UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 2-13328
For the fiscal year ending November 30, 2004
SENTEX SENSING TECHNOLOGY, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2333899
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1801 East Ninth Street
Cleveland, Ohio 44114
--------------- -----
(Address of principal executive offices) (Zip Code)
(216) 687-0289
--------------
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12 (b) of the Exchange Act:
None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Shares, no par value
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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B 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. [ ]
The Company's revenues for the fiscal year ended November 30, 2004 were
$3,847,228.
The aggregate market value of Sentex Sensing Technology, Inc. Common Shares, no
par value, held by non-affiliates, computed by reference to the average of the
closing bid and asked prices as reported on March 9, 2005: $3,052,947.
Number of Common Shares (No Par Value) of SENTEX SENSING TECHNOLOGY, INC.,
issued and outstanding as of February 20, 2005 is 101,764,911.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One)
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Part IV - Item 13 - Exhibits, Financial Statement Schedules, and Reports on
Form 8-K See Page 15
ITEMS OMITTED
None
2
This Amendment No. 1 to the Annual Report on Form 10-KSB/A ("Amendment No. 1")
amends and restates in its entirety Sentex Sensing Technologies' Annual Report
on Form 10-KSB for the year ended November 30, 2004. Amendment No. 1 is being
filed solely to revise the language in Item 8A and to amend the language in the
certification (Exhibit 31.1 and Exhibit 31.2). Amendment No. 1 has no impact on
our previously reported audited financial statements and notes thereto as of
November 30, 2004. Furthermore, this Amendment No. 1 does not reflect events
occurring after the filing date of the original Form 10-KSB and does not modify
or update the disclosure on any form in any way other than is explained above.
ITEM 1 BUSINESS
Sentex Sensing Technology, Inc. ("Sentex" or the "Company") is a corporation
duly organized in 1980 in the state of New Jersey. On July 2, 2001, the Company
purchased Regency Technologies, in LLC ("Regency Technologies") from Regency
Steel, LLC and other selling members.
Regency Technologies specializes in the buying, selling, and trading of
information technology equipment (primarily computer equipment). The primary
focus of our business revolves around acquiring unneeded, older computer
equipment and reselling that equipment to certain consumers on a global basis.
When a company or institution determines its equipment is at the end of a
technology life cycle, it will typically go through a "refresh" process. During
a typical refresh process, a company will replace an average of one third of
all of its user-based technology assets (primarily computers). The typical
lifespan for most of these assets is about three years. Therefore, most major
corporations and institutions are refreshing one third of their IT population
every year. These assets include PC's (CPU's and laptops), Servers, Monitors,
Printers, Networking Equipment (routers, hubs, bridges, and other peripheral
computer equipment), as well as other equipment (Midrange up to Mainframe
Assets).
The asset recovery group of a company, along with its IT department, typically
works to remove or dispose of the older technology assets while the new assets
are being rolled out. This process often emphasizes rolling out the new
equipment and tends to ignore the action plan for disposing of the old
equipment. This typically results in the complete write off of the old
equipment and a slow and cumbersome removal of the old equipment.
Regency Technologies seeks to fulfill a company's need to systematically and
efficiently dispose of its old equipment. We use traditional sales models as
well as Internet based research to identify prospects that are likely
candidates for our services. We have four full time employees concentrating on
sourcing equipment via asset recovery programs as well as selling equipment to
wholesalers, exporters, importers and maintenance companies. We have one inside
sales person who is responsible for selling equipment to retail accounts and
have one inside sales person who is responsible for the sale of parts only. We
expect our marketing staff to continue to expand and assist in our growth.
The Company hopes to offer a leasing option using the skills of its management
team, which has extensive experience in financial services and leasing of
equipment. The leasing industry generates in excess of $200 billion per year in
new lease revenue and is characterized by attractive growth prospects. It is a
mega-industry with many participants and no truly dominant player.
As of November 30, 2004, the Company employed approximately 24 full-time
employees and used the services of four other persons from CPS Capital, Ltd.
("CPS"). Management believes its relations with the employees are good. The
Company does not currently rely on any patented technologies or other trade
secrets to operate. It primarily relies on its knowledge of the industry and
the computer trading market. The financial barriers to entry into this market
are relatively low, and therefore, potentially faces competition from a variety
of sources. However, the Company believes that it has a competitive advantage
over most of its competition because its management team has significant years
of experience in leasing, sourcing and trading computer equipment. There can be
no assurance, however, that another company either does not possess or cannot
obtain that knowledge and compete effectively against the Company.
3
The Company to date has not had to make any substantial investment in research
and development costs. It relies primarily on its ability to find companies
that are disposing of computer equipment and then selling the equipment to
those who are in the market to buy older equipment that is still sufficient for
those buyers' purposes.
Any information technology equipment that cannot be resold must be disposed of
in accordance with certain environmental laws. However, these laws have not in
the past placed, and the Company does not believe that compliance with these
requirements in the future will place, a material financial or other burden on
the Company.
ITEM 2 PROPERTIES
Regency Technologies occupies approximately 25,000 square feet of
warehouse/office space at 30700 Carter Street, Solon, Ohio 44139. The lease
runs through February 2008 with remaining annual costs of $77,000 for 2005,
$80,000 for 2006, $89,000 for 2007 and $22,000 for the three months in 2008.
Administrative offices consist of approximately 3,500 square feet, which is
shared with CPS, at 1801 East Ninth Street, Cleveland, Ohio 44114. This lease
has a fixed annual cost of $66,000 and runs through March of 2006.
ITEM 3 LEGAL PROCEEDINGS
State of Ohio, Department of Administrative Services v. IQ Solutions, LLC, et
al.; Case No. 03-CVH05-6054; Franklin County Common Pleas Court, Ohio.
During October 2004, the Company was dismissed without prejudice from the
above-captioned matter.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares trade on the Over-the-Counter Bulletin Board. The
range of high and low closing bid prices by fiscal quarter was
2004 HIGH LOW
---- ---- ---
1st Quarter N/A N/A
2nd Quarter N/A N/A
3rd Quarter N/A N/A
4th Quarter .05 .01
4
2003
----
1st Quarter .02 .00
2nd Quarter .03 .01
3rd Quarter .04 .02
4th Quarter .02 .01
Due to a late 2003 annual report filing, the Company was listed on the Pink
Sheets through the third quarter of fiscal year 2004.
The bid quotations represent inter-dealer quotations and do not include retail
markup, markdown or commissions, and may not represent actual transactions. On
March 9, 2005 there were 109,460,911 Common Shares issued, 101,764,911 Common
Shares outstanding and 1,211 holders of record of the outstanding Common
Shares. The Company has not paid a dividend since becoming a public company in
November of 1980. The Company does not plan to pay cash dividends in the
foreseeable future.
5
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOUR" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
Certain statements in the Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements included in
this Annual Report on Form 10-KSB, in the Company's press releases and in oral
statements made by or with the approval of an authorized executive officer of
the Company constitute "forward-looking statements" as that term is defined in
the Private Securities Litigation Reform Act of 1995. These may include
statements projecting, forecasting or estimating Company performance and
industry trends. The achievement of the projections, forecasts or estimates is
subject to certain risks and uncertainties. Actual results and events may
differ materially from those projected, forecasted or estimated. The applicable
risks and uncertainties include general economic and industry conditions that
affect all business, as well as matters that are specific to the Company and
the markets it serves.
Specific risks to the Company include an inability of the Company to finance
its working capital needs. In light of this and other uncertainties, the
inclusion of a forward-looking statement herein should not be regarded as a
representation by the Company that the Company's plans and objectives will be
achieved.
FINANCIAL CONDITION
Working Capital and Liquidity
During the last several fiscal years, the Company has incurred losses from
operations. In addition, the Company's certified public accountants, Hausser +
Taylor LLC, have included in their auditors' report, which covers the Company's
financial statements for the years ended November 30, 2003 and November 30,
2004, a statement that the Company's recurring losses from operations raised
substantial doubt about the Company's ability to continue as a going concern.
For fiscal years 2003 and 2004, the Company sustained losses of approximately
$531,000 and $781,000, respectively. These losses have had a substantial
adverse effect on the working capital of the Company.
In June of 2004, the Company restructured its $2,500,000 in bank financing.
This financing has subsequently been taken over by CPS, which now holds much of
the working capital debt that has been used in the business during 2004. As of
November 30, 2004, there was an outstanding balance of $6,203,000 on the loans
from CPS. We believe these loans have been secured under terms no less
favorable than we could have obtained pursuant to an arms-length transaction.
In addition to the CPS loans, from time to time, Mr. Julius L. Hess, the
Company's Vice President, Secretary and a Director, has provided the Company
with cash investments to help fund certain specified transactions. From January
1, 2003 through November 30, 2004, Mr. Hess has invested a total of $1,335,044
to fund such transactions. In agreement for providing such funds, which amounts
may not otherwise have been available to the Company, Mr. Hess typically
receives remuneration in the amount of up to fifty percent of the gross profit
from such transactions. Upon settlement of the transactions during the period
from January 1, 2003 through November 30, 2004, Mr. Hess will have
6
received total proceeds of $1,321,651. We believe these investments have been
secured under terms no less favorable than we could have obtained pursuant to
an arms-length transaction. As of the end of fiscal year 2004, there was an
outstanding balance of $108,520 on these loans.
In addition to the above-noted investments by Mr. Hess has, from time to time,
provided loans to the Company to cover certain working capital expenses such as
payroll. Mr. Hess does not receive any remuneration for these loans, other than
the return of principal. These loans are typically paid back within a short
period of time. From January 1, 2003 through November 30, 2004 Mr. Hess
provided $58,600 in loans of this kind to the Company. As of the end of fiscal
year 2004, there was no outstanding balance on these loans.
Net Tax Operating Loss Carryforwards
As of November 30, 2004 the Company has approximately $15,781,000 in net tax
operating loss carryforwards which will expire at various dates through the
year 2024 that are mainly attributable to losses incurred by Monitek. Federal
tax law imposes restrictions on the use of net operating loss carryforwards in
the event of a change in ownership, such as a merger. Due to the merger with
Monitek, approximately $6,265,000 of the $15,781,000 net operating losses may
be subject to these limitations and potentially may not be available to provide
any economic benefit to the Company.
RESULTS FROM OPERATIONS
Fiscal 2004 as Compared to Fiscal 2003
Regency Technologies is an asset manager and computer dealer and is fully
integrated with complete demanufacturing and some recycling capability. We have
installed a new Database Management System to allow us to become a parts
supplier in the global market in addition to the current functions, and to
better manage inventories and the entire asset management process. The
Company's marketing strategy has shifted to a more global focus. Additionally,
we expect to exploit new niche opportunities in 2005 such as more parts
distribution, refurbishing and recycling.
Revenues increased from approximately $3,457,000 in fiscal 2003 to $3,915,000
in fiscal 2004, an increase of 13.2%. Gross margins on sales declined from
29.2% in 2003 to 23.8% in 2004 due primarily to an unfavorable sales mix in the
first two quarters of the year. Volume still was not sufficient to allow the
Company to be profitable for the full year.
Operating expenses (SG & A) increased from about $1,319,000 in fiscal 2003 to
$1,544,000 in fiscal 2004. Operating expenses as a per cent of sales increased
from 38.4% in fiscal 2003 to 40.1% in fiscal 2004. The increase in operating
expenses is due primarily to the growth in employee costs.
Interest expense of $220,000 for 2004 was slightly lower ($20,000 less) than in
2003. This reduction was due primarily to the reduced prime rate experienced
during the fiscal year.
7
CURRENT OUTLOOK
Revenues grew by 13% over 2003, and we expect a significant increase for 2005.
The Company is actively pursuing various capital sources and strategic partners
in an effort to recapitalize and restructure the Company so that it may move
forward with its new and expanded business model. Although there can be no
assurances, the Company believes that it will have its funding requirements
fulfilled in the very near future. This is the key to the substantial growth
that can be achieved within our platform.
ITEM 7 FINANCIAL STATEMENTS
See Index to Financial Statements appearing on page F-2.
ITEM 8 CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Principal Accounting Officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by
this report, have concluded that the Company's disclosure controls and
procedures were effective. There were no changes in the Company's internal
controls over financial reporting that occurred during the Company's last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
8
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
The Directors and Executive Officers of the Company are as follows:
Name Age Position
---- --- --------
Robert S. Kendall 66 Chairman, President and Treasurer
James S. O'Leary 67 Director
Julius L. Hess 43 Vice President, Secretary and Director
Ronald M. Lipson 70 Director
William R. Sprow 66 Controller
ROBERT S. KENDALL has been the Chairman, President and Treasurer of the Company
since March 1, 1996. He shall maintain his position as a duly elected director
of the Company until such time as his successor is duly qualified and elected.
He is also President and Chairman of CPS Capital, Limited, an investment
company based in Cleveland. Until April 1996, he was also Chairman of the Board
and founder of LDI Corporation, an asset leasing and technology services
company which he, along with two others, founded in 1972. LDI was one of the
largest independent lessors of technology and computer equipment in the United
States. Mr. Kendall is also a general partner in NCP, Ltd., a real estate
partnership actively engaged in investing, acquiring, financing and managing
commercial, industrial and other properties. From 1969 to 1972, Mr. Kendall was
branch manager at Victor Computer, a manufacturer and distributor of computer
systems. From 1963 to 1969, he was a salesman, financial specialist and sales
manager at Burroughs Corporation (now Unisys Corp.). Mr. Kendall graduated from
Case Western Reserve University with a bachelor's degree in psychology in 1960,
and attended graduate school at John Carroll University.
JAMES S. O'LEARY had been employed by Monitek since August 1982 and served as
its Executive Vice President, Secretary and Treasurer since April 1987. The
Company has retained his services and, from December 1996 through November
1998, he served as Vice President of Finance and Chief Financial Officer. In
December 1998, Mr. O'Leary was elected as a Director and was appointed Chief
Operating Officer of the Company. In September 1999, Mr. O'Leary resigned from
his position as Chief Operating Officer but he remained a Director. He shall
maintain his position as a duly elected director of the Company until such time
as his successor is duly qualified and elected.
JULIUS L. HESS has served as Assistant Vice President and Vice President for
CPS since November 1994 and is responsible for research and analysis. He has
served as director of the Company since December 1996 and shall maintain his
position as a duly elected director of the Company until such time as his
successor is duly qualified and elected. At CPS he serves as lead analyst in
the location and evaluation of investment opportunities of publicly held
companies which are believed to be undervalued, or closely held companies with
potential for appreciation. Prior to joining CPS, Mr. Hess was Human Resources
Manager for a division of GE Capital from 1990 to 1994. From 1989 to 1990, he
was Senior Human Resources Representative for B. F. Goodrich and prior thereto
he was Compensation and Labor Relations Manager from 1986 to 1989 at the Mayo
Clinic Medical Center. Mr. Hess graduated from Miami University in Oxford,
Ohio, with a bachelor's degree in political
9
science in 1983 and attended graduate school at the University of Minnesota.
Mr. Hess is Mr. Kendall's son-in-law.
RONALD M. LIPSON has served as a director of the Company since December 1996
and shall maintain his position as a duly elected director of the Company until
such time as his successor is duly qualified and elected. Mr. Lipson has been
an attorney for more than thirty five years in Cleveland, Ohio, practicing in
various areas including corporate, business, and real estate law. He was the
incorporating attorney for LDI Corporation and formerly served as legal counsel
and a director for LDI Corporation. Mr. Lipson is also a general partner in G&C
Properties, an Ohio real estate partnership engaged in buying, selling and
managing various types of real estate. Mr. Lipson attended Ohio University and
graduated from Adelbert College of Case Western Reserve University with a
bachelor's degree in business administration in 1955. He also received a Doctor
of Jurisprudence degree in 1958 from Case Western Reserve University School of
Law.
WILLIAM R. SPROW has served as the Chief Financial Officer of the Company since
December 2001. He is responsible for all financial operations from day to day
accounting, financial reporting, SEC report preparation and submission, and a
variety of administrative responsibilities for all CPS companies, Sentex and
Regency. He additionally handles IT administration issues for our own internal
system. Mr. Sprow also serves as Controller of CPS Holding Company, Ltd., a
related company that is responsible for energy purchasing and subsequent energy
management for a variety of clients ranging from large Fortune 1000 clients to
large public institutions. With over 38 years of related accounting and
financial experience, Mr. Sprow served as Vice President, Finance of Borden
Consumer Products, Canada from 1980 to 1985; as Controller and Operations
Manager for Sherwin-Williams Canada from 1986 to 1993; and in key management
positions with a number of Northeast Ohio companies from 1995 to 1999.
There were two meetings of the Company's Board of Directors during the fiscal
year ended November 30, 2004. The Company's Board of Directors does not
currently have a nominating committee, audit committee or a compensation
committee.
Currently Mr. Sprow serves as the Board's "Financial Expert" as that term is
defined in the Instruction to paragraph (e)(1) of Item 401 of Regulation S-B.
Mr. Sprow is not "independent" as that term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act.
Code of Ethics
The Company has not adopted a code of ethics or similar policy that applies to
our principal executive officer, principal financial officer, principal
accounting officer or Controller. We feel such a code of ethics is not
necessary at this time because of the limited size of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires directors,
executive officers and beneficial owners of more than ten percent of our common
shares to file reports with the Securities and Exchange Commission regarding
their ownership and changes in their ownership of our common
10
shares. To our knowledge, during 2004, our executive officers, directors and
greater than ten percent shareholders complied with all Section 16(a) filing
requirements on time.
ITEM 10 EXECUTIVE COMPENSATION
The following information is set forth with respect to the Company's Chief
Executive Officer. No other executive officer's total compensation exceeded
$100,000 for the fiscal year ended November 30, 2004
ANNUAL COMPENSATION
OTHER ANNUAL
YEAR SALARIES BONUS COMPENSATION
---- -------- ----- ------------
Robert S. Kendall 2004 -0- -0- -0-
(Chief Executive Officer) 2003 -0- -0- -0-
2002 -0- -0- -0-
Long-Term Compensation:
No long-term compensation was paid during the fiscal years ended November 30,
2004, 2003, or 2002 to any executive officer of the Company by way of
restricted stock awards, options or stock appreciation rights, or other
long-term incentive plans.
Stock Options:
The Company adopted Sentex Sensing Technology, Inc. Stock Option Plan (the
"Plan") at a special meeting of its shareholders held on November 14, 1996.
Under the Plan, the Company may grant different types of options covering up to
7,000,000 Common Shares to its existing and future directors, officers and
employees. As of November 30, 2004, there were no Company stock options held by
any directors or executive officers of the Company.
Compensation Pursuant to Plans:
The Company has no plans pursuant to which cash or non-cash equivalents were
paid during the fiscal years ended November 30, 2004, 2003, or 2002.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
EQUITY COMPENSATION PLAN INFORMATION
Plan category Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a))
(a) (b) (c)
Equity compensation plans approved by 0 0 7.000.000
security holders
Equity compensation plans not approved NA NA NA
by security holders
Total 0 0 7,000,000
The following table sets forth certain information regarding the beneficial
ownership of the Common Shares as of February 2, 2004 by: (a) the Company's
Directors; (b) each other person who is known by the Company to own
beneficially more than 5% of the outstanding Common Shares; and (c) the
Company's executive officers and Directors as a group. Except as otherwise
described in the notes below, the following beneficial owners have sole voting
power and sole investment power with respect to all Common Shares set forth
opposite their names.
11
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER (1) OF BENEFICIAL OWNER PERCENTAGE
----------------------- ------------------- ------
Robert S. Kendall (2) -- --
James S. O'Leary -- --
Julius L. Hess -- --
Ronald M. Lipson 687,500 *
3 Laurel Hill Lane
Pepper Pike, Ohio 44124
CPS Capital, Limited (3) 48,029,814 47.2%
1801 East Ninth Street
Cleveland, Ohio 44114
All Directors and Officers 48,717,314 47.9%
(as a group persons)
(1) The name and address of each individual listed in the table,
except where otherwise indicated, is c/o Sentex Sensing
Technology, Inc., 1801 East Ninth Street, Cleveland, Ohio
44114.
(2) All common shares distributed to Mr. Kendall are held of
record by CPS Capital, Ltd. or are beneficially owned by CPS
Capital, Ltd. Mr. Kendall and his wife own 100% of the
outstanding membership interests in CPS Capital, Ltd..
(3) CPS is the record holder of 48,029,814 Common Shares and has
sole voting and dispositive power with respect to such
shares.
* Represents less than 1% of the outstanding Common Shares.
Change in Control
No arrangements currently exist which may result in a change in control of the
Company.
12
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CPS Management Agreement:
After CPS acquired effective control of the Company, CPS entered into a
Management Agreement with the Company, which was effective on March 1, 1996
(the "Original Management Agreement"). In connection with the execution of the
Merger Agreement, dated June 24, 1996 (the "Merger Agreement"), CPS and the
Company entered into an Amended and Restated Management Agreement (the "Amended
and Restated Management Agreement"). Pursuant to the Original Management
Agreement, CPS agreed to cause its personnel to perform the functions that
would normally be performed by officers of the Company. Presently, such
personnel consist mainly of Mr. Kendall, the Chairman of CPS, and William R.
Sprow, the Controller of CPS. In order to permit Mr. Kendall and Mr. Sprow to
function as officers and for them to be properly insured as officers of the
Company, Mr. Kendall has been elected as the President and Treasurer of the
Company and Mr. Sprow has been elected Chief Financial Officer of the Company.
Under the terms of the Original Management Agreement, CPS received an annual
fee of $193,800, which was payable monthly. Under the terms of the Amended and
Restated Management Agreement, the annual fee was increased to $393,800 to
account for the increase in tasks and responsibilities relating to the
operation of Monitek. Due to the present financial condition of the Company,
CPS has not received payment under the Amended and Restated Management Services
Agreement since May 1997, but the Company agreed to accrue such expense. On May
15, 1998, CPS and the Company entered into the Second Amended and Restated
Management Services Agreement, pursuant to which CPS agreed to accept 5,025,745
Common Shares in lieu of the accrued management fees equaling $196,900,
representing fees for the second half of fiscal 1997. All the shares acquired
by CPS were acquired for investment purposes.
In December 1997, CPS and the Company agreed to a reduced management fee of
$250,000 for fiscal 1998. In December 1998, the parties agreed to adjust the
management fee to $300,000 for fiscal 1999 and subsequent years. CPS and the
Company agreed that the balance due as of November 30, 2000, was $442,000. No
management fees have been provided for fiscal years 2001 through 2004.
Working Capital Assistance:
During fiscal 1997 through fiscal 2001, CPS and Mr. Kendall provided the
Company assistance in connection with funding its working capital needs in the
form of loans and security for bank loans. From May 1997 through November 2002,
CPS provided the Company a series of temporary capital loans at a prime
interest rate plus 100 basis points. The outstanding balance of such loans
total $6,203,340, including accrued interest, as of November 30, 2004. From
time to time, Mr. Kendall has also provided security to banks by permitting the
banks to obtain a security interest in Mr. Kendall's personal assets and/or
providing guarantees so the Company could obtain financing from the Bank.
Except for the interest to be received on the loans provided by CPS, neither
Mr. Kendall nor CPS has received nor will receive any remuneration in
connection with providing such working capital assistance to the Company unless
the notes are converted into Common Shares at some future date. The Company
believes the interest payable to CPS is and was on terms no less favorable than
could be obtained pursuant to an arms-length transaction.
13
In addition to the CPS loans, from time to time, Mr. Julius L. Hess, the
Company's Vice President, Secretary and a Director, has provided the Company
with cash investments to help fund certain specified transactions. From January
1, 2003 through November 30, 2004, Mr. Hess has invested a total of $1,335,044
to fund such transactions. In agreement for providing such funds, which amounts
may not otherwise have been available to the Company, Mr. Hess typically
receives remuneration in the amount of up to fifty percent of the gross profit
from such transactions. Upon settlement of the transactions during the period
from January 1, 2003 through November 30, 2004, Mr. Hess will have received
total proceeds of $1,321,651. We believe these investments have been secured
under terms no less favorable than we could have obtained pursuant to an
arms-length transaction.
In addition to the above-noted investments by Mr. Hess has, from time to time,
provided loans to the Company to cover certain working capital expenses such as
payroll. Mr. Hess does not receive any remuneration for these loans, other than
the return of principal. These loans are typically paid back within a short
period of time. From January 1, 2003 through November 30, 2004 Mr. Hess
provided $58,600 in loans of this kind to the Company. As of the end of fiscal
year 2004, there was no outstanding balance on these loans.
14
ITEM 13 EXHIBIT LISTS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
3.1 Certificate of Incorporation, as amended (3)
3.2 First Amended and Restated Bylaws of the Company (6)
3.3 Certificate of Incorporation of Sentex Acquisition Corp. (4)
3.5 Certificate of Merger (Sentex Systems, Inc. into Sentex) (4)
3.6 Certificate of Incorporation of Sentex Systems, Inc. (5)
4.1 Specimen Certificate of Common Shares (3)
10.2 Consulting Agreement with Ms. Joanne Bianco, dated March 1, 1996 (2)
10.3 Sentex 1996 Long-Term Incentive Stock Option Plan (1)
21.1 List of Subsidiaries (6)
31.1 302 Certification of Chief Executive Officer
31.2 302 Certification of Chief Financial Officer
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act of 200
(1) Incorporated by reference to Annex A of the Joint Proxy
Statement/Prospectus which is a part of Amendment No. 1 to
the Registration Statement on Form S-4, filed on October 4,
1996, File No. 333-12993 (the "Registration Statement").
(2) Incorporated by reference to exhibits of the Registration
Statement bearing the same exhibit numbers.
15
(3) Incorporated by reference to exhibits bearing same exhibit
numbers, filed with the Company's Registration Statement on
Form S-1, File No. 2-86860.
(4) Incorporated by reference to exhibits bearing the same
exhibit numbers, filed with the Company's Form 10-KSB for the
fiscal year ended November 30, 1992.
(5) Incorporated by reference to exhibits bearing the same
exhibit numbers, filed with the Company's Form 10-KSB for the
fiscal year ended November 30, 1984.
(6) Incorporated by reference to exhibits bearing the same
exhibit numbers, filed with the Company's Form 10-KSB for the
fiscal year ended November 30, 1996.
(B) REPORTS ON FORM 8-K
None.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate audit fees billed for professional services rendered by
Hausser + Taylor LLC (the "Firm") for auditing registrant's annual
financial statements included in the registrant's 10-KSB and review of
its internal financial statements included in the registrant's
10-QSB's were $43,500 in 2004 and $40,734 in 2003.
The Firm did not charge the Company any audit-related, tax or other
fees for these years.
The Firm has a continuing relationship with American Express Tax and
Business Services, Inc. ("TBS") from which it leased auditing staff
who are full time, permanent employees of TBS and through which its
shareholders provide non-audit services. As a result of this
arrangement, the Firm has no full time employees and, therefore, none
of the audit services performed were provided by permanent full time
employees of the Firm. The Firm manages and supervises the audit and
audit staff, and is exclusively responsible for the opinion rendered
with its examination.
SIGNATURE
Pursuant to the requirements of Sections 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: June 22, 2005 SENTEX SENSING TECHNOLOGY, INC.
By: /s/ Robert S. Kendall
------------------------------------------
Robert S. Kendall, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Robert S. Kendall
--------------------------
Robert S. Kendall Chairman, President and Treasurer June 22, 2005
16
/s/ Julius L. Hess
--------------------------
Julius L. Hess Vice President, Secretary and Director June 22, 2005
/s/ Ronald M. Lipson
Ronald M. Lipson Director June 22, 2005
/s/ James S. O'Leary
--------------------------
James S. O'Leary Director June 22, 2005
/s/ William R. Sprow
--------------------------
William R. Sprow Chief Financial Officer June 22, 2005
/s/ William R. Sprow
William R. Sprow Controller June 22, 2005
17
SENTEX SENSING TECHNOLOGY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
F-1
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONTENTS
------------------------------------------------------------------------------
Page
----
AUDITORS' REPORT ON THE FINANCIAL STATEMENTS F-3
FINANCIAL STATEMENTS
Consolidated balance sheet F-4
Consolidated statements of operations F-5
Consolidated statements of stockholders' equity (deficit) F-6
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8 - F-15
F-2
Independent Auditors' Report
----------------------------
To the Board of Directors and Stockholders
Sentex Sensing Technology, Inc.
Cleveland, Ohio
We have audited the accompanying consolidated balance sheet of Sentex
Sensing Technology, Inc. and subsidiaries as of November 30, 2004, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the two years in the period ended November 30, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sentex
Sensing Technology, Inc. and subsidiaries as of November 30, 2004, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended November 30, 2004, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2A to the
financial statements, the Company has in the past and continues to sustain
substantial net and operating losses. In addition, the Company has used
substantial amounts of working capital in its operations which has reduced the
Company's liquidity to a very low level. At November 30, 2004, current
liabilities exceed current assets by $7,353,982. This and other matters raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
HAUSSER + TAYLOR LLC
Cleveland, Ohio
February 24, 2005
F-3
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
November 30, 2004
--------------------------------------------------------------------------------
ASSETS
------
CURRENT ASSETS
Cash $ 12,872
Accounts receivable - trade, net of allowance for
doubtful accounts of $55,000 98,206
Inventory 103,550
-----------
Total current assets $ 214,628
EQUIPMENT
Computer equipment 4,009
Less accumulated depreciation 4,009 -
-----------
OTHER ASSETS
Goodwill 36,042
Deposits 990 37,032
----------- -----------
$ 251,660
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES
Notes payable:
Related party $ 6,203,340
Trade and other accounts payable ($913,174 to
related parties) 1,171,122
Accrued liabilities 160,476
Consulting contracts payable 21,249
Convertible subordinated notes payable 12,423
-----------
Total current liabilities $ 7,568,610
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value
Authorized - 200,000,000 shares
Issued - 109,460,911 shares
Outstanding - 101,764,911 shares 2,867,579
Retained earnings (deficit) (9,915,061)
Treasury shares at cost, 7,696,000 shares (269,468)
-----------
Total stockholders' equity (deficit) (7,316,950)
-----------
$ 251,660
===========
The accompanying notes are an integral part of these financial statements.
F-4
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended November 30, 2004 and 2003
--------------------------------------------------------------------------------
2004 2003
---- ----
REVENUES
Sales $ 3,847,228 $ 3,432,553
Interest and other income 67,572 24,926
------------- -------------
Total revenues 3,914,800 3,457,479
COST AND EXPENSES
Cost of sales 2,931,456 2,428,754
Selling, general and administrative 1,544,001 1,319,304
------------- -------------
Total costs and expenses 4,475,457 3,748,058
------------- -------------
LOSS FROM OPERATIONS (560,657) (290,579)
OTHER EXPENSE
Interest 220,177 240,491
------------- -------------
NET LOSS $ (780,834) $ (531,070)
============= =============
NET LOSS PER SHARE (BASIC AND DILUTED) $ (0.01) $ (0.01)
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 101,764,911 101,764,911
============= =============
The accompanying notes are an integral part of these financial statements.
F-5
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended November 30, 2004 and 2003
--------------------------------------------------------------------------------
Total
Common Stock Retained Treasury Stock Stockholders'
---------------------------- Earnings -------------------------- Equity
Shares Amount (Deficit) Shares Amount (Deficit)
----------- ----------- ----------- --------- ----------- -----------
Balance - November 30, 2002 109,460,911 $ 2,867,579 $(8,603,157) 7,696,000 $ (269,468) $(6,005,046)
Comprehensive loss
Net loss - - (531,070) - - (531,070)
----------- ----------- ----------- --------- ----------- -----------
Balance - November 30, 2003 109,460,911 2,867,579 (9,134,227) 7,696,000 (269,468) (6,536,116)
Comprehensive loss
Net loss - - (780,834) - - (780,834)
----------- ----------- ----------- --------- ----------- -----------
Balance - November 30, 2004 109,460,911 $ 2,867,579 $(9,915,061) 7,696,000 $ (269,468) $(7,316,950)
=========== =========== =========== ========= =========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended November 30, 2004 and 2003
--------------------------------------------------------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (780,834) $ (531,070)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,082 1,083
Noncash interest expense 141,098 141,180
Changes in assets and liabilities:
Accounts receivable 127,275 (10,529)
Inventory 240,122 (292,880)
Other assets 4,800 (990)
Accounts payable (136,166) 271,447
Accrued liabilities (40,060) 9,129
----------- -----------
Total adjustments 338,151 118,440
----------- -----------
Net cash used by operating activities (442,683) (412,630)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on note receivable - 274,902
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on notes and accounts payable - related party 2,910,225 308,425
Payments on note payable - bank (2,500,000) (200,000)
----------- -----------
Net cash provided by financing activities 410,225 108,425
----------- -----------
NET DECREASE IN CASH (32,458) (29,303)
CASH - BEGINNING OF YEAR 45,330 74,633
----------- -----------
CASH - END OF YEAR $ 12,872 $ 45,330
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 33,296 $ 101,444
See notes to the consolidated financial statements for certain noncash
investing and financing activities.
The accompanying notes are an integral part of these financial statements.
F-7
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION, BACKGROUND, INDUSTRY SEGMENT AND DISCONTINUED OPERATIONS
The consolidated financial statements include the accounts of Sentex
Sensing Technology, Inc. and its wholly-owned subsidiaries (the
"Company"). All material intercompany accounts and transactions have
been eliminated in consolidation.
On July 2, 2001, the Company acquired Regency Technologies, Ltd. from
Regency Steel, LLC. In connection with the acquisition, the Company
issued 1,250,000 common shares held in treasury in exchange for 100% of
Regency Technologies, Ltd. The Company's only significant operations in
the years ended November 30, 2004 and 2003 consisted of Regency
Technologies, Ltd.'s operations. The Company specializes in the buying,
selling, and trading of information technology equipment (primarily
computer equipment). The primary focus of the Company's business
revolves around acquiring unneeded, older computer equipment and
reselling that equipment to certain consumers on a global basis. The
Company's business is confined to one industry segment and two
geographical reporting segments. The Company's assets are all located
within the United States.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Going Concern - The accompanying financial statements have
been prepared in conformity with accounting principles
generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern.
However, the Company has in the past and continues to sustain
substantial net and operating losses. In addition, the Company
has used substantial amounts of working capital in its
operations which has reduced the Company's liquidity to a very
low level. At November 30, 2004, current liabilities exceed
current assets by $7,353,982. Additionally, at November 30,
2004, the Company has limited operations. These and other
matters raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and
classification of recorded assets or the amounts and
classification of liabilities that might be necessary in the
event the Company cannot continue in existence. The Company's
ability to continue in existence is primarily dependent upon
its planned ability to arrange adequate financing and to
attain profitable operating activities to sustain required
cash flows.
B. Receivable and Credit Policies - Accounts receivable are
uncollateralized customer obligations due with various trade
terms from the invoice date and are stated at the amount
billed to the customer. Payments of accounts receivable are
applied to the specific invoices identified on the customer's
remittance advice. The carrying amount of accounts receivable
is reported net of the allowance for doubtful accounts
reserve, which reflects management's best estimate of the
amount that will not be collected. Management individually
reviews all accounts receivable balances and any customer
account balances with invoices dated over 120 days past due
are considered delinquent. These delinquent invoice amounts
plus any other invoices deemed not to be collected are
reserved for in the allowance for doubtful accounts reserve.
Specific accounts are charged directly to the reserve when
management obtains evidence of a customer's insolvency or
otherwise determines that the account is uncollectible.
The Company has provided $55,000 for possible doubtful
accounts receivable at November 30, 2004. The allowance for
doubtful accounts amounted to $35,000 at November 30, 2003.
F-8
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. Inventory - Inventory consists of used computer equipment held
for resale and a variety of electronic component parts.
Inventories are valued at the lower of cost (first-in,
first-out) or market.
D. Equipment - Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of
the respective assets. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts and any resulting
gain or loss is recognized in income or loss for the period.
The cost of maintenance and repairs is included in the
consolidated statements of operations as incurred; significant
renewals and betterments are capitalized.
E. Revenue Recognition - The Company records revenue as customers
are billed for consulting services or delivery of hardware
products.
F. Concentration of Credit and Risk Factors - Financial
instruments which potentially subject the Company to
concentrations of credit risk include cash and equivalents and
accounts receivable. The Company places its cash and cash
equivalents with high credit quality financial institutions.
The amount on deposit in any one institution that exceeds
federally insured limits is subject to credit risk. Also see
Notes 2.B., 2.I., and 12.
G. Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in
the United States of America 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.
H. Income Taxes - The Company utilizes Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. The
difference between the financial statement and tax basis of
assets and liabilities is determined annually. Deferred income
tax assets and liabilities are computed for those temporary
differences that have future tax consequences using the
current enacted tax laws and rates that apply to the periods
in which they are expected to affect taxable income. Valuation
allowances are established, if necessary, to reduce the
deferred tax asset to the amount that will, more likely than
not, be realized. Income tax expense is the current tax
payable or refundable for the period plus or minus the net
change in the deferred tax assets and liabilities.
I. Fair Value of Certain Financial Instruments - The fair values
of cash, accounts receivable, accounts payable, and other
short-term obligations approximate their carrying values
because of the short maturity of these financial instruments.
J. Loss Per Share - Loss per share is calculated using the
weighted average number of shares outstanding. Potentially
dilutive securities are insignificant.
F-9
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. New Accounting Standards - In December 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123
(Revised 2004), "Share Based Payment". SFAS No. 123R, which
amends SFAS No. 123, "Accounting for Stock-Based
Compensation," and SFAS No. 95, "Statement of Cash Flows."
SFAS 123R requires all companies to measure compensation cost
for all share-based payments at fair value, and will be
effective for public companies for interim and annual periods
beginning after June 15, 2005. This new standard may be
adopted in one of two ways - the modified prospective
transition method or the modified retrospective transition
method. The Company currently has no stock-based compensation
plans.
In December 2003, the FASB issued Interpretation No. 46
(revised December 2003) ("FIN 46"), "Consolidation of Variable
Interest Entities", an interpretation of Accounting Research
Bulletin No. 51. FIN 46R requires certain variable interest
entities, or VIEs, to be consolidated by the primary
beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46R is
effective for all VIEs created or acquired after January 31,
2003. For VIEs created or acquired prior to February 1, 2003,
the provisions of FIN 46 must be applied for the first interim
or annual period beginning after March 15, 2004. The Company
currently has no contractual relationship or other business
relationship with a variable interest entity.
The adoption of the new standards did not, or is not expected
to, materially affect the Company's financial position and
results of operations.
L. Certain amounts in the financial statements for the year ended
November 30, 2003 have been reclassified to conform with
current year presentation.
NOTE 3. ACQUISITION OF REGENCY TECHNOLOGIES, LTD.
In July 2001, the stockholders of Sentex Sensing Technology, Inc. and
the members of Regency Technologies, Ltd. (an Ohio limited liability
company) approved a merger whereby Regency Technologies, Ltd. became a
wholly-owned subsidiary of Sentex Sensing Technology, Inc., through the
issuance of 1,250,000 shares of Sentex common stock in exchange for
100% of the member interest in Regency Technologies, Ltd.
In the transaction, accounted for as a purchase, the Company issued
1,250,000 common shares, previously held in treasury at a cost of $.035
per share, for an aggregate purchase price of $31,250, approximating a
fair market value of $.025 per share. The resulting goodwill of $36,042
is the excess of the purchase price over the net deficit (assets of
$18,854 and liabilities of $23,646) of Regency Technologies, Ltd. The
operations of Regency Technologies, Ltd. are included in the Company's
financial statement from the acquisition date.
The Company accounts for goodwill under SFAS No. 142, "Goodwill and
Other Intangible Assets." Under this standard, goodwill is no longer
amortized over its useful life; rather, it is subject to a periodic
impairment test based upon its fair value. During the year ending
November 30, 2004, the Company determined that there was no impairment
in that goodwill.
F-10
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consist of the following at November 30, 2004:
Pension $100,000
Other 60,476
--------
$160,476
NOTE 5. NOTES PAYABLE - RELATED PARTY
During the years ended November 30, 2004 and 2003, the Company's
principal stockholder (CPS Capital, Ltd.) and the Company's Chairman
provided the Company assistance in connection with funding its working
capital needs in the form of loans and security for bank loans. As of
November 30, 2004, the Company had notes payable of $6,203,340
including accrued interest of approximately $907,000 (bearing interest
at 1% over the prime rate) to its principal stockholder in connection
with such unsecured loans.
Interest expense for the years ended November 30, 2004 and 2003
amounted to $220,177 and $240,491, respectively. Interest expense
includes $141,098 and $141,180 for the years ended November 30, 2004
and 2003, respectively, of interest that has been added to the
principal balance of the notes described in the preceding paragraph.
The Company restructured its $2,500,000 bank debt which had been a
major impediment to raising the necessary growth capital needed to
complete the Company's acquisition and growth goals.
NOTE 6. CONVERTIBLE SUBORDINATED NOTES PAYABLE
Convertible subordinated notes payable of $12,423 are subordinated to
all present and future obligations of the Company and have a stated
interest rate of 5.05% per annum. The notes can be converted at the
holders' or Company's option into that number of shares by dividing the
face amount of the note by $.075. The conversion terms contain standard
anti-dilutive provisions to adjust the conversion price. The notes
matured December 1, 2000.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company leases office and warehouse space under a non-cancelable
operating lease which expires February 29, 2008. The following is a
schedule, by year, of future minimum lease payments as of November 30,
2004:
2005 $ 76,896
2006 79,863
2007 88,764
2008 22,191
------
$ 267,714
Rent expense for the year ended November 30, 2004 was $118,995.
F-11
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCK INCENTIVE PLAN
The Company has a long-term incentive plan ("Incentive Plan") to
provide current and future directors, officers and employees incentives
to stimulate their active interest in the development and financial
success of the Company. The Incentive Plan provides for the granting of
"incentive stock options," under Section 422 of the Internal Revenue
Code of 1986, as amended, or other stock options, stock appreciation
rights, restricted, or nonrestricted stock awards to purchase not more
than 7,000,000 shares (which shares have been reserved by the Company)
of common stock as determined by the Company's Incentive Plan Committee
(the "Committee"). The option prices per share of common stock, which
are the subject of incentive stock options and other stock options
under the Incentive Plan, shall not be less than 100% of the fair
market value of the Company's shares of common stock on the date such
option is granted. The Committee shall determine when each option is to
expire but no option shall be exercisable for a period of more than 10
years from the date upon which the option is granted. Generally,
options granted under the Incentive Plan vest or terminate upon the
employee leaving the Company and are subject to automatic acceleration
of any vesting requirements given certain changes in control of the
Company. No options were outstanding to purchase the Company's stock
during the years ended November 30, 2004 and 2003.
Stock appreciation rights may be awarded by the Committee at the time
or subsequent to the time of the granting of options. Stock
appreciation rights awarded shall provide that the option holder shall
have the right to receive an amount equal to 100% of the excess, if
any, of the fair market value of the shares of common stock covered by
the option over the option price. Such amount shall be payable, as
determined by the Committee, in one or more of the following manners:
(a) cash; (b) fully-paid shares of common stock having a fair market
value equal to such amount; or (c) a combination of cash and shares of
common stock. As of November 30, 2004, the Company has not granted any
appreciation rights under the Incentive Plan.
NOTE 9. PROFIT-SHARING PLAN
The Company has a profit-sharing plan and a 401(k) retirement plan for
the benefit of eligible employees. Contributions under the plans are
determined at the discretion of the Board of Directors and are credited
to employees based upon a percentage of eligible salaries. The Company
elected to suspend all contributions for the years ended November 30,
2004 and 2003.
F-12
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. INCOME TAXES
As referred to in Note 1, the Company utilizes SFAS 109, "Accounting
for Income Taxes." A reconciliation between the Company's effective
income tax rate and the statutory federal income tax rate is as follows
for the years ended November 30:
2004 2003
---- ----
Expected federal income tax benefit at
the statutory rate (34.0)% (34.0)%
Increase in taxes resulting from:
Effect of operating loss for which no tax
carrybacks are available (34.0) 34.0
----- -----
-% -%
----- -----
The tax effects of significant temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below for the years ended November 30:
2004 2003
---- ----
Deferred tax assets:
Net operating loss carryforward $3,235,400 $2,969,600
Other - 42,500
---------- ----------
Total gross deferred tax assets 3,235,400 3,012,100
Less valuation allowance 3,235,400 3,012,100
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
The deferred tax assets do not include deferred tax assets related to
purchased net operating loss carryforwards that are subject to usage
limitations (see below).
The Company established a valuation allowance against tax benefits that
are potentially available to the Company but have not yet been
recognized. This valuation allowance relates to the amount of net
operating loss carryforwards in excess of existing net taxable
temporary differences and to certain deductible temporary differences
that may not reverse during periods in which the Company may generate
net taxable income. During the years ended November 30, 2004 and 2003,
the Company recorded increases of $223,300 and $138,300, respectively,
in the valuation allowance primarily as a result of the net operating
loss generated during the year.
At November 30, 2004, the Company had approximately $15,781,000 of net
operating loss carryforwards available to offset future federal taxable
income. The federal non-limited net operating loss carryforwards expire
at various dates from 2012 through 2024. Federal tax law imposes
restrictions on the utilization of net operating loss carryforwards in
the event of a change in ownership. The Company's net operating loss
includes approximately $6,265,000 of loss carryforwards that may be
subject to limitations as a result of these provisions.
F-13
SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. RELATED PARTY TRANSACTIONS
The Company has a management agreement with an affiliate and
significant stockholder, CPS Capital, Ltd., to perform management and
executive services. Based on limited operations, the Company and CPS
agreed to reduce the management fee until the Company expands its
operations. As of November 30, 2004, the balance due for unpaid
management fees was $441,671.
Two of the Company's officers have made temporary cash advances to the
Company in the amount of $471,503 which is included in trade and other
accounts payable.
The Company also leases its office and warehouse space from a real
estate partnership that is related through a minority interest by one
of the Company's officers and significant stockholders.
NOTE 12. SIGNIFICANT REVENUES
For the year ended November 30, 2004, 14 customers accounted for
approximately 73% of net sales revenue. For the year ended November 30,
2003, six customers accounted for approximately 44% of net sales
revenue. A significant portion of trade accounts receivable was
attributable to such customers.
NOTE 13. SEGMENT AND GEOGRAPHIC INFORMATION
The Company's business is confined to one industry segment as described
in Note 1 and two geographical reporting segments. Sales for the years
ended November 30, 2004 and 2003 and identifiable assets classified by
the major geographic areas in which the Company operated are as
follows:
Year Ended November 30,
-----------------------
2004 2003
---- ----
Sales to unaffiliated customers:
United States
Domestic $1,684,190 $2,536,904
Export sales 2,163,038 895,649
---------- ----------
Net sales $3,847,228 $3,432,553
========== ==========
Identifiable assets:
United States $ 251,660 $ 657,397
========== ==========
The Company does not track, or report, operating income by geographical
location due to the bulk acquisition and nature of its inventory (see
Notes 1 and 2.C.).
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SENTEX SENSING TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. LEGAL CONTINGENCIES
During October 2004, the Company was dismissed without prejudice from
the matter, State of Ohio, Department of Administrative Services v. IQ
Solutions, et al.; Case No. 03-CVH05-6054: Franklin County Common Pleas
Court, Ohio which was previously disclosed.
F-15