SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER: 1-12727
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SENTRY TECHNOLOGY CORPORATION
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 96-11-3349733
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
350 WIRELESS BOULEVARD, HAUPPAUGE, NEW YORK 11788
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 232-2100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
TITLE OF EACH CLASS: ON WHICH REGISTERED:
Common Stock, $.001 par value American Stock Exchange
Class A Preferred Stock, $.001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X] No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
At March 25, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $28,034,000, based upon the
closing price of the Common Stock on the American Stock Exchange on that date.
At March 25, 1997, the Registrant had outstanding 9,643,685 shares of Common
Stock, par value $.001 per share.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
ITEM 1. BUSINESS.
RECENT DEVELOPMENTS
At a special meeting of shareholders of Knogo North America Inc., a
Delaware corporation ("Knogo"), held on February 12, 1997, and a special meeting
of shareholders of Video Sentry Corporation, a Minnesota Corporation ("Video"),
the shareholders of Knogo and the shareholders of Video approved the Amended and
Restated Agreement and Plan of Reorganization and Merger, dated as of November
27, 1996, as subsequently amended (the "Merger Agreement"), by and among Knogo,
Video Sentry Technology Corporation, a Delaware corporation (the "Registrant,"
the "Company" or "Sentry"), Strip Merger Corp., a Delaware corporation ("Knogo
Merger Corp."), and Viking Merger Corp., a Minnesota corporation ("Video Merger
Corp."), and the transactions contemplated thereby.
Pursuant to the Merger Agreement, on February 12, 1997 (the "Effective
Date"), each of Knogo and Video became a wholly-owned subsidiary of Sentry, with
(a) each former Knogo shareholder being entitled to receive one share of Sentry
Common Stock, par value $.001 per share ("Sentry Common Stock"), and one share
of Sentry Class A Preferred Stock, par value $.001 per share ("Sentry Class A
Preferred Stock"), for each 1.2022 shares held of Knogo Common Stock, par value
$.01 per share, and (b) each former Video shareholder being entitled to receive
one share of Sentry Common Stock for each share held of Video Common Stock, par
value $.01 per share. This series of transactions is referred to herein
collectively as the "Merger."
The Company was incorporated in October 1996. The Merger was accounted for
under the purchase method of accounting. Although Video shareholders have a
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. As a result of these
factors, further described in Note 1 to the Consolidated Financial Statements,
and solely for accounting and financial reporting purposes, the Merger will be
accounted for as a reverse acquisition of Video by Knogo. Accordingly, the
financial statements of Knogo are the historical financial statements of Sentry
and the results of Sentry's operations will include the results of operations of
Video Sentry after the Effective Date. Therefore, the financial information
included in Items 6, 7 and 8 of this Form 10-K include the results only of
Knogo.
GENERAL
Sentry is a holding company for Video and Knogo and their respective
subsidiaries. Accordingly, the business of Sentry is the business conducted by
Video and Knogo and their respective subsidiaries. Prior to the Effective Date,
Sentry had not conducted any business activities, other than those incident to
its formation, its execution of the Merger Agreement and related agreements, and
the taking of other actions in connection with the Merger.
VIDEO
Video designs, manufactures, markets, installs and services a programmable
traveling closed circuit television ("CCTV") surveillance system that delivers a
high quality video picture which is used in a wide variety of applications.
Video was founded in 1990 and made its first sales in 1992.
Video's proprietary CCTV system, called SentryVision, is well suited for
loss prevention surveillance in retail stores and distribution centers and
security surveillance for monitoring and deterring illegal and unsafe activities
in a variety of other locations such as parking garages, correctional facilities
and public transit terminals. Video's SentryVision system may also be employed
in a broad range of operational and process monitoring applications in
commercial manufacturing and industrial settings. As of December 31, 1996,
Video's system had been installed in approximately 265 customer locations
nationwide. Current customers include Lowe's Home Centers, Target Stores, Eckerd
Corporation, Mills Fleet Farm, Estee Lauder and TJ Maxx. The Company believes
that by expanding surveillance coverage Video's systems have enabled customers
to significantly reduce inventory shrinkage, increase shoplifter apprehension
rates and improve merchandising flexibility. Based on the price of its system
and the experience of Video's customers to date, the Company believes Video's
system is a cost-effective loss prevention solution which can improve the
profitability of its customers.
The Registrant believes that Video's SentryVision system is the only
proven, commercially accepted, traveling CCTV system currently available. The
SentryVision system consists of two CCTV cameras mounted on a camera carriage
assembly designed to move horizontally through a tinted enclosure that conceals
the camera's location. The system's unique, cable-free design allows the camera
to move freely and rapidly through the enclosure while transmitting a continuous
video signal to provide increased surveillance coverage. The Registrant believes
the major advantage of Video's traveling surveillance system over conventional
fixed-mount or pan/tilt/zoom ("PTZ") dome surveillance cameras is the system's
ability to provide uninterrupted security monitoring and surveillance over large
areas and over areas which have numerous visual obstructions, often at a lower
system cost. The SentryVision system permits the monitoring of activities in
areas that traditionally have been difficult to monitor, such as aisles with
overhead signs, hidden corridors, areas between vehicles, and other obstructed
areas. The system is configured to meet each customer's specific surveillance
needs and is often integrated with the customer's existing peripheral
surveillance equipment.
KNOGO
Knogo is engaged in the design, manufacture, sale, installation and
servicing of a complete line of electronic article surveillance ("EAS")
equipment. Knogo was incorporated in Delaware in August 1994, while its
corporate predecessor had been in business for nearly 30 years. Knogo was
created in connection with an Amended and Restated Agreement and Plan of Merger
(the "Sensormatic Merger Agreement"), dated as of August 14, 1994, among
Sensormatic Electronics Corporation ("Sensormatic"), Knogo Corporation (the
"Knogo Predecessor") and Knogo. Pursuant to the Sensormatic Merger Agreement,
the Knogo Predecessor merged with and into Sensormatic on December 29, 1994 (the
"Sensormatic Merger"). Immediately prior to the Sensormatic Merger, the Knogo
Predecessor contributed to Knogo all of the Knogo Predecessor's operations in
the United States, Canada and Puerto Rico (the "Territory") and distributed one
share of common stock of Knogo for each share of common stock of the Knogo
Predecessor held of record immediately prior to the Sensormatic Merger (the
"Spinoff").
Certain information in this Annual Report on Form 10-K is presented as if
the Sensormatic Merger and Spinoff were consummated on March 1, 1992. In
addition, at the time of the Spinoff, Knogo changed its fiscal year end from
February 28 to December 31.
The EAS systems which Knogo manufactures are based upon three distinct
technologies. One system, the Swept Radio Frequency ("Swept RF") system, uses
medium frequency transmissions in the two to nine megahertz range. The second
system, the Dual Radio Frequency ("Dual RF") system, uses ultra-high frequency
radio signals in the 902 megahertz and 928 megahertz bands. The third system,
Micro-Magnetics ("MM"), uses very low frequency electromagnetic signals in the
range of 218 hertz to 9 kilohertz. Knogo also manufactures a non-electronic
dye-stain pin ("KnoGlo(TM)"). In addition, Knogo markets a closed circuit
television system, or ("CCTV"), known as "The KNOGO Surveillor(TM)." Effective
April 1, 1996, Knogo became an authorized distributor of the library security
systems and related products of Minnesota Mining and Manufacturing Company
("3M").
Of Knogo's bookings in the Territory for the year ended December 31, 1996
approximately 30% were attributable to the MM System, 15% to the Swept RF
system, 16% to the Dual RF system, 2% to the KnoGlo(TM) system,14% to the 3M
library security systems and 23% to the CCTV system. For the year ended December
31, 1995 approximately 48% were attributable to the MM system, 21% to the Swept
RF system, 13% to the Dual RF system, 2% to the KnoGlo(TM) system, 4% to the
Express system (a self-check system for libraries ("Express") which was sold by
Knogo in March 1996) and 12% to the CCTV system. For the 10 month period ended
December 31, 1994, and the year ended February 28, 1994, respectively,
approximately 20% and 40% of Knogo's bookings in the Knogo Territory were
attributable to the Swept RF system, 23% and 19% to the Dual RF system, 43% and
32% to the MM system, 3% and 2% to the KnoGlo(TM) system, and 11% and 7% to the
CCTV system, respectively. Knogo's bookings represent the gross value of orders
accepted.
The principal application of Knogo's products is to detect and deter
shoplifting and employee theft in supermarket, department, discount, specialty
and various other types of retail stores including bookstores, video, liquor,
drug, shoe, sporting goods and other stores. The use of these products reduces
inventory shrinkage by deterring shoplifting, increases sales potential by
permitting the more open display of greater quantities of merchandise, reduces
surveillance responsibilities of sales and other store personnel and, as a
result, increases profitability for the retailer. In addition, Knogo's EAS
systems are used in non-retail establishments to detect and deter theft, in
office buildings to control the loss of office equipment and other assets, in
nursing homes and hospitals for both asset and patient protection, and in a
variety of other hard goods applications.
Knogo has continued to devote resources to the development of its EAS
business in the supermarket sector, a relatively untapped market among retail
users of loss prevention devices. While revenues in this market have been modest
relative to those produced in Knogo's traditional markets, the Company believes
that this market offers considerable potential for growth.
Knogo has also devoted resources to the development of its asset protection
business in non-traditional areas, particularly in the area of manufactured hard
goods such as printed circuit boards, computer processor and memory chips and
related components. While no significant revenue has been received to date in
connection with this line of business, the Company believes the potential for
growth in this market is considerable.
THE SENTRYVISION SYSTEM
The SentryVision system consists of a camera carriage unit, a continuous
tinted enclosure and electronic control equipment. The carriage unit moves
within the enclosure and carries two pan/tilt/zoom CCTV cameras, electronic
transmission components and a motor drive. The carriage track and enclosure are
designed to custom lengths for more complete viewing. Using Video's patented
transmission technology, the carriage unit transmits a video signal from the
camera(s) through two copper conductors running inside the enclosure to a
receiver unit located at one end of the carriage track. The copper conductors
also carry power to the camera carriage, eliminating the need for power or
communication cables. From the receiver unit, the video signals are relayed to a
central monitoring location by wire or fiber optics, where a system operator can
position or move the camera carriage to obtain the best vantage point while
viewing and recording the continuous, live video pictures. The system design
supports conventional peripheral devices, such as videocassette recorders, alarm
inputs, pan/tilt/zoom camera and lens control, monochrome or color cameras, and
voice intercom systems.
The SentryVision system typically employs two cameras facing opposite
directions and operates at variable speeds up to 15 feet per second. The system
is designed to allow three control modes: manual control, automatic patrol, or
automated control. In the manual control mode, the combination of carriage
movement, camera pan, tilt and zoom features, and the ability to view from each
side of the enclosure, enables the user to manually follow and record persons
engaging in suspected activities from a central control station. When engaged in
the automatic patrol mode, the carriage will automatically travel through
pre-programmed "tours" of a facility, affording precise camera views of intended
target locations. The Company anticipates that tours may be programmed for full
end-to-end facility observation, random view facility observation, or
user-defined facility observation with a series of stops at precise locations
focusing on precise views. Under an automated control mode, the system would be
operated as a component in an automated control system. This configuration
enables the system to respond to control commands provided externally to the
system through a serial interface port. In addition, the SentryVision system
utilizes the RS-232 communication protocol, which allows Video's carriage
control to be integrated with any industry standard controller.
The SentryVision carriage was designed and manufactured to provide a number
of different options and features that can be applied to customer specific
applications. Available options include 30 degree panning, black and white (low
light) cameras and 10x or 12x lens upgrades. These features are offered to
customers as value-added upgrades to the standard carriage.
The Company is in the process of developing a unique point of sale ("POS")
video control system which utilizes the automated control mode of the
SentryVision system. This automated control system is designed to extract
transaction information from on-site retail POS terminals, monitor the
transactions for exceptions to standard transactions, analyze occurrences of
repeated exceptions for abnormal activity by specific cashiers, and then trigger
the SentryVision system to capture the suspect activity on video tape,
overlaying real-time register transaction information on the closed circuit
video picture. The SentryVision system's ability to provide precise overhead
views of register terminals when automatically triggered by POS activity is
expected to differentiate this product in the market. Video's POS system has
been installed in a store for customer testing.
Retail Market Applications. Video sold its first systems in 1992 for
installation in parking garage security surveillance applications, but quickly
moved its market focus into the retail sector. In this sector, the Company has
identified a number of specific market segments for which Video's SentryVision
systems are well suited for loss prevention surveillance, including home
centers, mass merchandise chains, supermarkets and drug stores, as well as
related distribution centers. The key application is inventory loss prevention
in the stores, stock rooms and distribution centers. In addition, the Company
believes that fraud detection at the cash registers will be a significant new
application area with the introduction of Video's POS system.
Video's system is typically installed in retail stores which use a checkout
area at the front of the store and product display configurations and high
merchandise shelving which form rows and aisles. Video specializes in designing
system applications which are customized to fit a customer's specific needs and
which integrate the customer's existing surveillance equipment (PTZ dome and
fixed-mount cameras) with the SentryVision system. The flexibility of the system
allows the customer to specify target-coverage areas ranging from stock rooms to
total store coverage and focus on shoplifting or employee theft. The
SentryVision system is installed near the ceiling along the rows of cash
registers and between the ends of the merchandise aisles. This allows the
retailer to easily observe both the cash handling activities of cashiers in the
checkout area and customer activities between the merchandise rows, despite the
presence of hanging signs and other obstructions. The entire sales floor can be
monitored efficiently by focusing up and down the aisles and by moving the
carriage horizontally from aisle to aisle, or from cash register to cash
register. In addition, with the use of camera tilt and zoom lens features,
activities in each area can be monitored in greater detail. Results from Video's
current installations indicate significant improvements in detecting shoplifting
and employee theft. Customers using Video's system have reported significant
reductions in theft-related inventory shrinkage. The Company expects to expand
Video's product line for loss prevention surveillance in retail stores by adding
Video's innovative POS video surveillance system.
o Home Centers. Video has installed systems in 168 store locations for
four customers in the home center segment of the retail market. Home
centers represent Video's fastest growing market segment. In the past
three years, Video's system has been installed in 143 locations for
Lowe's Home Centers, a 405 store chain, and in 23 locations for Mills
Fleet Farm, a 32 store regional hardware, home supply and discount
retail chain. Both companies required systems for total floor
coverage, with Lowe's Home Centers choosing to integrate track cameras
with PTZ dome and fixed-mount cameras, while Mills Fleet Farm chose to
use only the track camera system. Video received Security magazine's
"Best" award for New Security Installation in June 1994 for its
installation in the Mills Fleet Farm store in Brooklyn Park,
Minnesota. In addition Mills Fleet Farm has one store with Video's POS
system integrated with a SentryVision system over the cash registers.
According to industry publications, the home centers market consists
of approximately 5,100 companies operating over 20,000 stores in the
United States, with the top ten companies operating over 5,500 stores.
Typical systems for home centers installations range in price from
$20,000 to $30,000 for smaller stores and from $80,000 to $150,000 for
larger stores requiring more carriage runs to provide adequate
coverage.
o Mass Merchandise Chains. Video has installed systems in 23 store
locations for six customers in this segment, including Target Stores
and TJ Maxx. The targeted coverage varies extensively in these
installations from only stock rooms to total store coverage. According
to industry publications, in 1996 the mass merchandise market in the
United States had approximately 140 companies operating over 10,000
store locations, with the top nine companies operating approximately
7,400 of these stores. Typical systems for mass merchandise stores
range in price from $20,000 to $30,000 for smaller stores or target
coverage areas and from $90,000 to $130,000 for large systems.
o Supermarkets. Video has installed systems in 19 store locations for
seven supermarket customers. The targeted coverage in most of these
installations has been the entire retail space. The supermarket
segment of the market is very fragmented in the United States.
According to industry publications, in 1996 approximately 2,000
companies operated nearly 35,000 stores, with over half of those
companies having fewer than four stores. The top 28 companies operate
more than half of the total stores. Typical systems for supermarket
installations range in price from $15,000 to $20,000 for smaller
stores to $40,000 to $50,000 for larger stores.
o Drug Stores. Video has installed 24 systems for two drug store
customers, including a major national drug store chain of
approximately 1,750 stores. The targeted coverage area for this
customer is the entire store. According to industry publications, in
1996 the drug store market consisted of approximately 1,500 companies
operating approximately 21,000 stores. Typical systems for the drug
store market range in price from $15,000 to $25,000 for smaller stores
and from $40,000 to $50,000 for larger stores.
o Distribution Centers. Video also provides loss prevention surveillance
for retail distribution centers and warehouses, and has installed
systems in 27 distribution centers for 14 different customers.
Traveling through a facility from an overhead position, Video's system
can monitor activities occurring between the stacked rows of cartons
or lines of hanging garments. The system can also move a surveillance
camera into position to monitor shipping and receiving docks and
parked delivery trucks. To achieve surveillance capabilities
equivalent to those of the SentryVision system, a conventional PTZ
dome system or fixed-mount CCTV camera would have to be installed at
every desired vantage point, requiring numerous cameras, additional
equipment and wiring and increased installation and operating costs.
Even though the potential number of retail distribution centers is
much smaller than the related number of store locations, the Company
believes that such distribution center installations, in addition to
providing an important revenue source, provide a potential point of
entry into the retail stores of a number of major retailers. Typical
systems for distribution center installations range in price from
$40,000 to $50,000 for a small system to over $200,000 for a large
system.
o Security Surveillance. Video has installed systems in three parking
garages for two customers. The coverage area is the total parking ramp
including in and around the parked cars. In addition, Video has
installed one system in a bus terminal to provide coverage of the
maintenance area of the garage. Video has made proposals to
correctional facilities, airport terminals, airport baggage handling
and baggage claim areas as well as airport parking facilities.
While the security surveillance and operation and process monitoring
markets may significantly benefit from the increased security, surveillance and
monitoring provided by Video's system, such applications have been limited to
date. The Company believes future orders in these additional markets may be
characterized by long lead times between proposals and shipments, and that
marketing and other related expenses may be incurred in periods prior to the
recognition of any matching sales.
Video's customers include five of the top 20 United States retailers.
According to STORES magazine, the top 20 retailers have approximately 45,000
stores. The Company's strategy is to build on Video's initial retail sales by
implementing a direct sales program targeting the retail market, including the
top 100 United States retailers.
Although the composition of Video's largest customers has changed from year
to year, a significant portion of Video's sales has been attributable to a
limited number of major customers in each of the past three years. In 1996,
Lowe's Home Centers and TJ Maxx accounted for 74% and 11%, respectively, of
Video sales. Lowe's Home Centers and Mills Fleet Farm accounted for 67% and 12%,
respectively, of Video's sales in 1995 and 33% and 48% in 1994.
No other customers accounted for more than 10% of Video's sales during
1996, 1995 or 1994. While the Company believes that one or more major customers
could account for a significant portion of Video's sales for at least the next
two years, the Company anticipates that Video's customer base will continue to
expand and that in the future Video will be less dependent on major customers.
EAS SYSTEMS
EAS systems consist of detection devices which are triggered when articles
or persons tagged with wafers or tags pass through the detection device. The
principal application of the Swept RF and Dual RF systems is to detect and deter
theft of soft goods such as clothing, while the MM systems are primarily used to
detect and deter the theft of hard goods including packaged goods and books.
At December 31, 1996, the approximate number of Knogo's Swept RF and Dual
RF systems sold or leased in the Knogo Territory exceeded 13,300. At that date,
the approximate number of Knogo's MM systems sold or leased in the Knogo
Territory exceeded 9,200.
Swept and Dual Radio Frequency Detection Systems
Knogo manufactures and distributes the Swept RF system, the principal
application of which is to detect and deter shoplifting and employee theft of
clothing in retail establishments. Knogo also manufactures and distributes the
Dual RF system, a particularly useful and cost efficient EAS system for
soft-goods retail stores with wide mall-type exit areas which ordinarily would
require multiple Swept RF systems for adequate protection. The Swept RF and Dual
RF systems consist of radio signal transmission and monitoring equipment
installed at exits of protected areas, such as doorways, elevator entrances and
escalator ramps. The devices are generally located in panels or pedestals
anchored to the floor for a vertical arrangement or mounted in or suspended from
the ceiling and mounted in or on the floor for a horizontal arrangement. The
panels or pedestals are designed to harmonize with the decor of the store. The
monitoring equipment is activated by tags, containing electronic circuitry,
attached to merchandise transported through the monitored zone. The circuitry in
the tag interferes with the radio signals transmitted through the monitoring
system, thereby triggering alarms, flashing lights or indicators at a central
control point, or the transmission of an alarm directly to the security
authorities. By means of multiple installations of horizontal Swept RF systems
or installation of one or more Dual RF system, Knogo has the ability to protect
any size entrance or exit.
Tags are manufactured in a variety of sizes and types and are attached
directly to the articles to be protected by means of specially designed fastener
assemblies. A tag is removed from the protected article, usually by a clerk at
the checkout desk, by use of a decoupling device specially designed to
facilitate the removal of the fastener assemblies with a minimum of effort.
Removal of the tag without a decoupler is very difficult and unauthorized
removal will usually damage the protected article and thereby reduce its value
to a shoplifter. Optional reminder stations automatically remind the store
clerk, by means of audiovisual indicators, to remove the tag when the article is
placed on the cashier's desk.
Swept RF and Dual RF systems generally have an economic useful life of six
years (although many of Knogo's systems have been operating for longer periods),
have a negligible false alarm rate and are adaptable to meet the diversified
article surveillance needs of individual retailers.
Magnetic Detection Systems
The primary application of MM systems is to detect and deter theft in "hard
goods" applications such as supermarkets, bookstores and in other specialty
stores such as video, drug, liquor, shoe, record, sporting goods and similar
stores.
MM systems use detection monitors which are activated by
electromagnetically sensitized strips. The MM targets are typically attached to
the articles to be protected when price tags are affixed and are easily
camouflaged on a wide array of products. The detection monitors used by the MM
systems are installed at three to five foot intervals at the exits of protected
areas. The magnetic targets can be supplied in many forms and are attractively
priced, making them suitable for a variety of retail applications. In addition,
the MM targets can be manufactured to be activated and deactivated repeatedly
while attached to the articles to be protected, which is a particularly
desirable feature for use with items such as books, compact discs, CD Roms and
videotapes, which may be "checked-out" and later returned. Accurate deactivation
is also very important when the item to be protected is a personal accessory
that will be carried by its owner from place to place, such as pocket books,
pens, lipstick, shoes and camera film and cameras.
The MM system offers retailers several features not available in Swept RF
and Dual RF systems. Since the target is very small, relatively inexpensive and
may be inserted at the point of manufacture or packaging, it provides retailers
with a great deal of flexibility and is practical for permanent attachment to a
wide variety of hard goods, especially low profit-margin products. The target
can be automatically deactivated at check-out, eliminating the risk of
triggering alarms when merchandise leaves the store and saving sales personnel
valuable time. Since the targets can be incorporated directly into a price tag,
they are convenient to use.
OTHER LOSS PREVENTION PRODUCTS
KnoGlo(TM)
KnoGlo(TM), a non-electronic, dye-stain pin, releases an indelible liquid
when tampered with. Used with passive locking mechanisms without electronics,
KnoGlo(TM) is often a retailer's first step in loss prevention. KnoGlo(TM) is
also employed in stores with EAS systems as an extra layer of protection. Such
protection is useful in problem areas (near mall door openings, for example) or
where users must maximize selling space.
Closed Circuit Video Systems
"The KNOGO Surveillor(TM)" enhances the protection of retail stores from
shoplifting and employee theft by providing retailers with optical surveillance
of the premises. The Company believes that, while less profitable than
traditional EAS products, the CCTV complements its other EAS systems and
provides retailers with further protection against internal employee theft and
external shoplifting activities. The CCTV can also be electronically connected
to the EAS system, causing a video record to be generated when an alarm is
indicated. Knogo does not manufacture its Surveillor(TM) product, but installs
it from parts purchased from Knogo's vendors.
PRODUCTION
Video
Video's manufacturing operations consist primarily of the assembly of its
camera carriages and control units using materials and manufactured components
purchased from third parties. Video is not dependent upon any particular
supplier for these materials or components. Some parts are stock,
"off-the-shelf" components, and other materials and system components are
designed by Video and manufactured to Video's specifications. Prior to the
Merger, final assembly operations were conducted at the Company's facilities in
Eden Prairie, Minnesota. System components and parts included cameras, circuit
boards, electric motors and a variety of machined parts. Each system component
undergoes a quality assurance check by Video prior to its shipment to an
installation site. Video is not subject to any state or federal environmental
laws, regulations or obligations to obtain related licenses or permits in
connection with its manufacturing and assembly operations.
After the merger, Sentry plans on manufacturing in its Cidra, Puerto
Rico plant many of the manufactured components currently purchased from third
parties. This will allow Sentry to increase the quality of manufacture as well
as the manufacturing margin realized on its goods.
Product installation and service are performed and monitored by the
Company's experienced customer service department. Installations typically take
from three days to three weeks and consist of mounting the enclosures,
installing the controller unit, installing the carriage assembly, and connecting
control and transmission cables to the central monitoring location. Items such
as high voltage power termination wiring are typically the responsibility of the
end user.
KNOGO
Knogo produces at the Company's facilities in Cidra, Puerto Rico and, to a
lesser extent, Hauppauge, New York, or purchases through suppliers, its Swept
RF, Dual RF and MM, KnoGlo(TM), and CCTV systems or their components. Production
consists of assembling electronic and mechanical components and printed
circuitry which Knogo purchases from various suppliers. Knogo's specially
designed tools, plastic cases for the tags, and the target bands used in Knogo's
system for patient and personnel control, are produced to Knogo's specifications
by independent contractors using existing molds and tooling. Knogo is not
dependent on any one supplier or group of suppliers of components for its
systems. The Company's policy is to maintain Knogo's inventory at a level which
is sufficient to meet projected demand for its products. The Company does not
anticipate any difficulties in continuing to obtain suitable components for
Knogo at competitive prices in sufficient quantities as and when needed.
Knogo manufactures and sells to Sensormatic certain electronic article
surveillance products pursuant to a Supply Agreement, dated as of December 29,
1994 (the "Supply Agreement"). Under the Supply Agreement, for a period of 30
months after December 29, 1994, products valued at a minimum of $24 million are
required to be supplied to Sensormatic's operations outside North America. Once
the Supply Agreement terminates, Knogo will have to replace the lost volume in
order to maintain profitable margins in its manufacturing operations. See Item
7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
In January 1996, Knogo acquired a controlling interest in K&M Converting
Corp. ("KMCC"). KMCC is a joint venture entered into with Marian Rubber Products
Co., Inc. ("Marian"). KMCC is the exclusive converter of magnetic material into
disposable targets or labels used in Knogo's EAS systems.
MARKETING
VIDEO
Historically, Video's systems were marketed in the United States primarily
through the efforts of Video's former President and one direct salesperson.
Since the Effective Date, the Company has begun marketing Video's products
jointly through combined efforts with Knogo's direct sales force indicated
below.
KNOGO
The Company markets Knogo's products through the direct efforts of
approximately 30 salespersons located in selected metropolitan areas across the
United States and Canada. Knogo's customers include some of the major retail
stores and store chains in North America.
Knogo's EAS systems are marketed on both a direct sales and lease basis,
with direct sales representing approximately 85% of the business. The terms of
the standard leases are generally from one to five years. The sales prices and
lease rates vary based upon the type of system purchased or leased, number and
types of targets included, the sophistication of the system employed and, in the
case of a lease, its term. In the case of the MM systems, detection targets
which are permanently attached to the item to be protected are sold to the
customer even when the system is leased. Therefore, in the case of either a sale
or lease of an MM system, as the customer replenishes its inventory, additional
targets will be required for those items to be protected. The Company also
markets a more expensive, removable, reusable detection tag for use with Knogo's
MM systems on certain products such as clothing and other soft goods.
In keeping with industry practices, the Company also selectively offers EAS
systems on a deferred billing arrangement and, in some instances, on a
short-term introductory basis. At the end of such period the retailer has the
option to lease or purchase the equipment.
During the year ended December 31, 1996, Knogo placed in service in the
Territory 945 Swept RF, Dual RF, and MM systems. The Company does not believe
that the loss of any one Knogo customer would have a material adverse effect on
the Company's business.
The Company believes that the supermarket industry is a major potential
market in North America for EAS systems, and believes Knogo's technology and
service capabilities give the Company an important advantage in the supermarket
sector.
Historically, the supermarket industry in North America has been reluctant
to accept EAS for a number of reasons. The Company believes these include:
relatively high product turnover, low average selling prices and low profit
margins that have made the cost of targets and tagging appear prohibitive; the
belief on the part of supermarket management that theft was a relatively low
percent of costs; and the desire to not slow the checkout process and thus
increase labor expense or customer dissatisfaction. However, as bar code
scanning and other management and accounting systems improved in supermarkets,
supermarket managements were able to see that theft of a relatively narrow range
of products, namely health and beauty products, wine and liquor, cigarettes,
film, batteries and meats, were causing most of the loss of margin from theft,
and that protection of these products could in fact be economical. All EAS
suppliers have devoted considerable resources to this market area with
increasingly positive results, measured in terms of the supermarket industry
trade press, customer interest and installations. As the installed base of EAS
systems in supermarkets grows, theft will shift to unprotected stores. This, and
a proven financial return on investment, may increase demand rapidly.
The Company believes the library market continues to be a significant
growth market for magnetic technology. In March 1996, Minnesota Mining and
Manufacturing Company ("3M") and Knogo entered into a strategic alliance to
provide universal asset protection to libraries across North America. The
Company believes that this strategic alliance will strengthen service to library
customers.
The agreement, effective April 1, 1996, permits Knogo to act as a
distributor of all of 3M's library products, including the 3M Tattle-Tape(TM)
Security Strips, detection systems, 3M SelfCheck System hardware and software
and other 3M library materials flow management products and accessories to
public, academic and government libraries. In addition, under the agreement 3M
provides service and installation for all new and existing Knogo library
customers throughout North America.
In September 1995, Knogo and Asset Management Technologies ("AMT"), a loss
prevention consultant to the computer industry, signed an exclusive marketing
agreement to provide EAS technology services to the computer industry. Profits
in the computer industry are often threatened by the theft of computer
components, processor chips, memory modules ("SIMMS") and hard drives. An
estimated 80% of the thefts are perpetrated by employees stealing from computer
and computer component manufacturers and distributors. The Company and AMT
believe that the integration of Knogo's EAS system into an overall loss
prevention program in the computer industry would significantly curb such
thefts. Knogo's marketing efforts in this area include the introduction of
SecureBoard(TM) which the Company believes is the first EAS technology
specifically engineered to meet the requirements of the computer and electronics
industry.
SecureBoard(TM) EAS Technology extends Knogo's expertise in loss prevention
technology to the computer and electronics industry. Using this technology,
licensed KNOGO ENABLED(TM) board manufacturers can embed EAS material into an
internal layer of a printed circuit board, making SecureBoard(TM) the first EAS
system to be compatible with high volume printed circuit board manufacturing
processes. The resulting board has built-in theft prevention. Because the EAS
material is deposited onto an internal layer of the board, it cannot be removed
without destroying the board. SecureBoard(TM) is also compatible with magnetic
detection systems already available from major EAS manufacturers, including
Knogo. Knogo intends to license its technology to these manufacturers in return
for royalty payments. No significant revenue was produced from this market in
1996.
SERVICE
Installation, repair and maintenance services are performed primarily by
the Registrant's personnel. All products sold or leased are covered either by a
short warranty period or an extended warranty period. The Registrant also offers
to its customers the option of entering into a maintenance contract with the
Registrant or paying for service on a per call basis.
COMPETITION
The Registrant operates in a highly competitive market with many companies
engaged in the business of furnishing security services designed to protect
against shoplifting and theft. In addition to EAS systems using the concept of
tagged merchandise, such services use, among other things, conventional PTZ dome
and fixed mount CCTV systems, mirrors, guards, private detectives and
combinations of the foregoing. The Registrant competes principally on the basis
of the nature and quality of its products and the adaptability of these products
to meet specific customer needs and price requirements.
To the Registrant's knowledge, there are several other companies that
market, directly or through distributors, traditional closed circuit video
systems and/or EAS equipment to retail stores, of which Sensormatic, Checkpoint
Systems, Inc., Minnesota, Mining and Manufacturing Company, Burle Industries,
Inc., Pelco Manufacturing, Inc., Vicon Industries, Inc., Ultrak, Inc. and
Panasonic Broadcast and Television Systems Company are the Registrant's
principal competitors. Many of the Registrant's competitors have far greater
financial resources, more experienced marketing organizations and a greater
number of employees than the Registrant.
In connection with the Spinoff and Sensormatic Merger, Knogo has agreed
with Sensormatic that Knogo will not compete with Sensormatic in areas outside
of the Territory through the period ending December 29, 1999.
PATENTS AND OTHER INTELLECTUAL PROPERTY
VIDEO
Video holds a United States patent expiring in 2010, which covers the cable
free transmission of the video signal to and from the carriage. This technology
prevents degradation of the video signal which can result from movement and
prolonged friction caused by the carriage. Video has also applied for
corresponding foreign patents. The Company intends to seek patent protection on
specific aspects of Video's SentryVision system. In addition, the Company
intends to seek patent protection in the future for certain aspects of new
systems which may be developed for Video. There can be no assurance that any
patents applied for will be issued, or that the patent currently held, or new
patents, if issued, will be valid if contested or will provide any significant
competitive advantage to Video.
The Company is not aware of any infringement of patents or intellectual
property held by third parties. However, if Video is determined to have
infringed on the rights of others, Video and/or the Company may be required to
obtain licenses from such other parties. There can be no assurance that the
persons or organizations holding desired technology would grant licenses at all
or, if licenses were available, that the terms of such licenses would be
acceptable to the Company. In addition, the Company could be required to expend
significant resources to develop non-infringing technology.
The Company is aware of an Australian patent and an Australian patent
application describing certain aspects of a product which in some respects is
similar to the SentryVision system. Video's patent attorneys have advised Video
that the Australian patent and Australian patent application appear to have
lapsed. To Video's knowledge, the holder of the Australian patent is not
currently marketing, within the United States or Europe, the product covered by
the Australian patent. In addition, no issued patents or patent applications
corresponding to the Australian patent or the Australian patent application have
been uncovered in the United States or any other foreign country.
The Company is also aware of a British patent application from a third
party disclosing aspects of a device which is in some respects similar to the
SentryVision system. Video's patent attorneys have advised Video that the
British patent application appears to have lapsed. In addition, no issued
patents or patent applications corresponding to the British patent application
have been uncovered in the United States or any other foreign country. To
Video's knowledge, the applicant is not currently marketing the product
described in the application.
Video has also relied on the registration of trademarks and tradenames, as
well as on trade secret laws and confidentiality agreements with its employees.
While the Company intends to continue to seek to protect Video's proprietary
technology and developments through patents, trademark registration, trade
secret laws and confidentiality agreements, the Company does not rely on such
protection to establish and maintain Video's position in the marketplace. The
Company's management believes that improvement of Video's existing products,
reliance upon trade secrets and on unpatented proprietary know-how, and the
development of new products will be as important as patent protection in
establishing and maintaining a competitive advantage.
KNOGO
Knogo has 24 United States and Canadian patents and eight patent
applications (four in the United States and four in Canada) relating to (i) the
method and apparatus for the detection of movement of articles and persons and
accessory equipment employed by Knogo in its Swept RF, Dual RF and MM systems,
(ii) various specific improvements used in Knogo's Swept RF, Dual RF and MM
systems and (iii) various electrical theft detection methods, apparatus and
improvements not presently used in any of Knogo's EAS systems. Although patent
protection is advantageous to Knogo, the Company's management does not consider
any single patent or patent license owned or held by Knogo to be material to its
operations, but believes that Knogo's competitive position ultimately will
depend on its experience, know-how and proprietary data, engineering, marketing
and service capabilities and business reputation, all of which are outside the
scope of patent protection.
Sensormatic and Knogo license certain patent rights and technology of the
Knogo Predecessor to each other, for use in their respective territories,
pursuant to the License Agreement dated December 29, 1994, entered into in
connection with the Sensormatic Merger. In addition, Sensormatic has rights to
manufacture and sell SuperStrip within the Territory.
RESEARCH AND DEVELOPMENT
VIDEO
Historically, research and development has been conducted by Video's
engineering, technical and support staff, and by independent contractors. These
activities will be integrated with Knogo's research and development group in the
future. Video's expenditures for research, development and engineering were
$655,000, $607,000, and $352,000 during the years ended December 31, 1996, 1995
and 1994, respectively. To date, Video's research and development efforts have
focused on developing and improving its traveling CCTV security surveillance
system and incorporating POS controls into the system.
During 1995, Video completed development of its second generation product
known as the SentryVision system. This system is a microprocessor-driven product
which employs the same video signal transmission technology used in Video's
previous traveling system. The significant advancements of SentryVision include
precise carriage position control, programmable camera movement and positioning,
increased carriage speed control, a downsized enclosure and added cornering
capabilities. A key addition provided in the system is a serial communication
and control interface which enables control of the system by various external
devices. In addition to the improved performance, this system is designed for
reduced material, assembly, installation and service costs.
The third generation of the SentryVision system ("SentryVision II") is
currently in the research and development stage and is expected to replace the
existing SentryVision system. SentryVision II is intended to offer broader
applications in domestic markets, increased product compatibility for
international markets, quality enhancements, substantial reductions in
production costs, enhanced video performance and an upgraded software features.
Video's other major research and development effort occurring during the
past eighteen months is its POS control system. This system integrates POS
control technology with the serial control interface provided with the
SentryVision system. The development effort to date has included adaptations of
its POS technology to large retail store environments, graphical user interface
software for user programmability, exception analysis algorithms for prediction
of abnormal transaction behavior and integration into the SentryVision system.
The resulting combination will be a fully programmable real-time POS video
control system.
Research and development activities scheduled for 1997 include developing
additional enhancements and features to the SentryVision system including motion
detection capabilities, increasing compatibility of the POS video control system
with a broader range of register types and designing a SentryVision dome camera.
The SentryVision dome camera will be designed to incorporate Video's video
picture and power transmission technology into a PTZ dome camera.
KNOGO
At December 31, 1996, Knogo had 18 employees located in the United States
engaged either full or part-time in research and engineering and product
development. Knogo may from time to time retain consultants for specific project
assistance. Because of the importance to Knogo of products to better serve the
North American market and the improvement of its existing EAS products, Knogo
engages in company-sponsored research and engineering relating to the completion
of new products and the improvement of its existing EAS products. For the years
ended December 31, 1996 and 1995, approximately $1,686,000 and $1,537,000,
respectively, was expended on Knogo-sponsored research.
Knogo is focusing its research, development and engineering efforts on
those projects with the most potential for market growth in the Territory.
During 1996 and 1995, Knogo re-engineered and newly designed the Knoscape(TM)
line of electronic article surveillance systems. Offered in both magnetic and
radio frequency versions, these new systems feature digital signal processing
and ease of installation and maintenance and the aesthetic design Knogo's
customers desire. Other areas of research include new types of magnetic target
materials and its application in the protection of high-theft computer
components and the development of a new 8 mhz Swept RF system. In addition,
Knogo has designed new accessories including the deluxe desktop deactivator,
dual function hand stamp, Swept RF verifier/deactivator and an automatic label
applicator.
REGULATION
Because Knogo's EAS systems and Video's surveillance and CCTV systems use
radio transmission and electromagnetic wave principles, such systems are subject
to regulation by the Federal Communications Commission ("FCC") under the
Communications Act of 1934. In those instances where it has been required,
certification of such products by the FCC has been obtained. As new products are
developed by the Company, application will be made to the FCC for certification
or licensing when required. No assurance can be given that such certification or
licensing will be obtained or that current rules and regulations of the FCC will
not be changed in an adverse manner.
Sentry's business plan calls for the sale and use of Sentry's products in
domestic markets and, where consistent with contractual obligations, in
international markets. Sentry's products may be subject to regulation by
governmental authorities in various countries having jurisdiction over
electronic and communication use. Sentry intends to apply for certification of
its products to comply with the requirements under the regulations of the
countries in which it plans to market its products. No assurance can be given
that such certification will be obtained or that current rules and regulations
in such countries will not be changed in a manner adverse to Sentry.
The Company believes it is in material compliance with applicable United
States, state and local laws and regulations relating to the protection of the
environment.
EMPLOYEES
VIDEO
As of December 31, 1996, Video had 32 full-time employees, consisting
of 12 in installation and scheduling, two in engineering, research and
development and technical support, 12 in customer service, three in sales and
marketing, one in materials management, and two in accounting and senior
management positions. None of Video's employees are employed pursuant to
collective bargaining agreements. Subsequent to the Merger, 19 of Video's
employees remained with Video.
KNOGO
At December 31, 1996, Knogo employed 233 full-time employees, of whom three
were engaged in executive capacities, 49 in administrative and clerical
capacities, 18 in engineering, research and development, 77 in production, 35 in
marketing and sales and 51 in customer service. None of Knogo's employees are
employed pursuant to collective bargaining agreements. The Company believes that
Knogo's relations with its employees are good.
ITEM 2. PROPERTIES.
The Registrant's principal executive offices, East Region office and United
States production, research and development and distribution facilities are
located in Hauppauge, New York, in a 68,000 square foot facility leased by the
Registrant. The Registrant owns a 55,000 square foot manufacturing facility in
Cidra, Puerto Rico and a one-story building consisting of approximately 6,000
square feet in Villa Park, Illinois, where its West Region office is located.
The Registrant presently leases an office, assembly and warehouse facility of
approximately 13,000 square feet in Eden, Prairie, Minnesota, with the lease for
such facility expiring March 31, 1999. This facility is expected to be closed
and the lease terminated through negotiation with the landlord. In addition, the
Registrant leases other office and warehouse space as required but does not
regard any of such space as material to the Registrant's business.
ITEM 3. LEGAL PROCEEDINGS.
Although the Registrant is involved in ordinary, routine litigation
incidental to its business, it is not presently a party to any other legal
proceeding, the adverse determination of which, either individually or in the
aggregate, would be expected to have a material adverse affect on the
Registrant's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year ended December 31, 1996, there
were no matters submitted to a vote of the Registrant's security holders,
through the solicitation of proxies or otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON AND PREFERRED EQUITY AND RELATED
STOCKHOLDER MATTERS.
(a) Price Range of Common and Preferred Stock.
The Sentry Common Stock and Sentry Class A Preferred Stock began trading on
the America Stock Exchange on February 13, 1997. Prior to such date, there was
no public market for the Registrant's Common Stock or Preferred Stock. As of
March 24, 1997, the high and low sales price for (i) the Common Stock was $3 7/8
and $2 1/4, respectively, and (ii) for the Class A Preferred Stock was $4 1/4
and $2 1/4, respectively.
(b) Holders of Common and Preferred Stock.
At March 24, 1997, the number of record holders of Common Stock of the
Registrant was 551 and of its Class A Preferred Stock was 492.
(c) Dividends.
The payment of future dividends on Sentry Common Stock will be a business
decision to be made by the Board of Directors of Sentry from time-to-time based
upon the results of operations and financial condition of Sentry and such other
factors as the Sentry Board of Directors considers relevant. Sentry has not
paid, and does not presently intend to pay or consider the payment of, any cash
dividends on the Sentry Common Stock. Pursuant to the terms of the Merger
Agreement, Sentry is required to pay certain annual or semiannual dividends on
the Sentry Class A Preferred Stock.
The annual dividend rate on each share of the Sentry Class A Preferred
Stock has been fixed at five percent (5%) of the $5.00 per share face value (the
"Face Value") of such stock, payable as described below (the "Dividend"). The
holders of shares of the Sentry Class A Preferred Stock are entitled to receive
Dividends on the following dates (each, a "dividend payment date"): February 12,
1998 and 1999, August 12, 1999 and 2000, February 12, 2000 and 2001; the 12
month period ending on each of the first two dividend payment dates is an
"annual dividend period," the six month period ending on each of the next four
dividend payment dates is a "semi-annual dividend period," and each such annual
dividend period or semi-annual dividend period is a "dividend period." Dividends
(whether or not declared) are payable in additional shares of the Sentry Class A
Preferred Stock during the two annual dividend periods ending on the first two
dividend payment dates subsequent to issuance of the Sentry Class A Preferred
Stock, such that holders shall receive a Dividend of 1/20th of a share of Sentry
Class A Preferred Stock for each share of Sentry Class A Preferred Stock held.
Thereafter, the holders of shares of the Sentry Class A Preferred Stock are
entitled to receive, in preference to dividends on the Junior Stock, and whether
or not declared the Dividend (including any Dividend accrued and unpaid) payable
in cash, out of funds legally available for the payment of dividends, such that
holders shall receive a Dividend of $0.25 for each share of Sentry Class A
Preferred Stock held, which Dividend shall accrue semi-annually and be due in
equal installments on each of the last four dividend payment dates. Each
additional share of the Sentry Class A Preferred Stock issued as a Dividend
shall be valued at the Face Value. All Dividends paid with respect to shares of
the Sentry Class A Preferred Stock pursuant to this paragraph shall be paid pro
rata to the holders entitled thereto.
Whenever, at any time or times, any Dividend payable shall be in arrears,
the holders of the outstanding shares of Sentry Class A Preferred Stock shall
have the right, voting separately as a class, to elect two directors of Sentry
no later than two years after such Dividend shall be, and continue, in arrears.
Upon the vesting of such right of the holders of Sentry Class A Preferred Stock,
the maximum authorized number of members of the Sentry Board shall automatically
be increased by two and the two vacancies so created shall be filled by vote of
the holders of the outstanding shares of Sentry Class A Preferred Stock. The
right of the holders of Sentry Class A Preferred Stock to elect two members of
the Sentry Board as aforesaid shall continue until such time as all Dividends in
arrears shall have been paid in full, at which time such right shall terminate,
except as herein or by law expressly provided, subject to revesting in the event
of each and every subsequent default of the character above described.
If the Sentry Board declares, and Sentry pays or sets funds apart for
payment of, any dividend on any of the Junior Stock, the holders of the Sentry
Class A Preferred Stock shall share equally, share and share alike, in the
distribution of any and all dividends declared on such Junior Stock, provided
that for this purpose each share of Sentry Class A Preferred Stock shall be
treated as one share of such Junior Stock.
For additional information with respect to the Class A Preferred Stock, See
Note 1.A. to the Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The Company was incorporated in October 1996. However, information with
respect to the results of operations of the Company in this Form 10-K is
presented as if the Spinoff and Sensormatic Merger were consummated as of March
1, 1992. The table below sets forth selected consolidated historical financial
data of the Company for each of the two years in the period ended February 28,
1994, the ten-month period ended December 31, 1994 and the years ended December
31, 1995 and 1996. This consolidated financial data includes certain assets and
liabilities of Knogo, on a historical basis, relating to Knogo's operations in
the United States, Canada and Puerto Rico. The selected consolidated historical
financial data should be read in conjunction with the audited Consolidated
Financial Statements of the Company included in Item 8 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7.
<TABLE>
<CAPTION>
(Amounts in thousands except for per share data)
Ten Months Year Ended
Year ended the last Ended December Year Ended
day of February December 31 31 December 31
1993 1994 1994 1995 1996
SUMMARY OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Sales of security devices and related
interest income, service rentals and
other $22,592 $18,243 $13,724 $17,361 $18,612
Sales to affiliates/Sensormatic 10,072 11,375 6,957 12,043 4,651
Total revenues 32,664 29,618 20,681 29,404 23,263
Cost of sales 16,697 14,631 10,041 14,425 11,935
Customer service expenses 3,969 3,984 3,353 3,235 2,932
Selling, general and administrative
expenses 9,819 9,227 9,548 8,235 7,345
Income (loss) before income taxes 1,148 762 (2,858) 1,941 1,847**
Net income (loss) 624 123 (2,833) 1,731 1,183
Net income per share * * * 0.29 0.20
SELECTED BALANCE SHEET DATA:
(at end of period)
Total assets $33,546 $34,583 $26,522 $29,338 $32,857
Property, plant and equipment, net 13,092 12,830 9,842 9,081 7,288
Long term bank debt - - - - -
Obligations under capital leases 797 688 945 748 3,546
Total stockholders' equity 28,308 27,055 20,888 22,669 25,248
</TABLE>
See the notes to the Consolidated Financial Statements of Knogo included
elsewhere herein.
* Historical per share data for earnings and dividends have not been
presented for periods prior to the year ended December 31, 1995 as
Knogo was not a publicly-held company during these periods.
** Includes a gain on the sale of assets of $2,462.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Consolidated revenues were 21% lower in the year ended December 31, 1996
than in the year ended December, 1995. Revenues from customers other than
Sensormatic in the current year were $17,525,000 or 75% of total revenues as
compared to $17,361,000 or 59% of total revenues in the prior year. The increase
in the current period is attributable to higher sales in the retail and 3M
library market segments. There were no significant revenues from sales to the
computer manufacturing industry in 1996. Revenues in 1996 included the minimum
lease revenue ($1,500,000) under a contract with a retail customer which
provided for additional revenue if certain shrinkage reductions are met. Since
all of the equipment costs were included in cost of sales, gross margins were
adversely impacted.
Sales under the Supply Agreement with Sensormatic in 1996 were 4,651,000 or
20% of total revenues as compared to 12,043,000 or 41% of total revenues in
1995. Under the terms of the Supply Agreement, the Company expected a reduction
of approximately $4 million in revenues in 1996 compared to 1995. However, in
1996, Sensormatic did not meet its minimum order amounts. The Company recorded
in other revenues $1,087,000 which represented the minimum contractual margins
on the shortfall. The Supply Agreement with Sensormatic ends on June 30, 1997.
Although the minimum obligation for 1997 is $4 million, the Company expects,
based on meetings with Sensormatic's management and forecasts received, that
they will not meet their minimum order amounts. However, in accordance with the
agreement, Sensormatic will be obligated to pay the Company the agreed margins
on any shortfall. Sentry anticipates replacing these future revenues with
continued growth in its core markets and through the promotion of the
SentryVisionTM product line. Sales represented 85% and service revenues and
other income 15% of total revenues in 1996 as compared to 91% and 9% in 1995.
Revenues by product line to customers other than Sensormatic in 1996 were
34% Magnetics, 17% Swept RF, 14% Dual RF, 2% KnoGlo, 20% CCTV and 13% in 3M
library security systems, compared to 50%, 21%, 14%, 2%, 10% and 0%,
respectively in 1995. Additionally, 3% of the Company's revenues in 1995 were
for the Express system, a self-check system for libraries which was sold by the
Company to 3M in March 1996.
Cost of sales to customers other than Sensormatic was 59% of such sales in
1996 as compared to 45% in the previous year. The cost of sales percentage is
impacted by the mix of products sold to its own third-party customers. In 1996,
Knogo sold a higher percentage of CCTV equipment and 3M library products to its
third-party customers than in 1995. These products are not manufactured directly
by Knogo and carry lower margins than the traditional EAS products it does
produce. In 1996 cost of sales was also impacted by the higher initial costs
recorded on the large retail sale noted above. Margins on future sales will be
dependent upon product mix. During 1996, there was a substantially lower amount
of sales to Sensormatic than in 1995. The gross margin on these sales is fixed
at 35% under the Supply Agreement.
Customer service expenses were lower in 1996 as compared to 1995. This is a
result of permanent staff reductions due to more efficient installations and
fewer service calls primarily attributable to the transfer of its library
maintenance obligations to 3M.
The decrease in selling, general and administrative expenses in 1996 as
compared to 1995 is primarily a result of ongoing cost control measures, lower
sales promotional expenses and lower required bad debt and warranty provisions.
The increase in research and development costs in 1996 as compared to 1995
was a result of substantial efforts, particularly in the fourth quarter, towards
improving the SentryVision(TM) traveling CCTV surveillance system which the
Company will commence selling in the first quarter of 1997.
The Company's interest income was $164,000 in 1996 as compared to $59,000
in 1995. The increase is due to the investment of proceeds from the sale of
assets at the end of the first quarter. These amounts are shown net of interest
expense of $144,000 and $90,000 in the respective 1996 and 1995 periods relating
to interest on the settlement of a tax audit in 1996 and payments on capitalized
leases for Knogo's computer equipment in both years.
In 1996, Sentry sold certain assets to 3M, consisting of patents and
technology, for a purchase price of $3 million. The proceeds, net of certain
costs including patent costs, inventory write downs, new product training costs,
legal and other costs, resulted in a gain of approximately $2.5 million which is
included in other income in 1996. See Note 16 to the Consolidated Financial
Statements.
Sentry's effective tax rate is 36% for 1996 as compared to 11% in 1995. The
increase in the rate was primarily related to the tax on the gain on the sale of
assets in 1996 which will be taxed at the statutory federal tax rate and
represents a significant proportion of the taxable income in the current year.
The lower rate in 1995 was primarily due to the normal provisions on the
earnings of the Puerto Rico manufacturing operations.
As a result of the foregoing, Sentry had net income of $1,183,000 in 1996
as compared to $1,731,000 in 1995.
Year Ended December 31, 1995 Compared with Ten Months Ended December 31, 1994
Knogo was created and its shares distributed to the stockholders of the
Knogo Predecessor as part of a transaction which closed on December 29, 1994. As
a result, the comparable period for the prior year is the 10 months ended
December 31, 1994. The Company has not adjusted prior year amounts for purposes
of management's discussion and analysis due to the significance of the above
transaction of Knogo's operations. See Note 1.B. to the Consolidated Financial
Statements for the basis of presentation of prior year amounts.
Consolidated revenues for the year ended December 31, 1995 were $29.4
million as compared to $20.7 million for the 10 months ended December 31, 1994
reflecting an increase of $8.7 million over the previous period.
Sensormatic purchased $12 million of product for sale outside the Territory
in the year ended December 31, 1995, as agreed in accordance with the Supply
Agreement (See Note 13b to the Consolidated Financial Statements). In the 10
month period ended December 31, 1994, sales to the Knogo Predecessor's
international affiliates of $7 million were lower than in prior periods
primarily due to customer uncertainties relating to the pending Sensormatic
Merger and related transactions.
Revenues from customers other than Sensormatic were $3.6 million higher in
the year ended December 31, 1995 than in the 10-month period ended December 31,
1994. During 1995, the Company increased its penetration into the supermarket
and library markets while sales to the traditional retail markets remained
strong.
Revenues by product line to customers other than Sensormatic in 1995 were
50% Magnetics, 21% Swept RF, 14% Dual RF, 2% KnoGlo, 3% Express and 10% CCTV,
compared to 38%, 34%, 15%, 2%, 0% and 11%, respectively in the 10 month period
ended December 31, 1994. Revenues from sales to Sensormatic by product line were
57% MM, 40% Swept RF, 0% Dual RF and 3% KnoGlo as compared to 56%, 40%, 3% and
1%, respectively in the sales to the Knogo Predecessor's affiliates in the 10
month period ended December 31, 1994.
Cost of security devices sold, as a percentage of sales of security devices
and related interest income, remained constant at 45% in both the year ended
December 31, 1995 and the 10 months ended December 31, 1994 despite the increase
in product mix towards MM. Traditionally, the MM product line carried lower
margins than the Swept RF products. However, during 1995, Knogo was able to
improve the margin on MM through a combination of higher selling prices,
particularly through higher library sales, as well as lower costs associated
with product design changes and overall manufacturing efficiencies.
In accordance with the Supply Agreement, sales to Sensormatic in 1995 were
priced to yield a 35% gross margin. In the 10 months ended December 31, 1994
cost of sales to affiliates was variable based on product mix.
Customer service expenses include the cost of installing new systems and
maintaining installed systems. Total expenses were lower in the year ended
December 31, 1995 than in the 10 months ended December 31, 1994 due to a
reduction in the number of customer service engineers, a greater utilization of
their time and cost cutting measures related to their travel.
Selling, general and administrative expenses in the year December 31, 1995
were $1.3 million lower than in the 10 month period ended December 31, 1994. The
reduction is a result of a decrease in executive and administrative staff, lower
employee benefit costs, budgeted expense reductions and lower bad debts
provisions. The prior 10 month period also included allocated corporate costs
including costs related to the Sensormatic Merger of $1,575,000 and $186,000 of
the death benefit paid to the estate of a former executive.
Research and development increased by $1.1 million in 1995 over the
allocated costs in the 10 month period ended December 31, 1994. In 1995, the
Company directed 100% of its research and engineering efforts towards products
for the North American market. As a result of these efforts, the Company has
been introducing in 1996 a re-engineered and newly designed Knoscape(TM) line of
electronic article surveillance systems. Ongoing existing product development
also contributed towards lower costs primarily in the Magnetics product line,
during the year.
Interest expense relates to certain capitalized computer and office
equipment leases in both periods and is shown net of interest income of $59,000
in 1995 and $7,000 in 1994.
The Company had an effective tax rate in 1995 of 11% primarily as a result
of the tax benefits associated with the earnings of the Puerto Rico
manufacturing operations. In the 10 months ended December 31, 1994, the tax
benefit was primarily the result of the settlement of previous years tax audits
offset by the normal provisions on the earnings of the Puerto Rico manufacturing
operations.
As a result of the foregoing, the Company had net income of $1,731,000 in
the year ended December 31, 1995 compared to a net loss of $2,833,000 in the 10
month period ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position is strong, with $7.7 million in cash and
cash equivalents, shareholders' equity of approximately $25 million and no bank
debt. In addition, working capital increased by $7.4 million in the year
ended December 31, 1996.
The Company, through its Knogo subsidiary, has a $5 million unused and
unsecured revolving credit and term loan agreement which is described more fully
in Note 9 to the Consolidated Financial Statements. As a result of the Merger
with Video, the Company was in violation of certain loan covenants. The bank has
agreed that it will waive these violations and amend the agreement. During the
year, the Company was able to fund substantially all of its working capital
needs and capital expenditures through existing cash resources and the proceeds
from the sale of assets of 3M.
Before the end of May 1997, Sentry intends to enter into a new credit
arrangement with Knogo's present lender, Fleet Bank, and thereafter to make
advances to each of Video and Knogo as the business of the two subsidiaries may
require. Based upon discussions between Knogo's management and senior lending
officers at Fleet Bank, Sentry believes that a new facility will be made
available to it for at least the same amount, and on substantially the same
terms, as are currently available to Knogo. Such facility would be secured by a
lien on substantially all of the assets of Sentry and its subsidiaries. In
December 1996, Knogo completed a sale-leaseback arrangement with respect to its
Hauppauge, New York facility, resulting in the receipt by Knogo of net proceeds
of approximately $4.5 million. The Company will make advances out of available
cash and the proceeds from the sale/leaseback transaction to Video upon
consummation of the Merger to permit Video to repay certain existing
indebtedness and to pay for the costs of the merger.
Despite the expiration of the Supply Agreement, the Company anticipates
that current cash reserves, cash generated by operations and cash obtained under
the bank credit facility expected to be entered into by Sentry will be adequate
to finance its anticipated working capital requirements as well as future
capital expenditure requirements for at least the next 12 months.
INFLATION
The Company does not consider inflation to have a material impact on the
results of operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained under "Item 1. Business" and "Item 7.
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations," such as those relating to (i) Video's anticipated reduction in
material and installation costs on its new SentryVision system, (ii) Knogo's
anticipated replacement of sales to Sensormatic under the Supply Agreement (as
defined) with increased sales to third parties, (iii) Video's plans to increase
penetration of the domestic retail market and to expand into international
markets and (iv) Knogo's anticipated growth in the supermarket and computer
industry markets, and other statements contained herein regarding matters that
are not historical facts, are forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995). Because such
forward-looking statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those described below:
o The risk that the integration of the business of Knogo with the business of
Video will be more difficult to accomplish than is expected or will not
produce the anticipated synergies.
o The risk inherent in the relatively small number of Video customers, such
that a delay or cancellation of orders from one or more of its customers
may have a material adverse effect on Video's financial condition and
possibly Sentry's as well.
o The risk arising from the large market position and greater financial and
other resources of Sentry's principal competitors, as described under "Item
1. Business--Competition."
o The risk resulting from the limited geographical market in which Knogo may
compete, exposing Sentry to a possible business downturn if Knogo's
business is adversely affected by a general business decline in that
market. This market limitation is contractual and will continue until
December 29, 1999.
o Knogo's business plan assumes continued expansion in the use of EAS systems
in the supermarket sector, a relatively untapped market among retail users
of loss prevention devices, which sector Knogo believes offers considerable
potential, and in the commercial and industrial sector, including the
protection of high value components in the computer industry. However, any
anticipated growth in these areas is prospective and there is a risk that
market acceptance of EAS products will not develop as expected.
<PAGE>
ITEMS 8 AND 14(A)(1) AND 14(A)(2). FINANCIAL STATEMENTS.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets - December 31, 1996 and 1995 F-3
Consolidated statements of operations - years ended
December 31, 1996 and 1995 and ten months ended
December 31, 1994 F-4
Consolidated statements of shareholders' equity - years ended
December 31, 1996 and 1995 and ten months ended
December 31, 1994 F-5
Consolidated statements of cash flows - years ended December 31,
1996 and 1995 and ten months ended December 31, 1994 F-6
Notes to consolidated financial statements F-7
SCHEDULE II -
Valuation and Qualifying Accounts S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sentry Technology Corporation
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Sentry
Technology Corporation and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1996 and 1995 and the ten months ended
December 31, 1994. Our audits also included the financial statement schedule
listed in the Index at item 14(a)(1) and (2). These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Sentry Technology
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years ended December 31, 1996
and 1995 and the ten months ended December 31, 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, on February 12,
1997 Sentry Technology Corporation was established to effect the merger of Knogo
North America Inc. and Video Sentry Corporation. The consolidated financial
statements as of, and for all periods prior to December 31, 1996 are the
historical financial statements of Knogo North America Inc. On December 29, 1994
Knogo North America Inc. and Knogo Corporation consummated Merger and
Divestiture Agreements with Sensormatic Electronics Corporation.
DELOITTE & TOUCHE LLP
Jericho, New York
February 28, 1997
<PAGE>
<TABLE>
<CAPTION>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
December 31,
1996 1995
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 7,658 $ 409
Accounts receivable, less allowance for doubtful
accounts of $719 and $931, respectively 6,229 9,599
Net investment in sales-type leases - current portion 1,496 778
Inventories 6,926 5,954
Prepaid expenses and other current assets 389 496
Total current assets 22,698 17,236
NET INVESTMENT IN SALES-TYPE LEASES - non-current portion 1,205 1,753
SECURITY DEVICES ON LEASE, net 281 399
PROPERTY, PLANT AND EQUIPMENT, net 7,288 9,081
INTANGIBLES, including patent costs, less accumulated
amortization of $292 and $359, respectively 364 236
DEFERRED INCOME TAXES 174 -
OTHER ASSETS 847 633
$32,857 $29,338
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,101 $ 2,194
Accrued liabilities 2,268 3,070
Obligations under capital leases - current portion 392 277
Deferred lease rentals 231 369
Total current liabilities 3,992 5,910
OBLIGATIONS UNDER CAPITAL LEASES - non-current portion 3,154 471
DEFERRED INCOME TAXES - 288
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 463 -
COMMITMENTS AND CONTINGENCIES
(Notes 1, 12 and 13)
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 3,000
shares; none issued
Common stock, $.01 par value; authorized 10,000
shares, issued and outstanding 5,773 and 5,720
shares, respectively 58 57
Additional paid-in capital 22,276 20,881
Retained earnings 2,914 1,731
25,248 22,669
$32,857 $29,338
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended Ten Months Ended
December 31, December 31,
1996 1995 1994
REVENUES
<S> <C> <C> <C>
Sales of security devices and
related interest income $15,208 $14,625 $11,402
Sales to Sensormatic/affiliates 4,651 12,043 6,957
Service revenues and other 3,404 2,736 2,322
23,263 29,404 20,681
COSTS AND EXPENSES
Cost of security devices sold 8,897 6,630 5,078
Cost of sales to Sensormatic/
affiliates 3,038 7,795 4,963
Customer services expenses 2,932 3,235 3,353
Selling, general and
administrative expenses 7,345 8,235 9,548
Research and development 1,686 1,537 483
Interest (income)expense (20) 31 114
23,878 27,463 23,539
OPERATING PROFIT (LOSS) (615) 1,941 (2,858)
OTHER INCOME - GAIN ON SALE OF
ASSETS (Note 16) 2,462 - -
INCOME (LOSS) BEFORE INCOME TAXES 1,847 1,941 (2,858)
INCOME TAXES (BENEFIT) 664 210 (25)
NET INCOME (LOSS) $ 1,183 $ 1,731 $(2,833)
NET INCOME PER SHARE $ .20 $ .29 $ *
WEIGHTED AVERAGE COMMON SHARES 6,034 5,887 *
</TABLE>
* Historical per share data for net loss for the ten months ended December 31,
1994 has not been presented as the Company was not a publicly-held company
during this period.
See notes to consolidated financial statements.
<PAGE>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional Due Total
Common Stock Paid-In Retained From Shareholders'
Shares Amount Capital Earnings Affiliates Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 1, 1994 - $ - $32,580 $ - $(5,525) $27,055
Net loss - - (2,833) - - (2,833)
Transactions with
affiliates - - - - (1,953) (1,953)
Equity adjustments
resulting from
Merger and Divestiture - - 1,742 - - 1,742
Revaluation of corporate
headquarters - - (3,123) - - (3,123)
Establishment of Knogo
N.A. and distribution
of common stock 5,648 56 (7,534) - 7,478 -
BALANCE, DECEMBER 31, 1994 5,648 56 20,832 - - 20,888
Net income - - - 1,731 - 1,731
Final distribution of
common stock 34 - (16) - - (16)
Exercise of stock options 38 1 65 - - 66
BALANCE, DECEMBER 31, 1995 5,720 57 20,881 1,731 - 22,669
Net income - - - 1,183 - 1,183
Repayment of obligations
under section 16(b)
of the Securities
Exchange Act of 1934 - - 220 - - 220
Income tax benefit
related to revaluation
of corporate headquarters - - 978 - - 978
Exercise of stock options 53 1 197 - - 198
BALANCE, DECEMBER 31, 1996 5,773 $ 58 $22,276 $2,914 $ - $25,248
See notes to consolidated financial statements.
</TABLE>
<TABLE>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Year Ended Ten Months Ended
December 31, December 31,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 1,183 $ 1,731 $ (2,833)
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operating activities:
Depreciation and amortization of
security devices and property,
plant and equipment 1,135 1,103 1,114
Amortization of intangibles 60 64 67
Deferred income taxes (462) 152 (220)
Provision for bad debts 91 352 661
Income tax benefit related to the revaluation
of corporate headquarters 978 - -
Other (58) - -
Changes in operating assets and liabilities:
Accounts receivable 3,279 (5,209) 282
Net investment in sales-type leases (170) (730) 217
Inventories (836) 381 2,218
Prepaid expenses and other assets 33 628 (901)
Accounts payable and accrued liabilities (1,895) 1,032 (2,509)
Deferred lease rentals (138) 48 52
Due from affiliates - - (1,953)
Net cash provided by (used in) operating activities 3,200 (448) (3,805)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment, net (378) (202) (565)
Proceeds from sale of corporate headquarters 4,536 - -
Security devices on lease (56) 21 (278)
Intangibles (188) (25) (11)
Net cash provided by (used in)
investing activities 3,914 (206) (854)
CASH FLOWS FROM FINANCING ACTIVITIES
Equity adjustments resulting from Merger
and Divestiture - - 1,742
Proceeds from shareholder repayment of
obligations under
Section 16(b) of the Securities Exchange
Act of 1934 220 - -
Repayment of obligations under capital leases (283) (245) (156)
Exercise of stock options 198 66 -
Other - (16) -
Net cash provided by (used in)
financing activities 135 (195) 1,586
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,249 (849) (3,073)
CASH AND CASH EQUIVALENTS, at beginning of period 409 1,258 4,331
CASH AND CASH EQUIVALENTS, at end of period $ 7,658 $ 409 $ 1,258
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 248 $ 86 $ 103
Income taxes $ 90 $ 26 $ 645
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligation incurred for the
purchase of building, office
equipment and other assets $ 3,081 $ 48 $ 413
See notes to consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND TEN MONTHS ENDED DECEMBER 31, 1994
1. BASIS OF PRESENTATION
A. Knogo North America Inc. and Video Sentry Corporation Merger
Sentry Technology Corporation ("Sentry") a newly publicly
traded Delaware Corporation, was established to effect the merger
of Knogo North America Inc. ("Knogo N.A.") and Video Sentry
Corporation ("Video Sentry") which was consummated on February
12,1997 (the "Effective Date"). The merger resulted in Knogo N.A.
and Video Sentry becoming wholly owned subsidiaries of Sentry.
The term "Company" refers to Sentry as of and subsequent to
February 12, 1997 and to Knogo N.A. prior to such date.
The merger agreement provides for Sentry to issue 1 share of
common stock for each 1 share of Video Sentry common stock
outstanding at the effective time of the merger. Sentry also
issued 1 share of common stock and 1 share of Class A Preferred
Stock for each 1.2022 shares of Knogo common stock outstanding.
The Sentry Class A Preferred Stock has a face value of $5.00 per
share and a cumulative dividend rate of 5.0% (the first two years
of which are paid-in-kind). The preferred is non-voting and
subject to a mandatory redemption four years from the date of
issuance and optional redemption by Sentry at any time after one
year from the date of issuance. The redemption price will be
equal to $5.00 per preferred share (plus accrued and unpaid
dividends as of the redemption date) plus the amount, if any, by
which the market price of Sentry's common stock at the time of
redemption exceeds a hurdle price based on the price of Sentry
Common Stock one year after the Effective Date. The minimum
hurdle price is $5.00 per share and the maximum is $6.50. The
preferred stock is non convertible, but the redemption price may,
in certain circumstances, be paid in common stock at Sentry's
option.
The merger was accounted for under the purchase method of
accounting. Although Video Sentry shareholders have a majority
voting interest in Sentry based upon their common stock ownership
percentage, generally accepted accounting principles requires
consideration of a number 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 are held
by individuals previously holding similar such positions in Knogo
N.A.; (ii) the assets, revenues and net earnings of Knogo N.A.
significantly exceed those of Video; and (iii) the market value
of the securities received by the former holders of Knogo N.A.
Common Stock significantly exceeds the market value of the
securities 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 N.A.. Accordingly the
financial statements of Knogo N.A. are the historical financial
statements of Sentry and the results of Sentry's operations will
include the results of operations of Video Sentry after the
Effective Date. The Company anticipates that current cash
reserves, cash generated by operations, and its bank
credit facility 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.
B. Knogo N.A. Divestiture
Knogo North America Inc. and subsidiary was formerly a
wholly-owned subsidiary of Knogo Corporation ("Old Knogo"). Knogo
N.A. was incorporated in Delaware on August 12, 1994 and was
established in connection with the consummation of the
transactions described below.
On December 29, 1994 (the "Divestiture Date"), Old Knogo and
Knogo N.A. consummated a Merger Agreement and a Divestiture
Agreement with Sensormatic Electronics Corporation
("Sensormatic") whereby immediately prior to Old Knogo being
merged into Sensormatic (the "Merger"), Old Knogo contributed to
Knogo N.A., certain assets and liabilities relating to its
operations in the United States, Canada and Puerto Rico (the
"Divestiture Agreement"). Pursuant to the Merger each share of
Old Knogo common stock was converted into .5513 shares of
Sensormatic common stock. Pursuant to the Divestiture Agreement,
Old Knogo shareholders received one share of Knogo N.A. common
stock for each share of Old Knogo stock held. At the Divestiture
Date, Knogo N.A. changed its fiscal year end from February 28 to
December 31.
The accompanying consolidated financial statements include
certain assets and liabilities of Old Knogo, on an historical
basis, relating to Old Knogo's operations in the United States,
Canada and Puerto Rico ("Knogo N.A. Territory"). Pursuant to the
Merger and Divestiture Agreements, the net worth of Knogo N.A.
was adjusted to a target net worth of approximately $24 million
(the "Target Net Worth"), based on the historical carrying value
of Old Knogo's assets and liabilities at the Divestiture Date.
The Target Net Worth was achieved at the Divestiture Date by a
combination of inventory transfers and a receivable due from
Sensormatic. The Target Net Worth was then adjusted to reflect
the revaluation of Knogo N.A.'s corporate headquarters (see Note
6).
As a result of the Merger and Divestiture Agreements, certain
adjustments to the equity accounts of Knogo N.A. were required.
Certain assets and liabilities have been allocated between Knogo
N.A. and Old Knogo based on the terms of the Merger and
Divestiture Agreements. These allocations are presented in the
consolidated statements of shareholders' equity as equity
adjustments resulting from the Merger and Divestiture.
Transactions with affiliates represent the net change in balances
between Knogo N.A. and Old Knogo and its international
subsidiaries. In addition, Knogo N.A.'s corporate headquarters
was revalued from Old Knogo's historical carrying value.
Certain expenses reflected in the consolidated statements of
operations for the ten months ended December 31, 1994 include
corporate allocations from Old Knogo, which were based on
specific personnel, space, estimates of time spent to provide
services, or other appropriate bases. These allocations include
financial reporting, personnel, insurance, legal, information
management, and other miscellaneous services. Included in
selling, general and administrative expenses were $2,983,000 of
allocated corporate expenses for the ten months ended December
31, 1994. Included in selling, general and administrative
expenses for the ten months ended December 31, 1994 were
$1,575,000 in expenses incurred in connection with the Merger and
Divestiture with Sensormatic. In addition, research and
development expenses totaling $382,000 for the ten months ended
December 31, 1994 represent corporate allocations. Management
believes the foregoing allocations were made on a reasonable
basis and would approximate the costs which would have been
incurred had Knogo N.A. operated on a stand-alone basis and in a
similar manner.
2. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - The Company is engaged in only one segment and line of
business, the manufacture, distribution, installation and service of
systems designed to detect the unauthorized movement of articles and
persons.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary,
Knogo Caribe, Inc. and its 50.001% owned subsidiary, K&M Converting
Corporation ("KMCC"). All intercompany balances and transactions have
been eliminated in consolidation.
REVENUE RECOGNITION - The Company manufactures security devices which
it offers for sale or lease. Revenue related to the sale of equipment
is recorded at the time of shipment or upon acceptance by a
third-party leasing company of a customer lease and the related
equipment. In addition, in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 13, "Accounting for Leases", lease
contracts which meet the following criteria are accounted for as
sales-type leases: collection is reasonably assured, there are no
important uncertainties, and (l) the present value of the rental
payments over the term of the lease is at least 90% of the fair value
of the equipment or (2) the lease term is equal to 75% or more of the
estimated economic life of the equipment or (3) the lease contains a
bargain purchase option. Under this method, revenue is recognized as a
sale at the time of installation or acceptance by the lessee in an
amount equal to the present value of the required rental payments
under the fixed, noncancellable lease term. The difference between the
total lease payments and the present value is amortized over the term
of the lease so as to produce a constant periodic rate of return on
the net investment in the lease. Included in accounts receivable at
December 31, 1996 and 1995 is unbilled accounts receivable of $909,000
and $1,459,000, respectively.
The operating method of accounting for leases is followed for lease
contracts not meeting the above criteria. Under this method of
accounting, aggregate rental revenue is recognized over the term of
the lease (usually 12-48 months), which commences with date of
installation or acceptance by the lessee.
The Company has sold certain of its lease receivables subject to
recourse to third-party investors. The uncollected principal balance
of the receivables sold totaled approximately $183,000 and $353,000 at
December 31, 1996 and 1995, respectively. Receivables sold are
supported by underlying equipment value and credit worthiness of
customers. The Company records reserves for receivables sold which may
be uncollectible.
Service revenues are recognized as earned and maintenance revenues are
recognized ratably over the service contract period. Warranty costs
associated with products sold with warranty protection are estimated
based on the Company's historical experience and recorded in the
period the product is sold.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
temporary investments with original maturities of less then ninety
days to be cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market. Component parts and systems in inventory
available for assembly and customer installation are considered as
work-in-process.
SECURITY DEVICES ON LEASE - Security devices on lease are stated at
cost and consist of completed systems which have been installed.
DEPRECIATION AND AMORTIZATION - Depreciation of security devices on
lease and property, plant and equipment is provided for using the
straight-line method over their related estimated useful lives. The
security devices generally have estimated useful lives of six years,
except the cost of security devices related to operating leases with
purchase options are depreciated over the life of the lease.
INTANGIBLES - Costs and expenses incurred in obtaining patents are
amortized over the remaining life of the patents, not exceeding l7
years, using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS - In accordance with SFAS No. 121,
"Accounting For The Impairment of Long-Lived Assets and For Long-Lived
Assets To Be Disposed Of," the Company reviews its long-lived assets,
including net investment in sales type leases, security devices on
lease, property and equipment, intangible assets and other assets for
impairment whenever events or changes in circumstances indicate that
the carrying amount of these 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS - It is management's belief that
the carrying amounts of the Company's financial instruments (cash and
cash equivalents, accounts receivable, net investment in sales-type
leases, accounts payable and obligations under capital leases)
approximate their fair value at December 31, 1996 and 1995 due to the
short maturity of these instruments or due to the terms of such
instruments approximating instruments with similar terms currently
available to the Company.
DEFERRED LEASE RENTALS - Deferred lease rentals consist of rentals
related to operating leases and maintenance contracts billed or paid
in advance.
INCOME TAXES - The Company accounts for income taxes under SFAS No.
109, "Accounting for Income Taxes", which requires an asset and
liability approach to financial accounting and reporting for income
taxes.
The Company has computed its provision for income taxes for the ten
months ended December 31, 1994, assuming that it had operated on a
stand-alone basis. Certain amounts have been allocated to the Company
from Old Knogo relating to the estimated settlement costs of tax
examinations.
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".
INCOME PER COMMON SHARE - Income per common share is computed using
the weighted average number of common shares outstanding during the
year, plus when dilutive, net additional shares issuable upon exercise
of stock options.
FOREIGN CURRENCY TRANSLATION - The functional currency of the
Company's foreign entity is the US dollar. Therefore, assets and
liabilities of the foreign entity is translated using a combination of
current and historical rates. Income and expense accounts are
translated primarily using the average rate in effect during the year.
Unrealized foreign exchange gains and (losses) resulting from the
translation of this entity are included in selling, general and
administrative expenses and amounted to approximately $(45,000),
$20,000 and ($46,000) for the years ended December 31, 1996 and 1995
and the ten months ended December 31, 1994.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities 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.
RECLASSIFICATIONS - Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform to the 1996
presentation.
3. NET INVESTMENT IN SALES-TYPE LEASES AND OPERATING LEASE DATA
The Company is the lessor of security devices under agreements expiring in
various years through 2001. The net investment in sales-type leases consist
of:
<TABLE>
<CAPTION>
December 31,
1996 1995
(in thousands)
<S> <C> <C>
Minimum lease payments receivable $ 3,152 $ 3,183
Allowance for uncollectible minimum
lease payments (157) (159)
Unearned income (324) (523)
Unguaranteed residual value 30 30
Net investment 2,701 2,531
Less current portion 1,496 778
Non - current portion $ 1,205 $ 1,753
</TABLE>
The future minimum lease payments receivable under sales-type leases and
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
Sales-Type Operating
Leases Leases
Year Ending December 31, (in thousands)
<S> <C> <C> <C>
1997 $ 1,753 $ 341
1998 654 103
1999 485 34
2000 256 28
2001 4 9
$ 3,152 $ 515
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
(in thousands)
<S> <C> <C>
Raw materials $ 2,498 $ 2,692
Work-in-process 2,547 1,986
Finished goods 1,881 1,276
$ 6,926 $ 5,954
</TABLE>
Reserves for excess and obsolete inventory totaled $1,691,000 and
$1,441,000 as of December 31, 1996 and 1995, respectively and have been
included as a component of the above amounts.
5. SECURITY DEVICES ON LEASE
Security devices are stated at cost and are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(in thousands)
<S> <C> <C>
Security devices on lease $ 525 $ 644
Less allowance for depreciation 244 245
$ 281 $ 399
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are summarized as
follows:
<TABLE>
<CAPTION>
Estimated Useful December 31,
Lives (Years) 1996 1995
(in thousands)
<S> <C> <C> <C>
Land $ 506 $ 3,099
Buildings and improvements 20-25 5,737 5,828
Machinery and equipment 3-l0 3,472 5,885
Furniture, fixtures and
office equipment 3-l0 3,467 3,291
13,182 18,103
Less allowance for depreciation 5,894 9,022
$ 7,288 $ 9,081
</TABLE>
On December 24, 1996, the Company completed a sales-leaseback transaction
on the Company's corporate headquarters. (See Note 10.)
7. OTHER ASSETS
In January 1995, the Company sold its guest house in Puerto Rico for
$800,000 which approximated its carrying value. The Company holds notes
with a present value of $389,000 and $580,000 at December 31, 1996 and
1995, respectively, which are receivable in varying amounts through January
2000.
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
(in thousands)
<S> <C> <C>
Accrued salaries, employee benefits
and payroll taxes $ 733 720
Accrued warranty costs 361 $ 659
Customer deposits payable 237 466
Other accrued liabilities 937 1,225
$ 2,268 $ 3,070
</TABLE>
9. LINE OF CREDIT
The Company has a $5 million unsecured revolving credit and term loan
agreement with a bank. Revolving loans may be drawn under this agreement
until May 31, 1997, at which time the borrowings are convertible into term
loans payable in sixteen equal quarterly installments. All borrowings under
the agreement bear interest at the prime rate or the adjusted Libor rate
plus 2%. The Company pays a commitment fee of 1/4 of 1% on any unused
portion of the credit facility. The terms of the agreement, among other
matters, provide restrictions on additional borrowings, capital
expenditures and payment of dividends and require that the Company maintain
certain debt to worth, quick and interest coverage ratios. There were no
borrowings under this agreement at any time during the year ended December
31, 1996 or 1995.
As a result of the merger with Video Sentry, the Company was in violation
of certain loan covenants. The bank has agreed that it will waive these
violations and amend the agreement.
10. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
On December 24, 1996, the Company completed a sale-leaseback transaction on
the Company's corporate headquarters. The Company received net proceeds of
approximately $4.5 million which approximated the carrying amount of the
land and building. The lease covers a period of 20 years with quarterly
payments of $131,000. The lease agreement allows for an increase in lease
payments for years 4 through 20 based on a formula tied to the Consumer
Price Index. Because the fair market value of the land on which the
principal premises is built was greater than 25 percent of the total fair
value of the leased premises at the inception of the lease, the land and
building have been considered separately for the purposes of applying the
criteria of SFAS No. 13. The land portion of the lease has been classified
as an operating lease. Future minimum payments related to the land portion
of the lease are as follows:
Year ending December 31,
1997 $ 148,000
1998 148,000
1999 148,000
2000 148,000
2001 148,000
Thereafter 2,225,000
$ 2,965,000
The building portion of the lease has been classified as a capital lease.
The Company also leases certain computer and office equipment and related
items under noncancellable capital lease arrangements at varying interest
rates expiring through February 2001.
Minimum annual rentals are as follows (in thousands):
Year ending December 31,
1997 $ 688
1998 505
1999 492
2000 401
2001 377
Thereafter 5,636
8,099
Less amount representing interest 4,553
Present value of minimum rentals 3,546
Less current portion 392
Non-current portion $ 3,154
As a result of the sale-leaseback transaction, a capitalized lease asset
and obligation in the amount of $3,033,000 was recorded at the inception of
the lease. The capitalized lease asset is being amortized on a
straight-line basis over the 20 year lease term. The capitalized lease
obligation is being amortized under the interest method over the 20 year
lease period, utilizing an imputed interest rate of approximately eleven
percent.
The computer and office equipment and related items are included in
property and equipment and other assets with a gross value of $1,397,000
and $1,349,000 at December 31, 1996 and 1995, respectively, and a net book
value of $665,000 and $880,000 at December 31, 1996 and 1995, respectively.
11. SHAREHOLDERS' EQUITY
a. Stock Option Plan - In November 1994, the Company adopted the 1994 Stock
Incentive Plan of Knogo North America Inc. (the "1994 Plan"). The 1994 Plan
provides for grants up to 1,325,000 options to purchase the Company's
common stock. Awards may be granted by the stock option committee to
eligible employees in the form of stock options, restricted stock awards,
phantom stock awards or stock appreciation rights. Stock options may be
granted as incentive stock options or non-qualified stock options. Such
options become exercisable at a rate of 20% per year over a five year
period and expire ten years from the date of grant.
In January 1995, employees and directors who held outstanding options to
purchase Old Knogo common stock were granted substitute options under the
1994 Plan to purchase an aggregate of 137,700 shares of Knogo N.A. common
stock at prices determined pursuant to the formula set forth in the Merger
Agreement. All remaining options granted in 1995 and 1994 were issued at
fair market value at the date of grant.
In addition, approximately 34,000 shares of the Company's common stock were
issued to Old Knogo employees who were not transferred to Knogo N.A. These
shares were distributed in settlement of the cancellation of their Old
Knogo stock options.
Transactions from the date of inception of the 1994 Plan through December
31, 1996 were as follows:
<TABLE>
<CAPTION>
Shares Under Option
Option Price Number
Per Share of Shares
<S> <C> <C>
Balance, March 1, 1994 -
Granted $2.00 250,000
Balance, December 31, 1994 250,000
Granted $1.41 - $7.00 280,200
Exercised $1.41 - $1.92 (38,400)
Canceled $1.72 - $2.54 (67,000)
Balance, December 31, 1995 424,800
Granted $5.25 295,500
Exercised $1.72 - $3.00 (32,600)
Canceled $2.50 - $5.25 (24,000)
Balance, December 31, 1996 $1.41 - $7.00 663,700
</TABLE>
As of December 31, 1996 and 1995, options were outstanding at a weighted
average exercise price of $3.54 and $2.27 per share, respectively, and
expire at various dates beginning December 6, 2004. As of December 31,
1996, options for 590,300 shares were available for future grants and
options for 161,800 shares were exercisable. As of December 31, 1996,
1,254,000 shares of common stock were reserved for issuance in connection
with the exercise of stock options.
As discussed in Note 2, the Company continues to account for its
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 recognized in the financial statements for employee stock
arrangements.
SFAS No. 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 fiscal 1995. Under
SFAS No. 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 options 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 weighted average assumptions: expected life of
five years; stock volatility, 67.1% in 1996 and 66.0% in 1995; risk free
interest rates, 7.5% in 1996 and 6.5% in 1995; 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 and 1995 awards had been amortized to
expense over the vesting period of the awards, pro forma net income would
have been $1,061,000 ($0.18 per share) in 1996 and $1,710,000 ($0.29 per
share) in 1995. However, the impact of outstanding non-vested stock options
granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1996 and 1995 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.
b. Changes in Authorized Capital - In November 1994, the Board of Directors
authorized an increase to the number of common shares to 10,000,000. In
November 1994, the Board approved the authorization of 3,000,000 shares of
preferred stock, which may be issued by the Board on such terms and with
such rights, preferences and designations as the Board may determine,
without further stockholder action.
12. INCOME TAXES
The components of the Company's income tax provisions are as follows:
<TABLE>
<CAPTION>
Year ended Year ended Ten months ended
December 31, December 31, December 31,
1996 1995 1994
(in thousands)
Current:
<S> <C> <C> <C>
Federal $ 811 $ 51 $ -
State 94 9 -
Puerto Rico 221 (2) 195
1,126 58 195
Deferred:
Federal $ - $ - $ -
State - - -
Puerto Rico (462) 152 (220)
(462) 152 (220)
$ 664 $ 210 $ (25)
</TABLE>
The reconciliation between total tax expense and the expected U.S. Federal
income tax is as follows:
<TABLE>
<CAPTION>
Year ended Ten months ended
December 31, December 31,
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Expected tax expense (benefit)
at 34% $ 628 $ 660 $ (972)
Add/(deduct):
State taxes 94 9 -
U.S. losses producing no tax
benefit - - 1,273
Benefits of nontaxable
income of
Puerto Rico subsidiary/
losses producing
no tax benefit 74 (510) (366)
Prior years' estimated tax
adjustment (217) - 40
Other 85 51 -
$ 664 $ 210 $ (25)
</TABLE>
Significant components of deferred tax assets and liabilities are comprised
of:
<TABLE>
<CAPTION>
Deferred Tax Assets (Liabilities)
December 31, December 31, December 31,
1996 1995 1994
(in thousands)
Assets:
<S> <C> <C> <C>
Accounts receivable $ 266 $ 372 $ 293
Inventories 550 523 414
Accrued liabilities 181 315 470
Property, plant and equipment - 914 851
Security devices on lease - - 90
Intercompany transactions 17 9 29
Net operating loss carryforwards 191 - -
Tax credit carryforwards 209 98 -
Gross deferred tax assets 1,414 2,231 2,147
Less: Valuation allowance (38) (2,101) (2,112)
1,376 130 35
Liabilities:
Tollgate taxes (74) (409) (171)
Property, plant and equipment (1,108) - -
Security devices on lease (20) (9) -
Gross deferred tax
liabilities (1,202) (418) (171)
Net deferred tax asset
(liability) $ 174 $ (288) $ (136)
</TABLE>
The decrease in the valuation allowance for the years ended December 31,
1996 and 1995 was due to the decrease in deferred tax assets for which
realization was not more likely than not.
The income tax benefit relating to the sale of the Company's corporate
headquarters reduced currently payable taxes and was credited to additional
paid-in-capital. Such amount approximated $978 for the year ended December
31, 1996.
The Company's Puerto Rico manufacturing subsidiary is exempt from Federal
income taxes under Section 936 of the Internal Revenue Code. Also, the
Company was granted a partial income tax exemption under the provisions of
the Puerto Rico Industrial Incentives Act of l978 from the payment of
Puerto Rico taxes on income derived from marketing certain products
manufactured by the subsidiary. The grant provides for a 90% exemption from
Puerto Rico taxes until January 1, 2008. The Company provides tollgate
taxes on the earnings of the Puerto Rico subsidiary which it intends to
remit, in the form of a dividend, to the parent company based upon the
applicable rates.
13. COMMITMENTS AND CONTINGENCIES
a. Litigation - The Company is a party to litigation arising in the normal
course of business. Management believes the final disposition of such
matters will not have a material adverse effect on the consolidated
financial statements.
b. Supply Agreement - Knogo N.A. entered into a supply agreement in which
Sensormatic is obligated to purchase products from Knogo N.A. in the amount
of $12,000,000 during 1995 and an additional $12,000,000 during the ensuing
18 months. Such products are priced to yield Knogo 35% gross margin. During
1996 Sensormatic did not meet its minimum order amounts in accordance with
the terms of the supply agreement and, accordingly, the Company recorded in
revenues the cumulative profits on the shortfall. Included in accounts
receivable at December 31, 1996 and 1995 are amounts due from Sensormatic
of $1,212,000 and $4,561,000, respectively.
c. License Agreement - Knogo N.A. entered into a license agreement in which
Knogo N.A. has the exclusive right to manufacture and sell existing Knogo
products within the Knogo N.A. territory, and Sensormatic has such right
elsewhere, except that Knogo N.A. and Sensormatic each the right to develop
and market the SuperStrip technology in the Knogo N.A. territory.
d. 401(k) Plan - In November 1994, the Company adopted the Knogo North
America Inc. Retirement Savings 401(k) Plan (the "Plan"). The Plan permits
eligible employees to make voluntary contributions to a trust, up to a
maximum of 15% of compensation, subject to certain limitatio with the
Company making a matching contribution equal to a designated percentage of
the eligible employee's deferral election. The Company may also contribute
a discretionary contribution, subject to certain conditions, as defined in
the Plan. The Company contributed approximately $110,000 and $121,000 to
the Plan for the years ended December 31, 1996 and 1995, respectively.
e. Employment Agreements - The Company and several key executives entered
into employment agreements for terms of two to five years for which the
Company will have a minimum commitment of $1,844,000.
14. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS
The Company grants credit to customers who are principally in the retail
industry and libraries. During 1996, revenues from a single customer
represented 13% of total revenues. No other customer accounted for more
than 10 percent of total revenues for fiscal 1996.
15. FORMATION OF JOINT VENTURE
In January 1996, the Company acquired a controlling interest in K&M
Converting Corp. ("KMCC"), a newly established joint venture entered into
with Marian Rubber Products Co., Inc. ("Marian"). KMCC is the exclusive
converter of magnetic material into disposable targets or labels use in the
Company's EAS systems. The Company contributed $15,000 in cash, $430,000 in
inventory, and $49,000 in machinery to KMCC and issued 20,000 shares of
Knogo N.A. common stock to Marian in exchange for 50.001% of KMCC. The
acquisition was accounted for under the purchase method of accounting and
the operating results of KMCC are included in the consolidated operating
results of the Company since the date of acquisition. Pro forma results of
operations assuming KMCC was acquired as of the beginning of each of the
fiscal years ended December 31, 1996 and 1995 would not differ materially
from the reported results.
16. OTHER INCOME - SALE OF ASSETS
During 1996, the Company completed the sale of certain assets (primarily
patents and technology) of its library security systems business to
Minnesota Mining and Manufacturing Company ("3M") for a purchase price of
$3,000,000, paid at closing. In connection with such sale, the Comp and 3M
entered into an agreement pursuant to which the Company has become a
distributor of certain of 3M's library systems products for an initial term
of three years and has agreed not to compete with 3M in the sale of
security systems products (other than closed circuit video systems) in the
library market except as otherwise contemplated by the transaction
documentation. The parties also settled certain patent litigation between
them.
The impact of the transaction resulted in an increase in cash of $3,000,000
and pretax tax gain of approximately $2,462,000 for the year ended December
31, 1996. The impact on the Company's historical revenues and net income
from the sale of products covered by the patents and related technology
sold is not material.
<PAGE>
SCHEDULE II
<TABLE>
KNOGO NORTH AMERICA INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
Charged to
Balance at Charged to Other Balance
beginning Cost and Accounts Deductions at end of
Descriptions of Period Expenses - describe - describe Period
Year ended December 31, 1996:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 931 $ 91 $ 8 (1) $ 311 (2) $ 719
Allowance for uncollectible minimum lease
payments $ 159 $ (2) $ 157
Reserve for excess and obsolete inventory $ 1,441 $ 470 $ 220 (2) $ 1,691
Year ended December 31, 1995:
Allowance for doubtful accounts $ 862 $ 352 $ 34 (1) $ 317 (2) $ 931
Allowance for uncollectible minimum lease
payments $ 111 $ 48 $ 159
Reserve for excess and obsolete inventory $ 1,343 $ 394 $ 296 (2) $ 1,441
Ten months ended
December 31, 1994: $ 526 (3)
Allowance for doubtful accounts $ 1,491 $ 661 $ 16 (1) $ 780 (2) $ 862
Allowance for uncollectible minimum lease
payments $ 128 $ (17) $ 111
Reserve for excess and obsolete inventory $ 2,678 $ 319 $ 1,654 (2) $ 1,343
</TABLE>
(l) Recoveries of accounts written off.
(2) Amounts written off.
(3) Reserve charged to accrued liabilities
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
NAME AGE TITLE
Thomas A. Nicolette 46 President and Chief Executive Officer and
a Director
Robert D. Furst, Jr. 44 Director
Andrew L. Benson 40 Vice President-CCTV Systems and a Director
William A. Perlmuth 67 Director
Robert L. Barbanell 66 Director
Peter J. Mundy 40 Vice President-Finance, Chief Financial
Officer, Secretary and Treasurer
Peter Y. Zhou 57 Vice President-Technology
The principal occupations and positions for the past five years of each
such person are as follows:
Thomas A. Nicolette has been President, Chief Executive Officer and a
director of Sentry since January 1997 and of Knogo since its inception in August
1994. Prior thereto, Mr. Nicolette served in various capacities at the Knogo
Predecessor, where he was Chief Executive Officer from May 1994 to December
1994; President and Chief Operating Officer from 1990 to May 1994; President of
the North America Division from 1989 to 1990; Vice President from 1986 to 1990;
and a Director from 1987 to December 1994. Mr. Nicolette is a member of the
Board of Trustees of WLIW, the Long Island-based affiliate of the Public
Broadcasting System.
Robert D. Furst, Jr. has been a director of Sentry since its inception in
October 1996 and continues in such position. Prior thereto, Mr.
Furst was, until February 1997, a director of Video from January 1993, Chairman
of the Board since July 1996 and Chief Executive Officer since August 1996. Mr.
Furst was one of the original shareholders of Video. He is the founder and owner
of Furst Capital Management, a firm specializing in trading government and
equity securities as well as commodity futures. Mr. Furst is a member of the
Chicago Board of Trade and has been a securities and commodities trader since
1980. Mr. Furst currently serves on the Boards of Directors of NOW Technologies,
Inc., a privately-held manufacturer of chemical packaging and dispensing systems
serving the semiconductor industry; Lucht, Inc., a privately-held manufacturer
of high volume photographic printers and other equipment; and Neighborhood
Marketing Corporation, a privately-held consumer promotion and data base
marketing company utilizing proprietary patented technologies.
Andrew L. Benson has been Vice President-CCTV Systems of Sentry since
February 1997. Until February 1997, Mr. Benson was President and a director of
Video since its inception, and served as its Chairman of the Board between 1990
and July 1996 and Chief Executive Officer between 1990 and 1995. Mr. Benson
served as Video's Treasurer until June 1994 and Secretary until August 1994.
From May 1988 to August 1990, Mr. Benson was President of Assets Protection,
Inc., a Minnesota private detective agency which he founded. From 1983 to 1988,
Mr. Benson held several security-related management positions with various
companies, including Pinkerton, Inc. and Norwest Bank Minnesota, N.A.,
Minneapolis, Minnesota.
William A. Perlmuth has been a director of Sentry since January 1997 and
Chairman of the Board since February 1997. He has been a director of Knogo since
its inception. Prior thereto, Mr. Perlmuth served as a director of the Knogo
Predecessor from 1979 to December 1994. Mr. Perlmuth has been a partner in the
law firm of Stroock & Stroock & Lavan LLP in New York, New York for more than
five years.
Robert L. Barbanell has been a director of Sentry since January 1997 and
President of Robert L. Barbanell Associates, Inc., a financial consultancy firm,
since July 1994. Prior thereto, Mr. Barbanell served in various capacities at
Bankers Trust New York Corporation, where he was Managing Director of the
European Merchant Bank of Bankers Trust International PLC from 1991 to 1994;
Managing Director of BT Securities Corporation from 1989 to 1991; Managing
Director of Bankers Trust Company from 1986 to 1989; Senior Vice President of
Bankers Trust Company from 1981 to 1986. Prior to his service with Bankers
Trust, Mr. Barbanell served in various executive capacities at Amcon Group, Inc.
and GI Export Corporation. Mr. Barbanell currently serves on the Boards of
Directors of Marine Drilling Companies, Inc., Kaye Group, Inc. and Cantel
Industries, Inc.
Peter J. Mundy has been Vice President-Finance, Chief Financial Officer,
Secretary and Treasurer of Sentry since February 1997 and of Knogo since
December 1994. Prior thereto, Mr. Mundy served as an officer of the Knogo
Predecessor, where he was Vice President-Corporate Controller from May 1994 and,
prior to such time, Corporate Controller for more than five years. Mr. Mundy is
a Certified Public Accountant.
Peter Y. Zhou has been Vice President-Technology of Sentry since February
1997. Until February 1997, Dr. Zhou was Vice President-Technology of Knogo since
December 1994. Prior thereto, Dr. Zhou served as an officer of the Knogo
Predecessor where he was Senior Vice President-Technology from 1992 and Vice
President- Research from 1988.
The term of office, as director of Sentry, of Mr. Barbanell will expire at
its annual meeting of stockholders to be held in 1998. The terms of office, as
directors of Sentry, of Messrs. Benson and Perlmuth will expire at its annual
meeting of stockholders to be held in 1999 and of Messrs. Furst and Nicolette at
its annual meeting of stockholders to be held in 2000.
ITEM 11. EXECUTIVE COMPENSATION.
SENTRY EMPLOYMENT AGREEMENTS AND COMPENSATION OF EXECUTIVE OFFICERS
The employment agreement between Sentry and Mr. Nicolette is for a term of
four years. In addition to establishing Mr. Nicolette's annual compensation of
$200,000 per year, together with an opportunity to receive up to an additional
50% of such amount, based upon certain performance-based criteria, the use of an
automobile and the receipt of life insurance in the amount of $1,000,000, the
agreement provides that Sentry grant to Mr. Nicolette options to acquire 100,000
shares of Sentry Common Stock, with such options vesting at 20% per annum during
the five year period commencing on March 10, 1997, the date of the grant
thereof. The employment agreements of Messrs. Benson and Mundy and Dr. Zhou are
each for a term of two years. The employment agreements of Mr. Mundy and Dr.
Zhou provide for annual salaries of $120,000 and $130,000, respectively. In
addition to their annual salaries, Mr. Mundy and Dr. Zhou are each entitled to
receive options to purchase 40,000 shares of Sentry Common Stock, with such
options vesting at 20% per annum during the five year period commencing on the
respective dates of grant thereof. Mr. Benson's agreement provides for an annual
base salary in an amount equal to one percent (1%) of the gross sales of
Sentry's CCTV division up to the budgeted amount for such division established
yearly by the Sentry Board, together with an opportunity to receive an
additional 0.2% of the gross sales of the CCTV division based on certain
performance-based criteria. Mr. Benson has the option to receive an advance
against his base salary of up to $125,000 per annum. In addition to his salary,
Mr. Benson is entitled to receive options to acquire 50,000 shares of Sentry
Common Stock, with (x) 50% of such options vesting on the first anniversary of
the grant thereof and (y) the remaining 50% of such options vesting (i) on the
second anniversary of the grant thereof if the sales of Sentry's CCTV division
meet or exceed the amount budgeted by the Sentry Board for Mr. Benson's first
year of employment with Sentry or (ii) at 20% per annum during the four year
period following such first anniversary if such CCTV sales do not exceed such
budgeted amount. The employment agreements of Messrs. Nicolette and Mundy and
Dr. Zhou each provide for a cost of living adjustment to the base annual salary
of each such executive calculated based upon the percentage increase of the
Consumer Price Index (as defined in such agreements).
The employment agreements of Messrs. Nicolette, Benson and Mundy and Dr.
Zhou provide that in the event of a change in control of Sentry, the term of
each of their employment will be automatically extended for the period ending
two years in the case of Mr. Nicolette's agreement and one year in the case of
each of the other agreements, following the date of such change in control.
Following such change in control, each of such persons will have the right to
terminate his employment for good reason while continuing to receive the salary
and bonus otherwise payable thereunder for the remainder of the employment term.
Additionally, the employment agreements provide that in the event of a change in
control all options held by each such person, whether or not then vested, would
fully vest. If the change in control was not approved by a majority of the
Existing Directors (as defined in the Sentry certificate of incorporation),
each such officer would be entitled to receive cash in cancellation of such
options in an amount equal to the difference between the exercise price of such
options and the market price of Sentry Common Stock at the time of cancellation.
BENEFICIAL OWNERSHIP REPORTS
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers, Directors and persons who own more than 10% of
a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the American Stock Exchange. Officers, Directors and greater than
ten-percent shareholders are required by Securities and Exchange Commission
regulations to furnish the Company with copies of all such reports they file.
Based solely on a review of the copies of such reports furnished to the
Company, or written representations that no Form 5 was required, the Company
believes that all Section 16(a) filing requirements applicable to its officers,
Directors and greater than ten-percent beneficial owners were complied with
through December 31, 1996.
SUMMARY COMPENSATION TABLE
As Sentry did not commence compensation payments until the Effective Date
which occurred on February 12, 1997, the Summary Compensation Table reflects the
compensation for each of Messrs. Nicolette, Mundy, Zhou and Benson, the current
officers of Sentry, as paid to them in their pre-Merger positions with Knogo or
Video. The information set forth under "Securities Underlying Options" reflects
the numbers of such securities after giving effect to the Merger.
The following table summarizes the compensation for the years ended
December 31, 1996, 1995, and 1994 (in the case of Video only, Knogo having been
organized late in 1994) of Sentry's Chief Executive Officer and each of its
three other executive officers:
<TABLE>
<CAPTION>
ANNUAL LONG-TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION(1)
NAME AND SECURITIES
PRINCIPAL POSITION YEAR SALARY($) BONUS($) UNDERLYING ($)
------------------ ---- --------- -------- ----
OPTIONS (#)
-----------
<S> <C> <C> <C> <C> <C>
Thomas A. Nicolette,
President and CEO of Knogo (now 1996 $150,000 C 83,181 $4,391
President and CEO of Sentry) 1995 $150,000 C 89,004(2) $4,386
Peter J. Mundy,
Vice President - Finance,
Secretary and Treasurer of Knogo
(now Vice President - Finance, 1996 $103,800 C 33,272 $3,114
Secretary and Treasurer of Sentry) 1995 $103,800 C 37,431(2) $3,223
Dr. Peter Y. Zhou,
Vice President - Technology
of Knogo (now Vice President - 1996 $120,000 C 33,272 $3,600
Technology of Sentry) 1995 $120,000 C 37,431(2) $3,649
Andrew L. Benson,
President of Video 1996 $ 125,000 C C C
(now Vice President - CCTV 1995 $ 84,436 C C C
Systems of Sentry) 1994 $ 128,365 C C C
- ------------------------
(1) Amounts shown consist of Knogo's matching contributions under its Retirement Savings 401(k) Plan.
(2) Includes options granted late in 1994 in connection with Knogo's Spinoff from the Knogo Predecessor.
</TABLE>
As to various items of personal benefits, the Company has concluded that
the aggregate amount of such benefits with respect to each individual does not
exceed the lesser of $50,000 or 10% of the annual salary and bonus reported in
the table for such individual.
<PAGE>
OPTIONS GRANTED IN 1996
The following table sets forth certain information, after giving pro
forma effect to the Merger, concerning options granted by Knogo or Video, as
applicable, during 1996 to each executive officer named in the Summary
Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES % OF TOTAL ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED IN STOCK PRICE APPRECIATION FOR
OPTIONS 1996 OPTION
GRANTED EXERCISE EXPIRATION TERM ($)
---------
NAME (#) PRICE ($) DATE 0% 5% 10%
-- ----- -----
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas A. Nicolette (1) 83,181 33.8% $6.31 February 20, 2006 - 330,114 836,644
Peter J. Mundy (1) 33,272 13.5% $6.31 February 20, 2006 - 132,058 334,658
Dr. Peter Y. Zhou (1) 33,272 13.5% $6.31 February 20, 2006 - 132,058 334,658
Andrew L. Benson - - - - - - -
- --------------------
(1) Options are exercisable for units of equal shares of common stock and preferred stock.
</TABLE>
AGGREGATED OPTION EXERCISES IN 1996 YEAR END OPTION VALUES
The following table sets forth, after giving pro forma effect to the
Merger, for each of the named executive officers the number of options exercised
during 1996 and the amount realized by each such officer. In addition, the table
shows, after giving pro forma effect to the Merger, the number of options that
the named executive officer held as of December 31, 1996, and the value of such
options as of that date. As a result of the Merger, all options became
exercisable.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SHARES UNEXERCISED UNEXERCISED IN-THE-
ACQUIRED OPTIONS AT YEAR-END MONEY OPTIONS AT
ON EXERCISE VALUE (#) YEAR-END ($)
NAME (#) REALIZED ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas A. Nicolette 197,139 364,800
Peter J. Mundy 73,614 125,900
Dr. Peter Y. Zhou 4,991 27,900 70,703 115,800
Andrew L. Benson - -
</TABLE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table provides information at March 24, 1997, with
respect to (i) any person known to the Registrant to be the beneficial owner of
five percent or more of the Common Stock of the Registrant, (ii) all Directors
of the Registrant, (iii) each of the four most highly compensated executive
officers and (iv) all Directors and executive officers as a group. For the
purpose of computing the number of shares and the percentage of the Common Stock
owned by each person or group listed in this table, any shares not outstanding
which are subject to options exercisable within 60 days have been deemed to be
outstanding and owned by such person or group, but have not been deemed to be
outstanding for the purpose of computing the percentage of the Common Stock
owned by any other person. Unless otherwise indicated, beneficial ownership
disclosed consists of sole voting and sole investment power.
NUMBER OF
SHARES OF
SENTRY PERCENT
NAME AND ADDRESS OF COMMON OF
BENEFICIAL OWNER STOCK CLASS
Walter & Edwin Schloss 594,592(1) 6.2%
Associates L.P.
52 Vanderbilt Avenue
New York, New York 10017
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES OF
SHARES OF SENTRY
SENTRY PERCENT CLASS A PERCENT
COMMON OF PREFERRED OF
STOCK CLASS STOCK CLASS
Directors and Executive Officers
<S> <C> <C> <C> <C>
Thomas A. Nicolette 336,242(2) 3.4% 311,241(2) 6.2%
Peter J. Mundy 91,241(3) * 91,241(3) 1.9%
Andrew L. Benson 194,278 2.0%
Peter Y. Zhou 84,372(4) * 84,372(4) 1.7%
William A. Perlmuth 902,368(5) 9.3% 902,368(5) 18.7%
c/o Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
Robert D. Furst, Jr. 976,672(6) 10.0%
Robert L. Barbanell 5,000 * 5,000 *%
All directors and executive officers as
a group (7 persons) 2,590,172(7) 25.4% 1,392,221(8) 27.0%
</TABLE>
- ----------------------
* Less than 1% of the class.
(1) Includes 7,070 shares beneficially owned solely by Mr. Walter J. Schloss
and 5,822 shares beneficially owned solely by Mr. Edwin W. Schloss.
(2) Excludes 41,590 shares held by a trust for the benefit of Mr. Nicolette's
wife, as to which shares Mr. Nicolette disclaims beneficial ownership.
Includes 74,862 shares held by Mr. Nicolette as co-trustee under trusts for
the benefit of his minor children and as to which shares Mr. Nicolette
disclaims beneficial ownership. Also includes 197,139 shares issuable upon
the exercise of stock options exercisable within 60 days from the date
hereof.
(3) Includes 73,614 shares issuable upon the exercise of stock options
exercisable within 60 days from the date hereof.
(4) Includes 70,703 shares issuable upon the exercise of stock options
exercisable within 60 days from the date hereof.
(5) Consists of (a) 750,729 shares held by Mr. Perlmuth as Executor of the
Estate of Arthur J. Minasy, (b) 130,011 shares held by Mr. Perlmuth as
trustee under trusts for the benefit of Mr. Minasy's adult children, and
(c) 3,327 shares beneficially owned by Mr. Perlmuth. Also includes 18,299
shares issuable upon the exercise of stock options exercisable within 60
days from the date hereof. Under the policies of the law firm of which he
is a member, Mr. Perlmuth will share any economic benefits of the options
with the other members of such firm.
(6) Includes 175,182 shares which could be purchased upon the exercise of
existing options and warrants which are currently exercisable or which will
become exercisable within 60 days from the date hereof.
(7) Includes 534,934 shares which could be purchased upon the exercise of
existing options and warrants which are currently exercisable or which will
become exercisable within 60 days from the date hereof.
(8) Includes 359,755 shares which could be purchased upon the exercise of
existing options which are currently exercisable or which will become
exercisable within 60 days from the date hereof.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Directors who are also full-time employees of Sentry receive no additional
compensation for their services as directors. Each non-employee director will
receive $12,000 annually for services on the Sentry Board and $1,000 per Sentry
Board meeting attended. In addition, each non-employee director who is a member
of any committee of the Sentry Board receives $500 for attendance at any meeting
of such committee which is held neither immediately before nor immediately after
a Sentry Board meeting; provided, however, that the chairman of the compensation
and audit committee of the Sentry Board receives $1,000 for attendance at any
such separately held meeting of the compensation and audit committee and $500
for attendance at any meeting of such committee held either immediately before
or immediately after a Sentry Board meeting.
In addition, each non-employee director is eligible to participate in the
1997 Stock Incentive Plan of Sentry. Pursuant to this plan, options to purchase
15,000 shares of Sentry Common Stock are granted to each such director at the
time such director first joins the Sentry Board. Messrs. Perlmuth, Furst and
Barbanell were each granted such options as of the February 13, 1997. In
addition, additional options to purchase shares of Sentry Common Stock may be
granted to any of the directors at the discretion of the Sentry Board. All such
options are granted at fair market value and become exercisable over five years
beginning on the first anniversary of the date of grant.
During the year ended December 31, 1996, the firm of Stroock & Stroock &
Lavan, of which Mr. William A. Perlmuth, a director of the Company and of Knogo,
is a member, rendered services as general counsel to Knogo and received fees for
such services. The fees received by firm constituted less than 5% of the gross
revenues received by the firm during its most recent fiscal year. The Company
believes that the billing rates for the legal services were no less favorable to
Knogo than could have been obtained from unaffiliated parties for comparable
services.
Between October 1992 and February 1994, Robert D. Furst, Jr., a current
director of Sentry and a former director and principal shareholder of Video,
made loans and advances to Video in the aggregate principal amount of
approximately $890,000. Prior to August 1993, such loans to Video were evidenced
in part by a series of promissory notes, each bearing an annual interest rate of
10%. On August 3, 1993, Video and Mr. Furst entered into a revolving line of
credit agreement (the "Credit Agreement") and a security agreement pursuant to
which Mr. Furst agreed to loan Video up to $500,000 at an annual interest rate
of 10%. Pursuant to the security agreement, repayment of advances made under the
Credit Agreement was secured by all of the assets of Video. Upon the execution
of the Credit Agreement, the then outstanding balance of the prior loans and
advances in the aggregate amount of $469,500 was transferred to, and
incorporated into, the Credit Agreement. Video made periodic repayments of
principal and interest between December 1992 and January 1994 in the aggregate
amount of approximately $310,250, which were applied first to interest and then
to principal. In 1993, Video also repaid $11,000 borrowed from Mr. Furst
pursuant to a non-interest bearing promissory note dated October 15, 1991 which
was not included in the Credit Agreement. In April 1994, Video used
approximately $623,000 of the proceeds from a $1,500,000 debt issuance to repay,
in full, approximately $615,000 of principal and approximately $8,000 of
interest then owing to Mr. Furst under the Credit Agreement, and the Credit
Agreement was terminated.
In connection with the loans to Video described above, Video granted
warrants to Mr. Furst for the purchase of 145,182 shares of Video Common Stock.
Such warrants, which have been assumed as of the Effective Date by Sentry
pursuant to the Mergers, range in exercise price from $1.17 per share to $2.00
per share, are currently exercisable in full, and expire between October 1997
and September 1998. To date, Mr. Furst has not exercised any of the warrants.
In May 1996, Video received $500,000 under a promissory note (the "May 1996
Note") from Mr. Furst, with interest at 10% and secured by all of the assets of
Video. In July 1996, Video received $250,000 under a promissory note (the "July
1996 Note") from an investor, with interest at 10%, and secured by all of the
assets of Video. In September 1996, Video received $1,000,000 under a promissory
note (the "September 1996 Note") from another investor, with interest at 10%,
maturing in January 1997, and secured by all of the assets of Video. The
September 1996 Note was subordinated to Video's bank line of credit. Both the
May 1996 Note and the July 1996 Note were repaid in full in September 1996 with
proceeds from the September 1996 Note. In October and November 1996, Video
received an aggregate of $250,000 from Mr. Furst under a promissory note (the
"October 1996 Note") which allowed Video to borrow up to $500,000, with interest
at 10%, and which matured in January 1997. This promissory note was secured by
all of the assets of Video and was subordinated to Video's bank line of credit.
Subsequent to the Mergers, Video has repaid the September 1996 Note and the
October 1996 Note with funds advanced to Video from Knogo.
The Company believes that all prior transactions between Video and the
officers, directors, or other affiliates of Video were on terms no less
favorable to Video than could have been obtained from unaffiliated third parties
on an arm's length basis.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report on Form 10-K:
(1) (2) Consolidated Financial Statements of Registrant and its
subsidiaries for the year ended December 31, 1996 and Financial
Statement Schedules required to be filed by Items 8 and 14(d) of Form
10-K. See the Index to Consolidated Financial Statements of Sentry
Technology Corporation and its subsidiaries.
(3) Exhibits required to be filed by Item 601 of Regulation S-K:
MANAGEMENT CONTRACTS OR COMPENSATORY PLANS OR ARRANGEMENTS:
10.1 1997 Stock Incentive Plan of Sentry Technology Corporation.
Incorporated by reference to Exhibit 10.5 to Registrant's Registration
Statement on Form S-4 (No. 333-20135).
10.2 Form of Sentry Technology Corporation 401(k) Plan. Incorporated by
reference to Exhibit 10.6 to Registrant's Registration Statement on
Form S-4 (No. 333-20135).
10.3 Form of Employment Agreement, dated as of February 12, 1997, between
Registrant and Thomas A. Nicolette. Incorporated by reference to
Exhibit 10.1 to Registrant's Registration Statement on Form S-4 (No.
333-20135)
10.4 Form of Employment Agreement, dated as of February 12, 1997, between
Registrant and Peter J. Mundy. Incorporated by reference to Exhibit
10.2 to Registrant's Registration Statement on Form S-4 (No.
333-20135).
10.5 Form of Employment Agreement, dated as of February 12, 1997, between
Registrant and Peter Y. Zhou. Incorporated by reference to Exhibit
10.3 to Registrant's Registration Statement on Form S-4 (No.
333-20135).
10.6 Form of Employment Agreement, dated as of February 12, 1997, between
Registrant and Andrew L. Benson. Incorporated by reference to Exhibit
10.4 to Registrant's Registration Statement on Form S-4 (No.
333-20135).
OTHER EXHIBITS:
2.1 Amended and Restated Agreement and Plan of Reorganization and Merger,
dated as of November 27, 1996 among Video Sentry Corporation, Knogo
North America Inc., Sentry Technology Corporation, Viking Merger Corp.
and Strip Merger Corp., as amended by Amendment No. 1 to Amended and
Restated Agreement and Plan of Reorganization and Merger, dated as of
January 10, 1997. Incorporated by reference to Exhibit 2.1 to
Registrant's Registration Statement on Form S-4 (No. 333-20135).
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant, together with Form of Certificate of Designations of
Sentry Technology Corporation Class A Preferred Stock. Incorporated by
reference to Exhibit 3.1 to Registrant's Registration Statement on
Form S-4 (No. 333-20135).
3.2 Form of Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to Registrant's Registration Statement on Form S-4 (No.
333-20135).
10.7 Loan Agreement between Knogo North America Inc. and Fleet Bank.
Incorporated by reference to Exhibit 10.9 to Knogo North America
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994
(File No. 1-13528).
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed for the Registrant during the
relevant period.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SENTRY TECHNOLOGY CORPORATION
By: /s/ Peter J. Mundy
Peter J. Mundy
Vice President-Finance,
Chief Financial Officer,
Secretary and Treasurer
Dated: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE
/S/ THOMAS A. NICOLETTE President, Chief Executive Officer
Thomas A. Nicolette and Director
/S/ ROBERT D. FURST, JR. Director
Robert D. Furst, Jr.
/S/ WILLIAM A. PERLMUTH Director
William A. Perlmuth
/S/ ANDREW L. BENSON Vice President-CCTV Systems
Andrew L. Benson and Director
/S/ ROBERT L. BARBANELL Director
Robert L. Barbanell
/S/ PETER J. MUNDY Vice President-Finance,
Peter J. Mundy Chief Financial and Accounting Officer,
Secretary and Treasurer
Dated: March 28, 1997
<PAGE>
EXHIBIT INDEX
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
Exhibit 21
Subsidiaries
Set forth below are the names of the direct and indirect subsidiaries
of Sentry Technology Corporation, together with the percentage ownership
interest of each such corporation parent.
Knogo North America Inc. (100%)
Knogo Caribe Inc. (100%)
Video Sentry Corporation (100%)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,658
<SECURITIES> 0
<RECEIVABLES> 6,948
<ALLOWANCES> 719
<INVENTORY> 6,926
<CURRENT-ASSETS> 22,698
<PP&E> 13,182
<DEPRECIATION> 5,894
<TOTAL-ASSETS> 32,857
<CURRENT-LIABILITIES> 3,992
<BONDS> 3,154
0
0
<COMMON> 58
<OTHER-SE> 25,190
<TOTAL-LIABILITY-AND-EQUITY> 32,857
<SALES> 19,859
<TOTAL-REVENUES> 23,263
<CGS> 11,935
<TOTAL-COSTS> 11,872
<OTHER-EXPENSES> (2,462)
<LOSS-PROVISION> 91
<INTEREST-EXPENSE> (20)
<INCOME-PRETAX> 1,847
<INCOME-TAX> 664
<INCOME-CONTINUING> 1,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,183
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
