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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997 Commission File No. 33-20015-NY
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SENTECH EAS CORPORATION
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0734041
(State of Incorporation) (I.R.S. Employer Identification Number)
484 SOUTHWEST 12TH AVENUE
DEERFIELD BEACH, FLORIDA 33442-3108
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: 954-426-2965
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Not applicable None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.00024 PAR VALUE PER SHARE
------------------------------------------
Title of Class
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-KSB or any amendment to
this Form 10-KSB. Yes X No
--- ---
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
--- ---
The Registrant's revenues for the year ended December 31, 1997 was $2,395,844.
The aggregate market value of Common Stock held by non-affiliates of the
Registrant as of March 31, 1998 was $0.
As of March 31, 1998, there were 1,640,427 shares of the common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Definitive proxy statement for the Company's 1997 Annual Meeting of Shareholders
incorporated in Part III
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PART I
ITEM 1. BUSINESS
THE COMPANY
SenTech EAS Corporation and its wholly owned subsidiary, SenTech EAS
International, Inc., hereinafter referred to collectively as the "Company" or
"SenTech", manufactures, distributes, and services electronic article
surveillance ("EAS") systems and accessories worldwide. The Company's products
are used primarily by retailers to prevent financial losses attributed to theft
of merchandise. EAS equipment is composed of (i) a detachable or disposable
security circuit, label or other material (often referred to as a "tag" or
"target") which is attached to or placed on the article to be protected, and is
either removed upon sale of the article or, if not removed, activates a
detection system if the article is transported beyond the protected area, and
(ii) a detection system which is usually located in the exit path of the
protected area and is activated when an article, to which a tag or target is
attached, is transported beyond the protected area. EAS equipment has developed
over the last 30 years in response to problems associated with theft and
inventory control in the retail industry.
The Company's original focus was installing, refurbishing, marketing and
servicing EAS equipment developed by other companies in the EAS industry. Over
the past four years, the Company's business has evolved more and more to
assembling, marketing and servicing EAS equipment developed by the Company. The
Company's current strategy is to further expand its operations focusing
primarily on its own EAS equipment while continuing to refurbish, market,
re-sell, and service EAS equipment developed and sold by other companies. The
EAS equipment developed by the Company is compatible with EAS equipment
developed by other companies allowing the Company to market its own products to
retailers who have existing compatible equipment. Therefore, the Company
believes that it is able to attract customers who desire to upgrade their
existing systems as well as those customers who desire to purchase a new system
from an alternative supplier at lower prices.
The Company was incorporated in the State of Florida in February 1990 as
"Ultimate EAS Corporation" and changed its name on several occasions. Prior to
September 1995, the Company's name was "SenTech EAS Corporation." On September
22, 1995, all of the outstanding capital stock of SenTech EAS Corporation was
acquired by Lorry Bay & Co., Inc. through the merger of its subsidiary, Lorry
Bay Capital, into SenTech EAS Corporation. The resulting entity was renamed
SenTech EAS International, Inc. Lorry Bay & Co., Inc. was then merged into a
newly formed Florida corporation, SenTech EAS Corporation whereby the ultimate
surviving entity was SenTech EAS Corporation and its wholly-owned subsidiary,
SenTech EAS International, Inc. The Company's offices are located at 484
Southwest 12th Avenue, Deerfield Beach, Florida 33442-3108, (954) 426-2965.
ELECTRONIC ARTICLE SURVEILLANCE (EAS) INDUSTRY
Three distinct technologies are utilized in the EAS industry; radio frequency
("RF") detection, electromagnetic ("EM") detection, and acousto-magnetic ("AM")
detection. The Company manufactures, distributes, and services only EAS
equipment with RF detection.
EM DETECTION SYSTEMS
EM detection systems also utilize detection monitors at exit points combined
with detectable tags. The tags for EM detection systems also take the form of
reusable hard plastic tags or adhesive tags, however, instead of containing RF
circuitry, the detectable tags are electromagnetically sensitized strips. One of
the disadvantages of utilizing EM detection systems is the systems, unlike RF
detection systems, must be installed close together in order to detect EM tags
passing out of the protected area. EM systems are primarily used in food stores,
video stores, and libraries, where store operators are not as concerned with the
visual appeal of the entrances. One of the advantages of utilizing EM detection
systems is EM detection tags, unlike RF detection tags, are not detuned or
rendered ineffective when applied to metallic surfaces.
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AM DETECTION SYSTEMS
Recently, a new acousto-magnetic technology has been developed. Products
utilizing acousto-magnetic technology are capable of covering broader areas, and
have a higher ability to detect labels and tags than standard EM detection
systems. However, systems utilizing acousto-magnetic technology, and the
required tags, are more expensive than standard EM detection systems.
RF DETECTION SYSTEMS
RF detection systems are the most prevalent in the marketplace. RF detection
systems utilize low ("LF"), high ("HF") or ultra high ("UHF" or "microwave")
frequency systems. In RF detection systems, electronic detectors, consisting of
antennas which emit radio waves of a specified frequency, are housed in
pedestals, overhead units, floor mats or other panels located at the exits of
protected areas (such as checkout counters, doorways, elevator, and escalator
locations). Tags for RF detection systems, which contain electronic circuitry
that interferes with the signal established between the detector panels, are
attached to or placed on the article to be protected.
The tags for RF detection systems take the form of either reusable hard plastic
tags or adhesive tags. Reusable hard plastic tags are attached to the
merchandise being protected usually by means of a specially designed fastener.
The reusable plastic tags can only be removed, without causing damage to the
article, by using a special decoupling device. Adhesive tags are disposable,
intended to be used only once, and are deactivated at the point of purchase by
passing the adhesive tag through a deactivation field. When an adhesive tag is
transported through the area between the detector panels, the radio interference
caused by the tag's circuitry triggers an alarm such as a flashing light, a
buzzer, or a central control point signal.
RF detection systems protect a large entrance or exit area because of their
broad scope of detection stemming from the broad range of radio waves. Although
systems using microwave frequencies (900 MHz) protect the widest entrances, the
Company's EAS equipment does not utilize microwave frequencies because the
Company believes that 8.2 MHz systems, such as those manufactured by the
Company, will be utilized in most of the future growth in the EAS industry. Tags
must be attached to merchandise upon arrival at a store or distribution center
and removed at the time of purchase. RF detection systems are most widely used
in the protection of "soft goods" (i.e., clothing, footwear), although RF tags
in the form of metallic stickers, referred to as "labels", are becoming widely
used in the protection of "hard goods" (i.e., health and beauty supplies,
electronics, books). Increasingly, there is a trend towards source tagging
whereby the manufacturer attaches the EAS tags on products before shipping the
products to retailers.
THE COMPANY'S PRODUCT LINE
The Company currently assembles, refurbishes, markets and services the following
EAS Equipment for use in the retail industry, all of which were developed by the
Company.
"X"AISLE(TM) SYSTEM
The "X"Aisle System is SenTech's newest and most powerful extended aisle Swept
RF system which will be introduced during the second quarter of 1998. The
"X"Aisle System consists of a set of pedestals constructed of durable
lightweight injection molded plastic which contain the RF detection circuits
with each pedestal measuring 60.5" tall, 18.25" wide and 4" deep. The primary
color available is gray, although custom-designed colors may be offered if
requested by customers. Two pedestals are capable of protecting entrances/exits
up to 8 feet wide using SenTech's new 8.2 MHz "X" Tag and up to 5.5 feet wide
with a 1.5" adhesive label. Since the "X"Aisle System detects any tags with 8.2
or 9.5 MHz RF, which are commonly used frequencies, it is compatible with 8.2 or
9.5 MHz RF tags designed by the Company and its competitors. The "X"Aisle System
also uses advanced software programmable circuit design including a Digital
Signal Processor, surface mounted electronic components, self testing circuitry,
and fiber optics. Its adaptive filtering circuitry is largely immune to false
alarms and electrical interference. The electronics are designed for easy
installation by field technicians, dealers, or end users. The Company believes
the "X"Aisle System is among the most effective wide aisle EAS detection systems
currently available. The "X"Aisle System was designed by the Company and is
manufactured and assembled by a related party company (see "Product Development"
below).
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MULTITAG(TM) II SYSTEM
The MultiTag II System consists of a set of pedestals which contain RF detection
circuits. Each pedestal measures 60" tall, 12" wide and 4.25" deep and is
constructed of a solid all metal frame and composite components. The primary
color available is black although custom-designed colors may be offered if
requested by customers. The MultiTag II System is capable of protecting
entrances/exits up to six feet wide. Since the MultiTag II System detects any
tags with 8.2 or 9.5 MHz RF, which are commonly used frequencies, it is
compatible with 8.2 or 9.5 MHz RF tags designed by the Company and its
competitors. The Company believes the MultiTag II System is among the most
effective EAS detection systems currently available. The Company also believes
the MultiTag II System is less susceptible to false alarm sources than other EAS
detection systems currently available. The MultiTag II System was designed by
the Company, and its sub-assemblies are manufactured by outside sub-contractors
and are assembled by employees of the Company at the Company's facilities.
DEFENDER SYSTEM
The Defender System consists of a set of pedestals which contain RF detection
circuits. Each pedestal measures 60" tall, 12" wide and 3" deep and is
constructed of textured satin black galvanized tubular steel open-frame
construction with charcoal gray molded plastic covers. The primary color
available is black tubing with charcoal gray covers although custom-designed
colors may be offered if requested by customers. The Defender System is capable
of protecting entrances/exits up to five feet wide. Since the Defender System
detects any tags with 8.2 or 9.5 MHz RF, which are commonly used frequencies, it
is compatible with 8.2 or 9.5 MHz RF tags designed by the Company and its
competitors. The Defender System is a low-cost system intended for dealer and
domestic price competitive sales. The Company believes the Defender System is
among the highest in target detection rates of EAS detection systems currently
available. The Company also believes the Defender System is less susceptible to
false alarm sources than other EAS detection systems currently available. The
Defender System was designed by the Company, and its sub-assemblies are
manufactured by outside sub-contractors and are assembled by employees of the
Company at the Company's facilities.
SOLO SYSTEM
The Solo System, introduced during the fourth quarter of 1997, consists of a
single pedestal which contains RF detection circuits. The pedestal measures
60.5" tall, 12" wide and 3" deep and is constructed of textured satin black
galvanized tubular steel open-frame construction with charcoal gray molded
plastic covers. The primary color available is black tubing with charcoal gray
covers although custom-designed colors may be offered if requested by customers.
The Solo System is capable of protecting entrances/exits up to 9 feet wide.
Since the Solo System is available in either 2.0 or 3.25 MHz frequency allowing
for the detection of any tags with 2.0 or 3.25 MHz RF which are commonly used
frequencies, it is compatible with 2.0 and 3.25 MHz RF tags designed by the
Company and its competitors. The Company believes the Solo System is among the
most effective single pedestal EAS detection systems currently available. The
Company also believes the Solo System is less susceptible to false alarm sources
than other single pedestal EAS detection systems currently available. The Solo
System was designed by the Company, and its sub-assemblies are manufactured by
outside sub-contractors and are assembled by employees of the Company at the
Company's facilities.
DEACTIVATION PAD
The deactivation Pad is an instrument that permanently deactivates any 8.2 MHz
RF disposable label. Disposable tags are adhesive labels that are attached to
the merchandise and often disguised as a simulated bar code or as a
point-of-purchase advertising message. The Deactivation Pad electronically
deactivates the RF circuitry contained within the disposable tag. The
Deactivation Pad was designed by the Company, and its sub-assemblies are
manufactured by outside sub-contractors and are assembled by employees of the
Company at the Company's facilities. The Deactivation Pad contains all necessary
electronics and does not need to be "slaved" together with other components like
most EAS deactivation equipment. The Deactivation Pad is a 10.5" by 10.5" square
pad consisting of a black plastic chassis with a solid black metal base.
Multiple Deactivation Pads may be used together without causing interference
with the RF circuitry unlike most other deactivators available in the EAS
industry.
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MAGNETIC DETACHERS
Magnetic Detachers are instruments used to remove reusable hard tags that
contain RF circuitry from the merchandise to which they are attached. A magnetic
lock releases the pins contained within the reusable hard tags. The Company
offers two types of magnetic detachers; (i) the Table Top Detacher, and (ii) the
Surface Mount Detacher. Both magnetic detachers were designed by the Company,
and their sub-assemblies are manufactured by outside sub-contractors and
assembled by employees of the Company at the Company's facilities. The Table Top
Detacher measures 5" in diameter, is constructed of a durable scratch-resistant
finish, and is designed to be secured to a counter-top using a security lanyard.
The Surface Mount Detacher measures 2.5" or 3" in diameter and is designed to be
permanently attached to a surface such as a counter-top. The magnetic detachers
are compatible with tags that are designed by the Company and its competitors.
THIRD PARTY PRODUCT LINES
The Company currently sells the following EAS equipment which were developed by
other companies in the EAS Industry but are made to the Company's
specifications.
"X" TAG
The "X" Tag is a durable lightweight 8.2 MHz Swept RF tag to be used with
SenTech's newest and most powerful extended aisle Swept RF system, the "X"Aisle
System, which will be introduced during the second quarter of 1998. The "X" Tag
is beige and is compatible with all 8.2 MHz RF systems and most ink tags.
MINI SOLO TAG
The Mini Solo Tag, introduced during the fourth quarter of 1997, is a durable
lightweight 2.0 or 3.25 MHz RF tag which is used with SenTech's Solo System. The
Mini Solo Tag is light gray or beige and is compatible with all 2.0 or 3.25 MHz
RF systems and most ink tags.
INK TAGS
To be introduced during 1998, the SenTech Ink Tag contains two vials of ink on
the head of the tag which breaks and disperses permanent ink onto the item to
which it is attached if improperly removed. This feature provides an extra level
of deterrence against shoplifting by adding the threat of permanent garment
damage if the tag is improperly or forcibly removed. The SenTech Ink Tag may be
used together with an EAS hard tag or with a locking clutch.
OMNI TAG/MINI TAG
The Omni Tags and Mini Tags are reusable hard tags constructed of strong
lightweight plastic. The Omni Tag is a 2.75" by 2.25" rectangular tag and the
Mini Tag is a 1.875" by 1.625" rectangular tag, both of which contain 8.2 MHz RF
circuitry. Both tags are available in black, beige, or custom-designed colors.
If either tag passes between an RF detection system an alarm is triggered. The
tags are attached to merchandise using special fasteners prior to the
merchandise being placed on the sales floor and are detached at the point of
purchase using a magnetic detacher. Removal of the tags without the magnetic
detacher will damage the protected merchandise. The Omni Tag and the Mini Tag
are compatible with 8.2 MHz RF detection systems.
SENTAG
The SenTag is a reusable hard tag constructed of strong lightweight beige
polypropylene plastic. The SenTag is a 2.735" by 1.165" by 0.695" rectangular
tag containing microwave frequency circuitry. The SenTag is attached to
merchandise using special fasteners prior to the merchandise being placed on the
sales floor and is detached at the point of purchase using a special detacher.
Removal of the tags without the special detacher will damage the protected
merchandise. The SenTag is compatible with most microwave detection systems.
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LANYARDS
Lanyards are used in conjunction with any type of tag. It allows for the tagging
of hard good items which have closed loop openings such as handbags, luggage and
tennis rackets.
PINS
Several styles of pins are available for use with various types of reusable hard
tags.
PRODUCT DEVELOPMENT
The Company maintains an on-going effort to develop new EAS equipment. The
Company recently developed and marketed an ultra-light reusable hard tag, the
SenTag, described above, and intends to introduce the SenTech Ink Tag during
1998. The Company believes the SenTag and the Ink Tag, which are both
manufactured by non-affiliated companies, are well received by retailers who
demand contemporary styled reusable hard tags.
During the fourth quarter of 1997, the Company also developed and marketed the
Solo System, described above, which has been initially well received in the
marketplace. The Company believes the Solo System is among the most effective
single pedestal EAS detection systems currently available.
In June 1997, the Company entered into a three year purchase and manufacturing
agreement (the "Agreement") with a company whose President and Chief Executive
Officer is a director of the Company. The Agreement provides for the development
and manufacture of the Company's third generation EAS system, the "X"Aisle
System, and the electronic printed circuit boards for the MultiTag II System and
the Defender System. Currently, the electronic printed circuit boards for the
MultiTag II System and the Defender System are designed and manufactured by a
competitor of the Company. The Agreement requires the Company to pay for
non-recurring engineering costs in exchange for an assignment of fifty percent
of the joint technology as defined by the Agreement and requires the Company to
purchase minimum quantities of the system each year.
Management believes that any new EAS equipment it develops, combined with the
Company's existing equipment, customer and market base, may provide the Company
with the potential for significant growth. Historically, the Company's research
and development expenses have been immaterial relative to the Company's
operations.
ASSEMBLY AND MANUFACTURING OPERATIONS
The Company's manufacturing operations consist primarily of the procurement of
component parts and the assembly of finished products at the Company's leased
facility in Deerfield Beach, Florida. Most of the EAS equipment developed by the
Company consists of component parts manufactured for the Company or purchased
from third parties. The Company does not maintain an extensive finished goods
inventory since the Company believes it is able to obtain required component
parts, assemble, and ship its product within competitive lead times acceptable
to its customers. The Company subcontracts with local vendors to assemble
printed circuit boards, and machine, mold, and finish various component parts.
The Company anticipates it will continue to rely primarily on such third party
manufactures and vendors in order to minimize overhead. The Company minimizes
dependence on any one supplier by maintaining sufficient alternative suppliers
for each of its raw materials and finished goods.
REFURBISHING OPERATIONS
The Company acquires and refurbishes existing equipment developed by its major
competitors primarily from customers who are upgrading or changing their current
detection systems and from liquidation and foreclosure sales. All of the
Company's refurbishing activities, including the inspection and testing of the
refurbished product, are performed by employees of the Company at the Company's
leased facility in Deerfield Beach, Florida.
5
MARKETS AND MARKETING STRATEGY
The Company markets and sells EAS equipment in the United States and abroad
through an internal sales force of four individuals and through the Company's
management. The Company's current regional sales representatives primarily cover
the Northeast and Southeast portions of the United States. The Company is in the
process of recruiting a national sales force to expand its coverage of the
United States market. Domestic Dealer and Foreign Distributor sales are
conducted primarily by internal sales people. Management markets EAS equipment
through a direct-calling program in addition to attending trade shows,
advertising in trade publications, a direct-mailing program, and internet
advertising.
There were no material concentrations of sales or accounts receivable outside of
the United States during December 31, 1997 and 1996.
The Company's sales and marketing efforts are focused on retailers who do not
yet utilize EAS equipment as well as retailers who presently utilize EAS
equipment developed by the Company's major competitors and are seeking an
alternative supplier of EAS equipment offering lower prices with more
personalized service. Since the Company refurbishes, markets, and services EAS
equipment developed and sold by other companies, and its own products are
compatible with such other products, the Company believes it is able to compete
for many of the needs of retailers presently utilizing EAS equipment.
The Company's sales and marketing efforts include a "Try Buy" program under
which the Company installs its EAS equipment in a retailer's store for a trial
period at a minimal cost that covers only the Company's cost of labor to install
and monitor such equipment. The trial period lasts for approximately 60-90 days,
after which the retailer decides whether or not to purchase the equipment. If
the retailer chooses not to purchase the Company's EAS equipment, the equipment
is removed from the location without any further obligation. Since the
introduction of this program, most of the trials have resulted in the retailers'
purchase of the Company's equipment.
With respect to EAS equipment developed by other companies, the Company
purchases such equipment from third party manufactures and distributors in the
United States and abroad and resells such EAS equipment at discounted rates. The
Company is able to purchase such equipment from third parties at favorable rates
based upon its relationship with such third parties.
INSTALLATION AND CUSTOMER SERVICE
The Company usually provides one-year warranties on all its products covering
both parts and labor and offers optional extended warranties which may be
purchased by customers. In July 1995, the Company entered into a service
agreement effective August 1995 with a national service organization, whose
President and Chief Executive Officer is a director of the Company, which
provides for the installation and servicing of any 8.2 MHz EAS system. The
national service organization has 31 service centers throughout the United
States and is capable of providing service on a national level. Any EAS systems
not covered by the agreement are handled by the Company's service personnel or
other third party service providers. The agreement is for a one-year term and is
automatically renewable for one-year periods unless terminated in writing by
either party. The Company has not received any termination notices and believes
its relationship with the service provider is favorable. Although there can be
no assurance the agreement will not be terminated or will be renewed in the
future, the Company anticipates the agreement will automatically be renewed
through August 1999.
BACKLOG
At December 31, 1997, the Company ended the year with approximately $326,000 in
backlog of sales orders compared to only $54,000 in backlog at December 31,
1996. The Company expects the entire backlog of sales orders at the end of 1997
to be shipped prior to the end of the first quarter of 1998. The amount of
backlog at any time during the year is not necessarily indicative of the volume
of business for the upcoming year. The Company's revenues are substantially
dependent on its customers' seasonal retail sales. Historically, the Company has
experienced higher sales volume in the third and fourth quarters of each year.
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EMPLOYEES
The Company currently has 13 full time employees, none of which have entered
into employment agreements with the Company nor are represented by a labor
union. From time to time, the Company hires temporary personnel to accommodate
special requirements for larger projects. The Company does not have key-man life
insurance on any of its employees.
COMPETITION
The Company competes in the EAS industry with several companies. Many of these
companies are larger and better known and have significantly greater financial,
technological, manufacturing and marketing resources than the Company. The
Company's principal competitors are Sensormatic Electronics Corporation
("Sensormatic"), Checkpoint Systems, Inc. ("Checkpoint"), Sentry Technology
Corporation ("Sentry"), and a number of smaller companies. Although the Company
believes it has strived to compete effectively in the past by offering
innovative products and competitive prices, no assurance can be given that the
Company will be capable of effectively competing successfully in the future, or
that the Company will be successful in maintaining or expanding its share of the
market for its products. No assurance can be given the products or technologies
that may be developed and introduced by competitors will not render the
Company's products less competitive or obsolete. The Company remains competitive
in the EAS industry because the equipment developed by the Company is compatible
with EAS equipment developed by other companies. In addition, the Company
purchases EAS equipment developed by other companies from third party
manufacturers and distributors at favorable rates and resells such equipment at
discounted prices.
GOVERNMENT REGULATION
The EAS Industry is subject to extensive regulation by various federal and state
regulatory agencies including the Federal Communications Commission (the "FCC").
Any equipment manufactured by other companies that is refurbished and resold by
the Company has received the required approvals from the FCC. The Company
intends to submit applications for approval by the FCC of equipment invented and
developed by the Company. There can be no assurance that the Company will obtain
the requisite approvals and the failure to obtain such approvals could have a
materially adverse effect upon the Company's business.
From time to time, legislation and regulations that could potentially affect the
Company, either beneficially or adversely, have been proposed by federal and
state legislators and regulators. Management is not aware of any currently
pending or proposed legislation or regulations which would have a materially
adverse impact on the Company's operations if adopted. There can be no assurance
that the FCC or various state regulators will not adopt regulations or take
other actions that would materially adversely affect the business of the
Company.
ABSENCE OF PATENT PROTECTION
The Company does not currently have patent protection on most of its products.
Its ability to compete effectively with other companies will depend, in part, on
its ability to maintain the proprietary nature of its products. The Company may
apply for patent protection on future products it develops, however, there can
be no assurance that it will be successful in obtaining such patents or, if
obtained, that such patents will afford the Company sufficient protection. The
Company intends to rely substantially on unpatented proprietary information and
technological know-how, and there can be no assurance that others will not
develop such information and know-how independently or otherwise obtain access
to its technology. Also, it is not certain that the Company's proprietary
technology will not infringe patents or other rights owned by others. In the
event that patent infringement claims are brought against the Company, the
Company may be forced to obtain a license for such technology, and there can be
no assurance that it will be successful in obtaining such licenses. In the event
that the Company contests an infringement claim, it may divert the Company's
resources from other purposes.
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TECHNOLOGICAL OBSOLESCENCE OR FAILURE AND UNCERTAIN MARKET ACCEPTANCE OF FUTURE
PRODUCTS
The markets served by the Company are to a certain extent characterized by
technological advances, changes in customer requirements, and occasional new
product introductions and enhancements. The Company's business may require, at
times, ongoing research and development efforts and expenditures, and its future
success may depend on its ability to enhance its current products and develop
and introduce new products which keep pace with technological developments in
response to evolving customer requirements. There can be no assurance the
Company's failure to anticipate or respond adequately to technological
developments and changing customer requirements, or the occurrence of
significant delays in new product development or introduction, or the
technological failures of its products or the systems in which they are
incorporated, would not result in a material loss of anticipated future revenues
and seriously impair the Company's competitiveness. In addition, the Company may
misgauge market needs and introduce products which fail to gain the necessary
market acceptance for whatever reason. Hence, it is also uncertain whether new
products or enhancements of existing products can be successfully marketed and
sold by the Company.
ITEM 2. PROPERTIES
The Company's offices, warehouse, and distribution center are located in 6,300
square feet of leased facilities in Deerfield Beach, Florida of which
approximately 3,600 square feet are used for offices. Through the end of the
lease term on January 31, 2000, the lease provides for payments of approximately
$5,000 per month including sales tax and common area maintenance expenses. The
Company believes these facilities are adequate to accommodate operations through
the year 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Although the Company is unable to predict the
ultimate disposition of these matters, the Company does not believe the
resolution of such matters will have a material adverse effect on its
consolidated financial position, results of operations, or liquidity.
In October 1996, the Company was named as a defendant in a lawsuit filed in New
Jersey Superior Court whereby the plaintiff is seeking damages with respect to
certain alleged invoices totaling approximately $20,000. A motion to amend the
pleadings was filed and granted to assert counterclaims and third party claims
against the plaintiff and its officers for, among other things, false
designation of origin under the federal Lanham Act, violations of statutory and
common law unfair competition, trademark and trade dress infringement, and
breach of contract all of which may result in damages exceeding $1,000,000. The
Company's counterclaim and third party claims arose from an alleged intentional
breach of a requirements type contract in which the plaintiff was authorized to
manufacture for the Company certain equipment for sale to third parties.
Although the Company has recorded in accrued liabilities a provision of
approximately $20,000 for any liability which may result from the plaintiff's
claims, the Company plans to continue to vigorously defend against the
plaintiff's alleged claims and to pursue its counterclaims and third party
claims against the plaintiff. While there is no assurance as to the outcome of
this legal action, management and legal counsel for the Company believe the
ultimate resolution of this matter will not have a material adverse effect on
its consolidated financial position or results of operations.
Other than the claims noted above, the Company has no notice of any pending or
threatened litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The election of directors and the ratification of the appointment of the
Company's independent certified public accountants were the only matters
submitted to a vote of security holders during 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's common stock has not commenced trading but is listed on the
National Association of Securities Dealers, Inc. ("NASD") OTC Electronic
Bulletin Board ("Bulletin Board") under the symbol "SETE". There have been no
quotes on the Company's common stock since its listing on the Bulletin Board.
No assurance can be given that a public trading market for the Company's common
stock will develop or if developed will be sustained.
In April 1997, in connection with a private placement of the Company's common
stock under Regulation D Rule 506 of the Securities Act of 1933, as amended, the
Company consummated the sale of 343,894 units, each unit consisting of one share
of common stock and one common stock purchase warrant. Each warrant expires
after five years of issuance and entitles the registered holder to purchase one
share of common stock at a purchase price equal to the lesser of $5.50 or ten
percent above the offering price of a share of common stock in a proposed public
offering. The net proceeds received by the Company from this offering were
approximately $707,000 of which approximately $198,000 from the sale of 88,173
units was received during the year ended December 31, 1997.
In October 1997, the Company issued 97,500 shares of the Company's common stock
pursuant to directors' and officers' compensation agreements.
The Company has never paid a cash dividend on its common stock since its
inception nor does it anticipate paying any cash dividends in the near future.
The Company intends to retain any future earnings to finance the operations of
the Company.
At March 31, 1998, the Company had approximately 105 registered holders of
record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
Except for historical information contained herein, certain matters discussed
herein are forward looking statements made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995. These forward
looking statements are generally based on the Company's expectations and are
subject to certain risks and uncertainties, including but no limited to;
economic, competitive, regulatory, growth strategies, available financing, and
other factors discussed elsewhere in this Form 10-KSB and other documents filed
by the Company with the SEC. The associated risks and uncertainties could cause
actual results to differ materially from historical results or the Company's
expectations. In light of these risks and uncertainties, there can be no
assurance the forward looking statements contained in this Form will occur. The
Company undertakes no obligation to publicly update or revise any forward
looking statements resulting from future events, new information, or from any
other circumstances.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
REVENUES
Revenues were approximately $2,396,000 for the year ended December 31, 1997, an
increase of $602,000 or 34% from revenues of $1,794,000 for the year ended
December 31, 1996. The increase in revenues for the year ended December 31, 1997
was primarily attributed to sales from a new customer which generated 35% of the
Company's total revenues for the year ended December 31, 1997. Approximately 2%
and 16% of the revenues for the years ended December 31, 1997 and 1996,
respectively, represented revenues generated from another customer. The Company
estimates revenues from the new customer will continue and remain fairly
constant during 1998, however, there is no assurance of future sales from the
new customer. Although the Company's customer base increased only modestly
during 1997, the Company
9
<PAGE>
expects significant expansion of its customer base resulting from its sales
efforts in new markets, the introduction of new products in 1998, and its
reputation of providing affordable high quality products.
GROSS PROFIT
Gross profit was approximately $784,000 for the year ended December 31, 1997, an
increase of $216,000 or 38% from gross profit of $568,000 for the year ended
December 31, 1996 primarily as a result of the increase in revenues. Gross
profit margin was 32.7% for the year ended December 31, 1997, a slight increase
from 31.7% for the year ended December 31, 1996. Gross profit margins are
expected to remain fairly constant in the near term due to the ongoing
maintenance of the Company's new cost control management program and new pricing
structure. The Company realizes substantially higher gross profit margins on its
manufactured products than it realizes on its purchased products due to the
proprietary nature of purchased products, however, the current sales mix is
expected to remain constant as the Company's customer base expands.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative expenses were approximately $846,000 for
the year ended December 31, 1997, an increase of $233,000 or 38% from selling,
general, and administrative expenses of $613,000 for the year ended December 31,
1996. Overall, operating expenses remained stable during 1997 with the exception
of compensation, legal, and tax expenses. Compensation expense increased nearly
$90,000 primarily as a result of an increase of $47,500 in officers' salaries
and $34,125 of common stock granted to the Company's officers and board of
directors. Legal expenses increased approximately $88,000 primarily due to the
costs of litigating existing trade claims against a competitor of the Company,
the costs of acquiring various patents and trademarks, and the costs of
increased compliance reporting. The Company also incurred $40,000 related to
certain delinquent tax liabilities during 1997. Selling, general, and
administrative expenses are expected to moderately increase over the next year
relative to the expected increase in revenues primarily as a result of increased
costs of marketing as the Company continues to expand its customer base and
introduce new products.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense was approximately $9,000 for the year ended December 31, 1997,
a decrease of $11,000 or 55% from interest expense of $20,000 for the year ended
December 31, 1996 primarily due to the conversion of $63,000 of 8% mandatory
convertible notes and $40,000 of 8% shareholders' notes payable to shares of the
Company's common stock in June 1996. Interest income of approximately $16,000
for the year ended December 31, 1997 represents interest earned on cash balances
in excess of operating requirements; there was no interest income for the year
ended December 31, 1996.
NET LOSS AND NET LOSS PER SHARE
Net loss was approximately $(55,000) for the year ended December 31, 1997, a
decrease of $10,000 or 15% from the net loss of $(65,000) for the year ended
December 31, 1996 primarily as a result of an increase of approximately $216,000
in gross profit offset by an increase in operating costs of nearly $206,000 net
of interest expense and interest income. Net income for the year ended December
31, 1997 before non-cash charges of approximately $25,000 of depreciation and
$34,000 of non-cash compensation was approximately $4,000. Net loss for the year
ended December 31, 1996 before non-cash charges of approximately $31,000 of
depreciation was approximately $(34,000).
Net loss per share was $(0.04) at December 31, 1997, a decrease of $0.02 per
share or 33% from the net loss per share of $(0.06) at December 31, 1996
resulting from the $10,000 decrease in net loss and an increase of 490,143
weighted average number of common shares from 1,066,421 during 1996 to 1,556,564
during 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's accumulated deficit was approximately $(1,702,000) and
$(1,647,000) at December 31, 1997 and 1996, respectively. Working capital was
approximately $798,000 and $705,000 at December 31, 1997 and 1996, respectively,
an increase of $93,000. The increase in working capital was the result of
10
<PAGE>
proceeds received pursuant to a private offering whereby the Company consummated
the sale of 343,894 shares of the Company's common stock for net proceeds of
approximately $707,000, of which approximately $198,000 was received during
1997. The proceeds from the private offering are intended to be used for working
capital purposes and payment of the balance due under a stock purchase agreement
pursuant to which the Company repurchased shares of common stock held by a
former employee. Working capital will be used to hire additional sales
personnel, expand production capacity, and finance inventory, accounts
receivable, and research and development.
During 1996, the Company converted approximately $308,000 of debt to shares of
the Company's common stock and received net proceeds of over $218,000 from the
exercise of warrants.
Net cash used in operating activities was approximately $(202,000) in 1997, an
increase of $(63,000) from $(139,000) in 1996 primarily as a result of $117,000
of payments made pursuant to a three year purchase and manufacturing agreement
offset by approximately $54,000 of cash received from customers in excess of
cash paid to suppliers and employees, including interest receipts and
disbursements.
The Company believes the proceeds from the private offering plus the expected
results of operations in 1998 will be sufficient to fund current business
operations and anticipated growth. However, the Company believes it may need to
raise additional capital through debt or equity financing to fund its
anticipated growth beyond 1998. There is no assurance that such additional
financing will be available when needed or available with terms acceptable to
the Company.
SEASONALITY
The Company's revenues are substantially dependent on its customers' seasonal
retail sales. Historically, the Company has experienced higher sales volume in
the third and fourth quarters of each year.
ITEM 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Independent Auditors' Report 12
Consolidated Balance Sheets at December 31, 1997 and 1996 13
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996 14
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997 and 1996 15
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996 16
Notes to Consolidated Financial Statements 17-24
</TABLE>
Consolidated Financial Statement schedules have been omitted because they are
not applicable or the required information is shown in the Consolidated
Financial Statements or the notes thereto.
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
SenTech EAS Corporation and Subsidiary
Deerfield Beach, Florida
We have audited the accompanying consolidated balance sheets of SenTech EAS
Corporation and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. These consolidated 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 consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SenTech
EAS Corporation and Subsidiary, as of December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
SPEAR, SAFER, HARMON & CO.
Miami, Florida
February 12, 1998
12
<PAGE>
<TABLE>
<CAPTION>
SENTECH EAS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
DECEMBER 31, DECEMBER 31,
1997 1996
-------------------------------------------
ASSETS
- ----------------------------------------------------------------------
Current assets
<S> <C> <C>
Cash and cash equivalents $ 475,263 $ 567,212
Accounts receivable, net of allowances of $5,000 199,802 186,003
Inventories 531,197 397,827
Other current assets 62,150 42,033
--------------------- --------------------
Total current assets 1,268,412 1,193,075
Property and equipment, net 50,916 67,081
Other assets 96,407 9,341
--------------------- --------------------
$ 1,415,735 $ 1,269,497
===================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------
Current liabilities
Accounts payable $ 390,759 $ 372,386
Accrued liabilities 63,051 36,863
Current maturities of long-term debt 16,657 78,881
--------------------- --------------------
Total current liabilities 470,467 488,130
--------------------- --------------------
Long-term debt less current maturities 203,000 219,590
--------------------- --------------------
Shareholders' equity
Common stock; $0.00024 par value; 20,833,333 authorized;
1,640,427 and 1,452,952 issued and outstanding 394 349
Additional capital 2,444,054 2,208,283
Accumulated deficit (1,702,180) (1,646,855)
--------------------- --------------------
Total shareholders' equity 742,268 561,777
--------------------- --------------------
$ 1,415,735 $ 1,269,497
===================== ====================
</TABLE>
- ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
13
<PAGE>
<TABLE>
<CAPTION>
SENTECH EAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
YEARS ENDED DECEMBER 31, 1997 1996
- ------------------------------------------------------------------- ------------------ --------------------
<S> <C> <C>
Revenues $ 2,395,844 $ 1,793,758
Cost of revenues (1,611,975) (1,225,550)
------------------ --------------------
Gross profit 783,869 568,208
Selling, general, and administrative expenses (846,212) (613,073)
------------------ --------------------
Operating loss (62,343) (44,865)
Interest expense (8,975) (20,472)
Interest income 15,993 _
------------------ --------------------
Net loss $ (55,325) $ (65,337)
================== ====================
Net loss per share $ (0.04) $ (0.06)
================== ====================
</TABLE>
- -------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
<TABLE>
<CAPTION>
SENTECH EAS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
COMMON STOCK
----------------------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------- -------------- ----------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 965,417 $ 231 $ 1,220,869 $ (1,581,518) $ (360,418)
Conversion of debt 225,492 54 308,040 308,094
Exercise of warrants 161,843 39 218,448 218,487
Purchase and retirement of shares (172,520) (41) (48,262) (48,303)
Issued pursuant to private offering, net 272,720 66 509,188 509,254
Net loss (65,337) (65,337)
------------- -------------- ----------------- ------------------ ---------------
BALANCE AT DECEMBER 31, 1996 1,452,952 349 2,208,283 (1,646,855) 561,777
Conversion of debt interest 1,802 1 4,324 4,325
Issued pursuant to compensation agreements 97,500 23 34,102 34,125
Issued pursuant to private offering, net 88,173 21 197,345 197,366
Net loss (55,325) (55,325)
------------- -------------- ----------------- ------------------ ---------------
BALANCE AT DECEMBER 31, 1997 1,640,427 $ 394 $ 2,444,054 $ (1,702,180) $ 742,268
============= ============== ================= ================== ===============
</TABLE>
- ----------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE>
<TABLE>
<CAPTION>
SENTECH EAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
YEARS ENDED DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------- ------------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (55,325) $ (65,337)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 25,163 31,154
Loss on disposal of equipment _ 5,518
Provision for losses on accounts receivable _ (5,000)
Debt interest converted to common stock 4,325 25,094
Stock based compensation 34,125 _
Net changes in operating assets and liabilities:
Accounts receivable (13,799) (141,662)
Inventories (133,370) (172,509)
Other current assets (20,117) 21,714
Other assets (87,066) 581
Accounts payable 18,373 207,571
Accrued liabilities 26,188 (46,168)
------------------- ------------------
Net cash used in operating activities (201,503) (139,044)
------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,998) (8,450)
------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable to bank (61,314) (56,847)
Payments on notes payable to shareholders (17,500) (2,500)
Net proceeds from issuance of common stock 197,366 509,254
Proceeds from exercise of warrants _ 218,487
Payments to retire common stock _ (48,303)
------------------- ------------------
Net cash provided by financing activities 118,552 620,091
------------------- ------------------
Net increase in cash and cash equivalents (91,949) 472,597
Cash and cash equivalents at beginning of year 567,212 94,615
------------------- ------------------
Cash and cash equivalents at end of year $ 475,263 $ 567,212
=================== ==================
</TABLE>
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE>
SENTECH EAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
SenTech EAS Corporation manufactures, distributes, and services electronic
article surveillance (EAS) systems and accessories worldwide used primarily
by retailers to prevent financial losses attributed to theft of
merchandise.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
SenTech EAS Corporation and its wholly owned subsidiary, SenTech EAS
International, Inc., (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements, the Company considers all
highly liquid debt instruments with original maturities of three months or
less to be cash equivalents. Cash in excess of operating requirements is
invested in short term income producing instruments with stable, high
quality financial institutions which may exceed insurable limits. The book
value of the Company's investments approximates fair value because of the
short maturity of these instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets ranging
from three to eight years.
COMMON STOCK
Prior to the Company's underwritten private offering in November 1996, the
Company had 50,000,000 shares of $0.0001 par value common stock authorized.
In connection with the private offering, the Company's Board of Directors
approved a 1 to 2.4 reverse split of the Company's common stock by
authorizing a decrease in the number of common shares from 50,000,000 to
20,833,333 and a corresponding increase in the par value from $0.0001 to
$0.00024. All share and per share amounts have been restated to
retroactively reflect the stock split.
REVENUE RECOGNITION
Revenue from sales of systems and accessories is recognized upon shipment
of the equipment or upon acceptance by a third party leasing company of an
operating lease and the related equipment. Revenue from services are
recognized as earned, and maintenance revenues are recognized ratably over
the term of the maintenance contract.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement assets
and liabilities and their respective tax bases including operating losses
and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
17
<PAGE>
SENTECH EAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
is recognized as income in the period which includes the tax enactment
date. A valuation allowance is recorded to reduce deferred tax assets when
realization of a tax benefit is unlikely.
NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of
common shares and dilutive potential common stock outstanding during the
year. The number of shares used in the per share computations after giving
retroactive effect to the December 1996 reverse stock split were 1,556,564
and 1,066,421 at December 31, 1997 and 1996, respectively. Potential common
stock, when included in the computation of dilutive earnings per share, was
anti-dilutive at December 31, 1997 and 1996.
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.
IMPAIRMENT
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and For Long-Lived Assets to Be Disposed Of", the Company
reviews long-lived assets and related goodwill for impairment on an
exception basis whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be fully recoverable through
future cash flows. If this review indicates that the assets and related
goodwill will not be recoverable, as generally determined based on
estimated undiscounted cash flows over the remaining amortization period,
the carrying amount would be adjusted to fair value and any loss will be
recognized in the statement of operations and certain disclosures regarding
the impairment will be disclosed in the notes to financial statements. At
December 31, 1997 and 1996, the Company believes no material impairment
existed.
RECENT PRONOUNCEMENTS IN ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" and
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" which are both effective for fiscal
years beginning after December 15, 1997. SFAS No. 128 simplifies the
current required calculation of earnings per share ("EPS") under APB No.
15, "Earnings per Share", by replacing the existing calculation of primary
EPS with a basic EPS calculation. It requires a dual presentation for
complex capital structures of basic and diluted EPS on the face of the
income statement and requires a reconciliation of basic EPS factors to
diluted EPS factors. SFAS No. 129 requires disclosure of the Company's
capital structure. The Company plans to adopt SFAS No. 128 and SFAS No. 129
and expects no material impact to the Company's EPS calculation or
financial statement disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. SFAS
No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements which requires the Company to (i) classify items of
other comprehensive income by their nature in a financial statement and
(ii) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the
equity section of the balance sheet. The Company plans to adopt SFAS No.
130 during 1998 and expects no material impact to the Company's financial
reporting or presentation.
18
<PAGE>
SENTECH EAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise",
and amends SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries".
SFAS No. 131 requires annual financial statements to disclose information
about products and services, geographic areas, and major customers based on
a management approach, along with interim reports. The management approach
requires disclosing financial and descriptive information about an
enterprise's reportable operating segments based on reporting information
the way management organizes the segments for making business decisions and
assessing performance. It also eliminates the requirement to disclose
additional information about subsidiaries that were not consolidated. This
new management approach may result in more information being disclosed than
presently practiced and require new interim information not previously
presented. The Company plans to adopt SFAS No. 131 during 1998 which may
result in additional financial statement disclosures.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements and related footnotes to conform to the current year's
presentation.
2. INVENTORIES
Inventories consisted of the following at December 31, :
1997 1996
-------------- --------------
Raw materials $ 339,015 $ 280,080
Finished goods 192,182 117,747
-------------- --------------
$ 531,197 $ 397,827
============== ==============
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,:
1997 1996
------------- -------------
Furniture, fixtures and office equipment $ 94,324 $ 90,867
Machinery and equipment 85,963 80,422
Leasehold improvements 5,250 5,250
------------- -------------
185,537 176,539
Accumulated depreciation and amortization (134,621) (109,458)
------------- -------------
$ 50,916 $ 67,081
============= =============
19
<PAGE>
SENTECH EAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT
Long-term debt consisted of the following at December 31,:
1997 1996
------------- -------------
7.5% note payable to bank $ 16,657 $ 77,971
8% mandatory convertible notes 53,000 53,000
8% notes payable to shareholders _ 17,500
6% senior notes payable 150,000 150,000
------------- -------------
219,657 298,471
Current maturities of long-term debt (16,657) (78, 881)
------------- -------------
$ 203,000 $ 219,590
============= =============
NOTE PAYABLE TO BANK
The Company has a $225,000 four year loan agreement bearing interest at 7.5%
with its principal lending bank. The note is collateralized by substantially all
the assets of the Company and contains certain restrictive covenants. Principal
and interest payments of $5,429 are payable monthly through March 1998.
MANDATORY CONVERTIBLE NOTES
Through December 1994, the Company issued 8% Mandatory Convertible Notes
totaling in the aggregate $932,250 due June 1997 of which $226,000 of the notes
were issued to related parties. Upon an event resulting in the Company's common
stock being publicly held as defined by the note, the notes provide for
mandatory conversion at the rate of one share of common stock for each $3.49 of
outstanding amount of principal and accrued interest. Interest at 8% is payable
annually in arrears.
During 1995, $816,250 of the convertible notes plus $125,642 accrued interest
were converted into common stock.
In June 1996, the Company tendered an offer to the holders of the convertible
notes a one time reduced conversion rate of $1.35 to induce note holders to
convert their notes to shares of the Company's common stock. Accordingly, during
1996, $63,000 of the notes plus $19,492 accrued interest were converted to
58,381 shares of the Company's common stock.
The maturity date for the remaining $53,000 of the convertible notes was
extended to January 2001 in exchange for warrants to purchase 5,000 common stock
shares at $2.40 per share of which warrants to purchase 2,500 common stock
shares at $2.40 per share were granted in 1998.
NOTES PAYABLE TO SHAREHOLDERS
During 1994, the Company issued 8% Notes Payable totaling in the aggregate
$60,000 to three officers of the Company. Principal and interest were originally
due December 1994.
In June 1996, two holders of $40,000 of the notes tendered the full amount of
the notes plus $5,602 accrued interest in exchange for 33,778 shares of the
Company's common stock and 33,778 warrants to purchase the Company's common
stock.
20
<PAGE>
SENTECH EAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to a Stock Purchase Agreement in July 1996, the Company purchased
102,129 shares of the Company's common stock and the remaining $20,000 balance
of the notes payable in exchange for $45,000 plus $5,000 accrued interest. The
agreement provides for a monthly payment schedule with certain acceleration
clauses to pay the $50,000 aggregate principal balance by no later than April
1997. Principal bears interest at 8% payable monthly in arrears through no later
than April 1997.
SENIOR NOTES PAYABLE
In May 1995, the Company issued to two directors of the Company 6% Senior Notes
totaling in the aggregate $330,000 due June 1997 with detachable warrants to
purchase 137,500 common stock shares expiring June 30, 1999. Interest at 6% is
payable annually in arrears subject to certain net income requirements.
In June 1996, the Company tendered an offer to the holders of the senior notes a
one time reduced conversion rate of $1.35 to induce note holders to convert
their notes to shares of the Company's common stock. Accordingly, during 1996,
one holder of $180,000 of the senior notes tendered the full amount in payment
of the exercise price of the detachable warrant and received 133,333 shares of
the Company's common stock.
The maturity date for the remaining $150,000 of the senior notes was extended to
January 2001 in exchange for warrants to purchase 20,000 common stock shares at
$2.40 per share of which warrants to purchase 10,000 common stock shares at 2.40
per share were granted in 1998.
No interest was paid or payable on the senior notes during 1997 and 1996.
$16,657 and $203,000 of the total long-term debt matures in 1998 and 2001,
respectively.
5. SHAREHOLDERS' EQUITY
During 1996, the Company purchased and subsequently retired 172,520 shares
of the Company's common stock from four shareholders for an aggregate
amount of $48,303.
In April 1997, pursuant to an underwritten private offering , the Company
consummated the sale of 343,894 units, each unit consisting of one share of
common stock and one common stock purchase warrant. Each warrant expires
after five years of issuance and entitles the registered holder to purchase
one share of common stock at a purchase price equal to the lesser of $5.50
or ten percent above the offering price of a share of common stock in a
proposed public offering. The net proceeds received by the Company from
this offering were approximately $706,620 of which $509,254 was received in
December 1996. The proceeds are intended to be used for working capital
purposes and payment of the balance due under a stock purchase agreement
pursuant to which the Company repurchased shares of common stock held by a
former employee.
In October 1997, the Company issued 97,500 shares of the Company's common
stock pursuant to directors' and officers' compensation agreements. The
Company has accounted for the issuance of the shares of the Company's
common stock to the Company's directors and officers in accordance with
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation". Accordingly, the Company included in the
consolidated statement of operations approximately $34,000 or $0.35 per
share of compensation expense. For purposes of recording compensation
expense related to the Company's directors' and officers' stock based
compensation, each share of stock was valued using the net tangible book
value per share.
21
<PAGE>
SENTECH EAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCK OPTIONS AND WARRANTS
The following schedule summarizes stock warrant activity and status, after
giving retroactive effect to the December 1996 1 to 2.4 reverse stock
split:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
Outstanding at beginning of year 749,007 289,974
Issued pursuant to private offering 88,173 255,721
Issued pursuant to compensation agreements 30,000 -
Issued to related parties 12,500 365,154
Exercised - (161,842)
Expired - -
------------- ---------------
Outstanding at end of year 879,680 749,007
============= ===============
Price range of warrants outstanding at end of year $1.92 to 5.50 $1.92 to 5.50
Price range of warrants exercised during the year - $1.35
Weighted average exercise price of currently
exercisable warrants $4.60 $4.60
Weighted average exercise price of exercisable
warrants outstanding $4.60 $4.60
</TABLE>
7. INCOME TAXES
At December 31, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $1,600,000 which may be available to
offset future taxable income, if any, through 2012.
Deferred tax liabilities (assets) consisted of the following at December
31,:
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Net operating loss carryforwards $(543,000) $(408,000)
Valuation allowance 543,000 408,000
---------------- ---------------
- -
================ ===============
</TABLE>
A reconciliation of the statutory income tax rate with the Company's effective
income tax rate follows:
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Statutory federal income tax rate 34.0% 34.0%
State income tax, net of federal income tax benefit 3.6 3.6
Federal tax benefit of net operating loss carryforward (37.6) (37.6)
---------------- ---------------
Effective income tax rate - -
================ ===============
</TABLE>
8. SUPPLEMENTAL CASH FLOW INFORMATION
Excluded from financing activities in the 1996 Consolidated Statements of
Cash Flows is the conversion of $63,000 of mandatory convertible notes plus
$19,492 accrued interest to 58,381 shares of the Company's common stock,
the conversion of $40,000 of notes payable plus $5,602 accrued interest to
22
<PAGE>
SENTECH EAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
33,778 shares of the Company's common stock, and the conversion of $180,000
of senior notes to 133,333 shares of the Company's common stock.
The Company paid cash for interest of $4,735 and $14,412 in 1997 and 1996,
respectively.
The Company paid no cash for income taxes in 1997 and 1996.
9. CONCENTRATION OF CREDIT RISK
The Company's revenues included sales to one customer in 1997 and one
customer in 1996 representing 35% and 16% of total revenues, respectively.
Approximately $71,000 and $0 was due from each customer and included in
accounts receivable at December 31, 1997 and 1996, respectively. The
Company minimizes credit risk through diversification and continued
evaluation of its customers' financial condition and account status.
During 1997 and 1996, the Company purchased approximately 49% and 35% of
its inventory from three vendors in 1997 and two vendors in 1996,
respectively, of which approximately $182,000 and $180,000 were payable to
the suppliers and included in accounts payable at December 31, 1997 and
1996, respectively. The Company minimizes dependence on any one supplier by
maintaining sufficient alternative suppliers for each of its raw materials
and finished goods.
There were no material concentrations of sales or accounts receivable
outside of the United States during December 31, 1997 and 1996.
10. EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, the Company provides a 401(k) and profit sharing
plan (the "Plan") for eligible employees whereby the Company's annual
contributions to the Plan are made at the discretion of the board of
directors.
An employee stock option plan (the "Plan") was adopted by the shareholders
of the Company in 1995. After giving effect to the December 1996 1 to 2.4
reverse stock split, the plan provides for 312,500 shares of common stock
to be issued at the discretion of the Compensation Committee of the Board
of Directors. Of this amount, 156,250 shares may be purchased pursuant to
the exercise of incentive stock options, and 156,250 shares may be
purchased pursuant to the exercise of non-qualified stock options. No stock
options under the Plan have been granted as of December 31, 1997.
11. COMMITMENTS AND CONTINGENCIES
PURCHASE AND MANUFACTURING AGREEMENT
In June 1997, the Company entered into a three year purchase and
manufacturing agreement (the "Agreement") with a company whose President
and Chief Executive Officer is a director of the Company. The Agreement
provides for the development and manufacture of the Company's third
generation EAS system. The Agreement requires the Company to pay $175,000
of non-recurring engineering costs in exchange for an assignment of fifty
percent of the joint technology as defined by the Agreement. Payments made
for non-recurring engineering are recorded at cost and are amortized as a
component of cost of revenues using the units-of-production method. As of
December 31, 1997, approximately $117,000 of non-recurring engineering
costs were capitalized of which $29,000 and $88,000 are included in other
current assets and other assets, respectively. At December 31, 1997, there
were no amortized non-recurring engineering costs included in cost of
revenues. The Agreement also requires the Company to purchase minimum
quantities of the system each year representing an aggregate purchase
commitment of $2,250,000 with annual obligations of $375,000 by February
1998; $750,000 by January 1999; and $1,125,000 by January 2000.
23
<PAGE>
SENTECH EAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASES
The Company leases its office and production facility and certain equipment
under non-cancelable operating leases expiring through 2000. Rent expense
for all operating leases approximated $41,000 and $38,000 in 1997 and 1996,
respectively. Future minimum lease payments for operating leases having
non-cancelable terms in excess of one year at December 31, 1997 are
approximately $45,000; $45,000; and $8,000 in 1998, 1999, and 2000,
respectively.
INSTALLATION AND CUSTOMER SERVICE AGREEMENT
In July 1995, the Company entered into a service agreement effective August
1995 with a national service organization, whose President and Chief
Executive Officer is a director of the Company, which provides for the
installation and servicing of any 8.2 MHz EAS system. Any EAS systems not
covered by the agreement are handled by the Company's service personnel or
other third party service providers. The agreement is for a one-year term
and is automatically renewable for one-year periods unless terminated in
writing by either party. The Company has not received any termination
notices and believes its relationship with the service provider is
favorable. Although there can be no assurance the agreement will not be
terminated or will be renewed in the future, the Company anticipates the
agreement will automatically be renewed through August 1999. Costs incurred
in connection with this agreement were approximately $24,000 and $22,000
for the years ended December 31, 1997 and 1996, respectively.
LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Although management is unable to predict the
ultimate disposition of these matters, the Company does not believe the
resolution of such matters will have a material adverse effect on its
consolidated financial position, results of operations, or liquidity.
In October 1996, the Company was named as a defendant in a lawsuit filed in
New Jersey Superior Court whereby the plaintiff is seeking damages with
respect to certain alleged invoices totaling approximately $20,000. A
motion to amend the pleadings was filed and granted to assert counterclaims
and third party claims against the plaintiff and its officers for, among
other things, false designation of origin under the federal Lanham Act,
violations of statutory and common law unfair competition, trademark and
trade dress infringement, and breach of contract all of which may result in
damages exceeding $1,000,000. The Company's counterclaim and third party
claims arose from an alleged intentional breach of a requirements type
contract in which the plaintiff was authorized to manufacture for the
Company certain equipment for sale to third parties. Although the Company
has recorded in accrued liabilities a provision of approximately $20,000
for any liability which may result from the plaintiff's claims, the Company
plans to continue to vigorously defend against the plaintiff's alleged
claims and to pursue its counterclaims and third party claims against the
plaintiff. While there is no assurance as to the outcome of this legal
action, management and legal counsel for the Company believe the ultimate
resolution of this matter will not have a material adverse effect on its
consolidated financial position or results of operations.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in nor disagreements with the Company's Accountants on
accounting or financial disclosures.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain current information concerning the
directors and executive officers of the Company, including their ages, position,
and tenure as of the date hereof:
<TABLE>
<CAPTION>
DIRECTOR/
NAME AGE OFFICER SINCE POSITIONS WITH THE COMPANY
- ---- --- ------------- --------------------------
<S> <C> <C> <C>
Saul Pozensky 49 1992 President, Chief Executive Officer and Director
Ronald L. Meggison, Jr. 33 1996 Executive Vice President, Chief Financial
Officer, Corporate Secretary and Treasurer
Richard J. Spagna 36 1990 Vice President Operations and Director
Edward A. Mulhare 71 1994 Chairman of the Board of Directors
Milan Resanovich 67 1994 Vice Chairman of the Board of Directors
Thomas A. Nicolette 47 1997 Director
</TABLE>
Saul Pozensky joined the Company in November 1991 as a sales representative and
became Vice President of Sales in 1992. He was elected to serve as a Director in
early 1995 and has served as the Company's President and Chief Executive Officer
since April 1995. From 1988 to June 1991, he was a principal of CMAC, a sales
and finance business. From January 1986 to 1988, Mr. Pozensky served as
Executive Vice President of E.A.S. Technologies, a development stage company.
From 1973 to 1985, Mr. Pozensky was a National Account Manager at Sensormatic.
Mr. Pozensky received a B.A. in Criminology from Florida State University in
1970.
Ronald L. Meggison, Jr. has served as Chief Financial Officer and Vice President
of Finance of the Company since August 1996 and as Secretary and Treasurer of
the Company since April 1997. In February 1998, Mr. Meggison was named Executive
Vice President. Prior to joining the Company, Mr. Meggison served as the
Director of Finance from 1995 through 1996 at OMI Corporation, a manufacturer of
electro-optical and laser components and systems. From 1989 to 1995, Mr.
Meggison was a C.P.A. at the international accounting firm of KPMG Peat Marwick
LLP resigning as an audit manager. Mr. Meggison received a degree in accounting
from North Carolina State University in 1989.
Richard J. Spagna founded the Company in 1990 when it was originally named
Ultimate EAS Inc. and served as President until May 1991. Since May 1991, Mr.
Spagna has served as a Director and Vice President Operations. Mr. Spagna was
employed by Sensormatic Electronics Corporation from February 1980 to October
1989 in a variety of positions including six years as Technical Support
Specialist. While at Sensormatic, Mr. Spagna was the inventor of two key
patented products which remain the property of Sensormatic.
Edward A. Mulhare has served as the Chairman of the Board of the Company since
May 1994. From 1982 to 1992, Mr. Mulhare served as the Chairman of the Board and
Chief Executive Officer of Merrill Lynch Interfunding, Inc., a wholly-owned
subsidiary of Merrill Lynch, engaged in the management of a $1.6 billion
leverage acquisition portfolio. From 1980 to 1982, he served as Executive Vice
President of Republic National Bank of New York. For the prior twelve years, he
was a Vice President of Prudential
25
<PAGE>
Insurance Company of America where he managed a $4 billion portfolio of long
term commercial loans and was Prudential's specialist for rebuilding troubled
companies. Mr. Mulhare currently serves as a director of Advance Publishers,
L.C., Akers laboratories, Inc., and Realtec, Inc. Over the past ten years, Mr.
Mulhare has served as a director of fifteen companies including Aldila Inc.,
Truck Components, Inc., PanAmerica Diamond Co., McGraw Industries, Inc. and
American Silver Co. Mr. Mulhare received a B.S. in Accounting from Boston
University in 1950 and an M.B.A. from Farleigh Dikenson in 1978.
Milan Resanovich has served as a Director of the Company since October 1994 and
has been a management consultant since 1992. From 1986 to 1992, he served as a
Senior Vice President, and then President at Merrill Lynch Interfunding, Inc. At
Merrill Lynch Interfunding, Inc. he aided in the management of a
leveraged-buyout investment fund. Prior to such time, Mr. Resanovich served as a
Vice President at Prudential Insurance Company of America where he was employed
in investment management from 1956 to 1986. Mr. Resanovich serves as a director
of Advance Publishers, L.C., SPD Technologies, Inc. and Lancaster Composites
Inc. and has served as a director of more than ten companies, including IMCO
Recycling, a company traded on the New York Stock Exchange from 1986 through
1995. Mr. Resanovich received a B.A. from Gettysburg College in 1952 and an
M.B.A. from the University of Pennsylvania in 1956.
Thomas A. Nicolette has been President, Chief Executive Officer and a director
of Sentry Technology Corporation since January 1997 and of Knogo North America
Inc. since its inception in August 1994. Prior thereto, Mr. Nicolette served in
various capacities at Knogo Corporation where he was Chief Executive Officer
from May 1994 to December 1994; President and Chief Operating Officer from 1990
to May 1994; President of the North America Division from 1989 to 1990; Vice
President from 1986 to 1990; and a Director from 1987 to December 1994. Mr.
Nicolette is Vice Chairman of the Board of Trustees of WLIW, the Long
Island-based affiliate of the Public Broadcasting System. Mr. Nicolette received
a B.S. in Criminal Justice and a B.A. in Management from Michigan State
University in 1972.
SECTION 16(A) REPORTING
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 Company's common stock must report on their ownership of the
Company's common stock 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 December 31, 1997, the Company does not
believe any reports required to be filed by Section 16(a) were filed on a timely
basis, if at all.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with Rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with Rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with Rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.
26
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
EXHIBITS
The following documents are filed as a part of this report:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
10.1 Agreement by and between SenTech EAS Corporation and Knogo
North America Inc. dated June 1, 1997
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, on March 27, 1998.
SENTECH EAS CORPORATION
By: /s/ RONALD L. MEGGISON, JR.
-------------------------------
Ronald L. Meggison, Jr.
Executive Vice President and
Chief Financial 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 Company and in
the capacities indicated on March 27, 1998.
SIGNATURE TITLE
- --------- -----
/s/ SAUL POZENSKY President and Chief Executive Officer
- --------------------------- (Principal Executive Officer) and Director
Saul Pozensky
/s/ RONALD L. MEGGISON, JR. Executive Vice President and Chief Financial
- --------------------------- Officer (Principal Financial Officer)
Ronald L. Meggison, Jr.
/s/ RICHARD J. SPAGNA Vice President Operations and Director
- ---------------------------
Richard J. Spagna
/s/ EDWARD A. MULHARE Chairman of the Board of Directors
- ---------------------------
Edward A. Mulhare
/s/ MILAN RESANOVICH Director
- ---------------------------
Milan Resanovich
/s/ THOMAS A. NICOLETTE Director
- ---------------------------
Thomas A. Nicolette
28
PORTIONS OF THIS EXHIBIT MARKED WITH A SERIES OF X'S HAVE BEEN DELETED PURSUANT
TO THE COMPANY'S APPLICATION FOR CONFIDENTIAL TREATMENT OF SUCH INFORMATION.
EXHIBIT 10.1
AGREEMENT
---------
THIS AGREEMENT ("Agreement") is made as of the 1st day of June, 1997
(the Effective Date"), by and between SENTECH EAS CORPORATION., a Florida
corporation, with offices at 484 Southwest 12 Avenue, Deerfield Beach, FL 33442
("SenTech"), and KNOGO NORTH AMERICA INC. a Delaware corporation, with offices
at 350 Wireless Boulevard, Hauppauge, NY 11788 ("Knogo").
R E C I T A L S
SenTech desires to have developed for it by a third party manufacturer
a design specification and a manufacturing specification for an 8MHz Swept RF
System (the "System").
Knogo is engaged in the business of designing, manufacturing and
distributing certain electronic security systems and is the owner of certain
proprietary information related thereto ("Knogo Technology") including but not
limited to that set forth in Annex A attached hereto.
SenTech and Knogo have expressed their interest in mutually cooperating
toward, among other things, the development, manufacture and marketing of the
System. SenTech desires to have Knogo manufacture and sell the System to
SenTech, Knogo desires to manufacture and sell the System to SenTech, and
SenTech and Knogo desire to address certain matters relating to the System, all
upon the terms and conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the mutual and dependent provisions
hereinafter set forth, SenTech and Knogo, intending to be legally bound, agree
as follows:
1. MANAGING COORDINATORS
1.1 Knogo and SenTech each shall appoint a "Managing Coordinator" who
shall manage such party's performance under this Agreement, be the primary
manufacturing and technical interface with the other party and serve as the
focal point for the identification and resolution of any problems that may
surface during the course of development and manufacturing of the System. Each
party shall give prompt notice to the other party in the event there is a change
in its Managing Coordinator. The Managing Coordinators shall not have authority
to amend or modify the terms of this Agreement.
<PAGE>
1.2 The initial Managing Coordinators for each party shall be:
Knogo: Victor Platt
SenTech: Rick Spagna
2. MANUFACTURING SPECIFICATIONS
2.1 Prior to the Effective Date, SenTech shall provide Knogo with the
manufacturing specification relating to the first generation System for Knogo's
review together with a requirements specification, an industrial design, and the
key components and manufacturing specifications (collectively, the "SenTech
Specs"). Upon the Effective Date, Knogo shall deliver a design specification
(the "Design Specification") for the System, which shall include a requirements
specification, an industrial design and other key components as described in
Annex B attached hereto. SenTech shall review and comment on the proposed Design
Specification no later than ten (10) days after the Effective Date for SenTech's
approval or disapproval. Knogo shall promptly revise the Design Specification to
incorporate any comments and changes requested by SenTech, and upon revision
shall promptly resubmit the Design Specification to SenTech for final comments
(which shall also be incorporated) and approval. Within thirty (30) days of the
delivery of the final Design Specification (as approved by SenTech), Knogo shall
prepare and deliver to SenTech a preliminary manufacturing specification (the
"Preliminary Manufacturing Specification") for the System. The Preliminary
Manufacturing Specification shall contain proposed milestones and goals for the
production and delivery of the System, test procedures, production targets, cost
reduction targets, recommendations for components and vendors and reliability
and quality assurance guidelines.
2.2 As soon as practicable after Knogo delivers the Preliminary
Manufacturing Specification to SenTech, SenTech shall review them with Knogo.
Knogo shall promptly revise the Preliminary Manufacturing Specification to
incorporate any comments and changes requested by SenTech, and shall promptly
resubmit the Preliminary Manufacturing Specification to SenTech for SenTech's
review and final comments (which shall also be incorporated) and approval. Knogo
shall deliver the final manufacturing specification (the "Manufacturing
Specification") to SenTech within thirty (30) days after receipt of written
approval from SenTech of the Preliminary Manufacturing Specification, as
modified or revised pursuant to this Section, but in any event no later than
August 1, 1997. The Manufacturing Specification shall include all subjects set
forth in the Preliminary Manufacturing Specification as modified and such other
subjects as may be reasonably requested by the parties, subject to the
reasonable consent of the non-requesting party. The Design Specification, the
Preliminary Manufacturing Specification and the Manufacturing Specification,
each as approved by SenTech (collectively, the "Production File") shall upon
completion be attached hereto as Annex C and shall thereupon be incorporated
herein.
2.3 Subject to the provisions of Articles 7 and 8 hereof, the
Production File shall be owned jointly by Knogo and SenTech and shall be "Joint
Technology" (as defined in Section 8.2 below), and Knogo shall possess all
rights to use the Production File or any part thereof subject to the
restrictions set forth in this Agreement. SenTech shall promptly upon Knogo's
request execute and deliver such instruments and agreements as Knogo may
reasonably request in order to confirm the foregoing. SenTech shall notify Knogo
before disclosing any of the Production File to any third party and Knogo shall
have the right to review the Production File promptly and to delete, for a
reasonable business purpose, any of Knogo's confidential information contained
therein.
2
<PAGE>
3. WORKING SAMPLES.
3.1 Upon written approval by SenTech of the Manufacturing
Specification, Knogo shall produce and deliver to SenTech, no later than
September 1, 1997, one (1) prototype of the System, which shall be in conformity
with the Design Specification and the Manufacturing Specification (the "Working
Samples"), and in accordance with the development and delivery schedule set
forth in the Manufacturing Specification. The primary goal of the production of
the Working Samples shall be to test the design and performance of the System.
All components needed for the Working Samples shall be provided by Knogo.
3.2 If the parties agree during the course of development of the
Working Samples that changes should be made to the Manufacturing Specification
or the Design Specification, they shall embody such agreement in writing which
shall specifically amend Annex C. The parties shall attempt in good faith to
agree upon an equitable adjustment to accommodate the effect any such changes
may have upon the charges for development, payment schedule, delivery schedule
of Working Samples and Production Units (as defined below).
3.3 Knogo and SenTech shall test the Working Samples in accordance with
the test procedures to be developed and mutually agreed upon by the parties and
incorporated as part of the Manufacturing Specification. Such testing shall be
completed within forty-five (45) days after the delivery date of the Working
Samples to SenTech. If the Working Samples pass the test procedure and are in
conformity to and compliance with the Design Specification and the Manufacturing
Specification, SenTech shall provide Knogo with an acceptance notice and shall
place with Knogo an initial order for Production Units as described in Section
4.1.
3.4 If the Working Samples do not satisfactorily meet the requirements
of the test procedures contained in the Manufacturing Specification (the
"Acceptance Criteria"), or are otherwise not in conformity to and compliance
with the Design Specification or the Manufacturing Specification, other than due
solely to the fault of SenTech, SenTech shall give Knogo notice thereof and
shall specify in reasonable detail why the Working Samples do not meet the
Acceptance Criteria or are not acceptable to SenTech, and suggest necessary
corrections. Knogo shall promptly thereupon take necessary corrective action at
its sole cost, and, following correction and retesting, SenTech shall accept the
Working Samples if such Working Samples, as modified, meet the Acceptance
Criteria and are otherwise acceptable to SenTech. If the Working Samples do not
meet the Acceptance Criteria or are not in conformity to and compliance with the
Design Specification or the Manufacturing Specification, due solely to the fault
of SenTech in connection with the design or manufacture of the Working Samples,
Knogo shall nonetheless promptly take necessary corrective action so as to
ensure that the Working Samples meet the Acceptance Criteria and are in
conformity to and compliance with the Design Specification and the Manufacturing
Specification, provided that the cost of such corrective action shall be borne
by SenTech.
3
<PAGE>
3.5 The failure of SenTech to notify Knogo within forty-five (45) days
after its receipt of the Working Samples (or in the case of correction of any
deficiencies, within forty-five (45) days following receipt of the corrected
Working Samples) of any disapproval of the Working Samples or failure to meet
the Acceptance Criteria shall be deemed to constitute SenTech's acceptance of
the Working Samples.
3.6 Title and risk of loss or damage to Working Samples or
pre-production prototypes shall pass to SenTech upon delivery to SenTech, FOB,
Knogo's manufacturing facilities. If SenTech returns defective or disapproved
Working Samples or pre-production prototypes, risk of loss or damage shall pass
to Knogo when SenTech returns them to Knogo FOB SenTech's testing facilities.
3.7 RELATIVE TO THE WORKING SAMPLES, KNOGO DISCLAIMS ALL WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS OF ANY PARTICULAR PURPOSE.
4. PURCHASE ORDERS/PRODUCT FORECAST.
4.1 Upon its acceptance of the Working Samples, SenTech will place its
initial purchase order [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX] so long as the total value
of the combination is at least $375,000.00. Knogo agrees to deliver the first
Production Units ordered under the initial Purchase Order on or before February
1, 1998, as specified therein. SenTech's obligation to make such initial
Purchase Order shall be conditioned upon the acceptance by SenTech of the
Working Samples, notwithstanding anything set forth in the Purchase Order or
this Agreement. Knogo shall ship the Production Units as specified in the
Purchase Orders to SenTech's U.S. Warehouse. Knogo shall bear no responsibility
for payment of shipping expenses of the Production Units, FOB Knogo's
manufacturing facilities, and Knogo shall cause all shipping expenses incurred
at SenTech's request to be invoiced by the carrier(s) directly to SenTech. Knogo
agrees to accept such initial Purchase Order and manufacture and sell the
Production Units to SenTech on and subject to the terms and conditions of this
Agreement.
4.2 Subject to the terms and conditions of this Agreement, SenTech
shall submit a second Purchase Order [XXXXXXXXXXXXXXXXX] and third Purchase
Order [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX ] so long as the
total value of the combination is at least $750,000.00 and $1,125,000.00,
respectively by no later than January 31, 1999 and January 31, 2000,
respectively. SenTech may purchase additional Production Units by submitting
Purchase Orders from time to time during the term of this Agreement. Pricing for
Production Units beyond those ordered in the initial Purchase Order shall be
negotiated in good faith between the parties but the price of the Production
Units shall not increase more than five (5%) percent per year. Knogo agrees to
accept such second and third Purchase Orders and manufacture and sell Production
Units to SenTech on the terms and conditions of this Agreement. SenTech shall
issue such second and third Purchase Orders at least one hundred and twenty
(120) days prior to the first delivery date requested therein. Within fourteen
(14) days of receipt of such second and third Purchase Orders, Knogo
4
<PAGE>
shall furnish SenTech with a written order and shipment schedules so long as
such Purchase Order(s) shall be issued in accordance with the terms of this
Agreement. Knogo shall review this lead time every six (6) months to determine
if, in Knogo's reasonable judgment, it can be shortened, and shall notify
SenTech of the results of such reviews.
4.3 The risk of loss and title to the Production Units shall pass to
SenTech, FOB Knogo's manufacturing facilities.
4.4 Except for the initial, second and third Purchase Orders, SenTech
may cancel additional Purchase Orders or any portions thereof for any reason by
notice to Knogo at least sixty (60) days prior to the scheduled delivery date.
In the event of such cancellation, SenTech shall immediately pay Knogo for the
actual materials, labor costs and directly allocated overhead and general and
administrative costs directly incurred pursuant to Purchase Orders prior to the
effective date of the cancellation, plus a 15% profit on such costs, and Knogo
shall deliver to SenTech all completed and incomplete Production Units, work in
process and all components procured by Knogo before receipt of such cancellation
notice for such Purchase Orders.
4.5 Except as provided by Sections 4.1 and 4.2, SenTech shall have no
obligation to purchase any minimum quantities from Knogo under this Agreement.
5. MANUFACTURING.
5.1 SenTech may at any time during normal business hours of Knogo, upon
reasonable notice, conduct spot functional tests or other reviews of the
Production Units at Knogo's facility to determine compliance of the Production
Units with the Manufacturing Specification and the Design Specification. If any
Production Unit fails to pass the tests or reviews, SenTech may reject such
defective Production Unit and Knogo shall take all steps necessary to correct
any defects, at its sole cost.
5.2 SenTech shall provide Knogo with specifications and artwork for the
labeling and packaging of the Production Units as may be required by SenTech in
order to identify SenTech and show its logo on the Production Units and/or
packaging. Knogo shall label the Production Units in accordance with said
specifications. All Production Units shall be packaged by Knogo in accordance
with SenTech's specifications and subject to SenTech's reasonable approval.
5.3 All Production Units shall be marked for identification purposes
with (i) unit model number; (ii) date code, (iii) FCC compliance legend; (iv)
Electronic Testing Laboratories (ETL) label; and (v) the appropriate patent
markings of the Knogo Technology and Joint Technology (collectively
"Identification"), in accordance with the sample Identification provided by
SenTech. Knogo shall be responsible for producing and affixing the
Identification to the Production Units at no additional cost to SenTech.
5.4 Knogo shall obtain FCC and ETL certification with respect to the
Production Units, for the sale of the Production Units in the United States.
6. FEES
5
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6.1 SenTech shall pay Knogo (a) 33% of the $175,000 non-recurring
engineering costs ("NRE") for the development of the Production Files and
Working Samples upon the execution of this Agreement; (b) 33% of the NRE upon
approval of the Production file by SenTech; and (c) the remaining portion of the
NRE upon acceptance of the Working Samples by SenTech. The NRE shall be capped
by Knogo at $175,000.00.
6.2 SenTech shall pay Knogo for the Production Units shipped to SenTech
in the initial Purchase Order [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX]. Knogo shall
submit to SenTech, concurrently with each shipment, invoices in respect of
Production Units shipped to SenTech. SenTech shall pay Knogo within 60 calendar
days of receipt of invoice the amount set forth therein in U.S. dollars. Any
other fees, expenses or costs due hereunder shall be paid by SenTech to Knogo
within 60 days of receipt of an invoice relating thereto. Knogo may, at its sole
discretion, (a) charge a late payment penalty at a rate of 1.5% per month on all
payments due from SenTech that are not made in accordance with this Agreement
and/or (b) if any payment remains delinquent for a period of 90 days after the
due date, Knogo may stop all work under this Agreement and retain all work in
progress until all outstanding invoices are paid. Each party agrees that the
non-paying party shall be liable for all costs of collection, including but not
limited to reasonable attorney's fees, reasonably incurred by the other party
for the collection of any sums due hereunder.
7. CONFIDENTIAL INFORMATION
7.1 Before and during the term of this Agreement, it is anticipated
that each party will disclose to the other party certain information, including
but not limited to technology, design and manufacturing data, know-how, business
and financial plans or other information related to the subject matter of this
Agreement, either in writing, by other tangible medium or orally, which the
disclosing party considers to be and desires to be treated as confidential
("Confidential Information"). All Confidential Information shall be labeled or
identified as "Confidential" or "Proprietary" or with some similar designation
indicating its proprietary nature prior to any disclosure which is permitted
under this Section 7.
7.2 Without the prior written consent of the other party, or as
permitted by Section 7.4, neither party shall disclose the Confidential
Information of the other party to any third party, other than to its own
counsel, consultants, and employees and to employees of subsidiaries, affiliated
companies or independent contractors with a need to know who are bound by
confidentiality agreements comparable in scope to the provisions of this
Section, nor use the Confidential Information of the other party for any other
purpose than in the performance of this Agreement.
7.3 Each party shall use the same degree of care to avoid inadvertent
disclosure and impermissible use of the other party's Confidential Information
which the disclosing party employs with respect to its own proprietary
confidential information of a similar nature which it does not wish to have
disseminated, published or disclosed, but in no event shall handle the
Confidential Information with less than reasonable care.
7.4 This Section shall not apply to, and neither party shall be liable
for, the disclosure and use of any such Confidential Information which is:
6
<PAGE>
a. Already in the possession of the receiving party or its
subsidiaries or affiliated companies without an obligation of
confidentiality as shown by documentary evidence;
b. Publicly known through no fault of the receiving party;
c. Obtained by the receiving party from a third party who did
not owe the disclosing party a duty to preserve its confidentiality;
d. Approved in writing for release by the disclosing party; or
e. Required to be disclosed by a court or other government
authority; provided that prompt notice is given to the disclosing party
and the receiving party cooperates with the disclosing party if
requested to do so to resist disclosing such material or information.
7.5 SenTech and Knogo agree that either party's breach of this Section
7 will cause the other party irreparable injury for which it will not have an
adequate remedy at law. In the event of a breach of this Section, the
non-breaching party shall be entitled to injunctive relief in addition to any
other remedies it may have at law or in equity.
7.6 Except as provided in Section 8.2, all Confidential Information is
and shall remain the property of the disclosing party. Confidential Information,
and any copies thereof, shall be returned to the disclosing party if requested
at any time or upon termination of this Agreement.
7.7 The obligations of SenTech and Knogo under this Section shall
survive the expiration or termination of this Agreement for a period of five (5)
years after the Effective Date.
8. PATENTS, INVENTIONS, COPYRIGHTS
8.1 The Knogo Technology, Knogo's Confidential Information, patent
rights and other intellectual property rights which have general applicability
to System, including, but not limited to that described in Annex A, which were
developed by Knogo prior to the execution this Agreement, shall at all times be
and remain the exclusive property of Knogo.
8.2 Knogo hereby agrees to assign an undivided one-half interest in and
to, and the employees of Knogo will by written agreement agree to assign, to
SenTech (or to SenTech through Knogo) all inventions, discoveries, industrial
designs, copyrights, mask works and improvements relating to work performed by
Knogo for SenTech, whether or not such discoveries or improvements are
patentable or copyrightable and whether or not made solely or jointly with
others (collectively, "Joint Technology"). Joint Technology shall include all
patents, copyrights, mask works, and industrial designs, whether filed jointly
or not. Ownership of the Joint Technology does not give rise to any ownership,
license or right to use or sub-license the technology contributed or provided by
one party pursuant to this Agreement separate and apart from the technology
jointly developed to produce the System.
8.3(a) Knogo shall have the first option to file patent, copyright,
mask work or industrial design applications based upon the Joint Technology
inventions conceived or reduced to practice
7
<PAGE>
during the term of this Agreement and to obtain US and/or foreign patents,
copyrights, mask works and other design protection covering such Joint
Technology; such patent, copyright and mask work applications shall include
appropriate assignments as contemplated by Section 8.2. SenTech and Knogo shall
confer on the filing of all such Joint Technology patent, copyright, mask work
or design applications. In the event Knogo elects not to file one or more
patent, design and copyright applications on the Joint Technology as provided in
this Section, Knogo may notify SenTech of such decision, and SenTech shall after
receipt of such notice have the right to do so at its expense.
(b) The parties shall share equally the obligation to pay all fees
and expenses for searching, preparing, prosecuting, maintaining, reissuing, and
reexamining all patent, copyright, mask work and design applications and
patents, copyrights, mask works and design registrations covering the Joint
Technology. However, if there has been an election not to proceed as provided in
the preceding subparagraph, then as to the non-elected patent, mask work and/or
copyright application, the party electing to proceed will have sole
responsibility for all fees and expenses related to that patent, mask work and
copyright.
(c) The parties shall fully cooperate in the execution of all
documents necessary to file patent, copyright and design applications and to
obtain and to enforce all patents, copyrights and design applications covering
the Joint Technology throughout the world.
8.4(a) Knogo shall indemnify, defend and hold SenTech, its affiliates,
customers or other users harmless from any and all damages, liability, causes of
action, claims, costs and expenses (including reasonable legal fees)
(collectively, "Knogo Claims") deriving from or in connection with any Knogo
Claim by a third party that the sale and/or use of the Production File, Joint
Technology or any System supplied under this Agreement infringes any patent,
trademark, tradename, trade secret, copyright or other right arising under this
Agreement.
(b) SenTech shall give notice as promptly as reasonably practicable to
Knogo of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify Knogo shall not relieve Knogo from
any liability which it may have otherwise than on account of this indemnity
agreement. SenTech may also participate at its own expense in the defense of any
such action, provided that the counsel selected by Knogo shall control the
defense.
8.5(a) If a third party allegedly, actually or imminently threatens to
infringe on any patent, industrial design, copyright or trade secret covering
the Joint Technology, the parties shall promptly notify one another and provide
all material information concerning any such act by any third party.
(b) Both parties shall use their good faith efforts in cooperation
with each other to terminate such infringement or misappropriation without
litigation. If the efforts of the parties are not successful in abating the
infringement or misappropriation within thirty (30) days after the infringer or
misappropriator has been formally notified of the infringement or
misappropriation, either party shall have the right to and agree to:
i) Commence suit on their own account upon thirty (30)
days notice from the date of termination of the thirty (30) day notice period of
(b) to the other party,
8
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ii) Within the thirty (30) days specified in 8.5(b)(i),
the other party may give notice to said party of its intention to join such
suit,
iii) All expenses of such suit are the responsibility of
the party of account in such suit and said party of account shall receive all
recoveries,
iv) If such suit is joined by both parties, Knogo shall
select counsel and all expenses and recoveries will be apportioned according to
the actual damages to each party or by any other agreed upon formula, and
v) Each party agrees to cooperate fully with the other in
litigation proceedings instituted hereunder and, upon request and expense of the
party bringing suit, the other party shall agree to be joined and make available
to the party bringing suit all relevant records, papers, information, samples,
specimens, and the like which may be relevant and in its possession, custody or
control.
8.6(a) Knogo shall acquire no right or license to use any of SenTech's
trademarks, service marks or trade names. Knogo shall not use any of SenTech's
trademarks, service marks or trade names in any advertising copy, promotional
material, signs or other written materials other than as expressly authorized in
writing by SenTech.
(b) SenTech shall acquire no right or license to use any of Knogo's
trademarks, service marks or trade names. SenTech shall not use any of Knogo's
trademarks, service marks or trade names in any advertising copy, promotional
material, signs or other written materials other than as expressly authorized in
writing by Knogo
8.7 SenTech shall not modify, merge, translate, decompile, decode,
reverse engineer or otherwise alter, use, copy or transfer any components or
software provided by Knogo including, without limitation, that listed on Annex
A, to Knogo, or in whole or in part, except as specifically provided in this
Agreement.
8.8 Notwithstanding Section 8.2, SenTech shall have the sole and
exclusive rights to the mold for the Production Units developed in accordance
with this Agreement.
9. TECHNICAL SUPPORT: WARRANTY
9.1 Knogo warrants (the "Warranty") to SenTech that each Production
Unit sold and delivered under this Agreement shall be free from defects in
design, workmanship, manufacturing process and materials (excluding materials
provided by SenTech) and shall comply with the Design Specification and the
Manufacturing Specification, which Warranty shall remain in effect (a) for the
Production Units for a period of 90 days from the date of installation by Knogo
(hereinafter referred to as the "Production Unit Warranty Period") and (b) for
the Production Unit PCBs for a period of one-year from the date of shipment by
Knogo (hereinafter referred to as the "the PCB Warranty Period"). The provisions
of this Section 9 shall survive the termination of this Agreement.
9
<PAGE>
9.2 If any Production Unit or Production Unit PCB sold and/or delivered
by Knogo hereunder does not comply with the Warranty requirements set forth
above during the Production Unit Warranty Period or the PCB Warranty Period,
Knogo shall investigate any warranty claim to determine the nature and cause of
the Warranty defect and notify SenTech of the results of its investigation
within ten (10) business days of receipt. Knogo shall, at its sole option,
either repair or replace the defective Production Unit or Production Unit PCB at
Knogo's sole expense (including parts and labor). Any Production Unit or
Production Unit PCB to be repaired by Knogo hereunder shall be returned to Knogo
at the address set forth in Section 13.7, unless otherwise agreed by the parties
in writing. Transportation of such items to Knogo shall be the responsibility of
SenTech, at SenTech's sole expense and risk of loss, and transportation of such
items back to SenTech shall be the responsibility of Knogo, at Knogo's sole
expense and risk of loss. The Production Unit Warranty Period or PCB Warranty
Period shall be extended by an amount equal to any time period during which any
Production Unit or Production Unit PCB covered by the Warranty is being repaired
or replaced by Knogo hereunder. [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX]
9.3 The Warranty is conditioned upon the Production Unit and Production
Unit PCB being used and maintained in accordance with any written instructions
furnished by Knogo to SenTech. Any failure or defect due to normal wear and tear
is excluded from the Warranty. Physical damage to a Production Unit or
Production Unit PCB due to shipping and handling must be reported to Knogo
within 60 calendar days of receipt of shipment. After 60 days, such damage is
the responsibility of SenTech.
9.4 Knogo shall provide to SenTech a contact person of Knogo who will
be SenTech's contact for Warranty claims and questions.
10. REPRESENTATIONS
10.1 Each party represents and warrants to the other that such party
has the rights, licenses, permits and power to perform all obligations incurred
by it hereunder as provided and required under this Agreement.
10.2 Except as specifically provided in this Agreement, (i) Knogo
acknowledges and agrees that SenTech owns and shall have world-wide rights to
the Production Units developed in connection with this Agreement, and (ii) Knogo
agrees that it will not at any time sell, offer to sell, license or otherwise
transfer to any other entity the Production Units or any other product identical
in appearance or substantially similar in content to the Production Units.
10.3 SenTech acknowledges that Knogo or its Affiliates may manufacture
and sell other security systems other than the Production Units to customers
other than SenTech.
10.4 Knogo warrants and represents that its entry into this Agreement
with SenTech does not violate any other Agreement in which it is a party.
11. TERM AND TERMINATION
10
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11.1 This Agreement shall have a term of three (3) years commencing on
the date hereof. In the event SenTech terminates this Agreement prior to the
completion of the Production File and/or delivery of the Working Samples,
SenTech shall immediately pay Knogo for all actual NRE incurred by Knogo and
shall assign any and all Joint Technology to Knogo. This Agreement shall not be
renewed except pursuant to a written agreement executed by both parties. At
least ninety (90) days before the scheduled end of the term the parties shall
confer regarding whether the parties desire to renew the Agreement.
11.2 The failure of a party to enforce any right to termination
contained herein shall not in any manner act as a waiver of such party's right
to terminate this Agreement.
11.3 Notwithstanding anything set forth in this Agreement, the
provisions of Section 2.3 and Articles 7, 8, and 9 shall survive the expiration
or earlier termination of this Agreement.
12. DEFAULTS AND REMEDIES
12.1 The following events and/or conditions shall constitute a default
under this Agreement:
a. The failure by a party to comply with any of the covenants or
conditions set forth and this Agreement, which failure continues for a period of
thirty (30) days after notice thereof from the non-defaulting party to the
defaulting party.
b. If a party makes or has made to the other party any
representation, warranty or disclosure pursuant to this Agreement which is or
was materially false or misleading on the date as of which made.
c. If a party becomes the subject of a proceeding under the
United States Bankruptcy Code, if an assignment is made of a party's assets for
the benefit of creditors, if a receiver, trustee in bankruptcy or like official
is appointed to take all or part of a party's assets, or if a party ceases doing
business in the ordinary course of business.
12.2 Upon an event of default by a party, the non-defaulting party
shall have the right to do any one or more of the following:
a. Pursue any rights and remedies available under applicable law
or as otherwise specified in this Agreement.
b. Terminate the rights of the defaulting party under this
Agreement upon notice to the defaulting party, without limiting the rights and
remedies of the non-defaulting party.
c. The non-defaulting party may terminate all of its obligations
under this Agreement.
d. Terminate this Agreement upon notice to the defaulting party.
All of the remedies provided for in this Agreement shall be cumulative,
and not exclusive.
11
<PAGE>
12.3 If Knogo defaults hereunder prior to the termination of this
Agreement, Knogo shall to the extent reasonably practicable, cooperate, at
Knogo's expense, with SenTech to have a third party manufacture Production Units
or Production Unit PCBS using the Joint Technology on SenTech's behalf and at
SenTech's expense.
13. MISCELLANEOUS
13.1 All disputes arising between the parties concerning the validity,
construction, interpretation or effect of any provision of this Agreement, or
the rights and obligations created hereunder shall be brought before a
conciliation committee of executives representing both parties which shall,
within two (2) weeks after being informed of the dispute, attempt to work out a
recommendation for settlement of the dispute.
13.2 Unless otherwise mandated by applicable law, any dispute which
cannot be settled amicably by conciliation as provided above shall be heard,
settled and decided under the Commercial Arbitration Rules of the American
Arbitration Association by arbitrator(s) appointed in accordance with such
Rules. Such arbitration shall be held in New York, New York. The award in such
arbitration shall be binding, final and enforceable in any court of competent
jurisdiction.
13.3 The captions used herein are for convenience of reference only and
shall not be deemed as in any way affecting the substantive meaning of the
provisions to which such captions refer.
13.4 Neither party may assign or otherwise transfer or convey any of
its rights or obligations under this Agreement to any other party without the
prior written consent of the non-assigning party, which consent may not be
unreasonably withheld.
13.5 Any provision of this Agreement found to be prohibited by law
shall be disregarded to the extent of such prohibition without invalidating any
other provision of this Agreement.
13.6 If the performance of this Agreement, or any obligation hereunder
is prevented or restricted by reason of fire, work stoppage, war, government
action, natural disaster, or other cause beyond the reasonable control of the
party so affected (an "Excusable Delay"), such party, upon giving notice to the
other, shall be excused from performance to the extent of such prevention or
restriction, PROVIDED, HOWEVER, that the affected party shall use its reasonable
good faith efforts to remove such condition as soon as possible. In the event
such Excusable Delay continues for more than three months without an expected
resolution in the foreseeable future, either party may seek to terminate this
Agreement and, in that event, the parties shall negotiate a fair and equitable
resolution of the Agreement, provided that potential future profits shall not be
taken into account.
13.7 Any notices or other communications hereunder shall be in writing
and shall be sent to the recipient party at its address or facsimile number set
forth below by fax or registered mail:
If to SenTech:
12
<PAGE>
484 Southwest 12 Avenue
Deerfield Beach, Florida 33442
Tel: (954) 426-2965
Fax: (954) 426-8389
Attention: Mr. Saul Pozensky, President
If to Knogo:
350 Wireless Boulevard
Hauppauge, New York 11788
Tel.: (516) 232-2100
Fax: (516) 232-0954
Attention: Mr. Thomas Nicolette, President
Any such notice shall be effective on delivery if delivered in person;
when receipt is acknowledged or confirmed if sent by facsimile; upon signature
of receipt if sent by prepaid certified mail; and upon the expiration of the
second business day after such notice is sent by Federal Express or other
reputable overnight delivery service. The parties may, by notice given in
accordance herewith, designate other addresses and/or facsimile numbers for
receipt of notice.
13.8 The terms and conditions herein set forth the entire agreement
between the parties and shall supersede all previous communications and
agreements either oral or written, between the parties with respect to the
subject matter of this Agreement. This Agreement can be modified only by a
written amendment executed by both parties.
13.9 Without limiting the foregoing, the terms and conditions set forth
in this Agreement shall supersede any inconsistent terms and conditions set
forth in any Purchase Order or other standard form used by either party.
13.10 This Agreement shall not be construed to create between the
parties the relationship of principal and agent, joint venturers, co-partners or
any other similar relationship, the existence of which is hereby expressly
denied by each party. Each party is an independent contractor with respect to
the other.
13.11 Each of the parties agrees that, during the term of this
Agreement and for a period of six (6) months following the termination of this
Agreement, neither party will, except with the other party's prior written
approval, solicit, offer employment to, or contract with the other party's
employees or contractors.
13.12 This Agreement and performance by the parties hereunder shall be
governed by and construed in accordance with the laws of the State of New York,
USA without application of its conflicts of law provisions or principles.
13
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by each party
by its duly authorized representative on the date first set forth above.
SENTECH EAS CORPORATION
By: /s/ Saul Pozensky
Name: Saul Pozensky
Title: President and Chief Executive Officer
KNOGO NORTH AMERICA INC.
By: /s/ Thomas A. Nicolette
Name: Thomas A. Nicolette
Title: President and Chief Executive Officer
14
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