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