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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
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, 1998
SENTEX SENSING TECHNOLOGY, INC.
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(Exact name of Registrant as specified in its charter)
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<S> <C>
New Jersey 22-2333899
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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<S> <C>
1801 East Ninth Street
Cleveland, Ohio 44114
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(Address of principal executive offices) (Zip Code)
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(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
--- ---
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 25, 1999: $986,497.
Number of shares of Common Shares (No Par Value) of SENTEX SENSING
TECHNOLOGY, INC., issued and outstanding as of February 25, 1999 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 19
ITEMS OMITTED
Items 6 and 7 have been omitted pursuant to Rule 12B-25 and will be filed by
Amendment.
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ITEM 1 BUSINESS
DEVELOPMENT OF BUSINESS
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. In April 1984, the Company sold, in its initial public offering,
25,000,000 Common Shares, no par value of the Company (the "Common Shares").
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 ("Systems").
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 has become the principal
shareholder of the Company. CPS is controlled by Robert S. Kendall, the Chairman
and Chief Executive Officer of the Company.
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 a wholly owned subsidiary of the Company
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.
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.
On September 4, 1998, the Company completed the sale of all of the
outstanding capital stock of Systems to ALR Group Incorporated ("ALR"), which is
principally owned by Amos Linenberg ("Linenberg"). Prior to the sale, Linenberg
was the President of Systems and an Executive Vice President of the Company. In
the past, Linenberg has been a principal shareholder of the Company and served
as a director of the Company.
DESCRIPTION OF BUSINESSES OF MONITEK
General
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.
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Existing Products
Monitek's products consist of optical based products, non-optical based
products and spare parts of its optical and non-optical 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.
Monitek has developed a number of insertable in-line sensors for
measurement of consistency, for use in various industries. One of the sensors is
called the 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 two
non-optical-based products. The first is 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
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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.
The second non-optical based product 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.
(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
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 1999.
One of the new products is the result of the acquisition of Cypress. This
product consists of an insertable in-line sensor and a micro-processor based
transmitter, and was originally designed for specific use in the Produced Water
(oil production) industry, for which a number of units have already been sold.
Subsequent to the acquisition, management made the decision to make further
modifications to the transmitter for the purpose of making it compatible with
the Company's other optical based sensors, both present and future. As a result,
the official release of the product was delayed for several months. The Company
now estimates that the product will be available for sale in the second quarter
of fiscal 1999.
Research and Development
Monitek expended approximately $118,000 and $230,000 for research and
development during the fiscal years ended November 30, 1998 ("fiscal 1998") and
November 30, 1997 (the "fiscal 1997"), respectively. During fiscal 1998, a
number of products were improved but no new products were released for
production. However, a low-cost Nephelometer for the Potable Water and Waste
Water industries, which was designed and produced by a company in Germany, was
introduced into the European marketplace and an improved version of the product
is expected to be introduced into the United States during the second quarter of
fiscal 1999.
Marketing, Distribution and Sales
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.
Manufacturing/Suppliers
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
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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
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
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
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 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.
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Employees
As of February 25, 1999, the Company employed a total of 24 full-time
staff, 3 of whom were engaged in product design and engineering, 10 were engaged
in manufacturing and production, 7 were engaged in marketing and sales and 4
were engaged in general corporate and administrative positions. The Company also
had 3 part time employees and 1 temporary employee. The Company's ability to
develop, manufacture, market and sell products and to establish and maintain its
competitive position will depend, in large part, on its ability to attract and
retain qualified personnel. None of the Company's employees is represented by a
union. The Company believes that its relations with its employees are
satisfactory.
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
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 6,000 square feet of office and warehouse
space in Dusseldorf, Germany pursuant to a lease that expires in October 2001,
and provides for a base annual rental of $85,000, based on the rate of exchange
in effect at November 30, 1998.
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.
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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.
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1998 HIGH LOW
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1st quarter .04 .02
2nd quarter .05 .02
3rd quarter .04 .01
4th quarter .02 .01
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1997 HIGH LOW
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1st quarter .094 .063
2nd quarter .094 .031
3rd quarter .094 .031
4th quarter .063 .031
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The bid quotations represent interdealer quotations and do not include
retail markup, markdown or commissions, and may not represent actual
transactions. On February 25, 1999, 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.
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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.
FINANCIAL CONDITION
Working Capital and Liquidity
During the last several fiscal years, the Company has incurred losses from
operations. In addition, the Company's certified public accountants,
Hausser+Taylor LLP, have included in their auditors' report, which covers the
Company's financial statements for the years ended November 30, 1997 and
November 30, 1998, a statement that the Company's recurring losses from
operations raised substantial doubt about the Company's ability to continue as a
going concern. Subsequently, for fiscal 1998, the Company has sustained losses
of approximately $2,205,000. These losses have had a substantial adverse effect
on the working capital of the Company.
Working capital decreased to negative $1,823,000 at November 30, 1998 as
compared to $308,000 as of November 30, 1997. The decrease is mainly due to the
losses sustained by the Company during fiscal 1998 and the accrued expense
incurred in connection with the Cypress acquisition. Cash and cash equivalents
equaled approximately $111,000 as of November 30, 1998 as compared to $1,332,000
at November 30, 1997. 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 a bank line of credit of $2,000,000 and has borrowed an aggregate of
$1,880,400 as of November 30, 1998. This line of credit is secured by the
personal guarantee of Robert S. Kendall, the Chairman of the Company. From time
to time, CPS has provided the Company with temporary working capital loans and,
as of November 30, 1998, there was an outstanding borrowing of $551,000 on such
loans. As a result of the acquisition of Cypress, the Company is obligated to
make payments to the shareholders of Cypress (for payment of shares and
performing future consulting services) of approximately $535,000 over the next
four fiscal years. Approximately $246,000 of such amounts are payable in fiscal
1999. On February 16, 1999, a payment of $150,000 became due under the terms of
the Cypress purchase agreement but the Company has not yet made such payment.
The former shareholders of Cypress have sent the Company a notice of default.
The Company has indicated that it will make payment to the Cypress shareholders
before the end of April 1999. There are currently no
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material commitments anticipated for capital expenditures during fiscal 1999.
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 would 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. To control the operating losses attributable to Systems, which totaled
approximately $700,000 during fiscal 1998, the Company sold Systems to ALR. In
addition, during the fourth quarter of fiscal 1998 and the first quarter of
fiscal 1999, the Company's management has made other significant reductions in
operating expense. The Company estimates that these measures will save the
Company approximately $50,000 per month.
The Company also hopes that the offering of three new products during
fiscal 1999 will 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 $10,751,000 in net operating losses as of
fiscal 1998, which will expire at various dates through the year 2018 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
$6,625,000 of the $10,751,000 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
Fiscal 1998 as Compared to Fiscal 1997
The Company's net sales decreased by 26%, from $7,505,000 for fiscal 1997
to $5,590,000 for fiscal 1998. Sales of Systems products decreased by $848,000,
or 71%, primarily as a result of the Company's inability to effectively
integrate the sale of Systems products into Monitek's distribution channels and
the fact that the Company is only reporting sales of Systems products for the
seven months of fiscal 1998 as a result of the sale of Systems to ALR , as noted
above. Monitek's domestic sales decreased by $32,000, or 2%, while export sales
from the United States decreased by $423,000, or 52%, primarily as a result of a
very sharp drop-off in orders from Asian countries, most notably Japan. Sales to
Continental Europe by Monitek GmbH decreased by $612,000 from fiscal 1997 to
fiscal 1998, primarily as a result of weakness in the European economy and an
increase in the value of the U.S. Dollar relative to the German Deutsche Mark
(the "DM"). The actual decrease in sales in Monitek GmbH's native currency, the
DM, was 14% but the decrease in U.S. Dollars, after converting the sales figures
by the average exchange rate for each period, amounted to 18%.
Cost of goods sold, as a percentage of sales, increased to 50% for fiscal
1998 from 47% for fiscal 1997, primarily as a result of the decrease in sales
without a corresponding reduction in direct labor and factory overhead. Direct
labor and overhead increased to 13% of net sales for fiscal 1998 from 10% for
fiscal 1997, while material costs remained constant at 37% of net sales.
Selling, general and administrative expenses decreased to $4,494,000, or
80% of net sales, for fiscal 1998 from $5,463,000, or 73% of net sales, for
fiscal 1997. Sales commissions decreased to $1,009,000 from $1,307,000 as a
direct result of the decrease in net sales. Cost reduction measures in the U.S.,
which were implemented by management during the second half of fiscal 1997,
resulted in a decrease of approximately $360,000 for fiscal 1998 as compared to
fiscal 1997. The sale of Systems to ALR resulted in a reduction in expenses of
approximately $210,000 during the second half of fiscal 1998. Interest expense
increased to $236,000 for fiscal 1998 from $172,000 for fiscal 1997 as a result
of increased bank and other borrowings. Foreign currency transactions between
Monitek and its foreign subsidiary resulted in a gain of $45,000 for fiscal 1998
compared to a loss of $99,000 for fiscal 1997, as a result of fluctuations in
the value of the U.S. dollar relative to the DM.
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Research and development expenses decreased to $218,000 for fiscal 1998
from $406,000 for fiscal 1997, primarily as a result of the elimination of
Systems engineering expenses for the second half of fiscal 1998, a decrease in
activities by outside consultants and the elimination of one engineering
position at Monitek.
During fiscal 1998, the Company experienced a one-time $423,000 loss on
disposal of assets as a result of the sale of Systems.
Net losses increased to $2,205,000 for fiscal 1998 from $1,810,000 for
fiscal 1997, primarily as a result of the decrease in sales, the increase in
cost of sales and selling general and administrative expenses, as a percentage
of sales, the disposal of net assets as the result of the sale of Systems, and
the increase in interest expense, partially offset by the favorable change in
foreign currency exchange rates.
CHANGES IN ACCOUNTING STANDARDS
In February 1997, SFAS 128, Earnings per Share and SFAS 129, Disclosure of
Information About Capital Structure, were issued. SFAS 128 establishes new
standards for computing and reporting earnings per share. SFAS 129 requires an
entity to explain the pertinent rights and privileges of outstanding securities.
The Company has adopted these new standards in the current fiscal year and the
affect of the adoption was not material.
In June 1997, SFAS 130, Reporting Comprehensive Income, was issued. SFAS
130 establishes new standards for reporting comprehensive income and its
components and is effective for fiscal years
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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.
In February 1998, SFAS 132, Employers' Disclosure About Pensions and Other
Postretirement Benefits, was issued. SFAS 132 standardizes the disclosure
requirements for pension and other postretirement benefit plans but not change
the measurement or recognition of those plans. SFAS 132 is effective for fiscal
years beginning after December 15, 1997. Management believes this pronouncement
will have no material effect on the Company's financial statements or
disclosures thereto.
In June 1998, SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. SFAS 133 establishes accounting and reporting standards
for derivative instruments and hedging activities. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. Management believes this
pronouncement will have no effect on the financial statements.
YEAR 2000 COMPLIANCE
The inability of computer, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two
digit year is commonly referred to as a Year 2000 Compliance issue. As the year
2000 approaches, such systems may be unable to accurately process certain
data-based information. The Company is in the process of identifying and
modifying all significant hardware and software applications that will require
modification to ensure Year 2000 Compliance. Internal and external resources are
being used to make the required modification and test Year 2000 Compliance. The
estimated cost to address year 2000 issues is not expected to have a material
impact on the Company's business, operations or financial condition.
In addition, the Company is communicating with external service providers
to ensure that the external providers are taking the appropriate action to
address Year 2000 issues. However, there can be no assurance that the systems of
third parties on which the Company's systems rely will convert, or that a
conversion that is incompatible with the Company's systems would not have an
adverse effect on the Company's systems.
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
12
<PAGE> 13
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 59 Chairman, President and Treasurer
James S. O'Leary 60 Director, Executive Vice President, Chief Operating Officer and
Chief Financial Officer
James G. Few 49 Director
Julius L. Hess 36 Director
Ronald M. Lipson 63 Director
</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 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, from December 1996 through
November 1998, he served as Vice President of Finance and Chief Financial
Officer. In December 1998, Mr. O'Leary was elected as a Director and was
appointed Chief Operating Officer of the Company.
JAMES G. FEW has been a Director of the Company since March 1996. Mr. Few
is presently a Vice President of Corporate Network, Inc., a management
consulting firm in the long-term health care industry. From March 1996 through
December 1996, he served as the Chief Financial Officer and Vice President of
the Company and from December 1996 through June 1998, he also assumed the role
of Chief Operating Officer. Mr. Few also served as Vice President and Chief
Financial Officer for CPS from October 1995 through June 1998. 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
13
<PAGE> 14
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 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.
Two meetings of the Company's Board of Directors were held during the
fiscal year ended November 30, 1998. Each Director attended all 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, 1998:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- OTHER ANNUAL
YEAR SALARIES BONUS COMPENSATION
---- -------- ----- ------------
<S> <C> <C> <C> <C>
Robert S. Kendall 1998 $175,000(1) -0- -0-
(Chief Executive Officer) 1997 $275,000(1) -0- -0-
1996 $ 80,000(1) -0- -0-
Amos Linenberg 1998 $ 84,980 -0- $60,572(2)(3)
(Executive Vice-President) 1997 $140,728 $15,000 $17,779(3)
1996 $128,163 -0- $11,944(3)
Helmut H. Zoellmer(4) 1998 $116,646 -0- $ 7,262(3)
(Managing Director of 1997 $109,626 $ 5,788 $ 6,689(3)
Monitek GmbH) 1996 -0- -0- -0-
</TABLE>
(1) Represents compensation paid to CPS for management services rendered. (See
Item 12). Amounts assigned to Mr. Kendall represent the allocation provided
the Company by CPS at the Company's request, and may not actually represent
any sum actually paid to him 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) Mr. Linenberg's employment with the Company was terminated effective June
30, 1998, together with the Company's obligation under his employment
agreement. However, he was paid a consulting fee of approximately $12,000
per month through December 31, 1998.
(3) Consists of automobile and insurance allowances.
14
<PAGE> 15
(4) During fiscal 1996, 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, all reportable forms of
compensation for Mr. Zoellmer totaled $130,801. 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. Mr.
Zoellmer's employment with the Company was terminated in November 1998.
Long-Term Compensation. No long-term compensation was paid during the
fiscal years ended November 30, 1998, 1997 or 1996 to any executive officer of
the Company by way of restricted stock awards, options or stock appreciation
rights, or other long-term incentive plans.
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 were converted to options to
purchase 344,875 Common Shares. On December 2, 1996, Mr. O'Leary became the
Chief Financial Officer of the Company. In August 1998, half of Mr. O'Leary's
options expired, leaving him with options to purchase 172,438 Common Shares at
November 30, 1998.
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, 1998, 1997 or 1996.
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 as of February 28, 1999 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 four 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) 47,690,814 47.4%
James G. Few -- --
Julius L. Hess -- --
James S. O'Leary(3) 172,438 *
1495 Zephyr Avenue
Hayward, CA 94544
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
Ronald M. Lipson 700,000 *
3 Laurel Hill Lane
Pepper Pike, Ohio 44124
CPS Capital, Ltd.(4) 47,690,814 47.4%
1801 East Ninth Street
Cleveland, Ohio 44114
All Directors and Officers
(as a group persons) 48,563,252 48.2%
</TABLE>
(1) The name and address of each individual listed in the table, except
where otherwise indicated, is c/o Sentex Sensing Technology, Inc. 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. Mr. Kendall
and his wife own 100% of the outstanding membership interests in CPS.
(3) All Common Shares are held in the form of options that were acquired
pursuant to the Merger.
(4) CPS is the record holder of 19,706,461 Common Shares and has sole
voting and dispositive power with respect to such shares. CPS
beneficially owns 6,389,204 Common Shares, which were purchased from
Linenberg in April 1998, but have not yet been transferred to CPS by
the transfer agent. CPS also beneficially owns 21,595,149 Common
Shares which have not been issued by the transfer agent. CPS received
5,025,745 of these Common Shares in lieu of accrued management fees
and 16,569,404 of these Common Shares which were purchased from
Clarion Capital Corporation ("Clarion") immediately after Clarion
converted two convertible notes into Common Shares. (See Item 12).
*Represents less than 1% of the outstanding Common Shares.
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 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, 1998, reports for all
transactions were filed on a timely basis.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Linenberg Shareholder Agreement. In December 1998, pursuant to a
Shareholder Agreement between CPS and Linenberg (the "Linenberg Shareholder
Agreement"), Linenberg exercised a put right with respect to 6,389,204 Common
Shares and in April 1998, CPS purchased such Common Shares. The Linenberg
Shareholder Agreement is no longer in effect.
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
16
<PAGE> 17
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 officers of the Company. Presently, such personnel consists
mainly of Mr. Kendall, the Chairman of CPS and Peggy Nutaitis, the Secretary of
CPS. In order to permit Mr. Kendall and Ms. Nutaitis to function as officers and
for them to be properly insured as officers of the Company, Mr. Kendall has been
elected as the President and Treasurer of the Company and Ms. Nutaitis has been
elected Secretary of the Company.
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. 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. On May 15, 1998, CPS and the
Company entered into the Second Amended and Restated Management Services
Agreement, pursuant to which CPS agreed to accept 5,025,745 Common Shares in
lieu of accrued management fees equaling $196,900, representing fees for the
second half of fiscal 1997. All the shares acquired by CPS were acquired for
investment purposes.
In December 1997, CPS and the Company agreed to a reduced management fee of
$250,000 for fiscal 1998 and in December 1998, the parties agreed to reduce the
fee to $200,000 for fiscal 1999. CPS and the Company have agreed that the
balance due as of November 30, 1998, which totals $125,000, and the fee for
fiscal 1999, will be paid at some future time when the financial condition of
the Company improves.
Clarion. On May 15, 1998, Clarion, Monitek's principal shareholder at the
time of the Merger, converted two convertible notes in the aggregate principal
amount of $609,558, with the agreement of the Company, into an aggregate number
of 16,569,404 Common Shares of the Company. Immediately thereafter, CPS
purchased all 16,569,404 Common Shares from Clarion for $230,000.
Sale of Systems. On September 4, 1998, the Company completed the sale of
all of the outstanding capital stock of Systems to ALR, which is principally
owned by Linenberg. Prior to the sale, Linenberg was the President of Systems
and an Executive Vice President of the Company. In the past, Linenberg has been
a principal shareholder of the Company and served as a director of the Company.
Sales of Systems products had not been successfully integrated into
Monitek's distribution channels, which had resulted in a further drop-off of
Systems sales and even larger losses in this segment of the business. As a
result, the Company's management determined that the Company's best course of
action was to divest itself of the Systems operation, which generated less than
15% of the Company's revenues for the previous 21 months, while suffering 55% of
the Company's losses, as reported.
In consideration for all of the capital stock of Systems, ALR caused
Linenberg to terminate his existing Employment Agreement as of June 30, 1998,
which from July 1, 1998 through February 28, 2000 would have required payments
to Mr. Linenberg of approximately $325,000. Except for approximately $20,000 in
expenses, the Company paid all operating costs and expenses of Systems through
June 30, 1998 ALR assumed all the costs and operating expenses of Systems from
July 1, 1998 through the closing. The Company incurred a $447,327 loss,
representing the disposal of the net assets of Systems.
In connection with the sale of Systems to ALR, the Company retained
Linenberg to consult for the Company on an as needed basis. The consulting
period began effective July 1, 1998 and continued through December 31, 1998.
Linenberg received approximately $12,000 per month under this consulting
arrangement.
Working Capital Assistance. During fiscal 1997 and fiscal 1998, CPS and Mr.
Kendall provided the Company assistance in connection with funding its working
capital needs in the form of loans and security for
17
<PAGE> 18
bank loans. From May 1997 through May 1998, CPS provided the Company a series of
temporary working capital loans at a prime rate at National City Bank,
Cleveland, Ohio ("NCB"). The outstanding balance of such loans totaled
$551,000, plus accrued interest of $32,000, as of November 30, 1998. 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.
18
<PAGE> 19
ITEM 13 EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<S> <C>
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
</TABLE>
(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.
19
<PAGE> 20
(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.
20
<PAGE> 21
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 16, 1999 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 16, 1999
- ---------------------------- and Treasurer
Robert S. Kendall
/s/ James S. O'Leary Executive V.P., Chief March 16, 1999
- ---------------------------- Operating Officer, Chief
James S. O'Leary Financial Officer
Director
- ----------------------------
James G. Few
/s/ Julius L. Hess Director March 16, 1999
- ----------------------------
Julius L. Hess
/s/ Ronald M. Lipson Director March 16, 1999
- ----------------------------
Ronald M. Lipson
</TABLE>
21
<PAGE> 22
ITEM 7 FINANCIAL STATEMENTS
SENTEX SENSING TECHNOLOGY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
F-1
<PAGE> 23
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
F-2
<PAGE> 24
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, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended November 30, 1998. 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, 1998, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended November 30, 1998, 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 10, 1999
F-3
<PAGE> 25
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
November 30, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 111,133
Accounts receivable, less allowance for doubtful
accounts of $28,988 699,409
Inventories 1,118,990
Other current assets 62,279
-----------
Total current assets $ 1,991,811
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization of $163,089 175,500
OTHER ASSETS
Goodwill (net of accumulated amortization of $25,140) 376,784
Consulting contracts ($385,049) and other assets 404,184 780,968
----------- -----------
$ 2,948,279
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable:
Bank $ 1,880,400
Related party 551,000 $ 2,431,400
-----------
Trade accounts payable 604,297
Accrued liabilities 779,524
-----------
Total current liabilities $ 3,815,221
LONG-TERM DEBT
Convertible subordinated notes payable 10,810
Consulting contracts payable 288,899 299,709
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized - 200,000,000 shares
Issued - 109,460,911 shares
Outstanding - 100,514,911 shares 2,880,079
Retained earnings (deficit) (3,759,211)
Treasury shares at cost, 8,946,000 shares (313,218)
Cumulative translation adjustment 25,699
-----------
Total stockholders' equity (1,166,651)
-----------
$ 2,948,279
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 26
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended November 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
REVENUES
Net sales $ 5,589,591 $ 7,504,654
Interest and other income 129,567 83,253
------------ ------------
Total revenues 5,719,158 7,587,907
COST AND EXPENSES
Cost of sales 2,789,240 3,528,510
Selling, general and administrative 4,493,502 5,462,805
Research and development 217,789 406,432
Loss on sale of assets 423,283 -
------------ ------------
Total costs and expenses 7,923,814 9,397,747
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAX
EXPENSE (2,204,656) (1,809,840)
PROVISION FOR INCOME TAX EXPENSE - -
------------ ------------
NET LOSS $ (2,204,656) $ (1,809,840)
============ ============
NET LOSS PER SHARE (BASIC AND DILUTED) $ (0.02) $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 90,693,556 78,919,762
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 27
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended November 30, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Retained Treasury Stock Cumulative Total
------------------------ Earnings ----------------------- Translation Stockholders'
Shares Amount (Deficit) Shares Amount Adjustment Equity
----------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - November 30, 1996 87,865,762 $ 2,153,489 $ 255,285 8,946,000 $ (313,218) $ - $ 2,095,556
Net loss - - (1,809,840) - - - (1,809,840)
Translation adjustment - - - - - 21,951 21,951
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - November 30, 1997 87,865,762 2,153,489 (1,554,555) 8,946,000 (313,218) 21,951 307,667
Net loss - - (2,204,656) - - - (2,204,656)
Issuance of common stock for:
Conversion of subordinated
notes and payment
of accrued interest * 16,569,404 529,690 - - - - 529,690
Satisfaction of unpaid
management fees * 5,025,745 196,900 - - - - 196,900
Translation adjustment - - - - - 3,748 3,748
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - November 30, 1998 109,460,911 $ 2,880,079 $(3,759,211) 8,946,000 $ (313,218) $ 25,699 $(1,166,651)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
* These shares are considered issued and outstanding even though they have
not been formally issued by the transfer agent
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 28
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended November 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,204,656) $(1,809,840)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization of discount on convertible subordinated
notes payable 25,500 47,000
Depreciation and amortization 84,283 133,206
Other adjustments 200,578 23,956
Loss on sale of assets 423,283 -
Changes in assets and liabilities:
Accounts receivable 366,782 (401,402)
Inventories 32,935 231,431
Other current assets 117,666 9,491
Other assets 14,225 (5,743)
Accounts payable (253,640) (35,119)
Accrued expenses and other current liabilities (313,907) (20,082)
----------- -----------
Total adjustments 697,705 (17,262)
----------- -----------
Net cash used by operating activities (1,506,951) (1,827,102)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (30,014) (35,351)
Proceeds from sale of assets 18,050 -
----------- -----------
Net cash used by investing activities (11,964) (35,351)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments to related party (33,333) (33,333)
Net (payments) proceeds on note payable - bank (219,600) 1,530,000
Net proceeds on note payable - related party 551,000 -
----------- -----------
Net cash provided by financing activities 298,067 1,496,667
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,220,848) (365,786)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,331,981 1,697,767
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 111,133 $ 1,331,981
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 89,173 $ 92,747
See notes to the consolidated financial statements for certain noncash
investing and financing activities
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 29
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., whose assets and operations were disposed of in the
year ended November 30, 1998, was 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 (see Note 14). 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, 1998, Monitek GmbH's
assets, located in Continental Europe, represent approximately 42%
of the Company's total consolidated assets. A new subsidiary,
Cypress Instruments, Inc. ("Cypress"), was acquired by the Company
on March 5, 1998 for the purpose of acquiring a new product line
that is currently under development. The products under development
are similar to those of Monitek and will be folded into their
existing product lines.
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 primarily dependent upon its ability
to arrange adequate financing and to attain satisfactory
levels of operating cash flows.
B. Inventories - Inventories are stated at the lower of cost
(determined by the first-in, first-out method) or market.
F-8
<PAGE> 30
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. 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.
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.
H. 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.
F-9
<PAGE> 31
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. 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.
J. 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.
K. 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 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.
L. Loss Per Share - Loss per share is calculated using the
weighted average number of shares outstanding.
F-10
<PAGE> 32
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
M. New Authoritative Pronouncements - 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 effect of adoption
of these new standards on the accompanying financial
statements was not material.
In June 1997, SFAS 130, Reporting Comprehensive Income, was
issued. SFAS 130 establishes new standards for reporting
comprehensive income and its components and is effective for
fiscal years beginning after December 15, 1997. This
pronouncement has no effect on the Company's financial
statements for the year ended November 30, 1998.
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, which is not expected to materially affect the
Company's financial statements, no later than November 30,
1999.
In February 1998, SFAS 132, Employers' Disclosures About
Pensions and Other Postretirement Benefits, was issued. SFAS
132 standardizes the disclosure requirements for pension and
other postretirement benefit plans but does not change the
measurement or recognition of those plans. SFAS 132 is
effective for fiscal years beginning after December 15, 1997.
Management believes this pronouncement will have no material
effect on the Company's financial statements or disclosures
thereto.
In June 1998, SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, was issued. SFAS 133 establishes
accounting and reporting standards for derivative instruments
and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. Management believes this
pronouncement will have no effect on the financial statements.
NOTE 3. ACQUISITIONS
In March 1998, the Company acquired 100% of the outstanding stock of
Cypress Instruments, Inc. ("Cypress") for the purpose of acquiring a
new product line that was under development. The acquisition was not
material to the overall business of the Company and was accounted
for as a purchase. Consideration in the amount of $150,000 was given
in the form of a contingent payment. The excess of the aggregate
purchase price over the estimated fair value of the net assets
acquired (goodwill) was $150,000, and is being amortized over 20
years. In connection with the acquisition, the Company entered into
consulting agreements with the former shareholders of Cypress (see
Note 9).
F-11
<PAGE> 33
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS (CONTINUED)
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.
NOTE 4. INVENTORIES
Inventories consist of the following at November 30, 1998:
<TABLE>
<S> <C>
Raw materials $ 486,871
Work-in-process 186,099
Finished goods 446,020
----------
$1,118,990
==========
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at November 30,
1998:
<TABLE>
<S> <C>
Machinery and equipment $284,183
Furniture and fixtures 48,220
Leasehold improvements 6,186
--------
338,589
Less accumulated depreciation and amortization 163,089
--------
$175,500
========
</TABLE>
F-12
<PAGE> 34
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities consist of the following at November 30, 1998:
<TABLE>
<S> <C>
Accrued acquisition - Cypress Instruments, Inc. $149,850
Accrued bonuses and other compensation 63,798
Accrued commissions 67,239
Accrued consulting 96,150
Accrued pension 265,013
Accrued payroll and related taxes 61,075
Accrued professional fees 42,131
Other accrued liabilities 34,268
--------
$779,524
========
</TABLE>
NOTE 7. NOTES PAYABLE - BANK AND OTHER BORROWING ARRANGEMENTS
The Company has available a $2,000,000 demand line of credit secured
by the Company's assets and 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 $1,880,400 at November 30, 1998.
During the years ended November 30, 1998 and 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. As of November 30,
1998, the Company had notes payable of $551,000 (bearing interest at
the prime rate) to its principal shareholder, CPS Capital, Ltd., in
connection with such unsecured loans.
Interest expense for the years ended November 30, 1998 and 1997
amounted to $182,372 and $92,533, 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 were discounted using a yield rate of 15% to reflect
management's estimate of the fair value of the debt.
F-13
<PAGE> 35
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. CONVERTIBLE SUBORDINATED NOTES PAYABLE (CONTINUED)
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
$14,645 and $31,400 for the years ended November 30, 1998 and 1997,
respectively. In 1998, the Company issued 1,118,467 shares of common
stock in satisfaction of the accrued interest. The notes were
convertible at various rates ($.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.
The notes were 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 could 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.
In 1998, a board resolution was proposed to allow the holder of
significantly all 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 agreed to convert the notes if CPS
Capital, Ltd. ("CPS") purchased the common shares that would be held
by the holder following conversion. CPS agreed to purchase the common
shares (including shares issued in satisfaction of accrued interest)
for approximately $230,000. Pursuant to the board resolution,
convertible notes, having a face value of $609,578 and a carrying
value of $529,690, were converted into 15,450,937 shares of the
Company's common stock. The remaining face and carrying values of the
subordinated notes at November 30, 1998 amounted to $12,423 and
$10,810, respectively.
F-14
<PAGE> 36
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. CONSULTING CONTRACTS PAYABLE
In connection with the purchase of Cypress (see Note 3), the Company
entered into consulting agreements with the principal stockholders of
Cypress. Payments under the agreements total $385,049 and are payable
over thirty-six months. The Company has included the cost of the
contracts in other assets and the payment requirements as a liability
in its financial statements. The cost of contracts will be ratably
expensed over the thirty-six month period of the contracts. As of
November 30, 1998, the following is a schedule of future payment
requirements:
<TABLE>
<S> <C>
1999 $ 96,150
2000 128,350
2001 128,350
2002 32,199
--------
$385,049
========
</TABLE>
NOTE 10. 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 $272,000 and
$320,400 (of which $32,500 and $57,900 were for related party leases)
for the years ended November 30, 1998 and 1997, respectively. Future
minimum payments under leases that have initial or remaining terms in
excess of one year are as follows at November 30, 1998:
<TABLE>
<S> <C>
1999 $279,950
2000 109,400
2001 120,289
--------
$509,639
========
</TABLE>
F-15
<PAGE> 37
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. 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.
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, 1998, 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, 241,412 shares under option were forfeited
and 689,749 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 options under SFAS 123 was not material). During the year ended
November 30, 1998, 1,307,075 shares under option expired. The options
outstanding to purchase 1,034,623 shares of the Company's common
stock (as of November 30, 1998) have an average exercise price of
$.1450 per share, an exercise price range of $.0725 to $.1812 per
share and expire in varying amounts between June 1999 and March 2000.
NOTE 12. 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, 1998 and 1997.
F-16
<PAGE> 38
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. 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>
1998 1997
------ ------
<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 33.9 33.6
Other 0.1 0.4
------ ------
-% -%
------ ------
</TABLE>
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>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts and
miscellaneous other $ (24,200) $ (8,800)
Net operating loss carryforward 1,525,400 919,000
----------- -----------
Total gross deferred tax assets 1,501,200 910,200
Less valuation allowance 1,501,200 910,200
----------- -----------
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, 1998 and
1997, the Company recorded increases of $591,000 and $578,200,
respectively, in the valuation allowance primarily as a result of the
net operating loss generated during the year.
F-17
<PAGE> 39
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. INCOME TAXES (CONTINUED)
At November 30, 1998, the Company had approximately $10,751,000 of
net operating loss carryforwards available to offset future federal
taxable income. The federal net operating loss carryforwards expire
at various dates through 2018. 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 14. LOSS ON SALE OF ASSETS
In September 1998, the Company divested itself of Sentex Systems,
Inc.'s operation, which generated less than 15% of the Company's
revenues, but a much more significant part of the Company's losses.
The Company agreed to sell all of the outstanding capital stock of
Sentex Systems, Inc. to a company which is principally owned by Amos
Linenberg. Prior to the sale, Mr. Linenberg was the President of
Sentex Systems, Inc. and an Executive Vice President of the Company.
In the past, Mr. Linenberg has been a principal shareholder of the
Company and served as a director of the Company. In consideration for
all of the capital stock of Sentex Systems, Inc., Mr. Linenberg
terminated his existing Employment Agreement as of June 30, 1998,
which, from July 1, 1998 through February 28, 2000, would have
required payments to Mr. Linenberg of approximately $325,000. Except
for approximately $20,000 in expenses, the Company paid all operating
costs and expenses of Sentex Systems, Inc. through June 30, 1998 and
the Buyer assumed all the costs and operating expenses of Sentex
Systems, Inc. from July 1, 1998 through the closing. The Company
incurred a $423,283 loss, representing the disposal of the net assets
of Sentex Systems, Inc. In connection with the sale of Sentex
Systems, Inc. to the Buyer, the Company has retained Mr. Linenberg to
consult for the Company on an as needed basis.
NOTE 15. 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. In June 1996, 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. 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. On May 15, 1998, CPS and the
Company entered into the Second Amended and Restated Management
Services Agreement, pursuant to which CPS agreed to accept 5,025,745
common shares in lieu of accrued management fees equaling $196,900,
representing fees for the second half of fiscal 1997.
In December 1997, CPS and the Company agreed to a reduced management
fee of $250,000 for fiscal 1998 and, in December 1998, the parties
agreed to reduce the fee to $200,000 for fiscal 1999. CPS and the
Company have agreed that the balance due as of November 30, 1998,
which totals $125,000, and the fee for fiscal 1999 will be paid at
some future time when the financial condition of the Company
improves.
F-18
<PAGE> 40
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment as described in Note 1.
Sales and operating losses for the years ended November 30, 1998 and
1997, and identifiable assets classified by the major geographic
areas in which the Company operates, are as follows:
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Sales to unaffiliated customers:
United States
Domestic $ 2,109,442 $ 2,465,606
Export sales 423,040 1,369,700
Continental Europe 3,057,109 3,669,348
Intercompany transfers 396,846 609,171
Eliminations (396,846) (609,171)
----------- -----------
Net sales 5,589,591 7,504,654
Operating loss:
United States (2,053,572) (1,546,507)
Continental Europe (57,054) (46,460)
----------- -----------
Total operating loss (2,110,626) (1,592,967)
Interest expense (223,597) (172,201)
Other income (expense), net 129,567 (44,672)
----------- -----------
Loss before income tax expense $(2,204,656) $(1,809,840)
=========== ===========
Identifiable assets:
United States $ 1,707,479 $ 3,528,239
Continental Europe 1,240,800 1,147,633
----------- -----------
Total assets $ 2,948,279 $ 4,675,872
=========== ===========
</TABLE>
F-19
<PAGE> 41
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields
containing a two-digit year is commonly referred to as the Year 2000
Compliance issue. As the year 2000 approaches, such systems may be
unable to accurately process certain date-based information. The
Company is in the process of identifying and modifying all
significant hardware and software applications that will require
modification to ensure Year 2000 Compliance. Internal and external
resources are being used to make the required modifications and test
Year 2000 Compliance. The estimated cost to address Year 2000 issues
is not expected to have a material impact on the Company's business,
operations or financial condition.
In addition, the Company is communicating with external service
providers to ensure that the providers are taking the appropriate
action to address Year 2000 issues. However, there can be no
assurance that the systems of third parties on which the Company's
systems rely will convert, or that a conversion that is incompatible
with the Company's systems would not have an adverse effect on the
Company's systems.
F-20
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<S> <C>
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
</TABLE>
(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.
<PAGE> 43
(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.
<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, 1998.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
<CASH> 111,133
<SECURITIES> 0
<RECEIVABLES> 728,397
<ALLOWANCES> 28,988
<INVENTORY> 1,118,990
<CURRENT-ASSETS> 1,991,811
<PP&E> 338,589
<DEPRECIATION> 163,089
<TOTAL-ASSETS> 2,948,279
<CURRENT-LIABILITIES> 3,815,221
<BONDS> 0
0
0
<COMMON> 2,880,079
<OTHER-SE> (4,046,730)
<TOTAL-LIABILITY-AND-EQUITY> 2,948,279
<SALES> 5,589,591
<TOTAL-REVENUES> 5,719,158
<CGS> 2,789,240
<TOTAL-COSTS> 2,789,240
<OTHER-EXPENSES> 4,910,977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223,597
<INCOME-PRETAX> (2,204,656)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,204,656)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,204,656)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
