SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended: February 28, 2001
Commission File Number: 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 Identification Number)
Incorporation or Organization)
2012 Route 9W, Milton, New York 12547
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (845) 795-2020
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
(Title of Class)
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. X Yes __ No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of May 29, 2001 the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was approximately
$1,782,719 computed by reference to the average of the bid and asked prices
of the Common Stock on said date, which average was $0.24.
The Registrant had 9,092,355 shares of Common Stock outstanding as
of May 29, 2001.
PART I
ITEM 1 BUSINESS
Organization and Business.
Sono-Tek Corporation (the"Company" or "Sono-Tek") was incorporated in
New York on March 21, 1975 for the purpose of engaging in the development,
manufacture and sale of ultrasonic liquid atomizing nozzles.
During Fiscal Year 2000 the Company completed the sale of 1,166,667
shares, at $0.30 per share, of Common Stock pursuant to a private placement
(the "Private Placement"). The gross proceeds from the Private Placement
were used to pay certain costs associated with the August 1999 acquisition of
S&K Products International, Inc., a New Jersey corporation ("S&K"), which
was subsequently renamed Sono-Tek Cleaning Systems, Inc. ("SCS"), and for
general working capital purposes. SCS is a supplier of cleaning and drying
systems for the semiconductor, disk drive, and precision cleaning industries.
SCS is a wholly owned subsidiary of the Company.
The Company also markets a full range of pressure nozzles in the U.S.
through a joint venture with Flowtech Srl, an Italian company ("Flowtech").
In January 2000, the two companies formed PNR America, LLC, a Delaware
limited liability company ("PNR America"). The Company has a 49%
ownership interest in PNR America. The Company has provided
administrative and operational support for PNR America and allocated such
costs to PNR America.
During Fiscal year 2001, the Company purchased the assets of Serec, a
company that designed and sold vacuum based solvent cleaning systems. The
Company financed this acquisition with the proceeds of additional private
placement sales of common stock.
Current Business Situation
During Fiscal Year 2001 and 2000, the Company's operations fell into two
segments: spraying systems and cleaning and drying systems. Prior to
Fiscal Year 2000, the Company operated with only one segment, spraying
systems. In the past, the spraying systems segment has had periods of sales
growth and financial stability, but suffered sales declines and losses when
the electronics industry had a downturn. During the last quarter of Fiscal
Year 2001, there was a decline in demand for the Company's fluxing units
due do a downturn in the electronics industry.
The Company acquired SCS in Fiscal Year 2000 and incurred losses in both
Fiscal Year 2000 and 2001 in the cleaning and drying segment. These
losses, combined with the decrease in sales in the spraying systems, led to
an increase in Company debt and negative cash flow. During Fiscal Year
2001, the Company increased its borrowing from a bank, Norwood Ventures
Group ("Norwood"), and officers and directors of the Company. From time
to time certain officers of the Company have been requested to postpone
their payroll and provide cash advances to purchase raw materials until
adequate cash was available to render such payments. The Company also
received additional cash from the sale of common stock and the exercise of
warrants. These influxes of cash were not able to provide the Company with
adequate amounts to pay its debts. The Company continues to have
difficulty paying vendors and purchasing necessary raw materials.
Subsequent to the Fiscal Year End 2001, the Company took actions to limit
the losses and reduce the negative cash flow. The spraying systems segment
was downsized to reflect the decline in market demand, and the sales force
was refocused to increase nozzle sales instead of fluxer sales. The cleaning
and drying segment terminated production of capital equipment, but
continues to service equipment and sell spare parts on a limited basis.
By decreasing operating costs, primarily in the form of reducing staff by
thirty-two employees, the Company anticipates generating income
beginning in the second quarter of Fiscal Year 2002. It is anticipated that
Fiscal Year 2002 earnings will be sufficient to cover current operating costs,
and will permit partial payments to vendors and pay the required principal
payments on all debt. During the first quarter of Fiscal Year 2002, the
Company received additional financing from Norwood and directors of the
Company. The Company is negotiating long-term payment arrangements
with its vendors for its past due balance, emphasizing that full demand of
past due balances will necessitate the Company to consider legal protection
from its creditors and that the Company's secured debt has certain priority to
repayments.
During the Fiscal Year 2001, the Company was in default on a note for
failure to make interest payments. The interest was paid, and the
subordinated mezzanine debt was subsequently amended. Subsequent to
year end, the Company's subsidiary, SCS, was in default on a bank note
payable. A partial payment was made of principal and interest, however,
SCS did not receive a waiver from the bank and the bank reserved all its
rights and remedies.
Absent a creditor action, management anticipates the remaining operating
results for the remaining three quarters of Fiscal Year 2002 should provide
sufficient cash flows to continue operations and return to profitability.
Spraying Systems - The Company's spraying systems segment is its core
business. It is engaged in the business of developing, manufacturing,
marketing, selling and installing ultrasonic liquid atomizing units
consisting of a nozzle based on patented technology, an electrical power
supply, and related hardware which atomizes low-to-medium viscosity
liquids used in various spraying applications. This business has been
affected by the slowdown in the manufacture of electronic printed circuit
boards. Subsequent to February 28, 2001, it has been downsized consistent
with the decline in market demand, and will be increased in size as the
situation improves. It has also been affected over the past two years by the
start-up cash needs of the acquisitions, causing it to fall behind in payments
to trade vendors. The current goal for this business is to return to
profitability and to make prompt payment of all new obligations.
Management expects to record a loss for the first quarter of Fiscal Year
2002, due to the restructuring activities needed to create a profitable core
business in that quarter.
Cleaning and Drying Systems - The Company's cleaning and drying
systems segment is engaged in the business of developing, manufacturing,
marketing, selling and installing cleaning, rinsing and drying systems. The
product line includes vapor dryers, pod/box cleaners, solvent reprocessors
and polymer removal systems which can be sold individually or as an
integrated system. This segment includes the wholly-owned subsidiary,
SCS, and the assets acquired in the Serec acquisition. This segment has
proven to be unprofitable since inception, missing both forecasted sales and
income goals and requiring significant cash infusions to continue operations
as a capital equipment supplier. The continued poor performance of this
segment provided sufficient evidence to conclude the related goodwill was
impaired. Accordingly, the Company recorded an impairment loss
adjustment of $669,697 which is included in discontinued operations.
Subsequent to February 28, 2001 management approved a plan to
discontinue operations of this business segment to limit losses and negative
cash flow. Currently, these businesses are being operated in a manner that
does not require cash support from the Company's core business and that
limits its operation to providing some spare parts or other short term
transactions, or to those transactions that provide enough cash up front to
facilitate the requested product or service. The ultimate disposition of this
segment may take the form of selling all or some of its assets, licensing its
product technology, and possibly continuing spare parts sales and service
on a limited basis.
SCS is a wholly owned subsidiary that has substantial debts to trade
vendors that are overdue. SCS's ability to repay these vendors depends on
the success of the strategies mentioned above. However it is possible that
some of these vendors or other creditors might take action demanding
repayment that would force SCS into a liquidation of assets. Should this
occur, it is not expected that it would materially impact Sono-Tek's core
business. SCS is a separate legal entity and Sono-Tek does not legally
guarantee the obligations of SCS. Sono-Tek is the major creditor of SCS
through its cash loans over the past two years.
Investment in PNR America - Since the formation of PNR America to sell
Flowtech pressure nozzles in the U.S. market, the Company has advanced
significant resources in developing brand recognition without yielding an
expected rate of return. Flowtech, the manufacturer and supplier of these
nozzles, is the leading developer and manufacturer of pressure nozzles in
Europe. The Flowtech pressure nozzles are commodity items and do not
compete against the Company's ultrasonic nozzles used in capital
equipment. The Company believes its continued investment in PNR
America to be a sound business decision in the long term, but, due to PNR
America's limited ability to generate positive cash flows from operating
activities, and forecasted demands to continue market penetration, the
Company is seeking to renegotiate the arrangement with Flowtech,
including the possible sale of the Company's ownership share.
Sono-Tek and Flowtech plan to continue joint marketing initiatives such as a
linked web site, the use of Flowtech's sales representation in Europe, and
collocation of the sales and shipping functions of PNR America at the
Company's factory for the foreseeable future. Management would
reconsider acquiring an ownership position in PNR America at a future date,
if available, desirable, and if the Company is in a stronger financial position.
Product Development
Management believes that the Company's long-term growth and stability is
linked to the development and release of products that provide total
solutions to customer needs across a wide spectrum of industries, while
advancing the utility of the Company's core technology. To this end, the
Company's resources will be focused on a strategy of growth from within
the core ultrasonic spray technology to new segments and customer needs.
The Company has several new products under development that could
expand the market opportunities for our core technology. One of these, the
Thinsonic-CVD product, is being used in research and development
activities connected with new markets and customers for the Company.
Another, the Microflux 500, is a computer controlled, three dimensional
precision spray system that is expected to find application in the both the
fluxer industry and newer applications requiring precision spray of costly or
environmentally controlled liquids. The Company is reviewing its current
product line against the competition and evolving market demands to
determine the most important product upgrades for future success.
Manufacturing
The Company currently employs nine people for its manufacturing and
quality control activities. The Company's manufacturing operations are
located in one facility in the town of Milton, New York.
The Company's current manufacturing areas consists of (i) a machine
shop, (ii) a nozzle assembly/test area, (iii) an electronics assembly area,
and (iv) a receiving and shipping area.
The Company purchases circuit board assemblies and sheet metal
components from outside suppliers. These are available from a wide range
of suppliers throughout the world. All raw materials used in the Company's
products are readily available from many different domestic suppliers. The
Company provides a limited warranty on all of its products covering parts
and labor for a period of one year from the date of sale. The Company
maintains comprehensive general liability insurance in an amount which it
believes is adequate for the nature of its operations. The Company became
ISO 9001 registered in September 1998 and was recertified in September
2000. In addition to the high degree of quality implied by being ISO
registered, the Company expects that such registration will discipline the
Company in running its business and will stimulate continuous
improvement.
Patents
The Company's business is based in part on the technology covered by eight
United States patents held by the Company, two of which have expired with
no material effect on the Company. Patent applications, based on the United
States applications, covering fundamental aspects of the ultrasonic
technology developed by the Company have been issued in several foreign
jurisdictions. Two patents have expired and the rest will expire between
now and December 2007. The Company's patent on its central bolt design,
used in current product offerings, expires in July 2004. There can be no
assurance that the Company's existing patents will, if challenged, be upheld,
or that any such patents will afford the necessary degree of patent protection
with respect to the nozzle systems. Furthermore, due to the high cost of
maintaining patents in several foreign jurisdictions, the Company decided
not to maintain its patent protection in certain countries in which the
Company believes the protection is no longer required. There can be no
assurance that events will not occur which, as a result of the Company's
failure to maintain its patent protection, would have a material adverse affect
on the Company's sales in such foreign jurisdictions. In addition, the
Company may be unable, for financial or other reasons, to enforce its rights
under its patents.
The Company also relies on unpatented know-how in the production of its
nozzle systems. Management is aware of one other company that has
developed a nozzle that operates in a manner similar to the nozzle that is
part of the Company's nozzle systems. This company has access to financial
resources significantly greater than the Company's financial resources.
There can be no assurance that this company will not develop additional
nozzle designs and thus expand the applications of its nozzles. Moreover,
technological advances have evolved in the nozzle industry and there can be
no assurance that these companies or other entities with far greater resources
and capabilities than the Company will not develop products competitive
with or superior to the Company's nozzle system.
Employees
As of May 29, 2001, the Company had 23 full-time employees and 3 part-
time employees. The Company believes that its relationship with its
employees is good.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales
The Company has focused primarily on the North American market. The
Company utilizes independent sales representatives or sales representative
companies throughout North America to sell spraying systems on a
commission basis. The Company also has a distribution agreement with
Flowtech and its subsidiaries in eleven countries covering parts of Europe,
Asia and South America to market and sell all Sono-Tek product lines
except the SonoFlux System. During Fiscal Years 2001, 2000, and 1999 the
sales to foreign customers accounted for approximately $1,059,000,
$808,000, and $620,000, respectively, or 24%, 21%, and 17%, respectively,
of total revenues. During Fiscal Years 2001 and 2000 the sales from
discontinuing operations to foreign customers accounted for approximately
$263,000 and $184,000, respectively or 6% and 5%, respectively of total
revenues.
(e) Backlog
The backlog of orders from the Company's continuing operating segment
was approximately $208,000, $197,000, and $115,000 as of February 28,
2001, February 29, 2000, and February 28, 1999, respectively. The
Company anticipates that it will ship all of its February 28, 2001 backlog
during Fiscal Year 2002.
ITEM 2 PROPERTIES
The Company's offices, product development, manufacturing and assembly
facilities are located in two buildings consisting of 13,200 square feet and
7,800 square feet of space at 2012 Route 9W, Milton, New York, pursuant
to a lease which will expire on November 30, 2002. The Company also
leases 2,000 square feet of warehouse space in the same complex. Due to
downsizing in the first quarter of Fiscal 2002, the warehouse and 4,250
square feet of production space were eliminated.
ITEM 3 LEGAL PROCEEDINGS
On April 23, 2001, Essex Products International, Inc. ("EPI") notified SCS
of the termination of the Manufacturer's Representative Agreement dated
August 23, 2000 for cause by SCS. SCS has denied that the Agreement was
properly terminated for cause. The Agreement requires SCS to continue
fixed payments due through July 2001 upon cancellation, unless SCS
canceled the agreement for cause on the part of EPI. SCS also believes it
had sufficient cause to terminate the Agreement. The Company believes
that the agreement was canceled without cause by EPI, and therefore the
Company is entitled to Kevin Schumacher's, (a principal of EPI and former
director of the Company) unvested, 300,000 shares of common stock issued
him in connection with the Company's acquisition of S&K and to consider
the balance (April 2001 to July 2001) of the fixed payments due EPI,
forfeited. This matter will likely result in a legal dispute, the outcome of
which is uncertain, however, it should not result in adjustments to the
February 28, 2001 Fiscal Year financial statements as all amounts due EPI
have been accrued.
Subsequent to the Fiscal Year End, the Company received notice that SCS
was in default of its note payable for failure to make principal and interest
payments when due. The Company subsequently made a partial payment of
principal and interest as required, however, it did not receive a waiver from
the bank and the bank has reserved all of its rights and remedies.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDERS MATTERS
(a) The Company's Common Stock trades in the over-the-counter
market on the OTC Bulletin Board. The following table sets forth the range
of high and low closing bid quotations for the Company's Common Stock
for the periods indicated as furnished by the National Quotations Bureau,
Incorporated.
FISCAL YEAR ENDED
FEBRUARY 28, FEBRUARY 29,
2001 2000
HIGH LOW HIGH LOW
First Quarter $2.4375 $1.375 $0.4375 $0.24
Second Quarter 1.75 0.9062 0.565 0.35
Third Quarter 1.3125 0.5625 1.025 0.51
Fourth Quarter 1.125 0.3281 2.875 0.51
The above quotations are believed to represent inter-dealer quotations
without retail markups, markdowns or commissions and may not represent
actual transactions. The Company believes that, although limited or
sporadic quotations exist, there is no established public trading market for
the Company's Common Stock.
(b) As of May 29, 2001 there were 322 record holders of the Company's
Common Stock.
(c) The Company has not paid any cash dividends on its Common Stock
since its inception and intends to retain earnings, if any, for use in its
business and for other corporate purposes. The Company has entered into
debt and equity agreements that restrict the payments of cash dividends.
ITEM 6 SELECTED FINANCIAL DATA <F1>
The following sets forth selected consolidated financial data in respect of the
Company's continuing operations. The selected financial information set
forth in the table below is not necessarily indicative of the results of future
operations of the Company and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements, related notes and
independent auditors' report, contained herein. The statement of operations
data for the five years ended February 28, 2001 and the related balance sheet
data have been derived from the audited consolidated financial statements of
the Company. These financial statements were prepared on a going concern
basis.
Year Ended 02/28/01 02/29/00 02/28/99 02/28/98 02/28/97
(In thousands, except per share data)
Net Sales $4,307 $3,913 $2,903 $3,570 $3,111
Income (Loss) from
Continuing Operations $375 $(126) $(811) $252 $153
Loss from Discontinued
Operations<F3> $(2,006) $(546) - - -
Net (Loss) Income $(1,630) $(672) $(811)<F2> $252 $153
Basic (Loss) Earnings
Per Share
Continuing Operations $0.04 $(0.02) $(0.18) $0.06
$0.04
Discontinued Operations $(0.22) $(0.07) - - -
Net (Loss) Income $(0.18) $(0.09) $(0.18) $0.06 $0.04
Diluted (Loss) Earnings
Per Share
Continuing Operations $0.04 $(0.02) $(0.18) $0.05
$0.03
Discontinued Operations $(0.22) $(0.07) - - -
Net (Loss) Income $(0.18) $(0.09) $(0.18) $0.05 $0.03
Cash Dividends None None None None None
Weighted Average
Shares - Basic 9,011 7,511 4,387 4,376 4,205
Weighted Average
Shares - Diluted<F4> 9,011 7 ,511 4,387 4,774
4,507
Total Assets $2,212 $2,798<F5> $1,336 $1,729 $1,252
Long-Term Liabilities $605 $559<F6> $46<F7> $586
$577
<FN>
<F1> Should be read in conjunction with the Consolidated Financial Statements
and notes thereto.
<F2> Upon conversion of $530,000 of Subordinated Debt to equity, the Company
expensed $354,280 of which $302,857 is due to the lowering of the conversion
price from $.70 to $.30 and $51,423 is due to the value of the new warrants
granted.
<F3> The discontinued segment was acquired in Fiscal Year 2000, therefore there
is no Loss for Discontinued operations for Fiscal Year 1999, 1998 and 1997.
<F4> Stock options for employees and outside consultants are antidilutive during
Fiscal 1999, 2000 and Fiscal 2001 as a result of the net loss and therefore are
not considered in the Diluted EPS calculation.
<F5> Total Assets increased in Fiscal 2000 due to the purchase of S&K Products
International on August 3, 1999 and from the proceeds from financing activities.
<F6> The Long-Term Liabilities increased in Fiscal 2000 due to a new loan of
$450,000 plus long term and subordinated liabilities assumed in connection with
the S&K acquisition.
<F7> The Long-Term Liabilities decreased in Fiscal 1999 due to the conversion of
the Subordinated Convertible Debt of $530,000 to equity.
</FN>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Statements
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Federal Securities Laws. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve
known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include, among other things, the following:
- - the Company's access to adequate funds to meet the Company's
operating and financial needs and to repay its past due debt, and the
Company's ability to continue as a going concern if it is unable to access
adequate financing;
- - the possibility that the Company's creditors may take legal action for
the repayment of past due indebtedness and the ability of the Company to
continue as a going concern if any such action is taken;
- - the Company's ability to restructure its past due debt;
- - the possibility of additional impairment write downs of assets;
- - the Company's ability to respond to competition in its markets;
- - general economic conditions in the Company's markets;
- - the risk that the Company's analyses of these risks could be incorrect
and/or the strategies developed to address them could be unsuccessful; and
- - various other factors discussed in this Annual Report on Form 10-K.
The Company undertakes no obligation to update publicly any forward-
looking statement.
Capital Resources and Liquidity
On February 28, 2001, the Company had a working capital deficiency of
$627,799 and stockholders' deficiency of $605,364. This compares to
working capital deficiency of $22,496 and stockholders' equity of $727,629
on February 29, 2000. The net increase in working capital deficiency of
$605,303 is due to a decrease in accounts receivable plus increases in
inventory and that were offset by increases in debt, accounts payable and
accrued expenses. The net decrease of $1,332,993 in the Company's
stockholders' equity is a result of the sale of $137,500 in common stock
through a private placement, the addition of $57,293 for warrants and
options exercised and $102,701 for the issuance of warrants and options, net
of the Fiscal Year 2001 operating loss due to discontinued operations.
During Fiscal Year 2001, the Company amended its agreement with
Norwood pursuant to which the Company increased its five year loan in the
principal amount of $100,000. The terms of the loan require interest
payments only through September 2002 followed by monthly payments of
$15,278 plus interest through September 30, 2004. The Company was also
required to grant a warrant to purchase 244,000 shares of the Company's
common stock at an exercise price of $0.30 per share, which can be put to
the Company. Such warrants were valued at $17,111 which is accounted for
as a discount and will be imputed as additional interest expense over the
term of the loan. Subsequent to Fiscal Year End 2001, the Company
amended its agreement on April 30, 2001 with Norwood pursuant to which
the Company increased its five year loan in the principal amount of
$300,000, of which $50,000 represented related party loans assigned to
Norwood. The terms of the amended loan require monthly payments of
interest only through September 30, 2001, followed by thirty-six equal fixed
monthly payments of principal, plus interest. The Company was also
required to grant a warrant to purchase 733,333 shares of the Company's
common stock at an exercise price of $0.10 per share, which can be put to
the Company.
During Fiscal Year 2000, the Company entered into a short term loan of
$100,000 with an outside non-affiliated individual. The loan and related
interest was repaid in May 2000. As part of the loan agreement, when the
loan was repaid, the lender received a warrant to purchase 50,000 shares of
the Company's common stock at a price of $1.00 per share. During Fiscal
Year 2001, the Company recognized a non-cash interest charge of $64,033
based on the fair market value of the warrants granted.
The Company maintains a revolving line of credit which provide maximum
borrowings of $350,000, $350,000 and $300,000 at Fiscal Years ended
February 28, 2001, February 29, 2000 and February 28, 1999, respectively.
This line of credit is collateralized by accounts receivable, inventory and all
other personal property of the Company, and is guaranteed by James Kehoe,
former Chief Executive Officer of the Company, and is subject to certain
priority liens on SCS assets.
Capital expenditures increased $66,000 during Fiscal Year 2001 to $124,000
from $59,000 during Fiscal Year 2000. During Fiscal Year 2001, the
Company entered into two collateralized term loan agreements with a bank.
One loan for $45,359 was to purchase production equipment for the
Company. Another piece of equipment was purchased for the cleaning and
drying system segment, which has discontinued operations. This loan for
$33,500 is expected to be paid off during Fiscal Year 2002, when the
cleaning and drying systems segment is discontinued. During Fiscal Year
2000, the Company entered into a collateralized $73,000 term loan
agreement with a bank to purchase a cleanroom. This clean room was
purchased for the cleaning and drying systems segment and is expected to be
terminated in Fiscal Year 2002. During Fiscal Year 2001, 2000 and 1999
the Company repaid $258,859, $114,622, and $55,457, respectively, on
notes payable and equipment loans held by both the spraying and cleaning
and drying segments of the Company.
Subsequent to Fiscal Year End, the discontinued operating segment received
a default notice regarding its bank loan. The Company paid a portion of the
required principal and interest, however, the Company did not receive a
waiver from the bank and the bank has reserved all of its rights and
remedies. Due to the limited operations of the discontinued operating
segment, the cash generated may not be sufficient to complete the monthly
principal and interest payments through January 2002 when the loan
matures.
The Company's Convertible Secured Subordinated Promissory Notes that
were scheduled to mature on August 15, 2000 were converted to Common
Stock under the Fourth Note Amendment Agreement dated February 26,
1999. This agreement provided for the reduction in the conversion price
from $.70 per share to $.30 per share. The Noteholders received stock for
the converted Notes and for the unpaid interest as of February 26, 1999. At
the same time, the exercise price of the warrants was reduced from $1.50 per
share to $.65 per share, and the expiration date of the warrants was extended
to February 28, 2002. During Fiscal Year 2001, warrants for 85,680 shares
of stock were exercised, resulting in $55,692 of new capital. During Fiscal
Year 2000, warrants for 300,985 shares of stock were exercised, resulting in
$195,640 of new capital.
Due to the consolidated Company losses incurred during Fiscal Years 2001,
2000 and 1999, the Company was required to borrow on a short term basis
from officers and directors of the Company. Employees also made cash
advances to the Company in order to purchase raw materials and pay
operating expenses. At Fiscal Year End 2001, the amount owed one
employee was $27,000, which was added to the short term loans. During
Fiscal Year 2001 and 2000, a total of $335,000 and $247,000, respectively,
was loaned by these individuals. Of these amounts, $241,000 and $50,000
was repaid with interest in Fiscal Year 2001 and 2000, respectively.
Subsequent to Fiscal Year End 2001, $146,000 in principal, plus interest
was repaid and $50,000 was assigned to Norwood in connection with its
additional advance of $300,000 on April 29, 2001. During Fiscal Year
2000, an additional $51,051, of which $5,135 was accrued interest, was
used, in a non-cash transaction, to exercise warrants to purchase 78,540
shares of the Company's common stock. As of February 28, 2001, the
balance owed the officers and directors was $432,084.
During Fiscal Year 2001, warrants to purchase 50,000 shares of the
Company's common stock were issued to an officer of the Company in
acknowledgment of short term loans granted to the Company in Fiscal Year
2000. The Company recognized a non-cash interest charge of $11,799
based on the fair market value of the warrants granted. As an
acknowledgement of the loans, 300,000 warrants were issued each to an
officer and a director of the Company in Fiscal Year 2000. Each warrant
expires May 12, 2004 and has an exercise price of $0.30 per share. The
Company recognized a non-cash interest charge of $102,626 based on the
fair market value of the warrants granted.
Subsequent to Fiscal Year End 2001, the Company discontinued the
production of capital equipment in the cleaning and drying systems
segment and began to focus on its original product lines, specifically the
sales of ultrasonic nozzles. Although there can be no assurances,
management believes that by taking these steps the Company will be able
to return to profitability in Fiscal Year 2002. It is anticipated that future
cash flows may not allow the Company to repay its current debt and trade
creditors in a timely manner.
Results of Continuing Operations - 2001 Compared to 2000
The Company's sales increased $393,719 or 10% from $3,913,176 in Fiscal
Year 2000 to $4,306,895 in Fiscal Year 2001. The increase in sales was a
result of increased sales of Fluxers of $424,000 and special orders of
$276,000 that were offset by a decrease in ultrasonic nozzle sales of $96,000
and pressure nozzles sales of $213,000, now sold and distributed by the
Company's affiliate PNR America.
The Company's cost of goods sold decreased $170,098 or 9% from
$1,992,107 for Fiscal Year 2000 to $1,822,009 for Fiscal Year 2001. The
decrease in cost of goods sold is a result of a increase in the indirect
charges proportionately allocated to discontinued operations of $434,000
and a decrease in inventory obsolescence of $113,000 that is offset by an
increase in material costs due to the increase in sales. The gross profit
margin increased $563,817 or 30% from $1,921,069 in Fiscal Year 2000
to $2,484,886 in Fiscal Year 2001. The gross profit margin increased to
58% from 49% for Fiscal Years 2001 and 2000 as a result of an increase in
sales plus the realization of cost sharing between the continuing and
discontinued operating segments.
Research and product development ("R&D") costs decreased $120,228 or
29% from $418,695 in Fiscal Year 2000 to $298,467 in Fiscal Year 2001.
The decrease is attributable to lower personnel costs due to allocating R&D
efforts to its discontinued operating segment proportionately based on the
level of effort employed for these segments.
General and administrative costs increased $148,287 or 29% from $510,712
in Fiscal Year 2000 to $662,999 in Fiscal Year 2001. The increase is
attributable to additional professional fees of $107,000 and bad debt expense
of $50,000.
Sales and marketing expense decreased $69,419 or 3% from $927,742 in
Fiscal Year 2000 to $858,323 in Fiscal Year 2001. The decrease is
attributable to lower personnel costs of $69,000, professional fees of
$26,000 and marketing of $28,000 that were offset by an increase in
commissions of $58,000.
The Company's operating income increased $601,177 or 940% from
$63,920 in Fiscal Year 2000 to $665,097 in Fiscal Year 2001. The increase
was a result of an increase in gross profit of $564,000 and a decrease in
operating expenses of $37,000.
Interest and other income (loss) increased $41,505 or 839% from a loss of
$4,946 in Fiscal Year 2000 to a loss of $46,451 in Fiscal Year 2001. The
increase is attributable to recording the proportionate share of the
affiliate's loss plus write offs of uncollectible balances owed from the
affiliate. Interest expense increased $57,835 or 31% from $185,501 in
Fiscal Year 2000 to $243,336 in Fiscal Year 2001. The increase is due to
a non cash charge of $75,832 associated with the issuance of warrants, that
was offset by lowered interest rates.
The Company's net income before discontinued operations increased
$501,837 from a loss of $126,527 in Fiscal Year 2000 to a net income of
$375,310 in Fiscal Year 2001. The increase is a result of increased sales and
a decrease in expenses due to sharing of costs with SCS.
Results of Discontinued Operations - 2001 compared to 2000
The Company's loss from discontinued operations increased by $1,459,600
from a loss of $546,199 in Fiscal Year 2000 to a loss of $2,005,799 in Fiscal
Year 2001. The increase in the loss was due to the impairment of its
goodwill of $669,697, an increase in the inventory and accounts receivable
reserves of $193,887, plus the lack of sales to support the necessary amount
of overhead.
Results of Continuing Operations - 2000 Compared to 1999
The Company's sales increased $1,010,225 or 35% from $2,902,951 in
Fiscal Year 1999 to $3,913,176 in Fiscal Year 2000. The increase in sales
was a result of increased sales of fluxing systems of $614,000, MCS and
special systems of $330,000, and sales to affiliates of $197,000 that were
offset by a decrease in nozzle sales of $129,000.
The Company's cost of goods sold increased $375,490 or 23% from
$1,616,617 for Fiscal Year 1999 to $1,992,107 for Fiscal Year 2000. The
increase in cost of goods sold is a result of a $179,000 charge for inventory
obsolescence, an increase in sales of the Company's products, and the
related increase in material costs of $338,000 that were offset by a decrease
in personnel expense of $149,000 due to sharing costs with SCS. The gross
profit margin increased $634,735 or 49% from $1,286,334 in Fiscal Year
1999 to $1,921,069 in Fiscal Year 2000. The gross profit margin was 49%
and 44% of sales for Fiscal Years 2000 and 1999. The increase was a result
of an increase in sales plus the realization of cost reductions through the
consolidation of the operations of the Company and SCS.
Research and product development costs decreased $69,093 or 14% from
$487,788 in Fiscal Year 1999 to $418,695 in Fiscal Year 2000. The
decrease is attributable to a decrease in personnel cost of $46,000 due to
sharing costs with SCS and a decrease in engineering materials of $10,000.
General and administrative costs decreased $12,195 or 2% from $498,517 in
Fiscal Year 1999 to $510,712 in Fiscal Year 2000.
Sales and marketing expense increased $220,527 or 31% from $707,215 in
Fiscal Year 1999 to $927,742 in Fiscal Year 2000. The increase is
attributable to added personnel costs of $93,000, increased commissions of
$66,000, increased travel of $27,000 and marketing of $21,000.
The Company's operating income before discontinued operations increased
$825,386 or 108% from a loss of $761,466 in Fiscal Year 1999 to a net
income of $63,920 in Fiscal Year 2000. The increase was a result of
$354,280 non-cash charge in Fiscal Year 1999 and increased revenue and
cost sharing with SCS in Fiscal Year 2000.
Interest and other income (loss) increased $16,158 or (144%) from an
income of $11,212 in Fiscal Year 1999 to a (loss) of ($4,946) in Fiscal Year
2000. The increase is attributable to recording the proportionate share of the
affiliate's loss. Interest expense increased $125,053 or 207% from $60,448
in Fiscal Year 1999 to $185,501 in Fiscal Year 2000. The increase is due to
a non cash charge of $102,626 associated with the issuance of warrants, the
addition of the Norwood loan interest, plus additional balances on the line of
credit and a new equipment loan.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates.
The interest rate on the Company's debt is based on fluctuations in the
prime rates. If the prime rate increased by 1 percentage point from the
levels at February 28, 2001, the negative effect on the Company's results of
operations would approximate $4,000.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Financial information required by Item 8 is included in Part IV, Item 14 of
this report on Form 10-K.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
(a) Identification of Directors
Name Age Position with the Company
Harvey L. Berger 62 Director
Christopher L. Coccio 60 Chief Executive Officer,
President and a Director
James L. Kehoe 54 Director
Samuel Schwartz 81 Acting Chair and Director*
Jeffrey O. Spiegel 43 Director
J. Duncan Urquhart 47 Director*
* Member of the Audit Committee and Compensation Committee.
Dr. Berger has been a Director of the Company since June 1975. In April
2001, he resigned his position as President. Dr. Coccio has been a Director
of the Company since June 1998. Subsequent to year end, he accepted the
positions of President and CEO. Mr. Kehoe has been a Director since June
1991. In March 2001, he resigned his positions of CEO and Chairman. Mr.
Schwartz has been a Director since August 1987. Subsequent to year end,
he accepted the position of Acting Chairman. Mr. Spiegel has been a
Director since November 2000. Mr. Urquhart has been a Director since
September 1988.
The Board of Directors is divided into two classes, which were established
by the Company's shareholders at their annual meeting held on October 19,
1989. The directors in each class serve for a term of two years. The terms
of the classes are staggered so that only one class of directors is elected at
each annual meeting of the Company. The terms of Drs. Berger and Coccio,
and Mr. Spiegel run until the annual meeting to be held in 2001, and the
term of Messrs. Kehoe, Schwartz and Urquhart run until the annual meeting
to be held in 2002, and in each case until their respective successors are duly
elected and qualified.
(b) Identification of Executive Officers
Name Age Position with the Company
Christopher L. Coccio 60 Chief Executive Officer,
President and a Director
R. Stephen Harshbarger 33 Vice President
Kathleen N. Martin 48 Chief Financial Officer and
Treasurer
William J. McCormick 44 Vice President
Dr. Coccio was appointed Acting CEO in March 2001, and accepted the
positions of Chief Executive Officer and President in April 2001. Mr.
Harshbarger has served as Vice Presidents since June 2000. Ms. Martin has
served as Chief Financial Officer and Treasurer since November 1997. Mr.
McCormick has served as Vice President since May 1999.
The foregoing officers are elected for terms of one year or until their
successors are duly elected and qualified or until terminated by the action of
the Board of Directors. There are no arrangements or understandings
between any executive officer and any other persons(s) pursuant to which he
was or is to be selected as an officer.
(c) Identification of Certain Significant Employees
Not applicable.
(d) Family Relationships
None.
(e) Business Experience
DR. HARVEY L. BERGER has been a Director of the Company since June
1975. He was President of the Company from November 1981 to
September 1984 and from September 1985 until April 2001. From
September 1986 to September 1988 he also served as Treasurer. He was
Vice Chairman of the Company from March 1981 to September 1985. Dr.
Berger holds a Ph.D. in physics from Rensselaer Polytechnic Institute and is
a member of the Marist College Advisory Board.
DR. CHRISTOPHER L. COCCIO has been a Director of the Company
since June 1998. From 1964 to 1996 he held various engineering, sales,
marketing and management positions at General Electric Company, with
P&L responsibilities for up to $100 million in sales and 500 people
throughout the US. His business experience includes both domestic and
international markets and customers. He founded a management consulting
business in 1996, and worked with the New York State Assembly's
Legislative Commission on Science and Technology from 1996 to 1998. In
1998 he began to work with Accumetrics Associates, Inc., a manufacturer of
digital wireless telemetry systems as VP of Business Development and
member of the Board of Advisors. Mr. Coccio received a B.S.M.E. from
Stevens Institute of Technology, a M.S.M.E. from the University of
Colorado, and a Ph.D. from Rensselaer Polytechnic Institute in Chemical
Engineering. He was appointed President and CEO of Sono-Tek on April
30, 2001.
R. STEPHEN HARSHBARGER has been Vice President of the Company
since June 2000. He joined Sono-Tek in October 1993 as a Sales Engineer.
In 1997, he was promoted to Regional Sales Manager and in 1999 he
advanced to National Sales Manager. Prior to joining Sono-Tek, Mr.
Harshbarger was the Sales and Marketing Coordinator for three years at
Plasmaco, Inc., a developer and manufacturer of state-of-the-art flat panel
displays. He is a graduate of Bentley College, with a major in Finance and a
minor in Marketing.
JAMES L. KEHOE was Chairman of the Board from May 1999, and Chief
Executive Officer of the Company from August 1993 until his resignation
from both positions in March 2001. He has been a Director of the Company
since June 1991. From 1987 until 1993, he was President and Chief
Executive Officer of Plasmaco, Inc., which he founded in 1987. Plasmaco is
involved in the development and manufacture of AC plasma flat panel
displays. Prior to founding Plasmaco, Mr. Kehoe was employed for twenty
two years by International Business Machines Corporation where he held a
variety of engineering and management positions.
KATHLEEN N. MARTIN has been the Chief Financial Officer and
Treasurer of the Company since November 1997. From 1992 to 1997, Ms.
Martin was employed by Plasmaco, Inc. where she served as Accounting
Analyst and Controller. Ms. Martin has a B.A. in Mathematics from
Hartwick College and a B.S. in Accounting from the State University of
New York at New Paltz.
WILLIAM J. MC CORMICK has been Vice President of the Company
since May 1999. He joined Sono-Tek in 1994 as a sales engineer. Since
April 1995 he has been the Engineering Manager of the Company. Prior to
joining Sono-Tek, Mr. McCormick worked for 13 years at IBM and
Highland Manufacturing Company where he held various technical, sales,
and management positions. He has over thirteen years of experience
managing various business functions such as engineering, manufacturing,
operations, sales, and finance. He has an Electronics Engineering
Technology Degree from Ohio Institute of Technology, and is pursuing his
MBA from SUNY at New Paltz.
SAMUEL SCHWARTZ has been a Director of the Company since August
1987 and was Chairman of the Board from February 1993 to May 1999. In
April 2001 he accepted the position as Acting Chairman of the Board. From
1959 to 1992 he was the Chairman and CEO of Krystinel Corporation, a
manufacturer of ceramic magnetic components used in electronic circuitry.
He received a B.CH.E. from Rensselaer Polytechnic Institute in 1941 and a
M.CH.E. from New York University in 1948.
JEFFREY SPIEGEL has been a Director of the Company since November
2000. He is the President and CEO of Randa Corporation, a position he has
held since 1986. Randa is an international men's accessory company. Mr.
Spiegel received an B.A. from Brandeis University in 1979.
J. DUNCAN URQUHART has been a Director of the Company since
September 1988. Since January 1999 he has been a Consultant Associate
with Resources Connection, which provides contract accounting services.
From October 1997 to December 1998, Mr. Urquhart was Director of
Business Operations at The Gun Parts Corporation, an international supplier
of gun parts. Prior to his resignation from Sono-Tek in October 1997, he
was Controller of the Company from January 1988, and Treasurer of the
Company from September 1988.
Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth the aggregate remuneration paid or accrued by
the Company through February 28, 2001 for each named officer of the
Company. No other executive officer received aggregate remuneration that
equaled or exceeded $100,000 for the Fiscal Year ended February 28, 2001.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
Name and Awards, Securities All Other*
Principal Position Year Salary ($) Bonus ($) Underlying
Options(#)Compensation
R. Stephen Harshbarger 2001 $102,487 0 0 $2,695
Vice President
* Dollar amounts are Company contributions under the Company's retirement plan.
The following table sets forth information regarding option exercises during
the Fiscal Year ended February 28, 2001, as well as any unexercised options
held as of February 28, 2001 by each named executive who receives in
excess of $100,000 in salary and bonus.
# of Securities Underlying Value of Unexercised
Unexercised Options In-the Money Options
Shares at Fiscal Year End (#) At Fiscal Year End ($)
Acquired on Value
Name Exercise (#) Realized ($)
Exercisable/UnexercisableExercisable/Unexercisable
R. Stephen Harshbarger 0 0 29,250 20,750 $8,363 $6,738
Vice President
Audit Committee
The Company's Board of Directors has an Audit Committee composed of
Samuel Schwartz and J. Duncan Urquhart, all Directors of the Company.
There is a vacancy on the committee due to Christopher Coccio's
employment by the Company in April 2001. The Audit Committee is
responsible for (i) selecting an independent public accountant for ratification
by the stockholders, (ii) reviewing material accounting items affecting the
consolidated financial statements of the Company, and (iii) reports its
findings to the Board of Directors.
Compensation Committee Interlocks and Insider Participation
The Company's Board of Directors has a Compensation Committee
composed of Samuel Schwartz and J. Duncan Urquhart, all Directors of the
Company. There is a vacancy on the committee due to Christopher
Coccio's employment by the Company in April 2001. However, the
Compensation Committee serves an advisory function only. All decisions
regarding compensation are made by the full Board of Directors, including
Drs. Berger and Coccio who could participate in decisions regarding the
compensation of the Company's executive officers, including their own.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following information is furnished as of May 29, 2001 to indicate
beneficial ownership of the Company's Common Stock by each Director, by
each named executive officer who has a salary and bonus in excess of
$100,000, by all Directors and executive officers as a group and by each
person known to the Company to be the beneficial owner of more than 5%
of the Company's outstanding Common Stock. Such information has been
furnished to the Company by the indicated owners. Unless otherwise
indicated, the named person has sole voting and investment power.
Name (and address if Amount
more than 5%) of Beneficially
Beneficial owner Owned Percent
Directors
*Harvey L. Berger 366,700<F1> 4.0%
*Christopher L. Coccio 50,000<F2> **
*James L. Kehoe 721,317<F3> 7.5%
*Samuel Schwartz 977,083<F4> 10.4%
*Jeffrey O. Spiegel 106,777<F5> 1.2%
*J. Duncan Urquhart 20,000<F6> **
All Executive Officers and Directors as a Group 2,241,877<F7> 22.4%
Additional 5% owners
Herbert Spiegel 513,692 5.6%
425 East 58th Street
New York, NY 10022
Norwood Venture Corporation 2,077,777<F8> 18.6%
1430 Broadway
New York, NY 10018
*c/o Sono-Tek Corporation, 2012 Route 9W, Bldg. 3, Milton, NY 12547.
** Less than 1%
<FN>
<F1> Includes 4,000 shares in the name of Dr. Berger's wifeand 45,000 options
deemed exercisable issued under the 1993 Plan.
<F2> Includes 10,000 options deemed exercisable granted in September 1999
under the 1993 Plan.
<F3> Includes 230,000 options deemed exercisable issued under the 1993 Plan,
plus 300,000 warrants deemed exercisable awarded by the Board of Directors in
May 1999.
<F4> Includes 300,000 warrants deemed exercisable awarded by the Board of
Directors in May 1999.
<F5> Assumes the exercise of a warrant Mr. Spiegel received upon conversion of
a secured subordinated promissory note,,which warrant is exercisable at $.65
per share for an additional 28,560 shares of Common Stock.
<F6> Includes 20,000 options deemed exercisable granted in May 1999 under the
1993 Plan.
<F7> Includes 305,000 options deemed exercisable issued under the 1993 Plan,
600,000 warrants deemed exercisable awarded by the Board of Directors in May
1999, an 28,560 warrants deemed exercisable received upon conversion of
secured subordinated promissory note.
<F8> Includes 1,100,000 warrants deemed exercisable issued on September 30,
1999, 244,444 warrants deemed exercisable issued on December 20, 2000, and
733,333 warrants deemed exercisable issued on April 30, 2001, all in
conjunction with a loan, as amended, made to the Company.
</FN>
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Short term loans - From time to time the Company has required short-term
loans to meet its payment obligations. Most 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 range from 9.75% to
11.50% at February 29, 2001. As of February 28, 2001 and February 29,
2000 the amount of these loans outstanding was $459,605 and $239,084,
respectively. During Fiscal Year 2001, a total of $334,000 was loaned by
these individuals to the Company. Of this amount, $241,000 was repaid in
Fiscal Year 2001 and $96,000 was repaid subsequent to year end. Interest
expense for the twelve month period ended February 28, 2001 and February
29, 2000 was $26,395 and $17,989, respectively. Accrued interest was
$37,075 and $13,165 at February 28, 2001 and February 29, 2000,
respectively.
As an acknowledgement of loans granted to the Company in Fiscal Year
2000, warrants were issued to an officer of the Company in Fiscal Year
2001. One warrant is to purchase 25,000 shares of the Company's common
stock at $0.50 per share, the other warrant is to purchase 25,000 shares of
the Company's common stock at $1.00 per share. Both warrants expire
March 3, 2005. The Company recognized a non-cash interest charge of
$11,799 based on the fair market value of the warrants granted.
Subordinated convertible loans- Two convertible subordinated notes issued
to the former shareholders of S&K or members of their immediate family,
for an aggregate principal amount of $150,000 were assumed by the
Company on August 3, 1999, the date of the SCS acquisition (the "SCS
Notes"). The SCS Notes are subordinate to the long-term debt with SCS's
bank and the Company's bank. The SCS Notes are payable August 3, 2002
with interest accruing at a rate of 6% per annum. The unpaid principal
balance on the SCS Notes is convertible into Common Stock at $1.00 per
share. If the Company's Common Stock trades at a value equal to or greater
than $2.00 per share for thirty consecutive trading days, the unpaid principal
balance shall automatically convert to Common Stock. Interest expense for
the twelve month period ended February 28, 2001 was $9,000. Accrued
interest was $14,250 at February 28, 2001.
PART IV
ITEM 14 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The consolidated financial statements and schedules listed in the
accompanying "Index to Consolidated Financial Statements" are filed as a
part of this annual report.
(2) See (a)(1) above.
(3) Exhibits
Ex. No. Description
3(a)1 Certificate of Incorporation of the Company and all
amendments thereto.
3(b)2 By-laws of the Company as amended.
3(c) 3 Certificate of Amendment of the Certificate of Incorporation,
dated September 30, 1999.
3(d) 12 Restated Certificate of Incorporation
4(a)1 Form of Convertible Note.
4(b)4 Form of Warrant.
4(c)4 Master Security Agreement.
4(d) The Company agrees to furnish a copy of the equipment loan
referred to in the Company's financial statements to the
Commission upon request.
4(e)5 Form of 1995 Amendment to Convertible Note.
4(f)6 Form of 1996 Amendment to Convertible Note.
4(g)7 Form of 1997 Amendment to Convertible Note
4(h)8 Letter agreement between the Company and The Bank of
New York.
4(i) 9 Form of 1999 Amendment to Convertible Note.
4(j) 9 Mr. Kehoe's Personal Guarantee for the Bank of New York.
4(k) 3 Note and Warrant Purchase Agreement dated September 29,
1999 by and between the Company and Norwood Venture
Corp.
4(l) 3 Note issued by the Company, dated September 29, 1999, in
the principal sum of $450,000
4(m) 3 Common Stock Purchase Warrant, dated September 29,
1999, issued by the Company to Norwood Venture Corp.
4(n) 3 General Security Agreement, dated September 29, 1999,
issued by the Company in favor of Norwood Venture Corp.
4(o) Amended, Note and Warrant Purchase Agreements dated
December 22, 2000 and April 30, 2001 by and between the
Company and Norwood Venture Corp.
10(a) 11 Lease for the Company's facilities in Milton, NY dated
December 1, 1999.
10(b) 11 Lease for the Company's facilities in Milton, NY dated
January 1, 2000.
10(c) 11 Lease for the Company's facilities in Milton, NY dated
January 1, 2000.
10(d) Release from the lease for two of the Company's facilities in
Milton, NY dated June 13, 2001
*10(e) 10 1993 Stock Incentive Plan as amended.
10(f) 9 Bank of New York Line of Credit.
10(g) 12 Lease for the Company's facilities in Milton, NY dated
September 29, 2000.
23(a) Independent Auditors' Consent.
* Management Contract or Compensatory Plan.
1 Incorporated herein by reference to the Company's Form 10-K for the year
ended February 28, 1994.
2 Incorporated herein by reference to exhibit 2 to Amendment No. 1 to Form
8-A, SEC file #0-16035.
3 Incorporated herein by reference to the Company's Form 10-Q Quarterly
Report for the quarter ended November 30, 1999.
4 Incorporated herein by reference to the Company's Form 10-Q Quarterly
Report for the quarter ended November 30, 1993.
5 Incorporated herein by reference to the Company's Form 10-K for the year
ended February 28, 1995.
6 Incorporated herein by reference to the Company's Form 10-K for the year
ended February 29, 1996.
7 Incorporated herein by reference to the Company's Form 10-K for the year
ended February 28, 1997.
8 Incorporated herein by reference to the Company's Form 10-Q quarterly
report for the quarter ended May 31, 1996.
9 Incorporated herein by reference to the Company's Form 10-K for the year
ended February 28, 1999.
10 Incorporated herein by reference to the Company's Form 10-Q quarterly
report for the quarter ended August 31, 1994.
11 Incorporated herein by reference to the Company's Form 10-K for the year
ended February 29, 2000.
12 Incorporated herein by reference to the Company's Form 10-Q quarterly
report for the quarter ended November 30, 2000.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
SONO-TEK CORPORATION
FORM 10-K
ITEMS 8 AND 14(d)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SCHEDULES
FOR THE YEAR ENDED FEBRUARY 28, 2001
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS (ITEM 8):
Consolidated Balance Sheets at February 28, 2001 and February 29, 2000
Consolidated Statements of Operations
For the Years Ended February 28, 2001, February 29, 2000 and
February 28, 1999
Consolidated Statements of Stockholders' Equity (Deficiency)
For the Years Ended February 28, 2001, February 29, 2000 and
February 28, 1999
Consolidated Statements of Cash Flows
For the Years Ended February 28, 2001, February 29, 2000 and
February 28, 1999
Notes to the Consolidated Financial Statements
FINANCIAL STATEMENTS SCHEDULE (ITEM 14(d) SCHEDULE
INCLUDED):
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the conditions
requiring their filing do not exist or because the required information is
given in the consolidated financial statements, including the notes.
INDEPENDENT AUDITORS REPORT
To the Stockholders and Directors of
Sono-Tek Corporation
Milton, New York
We have audited the accompanying consolidated balance sheets of Sono-Tek
Corporation and subsidiary (the "Company") as of February 28, 2001 and February
29, 2000 and the related consolidated statements of operations, stockholders'
(deficiency) equity, and cash flows for each of the three years in the period
ended February 28, 2001. Our audits also included the consolidated financial
statement schedule listed in the index at item 14d. These consolidated
financial statements and consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sono-Tek Corporation and
subsidiary as of February 28, 2001 and February 29, 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended February 28, 2001 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, such
consolidated financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects, the information set forth therein.
The accompanying consolidated financial statements for the year ended February
28, 2001 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, the
Company's recurring losses from operations, working capital deficiency and net
stockholders' deficiency raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Stamford, CT
June 12, 2001
SONO-TEK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
February 28, February 29,
Current Assets 2001 2000
Cash and cash equivalents $3,232 $6,131
Accounts receivable (less allowance of $116,581 and $32,997
in 2001 and 2000, respectively) 593,605 720,009
Inventories (Note 7) 796,696 635,739
Prepaid expenses and other current assets 97,093 50,402
Total current assets 1,490,626 1,412,281
Equipment, furnishings and leasehold improvements (less accumulated
depreciation of $508,928 and $450,344 in 2001 and 2000,
respectively) (Note 8) 209,675 143,826
Intangible assets, net:
Patents and patents pending (Note 3) 25,640 31,642
Deferred financing fees 25,459 32,563
Total intangible assets 51,099 64,205
Net assets of discontinued operations (Note 6) 452,462 1,150,318
Due from affiliate (Note 9) 0 19,310
Other assets 8,168 8,168
TOTAL ASSETS $2,212,030 $2,798,108
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Accounts payable $841,267 $482,767
Accrued expenses (Note 10) 369,386 267,751
Revolving Line of Credit (Note 11) 350,000 334,307
Short term loans-related parties (Note 20) 459,605 239,084
Current maturities of long term debt (Note 13) 21,777 10,868
Current maturities of subordinated mezzanine debt (Note 14) 76,390
0
Short term convertible loan (Note 11) 0 100,000
Total current liabilities 2,118,425 1,434,777
Subordinated mezzanine debt (Note 14) 411,547 382,060
Long term debt, less current maturities (Note 13) 43,311 26,641
Subordinated convertible loans-related parties (Note 20) 150,000 150,000
Total liabilities 2,723,283 1,993,478
Commitments and Contingencies (Note 15) - -
Put Warrants (Note 14) 94,111 77,000
Stockholders' (Deficiency) Equity
Common stock, $.01 par value; 25,000,000 and 12,000,000 shares
authorized, 9,092,354 and 8,866,612 issued and outstanding in
2001 and 2000, respectively 90,924 88,666
Additional paid-in capital 6,007,037 5,711,800
Accumulated deficit (6,703,325) (5,072,836)
Total stockholders' (deficiency) equity (605,364) 727,630
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY $2,212,030
$2,798,108
See notes to consolidated financial statements.
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
February 28, February 29, February 28,
2001 2000 1999
Net Sales (Note 21) $4,306,895 $3,913,176 $2,902,951
Cost of Goods Sold 1,822,009 1,992,107 1,616,617
Gross Profit 2,484,886 1,921,069 1,286,334
Operating Expenses
Research and product development 298,467 418,695 487,788
Marketing and selling 858,323 927,742 707,215
General and administrative 662,999 510,712 498,517
Non-cash charge for conversion of debt (Note 18)- - 354,280
Total Operating Expenses 1,819,789 1,857,149 2,047,800
Operating Income (Loss) 665,097 63,920 (761,466)
Interest Expense (243,336) (185,501) (60,448)
Interest and Other Income (Loss) (46,451) (4,946) 11,212
Income (Loss) from Continuing Operations
Before Income Tax Expense 375,310 (126,527) (810,702)
Income Tax Expense (Note 16) - - -
Income (Loss) from continuing operations 375,310 (126,527) (810,702)
Loss from discontinued operations (Note 6) (2,005,799) (546,199) 0
Net Loss $(1,630,489) $(672,726) $(810,702)
Basic and DilutedEarnings (Loss) Per Share
Continuing Operations $0.04 $(0.02) $(0.18)
Discontinued Operations $(0.22) $(0.07) -
Net Loss ($0.18) ($0.09) ($0.18)
Weighted Average Shares - Basic and Diluted 9,011,310 7,511,186
4,386,799
See notes to consolidated financial statements.
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
YEARS ENDED FEBRUARY 28, 2001, FEBRUARY 29, 2000 AND FEBRUARY 28,
1999
Common Stock Total
Par Value $.01 Additional Stockholders'
Paid-In Accumulated (Deficiency)
Shares Amount Capital Deficit Equity
Balance - March 1, 1998 4,374,387 $43,744 $3,824,221 $(3,589,408)
$278,557
Issuance of common stock 4,000 40 1,280 - 1,320
Subordinated debt conversion 1,766,667 17,667 866,613 - 884,280
Interest conversion 136,613 1,366 39,618 - 40,984
Non-employee stock option - - 4,243 - 4,243
Net Loss - - - (810,702) (810,702)
Balance - February 28, 1999 6,281,667 62,817 4,735,975 (4,400,110)
398,682
Issuance of common stock 1,166,667 11,667 338,333 - 350,000
Cost of private placement - - (31,589) - (31,589)
Purchase of subsidiary 810,000 8,100 234,900 - 243,000
Stock issued to consultant 150,000 1,500 43,500 - 45,000
Stock issued to officer and director 100,000 1,000 29,000 -
30,000
Issuance of warrants - - 148,215 - 148,215
Warrants exercised 300,985 3,009 192,631 - 195,640
Conversion of bonus 57,294 573 16,615 - 17,188
Non-employee stock option - - 4,220 - 4,220
Net Loss - - - (672,726) (672,726)
Balance - February 29, 2000 8,866,612 88,666 5,711,800 (5,072,836)
727,630
Warrants exercised 85,680 857 54,835 - 55,692
Options exercised 2,562 26 1,575 - 1,601
Issuance of warrants - - 75,832 - 75,832
Issuance of common stock 137,500 1,375 136,125 - 137,500
Non-employee stock option - - 26,870 - 26,870
Net Loss - - - (1,630,489) (1,630,489)
Balance - February 28, 2001 9,092,354 $90,924 $6,007,037 $(6,703,325)
$(605,364)
See notes to consolidated financial statements
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
February 28, February 29, February 29,
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,630,489) $(672,726) $(810,702)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss (Gain) on equity investment 19,310 (19,310) -
Provision for inventory obsolescence - 179,047 -
Depreciation and amortization 71,691 52,509 44,941
Imputed interest expense on subordinated
mezzanine debt 22,988 9,060 -
Provision for doubtful accounts 83,584 26,997 5,000
Non-cash charge for stock options & warrants 102,701 106,846
4,243
Non-cash charge for conversion of debt 7,500 - 354,280
(Increase) decrease in:
Accounts receivable 42,820 (482,789) 541,343
Inventories (160,957) (27,586) (171,741)
Prepaid expenses and other current assets (46,691) (8,363) (26,258)
Other assets - (2,250) -
Increase (decrease) in:
Accounts payable and accrued expenses 460,134 175,565
(125,661)
Non-current rent payable 0 (9,083) 1,000
1458: Net Cash Used In Continuing Operations (1,027,409) (672,083)
(183,555)
Net Cash Provided by Discontinued Operations 873,323 (834,596) -
Net Cash Used In Operating Activities (154,086) (1,506,679)
(183,555)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business net of cash acquired - 332,000 -
Purchase of equipment, furnishings and
leasehold improvements (124,433) (58,792) (43,964)
Net Cash Used in Continuing Operations (124,433) 273,208 (43,964)
Net Cash Used in Discontinued Operation (428) (84,388) -
Net Cash Used in Investing Activities (124,861) 188,820 (43,964)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 15,639 134,359 149,948
Proceeds from short term loans-related parties 361,521 247,000
88,000
Proceeds from equipment loans 45,359 - -
Proceeds from issuance of stock 130,000 350,000 1,320
Proceeds from short term convertible loan - 100,000 -
Proceeds from exercise of warrants & options 57,293 195,640 -
Proceeds from subordinated mezzanine debt 100,000 450,000 -
Loan assumed at acquisition of SCS - 150,000 -
Deferred financing fees - (35,523) -
Repayments of note payable & equipment loans (17,780) (10,287)
(55,457)
Repayments of short term convertible loan (100,000) - -
Repayment of short term debt-related party (141,000) (95,916) -
Net Cash Provided by Continuing Operations 451,087 1,485,273
183,811
Net Cash Used in Discontinued Operations (175,039) (231,334) -
Net Cash Provided by Financing Activities 276,048 1,253,939
183,811
NET DECREASE IN CASH AND
CASH EQUIVALENTS (2,899) (63,920) (43,708)
CASH AND CASH EQUIVALENTS
Beginning of year 6,131 70,051 113,759
End of year $3,232 $ 6,131 $ 70,051
See notes to consolidated financial statements.
SONO-TEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 2001, FEBRUARY 29, 2000 AND
FEBRUARY 28, 1999
NOTE 1: BUSINESS DESCRIPTION
The Company was incorporated in New York on March 21, 1975 for the
purpose of engaging in the development, manufacture, and sale of ultrasonic
liquid atomizing nozzles. Ultrasonic nozzle systems atomize low to medium
viscosity liquids by converting electrical energy into mechanical motion in
the form of high frequency (ultrasonic) vibrations which break liquids into
minute drops that can be applied to surfaces at low velocity. During Fiscal
Year 2001 and 2000, the Company also developed, manufactured, installed
and serviced cleaning systems for the semiconductor, disk drive and
precision cleaning industries through its wholly owned subsidiary Sono-Tek
Cleaning Systems, Inc. ("SCS").
NOTE 2: FINANCIAL CONSIDERATIONS AND MANAGEMENT'S
PLANS
Both the Company and its wholly owned subsidiary, SCS, incurred losses in
Fiscal Year 2000 and 2001. These losses led to an increase in the
Company's debt and negative cash flow. During Fiscal Year 2001, the
Company increased its borrowing from a bank, an investment banker, and
officers and directors of the Company. At February 28, 2001, the Company
was in default on its subordinated mezzanine debt with Norwood for failure
to make interest payments when due. The Company subsequently paid the
interest. In addition, subsequent to Fiscal Year End 2001, the Company's
discontinued operating segment was in default on a bank note for failure to
make interest and principal payments when due. The Company
subsequently made a partial payment on its past due balance, however, it did
not receive a waiver from the bank and the bank reserved all of its rights and
remedies.
During Fiscal Year 2001, the Company received additional cash from the
sale of common stock and the exercise of warrants. These influxes of cash
were not able to provide the Company with adequate amounts to pay its
debts. The Company continues to have difficulty paying vendors and
purchasing necessary raw materials.
Subsequent to the Fiscal Year End 2001, the Company took actions to limit
its losses and reduce negative cash flow. The spraying systems segment was
downsized to reflect the decline in market demand, and the sales force was
refocused to increase nozzle sales instead of fluxer sales. The cleaning and
drying segment, represented by SCS, terminated production of capital
equipment, but continues to service equipment and sell spare parts on a
limited basis. By decreasing operating costs and terminating thirty-two
employees, the Company anticipates generating income beginning in the
second quarter of Fiscal Year 2002. It is anticipated that this income will be
sufficient to cover current operating costs, and will permit partial payments
to vendors and pay the required principal payments on all debt. During the
first quarter of Fiscal Year 2002, the Company received additional financing
from Norwood and directors of the Company.
At present, the Company may not have access to adequate funds to meet its
operating and financial needs and to repay its past due debt, creditors may
take legal action for the repayment of past due indebtedness, and the
Company may not be able to restructure its past due obligations.
In order to decrease its losses, the Company moved to discontinue
operations of cleaning and drying systems segment during the first quarter
of Fiscal 2002 (see Note 6). The Company is refocusing on the sales of
ultrasonic nozzles and attempting to increase sales through diversifying the
product line while decreasing the reliance on the electronics industry.
Although the results of these actions cannot be predicted, the Company
believes that these steps are appropriate and will help the Company return to
profitability in Fiscal Year 2002.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing and refinancing as may be required, and to timely
dispose or sell off assets related to its discontinued operating segment.
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The accompanying consolidated financial statements of
Sono-Tek Corporation, a New York Corporation (the "Company"), include
the accounts of the Company and its wholly owned subsidiary, Sono-Tek
Cleaning Systems, Inc., a New Jersey Corporation ("SCS"), which the
Company acquired on August 3, 1999 (the "Acquisition"). All significant
intercompany accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents - Cash and cash equivalents consist of money
market mutual funds and short-term certificates of deposit with original
maturities of 90 days or less.
Supplemental Cash Flow Disclosure -
Years Ended
February 28, February 29, February 28,
2001 2000 1999
Interest paid
Continuing Operations $99,186 $52,015 $17,960
Discontinued Operations $35,966 $25,997 -
Income taxes paid - - -
Non-cash items:
Conversion of accrued interest to equity - - $40,984
Conversion of debt to equity - - $884,280
Interest expense for issuance of warrants $127,453 $106,846 -
Conversion of accrued bonus to equity - $17,188 -
Conversion of related party loan
and accrued interest to equity - $41,051 -
Stock issued and warrants and options
granted for services $7,500 $31,589 -
Stock issued for acquisition (Note 5) - $288,000 -
Warrants issued for acquisition (Note 5) - $44,000 -
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method for raw materials,
subassemblies and work-in-progress and the specific identification method
for finished goods. Consignment goods are spare parts used by outside sales
representatives for emergency repairs performed on customer's equipment.
Equipment, Furnishings and Leasehold Improvements - Equipment,
furnishings and leasehold improvements are stated at cost. Depreciation of
equipment and furnishings is computed by use of the straight-line method
based on the estimated useful lives of the assets which range from three to
five years.
Product Warranty - Expected future product warranty expense is recorded
when the product is sold.
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 $86,056
and $80,053 at February 28, 2001 and February 29, 2000, respectively.
Amortization of Discounts on Borrowings - A discount between the face
value of borrowings and the fair value of the proceeds received are
amortized over the term of the borrowing using the effective interest
method. Borrowings are reported net of the related unamortized discount.
Deferred Financing Fees - Deferred financing fees of $35,523 at February
28, 2001 are being amortized over the term of the related debt.
Accumulated amortization was $10,064 at February 28, 2001.
Research and Product Development Expenses - Research and product
development expenses represent engineering and other expenditures
incurred for developing new products, for refining the Company's existing
products and for developing systems to meet unique customer specifications
for potential orders or for new industry applications and are expensed as
incurred. Engineering costs directly applicable to the manufacture of
existing products are included in cost of goods sold.
Income Taxes - The Company accounts for income taxes under the asset
and liability method. Under this method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation allowance is recognized.
Earnings (Loss) Per Share - Basic earnings (loss) per share ("EPS") is
computed by dividing net income (loss) by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Stock
options granted but not yet exercised under the Company's stock option
plans are included for Diluted EPS calculations under the treasury stock
method.
Advertising Expenses - The Company expenses the cost of advertising in
the period in which the advertising takes place. Advertising expense for the
years ended February 28, 2001, February 29, 2000 and February 28, 1999
was $115,843, $131,939, and $110,805, respectively.
Equity Method Investment - The Company accounts for its investment in
PNR America LLC ("PNR America") on the equity method, whereby the
Company records its proportionate share of the earnings/loss of PNR
America (Note 9).
Long-Lived Assets - The Company periodically evaluates the carrying value
of long-lived assets, including intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived
asset is considered impaired when the anticipated undiscounted cash flow
from such asset is separately identifiable and is less than its carrying value.
In that event, a loss is recognized based on the amount by which the carrying
value exceeds the fair market value of the long-lived asset. Fair market
value is determined primarily using the anticipated cash flows discounted at
a rate commensurate with the risk involved.
In the fourth quarter of Fiscal Year 2001, the Company identified indicators
that goodwill related to two acquisitions, one made in Fiscal Year 2000 the
other in Fiscal Year 2001, was impaired. The indicators consisted of lack of
future orders, low profit on equipment sales and the termination of the two
principals of the previous S&K company that were responsible for
equipment sales. The Company estimated it will not likely realize positive
future cash flows from these acquired businesses and, therefore recorded a
write off of the goodwill related to such acquisitions (see Note 6).
Stock-Based Employee Compensation - The Company accounts for stock-
based compensation plans utilizing the provisions of Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees" and the Financial Accounting Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". Under SFAS 123, the Company will continue to apply the
provisions of APB 25 to its stock-based employee compensation
arrangements, and is only required to supplement its financial statements
with additional proforma disclosures.
Recognition of Revenue - Sales are recorded at the time title passes to the
customer, which, based on shipping terms, generally occurs when the
product is shipped to the customer. Based on prior experience, the
Company reasonably estimates its sales returns and warranty reserves. In
connection with the acquisition of SCS, the introduction of new product
lines, and the terms of certain equipment sales contracts with specific
acceptance and return provisions, the Company has no reasonable basis for
recognizing revenue related to certain deliveries that fall into this category.
Accordingly, the Company has billed its customers upon shipment of the
equipment and deferred the revenue recognition until such point in time that
the earnings process is complete.
In connection with the sale of capital equipment and services, the Company
also sells extended service contracts. The related revenue is deferred at the
date the contract is sold and recognized ratably over the life of the contract.
Management Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications - Certain amounts in the prior year financial statements
have been reclassified to conform to the current year presentation.
Impact of New Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS no. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"). This
statement establishes standards for derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The recognition of gains or losses resulting from
changes in the values of derivatives is based on the use of each derivative
instrument and whether it qualifies for hedge accounting. The Company
adopted SFAS 133 on March 1, 2001. The adoption of SFAS No 133 did
not have a material effect on the Company's result of operations of financial
condition.
NOTE 4: 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". Previously, the Company had two reportable
segments: spraying systems and cleaning and drying systems. Subsequent
to Fiscal Year End 2001, the Company moved to discontinue the cleaning
and drying system segment. As a result of these actions, the cleaning and
drying system segment is no longer applicable.
The spraying systems segment is primarily engaged in the business of
developing, manufacturing, selling, installing and servicing ultrasonic spray
equipment. The cleaning and drying systems segment was engaged in the
business of developing, manufacturing, selling, installing and servicing
cleaning 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:
Year Ended February 28, 2001
Spraying Cleaning/Drying
Systems Systems
(Continuing) (Discontinued) Total
Net Sales $4,306,895 $3,726,562 $8,033,457
Net Income (Loss) 375,310 (2,005,799) (1,630,489)
Capital Expenditures 124,433 428 124,861
Depreciation & Amortization Expense 94,679 881,167 975,846
Year Ended February 29, 2000
Spraying Cleaning/Drying
Systems Systems*
(Continuing) (Discontinued) Total
Net Sales $3,913,176 $884,435 $4,797,611
Net Loss (126,527) (546,199) (672,726)
Capital Expenditures 58,792 124,002 182,794
Depreciation & Amortization Expense 52,509 68,540 121,049
*Represents operating results commencing on August 3, 1999, the date of
the SCS Acquisition (Note 5).
The Company operated in a single reportable segment for the year ended
February 28, 1999.
NOTE 5: ACQUISITIONS
SCS - On August 3, 1999 the Company purchased all the outstanding stock
of SCS, a supplier of cleaning and drying systems for the semiconductor,
disk drive, and precision cleaning industries. SCS is a wholly owned
subsidiary of the Company.
The aggregate purchase price exceeded the fair value of net assets acquired
resulting in goodwill that was to be amortized on the straight-line basis over
15 years. Subsequent to the year ended February 28, 2001, the Company
discontinued the cleaning and drying systems segment. At February 28,
2001, the Company wrote off $669,697 remaining goodwill for this segment
due to the impairment.
Serec - On September 21, 2000, the Company acquired for $100,000, plus
closing costs, certain intellectual property and intangible assets of Serec
Corporation, a Rhode Island corporation which manufactured and sold
solvent based cleaning systems. Professional fees and other costs of
$10,313, $7,500 of which, was attributed to the issuance of common stock,
were capitalized as additional purchase price. The aggregate purchase price
of $110,313 was recorded as goodwill due to the inability to specifically
identify the values associated with the various intangible assets acquired.
The goodwill was to be amortized on the straight-line basis over five years.
Subsequent to the year ended February 28, 2001, the Company discontinued
the cleaning and drying systems segment. At February 28, 2001, the
Company wrote off $100,313 in goodwill due to the impairment.
NOTE 6: DISCONTINUED OPERATIONS
In order to decrease its losses, the Company moved to discontinue the
operations of cleaning and drying systems segment during the first quarter
of Fiscal 2002.
The accompanying statements of operations have been reclassified so that
the results for the cleaning and drying systems segment are classified as
discontinued operations for all periods presented. The assets and liabilities
of the discontinued operations have been reclassified in the February 28,
2001 and February 29, 2000 balance sheet as "net assets of discontinued
operations". The statements of cash flows and related notes to the
consolidated financial statements have also been reclassified to conform to
the discontinued operations presentation.
Summary operating results of the discontinued operations for each fiscal
year are as follows:
February 28, February 29,
2001 2000
Revenues $3,726,562 $884,435
Expenses 5,732,361 1,430,634
Loss from discontinued operations $(2,005,799) $(546,199)
A summary of the net assets of the discontinued operations are as follows:
February 28, February 29,
2001 2000
Assets
Cash $183 $2,046
Accounts Receivable, net 551,028 899,630
Inventory, net 631,970 588,640
Prepaid Expenses 783 23,905
Total current assets 1,183,963 1,514,221
Goodwill 487,377 1,232,571
Equipment and furnishings, net 87,935 113,167
Other assets 0 6,375
Total assets $1,759,276 $2,866,334
Liabilities
Current Liabilities
Notes payable (Note 13) $238,917 $209,664
Accounts payable 603,146 364,368
Accrued expenses 239,200 139,796
Customer deposits 182,940 29,795
Deferred revenue 0 725,491
Total current liabilities 1,326,524 1,469,114
Long term debt 42,611 246,902
Total liabilities 1,306,814 1,716,016
Net assets $452,462 $1,150,318
NOTE 7: INVENTORIES
Inventories for continuing operations consist of the following:
February 28, February 29,
2001 2000
Raw Materials $746,767 $593,605
Work-in-process 131,996 48,224
Consignment 9,037 11,908
Finished Goods 120,177 172,566
Totals 1,007,977 826,303
Less: Allowance (211,281) (190,564)
$796,696 $635,739
NOTE 8: EQUIPMENT, FURNISHINGS AND LEASEHOLD
IMPROVEMENTS
Equipment, furnishings and leasehold improvements for continuing
operations consist of the following:
February 28, February 29,
2001 2000
Laboratory equipment $79,441 $79,441
Machinery and equipment 393,051 331,143
Leasehold improvements 41,071 20,535
Furniture and fixtures 205,040 163,051
Totals 718,603 594,170
Less: accumulated depreciation (508,928) (450,344)
$209,675 $143,826
NOTE 9: LONG-TERM EQUITY INVESTMENT
In January 2000, in connection with the formation of PNR America, LLC, a
Delaware limited liability company ("PNR America"), the Company
invested $19,600 in PNR America for a 49% ownership interest. Flowtech
Srl, an Italian company ("Flowtech"), a pressure nozzle manufacturer, owns
the remaining 51%. 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 are
controlled by Flowtech. Because the Company does not control PNR
America it is not consolidated for reporting purposes.
The Company shares its facilities and personnel with PNR America. The
Company allocated costs of $104,199 and $13,967 to PNR America during
Fiscal year 2001 and for the period from inception through to February 29,
2000, respectively. Balances due from PNR America are $45,250 and
$13,967 at February 28, 2001 and February 29, 2000, respectively.
PNR America's year end is December 31, however, for financial reporting
purposes the Company reflects 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 February 28, 2001 was $45,250. The Company recognized,
during the twelve month period ended February 28, 2001 and the period
from inception to February 29, 2000, $60,393 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.
Subsequent to the year ended February 28, 2001, the Company discontinued
its relationship with PNR America.
The condensed financial information of PNR America as of and for the
twelve month period ended February 28, 2001 is as follows:
Revenue $190,452
Expense 382,548
Net loss-twelve months ended February 28, 2001 $(192,088)
Total assets - current $51,142
Due to Sono-Tek $45,250
Due to Flowtech 148,501
Accrued Expenses 18,579
Total Liabilities 212,330
Stockholders' deficiency (161,188)
Total liabilities and stockholders' deficiency $51,142
NOTE 10: ACCRUED EXPENSES
Accrued expenses from continuing operations consist of the
following:
February 28, February 29,
2001 2000
Accrued compensation $139,469 $60,367
Professional fees 93,176 84,426
Estimated warranty costs 20,175 19,800
Accrued commissions 24,947 44,861
Other accrued expenses 40,293 20,283
Accrued interest 51,325 18,415
Due to affiliate 0 19,600
$369,385 $267,752
NOTE 11: REVOLVING LINE OF CREDIT
On January 2, 1998, the Company entered into a $150,000 line of credit
which carries an interest rate of prime plus 2% (10.50% at February 28,
2001). On February 15, 1999, the line of credit was restructured and
increased to $300,000. On February 1, 2000, the line of credit was increased
to $350,000. The loan is collateralized by accounts receivable, inventory
and all other personal property of the Company and is guaranteed by the
former CEO of the Company subject to certain priority liens on SCS assets.
The line of credit is payable on demand. As of February 28, 2001 and
February 29, 2000, the balance was $350,000 and $334,307, respectively.
NOTE 12: SUBORDINATED CONVERTIBLE LOAN
On February 15, 2000, the Company entered into a 90 day $100,000
subordinated convertible loan with a non-affiliated individual convertible
into common stock at $1.00 per share. The loan and related interest of 8 %
was repaid upon maturity, May 15, 2000. As part of the loan agreement, the
lender was eligible to receive a warrant to purchase 50,000 shares of the
Company's common stock, if the loan was not converted to equity or was
not repaid. When the loan was repaid, the lender received a five-year
warrant to purchase 50,000 shares of the Company's common stock at $1.00
per share in accordance with the provisions of the agreement. The warrant
expires on May 15, 2005. During Fiscal Year 2001, the Company
recognized a non-cash interest charge of $64,033 based on the fair market
value of the warrants granted.
NOTE 13: LONG-TERM DEBT
Long-term debt of continuing operations consists of the following:
February 28, February 29,
2001 2000
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 (10.5% at
February 28, 2001) through February 2003. $26,533 $37,508
Equipment loan, bank, collateralized by related
production equipment, payable in monthly
installments of principal of $756 plus interest
at 2% over the bank's prime rate (10.5% at
February 28, 2001) through May 2005. 38,555 0
Total long term debt 65,088 37,508
Due within one year (21,777) (10,868)
Due after one year $43,311 $26,641
Long-term debt is payable as follows (as of February 28, 2001):
Fiscal Year ending February,
2002 $21,777
2003 22,900
2004 9,072
2005 9,072
2006 2,267
$65,088
Included in long-term debt of discontinued operations (see Note 6) are the
following debt instruments:
February 28, February 29,
2001 2000
Note payable, bank, collateralized by all assets of
SCS, personally guaranteed by the two former
owners of SCS, payable in monthly installments
of $17,852, including interest at 9.5%, through
January 2002. $207,884 $387,624
Equipment loan, bank, collateralized by related
cleanroom equipment, payable in monthly
installments of principal of $2,028 plus interest
at 2% over the bank's prime rate (10.5% at
February 28, 2001) through December 2002. 44,611 68,944
Equipment loan, bank, collateralized by related
production equipment, payable in monthly
installments of principal of $558 plus interest
at 2% over the bank's prime rate (10.5%
at February 28, 2001, through May 2005. 29,033 -
Total long term debt 281,528 456,568
Due within one year (238,917) (204,072)
Due after one year $42,611 $252,496
Management believes that the fair value of the debt payable to the bank
approximates its carrying value because of the variable interest rate on the
loan.
Subsequent to the Fiscal Year End, the Company received notice that the
discontinued operations segment was in default of its note payable for
failure to make principal and interest payments when due. The Company
subsequently made a partial payment of principal and interest as required,
however, it did not receive a waiver from the bank.
NOTE 14: SUBORDINATED MEZZANINE DEBT
On September 30, 1999, the Company entered into a 12%, $450,000 Note
and Warrant Purchase Agreement with Norwood Venture Corporation
("Norwood Note"). On December 22, 2000 Norwood amended the Note
and Warrant Purchase Agreement to increase the Note to $550,000. The
Norwood Note, as amended, requires interest payments through September
2001, followed by monthly principal payments of $15,278 and interest
through September 2004. The Norwood Note is collateralized by certain
assets of the Company, equity interests in SCS and assigned life insurance
policies on one director and one former director of the Company. The
Norwood Note, among other things, restricts the payment of dividends. At
February 28, 2001, the Company was in default for the failure to pay interest
when due. Subsequent to Fiscal Year End, the interest was paid and the
default cured.
In addition, the original Norwood 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 exercise price of $.30, the fair market value
of the Company's common stock on September 30, 1999. The fair market
value, as determined by an independent appraisal, of the Put Warrants was
determined to be $0.07 per share, and is accounted for as a discount to the
Norwood Note and will be amortized over the life of the principal
repayment term of the agreement. In connection with the amendment, dated
December 22, 2000 an additional 244,444 Warrant shares were granted at an
exercise price of $0.30 per share. These new warrants have been valued
using the same method as the original warrant. The unamortized discount at
February 28, 2001 is $62,063. The Put Warrants can be put to the Company
from May 29, 2006 to May 29, 2007 as defined by the agreement, and they
expire on September 30, 2010.
On April 30, 2001, Norwood amended the Norwood Note and increased the
loan by an additional $300,000 and was granted 733,333 Warrant shares on
similar terms, except the new shares are exercisable at $0.10 per share. In
connection with this additional loan, $50,000 of advances from certain
shareholders and directors were repaid (See note 20).
The deferred financing fees incurred to acquire the Norwood Note is being
amortized over the life of the loan. Accumulated amortization of the
deferred financing fees was $10,064 at February 28, 2001.
NOTE 15: COMMITMENTS AND CONTINGENCIES
Litigation - Subsequent to Fiscal Year End, the Company has agreed to a
plan to discontinue operations of its cleaning and drying systems operating
segment and canceled several customer orders. As a result of such actions,
there may be lawsuits, claims or proceedings instituted or asserted against
the Company. During the normal course of business, the Company is
involved in various routine legal matters. The Company believes the
outcome of these matters will not have a material adverse effect on the
Company's financial statements.
Leases - During Fiscal Year 2001, the Company entered into a lease
agreement for additional production space in Milton, NY. The lease, which
terminates November 30, 2002, has an annual rent of $18,000. The
Company has the option to renew the lease for a period of three years after
expiration. Subsequent to year end, the Company vacated the space due to
downsizing.
Total rent expense was approximately $124,500, $109,000, and $73,000 for
the three years ended February 28, 2001, February 29, 2000, and February
28, 1999, respectively.
The Company has the following future annual minimum obligations under
these leases as follows:
Fiscal Year ending February
2002 $123,000
2003 92,250
$215,250
Subsequent to the Fiscal Year End, the Company vacated a warehouse and
production area based on an agreement reached with its landlord. The
adjusted minimum obligations, based on the reduced rental area is as
follows:
Fiscal Year ending February
2002 $102,000
2003 72,000
$174,000
NOTE 16: INCOME TAXES
The annual provision (benefit) for income taxes differs from amounts
computed by applying the maximum U.S. Federal income tax rate to pre-tax
income (loss) as follows:
February 28, February 29, February 29,
2001 % 2000 % 1999 %
Computed tax (benefit)
expense at maximum rate $(554,366) (34.0) $(228,727) (34.0)
$(275,639) (34.0)
Non-deductible goodwill 256,766 2.5 16,957 2.5 - -
Other permanent differences 6,457 1.3 8,782 1.3 2,574 0.3
Tax effect of debt
conversion costs - - 121,898 15.0 - -
Change in valuation
allowance for tax
effect of operating
loss carryforwards (291,143) 30.2 (202,988) 30.2 151,167
18.7
Provision for
income taxes $ - - $ - - $ -
- -
The net deferred tax asset is comprised of the following:
February 28, February 29,
2001 2000
Allowance for doubtful accounts $78,000 $3,000
Accumulated depreciation 29,000 31,000
Accumulated amortization 9,000 8,000
Inventory 232,000 157,000
Noncurrent rent payable 4,000 4,000
Accrued vacation 16,000 15,000
Accrued expenses 53,000 50,000
Net operating losses and other
carryforwards 2,028,000 1,877,000
Net deferred tax assets before
valuation allowance 2,449,000 2,155,000
Deferred tax asset valuation allowance (2,449,000) (2,155,000)
Net deferred tax asset $ - $ -
The change in the valuation allowance was $1,255,000 and $543,000 for the
years ended February 28, 2001 and February 29, 2000, respectively.
At February 29, 2000, the Company has available net operating loss
carryforwards of approximately $5,483,849 for income tax purposes which
expire between fiscal 2001 and fiscal 2020. The Company also has research
and development credits of approximately $136,000, which expire between
fiscal 2010 and fiscal 2020. The net operating loss and credit carryforwards
generated by S&K prior to the acquisition are subject to limitations under
Section 382 of the Internal Revenue Code.
NOTE 17: CAPITAL STOCK
On May 5, 1999, the Company commenced a private placement through the
Private Placement Memorandum to raise $500,000 by offering 1,666,667
shares of common stock at $0.30 per share (the "Private Placement").
During Fiscal Years 2001 and 2000 the Company completed the sale of
130,000 and 1,166,666 shares, respectively, of common stock pursuant to
the Private Placement.
During Fiscal Year 1999, in connection with the conversion of the
Convertible Secured Subordinated Promissory Notes, on February 26, 1999
the Company modified the terms of the original detachable stock warrants
reducing the exercise price from $1.50 per share to $0.65 per share on the
756,840 warrants outstanding (See Note 18). During Fiscal Years 2001 and
2000, 85,680 and 300,985, respectively, of the above mentioned warrants
were exercised to purchase the Company's common stock, resulting in
$55,692 and $195,640, respectively, of new capital.
NOTE 18: STOCK OPTIONS AND WARRANTS
Stock Options - Under the 1993 Stock Incentive Plan, as amended, ("1993
Plan") options can be granted to officers, directors, consultants and
employees of the Company and its subsidiaries to purchase up to
1,500,000of the Company's common shares. Options granted under the
1993 Plan expire on various dates through 2011.
Under the 1993 Stock Incentive Plan, option prices must be at least 100% of
the fair market value of the common stock at time of grant. For qualified
employees, except under certain circumstances specified in the 1993 plan or
unless otherwise specified at the discretion of the Board of Directors, no
option may be exercised prior to one year after date of grant, with the
balance becoming exercisable in cumulative installments over a three year
period during the term of the option, and terminate at a stipulated period of
time after an employee's termination of employment.
During Fiscal Year 2001, the Company granted options for 135,000 shares
exercisable at between $0.92 per share and $1.97 per share to qualified
employees, 100,000 shares exercisable at $1.625 per share to consultants of
the Company, and 60,000 shares exercisable at between $0.625 per share
and $1.48 per share to Directors of the Company. During Fiscal Year 2001,
compensation expense of $26,870 was recognized based on the fair value of
the vested options granted to consultants. During Fiscal Year 2001, an
option for 2,562 shares of the Company's stock, at $.625 per share was
exercised.
During Fiscal Year 2000, the Company granted options for 365,000 shares
exercisable at between $0.35 per share and $0.75 per share to qualified
employees, and 20,000 shares exercisable at $0.24 per share to a Director of
the Company and 10,000 shares exercisable at $0.563 per share to a
consultant of the Company. During Fiscal Year 2000, compensation
expense of $7,783 was recognized based on the fair value of fully vested
options granted to non-employees. During Fiscal Year 1999, the Company
granted options for 172,500 shares exercisable at between $0.38 per share
and $0.60 per share to qualified employees, and 20,000 shares exercisable at
$0.30 per share to a consultant of the Company. During Fiscal Year 1999
compensation expense of $4,243 was recognized based on the fair value of
fully vested options granted to non-employees.
A summary of the 1993 Plan activity for the three year period ended
February 28, 2001 is as follows:
2276:
Weighted Average
Stock Options Exercise Price
Outstanding Exercisable Outstanding Exercisable
Balance - March 1, 1998 557,624 457,875 $.40 $.38
Granted Fiscal Year 1999 192,500 .55
Canceled Fiscal Year 1999 (43,500) (.39)
Exercised Fiscal Year 1999 (4,000) (.33)
Balance - February 28, 1999 702,624 512,049 .44 .39
Granted Fiscal Year 2000 395,000 .59
Canceled Fiscal Year 2000 (127,500) (.07)
Balance-February 29, 2000 970,124 598,699 .48 .41
Granted Fiscal Year 2001 295,000 1.20
Canceled Fiscal Year 2001 (142,500) (.08)
Exercised Fiscal Year 2001 (2,562) (.63)
Balance - February 28, 2001 1,120,062 752,187 $.69 $.52
The fair value of options granted under the Company's fixed stock option
plans during Fiscal Years 2001, 2000, and 1999 were estimated on the dates
of grant using the minimum value options-pricing models with the following
weighted-average assumptions used: expected volatility of approximately
103%, 94%, and 83% in Fiscal Years 2001, 2000, and 1999, respectively,
risk free interest rate of approximately 5.75%, 5.71%, and 5.25% in Fiscal
Years 2001, 2000, and 1999, respectively, and expected lives of option
grants of approximately five years.
The estimated fair value of options granted during Fiscal Years 2001, 2000,
and 1999 were $.67 per share, $.24 per share, and $.25 per share,
respectively. The Company applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for the 1993 Plan. Had
compensation cost for the Company's stock option plan been determined
based on the fair value at the option grant dates for awards in accordance
with the accounting provisions of SFAS 123, the Company's net income
(loss) and basic and diluted earnings (loss) per share for the years ended
February 28, 2001, February 29, 2000 and February 28, 1999 would have
been changed to the pro forma amounts indicated below:
2001 2000 1999
Net Loss:
As reported $(1,630,489) $(672,726) $(810,702)
Pro forma $(1,758,456) $(744,821) $(882,675)
Basic and diluted loss per share (see Note 19):
As reported $(.18) $(.09) $(.18)
Pro forma $(.20) $(.10) $(.20)
Warrants - During Fiscal 2001, the following warrants were issued.
During Fiscal Year 2001, warrants to purchase 50,000 shares of the
Company's common stock were issued to an officer of the Company in
acknowledgment of short term loans granted to the Company in Fiscal Year
2000. One warrant is to purchase 25,000 shares of the Company's common
stock at $0.50 per share, the other warrant is to purchase 25,000 shares of
the Company's common stock at $1.00 per share. Both warrants expire
March 3, 2005. The Company recognized a non-cash interest charge of
$11,799 based on the fair market value of the warrants granted.
During Fiscal Year 2000, the Company entered into a short term loan of
$100,000 with an outside non-affiliated individual. The loan and related
interest was repaid in May 2000. As part of the loan agreement, when the
loan was repaid, the lender received a warrant to purchase 50,000 shares of
the Company's common stock at a price of $1.00 per share. During Fiscal
Year 2001, the Company recognized a non-cash interest charge of $64,033
based on the fair market value of the warrants granted.
During Fiscal Year 1999, the Company converted the Convertible Secured
Subordinated Promissory Notes on February 26, 1999 to equity concurrent
with changing the conversion price from $.70 to $.30 per share. In addition,
the Company modified the terms of the original detachable stock warrants
reducing the exercise price from $1.50 per share to $0.65 per share. After
conversion of the note, there were 756,840 warrants outstanding. The
estimated fair value of these warrants at the date issued was $0.07 per share
using the minimum value options-pricing model and assumptions similar to
those used for valuing the Company's stock options as described above,
except the expected lives of the warrants is two years. A non-cash charge of
$354,280 was recorded during Fiscal Year 1999 for the conversion of debt
and modification of the warrants.
During Fiscal Year 2001 and 2000, 85,680 and 300,985, respectively, of the
above mentioned warrants were exercised to purchase 386,665 shares of the
Company's common stock.
NOTE 19: LOSS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
February 28, February 29, February 28,
2001 2000 1999
Numerator for basic and diluted
2364: Earnings (loss) per share:
Continuing operations $375,310 $(126,527) $(810,702)
Discontinued operations $(2,005,799) $(546,199) -
Net loss $(1,630,489) $(672,726) $(810,702)
Denominator:
Denominator for basic earnings (loss)
per share -weighted average shares 9,011,310 7,511,186 4,386,799
Effects of dilutive securities:
Warrants 0* 0* 0*
Stock options for employees
and outside consultants 0* 0* 0*
Denominator for diluted earnings
(loss) per share 9,011,310*** 7,511,186** 4,386,799**
Basic Earnings (Loss) Per Share-
Continuing Operations $.04 $(.02) $(.18)
Discontinued Operations $(.22) $(.07) -
Net Loss $(.18) $(.09) $(.18)
Dilute Earnings (Loss) Per Share-
Continuing Operations $.04 $(.02) $(.18)
Discontinued Operations $(.22) $(.07) -
Net Loss $(.18)**** $(.09)**** $(.18)****
* The warrants and stock options for employees and outside consultants are
antidilutive during Fiscal Year 2001, 2000 and 1999 as a result of the net
loss and therefore are not considered in the Diluted EPS calculation.
**The effect of considering the warrants issued in connection with the debt
conversion during Fiscal Year 1999, the convertible secured subordinated
promissory notes and related warrants, the warrants issued at the time of the
acquisition of SCS, the warrants issued in acknowledgement of the short
term loans, the warrants issued in connection with the Private Placement and
the Norwood warrants (see Note 18) at February 28, 2001, February 29,
2000 and February 28, 1999 are antidilutive and therefore not considered for
the diluted (loss) earnings per share calculations.
***At February 28, 2001, the Diluted EPS calculation for discontinued
operations and net loss will not consider the stock options and warrants as a
result of the loss from discontinued operations and net loss.
****Under the assumption that stock options and warrants were not
antidilutive as described in * and **, the denominator for diluted loss per
share would be 11,006,435, 10,570,740, and 5,766,578 at February 28,
2001, February 29, 2000, February 28, 1999, respectively.
NOTE 20: RELATED PARTY TRANSACTIONS
Short term loans - related parties - From time to time the Company has
required short term loans to meet its cash requirements. Employees have
made advances to the Company in order to purchase raw materials and pay
operating expenses. At Fiscal Year End 2001, the amount owed one
employee was $27,000, which was added to the short term loans. Most of
these loans have been provided by officers and directors of the Company, at
the rate of prime plus 2% (9.75% to 11.50% at February 28, 2001). During
Fiscal Year 2001 a total of $334,000 was loaned by these individuals to the
Company, of which $241,000 was repaid. During Fiscal Year 2001 and
2000, interest expense relating to these loans was $26,395 and $17,989,
respectively. At February 28, 2001 and February 29, 2000, the accrued
interest on the loans was $37,075 and $13,165, respectively, Subsequent to
year end, loans in the amount of $146,000 were repaid with interest. A non
cash charge of $11,799 was made to interest expense for the issuance of
warrants to a note holder (see Note 18).
Subordinated convertible loans - related parties - Two subordinated
convertible loans for a total of $150,000 were converted from S&K debt to
Company debt on August 3, 1999, the date of acquisition. The notes are
subordinate to the long term debt with S&K's bank. The notes are payable
August 3, 2002 with interest of 6%. The unpaid principal balance is
convertible into common stock at $1.00 per share. If the Company's
common stock trades at a value equal to or greater than $2.00 per share for
thirty consecutive trading days, the unpaid principal balance shall
automatically convert to common stock.
Consulting agreement - At February 28, 2001 and February 29, 2000,
accrued expense includes a liability for prior years' consulting fees to the
Company's former Chairman of the Board of $69,076 recorded from 1993
to 1996.
NOTE 21: SIGNIFICANT CUSTOMERS AND FOREIGN SALES
From continuing operations - For the year ended February 28, 2001, one
customer accounted for 17% of the Company's sales and 17% of the
Company's trade receivables at February 28, 2001.
For the year ended February 29, 2000, one customer accounted for 16% of
the Company's sales and 29% of the Company's trade receivables at
February 29, 2000. For the year ended February 28, 1999, one of the
Company's customers accounted for 17% of sales and 29% of trade
receivables at February 28, 1999.
Export sales to customers located outside the United States were
approximately as follows:
February 28, February 29, February 28,
2001 2000 1999
Western Europe $434,000 $259,000 $235,000
Far East 60,000 156,000 100,000
Other 565,000 393,000 285,000
$1,059,000 $808,000 $620,000
From discontinued operations - For the year ended February 28, 2001, four
customers accounted for 74% of the discontinued operations sales, and two
of those customers accounted for 89% of the discontinued operations trade
receivables at February 28, 2001.
For the year ended February 29, 2000, four customers accounted for 75% of
the discontinued operations sales and one of these customers accounted for
13% of the discontinued operations trade receivables at February 29, 2000.
Export sales to customers located outside the United States were
approximately as follows:
February 28, February 29,
2001 2000
Western Europe $263,000 $177,000
Far East 0 7,000
$263,000 $184,000
NOTE 22: SUBSEQUENT EVENTS
On April 23, 2001, the Company began to take actions to decrease the losses
generated by the cleaning and drying systems segment by implementing a
plan to discontinue this segment's operations (see Note 6). The Company
refocused its operations in the spraying systems segment, specifically the
ultrasonic nozzles. Upon communicating this plan to a certain customer of
the affected segment, the Company believes that a purchase order for a
significant piece of equipment, in production at February 28, 2001, will be
canceled, jeopardizing other past due balances from this customer. The
expected ultimate completion and sale of this piece of equipment, as well as
the collection of past due balances is uncertain, and will be evaluated during
the close of the Company's first quarter of Fiscal Year 2002.
On April 23, 2001, Essex Products International, Inc. ("EPI") notified SCS
of the termination of the Manufacturer's Representative Agreement dated
August 23, 2000 for cause by SCS. SCS has denied that the Agreement was
properly terminated for cause. The Agreement requires SCS to continue
fixed payments due through July 2001 upon cancellation, unless SCS
canceled the agreement for cause on the part of EPI. SCS also believes it
had sufficient cause to terminate the Agreement. The Company believes
that the agreement was canceled without cause by EPI, and therefore the
Company is entitled to Kevin Schumacher's, (a principal of EPI and former
director of the Company) unvested, 300,000 shares of common stock issued
him in connection with the Company's acquisition of S&K and to consider
the balance (April 2001 to July 2001) of the fixed payments due EPI,
forfeited. This matter will likely result in a legal dispute, the outcome of
which is uncertain, however, it should not result in adjustments to the
February 28, 2001 Fiscal Year financial statements as all amounts due EPI
have been accrued.
Subsequent to the Fiscal Year End, Norwood amended the Norwood Note
and Warrant Purchase Agreement (see Note 14) on April 30, 2001 to
increase the Note to $850,000 and the Warrant shares to 2,077,777. The
monthly principal payments to commence in October 2001 are increased to
$23,612 per month accordingly, the balance sheet reflects this monthly rate
in reporting the related current maturities. The additional 733,333 Warrant
shares will be valued at $80,667 which is accounted for as a discount and
will be imputed as additional interest expense over the term of the loan.
Subsequent to the Fiscal Year End, the Company repaid $146,000 of
principal plus interest on its short term related party loans (Note 20).
Subsequent to the Fiscal Year End, the Company's subsidiary was in default
of the discontinued operations Note Payable (see Note 13). The Company
paid a portion of the past due principal and interest, however, the Company
did not obtain a waiver and the bank reserved all of its rights and remedies.
NOTE 23: QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended February 28, 2001 and February 29, 2000. These quarterly
results have been reclassified from those previously reported in Form 10-
Q's filed with the Securities and Exchange Commission so the results of
operations for cleaning and drying systems operating segment, that was
discontinued subsequent to the Fiscal Year End, are classified as
discontinued operations for all periods presented.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
Fiscal Year Ended February 28, 2001
Net Revenues $967,005 $1,203,816 $1,190,617 $945,457 $4,306,895
Gross profit 534,017 648,184 750,364 552,321 2,484,886
(Loss) income from
continuing operations (36,508) 173,649 252,190 (14,021) 375,310
Loss from discontinued
operations (227,221) (88,757) (188,168) (1,501,653) (2,005,799)
Net (loss) income $(263,729) $84,892 $64,022 $(1,515,674)
$(1,630,489)
Basic earnings (loss) per share
(Loss) income from
continuing operations $(0.00) $0.02 $0.03 $(0.00) $0.04
Loss from discontinued
operations $(0.03) $(0.01) $(0.02) $(0.16) $(0.22)
Net (loss) income $(0.03) $0.01 $0.01 $(0.17) $(0.18)
Diluted earnings (loss) per share
(Loss) income from
continuing operations $(0.00) $0.02 $0.02 $(0.00) $0.04
Loss from discontinued
operations $(0.03) $(0.01) $(0.02) $(0.16) $(0.22)
Net (loss) income $(0.03) $0.01 $0.01 $(0.17) $(0.18)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
Fiscal Year Ended February 29, 2000
Revenues $805,329 $1,215,324 $1,036,179 $856,344 $3,913,176
Gross profit 459,758 594,743 490,388 376,180 1,921,069
(Loss) income from
continuing operations (91,094) 91,231 9,051 (135,715) (126,527)
Loss from discontinued
operations - (29,629) (10,669) (505,871) (546,199)
Net (loss) income $(91,094) $61,602 $(1,648) $(641,586)
$(672,726)
Basic earnings (loss) per share
(Loss) income from
continuing operations $(0.01) $0.01 $0.00 $(0.02) $(0.02)
Loss from discontinued
operations - $(0.00) $(0.00) $(0.07) $(0.07)
Net (loss) income $(0.01) $0.01 $(0.00) $(0.09) $(0.09)
Diluted earnings (loss) per share
(Loss) income from
continuing operations $(0.01) $0.01 $0.00 $(0.02) $(0.02)
Loss from discontinued
operations - $(0.00) $(0.00) $(0.07) $(0.07)
Net (loss) income $(0.01) $0.01 $(0.00) $(0.09) $(0.09)
SCHEDULE II
SONO-TEK CORPORATION
VALUATION AND QUALIFYING ACCOUNTS FROM CONTINUING
OPERATIONS
Column C
Column A Column B Additions Column D Column E
Charged
Balance (Credited) Charged to Balance
at Beginning to Costs and to Other at End
Description of Period Expenses Accounts Deductions* of Period
Allowance for doubtful accounts, Year Ended:
February 28, 2001 $32,997 $83,584 $0 $0 $116,581
February 29, 2000 $6,000 $26,997 $0 $0 $32,997
February 28, 1999 $1,000 $5,000 $0 $0 $6,000
* Represents write-offs, net of recoveries, of uncollectible accounts.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf
by the undersigned, thereto duly authorized.
Dated: June 13, 2001
Sono-Tek Corporation
(Registrant)
By: /s/ Christopher L. Coccio
Christopher L. Coccio, Chief Executive Officer and President
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and
officers of Sono-Tek Corporation, a New York corporation, which is filing its
Annual Report on Form 10-K with the Securities and Exchange Commission
under the provisions of the Securities Exchange Act of 1934, as amended,
hereby constitute and appoint Christopher L. Coccio and Kathleen N. Martin
and each of them their true and lawful attorney-in-fact and agent, with full
power and substitution and re-substitution, for him and her and in his or her
name, place and stead, in any and all capacities, to sign such Form 10-K and
any or all amendments to the Form 10-K, and all other documents in connection
therewith to be filed with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all interests and purposes as each of them might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/Christopher L Coccio June 13, 2001 /s/Samuel Schwartz June 13, 2001
Christopher L. Coccio Samuel Schwartz
Chief Executive Officer Acting Chair and Director
President and Director
/s/Harvey L Berger June 13, 2001 /s/James L. Kehoe June 13, 2001
Harvey L. Berger James L. Kehoe
Director Director
/s/Jeffrey O. Speigel June 13, 2001 /s/J. Duncan Urquhart June 13, 2001
Jeffrey O. Speigel J. Duncan Urquhart
Director Director
/s/William J. McCormickJune 13, 2001 /s/Kathleen N. Martin June 13, 2001
William J. McCormick Kathleen N. Martin
Vice President Treasurer and Chief Financial Officer
/s/R. Stephen Harshbarger June 13, 2001
R. Stephen Harshbarger
Vice President