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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No, 2-13328
For the fiscal year ending November 30, 1997
SENTEX SENSING TECHNOLOGY, INC.
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(Exact name of Registrant as specified in its charter)
New Jersey 22-2333899
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1801 East Ninth Street
Cleveland, Ohio 44114
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(Address of principal executive offices) (Zip Code)
(216) 687-9133
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(Registrant's telephone number including area code)
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Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Shares, no par value
Indicate by check 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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Sentex Sensing Technology, Inc. Common
Shares, no par value, held by non-affiliates, computed by reference to the
average of the closing bid and asked prices as reported on the Over-the Counter
Bulletin Board on February 27, 1998: $3,033,940.
Number of shares of Common Shares (No Par Value) of SENTEX SENSING
TECHNOLOGY, INC., issued and outstanding as of February 27, 1997 is 78,919,762.
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TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One)
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Part IV -Item 13 - Exhibits, Financial Statement
Schedules, and Reports on Form 8-K See Page 26
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ITEM 1 BUSINESS
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DEVELOPMENT OF BUSINESS
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Initially formed in November 1980 under the name Sinex Corp., Sentex
Sensing Technology, Inc., a New Jersey corporation (the "Company"), commenced
the commercial production of a portable explosives detector of its own design,
the T-54, which was sold on a worldwide basis by an unaffiliated third party
pursuant to an exclusive distribution agreement. Since 1984, the Company has
marketed this product under the trade name Scanex Jr. the Company also markets a
walk-through, stationary explosives detector, the Scanex I. Additionally, in
1984, the Company entered the environmental marketplace with both portable and
fixed site gas chromatography that tests air, soil, and water for chemicals
deemed potentially hazardous. Through fiscal 1996, the Company generally
conducted the operations of its business through Sentex Systems, Inc., a
Delaware corporation and wholly owned subsidiary of the Company.
In April 1984, the Company sold, in its initial public offering,
12,500,000 units. Each unit consisted of two Common Shares, no par value of the
Company (the "Common Shares") and a warrant to purchase one Common Share. No
warrants are presently outstanding.
On March 1, 1996, certain shareholders of the Company sold a
substantial portion of their shares to CPS Capital, Ltd., an Ohio limited
liability company, ("CPS"). As a result of such acquisition, CPS became the
record holder of 17,706,461 Common Shares. In addition, pursuant to two
shareholders agreements with two of the then principal shareholders of the
Company, CPS obtained voting control of an additional 9,389,204 Common Shares.
In total, CPS was the beneficial owner of 27,095,665 of the Company's Common
Shares, which currently represents approximately 34% of the outstanding Common
Shares. As of March 1, 1998, CPS owned of record 19,706,461 Common Shares and
beneficially owns 26,095,665 Common Shares. CPS is controlled by Robert S.
Kendall, the Chairman and Chief Executive Officer of the Company. (See Item 12).
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 operating 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 approximately 60% of Monitek's total revenues. 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. During the past
year, the Company has started to integrate the operations of Monitek with the
operations of the Company.
Prior to the Merger, there were two classes of Monitek common stock
outstanding. Upon the consummation of the Merger, the shares of Common Stock,
$0.01 par value, of Monitek (the "Monitek Common Stock") were exchanged for an
aggregate of 11,659,681 Common Shares or 6.8974890 Common Shares for each share
of Monitek Common Stock. The shares of Monitek Class A Common Stock, $0.01 par
value, of Monitek (the "Monitek Class A Common Stock") were exchanged for Class
A Convertible Notes in the aggregate principal amount of $485,586 (the "Class A
Convertible Notes"), each share of Monitek Class A Common Stock being exchanged
for $0.3876389 of principal of a Class A Convertible Note. The principal amount
of the Class A Convertible Notes can be converted into an aggregate of 8,640,320
Common Shares (at a rate of $0.0562 per share) after approximately three years
(or earlier under certain conditions). The conversion rate of $0.0562 will
enable the holders of the Class A Convertible Notes to receive on conversion
6.8974890 Common Shares for each share of Monitek Class A Common Stock owned by
such holders immediately prior to the consummation of the Merger.
Clarion Capital Corporation, a Delaware corporation and the principal
stockholder of Monitek prior to the Merger ("Clarion"), exchanged a promissory
note issued by Monitek in the aggregate principal amount of $476,940 that was
secured by substantially all the assets of Monitek for a convertible note issued
by the Company in the
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principal amount of $136,414 (the "Clarion Note"). The principal amount of the
Clarion Note can be converted into 7,031,649 Common Shares (at a rate of $0.0194
per share) after approximately three years (or earlier under certain
conditions).
The Merger was consummated as part of a strategic plan of the Company
to counteract the reduction of its sales in the last four years. The estimated
fair market value of tangible assets and liabilities acquired pursuant to the
Merger was $2,650,153 and $2,013,236 (approximately $540,000 of which was
eliminated in consolidation), respectively. Goodwill of $251,402 was recorded as
an intangible asset in connection with the Merger (see Note 3 to the Financial
Statements for more detail on the accounting treatment and consolidated results
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.
DESCRIPTION OF BUSINESSES OF SENTEX AND MONITEK
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General
Sentex is engaged in the business of developing, manufacturing and
selling automated instruments designed to identify and measure the
concentrations of certain chemicals in air, soil and water. Sentex sells
portable and walk-through explosive detectors, two portable air analyzers, a
portable and fixed-site water-monitoring system and a sensor that measures the
total organic content of air. Sentex's products are sold to customers who employ
them for bomb detection, environmental testing and the monitor and control of
specific industrial processes. Sentex also provides technical assistance and
service to its customers and on occasion performs research and development on a
contractual basis to develop instrumentation designed to fulfill
customer-specific analytical requirements. All of Sentex's products employ gas
chromatography as the method of analysis.
Gas chromatography, a well-established technique with more than 30
years of application, is used to identify unknown chemicals and determine their
concentrations in a given sample. The identification of the chemical and its
concentration are obtained by comparing the speed electronic intensity at which
the pure unknown chemical travels in a controlled environment to the known speed
of and electronic intensity of a pure known chemical. Sentex has refined this
basic process to allow its products to detect minute quantities of potentially
hazardous chemicals.
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 products are typically used in-line (i.e., inserted directly into the
monitored liquid), thereby facilitating automation and control of various
industrial processes by providing on-line (i.e., continuous) measurement of the
characteristic being monitored. Monitek's current line of products, which are
based on optical, ultrasonic, acoustic and magnetic technologies, have been
specially adapted for various applications in the chemical and petrochemical,
water treatment, food and beverage, pulp and paper, and biotechnology and
pharmaceutical industries, where their abilities to withstand high temperature,
extremes in pressure and corrosive environments are important factors. The
Company believes Monitek's instruments are capable of adaptation and enhancement
for use in other industries, as well as for additional applications in those
industries which Monitek currently serves. Monitek's products are currently sold
worldwide.
Existing Products
Existing Sentex Products. Sentex currently markets six products. Four
products are used in environmental testing or process control and the other two
are used to detect explosives.
The Scentoscreen, the Scentograph Plus II, the Aquascan and the
Scentoscan are the four products utilized in testing and control. They are
primarily used in environmental industries or industries that must control a
process.
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The Scentoscreen is a self-contained, portable gas chromatograph
designed specifically as a comprehensive screening tool for determination of
hazardous chemicals. It is completely automatic and detects individual volatile
compounds in air, water and soil.
The Scentograph Plus II is a battery-operated portable gas
chromatograph designed to perform a complete laboratory analysis on-site.
Powered by a detachable, laptop computer, the Scentograph Plus II stores all
data on a disk and is capable of being operated from off-site locations.
The Aquascan is a portable or stationary water-monitoring system that
can detect volatile organic compounds to levels below one part per billion. The
Aquascan is totally computerized and the system can automatically analyze a
water sample from multiple sources and can interface with a variety of water
treatment and remediation systems.
The Scentoscan is a stationary analyzer intended to monitor volatile
compounds in air from up to 32 locations simultaneously. It is fully automatic
and controlled by a desktop portable computer. This product has been recently
redesigned to provide rack-mounted operation, multiple computer interfaces, and
customer-selected alarm levels.
The Scanex Jr. and Scanex I are the two products which are used to
detect explosives. The Scanex Jr. is a portable, briefcase-sized detector that
samples air to detect the presence of the most commonly used explosives. The
Scanex Jr., however, may be unable to detect nonconventional explosives and may
not be effective where explosives are concealed in tightly sealed containers,
which prevent the escape of air. Scanex I is a walk-through explosive detector.
The Scanex I screens persons entering a restricted area or company, such as a
nuclear power plant, to determine the potential presence of explosive substances
by sampling the air surrounding the person. It is also subject to the same
limitations as the Scanex Jr. In fiscal 1997, sales of these two products
comprised an immaterial amount of the Company' total revenues.
Existing Monitek Products. Monitek's products consist of optical based
products, non-optical based products and spare parts of its optical and
nonoptical based products.
(i) Optical Based Products. The heart of Monitek's product line are
suspended solids analyzers, which are in-line monitors that measure clarity,
suspended solids content and purity of liquids. Monitek's two major types of
suspended solids analyzers, which operate on the same basic principle, are
turbidimeters and concentration/content monitors. The suspended solids analyzers
work on the principle of light scatter and/or absorption. Light is emitted by
the instrument and photosensors detect the amount of light that is either
scattered or absorbed by the solids in the liquid. This information is
transmitted to a remote electronic indicating transmitter device, which displays
the data on a scale of the characteristic being monitored and retransmits the
information to a control computer or data logger. Many of Monitek's transmitters
offer alarm features while others eliminate false readings caused by bubbles or
signal an abnormal sample. The sales prices of suspended solids analyzers range
from $4,000 to $10,000 per system.
Monitek's suspended solids analyzers are available in a wide range of
sizes and configurations to meet customer requirements. Monitek's basic
instruments can also be specially adapted for particular applications with the
addition of available options. Certain instruments are designed to be "explosion
proof," (i.e., the instrument is enclosed in such a way as to prevent internal
electrical or chemical reactions from igniting explosive mixtures existing in
the atmosphere surrounding the encased instrument, and have been approved for
the use in explosive environments by Underwriters' Laboratories (U.L.)). This
characteristic is of a particular importance in the petrochemical industry.
Other instruments are adapted to be watertight and dust-tight to protect the
equipment against splashing, seeping or falling water and severe external
condensation, while others are adapted to withstand high temperatures, extremes
in pressure and corrosion for applications in such industries as the chemical
and pulp and paper industries. An example of an adaptation for a particular
application is a line of Monitek's suspended solids analyzers-Cleansimatic
Liquid Analysis Meters (CLAM), which employ a mechanical self-cleaning apparatus
designed to eliminate the problem of fouling inherent in wastewater treatment
applications.
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Monitek has developed two insertable in-line sensors, one for
measurement of consistency, for use in various industries and the other (Cell
Density Analyzer) for measurement of cell growth rate and concentration in
fermentation processes. Fermentation is a major process used in the
pharmaceutical and biotechnology industries and the instrument provides a
continuous measurement relative to cell growth. Unlike Monitek's original line
of suspended solids analyzers, which require accessories fitted to the actual
pipe size to which the instrument is attached, the insertable fiber optic
sensors are capable of being inserted into any size pipe through special
fittings. The advantage of such devices over conventional suspended solids
analyzers is their ability to provide the customer with an easier, more
cost-effective means of installation and servicing, in that it does not require
shutting down the process flow of the liquid or extensive structural work often
necessary with the non-insertable products.
A second optical-based product line is color monitors, which are used
to measure the difference in the absorption of light through a liquid at two
wavelengths. This measurement is indicative of color or concentration. To date,
these instruments have been sold primarily to petrochemical refineries where the
avoidance of color in the final product is essential. Monitek's color monitors
also have application in the processes of color addition and color removal in
such industrial liquids as printing inks, sugar, vegetable oil, beverages and
solvents. Color monitors use photosensors and optical filters that detect the
amount of light absorbed by the pertinent wavelength or color. Sales prices of
color monitors range from $6,000 to $14,000 per system.
(ii) Non-Optical-Based Products. Monitek currently markets three
non-optical-based products. The first is an insertable magnetic flowmeter, a
device that measures flow of liquids in closed pipes. The flow of the measured
liquid through the sensor's magnetic field creates a voltage proportional to the
flow. This voltage is sensed, amplified and combined with the cross-sectional
area of the pipe to produce a flow measurement. Monitek's magnetic flowmeters,
which range in price from $4,000 to $6,000, have applications in water
distribution, water treatment and pulp and paper plants.
The ultrasonic level and flow meter is Monitek's second significant
non-optical-based product line. These instruments were designed to measure the
level of any liquid, solid or granular material in any vessel or open area using
non-contact, ultrasonic techniques and to calculate electronically the height or
volume of the monitored material based on the size of the vessel. When used in a
flume or weir, level is electronically interpreted as flow. Ultrasonic level and
flow meters have traditionally ranged in price from $1,000 to $2,500.
The Micro Pure ultrasonic suspended solids meter, the third significant
non-optical based product line, has allowed Monitek to expand into new markets
and improve its effectiveness in existing markets. The acoustic technique allows
the low range measurement of suspended solids and emulsions independent of color
and coating. Significant opportunities exist for measuring oil in water, inks,
dyes and photographic liquids, all of which have been difficult measurements for
Monitek's optical products because of the lack of light and/or existence of
substances (i.e., oil) which coat the optical parts. Micro Pure products range
in price from $10,000 to $16,000 per system.
(iii) Spare Parts. Sales of spare parts is an important part of
Monitek's business, accounting for approximately 15% of sales volume of Monitek
for the past three years.
Products Under Development
Sentex currently has one new product under development. It is involved
in a joint development project with a British company that manufactures products
that are similar and complementary to those of Sentex. The first version of the
new product is now ready for release and a lower cost version of the product,
which will not require any further development costs on the part of Sentex, is
expected to be available for sale in approximately one year.
Research and development activities of Monitek are primarily devoted to
the development of new products and the adaptation and enhancement of existing
products for new applications. The Company plans to make available a number of
new products and enhancements of existing Monitek products during fiscal 1998.
One of the new
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products is the result of the acquisition of Cypress, which currently has the
product under development. The Company estimates that the design and testing are
95% complete and that the product will be available for sale in the second
quarter of fiscal 1998.
Research and Development
Sentex expensed $177,000 and $213,000 for research and development for
the fiscal years ending 1997 and 1996, respectively. The research and
development was not passed to the Company's customers and was related to the
improvement of existing products including the Aquascan and Scentoscan, and the
development of the new product described above.
Monitek expended approximately $230,000 and $249,000 for research and
development during the fiscal year ended November 30, 1997 ("Monitek Fiscal
1997") and the last 12 months ended November 30, 1996 (the "LTM November 1996"),
respectively. During the Monitek Fiscal 1997, two new Cell Density probes were
introduced and a number of others products were improved. A third new product,
which was expected to be completed several months ago, suffered a setback and is
now scheduled for introduction during the second quarter of fiscal 1998.
The Company has established a joint budget for research and development
for both Sentex and Monitek and authorize expenditure from the budget based on
the overall assessment of the project's potential contribution to the Company's
net income.
Marketing, Distribution and Sales
Sentex markets its portable and fixed-site gas chromatography products
to regulatory and municipal agencies for levels of toxic substances, to
environmental consulting firms involved in analysis and remediation of hazardous
sites, and to businesses that must comply with various environmental
regulations. The list prices of these products range from $15,000 for a portable
battery-operated device to approximately $40,000 for a rack-mounted, plantwide
system. In the United States, Sentex sells these products both directly and
through sales representatives who are engaged on a non-exclusive basis. The
representatives are primarily the same ones that represent Monitek, and they are
overseen by Monitek's three regional sales managers. Commissions paid to these
sales representatives, on sales of the various products, are 15% of list prices.
The representatives receive commissions for sales made in their territories if
they are instrumental in providing the sales lead to Sentex. In addition, Sentex
directly markets these products by placing advertisements in trade publications
and participating in trade shows. With respect to direct sales, Sentex does not
pay commissions.
Sentex has appointed international representatives in Canada, Germany,
England, Italy, Austria, Poland, Switzerland, Israel, Australia, Indonesia,
Taiwan, Korea and a number of countries in South America. International
representatives are sold products at negotiated prices below the suggested list
price and are responsible for the service and the warranty repair for the
products they sell. All sales are made in United States currency and are net of
transportation costs, export fees and any additional charges incurred by the
representatives.
The Scanex Jr. is presently sold directly by Sentex's employees and
through unaffiliated representatives. The list price of the Scanex Jr. is
approximately $10,000. The Scanex Jr. is marketed to local and overseas police
agencies, governmental security agencies and private security firms.
The Scanex I has been marketed to nuclear power plants and to foreign
governments which are concerned about preventing terrorist activities. The
suggested list price of the Scanex I is about $27,000, with discounts on
multiple unit orders. Sentex presently markets these products directly, through
advertisements, or through nonaffiliated, nonexclusive sales representatives,
who receive a 10% commission on any sales generated by their efforts.
In fiscal 1997, the combined sales of the Scanex Jr. and Scanex I
comprised an immaterial amount of the
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Company's total revenues.
Monitek markets its products on a world-wide basis, with particular
emphasis on the United States and Continental Europe. Monitek employs three
regional sales managers, who oversee and monitor approximately 60 independent
sales representatives worldwide, with about half of such representatives selling
in the United States and the other half selling internationally. The Company has
begun to integrate the sales and marketing aspects of both Sentex and Monitek
into one domestic and one international marketing and distribution system. The
system has generally been modeled after the system previously employed by
Monitek.
During fiscal 1997, Sentex had one sale, to its representative in South
Korea, which amounted to $467,700. Other than that one sale, Sentex did not
derive more than 10% of its annual net sales from any one customer during fiscal
1997 or fiscal 1996. During the Monitek Fiscal 1997 and Fiscal 1996, Monitek did
not derive 10% or more of its annual net sales from any one customer.
Manufacturing/Suppliers
Most of the hardware components used in Sentex's products are
manufactured to Sentex's specifications by outside sources. The assembly of the
electronic components of Sentex's products is currently performed at Sentex's
plant in Ridgefield, New Jersey, by one production manager and four full-time
employees. Final assembly and testing of finished products is also performed by
Sentex at its plant. All supplies required for product assembly are commonly
available from a variety of suppliers. Sentex estimates that it currently has
the capacity to double its production within the existing facilities without
requiring a significant increase in production staff.
Monitek's manufacturing operations primarily involve the assembly,
testing, quality control and packaging of materials and components, which are
generally available in the market place from numerous suppliers and sources.
Material and components necessary for Monitek's manufacturing activities have
always been available, and Monitek does not anticipate any future shortages or
unavailability of such materials and components.
Monitek's inventory is comprised primarily of parts to make
sub-assemblies, fully assembled instruments and materials required to adapt
instruments for particular applications and customer specifications. Monitek
attempts to maintain a sufficient inventory of materials and components it may
fill orders for its products within four to eight weeks after receipt of an
order.
Warranties and Disclaimers
All of Sentex's products are sold with a one-year warranty for
defective parts. If a unit requires a repair, the customer must pay for shipping
the unit to Sentex's plant in Ridgefield, New Jersey, and Sentex will replace
defective parts at its expense. Upon the expiration of the one-year warranty,
Sentex will continue to make any necessary repairs at Sentex's or the customer's
plant, at the expense of the customer. Sentex disclaims liability for any loss
or consequential damage suffered in connection with the use of its products.
While Sentex believes such disclaimer would protect Sentex from any liability in
the event of a claim brought against Sentex, there can be no guarantee that the
courts would give effect to the disclaimer and that Sentex would be insulated
from any liability. Sentex believes it has adequate product liability insurance
to cover the costs associated with its warranty policy.
Monitek typically warrants its products for a period of one year after
shipment and passes along any warranties from original manufacturers of
components used in its products. To date, Monitek has not had any significant
claims pursuant to warranties. Monitek provides for its own equipment servicing
for certain products with in-house field service personnel.
Competition
There are companies, including Photovac and Siemens, which produce
products which compete with
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substantially all of Sentex's existing products. These companies have
substantially greater resources than Sentex. Sentex's competitors primarily
compete against its portable and stationary gas chromatography products. Sentex
is aware of several other portable gas chromatography products and one
water-monitoring system that are capable of detecting toxic chemicals. Based
upon price and performance features, however, Sentex believes that its products
compete favorably.
Sentex's portable and walk-through explosives detectors face
competition from other companies which currently sell such devices. Sentex
believes that its products are more sensitive and accurate, have fewer false
alarms than the competing explosives detectors, and are competitively priced.
Sentex's competitors have greater financial, manufacturing,
technological or marketing resources and current sales that exceed those of
Sentex. In addition, there are relatively few barriers to entry for new
manufacturers and, in the future, Sentex could face competition from other
companies currently not engaged in the sale or development of hazardous
substance detectors.
Monitek sells products which have use in a wide variety of applications
in many industrial and municipal markets. Monitek faces competition in each
market to which it sells products from companies which sell products that are
substantially similar to, or which perform comparable functions as, those sold
by Monitek. McNabb, Wedgewood Technologies, Optek, BTG, Hach and Sigrist are
Monitek's principle competitors which sell products using the same or similar
technologies as those of Monitek. Valmet Automation Inc., Royce Instruments and
Kay-Ray Inc. sell devices based on mechanical, ultrasound and nuclear
technologies which compete with certain of the products sold by Monitek. Certain
of Monitek's competitors have production facilities in Europe and consequently
may not be subject to the same fluctuations in the value of the United States
dollar as Monitek is with respect to its German subsidiary. All of such
companies, and many smaller entities that specialize in a limited number of
products competitive with those of Monitek, have financial, marketing and other
resources substantially greater than those of Monitek.
Monitek believes that the most significant competitive factors with
respect to the industrial market are technical performance and adaptability,
quality, maintenance and service, while price is the major competitive factor
for the municipal market. Monitek believes it has a competitive advantage in its
ability to service numerous market segments while other companies, other than
BTG, service only a limited market. Accordingly, a salesperson or distributor
calling on an industrial company which has a liquid-based product or uses water
in its manufacturing process will generally have a number of Monitek's products
in its line which it could sell.
Patents, Trademarks and Trade Secrets
Sentex presently holds no patents and does not believe patents would
significantly protect Sentex's trade secrets and processes. Although Sentex may,
in the future, seek patent protection on certain of the components of its
products, Sentex intends to rely primarily on common law protection of trade
secrets and other confidential information and on confidentiality agreements
with its employees and distributors to protect its trade secrets and processes
from competitors. Furthermore, there can be no assurance that Sentex's present
or future products will not infringe on patents held by others. Sentex has not
registered the trademarks "Scanex I," "Scanex Jr.," "Scentoscreen," "Scentograph
Plus II," "Scentogun," "Scentoscan" or "Aquascan." Sentex does not believe that
marketing of these products will be significantly affected in the event it is
required to market these products under other trade names.
Monitek has obtained 11 United States patents and a number of foreign
patents covering fundamental technology and applications of use of the Micro
Pure product line and some other potential products. Monitek has also obtained a
United States patent and several foreign patents for its Cell Density Analyzer.
Monitek believes that trade secrets and unpatented proprietary
knowledge used to adapt its products for specific industries and applications is
of greater importance to the development of its competitive position than
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patents. All of Monitek's employees have entered into confidentiality agreements
and have agreed to assign to Monitek any inventions relating to Monitek's
business made by them while in Monitek's employ. However, there can be no
assurance that others may not acquire or independently develop similar
technologies which will enable them to more effectively compete with Monitek.
While Monitek believes that none of its instruments infringes upon
patents or other proprietary rights of others, there is a possibility that other
parties may claim that parts of Monitek's instruments do infringe upon their
patents or other proprietary rights. There can be no assurance that Monitek will
be successful in defending against such claims of infringement, and the expenses
of defending such claims could be substantial.
Monitek has obtained registered trademarks for the names "Monitek",
"CLAM" and "Micro Pure" and the Monitek and Micro Pure logos.
Employees
As of February 27, 1998, the Company employed a total of approximately
45 full-time staff, approximately 6 of which devote their time to both Sentex
matters and Monitek matters, approximately 9 of which work exclusively for
Sentex and 30 of which work exclusively for Monitek.
Government Regulations
The Company complies with a number of government regulations, including
environmental regulations. The cost of such compliance is not significant. The
Company has routinely received all governmental approvals necessary to conduct
its business.
ITEM 2 PROPERTIES
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Sentex currently leases 4,500 square feet on two floors of a
three-story building at 553 Broad Avenue, Ridgefield, New Jersey 07657, under a
month-to-month lease. The premises are used for executive offices, research and
development, product assembly and are generally in good condition. The premises
are leased from a principal of the Company, Dr. Amos Linenberg, the Executive
Vice President of the Company. Rental expense amounted to $56,000 for the year
ended November 30, 1997. (See Item 12).
Monitek's manufacturing operations occupy approximately 23,500 square
feet of leased space in Hayward, California. In addition, Monitek conducts
corporate accounting, sales and research and development functions in
California. The lease provides for a base annual rental of approximately
$149,000 and expires in November 1999.
Monitek also leases approximately 3,000 square feet of office and
warehouse space in Dusseldorf, Germany pursuant to a lease that expires in
October 1998, and provides for a base annual rental of $81,000, based on the
rate of exchange in effect at November 30, 1997.
The Company believes that these facilities are adequate to provide for
the Company's business needs during the remaining terms of the respective
leases.
ITEM 3 LEGAL PROCEEDINGS
- ------ -----------------
There are no material lawsuits pending, or to the Company's knowledge,
threatened against the Company or any of its subsidiaries.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None.
-10-
<PAGE> 11
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- ------ --------------------------------------------------------
The Company's Common Shares were traded on the Nasdaq Small Cap Market
tier of The Nasdaq Stock Market under the symbol "SENS" through November 11,
1997. The Common Shares now trade on the Over-the-Counter Bulletin Board. The
range of high and low closing bid prices by fiscal quarter is presented below.
<TABLE>
<CAPTION>
1997 HIGH LOW
- ---- ---- ---
<S> <C> <C>
1st quarter .094 .063
2nd quarter .094 .031
3rd quarter .094 .031
4th quarter .063 .031
1996 HIGH LOW
- ---- ---- ---
1st quarter .094 .031
2nd quarter .718 .031
3rd quarter .281 .156
4th quarter .156 .063
</TABLE>
The bid quotations represent interdealer quotations and do not include
retail markup, markdown or commissions, and may not represent actual
transactions. On February 27, 1998, there were 78,919,762 Common Shares issued
and outstanding and approximately 1,300 holders of record of the outstanding
Common Shares. The Company has not paid a dividend since becoming a public
company in November of 1980. The Company does not plan to pay cash dividends in
the foreseeable future.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
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 Annual Report on Form 10-KSB, 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.
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
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.
-11-
<PAGE> 12
FINANCIAL CONDITION
- -------------------
Effects of Merger, Working Capital and Liquidity
The Merger became effective on November 30, 1996, the last day of the
Company's fiscal year. Accordingly, assets of approximately $2,900,000
(including $250,000 of goodwill) and liabilities of approximately $1,473,000
(net of a $540,000 payable that was eliminated in consolidation) of Monitek have
been included in the balance sheet of the Company. The inclusion of such assets
and liabilities dramatically increased the Company's assets and liabilities as
compared to the assets and liabilities reported for fiscal year 1995. Total
current assets increased to $4,368,343 at November 30, 1996 as compared to
$2,817,166 at November 30, 1995 and, for the same dates, current liabilities
increased to $2,378,406 from $118,149. No revenues, expenses or other results
from the operations of Monitek have been included in the Company's Consolidated
Statements of Operations for fiscal year 1996. (See Note 3 to the Company's
Financial Statements). As a result, the Balance Sheets shown in the accompanying
independent auditors' report are comparable for November 30, 1997 and November
30, 1996, but the income statements for Fiscal Years 1997 and 1996 are not
comparable.
During the last three fiscal years of Monitek, prior to the Merger,
Monitek had incurred recurring losses from operations. In addition, Monitek's
certified public accountants, KPMG Peat Marwick LLP, had included in their
auditors' report, which covers Monitek's financial statements for each of the
years in the three-year period ended March 31, 1996, a statement that Monitek's
recurring losses from operations raised substantial doubt about Monitek's
ability to continue as a going concern. Subsequently, for fiscal 1997 and the
LTM November 1996, respectively, Monitek has sustained losses of approximately
$746,000 and $1,204,000, which, together with the losses sustained by Sentex
through fiscal year 1997, has had an extremely adverse effect on the working
capital of the Company.
Working capital decreased to $308,000 at November 30, 1997 as compared
to $1,990,000 as of November 30, 1996. The decrease is mainly due to the losses
sustained by the Company during Fiscal 1997. Cash and cash equivalents equaled
approximately $1,332,000 as of November 30, 1997, $1,285,000 of which has been
pledged to secure current borrowings on a line of credit. As set forth in the
accompanying independent auditors' report and notes to consolidated financial
statements, 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
$2,100,000 as of November 30, 1997 as compared to $570,000 in borrowings as of
November 30, 1996. The primary use of the additional proceeds was to fund
operating losses incurred during fiscal 1997. As of November 30, 1997,
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 is for a maximum of
$1,000,000 and is secured by the personal guarantee of Robert S. Kendall, the
Chairman of the Company. Borrowings under this line of credit totaled $900,000
as of November 30, 1997. From time to time, CPS has provided the Company with
temporary working capital loans and, as of March 13, 1998, there is an
outstanding borrowing of $250,000 on one such loan. (See Item 12). The Company
anticipates the need to raise additional funds during fiscal 1998 to fund its
working capital needs that presently cannot be funded through the operations of
the Company. In this regard, the Company will probably seek to expand its
borrowings through increased asset based lines of credit, which the Company
cannot be assured it will be able to obtain. In the event that additional
sources of outside financing cannot be attained, CPS has indicated to the
Company that it will continue to fund the operations of the Company through
additional working capital loans to the Company. 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 $530,000 over the next four fiscal years, with over
$250,000 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. Although CPS
-12-
<PAGE> 13
and Mr. Kendall have expressed their commitment to provide the financial
resources necessary to fund the Company's operations until a turnaround occurs,
there are no formal agreements in place pertaining to the financial commitment
of CPS and Mr. Kendall. Consequently, there can be no assurance that CPS or Mr.
Kendall will continue to provide loans to the Company or security for future
lines of credit. 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 fiscal year of
operating the Sentex and Monitek as a combined company and there can be no
assurance that the Company will generate a positive cash flow in fiscal 1998.
The Company has, however, combined certain aspects of the two companies during
fiscal 1997 such as, realigning and restaffing management and achieving some
economies of scale that have resulted in a modest reduction in selling, general
and administrative expenses. Despite these achievements, the ultimate
profitability of the Company still depends, in large part, on further reducing
expenses and combining certain other aspects of Sentex's and Monitek's
businesses. One aspect of combining the companies that was not achieved as well
as anticipated by management during fiscal 1997 was the attempt to integrate the
sale of Sentex products into Monitek's distribution channels. In order to
rectify this situation, the Company has determined that it will have to provide
the Monitek sale representatives, who are independent agents, additional and
more specific training about the Sentex products, which are very technical in
nature and tend to be rather difficult to describe. While no assurances can be
made that the Merger will result in the Company becoming profitable again, the
Company believes that it is now, and upon the completion of additional training
of the Monitek representatives will be, in a much better position to take
advantage of the established manufacturer representative relationships and
expanded industry and market exposure, which were considered to be Monitek's
primary strengths prior to the Merger.
In addition to the effects of the Merger, the Company also intends to
offer four new products during fiscal 1998 (two of which are product offerings
that were originally scheduled for offering in fiscal 1997, but were rescheduled
for offering in fiscal 1998). These products are anticipated to increase both
sales and gross margin percentage, because they will be less expensive to
produce. (See Item 1).
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.
RESULTS FROM OPERATIONS
- -----------------------
Prior to the Merger, Monitek's fiscal year covered the period from
April 1 through March 31. No revenues, expenses or other results from the
operations of Monitek were included in the Company's Consolidated Statement of
Operations during Sentex's fiscal 1996, because the Merger was not effective
until after the last day either Sentex or Monitek conducted any business during
Sentex's fiscal year 1996. However, since the operations of Monitek have been
included in the Company's Consolidated Statement of Operations for fiscal 1997,
the Company
-13-
<PAGE> 14
has provided a discussion with respect to the comparison of operating results
for the Monitek fiscal 1997 versus the final twelve months that Monitek operated
as a stand alone company (the "LTM November 1996"), based on unaudited
information that has been made available to the Company.
Fiscal 1997 as Compared to Fiscal 1996
Net sales increased to $7,505,000 in fiscal 1997 as compared to
$999,000 in fiscal 1996, primarily as a result of the acquisition of Monitek.
Net sales of Sentex products increased by 19%, to $1,192,000 for fiscal 1997 as
compared to $999,000 for fiscal 1996, reversing a trend of four consecutive
years of declining sales. The increase was due to one very large sale to South
Korea, in the amount of $468,000. Domestic sales continued to decline, in spite
of the attempt to start selling the products through Monitek's sales force,
which consists of independent manufacturers' representatives. The Company
believes that there are a number of reasons for the lack of immediate success of
this program, including the need for more training of the representatives, the
long sales cycle of the Sentex products and the fact that the Sentex products
are highly technical and may require a more sophisticated sales approach.
Management plans to provide additional training to the Monitek sales force,
which should allow the representatives to obtain knowledge that is comparable to
the knowledge they have with respect to the Monitek products. Net sales of
Monitek products increased by 4%, to $6,313,000 in fiscal 1997 as compared to
$6,066,000 during the LTM November 1996. During fiscal 1997, domestic sales and
export sales from the United States increased by 13% and 14%, respectively,
compared to the prior year period, while sales to Continental Europe by Monitek
GmbH, which accounted for 58% of Monitek's total revenues, decreased by 2%.
Management believes that the increase in domestic sales is primarily due to
improved economic conditions and more thorough training of the sales force.
Sales into Japan, which accounted for 70% of the export sales in fiscal 1997,
were especially strong as a result of adding a second representative in that
country. One representative is working strictly in the Brewery industry and the
other representative covers all other industries. Management believes that the
decrease in sales in Europe can be attributed to the weakening of economic
conditions combined with the increased value of the U.S. Dollar relative to the
European currencies.
Cost of sales increased to $3,529,000, or 47% of net sales, in fiscal
1997 as compared to $418,000, or 42% of net sales, in fiscal 1996. Sentex's cost
of sales, as a percentage of net sales, increased to 43% in fiscal 1997 as
compared to 42% in fiscal 1996, primarily as a result of a change in sales mix.
Monitek's cost of sales, as a percentage of sales, decreased to 48% in fiscal
1997 from 50% in the LTM November 1996. During the LTM November 1996 period,
Monitek increased its inventory obsolescence reserve by $140,000, which accounts
for the 2% difference between the two periods.
Selling, general and administrative expenses increased to $5,463,000 in
fiscal 1997 as compared to $1,403,000 in fiscal 1996, primarily as a result of
the addition of Monitek. Sentex's Selling, general and administrative expense
increased to $1,578,000 in fiscal 1997 from $1,403,000 in fiscal 1996, but the
percentage of net sales actually decreased to 132% from 140%. Sales commissions
increased by $163,000 in fiscal 1997, primarily as a result of the commission
payable on the large Korean sale noted above. Interest expense increased by
$56,000 as a result of increased bank and other borrowings. Management fees paid
and payable to CPS (see Item 12) increased by $248,000 in fiscal 1997, of which
$200,000 was attributable to the increased responsibilities associated with
Monitek and, as such, was allocated as an expense of Monitek. Effective December
1, 1997, CPS has agreed to reduce its management fee by $144,000 per year, from
$394,000 to $250,000. There was a $100,000 expense in fiscal 1996, relating to a
covenant not to compete, that did not recur in fiscal 1997. Monitek's selling,
general and administrative expenses decreased to $3,885,000, or 62% of sales, in
fiscal 1997 as compared to $4,071,000, or 67% of sales, in the LTM November
1996. During the LTM November 1996, approximately $162,000 was recorded for
legal, accounting and other professional services related to the impending
Merger with Sentex. During fiscal 1997, as a result of certain personnel and
other expense reductions related to the combining of the operations of Monitek
and Sentex, Monitek realized savings that amounted to approximately $20,000 per
month after all of the changes were made. As a consequence, in spite of the
increase in management fees charged to Monitek by Sentex, an increase of $63,000
in foreign currency exchange losses and an increase of $45,000 in interest
expense, which were partially offset by the $162,000 decrease in Merger
-14-
<PAGE> 15
expenses mentioned above, Monitek realized a modest reduction in selling,
general and administrative expense during fiscal 1997.
Research and development expense increased to $406,000 in fiscal 1997
from $213,000 in fiscal 1996 as a result of the Monitek acquisition. Sentex's
research and development expense decreased to $177,000 in fiscal 1997 from
$213,000 in fiscal 1996, primarily as a result of sharing certain expenses with
Monitek, whereas Monitek's decreased to $229,000 in fiscal 1997 from $250,000
during the LTM November 1996 as a result of the sharing of expenses.
Interest and other income decreased to $83,000 in fiscal 1997 as
compared to $179,000 in fiscal 1996 Sentex's interest income decreased to
$61,000 in fiscal 1997 from $88,000 in fiscal 1996, as a result of declining
cash balances. The cash was required to fund the operating losses of both Sentex
and Monitek. Sentex's other income decreased to $1,000 in fiscal 1997 from
$91,000 in fiscal 1996. During fiscal 1996, the Company billed Monitek $83,000
for management services provided prior to the Merger and the transaction was
recorded as other income. During fiscal 1997, the fees charged to Monitek for
management services were recorded in selling, general and administrative expense
(see above). Monitek had neither interest income in either fiscal 1997 nor the
LTM November 1996. Monitek's other income decreased to $21,000 in fiscal 1997
from $96,000 in the LTM November 1996. In the LTM November 1996, a lawsuit was
settled in favor of Monitek GmbH, resulting in an award from the opposing party
of approximately $60,000.
Net losses increased to $1,810,000 in fiscal 1996 as compared to
$855,000 in fiscal 1996, primarily as a result of the addition of Monitek.
Sentex's net losses increased to $1,017,000 in fiscal 1997 as compared to
$855,000 during fiscal 1996, primarily as a result of the increases in cost of
sales and selling general and administrative expenses of Sentex and the
decreases in interest and other income, partially offset by the increase in net
sales. Monitek's net losses decreased to $793,000 in fiscal 1997 as compared to
$1,204,000 in the LTM November 1996, primarily as a result of the increase in
sales, the decrease in cost of sales as a percentage of sales and the decrease
in selling, general and administrative expenses, partially offset by the
decrease in other income.
CHANGES IN ACCOUNTING STANDARDS
- -------------------------------
Effective December 1, 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards NO. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121). SFAS 121 requires the Company to review long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The assessment of impairment is based on the estimated undiscounted
future cash flows from operating activities compared with the carrying value of
the assets. If the undiscounted future cash flows of an asset are less than the
carrying value, a write-down would be recorded measured by the amount of the
difference between the carrying value of the asset and the fair value of the
asset. The adoption of SFAS 121 did not have any effect on the Company's
consolidated financial statements.
In October 1995, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, was issued which establishes accounting
and reporting standards for stock-based compensation plans. This standard
encourages the adoption of the fair value-based method of accounting for
employee stock options or similar equity instruments, but continues to allow the
Company to measure compensation cost for those equity instruments using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion NO. 25, Accounting for Stock Issued to Employees. Under the fair
value-based method, compensation cost is measured at the grant date based on the
value of the award. Under the intrinsic value-based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount the employee must pay to acquire the
stock. The Company is using the intrinsic value-based method. As a result, this
standard does not have any effect to the Company's consolidated financial
statements other than to require disclosure, beginning in the fiscal year ended
November 30, 1997, of the pro forma effect on net income of using the fair
value-based method of accounting for stock issued to employees. The Company's
outstanding stock options
-15-
<PAGE> 16
and/or similar equity instruments not held by employees are not material.
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 must adopt these new standards in its first quarter ended February
28, 1998. All prior period earnings per share data will be restated for the
adoption of SFAS 128. Management believes the effect of adoption will not be
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.
ITEM 7 FINANCIAL STATEMENTS
- ------ --------------------
See Index to Financial Statements appearing on page F-2.
ITEM 8 CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ------ -------------------------------------------------------------------
None.
-16-
<PAGE> 17
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
The Directors and Executive Officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Robert S. Kendall 57 Chairman, President and Treasurer
James G. Few 48 Director, Executive Vice President and Chief Operating Officer
Julius L. Hess 35 Director
Ronald M. Lipson 62 Director
Dr. Amos Linenberg 61 Director, Executive Vice President and President of Sentex Systems,
Inc.
Morton A. Cohen 62 Director
James S. O'Leary 59 Vice President, Finance and Chief Financial Officer
Helmut H. Zoellmer 52 Managing Director, Monitek GmbH
</TABLE>
ROBERT S. KENDALL has been the Chairman, President and Treasurer of the
Company since March 1, 1996. He is also Chairman and President of CPS, a mergers
and acquisitions company based in Cleveland. Until April 1996, he was also
Chairman of the Board and founder of LDI Corporation, an asset leasing and
technology services company which he, along with two others, founded in 1972.
LDI is one of the largest independent lessors of technology and computer
equipment in the United States. Mr. Kendall is also a general partner in NCP,
Ltd., a real estate partnership actively engaged in investing, acquiring,
financing and managing commercial, industrial and other properties. From 1969 to
1972, Mr. Kendall was branch manager at Victor-Nixdorf Computer, a manufacturer
and distributor of computer systems. From 1963 to 1969, he was a salesman,
financial specialist and sales manager at Burroughs Corporation (now Unisys
Corp.). Mr. Kendall graduated from Case Western Reserve University with a
bachelor's degree in psychology in 1960, and attended graduate school at John
Carroll University.
JAMES G. FEW has been the Chief Financial Officer and Vice President of
the Company since March 1, 1996 and Chief Operating Officer since December 2,
1996. He has also served as Vice President and Chief Financial Officer for CPS
since October 1995. From June 1993 to October 1995, he was engaged as an
independent financial consultant. Mr. Few served as Senior Vice President of
Boston Distributors from November 1992 through May 1993 where he was responsible
for finance, accounting systems and warehouse operations. In February 1993,
Boston Distributors was declared bankrupt and was liquidated some time
thereafter. From May 1991 through November 1992, Mr. Few served as Executive
Vice President of Operations and Finance for Progressive Communications
Technology. Mr. Few was engaged as an independent financial consultant from 1989
to 1991. From 1978 to 1989, he served as Executive Vice President and Chief
Financial Officer of Harris Wholesale Drug Company, where he oversaw three
operating divisions. Prior thereto, he served as Division Controller of IT&T for
eight years. Mr. Few received a bachelor's degree in Business Management from
Providence College.
JULIUS L. HESS has served as Assistant Vice President for CPS since
November 1994 and is responsible for research and analysis. At CPS he serves as
lead analyst in the location and evaluation for acquisitions of publicly held
companies or divisions of companies which are believed to be undervalued, or
closely held companies with potential for appreciation. Prior to joining CPS,
Mr. Hess was Human Resources Manager for a division of GE Capital from 1990 to
1994. From 1989 to 1990 he was Senior Human Resources Representative for B.F.
Goodrich and prior thereto he was Compensation and Labor Relations Manager from
1986 to 1989 at the Mayo Clinic Medical Center. Mr. Hess graduated from Miami
University in Oxford, Ohio, with a bachelor's degree in political science in
1983 and attended graduate school at the University of Minnesota. Mr. Hess is
Mr. Kendall's son-in-law.
RONALD M. LIPSON has been an attorney for more than thirty-five years
in Cleveland, Ohio, practicing in
-17-
<PAGE> 18
various areas including corporate, business, and real estate law. He was the
incorporating attorney for LDI Corporation and formerly served as legal counsel
and a director of LDI Corporation. Mr. Lipson is also a general partner in G&C
Properties, an Ohio real estate partnership engaged in buying, selling and
managing various types of real estate. Mr. Lipson attended Ohio University and
graduated from Adelbert College of Case Western Reserve University with a
bachelor's degree in business administration in 1955. He also received a Doctor
of Jurisprudence degree in 1958 from Case Western Reserve University School of
Law.
DR. AMOS LINENBERG, except from March 1, 1996 through November 14,
1996, has been a director since founding the Company in November 1980. From
November 1980 until August 1994, Dr. Linenberg was President of the Company. He
is currently the President of Sentex Systems, Inc., and the Executive Vice
President of Sentex. He is primarily responsible for executive management of
Sentex Systems, Inc. as well as supervising the Company's research, development
and engineering of new products. Dr. Linenberg received his M.Sc. in Analytical
Chemistry and his Ph.D. in Analytical Chemistry from Hebrew University.
MORTON A. COHEN was Chairman of the Board of Monitek from November 1983
until the consummation of its Merger with the Company. On December 2, 1996, Mr.
Cohen became a director of the Company pursuant to the terms of a Board
Representation Agreement. (See Item 12.) Mr. Cohen has been the Chairman of the
Board of Clarion Capital Corporation, Monitek's prior principal stockholder,
since July 1981 and, since April 1982, has been Clarion's Chief Executive
Officer. Mr. Cohen is also a member of the boards of directors of the following
public companies: Cohesant Technologies, Inc., for which he also serves as
chairman; Gothic Energy Corporation; DHB Capital Group; and Zemex Corporation.
Formerly, Mr. Cohen was governor of the Montreal Stock Exchange (1972-73); a
member of the board of governors of the National Association of Small Business
Investment Companies (1990-1992); and a member of the boards of directors of
Sanyo-Canada, Adac Laboratories, Abaxis Co., and Alexander Energy.
JAMES S. O'LEARY has been employed by Monitek since August 1982 and had
served as its Executive Vice President, Secretary and Treasurer since April
1987. The Company has retained his services and, since December 2, 1996, he has
served as Vice President of Finance and Chief Financial Officer.
HELMUT H. ZOELLMER has been employed by Monitek GmbH since 1980 and has
served as its Managing Director since May 1984. The Company has retained his
services and he continues in the same position that he held prior to the Merger.
As a result his position with a major subsidiary of the Company, Mr. Zoellmer is
deemed to be an executive officer of the Company.
Four meetings of the Company's Board of Directors were held during the
fiscal year ended November 30, 1997. Each Director attended at least 75% of the
meetings of the Company's Board of Directors.
The Company's Board of Directors does not currently have a nominating
committee, audit committee or a compensation committee.
ITEM 10 EXECUTIVE COMPENSATION
- ------- ----------------------
The following information is set forth with respect to the Company's Chief
Executive Officer and each of the Company's other executive officers whose total
compensation exceeded $100,000 for the fiscal year ended November 30, 1997:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- OTHER ANNUAL
YEAR SALARIES BONUS COMPENSATION
---- -------- ----- ------------
<S> <C> <C> <C> <C>
Robert S. Kendall 1997 $275,000(1) -0- -0-
(Chief Executive Officer) 1996 $ 80,000(1) -0- -0-
1995 --- --- ---
</TABLE>
-18-
<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C>
Amos Linenberg 1997 $140,728 $15,000 $17,779(2)
(Executive Vice-President) 1996 $128,163 -0- $11,944(2)
1995 $130,676 -0- $18,545(2)
Helmut H. Zoellmer(3) 1997 $109,626 $5,788 $6,689(2)
(Managing Director of 1996 --- --- ---
Monitek GmbH) 1995 --- --- ---
</TABLE>
(1) Represents compensation paid to CPS for management services rendered.
(See Item 12). Amounts assigned to each officer represent the
allocation provided the Company by CPS at the Company's request, and
may not actually represent any sum actually paid to these persons by
CPS. Amounts for Fiscal 1996 only reflect amounts reportable from March
1, 1996 through November 30, 1996. Since May 31, 1997, the Company has
not made any payments to CPS for management services but has accrued
for such fees.
(2) Consists of automobile and insurance allowances.
(3) During fiscal 1996 and 1995, Mr. Zoellmer was not employed by the
Company but was employed by Monitek GmbH. Based on annual reports of
Monitek, filed on Form 10-K, for its fiscal years ended March 31, 1996
and March 31, 1995, all reportable forms of compensation for Mr.
Zoellmer totaled $130,801 and $164,790, respectively. Payments to Mr.
Zoellmer were made in Deutsche Marks. Dollar amounts have been
calculated using average exchange rates for each of the fiscal periods
reported.
Long-Term Compensation. No long-term compensation was paid during the
fiscal years ended November 30, 1997, 1996 or 1995 to any executive officer of
the Company by way of restricted stock awards, options or stock appreciation
rights, or other long-term incentive plans.
Employment, Consulting and Management Agreements. As of March 1, 1996,
the Company entered into an Employment Agreement with Amos Linenberg, a
Consulting Agreement with Joanne Bianco and a Management Agreement with CPS
(which was amended and restated on June 24, 1996). (See Item 12).
Stock Options. The Company adopted the Plan at a special meeting of its
shareholders held on November 14, 1996. (See Item 4). Under the Plan, the
Company may grant different types of options covering up to 7,000,000 Common
Shares to its existing and future directors, officers and employees. As of
November 30, 1996, there were no Company stock options held by the directors or
executive officers of the Company. Upon consummation of the Merger, options to
purchase Monitek Common Stock held by James O'Leary, Morton Cohen and Helmut
Zoellmer were converted to options to purchase 344,875, 617,325 and 482,825
Common Shares, respectively. On December 2, 1996, James O'Leary and Morton Cohen
became the Chief Financial Officer and a director, respectively, of the Company
and Mr. Zoellmer remained in his capacity as the Managing Director of Monitek
GmbH.
Compensation Pursuant to Plans. The Company has no plans pursuant to
which cash or non-cash equivalents were paid during the fiscal years ended
November 30, 1997, 1996 or 1995.
Compensation of Directors. During fiscal years 1996 and 1995, directors
were not compensated for serving as such. Commencing December 2, 1996, the
Company had agreed to compensate all outside directors with annual compensation
of $6,000 per year but, to-date, no such payments have been made.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The following table sets forth certain information regarding the
beneficial ownership of the Common Shares
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<PAGE> 20
as of March 1, 1998 by: (a) the Company's Directors; (b) each other person who
is known by the Company to own beneficially more than 5% of the outstanding
Common Shares; (c) the Company's Chief Executive Officer and the other two most
highly compensated executive officers named in the Summary Compensation Table;
and (d) the Company's executive officers and Directors as a group. Except as
otherwise described in the notes below, the following beneficial owners have
sole voting power and sole investment power with respect to all Common Shares
set forth opposite their names.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER(1) OF BENEFICIAL OWNER PERCENTAGE
- ---------------------- ------------------- ----------
<S> <C> <C>
Robert S. Kendall(2) 26,095,665 32.7%
James G. Few -- --
Julius L. Hess -- --
Morton A. Cohen(3) 1,585,022 2.0%
James S. O'Leary(4) 344,875 *
1495 Zephyr Avenue
Hayward, CA 94544
Helmut H. Zoellmer(4) 482,825 *
Morsenbroicher Weg 200
D-40470 Dusseldorf, Germany
Ronald M. Lipson 700,000 *
3 Laurel Hill Lane
Pepper Pike, Ohio 44124
Amos Linenberg(5) 6,389,204 8.0%
CPS Capital, Ltd.(6) 26,095,665 32.7%
1801 East Ninth Street
Cleveland, Ohio 44114
All Directors and Officers
(as a group persons) 29,208,387 36.6%
</TABLE>
(1) The name and address of each individual listed in the table,
except where otherwise indicated, is c/o Sentex Sensing
Technology, Inc. 553 Broad Avenue, Ridgefield, NJ 07657 or in
the case of Mr. Kendall, Mr. Few and Mr. Hess, c/o Sentex
Sensing Technology, Inc., 1801 East Ninth Street, Cleveland,
OH 44114. and in the case of Mr. Cohen, c/o Clarion Capital
Corporation, 1801 East Ninth Street, Cleveland, OH 44114.
(2) The Common Shares set forth herein with respect to Mr. Kendall
are all held of record by CPS or are beneficially owned by CPS
pursuant to an exercise of a put right by Dr. Linenberg
requiring CPS to purchase Dr. Linenberg's remaining 6,389,204
Common Shares and voting rights with respect to such shares.
Under a shareholders agreement with Dr. Linenberg, CPS has the
power to
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<PAGE> 21
vote all of the Common Shares held by Dr. Linenberg. Mr.
Kendall and his wife own 100% of the outstanding membership
interests in CPS. On February 28, 1998, CPS' voting rights,
with respect to 1,000,000 Common Shares held of record by Ms.
Bianco, expired.
(3) Mr. Cohen owns 127,600 Common Shares of record, holds options
to purchase 617,325 Common Shares, controls a corporation that
owns 6,897 Common Shares and, through his ownership and
control of Clarion, has the right to receive approximately
833,200 Common Shares upon payment of interest under Class A
Convertible note and the Clarion note. All Common Shares
reported by Mr. Cohen were acquired pursuant to the Merger.
(4) All Common Shares are held in the form of options that were
acquired pursuant to the Merger.
(5) Dr. Linenberg has exercised his right to have CPS purchase his
remaining 6,389,204 Common Shares. CPS will consummate the
transaction in April 1998.
(6) CPS is the record holder of 19,706,461 Common Shares and has
sole voting and dispositive power with respect to such shares.
CPS is deemed to beneficially own 6,389,204 Common Shares,
which it is required to purchase from Dr. Linenberg in April
1998 and currently has share voting power with respect to such
shares. Upon such purchase, CPS will acquire sole voting and
dispositive power with respect to the 6,389,204 Common Shares.
*Represents less than 1% of the outstanding Common Shares.
Upon consummation of the Merger, Clarion did not become a "beneficial
owner" of any Common Shares within the meaning of Rule 13d-3(a) of the
Securities and Exchange Act of 1934 or have the right to acquire beneficial
ownership of any Common Shares within 60 days of the Merger. If the table set
forth above assumed that Clarion were able to immediately convert its Class A
Convertible Note and the Clarion Note into the maximum number of Common Shares
into which each such note is convertible, then Clarion would be the beneficial
owner of 15,450,937 Common Shares, which would represent 16.1% of the Company's
Common Shares outstanding. The power to direct the vote of such Common Shares
will be held by CPS for a three-year period after the Merger. In addition, the
percentage ownership of Common Shares held by Mr. Linenberg would be adjusted
downward to approximately 8.6%. Pursuant to the 3 year voting agreement under
the Shareholders Agreement, CPS's percentage ownership would be increased to
approximately 44%. Mr. Cohen is the Chairman of the Board of Clarion and also
owns 75.7% of Maycap Holding Company, which in turn, owns 94.9% of Clarion.
On March 11, 1998, the Company decided to allow Clarion to convert its
notes earlier without regard to restrictions thereon in the hopes of reducing
the amount of the Company's debt. Clarion has agreed in principle to convert
these notes if CPS purchases the Common Shares that would be held by Clarion
upon conversion. CPS has agreed in principle to purchase the Common Shares for
approximately $230,000. These transactions are subject to entering into
definitive agreements, but if they occur, Mr. Cohen would resign as a Director
of the Company.
On April 3, 1997, CPS purchased 2,000,000 Common Shares from Dr.
Linenberg for an aggregate purchase price of $152,000, pursuant to a put right
exercised by Dr. Linenberg. In December of 1997, Dr. Linenberg notified CPS that
he was exercising a related put right to cause CPS to purchase his remaining
6,389,204 Common Shares for an aggregate purchase price of approximately
$319,500. CPS and Dr. Linenberg anticipate consummating the purchase of the
6,389,204 Common Shares in April of 1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS
As required under the securities laws of the United States, the
Company's directors, its executive (and certain other) officers, and any persons
holding ten percent or more of the Common Shares must report on their
-21-
<PAGE> 22
ownership of the Common Shares and any changes in that ownership to the
Securities and Exchange Commission and to the National Association of Securities
Dealers, Inc.'s Automated Quotation System. Specific due dates for these reports
have been established. During the year ended November 30, 1997, all reports for
all transactions were filed on a timely basis, except for 200,000 shares that
were purchased by Ronald Lipson in June 1997.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
CPS Acquisition. On March 1, 1996, CPS consummated the purchase of
17,606,461 Common Shares for a total aggregate purchase price of $1,338,091 (the
"Stock Purchase") pursuant to four separate stock purchase agreements (the
"Stock Purchase Agreements") dated October 18, 1995, between CPS and each of (i)
Amos Linenberg, ("Linenberg"), (ii) Joanne Bianco ("Bianco"), (iii) Maxine Ganer
as Trustee of the Daniele Linenberg Trust, and (iv) Salvatore Bianco and The
Estate of Marie Bianco. Upon consummation of the Stock Purchase, Mr. Kendall,
the Chairman, Chief Executive Officer and principal owner of CPS, became the
Chairman and President of the Company and Mr. Few, the Chief Financial Officer
of CPS, became the Chief Financial Officer and a director of the Company. Julius
L. Hess, the Assistant Vice President of CPS, and Ronald Lipson (who has served
in various capacities to companies owned by Mr. Kendall) each became a director.
Mr. Few now serves as the Chief Operating Officer of the Company.
In connection with the Stock Purchase, CPS entered into a shareholder
agreement with each of Linenberg and Bianco (the "Shareholder Agreements"),
pursuant to which CPS obtained voting control of 9,389,204 additional Common
Shares. As of March 1, 1996, CPS beneficially owned a total of 27,095,665 Common
Shares, which represented approximately 34% of the outstanding Common Shares,
based on 78,919,762 Common Shares then outstanding. CPS has the sole voting and
dispositive power with respect to 17,706,461 of such shares and had the sole
power to direct the vote with respect to the remaining 9,389,204 of such shares.
(As of March 1, 1998, CPS owns 19,706,461 Common Shares of record and has the
voting rights with respect to 6,389,204 Common Shares). Pursuant to the
Shareholder Agreement between CPS and Linenberg (the "Linenberg Shareholder
Agreement"), CPS has agreed to allow Linenberg, from March 1, 1996 through
February 28, 2001, the right to participate in either (i) a private sale of the
Common Shares or (ii) a public offering of such Common Shares, each on a pro
rata basis with CPS and Bianco (if Bianco elects or is eligible to participate),
and each on the same terms and conditions available to CPS.
From March 1, 1996 through February 28, 1997, pursuant to the Linenberg
Shareholder Agreement, Linenberg could require CPS to purchase up to 2,000,000
shares of his Common Shares at $.076 per share. On April 3, 1997, CPS and
Linenberg consummated a sale of such shares pursuant to an exercise of such
right by Linenberg. In addition, from September 1, 1997 through February 28,
2001, Linenberg could require CPS to purchase up to 8,389,204 of his Common
Shares at $.05 per share. In December 1997, Linenberg exercised his put right
with respect to his remaining 6,389,204 Common Shares. CPS will purchase such
shares in March 1998. Pursuant to the Linenberg Shareholder Agreement, Linenberg
agreed not to sell any of his Common Shares from March 1, 1996 through February
28, 1998 without the consent of CPS. From March 1, 1998 through February 28,
2001, Linenberg must give CPS the right to buy his Common Shares before he can
sell any of such shares. If Linenberg provides CPS notice (a "Notice") of his
intent to sell any of his Common Shares (the "Committed Shares"), then CPS must
notify Linenberg within 15 days that it desires to exercise its right to buy the
Committed Shares. If the Notice indicates that the Committed Shares are to be
sold privately, then CPS must pay Linenberg the price at which Linenberg was to
sell the Committed Shares to the private party. If the Notice indicates that
Linenberg desires to sell the Committed Shares in the public market, then CPS
must pay to Linenberg a price equal to the market price of the Common Shares on
the day before CPS received the Notice relating to the Committed Shares. If CPS
does not elect to purchase the Committed Shares, Linenberg can sell such
Committed Shares for a period of 180 days to any third party.
Linenberg has provided CPS with an irrevocable proxy with respect to
all Common Shares held by him during the term of the Linenberg Shareholder
Agreement. The Linenberg Shareholder Agreement will terminate on
-22-
<PAGE> 23
the earlier of February 28, 2001 or the date Mr. Kendall ceases to have
effective control of the Company.
The Shareholder Agreement between CPS and Bianco (the "Bianco
Shareholder Agreement") is similar to the Linenberg Shareholder Agreement, but
terminated on February 28, 1998 and did not provide CPS any right to buy or
Bianco any right to require CPS to buy any of Bianco's Common Shares. Pursuant
to the Bianco Shareholder Agreement, Bianco agreed not to sell any of her Common
Shares without the consent of CPS through February 28, 1998, and had the right
to participate in (i) a private sale or (ii) a public offering, on a pro rata
basis with CPS and Linenberg (if he elects or is eligible to participate),
through February 28, 1998. Bianco has also provided CPS with an irrevocable
proxy with respect to all Common Shares held by her during the term of the
Bianco Shareholder Agreement.
Linenberg Employment Agreement. In March 1996, Dr. Linenberg entered
into a four-year employment agreement with the Company, pursuant to which
Linenberg has been retained to act as Executive Vice President of the Company
for a base salary of $132,176 per annum, plus annual cost-of-living increases
and certain incentive compensation, and has agreed to not engage directly or
indirectly in any competing business during the term of his employment and for
one year thereafter.
Bianco Consulting Agreement. In March 1996, Ms. Bianco entered into a
two-year Consulting Agreement with the Company pursuant to which Ms. Bianco was
retained to serve as a part-time consultant to the Company for a base
compensation of $75,000 per annum, and agreed to not engage directly or
indirectly in any competing business for a three-year period. Bianco has
received an additional $100,000 from the Company in consideration of her
agreement not to compete, paid in three equal installments on March 1, 1996,
March 1, 1997 and March 1, 1998.
CPS Management Agreement. Within two months after CPS acquired
effective control of the Company, CPS entered into a Management Agreement with
the Company, which was effective on March 1, 1996 (the "Original Management
Agreement"). In connection with the execution of the Merger Agreement, CPS and
the Company entered into an Amended and Restated Management Agreement (the
"Amended and Restated Management Agreement"). Pursuant to the Original
Management Agreement, CPS agreed to cause its personnel to perform the functions
that would normally be performed by the executive officers of the Company.
Presently, such personnel consists mainly of Mr. Kendall, the Chairman of CPS,
Mr. Few, the Chief Financial Officer of CPS and Peggy Nutaitis, the Secretary of
CPS. In order to permit Mr. Kendall and Mr. Few to function as executive
officers of the Company, Ms. Nutaitis to function as a non-executive officer and
for all of them to be properly insured as officers of the Company, Mr. Kendall
has been elected as the President and Treasurer, the Company, Mr. Few has been
elected the Vice President, Secretary and Chief Operating Officer of the
Company, and Ms. Nutaitis has been elected Assistant Secretary of Sentex.
Under the terms of the Original Management Agreement, CPS received an
annual fee of $193,800, which was payable monthly. Under the terms of the
Amended and Restated Management Agreement, the annual fee was increased to
$393,800 to account for the increase in tasks and responsibilities relating to
the operation of Monitek. Both the Original Management Agreement and the Amended
and Restated Management Agreement were approved by Ms. Bianco (a then director
of the Company) and Mr. Lipson, neither of whom are affiliated with CPS. Due to
the present financial condition of the Company, CPS has not received payment
under the Amended and Restated Agreement since May 1997, but the Company has
accrued such expense. CPS and the Company have agreed that the balance due as of
November 30, 1997, which totals approximately $197,000, and the fee for fiscal
1998, which will be reduced to $250,000, may be paid at some future time in the
form of Common Shares rather than cash, to the extent permitted under the New
Jersey Shareholder Protection Act.
Clarion. Upon consummation of the Merger, Clarion received a Class A
Convertible Note and the Clarion Note. Upon conversion of Clarion's Class A
Convertible Note and the Clarion Note, Clarion will receive approximately
15,450,937 Common Shares, which at the time of issuance will represent
approximately 16% percent of the issued and outstanding Common Shares (assuming
no other Common Shares are issued). Both notes are generally convertible after
three years, but are convertible earlier if (i) the Company proposes to declare
a dividend
-23-
<PAGE> 24
or other distribution to the Company shareholders other than a stock split or
reverse stock split; (ii) the Company proposes to offer the Company shareholders
the opportunity to subscribe for additional equity securities of the Company or
the Company issues any equity securities pursuant to either a private or public
sale thereof; (iii) the Company proposes to reclassify or change the outstanding
Common Shares (other than a change in par value or as a result of a stock
split); (iv) the Company proposes to consolidate or merge with another entity
(other than a consolidation or merger in which the Company will be the surviving
corporation and which does not result in any reclassification or change in the
Common Shares; (v) the Company proposes to sell or convey substantially all of
its assets to another company); (vi) Robert S. Kendall, the Chairman of the
Board and President of the Company, dies or becomes permanently disabled; or
(vii) there is a change in control of the Company.
The Company may compel conversion of the Class A Convertible Notes upon
written notice to the holder if (i) there is a proxy contest for control of the
Company's board of directors or (ii) the Company is unable, in the judgment of
its board of directors, without compelling such a conversion, to obtain the
requisite shareholder vote to approve a material transaction approved by the
Company's board of directors. If the notes are converted before the third
anniversary of their issuance, CPS, will have the right to vote all of the
Common Shares held by Clarion as a result of conversion of the notes for the
remainder of such three-year period.
CPS's three year voting rights are set forth in a shareholders
agreement among CPS, Clarion and certain other holders of the Class A
Convertible Notes (the "Clarion Shareholders Agreement"). The Clarion
Shareholders Agreement was entered into in connection with and as a condition of
the Merger. In addition to the voting rights of CPS, the Shareholders Agreement
provides for (i) CPS and Clarion not to make any purchases or sales of Common
Shares on the open market, without the approval of the other, for a period of
three years; (ii) Clarion and the Company to give the other a right of first
refusal before making any transfers of their respective Common Shares to any
third party; and (iii) in the event CPS desires to sell any of its Common
Shares, either through a public or private sale, to permit Clarion and certain
other holders of the Class A Convertible Notes to include a pro rata portion of
their Common Shares in such sale. The Clarion Shareholders Agreement will
terminate if CPS ceases to have effective control of the Company.
In connection with the Merger, the Company and Clarion entered into a
Board Representation Agreement (the "Board Agreement"), pursuant to which the
Company increased the size of its board of directors from five to six members in
order to create a vacancy that was filled by Clarion, in accordance with the
Board Agreement. The current Clarion designee was Morton Cohen, the former
Chairman of Monitek. In the event the Company decides to increase the size of
its board to more than six members, Clarion would have the right to designate a
percentage of all members of the board equal to the percentage of Common Shares
that Clarion and its affiliates own or would own upon conversion of its Class A
Convertible Note and the Clarion Note. The Company has agreed to nominate for
election to the board any person that Clarion has the right to designate under
the Board Agreement. The Board Agreement will terminate if Clarion and its
affiliates fail to own more than 10,000,000 Common Shares. For purposes of
calculating the number of Common Shares owned by Clarion, the Board Agreement
assumes Clarion's Class A Convertible Note and the Clarion Note have been
converted.
Upon the consummation of the Merger, the Company, Clarion, and certain
holders of the Class A Convertible Notes entered into a Participation Rights
Agreement (the "Participation Rights Agreement"), pursuant to which Clarion and
such holders will be allowed to participate in any public or private offering by
the Company of any of its securities. Clarion and such holders will be able to
participate in such private sale or public offering in an amount proportionate
to Clarion's or such holder's percentage ownership of Common shares. For the
purpose of calculating such percentage, the Participation Rights Agreement
assumes that the Clarion Note and the Class A Convertible Notes have been
converted into Common Shares.
Working Capital Assistance. During fiscal 1997, CPS and Mr. Kendall
provided the Company assistance in connection with funding its working capital
needs in the form of loans and security for bank loans. From May 1997 through
September 1997, CPS provided the Company a temporary working capital loan in the
aggregate principle amount of $250,000 at a prime rate at National City Bank,
Cleveland, Ohio ("NCB") plus 2%. On
-24-
<PAGE> 25
March 5, 1998, CPS has made another loan to the Company, which bears interest at
the prime rate at NCB. From time to time Mr. Kendall has also provided security
to banks by permitting the banks to obtain a security interest in Mr. Kendall's
personal assets and/or providing guarantees so the Company could obtain
financing from the bank. Except for the interest to be received on the loans
provided by CPS, neither Mr. Kendall nor CPS has received nor will receive any
remuneration in connection with providing such working capital assistance to the
Company. The Company believes the interest payable to CPS is and was on terms no
less favorable than could be obtained pursuant to an arms-length transaction.
Office Lease. Sentex currently leases 5,500 square feet on three floors
of a three-story building at 553 Broad Avenue, Ridgefield, New Jersey 07657, as
executive offices and research and product assembly facilities under
month-to-month leases from Dr. Linenberg, the current Vice President of the
Company and President of Sentex Sensing, Inc., an operating subsidiary of the
Company. Rental expenses amounted to $55,740 for the year ended November 30,
1997.
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<PAGE> 26
ITEM 13 EXHIBITS, LISTS AND REPORTS ON FORM 8-K
- ------- ---------------------------------------
(A) EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
3.1 Certificate of Incorporation, as amended(3)
3.2 First Amended and Restated Bylaws of the Company(6)
3.3 Certificate of Incorporation of Sentex Acquisition Corp.(4)
3.5 Certificate of Merger (Sentex Systems, Inc. into Sentex)(4)
3.6 Certificate of Incorporation of Sentex Systems, Inc.(5)
3.7 Certificate of Incorporation of Monitek Technologies, Inc.(6)
4.1 Specimen Certificate of Common Shares(3)
4.2 Specimen of Class A Convertible Note(1)
4.3 Participation Rights Agreements(1)
4.4 Specimen of Clarion Note(1)
9.1 Shareholders Agreement between CPS Capital, Ltd. and Amos Linenberg,
dated March 1, 1996(2)
9.2 Shareholders Agreement between CPS Capital, Ltd. and Joanne Bianco,
dated March 1, 1996(2)
9.3 Shareholders Agreement among CPS Capital, Ltd. and Clarion Capital
Corporation and others(1)
10.1 Employment Agreement with Dr. Amos Linenberg, dated March 1, 1996(2)
10.2 Consulting Agreement with Ms. Joanne Bianco, dated March 1, 1996(2)
10.3 Sentex 1996 Long-Term Incentive Stock Option Plan(1)
21.1 List of Subsidiaries(6)
27.1* Financial Data Schedule
(1) Incorporated by reference to Annex A of the Joint Proxy
Statement/Prospectus which is a part of Amendment No. 1 to the
Registration Statement on Form S-4, filed on October 4, 1996, File No.
333-12993 (the "Registration Statement").
(2) Incorporated by reference to exhibits of the Registration Statement
bearing the same exhibit numbers.
(3) Incorporated by reference to exhibits bearing same exhibit numbers,
filed with the Company's Registration Statement on Form S-1, File No.
2-86860.
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<PAGE> 27
(4) Incorporated by reference to exhibits bearing the same exhibit numbers,
filed with the Company's Form 10-KSB for the fiscal year ended November
30, 1992.
(5) Incorporated by reference to exhibits bearing the same exhibit numbers,
filed with the Company's Form 10-KSB for the fiscal year ended November
30, 1984.
(6) Incorporated by reference to exhibits bearing the same exhibit numbers,
filed with the Company's Form 10-KSB for the fiscal year ended November
30, 1996.
* Filed herewith.
(B) REPORTS ON FORM 8-K
None.
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<PAGE> 28
SIGNATURE
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 13, 1998 SENTEX SENSING TECHNOLOGY, INC.
By: /s/ Robert S. Kendall
------------------------------------------
Robert S. Kendall, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert S. Kendall Chairman, President March 13, 1998
- ------------------------------ and Treasurer
Robert S. Kendall
/s/ James G. Few Executive V.P., Chief March 13, 1998
- ------------------------------ Operating Officer, Secretary
James G. Few and Director
/s/ James S. O'Leary Vice President, Finance and March 13, 1998
- ------------------------------ Chief Financial Officer
James S. O'Leary
/s/ Julius L. Hess Director March 13, 1998
- ------------------------------
Julius L. Hess
/s/ Ronald M. Lipson Director March 13, 1998
- ------------------------------
Ronald M. Lipson
Director
- ------------------------------
Amos Linenberg
Director
- ------------------------------
Morton A. Cohen
</TABLE>
-28-
<PAGE> 29
SENTEX SENSING TECHNOLOGY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
F-1
<PAGE> 30
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONTENTS
- ------------------------------------------------------------------------------
Page
----
AUDITORS' REPORT ON THE FINANCIAL STATEMENTS F-3
FINANCIAL STATEMENTS
Consolidated balance sheet F-4
Consolidated statements of operations F-5
Consolidated statements of stockholders' equity F-6
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8 - F-20
F-2
<PAGE> 31
Independent Auditors' Report
----------------------------
To the Board of Directors and Stockholders
Sentex Sensing Technology, Inc.
Cleveland, Ohio
We have audited the accompanying consolidated balance sheet of Sentex
Sensing Technology, Inc. and subsidiaries as of November 30, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended November 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sentex
Sensing Technology, Inc. and subsidiaries as of November 30, 1997, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended November 30, 1997, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2A to the
financial statements, the Company has in the past and continues to sustain
substantial net and operating losses. In addition, the Company has used
substantial amounts of working capital in its operations which has reduced the
Company's liquidity to a very low level. Additionally, the Company's stock is no
longer listed on the NASDAQ Small Cap Market tier of the NASDAQ stock market and
is now traded on the Over-the- Counter Bulletin Board which might limit the
Company's ability to raise equity capital. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
HAUSSER + TAYLOR LLP
Cleveland, Ohio
March 9, 1998
F-3
<PAGE> 32
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
November 30, 1997
-----------------
<TABLE>
<CAPTION>
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents, including $1,285,000 pledged
as collateral to bank for borrowing arrangements $ 1,331,981
Accounts receivable, less allowance for doubtful accounts
of $30,993 1,248,187
Inventories 1,399,944
Other current assets 180,920
---------
Total current assets $4,161,032
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization of $229,886 242,647
OTHER ASSETS
Goodwill 238,833
Deposits and other assets 33,360 272,193
-------- ----------
$4,675,872
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable - bank $ 2,100,000
Trade accounts payable 857,937
Accrued liabilities 861,935
Due to related party 33,333
---------
Total current liabilities $3,853,205
LONG-TERM DEBT
Convertible subordinated notes payable 515,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized - 200,000,000 shares
Issued - 87,865,762 shares
Outstanding - 78,919,762 shares 2,153,489
Retained earnings (deficit) (1,554,555)
Treasury shares at cost, 8,946,000 shares (313,218)
Cumulative translation adjustment 21,951
----------
Total stockholders' equity 307,667
----------
$4,675,872
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 33
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended November 30, 1997 and 1996
--------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES
Net sales $ 7,504,654 $ 999,337
Interest and other income 83,253 179,090
------------ ------------
Total revenues 7,587,907 1,178,427
COST AND EXPENSES
Cost of sales 3,528,510 417,873
Selling, general and administrative 5,462,805 1,402,660
Research and development 406,432 212,907
------------ ------------
Total costs and expenses 9,397,747 2,033,440
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAX
EXPENSE (1,809,840) (855,013)
PROVISION FOR INCOME TAX EXPENSE - -
------------ ------------
NET LOSS $ (1,809,840) $ (855,013)
============ ============
NET LOSS PER SHARE $ (0.02) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 78,919,762 67,264,248
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 34
<TABLE>
<CAPTION>
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended November 30, 1997 and 1996
--------------------------------------
Unrealized
Holding
Gain
on
Securities
Common Stock Retained Available
------------------- Earnings for
Shares Amount (Deficit) Sale
-------- ------- --------- ----------
<S> <C> <C> <C> <C>
Balance - November 30, 1995 76,206,081 $ 1,955,489 $ 1,110,298 $ 6,174
Net loss -- -- (855,013) --
Reversal of unrealized holding gain on
securities sold -- -- -- (6,174)
Other -- -- -- --
Issuance of common stock, net of registration
costs of $150,000 11,659,681 198,000 -- --
----------- --------- --------- ----------
Balance - November 30, 1996 87,865,762 2,153,489 255,285 --
Net loss -- -- (1,809,840) --
Translation adjustment -- -- -- --
----------- --------- --------- ----------
Balance - November 30, 1997 87,865,762 $ 2,153,489 $(1,554,555) $ --
=========== =========== =========== ===========
<CAPTION> Treasury Stock Cumulative Total
--------------------- Translation Stockholders'
Shares Amount Adjustment Equity
------ --------- ------------ -------------
<S> <C> <C> <C> <C>
Balance - November 30, 1995 8,846,000 $ (313,218) $ -- $ 2,758,743
Net loss -- -- -- (855,013)
Reversal of unrealized holding gain on
securities sold -- -- -- (6,174)
Other 100,000 -- -- --
Issuance of common stock, net of registration
costs of $150,000 -- -- -- 198,000
---------- ----------- ----------- -----------
Balance - November 30, 1996 8,946,000 (313,218) -- 2,095,556
Net loss -- -- -- (1,809,840)
Translation adjustment -- -- 21,951 21,951
---------- ----------- ----------- -----------
Balance - November 30, 1997 8,946,000 $ (313,218) $ 21,951 $ 307,667
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 35
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended November 30, 1997 and 1996
--------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,809,840) $ (855,013)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization of discount on convertible subordinated
notes payable 47,000 -
Depreciation and amortization 133,206 18,085
Not-to-compete charge - 100,000
Other adjustments 23,956 7,954
Changes in assets and liabilities:
Accounts receivable (401,402) 85,881
Inventories 231,431 33,347
Other current assets 9,491 112,015
Other assets (5,743) 10,220
Accounts payable (35,119) 15,810
Accrued expenses and other current liabilities (20,082) 167,643
----------- -----------
Total adjustments (17,262) 550,955
----------- -----------
Net cash used by operating activities (1,827,102) (304,058)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Monitek net of $41,936 cash acquired - (180,383)
Pre-acquisition advances to Monitek - (539,766)
Proceeds on sale of equipment - 1,500
Redemption of short-term investments - 299,769
Acquisition of property and equipment (35,351) (1,937)
----------- -----------
Net cash used by investing activities (35,351) (420,817)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments to related party (33,333) (33,333)
Net proceeds on note payable - bank 1,530,000 570,000
----------- -----------
Net cash provided by financing activities 1,496,667 536,667
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (365,786) (188,208)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,697,767 1,885,975
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,331,981 $ 1,697,767
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 92,747 $ 2,803
Income taxes - -
</TABLE>
See notes to the consolidated financial statements for certain noncash investing
and financing activities.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 36
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION, BACKGROUND AND INDUSTRY SEGMENT
The consolidated financial statements include the accounts of
Sentex Sensing Technology, Inc. and its wholly-owned subsidiaries
(the "Company"). All material intercompany accounts and
transactions have been eliminated in consolidation.
The Company's business is confined to a single industry segment,
manufacturing analysis equipment. One of the subsidiaries, Sentex
Systems, Inc., is engaged in the business of developing,
manufacturing and selling automated gas chromatography devices
designed to detect the presence of certain substances by
identifying and measuring the concentrations of certain
atmospheric vapors. A new subsidiary, Monitek Technologies, Inc.
("Monitek"), was acquired by the Company on November 30, 1996 and
designs, develops, assembles and markets instruments for the
measurement of clarity (turbidity), suspended solid content,
color, purity, flow, level and volume of liquids in industrial
waste water environments. Monitek GmbH, a wholly-owned subsidiary
of Monitek, was formed in Germany to sell and service Monitek's
(and now the Company's) products throughout Continental Europe.
At November 30, 1997, Monitek GmbH's assets, located in
Continental Europe, represent approximately 25% of the Company's
total consolidated assets. Monitek is included in the
consolidated balance sheet as of the acquisition date (see Note
3).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Going Concern - The accompanying financial statements
have been prepared in conformity with generally accepted
accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company has
in the past and continues to sustain substantial net and
operating losses. In addition, the Company has used
substantial amounts of working capital in its operations
which has reduced the Company's liquidity to a very low
level. Additionally, the Company's stock is no longer
listed on the NASDAQ Small Cap Market tier of the NASDAQ
stock market and is now traded on the Over-the-Counter
Bulletin Board which might limit the Company's ability to
raise equity capital. These matters raise substantial
doubt about the Company's ability to continue as a going
concern. The financial statements do not include any
adjustments relating to the recoverability and
classification of recorded assets or the amounts and
classification of liabilities that might be necessary in
the event the Company cannot continue in existence. The
Company's ability to continue in existence is partly
dependent upon its ability to arrange adequate financing
and to attain satisfactory levels of operating cash
flows. Management believes the Company will probably seek
to expand its financing through increased asset based
lines of credit, which management believes, but cannot be
assured, will be obtainable. Additionally, management
believes, but has no assurance, that a principal
shareholder of the Company has the ability to and will
fund the Company's financing requirements as the Company
plans for its future.
B. Inventories - Inventories are stated at the lower of cost
(determined by the first-in, first-out method) or market.
F-8
<PAGE> 37
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. Property and Equipment - Property and equipment are
stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed
using straight-line and accelerated methods over the
estimated useful lives of the respective assets.
When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation or amortization
are removed from the accounts and any resulting gain or
loss is recognized in income or loss for the period. The
cost of maintenance and repairs is included in the
statements of operations as incurred; significant
renewals and betterments are capitalized.
D. Revenue Recognition - The Company records revenue as
products are shipped to customers.
E. Research and Development Costs - Research and development
costs are expensed as incurred.
F. Cash and Cash Equivalents - Cash equivalents are
comprised of certain highly liquid investments with a
maturity of three months or less when purchased.
G. Reclassification - Certain prior year balances have been
reclassified to conform to current year's presentation.
H. Concentration of Credit and Risk Factors - Financial
instruments which potentially subject the Company to
concentrations of credit risk are cash and equivalents,
investments in certificates of deposit and accounts
receivable arising from its normal business activities.
Concentrations of credit risk with respect to trade
receivables are limited, due to the number of customers
comprising the Company's customer base and their
disposition across different industries and geographic
areas. Bad debt expenses have not been material. The
Company places its cash and cash equivalents with high
credit quality financial institutions. The amount on
deposit in any one institution that exceeds federally
insured limits is subject to credit risk. As of November
30, 1997, the Company had significant cash balances at
financial institutions which were in excess of the
federally insured limits.
The Company operates in an environment with many
financial risks, including, but not limited to, its lack
of history of profitable operations, the inherent risks
associated with new product research and development, the
highly competitive nature of the industry in which it
operates and worldwide economic conditions. The Company's
ability to capitalize on its current and emerging
technology and diversity of its operations and products
is also dependent upon the Company's ability to obtain
the necessary capital through operating cash flow,
additional borrowings or additional equity funds.
F-9
<PAGE> 38
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. Use of Estimates - The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
J. Income Taxes - The Company utilizes Statement of
Financial Accounting Standards No. 109 ("SFAS 109"),
Accounting for Income Taxes, which requires an asset and
liability approach to financial accounting and reporting
for income taxes. The difference between the financial
statement and tax basis of assets and liabilities is
determined annually. Deferred income tax assets and
liabilities are computed for those temporary differences
that have future tax consequences using the current
enacted tax laws and rates that apply to the periods in
which they are expected to affect taxable income.
Valuation allowances are established, if necessary, to
reduce the deferred tax asset to the amount that will,
more likely than not, be realized. Income tax expense is
the current tax payable or refundable for the period plus
or minus the net change in the deferred tax assets and
liabilities.
The Company has no current plans to repatriate
undistributed earnings of Monitek's foreign subsidiary.
Therefore, no tax has been provided to cover the
repatriation of such undistributed earnings. The
cumulative amount of undistributed earnings for which the
Company has not provided United States income taxes is
not material.
The Company has terminated its IC-DISC and, therefore,
has begun repatriation of the undistributed earnings of
the IC-DISC. The undistributed earnings of approximately
$780,000 will be recognized as income by the Company over
a 10-year period ending March 31, 2001.
K. Fair Value of Financial Instruments - The fair values of
cash, accounts receivable, accounts payable and other
short-term obligations approximate their carrying values
because of the short maturity of these financial
instruments. The carrying values of the Company's
long-term obligations approximate their fair value. In
accordance with Statement of Financial Accounting
Standards No. 107, Disclosure About Fair Value of
Financial Instruments, rates available at balance sheet
dates to the Company are used to estimate the fair value
of existing debt.
L. Foreign Currency Translation - The Company accounts for
foreign currency translation in accordance with Statement
of Financial Accounting Standards No. 52, Foreign
Currency Translation. The functional currency of the
Company's German subsidiary is the deutsche mark. All
transactions of that subsidiary denominated in currency
other than the functional currency are remeasured into
the functional currency with the resulting gain or loss
included as foreign currency transaction gains or losses
as incurred in the accompanying consolidated statements
of operations. Assets and liabilities denominated in
currencies other than U.S. dollars are translated at year
end exchange rates and all statement of operations items
are translated at the weighted average exchange rate for
the year.
F-10
<PAGE> 39
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
M. Loss Per Share - Loss per share is calculated using the
weighted average number of shares outstanding during the
year and additional shares assumed to be outstanding to
reflect the dilutive effect of common stock equivalents.
N. Factoring of Receivables - Monitek entered into an
agreement, in May 1995, pursuant to which it sold certain
trade accounts receivable, subject to recourse
provisions. Under the terms of the agreement, Monitek
retained substantially the same risk of credit loss as if
the receivables had not been sold. In 1997, the Company
replaced the factoring of Monitek's receivables with
traditional receivable financing (lines of credit).
O. New Authoritative Pronouncements - Effective December 1,
1995, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS 121). SFAS 121 requires
the Company to review long-lived assets and certain
identifiable intangibles for impairment whenever events
or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The assessment
of impairment is based on the estimated undiscounted
future cash flows from operating activities compared with
the carrying value of the assets. If the undiscounted
future cash flows of an asset are less than the carrying
value, a write-down would be recorded measured by the
amount of the difference between the carrying value of
the asset and the fair value of the asset. The adoption
of SFAS 121 did not have any effect on the Company's
consolidated financial statements.
In October 1995, Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), was issued which establishes
accounting and reporting standards for stock-based
compensation plans. This standard encourages the adoption
of the fair value-based method of accounting for employee
stock options or similar equity instruments, but
continues to allow the Company to measure compensation
cost for those equity instruments using the intrinsic
value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Under the fair value-based method,
compensation cost is measured at the grant date based on
the value of the award. Under the intrinsic value-based
method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date or
other measurement date over the amount the employee must
pay to acquire the stock. The Company intends to use the
intrinsic value-based method for stock issued to
employees. As a result, this standard does not have any
effect to the Company's consolidated financial statements
other than to require disclosure, beginning in the fiscal
year ended November 30, 1997, of the pro forma effect on
net income of using the fair value-based method of
accounting for stock issued to employees. The Company's
outstanding stock options and/or similar equity
instruments subject to the requirements of SFAS 123 are
not material.
F-11
<PAGE> 40
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
O. New Authoritative Pronouncements (Continued)
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 must
adopt these new standards in its first quarter ended
February 28, 1998. All prior period earnings per share
data will be restated for the adoption of SFAS 128.
Management believes the effect of adoption will not be
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 than
November 30, 1999.
NOTE 3. ACQUISITION
On November 30, 1996, the Company acquired 100% of the
outstanding stock of Monitek Technologies, Inc. (see Note 1).
The acquisition was accounted for as a purchase and resulted in
the issuance of 11,659,681 common shares and convertible notes
having face and discounted values of $622,000 and $468,000,
respectively, in exchange for 100% of the outstanding stock and
other securities of Monitek. The acquisition cost attributable to
the common shares of $348,000 was based on the estimated fair
value, including goodwill, of the net assets acquired, net of the
cost attributable to the convertible notes and before costs
associated with the registration of the securities issued
($150,000, which was charged against stockholders' equity). In
addition, the total acquisition cost includes direct acquisition
costs of $72,319.
The estimated fair market value of tangible assets and
liabilities acquired was $2,650,153 and $2,013,236, respectively.
The excess of the aggregate purchase price over the estimated
fair market value of the net assets acquired (goodwill) was
approximately $251,402, which is being amortized on a
straight-line basis over 20 years.
The acquisition of Monitek was accounted for as a purchase and,
accordingly, the operating results are included in the Company's
consolidated statements of operations beginning December 1, 1996.
Unaudited pro forma information relating to the acquisition was
included in the notes to the Company's financial statements for
the year ended November 30, 1996.
F-12
<PAGE> 41
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INVENTORIES
Inventories consist of the following at November 30, 1997:
<TABLE>
<S> <C>
Raw materials $ 628,317
Work-in-process 165,681
Finished goods 605,946
----------
$1,399,944
==========
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at November 30,
1997:
<TABLE>
<S> <C>
Machinery and equipment $398,910
Furniture and fixtures 52,337
Leasehold improvements 21,286
----------
472,533
Less accumulated depreciation and amortization 229,886
----------
$242,647
==========
</TABLE>
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities consist of the following at November 30,
1997:
<TABLE>
<S> <C>
Accrued bonuses and other compensation $151,639
Accrued commissions 257,082
Accrued pension 228,750
Accrued payroll and related taxes 106,674
Accrued professional fees 52,302
Other accrued liabilities 65,488
----------
$861,935
==========
</TABLE>
NOTE 7. NOTES PAYABLE - BANK AND OTHER BORROWING ARRANGEMENTS
The Company has available a revolving credit facility which
provides for borrowings of $2,000,000, limited to the collateral
amount. The line is collateralized by significantly all of the
Company's cash and cash equivalents in the form of 30 day
certificates of deposit totalling $1,285,000 at November 30,
1997. Interest is charged at a rate that is .40% per annum in
excess of the interest rate paid on its deposit (collateral)
accounts. Amounts outstanding under the facility, which expires
in June 1998, amounted to $1,200,000 and $570,000 at November 30,
1997 and 1996, respectively.
F-13
<PAGE> 42
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. NOTES PAYABLE - BANK AND OTHER BORROWING ARRANGEMENTS (CONTINUED)
Effective September 23, 1997, the Company has available a
$1,000,000 demand line of credit secured by the assets of the
Company's Chairman of the Board. Interest is charged on a 90 day
contract period at the lower of the prime lending rate or LIBOR
plus 150 basis points. Interest is payable monthly. Amounts
outstanding under the line amounted to $900,000 at November 30,
1997.
During the year ended November 30, 1997, a principal shareholder
and the Company's Chairman provided the Company assistance in
connection with funding its working capital needs in the form of
loans and security for bank loans. From May 1997 through
September 1997, the shareholder provided the Company a temporary
working capital loan in the aggregate principle amount of
$250,000 at the prime rate plus 2%.
Interest expense on notes payable - bank for the years ended
November 30, 1997 and 1996 amounted to $92,533 and $2,803,
respectively.
NOTE 8. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In connection with the acquisition of Monitek on November 30,
1996, the Company issued convertible notes having aggregate face
and discounted values of $622,000 and $468,000, respectively. The
unsecured notes, which are subordinated to all present and future
obligations of the Company, have a stated interest rate of 5.05%
per annum and have been discounted using a yield rate of 15% to
reflect management's estimate of the fair value of the debt. The
carrying value of the notes at November 30, 1997 amounted to
$515,000 which reflects the $47,000 amortization of the discount
for the year then ended.
Interest on the notes is payable annually (November 30) in shares
of the Company's common stock based on the average of the bid and
ask prices of the shares on the last ten trading days prior to
the date on which the interest payment is due. Interest expense
related to the convertible subordinated notes payable amounted to
approximately $31,400 for the year ended November 30, 1997, all
of which is accrued at year end. The Company expects to issue
approximately 833,200 shares of common stock in satisfaction of
the accrued interest. The notes are convertible at various rates
($.0194 and $.0562 on $136,414 and $485,586 of face amount,
respectively) averaging $.03 per face amount of debt, into an
aggregate of 15,671,969 shares of the Company's common stock.
Clarion Capital Corporation is the holder of $609,578 of the
convertible notes. Upon conversion, Clarion will receive
approximately 15,450,937 common shares.
The notes are convertible by the holder 300 days after the second
anniversary of issuance and earlier under certain conditions
including certain changes in control or the
restructuring/recapitalization of the Company. The notes can be
converted at the Company's option 345 days after the second
anniversary of issuance into that number of shares by dividing
the face amount of the note by $.075 or at a time earlier at the
standard conversion rates ($.0194 and $.0562) if there is a proxy
contest for control of the Company's Board of Directors or if the
Company is unable, in the judgment of the Company's Board of
Directors, without compelling such a conversion, to obtain the
requisite shareholder vote to approve a material transaction
approved by the Board of Directors. The conversion terms contain
standard anti-dilutive provisions to adjust the conversion price.
In the event the notes are not converted, they become due on
November 30, 1999.
F-14
<PAGE> 43
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. CONVERTIBLE SUBORDINATED NOTES PAYABLE (CONTINUED)
The Company has reserved 18,687,424 of its common shares for the
payment of interest on and the conversion of the notes.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and occupies premises under
various operating leases, certain of which are with a principal
shareholder. Rental expense amounted to approximately $320,400
and $56,800 (of which $57,900 and $56,800 were for related party
leases) for the years ended November 30, 1997 and 1996,
respectively. Future minimum payments under leases that have
initial or remaining terms in excess of one year are as follows
at November 30, 1997:
<TABLE>
<S> <C> <C>
1998 $271,400
1999 183,900
2000 19,600
2001 6,200
2002 5,300
--------
$486,400
========
</TABLE>
NOTE 10. STOCK INCENTIVE PLAN
The Company has a long-term incentive plan ("Incentive Plan") to
provide current and future directors, officers and employees
incentives to stimulate their active interest in the development
and financial success of the Company. The Incentive Plan provides
for the granting of "incentive stock options," under Section 422
of the Internal Revenue Code of 1986, as amended, or other stock
options, stock appreciation rights, restricted or nonrestricted
stock awards to purchase not more than 7,000,000 shares (which
shares have been reserved by the Company) of common stock as
determined by the Company's Incentive Plan Committee (the
"Committee"). The option prices per share of common stock which
is the subject of incentive stock options and other stock options
under the Incentive Plan shall not be less than 100% of the fair
market value of the Company's shares of common stock on the date
such option is granted. The Committee shall determine when each
option is to expire but no option shall be exercisable for a
period of more than 10 years from the date upon which the option
is granted. Generally, options granted under the Incentive Plan
vest or terminate upon the employee leaving the Company and are
subject to automatic acceleration of any vesting requirements
given certain changes in control of the Company.
F-15
<PAGE> 44
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. STOCK INCENTIVE PLAN (CONTINUED)
Stock appreciation rights may be awarded by the Committee at the
time or subsequent to the time of the granting of options. Stock
appreciation rights awarded shall provide that the option holder
shall have the right to receive an amount equal to 100% of the
excess, if any, of the fair market value of the shares of common
stock covered by the option over the option price. Such amount
shall be payable, as determined by the Committee, in one or more
of the following manners: (a) cash; (b) fully-paid shares of
common stock having a fair market value equal to such amount; or
(c) a combination of cash and shares of common stock. As of
November 30, 1997, the Company has not granted any awards under
the Incentive Plan.
Stock options outstanding at November 30, 1996 consisted of
Monitek stock options that were automatically converted, at the
date of acquisition (see Note 3), into options to purchase
2,583,110 of the Company's common shares at an average exercise
price of $.1038 per share and a range of $.0725 to $.1812 per
share. During the year ended November 30, 1997, 35,000 shares
under option were forfeited and 100,000 shares under option
expired by their terms but were extended for an additional 18
months with an exercise price equal to the original exercise
price of $.1812 per share. The fair value of the extended options
under SFAS 123 was not material. The options outstanding to
purchase 2,341,700 shares of the Company's common stock (as of
November 30, 1997) have an average exercise price of $.1045 per
share, an exercise price range of $.0725 to $.1812 per share and
expire in varying amounts between August 1998 and March 2000.
NOTE 11. PROFIT-SHARING PLAN
The Company has a profit-sharing plan and a 401(k) retirement
plan for the benefit of eligible employees. Contributions under
the plans are determined at the discretion of the Board of
Directors and are credited to employees based upon a percentage
of eligible salaries. The Company elected to suspend all
contributions for the years ended November 30, 1997 and 1996.
NOTE 12. INCOME TAXES
As referred to in Note 1, the Company utilizes SFAS 109,
Accounting for Income Taxes. A reconciliation between the
Company's effective income tax rate and the statutory federal
income tax rate is as follows for the years ended November 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Expected federal income tax benefit at
the statutory rate (34.0)% (34.0)%
Increase in taxes resulting from:
Effect of operating loss for which no tax
carrybacks are available 33.6 33.5
Other 0.4 0.5
----- -----
- % - %
===== =====
</TABLE>
F-16
<PAGE> 45
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. INCOME TAXES (CONTINUED)
The tax effects of significant temporary differences that give
rise to significant portions of the deferred tax assets and
deferred tax liabilities are presented below for the years ended
November 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts and
miscellaneous other $ (8,800) $ (8,000)
Net operating loss carryforward 919,000 340,000
-------- --------
Total gross deferred tax assets 910,200 332,000
Less valuation allowance 910,200 332,000
-------- --------
Net deferred tax assets $ - $ -
======== ========
</TABLE>
The deferred tax assets do not include deferred tax assets
related to purchased net operating loss carryforwards that are
subject to usage limitations (see below).
The Company established a valuation allowance against tax
benefits that are potentially available to the Company but have
not yet been recognized. This valuation allowance relates to the
amount of net operating loss carryforwards in excess of existing
net taxable temporary differences and to certain deductible
temporary differences that may not reverse during periods in
which the Company may generate net taxable income. During the
years ended November 30, 1997 and 1996, the Company recorded
increases of $578,200 and $290,000, respectively, in the
valuation allowance primarily as a result of the net operating
loss generated during the year.
At November 30, 1997, the Company had approximately $8,942,000 of
net operating loss carryforwards available to offset future
federal taxable income. The federal net operating loss
carryforwards expire at various dates through 2012. Federal tax
law imposes restrictions on the utilization of net operating loss
carryforwards in the event of a change in ownership. The
Company's net operating loss includes approximately $6,265,000 of
loss carryforwards that are subject to limitations as a result of
these provisions.
NOTE 13. RELATED PARTY TRANSACTIONS
Effective March 1, 1996, the Company entered into a management
agreement with an affiliate and significant shareholder, CPS
Capital, Ltd., to perform management and executive services at an
annual fee of $193,800, payable ratably each month, plus any
reasonable "out-of-pocket" expenses. On June 24, 1996, the
management agreement was amended and restated in order for CPS
Capital, Ltd. to extend its management services at an annual fee
of $393,800. For the years ended November 30, 1997 and 1996,
management fees incurred under the agreement amounted to $393,800
and $145,350, respectively, and have been included as selling,
general and administrative expenses in the statements of
operations. Approximately $197,000 of the management fees were
unpaid and are included in accrued liabilities on the Company's
balance sheet.
F-17
<PAGE> 46
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. RELATED PARTY TRANSACTIONS (CONTINUED)
As a condition of the merger with Monitek, the Company has
entered into an agreement with an affiliate, Clarion Capital
Corporation, to provide management services at an hourly fee as
requested.
In the year ended November 30, 1996, prior to the acquisition of
Monitek, the Company had product sales of $194,112 and provided
strategic operational and financial consulting services of
$83,335 to Monitek. These amounts are included in net sales and
other income, respectively, in the Company's consolidated
statements of operations. Amounts due from Monitek for sales,
services and advances amounted to approximately $539,800 at the
date of acquisition. These amounts were eliminated against
Monitek's offsetting payable in consolidation. Management intends
such amounts to be repaid from Monitek's operations.
In 1996, the Company entered into a four year employment
agreement with its Executive Vice President and significant
shareholder of the Company. The agreement provides for a base
salary of approximately $132,000 per annum, plus annual cost of
living adjustments and certain incentive compensation.
Additionally, the agreement provides for a covenant not to
compete during the term of employment and for one year
thereafter.
In 1996, the Company entered into a two year consulting agreement
with a significant shareholder and former officer that provides
for a base compensation of $75,000 per annum and a three year
covenant not to compete. Consideration for the covenant not to
compete amounted to $100,000 (which was charged against
operations in the year ended November 30, 1996) in the aggregate
and is payable in three equal installments in March 1996, 1997
and 1998. The Company's obligations under the consulting
agreement are secured by a letter of credit.
NOTE 14. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment as described in Note
1. Sales and operating losses for the year ended November 30,
1997, and identifiable assets classified by the major geographic
areas in which the Company operates, are as follows:
F-18
<PAGE> 47
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<S> <C>
Sales to unaffiliated customers:
United States
Domestic $ 2,465,606
Export sales (including approximately
$500,000 to Japan and $468,000 to
South Korea) 1,369,700
Continental Europe 3,669,348
Intercompany transfers 609,171
Eliminations (609,171)
------------
Net sales 7,504,654
Operating loss:
United States (1,546,507)
Continental Europe (46,460)
------------
Total operating loss (1,592,967)
Interest expense (172,201)
Other expense, net (44,672)
------------
Loss before income tax expense $ (1,809,840)
============
Identifiable assets:
United States $ 3,528,239
Continental Europe 1,147,633
------------
Total assets $ 4,675,872
============
</TABLE>
NOTE 15. SUBSEQUENT EVENT (UNAUDITED)
In March 1998, management proposed a board resolution to allow
the holder of the Company's convertible subordinated notes payable
to convert its notes immediately without regard to restrictions
thereon in the hopes of reducing the amount of the Company's debt.
The holder has agreed in principle to convert the notes if CPS
Capital, Ltd. ("CPS") purchases the common shares that would be
held by the holder following conversion. CPS has agreed in
principle to purchase the common shares for approximately $230,000.
These transactions are subject to entering into definitive
agreements.
As described in Note 13, the Company has a management agreement
with CPS. In March 1998, CPS and the Company agreed that the unpaid
management fees as of November 30, 1997, which totaled
approximately $197,000, and the fee for fiscal 1998, which will be
reduced to $250,000,, may be paid at some future time in the form
of common shares rather than cash, to the extent permitted under
the New Jersey Shareholder Protection Act.
F-19
<PAGE> 48
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
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 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 $530,000
over the next four fiscal years, with over $250,000 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.
<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 ANNUAL REPORT, FILED ON FORM
10-KSB, FOR THE FISCAL YEAR ENDING NOVEMBER 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<CASH> 1,331,981
<SECURITIES> 0
<RECEIVABLES> 1,279,180
<ALLOWANCES> 30,993
<INVENTORY> 1,399,944
<CURRENT-ASSETS> 4,161,032
<PP&E> 472,533
<DEPRECIATION> 229,886
<TOTAL-ASSETS> 4,675,872
<CURRENT-LIABILITIES> 3,853,205
<BONDS> 515,000
0
0
<COMMON> 2,153,489
<OTHER-SE> (1,845,822)
<TOTAL-LIABILITY-AND-EQUITY> 4,675,872
<SALES> 7,504,654
<TOTAL-REVENUES> 7,587,907
<CGS> 3,528,510
<TOTAL-COSTS> 3,528,510
<OTHER-EXPENSES> 5,698,205
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 171,032
<INCOME-PRETAX> (1,809,840)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,809,840)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,809,840)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
