**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

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**FORM 10-KSB**

 

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**(Mark One)**

**ý****                                ****ANNUAL REPORT UNDER SECTION 13OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.**

 

# **For thefiscal year ended September 30, 2005**

# ** **

**o****                                ****TRANSITION REPORT UNDER SECTION 13OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from                to                .**

 

# **CommissionFile Number 0-18785**

 

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# **STENCORPORATION**

(Exact name of small businessissuer as specified in its charter)

 
| **Minnesota**                                                   | ** ** | **41-1391803**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State or  other jurisdiction of incorporation                  |       | (IRS  Employer Identification No.) |
| or  organization)                                               |       |                               |
|                                                            |       |                               |
| **10275  Wayzata Blvd S, Suite 310, Minnetonka, MN 55305** |
| (Address of  principal executive offices)                       |
|                                                            |       |                               |
| **(952) 545-2776**                                              |
| (Issuer’s  telephone number)                               |

 

Securitiesregistered under Section 12(b) of the Exchange Act:   **None**

 

Securitiesregistered under Section 12(g) of the Exchange Act:

 

**Commonstock, Par Value $.01 Per Share**

(Titleof Class)

 

# **Three-YearCommon Stock Purchase Warrant**

# **(Title of Class)**

# ** **

Checkwhether the issuer: (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  ý   Yes      o   No

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B contained in this form, and no disclosure will be contained, tothe best of registrant’s knowledge, in definitive proxy of informationstatements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. ý

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act):

o   Yes      ý   No

 

Stateissuer’s revenues for its most recent fiscal year:   $8,358,447

 

Basedupon the closing price of the issuer’s common stock as reported by The NasdaqSmallCap Market, the aggregate market value of such common stock held bynon-affiliates of the issuer as of December 22, 2005 was approximately$5,895,597.

 

Asof December 22, 2005, the issuer had outstanding 2,128,727 shares ofcommon stock, $.01 par value.

 

**Documents Incorporated by Reference:   **The information called for by Part III of this Form 10-KSBwill be filed as an amendment to this Form 10-KSB not later than the endof the 120 day period following the end of the fiscal year covered bythis report.

 

 

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TABLECONTENTS

 
| **PART I**   |   |                                                                                                                        |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                        |   |   |
| ITEM 1.           |   | DESCRIPTION OF BUSINESS                                                                                                     |   |   |
| ITEM 2.           |   | DESCRIPTION OF PROPERTY                                                                                                     |   |   |
| ITEM 3.           |   | LEGAL PROCEEDINGS                                                                                                           |   |   |
| ITEM 4.           |   | SUBMISSION OF MATTERS TO A  VOTE OF SECURITY HOLDERS                                                                        |   |   |
|              |   |                                                                                                                        |   |   |
| **PART II**  |   |                                                                                                                        |
|              |   |                                                                                                                        |   |   |
| ITEM 5.           |   | MARKET FOR COMMON EQUITY AND  RELATED STOCKHOLDER MATTERS                                                                   |   |   |
| ITEM 6.           |   | MANAGEMENT’S DISCUSSION AND  ANALYSIS OR PLAN OF OPERATION                                                             |   |   |
| ITEM 7.           |   | CONSOLIDATED FINANCIAL  STATEMENTS                                                                                          |   |   |
| ITEM 8.           |   | CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                       |   |   |
| ITEM 8A.          |   | CONTROLS AND PROCEDURES                                                                                                     |   |   |
| ITEM 8B.          |   | OTHER INFORMATION                                                                                                           |   |   |
|              |   |                                                                                                                        |   |   |
| **PART III** |   |                                                                                                                        |
|              |   |                                                                                                                        |   |   |
| ITEM 9.           |   | DIRECTORS,  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF  THE EXCHANGE ACT |   |   |
| ITEM 10.          |   | EXECUTIVE  COMPENSATION                                                                                                     |   |   |
| ITEM 11.          |   | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                            |   |   |
| ITEM 12           |   | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                                             |   |   |
| ITEM 13.          |   | EXHIBITS                                                                                                                    |   |   |
| ITEM 14.          |   | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                                     |   |   |
|              |   |                                                                                                                        |   |   |
| **SIGNATURES**    |   |                                                                                                                        |

 

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**PART I**

 

## **ITEM 1. DESCRIPTION OF BUSINESS**

## ** **

## **Forward Looking Statements**

## ** **

Statements included in this Annual Report on Form 10-KSB,in our quarterly reports, in future filings by us with the Securities andExchange Commission, in the Company’s press releases, and oral statements madewith the approval of an authorized executive officer that are not historical,or current facts are “forward-looking statements” made pursuant to the safeharbor provisions of the Private Securities Litigation Reform Act of 1995. Whenused in this report, the words “believe,” “expect,” “will,” “can,” “estimate,”  “anticipate” and similar expressions areintended to identify such forward-looking statements. Certain important factorscould cause results to differ materially from those anticipated by somestatements made herein and these statements are not predictions of actual futureresults.  Investors are cautioned thatall forward-looking statements involve risks and uncertainties. A number offactors that could cause results to differ materially are those discussed inthis Annual Report on Form 10-KSB, including those discussed under “RisksRelated to Our Business,” as well as others not now anticipated. All suchforward-looking statements, whether written or oral, and whether made by or onour behalf are expressly qualified by these cautionary statements. In addition,we disclaim any obligation to update forward-looking statements to reflectevents or circumstances after the date hereof.

 

## **Introduction**

## ** **

Effective February 2, 2005, we changedour name to STEN Corporation (“STEN”) from Sterion Incorporated (“Sterion”).  We were incorporated in Minnesota in 1978under the name Oxboro Medical International, Inc.  STEN is a diversified business.

 

Historically, our principal business wasmanufacturing and marketing medical products in a business we refer to as the “MedicalProducts Group.” We expanded the Medical Products Group with an acquisition in April 2001of a line of surgical instrument sterilization containers and relateddisposable medical supplies, and we further expanded this business with anacquisition in January 2002 of a surgical wound drainage product line andwith the acquisition in February 2002 of a wound closure product line. In May 2003,we sold the assets relating to our surgical instrument sterilization containerbusiness to STERIS Corporation (“STERIS”). We manufacture these products for STERIS under a manufacturing agreementand this comprises our “Contract Manufacturing Business”. On November 8,2004, we sold the remaining assets and certain liabilities of the MedicalProducts Business to Grand Rapids, Michigan-based Aspen Surgical Products, Inc.(“Aspen”) for $6 million in cash and a $500,000 note receivable. The assetssold in this transaction related to our disposable operating room supportproducts, surgical wound drainage products, and our wound closure product line.Aspen also acquired the Sterion, Oxboro and Surgidyne brand names.

 

In November 2003, through our LifeSafeServices, Inc. (“LifeSafe”) subsidiary, we purchased certain assets andliabilities of SOS International, Inc. (“SOS”) relating to the business ofleasing and servicing oxygen systems for emergency purposes.  In June 2004, we also purchased certainassets relating to a line of first aid kits for hurricane, emergency anddisaster preparedness marketed under the LifeKit brand name.  The businesses comprised our Emergency OxygenBusiness.  On June 30, 2005, wecompleted the sale to Life Safe Services, LLC of assets related to ourEmergency Oxygen Business including the LifeSafe and LifeKit product lines for$2,450,000 in cash, a $700,000 note receivable plus the assumption by the Buyerof certain liabilities.

 

On July 1, 2004, through our Burger TimeAcquisition Corporation (“BTAC”) subsidiary, we purchased the assets andbusiness operations of a chain of restaurants operated under the Burger Time name.BTAC operates our thirteen-unit chain of drive-through quick-servicerestaurants focusing on high-quality hamburgers offered at competitive prices.In May of 2005, we completed a mortgage financing relating to eightparcels of real estate used by BTAC in its operation of the Burger Timerestaurants.

 

The sale to of our Medical Products Group toAspen and the sale of our Emergency Oxygen Business to Life Safe Services, LLCreflects our strategic decision to focus our management attention and resourceson businesses we believe will provide better opportunities to grow value forour shareholders, including, but not limited to, our Contract ManufacturingBusiness and our Burger Time businesses.

 

In our fiscal year 2005 financial statements,we have accounted for the Medical Products Group and Emergency Oxygen Businesssegments as “Discontinued Operations.”

 

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**Principal Products and Distribution**

 

In 2005, our business was divided into twoareas: the business operations of STEN Corporation, which includes ourcorporate and Contract Manufacturing Business, and the business operations ofBTAC, which includes our Burger Time restaurants. Our corporate offices arelocated in approximately 1,142 square feet of leased office space inMinnetonka, Minnesota. The Contract Manufacturing Business products aremanufactured and distributed from a leased facility located in Jacksonville,Texas. The Texas facility is ISO 9002 certified.  Of the properties relating to our thirteenBurger Time restaurants, eleven are owned and two are leased.  The Burger Time properties are located inMinnesota, North Dakota, South Dakota and Iowa.

 

### **Purchasing**

### ** **

The rawmaterials used in our Contract Manufacturing Business are readily available frommultiple sources. Burger Time purchases food, beverages and supplies fromCompany-approved suppliers. All products must meet our standards andspecifications, and management monitors the quality of the food, beverages andsupplies. All essential food and beverage products are available, or upon shortnotice and could be available from alternate qualified suppliers. Among otherfactors, profitability for our Burger Time business is dependent upon ourability to anticipate and react to changes in food costs. Various factorsbeyond our control, such as climate changes and adverse weather conditions, mayalso affect food costs.

 

**Patents,Trademarks, and Licenses**

 

Currently,we have no patents or registered trademarks relating to our STEN Corporationbusiness or our Burger Time business.

 

Historically, we have not relied upon patentsfor protection of the intellectual property relating to our products orprocesses.  We had no patents relating tothe products in our Medical Products Group or the Emergency Oxygen Business.  Further, we pursued only limitedregistrations for trademarks and license agreements in connection with themarketing of our Medical Products Group and Emergency Oxygen Business productsand the intellectual property associated with these businesses was transferredto the respective buyers.

 

### **Competition**

### ** **

Each of ourbusinesses is extremely competitive. In our Burger Time business we face directcompetitors with substantially greater assets, marketing capability, andexperience. Our Contract Manufacturing Business relies on the ability of oursole customer to market, sell and service to the end user.  We believe that in each of our businesses wemust offer a competitive price, superior quality, reliability, and speed oforder fulfillment to be competitive.

 

Our BurgerTime restaurants compete in the quick-service restaurant industry, which ishighly competitive with respect to price, concept, quality and speed ofservice, location, attractiveness of facilities, customer recognition,convenience and food quality and variety. The industry includes manyquick-service chains, including national chains which have significantlygreater resources to devote to advertising, product development and newrestaurants, and which makes them less vulnerable to fluctuations in food,paper, labor and other costs. The quick-service industry is often significantlyaffected by many factors, including changes in local, regional or nationaleconomic conditions affecting consumer spending habits, demographic trends andtraffic patterns, changes in consumer taste, consumer concerns about thenutritional quality of quick-service food and increases in the number, type andlocation of competing quick-service restaurants. We compete primarily on thebasis of speed of service, price, value, food quality and taste. All of themajor chains have increasingly offered selected food items and combinationmeals, including hamburgers, at temporarily or permanently discounted prices.Increased competition, additional discounting and changes in marketingstrategies by one or more of these competitors could have an adverse effect onour sales and earnings.

 

### **Research and Development Expenditures**

### ** **

In thefiscal years ended September 30, 2005 and 2004, the Company spent $0 and$1,407, respectively, for research and development of medical products.

 

### **Government Regulation**

### ** **

The medical products included in our MedicalProducts Group and our manufacturing of those products was subject toregulations by the Food and Drug Administration (FDA) and the U.S. Departmentof Health and

 

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Human Services and similar state agencies.  In addition, our sales and marketingpractices relating to the Medical Products Group were subject to regulation bythe U.S. Department of Health and Human Services, pursuant to federalanti-kickback laws, and was also subject to similar state laws. While we soldthe Medical Products Group business in November 2004, we continue to be subjectto regulation by the FDA, the U.S. Department of Health and Human Services andsimilar state agencies because we are a contract manufacturer of sterilizationcontainers and associated materials. Medical devices intended for human use are classified into three categories(Classes I, II and III). The amount of regulation varies dependant upon theclassification.  Most of the MedicalProducts Group products, and the sterilization container products, were Class Iproducts.  However, our QualityManagement System was compliant with the requirements for Class I and Class IImedical products.

 

Thesterilization container products are also subject to regulation in foreigncountries, including ISO 9000 certification, which is required to conductbusiness in the European Community and Canada. The sterilization containerproducts have received ISO 9002 and ISO 13488 Certification and are alsocovered under a CE Certificate.  For ourContract Manufacturing Business we have continued to devote, significantfinancial and human resources to comply with the extensive regulations by theFDA and other government agencies.

 

Therestaurant industry is subject to numerous federal, state and local governmentregulations, including those relating to the preparation and sale of food andbuilding and zoning requirements. In addition, we are subject to laws governingour relationship with employees, including minimum wage requirements, overtime,working and safety conditions and citizenship requirements. Many of ouremployees are paid hourly rates based upon the federal and state minimum wagelaws. Legislation increasing the minimum wage would result in increased laborcosts. An increase in the minimum wage rate, employee benefit costs or othercosts associated with employees could have a material adverse effect on ourbusiness, financial condition and results of operation.

 

If we failto comply with the regulations applicable to our lines of business, we would besubject to administrative and criminal actions, which could have a materialadverse effect on our business. Our operations may be affected with the passageof new legislation or court rulings with respect to existing legislation. Ourcontinued compliance with all regulatory requirements may be costly.

 

**EnvironmentalMatters**

 

We are subject to various federal, state andlocal environmental laws. These laws govern discharges to air and water fromour restaurants, as well as handling and disposal practices for solid andhazardous waste. These laws may impose liability for damages for the costs ofcleaning up sites of spills, disposals or other releases of hazardousmaterials. We may be responsible for environmental conditions relating to ourrestaurants and the land on which the restaurants are located or were located,regardless of whether the restaurants or land in question are leased or ownedand regardless of whether such environmental conditions were created by us orby a prior owner, tenant, or other third party.

 

We cannot be certain that environmentalconditions relating to prior, existing or future restaurants will not have amaterial adverse effect on us. Moreover, there is no assurance that: (1) futurelaws, ordinances or regulations will not impose any material environmentalliability; or (2) the current environmental condition of the propertieswill not be adversely affected by tenants or other third parties or by thecondition of land or operations in the vicinity of the properties.

 

**Employees**

 

As of September 30, 2005, we employed 3full-time employees in the Minnetonka, Minnesota facility, 15 full-timeemployees in our Jacksonville, Texas facility and through our Burger Timerestaurants we employed ****26**** full-time and ****150****part-time employees. We have never had a work stoppage and none of ouremployees are currently represented under collective bargaining agreements. Weconsider relations with our employees to be good.

 

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**RISKS RELATED TO OURBUSINESS**

** **

The following are important factors that could cause actual results,performance, or achievements to materially different from any future results,performance, or achievements expressed or implied by any forward-lookingstatement made by or on behalf of us.

 

**Our arrangement withSite Equities and Paycenters presents significant risks to our business.**  On November 22, 2005, we entered into anagreement with Las Vegas-based Site Equities International, Inc. (“SiteEquities”) and its wholly-owned subsidiary, Paycenters, LLC (“Paycenters”)pursuant to which we agreed to loan Site Equities up to $2,000,000 to supportPaycenters’ deployment of self-service financial services kiosks.  Pursuant to this agreement, we have the rightto effect a merger with Site Equities at our option.  Paycenters is engaged in placing self-servicekiosks in retail locations that are used to facilitate bill payments and otherfinancial transactions for a fee.  Thekiosk units are also expected to yield fee income from the sale ofadvertising.  Paycenters is adevelopment-stage business and its business is subject to all of thesignificant risks associated with the development of a new business.

 

Risks to us associated with this transactioninclude the possibility that Site Equities may fail to repay the loan amountswhen due; the collateral securing the debt to Site Equities may be insufficientfor us to recoup amounts lent in the event of default; Site Equities’ use ofthe loan proceeds may not improve its operations, making it more difficult forSite Equities to repay the loan to us and making our merger option lessattractive; the expenses associated with the transaction may exceed thebenefits received by us; management’s time and attention may be diverted inevaluating Paycenters’ business to determine whether to proceed with the mergerwill occur on the terms negotiated or on any terms; and the anticipatedbenefits of any transaction with Site Equities and Paycenters may notmaterialize as expected, if at all.

 

**Our evolving businessplan has significant risks.**The risks inherent in eachof our businesses may affect us more acutely because our businesses arediverse.****Over the past five yearswe have purchased and sold several business units. We may, in the future, alsoconsider additional business opportunities, which may not necessarily be inindustries in which we have prior experience or in any industry in particularand which may or may not have synergies with our existing businesses. As aresult of the sale of our Medical Products Group in November 2004 and ourLifeSafe business in June 2005, we are focusing our limited resources onour Burger Time and Contract Manufacturing Businesses, and have invested someof our resources in exploring other business ventures, such as the Paycenter’sbusiness. While our Burger Time and Contract Manufacturing businesses sharecertain risks related to their small size in relation to industriescharacterized by numerous well established competitors who have substantiallygreater financial resources and longer operating histories, each of thesebusinesses has many unique risks associated with it. To be successful with eachof the Burger Time and Contract Manufacturing Business, we must successfullyexecute two distinct business plans at the same time. Given our limitedmanagement and lack of experience in each of these businesses, we believe itmay be more difficult for us to succeed with such diverse businesses. A lack offocus on a single business activity together with the significant risk offailure that may occur in pursuing possible growth opportunities in these andnew businesses, where we have limited executive management experience, maycontribute to poor financial performance and significant losses for ourshareholders.

 

**We have limitedexperience in operating quick service restaurants, and if Burger Time is unableto deliver its products successfully in terms of quality, service and cost, ourability to generate revenues will be impaired.**   We have very limited experience in operatingquick service restaurants. We must operate the Burger Time restaurants to meetour customers’ expectations as to quality, consistency, service and cost in atimely and cost-effective manner.  Wecannot assure you that we will operate the Burger Time restaurants in the mostprofitable manner.  If the Burger Timeconcept or products are not acceptable to customers, we could experience substantiallydecreased revenues.

 

**We are dependent onmanagement and key personnel to succeed.** We depend onthe experience of our principal executive officers and key personnel. Ourcontinued success also depends on the ability of our management to effectivelymanage and grow our business. The loss of the services of any of our executiveofficers or other key personnel, or our failure to attract and retain otherskilled and experienced personnel on acceptable terms, could impede theachievement of our business objectives and have a material adverse effect onour business. In addition, as we seek to develop our Burger Time business, themarket for attracting experienced quick-service restaurant management isparticularly competitive.

 

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**Future growth in ourBurger Time business will depend upon our ability to successfully open newrestaurant locations.** We presently plan to open onenew Burger Time restaurants in fiscal 2006. Our success in opening any newunits depends on numerous factors, many of which are beyond our controlincluding: the hiring, training and retention of qualified management and otherrestaurant personnel; the ability to obtain necessary governmental permits andapprovals; competition for desirable site locations; the availability ofappropriate financing; and general economic conditions. Additionally, ourability to successfully open additional restaurants will depend upon a numberof other factors, particularly the acceptance of the Burger Time concept in newmarkets, competition and market saturation. To manage our planned expansion, wemust ensure the continuing adequacy of our existing systems and procedures,including our supply and distribution arrangements, restaurant management,financial controls and information systems. While we expect to modestly expandour Burger Time business, we cannot assure you that we will be able to identifyfavorable expansion opportunities, moreover, there is no assurance that we willbe able to maintain the same-store sales growth in our existing units.

 

**The capital resourcesrequired to develop our Burger Time business is significant.**We estimate that the costs of developing and opening most of our futurerestaurants will range from $200,000 to $1,000,000 per restaurant. We mayrequire additional equity or debt financing to open additional units beyond theplanned restaurants. Our ability to open and successfully operate additionalBurger Time restaurants will also depend upon the hiring and training of skilledrestaurant management personnel and the general ability to successfully managegrowth, including monitoring restaurants and controlling costs, food qualityand customer service. Accordingly, there can be no assurance that we will beable to open new restaurants or that, if opened; those restaurants can beoperated profitably.

 

**Our success dependson our ability to compete with our major competitors.**Thefoodservice industry is intensely competitive with respect to the quality andvalue of food products offered, concept, service, price, dining experience andlocation. In our Burger Time business, we compete with major restaurant chains,some of which dominate the quick-service restaurant industry. Our competitorsalso include a variety of mid-price, full-service casual-dining restaurants,health and nutrition-oriented restaurants, delicatessens and prepared foodstores, as well as supermarkets and convenience stores. In our ContractManufacturing Business, we face competition from a variety of firms both largeand small who offer similar contract manufacturing services.

 

In both our Burger Time and ContractManufacturing Business, many of our competitors have substantially greaterfinancial, marketing and other resources than we have, which may give them competitiveadvantages. Our competitors could also make changes to pricing or othermarketing strategies. As our competitors expand operations or productofferings, we expect competition to intensify. Such increased competition couldhave a material adverse effect on our financial condition and results ofoperations.

 

**Consumer preferencesand perceptions, seasonality and general economic conditions may havesignificant effects on our Burger Time business.**Foodservice businesses are often affected by changes in consumer tastes,national, regional and local economic conditions and demographic trends. Theperformance of individual restaurants may be adversely affected by trafficpatterns, demographics and the type, number and locations of competingrestaurants. Restaurant performance may also be affected by adverse weatherconditions, because a significant number of them are located in areas whichexperience severe winter conditions. Multi-unit foodservice businesses such asours can also be materially and adversely affected by publicity resulting frompoor food quality, illness, injury or other health concerns or operating issuesstemming from one or a limited number of restaurants. We can be similarlyaffected by consumer concerns with respect to the nutritional value ofquick-service food. In addition, our dependence on frequent deliveries of foodand paper products subjects our restaurants to the risk that shortages orinterruptions in supply, caused by adverse weather or other conditions, couldadversely affect the availability, quality and cost of ingredients. Unfavorabletrends or developments concerning factors such as inflation, increased food,labor and employee benefit costs (including increases in hourly wage andunemployment tax rates), increases in the number and locations of competingquick-service restaurants, regional weather conditions and the availability ofexperienced management and hourly employees may also adversely affect ourfinancial condition and results of operations. Changes in economic conditionsaffecting our customers could reduce traffic in some or all of our restaurantsor impose practical limits on pricing, either of which could have a materialadverse effect on our financial condition and results of operations. Ourcontinued success will depend in part on our management’s ability toanticipate, identify and respond to changing conditions.

 

**Our ContractManufacturing Business is dependent on a single customer.**In fiscal year 2005, we realized sales of approximately $2,146,000 and $315,600in gross profit from our Contract Manufacturing Business, all of which werederived from sales to STERIS Corporation. Our manufacturing agreement withSTERIS continues

 

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through December 31, 2006, with extensions subject to agreementbetween the parties and STERIS may terminate the agreement at any time upon 90days notice. While we are obligated to manufacture the products exclusively forSTERIS, STERIS has the right to manufacture the products itself or arrange foranother party to manufacture the products. Any action by STERIS to obtainalternative manufacturing would adversely affect our revenue from thisbusiness. Further, there are no minimum purchase obligations under themanufacturing agreement. Any action by STERIS to otherwise limit or discontinueits purchases from us would have a material adverse impact on sales of ourproducts and, consequently, our financial results. Our Contract ManufacturingBusiness is dependent upon our on-going relationship with STERIS and theability and desire of STERIS to continue marketing the products to itscustomers. While we believe our relationship with STERIS is good, there can beno assurance this business will continue.

 

**Controlby existing management.** Our officers and directors,together with family and related entities own approximately 44.7% of the issuedand outstanding shares of the common stock of the Company. As a result, suchshareholders acting as a group will have the ability to influence or control transactionsrequiring shareholder approval, including the election or removal of members ofthe board of directors, mergers and other business combinations, and changes incontrol of our company.

 

In addition, conflicts of interest mayarise between those significant shareholders that are members of management andnon-management minority shareholders.  Wemay not be able to resolve conflicts of interests, or if resolved, theresolution may be less favorable than if it involved unaffiliated parties.  There can be no assurance that conflicts ofinterest will not adversely affect our business and the value of shares of ourcommon stock.

 

**Fluctuations inquarterly operating results may negatively affect stock price.**Wemay experience variability in our net sales and operating profit on a quarterlybasis as a result of many factors, including, among other things, the buyinghabits of our customers, seasonality in our Burger Time business, size andtiming of orders by certain customers, shifts in demand for types of products,technological changes and industry announcements of new products. If revenuesdo not meet expectations in any given quarter, our stock price may bematerially adversely affected.

 

**We have a limitedpublic market for our common stock.**  As of December 22, 2005, we had2,128,727 shares of common stock outstanding, of which 1,176,766 shares areheld by persons other than members of our management.  The concentration of shares of our commonstock in the hands of our management may limit the availability of shares forsale.  Further, the average daily tradingvolume of our common stock on The Nasdaq SmallCap Market has historically beenlow.  For example, the average daily tradingvolume in calendar year 2005 was approximately 7,000 shares. There can be noassurance that an active market will exist for our common stock, or that ourcommon stock could be sold without a significant negative impact on thepublicly quoted price per share.

 

**There is no assurancethat future capital will be available to us, and additional capital will dilutethe holdings of our stockholders.** Our shareholdershave no preemptive rights. Our shareholders, who are not entitled toparticipate in any future stock issuance, will experience dilution of theirequity investment if we commence a subsequent public or private offering ofcommon stock, convertible debt, or preferred stock; or issue preferred stock orshares of common stock upon exercise of warrants to consultants or otherparties providing goods or services to us in lieu of or in addition to cashconsideration.

 

We cannot assure that additional financingwill be available or if available, that it will be available on terms favorableto our shareholders. If funds are not available to satisfy our short-term andlong-term operating requirements, we may limit or suspend our operations in theentirety or, under certain circumstances, seek protection from our creditors.We believe that future financing undertaken may contain terms that could resultin more substantial dilution that we now have, which would adversely affect ourbusiness.

 

**ITEM 2. DESCRIPTION OF PROPERTY**

 

In November 2005,we moved our headquarters to Minnetonka, Minnesota, a suburb of Minneapolis,from our facilities in Ham Lake, Minnesota. Our headquarters in Minnetonka isleased office space of approximately 1,142 square feet located in an officebuilding. The lease requires monthly payments of $2,460 per month and expireson December 31, 2008 with our option to extend the lease for an additional36 months.

 

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Our formerheadquarters, manufacturing, and warehouse facilities were located in a 30,000square foot building on 2.41 acres in Ham Lake, Minnesota. The building isapproximately 10 years old. This Ham Lake facility is subject to a mortgage dueFebruary 2011, secured by a mortgage on the land and building.  At September 30, 2005, there was$766,631 in principal outstanding on the mortgage of the Ham Lake facility andthe interest rate on this debt was 8.5% at September 30, 2005.  Monthly payments, including interest are$8,175. We are currently renting the Ham Lake facility to North Anoka ControlsSystems Inc. pursuant to a lease dated October 15, 2005  We have an agreement to sell the property toan affiliate of North Anoka Control Systems, Inc. for $1,600,000, and weexpect to close on the sale of the property in January 2006.

 

We alsolease 30,000 square feet of space in Jacksonville, Texas for our ContractManufacturing Business. The lease is month-to-month at a rental rate of $9,000per month.  We have entered into anagreement to purchase this property for $675,000 and we expect this transactionto close in January, 2006.

 

Inconnection with our Burger Time restaurant business, we own eleven properties,eight of which are subject to mortgage, and we lease two additional restaurantlocations.  The following table describesour Burger Time locations:

 

**Burger Time Locations**

 
| ** **                 | ** ** | ** **          | ** ** | **Building**       | ** ** | **Land**          | ** ** |
|----------------------------|------------|---------------------|------------|--------------------|------------|-------------------|------------|
| **Location**               | ** ** | **Open Since**      | ** ** | **(Approx Sq Ft)** | ** ** | **(Square Feet)** | ** ** |
| Fargo, North Dakota +      |       | August 1987    |       | 600                |       | 35,000            |       |
| Moorhead, Minnesota +      |       | August 1988    |       | 600                |       | 22,680            |       |
| Waite Park, Minnesota +    |       | February 1989  |       | 600                |       | 17,575            |       |
| Detroit Lakes, Minnesota + |       | June 1989      |       | 600                |       | 18,000            |       |
| Bismarck, North Dakota +   |       | July 1989      |       | 600                |       | 30,750            |       |
| Grand Forks, Minnesota +   |       | October 1989   |       | 650                |       | 29,580            |       |
| Sioux Falls, South Dakota  |       | August 1991    |       | 650                |       | 17,688            |       |
| Sioux Falls, South Dakota* |       | August 1991    |       | 650                |       | 15,000            |       |
| Minot, North Dakota +      |       | September 1992 |       | 800                |       | 33,600            |       |
| Elk River, Minnesota +     |       | May 1996       |       | 650                |       | 37,500            |       |
| Sioux City, Iowa           |       | April 1997     |       | 616                |       | 15,000            |       |
| Watertown, South Dakota*   |       | January 2005   |       | 650                |       | 15,000            |       |
| Fergus Falls, Minnesota    |       | July 2005      |       | 2,743              |       | 22,880            |       |

 

----

*                 Leased

+                 Subjectto mortgage described below

 

We lease theSioux Falls, South Dakota property for $1,000 per month and the lease expires December 31,2010. We entered into a lease dated January 1, 2005 with respect to theWatertown, South Dakota property which requires base rent payments of $2,000per month.  This lease expires December 31,2006 and includes an option to purchase the property for $250,000.

 

On May 9, 2005 and May 10, 2005, wecompleted a mortgage financing relating to eight parcels of real estate used inthe operation of the Burger Time restaurants. To facilitate the mortgage financing, BTAC created a wholly-ownedsubsidiary, BTAC Properties, Inc., a Minnesota corporation (“BTACProperties”) and then transferred to BTAC Properties eight parcels of realestate.

 

BTAC Properties received a total of$2,055,000 in the mortgage financing from its lender, Standard InsuranceCompany.  In consideration of theseloans, BTAC Properties issued two promissory notes (each, a “Note”) to thelender, one in the amount of $995,000 and one in the amount of $1,060,000.  Kenneth W. Brimmer, our Chief ExecutiveOfficer and a director and Gary Copperud, a director of STEN, are also jointand several borrowers with BTAC Properties on the Notes.  To facilitate the payment by BTAC Propertiesof the obligations under the Notes, BTAC and BTAC Properties have entered intolease for each of the eight properties. The rent amounts to be paid by BTAC to BTAC Properties under the leaseshave been assigned to the Lender for repayment of amounts owed under theNotes.  Amounts under the Notes accrueinterest at a rate of 6.25% per annum and are payable in 180 equal monthlyinstallments of an aggregate of $17,621 with the entire indebtedness evidencedby the Notes due June 1, 2020. Monthly payments on the Notes began on July 1, 2005.  The obligations of the Notes are secured by amortgage, assignment of rents, security agreement and fixture filing in favorof the lender on each of the eight properties.

 

7

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**ITEM 3. LEGAL PROCEEDINGS**

 

On May 9, 2005, the former Chairman andCEO of the Company, Larry Rasmusson, filed suit against the Company and AspenSurgical Products, Inc. in the Hennepin County District Court ofMinnesota.  In his complaint, Mr. Rasmusson seeks damagesin excess of $600,000 relating to claims that the Company hasbreached a License Agreement dated April 1, 1990 between theCompany and Mr. Rasmusson in connection with the sale bythe Company on November 8, 2004 of itsMedical Products Group to Aspen Surgical Products, Inc. The Company does not believe that Mr. Rasmusson’s claims havemerit and intends to vigorously defend against them.  However, theCompany cannot be sure that it will prevail in this action and any adverseoutcome could require the Company, among other things, to pay damagesto Mr. Rasmusson.  The Company does not believe it is currentlypossible to calculate the potential for, or the extent of, any liabilitiesresulting from this claim, if any.

 

##### **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

##### ** **

None.

 

8

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**PART II**

 

**ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERMATTERS**

** **

Our commonstock is traded on The Nasdaq SmallCap Market under the symbol “STEN”. Thefollowing table sets forth the quarterly high and low closing bid prices forour common stock for each quarter of the past two fiscal years as reported byThe Nasdaq SmallCap Market. The prices may not reflect actual transactions.

 
| ** **      | ** ** | **Closing Bid Price** | ** ** |
|-----------------|------------|-----------------------|------------|
| **Period**      | ** ** | **High**              | ** ** | **Low** | ** ** |
| Fiscal 2004     |       |                  |       |   |   |
| First  Quarter  |       | $                     | 6.50       |   | $ | 4.80 |   |
| Second  Quarter |       | 9.00                  |       | 5.25 |   |
| Third  Quarter  |       | 6.20                  |       | 4.41 |   |
| Fourth  Quarter |       | 6.40                  |       | 4.50 |   |
|            |       |                  |       |   |   |
| Fiscal 2005     |       |                  |       |   |   |
| First  Quarter  |       | $                     | 6.62       |   | $ | 5.43 |   |
| Second  Quarter |       | 6.25                  |       | 4.87 |   |
| Third  Quarter  |       | 5.55                  |       | 4.46 |   |
| Fourth  Quarter |       | 4.98                  |       | 3.96 |   |

 

As of December 21, 2005, there wereapproximately 400 holders of record of our common stock.

 

**Common Stock Purchase Warrants**

 

In connection with a registered offering thatwas completed in October 2000, we issued warrants to purchase commonstock.  At September 30, 2005, therewere outstanding common stock purchase warrants to purchase 369,973 shares at$4.00 per share.  On May 11, 2005,our Board of Directors extended the expiration date of the outstanding commonstock purchase warrants to September 30, 2008 at 5:00 p.m.Minneapolis time.

 

**DividendPolicy**

 

We have paid no cash dividends on our commonstock and do not intend to pay any dividends in the future.

 

**InformationRegarding Equity Compensation Plans**

 

The following table sets forth informationregarding our equity compensation plans in effect as of September 30,2005. Each of our equity compensation plans is an “employee benefit plan” asdefined by Rule 405 of Regulation C of the Securities Act of 1933.

 

**Securities Authorized for Issuance UnderEquity Compensation Plans**

 
| **Plan category**                                       | ** ** | **Number  of shares of  common stock to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants********and rights** | ** ** | **Number  of shares of  common stock remaining  available for future  issuance under equity  compensation plans** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | ** **                                                                                                       | ** ** | ** **                                                                                | ** ** | ** **                                                                                                        | ** ** |
| Equity compensation plans approved by  stockholders:    |       | 345,500                                                                                                          |       | $                                                                                         | 5.960      |                                                                                                              | 254,500    |   |
|                                                    |       |                                                                                                             |       |                                                                                      |       |                                                                                                              |       |
| Equity compensation plans not approved by stockholders: |       | 369,973                                                                                                          |       | $                                                                                         | 3.960      |                                                                                                              | —     |   |
|                                                    |       |                                                                                                             |       |                                                                                      |       |                                                                                                              |       |
| Total                                                   |       | 715,473                                                                                                          |       | $                                                                                         | 4.930      |                                                                                                              | 254,500    |   |

 

9

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**Repurchases of Common Stock**

 

**The following table provides certaininformation regarding purchases made by us of our equity securities in the fourthquarter of fiscal year 2005:**

 

**Issuer Purchases ofEquity Securities**

 
| **Period**                                      | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares  Purchased as  Part of Publicly  Announced Plan  or Program** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs (1)** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| July 1 – July 30, 2005           |       | 3,400                                  |       | $                                 | 4.34       |                                                                                         | 3,400      |                                                                                       | 143,065    |   |
| August 1 – August 30, 2005       |       | 7,400                                  |       | 4.43                              |       | 7,400                                                                                        |       | 135,665                                                                                    |       |
| September 1 – September 30, 2005 |       | 8,200                                  |       | 4.16                              |       | 8,200                                                                                        |       | 127,465                                                                                    |       |
| Total                                           |       | 19,000                                 |       | $                                 | 4.29       |                                                                                         | 19,000     |                                                                                       | 127,465    |   |

 

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**(1)**   On September 17, 2001, we announced that our board ofdirectors had approved a stock repurchase program authorizing us to repurchaseup to 175,000 shares of our common stock from time to time in open markettransactions or in privately negotiated transactions and on November 8,2004, our Board of Directors authorized a repurchase program covering a totalof 175,000 shares, replacing our earlier repurchase plan.

** **

**ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

** **

Management’s Discussion and Analysis or Planof Operation discusses our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of these consolidated financialstatements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses and relateddisclosure of contingent assets and liabilities.

 

We believe that the estimates, assumptionsand judgments involved in the accounting policies described below have thegreatest potential impact on our consolidated financial statements, so weconsider these to be our critical accounting policies. Because of theuncertainty inherent in these matters, actual results could differ from theestimates we used in applying the critical accounting policies. Within thecontext of these critical accounting policies, we are not currently aware ofany reasonably likely event that would result in materially different amountsbeing reported.

 

Our significant accounting policies aredescribed in Note 1 to the consolidated financial statements. Our criticalaccounting policies and estimates are those both having the most impact to thereporting of our financial condition and results, and requiring significantjudgments and estimates. Our critical accounting policies include those relatedto (a) revenue recognition, (b) allowance for uncollectible accountsreceivable, (c) inventories, (d) goodwill, intangible and otherlong-lived assets and (e) accounting for business combinations.

 

**(a) Revenue Recognition and Shipping and Handling Costs –**We recognize revenue in accordance with Staff Accounting Bulletin No. 104(SAB 104), “Revenue Recognition”.  SAB 104required revenue to be recognized when all of the following are met: a)persuasive evidence of an arrangement exists; b) delivery has occurred orservices have been rendered; c) the seller’s price to the buyer is fixed ordeterminable; and d) collectibility is reasonable assured.

 

We recordsales revenue for the Contract Manufacturing Business segment at the time allmerchandise is shipped, contractual obligations have been substantially met andtitle and risk of loss have passed to the customer.  Revenues from the Burger Time businesssegment is recognized at the time the food is served.

 

We recordamounts being charged to customers for shipping and handling as sales inaccordance with Emerging Issues Task Force (EITF) Issue 00-10, “Accounting forShipping and Handling Fees and Costs”. Shipping and handling costs incurred by us related to the ContractManufacturing Business are included in cost of goods sold.

 

10

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**(b) Allowancefor Uncollectible Accounts Receivable -**Accountsreceivable is reduced by an allowance for amounts that may become uncollectiblein the future.  The estimated allowancefor uncollectible amounts is based primarily on management’s evaluation of thefinancial condition of the customer.  Future changes in the financial condition of acustomer may require an adjustment to the allowance for uncollectible accountsreceivable.

 

**(c) Inventoriesand Related Allowance for Obsolete and Excess Inventory**- Inventories are valued at the lower of cost (first-in, first-out method) ormarket value and have been reduced by an allowance for obsolete and excessinventories.  The estimated allowance isbased on management’s review of inventories on hand compared to estimatedfuture usage and sales.

 

**(d) Goodwill,Intangible and Other Long-Lived Assets -**Property,equipment and intangible assets are amortized over their useful lives.  Useful lives are based on management’sestimates of the period that the assets will generate revenue.  Property and equipment, goodwill andintangible assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  We believe no impairmentcharges need to be recorded as of September 30, 2005.

 

**(e) Accountingfor Business Combinations**- Goodwill and intangibleassets represent the excess of consideration over the fair value of tangiblenet assets acquired.  Certain assumptionsand estimates are employed by management in determining the fair value ofassets acquired, including goodwill and other intangible assets, as well asdetermining the allocation of goodwill to the appropriate reporting unit.  In addition, we assess the recoverability ofthese intangibles by determining whether the fair values of the applicablereporting units exceed their carrying values. The evaluation of fair value requires the use of projections, estimatesand assumptions as to the future performance of the operations in performing a discountedcash flow analysis as well as assumptions regarding sales and earningsmultiples that would be applied in comparable acquisitions in theindustry.  Actual results could differfrom these assumptions and projections resulting in us revising our assumptionsand, if required, recognizing an impairment loss.

 

**Recent Accounting Pronouncements**

 

InDecember 2003, the Financial Accounting Standards Board (FASB) issued FASBInterpretation No. 46R, “Consolidation of Variable Interest Entities” (FIN46R).  FIN 46R states that companies that have exposure to the economicrisks and potential rewards from another entity’s assets and activities have acontrolling financial interest in a variable interest entity and shouldconsolidate the entity, despite the absence of clear control through a votingequity interest.  The consolidation requirements apply to allspecial-purpose entities by the end of the first reporting period ending after December 15,2003.  FIN 46R shall be applied to allvariable interest entities by the end of the first reporting period endingafter March 15, 2004, for enterprises that are not small business issuersor December 15, 2004 for enterprises that are small business issuers.  The Company is currently evaluating FIN 46Rin terms of its Site Equities/Paycenters transaction and it appears likely thatFIN 46 will have a material effect on future consolidated financial statements.

 

InNovember 2004, the FASB issued Statement of Financial Accounting Standards(SFAS) No. 151 “Inventory Costs” amends the guidance in ARB No. 43,Chapter 4 “Inventory Pricing,”  toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs, and wasted material (spoilage). Paragraph 5 pf ARB 43, Chapter4, previously stated that under some circumstances, items such as idle facilityexpense, excessive spoilage, double freight, and rehandling costs may be soabnormal as to require treatment as current period charges. SFAS No. 151requires that those items be recognized as current-period charges regardless ofwhether they meet the criterion of “so abnormal.” In addition, SFAS No, 151requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities.   SFAS No. 151 shall be effective forinventory costs incurred during fiscal years beginning after June 15,2005. Earlier application is permitted for inventory costs incurred duringfiscal years beginning after the date SFAS No. 151 was issued. SFAS No. 151shall be applied prospectively.  TheCompany does not expect the adoption of SFAS No. 151 to have a materialeffect on its consolidated financial statements.

 

InDecember 2004, the FASB issued SFAS No. 153 “Exchanges of NonmonetaryAssets” amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions.”APB No. 29 is based on the principle that exchanges of nonmonetary assetsshould be measured based on the fair value of the assets exchanged. Theguidance in that Opinion, however, included certain exceptions to thatprinciple. SFAS No. 153 amends APB No. 29 to eliminate the exceptionfor nonmonetary exchanges of similar productive assets and replaces it with ageneral exception for

 

11

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exchangesof nonmonetary assets that do not have commercial substance. A nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange.   SFAS No. 153 shall be effective fornonmonetary asset exchanges occurring in fiscal periods beginning after June 15,2005. Earlier application is permitted for nonmonetary asset exchangesoccurring in fiscal periods beginning after the date SFAS No. 153 wasissued. SFAS No. 153 shall be applied prospectively.  The Company does not expect the adoption ofSFAS No. 153 to have a material effect on its consolidated financialstatements.

 

In December 2004, the FASB issued SFAS No. 123Rwhich requires companies to recognize in the income statement the grant-datefair value of stock options and other equity-based compensation issued toemployees, but expressed no preference for the type of valuation model.  FASB No. 123R is effective for smallbusiness issuers as of the beginning of interim or annual reporting periodsthat begin after December 15, 2005. The impact of SFAS No. 123R has not been determined at this time.

 

In June 2005, the FASB issued SFAS No. 154“Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20and FASB Statement No. 3.  Thestatement applies to all voluntary changes in accounting principal, and changesthe requirements for accounting for and reporting of a change in accountingprinciple.  SFAS No. 154 requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is impracticable.  SFAS No. 154 is effective for accountingfor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.  Earlierapplication is permitted for accounting changes and corrections of errors madeoccurring in fiscal years beginning after June 1, 2005.  The statement does not change the transitionprovisions of any existing accounting pronouncements, including those that arein a transition phase as of the effective date of this statement.  The Company does not expect the adoption ofSFAS No. 154 to have a material effect on its consolidated financialstatements.

 

### **Results of Operations**

### ** **

**For the year ended September 30, 2005and September 30, 2004**

 

Net sales from continuing operations for theyear ended September 30, 2005 were $8,358,447 an increase of 124.3%compared to the year ended September 30, 2004 net sales of$3,725,296.  We acquired the Burger Timebusiness in July 2004 and the increase in net sales was primarily theresult of a full year of operations for fiscal year 2005 as compared to threemonths of operations in fiscal year 2004. Revenues attributable to Burger Time were $6,212,443, or 74.3% of ournet sales for the year ended September 30, 2005, as compared to sales of$1,586,180 for the corresponding period in 2004.  Net sales in the Contract ManufacturingBusiness segment increased slightly to $2,146,004 or 25.7% of our net sales forthe year ended September 30, 2005, as compared to $2,139,116 for the sameperiod in fiscal year 2004.

 

Gross profitfor the year ended September 30, 2005 was $548,453 compared to $500,998for the corresponding period in fiscal year 2004.  Gross profit as a percent of net sales forfiscal year 2005 and 2004 was 6.56% and 13.45%, respectively.  The increase in gross profit dollars anddecrease in gross profit as a percent of net sales for the year ended September 30,2005 as compared to the year ended September 30, 2004 is the net result ofa write down of approximately $152,100 of inventory in our ContractManufacturing Business offset by impact of Burger Time on our grossprofit.  For the year ended September 30,2005, Burger Time contributed $232,772 in gross profits or 2.78% gross profitas a percent of net sales.  We opened twonew restaurants in fiscal year 2005 and experienced higher than normaladvertising and promotions for the year. Once these new Burger Time operations mature, we expect that the grossmargins of BTAC will improve.  OurContract Manufacturing Business’s gross profit as a percent of net sales forthe year ended September 30, 2005 was 3.78% or gross profit of $315,681.

 

The increase in Selling, General andAdministrative (SG&A) expenses to $827,762 from $452,827 for the year endedSeptember 30, 2005 and 2004, respectively, is principally the result ofSG&A related to BTAC for the year ended September 30, 2005 was$266,025 compared to $62,051 for the corresponding period in fiscal year 2004.Fiscal year 2004 only incurred three months of expense due to the acquisitionof Burger Time in July 2004.  Theremaining SG&A for the year ended June 30, 2005 of $561,737 relates toCorporate and Contract Manufacturing expenses.

 

The loss on impairment of intangible asset of $172,329, for the yearended September 30, 2005 relates to the net book value of the Hot’N NowFranchise Agreement that the Company determined to be impaired. The impairmentswere based on changes in circumstances and the delay in negotiating newagreements with individual franchisees.

 

12

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Interest expense for the twelve months ended September 30,2005 was $51,118 compared to $48,750 in the same period of 2004.  The increase in interest expense of $2,368 isrelated to $32,001 of interest expense associated with permanent financingobtained through a mortgage on four Minnesota and four North Dakota Burger Timeproperties in May 2005, offset by no interest expense relating to theseproperties prior to May 2005. For the year ended September 30, 2005,we paid $13,167 in interest relating to the original financing of the BurgerTime real estate. The balance of the interest expense of $5,950 relates tointerest paid on our credit facility. The Company recognized interest income of $55,260 for the year ended September 30,2005 as compared to $6,139 for the same period of 2004. The increase ininterest income is related to a note receivable relating to our sale of theMedical Products Group to Aspen and interest income from a note receivable fromour sale of the Emergency Oxygen Business to Life Safe, LLC (see Note 1) andinterest earned on the Company’s short-term investments.  The Company recognized $15,184 in interestincome on the Aspen note and $12,687 in interest income on the Life Safe notefor the year ended September 30, 2005.  The balance of the interest income $27,389relates to short-term investments for the year ended September 30, 2005

 

Net income per share for the year ended September 30,2005 were $0.19 basic and $0.18 diluted as compared to $0.11 basic and $0.11diluted in same period of 2004.  Lossfrom continuing operations per share for the year ended September 30, 2005were $0.16 basic and $0.16 diluted as compared to income of $0.00 basic and$0.00 diluted in same period of 2004. Income from discontinued operations per share for the year ended September 30,2005 were $0.35 basic and $0.34 diluted as compared to income of $0.11 basicand $0.10 diluted in same period of 2004. Net income for the year ended September 30,2005 was $326,882 as compared to $197,911 in the same period of 2004.

 

**Liquidityand Capital Resources**

 

Historically, we have financed our operationsthrough internal working capital and a bank line of credit and notes.  In May 2005, we completed mortgagefinancing of eight parcels of real estate used in our Burger Time business fortotal proceeds from the loans of $2,055,000. We believe that we have adequate capital from this mortgage financing,our internally generated working capital and bank line of credit and term loanto meet our cash requirements for the next twelve months.  As of September 30, 2005, we had workingcapital of $3,799,558 as compared to $3,960,230 at September 30, 2004, andlong term debt of $2,679,732 at September 30, 2005 compared to $3,785,063at September 30, 2004.  As of September 30,2005, we had $2,648,044 in cash and cash equivalents as compared to $431,942 atSeptember 30, 2004.  In December 2004,we repaid our line of credit borrowings in the amount of $1,440,921, repaid theterm loan with Citizens Independent Bank of Hopkins, Minnesota (“Citizens Bank”)in the amount of $1,247,439 and fully paid the contracts for deed on our BurgerTime properties held by the former owner in the amount of $2,000,000.  The increase in working capital at September 30,2005 compared to September 30, 2004 was the combined result of paying offthe line of credit and cash proceeds from sale of assets.

 

The restaurant industry, in general, operateswith a working capital deficit because most investments are in long-termrestaurant operating assets.  Theoperation of our Burger Time business does not normally require large amountsof working capital to maintain operations since sales are for cash, purchasesare on open accounts and meat and produce inventories are limited to athree-to-five day supply to assure freshness. Burger Time does not have significant levels of accounts receivable orinventory, and it receives credit from our trade suppliers.  Funds available from cash sales are notneeded immediately to pay our trade suppliers and as we continue to grow ourBurger Time business the cash from sales may be used for non-current capitalexpenditures.

 

In November 2004, concurrent with thesale of our Medical Products Group, we repaid in full all amounts thenoutstanding with our bank, Citizens Bank of $2,688,360 and all amounts undercontacts for deed related to the Burger Time acquisition of $2,000,000.   The debt to Citizens Bank was a $1,500,000term note due November 1, 2008, with an interest rate of prime plus 0.5%resulting in an initial rate of 4.500%. The term note required monthlyprincipal and interest payments of approximately $28,000.  The term loan with Citizens Bank wascollateralized by substantially all of the assets of the Company and the Company’sindebtedness to Citizens Bank was guaranteed by Messrs. Kenneth W.Brimmer, our Chief Executive Officer and director, and Gary Copperud, also anofficer and a director. The contracts for deed were $2,000,000 in aggregateoriginal principal amount relating to ten parcels of real estate. The contactsfor deed had an interest rate of 6% and required monthly interest only paymentsof approximately $10,000 with the balance of interest and principal due June 30,2019.

 

At September 30, 2005, our debt consistsof a mortgage note due in 2011 to Stan Corp Mortgage Investors relating to ourHam Lake facility and two mortgage notes to Standard Insurance Company relatingto eight of our Burger Time properties in the aggregate original principalamount of $2,055,000.

 

13

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During the year ended September 30,2005, the Company had cash flows from operating activities of $302,129 comparedto September 30, 2004 where the Company had $1,031,536 in net cash fromoperating activities. The decrease from the prior year is primarily due todecreased profitability from continuing operations, an increase in depreciationand amortization and the increase in accrued income taxes. The Company createdcash flows of $6,488,280 in investing activities for the year ended September 30,2005. The cash flows from investing activities were principally attributed tothe sale of the Company’s Medical Products Group for $6,000,000 and itsEmergency Oxygen Business for $2,450,000. The Company purchased property andequipment of approximately $962,460, primarily for its Burger Time business,for the year ended September 30, 2005. The Company used $3,469,427 in cashfrom financing activities, which included paying off the line of credit for$1,440,921, paid down debt by $3,765,742 and repurchased 47,535 common sharesfor $226,086 for the year ended September 30, 2005.  Cash from financing activities was $3,469,427primarily resulting from mortgaging eight Burger Time properties in fiscal year2005.

 

Under a Loan and Merger Option Agreement withSite Equities International, Inc. and its wholly-owned subsidiaryPaycenters, the Company will make a loan of an aggregate amount of $2,000,000to the Site Equities, which will be disbursed in three installments with$800,000 being disbursed on the date of the agreement. The loan is evidenced bya promissory note. Additional installments of $600,000 will be disbursed on orfollowing on January 16, 2006 and March 16, 2006, respectively,provided that certain conditions are met.

 

Other than as stated above, we have noplanned capital expenditures as of September 30, 2005.

 

The following summarizes our contractualobligations at September 30, 2005. The notes payable consists of amortgage note to StanCorp Mortgage Investors in the amount of $766,631 relatingto our former headquarters in Ham Lake, Minnesota and two mortgage notes toStandard Insurance Company in the amounts of $984,898 and $1,049,240 relatingto the four North Dakota Burger Time properties and four Minnesota Burger Timeproperties, respectively. The operating leases include the lease of ourMinnetonka, Minnesota offices and our Jacksonville, Texas manufacturingfacility, as well as leases of our Burger Time locations and certainequipment.  The table shows the effectthese contractual obligations are expected to have on our liquidity and cashflows as of September 30, 2005.

 
| ** **       | ** ** | **Total**  | ** ** | **1 Year or  Less** | ** ** | **1-3 years** | ** ** | **3-5 Years** | ** ** | **Over 5  Years** | ** ** |
|------------------|------------|------------|------------|---------------------|------------|---------------|------------|---------------|------------|-------------------|------------|
| ** **       | ** ** | ** ** | ** ** | ** **          | ** ** | ** **    | ** ** | ** **    | ** ** | ** **        | ** ** |
| Operating Leases |       | $          | 173,398    |                | $          | 87,712        |       | $             | 52,950     |              | $          | 32,736 |   | $ | — |   |
| Line of Credit   |       | —     |       | —              |       | —        |       | —        |       | —            |       |
| Notes Payable    |       | 2,800,769  |       | 121,037             |       | 268,366       |       | 308,191       |       | 2,103,175         |       |
| Total            |       | $          | 2,974,167  |                | $          | 208,749       |       | $             | 321,316    |              | $          | 340,927 |   | $ | 2,103,175 |   |

##### ** **

##### **ITEM 7.  CONSOLIDATEDFINANCIAL STATEMENTS**

 
| Report of Independent Registered Public  Accounting Firm |   |   |
|----------------------------------------------------------|--------|--------|
|                                                     |   |   |
| For the years ended September 30, 2005  and 2004    |   |   |
|                                                     |   |   |
| Consolidated Balance Sheets                              |   |   |
| Consolidated Statements of Operations                    |   |   |
| Consolidated Statements of Cash Flows                    |   |   |
| Consolidated Statements of Stockholders’  Equity    |   |   |
| Notes to Consolidated Financial Statements               |   |   |

 

**ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

** **

None.

 

14

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**ITEM 8A. CONTROLS AND PROCEDURES**

** **

**(a)****           Evaluationof****Disclosure Controls andProcedures**

 

The Company’s Chief Executive Officer, Kenneth W. Brimmer, and ChiefFinancial Officer, Mark F. Buckrey, have evaluated the Company’s disclosurecontrols and procedures as of the end of the period covered by thisreport.  Based upon that evaluation, theyhave concluded that as of that date, the Company’s disclosure controls andprocedures are effective.

 

**(b)****           Changesin****Internal Control Over FinancialReporting**

 

Therehave been no changes in internal control over financial reporting that occurredduring the period covered by this report that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**ITEM 8B. OTHER INFORMATION**

** **

Effective October 22,2004, Burger Time Acquisition Corporation entered into a lease relating to aWatertown, South Dakota Burger Time location. A copy of this lease is dated October 22,2004 by and between Burger Time Acquisition Corporation and Mark Fiechtner is attached to this Annual Report on Form 10-KSBas Exhibit 10.36.

 

OnAugust 10, 2005, we entered into a purchase agreement with OLD Holdings,LLC relating to the purchase of our former headquarters located in Ham Lake,Minnesota, a copy of which is attached to this Annual Report on Form 10-KSBas Exhibit 10.37.  On October 15,2005, we entered into a Lease Agreement with OLD Holdings, LLC relating to itslease of the Ham Lake facilities pending the closing of the sale of this realestate, which Lease Agreement is attached hereto as Exhibit 10.38.  On December 12, 2005, we amended thePurchase Agreement with OLD Holdings, LLC to modify the provisions regardingthe closing date and the Amendment No. 1 to Purchase Agreement dated as ofDecember 12, 2005 by and between STEN Corporation and OLD Holdings, LLC isattached hereto as Exhibit 10.40.

 

OnSeptember 13, 2005, we entered into a lease relating to our newMinnetonka, Minnesota headquarters.  Acopy of this lease dated September 13, 2005 by and between Ambar, L.L.C.and STEN Corporation is attached hereto as Exhibit 10.39.

 

15

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**PART III**

 

**ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROLPERSONS; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT**

** **

**ITEM 10. EXECUTIVE COMPENSATION**

** **

**ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

 

# **ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

** **

**Theinformation called for by Items 9-12 of Part III of this Form 10-KSB will befiled as an amendment to this Form 10-KSB not later than the end of the 120 dayperiod**followingthe end of the fiscal year covered by this report.

** **

**ITEM 13.EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1                 |       | Composite  Restated Articles of Incorporation of the Company (incorporated by reference  to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the  quarter ended March 31, 2000).                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2                 |       | Amended and  Restated Bylaws effective February 23, 1995 (incorporated by reference to  Exhibit 3.1(b) to the Company’s Annual Report on Form 10-KSB for the year  ended September 30, 1998 (the “1998 Form 10-KSB”)).                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1                 |       | Warrant  Agreement between the Company and Wells Fargo Bank Minnesota, N.A. dated  August 23, 2000 (incorporated by reference to Exhibit 4(d) to the Company’s  Registration Statement on Form S-3 (File No. 333-43616) (the “2000 Form  S-3”)) as amended as reported by the Company’s Current Report on Form 8-K  dated August 12, 3003 and Current Report on Form 8-K dated May 13, 2005. |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2                 |       | Form of Warrant Certificate (incorporated by  reference to Exhibit 4(e) to the 2000 Form S-3) as amended as reported by the  Company’s Current Report on Form 8-K dated August 12, 3003.                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1*               |       | Termination  of Stock Award Agreement effective September 30, 1997, between the Company  and Larry A. Rasmusson (incorporated by reference to Exhibit 10.2 to the 1998  Form 10-KSB).                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2(a)*            |       | Exclusive License  Agreement between the Company and Larry Rasmusson dated April 1, 1990 (the  “Exclusive License Agreement”) (incorporated by reference to Exhibit 10.3(a)  to the 1998 Form 10-KSB).                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2(b)*            |       | First  Amendment to Exclusive License Agreement effective November 8, 1995  (incorporated by reference to  Exhibit 10.3(b) to the 1998 Form 10-KSB).                                                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2(c)*            |       | Second  Amendment to Exclusive License Agreement effective September 1, 1998  (incorporated by reference to  Exhibit 10.3(c) to the 1998 Firm 10-KSB).                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3(a)*            |       | Employment  Agreement between the Company and Larry A. Rasmusson dated April 1. 1993  (incorporated by reference to Exhibit 10.4(a) to the 1998 Form 10-KSB)                                                                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3(b)*            |       | First  Amendment to Employment Agreement effective December 21, 1993 (incorporated  by reference to Exhibit 10.4(b) to the 1998 Form 10-KSB)                                                                                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3(c)*            |       | Second  Amendment to Employment Agreement effective October 1, 1997 (incorporated to  reference to Exhibit 10.4(c) to the 1998 Form 10-KSB).                                                                                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3(d)*            |       | Third  Amendment to Employment Agreement effective February 25, 1998 (incorporated  by reference to Exhibit 10.4(d) to the 1998 Form 10-KSB).                                                                                                                                                                                                                                                                    |

 

16

----

 
| 10.4(a)* |   | Exclusive  License and Royalty Agreement between Oxboro Outdoors, Inc. and Larry  Rasmusson dated April 17, 1993 the (“Exclusive License and Royalty  Agreement”) (incorporated by reference to Exhibit 10.5(a) to the 1998 Form  10-KSB).    |
|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                    |
| 10.4(b)* |   | First  Amendment to Exclusive License and Royalty Agreement effective December 21,  1993 (incorporated by reference to Exhibit 10.5(b) to the 1998 Form 10-KSB).                                                                                        |
|     |   |                                                                                                                                                                                                                                                    |
| 10.4(c)* |   | Second  Amendment to Exclusive License and Royalty Agreement effective November 8,  1995 (incorporated by reference to Exhibit 10.5(c) to the 1998 Form 10-KSB).                                                                                        |
|     |   |                                                                                                                                                                                                                                                    |
| 10.4(d)* |   | Third  Amendment to Exclusive License and Royalty Agreement effective February 25,  1998 (incorporated by reference to Exhibit 10.5(d) to the 1998 Form 10-KSB).                                                                                        |
|     |   |                                                                                                                                                                                                                                                    |
| 10.4(e)* |   | Fourth  Amendment to Exclusive License and Royalty Agreement, effective as of the 1st  day of September, 1998 (incorporated by reference to Exhibit 10.5(e) to the  1998 Form 10-KSB).                                                                  |
|     |   |                                                                                                                                                                                                                                                    |
| 10.5(a)* |   | Consulting Agreement effective November 1,  1995, by and between the Company and Larry A. Rasmusson (the “Consulting  Agreement”) (incorporated by reference to Exhibit 10.6(a) to the 1998 Form  10-KSB).                                    |
|     |   |                                                                                                                                                                                                                                                    |
| 10.5(b)* |   | First  Amendment to the Consulting Agreement effective October 1, 1998 (incorporated  by reference to Exhibit 10.6(b) to the 1998 Form 10-KSB).                                                                                                         |
|     |   |                                                                                                                                                                                                                                                    |
| 10.5(c)* |   | Second  Amendment to the Consulting Agreement effective September 1, 1998  (incorporated by reference to  Exhibit 10.6(c) to the 1998 Form 10-KSB).                                                                                                     |
|     |   |                                                                                                                                                                                                                                                    |
| 10.6(a)* |   | Stock Option  Agreement effective August 17, 1995, by and between the Company and Larry A.  Rasmusson (incorporated by reference to Exhibit 10.7(a) to the 1998 Form  10-KSB).                                                                          |
|     |   |                                                                                                                                                                                                                                                    |
| 10.6(b)* |   | Stock Option  Exercise and Loan Agreement for the Purchase of 20,536 shares of common stock  of the Company, between Company and Larry A. Rasmusson dated January 15, 1998  incorporated by reference to Exhibit 10.7(b) to the 1998 Form 10-KSB).      |
|     |   |                                                                                                                                                                                                                                                    |
| 10.6(c)* |   | Secured  Promissory Note in the amount of $30,546 to Company for Larry A. Rasmusson  dated January 15, 1998 (incorporated by reference to Exhibit 10.7(c) to the  1998 Form 10-KSB).                                                                    |
|     |   |                                                                                                                                                                                                                                                    |
| 10.6(d)* |   | Instruments  Security Agreement between Company and Larry A. Rasmusson dated January 15,  1998 (incorporated by reference to Exhibit 10.7(d) to the 1998 Form 10-KSB).                                                                                  |
|     |   |                                                                                                                                                                                                                                                    |
| 10.6(e)* |   | First  Amendment to August 17, 1995 Stock Option Agreement by and between the  Company and Larry A. Rasmusson, effective September 1, 1998 (incorporated by  reference to Exhibit 10.7(e) to the 1998 Form 10-KSB).                                     |
|     |   |                                                                                                                                                                                                                                                    |
| 10.7(a)* |   | Current  Stock Option Agreement effective October 1, 1997, by and between the Company  and Larry A. Rasmusson (incorporated by reference to Exhibit 10.8(a) to the  1998 Form 10-KSB).                                                                  |
|     |   |                                                                                                                                                                                                                                                    |
| 10.7(b)* |   | Deferred  Stock Option Agreement effective October 1, 1997, by and between the Company  and Larry A. Rasmusson (incorporated by reference to Exhibit 10.8(b) to the  1998 Form 10-KSB).                                                                 |
|     |   |                                                                                                                                                                                                                                                    |
| 10.7(c)* |   | Stock Option  Exercise and Loan Agreement for the purchase of 200,000 shares of common  stock of the Company, between the Company and Larry A. Rasmusson dated  January 15, 1998 incorporated by reference to Exhibit 10.8(c) to the 1998  Form 10-KSB. |
|     |   |                                                                                                                                                                                                                                                    |
| 10.7(d)* |   | Secured  Promissory Note in the Amount of $200,000 to Company from Larry A. Rasmusson  dated January 15, 1998 (incorporated by reference to Exhibit 10.8(d) to the  1998 Form 10-KSB).                                                                  |
|     |   |                                                                                                                                                                                                                                                    |
| 10.7(e)* |   | Instruments  Security Agreement between the Company and Larry A. Rasmusson dated January  15, 1998 (incorporated by reference to Exhibit 10.8(e) to the 1998 Form  10-KSB).                                                                             |

 

17

----

 
| 10.7(f)* |   | First  Amendment to October 1, 1997 Current Stock Option Agreement by and between  the Company and Larry A. Rasmusson effective September 1, 1998 (incorporated  by reference to Exhibit 10.8(f) to the 1998 Form 10-KSB).                                                                                                                                 |
|----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.8*    |   | Mutual  Release and Non-competition Agreement by and between Larry A. Rasmusson and  the Company effective September 1, 1998 (incorporated by reference to Exhibit  10.9 to the Form 10-KSB).                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.9*    |   | Product  Development and Incentive Agreement effective November 8, 1995, by and  between the Company and Harley Haase (incorporated by reference to Exhibit  10.10 to the 1998 Form 10-KSB).                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.10*   |   | Royalty  Sharing Agreement effective November 21, 1995, by and between the Company,  Oxboro Outdoors Inc., Larry A, Rasmusson and Harley Haase (incorporated by  reference to Exhibit 10.11 to the 1998 Form 10-KSB).                                                                                                                                      |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.11*   |   | Settlement  Agreement and Mutual Release of Claims by and between Harley Haase and the  Company dated June 13, 1997 (incorporated by reference to Exhibit 10.12 to  the 1998 Form 10-KSB).                                                                                                                                                                 |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.12*   |   | Non-qualified  Stock Option Agreement between Gary Copperud and the Company effective as of  April 20, 1999 (incorporated by reference to Exhibit 10.22 to the 1999 Form  10-KSB).                                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.13*   |   | Non-qualified  Stock Option Agreement between Kenneth W. Brimmer and the Company effective  as of April 20, 1999 (incorporated by reference to Exhibit 10.23 to the 1999  Form 10-KSB).                                                                                                                                                                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.14*   |   | Non-qualified  Stock Option Agreement between John E. Sayer and the Company effective as of  April 20, 1999 (incorporated by reference to Exhibit 10.23 to the 1999 Form  10-KSB).                                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.15    |   | Mortgage  Note dated December 15, 2000 issued in the amount of $975,000 by StanCorp.  (Incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on  Form 10-KSB for September 30, 2002)                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.16    |   | Lease dated  December 21, 2000, as amended by letter agreement dated March 6, 2001 by and  between ZEP Properties, as Landlord, and Complient Corporation, as Tenant, as  assigned to LifeSafe Services, Inc. on November 26, 2003 (incorporated by  reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated  November 26, 2003). |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.17    |   | Assignment of Real Estate Lease effective  July 1, 2004 between Burger Time Acquisition Corporation and Burger Time  Corporation with Landlord Consent and Estoppel by Dallas Vandenboos and  Janice Vandenboos (incorporated by reference to Exhibit 10.3 to the Company’s  Current Report on Form 8-K dated July 1, 2004).                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.18    |   | Closing Promissory Note dated November 8,  2004 issued by Aspen Surgical Products, Inc. to Sterion Incorporated in the  original principal amount of $500,000 (incorporated by reference to Exhibit  10.2 of the Company’s Current Report dated November 8, 2004).                                                                                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.19    |   | Transitional Services Agreement dated  November 8, 2004 between Sterion Incorporated and Aspen Surgical Products,  Inc. (incorporated by reference to Exhibit 10.3 of the Company’s Current  Report dated November 8, 2004).                                                                                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.20    |   | Subordinated Promissory Note dated June  30, 2005 in the principal amount of $700,000 made by Life Safe Services, LLC  to STEN Corporation (incorporated by reference to Exhibit 0.2 of the  Company’s Current Report on Form 8-K dated June 30, 2005).                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.21    |   | Guaranty dated June 30, 2005 by Patrick  Hoene and Christine Hoene in favor of STEN Corporation. (incorporated by reference  to Exhibit 0.3 of the Company’s Current Report on Form 8-K dated June 30,  2005).                                                                                                                                        |

 

18

----

 
| 10.22  |   | Mortgage, Assignment of Rents, Security  Agreement Fixture Filing dated as of April 15, 2005 between BTAC Properties,  Inc. and Standard Insurance Company (incorporated by reference to Exhibit  10.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended  June 30, 2005 (the “June 2005 10-Q”)). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.23  |   | Note in the principal amount of  $1,060,000 dated April 15, 2005 payable to Standard Insurance Company and  made by BTAC Properties, Inc., Gary Copperud and Kenneth W. Brimmer  (incorporated by reference to Exhibit 10.2 to the June 2005 10-Q).                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.24  |   | Assignment of Lessor’s Interest in Leases  dated as of April 15, 2005 between BTAC Properties, Inc. and Standard  Insurance Company (incorporated by reference to Exhibit 10.3 to the June 2005  10-Q).                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.25  |   | Mortgage, Assignment of Rents, Security  Agreement Fixture Filing dated April 25, 2005 between BTAC Properties, Inc.  and Standard Insurance Company (incorporated by reference to Exhibit 10.4 to  the June 2005 10-Q).                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.26  |   | Note dated April 25, 2005 in the  principal amount of $995,000 payable to Standard Insurance Company and made  by BTAC Properties Inc., Gary Copperud and Kenneth W. Brimmer (incorporated  by reference to Exhibit 10.5 to the June 2005 10-Q).                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.27  |   | Assignment of Lessor’s Interest in Leases  dated as of April 25, 2005 between BTAC Properties, Inc. and Standard  Insurance Company (incorporated by reference to Exhibit 10.6 to the June 2005  10-Q).                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.28  |   | Loan and Merger Agreement dated  November 22, 2005 by and between STEN Acquisition Corporation, Site  Equities International, Inc. and Paycenters, LLC (incorporated by  reference to Exhibit 10.1 to the Company’s Form 8-K dated November 22, 2005  (the “Paycenters 8-K”)).                              |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.29  |   | Promissory Note dated November 22,  2005 by Site Equities International, Inc. as maker and STEN Acquisition  Corporation as payee (incorporated by reference to Exhibit 10.2 to the  Company’s Form 8-K dated November 22, 2005).                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.30  |   | Guaranty dated November 22, 2005 by  and between STEN Acquisition Corporation and Paycenters, LLC (incorporated by  reference to Exhibit 10.3 to the Company’s Form 8-K dated November 22, 2005).                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.31  |   | Security Agreement dated  November 22, 2005 by and between STEN Acquisition Corporation and  Paycenters, LLC (incorporated by reference to Exhibit 10.4 to the Company’s  Form 8-K dated November 22, 2005).                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.32  |   | Pledge Agreement dated November 22,  2005 by Site Equities International, Inc. in favor of STEN Acquisition  Corporation (incorporated by reference to Exhibit 10.5 to the Company’s Form  8-K dated November 22, 2005).                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.33  |   | Debt Subordination Agreement dated November 22,  2005 by and between STEN Acquisition Corporation and Arthur Petrie  (incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K dated  November 22, 2005).                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.34  |   | Form of Voting Agreement dated  November 22, 2005 by each of Kenneth Antos, Mark Hill, and Arthur Petrie  and STEN Acquisition Corporation (incorporated by reference to Exhibit 10.7  to the Company’s Form 8-K dated November 22, 2005).                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.35  |   | Form of Letter of Understanding  dated November 22, 2005 between STEN Acquisition Corporation and each of  Kenneth Antos and Mark Hill (incorporated by reference to Exhibit 10.8 to the  Company’s Form 8-K dated November 22, 2005). 10.36                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.36  |   | Lease and  Option to Purchase dated October 22, 2004 between Burger Time Acquisition  Corporation and Mark Fiechtner  (relating to Watertown, South Dakota Burger Time location).                                                                                                                                                    |

 

19

----

 
| 10.37  |   | Purchase  Agreement dated August 10, 2005 by and between STEN Corporation and OLD  Holdings, LLC.                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                        |
| 10.38  |   | Lease Agreement  dated October 15, 2005 by and between STEN Corporation and OLD Holdings, LLC.                                                              |
|   |   |                                                                                                                                                        |
| 10.39  |   | Lease dated  September 13, 2005 by and between Ambar, L.L.C. and STEN Corporation.                                                                          |
|   |   |                                                                                                                                                        |
| 10.40  |   | Amendment No.  1 to Purchase Agreement dated December 12, 2005 by and between STEN  Corporation and OLD Holdings, LLC.                                      |
|   |   |                                                                                                                                                        |
| 11     |   | Computation  of Earnings Per Share – See footnote 1, page F-9                                                                                          |
|   |   |                                                                                                                                                        |
| 14     |   | Code of Ethics of Sterion Incorporated  (incorporated by reference to Exhibit 14 to the Company’s Form 10-KSB for the  year ended September 30, 2003). |
|   |   |                                                                                                                                                        |
| 21     |   | List of  Subsidiaries                                                                                                                                       |
|   |   |                                                                                                                                                        |
| 23.1   |   | Consent of  Virchow, Krause & Company, LLP                                                                                                              |
|   |   |                                                                                                                                                        |
| 31.1   |   | Certification  of Chief Executive Officer pursuant to 13a-14 and 15d-14 of the Exchange Act                                                                 |
|   |   |                                                                                                                                                        |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to 13a-14 and 15d-14 of the Exchange  Act                                                           |
|   |   |                                                                                                                                                        |
| 99.1   |   | Certification  pursuant to 18 U.S.C. §1350                                                                                                             |

 

----

* Managementcontact, compensatory plan or arrangement required to be filed as an exhibit tothis Form 10-KSB.

 

**ITEM14.  PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

**Theinformation called for by Item 14 of Part III of this Form 10-KSB will be filedas an amendment to this Form 10-KSB not later than the end of the 120 dayperiod**followingthe end of the fiscal year covered by this report.

 

20

----

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Exchange Act, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto authorized on December 28, 2005.

 
|   | STEN CORPORATION |
|--------|------------------|
|   |             |   |
|   | By:              | /s/ Kenneth  W. Brimmer |   |
|   |             |   | Kenneth W. Brimmer |
|   |             |   | Chief Executive Officer |
|   |             |   |
|        |                  |  |  |  |

 

**POWER OF ATTORNEY**

 

Each person whose signature appears below constitutes and appointsKenneth W. Brimmer as his true and lawful attorney-in-fact and agent, with fullpower of substitution and re-substitution, for the undersigned and in theundersigned’s name, place and stead in any and all capacities to sign any ofall amendments to this Annual Report on Form 10-KSB and to file the same, withall exhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission, granting unto said attorney-in-fact andagent, full power and authority to do and perform each and every act and thingrequisite and necessary to be done as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming allsaid attorney-in-fact and agent, or his substitute or substitutes, may lawfullydo or cause to be done by virtue thereof.

 

In accordance with the Exchange Act, this report has been signed belowby the following persons on behalf of the registrant and in the capacitiesindicated on December 28, 2005.

 
| /s/  Kenneth  W. Brimmer   |   | Director,  Chief Executive Officer |
|--------------------------------------|--------|------------------------------------|
| Kenneth W.  Brimmer                  |   | (Principal  Executive Officer)     |
|                                 |   |                               |
| /s/  Mark  F. Buckrey      |   | Chief  Financial Officer           |
| Mark F  Buckrey                      |   | (Principal  Financial Officer)     |
|                                 |   |                               |
| /s/  Gary  Copperud        |   | Director                           |
| Gary  Copperud                       |   |                               |
|                                 |   |                               |
| /s/  Gervaise  Wilhelm     |   | Director                           |
| Gervaise  Wilhelm                    |   |                               |
|                                 |   |                               |
| /s/  Allan  D. Anderson    |   | Director                           |
| Allan D.  Anderson                   |   |                               |
|                                 |   |                               |
| /s/  Jeffrey  A. Zinnecker |   | Director                           |
| Jeffrey A.  Zinnecker                |   |                               |

** **

**21**

----

** **

TABLE OF CONTENTS

 
| **Report  of Independent Registered Public Accounting Firm** |       |       |
|--------------------------------------------------------------|------------|------------|
| ** **                                                   | ** ** | ** ** |
| **Consolidated  Financial Statements**                       | ** ** | ** ** |
| ** **                                                   | ** ** | ** ** |
| Balance  Sheets                                              |       |       |
|                                                         |       |       |
| Statements  of Operations                                    |       |       |
|                                                         |       |       |
| Statements  of Stockholders’ Equity                     |       |       |
|                                                         |       |       |
| Statements  of Cash Flows                                    |       |       |
|                                                         |       |       |
| Notes  to Consolidated Financial Statements                  |       |       |

** **

**22**

----

** **

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Shareholders, Audit Committee and Board of Directors

STEN Corporation and Subsidiaries (formerly known as SterionIncorporated and Subsidiaries)

**Minnetonka, Minnesota**

** **

We have audited the accompanying consolidated balance sheetsof STEN Corporation and Subsidiaries (formerly known as Sterion Incorporatedand Subsidiaries) as of September 30, 2005 and 2004 and the relatedconsolidated statements of operations, stockholders’ equity and cash flows forthe years then ended. These consolidated statements are the responsibility ofthe company’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

Weconducted our audits in accordance with standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of STEN Corporation and Subsidiaries (formerly known as SterionIncorporated and Subsidiaries) as of September 30, 2005 and 2004 and theresults of their operations and their cash flows for the years then ended inconformity with accounting principles generally accepted in the United Statesof America.

 
|   | /s/  Virchow, Krause & Company, LLP |
|--------|-----------------------------------------|

 

Minneapolis,Minnesota

November 29, 2005

 

F-1

----

 

**STEN CORPORATION AND SUBSIDIARIES**

(formerlySterion Incorporated and Subsidiaries)

CONSOLIDATEDBALANCE SHEETS

Yearsended September 30, 2005 and 2004

 
| ** **                                                                                                                                                                                           | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***ASSETS***                                                                                                                                                                                         | ** ** |
| **CURRENT ASSETS**                                                                                                                                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                                                                                                                            |       | $          | 2,648,044  |       | $          | 431,942 |   |
| Certificates of deposit                                                                                                                                                                              |       | 912,609    |       | 0          |       |
| Accounts receivable, net                                                                                                                                                                             |       | 377,327    |       | 358,290    |       |
| Inventories                                                                                                                                                                                          |       | 563,579    |       | 803,528    |       |
| Deferred income taxes                                                                                                                                                                                |       | 46,000     |       | 128,400    |       |
| Current assets of discontinued businesses                                                                                                                                                            |       | 0          |       | 6,131,282  |       |
| Current portion of notes receivable                                                                                                                                                                  |       | 370,708    |       | 0          |       |
| Other current assets                                                                                                                                                                                 |       | 94,624     |       | 252,086    |       |
| Total Current Assets                                                                                                                                                                                 |       | 5,012,891  |       | 8,105,528  |       |
|                                                                                                                                                                                                 |       |       |       |       |       |
| **PROPERTY AND EQUIPMENT, NET**                                                                                                                                                                      | ** ** | 3,730,190  |       | 3,114,199  | ** ** |
| ** **                                                                                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **OTHER ASSETS**                                                                                                                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangible assets, net                                                                                                                                                                               |       | 90,041     |       | 98,955     |       |
| Notes receivable, net of current portion                                                                                                                                                             |       | 665,000    |       | 0          |       |
| Prepaid mortgage costs                                                                                                                                                                               |       | 93,678     |       | 0          |       |
| Other assets of discontinued businesses                                                                                                                                                              |       | 0          |       | 2,389,542  |       |
| Assets of discontinued business held for  sale                                                                                                                                                       |       | 728,680    |       | 722,856    |       |
| Deferred income taxes                                                                                                                                                                                |       | 53,000     |       | 0          |       |
| Net cash surrender value of life insurance                                                                                                                                                           |       | 46,749     |       | 32,865     |       |
| Total Other Assets                                                                                                                                                                                   |       | 1,677,148  |       | 3,244,218  |       |
|                                                                                                                                                                                                 |       |       |       |       |       |
| **TOTAL ASSETS**                                                                                                                                                                                     |       | $          | 10,420,229 |       | $          | 14,463,945 |   |
| ** **                                                                                                                                                                                           |       |       |       |       |       |
| ***LIABILITIES AND STOCKHOLDERS’ EQUITY***                                                                                                                                                      |       |
| **CURRENT LIABILITIES**                                                                                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Line of credit payable to bank                                                                                                                                                                       |       | $          | 0          |       | $          | 1,440,921 |   |
| Current portion of long-term debt                                                                                                                                                                    |       | 121,037    |       | 534,448    |       |
| Accounts payable                                                                                                                                                                                     |       | 440,493    |       | 500,856    |       |
| Accrued payroll and related taxes                                                                                                                                                                    |       | 228,136    |       | 248,920    |       |
| Other accrued expenses                                                                                                                                                                               |       | 88,438     |       | 210,244    |       |
| Accrued income taxes including those  related to discontinued operations                                                                                                                             |       | 266,160    |       | 0          |       |
| Liabilities of discontinued businesses                                                                                                                                                               |       | 69,069     |       | 1,209,909  |       |
| Total Current Liabilities                                                                                                                                                                            |       | 1,213,333  |       | 4,145,298  |       |
| ** **                                                                                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **LONG-TERM LIABILITIES**                                                                                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt, net of current  portion                                                                                                                                                              |       | 2,679,732  |       | 3,785,063  |       |
| Deferred income taxes                                                                                                                                                                                |       | 0          |       | 117,000    |       |
| Total Liabilities                                                                                                                                                                                    |       | 3,893,065  |       | 8,047,361  |       |
|                                                                                                                                                                                                 |       |       |       |       |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital stock, $.01 par value, 20,000,000  common shares authorized, 5,000,000 undesignated shares authorized, 1,697,583  and 1,838,689 common shares issued and 1,684,283 and 1,731,318 outstanding |       | 16,843     |       | 17,313     |       |
| Additional paid-in capital                                                                                                                                                                           |       | 3,070,531  |       | 3,445,774  |       |
| Retained earnings                                                                                                                                                                                    |       | 3,439,790  |       | 3,112,908  |       |
| Deferred compensation                                                                                                                                                                                |       | 0          |       | (159,411   | )          |
| Total Stockholders’ Equity                                                                                                                                                                      |       | 6,527,164  |       | 6,416,584  |       |
| ** **                                                                                                                                                                                           |       |       |       |       |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                  |       | $          | 10,420,229 |       | $          | 14,463,945 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

F-2

----

 

**STEN CORPORATION AND SUBSIDIARIES**

(formerly Sterion Incorporated and Subsidiaries)

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended September 30, 2005 and 2004

 
| ** **                                                        | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|-------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                              |       |      |       |      |       |
| **Sales, net**                                                    |       | $         | 8,358,447  |      | $          | 3,725,296 |   |
|                                                              |       |      |       |      |       |
| **Cost of goods sold**                                            |       | 7,809,994 |       | 3,224,298 |       |
| Gross profit                                                      |       | 548,453   |       | 500,998   |       |
|                                                              |       |      |       |      |       |
| **Selling, general and administrative  expenses**                 |       | 827,762   |       | 452,827   |       |
| **Loss on impairment of intangible asset**                        |       | 172,329   |       | 0         |       |
| Income (loss) from operations                                     |       | (451,638  | )          | 48,171    |       |
|                                                              |       |      |       |      |       |
| **Other income (expense)**                                        |       |      |       |      |       |
| Interest income                                                   |       | 55,260    |       | 6,139     |       |
| Interest expense                                                  |       | (51,118   | )          | (48,750   | )          |
| Total other income (expense)                                      |       | 4,142     |       | 42,611    |       |
|                                                              |       |      |       |      |       |
| Income (loss) from continuing operations  before income taxes     |       | (447,496  | )          | 5,560     |       |
|                                                              |       |      |       |      |       |
| Provision for (benefit from) income taxes                         |       | (168,000  | )          | 1,944     |       |
|                                                              |       |      |       |      |       |
| **Income (loss) from continuing operations**                      |       | (279,496  | )          | 3,616     |       |
|                                                              |       |      |       |      |       |
| Income from discontinued operations                               |       | 969,108   |       | 280,951   |       |
|                                                              |       |      |       |      |       |
| Provision for income taxes from  discontinued operations          |       | 362,730   |       | 86,656    |       |
|                                                              |       |      |       |      |       |
| **Income from discontinued operations**                           |       | 606,378   |       | 194,295   |       |
|                                                              |       |      |       |      |       |
| **Net Income**                                                    |       | $         | 326,882    |      | $          | 197,911 |   |
|                                                              |       |      |       |      |       |
| Income (loss) from continuing operations  per share               |       |      |       |      |       |
| Basic                                                             |       | $         | (.16       | )         | $          | .00 |   |
| Diluted                                                           |       | $         | (.16       | )         | $          | .00 |   |
| Income from discontinued operations per  share                    |       |      |       |      |       |
| Basic                                                             |       | $         | .35        |      | $          | .11 |   |
| Diluted                                                           |       | $         | .34        |      | $          | .10 |   |
| Net income per share                                              |       |      |       |      |       |
| Basic                                                             |       | $         | .19        |      | $          | .11 |   |
| Diluted                                                           |       | $         | .18        |      | $          | .11 |   |
| Weighted average common and common  equivalent shares outstanding |       |      |       |      |       |
| Basic                                                             |       | 1,708,792 |       | 1,737,997 |       |
| Diluted                                                           |       | 1,801,288 |       | 1,859,551 |       |

 

Seeaccompanying notes to consolidated financial statements.

 

F-3

----

 

**STEN CORPORATION AND SUBSIDIARIES**

(formerly Sterion Incorporated and Subsidiaries)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years ended September 30, 2005 and 2004

** **

 
| ** **                                                                    | ** ** | **Common Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Deferred  Compensation** | ** ** | **Total  Stockholders’  Equity** | ** **    |
|-------------------------------------------------------------------------------|------------|------------------|------------|----------------------------------|------------|------------------------|------------|----------------------------|------------|---------------------------------------|---------------|
| ** **                                                                    | ** ** | **Shares**       | ** ** | **Amount**                       | ** ** |
| ** **                                                                    |       |             |       |                             |       |                   |       |                       |       |                                  |          |   |   |
| **BALANCES, September 30, 2003**                                              |       | 1,738,418        |       | $                                | 17,384     |                   | $          | 3,144,494                  |       | $                                     | 2,914,997     |   | $ | (74,877 | ) | $ | 6,001,998 |   |
|                                                                          |       |             |       |                             |       |                   |       |                       |       |                                  |          |   |   |
| Exercise of warrants                                                          |       | 200              |       | 2                                |       | 798                    |       | —                     |       | —                                |          | 800 |   |
| Options issued for guarantee of debt                                          |       | —           |       | —                           |       | 175,000                |       | —                     |       | —                                |          | 175,000 |   |
| Net income                                                                    |       | —           |       | —                           |       | —                 |       | 197,911                    |       | —                                |          | 197,911 |   |
| Repurchase of common shares                                                   |       | (7,300           | )          | (73                              | )          | (37,148                | )          | —                     |       | —                                |          | (37,221 | ) |
| Deferred consulting expense related to  stock options issued to non-employees |       | —           |       | —                           |       | 162,630                |       | —                     |       | (84,534                               | )             | 78,096 |   |
| **BALANCES, September 30, 2004**                                              | ** ** | **1,731,318**    | ** ** | **17,313**                       | ** ** | **3,445,774**          | ** ** | **3,112,908**              | ** ** | **(159,411**                          | **)**         | **6,416,584** | ** ** |
|                                                                          |       |             |       |                             |       |                   |       |                       |       |                                  |          |   |   |
| Exercise of warrants                                                          |       | 500              |       | 5                                |       | 1,995                  |       | —                     |       | —                                |          | 2,000 |   |
| Compensation related to stock options                                         |       | —           |       | —                           |       | —                 |       | —                     |       | 7,784                                 |          | 7,784 |   |
| Cancellation of consultant options                                            |       | —           |       | —                           |       | (151,627               | )          | —                     |       | 151,627                               |          | — |   |
| Repurchase of common shares                                                   |       | (47,535          | )          | (475                             | )          | (225,611               | )          | —                     |       | —                                |          | (226,086 | ) |
| Net income                                                                    |       | —           |       | —                           |       | —                 |       | 326,882                    |       | —                                |          | 326,882 |   |
| **BALANCES, September 30, 2005**                                              | ** ** | **1,684,283**    | ** ** | **$**                            | **16,843** | ** **             | **$**      | **3,070,531**              | ** ** | **$**                                 | **3,439,790** | ** ** | **$** | **0** | ** ** | **$** | **6,527,164** | ** ** |

 

Seeaccompanying notes to consolidated financial statements.

 

F-4

----

 

**STEN CORPORATION AND SUBSIDIARIES**

(formerly Sterion Incorporated and Subsidiaries)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended September 30, 2005 and 2004

 
| ** **                                                                        | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                              |       |       |       |       |       |
| **Cash flows from operating activities:**                                         |       |       |       |       |       |
| Net Income                                                                        |       | $          | 326,882    |       | $          | 197,911 |   |
| Adjustments to reconcile net income to net  cash flows from operating activities: |       |       |       |       |       |
| Depreciation and amortization                                                     |       | 397,286    |       | 185,441    |       |
| Loss on impairment of intangible assets                                           |       | 172,329    |       | 0          |       |
| Provision for deferred taxes                                                      |       | (87,600    | )          | 88,600     |       |
| Compensation expense related to  non-employee stock options                       |       | 7,784      |       | 78,097     |       |
| Loss (gain) from operations of discontinued  operations                           |       | 210,614    |       | (280,951   | )          |
| Gain on sale of discontinued operations                                           |       | (1,179,722 | )          | 0          |       |
| Changes in certain assets and liabilities:                                        |       |       |       |       |       |
| Accounts receivable                                                               |       | (19,037    | )          | 455,616    |       |
| Inventories                                                                       |       | 252,924    |       | (3,416     | )          |
| Other current assets                                                              |       | 157,462    |       | (37,563    | )          |
| Accounts payable                                                                  |       | (60,363    | )          | 306,506    |       |
| Accrued payroll and related taxes                                                 |       | (20,784    | )          | (40,972    | )          |
| Other accrued expenses                                                            |       | (121,806   | )          | 82,267     |       |
| Accrued income taxes                                                              |       | 266,160    |       | 0          |       |
| **Net cash flows from operating activities**                                      |       | 302,129    |       | 1,031,536  |       |
|                                                                              |       |       |       |       |       |
| **Cash flows from investing activities:**                                         |       |       |       |       |       |
| Investments in certificates of deposit                                            |       | (912,609   | )          | 0          |       |
| Purchase of assets of SOS International                                           |       | 0          |       | (2,700,000 | )          |
| Purchase of assets of Burger Time  Corporation                                    |       | 0          |       | (760,150   | )          |
| Purchase of assets of Barry Medical  Products                                     |       | (50,000    | )          | 0          |       |
| Purchase of franchise license of Hot ‘N Now                                  |       | (175,000   | )          | 0          |       |
| Purchases of property and equipment                                               |       | (962,460   | )          | (93,033    | )          |
| Purchase of intangibles                                                           |       | (12,059    | )          | (6,515     | )          |
| Proceeds from sale of Medical Products  Group                                     |       | 6,000,000  |       | 0          |       |
| Payment received on notes receivable                                              |       | 164,292    |       | 0          |       |
| Proceeds from sale of Emergency Oxygen  Business                                  |       | 2,450,000  |       | 0          |       |
| Change in cash surrender value of life  insurance                                 |       | (13,884    | )          | 8,486      |       |
| **Net cash flows from investing activities**                                      |       | 6,488,280  |       | (3,551,212 | )          |
|                                                                              |       |       |       |       |       |
| **Cash flows from financing activities:**                                         |       |       |       |       |       |
| Net increase (decrease) in line of credit,  bank                                  |       | (1,440,921 | )          | 1,440,921  |       |
| Proceeds from long-term debt                                                      |       | 2,055,000  |       | 1,500,000  |       |
| Payments on long-term debt                                                        |       | (3,765,742 | )          | (984,242   | )          |
| Prepaid mortgage costs                                                            |       | (93,678    | )          | 0          |       |
| Repurchase of common shares                                                       |       | (226,086   | )          | (37,222    | )          |
| Proceeds from exercise of stock purchase  warrants                                |       | 2,000      |       | 2,400      |       |
| Payments on capital lease obligation                                              |       | 0          |       | (4,681     | )          |
| **Net cash flows from financing activities**                                      |       | (3,469,427 | )          | 1,917,176  |       |
|                                                                              |       |       |       |       |       |
| **Net cash used in discontinued operations**                                      |       | (1,104,880 | )          | (728,377   | )          |
|                                                                              |       |       |       |       |       |
| **Net increase (decrease) in cash and cash  equivalents**                         |       | 2,216,102  |       | (1,330,877 | )          |
|                                                                              |       |       |       |       |       |
| **Cash and cash equivalents-beginning of  period**                                |       | 431,942    |       | 1,762,819  |       |
| **Cash and cash equivalents-end of period**                                       |       | $          | 2,648,044  |       | $          | 431,942 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

F-5

----

 

**STEN CORPORATION AND SUBSIDIARIES**

(formerly Sterion Incorporated and Subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended September 30, 2005 and 2004

 

**NOTE 1 - Nature ofBusiness and Summary of Significant Accounting Policies**

 

**Natureof Business**

 

STEN Corporation and subsidiaries (the Companyformerly known as Sterion Incorporated and Subsidiaries) is a diversifiedbusiness. The Company manufactures, on a contract basis, a line ofsterilization containers and filters for use by hospitals, clinics and surgerycenters. In July 2004, the Company created Burger Time Acquisition Corporation(“BTAC”) as a wholly-owned subsidiary and purchased an 11-store chain of fastfood restaurants located in the upper midwest. In fiscal year 2005, the Companyopened two additional restaurants, one in Watertown, South Dakota and the otherin Fergus Falls, Minnesota.  In May 2005,the Company created BTAC Properties Inc, (“BTAC Properties”) to own certainreal estate related to Burger Time.

 

**Discontinued Operations**

 

On November 8, 2004, the Company sold substantially all of the assetsrelating to its medical products manufacturing and distribution business, the “MedicalProducts Group,” to Aspen Surgical Products, Inc. (“Aspen”).  On June 30, 2005, the Company soldsubstantially all of the assets relating to its Emergency Oxygen Business (the “EmergencyOxygen Business”) to Life Safe Services, LLC. In accordance with appropriate accounting rules, the Company hasreclassified its previously reported financial results to exclude the resultsof the Medical Products Group and the Emergency Oxygen Business and theseresults are presented on a historical basis as a separate line in the Company’sconsolidated statements of operations and balance sheets entitled “DiscontinuedBusinesses or Discontinued Operations.” All of the financial information in the consolidated financialstatements and notes to the consolidated financial statements has been revisedto reflect only the results of continuing operations.

 

**Principlesof Consolidation**

 

Theconsolidated financial statements include the accounts of STEN Corporation andits wholly-owned subsidiaries, Oxboro, Inc. (formerly known as Oxboro Medical,Inc.), Burger Time Acquisition Corporation, as of July 1, 2004 and BTACProperties, Inc as of May 1, 2005. All significant intercompany transactionsand balances have been eliminated in consolidation.

 

**Cashand Cash Equivalents**

 

The Companyincludes as cash and cash equivalents highly liquid, short-terminvestments with maturity of one year or less when purchased, which are readilyconvertible into known amounts of cash. The Company maintains its cash in highquality financial institutions. The balances, at times, may exceed federallyinsured limits.

 

**Certificatesof Deposits**

 

The Companyhas several certificates of deposit which mature through November 13, 2006.

 

**AccountsReceivable**

 

The Companyreviews customers’ credit history before extending unsecured credit andestablishes an allowance for uncollectible accounts based upon factorssurrounding the credit risk of specific customers and other information.  Accounts receivable over 30 days areconsidered past due. The Company does not accrue interest on past due accountsreceivable. Receivables are written off only after all collection attempts havefailed and are based on individual credit evaluation and specific circumstancesof the customer. Accounts receivable have been reduced by an allowance foruncollectible accounts of approximately $4,000 at September 30, 2005.  There was no allowance for doubtful accountsat September 30, 2004.

 

F-6

----

 

**Inventories**

 

Inventoriesconsist of products related to our contract manufacturing operations,restaurant food and paper supplies and are valued at lower of cost using thefirst-in, first-out (FIFO) method or market.

 

**IncomeTaxes**

 

The Companyaccounts for income taxes using the asset and liability approach, whichrequires the recognition of deferred tax assets and liabilities for taxconsequences of temporary differences between the financial statement andincome tax reporting bases of assets and liabilities based on currently enactedrates and laws.  These temporarydifferences include depreciation, related party accruals, allowance fordoubtful accounts and inventory valuation adjustments.  Deferred taxes are reduced by a valuationallowance to the extent that realization of the related deferred tax assets isnot assured.

 

**Researchand Development**

 

The Companyexpenses all costs related to product research and development asincurred.  Research and developmentexpense was $0 and $1,407 for the years ended September 30, 2005 and 2004,respectively.

 

**Assetsof Discontinued Business Held For Sale**

 

As a part ofthe sale of the Medical Products Group in November 2004, the Company ispursuing the sale of its building located in Ham Lake, Minnesota.  The building includes the formermanufacturing and distribution facility and former corporate headquarters.  Accordingly, the Company has reflected thecarrying value of the building as an asset of discontinued business held forsale at September 30, 2005 and 2004.  Asa result, the Company has discontinued recording depreciation on the building.  The Company believes that the current marketvalue of the building, less costs to sell, is in excess of its carryingvalue.  The Company has entered into anagreement to sell the building that is expected close in January 2006.  Net proceeds from the sale are expected toapproximate $1,500,000 resulting in a pre tax gain of approximately $600,000.

 

**Depreciation**

 

Property andequipment are recorded at cost. Improvements are capitalized and amortized overthe shorter of the lease term or the estimated useful life.  Capital leases are capitalized at the lowerof the present value of the future minimum lease payments or fair market valueat the inception of the lease while maintenance, repairs and minor renewals areexpensed when incurred. Depreciation is computed using the straight-line methodbased on estimated service lives of the various assets as follows:

 
| Buildings                |   | 30 years  |   |
|--------------------------|--------|-----------|--------|
| Containers               |   | 5 years   |   |
| Furniture  and equipment |   | 3-7 years |   |
| Vehicles                 |   | 10 years  |   |

 

**NotesReceivable**

 

Notes receivable consists of $335,708 due from Aspen related to thesale of the Medical Products Group.  Thenote is unsecured and bears interest at 4.75% per annum.  Aspen is obligated to repay the Note in sixequal quarterly installments of $83,333 beginning on May 8, 2005 until August8, 2006.  Notes receivable also includes$700,000 due from Life Safe Services, LLC (“Life Safe”) related to the purchaseof the Emergency Oxygen Business, which is in the form of a subordinatedpromissory note personally guaranteed by the owners of Life Safe.  The Life Safe Note bears interest at a rateof 7.25% per annum.  The Life Safe Notecalls for payments of interest only for the first twelve months, interest andprincipal based upon a sixty month amortization schedule for months 13 to 41 anda balloon payment of all remaining outstanding interest and principal at theend of month 42.  The Company’s rightsunder the Life Safe Note are subordinate to those of the Buyer’s seniorlender.  The balance of the notesreceivable was $1,035,708 at September 30, 2005.  Future collections on the notes receivablefor the years ending September 30, 2006, 2007, 2008 are $370,708, $11,667, and$653,333, respectively.

 

**DebtIssuance Costs**

 

Debt issuancecosts are amortized over the life of the loan using the straight-line methodwhich approximates the interest method. On May 10, 2005, the Company’s completed a mortgage financing relatingto real estate used by the subsidiary, Burger Time AcquisitionCorporation.  In the course of closingthe mortgages, the Company incurred costs of $87,734.  These mortgage costs are being amortized overof the life of the notes (15 years) and accordingly, the Company expensed$2,422 for the year ended September 30, 2005. Amortization

 

F-7

----

 

expense related to the debtissuance cost was $2,422 and $8,570 for the years ended September 30, 2005 and2004.  At the time of the sale to Aspen,the Company repaid all borrowings under the credit facility existing at thattime and the borrowing arrangement was cancelled.  The remaining unamortized debt issuance costof $142,236 was expensed in the year ended September 30, 2005 and is reflectedin the gain from discontinued operations.

 

**IntangibleAssets**

** **

Intangibleassets subject to amortization consist of the following:

 
| ** **               | ** ** | **September 30, 2005**      | ** ** | **September 30, 2004**        | ** ** | **Estimate  Useful  Lives  (mos.)** | ** ** |
|--------------------------|------------|-----------------------------|------------|-------------------------------|------------|-------------------------------------|------------|
| ** **               | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount**         | ** ** | **Accumulated  Amortization** | ** ** | ** ** |
|                     |       |                        |       |                          |       |                                |       |   |   |   |   |
| Covenants not to compete |       | $                           | 100,000    |                          | $          | 12,496                              |       | $ | 100,000 |   | $ | 2,499 |   | 120 |   |
| Franchise Agreements     |       | 187,059                     |       | 187,059                       |       | 0                                   |       | 0 |   | 84 |   |
| Other intangibles        |       | 3,172                       |       | 635                           |       | 1,454                               |       | 0 |   | 60 |   |
|                     |       |                        |       |                          |       |                                |       |   |   |   |   |
| Total                    |       | $                           | 290,231    |                          | $          | 200,190                             |       | $ | 101,454 |   | $ | 2,499 |   |   |   |
|                          |            |                             |            |                               |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

Intangible assets are being amortized over their estimateduseful lives ranging from 60 months to 120 months (weighted average life of7.98 years).  Amortization of intangibleassets was $25,361 and $2,499 for the years ended September 30, 2005 and 2004.  Estimated amortization expense of intangibleassets for the years ending September 30, 2006, 2007, 2008, 2009, and 2010 is$10,584 per year.  In September 2005, theCompany determined that the Hot’N Now Franchise Agreements was impaired andaccordingly the Company established a valuation reserve to fully reserve forthe net book value of $172,329.

 

**Revenue Recognition andShipping and Handling Costs**

 

The Companyrecords sales revenue at the time all merchandise is shipped.  Revenues from Burger Time are recognized atthe time food is served.

 

The Securitiesand Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, “RevenueRecognition.”  SAB No. 101, as amended bySAB No. 104, sets forth the SEC staff’s position regarding the point at whichit is appropriate for a registrant to recognize revenue.  The SEC staff believes that revenue isrealizable and earned when all of the following criteria are met: persuasiveevidence of an arrangement exists, delivery has occurred or service has beenrendered, the seller’s price to the buyer is fixed or determinable andcollectibility is reasonably assured. The Company uses the above criteria to determine whether revenue can berecognized.

 

The Companyrecords amounts being charged to customers for shipping and handling as salesin accordance with Emerging Issues Task Force (EITF) Issue 00-10, “Accountingfor Shipping and Handling Fees and Costs.” Shipping and handling costs incurred by the Company related to theContract Manufacturing business are included in cost of goods sold.

 

**DeferredRevenue and Service Cost Liability**

 

Prior to the sale of the Company’s EmergencyOxygen Business, the Company accounted for amounts billed in advance asdeferred revenue.  With the acquisitionby LifeSafe as of November 26, 2003 of certain assets of SOS, and theassumption of certain liabilities of SOS by LifeSafe, the Company assumed theobligation to provide on-going service to existing customers.  Such leases were accounted for by the Companyas operating leases.  Deferred revenueswere recognized ratably over the term of the contracts, typically 3 to 12months.  With the sale of the LifeSafeServices business to Life Safe Services LLC, an unrelated party, in June 2005all deferred revenue at that time was transferred to Life Safe Services LLC.  The Company has reflected the recognition ofdeferred revenue and service costs liabilities as discontinued operations.

 

F-8

----

 

**Advertising**

 

Advertisingcosts are charged to operations when incurred. Advertising expense was $60,629 and $0 for the years ended September 30, 2005 and 2004, respectively.

 

**Stock-BasedCompensation**

 

The Company uses the intrinsicvalue-based method prescribed by Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees,” and related interpretations inaccounting for employee stock options and stock based compensation.  Under the intrinsic value method,compensation expense is recorded only to the extent that the market price ofcommon stock exceeds the exercise price of the stock option on the date ofgrant.

 

In December 2002, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 148 as an amendment to SFAS No. 123 providing alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation and also provides requiredadditional disclosures about the method of accounting for stock-basedemployee compensation.  The Companyadopted the disclosure provision of SFAS No. 148 and has chosen to not adoptthe voluntary change to the fair value based method of accounting for stock-basedemployee compensation, pursuant to SFAS No. 148.

 

The Company has adopted the disclosure-onlyprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”Accordingly, no compensation cost has been recognized with respect to stockoptions. Had compensation cost for the Company’s stock options been determinedbased on fair value at the grant dates consistent with the method as defined underSFAS No. 123, the Company’s net income would have changed to the pro formaamounts indicated below:

 
| ** **                     | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|--------------------------------|------------|-----------------|------------|-----------------|------------|
| Net income:                    |       |            |       |            |       |
| As reported                    |       | $               | 326,882    |            | $          | 197,911 |   |
| Pro forma                      |       | $               | 205,012    |            | $          | 29,580 |   |
|                           |       |            |       |            |       |
| Net income  per share basic:   |       |            |       |            |       |
| As reported                    |       | $               | 0.19       |            | $          | 0.11 |   |
| Pro forma                      |       | $               | 0.12       |            | $          | 0.02 |   |
|                           |       |            |       |            |       |
| Net income  per share diluted: |       |            |       |            |       |
| As reported                    |       | $               | 0.18       |            | $          | 0.11 |   |
| Pro forma                      |       | $               | 0.11       |            | $          | 0.02 |   |
|                           |       |            |       |            |       |
| Stock based  compensation:     |       |            |       |            |       |
| As reported                    |       | $               | 7,784      |            | $          | 78,097 |   |
| Pro forma                      |       | $               | 121,870    |            | $          | 168,331 |   |

 

The pro forma amounts may not be representativeof the effects on reported net income for future years. The per share, weighted-averagefair value of each option granted is calculated using the Black-Scholespricing model with the following weighted-average assumptions used forgrants in the following years:

 
| ** **                        | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|-----------------------------------|------------|-----------------|------------|-----------------|------------|
| Risk free  interest rate          |       | 5.00%-5.75      | %          | 5.00            | %          |
| Expected  life of options granted |       | 5 years         |       | 3-5 years       |       |
| Expected  volatility range        |       | 50.00           | %          | 50.00           | %          |
| Expected  dividend yield          |       | 0               | %          | 0               | %          |

 

F-9

----

 

**NetIncome per Share**

 

Basic incomeper share are computed by dividing the net income by the weighted averagenumber of shares outstanding for the reporting period.  The Company’s diluted net income per share iscomputed by dividing net income by the weighted average number of common sharesoutstanding and common share equivalents, when dilutive, for the reportingperiod.  Options totaling 300,500 and320,000 were excluded from the computation of diluted income per share for theyears ended September 30, 2005 and 2004 as their effect was antidilutive.  Following is a reconciliation of basic anddiluted net income per share:

 

| ** **                          | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|-------------------------------------|------------|-----------------|------------|-----------------|------------|
| Net income per share - basic:       |       |            |       |            |       |
| Net income                          |       | $               | 326,882    |            | $          | 197,911 |   |
|                                |       |            |       |            |       |
| Weighted average shares outstanding |       | 1,708,792       |       | 1,737,997       |       |
|                                |       |            |       |            |       |
| Net income per share - basic        |       | $               | 0.19       |            | $          | 0.11 |   |
|                                |       |            |       |            |       |
| Net income per share - diluted:     |       |            |       |            |       |
| Net income                          |       | $               | 326,882    |            | $          | 197,911 |   |
|                                |       |            |       |            |       |
| Weighted average shares outstanding |       | 1,708,792       |       | 1,737,997       |       |
| Effect of diluted securities        |       | 92,496          |       | 121,554         |       |
| Weighted average shares outstanding |       | 1,801,288       |       | 1,859,551       |       |
|                                |       |            |       |            |       |
| Net income per share - diluted      |       | $               | 0.18       |            | $          | 0.11 |   |

 

**Estimates**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

**SegmentReporting**

 

The Company’stwo reportable segments are strategic business units that offer differentproducts.  They are managed separately aseach business requires different technology and manufacturing processes.

 

Operatingincome (loss) is total net sales less operating expenses, excludinginterest.  The Company did not have anysales between industry segments.  Identifiable assets by industry segmentinclude both assets directly identified with those operations and an allocableshare of jointly used assets.  Generalcorporate assets consist primarily of cash, certificates of deposit andbuilding costs.  The accounting policiesapplied to determine segment information are the same as those described in thesummary of significant accounting policies. Management evaluates the performance of each segment based on profit andloss from operations before income taxes, exclusive on non-recurring gains orlosses.  The following table summarizesdata by industry segment.

 

| ** **                    | ** ** | **Corporate and Contract Manufacturing** | ** ** | **Burger Time** | ** ** | **Total**  | ** ** |
|-------------------------------|------------|------------------------------------------|------------|-----------------|------------|------------|------------|
|                          |       |                                     |       |            |       |       |       |
| Year ended September 30, 2005 |       |                                     |       |            |       |       |       |
| Revenues                      |       | $                                        | 2,146,004  |            | $          | 6,212,443  |       | $ | 8,358,447 |   |
| Loss from operations          |       | (235,407                                 | )          | (216,231        | )          | (451,638   | )          |
| Identifiable assets           |       | 5,536,547                                |       | 4,883,682       |       | 10,420,229 |       |
| Depreciation and amortization |       | 70,856                                   |       | 326,430         |       | 397,286    |       |
| Capital expenditures          |       | 112,106                                  |       | 850,354         |       | 962,460    |       |
|                          |       |                                     |       |            |       |       |       |
| Year ended September 30, 2004 |       |                                     |       |            |       |       |       |
| Revenues                      |       | $                                        | 2,139,116  |            | $          | 1,586,180  |       | $ | 3,725,296 |   |
| Income (loss) from operations |       | (75,592                                  | )          | 123,763         |       | 48,171     |       |
| Identifiable assets           |       | 11,406,574                               |       | 3,057,371       |       | 14,463,945 |       |
| Depreciation and amortization |       | 126,179                                  |       | 59,262          |       | 185,441    |       |
| Capital expenditures          |       | 32,165                                   |       | 60,868          |       | 93,033     |       |

 

F-10

----

 

**FinancialInstruments**

 

The carryingamounts for all financial instruments approximates fair value.  The carrying amounts for cash and cashequivalents, accounts receivable, accounts payable and accrued liabilitiesapproximate fair value because of the short maturity of these instruments. TheCompany’s long-term debt includes debt with variable interest rates. The fairvalue of long-term debt approximates the carrying amounts based upon theCompany’s expected borrowing rate for debt with similar remaining maturitiesand comparable risk.

 

**Reclassifications**

 

Certainaccounts in the prior year consolidated financial statements have beenreclassified for comparative purposes to conform with the presentation in thecurrent year consolidated financial statements. These reclassifications had noeffect on consolidated net income or stockholders’ equity.

 

**Impairmentof Long-lived and Intangible Assets**

 

The Companycontinually evaluates whether events and circumstances have occurred thatindicate the remaining estimated useful life of long-lived may warrantrevision, or that the remaining balance of these assets may not be recoverable.  The Company evaluates the recoverability ofits long-lived assets in accordance with Statement of Financial AccountingStandards No. 144 “Accounting for the Impairment or Disposal of Long-livedAssets”  When deemed necessary, theCompany completes this evaluation by comparing the carrying amount of theassets against the estimated undiscounted future cash flows associated withthem.  If such evaluations indicate thatthe future undiscounted cash flows of long-lived assets are not sufficient torecover the carrying value of such assets, the assets are adjusted to theirestimated fair values.  The Companyassesses the impairment of its manufacturing equipment at least annually, orwhenever events or changes in the circumstances indicate that the carryingvalue may not be recoverable.  TheCompany uses a number of factors which it considers important which couldtrigger an impairment review, and potentially an impairment charge, includingthe following:  Significantunderperformance relative to historical or projected cash flows; significantchanges in the manner of use of the acquired assets or the Company’s overallbusiness strategy; significant negative market or economic trends; significantdecline in the Company’s stock price for a sustained period changing the Company’smarket capitalization relative to its net book value.  At September 30, 2005, there was animpairment of $172,329 related to a franchise agreement that was acquired bythe Company in 2005 based on changes in circumstances and the delay innegotiating new agreements with individual franchisees.

 

**Impactof Recently Issued Accounting Standards**

 

In December 2003, the FASBissued FASB Interpretation No. 46R, “Consolidation of Variable InterestEntities” (FIN 46R).  FIN 46R states that companies that have exposure tothe economic risks and potential rewards from another entity’s assets andactivities have a controlling financial interest in a variable interest entityand should consolidate the entity, despite the absence of clear control througha voting equity interest.  The consolidation requirements apply to allspecial-purpose entities by the end of the first reporting period ending afterDecember 15, 2003.  FIN 46R shall beapplied to all variable interest entities by the end of the first reportingperiod ending after March 15, 2004, for enterprises that are not small businessissuers or December 15, 2004 for enterprises that are small business issuers(Note17).

 

In November 2004, the FASBissued SFAS No. 151 “Inventory Costs” amends the guidance in ARB No. 43,Chapter 4 “Inventory Pricing,”  toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs, and wasted material (spoilage). Paragraph 5 pf ARB 43, Chapter4, previously stated that under some circumstances, items such as idle facilityexpense, excessive spoilage, double freight, and rehandling costs may be soabnormal as to require treatment as current period charges. SFAS No. 151requires that those items be recognized as current-period charges regardless ofwhether they meet the criterion of “so abnormal.” In addition, SFAS No, 151requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities.   SFAS No. 151 shall be effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. Earlierapplication is permitted for inventory costs incurred during fiscal yearsbeginning after the date SFAS No. 151 was issued. SFAS No. 151 shall be appliedprospectively.  The Company does notexpect the adoption of SFAS No. 151 to have a material effect on itsconsolidated financial statements.

 

F-11

----

 

In December 2004, the FASBissued SFAS No. 153 “Exchanges of Nonmonetary Assets” amends APB Opinion No.29, “Accounting for Nonmonetary Transactions.” APB No. 29 is based on theprinciple that exchanges of nonmonetary assets should be measured based on thefair value of the assets exchanged. The guidance in that Opinion, however, includedcertain exceptions to that principle. SFAS No. 153 amends APB No. 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange.  SFAS No. 153 shall be effective for nonmonetary asset exchangesoccurring in fiscal periods beginning after June 15, 2005. Earlier applicationis permitted for nonmonetary asset exchanges occurring in fiscal periodsbeginning after the date SFAS No. 153 was issued. SFAS No. 153 shall be appliedprospectively.  The Company does notexpect the adoption of SFAS No. 153 to have a material effect on itsconsolidated financial statements.

 

In December2004, the FASB issued SFAS No. 123R which requires companies to recognize inthe income statement the grant-date fair value of stock options and otherequity-based compensation issued to employees, but expressed no preference forthe type of valuation model.  FASB No.123R is effective for small business issuers as of the beginning of interim orannual reporting periods that begin after December 15, 2005.  The impact of SFAS No. 123R has not beendetermined at this time.

 

In June 2005,the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections,” areplacement of APB Opinion No. 20 and FASB Statement No. 3.  The statement applies to all voluntarychanges in accounting principle, and changes the requirements for accountingfor and reporting of a change in accounting principle.  SFAS No. 154 requires retrospectiveapplication to prior periods’ financial statements of a voluntary change in accountingprinciple unless it is impracticable. SFAS No. 154 is effective for accounting for accounting changes andcorrections of errors made in fiscal years beginning after December 15, 2005.  Earlier application is permitted foraccounting changes and corrections of errors made occurring in fiscal yearsbeginning after June 1, 2005.  Thestatement does not change the transition provisions of any existing accountingpronouncements, including those that are in a transition phase as of theeffective date of this statement.  TheCompany does not expect the adoption of SFAS No. 154 to have a material effecton its consolidated financial statements.

 

**NOTE 2 - Acquisitionsand Dispositions of Assets**

 

**Acquisitions**

 

**Hot‘N Now**

 

On March 3,2005, the Burger Time Acquisition Corporation completed the purchase of certainassets of the former franchisor of Hot ‘N Now restaurants in a transactionapproved by the United States Bankruptcy Court for the Western District ofMichigan.  The assets acquired includethe Hot ‘N Now franchise, all Hot ‘N Now franchise agreements and all royaltiesand other franchise fees due.  Amongother things, the acquired rights also include the Hot ‘N Now name andtradename.  There are currently 14franchisee locations of Hot ‘N Now all operating in the State of Michigan.  The purchase price paid was $175,000 for thefranchise license.  The Company is in theprocess of pursuing settlement of amounts owed and new royalty agreements withthe 14 Hot ‘N Now locations.** **The purchase price of $175,000 wasallocated to the franchise license acquired based on the estimated fair valueas of the acquisition date.  Based onchanges in circumstances and the delay in negotiating new agreements, theCompany determined the franchise license to be impaired and recorded an expenseof $172,329 for the year ended September 30, 2005.

 

**BarryMedical**

** **

On January 3,2005, the LifeSafe subsidiary purchased from Barry Medical Corp. (“Seller”)substantially all of Seller’s assets for $242,000 plus the assumption of certainliabilities.  The assets purchasedrelated to Seller’s business of buying, leasing, selling, servicing andtraining customers in the use of emergency oxygen equipment and defibrillatorunits as the sole, exclusive franchisee of SOS in Connecticut and a representativeof Oxygen Therapy Institute, Inc. in the states of Massachusetts, NewHampshire, Rhode Island and Vermont.  Inconnection with the purchase, the former owner entered into a noncompeteagreement with LifeSafe.

 

F-12

----

 

Theacquisition of assets including inventory of $12,975, leased oxygen tanks of$31,280, covenant not to compete of $50,000, customer lists of $75,000,goodwill of $72,745 were accounted for under the purchase method of accountingand, accordingly, at the time of the purchase, the purchase price was allocatedto assets acquired based on the estimated fair value as of the acquisitiondate.  See disposition of assets in Note2 noting the sale of these assets on June 30, 2005

 

**LifeKit**

** **

On July 9,2004, through the LifeSafe subsidiary, the Company purchased for $287,000substantially all of the assets of LifeKit.com, a California business offeringweb based emergency/disaster recovery kit business.  In connection with the purchase, the Companyentered into a noncompete agreement with the former sole owner of the businessin favor of LifeSafe.  The purchase waspursuant to a Business Transfer Agreement dated July 9, 2004 between LifeSafeand LifeKit.  The assets purchased fromLifeKit.com were included in our sale of the Emergency Oxygen Business onJune 30, 2005. See disposition of assets in Note 2 noting the sale ofthese assets on June 30, 2005

 

Theacquisition of assets included a covenant not to compete of $100,000, customerlists of $100,000, contracts of $60,000 and domain and trade names of $27,000.The transaction was accounted for under the purchase method of accounting and,accordingly, at the time of the purchase, the purchase price was allocated toassets acquired based on the estimated fair value as of the acquisition date.

 

**BurgerTime**

** **

On July 1,2004, our BTAC subsidiary completed the purchase of substantially all of theassets of Burger Time Corporation (“Burger Time”) relating to Burger Time’sfast food restaurant business operated under the same name.

 

The purchase was pursuant to a Business TransferAgreement dated as of July 1, 2004 between BTAC and Burger Time.  The purchase price for the assets was$3,064,950.  Of the purchase priceconsideration, BTAC paid $764,950 in cash from working capital obtained fromthe Company and BTAC agreed to pay $2,000,000 through Contracts for Deed on tenparcels of real estate.  In November2004, all debt due to the former owner related to the Burger Time purchase waspaid in full.

 

The obligations under the Contracts for Deed andPromissory Note(s) were guaranteed by Gary Copperud, one of our directors,pursuant to a Personal Guaranty.  Mr.Copperud received no consideration from the Company or BTAC in exchange for hisguaranty, which was approved by the Company’s Audit Committee.

 

Theacquisition of assets and assumed liabilities of Burger Time Corporation wereaccounted for under the purchase method of accounting and, accordingly, thepurchase price was allocated to assets acquired and liabilities assumed basedon the estimated fair value as of the acquisition date.  The following table is a condensed balancesheet summarizing the amounts assigned to the assets acquired and liabilitiesassumed:

 
| ** **                | ** ** | **Burger Time** | ** ** |
|---------------------------|------------|-----------------|------------|
| Cash and cash equivalents |       | $               | 4,800      |   |
| Inventories               |       | 42,000          |       |
| Property and equipment    |       | 2,918,150       |       |
| Covenant not to compete   |       | 100,000         |       |
| Net purchase price        |       | $               | 3,064,950  |   |

** **

**LifeSafe**

 

On November 26, 2003, wecompleted the purchase for $2.7 million, through our LifeSafe subsidiary, ofcertain assets and assumed certain liabilities of SOS International, Inc. fromits parent corporation, Complient Corporation. Included in the assets purchased were certain intangible assets such asthe rights under the franchise agreement to operate the business and theexisting customer lists.  Included in theliabilities assumed was the assumption by LifeSafe of service obligations toexisting customers.  This business wassold on June 30, 2005 as part of the disposal of the Emergency Oxygen Business.

 

Statement of Financial Accounting Standards(SFAS) No. 141 “Business Combinations” requires that all business combinationsafter June 30, 2001 be accounted for under the purchase method ofaccounting.  The acquisition of 

 

F-13

----

 

assets and assumed liabilities of oxygenleasing and servicing business of SOS were accounted for under the purchasemethod of accounting and, accordingly, at the time of the purchase, thepurchase price was allocated to assets acquired and liabilities assumed basedon the estimated fair value as of the acquisition date.  The following table is a condensed balancesheet summarizing the amounts assigned to the assets acquired and liabilitiesassumed:

** **
| ** **             | ** ** | **LifeSafe** | ** ** |
|------------------------|------------|--------------|------------|
| Accounts receivable    |       | $            | 372,791    |   |
| Inventories            |       | 23,360       |       |
| Property and equipment |       | 2,293,960    |       |
| Intangibles            |       | 963,000      |       |
| Liabilities assumed    |       | (953,111     | )          |
| Net purchase price     |       | $            | 2,700,000  |   |

 

**Pro forma Results**

** **

The accompanying unaudited proforma condensed consolidated results of operations for the year ended September30, 2005 and 2004 are presented to give effect to the Burger Time acquisitiondescribed above as if such transactions had occurred on October 1, 2003, thefirst day of our 2004 fiscal year.

** **

**The unaudited pro forma information does not purport to represent whatour results of operations would actually have been if such transactions in facthad occurred at such date or to project our results of future operations.**

** **

| ** **                                        | ** ** | **Sept 30, 2004** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|
|                                              |       |              |       |
| Sales, net                                        |       | $                 | 7,424,723  |   |
|                                              |       |              |       |
| Income from operations                            |       | 317,664           |       |
|                                              |       |              |       |
| Net income from continuing operations             |       | 63,328            |       |
|                                              |       |              |       |
| Net income from continuing operations per  share: |       |              |       |
| Basic                                             |       | $                 | .04        |   |
| Diluted                                           |       | $                 | .04        |   |

 

**Disposition of Assets**

 

                On June 30, 2005, the Company and its wholly-owned subsidiary, LifeSafe Services, Inc. completed the sale to Life Safe Services, LLC (the “Buyer”), an unrelated party, of assets related to our Emergency Oxygen Business including the LifeSafe and LifeKit product lines The sale was made pursuant to an Asset Purchase Agreement dated June 30, 2005 by and among STEN, LifeSafe and the Buyer.

 

**The purchase price for the assets was$3,150,000 plus the assumption by the Buyer of certain liabilities and adjustedby $113,976 due to the amount of working capital at June 30, 2005, as agreed.Of the purchase price, $2,450,000 was paid in cash at closing and $700,000 waspaid by delivery of a subordinated promissory note (the Note) personallyguaranteed by the owners.  The Note bearsinterest at a rate of 7.25% per annum.  The Note calls for payments of interest onlyfor the first twelve months, interest and principal based upon a sixty monthamortization schedule for months 13 to 41 and a balloon payment of allremaining outstanding interest and principal at the end of month 42.  The Company’s rights under the Note aresubordinate to those of the Buyer’s senior lender.**

** **

**Additionally, in connection with theclosing of the sale, each of STEN and Life Safe entered into a**Non-Competitionand Non-Solicitation Agreement, prohibiting either of them from competing withthe Business during the period the Note remains current and outstanding, plus aperiod of two years following the final payment of the Note.

** **

**F-14**

----

** **

**Following the completion of the sale, theCompany paid in full the remaining balances on its indebtedness relating to theEmergency Oxygen Business, including $93,953 to the former owner of the LifeKitportion of the Emergency Oxygen Business and $167,355 to Barry Medical Corporation,the former owner of the Connecticut portion of the Emergency Oxygen Business.**

 

The Company recorded $193,141 of estimatedexpenses for --severance and other exit costs as a part of the sale of theEmergency Oxygen Business.  The Companymade payments of $193,141 for the year ended September 30, 2005, and theaccrued amounts are summarized as follows:

 

| Accrued Severance Costs                 |   |     |   |
|-----------------------------------------|--------|----------|--------|
| Beginning balance                       |   | $        | 0      |   |
| Estimated Expenses                      |   | 35,000   |   |
| Payments                                |   | (35,000  | )      |
| Ending balance                          |   | $        | 0      |   |
|                                    |   |     |   |
| Other Exit Costs                        |   |     |   |
| Beginning balance                       |   | $        | 0      |   |
| Estimated transition expenses           |   | 8,141    |   |
| Reserve for working capital requirement |   | 150,000  |   |
| Payments                                |   | (158,141 | )      |
| Ending balance                          |   | $        | 0      |   |

 

In accordance with the provisions of SFAS 144,the Company has not included the results of operations of the Emergency OxygenBusiness in the results from continuing operations.  The results of operations for this businesshave been reflected as discontinued operations. The loss from discontinued operations for the years ended September 30,2005 and 2004 respectively, consist of the following:

 

| ** **                                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue, Net                                                    |       | $          | 2,169,478  |       | $          | 1,620,776 |   |
|                                                            |       |       |       |       |       |
| Cost of Goods Sold                                              |       | 1,239,187  |       | 432,864    |       |
|                                                            |       |       |       |       |       |
| Gross Profit                                                    |       | 930,291    |       | 1,187,912  |       |
|                                                            |       |       |       |       |       |
| Total operating expenses                                        |       | 958,314    |       | 869,263    |       |
|                                                            |       |       |       |       |       |
| Net income (loss) operations                                    |       | (28,023    | )          | 318,649    |       |
|                                                            |       |       |       |       |       |
| Gain on sale of assets:                                         |       |       |       |       |       |
| Sale Price                                                      |       | 3,150,000  |       |       |       |
| Less costs and expenses                                         |       |       |       |       |       |
| Accounts Receivable                                             |       | 532,710    |       |       |       |
| Inventories                                                     |       | 205,319    |       |       |       |
| Prepaids                                                        |       | 22,836     |       |       |       |
| Property and Equipment, net                                     |       | 2,014,485  |       |       |       |
| Intangibles, net                                                |       | 1,182,024  |       |       |       |
| Goodwill                                                        |       | 60,198     |       |       |       |
| Accounts Payable                                                |       | (10,141    | )          |       |       |
| Severance                                                       |       | 35,000     |       |       |       |
| Reserve related to working capital  agreement                   |       | 150,000    |       |       |       |
| Deferred Revenue                                                |       | (793,463   | )          |       |       |
| Transaction, Legal, Transition and other                        |       | 8,709      |       |       |       |
| Total costs  of sale                                            |       | 3,407,677  |       |       |       |
|                                                            |       |       |       |       |       |
| Net loss on  sale before taxes                                  |       | (257,677   | )          |       |       |
| Income  (loss) from discontinued operations before income taxes |       | $          | (285,700   | )          | $          | 318,649 |   |

 

F-15

----

 

On November 8, 2004, the Company completed thesale of certain assets and certain liabilities to Aspen Surgical Products,Inc., a Michigan corporation, relating to products comprising its MedicalProducts Group, including its disposable operating room support products,private-label products and the Surgidyne brand of surgical wound drainageproducts, and excluding the physical plant which is currently an asset held forsale.

 

The consideration for the sale transactionconsisted of $6 million in cash paid at closing and $500,000 in the form of apromissory note.  In addition, theCompany may receive additional proceeds based upon the total sales from theoperations over the twelve months following the sale.  The Company recorded a gain on the sale ofthe assets of $1,504,258 ($951,484 net of tax). The gain was calculated as the proceeds less $4,472,951 in net assets,$589,650 in transaction and shut down expenses (including employee severancecosts, legal fees and other professional fees). Net assets were comprised of inventory, fixed assets, prepaid expenses,intangibles, goodwill and certain liabilities consisting primarily of accountspayable.

 

The Company recorded $589,650 of expenses forseverance and other exit costs as a part of the sale of the Medical ProductsGroup.  The Company made paymentstotaling $520,581 for the year ended September 30, 2005 and are summarized asfollows:

 

| Accrued Severance Costs     |   |     |   |
|-----------------------------|--------|----------|--------|
| Beginning balance           |   | $        | 0      |   |
| Estimated expenses          |   | 100,000  |   |
| Payments                    |   | (100,000 | )      |
| Ending balance              |   | $        | 0      |   |
|                        |   |     |   |
| Other Exit Costs            |   |     |   |
| Beginning balance           |   | $        | 0      |   |
| Estimate shut down expenses |   | 50,000   |   |
| Accrued legal, audit        |   | 116,859  |   |
| Other expenses              |   | 322,791  |   |
| Payments                    |   | (420,581 | )      |
| Ending balance              |   | $        | 69,069 |   |

 

In connection with the Purchase Agreement, theCompany also entered into a Transitional Services Agreement with Aspen.  Also in connection with the PurchaseAgreement transactions, Mr. Kenneth Brimmer and Mr. Gary Copperud are providingAspen certain services pursuant to an eighteen-month consulting agreement.  Mr. Brimmer is the Company’s Chief ExecutiveOfficer and a director and Mr. Copperud is a member of the Company’s Board ofDirectors.  The Company and Messrs.Brimmer and Copperud also entered into a non-competition agreement withAspen.  Messrs. Brimmer and Copperud wereeach paid $250,000 by Aspen in connection with these agreements.  These payments were approved by the Company’sAudit Committee and Board of Directors.

 

In accordance with the provisions of SFAS 144,the Company has not included the results of operations of its former MedicalProducts Group in the results from continuing operations.  The results of operations for this businessare reflected as discontinued operations. The income (loss) from discontinued operations for the years endedSeptember 30, 2005 and 2004 respectively, consist of the following:

 

F-16

----

 

| ** **                                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue, Net                                                    |       | $          | 710,574    |       | $          | 6,794,570 |   |
|                                                            |       |       |       |       |       |
| Cost of Goods Sold                                              |       | 470,320    |       | 4,126,870  |       |
|                                                            |       |       |       |       |       |
| Gross Profit                                                    |       | 240,254    |       | 2,667,700  |       |
|                                                            |       |       |       |       |       |
| Total operating expenses                                        |       | 422,845    |       | 2,705,398  |       |
|                                                            |       |       |       |       |       |
| Net loss from operations                                        |       | (182,591   | )          | (37,698    | )          |
|                                                            |       |       |       |       |       |
| Gain on sale of assets:                                         |       |       |       |       |       |
| Sale Price                                                      |       | 6,500,000  |       |       |       |
| Less costs and expenses                                         |       |       |       |       |       |
| Accounts Receivable                                             |       | 927,376    |       |       |       |
| Inventories                                                     |       | 2,434,690  |       |       |       |
| Prepaids                                                        |       | 156,056    |       |       |       |
| Property and Equipment, net                                     |       | 648,086    |       |       |       |
| Intangibles, net                                                |       | 151,203    |       |       |       |
| Deferred Debt Issuance Costs                                    |       | 142,236    |       |       |       |
| Goodwill                                                        |       | 355,563    |       |       |       |
| Accounts Payable                                                |       | (342,259   | )          |       |       |
| Severance                                                       |       | 100,000    |       |       |       |
| Transaction, Legal, Transition and other                        |       | 489,650    |       |       |       |
| Total costs of sale                                             |       | 5,062,601  |       |       |       |
|                                                            |       |       |       |       |       |
| Net gain on sale before taxes                                   |       | 1,437,399  |       |       |       |
| Income (loss) from discontinued operations  before income taxes |       | $          | 1,254,808  |       | $          | (37,698 | ) |

 

The table below is a consolidation of theEmergency Oxygen Business and the Medical Product Groups.  In accordance with the provisions of SFAS144, the Company has not included the results of operations of our formerMedical Products Group and Emergency Oxygen Business in the results fromcontinuing operations.  The results ofoperations for this business have been reflected as discontinued operations.  The income from discontinued operations forthe years ended September 30, 2005 and 2004 respectively, consist of thefollowing:

 

| ** **                                               | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|----------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                     |       |      |       |      |       |
| Revenue, Net                                             |       | $         | 2,880,052  |      | $          | 8,415,346 |   |
|                                                     |       |      |       |      |       |
| Cost of Goods Sold                                       |       | 1,709,507 |       | 4,559,734 |       |
|                                                     |       |      |       |      |       |
| Gross Profit                                             |       | 1,170,545 |       | 3,855,612 |       |
|                                                     |       |      |       |      |       |
| Total operating expenses                                 |       | 1,381,159 |       | 3,574,661 |       |
|                                                     |       |      |       |      |       |
| Net (loss) income operations                             |       | (210,614  | )          | 280,951   |       |
|                                                     |       |      |       |      |       |
| Gain on sale of assets:                                  |       |      |       |      |       |
| Sale Price                                               |       | 9,650,000 |       |      |       |
| Less costs and expenses                                  |       |      |       |      |       |
| Accounts Receivable                                      |       | 1,460,086 |       |      |       |
| Inventories                                              |       | 2,640,009 |       |      |       |
| Prepaids                                                 |       | 178,892   |       |      |       |
| Property and Equipment, net                              |       | 2,662,571 |       |      |       |
| Intangibles, net                                         |       | 1,333,227 |       |      |       |
| Deferred Debt issuance Costs                             |       | 142,236   |       |      |       |
| Goodwill                                                 |       | 415,761   |       |      |       |
| Accounts Payable                                         |       | (352,400  | )          |      |       |
| Severance                                                |       | 135,000   |       |      |       |
| Reserve related to working capital  agreement            |       | 150,000   |       |      |       |
| Deferred Revenue                                         |       | (793,463  | )          |      |       |
| Transaction, Legal, Transition and other                 |       | 498,359   |       |      |       |
| Total costs of sale                                      |       | 8,470,278 |       |      |       |
|                                                     |       |      |       |      |       |
| Net gain on sale before taxes                            |       | 1,179,722 |       |      |       |
| Income from discontinued operations before  income taxes |       | $         | 969,108    |      | $          | 280,951 |   |

 

F-17

----

 

**NOTE 3 - Inventories**

 

Inventories consisted of thefollowing at September 30:

 

| ** **        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Raw materials     |       | $        | 363,276    |     | $          | 481,832 |   |
| Work in process   |       | 121,010  |       | 279,961  |       |
| Finished goods    |       | 79,293   |       | 41,735   |       |
|              |       |     |       |     |       |
| Total inventories |       | $        | 563,579    |     | $          | 803,528 |   |

 

**NOTE 4 - Property and Equipment**

 

Property and equipment consisted of thefollowing at September 30:

 
| ** **                                       | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                             |       |      |       |      |       |
| Land                                             |       | $         | 1,160,562  |      | $          | 1,067,773 |   |
| Building                                         |       | 935,944   |       | 1,065,113 |       |
| Containers                                       |       | 17,940    |       | 3,254     |       |
| Furniture and equipment                          |       | 2,321,874 |       | 1,656,019 |       |
| Total                                            |       | 4,436,320 |       | 3,792,159 |       |
| Less: accumulated depreciation and  amortization |       | (706,130  | )          | (677,960  | )          |
| Net                                              |       | $         | 3,730,190  |      | $          | 3,114,199 |   |

 

Depreciationand amortization expense on property and equipment was $371,925 and $161,626for the years ended September 30, 2005 and 2004, respectively.

** **

**F-18**

----

 

**NOTE 5 - Other Accrued Expenses**

 

Other accruedexpenses consisted of the following at September 30:

 

| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Accrued professional fees    |       | $        | 8,474      |     | $          | 19,470 |   |
| Accrued property taxes       |       | 27,132   |       | 39,409   |       |
| Accrued sales and income tax |       | 47,332   |       | 16,885   |       |
| Other accrued expenses       |       | 5,500    |       | 134,480  |       |
| Total                        |       | $        | 88,438     |     | $          | 210,244 |   |

 

**NOTE 6 - Line of Credit,Bank**

 

During January2005, the Company entered into a $750,000 line of credit agreement withCitizens Independent Bank.  The line ofcredit is subject to a defined borrowing base. Amounts outstanding are due on January 1, 2006 and bear interest atprime plus .5% (6.75% at September 30, 2005). The line of credit is collateralized by substantially all of the Company’scurrent assets.  At September 30, 2005there were no borrowings outstanding under this agreement and the Company hadthe entire amount available under the borrowing base formula.

 

The Company inJuly 2003, entered into a $1,000,000 line of credit agreement with CitizensIndependent Bank. The line of credit was subject to a defined borrowing baseany amounts outstanding were due on April 1, 2005 and bear interest at primeplus .5% (5.25% at September 30, 2004). The line of credit was collateralizedby substantially all assets of the Company. On November 26, 2003, concurrentwith the asset acquisition by LifeSafe Services, the Company and CitizensIndependent Bank entered into an amendment to the line of credit agreement toincrease the amount of borrowings available on the line of credit agreementfrom $1,000,000 to $1,800,000. As of September 30, 2004, outstanding borrowingsunder the line of credit agreement were $1,440,921. With the Medical ProductsGroup sale to Aspen Surgical, in November of 2004 (See Note 2).  The Company repaid the then outstandingbalance due on this facility and cancelled this credit agreement.

 

The Company’sindebtedness to Citizens Independent Bank under the line of credit agreementand the term loan is guaranteed by Mr. Kenneth W. Brimmer, the Company’s ChiefExecutive Officer and a director and Mr. Gary Copperud, a director of theCompany. In exchange for the guaranty, Messr’s Brimmer and Copperud were eachgranted five-year options to purchase 50,000 shares of its common stock, vestedimmediately, with an exercise price of $6.00. The options which were valued at$175,000 as debt issuance costs to be amortized over 5 years. The remainingunamortized debt issuance costs was eliminated on June 30, 2005 as part of thedisposal of the Emergency Oxygen Business and was expensed to discontinuedoperations.

 

**NOTE 7 - Long-Term Debt**

 

**On May 9, 2005 and May 10, 2005, the Company completed a mortgagefinancing relating to eight parcels of real estate used by the Company’ssubsidiary, Burger Time Acquisition Corporation (“BTAC”), in BTAC’s operationof a chain of fast-food, drive-thru restaurants under the Burger Time name.**

 

**To facilitate the mortgage financing, the Company created awholly-owned subsidiary, BTAC Properties, Inc., a Minnesota corporation (“BTACProperties”) and transferred to BTAC Properties eight parcels of real estatelocated in Minnesota and North Dakota.**

** **

**On May 9, 2005, BTAC Properties received $995,000 relating to the NorthDakota properties and on May 10, 2005, BTAC Properties borrowed $1,060,000relating to the Minnesota properties from StanCorp Mortgage (the “Lender”).  In consideration of these loans, BTACProperties issued two promissory notes to the Lender, one in the**

** **

**F-19**

----

** **

**amount of $995,000 andone in the amount of $1,060,000.  KennethW. Brimmer, our Chief Executive Officer and a director, and Gary Copperud, ourdirector, are also joint and several borrowers with BTAC Properties on thenotes.  Messrs. Brimmer and Copperud didnot receive any compensation for joining as borrowers on the notes.  The participation of Messrs. Brimmer andCopperud in the notes transaction was approved by the Company’s AuditCommittee.  To facilitate the payment byBTAC Properties of the obligations under the notes, BTAC and BTAC Propertieshave entered into leases for each of the eight properties.  The rent amounts to be paid by BTAC to BTACProperties under the leases have been assigned to the Lender for repayment ofamounts owed under the notes.**

 

**The notes accrue interest at a rate of 6.25% per annum and are payablein 180 equal monthly installments of an aggregate of $17,621, with the finalpayment due June 1, 2020.  Theobligations of the notes are collateralized by a mortgage, assignment of rents,security agreement and fixture filing in favor of the Lender on each of theeight properties.**

 

**In November 2003, the Company entered into a five-year term loan in theamount of $1,500,000 with Citizens Independent Bank.  The terms of the loan required monthlyprincipal and interest payments of approximately $27,900 at an interest rate ofprime plus 0.5% (5.25% at September 30, 2004). The loan was collateralized by substantially all of the Company’sassets.  The term note was paid in fullin November 2004.  For the years endingSeptember 30, 2005 and 2004 the long-term debt consisted of the following:**

 

| ** **                                                                                                                                                                                                                                       | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Mortgage note payable to StanCorp Mortgage  Investors, LLC. With monthly installments of $8,175 including interest at  8.5%, due February 2011, collateralized by building and land held for sale.                                               |       | $         | 766,631    |      | $          | 844,094 |   |
| Note payable to Citizens Independent Bank.  Paid in full on November 8, 2004.                                                                                                                                                                    |       | 0         |       | 1,247,439 |       |
| Note payable to former owner of  LifeKit.com. Paid in full on June 30, 2005.                                                                                                                                                                     |       | 0         |       | 127,978   |       |
| Note payable to Barry Medical Corporation.  Paid in full on June 30, 2005.                                                                                                                                                                       |       | 0         |       | 0         |       |
| Mortgage note payable to StanCorp Mortgage  Investors, LLC. With monthly installments of $9,089 including interest at  6.25%, due June 2020, collateralized by buildings and land located at Elk  River, Waite Park, Moorhead and Detroit Lakes. |       | 1,049,240 |       | 0         |       |
| Mortgage note payable to StanCorp Mortgage  Investors, LLC. With monthly installments of $8,532 including interest at  6.25%, due June 2020, collateralized by buildings and land located at Minot,  Grand Forks, Bismarck and Fargo.            |       | 984,898   |       | 0         |       |
| Note payable to Burger Time Corporation.  Paid in full on November 8, 2004.                                                                                                                                                                      |       | 0         |       | 100,000   |       |
| Contracts for deed due to Burger Time  Corporation. Paid in full on November 8, 2004.                                                                                                                                                       |       | 0         |       | 2,000,000 |       |
| Totals                                                                                                                                                                                                                                           |       | 2,800,769 |       | 4,319,511 |       |
| Less current portion                                                                                                                                                                                                                             |       | (121,037  | )          | (534,448  | )          |
| Long-term portion                                                                                                                                                                                                                                |       | $         | 2,679,732  |      | $          | 3,785,063 |   |

 

Future maturities on long-termdebt for the years ending September 30 are as follows:

 

| 2006       |   | $         | 121,037   |   |
|------------|--------|-----------|-----------|--------|
| 2007       |   | 129,647   |      |
| 2008       |   | 138,719   |      |
| 2009       |   | 148,779   |      |
| 2010       |   | 159,412   |      |
| Thereafter |   | 2,103,175 |      |
|       |   |      |      |
| Total      |   | $         | 2,800,769 |   |

 

F-20

----

 

**NOTE 8 - Capital LeaseObligation**

 

The Companyhad a lease agreement for the use of equipment which expired in August2004.  The lease was recorded as acapital lease obligation and bore interest at 5%.  The obligation was collateralized by theproperty under lease. The total cost of the leased equipment was $12,631. TheCompany paid $5,268 during the year ended September 30, 2004 and the title tothe equipment was transferred to the Company. The Company has no capital leaseobligations as of September 30, 2005.

 

**NOTE 9 - Stockholders’Equity**

 

During theyear ended September 30, 2005, warrants to purchase 500 shares were exercisedand proceeds were $2,000.  During theyear ended September 30, 2005, the Company issued five-year options to theBoard of Directors and an employee to purchase 32,500 shares at $6.00. Aportion of these options were subject to forfeiture under certain performancecriteria. These options were valued at a range of $2.25 to $2.97 using theBlack Scholes pricing method.

 

**StockWarrants**

 

In connectionwith a registered offering that was completed in October 2000, the Companyissued warrants to purchase common stock. At September 30, 2005, there were outstanding common stock purchasewarrants to purchase 369,793 shares at $4.00 per share.  On May 13, 2005, the Company’s Board ofDirectors extended the expiration date of the outstanding common stock purchasewarrants to September 30, 2008 at 5:00 p.m. Central time.  There was not an accounting charge related tothe extension of the warrants.

 

**StockOption Plan**

 

The Companyhas a Stock Option Plan (the Plan) which provides for granting of incentive andnon-qualified stock options to employees and others.  The aggregate of 600,000 shares of theCompany’s common stock may be granted at exercise prices not less than fairmarket value at the date of grant (not less than 110% of fair market value forsignificant stockholders).  The Board ofDirectors or a committee administers the Plan. In general, options vest over five years and expire up to ten years fromthe date of grant.  In addition, theCompany has issued options outside the Plan.

 

The Companycancelled certain options to a consultant as a result of the sale of theMedical Products Group and accounted for them in discontinued operations.

 

Information regarding stockoptions is summarized below:

 
| ** **                              | ** ** | **Number of  Options** | ** ** | **Weighted Average Exercise Price** | ** ** | **Range of Option  Exercise Price** | ** **  |
|-----------------------------------------|------------|------------------------|------------|-------------------------------------|------------|-------------------------------------|-------------|
|                                    |       |                   |       |                                |       |                                |        |
| Options outstanding, September 30, 2003 |       | 252,000                |       | $                                   | 5.98       |                                | $3.63-9.74  |   |
| Granted                                 |       | 205,000                |       | 5.83                                |       | 4.95-6.00                           |        |
| Cancelled                               |       | (18,000                | )          | 5.61                                |       | 4.63-7.50                           |        |
| Exercised                               |       | —                 |       | —                              |       | —                              |        |
|                                    |       |                   |       |                                |       |                                |        |
| Options outstanding, September 30, 2004 |       | 439,000                |       | 5.92                                |       | 3.63-9.74                           |        |
| Granted                                 |       | 32,500                 |       | 6.00                                |       | 6.00                                |        |
| Cancelled                               |       | (126,000               | )          | 5.61                                |       | 4.63-7.50                           |        |
| Exercised                               |       | —                 |       | —                              |       | —                              |        |
|                                    |       |                   |       |                                |       |                                |        |
| Options outstanding, September 30, 2005 |       | 345,500                |       | $                                   | 5.96       |                                | $3.63-$9.74 |   |
| Options exercisable, September 30, 2005 |       | 317,500                |       | $                                   | 5.89       |                                | $3.63-$9.74 |   |
| Options exercisable, September 30, 2004 |       | 305,666                |       | $                                   | 5.85       |                                | $3.63-$9.74 |   |

 

F-21

----

 

The followingtable summarizes information about stock options outstanding at September 30,2005:

 
| ** **          | ** ** | **Options outstanding** | ** ** | **Options exercisable**                             | ** ** |
|---------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|
| **Exercise prices** | ** ** | **Number  outstanding** | ** ** | **Weighted-  average  remaining  contractual life** | ** ** | **Weighted-  average  exercise price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  average  Exercise price** | ** ** |
| $ 3.63-$5.25   |       | 45,000                  |       | 2.86                                                |       | $ | 3.91 |   | 45,000 |   | $ | 3.91 |   |
| $ 5.35-$7.95   |       | 290,500                 |       | 4.39                                                |       | 6.15 |   | 266,500 |   | 6.14 |   |
| $ 9.74         |       | 10,000                  |       | 6.33                                                |       | 9.74 |   | 6,000 |   | 9.74 |   |
| $ 3.63-$9.74   |       | 345,500                 |       | 4.48                                                |       | $ | 5.96 |   | 317,500 |   | $ | 5.89 |   |

 

**NOTE 10 - Income Taxes**

 

At September 30, 2005the Company did not have any federal or state operating loss carryforwards. TheCompany also has research and development credit carryforwards of approximately$10,000 which, if not used, will begin to expire in 2013.  Future changes in the ownership of theCompany may place limitations on the use of these carryforwards.  The provision for income taxes fromcontinuing operations consisted of the following components for the years endedSeptember 30:

 
| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Current:   |       |     |       |     |       |
| Federal    |       | $        | (207,600   | )        | $          | — |   |
| State      |       | (20,000  | )          | —   |       |
| Deferred   |       | 59,600   |       | 88,600   |       |
|       |       | $        | (168,000   | )        | $          | 88,600 |   |

 

The Company’s total deferred tax liabilities and deferredtax assets consisted of the following at September 30:

 
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Total  deferred tax assets      |       | $        | 99,000     |     | $          | 128,400 |   |
| Total  deferred tax liabilities |       | 0        |       | (117,000 | )          |
|                            |       | $        | 99,000     |     | $          | 11,400 |   |

 

These amounts have been presented in the Company’s financialstatements as follows at September 30:

 
| ** **                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Current deferred tax asset         |       | $        | 46,000     |     | $          | 128,400 |   |
| Non-current deferred tax asset     |       | 53,000   |       | 0        |       |
| Non-current deferred tax liability |       | 0        |       | (117,000 | )          |
|                               |       | $        | 99,000     |     | $          | 11,400 |   |

 

F-22

----

 

The Company’s deferred tax assets andliabilities are as follows at September 30:

 

| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:             |       |     |       |     |       |
| Accrued liabilities              |       | $        | 16,200     |     | $          | 29,000 |   |
| Allowance for doubtful accounts  |       | 1,400    |       | 12,000   |       |
| Inventory valuation adjustments  |       | 14,300   |       | 74,400   |       |
| Net operating loss carryforwards |       | 0        |       | 13,000   |       |
| Intangible assets                |       | 62,000   |       | 0        |       |
| Other                            |       | 14,100   |       | 0        |       |
|                             |       | 108,000  |       | 128,400  |       |
| Deferred tax liabilities:        |       |     |       |     |       |
| Depreciation                     |       | (9,000   | )          | (117,000 | )          |
| Net Deferred Tax Asset           |       | $        | 99,000     |     | $          | 11,400 |   |

 

Reconciliation between the statutory rateand the effective tax rate for continuing operations for the years endedSeptember 30 is as follows:

 
| ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Federal statutory tax rate          |       | (34.0    | )%         | 34.0     | %          |
| State taxes, net of federal benefit |       | (3.5     | )          | 1.5      |       |
| Other                               |       | 0        |       | (.05     | )          |
|                                |       |     |       |     |       |
| Effective tax rate                  |       | (37.5    | )%         | 35.0     | %          |

 

NOTE 11 - Related PartyTransactions

 

In September1998, the Company entered into certain royalty agreements. A former officerreceived royalties on medical product sales under certain these royaltyagreements.  Royalty expense for theyears ended September 30, 2005 and 2004 under these agreements was $5,195 and$54,044, respectively.  With the sale ofthe Medical Products Group to Aspen in November 2004, (see Note 2) the Companyno longer sells, markets or distributes products under this agreement.

 

**NOTE 12 - Retirement Savings Plan**

 

The Companyhas a pre-tax salary reduction/profit-sharing plan under the provisions ofSection 401(k) of the Internal Revenue Code. The Plan covers substantially all full-time employees who have reachedthe age of 18 and have been employed by the Company for one year or worked1,000 or more hours during the year.  TheCompany will match 25% of the first 6% of employee contributions.  Company contributions to the 401(k) plan,which are made at the discretion of management, for the years ended September30, 2005 and 2004 were $8,394 and $21,132, respectively.

 

**NOTE 13 - Commitments and Contingencies**

 

**OperatingLeases**

 

The Companyleases a building in Jacksonville, Texas under a monthly lease agreement with abase rent of $9,000.  The Companycurrently is negotiating to purchase the building and expects to complete thepurchase for $675,000 in fiscal 2006.

 

In January of2005, the Company, through Burger Time, leased a property, land and building,at its Watertown location.  Base rent is$2,000 plus property taxes of $113, per month and rent expense was $22,130 forthe year ended September 30, 2005.  Theterm of the lease is for one year, expiring on December 31, 2005, and theCompany has the option to extend the lease to another year (exercisable upon writtennotice to Landlord not later than December 1, 2005). The Company has the rightto purchase this location for $275,000.

 

F-23

----

 

In July 2004,the Company, through Burger Time, assumed a lease for land at its Sioux Fallslocation. Base rent is $1,000 per month and was $12,000 and $3,000 for the yearended September 30, 2005 and 2004, respectively.

 

In October2005, the Company leased office space in Minnetonka, Minnesota.  Base rent is $ 2,460 per month.  The term of the lease expires on December 31,2008. No payments were made in fiscal 2005.

 

In addition,the Company leases certain equipment under leases expiring through April2007.  Monthly base rent for theequipment is $1,865. Total rent and equipment expense was $222,709 and $171,893for the years ended September 30, 2005 and 2004, respectively.

 
| Future minimum rental payments for the  years ending September 30 are as follows: |   |   |    |
|-----------------------------------------------------------------------------------|--------|--------|---------|
| 2006                                                                              |   | $      | 87,712  |   |
| 2007                                                                              |   | 36,582 |    |
| 2008                                                                              |   | 16,368 |    |
| 2009                                                                              |   | 16,368 |    |
| 2010                                                                              |   | 16,368 |    |
| Total                                                                             |   | $      | 173,398 |   |

 

**StockRepurchase Program**

 

On November 8,2004, our Board of Directors authorized a repurchase program in the amount of175,000 shares replacing a repurchase program originally adopted in September2001.  As of September 30, 2005 and 2004,the Company has purchased 110,235 and 62,700 common shares, respectively for acost of $651,594 and $435,507, respectively. The Company retired 103,235 shares during the year ended September 30,2005.

 

**LifeSafeFranchise Agreement**

 

During theyear ended September 30, 2004, the Company assumed a franchise agreementrelated to certain exclusive territories for leasing a proprietary emergencyoxygen system. The agreement requires payments of $8,081 monthly. Royaltyexpense under this agreement was $74,466 and $80,806 for the years endedSeptember 30, 2005 and 2004, respectively. This agreement was transferred toLife Safe Services LLC upon completion of sale of the Company’s EmergencyOxygen services business in June 2005 (see note 2).

 

**NOTE 14 - Concentrations**

 

During theyear ended September 30, 2005, the Company had one customer from our ContractManufacturing Business representing 25.3% of sales constituting 92% of theaccounts receivable balance and two vendor from its restaurant businessrepresenting 16.4% of purchases. During the year ended September 30, 2005, theCompany had accounts payable with one vendor representing 6.1% of totalaccounts payable and sales with one customer represented 11.7% of salesrepresenting 93% of the accounts receivable balance at September 30, 2004.

 

**NOTE 15- International Operations**

 

The Company hadinternational sales of approximately $0 and $952,524 for the years endedSeptember 30, 2005 and 2004, respectively and are included in income fromdiscontinued operations.  The Company didnot have any international sales related to continuing operations for the yearsended September 30, 2005 and 2004.

 

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**NOTE 16- Supplemental Cash Flow Information**

 
| ** **                                                                 | ** ** | **2005** | ** ** | **2004**  | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|-----------|------------|
| **Supplemental cash flow information:**                                    |       |     |       |      |       |
| Cash paid for interest                                                     |       | $        | 51,118     |      | $          | 48,750 |   |
|                                                                       |       |     |       |      |       |
| **Noncash investing and financing activities:**                            |       |     |       |      |       |
| Stock option issued for guarantee of long  term debt                       |       | $        | 0          |      | $          | 175,000 |   |
| Goodwill related to purchase price  adjustment of capital lease obligation |       |     |       | 876       |       |
| Issuance of long-term debt in connection  with Burger Time assets          |       |     |       | 2,300,000 |       |
| Issuance of long-term debt in connection  with LifeKit intangible assets   |       |     |       | 150,000   |       |
| Noncash in connection with purchase of  Barry Medical                      |       |     |       |      |       |
| Inventory                                                                  |       | $        | 12,975     |      | $          | 0 |   |
| Property and equipment                                                     |       | 31,280   |       | 0         |       |
| Intangibles                                                                |       | 125,000  |       | 0         |       |
| Goodwill                                                                   |       | 72,745   |       | 0         |       |
| Note payable                                                               |       | (192,000 | )          | 0         |       |
|                                                                       |       |     |       |      |       |
| Notes receivable in connection with sale of  discontinued businesses       |       | $        | 1,200,000  |      | $          | 0 |   |

 

**NOTE 17- Subsequent Events**

 

**Private Placement**

 

On November 15, 2005, theCompany entered into a subscription agreement with two private investors forthe sale of 222,222 shares of its common stock to each investor for cashconsideration of $4.50 per share. The closing date for the subscriptionagreements was November 30, 2005, subject to the right of the parties toestablish a different closing date. At the closing, each investor delivered thepurchase price of $999,999 for the 222,222 shares to be issued.

 

**Site Equities/Paycenters**

 

On November 22, 2005, theCompany, through its newly created wholly-owned subsidiary, STEN AcquisitionCorporation entered into a Loan and Merger Option Agreement with Site EquitiesInternational, Inc. and its wholly-owned subsidiary, Paycenters, LLC(“Paycenters”).Paycenters is engaged marketing and selling kiosks products used to facilitatebill payment and other financial transactions in retail locations.

 

Under the Agreement, theCompany will make a loan of an aggregate amount of $2,000,000 to the SiteEquities, which will be disbursed in three installments with $800,000 beingdisbursed on the date of the agreement. The loan is evidenced by a promissorynote. Additional installments of $600,000 will be disbursed on or following onJanuary 16, 2006 and March 16, 2006, respectively, provided that certainconditions are met. Interest will accrue on the outstanding and unpaidprincipal amount of the loan at a rate of 8% per annum. Site Equities will makeinterest only payments beginning on December 15, 2006 and continuing on June 15and December 15 of each year thereafter until December 15, 2010, at which timethe outstanding principal and accrued and unpaid interest under the loan is dueand payable. However, if the Company notifies Site Equities that it intends toexercise its merger option (as described below), interest payments will besuspended for certain periods. If the merger becomes effective, the noteevidencing the loan will be cancelled and all outstanding principal andinterest owed under the loan will be deemed to have been paid in full as of theeffective date of the merger. The loan is guaranteed by Paycenters pursuant toa guaranty and collateralized by all of the assets of Paycenters. Site Equitieshas also pledged the membership interest in Paycenters to the Company ascollateral for the loan. Amounts under the loan are subordinate to certainother debt of Site Equities.

 

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Pursuant to the Agreement, Site Equities andPaycenters granted to the Company the right and option to cause Site Equitiesand Paycenters to merge with and into the Company. Upon the consummation of themerger, the separate existence of Site Equities will cease and the Company willcontinue after the merger as the surviving entity and Paycenters will exist,immediately after the merger, as a wholly-owned subsidiary of the Company. Themerger option is exercisable in the sole discretion of the Company at any timeon or after the date of the Agreement, but no later than 270 days followingdisbursement of proceeds under the final installment of the loan. If theCompany notifies Site Equities and Paycenters that it will pursue the mergeroption, the Company and its advisors will have access to the facilities,properties, books, records and all other information of Site Equities duringnormal business hours.

 

Upon the Company’s exerciseof its merger option, Site Equities will execute and deliver an agreement andplan of merger (the “Plan of Merger”), and containing such other customaryterms and conditions reasonably acceptable to the Company. The Plan of Mergerwill contain provisions regarding the composition of the Board of Directors ofthe Company following the merger and employment agreements with certainexecutives of Paycenters. Pursuant to the Plan of Merger, shareholders of SiteEquities will receive as common stock of the Company as merger consideration.The number of shares of common stock to be received by Site Equities’sshareholders will be such that the Company’s shareholders immediately prior tothe merger will own 50.25% of the common stock outstanding of the Company afterthe merger and Site Equities’s shareholders immediately prior to the mergerwill own 49.75% of the common stock outstanding of the Company after themerger. The percentage ownership of the Company’s shareholders and SiteEquities’s shareholders will be determined on a fully diluted basis, and aresubject to adjustment, as described below, for cash contribution by the Companyto Site Equities. Immediately prior to the effective date of the merger, theCompany will pay at least $3,000,000 in cash to Site Equities. The Company may,in its sole discretion, pay an amount greater than $3,000,000, with any suchadditional payments to Site Equites made in increments of $1,000,000 and notexceeding a maximum of $15,000,000. For each $1,000,000 in excess of $3,000,000paid by the Company, the percentage ownership of the Company owned by the SiteEquities shareholders immediately after the merger will decrease by 125 basispoints. The parties have agreed to use their commercially reasonable bestefforts to cause the merger to occur within 120 days following the delivery ofthe Company’s confirmation of its notice of intent to exercise the mergeroption and it is an event of default under the note if the Site Equities failsto obtain all required approvals from its shareholders within sixty daysfollowing delivery by the Company of the such confirmation notice.

 

In connection with thetransactions, the principal shareholders of Site Equities, entered into avoting agreement, agreeing to vote the capital stock held by each for theapproval of the merger and related transactions.

 

In connection with theagreement, the Company entered into letters of understanding with twoemployees, pursuant to which the two employees will remain employed by SiteEquities for the period during which the Company may exercise its mergeroption, but their existing employment agreements with Site Equities will besuspended in favor of the terms of the letter of understanding. The letters ofunderstanding also contain certain provisions regarding the salary, benefitsand severance benefits available to each employee and provisions regardingemployment with the Company following the merger.

 

While the Company continuesto evaluate the issue, the terms of the Company’s agreement with Site Equitiesappears to qualify for consolidation under the provisions of FASBInterpretation 46, Consolidation of Variable Interest Entities, and an Interpretationof ARB No. 51 (FIN 46).

 

FIN 46 provides a newframework for identifying variable interest entities (VIEs) and determiningwhen a company should include the assets, liabilities, non-controllinginterests and results of activities of a VIE in its consolidated financialstatements.

 

In general, a VIE is acorporation, partnership, limited-liability corporation, trust, or any otherlegal structure used to conduct activities or hold assets that either (1) hasan insufficient amount of equity to carry out its principal activities withoutadditional subordinated financial support, (2) has a group of equity ownersthat are unable to make significant decisions about its activities, or (3) hasa group of equity owners that do not have the obligation to absorb losses orhte right to receive returns generated by its operations.

 

FIN 46 requires a VIE to beconsolidated if a party with an ownership, contractual or other financialinterest in the VIE (a variable interest holder) is obligated to absorb amajority of the risk of loss from the VIE’s activities, is entitled to receivea majority of the VIE’s residual returns (if no party absorbs a majority of theVIE’s losses), or both.  A variableinterest holder that consolidates the VIE is called the primary beneficiary.  Upon consolidation, the primary beneficiarygenerally must initially record all of the VIE’s assets, liabilities andnon-controlling interests at fair value and subsequently account for the VIE asif it were consolidated based on majority voting interest.  FIN 46 also required 

 

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disclosures about VIEs that the variableinterest holder is not required to consolidate but in which it has asignificant variable interest.

 

The Company currently expectsthat its agreement with Site Equities will result in the Company being theprimary beneficiary of Site Equities, a VIE. Maximum loss exposure of the Company would be up to the amount loaned toSite Equities.  The likely conclusion isthat the Company will be required to consolidate the financial position andresults of operations of Site Equities beginning on November 22, 2005, theeffective date of the agreement.

 

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