<PAGE> 1
FORM 10-QSB
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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- -----------------------------------------------------------------------
EXCHANGE ACT OF 1934
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For the quarterly period ended May 31, 1998
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OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-13328
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SENTEX SENSING TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
New Jersey 22-2333899
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1801 East Ninth Street, Cleveland, Ohio 44114
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (216)687-9133
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and 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
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<PAGE> 2
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities and Exchange Act of 1934
after the distribution of securities under a plan confirmed by a court.
Yes No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 100,514,911.
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<PAGE> 3
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1997 AND MAY 31, 1998
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1997 1998
(AUDITED) (UNAUDITED)
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ASSETS
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,331,981 $1,240,035
Accounts receivable 1,248,187 1,076,554
Inventories 1,399,944 1,360,406
Other current assets 164,920 206,077
Income tax refunds 16,000 16,000
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TOTAL CURRENT ASSETS 4,161,032 3,899,072
EQUIPMENT AND IMPROVEMENTS - [NET
OF ACCUMULATED DEPRECIATION AND
AMORTIZATION] 242,647 225,700
OTHER ASSETS
Goodwill and other intangibles 238,833 767,605
Deposits and other assets 33,360 26,694
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TOTAL ASSETS $4,675,872 $4,919,071
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1997 AND MAY 31, 1998
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1997 1998
(AUDITED) (UNAUDITED)
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Bank loans $ 2,100,000 $ 2,195,400
Accounts payable 857,937 838,597
Accrued expenses and other current liabilities 861,935 877,637
Due to related party 33,333 551,000
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TOTAL CURRENT LIABILITIES 3,853,205 4,462,634
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LONG-TERM DEBT
Convertible subordinated notes payable 515,000 10,810
Other Accrued Expenses --- 335,049
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TOTAL LONG-TERM DEBT 515,000 345,859
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STOCKHOLDERS' EQUITY:
Common stock, no par value, authorized
200,000,000 shares, issued 87,865,762
and 109,460,911 shares, outstanding
78,919,762 and 100,514,911 shares,
respectively 2,153,489 2,880,079
Accumulated deficit (1,554,555) (2,480,058)
Treasury shares at cost, 8,946,000 shares (313,218) (313,218)
Cumulative translation adjustment 21,951 23,775
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TOTAL STOCKHOLDERS' EQUITY 307,667 110,578
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,675,872 $ 4,919,071
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</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS [UNAUDITED]
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
MAY 31, MAY 31, MAY 31, MAY 31,
------------ ------------ ------------ ------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 1,624,552 $ 2,057,242 $ 2,974,824 $ 3,867,140
Cost of sales 812,118 993,002 1,520,072 1,851,304
------------ ------------ ------------ ------------
Gross profit 812,434 1.064.240 1,454,752 2,015,836
Selling, General and Admin 1,122,609 1,290,301 2,146,922 2,548,193
Research and Development 79,044 97,890 151,548 187,030
------------ ------------ ------------ ------------
Operating loss (389,219) (323,951) (843,718) (719,387)
------------ ------------ ------------ ------------
Other income (expense)
Interest income 20,366 12,168 35,458 30,529
Other income 6,081 9,822 8,398 22,842
Interest expense (68,690) (13,264) (121,118) (35,511)
Foreign currency transaction loss 3,262 (28,695) (4,523 (82,113)
------------ ------------ ------------ ------------
Loss before income tax expense (428,200) (343,920) (925,503) (783,640)
Provision for income taxes 0 5,988 0 5,988
------------ ------------ ------------ ------------
Net loss $ (428,200) $ (349,908) $ (925,503) $ (789,628)
============ ============ ============ ============
Net loss per share $ (0.01) $ 0 $ (0.01) $ (0.01)
============ ============ ============ ============
Weighted Average Number of
Shares Outstanding 82,518,953 78,919,762 80,719,358 78,919,762
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED]
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MAY 31, MAY 31,
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1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (925,503) $ (789,628)
Adjustments to reconcile net [loss] income to net cash
Provided by [used in] operating activities:
Depreciation and amortization 32,807 48,642
Change in assets and liabilities:
[Increase] decrease in:
Accounts receivable 171,633 (445,578)
Inventories 39,538 192,062
Other current assets (38,473) 33,506
Increase [decrease] in:
Accounts payable 177,560 47,184
Accrued expenses and other current liabilities (158,798) (254,954)
Currency translation adjustment 1,824 22,962
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TOTAL ADJUSTMENTS 226,091 (356,176)
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NET CASH USED BY OPERATING ACTIVITIES (699,412) (1,145,804)
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INVESTING ACTIVITIES:
Acquisition of equipment and improvements (5,601) 0
Payment to prior shareholder (33,333) (33,333)
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NET CASH USED BY INVESTING ACTIVITIES (38,934) (33,333)
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FINANCING ACTIVITIES:
Net proceeds on note payable - bank 95,400 865,000
Net proceeds on note payable - related party 551,000 250,000
Net decrease in factoring of accounts receivable 0 (76,948)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 646,400 1,038,052
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (91,946) (141,085)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIODS 1,331,981 1,697,767
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CASH AND CASH EQUIVALENTS - END OF PERIODS $ 1,240,035 $ 1,556,682
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[1] In the opinion of management, the unaudited financial statements contain all
adjustments [consisting of only normal recurring accruals and repayments]
necessary to present fairly the financial position at May 31, 1998 and the
results of operations and cash flows for the six months ended May 31, 1998 and
May 31, 1997.
These interim statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the fiscal year ended November 30, 1997 (Commission File No.
2-13328).
[2] The results of operations for the six months ended May 31, 1998 and May 31,
1997 are not necessarily indicative of the results to be expected for the full
year.
[3] INVENTORY
Inventories consist of:
<TABLE>
<CAPTION>
MAY 31,
-------
1998
----
<S> <C>
Raw Materials $ 493,827
Work-in-Process 186,245
Finished Goods 680,334
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Total $1,360,406
==========
</TABLE>
[4] EARNINGS PER SHARE
Earnings [loss] per share are based on the weighted average number of common
shares outstanding for the periods presented, after adjustment for the shares
issued in the stock acquisition.
[5] PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Sentex Sensing
Technology, Inc. and its wholly-owned subsidiaries [the "Company"]. All material
inter-company accounts and transactions have been eliminated in consolidation.
[6] ACQUISITIONS
In March 1998, the Company purchased Cypress Instruments, Inc. ("Cypress") for
the purpose of acquiring a new product line that is currently under development
and, upon completion, is intended to be folded into the Monitek product line.
The acquisition is not material to the overall business of the Company. The
acquisition of Cypress by the
7
<PAGE> 8
Company may result in the Company being obligated to make payments to the
shareholders of Cypress (for payment of shares and performing future consulting
services) of approximately $535,000 over the next four fiscal years, with over
$200,000 of such amounts potentially being payable in fiscal 1998.
[7] STOCKHOLDERS' EQUITY
On May 15, 1998, Clarion Capital Corporation ("Clarion") converted two
convertible notes in the aggregate principal amount of $609,558 into an
aggregate number of 16,569,404 Common Shares of the Company. Immediately
thereafter, CPS Capital Ltd. ("CPS") purchased all 16,569,404 Common Shares from
Clarion for $230,000.
In addition, on May 15, 1998, CPS and the Company entered into the Second
Amended and Restated Management Services Agreement, pursuant to which CPS agreed
to accept 5,025,745 Common Shares in lieu of accrued management fees equaling
$196,900. All the shares acquired by CPS were acquired for investment purposes.
[8] SUBSEQUENT EVENTS
Sales of Sentex products have not been successfully integrated into Monitek's
distribution channels, which has resulted in a further drop-off of Sentex sales
and even larger losses in this segment of the business. As a result, the
Company's management has determined that the Company's best course of action
will be to divest itself of the Sentex operation, which has generated less than
15% of the Company's revenues for the last eighteen months, while suffering 54%
of the Company's losses, as reported. Currently, the Company is engaged in
discussions with Amos Linenberg, a former director of the Company and a current
executive officer of the Company to sell Sentex to Mr. Linenberg. As of July 13,
1998, no definitive agreement had been reached. Mr. Linenberg was also one of
the principle shareholders of the Company prior to CPS's acquisition of its
interest in the Company. In the event the Company and Mr. Linenberg are unable
to complete a sale of Sentex to Mr. Linenberg, the Company intends to
discontinue the operations of Sentex. Although the Company has not selected a
final date for the terminations of operations of Sentex, the Company currently
anticipates that if the operations of Sentex were discontinued, they would be
discontinued prior to the next fiscal quarter.
In June 1998, the Company increased its existing $1,000,000 bank line of credit
to $2,000,000. The Company's management believes that the increase in this line
of credit, which is secured by a personal guarantee, of Robert S. Kendall, the
Chairman of the Company, will satisfy the company's working capital needs at
least through the remainder of fiscal 1998.
8
<PAGE> 9
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company formed two wholly owned subsidiaries, Sentex Systems, Inc., and
Sentex Acquisitions Corp. on May 31, 1991, to separate the present operations of
the Company into a subsidiary to continue the business of designing, developing
and marketing gas chromatographic devices, and a subsidiary to develop and
acquire new investment opportunities.
Effective November 30, 1996, Monitek Technologies, Inc., a Delaware corporation
("Monitek") became a wholly owned subsidiary of the Company, pursuant to a
merger (the "Merger") of Sentex Merger Corp., a Delaware corporation and wholly
owned subsidiary of the Company ("Subcorp"), with and into Monitek. Monitek is
now being operated as a wholly owned subsidiary of the Company. Monitek also
operates a portion of its business through a wholly owned German subsidiary of
Monitek named Monitek GmbH, which over the last three years has accounted for
over 60% of Monitek's total revenues.
Hereinafter the "Company" shall refer to Sentex Sensing Technology, Inc. and its
three wholly owned subsidiaries, Monitek, Sentex Acquisition Corp. and Sentex
Systems, Inc. ("Sentex").
Monitek designs, develops, assembles and markets instruments for the measurement
of clarity (turbidity), suspended solids content, color, purity, flow, level and
volume of liquids in industrial and waste water environments. Monitek's current
line of products, which are based on optical, acoustic, magnetic and ultrasonic
technologies, have been specially adapted for various applications in the
chemical and petrochemical, food and beverage, water treatment, pulp and paper,
and bio-technology and pharmaceutical industries, where their abilities to
withstand high temperature, extremes in pressure and corrosive environments are
important factors. Monitek's products are currently sold world-wide.
Sentex is engaged in the business of developing, manufacturing and selling
automated devices designed to identify and measure the concentrations of certain
chemicals in air, water and soil. Since the Merger, sales of Sentex products
have represented less than 15% of the total revenues of the Company.
In March 1998, the Company purchased Cypress Instruments, Inc. ("Cypress") for
the purpose of acquiring a new product line that is currently under development
and, upon completion, is intended to be folded into the Monitek product line.
The acquisition is not material to the overall business of the Company.
The Company also intends to acquire other businesses that may be unrelated to
its present activities and is presently investigating such opportunities. As of
June 30, 1998, the Company had not entered into a firm commitment for any such
transaction.
9
<PAGE> 10
FINANCIAL CONDITION
- -------------------
Working capital decreased to a negative $564,000 at May 31, 1998 as compared to
$308,000 as of November 30, 1997. The decrease in working capital is primarily
due to the losses sustained by the Company during the first half of Fiscal 1998
and the accrued expense incurred in connection with an acquisition discussed
below. Cash and cash equivalents equaled approximately $1,240,000 as of May 31,
1998, $1,200,000 of which has been pledged to secure current borrowings on a
line of credit. As set forth in the independent auditors' report and notes to
consolidated financial statements that accompanied the Company's Form 10-KSB for
the fiscal year ended November 30, 1997, the Company's recurring losses from
operations and the resulting effect on cash flow have reduced the Company's
liquidity to its current level, which raises substantial doubt about the
Company's ability to continue as a going concern.
To address the Company's immediate working capital needs, the Company has
established two bank lines of credit and has borrowed an aggregate of $2,195,400
as of May 31, 1998 as compared to $1,435,000 in borrowings as of May 31, 1997.
The primary use of the additional proceeds was to fund operating losses incurred
during the past year. As of May 31, 1998, borrowings under one bank line of
credit were $1,200,000, and were secured by cash balances of the Company. The
other bank line of credit, as of May 31, 1998, was for a maximum of $1,000,000,
but in June 1998, the bank agreed to increase the line to $2,000,000. The
Company's management believes that the increase in this line of credit, which is
secured by the personal guarantee of Robert S. Kendall, the Chairman of the
Company, will satisfy the Company's working capital needs at least through the
remainder of fiscal 1998. Borrowings under this line of credit totaled $995,400
as of May 31, 1998. From time to time, CPS has provided the Company with
temporary working capital loans and, as of May 31, 1998, there was an
outstanding borrowing of $551,000 on such loans. The acquisition of Cypress by
the Company will result in the Company being obligated to make payments to the
shareholders of Cypress (for payment of shares and performing future consulting
services) of approximately $535,000 over the next four fiscal years, with over
$200,000 of such amounts potentially being payable in Fiscal 1998. CPS has
assured the Company that it will arrange or provide the financing required to
fund the acquisition of Cypress. There are currently no material commitments
anticipated for capital expenditures during fiscal 1998. The Company will
continue to seek growth through internal means as well as further acquisitions.
In the event an acquisition candidate were identified, the Company may need to
seek additional financing.
To address the Company's working capital needs on a more long-term basis, the
Company will attempt to generate cash from internal operations of the Company.
As anticipated in the Registration Statement containing the Joint
Proxy/Prospectus that was filed in connection with the Merger, however, the
Company has been unable to generate a profit during its first year and one-half
of operating Sentex and Monitek as a combined company and there can be no
assurance that the Company will generate a positive cash flow for the remainder
of Fiscal 1998. The Company has combined certain aspects of the two companies
such as realigning and re-staffing management, which has resulted in a modest
reduction in selling, general and administrative
10
<PAGE> 11
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D)
expenses. Despite these achievements, the ultimate profitability of the Company
still depends, in large part, on further reducing expenses. Sales of Sentex
products have not been successfully integrated into Monitek's distribution
channels, which has resulted in a further drop-off of Sentex sales and even
larger losses in this segment of the business. As a result, the Company's
management has determined that the Company's best course of action will be to
divest itself of the Sentex operation, which has generated less than 15% of the
Company's revenues for the last eighteen months, while suffering 54% of the
Company's losses, as reported. Currently, the Company is engaged in discussions
with Amos Linenberg, a former director of the Company and a current executive
officer of the Company to sell Sentex to Mr. Linenberg. As of July 8, 1998, no
definitive agreement had been reached. Mr. Linenberg was also one of the
principle shareholders of the Company prior to CPS's acquisition of its interest
in the Company. In the event the Company and Mr. Linenberg are unable to
complete a sale of Sentex to Mr. Linenberg, the Company intends to discontinue
the operations of Sentex. Although the Company has not selected a final date for
the terminations of operations of Sentex, the Company currently anticipates that
if the operations of Sentex were discontinued, they would be discontinued prior
to the next fiscal quarter.
Net Operating Losses; IC-DISC
The Company has approximately $8,942,000 in net operating losses as of fiscal
1997, which will expire at various dates through the year 2012 that are mainly
attributable to losses incurred by Monitek. Federal tax law imposes restrictions
on the use of net operating loss carry-forwards in the event of a change in
ownership, such as a merger. Due to the Merger, approximately $6,265,000 of the
$8,942,000 net operating losses may be subject to these limitations and
potentially may not be able to provide any economic benefit to the Company.
As of April 1, 1991, Monitek's IC-DISC, Monitek International, Inc., was
effectively terminated. As a result, Monitek had begun repatriation of the
undistributed earnings of the IC-DISC as of April 1, 1991. The undistributed
earnings of approximately $780,000 has been and will continue to be recognized
as income, for tax return purposes, over the 10-year period ending March 31,
2001.
11
<PAGE> 12
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D)
RESULTS OF OPERATIONS
- ---------------------
Six Months Ended May 31, 1998 Compared to Six Months Ended May 31, 1997
The Company's net sales decreased by 23%, from $3,867,000 for the six months
ended May 31, 1997 ("Fiscal 1997 Six Months") to $2,975,000 for the six months
ended May 31, 1998 ("Fiscal 1998 Six Months"). Sales of Sentex products
decreased by $192,000, or 40%, primarily as a result of the Company's inability
to effectively integrate the sale of Sentex products into Monitek's distribution
channels, as noted above. Monitek's domestic sales decreased by $7,000, or less
than 1%, while export sales from the United States decreased by $278,000, or
63%, as a result of a very sharp drop-off of orders from Asian countries,
primarily Japan. Sales to Continental Europe by Monitek GmbH decreased by
$415,000 from the Fiscal 1997 Six Months to the Fiscal 1998 Six Months,
primarily as a result of weakness in the European economy and an increase in the
value of the U.S. Dollar relative to the German Deutsche Mark (the "DM"). The
actual decrease in sales in Monitek GmbH's native currency, the DM, was 14% but
the decrease in U.S. Dollars, after converting the sales figures by the average
exchange rate for each period, amounted to 21%.
Cost of goods sold, as a percentage of sales, increased to 51% for the Fiscal
1998 Six Months from 48% for the Fiscal 1997 Six Months, primarily as a result
of the decrease in sales without a corresponding reduction in direct labor and
factory overhead. Direct labor and overhead increased to 14% of net sales for
the Fiscal 1998 Three Months from 11% for the comparable Fiscal 1997 period,
while material costs remained constant at 37% of net sales.
Selling, general and administrative expenses decreased to $2,147,000 for the
Fiscal 1998 Six Months from $2,548,000 for the Fiscal 1997 Six Months. Sales
commissions decreased to $494,000 from $580,000 as a direct result of the
decrease in net sales. Cost reduction measures in the U.S., which were
implemented by management during the second half of Fiscal 1997, resulted in a
decrease of approximately $180,000 for the Fiscal 1998 Six Months as compared to
the Fiscal 1997 Six Months. Expenses at Monitek GmbH decreased by $139,000, of
which $45,000 can be attributed to the fluctuation in currency exchange rates
during the two periods.
Research and development expenses decreased to $152,000 for the Fiscal 1998 Six
Months from $187,000 for the Fiscal 1997 Six Months, primarily as a result of a
decrease in activities by outside consultants.
12
<PAGE> 13
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D)
Operating losses increased to $844,000 for the Fiscal 1998 Six Months from
$719,000 for the Fiscal 1997 Six Months, primarily as a result of the decrease
in sales and the increase in cost of goods sold, as a percentage of sales,
partially offset by the decreases in selling, general and administrative
expenses and research and development expenses.
Interest expense increased to $121,000 for the Fiscal 1998 Six Months from
$36,000 for the Fiscal 1997 Six Months as a result of increased bank and other
borrowings.
Foreign currency transactions between Monitek and its German subsidiary resulted
in losses of $5,000 for the Fiscal 1998 Six Months and $82,000 for the Fiscal
1997 Six Months as a result of fluctuations in the value of the U.S. Dollar
relative to the DM.
Net losses increased to $925,000 for the Fiscal 1998 Six Months from $790,000
for the Fiscal 1997 Six Months, primarily as a result of the increases in
operating losses and interest expense, partially offset by the decrease in
foreign currency exchange losses.
CHANGES IN ACCOUNTING STANDARDS
- -------------------------------
In February 1997, SFAS 128, Earnings per Share and SFAS 129, Disclosure of
Information About Capital Structure, were issued. SFAS 128 establishes new
standards for computing and reporting earnings per share. SFAS 129 requires an
entity to explain the pertinent rights and privileges of outstanding securities.
The Company has adopted these new standards in the current fiscal year and the
affect of the adoption was not material.
In June 1997, SFAS 130, Reporting Comprehensive Income, was issued. SFAS 130
establishes new standards for reporting comprehensive income and its components
and is effective for fiscal years beginning after December 15, 1997. The Company
expects that comprehensive income (loss) will not differ materially from net
income (loss).
In June 1997, SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, was issued. SFAS No. 131 changes the standards for
reporting financial results by operating segments, related products and
services, geographic areas and major customers. The Company must adopt the new
standard no later that November 30, 1999.
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<PAGE> 14
II. OTHER INFORMATION
ITEM 2
(a) Not Applicable.
(b) Not applicable.
(c) On May 15, 1998, Clarion Capital Corporation ("Clarion")
converted two convertible notes in the aggregate principal amount of $609,558
into an aggregate number of 16,569,404 Common Shares of the Company. Immediately
thereafter, CPS purchased all 16,569,404 Common Shares from Clarion for
$230,000.
In addition, on May 15, 1998, CPS and the Company entered into
the Second Amended and Restated Management Services Agreement, pursuant to which
CPS agreed to accept 5,025,745 Common Shares in lieu of accrued management fees
equaling $196,900. All the Common Shares issued to Clarion and CPS were issued
in reliance on Section 4(2) to the Securities Act of 1933, as amended. The
shares sold by Clarion to CPS were sold in reliance on Section 4(1) of the
Securities Act of 1933, as amended. No underwriting discounts or commissions
were paid in connection the sale of any of these securities and all the shares
acquired by CPS were acquired for investment purposes.
ITEM 5
CAUTIONARY STATEMENT FOR PURPOSES OF THE
"SAFE HARBOUR" OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
Certain statements in the Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements included in
this Quarterly Report on Form 10-QSB, in the Company's press releases and in
oral statements made by or with the approval of an authorized executive officer
of the Company constitute "forward-looking statements" as that term is defined
under the Private Securities Litigation Reform Act of 1995. These may include
statements projecting, forecasting or estimating Company performance and
industry trends. The achievement of the projections, forecasts or estimates is
subject to certain risks and uncertainties. Actual results and events may differ
materially from those projected, forecasted or estimated. The applicable risks
and uncertainties include general economic and industry conditions that affect
all businesses, as well as matters that are specific to the Company and the
markets it serves.
14
<PAGE> 15
General risks that may impact the achievement of such forecasts include
compliance with new laws and regulations; significant raw material price
fluctuations; currency exchange rate fluctuations; business cycles; and
political uncertainties. Specific risks to the Company include an inability of
the Company to finance its working capital needs; an inability of the Company to
curtail its recurring losses; an inability of the Company to successfully
integrate the business of Sentex and Monitek; a risk of recession in the
economies in which its products are sold, such as the Chemical or Petroleum
industries; and new or emerging products from current competitors. In light of
these and other uncertainties, the inclusion of a forward-looking statement
herein should not be regarded as a representation by the Company that the
Company's plans and objectives will be achieved.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) 10(4) The Second Amended and Restated Management Agreement between the
Company and CPS Capital, Ltd., dated March 15, 1998.
10(5) The Note Exchange Agreement between the Company and Clarion
Capital Corporation, dated March 15, 1998.
(b) During the quarter ended May 31, 1998, the Company did not file any
reports on Form 8-K.
SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized:
Date: July 15, 1998 SENTEX SENSING TECHNOLOGY, INC.
By: /s/ Robert S. Kendall
------------------------------------------
Robert S. Kendall, Chief Executive Officer
/s/ James S. O'Leary
------------------------------------------
James S. O'Leary, Chief Financial Officer
15
<PAGE> 1
Exhibit 10(4)
SECOND
AMENDED AND RESTATED
MANAGEMENT SERVICES AGREEMENT
CPS
This Agreement has been executed on May 15, 1998, by and between CPS CAPITAL
LTD., an Ohio limited liability company, whose principal offices are located at
of 1801 East Ninth Street, Suite 1510, Cleveland, Ohio 44114 ("CPS"), and SENTEX
SENSING TECHNOLOGY, INC., an New Jersey corporation, whose principal offices are
located at 553 Broad Avenue, Ridgefield, New Jersey 07657 ("Sentex").
PRELIMINARY STATEMENTS:
A. CPS possesses a diverse executive management background in
manufacturing, distribution and service industries.
B. CPS also has direct management experience in Finance,
Marketing, Sales, Business Systems, Strategic Planning, and
Human Resources and is willing to provide services to Sentex
based on this background.
C. CPS has made these services available to Sentex.
D. Sentex desires to have these services provided by CPS.
E. CPS has provided these services to Sentex during fiscal 1997
and is due the sum of $196,900 for which it has not yet been
paid.
F. The parties have agreed that effective December 1, 1998 CPS
would reduce its fee to $250,000 per year and that Sentex
would pay CPS the unpaid balance of $196,900 or a portion
thereof in common shares, without par value, of Sentex
("Common Shares") to the extent permitted under the New Jersey
Shareholder Protection Act ("Act").
G. The parties have agreed to amend and restate their prior
agreement to account for the changes in Preliminary Statement
E and F.
<PAGE> 2
Therefore, in consideration of the mutual covenants set forth herein, the
parties hereto agree as follows:
1. MANAGEMENT SERVICES. Subject to the terms and conditions of this
Agreement, Sentex hereby retains CPS, as an independent contractor, to
provide executive management services to Sentex and its subsidiaries
(collectively the "Sentex Companies"). The nature and extent of the
services to be provided may vary from time to time as agreed by the
parties (the "Services"), but shall include:
(a) those services normally provided by the executive
officers of a corporation of similar size and
diversity including, without limitation, those
services normally provided by the Chief Executive
Officer, the Chief Operating Officer and Corporate
Secretary;
(b) management and oversight of the accounting and
financial functions of the Sentex Companies;
(c) management of advertising and promotions for all
business segments;
(d) strategic planning;
(e) stockholders relations;
(f) supervision of day to day business operations;
(g) perform those items set forth in the Interim Letter
Agreement during the pendency of the Merger
Agreement; and
(h) upon the consummation of the Merger, continue to
perform the items set forth in the Interim Letter
Agreement.
The Services will be performed by Robert S. Kendall acting in
his capacity as Chairman, President and Treasurer of Sentex
and James G. Few acting in his capacity as Vice President,
Secretary and Chief Operating Officer of Sentex (collectively,
the "Executive Officers") and other CPS employees as, from
time to time, may be required to provide the Services to be
rendered hereunder. The parties may add, remove or substitute
personnel from time to time as they may agree; provided,
however, that at all times the Executive Officers shall be
elected by the Board of Directors of Sentex and shall hold
office until their successors are qualified and chosen.
Notwithstanding any of the foregoing to the contrary, the
nature and extent of Services to be performed by CPS, through
the Executive Officers and other CPS employees, shall in all
respects be determined by the Board of Directors of Sentex.
2. PERFORMANCE OF SERVICES. Notwithstanding that the nature and extent
of the services will be determined in all respects by the Board of
Directors of Sentex, the manner in which the Services are to be
performed and the specific hours to be worked by CPS personnel shall be
determined in all respects by CPS.
3. COMPENSATION.
(a) Effective December 1, 1997, Sentex will pay a fee to CPS
(the "Compensation") at the annual rate of $250,000. The
Compensation shall be payable monthly, in advance,
-2-
<PAGE> 3
and due no later than the tenth day of each month.
Notwithstanding the foregoing sentence, in the event Sentex
shall be unable to pay the fee in accordance with the terms in
the prior sentence, Sentex shall pay the fee to CPS as soon as
the financial condition of Sentex will permit such fee to be
paid and in all events Sentex shall record such a fee as a
liability of Sentex. The Compensation includes an allocation
of CPS's overhead costs, including, without limitation, rent,
utilities, office, clerical, personnel and administrative
expenses. The Compensation is subject to change based upon
changes in Sentex's business activity; provided, however, any
such change will become effective only upon thirty days notice
to Sentex and require the written approval of a majority of
the members of the Board of Directors of Sentex who are
neither an officer nor controlling member of CPS. Upon
Termination of this Agreement (as defined in Section 5 hereof)
the Compensation shall cease; provided, however, CPS shall be
entitled to Compensation for periods or partial periods that
occurred prior to Termination and for which CPS has not yet
been paid.
(b) In exchange for $196,900 of the fiscal 1997 fee that has
not been paid, Sentex hereby issues to CPS 5,025,745 Common
Shares; provided, however, that in the event is shall have
been determined that the number of Common Shares issued to CPS
exceeds that number of Common Shares that are permitted to be
issued to CPS under Act, then CPS shall return such excess
Common Shares to the Company.
4. EXPENSE REIMBURSEMENT. CPS shall be entitled to reimbursement from
Sentex for all reasonable "out-of-pocket" expenses incurred in the
performance of the Services hereunder in accordance with and subject to
Sentex's regular policies in effect regarding reimbursement of expenses
and the documentation required in connection therewith.
5. TERM/TERMINATION. The term of this Agreement shall be for a period
of one year, to commence on the date hereof, and shall renew,
automatically, for successive terms of the same duration. This
Agreement may be terminated, with or without cause, by either party
upon thirty days written notice of termination to the other party
("Termination").
6. INDEPENDENT CONTRACTOR. It is understood by the parties to this
Agreement that CPS is an independent contractor to Sentex and nothing
in this Agreement shall be construed to create an employer/employee
relationship between any of the Sentex Companies and any of the
personnel of CPS. The Compensation provided for hereunder includes all
benefits due or owed to the Executive Officers by CPS, including,
without limitation, vacation pay, health, life or disability insurance,
workman's compensation (collective, "Additional Benefits") and the
Sentex Companies shall incur no responsibility or liability for any
such Additional Benefits.
7. ASSIGNMENT. CPS's obligations under this Agreement may not be
assigned or transferred to any other person, firm, or corporation
without the prior written consent of Sentex.
8. CONFIDENTIALITY. CPS acknowledges and agrees that the Sentex
Companies maintain confidential and proprietary information and trade
secrets, including, without limitation, discoveries, ideas, inventions,
drawings, blueprints, manuals, customer and supplier lists and other
material of a technical, business or fiscal nature (collectively
"Confidential Information"). CPS agrees not to disclose any
Confidential Information to third parties unless authorized to do so by
Sentex in writing, except, however, that CPS may disclose or use such
Confidential Information in the performance of the Services hereunder.
The foregoing restriction shall not apply to any information that is in
the public domain or becomes available to CPS, after the Termination of
the Agreement, from sources other than Sentex. CPS acknowledges and
agrees
-3-
<PAGE> 4
that disclosures of Confidential Information would cause irreparable
damage to Sentex and, in the event of breach of this provision, Sentex
would be entitled to any and all remedies at law and equity including
temporary and permanent injunctive relief.
9. COVENANT NOT TO COMPETE. Except as otherwise mutually agreed to by
the parties, during the Term of this Agreement and for one year
thereafter, CPS shall not engage, directly nor indirectly, in any
business that is competitive with the business that is being conducted
by the Sentex Companies or solicit or attempt to solicit any business
from any person, firm or entity that was or is a customer or is a
prospective customer of the Sentex Companies. For the purposes of this
paragraph, "prospective customer" shall mean a potential customer which
one of the Sentex Companies has solicited or with whom one of the
Sentex Companies has had active discussions concerning potential
business at any time during the Term of this Agreement. CPS
acknowledges, and agrees that, in the event of the breach of this
paragraph, Sentex would be entitled to any and all remedies at law and
equity including temporary and permanent injunctive relief.
10. INDEMNIFICATION. CPS hereby agrees to indemnify and hold harmless
Sentex, its successors and assigns, from and against any and all
claims, investigations, losses, damages, liabilities, actions and
causes of action including, without limitation, reasonable attorney
fees and costs of investigation, arising out of any actual violation of
the Act resulting from the payment by Sentex to CPS of management fees
that constitutes, in whole or in part, a prohibited "business
combination" (as defined in the Act).
11. RETURN OF RECORDS. Upon termination of this Agreement, CPS shall
deliver all records, notes, data, memorandums, models, and equipment of
any nature that are in CPS's possession or under CPS's control and that
are the property or relate to the business of any of the Sentex
Companies.
12. NOTICES. All notices required or permitted under this Agreement
shall be in writing and shall be deemed delivered when delivered in
person or deposited in the United States mail, postage prepaid,
addressed as follows:
CONSULTANT COMPANY
CPS Capital Ltd. Sentex Sensing Technology, Inc.
Robert S. Kendall Robert Kendall
President President
1801 East Ninth Street 1801 East Ninth Street
Suite 1510 Suite 1510
Cleveland, Ohio 44114 Cleveland, Ohio 44114
Such address may be changed from time to time by either party by
providing written notice to the other in the manner set forth above.
13. ENTIRE AGREEMENT. This Agreement contains the entire agreement of
the parties and there are no other promises or conditions in any other
agreement whether oral or written. This Agreement supersedes any prior
written or oral agreements between the parties.
14. AMENDMENT. This Agreement may be modified or amended if the
amendment is made in writing and is signed by both parties.
-4-
<PAGE> 5
15. SEVERABILITY. If any provision of this Agreement shall be held to
be invalid or unenforceable for any reason, the remaining provisions
shall continue to be valid and enforceable. If a court finds that any
provision of this agreement is invalid or unenforceable, but that by
limiting such provision it would become valid and enforceable, then
such provision shall be deemed to be written, constructed, and enforced
as so limited.
16. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to enforce
any provision of this Agreement shall not be construed as a waiver or
limitation of that party's right to subsequently enforce and compel
strict compliance with every provision of this Agreement.
17. APPLICABLE LAW. This Agreement shall be governed by the laws of the
State of New Jersey without regard to principles of conflict of laws.
CPS CAPITAL LTD. SENTEX SENSING TECHNOLOGY, INC.
By: /s/Robert S. Kendall By: /s/Robert S. Kendall
Robert S. Kendall, President Robert S. Kendall, President
-5-
<PAGE> 1
Exhibit 10(5)
NOTE CONVERSION AGREEMENT
This Note Conversion Agreement (this "Agreement") is entered
this 15th day of May, 1998, by and between Sentex Sensing Technology, Inc., a
New Jersey corporation ("Sentex"), and Clarion Capital Corporation, a Delaware
corporation ("Clarion").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, on November 30, 1996, Sentex issued to Clarion (i) a
promissory note in the aggregate principal amount of $473,164.00 (the "Class A
Convertible Note"), which is exchangeable, under certain conditions, into
8,419,288 common shares, no par value, of Sentex (the "Common Shares") and (ii)
a promissory note in the aggregate principle amount of $136,414.00 (the "Clarion
Note" and together with the Class A Convertible Note, the "Convertible Notes"),
which such Clarion Note is exchangeable, under certain conditions, into
7,031,649 Common Shares;
WHEREAS, the Board of Directors of Sentex has determined that
it is in the best interest of Sentex to permit Clarion to convert the
Convertible Notes into 15,450,937 Common Shares (the "Principal Shares"),
without regard to the actual restrictions contained on such Convertible Notes;
and
WHEREAS, Sentex and Clarion have agreed that Clarion is
entitled to receive 1,118,469 Common Shares in satisfaction of all interest due
under the Convertible Notes through the date hereof (the "Interest Shares" and
together with the Principle Shares, the "Converted Shares"); and
WHEREAS, Clarion has determined that it desires to convert the
Convertible Note into the Principal Shares and accept the Interest Shares in
lieu of all other claims for interest under the Convertible Notes;
NOW, THEREFORE, in consideration of the premises and of the
mutual promises and covenants set forth herein, the parties agree to the
following:
1. CONVERSION OF NOTES. Clarion hereby surrenders to the
custody of Sentex the Convertible Notes, together with all interest accrued
thereon in exchange for Converted Shares. Sentex hereby issues to Clarion the
converted Shares in exchange for the Convertible Notes and Clarion's claim for
all accrued interest due thereon.
2. REPRESENTATIONS AND WARRANTIES OF CLARION. Clarion
represents and warrants to Sentex that (i) Clarion is duly organized, validly
existing, and in good standing in the State of Delaware and is licensed to do
business and in good standing in the State of Ohio; (ii) Clarion has the full
power and authority to execute, deliver and perform its obligations under this
Agreement; (iii) Clarion has taken such action as is necessary to authorize the
execution, delivery and performance of this Agreement; (iv) neither the
execution nor the performance of this Agreement will conflict with, be a
violation of, or cause a breach of any agreement to which Clarion is a party;
(v) from November 30, 1996 through the date hereof, Clarion has been the only
holder of the Convertible Notes; and (vi) no third party has any right or claim
to payments or other performance due under the either Convertible Note. These
representations and warranties shall survive the performance of this Agreement.
Clarion shall indemnify and hold Sentex harmless from and against any and all
losses, liabilities, damages, costs and expense asserted against, imposed upon
or incurred or suffered by Sentex as a result of any inaccuracy in these
representations or warranties; provided Clarion shall have the right to control
the defense of any claim by a third party.
3. REPRESENTATIONS AND WARRANTIES OF SENTEX. Sentex represents
and warrants to Sentex that (i) Sentex is duly organized validly existing; (ii)
Sentex has the full power and authority to
<PAGE> 2
execute, deliver and perform its obligations under this Agreement; (iii) Sentex
has taken such action as is necessary to authorize the execution, delivery and
performance of this Agreement; (iv) neither the execution nor the performance of
this Agreement will conflict with, be a violation of, or cause a breach of any
agreement to which Sentex is a party; and (v) the Conversion Shares have been
duly authorized are fully paid and nonassessable. These representations and
warranties shall survive the performance of this Agreement. Sentex shall
indemnify and hold Clarion harmless from and against any and all losses,
liabilities, damages, costs and expense asserted against, imposed upon or
incurred or suffered by Clarion as a result of any inaccuracy in these
representations or warranties; provided Sentex shall have the right to control
the defense of claim by a third party.
4. SECURITIES FILINGS. Clarion shall be responsible to make a
file, at its own expense, all filing required by the Securities and Exchange
Commission.
5. TERMINATION OF AGREEMENTS. Effective upon the disposition
of the Converted Shares by Clarion to any third party that is not an affiliate
or associate of Clarion, all of Clarion's rights and obligations and all of
Sentex's rights and obligations (as such rights and obligations relate to
Clarion) under the Participation Rights Agreement, dated November 29, 1996 and
the Board Representation Agreement, dated November 29, 1996, shall automatically
terminate.
6. MUTUAL RELEASE.
(a) Except as provided for in Section 6(b), upon the
disposition of the Converted Shares by Clarion, each of
Clarion and Sentex, on its own behalf and on behalf of its,
successors, and assigns, hereby waives, releases, discharges
and forever holds harmless the other, its shareholders,
directors, officers, agents and employees, and anyone
connected with any such entity from any and all claims,
demands, rights and causes of action of whatsoever kind and
nature that Clarion or Sentex, as the case may be, may have
relating to the action taken by either of them in connection
with Clarion's its investment in Sentex or its associate's
representation on the Board of Directors of Sentex, including
any claim in contract, or tort, or under any federal or state
statute, including without limitation federal or state
securities laws.
(b) Notwithstanding anything in this Section 6 to the
contrary, Seller nor Buyer releases the other from any claim
relating to fraud, intentional misrepresentation or the
misappropriation of property, or from any claim that may arise
under this Agreement.
7. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements with respect to such subject matter.
8. BINDING EFFECT ASSIGNMENT. The provisions of this Agreement
are binding upon and inure to the benefit of the parties hereto and their
respective successors. This Agreement may not be assigned by either party
without the prior written consent of the other party.
9. APPLICABLE LAW. This Agreement shall be governed and
construed exclusively in accordance with the laws of the State of New Jersey,
without regard to principles of conflicts of laws.
10. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original for all purposes, and
all of which together shall constitute one agreement.
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have set their hands to
this Agreement on the date first written above.
SENTEX SENSING TECHNOLOGY, INC.
/s/ Robert S. Kendall
-----------------------------------------
Robert S. Kendall, Chairman and President
CLARION CAPITAL CORPORATION
/s/ Morty Cohen
-----------------------------------------
Morty Cohen, Chairman
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SENTEX SENSING TECHNOLOGY, INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT, FILED ON FORM
10-QSB, FOR THE PERIOD ENDING MAY 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<CASH> 1,240,035
<SECURITIES> 0
<RECEIVABLES> 1,111,346
<ALLOWANCES> 34,792
<INVENTORY> 1,360,406
<CURRENT-ASSETS> 3,899,072
<PP&E> 478,134
<DEPRECIATION> 252,434
<TOTAL-ASSETS> 4,384,022
<CURRENT-LIABILITIES> 4,262,634
<BONDS> 10,810
0
0
<COMMON> 2,153,489
<OTHER-SE> (2,042,911)
<TOTAL-LIABILITY-AND-EQUITY> 4,384,022
<SALES> 1,624,552
<TOTAL-REVENUES> 1,650,999
<CGS> 812,118
<TOTAL-COSTS> 812,118
<OTHER-EXPENSES> 1,198,391
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,690
<INCOME-PRETAX> (428,200)
<INCOME-TAX> 0
<INCOME-CONTINUING> (428,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (428,200)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
