registered assigns is entitled to purchase from SONO-TEK CORPORATION, a New York corporation (the "Company"), 1,100,000 (subject to adjustment as provided herein) shares of the Company's $0.01 par value Common Stock ("Common Stock") at a price of $0.30 per share (the "Initial Exercise Price"; such price as adjusted from time to time pursuant to this Warrant being hereinafter referred to as the "Exercise Price"). In making payment of part or all of the Exercise Price, the holder shall be credited with any obligations payable or to become payable on the 12% Note due September 30, 2004 issued by the Company (the "Note") pursuant to a certain Note and Warrant Purchase Agreement dated September 29, 1999 (the "Purchase Agreement") between the Company and Norwood Venture Corp. ("NVC") to the extent that the holder tenders all or any portion of such holder's Note for cancellation and requests the application of such obligations to the payment of the Exercise Price. The Company agrees, on any such tender, to cause to be issued and to deliver to such holder a duly executed Note (in the form required by the Purchase Agreement) dated the date through which all accrued interest was fully paid on the Note so tendered and evidencing the obligation of the Company to pay that portion of the outstanding principal amount of the Note so tendered which is not requested to be so applied. Payment of the Exercise Price may be made in cash, by certified check payable to the order of the Company or by wire transfer of immediately available funds to an account designated in writing by the Company. Terms not otherwise defined in this Warrant are used with the meanings of such terms which are set forth in the Purchase Agreement. This Warrant shall expire on the sixth anniversary of the date on which payment has been made of the Note in full, but shall in no event expire earlier than the Put Date. This Warrant is exercisable in whole or in part at any time on surrender to the Company at its address set forth in the Purchase Agreement of this Warrant together with a statement in the form attached hereto (with the blanks in such form appropriately completed and duly executed) of such holder's election to purchase, together with payment of the Exercise Price. The holder shall be deemed to be the record owner of the shares thereby purchased as of the close of business on the date this Warrant shall have been exercised. Upon such surrender of the Warrant and payment of the Exercise Price as described above, the Company agrees to cause to be issued and delivered with all reasonable dispatch to or upon the written order of the registered holder and in such name or names as such registered holder may designate, a certificate or certificates for the number of shares and fractional shares so purchased upon the exercise of such Warrant. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such shares as of the date of surrender of such Warrant and payment of the Exercise Price as described above. The number and type of securities for which this Warrant is exercisable shall be appropriately changed and adjusted so that in all events (whether the Company subdivides, reclassifies or combines, or declares or pays a dividend (other than a cash dividend) on its Common Stock or merges or consolidates with any other corporation, reorganizes or transfers other than in the ordinary course of its business all or substantially all of the assets of the Company or liquidates or dissolves or is subject to any other change which might otherwise affect the securities for which this Warrant is exercisable), the holder shall continue to be entitled to receive upon exercise of this Warrant shares of the Company's capital stock and other securities and consideration as nearly equivalent (on an economic basis) as practicable to what such holder would have been entitled to receive if the exercise of this Warrant had occurred immediately prior to such event. The Company shall give written notice to the record holder of this Warrant at such holder's address appearing on the Company's records of any of the events which would cause a change or adjustment pursuant to the preceding paragraph and of any proposed payment of any dividend or other distribution to the holders of Common Stock, which notice shall be given at least twenty days prior to the earlier of (a) the date on which such event is to occur or such payment is to be made and (b) the record date, if any, with respect thereto. Such notice shall specify any such record date, the date on which such event is to take place and such facts as shall be reasonably necessary to indicate the effect of such event on the number, kind or class of shares or other securities or consideration that shall be deliverable or purchasable upon the occurrence of such event or upon exercise of this Warrant. As to any change or adjustment to be made pursuant to the preceding paragraph, the determination of the Company's independent certified public accountants shall be determinative absent manifest error. All shares issued upon the exercise of the rights represented by this Warrant shall be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). The Company shall from time to time take all such action as may be requisite to assure that the par value per share of Common Stock is at all times equal to or less than the per share Exercise Price then in effect. During the period within which the rights represented by this Warrant may be exercised, the Company shall at all times have authorized, and reserved for the purpose of issuance upon exercise of the rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. The Company shall take all such action as may be necessary to assure that such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange upon which the shares of Common Stock may be listed. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company. The Company shall not take any action which would result in any adjustment of the Exercise Price if the total number of shares of Common Stock issuable after such action upon exercise of all Warrants then outstanding would exceed the total number of then authorized but unissued shares of Common Stock. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on its behalf by a duly authorized officer, as of the day of , 19 . [SEAL] SONO-TEK CORPORATION By: Chairman and Chief Executive Officer Attest: Secretary 8/3/99 [Form of] ELECTION TO PURCHASE To: Sono-Tek Corporation The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant for, and to purchase thereunder, the following securities and other property: and tenders payment in the amount of $ by [delivery of a certified check] [wire transfer] payable to you in such amount or delivery of the Note (referred to in the Warrant) for cancellation of indebtedness represented thereby in such amount. The undersigned requests that certificates for such securities be issued in the name of and delivered, together with any other property referred to above, to and, if such securities and property shall not be all of the securities and property issuable and/or deliverable thereunder, that a new Warrant for the balance be registered in the name of, and issued and delivered to, the undersigned at the following address: Dated: - ----------------------- Exhibit 4.11(c) GENERAL SECURITY AGREEMENT September 29, 1999 The undersigned, SONO-TEK COPORATION, a New York corporation (herein referred to as "Debtor") with an address as it appears with the signature below, hereby agree(s) in favor of Norwood Venture Corp.(herein referred to as Secured Party), as follows: 1. In consideration of one or more loans, advances, or other financial accommodations at any time before, at or after date made or extended by Secured Party to Debtor, directly or indirectly, as principal, guarantor or otherwise, at the sole discretion of Secured Party in each instance, including without limitation the purchase by Secured Party of Debtor's Note due September 30, 2004 pursuant to the Note and Warrant Purchase Agreement dated of even date herewith between Debtor and Secured Party (the "Purchase Agreement"), Debtor hereby grants to Secured Party a security interest in, a continuing lien upon and a right of set-off against, and Debtor hereby assigns to Secured Party, the Collateral described in Paragraph 2, to secure the payment, performance and observance of all indebtedness, obligations, liabilities and agreements of any kind of Debtor to Secured Party, now existing or hereafter arising, direct or indirect (including participations or any interest of Secured Party in obligations of Debtor to others), acquired outright, conditionally, or as collateral security from another, absolute or contingent, joint or several, secured or unsecured, due or not, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, and of all loan agreements, documents and instruments evidencing any of the foregoing obligations or under which any of the foregoing obligations may have been issued, created, assumed or guaranteed (all of the foregoing being herein referred to as the "Obligations"). 2. The Collateral is described as follows and/or on Schedule A, if any, annexed hereto as part hereof and on any separate schedule at any time furnished by Debtor to Secured Party (all of which are hereby deemed part of this Security Agreement), which Collateral includes all attachments, accessions and equipment now or hereafter affixed to the Collateral or used in connection therewith, substitutions and replacements thereof, and (unless the description of the Collateral expressly excludes after acquired Collateral) all items of the Collateral both now owned or existing and hereafter acquired, created or arising, and any and all products and proceeds thereof (including, without limitation, any claims of Debtor against third parties, for loss or damage to or destruction of any or all of the Collateral): SEE ATTACHED SCHEDULE A ANNEXED HERETO AND MADE A PART HEREOF. together with any and all monies, securities, drafts, notes, items and other property of the Debtor and the proceeds thereof, now or hereafter held or received by or in transit to, Secured Party from or for the Debtor, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and any and all deposits (general or special), balances, sums, proceeds, and credits of the Debtor with, and any and all claims of the Debtor against, Secured Party, at any time existing. In the event that the Collateral includes inventory, Debtor also grants to Secured Party a security interest in, and the collateral shall include, all labels and other devices, names, or marks affixed or to be affixed to inventory for purposes of selling or of identifying the same or the seller or manufacturer thereof and all right, title and interest of Debtor therein and thereto. 3. Debtor warrants, represents and covenants that: (a) the chief and other places of business of Debtor, the books and records relating to the Collateral and the Collateral are located at the addresses set forth below and Debtor will not change any of the same without prior written notice to Secured Party; (b) the Collateral is and will be used in Debtor's business and not for personal, family, household or farming use; (c) the Collateral is now, and at all times will be, owned by Debtor free and clear of all liens, security interests, claims and encumbrances except as otherwise permitted in the Purchase Agreement; (d) except as otherwise permitted in the Purchase Agreement, Debtor will not assign, sell, mortgage, lease, transfer, pledge, grant a security interest in or lien upon, encumber or otherwise dispose of or abandon, nor will Debtor suffer or permit any of the same to occur with respect to, any part or all of the Collateral, without prior written consent of Secured Party, except for the sale from time to time in the ordinary course of business of Debtor of such items of Collateral as may constitute part of the business inventory of Debtor, and the inclusion of "proceeds" of the Collateral under the security interest granted herein, shall not be deemed a consent by Secured Party to any sale or other disposition of any part or all of the Collateral except as expressly permitted herein; (e) subject to the provisions of the Purchase Agreement, Debtor has made, and will continue to make payment or deposit or otherwise provide for the payment, when due, of all taxes, assessments or contributions required by law which have been or may be levied or assessed against the Debtor, whether with respect to any of the Collateral, to any wages or salaries paid by Debtor, or otherwise, and will deliver to Secured Party, on demand, certificates or other evidence satisfactory to Secured Party attesting thereto; (f) Debtor will use the Collateral for lawful purposes only, with all reasonable care and caution and in conformity with the provisions of the Purchase Agreement; (g) Debtor will keep the Collateral in reasonably good repair at Debtor's own cost and expense; (h) subject to any limitations in the Purchase Agreement, Secured Party shall at all times have free access to and right of inspection of the Collateral and any records pertaining thereto (and the right to make extracts from and to receive from Debtor originals or true copies of such records and any papers and instruments relating to any or all of the Collateral and to receive from Debtor originals or true copies of such records and any papers and instruments relating to any or all of the Collateral upon request therefor) and Debtor hereby grants to Secured Party a security interest in all such records, papers and instruments to secure the payment, performance and observance of the Obligations; (i) the Collateral is now and shall remain personal property and Debtor will not permit any of the Collateral to become a part of or affixed to real property without prior written notice to Secured Party and without first making all arrangements, and delivering, or causing to be delivered, to Secured Party all instruments and documents, including, without limitation, waivers and subordination agreements by any landlords or mortgagees, requested by and satisfactory to Secured Party to preserve and protect the primary security interest granted herein against all persons; (j) Debtor will, at its expense, perform all acts and execute all documents reasonably requested by Secured party at any time to evidence, perfect, maintain and enforce Secured Party's primary security interest in the Collateral or otherwise in furtherance of the provisions of this Security Agreement; (k) Debtor assumes all responsibility and liability arising from the use of the Collateral; (l) upon request of Secured Party, at any time and from time to time, Debtor shall, at its sole cost and expense, execute and deliver to Secured Party one or more financing statements pursuant to the Uniform Commercial Code ("UCC") and one or more applications for certificate of title and any other papers, documents or instruments requested by Secured Party in connection with this Security Agreement, and Debtor hereby authorizes Secured Party to execute and file at any time or times, one or more financing statements with respect to all or any part of the Collateral, signed only by the Secured Party; (m) in its discretion, Secured Party may, only after a Default (as hereinafter defined) has occurred, in its name or Debtor's or otherwise, notify any account debtor or obligor of any account, contract, instrument, chattel paper or general intangible included in the Collateral to make payment to Secured Party; (n) Secured Party may, in its reasonable discretion at any time after a Default demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable by Secured Party with respect to, any of the Collateral, and/or extend the time of payment, arrange for payment in installments, or otherwise modify the terms of, or release, any of the Collateral or the Obligations, all without consent by Debtor and without otherwise discharging the Obligations, the Collateral or the security interest granted herein; (o) Secured Party may, in its reasonable discretion, after a Default, for the account and expense of Debtor, pay any amount or do any act required of Debtor hereunder or requested by Secured Party to preserve, protect, maintain or enforce the Obligations, the Collateral or the primary security interest granted herein, and which Debtor fails to do or pay, and any such payment shall be deemed an advance by Secured Party to Debtor and shall be payable on demand together with interest at the highest rate then payable on any of the Obligations; (p) after a Default, Debtor will promptly pay Secured Party for any and all sums, costs and expenses which Secured Party may reasonably pay or reasonably incur pursuant to the provisions of this Security Agreement or in defending, protecting or enforcing the security interest granted herein or in enforcing payment of the Obligations or otherwise in connection with the provisions hereof, including but not limited to all court costs, collection charges, reasonable travel, and reasonable attorney's fees (not less than 15% of the outstanding Obligations where permitted by applicable law), all of which, together with interest at a rate equal to the highest rate then payable on any of the Obligations, shall be part of the Obligations and be payable on demand; (q) Secured Party shall have the right to receive and retain as additional Collateral all securities and rights issued or granted in respect of any Collateral consisting of securities and after a Default, Secured Party, in its discretion, may transfer to or register in the name of Secured Party or its nominee all or any of the Collateral consisting of securities, and whether or not so transferred or registered, Secured Party, after a Default, shall be entitled to receive and retain all income, dividends and other distributions thereon as part of the Collateral and to exchange any or all such Collateral upon the reorganization, recapitalization, or readjustment of any entity issuing such securities, and to exercise all rights with respect thereto as if it was the absolute owner thereof (provided that prior to a Default Debtor alone shall be entitled to exercise the right to vote such Collateral), and if the Collateral has been so transferred or registered, Secured Party shall take such action as Debtor may reasonably request to enable Debtor to exercise the right to vote such Collateral or any part thereof for any purpose which is not inconsistent with the terms of this Security Agreement or the Obligations or which would not have an adverse effect on the value of the Collateral or any part thereof; (r) after a Default any of the proceeds of the Collateral received by Debtor shall not be commingled with other property of Debtor, but shall be segregated, held by the Debtor in trust as the exclusive property of Secured Party, and Debtor will immediately deliver to Secured Party the identical checks, monies, or other proceeds of Collateral received, duly endorsed in blank where appropriate to effectuate the provisions hereof, the same to be held by Secured party as additional Collateral hereunder or, at Secured Party's option, to be applied to payment of any of the Obligations, whether or not due and in any order; and (s) at any time Secured Party may assign, transfer and deliver to any transferee of any of the Obligations, any or all of the Collateral, whereupon Secured Party shall be fully discharged from all responsibility and the transferee shall be vested with all powers and rights of Secured Party hereunder with respect thereto, but Secured Party shall retain all rights and powers with respect to any Collateral not assigned, transferred or delivered. 4. The occurrence of any one or more "Defaults" or "Events of Default", as defined in the Purchase Agreement, or the failure of Debtor to perform its obligations under this Security Agreement shall constitute an event of default ("Default") by Debtor under this Security Agreement. 5. Upon the occurrence of any Default and during the continuance thereof, Secured Party may, without demand upon Debtor, declare any or all Obligations of Debtor immediately due and payable and Secured party shall have the following rights and remedies (to the extent permitted by applicable law) in addition to all rights and remedies of a secured party under the UCC, or of Secured Party under the Obligations, all such rights and remedies being cumulative, not exclusive and enforceable alternatively, successively or concurrently: Secured Party may at any time and from time to time, with or without judicial process or the aid and assistance of others, enter upon any premises in which any of the Collateral may be located and, without resistance or interference by Debtor, take possession of the Collateral; and/or dispose of any part or all of the Collateral on any premises of Debtor; and/or require Debtor to assemble and make available to Secured Party at the expense of Debtor any part or all of the Collateral at any place and time designated by Secured Party which is reasonably convenient to both parties and/or remove any part or all of the Collateral from any premises on which any part may be located for the purpose of effecting sale or other disposition thereof (and if any of the Collateral consists of motor vehicles, Secured Party may use Debtor's license plates) and/or sell, resell, lease, assign and deliver, grant options for or otherwise dispose of any or all of the Collateral in its then condition or following any commercially reasonable preparation or processing, at public or private sale or proceedings or otherwise, by one or more contracts, in one or more parcels, at the same or different times, with or without having the Collateral at the place of sale or other disposition, for cash and/or credit, and upon any terms, at such place(s) and time(s) and to such persons, firms or corporations as Secured Party deems best, all without demand for performance or any notice or advertisement whatsoever except that where an applicable statute requires reasonable notice of sale or other disposition Debtor hereby agrees that five days notice by ordinary mail, postage prepaid, to any address of Debtor set forth in this Security Agreement of the place and time of any public sale or of the time after which any private sale or other intended disposition is to be made, shall be deemed reasonable notice thereof (if any of the Collateral is sold by Secured Party upon credit or for future delivery, Secured Party shall not be liable for the failure of the purchaser to pay for same and in such event Secured Party may resell such Collateral); Secured Party may buy any part or all of the Collateral at any public sale and if any part or all of the Collateral is of a type customarily sold in a recognized market or is of the type which is the subject of widely distributed standard price quotations Secured Party may buy at private sale and may make payment therefor by any means; Secured Party may apply the cash proceeds actually received from any sale or other disposition to the reasonable expenses of retaking, holding, preparing for sale, selling, leasing and the like, to reasonable attorney's fees (not exceeding 15% of the outstanding Obligations) and all reasonable travel and other expenses which may be incurred by Secured Party in attempting to collect the Obligations or enforce this Security Agreement or in the prosecution or defense of any action or proceeding related to the subject matter of this Security Agreement (and then to the Obligations in such order and as to principal or interest as Secured Party may desire), Debtor remaining liable and agreeing to pay Secured Party on demand any deficiency remaining, together with interest thereon at a rate equal to the highest rate then payable on the Obligations and the balance of any expenses unpaid, with any surplus to be paid to Debtor (subject to any duty of Secured Party imposed by law to the holder of any subordinate security interest in the Collateral); Secured Party may appropriate, set off and apply to the payment of any or all of the Obligations, any and all Collateral in or coming into the possession of Secured Party or its agents and belonging or owing to Debtor, without notice to Debtor, and in such manner as Secured Party may in its discretion determine; Secured Party may exercise all voting rights with respect to all or any of the Collateral consisting of securities and may exercise all powers with respect thereto as if an absolute owner thereof. Debtor recognizes that the Secured Party may be unable to effect a public sale of all or a part of the Collateral consisting of securities by reason of certain prohibitions contained in the Securities Act of 1933, but may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. Debtor agrees that any such private sales may be at prices and other terms less favorable to the seller than if sold at public sales and that such private sales shall be deemed to have been made in a commercially reasonable manner. Secured party has no obligation to delay sale of any such securities for the period to time necessary to permit the issuer of such securities, even if such issuer would agree, to register such securities for public sale under the Securities Act of 1933 6. To effectuate the terms and provisions hereof, Debtor hereby designates and appoints Secured Party and its designees or agents as attorney-in-fact of Debtor, irrevocably and with power of substitution, with authority, after a Default, to receive, open and dispose of all mail addressed to Debtor, to notify the Post Office authorities to change the address for delivery of mail addressed to Debtor to such address as Secured Party may designate; to endorse the name of Debtor on any notes, acceptances, checks, drafts, money orders, instruments or other evidences of payment or proceeds of the Collateral that may come into Secured Party's possession; to sign the name of Debtor on any invoices, documents, drafts against and notices to account debtors or obligors of Debtor, assignments and requests for verification of accounts; to execute proofs of claim and loss; to execute any endorsements, assignments, or other instruments of conveyance or transfer; to adjust and compromise any claims under insurance policies; to execute releases; and to do all other acts and things (before as well as after a Default) necessary and advisable in the reasonable discretion of Secured Party to carry out and enforce this Security Agreement. All lawful and reasonable acts of said attorney or designee are hereby ratified and approved and, except for willful misconduct or gross negligence, said attorney or designee shall not be liable for any acts of commission or omission, nor for any error of judgment or mistake of fact or law. This power of attorney being coupled with an interest is irrevocable while any of the Obligations shall remain unpaid. 7. Secured Party shall have the duty to exercise reasonable care in the custody and preservation of any securities in its possession included in the Collateral, which duty shall be fully satisfied if Secured Party maintains safe custody of any such securities, and, with respect to any maturities, calls, conversions, exchanges, redemption, offers, tenders or similar matters relating to any of such securities (herein called "events"), in the exercise of its sole discretion (a) Secured Party endeavors to take such action with respect to any of the events as Debtor may reasonably and specifically request in writing in sufficient time for such action to be evaluated and taken or (b) if Secured Party determines that the action requested might adversely affect the value of the securities as collateral, the collection of the Obligations secured, or otherwise prejudice the interests of Secured Party, Secured Party gives reasonable notice to Debtor that any such requested action will not be taken and if Secured Party makes such determination or if Debtor fails to make such timely request, Secured Party takes such other action as it deems advisable in the circumstances. Secured Party shall have no further obligation to ascertain the occurrence of, or to notify Debtor with respect to, any events and shall not be deemed to assume any such obligation as a result of the establishment by Secured Party of any internal procedures with respect to any securities in its possession, nor shall Secured Party be deemed to assume any responsibility for, or obligation or duty with respect to, any part or all of the Collateral, of any nature or kind, or any matter or proceedings arising out of or relating thereto, including, without limitation, any obligation or duty to take any action to collect, preserve or protect its or Debtor's rights in the Collateral or against any prior parties thereto, but the same shall be at Debtor's sole risk at all times. If the Collateral hereunder includes "stock" as defined in Regulation U of the Federal Reserve Board, it is hereby agreed such "stock" shall not secure Obligations which are "purpose credits", as that term is used in Regulation U, and (i) are secured solely by collateral other than "stock" or (ii) are unsecured. Secured Party's prior recourse to any part or all of the Collateral shall not constitute a condition of any demand, suit or proceeding for payment or collection of the Obligations. No act, failure or delay by Secured Party shall constitute a waiver of its rights and remedies hereunder or otherwise. No single or partial waiver by the Secured Party of any Default or right or remedy which it may have shall operate as a waiver of any other Default, right or remedy or of the same Default, right or remedy on a future occasion. Debtor hereby waives presentment, notice of dishonor and protest of all instruments included in or evidencing any of the Obligations or the Collateral, and any and all other notices and demands whatsoever (except as expressly provided herein). Subject to the terms of the Purchase Agreement, Debtor agrees to pay, on demand, all reasonable out-of-pocket expenses incurred by Secured Party in connection with the enforcement of this Security Agreement, the Obligations, and the transactions contemplated hereunder and thereunder, including but not limited to the reasonable fees and expenses of counsel to Secured Party. In the event of any litigation, with respect to any matter connected with this Security Agreement, the Obligations or the Collateral, Debtor hereby waives the right to a trial by jury and all defenses, including any defense based on any Statute of Limitations, any claim of laches, rights of setoff and the rights to interpose counterclaims of any nature other than mandatory counterclaims. Debtor hereby irrevocably consents to the jurisdiction of the courts of the State of New York and of any Federal Court located in such State in connection with any action or proceeding arising out of or relating to the Obligations, this Security Agreement or the Collateral, or any document or instrument delivered with respect to any of the Obligations. Debtor hereby waives personal service of any summons, complaint or other process in connection with any such action or proceeding and agrees that the service thereof may be made by certified or registered mail directed to Debtor at any place of business set forth below, or at such other address as Debtor may designate by written notification by certified or registered mail directed to and received by Secured Party at its office set forth in the financing statements filed hereunder (or if no such financing statements have been filed, at the office of Secured Party at which is located the officer in direct supervision of the within security interest). The Debtor so served shall appear or answer to such summons, complaint or other process within thirty days after the mailing thereof. Should the Debtor so served fail to appear or answer within said thirty-day period, such Debtor shall be deemed in default and judgment may be entered by Secured Party against such Debtor for the amount or such other relief as may be demanded in any summons, complaint or other process so served. In the alternative, in its discretion Secured Party may effect service upon Debtor in any other form or manner permitted by law. All terms used herein shall have the meanings as defined in the UCC, unless the context otherwise requires. No provision hereof shall be modified, altered or limited except by a written instrument expressly referring to this Security Agreement and to such provision, and executed by the party to be charged. The execution and delivery of this Security Agreement has been authorized by the Board of Directors of Debtor and by any necessary vote or consent of stockholders of Debtor. This Security Agreement and all Obligations shall be binding upon the successors and assigns of Debtor, and the foregoing, together with the rights and remedies of Secured Party hereunder, shall inure to the benefit of Secured Party, its successors, endorsees and assigns. This Security Agreement and the Obligations shall be governed in all respects by the laws of the State of New York. If any term of this Security Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby. Secured Party is authorized to annex hereto any schedules referred to herein. Debtor acknowledges receipt of a copy of this Security Agreement. IN WITNESS WHEREOF, the undersigned has executed or caused this Security Agreement to be executed in the State of New York, the date first above set forth. (CORPORATE SEAL) SONO-TEK CORPORATION By James L. Kehoe, Chairman Trade Name (if any) All location(s) of Collateral (including the Section, Block and Lot where there is located any of the Collateral which is or may be affixed to realty). Chief Place of Business: Other Places of Business: Name of record owner of real estate where any of the Collateral is or may be affixed to realty: Location of Books and Records Relating to the Collateral: 1 Schedule A Collateral shall mean and include all of Debtor's right, title and interest in and to: 1. All Accounts; 2. All Inventory; 3. All Equipment; and 4. All Proceeds and products of any or all of the foregoing, to the extent not otherwise included. 5. That certain Secured Note, dated as of August 3, 1999, payable by S&K Products International, Inc. to Sono-Tek Corporation in the original principal amount of $300,000 and ninety (90) shares of the Common Stock of S&K Products International, Inc. standing in the name of Sono-Tek Corporation on the books of S&K Products International, Inc. represented by Certificate No. 5. For purposes of this Schedule A, the following terms shall have the following meanings: "Accounts" shall mean all "accounts", as such term is defined in Section 9-106 of the Uniform Commercial Code as in effect on the date hereof in the State of New York (the "Code"), in which Debtor now or hereafter has any right, title or interest. "Equipment" shall mean all "equipment", as such term is defined in Section 9-109 of the Code, in which Debtor now or hereafter has any right, title or interest. "Inventory" shall mean all "inventory", as such term is defined in Section 9-109 of the Code, in which Debtor now or hereafter has any right, title or interest. "Proceeds" shall mean "proceeds", as such term id defined in Section 9-306 of the Code including, but not limited to (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Debtor from time to time with respect to any of the Collateral, (ii) any and all payments (in any form whatsoever) made or due and payable to Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental body, authority, bureau or agency (or any person, corporation, agency, authority or other entity acting under color of governmental authority) and (iii) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral.Corp, Lessee /s/ Kathleen N. Martin, Witness