SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: August 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-16035
SONO-TEK CORPORATION
(Exact name of registrant as specified in its charter)
New York 14-1568099
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2012 Rt. 9W, Milton, NY 12547
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone no., including area code: (845) 795-2020
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding as of
Class October 9, 2001
Common Stock, par value $.01 per share 9,092,354
SONO-TEK CORPORATION
INDEX
Part I - Financial Information Page
Item 1-Consolidated Financial Statements:
Consolidated Balance Sheets - August 31, 2001 (Unaudited) and
February 28, 2001 1
Consolidated Statements of Operations - Six Months and
Three Months Ended August 31, 2001 and 2000 (Unaudited) 2
Consolidated Statements of Cash Flows - Six Months and
Three Months Ended August 31, 2001 and 2000 (Unaudited) 3
Notes to Consolidated Financial Statements 4 - 10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 15
Item 3 - Quantitative and Qualitative Disclosure About Market Risk 15
Part II - Other Information 15 - 16
Signatures 17
12
SONO-TEK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, February 28,
2001 2001
Current Assets Unaudited Audited
Cash and cash equivalents $ 155,350 $ 3,232
Accounts receivable (less allowance of $34,484
and $116,581 at August 31 and February 28,
respectively) 526,766 593,605
Inventories (Note 4) 652,761 796,696
Prepaid expenses and other current assets 82,807 97,093
--------- ---------
Total current assets 1,417,684 1,490,626
--------- ---------
Equipment, furnishings and leasehold improvements
(less accumulated depreciation of $511,007
and $508,928 at August 31 and February 28,
respectively) 173,504 209,675
Intangible assets, net:
Patents and patents pending (Note 1) 22,914 25,640
Deferred financing fees 21,907 25,459
--------- ---------
Total intangible assets 44,821 51,099
Net assets of discontinued operations (Note 3) - 452,462
Net investment in affiliate - 8,068
Other assets 6,666 100
--------- ---------
TOTAL ASSETS $1,642,675 $2,212,030
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $427,962 $841,267
Accrued expenses 390,472 369,386
Revolving Line of Credit 344,000 350,000
Short term loans-related parties (Notes 6) 286,084 459,605
Current maturities of long term debt 22,484 21,777
Current maturities of subordinated
convertible loans 60,000 -
Current maturities of subordinated
mezzanine debt (Note 7) 259,732 76,390
--------- ---------
Total current liabilities 1,790,734 2,118,425
Subordinated mezzanine debt 475,874 411,547
Long term debt, less current maturities 31,847 43,311
Subordinated convertible loans 90,000 150,000
Estimated future costs of discontinued
operations (Note 3) 479,037
--------- ---------
Total liabilities 2,867,492 2,723,283
--------- ---------
Commitments and Contingencies - -
Put Warrants (Note 7) 174,778 94,111
Stockholders' Equity
Common stock, $.01 par value;
25,000,000 shares authorized,
9,092,354 shares issued and outstanding at
August 31 and February 28, respectively 90,924 90,924
Additional paid-in capital 6,008,834 6,007,037
Accumulated deficit (7,499,354) (6,703,325)
----------- -----------
Total stockholders' deficiency (1,399,595) (605,364)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $1,642,675 $2,212,030
========== ==========
See notes to consolidated financialstatements.
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended Three Months Ended
August 31, August 31,
Unaudited Unaudited
2001 2000 2001 2000
--------------------- ---------------------
Net Sales $1,674,331 $2,170,821 $970,046 $1,203,816
Cost of Goods Sold 672,578 988,619 352,398 555,632
--------- --------- -------- ---------
Gross Profit 1,001,753 1,182,202 617,648 648,184
--------- --------- -------- ---------
Operating Expenses
Research and product development
costs 185,452 175,375 99,916 71,092
Marketing and selling expenses 328,825 406,213 150,681 205,106
General and administrative costs 292,373 260,720 155,014 144,405
-------- --------- ------- --------
Total Operating Expenses 806,650 842,308 405,611 420,603
-------- --------- ------- --------
Operating Income 195,103 339,894 212,037 227,581
Interest Expense (115,021) (155,335) (71,592) (38,911)
Loss from Affiliate (9,858) (52,027) - (18,023)
Interest and Other Income 2,976 4,609 1,504 3,002
-------- -------- -------- --------
Income from Continuing Operations
Before Income Taxes 73,200 137,141 141,949 173,649
Income Tax Expense 0 0 0 0
-------- -------- ------- -------
Income from Continuing Operations 73,200 137,141 141,949 173,649
Loss from Discontinued Operations (869,229) (315,978) (87,904) (88,757)
-------- -------- -------- --------
Net (Loss) Income $(796,029) $(178,837) $54,045 $84,892
========= ========= ======= =======
Basic (Loss) Earnings Per Share
Earnings from continuing operations $ 0.01 $ 0.02 $0.02 $0.02
Loss from discontinued operations (0.10) (0.04) (0.01) (0.01)
------ ------- -------- ------
Net (Loss) Earnings $(0.09) $(0.02) $0.01 $0.01
======= ======= ===== =====
Diluted (Loss) Earnings Per Share
Earnings from continuing operations $ 0.01 $ 0.02 $0.02 $0.02
Loss from discontinued operations (0.10) (0.04) (0.01) (0.01)
------ ------- ------ ------
Net (Loss) Earnings $(0.09) $(0.02) $0.01 $0.01
======= ======= ===== =====
Weighted Average Shares - Basic 9,092,354 8,954,006 9,092,354 8,954,855
========= ========= ========= =========
Weighted Average Shares - Diluted 9,092,354 8,954,006 9,092,354 11,373,814
========= ========= ========= ==========
See notes to consolidated financial statements.
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended August 31,
Unaudited
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $73,200 $137,141
Adjustments to reconcile net income to
net Cash provided by (used in)
operating activities:
Loss from discontinued operations (270,745) (315,978)
Write-down of impaired assets
of discontinued operations (598,484) 0
Non-cash charge for issuance of warrants 1,797 75,831
Imputed interest expense on
subordinated mezzanine debt 28,336 10,872
Loss on equity investment 0 19,310
Depreciation and amortization 8,357 33,896
Provision for doubtful accounts (82,097) 6,000
Decrease (Increase) in:
Accounts receivable 148,936 142,091
Inventories 143,935 (29,006)
Prepaid expenses and other
current assets 15,787 (43,135)
(Increase) Decrease in:
Accounts payable and accrued
expenses (392,216) 263,899
--------- ---------
Net Cash (Used In) Provided by
Continuing Operations (923,194) 300,921
Net Cash Provided By (Used In)
Discontinued Operations 1,096,568 (51,982)
--------- ----------
Net Cash Provided By Operating Activities 173,374 248,939
---------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Sale (Purchase) of equipment and furnishings 34,092 (98,323)
--------- --------
Net Cash Provided By (Used In)
Investing Activities 34,092 (98,323)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from bank loan for
production equipment 0 58,784
Proceeds from short term loans
- related parties 0 135,000
Proceeds from subordinated mezzanine debt 300,000 0
Proceeds from exercise of warrants 0 55,692
Proceeds from stock options 0 1,602
Repayments of short term loans
- related parties (173,521) (226,000)
Repayments of note payable and equipment loans (16,758) (5,349)
---------- ---------
Net Cash Provided By Continuing Operations 109,721 19,729
Net Cash Used In Discontinued Operations (165,069) (87,145)
---------- ---------
Net Cash Used In Financing Activities (55,348) (67,416)
---------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 152,118 83,200
CASH AND CASH EQUIVALENTS
Beginning of period 3,232 6,131
-------- ----------
End of period $155,350 $ 89,331
======== ==========
SUPPLEMENTAL DISCLOSURE:
Interest paid $88,973 $ 36,019
======= ==========
See notes to consolidated financial statements.
SONO-TEK CORPORATION
Notes to Consolidated Financial Statements
Six Months and Three Months Ended August 31, 2001 and 2000
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The accompanying consolidated financial statements of Sono-Tek
Corporation, a New York Corporation (the "Company"), include the accounts of the
Company and its wholly owned subsidiary, Sono-Tek Cleaning Systems, Inc., a New
Jersey Corporation ("SCS"), which the Company acquired on August 3, 1999 (the
"Acquisition"). On April 23, 2001, the Company adopted a plan to discontinue the
operations of the cleaning and drying systems segment, which includes SCS and
Serec. These operations were discontinued and were classified as discontinued
operations. All significant intercompany accounts and transactions are
eliminated in consolidation.
Interim Reporting - The attached summary consolidated financial information does
not include all disclosures required to be included in a complete set of
financial statements prepared in conformity with accounting principles generally
accepted in the United States of America. Such disclosures were included with
the financial statements of the Company at February 28, 2001, and included in
its report on Form 10-K. Such statements should be read in conjunction with the
data herein.
The financial information reflects all adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. The results for such interim periods are not necessarily
indicative of the results to be expected for the year.
Patent and Patent Pending Costs - Cost of patent applications are deferred and
charged to operations over seventeen years for domestic patents and twelve years
for foreign patents. However, if it appears that such costs are related to
products which are not expected to be developed for commercial application
within the reasonably foreseeable future, or are applicable to geographic areas
where the Company no longer requires patent protection, they are written off to
operations. The accumulated amortization is $88,782 and $86,056 at August 31,
2001 and February 28, 2001, respectively.
Reclassifications - Certain February 28, 2001 balances have been reclassified to
conform with the current period presentation.
NOTE 2: FINANCIAL CONSIDERATIONS AND MANAGEMENT'S PLANS
Both the Company and its wholly owned subsidiary, SCS, incurred losses in Fiscal
Year 2000 and 2001. These losses led to an increase in the Company's debt and
negative cash flow. During Fiscal Year 2001, the Company increased its borrowing
from a bank, an investment banker, and officers and directors of the Company. At
February 28, 2001, the Company was late on its payments to various vendors and
in default on its subordinated mezzanine debt with Norwood Venture Corp.
("Norwood") for failure to make interest payments when due. The Company
subsequently paid the interest and the default was cured. In addition, during
the three months ended May 31, 2001, SCS was in default on a bank note for
failure to make interest and principal payments when due. This default was cured
in July 2001 when SCS brought all its payments up to date.
During Fiscal Year 2001, the Company received additional cash from the sale of
common stock and the exercise of warrants. These influxes of cash were not able
to provide the Company with adequate amounts to pay its debts. The Company
continues to have difficulty paying vendors and purchasing necessary raw
materials.
During the six months ended August 31, 2001, the Company took actions to limit
its losses and reduce negative cash flow. The spraying systems segment was
downsized to reflect the decline in market demand, and the sales force was
refocused to increase nozzle sales instead of fluxer sales. The cleaning and
drying segment, represented by SCS, terminated production of capital equipment.
By decreasing operating costs and terminating thirty-two employees, the Company
achieved positive cash flow beginning in the second quarter of Fiscal Year 2002.
Although there can be no assurances, it is anticipated that continued cash flow
improvements will be sufficient to cover current operating costs, and will
permit partial payments to vendors and payment of the required principal
payments on all debt. During the first quarter of Fiscal Year 2002, the Company
received additional financing from Norwood, directors, an officer and an
affiliate of the Company.
The Company may not have access to adequate funds to meet its operating and
financial needs and to repay its past due vendor obligations, creditors may take
legal action for the repayment of past due indebtedness, and the Company may not
be able to restructure its past due obligations.
In order to decrease its losses, the Company adopted a plan to discontinue
operations of cleaning and drying systems segment during the first quarter of
Fiscal 2002 (see Note 3). The Company is refocusing on the sales of ultrasonic
nozzles and attempting to increase sales through diversifying the product line
while decreasing the reliance on the electronics industry. Although the results
of these actions cannot be predicted, the Company believes that these steps are
appropriate and will help the Company return to profitability in Fiscal Year
2002.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing and
refinancing as may be required, and to timely dispose or sell off assets related
to its discontinued operating segment.
NOTE 3: DISCONTINUED OPERATIONS
In order to decrease its losses, on April 23, 2001, the Company adopted a plan
to discontinue the operations of cleaning and drying systems segment. We
anticipate that the orderly liquidation of the disposed assets and liabilities
will be completed within the fiscal year ending February 28, 2002.
The accompanying statements of operations have been reclassified so that the
results for the cleaning and drying systems segment are classified as
discontinued operations for all periods presented. The assets and liabilities of
the discontinued operations have been reclassified in the August 31, 2001 and
February 28, 2001 balance sheets as "net assets of discontinued operations" and
"estimated future costs of discontinued operations". The statements of cash
flows and related notes to the consolidated financial statements have also been
reclassified to conform to the discontinued operations presentation.
Summary operating results of the discontinued operations for each of the periods
presented are as follows:
Six Months Six Months Three Months Three Months
August 31, August 31, August 31, August 31,
2001 2000 2001 2000
-------------- ------------ ------------ ------------
Revenues $1,041,419 $2,123,163 $149,754 $1,117,135
Expenses 1,910,648 2,439,141 237,658 1,205,892
--------- --------- ------- ---------
Loss from
discontinued operations $ (869,229) $ (315,978) $(87,904) $ (88,757)
========== ========== ========= ===========
The Company wrote off goodwill in the amount of $477,377 during the six month
period ended August 31, 2001. This goodwill is related to the acquisition of its
discontinued operations and was deemed to be impaired as the Company estimated
that it would not likely realize positive future cash flows from the residual
assets and uncompleted orders of this business. Additionally, the Company wrote
off impaired accounts receivable of $30,000, impaired inventory of $81,057 and
impaired fixed assets of $10,050. The Company does not expect that there will be
any additional estimated future costs of discontinuance for the orderly
liquidation of the disposed assets and liabilities.
A summary of the net assets of the discontinued operations is as follows:
August 31, February 28,
2001 2001
Assets
Cash $(1,499) $ 183
Accounts Receivable, net 72,762 551,028
Inventory, net 85,809 631,970
Prepaid Expenses 484 783
---------- ----------
Total current assets 157,556 1,183,964
Goodwill 10,000 487,377
Equipment and furnishings, net 64,287 87,935
---------- ----------
Total assets $231,843 $1,759,276
======== ==========
Liabilities
Current Liabilities
Notes payable $ 89,365 $238,917
Accounts payable 381,507 603,146
Accrued expenses 202,926 239,200
Customer deposits 9,988 182,940
--------- ---------
Total current liabilities 683,786 1,264,203
Long term debt 27,094 42,611
-------- ---------
Total liabilities 710,880 1,306,814
------- ---------
Net (liabilities) assets $(479,037) $452,462
========== ========
NOTE 4: INVENTORIES
Inventories at August 31, 2001 are comprised of:
Finished goods $221,339
Work in process 44,570
Consignment 9,037
Raw materials and subassemblies 586,456
---------
Total 858,401
Less: Allowance (205,640)
--------
Net inventories $652,761
========
NOTE 5: LONG-TERM EQUITY INVESTMENT - NET
The Company had a 49% ownership interest in PNR America, LLC, a Delaware limited
liability company. During the six month period ended August 31, 2001, PNR
America incurred a loss of $20,119 and the Company recorded its share of this
loss in the amount of $9,858. The Company sold of its share of equity in PNR
America during the three months ended August 31, 2001 for the book value of such
interest.
NOTE 6: RELATED PARTY TRANSACTIONS
Short term loans - related parties - From time to time the Company has required
short term loans to meet its cash requirements. All of these loans have been
provided by officers and directors of the Company, at the fixed rate of prime
plus 2% at the date of the loans (9.75% to 11.50% at August 31, 2001). Accrued
interest on these short term loans was $47,373 and $37,075 at August 31, 2001
and February 28, 2001, respectively. Interest expense for the six and three
months ended August 31, 2001 was $13,090 and $6,915, respectively.
On April 30, 2001, in order to induce the advance of the additional $300,000 by
Norwood, certain of the Company's directors, an officer and an affiliate of the
Company participated in the amount of $216,750 in the additional subordinated
mezzanine financing (see Note 7).
See subsequent event, footnote 11 for additional related party transactions.
NOTE 7: SUBORDINATED MEZZANINE DEBT
On April 30, 2001, Norwood amended the Norwood Note and Warrant Purchase
Agreement to increase the Note to $850,000 and the Warrant shares to 2,077,777.
The monthly principal payments to commence in October 2001 are increased to
$23,612 per month accordingly, and the balance sheet reflects this monthly rate
in reporting the related current maturities. The additional 733,333 Warrant
shares are valued at $80,667 which is accounted for as a discount and is being
imputed as additional interest expense over the term of the loan.
Certain of the Company's directors, an officer and an affiliate are participants
with Norwood in its subordinated mezzanine financing (see Note 6).
NOTE 8: SETTLEMENT OF LITIGATION
During August 2001 the Company settled its threatened litigation with Essex
Products International. This settlement did not have a material impact on the
financial statements.
NOTE 9: EARNINGS PER SHARE
Basic earnings per share ("EPS") and loss per share ("LPS") are computed by
dividing net income (loss) by the weighted-average number of common shares
outstanding for the period. Diluted EPS and LPS reflect the potential dilution
that could occur if securities or other obligations to issue common stock were
exercised or converted into common stock. Stock options granted but not yet
exercised under the Company's stock option plans are included for Diluted EPS
and LPS calculations under the treasury stock method.
The computation of basic and diluted earnings (loss) per share are set forth on
the following table:
Six Months Ended Three Months Ended
August 31, August 31,
2001 2000 2001 2000
---- ---- ---- ----
Numerator-
Numerator for basic and diluted
earnings (loss) per share $(178,838) $(29,491) $54,045 $84,892
========== ========= ======= =======
Denominator:
Denominator for basic
earnings (loss)per share
- weighted average shares 9,092,354 8,954,006 9,092,354 8,954,855
Effects of dilutive securities:
Stock warrants 0* 0* 0** 1,932,821
Stock options for employees,
directors and outside
consultants 0* 0* 0** 486,138
--------- ---------- ---------- ---------
Denominator for diluted
earnings(loss) per share 9,092,354 8,954,006 9,092,354 11,373,814
========= ========= ========= ==========
*Stock options and warrants for employees, directors and outside
consultants are antidilutive as a result of the net loss and therefore
are not considered in the Diluted LPS calculation.
**Stock options and warrants are antidilutive based on the exercise
price as compared to the ending market price of the Company's stock and
therefore are not considered in the Diluted earnings per share
calculation.
Under the assumption that stock options, warrants and convertible long term
loans were not antidilutive as described in * and **, the denominator for
Diluted LPS would be 9,480,139 and 11,199,372 weighted average shares at August
31, 2001 and 2000 respectively.
NOTE 10: NEW ACCOUNTING DEVELOPMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combination", SFAS No.
142, "Goodwill and Other Intangible Assets" and SFAS No. 143, "Accounting for
Asset Retirement Obligations", SFAS No. 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. It also
requires that the Company recognize acquired intangible assets apart from
goodwill. SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. SFAS No. 143
establishes accounting standards for recognition and measurement of a liability
for an asset retirement obligation and the associated asset retirement cost,
which will be effective for financial statements issued for fiscal years
beginning after June 15, 2002. The adoption of SFAS No. 141, SFAS No. 142 and
SFAS No. 143 is not expected to have a material effect on the Company's
financial position, results of operations and cash flows.
Note 11: SUBSEQUENT EVENT
On September 14, 2001 the Company sold the intellectual property of Serec
Corporation, consisting of patents, trademarks and drawings, for $35,000 to an
officer of the Company and another individual. The intellectual property was
purchased during fiscal year 2001 for $100,000 plus closing costs. At February
28, 2001 these assets were written down to $10,000 due to impairment. The gain
realized on disposition will be included in discontinued operations.
SONO-TEK CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Federal Securities Laws. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following:
- The Company's access to adequate funds to meet the Company's operating and
financial needs and to repay its past due debt, and the Company's ability to
continue as a going concern if it is unable to access adequate financing;
- The possibility that the Company's creditors may take legal action for the
repayment of past due indebtedness and the ability of the Company to continue as
a going concern if any such action is taken;
- The Company's ability to restructure its debt;
- The possibility of additional impairment write downs of assets;
- The Company's ability to respond to competition in its markets;
- General economic conditions in the Company's markets;
- The risk that the Company's analyses of these risks could be incorrect and/or
the strategies developed to address them could be unsuccessful; and
- Various other factors discussed in the Annual Report on Form 10-K.
The Company undertakes no obligation to update publicly any forward-looking
statement.
Liquidity and Capital Resources
The Company's working capital deficiency decreased $254,749 from a working
capital deficiency of $627,799 at February 28, 2001 to $373,050 at August 31,
2001. The decrease in working capital deficiency was a result of an increase in
cash of $152,000, decreases in net accounts receivable of $67,000, decrease in
inventory of $144,000, offset by reductions in accounts payable and accrued
expenses of $392,000, decrease in related party loans of $174,000 and increases
in the current maturities of convertible loans of $60,000 and the current
maturities of subordinated mezzanine debt of $183,000. The stockholders'
deficiency increased $794,231 from $605,364 at February 28, 2001 to $1,399,595
at August 31, 2001. The decrease in stockholders' equity was the result of the
loss of $796,000 for the six months ended August 31, 2001.
Accounts receivable at August 31, 2001 decreased 148,936 or 21% from February
28, 2001 due to better collection efforts in the six months ended August 31,
2001. The allowance for doubtful accounts was reduced $82,097 from February 28,
2001 due to collection of one foreign customer whose payment was remitted during
the second quarter of this fiscal year.
Inventory decreased $143,935 or 18% as the result of reduced purchasing in the
six months ended August 31, 2001. This reduction was based upon the order level
for the Company's principal product, solder flux application products
("fluxers") during the six months ended August 31, 2001. This reduction in the
sale of fluxers was due to the slowdown in the manufacture of printed circuit
boards.
Accounts payable decreased $413,000 as compared to February 28,2001 due to the
reduced purchasing activity noted above and payments made to vendors during the
six months ended August 31, 2001.
On April 30, 2001, the Company amended its agreement with Norwood pursuant to
which the Company increased its five year loan in the principal amount of
$300,000 of which $216,750 was loaned by certain of the Company's directors, an
officer and an affiliate of the Company. The terms of the loan require interest
payments only through September 2001 followed by monthly payments of $23,612
plus interest through September 30, 2004. The Company was also required to grant
a warrant to purchase 733,333 shares of the Company's common stock at an
exercise price of $0.10 per share, which can be put to the Company. Such
warrants were valued at $80,667, which is accounted for as a discount and will
be imputed as additional interest expense over the term of the loan.
The Company currently has a $350,000 line of credit with a bank. The loan is
collateralized by accounts receivable, inventory and all other personal property
of the Company and is guaranteed by James Kehoe, former Chief Executive Officer
of the Company and is subject to certain priority liens on SCS assets. As of
August 31, 2001 the outstanding balance was $344,000
Due to the consolidated Company losses incurred during Fiscal Years 2001, 2000
and 1999, the Company was required to borrow on a short term basis from officers
and directors of the Company. During the three month period ended May 31, 2001
$173,521 plus interest was repaid. As of May 31, 2001, the balance owed the
officers and directors was $286,084 plus accrued interest of $47,373.
During the first quarter of Fiscal Year 2002, SCS received a default notice
regarding its bank loan. This default was cured in July 2001 when SCS brought
all its payments up to date. Due to the limited operations of SCS, the cash
generated may not be sufficient to complete the monthly principal and interest
payments through January 2002, when the loan matures.
It is anticipated that future cash flows may not allow the Company to repay its
current debt and trade creditors in a timely manner. During the first quarter of
Fiscal Year 2002, the Company discontinued the production of capital equipment
in the cleaning and drying systems segment and began to focus on its original
product lines, specifically the sales of ultrasonic nozzles. Although there can
be no assurances, management believes that by taking these steps the Company
will be able to return to profitability in the remaining quarters of Fiscal Year
2002.
Results of Continuing Operations
For the six months ended August 31, 2001, the Company's sales decreased $496,490
to $1,674,331 as compared to $2,170,821 for the six months ended August 31,
2000. The decrease was a result of a decrease in fluxer sales of $841,000 offset
by an increase in nozzle sales of $248,000 and MCS and special sales of $89,000.
The sales decrease was caused by the slowdown in the consumer electronics
markets that uses the company's solder flux spraying systems.
For the three months ended August 31, 2001, the Company's sales decreased
$233,770 to $970,046 as compared to $1,203,816 for the three months ended August
31, 2000. The decrease was a result of a decrease in fluxer sales of $536,000
offset by an increase in nozzle sales of $248,000 and MCS and special sales of
$54,000. The sales decrease was caused by the slowdown in the consumer
electronics markets that uses the company's solder flux spraying systems.
The Company's gross profit decreased $180,449 to $1,001,753 for the six months
ended August 31, 2001 from $1,182,202 for the six months ended August 31, 2000.
The decrease was primarily a result of decreased sales of the Company's products
that were offset by the related material costs and labor. The change in the mix
of the company's products sold improved the gross margin percentage from 54% for
the six months ended August 31, 2000 to 60% for the six months ended August 31,
2001.
The Company's gross profit decreased $30,536 to $617,648 for the three months
ended August 31, 2001 from $648,184 for the three months ended August 31, 2000.
The decrease was primarily a result of decreased sales of the Company's products
that were offset by the related material costs and labor. The change in the mix
of the company's products sold improved the gross margin percentage from 54% for
the three months ended August 31, 2000 to 64% for the three months ended August
31, 2001.
Research and product development costs increased $10,077 to $185,452 for the six
months ended August 31, 2001 from $175,375 for the three months ended August 31,
2000. The increase was a result of product development costs on the Microfluxer
(which is a new product) and continued work on the CVD (chemical vapor
deposition) product line.
Research and product development costs increased $28,824 to $99,916 for the
three months ended August 31, 2001 from $71,092 for the three months ended
August 31, 2000. The increase was a result of product development costs on the
Microfluxer (which is a new product) and continued work on the CVD (chemical
vapor deposition) product line.
Marketing and selling costs decreased $77,388 to $328,825 for the six months
ended August 31, 2001 from $406,213 for the six months ended August 31, 2000.
The decrease was a result of decreased marketing expense of $24,000, sales
commissions of $32,000, trade show expense of $24,000, professional fees of
$13,000and travel expense of $3,000, that were offset by increased personnel
costs of $25,000.
Marketing and selling costs decreased $54,425 to $150,681 for the three months
ended August 31, 2001 from $205,106 for the three months ended August 31, 2000.
The decrease was a result of decreased marketing expenses of $22,000, sales
commissions of $31,000, travel expenses of $8,000 and professional fees of
$6,000 that were offset by increased sales personnel costs of $3,000.
General and administrative costs increased $31,653 to $292,373 for the six
months ended August 31, 2001 from $260,720 for the six months ended August 31,
2000. The increase was primarily attributable to increased personnel and travel
costs of $42,000, increased professional fees of $4,000, increased banks fees of
$9,000, increased facility & utility costs of $9,000 and increased insurance
costs of $5,000, offset by reduced consulting expense of $29,000, reduced
licensing fees of $3,000, and reduced corporate expenses of $8,000.
General and administrative costs increased $10,609 to $155,014 for the three
months ended August 31, 2001 from $144,405 for the three months ended August 31,
2000. The increase was primarily attributable to increased personnel costs of
$32,000, increased professional fees of $3,000, increased banks fees of $5,000,
increased facility & utility costs of $6,000, offset by reduced consulting
expense of $24,000, reduced licensing fees of $3,000, and reduced corporate
expenses of $6,000.
Interest expense decreased $40,314 to $115,021 for the six months ended August
31, 2001 from $155,335 for the six months ended August 31, 2000. The decrease is
primarily due to a non-recurring, non-cash charge of $64,033 reflecting the
value of warrants issued in the quarter ended May 31, 2000, offset by $44,000 of
additional interest of the Norwood financing in the six months ended August 31,
2001.
Interest expense increased $32,681 to $71,592 for the three months ended August
31, 2001 from $38,911 for the three months ended August 31, 2000. The increase
is primarily due to the Norwood financing of $26,000.
The Company's loss from affiliate was eliminated in the three months ended
August 31, 2001 with the sale of the Company's interest in this affiliate.
During the six and three month periods ended August 31, 2000, the Company's
share of the loss of this affiliate was $52,027 and $18,023, respectively.
The Company's income from continuing operations decreased $31,700 from $173,649
or $0.02 per share for the six months ended August 31, 2000 to $141,949 or $.02
per share for the six months ended August 31, 2001.
The Company's income from continuing operations decreased $63,941 from $137,141
or $0.02 per share for the three months ended August 31, 2000 to $73,200 or $.01
per share for the three months ended August 31, 2001.
Results of Discontinued Operations
The Company's loss from discontinued operations increased by $553,251 from a
loss of $315,978 for the six months ended August 31, 2000 to a loss of $869,229
for the six months ended August 31, 2001. The increase in the loss was due to
the impairment of goodwill of $477,377, an increase in the inventory reserves
$81,000, increase in allowance for bad debts of $30,000 and impairment of fixed
assets of $10,000 plus the lack of sales to support the necessary amount of
overhead.
SONO-TEK CORPORATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates. The
interest rate on the Company's debt is based on fluctuations in the prime rates.
If the prime rate increased by 1 percentage point from the levels at February
29, 2000, the negative effect on the Company's results of operations would
approximate $2,000 and $1,000 for the six and three months ended August 31,
2001.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During August 2001 the Company settled its threatened
litigation with Essex Products International.
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were voted upon at the Company's
annual meeting of shareholders held on August 23, 2001.
1. The election of three (3) directors of the Company to serve until the
Company's 2004 annual meeting of shareholders.
For Withheld
Harvey L. Berger 6,628,743 353,730
Christopher L. Coccio 6,955,868 26,605
Jeffrey O. Spiegel 6,955,693 26,780
2. Ratify the appointment of Radin Glass & Co. as the
Company's independent auditors for the fiscal year ended
February 28, 2002.
For 6,930,572
Against 50,201
Abstained 1,700
There were no broker non-votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On July 6, 2001, the Company filed a Current Report
on Form 8-K announcing that the Company had engaged
Radin, Glass & Co., LLP to audit the Company's
February 28, 2002 financial statements, and filed as
an exhibit to such Current Report a letter from
Deloitte & Touche LLP confirming the cessation of the
Company's client-auditor relationship with Deloitte &
Touche LLP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 10, 2001
SONO-TEK CORPORATION
(Registrant)
/s/ Christopher L. Coccio
By: ____________________________________
Christopher L. Coccio
Chief Executive Officer and President
/s/ Duncan Urquhart
By: ____________________________________
Duncan Urquhart
Treasurer