SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported) FEBRUARY 12, 1997
SENTRY TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1-12727 96-11-3349733
(State or other jurisdiction (Commission (IRS Employer
incorporation) File Number) ID Number)
350 WIRELESS BOULEVARD, HAUPPAUGE, NEW YORK 11778
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (516) 232-2100
(Former name or former address, if changed since last report)
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
On February 12, 1997, the shareholders of Knogo North America Inc.
("Knogo") and Video Sentry Corporation ("Video") approved the Amended and
Restated Agreement and Plan of Reorganization and Merger, dated as of November
27, 1996, as amended by Amendment No. 1 to the Amended and Restated Agreement
and Plan of Reorganization and Merger, dated as of January 10, 1997
(collectively, the "Merger Agreement"). Pursuant to the terms and conditions of
the Merger Agreement, as described in the Registration Statement on Form S-4 of
Sentry Technology Corporation ("Sentry") (File No. 333-20135), Sentry is now the
sole shareholder of both Knogo and Video. Each Knogo shareholder received one
share of Sentry common stock, par value $.001 per share ("Sentry Common Stock"),
and one share of Sentry Class A preferred stock, face value $5.00 per share, for
each 1.2022 shares of common stock of Knogo held by such shareholder. Each Video
shareholder received one share of Sentry Common Stock for each share of common
stock of Video held by such shareholder.
This Current Report on Form 8-K/A is being filed to amend Item 7 of
the Current Report on Form 8-K, dated February 12, 1997, as filed with the
Commission on February 25, 1997, to add the required financial information.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS.
(a) Financial Statements:
(i) Unaudited pro forma combined condensed financial statements
as of December 31, 1996 and for the year ended December 31, 1996, giving effect
to the above referenced merger.
(ii) Audited financial statements of Video Sentry Corporation for
the fiscal year ended December 31, 1996.
(iii) Audited financial statements of Video Sentry Corporation for
the two fiscal years ended December 31, 1995. (Incorporated by reference to such
financial statements included in the Registrant's Registration Statement on Form
S-4 filed January 21, 1997.)
(b) Exhibits.
23.1 Consent of Ernst & Young.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SENTRY TECHNOLOGY CORPORATION
By: /S/ PETER J. MUNDY
Peter J. Mundy
Vice President-Finance,
Secretary and Treasurer
Dated: April 28, 1997
<PAGE>
SENTRY TECHNOLOGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION
The following unaudited pro forma combined condensed financial statements
give effect to the merger on a purchase accounting basis based on the fair
market value of Video Sentry Corporation's ("Video") Common Stock at a price of
$4.02 per share, the estimated fair market value of the stock for a reasonable
period before and after October 10, 1996, the announcement date of the merger.
Upon consummation of the merger, shareholders of Knogo North America Inc.
("Knogo") will own approximately 4,802,000 shares of Sentry Technology
Corporation ("Sentry") Common Stock based on an exchange ratio of 1.2022 shares
of Knogo Common Stock in exchange for each share of Sentry Common Stock, or
approximately 49.8% of the issued and outstanding Sentry Common Stock, plus one
share of Sentry Class A Preferred Stock. Video shareholders will own
approximately 4,842,000 shares of Sentry Common Stock, or approximately 50.2% of
the issued and outstanding Sentry Common Stock. Although Video shareholders have
majority voting interest in Sentry based upon their common stock ownership
percentage, generally accepted accounting principles requires consideration of a
number of factors, in addition to voting interest, in determining the acquiring
entity for purposes of purchase accounting treatment. Such other factors to be
considered include: (I) key Sentry management positions will be held by
individuals currently holding similar positions in Knogo; (ii) the assets,
revenues and net earnings of Knogo significantly exceed those of Video; and
(iii) the market value of the securities to be received by the former
shareholders of Knogo Common Stock significantly exceeds the market value of the
securities to be received by the former holders of Video Common Stock. As a
result of these other factors, and solely for accounting and financial reporting
purposes, the merger will be accounted for as a reverse acquisition of Video by
Knogo. Accordingly, the pro forma financial information presented herein is the
historical financial statements of Knogo with purchase accounting adjustments to
reflect the acquisition of Video.
The pro forma combined condensed balance sheet assumes the merger took
place on December 31, 1996, whereby Sentry acquired all of the outstanding Video
Common Stock at its fair value plus direct costs incurred, which are estimated
to be approximately $2,350,000. The pro forma combined condensed statements of
operations present Knogo's historical condensed consolidated statements of
income for the fiscal year ended December 31, 1996 with Video's condensed
statements of operations for the same period adjusted to give effect to the
merger as if the merger occurred on January 1, 1996. Unaudited Pro Forma
Combined Condensed Financial Statements presented herein reflects the
adjustments for (i) the estimated allocation of purchase price to the assets
acquired, including goodwill and other intangibles, (ii) the write-off of
non-recurring charges related to in-process research and development, and (iii)
the effect of recurring charges related to the merger, primarily the
amortization of goodwill and other intangibles. The Unaudited Pro Forma Combined
Condensed Financial Statements do not reflect any expected cost savings as a
result of the merger. Knogo and Video are reviewing certain opportunities to
reduce combined costs and plan to eliminate duplicitive operations. The annual
cost savings associated with reducing duplicative operating expenses is
estimated to be approximately $1,200,000 for the year ended December 31, 1996.
Under the purchase accounting method, goodwill and other intangibles in the
amount of approximately $10,505,000 will be capitalized and non-recurring
charges of approximately $13,200,000 relating to in-process research and
development will be expensed and recorded in the quarter ended March 31, 1997,
the quarter the merger was consummated. These amounts are estimated based on a
preliminary purchase price allocation and a valuation of existing technology and
technology in-process. The fair market value of Video's technology was
determined utilizing a discounted cash flow approach at a discount rate of 15
percent. The charge for in-process research and development equaled its
estimated current fair value based on risk adjusted cash flows of specifically
identified technologies for which technological feasibility has not yet been
established and alternative future uses did not exist. The amortization of
goodwill and other intangibles after the merger will have an adverse effect on
the results of operations of Sentry.
The pro forma combined condensed financial statements are presented for
illustrative purposes only and is not necessarily indicative of either the
financial position or results of operations which would have been achieved had
the merger been consummated on the dates described above and should not be
construed as representations of future operations.
These pro forma combined condensed financial statements are based on, and
should be read in conjunction with, the historical financial statements and the
related notes thereto of Knogo and Video.
<PAGE>
<TABLE>
<CAPTION>
SENTRY TECHNOLOGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1996
(in thousands)
PRO FORMA PRO FORMA
KNOGO VIDEO ADJUSTMENTS COMBINED
ASSETS
CURRENT ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 7,658 $ 10 $ - $ 7,668
Accounts receivable, net 6,229 854 - 7,083
Net investment in sales-type leases - current portion 1,496 - - 1,496
Inventories 6,926 1,001 - 7,927
Prepaid expenses and other current assets 389 78 - 467
------- ------ ---- --------
Total current assets 22,698 1,943 - 24,641
NET INVESTMENT IN SALES-TYPE LEASES - non-current portion 1,205 - - 1,205
SECURITY DEVICES ON LEASE, net 281 - - 281
PROPERTY, PLANT AND EQUIPMENT, net 7,288 318 (100) (a) 7,506
GOODWILL AND OTHER INTANGIBLES 364 460 10,505 (b) 11,329
DEFERRED INCOME TAXES 174 - - 174
OTHER ASSETS 847 - - 847
--------- --------- ----------- ---------
$ 32,857 $ 2,721 $ 10,405 $ 45,983
========= ========= =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ - $ 2,046 $ - $ 2,046
Accounts payable 1,101 1,481 - 2,582
Accrued liabilities 2,268 661 2,047 (c)(d) 4,976
Obligations under capital leases - current portion 392 - - 392
Deferred revenue 231 21 - 252
--------- --------- ----------- ---------
Total current liabilities 3,992 4,209 2,047 10,248
OBLIGATION UNDER CAPITAL LEASES - non-current portion 3,154 - - 3,154
OTHER LIABILITIES - 13 - 13
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 463 - - 463
REDEEMABLE CUMULATIVE PREFERRED STOCK - - 24,010 (e) 24,010
SHAREHOLDERS' EQUITY
Common stock and additional paid-in capital 22,334 7,936 (11,889)(e) 18,381
Retained earnings/(Accumulated deficit) 2,914 (9,437) ( 3,763)(f)(g) (10,286)
--------- ----------- ------------ ---------
25,248 (1,501) (15,652) 8,095
--------- --------- ----------- ---------
$ 32,857 $ 2,721 $ 10,405 $ 45,983
========= ========= =========== ==========
See accompanying notes to unaudited pro forma combined condensed financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SENTRY TECHNOLOGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(in thousands)
PRO FORMA PRO FORMA
KNOGO VIDEO ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
REVENUES $ 23,263 $ 2,636 $ - $ 25,899
COSTS AND EXPENSES
Cost of sales 14,867 5,183 - 20,050
Selling, general and administrative expenses 7,345 2,075 (20)(i) 9,400
Amortization of goodwill and other intangibles - - 1,501 (h) 1,501
Research and development 1,686 655 - 2,341
Merger costs - 265 (265)(j) -
Interest (income) expense (20) 147 - 127
--------- --------- --------- --------
23,878 8,325 1,216 33,419
--------- --------- --------- --------
OPERATING LOSS (615) (5,689) (1,216) (7,520)
OTHER INCOME - GAIN ON SALE OF ASSETS 2,462 - - 2,462
--------- --------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES 1,847 (5,689) (1,216) (5,058)
INCOME TAX PROVISION (BENEFIT) 664 - (905)(k) (241)
--------- --------- --------- --------
NET INCOME (LOSS) 1,183 (5,689) (311) (4,817)
PREFERRED STOCK DIVIDENDS - - (1,212)(l) (1,212)
--------- --------- ----------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 1,183 $ (5,689) $ (1,523) $ (6,029)
========= ========= ============ ========
NET INCOME PER SHARE $ 0.20 $ (1.18) (0.63)
========= ========= ========
WEIGHTED AVERAGE COMMON SHARES 6,034 4,817 9,626
========= ========= ========
See accompanying notes to unaudited pro forma combined condensed financial
statements.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
Under purchase accounting, the total purchase price was allocated to
Video's assets and liabilities based upon their relative fair values.
Allocations are subject to valuations as of the date of the acquisition
based upon appraisal and other studies which are not yet completed. The
purchase price and preliminary allocation of the purchase price to assets
purchased and liabilities assumed are as follows:
(DOLLARS IN THOUSANDS)
Purchase price $ 19,454
Acquisition costs 2,350
-----------
Total estimated purchase price $ 21,804
===========
Historical net book value $ (1,501)
Estimated write-down of property, plant and equipment (100)
Liability for restructuring and integration costs (300)
Goodwill and other intangibles 10,505
In-process research and development 13,200
-----------
$ 21,804
===========
The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect to
the following pro forma adjustments:
(a) Represents the write-down of property, plant and equipment to its
estimated fair value at the balance sheet date.
(b) Represents goodwill and other intangible assets resulting
from the merger to be amortized over a seven year useful life.
(c) The Company expects to incur costs of approximately
$300,000 in connection with the implementation of a formal plan to
reduce duplicative operating expenses. The charge primarily relates to
costs associated with combining the operations of the two companies and
includes severance benefits, closure of duplicate and excess facilities
and other expenses related to the merger. This amount is a preliminary
estimate and is subject to change.
(d) Represents an accrual of approximately $1,747,000 for direct costs
related to the merger. At December 31, 1996, Knogo incurred and recorded
$338,000 and Video incurred and recorded $265,000 related to the merger.
The total estimated direct costs related to the merger are approximately
$2,350,000.
(e) As of December 31, 1996, Knogo had outstanding approximately
5,773,000 shares of common stock and Video had outstanding approximately
4,842,000 shares of common stock. Based upon the exchange ratio described
above, as of December 31, 1996, Sentry would issue approximately
4,802,000 shares of Sentry Common Stock plus approximately 4,802,000
shares of Sentry Class A Preferred Stock in exchange for all the
outstanding shares of Knogo Common Stock and would issue approximately
4,842,000 shares of Sentry Common Stock in exchange for all the
outstanding shares of Video Common Stock.
(f) Represents the elimination of Video's historical accumulated
deficit.
(g) Represents the write-off of acquired in-process research
and development upon the consummation of the merger currently estimated
to be $13,200,000. The actual amount of the write-off is subject to
change based on the completion of the valuation of existing technology
and technology in-process. This adjustment is excluded from the
Unaudited Pro Forma Combined Condensed Statement of Operations due to the
non-recurring nature of this expense.
The Unaudited Pro Forma Condensed Combined Statements of Operations gives
effect to the following pro forma adjustments:
(h) Represents the amortization of goodwill and other intangibles
calculated as of January 1, 1996 over an estimated useful life of seven
years. Goodwill and other intangibles and the related amortization
expense is subject to possible adjustment resulting from the completion
of the final purchase price adjustments and the valuation analysis.
(i) Represents the adjustment to depreciation expense based on the
estimated fair value of property, plant and equipment at January 1, 1996
over the current estimated useful lives.
(j) Represents the elimination of merger costs directly related to the
merger.
(k) Represents the adjustment to income tax expense based on pro forma
income before taxes. The provision for income taxes on a pro forma
combined basis primarily reflects the income taxes payable on Sentry's
earnings generated in Puerto Rico that cannot be offset against Sentry's
U.S. operations.
(l) Represents dividends accrued on the Sentry Class A Preferred Stock.
The Sentry Class A Preferred Stock dividends are cumulative non-cash,
payment-in-kind dividends, payable at a rate of five percent per annum of
the $5 face value per share.
<PAGE>
VIDEO SENTRY CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Balance Sheet - December 31, 1996 F-3
Statement of Operations - Year Ended December 31, 1996 F-4
Statement of Shareholders' Equity (Deficiency) - Year Ended
December 31, 1996 F-5
Statement of Cash Flows - Year Ended December 31, 1996 F-6
Notes to Financial Statements - Year Ended December 31, 1996 F-7 to F-12
<PAGE>
INDEPENDENT AUDITORS'S REPORT
We have audited the accompanying balance sheet of Video Sentry Corporation
as of December 31, 1996, and the related statements of operations, shareholders'
equity (deficiency) and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Video Sentry Corporation at December 31,
1996, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Jericho, New York
April 22, 1997
<PAGE>
VIDEO SENTRY CORPORATION
<TABLE>
<CAPTION>
BALANCE SHEET
DECEMBER 31, 1996
<S> <C>
ASSETS
CURRENT ASSETS
Cash $10,000
Accounts receivable, net of allowance for doubtful 854,000
accounts of $190,000
Inventories 1,001,000
Prepaid expenses and other current assets 78,000
-----------
Total Current Assets 1,943,000
PROPERTY AND EQUIPMENT, net 318,000
OTHER ASSETS 460,000
============
$2,721,000
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Notes payable - bank $796,000
Notes payable - shareholder 1,000,000
Notes payable - officer 250,000
Accounts payable 1,481,000
Accrued liabilities 661,000
Customer deposits 21,000
----------
Total Current Liabilities 4,209,000
OTHER LIABILITIES 13,000
-----------
COMMITMENTS
SHAREHOLDERS' DEFICIENCY:
Common stock; $.01 par value, 10,000,000 shares authorized,
4,842,000 shares issues and outstanding 48,000
Additional paid-in capital 7,888,000
Accumulated deficit (9,437,000)
----------
Total Shareholders' Deficiency (1,501,000)
------------
$2,721,000
==============
See notes to financial statements.
VIDEO SENTRY CORPORATION
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
SALES $ 2,636,000
COST OF SALES 5,183,000
-------------
GROSS MARGIN (2,547,000)
-------------
OPERATING EXPENSES:
Research and development 655,000
Selling and marketing 655,000
General and administrative 1,417,000
Merger costs (Note 1) 265,000
-------------
OPERATING LOSS (5,539,000)
---------------
OTHER EXPENSES:
Other expense 3,000
Interest expense 147,000
----------------
NET LOSS $(5,689,000)
================
NET LOSS PER SHARE $ (1.18)
================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,817,000
================
See notes to financial statements.
</TABLE>
<PAGE>
VIDEO SENTRY CORPORATION
<TABLE>
<CAPTION>
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEAR ENDED DECEMBER 31, 1996
Additional Shareholders'
Common Stock Paid-In Accumulated Equity
Shares Amount Capital Deficit (Deficiency)
<S> <C> <C> <C> <C> <C>
Balance January 1, 1996 4,727,000 $ 47,000 $7,577,000 $(3,748,000) $ 3,876,000
Stock option exercises 115,000 1,000 286,000 - 287,000
Other - - 25,000 - 25,000
Net loss - - - (5,689,000) (5,689,000)
---------- --------- ----------- -------------- ------------
Balance December 31, 1996 4,842,000 48,000 7,888,000 (9,437,000) $(1,501,000)
========== ======== =========== ============= ============
See notes to financial statements.
</TABLE>
<PAGE>
VIDEO SENTRY CORPORATION
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
OPERATING ACTIVITIES:
<S> <C>
Net loss $(5,689,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts 190,000
Depreciation and amortization 186,000
Other 27,000
Changes in operating assets and liabilities
Accounts receivable 1,494,000
Inventories 1,552,000
Prepaid expenses and other current assets 86,000
Other assets 185,000
Accounts payable (743,000)
Accrued liabilities 196,000
Customer deposits (7,000)
Other liabilities (9,000)
---------
Net cash used in operating activities (2,532,000)
-----------
INVESTING ACTIVITIES:
Purchase of property and equipment (13,000)
-----------
Net cash used in investing activities (13,000)
-----------
FINANCING ACTIVITIES:
Net borrowings from notes payable 2,046,000
Proceeds from exercise of options and warrants 287,000
----------
Net cash provided by financing activities 2,333,000
---------
NET DECREASE IN CASH (212,000)
CASH - JANUARY 1, 1996 222,000
---------
CASH - DECEMBER 31, 1996 $10,000
=========
SUPPLEMENTAL DISCLOSE OF CASH FLOW INFORMATION:
Interest paid $109,000
=========
See notes to financial statements.
</TABLE>
VIDEO SENTRY CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS AND SUBSEQUENT EVENT
Video Sentry Corporation (the "Company"), incorporated in Minnesota on
September 10, 1990, is engaged in the design, development and marketing of
a traveling closed circuit television ("CCTV") security surveillance system
throughout the United States.
During the current fiscal year, the Company incurred significant losses
primarily relating to customer uncertainties about the Company's future and
to quality issues arising in the systems installed at existing customer
locations. These issues caused a slow-down in the number of orders
placed and, therefore, a significant decline in sales during the year.
The Company incurred increased warranty, service and product costs in order
to remedy the above mentioned quality issues and to preserve customer
base. These costs, along with certain fixed overhead costs which continued
to be incurred despite the loss of sales, contributed to the significant
increase in cost of sales during the year. In addition, during the fourth
quarter, the Company recorded a book to physical inventory adjustment of
$555,000, recorded inventory reserves of $539,000, increased warranty
reserves by $ 64,000, increased the allowance for doubtful accounts by
$140,000 and wrote off capitalized software costs of $271,000.
On February 12, 1997, the Company was acquired by Sentry Technology
Corporation. The acquisition was accounted for using the purchase method of
accounting. Under the purchase method of accounting, the Company's assets
and liabilities were revalued to fair market value at such date. Pursuant
to the terms of the Agreement and Plan of Reorganization and Merger, the
shareholders of the Company received one share of Sentry Technology
Corporation common stock for each share of common stock of the Company. The
Company anticipates that current cash reserves, cash generated from
operations and guarantees from its parent, Sentry Technology Corporation,
will be adequate to finance the Company's anticipated working capital
requirements as well as future capital expenditure requirements for at
least the next twelve months.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND COST RECOGNITION - The Company recognizes revenue for its
systems at the time of shipment. Revenue for installation is recorded when
the CCTV system is installed and is netted against the costs of
installation included in cost of sales. The Company provides for one-year
coverage on defective equipment. Estimated warranty costs are recorded when
revenues are recognized.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out) or market and consist primarily of purchased parts and
components.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from two to five years.
INCOME TAXES -The Company accounts for income taxes by recognizing deferred
tax assets and liabilities for the expected future tax consequences of
events that have been included in the Company's financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial accounting and
tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No 25, "Accounting for Stock Issued to Employees".
IMPAIRMENT OF LONG-LIVED ASSETS -In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and For
Long-Lived Assets To Be Disposed Of". In accordance with SFAS 121, the
Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
fully recoverable. To determine recoverability of its long-lived assets,
the Company evaluates the probability that future undiscounted net cash
flows, without interest charges, will be less than the carrying amount of
the assets. Impairment is measured at fair value.
NET LOSS PER SHARE - Net loss per share is computed by dividing net loss
for the year by the weighted average number of common shares outstanding
during the year. The weighted average number of shares of common stock
outstanding used in the calculation of net loss per share does not include
shares issuable pursuant to the exercise of stock options or stock warrants
since the effect is anti-dilutive.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consisted of the following:
Office furniture and equipment $ 344,000
Production equipment 116,000
Machinery and equipment 169,000
Leasehold improvements 27,000
------------
656,000
Less: Accumulated depreciation 338,000
------------
$ 318,000
=============
4. OTHER ASSETS
Other assets at December 31, 1996 consisted of the following:
Deferred royalty costs $ 300,000
Deferred license costs 150,000
Other 10,000
-----------
$ 460,000
===========
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996 consisted of the following:
Accrued merger costs $ 265,000
Accrued warranty costs 250,000
Other accrued liabilities 146,000
-----------
$ 661,000
==========
6. INCOME TAXES
The components of the Company's deferred taxes at December 31, 1996 are as
follows:
Deferred tax assets:
Net operating loss carryforwards $ 2,750,000
Accounts receivable 65,000
Inventories 272,000
Accrued liabilities 85,000
-----------------
3,172,000
Less valuation allowance (3,172,000)
------------------
Net deferred tax assets $ -
==================
The valuation allowance was provided as the recoverability of the deferred
tax assets is dependent on future taxable income.
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $8,100,000 which are available to offset future taxable
income and expire in varying amounts through 2011. These carryforwards are
subject to the limitations of Internal Revenue Code section 382. This
section provides that limitations on the availability of net operating
losses to offset current taxable income result when an ownership change has
occurred for federal tax purposes.
7. COMMITMENTS
The Company leases its office and manufacturing facility under a lease
which runs through March 31, 1999. The Company is recognizing the benefit
of certain abatements made by the landlord over the life of the lease on a
straight-line basis.
The Company also leases automobiles, trucks and warehouse facilities under
operating lease agreements with an initial term of more than one year at
their inception.
Future minimum annual lease payments for all of the above leases are as
follows:
Year ending December 31:
1997 $ 106,000
1998 89,000
1999 19,000
------------
$ 214,000
=============
Total rent expense for the year ended December 31, 1996 was approximately
$163,000.
8. STOCK OPTIONS
The Company has a stock option plan for key employees, directors,
consultants and independent contractors. The exercise price for incentive
stock options granted may not be less than the fair value of the shares on
the date of grant, except for 10% shareholders, in which case the exercise
price may not be less than 110% of the fair market value. For non-
qualified stock options the exercise price may not be less than 85% of the
fair market value on the date of grant. The term for options granted under
the plan may not exceed 10 years from the date of grant, or five years in
the case of incentive stock options granted to 10% shareholders.
The Company has also granted non-qualified options to various individuals
outside of the Plan, all of which were granted at a price equal to the fair
market value of the shares at the date of grant as determined by the Board
of Directors.
The following table summarizes stock option transactions during 1996:
<TABLE>
<CAPTION>
Shares Option
Available Options Price
FOR GRANT OUTSTANDING EXERCISABLE PER SHARE
<S> <C> <C> <C> <C>
Balance January 1, 1996 65,000 693,000 189,000 $1.33-$13.56
Granted (230,000) 230,000 166,000 5.13- 7.38
Exercised - (208,000) (208,000) 1.33- 8.00
Canceled 520,000 (520,000) (14,000) 1.88- 13.56
------- --------- --------
Balance December 31,1996 355,000 195,000 133,000 $1.33-$11.63
======= ======== ========
</TABLE>
9. STOCK WARRANTS
Warrants for the purchase 150,000 shares of Common Stock were issued in
connection with the sale of unsecured notes in March 1994. The warrants are
exercisable for a period of five years from the date of issuance, and have
an exercise price of $3.38 per share. At December 31, 1996, the Company had
101,000 warrants outstanding related to this issuance.
For nominal consideration, a warrant was issued to the underwriter of the
Company's initial public offering in 1994 for the purchase approximately
187,000 shares of Common Stock at a price of $4.95 per share. The warrant
is exercisable for a period of four years commencing October 21, 1995. At
December 31, 1996, the Company had 187,000 warrants outstanding related to
this issuance.
In addition to the above warrants, at December 31, 1996 the Company had
exercisable outstanding warrants to purchase approximately 167,000 shares
of Common Stock as follows:
SHARES PRICE PER SHARE
Year expires:
1997 43,000 $1.17
1998 38,000 1.33
1998 86,000 2.00
---------
167,000 $1.17-$2.00
=========
10. STOCK - BASED COMPENSATION
As discussed in Note 2, the Company continues to account for stock-based
awards using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
and its related interpretations. Accordingly, no compensation expense has
been recorded in the financial statements for employee stock arrangements.
SFAS 123, "Accounting for Stock-Based Compensation" requires the disclosure
of pro forma net income and earnings per share had the Company adopted the
fair value method as of the beginning of the year. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock
option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made using
the Black-Scholes option pricing model with the following assumptions:
expected life, 5 years following vesting; 105% percent stock volatility;
7.5 percent risk free interest rate; and no dividends during the expected
term. The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the 1996 awards had been amortized to expense over the vesting
period of the awards the effect on pro forma net loss and net loss per
share would not have differed materially from the reported results.
11. SIGNIFICANT CUSTOMERS
The Company sells its product to large commercial enterprises in need of
security surveillance systems. Its major customers to date have been
primarily large retailers. The Company performs credit evaluations and does
not require collateral of its customers.
For the years ended December 31, 1996, the Company had sales to two
customers which accounted for approximately 74 percent and 11 percent of
the Company's total sales.
12. PROFIT SHARING PLAN
The Company has a Profit Sharing Plan (the "Plan") which covers
substantially all employees meeting the eligibility requirements.
Contributions to the Plan are determined by the Board of Directors on an
annual basis. The Plan contains a provision for a deferred compensation
plan under Section 401(k) of the Internal Revenue Code for eligible
employees. No contributions have been made by the Company to the Plan.
13. EMPLOYEE STOCK PURCHASE PLAN
In 1995, the Company has established an Employee Stock Purchase Plan and
has reserved 100,000 shares of Common Stock for future issuance. As of
December 31, 1996, no shares had been issued under the plan.
14. NOTES PAYABLE
The Company has a $2.5 million working capital revolving line of credit
with a bank. The line of credit is secured by substantially all of the
Company's assets and the personal guarantee of the Company=s President. The
line of credit accrues interest at a rate equal to three percent above the
bank's reference rate and matures in March 1998. In conjunction with the
acquisition of the Company by Sentry Technology Corporation, this note was
subsequently paid in full.
In September 1996, the Company entered into a promissory note with a
shareholder of the Company for $1,000,000. The notes payable bears interest
at 10 percent per annum and are secured by all of the assets of the
Company. The note payable is subordinated to the working capital revolving
line of credit. In conjunction with the acquisition of the Company by
Sentry Technology Corporation, this note was subsequently paid in full.
In October 1996, the Company entered into a promissory note with the Chief
Executive Officer of the Company which allows the Company to borrow up to
$500,000. The note payable bears interest at 10 percent per annum and is
secured by all the assets of the Company. The note payable is subordinated
to the working capital revolving line of credit. In conjunction with the
acquisition of the Company by Sentry Technology Corporation, this note was
subsequently paid in full.
It is management's belief that the carrying value of notes payable
approximate their fair value at December 31, 1996 due to the terms of such
instruments approximating instruments with similar terms current available
to the Company.
EXHIBIT 23.1
Consent of Ernst & Young LLP
We consent to the incorporation by reference of our report dated February 27,
1996, except as to Note 12, as to which the date is March 26, 1996, with respect
to the financial statements of Video Sentry Corporation for the two years ended
December 31, 1995 included in this Form 8-K/A for Sentry Technology Corporation
dated April 28, 1997 in the Registration Statement (Form S-4 No. 333-20135) of
Sentry Technology Corporation.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 25, 1997
