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, 2002
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 September 26, 2002
Common Stock, par value $.01 per share 9,105,422
SONO-TEK CORPORATION
INDEX
Part I - Financial Information Page
Item 1 - Consolidated Financial Statements: 1 - 3
Consolidated Balance Sheets - August 31, 2002 (Unaudited) and
February 28, 2002 1
Consolidated Statements of Operations - Six Months and Three Months Ended
August 31, 2002 and 2001 (Unaudited) 2
Consolidated Statements of Cash Flows - Six Months and Three Months Ended
August 31, 2002 and 2001 (Unaudited) 3
Notes to Consolidated Financial Statements 4 - 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 7 - 10
Item 3 - Quantitative and Qualitative Disclosure About Market Risk 11
Part II - Other Information 12
Signatures 13
SONO-TEK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, February 28,
2002 2002
Current Assets Unaudited Audited
Cash and cash equivalents $ 200,383 $ 453,215
Accounts receivable (less allowance of
$33,825 and $25,000 at August 31 and
February 28, respectively) 424,457 380,092
Inventories (Note 2) 743,760 768,711
Prepaid expenses and other current assets 31,318 68,395
--------- ----------
Total current assets 1,399,918 1,670,413
--------- ----------
Equipment, furnishings and leasehold
improvements (less accumulated
depreciation of $605,919 and $573,547
at August 31 and February 28, respectively) 117,298 141,509
Intangible assets, net:
Patents and patents pending (Note 1) 28,571 20,187
Deferred financing fees 14,803 18,355
--------- ---------
Total intangible assets 43,374 38,542
Other assets 8,042 7,667
---------- -----------
TOTAL ASSETS $1,568,632 $1,858,130
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $193,354 $280,548
Accrued expenses 232,752 257,968
Revolving Line of Credit 312,000 344,000
Current maturities of long term
loans-related parties (Note3) 94,470 87,203
Current maturities of long term debt 11,162 22,686
Current maturities of subordinated loans 72,758 60,000
Current maturities of subordinated
mezzanine debt 283,344 118,060
---------- -----------
Total current liabilities 1,199,840 1,170,465
Subordinated mezzanine debt 515,996 643,813
Long term debt, less current maturities 238,419 282,050
Subordinated loans 77,243 90,000
Other long-term liabilities 95,064 98,759
Estimated future costs of discontinued operations - 167,404
--------- ---------
Total liabilities 2,126,562 2,723,283
--------- ---------
Commitments and Contingencies - -
Put Warrants (Note 4) 188,223 188,223
Stockholders' Equity
Common stock, $.01 par value;
25,000,000 shares authorized,
9,105,422 shares issued and outstanding
at August 31 and February 28, respectively 91,055 91,055
Additional paid-in capital 6,016,107 6,016,107
Accumulated deficit (6,853,315) (6,889,716)
---------- ----------
Total stockholders' deficiency (746,153) (782,554)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $1,568,632 $1,858,130
========== ==========
See notes to consolidated financial statements.
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Three Months
Ended August 31, Ended August 31,
Unaudited Unaudited
2002 2001 2002 2001
----------------- -----------------
Net Sales $1,485,991 $1,674,331 $705,133 $970,046
Cost of Goods Sold 686,758 672,578 311,913 352,398
---------- ---------- --------- --------
Gross Profit 799,233 1,001,753 393,220 617,648
---------- --------- --------- --------
Operating Expenses
Research and product development
costs 163,171 185,452 108,930 99,916
Marketing and selling expenses 283,042 328,825 133,559 150,681
General and administrative costs 288,118 292,373 152,642 155,014
--------- ---------- ------- --------
Total Operating Expenses 734,331 806,650 395,131 405,611
---------- --------- ------- ---------
Operating Income (Loss) 64,902 195,103 (1,911) 212,037
Interest Expense (115,328) (115,021) (57,361) (71,592)
Loss from Affiliate - (9,858) - -
Interest and Other Income 86,827 2,976 62,247 1,504
---------- ---------- -------- ---------
Income from Continuing Operations
Before Income Taxes 36,401 73,200 2,975 141,949
Income Tax Expense 0 0 0 0
--------- -------- -------- -------
Income from Continuing Operations 36,401 73,200 2,975 141,949
Loss from Discontinued Operations - (869,229) - (87,904)
--------- -------- ------ --------
Net Income (Loss) $ 36,401 $(796,029) $2,975 $54,045
======== ========== ====== =======
Basic Earnings (Loss) Per Share
Earnings from continuing operations $0.00 $ 0.01 $0.00 $0.02
Loss from discontinued operations 0.00 (0.10) 0.00 (0.01)
---- ------- ---- ------
Net Earnings (Loss) $0.00 $(0.09) $0.00 $0.01
===== ======= ===== =====
Diluted Earnings (Loss) Per Share
Earnings from continuing operations $ 0.00 $ 0.01 $0.00 $0.02
Loss from discontinued operations 0.00 (0.10) 0.00 (0.01)
---- ------- ---- ------
Net Earnings (Loss) $0.00 $(0.09) $0.00 $0.01
===== ======= ===== =====
Weighted Average Shares - Basic 9,105,422 9,092,354 9,105,422 9,092,354
========= ========= ========= =========
Weighted Average Shares - Diluted 10,454,318 9,092,354 10,291,966 9,092,354
========== ========= ========== ========
See notes to consolidated financial statements.
SONO-TEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended August 31,
Unaudited Unaudited
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 36,401 $(796,029)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Loss from discontinued operations 0 869,229
Depreciation and amortization 38,238 8,357
Imputed interest expense 37,467 28,336
Provision for doubtful accounts 8,825 (82,097)
Non-cash charge for issuance of warrants 0 1,797
Decrease (Increase) in:
Accounts receivable (53,190) 148,936
Inventories 24,951 143,935
Prepaid expenses and other current assets 37,077 15,787
Decrease in:
Accounts payable and accrued expenses (112,409) (392,216)
--------- ----------
Net Cash Provided by (Used In)
Continuing Operations 17,360 (53,965)
Net Cash (Used In) Provided By
Discontinued Operations (167,403) 227,339
--------- ---------
Net Cash (Used In) Provided By
Operating Activities (150,043) 173,374
--------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Patent Application Costs (10,701) 0
(Purchase) Sale of equipment and furnishings (8,159) 34,092
Deposits (375) 0
--------- -------
Net Cash (Used In) Provided By
Investing Activities (19,235) 34,092
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from subordinated mezzanine debt 0 300,000
Repayments of loans - related parties (43,602) (173,521)
Repayments of note payable and equipment loans (36,257) (16,758)
Other Long-term liabilities paid (3,695) 0
---------- ---------------
Net Cash (Used In) Provided By
Continuing Operations (83,554) 109,721
Net Cash Used In
Discontinued Operations 0 (165,069)
---------- ----------
Net Cash Used In Financing Activities (83,554) (55,348)
----------- --------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (252,832) 152,118
CASH AND CASH EQUIVALENTS
Beginning of period 453,215 3,232
--------- --------
End of period $200,383 $155,350
======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid $135,676 $88,973
======== =======
See notes to consolidated financial statements.
SONO-TEK CORPORATION
Notes to Consolidated Financial Statements
Six Months Ended August 31, 2002 and 2001
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, 2002, and included in
its report on Form 10-KSB. 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 $63,454 and $61,138 at August 31,
2002 and February 28, 2002, respectively. During the six months ended August 31,
2002, the Company incurred $8,989 of costs related to the documentation and
filing fees for a new patent.
NOTE 2: INVENTORIES
Inventories at August 31, 2002 are comprised of:
Finished goods $415,701
Work in process 113,564
Consignment 5,437
Raw materials and subassemblies 422,852
---------
Total 957,554
Less: Allowance (213,794)
--------
Net inventories $743,760
========
NOTE 3: RELATED PARTY TRANSACTIONS
Short term loans - related parties - At Fiscal Year End 2002, loans from
directors and former officers in the amount of $286,084 plus accrued interest of
$62,728 were formalized into four-year notes bearing interest at 5% on the
unpaid balance. Repayments of these notes commenced on March 31, 2002. During
the six months ended August 31, 2002, $6,964 of interest and $36,335 of
principal were repaid on these notes.
Certain of the Company's directors, an officer and an affiliate are participants
with Norwood in its subordinated mezzanine financing (see Note 4).
NOTE 4: 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 $23,612 per month
and the balance sheet reflects this monthly rate in reporting the related
current maturities. The additional Warrant shares are valued at $188,223 and 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 3).
NOTE 5: EARNINGS (LOSS) PER SHARE
The denominators for the calculation of diluted earnings per share for the six
and three month periods ended August 31, 2002 are calculated as follows:
6 Months 8/31/02 3 Months 8/31/02
Denominator for basic earnings per share 9,105,422 9,105,422
Dilutive effect of warrants 1,313,888 1,161,111
Dilutive effect of stock options 35,008 25,434
--------- ---------
1,348,896 1,186,545
--------- ---------
Denominator for dilutive earnings per share 10,454,318 10,291,966
========== ==========
There are no reconciling items in the computation of loss per share for the six
and three months ended August 31, 2001, as all items are antidilutive.
NOTE 6: NEW ACCOUNTING DEVELOPMENTS
In June 2002, the Financial accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". The Company
is reviewing the requirements and implications of adopting such standards by
December 31, 2002. This Statement addresses financial and reporting for costs
associated with exit or disposal activities and nullifies Emerging Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The Company does not believe adopting such standards will
have a material effect on the presentation of the financial statements.
SONO-TEK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Federal Securities Laws. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following:
- - the Company's ability to respond to competition in its markets;
- - general economic conditions in the Company's markets; and
- - various other factors discussed in the Annual Report on Form 10-KSB.
The Company undertakes no obligation to update publicly any forward-looking
statement.
Liquidity and Capital Resources
The Company has experienced sluggish sales in the six month period ended August
31, 2002. These reduced sales are attributable to the economic slowdown that
is affecting the capital goods segment of the economy, and more specifically
the electronics industry, which has been our main business. As a result, we
have used more than half our cash reserves over the past six months. We are
taking steps to preserve our remaining working capital by continuing to seek
re-financing of our lending lines and meeting with existing lenders to
restructure agreements to defer the payment of principal on certain outstanding
loans for the next six months. We believe these measures, assuming all
lenders agree, will allow us to maintain adequate working capital until the
economy has recovered and our electronic industry sales return to normal levels.
The Company continues to see developing opportunities for its technology in
newer markets such as biomedical and defense.
The Company's working capital decreased $299,863 from a working capital of
$499,948 at February 28, 2002 to $200,085 at August 31, 2002. The decrease in
working capital was a result of a decrease in cash of $252,000, an increase in
the current maturities of debt of $174,000, a decrease in inventory of $25,000,
a decrease in prepaid expenses of $37,000, that was offset by increases in
accounts receivable of $44,000, decrease in accounts payable and accrued
expenses of $112,000 and repayments of short-term borrowings of $32,000. The
stockholders' deficiency decreased $36,401 from $782,554 at February 28, 2002 to
$746,143 at August 31, 2002. The decrease in stockholders' deficiency was the
result of the net profit of $36,401 for the six months ended August 31, 2002.
Accounts receivable at August 31, 2002 increased $44,365 or 11% from February
28, 2002 due to higher sales levels in the last month of current fiscal period.
Inventory decreased $24,951 or 3% as the result of reduced purchasing in the six
months ended August 31, 2002. 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, 2002. This reduction in the sale of
fluxers was due to the slowdown in the manufacture of printed circuit boards.
Accounts payable decreased $87,194 as compared to February 28, 2002 due to the
reduced purchasing activity noted above and payments made to vendors during the
six months ended August 31, 2002.
Accrued expenses decreased $25,216 principally due to an reduction in accrued
payroll expenses of $60,000 offset by an increases in accrued commissions of
$10,000, accrued professional fees of $7,000 and accrued marketing expenses of
$14,000
The estimated future costs of discontinued operations were reduced $167,404 due
to obligations paid or settled in the six months ended August 31, 2002.
The Company currently has a $350,000 line of credit with a bank. The loan is
collateralized by accounts receivable, inventory and all other personal property
of the Company and is guaranteed by the former Chief Executive Officer of the
Company. As of August 31, 2002 the outstanding balance was $312,000.
Results of Continuing Operations
For the six months ended August 31, 2002, the Company's sales decreased $188,340
to $1,485,991 as compared to $1,674,331 for the six months ended August 31,
2001. The decrease was the result of a decrease in nozzle sales of $99,000, a
decrease in fluxer sales of $7,000, a decrease in sales of other products of
$135,000, partially offset by an increase in cleaning system spare part sales of
$53,000.
For the three months ended August 31, 2002, the Company's sales decreased
$264,913 to $705,133 as compared to $970,046 for the three months ended August
31, 2001. The decrease was the result of a decrease in nozzle sales of $156,000,
a decrease in fluxer sales of $79,000, a decrease in sales of other products of
$60,000, partially offset by an increase in cleaning system spare part sales of
$31,000.
The Company's gross profit decreased $202,520 to $799,233 for the six months
ended August 31, 2002 from $1,001,753 for the six months ended August 31, 2001.
The decrease was primarily a result of reduced sales of the Company's products.
The gross profit margin was 53.8% of sales for the six months ended August 31,
2002 as compared to 59.8% of sales for the six months ended August 31, 2001. The
change in margin occurred as the result of the changing mix of products in each
period.
The Company's gross profit decreased $224,429 to $393,219 for the three months
ended August 31, 2002 from $617,648 for the three months ended August 31, 2001.
The decrease was primarily a result of reduced sales of the Company's products.
The gross profit margin was 55.8% of sales for the three months ended August 31,
2002 as compared to 63.7% of sales for the three months ended August 31, 2001.
The change in margin occurred as the result of the changing mix of products in
each period..
Research and product development costs decreased $22,281 to $163,171 for the six
months ended August 31, 2002 from $185,452 for the six months ended August 31,
2001. The decrease was a result of decreased compensation and fringe benefits of
$54,000 due to a smaller engineering staff, partially offset by an increase of
$32,000 for engineering materials in the current year's period.
Research and product development costs increased $9,014 to $108,930 for the
three months ended August 31, 2002 from $99,916 for the three months ended
August 31, 2001. The increase was a result of an increase of 21,000 for
engineering materials, partially offset by a $10,000 decrease in compensation
and fringe benefits due to a smaller engineering staff.
Marketing and selling costs decreased $45,784 to $283,041 for the six months
ended August 31, 2002 from $328,825 for the six months ended August 31, 2001.
The decrease was a result of decreases in commissions of $37,000, travel costs
of $20,000, professional fees of $8,000 and facilities and utilities costs of
$5,000, that were offset by increases in trade shows and advertising of $5,000
and increased personnel costs of $18,000.
Marketing and selling costs decreased $17,122 to $133,559 for the three months
ended August 31, 2002 from $150,681 for the three months ended August 31, 2001.
The decrease was a result of decreases in commissions of $15,000, travel costs
of $4,000, professional fees of $4,000, facilities and utilities costs of $4,000
and trade shows of $8,000, that were offset by increased personnel costs of
$19,000.
General and administrative costs decreased $4,255 to $288,118 from $292,373 and
$2,372 to $152,642 from $155,014 for the six and three months periods ended
August 31, 2002 from the six and three months ended August 31, 2001,
respectively.
Interest expense was unchanged for the six months ended August 31, 2002 from the
six months ended August 31, 2001. Interest expense decreased $14,231 to $57,361
for the three months ended August 31, 2002 from $71,592 for the three months
ended August 31, 2001. The decrease is primarily due to reduced interest of
$7,000 on related party and bank loans.
Interest and other income increased $83,851 to $86,827 for the six months ended
August 31, 2002 from $2.976 for the six months ended August 31, 2001. The
increase is primarily due to settlements income of $79,000 with former vendors
and sales representatives, and a reduction of the accrual for future rent
expense of $6,000. Settlements with former vendors and sales representatives
resulted in $60,000 of other income in the three month period ended August 31,
2002.
The Company's profit from continuing operations decreased $36,799 from $73,200
or $.01 per share for the six months ended August 31, 2001 to a profit of
$36,401 or $0.004 per share for the six months ended August 31, 2002. For the
three months ended August 31, 2002 the Company had income from continuing
operations of $2,975 as compared to $141,949 for the three months ended August
31, 2001.
Results of Discontinued Operations
The Company discontinued its cleaning and drying segment during the quarter
ended May 31, 2001. The Company's loss from discontinued operations was $869,229
and $87,904 for the six and three month periods ended August 31, 2001. At
February 28, 2001 the discontinued operation had residual goodwill of $477,377.
This goodwill was based on the residual profits on open contracts at February
28, 2001, the assumed value of the residual spares business, and the value that
was assumed could be realized from the sale of the business. During the quarter
ended May 31, 2001, one major customer canceled the balance of his order, it was
determined that the business could not be sold and the value of the spares
business was deemed to be overstated. Accordingly, the goodwill was considered
impaired and was written off. The increase in the loss was due to the impairment
of goodwill of $477,377, an increase in the inventory raw material obsolescence
reserve of $39,246, a reserve of $89,812 for work in process inventory, plus the
lack of sales to support the necessary amount of overhead. All major accounts of
this operation were resolved during fiscal year ended February 28, 2002,
accordingly, there was no impact of discontinued operations on the six and three
month periods ended August 31, 2002.
New Accounting Developments
In June 2002, the Financial accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". The Company
is reviewing the requirements and implications of adopting such standards by
December 31, 2002. This Statement addresses financial and reporting for costs
associated with exit or disposal activities and nullifies Emerging Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The Company does not believe adopting such standards will
have a material effect on the presentation of the financial statements.
SONO-TEK CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates. The
interest rate on the Company's debt is based on fluctuations in the prime rates.
If the prime rate increased by 1 percentage point from the levels at February
28, 2002, the negative effect on the Company's results of operations would
approximate $2,000 and $1,000 for the six and three month periods ended August
31, 2002, respectively.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds.
None
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 22, 2002.
1. The election of two (2) directors of the Company to serve until the
Company's 2004 annual meeting of shareholders.
For Against
Samuel Schwartz 6,968,365 352,030
Duncan Urquhart 6,968,365 352,030
There were no broker non-votes.
2. Ratify the appointment of Radin Glass & Co. as
the Company's independent auditors for the fiscal
year ended February 28, 2003.
For 7,232,026; Against 84,901; Abstained 3,468
There were no broker non-votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 CEO Certification
99.2 Treasurer Certification
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 1, 2002
SONO-TEK CORPORATION
(Registrant)
/s/ Christopher L. Coccio
By: ____________________________________
Christopher L. Coccio
Chief Executive Officer and President