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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
350 WIRELESS BOULEVARD, HAUPPAUGE, NEW YORK 11788
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 232-2100
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS:
Common Stock, $.001 par value
Class A Preferred Stock, $.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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 31, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $1,973,000 based upon the
closing price of such securities on the American Stock Exchange on that date. At
March 31, 2000, the Registrant had outstanding 9,750,760 shares of Common Stock
and 5,333,334 shares of Class A Preferred Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
ITEM 1. BUSINESS.
FORMATION OF THE COMPANY; GENERAL
The Company was formed in connection with the February 1997 merger of Knogo
North America Inc., a Delaware corporation, and Video Sentry Corporation, a
Minnesota corporation. Pursuant to the Merger Agreement for the transaction,
Sentry Technology Corporation ("Sentry") is now the parent corporation of two
wholly-owned Delaware subsidiaries: Knogo North America Inc. ("Knogo") and Video
Sentry Corporation ("Video"). This series of transactions is referred to herein
collectively as the "Merger."
The Merger was accounted for under the purchase method of accounting.
Although former Video shareholders received 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 was 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 include the results of operations of Video after the Effective Date.
Video designs, manufactures, markets, installs and services a programmable
traveling closed circuit television surveillance system that delivers a high
quality video picture which is used in a wide variety of applications. Video
also acts as a system integrator for conventional CCTV products that it markets,
installs and services. Video's predecessor was founded in 1990 and made its
first sales in 1992.
Knogo is engaged in the design, manufacture, sale, installation and
servicing of a complete line of electronic article surveillance equipment. Knogo
was incorporated in Delaware in October 1996. Its corporate predecessors had
been in business for more than 30 years.
RECENT DEVELOPMENTS
The Company's strategy following the Merger in 1997 was to use Knogo's
engineering staff and excess manufacturing capacity resulting from a 1994
restructuring for the reengineering and production of its proprietary and
patented SentryVision(R) programmable traveling closed circuit television
surveillance ("CCTV") systems. With the reengineering completed, management
believed that sales of SentryVision(R), which had fallen in the final year that
Video was a separate corporation, would rebound.
While the engineering staff was able to resolve substantially the design
and manufacturing problems associated with SentryVision(R), the sales of the
system did not achieve the levels anticipated by the Company.
Furthermore, while still profitable, sales of Knogo's Electronic Article
Surveillance ("EAS") systems have continued to erode due to the attention the
Company gave to the reengineering and marketing of SentryVision(R) as well as
competition from lower-priced "off-the-shelf" systems and competition from
larger, better-financed competitors such as Sensomatic Electronics Corporation
and Checkpoint Systems Inc. In addition, due to a non-compete provision entered
into by Knogo in 1994, the Company has not been permitted to market its EAS
products outside of the United States and Canada. The non-compete provision
expired at the end of 1999.
Prior to the expiration of the non-compete, the Company recognized that,
because of its continuing operating losses and the depletion of its tangible
assets to fund ongoing operations, its ability to continue to market its
existing SentryVision(R) and EAS products and to develop new products and
product extensions to allow it to remain competitive would require additional
investment. The Company engaged an investment banking firm to help position the
Company for an additional investment or for possible acquisition. This effort
was not successful, and the Company terminated its arrangement with the
investment bank in November, 1999.
In October 1999, faced with continued losses and sales which failed to meet
projected levels, the Board of Directors removed the Company's Chief Executive
Officer and appointed as interim Chief Executive Officer Anthony H.N.
Schnelling, and retained Restoration Management (of which Mr. Schnelling is a
principal) to assist in the Company's efforts to reduce operating expenditures,
to return the Company to profitability, and to further the Company's efforts to
find an acquisition partner or strategic investor.
Commencing with Mr. Schnelling's engagement, the Company undertook a
rigorous review of its operations to determine changes needed to allow for the
development of a business plan appropriate to the Company's then existing
operational problems and financial circumstances.
Steps taken in connection with or as a result of this review included:
o Performance of an in-depth review of the Company's immediate
and medium term cash needs and the renegotiation of the
Company's credit facility.
o Correction of ongoing manufacturing and operational problems
associated with the SentryVision(R) product.
o Narrowing the target market for the Company's conventional
CCTV and SentryVision(R) products to focus on those markets
in which the Company had previously achieved successful
market penetration.
o Refocusing the Company's sales efforts to include more
emphasis domestically and internationally on the traditional
EAS product lines.
o Realigning each department's organization structure to
eliminate barriers to intra- and inter-departmental
communication.
o Revising the budget process to provide increased accuracy in
the Company's ability to forecast sales and margins.
o Downsizing the organization to fit current circumstances and
meet forecasted objectives resulting in a reduction in the
work force of approximately 23% and a reduction in projected
annual operating expenses of approximately $2 million.
o Reassessing the carrying values of certain assets including
inventory and goodwill based on the new business plan.
THE SENTRYVISION(R) SYSTEM
Video's proprietary CCTV system, called SentryVision(R), is designed to
provide enhanced prevention surveillance in retail stores and distribution
centers as well as to provide monitoring and deterrence of illegal and unsafe
activities in a variety of other locations such as parking garages, correctional
facilities, warehouses, transportation centers and public transit terminals. The
SentryVision(R) 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, 1999, 1,030 SentryVision(R) systems had been
installed in approximately 429 customer locations in North America. Current
customers include Lowe's Home Centers, Target Stores, Eckerd Corporation, Mills
Fleet Farm, Winn Dixie, Federal Express, UPS, J.C. Penney, Canadian Tire, Reno
Depot, Estee Lauder, Kohl's Department Stores, Disney Direct Marketing and Duke
University. In addition, during 1999 the Company's international distributors
installed 20 SentryVision(R) systems in 9 customer locations in Western Europe,
Latin America and South Africa. The Company believes that, by providing expanded
surveillance coverage and enhanced flexibility to select the locations watched,
the SentryVision(R) systems have enabled customers to significantly reduce
inventory shrinkage, increase theft apprehension rates and improve safety and
security. Based on the price of its system and the experience of Video's
customers to date, the Company believes the SentryVision(R) system is a
cost-effective solution which can improve the operations of its customers.
The SentryVision(R) system consists of a camera carriage unit, a continuous
track enclosed with tinted or mirrored glass enclosure and electronic control
equipment. The carriage unit moves within the enclosure and carries two
pan/tilt/zoom ("PTZ") CCTV cameras, electronic transmission components and motor
drives. The carriage track and enclosure are designed to custom lengths for more
complete viewing. Using Video's patented transmission technology, the carriage
unit transmits video and control signals 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 analog and digital videocassette recorders, alarm
inputs, fixed cameras, PTZ dome cameras, switches/multiplexers, voice intercom
systems, panic buttons and remote viewing capability using dedicated phone lines
or internet technology.
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 the SentryVision(R) systems are well suited for loss
prevention surveillance, including home centers, mass merchandise chains,
supermarkets, hypermarkets and drug stores, as well as related distribution
centers. The key application is inventory loss prevention in the stores, stock
rooms and distribution centers.
The SentryVision(R) system is typically installed in large 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(R) 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 employee theft or performance evaluation of client
personnel. Typically, the SentryVision(R) system has been installed near the
ceiling between the rows of cash registers and 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.
More recently, SentryVision(R) has been integrated with "front end"
packages of conventional CCTV cameras, dedicated to monitoring the registers and
allowing users to locate the traveling camera track where the maximum coverage
of in-store traffic can be monitored. The SentryVision(R) system is today
generally sold in conjunction with conventional CCTV applications. Customers
using the SentryVision(R) system have reported significant reductions in
theft-related inventory shrinkage.
RETAIL MARKET APPLICATIONS
o HOME CENTERS. Video has installed 709 systems in more than 275
store locations for six customers in the home center segment of
the retail market. Typical of the Company's customers in this
market are Lowe's Home Centers, a 580 store chain, and Mills
Fleet Farm, a 32 store regional hardware, home supply and
discount retail chain. Both companies required systems for total
floor coverage. Different solutions to this common problem were
applied in each case. Lowe's Home Centers chose to integrate
track cameras with PTZ dome and fixed-mount cameras, while Mills
Fleet Farm chose to use only the track camera system.
o MASS MERCHANDISE CHAINS. Video has installed 55 systems for six
customers in this segment, including Sears and Target Stores. The
targeted coverage varies extensively in these installations from
only stock rooms to total store coverage. The equipment package
provided in each case varies with the application and location of
the need.
o SUPERMARKETS. Video has installed 30 systems in 28 store
locations for seven supermarket customers. The targeted coverage
in most of these installations has been the entire retail space.
Supermarket chains using SentryVision(R) include Kroger, Marsh,
Cub Foods, Winn-Dixie and Fiesta Mart.
o DRUG STORES. Video has installed 27 systems in 25 store locations
for Eckert Drug, Navaro Pharmacy and Rite Aid drug stores. The
targeted coverage area for these customers is the entire store.
INDUSTRIAL MARKET APPLICATIONS
o DISTRIBUTION CENTERS. Video also provides loss prevention
surveillance for distribution centers and warehouses, and has
installed 78 systems in distribution centers for 29 different
retailers including Kohl's Department Stores, Target Stores,
Borders Group, Disney Direct Marketing, Barnes & Noble,
Robinsons-May, Ross, Saks, Guess, Tower Records and J.C. Penney.
Traveling through a facility from an overhead position, the
SentryVision(R)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(R)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.
o MANUFACTURING AND TRANSPORTATION FACILITIES. So far
SentryVision(R)use in factories has been limited but the benefits
of continuous tracking of industrial operations and processes
indicate future growth. Continued expansion of the
SentryVision(R)dealer program is expected to generate increased
installations in factories manufacturing electronics,
pharmaceuticals, computers and other high value products and in
various wholesale distribution and transportation facilities.
Express package and other high throughput distribution facilities
are also good prospects for a continuous tracking CCTV system for
theft prevention. Recent installations include AT&T Wireless,
American Steel, Federal Express, UPS and Wyeth-Agerst Labs.
INSTITUTIONAL MARKET APPLICATIONS
o PARKING, CORRECTIONS, AND GOVERNMENT INSTITUTIONS. The Company
has installed 108 systems in three parking garages at Duke
University's Medical Center with major benefits identified as
savings in guard costs, vandalism, safety and theft.
SentryVision(R) has been installed in correctional facilities in
Texas, California, New Mexico and Illinois, with reported safety
benefits of continuous coverage in dormitory, recreation and
visitation areas. SentryVision(R) installations have also been
completed in various government agencies including the Federal
Reserve Bank, US Postal Service, US Immigration Service and the
US Marine Corps.
The Company has developed a new generation SV-2000 SentryVision(R) system
which will begin shipping in the second quarter of 2000. New components and
software provide increased life, reliability and performance.
CONVENTIONAL CCTV SYSTEMS
Conventional CCTV is cost effective in many applications and is the most
widely used loss prevention system in North America. Conventional CCTV uses all
the basic components of the video surveillance industry including fixed and dome
cameras, VCR's, monitors, switchers, multiplexers and controllers. As all of
this equipment is manufactured for Video by outside vendors, the Company can
provide its customers with state-of-the-art equipment for specific applications
at favorable costs. The Company believes that, while less profitable than
SentryVision(R) and traditional EAS products, the CCTV products complement the
Company's other surveillance systems and provide retailers with further
protection against internal theft and external shoplifting activities. CCTV
systems can also be electronically connected to EAS systems, causing a video
record to be generated when a theft alarm is triggered.
While the Company believes that conventional CCTV and SentryVision(R) are
complementary security solutions, many companies have traditionally viewed them
as competing solutions and have selected between conventional CCTV systems and
SentryVision(R) systems for their security solutions. The Company has received
indications that its largest single SentryVision(R) customer, Lowe's Home
Centers, continues to project that the bulk of its orders in 2000 will be for
conventional CCTV systems.
Remote video transmission and digital recording are other potential growth
areas for Video. These systems allow customers to monitor remote sites using
existing communication lines and a PC-based system. Video camera images are
stored and manipulated digitally, substituting the PC for the VCR and
eliminating the videotape. Video markets a remote video transmission system with
software developed by Prism Video, Inc., a third-party vendor. In 1999, Sentry
received initial orders for remote video transmission systems from customers in
the retail, industrial and school markets.
The Company continues to expand conventional CCTV installations in
industrial and institutional facilities. Significant installations have been
made for express package companies, including Federal Express, United Parcel
Service and Emery Air Freight. The use of CCTV surveillance also continues to
grow in both new and existing correctional facilities and Sentry now has CCTV
installations in both state and county facilities.
In 1999, the Company continued marketing CCTV to the school market.
Successful installations were completed with reported benefits including
decreased vandalism and improved safety. In schools, conventional CCTV is an
extremely cost effective security option with Remote Video Transmission becoming
an attractive option for large school districts.
The Company estimates the US retail CCTV market to be approximately $370
million per year. Comparable estimates for the institutional and industrial CCTV
markets are $120 million and $240 million per year, respectively. The North
American market for CCTV products is growing at an estimated rate of 12% per
year.
EAS SYSTEMS
EAS systems consist of detection devices which are triggered when articles
or persons tagged with reusable tags or disposable labels, (referred to as
tags), pass through the detection device. The EAS systems which Knogo
manufactures are based upon three distinct technologies. One, the Radio
Frequency ("Knoscape RF(TM)") System, uses medium radio frequency transmissions
in the two to nine megahertz range. Second, the "Ranger (TM)" system, uses
ultra-high frequency radio signals in the 902 megahertz and 928 megahertz bands.
Third, the Magnetic ("Knoscape MM(TM)") system, uses very low frequency
electromagnetic signals in the range of 218 hertz to nine kilohertz. Knogo also
manufactures a non-electronic dye-stain pin ("KnoGlo(TM)"). Since 1996, Knogo
has been an authorized distributor of the library security systems and related
products of Minnesota Mining and Manufacturing Company ("3M").
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 applications.
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. No significant revenue has been received to date in
connection with this line of business.
The U.S. market for retail EAS systems and tags is estimated by industry
sources at $550 million and is growing at an estimated rate of 12% per year.
At December 31, 1999, the approximate number of EAS Systems sold or leased
by Knogo and its predecessors exceeded 24,700.
RADIO FREQUENCY AND RANGER(TM) DETECTION SYSTEMS
Knogo manufactures and distributes the Knoscape RF(TM) system, the
principal application of which is to detect and deter shoplifting and employee
theft of clothing and hard goods in retail establishments. Knogo also
manufactures and distributes the Ranger(TM) system, which the Company believes
is a particularly useful and cost efficient EAS system for high fashion retail
stores with wide mall-type exit areas which ordinarily would require multiple
Knoscape RF(TM) systems for adequate protection. The Knoscape RF(TM) and
Ranger(TM) 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 (Silver Cloud(TM)) and mounted in or on the floor in 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 triggering the transmission of an alarm directly to
the security authorities. By means of multiple installations of horizontal
Knoscape RF(TM) systems or installation of one or more Ranger (TM) systems, the
Company's products have the ability to protect any size entrance or exit.
Non-deactivatable reusable 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 reusable 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.
Disposable labels can be applied to products either by placing them
directly on the outside packaging of the item or hidden within the product by
the manufacturer. These labels can be deactivated, at the checkout desk, through
the use of a deactivation device.
Knoscape RF(TM) and Ranger (TM) 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 Knoscape MM(TM) 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 and sporting goods.
Knoscape MM(TM) systems use detection monitors which are activated by
electromagnetically sensitized strips. The MM targets are typically attached to
the articles to be protected and are easily camouflaged on a wide array of
products. The detection monitors used by the Knoscape MM(TM) 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. 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, camera film and cameras.
The Knoscape MM(TM) system offers retailers several features not available
in Knoscape RF(TM) and Ranger (TM) 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 or the article itself, they are
convenient to use.
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.
BOOKINGS
Of Sentry's bookings for the year ended December 31, 1999, approximately
13% were attributable to SentryVision(R), 39% to CCTV, 42% to EAS and 6% to 3M
library security systems. For the year ended December 31, 1998, approximately
18% were attributable to SentryVision(R), 28% to CCTV, 47% to EAS, 7% to 3M
library security systems. For the year ended December 31, 1997, approximately
46% were attributable to SentryVision(R) (including several multi-year orders),
15% to CCTV, 30% to EAS and 9% to 3M library security systems.
MAJOR CUSTOMERS
Although the composition of the Company's largest customers has changed
from year to year, a significant portion of the Company's revenues has been
attributable to a limited number of major customers. Sales to Sensormatic
accounted for 10% of total revenues in 1997. In 1999, 1998 and 1997, Lowe's Home
Centers accounted for 19%, 22%, and 18% respectively, of total revenues. In
1999, Goody's Family Clothing accounted for 14% of total revenues. While the
Company believes that one or more major customers could account for a
significant portion of the Company's sales for at least the next two years, the
Company anticipates that its customer base will continue to expand and that in
the future the Company will be less dependent on major customers.
PRODUCTION
In October 1998 the Company ceased manufacturing at its Cidra, Puerto Rico
facility and consolidated all manufacturing and assembly at the Company's
Hauppauge, New York facility. The Puerto Rico facility was sold in February
1999. The consolidation was intended to reduce operating costs and increase
manufacturing controls by allowing management and engineering staffs to
interface real time with the manufacturing process. However, as a result of
product design and reliability issues identified throughout the year, redesign
initiatives were implemented addressing both quality and manufacturability. In
addition, an enhanced quality assurance department was staffed, test equipment
procured and measures implemented to address and resolve quality concerns.
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. Final assembly
operations are conducted at the Company's facilities in Hauppauge, New York.
System components and parts include cameras, circuit boards, electric motors and
a variety of machined parts. Each system component and finished assembly
undergoes a quality assurance check by Video prior to its shipment to an
installation site. All electronics in their circuit board enclosures are tested
and burned in for 72 hours. Upon completion, the finished product is tested and
run for an addition 24 hours resulting in approximately 3,000 travel and PTZ
cycles prior to quality assurance sign off. 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.
KNOGO
Knogo produces at the Company's facilities in Hauppauge, New York, or
purchases through suppliers, its Knoscape RF(TM), Ranger(TM), Knoscape MM(TM)
and KnoGlo(TM), or their components. Production consists of final assembly
operations of printed circuitry, electronic and mechanical components that Knogo
purchases from various suppliers. Independent contractors using existing molds
and tooling produce plastic cases for the tags to Knogo's specifications. Due to
the age and design of existing production machinery coupled with the lack of
experienced machine maintenance mechanics, production rates in New York were not
as efficient as expected. Through product redesign efforts, final assembly
machines were modified to reduce production complexities. As a result, increased
production run rates of this product are expected to be realized, simultaneously
increasing production quality and reducing manpower. 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 that 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.
MARKETING
The Company markets its products for Video and Knogo, jointly, through the
direct efforts of approximately 15 salespersons located in select metropolitan
areas across the United States and Canada, as well as through a network of over
180 dealers/system integrators. Marketing efforts include participation in trade
shows, advertising in trade publications, targeted direct mailings and
telemarketing. In addition, the effort is augmented through the Company's
Website which has been recently updated to provide enhanced product and market
oriented information.
VIDEO
To date, virtually all SentryVision(R) and conventional CCTV Systems have
been sold on a direct sale basis. Typical billing arrangements for
SentryVision(R) systems involve invoicing 50% of total cost upon shipment of the
product and 50% on the completion of the installation.
While most of the current SentryVision(R) and conventional CCTV sales have
been made to home centers, retail chains and distribution centers, the Company's
1999 marketing plan for Video also emphasized, institutional and industrial
prospects. These efforts resulted in SentryVision(R) or conventional CCTV
installations in seven factories, government agencies, school districts and in
additional facilities for major express package delivery companies.
Beginning in mid-1998, the Company began a program to market
SentryVision(R) through qualified security dealers and integrators. Much of the
industrial and institutional SentryVision(R)/CCTV prospects are serviced by
local security companies who design and install integrated CCTV, access control
and alarm systems. By working with these companies, the Company is able to reach
a far larger number of SentryVision(R) prospects and penetrate the market more
rapidly. During the 2nd half of 1998, the program generated much interest
through trade advertising, direct mail and trade show participation. By the end
of 1999, non-exclusive contractual relationships with over 180 security dealers
were established. These and additional dealers are expected to generate
significant SentryVision(R) installations in industrial and institutional
facilities in 2000.
In addition, the Company markets SentryVision(R) internationally using
independent distributors. The distribution agreements generally appoint a
distributor for a specified term as the exclusive distributor for a specified
territory. The agreements require the distributor to purchase a minimum dollar
amount of the Company's product during the term of the agreement to retain
exclusivity. The Company sells its products to independent distributors at
prices below those charged to end-users because distributors typically make
volume purchases and assume marketing, customer training, installation,
servicing and financing responsibilities. As of December 31, 1999, the Company
had signed distribution agreements for Canada, Brazil, UK, France, Russia,
Spain, Portugal, South Africa, Belgium, Holland, Poland and Mexico.
During 1999, Video placed in service 58 SentryVision(R) systems and 5,066
CCTV cameras and peripherals as compared to 198 Sentry Vision(R) systems and
4,405 CCTV cameras and peripherals in 1998.
KNOGO
Knogo EAS systems are marketed on both a direct sales and lease basis, with
direct sales representing the majority 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 Knoscape MM(TM) 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 a Knoscape MM(TM) 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 the Knoscape MM(TM) systems on certain products such as clothing and
other soft goods.
During each of the years ended December 31, 1999 and 1998, Knogo placed in
service 439 Knoscape RF(TM), Ranger(TM), and Knoscape MM(TM) systems.
RF and Ranger systems continue to be used by apparel and department stores
which have wide exit areas and a desire for deterrence based on reusable hard
tags. Both the Silver Cloud(TM) and Knoscape RF systems are universal in that
they can detect both 2 MHZ hard tags and 8 MHZ labels. In the latter part of
1999, Knogo introduced a new series of 8MHz RF systems including the P-2000 and
T-2000 systems designed for both hard and soft good customers. The P-2000 system
is unique in that it is economical and self-installable by the customer. The
T-2000 system is designed for wide-aisle applications in single and dual-aisle
configurations up to six feet wide. At the same time, Knogo introduced a line of
8MHz disposable labels manufactured by All-Tag Security, SA in Belgium. These RF
systems and labels are compatible with and are an alternative to those products
offered by Checkpoint Systems, Inc. They will be targeted to a broad range of
mass merchandise, apparel and specialty stores.
Supermarkets, bookstores, video stores and specialty stores remain good
prospects for MM systems due to the small size and low cost of Micro-Magnetic
strips. In 2000, Knoscape MM Systems will feature updated digital electronics.
Knoscape MM Systems detect virtually all manufacturers' magnetic strips and can
universally replace older magnetic strip systems manufactured by various EAS
vendors.
The library market continues to be a substantial market for magnetic
technology. In March 1996, 3M and Knogo entered into a strategic alliance to
provide universal asset protection to libraries across North America. The
agreement, effective through March 2002, 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 1998, the Company designed and developed
for 3M a new library specific magnetic EAS system which in turn will be added to
this product listing. Under the agreement 3M provides service and installation
for all new and existing Knogo library customers throughout North America.
In 1999, the Company was awarded a patent on SecureBoard(TM), a process
which provides EAS protection service to the computer industry. The Company
believes that the integration of Knogo's SecureBoard(TM) system into an overall
loss prevention program in the computer industry would significantly curb thefts
of PC boards, memory chips and other computer components. Using SecureBoard(TM)
technology, board manufacturers could embed EAS material into an internal layer
of a printed circuit board, making SecureBoard(TM) compatible with high volume
printed circuit board manufacturing processes. The Company's limited financial
resources has prevented it from dedicating substantial marketing efforts in this
market segment.
BACKLOG
The Company's backlog of orders was approximately $3.2 million at December
31, 1999 as compared with approximately $4.1 million at December 31, 1998. The
decrease is due primarily to weak sales in the 4th quarter of 1999. The Company
anticipates that substantially all of the backlog present at the end of 1999
will be delivered during 2000.
SEASONAL ASPECTS OF THE BUSINESS
The Company's current customers are primarily dependent on retail sales
which are seasonal and subject to significant fluctuations which are difficult
to predict. In the Company's experience, orders and installations are generally
the lowest in the first quarter of each year.
SERVICE
Installation services are performed by the Company's personnel and by
carefully screened and supervised subcontractors as well as authorized dealers
and distributors. Repair and maintenance services for Video and Knogo are
performed primarily by the Company's personnel. All products sold or leased are
covered by a warranty period. Generally, Video's products provide for a one-year
warranty and Knogo's products for a 90-day warranty. After the warranty period,
the Company offers its customers the option of entering into a maintenance
contract with the Company or paying for service on a per call basis.
Installations of SentryVision(R) systems typically take from three days to
three weeks and involve 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.
Throughout the first half of 1999, the Company focused on recruiting and
training entry level installers for SentryVision(R) and CCTV. As the travel
costs for these employees rose unacceptably, in the second half of the year the
Company expanded its program of hiring local sub-contractors for installation
work and refocused its employee efforts on service and maintenance work.
A great deal of the Company's efforts were directed at servicing the
existing SentryVision(R) systems, as reliability problems were not completely
resolved. The Company's engineering efforts were directed at resolving
electronic problems, which resulted in numerous service calls and in the
re-design of printed circuit boards to upgrade them and increase their
performance and reliability. These issues were substantially resolved in the
first half of 1999. Mechanical reliability issues then became the focus of the
Company in the latter half of 1999 as system problems continued. These issues
appear to have been largely resolved with the development and introduction in
1999 of new drive and idler wheels, brush block assemblies and wire harnesses.
The use of subcontractors supervised by Company employees proved cost
effective with no sacrifice in quality. A network of over 100 qualified
contractors was established. In the second half of 1999, the Company released 34
installation employees and retained only its most technically skilled employees.
The Company intends to continue to focus on EAS, SentryVision(R) and CCTV
technical service and maintenance and continue to expand its contractor network
for installation work.
This strategy has resulted in significant cost savings. In addition, the
Company retains its reputation of technical expertise within the industry and
management efforts can be focused on increased electronics training for its
employees, distributors and sub-contractors.
As SentryVision(R) reliability and sales increase, it is expected that
increased installation and service work can be supported by the existing
headcount and infrastructure.
COMPETITION
The Company 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, traveling CCTV systems, mirrors, guards, private
detectives and combinations of the foregoing. The Company competes principally
on the basis of the nature and quality of its products and services and the
adaptability of these products to meet specific customer needs and price
requirements.
To the Company's knowledge, there are several other companies that market,
directly or through distributors, conventional closed circuit video systems
and/or EAS equipment to retail stores, of which Sensormatic, Checkpoint Systems,
Inc., Philips, Inc., Pelco Manufacturing, Inc., Panasonic, Inc., and Ultrak,
Inc. are the Company's principal competitors. Sensormatic has also begun
marketing a traveling CCTV system in the US. Outside the US, the Company is
aware of other companies that market other types of traveling CCTV systems
including Lextar Technologies, Ltd. in Australia, T.E.B., Sensormatic and DETI
in France and Moving Cameras Ltd. in the UK. Some of the Company's competitors
have far greater financial resources, more experienced marketing organizations
and a greater number of employees than the Company.
In connection with the merger of Knogo's international EAS business with
Sensormatic in December 1994, Knogo agreed with Sensormatic that Knogo would not
compete with Sensormatic in selling EAS and conventional CCTV products in areas
outside of the United States, Canada and Puerto Rico through the period ending
December 29, 1999. In 2000 Sentry expects to promote selected EAS systems and
tags through a distribution network outside of North America although Sentry
will not be permitted to use the Knogo name outside of the United States and
Canada.
PATENTS AND OTHER INTELLECTUAL PROPERTY
VIDEO
Video's core United States patent, which expires in 2011, covers the
cable-free transmission of a video signal to and from the carriage. This
technology prevents degradation of the video signal which can result from the
movement of and prolonged friction caused by the carriage. A U.S. patent
application was recorded in 1998 for improvements made to such technology. Video
also has received a corresponding European patent and nine foreign country
patents. The Company also has pending four patents for additional corresponding
foreign patents. The Company intends to seek patent protection on specific
aspects of the SentryVision(R) system, as well as 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 patents 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.
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 22 United States and Canadian patents and three patent
applications relating to (i) the method and apparatus for the detection of
movement of articles and persons and accessory equipment employed by Knogo in
its Knoscape RF(TM), Ranger(TM) and Knoscape MM(TM) systems, (ii) various
specific improvements used in the Knoscape RF(TM), Ranger(TM) and Knoscape MM
(TM) 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 to each
other, for use in their respective territories, pursuant to the License
Agreement dated December 29, 1994, entered into in connection with the 1994
Sensormatic transaction. In addition, Sensormatic has rights to manufacture and
sell SuperStrip within the United States, Canada and Puerto Rico.
In 1999, the Company received a U.S. patent for optically identifying
counterfeit goods and filed a second U.S. patent application for confirming the
authenticity of an article using a magnetic reader.
The Company also holds a patent on SecureBoard technology, a process which
protects against the theft of PC boards, memory chips and other computer
components, by embedding EAS material into the internal layer of a printed
circuit board.
RESEARCH AND DEVELOPMENT
At December 31, 1999, Sentry had 8 employees located in the United States
engaged full-time in research and engineering and product development. The
Company may from time to time retain consultants for specific project
assistance. For the years ended December 31, 1999, 1998 and 1997, approximately
$1,291,000, $1,342,000, and $1,658,000, respectively, was expended on
Company-sponsored research.
VIDEO:
During 1999, in response to an increasing number of service calls for
systems in the field, the majority of the Company's research and development
expenditures were directed towards improving the reliability and performance of
the SentryVision(R) product line. The improvements made included:
MECHANICAL:
o Upgraded the materials used in the drive and idler wheels to prolong
their life span.
o Modified the wire harness assembly for increased durability.
o Upgraded the material used in and modified the application for the
transmission of power to and the delivery of the video signal from the
carriage. This change substantially eliminates copper dust, a
by-product of the operation of the system, which degrades picture
quality.
ELECTRICAL:
o Redesigned all electrical boards to improve reliability and
performance.
o Reengineered the modulator, demodulator and RF adapter to improve the
reception of the video image and to extend the overall distance from
the end of the track to the control room from 700 feet to more than
2,000 feet.
o Added automated acceleration and breaking control software to
minimize wear on the carriage.
OPTICAL:
o Upgraded cameras to the most advanced versions improving video
quality, particularly in low light environments.
o Introduced a new mirrored glass enclosure to improve image quality,
light transparency and aesthetics.
The combination of all of the above changes were incorporated into the new
SV-2000 system introduced in March 2000.
KNOGO
The Company continued its research and development activities with respect
to EAS products. In 1999, these included the development of two new systems, the
P-2000 and T-2000, which detect all 8 MHz hard tags and disposable paper tags
sold by the Company and others in the industry. It also completed the
development of a new 8 MHz verifier/deactivator unit.
In addition, the Company redesigned the reusable hard tag and its related
manufacturing and assembly processes.
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
At December 31, 1999, the Company and its subsidiaries employed 155
full-time employees, of whom, 22 in administrative and clerical capacities, 8 in
engineering, research and development, 45 in production, 26 in marketing and
sales and 54 in customer service and support. None of the Company's employees
are employed pursuant to collective bargaining agreements. The Company believes
that its relations with its employees are good.
ITEM 2. PROPERTIES.
The Company's principal executive, sales and administrative offices, and
its production, research and development and distribution facilities are located
in Hauppauge, New York, in a 68,000 square foot facility leased by the Company.
At December 31, 1998, the Company owned 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. Both facilities were
sold in February 1999.
ITEM 3. LEGAL PROCEEDINGS.
Although the Company 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 Company'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, 1999, there
were no matters submitted to a vote of the Company's security holders, through
the solicitation of proxies or otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Price Range of Common Stock.
The following table sets forth, for the periods indicated, the high, low
and closing sales prices per share of common stock as reported on the American
Stock Exchange composite tape.
STOCK PRICES
HIGH LOW CLOSE
---- --- -----
1999
First Quarter..................... $ 11/16 $ 5/16 $ 5/16
Second Quarter.................... 11/16 1/4 1/2
Third Quarter..................... 11/16 1/4 1/4
Fourth Quarter.................... 5/16 1/16 3/32
2000
First Quarter..................... $ 11/16 $ 5/32 $ 1/4
Effective March 31, 2000, the Company's Common and Class A Preferred Stocks
were delisted from trading on the American Stock Exchange (Amex), because the
Company does not satisfy the current Amex guidelines for continued listing. The
Company's Common Stock is also quoted on the OTC Bulletin Board ("OTCBB") using
the symbol SKVY. Because of insufficient trading volume to date, the Company's
Class A Preferred Stock ("SKVYP") has not traded on the OTCBB. The Company will
seek to have this class of stock quoted on the OTCBB. As a result, it may be
more difficult to dispose of, or obtain adequate quotations as to, the prices of
both issues.
(b) Holders of Common Stock.
The Common Stock began trading on the American Stock Exchange on February
13, 1997 under the symbol "SKV." Prior to such date, no public market for the
Common Stock existed. As of March 31, 2000, the Company had 9,750,760 shares of
Common Stock issued and outstanding, which were held by 256 holders of record
and approximately 3,300 beneficial owners.
(c) Dividends.
The payment of future dividends 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 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 Common
Stock. In addition, covenants in the Company's credit agreement prohibit the
Company from paying cash dividends without the consent of the lender.
Sentry is required to pay certain annual or semiannual dividends on the
Class A Preferred Stock. Under the terms of the Company's loan agreement as
presently in effect, cash dividends on the Class A Preferred Stock are
restricted. The annual dividend rate on each share of the 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 holders of shares
of the 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 Class A Preferred Stock during
the two annual dividend periods ending on the first two dividend payment dates
subsequent to issuance of the Class A Preferred Stock, such that holders shall
receive a dividend of 1/20th of a share of Class A Preferred Stock for each
share of Class A Preferred Stock held. The last such dividend was paid on
February 12, 1999. Beginning with the August 12, 1999 dividend, the holders of
shares of the Class A Preferred Stock are entitled to receive, in preference to
dividends on all classes of equity securities of Sentry to which the Class A
Preferred Stock ranks prior (such securities, the "Junior Stock"), and whether
or not declared, a dividend payable in cash, out of funds legally available for
the payment of dividends, of $0.25 for each share of 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. All dividends paid with respect
to shares of the Class A Preferred Stock pursuant to this paragraph shall be
paid pro rata to the holders entitled thereto. Notwithstanding the foregoing,
because the Company's financial condition was such that cash dividends were not
permitted under its loan agreement with GE Capital Corporation, the cash
dividends on the Class A Preferred Stock were not paid in August 1999 and
February 2000.
Whenever, at any time or times, any dividend payable shall be in arrears,
the holders of the outstanding shares of 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 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 Class A Preferred Stock. The right of the
holders of 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.
No cash dividends may be paid on any Junior Stock until all accumulated
dividends on the Class A Preferred Stock shall have been paid. 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 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 Class A Preferred Stock shall be treated as one share of such Junior
Stock.
(d) Redemption Provisions of Class A Preferred Stock.
The shares of Class A Preferred Stock may be redeemed at the option of the
Company beginning February 12, 1998, and are mandatorily redeemable on February
12, 2001. The redemption price is $5.00 per share plus accrued dividends and the
amount, if any, by which the average of the closing prices for a share of Common
Stock during the twenty trading-day period before redemption exceeds $5.00 (such
aggregate price, the "Redemption Price").
OPTIONAL REDEMPTION. Subject to the mandatory redemption provisions of the
Class A Preferred Stock summarized below, Sentry may, at its option, redeem the
Class A Preferred Stock for cash at any time in whole at the Redemption Price,
together with accrued and unpaid dividends, if any, thereon. If Sentry completes
a Public Offering (as defined below) or an Acquisition (as defined below) more
than 35 days prior to the Mandatory Redemption Date (as defined below), then
Sentry may, at its option, redeem the Class A Preferred Stock for Common Stock
at the then applicable Redemption Price.
"Public Offering" means an underwritten public offering of Common Stock
with net proceeds resulting therefrom in excess of $12,000,000. "Acquisition"
means an acquisition by Sentry of property of or securities issued by a third
party in which the consideration paid by Sentry (i) consists, in whole or in
part, of shares of Common Stock and (ii) the aggregate value of such shares of
Common Stock exceeds $12,000,000; provided that such aggregate value shall be
based upon the number of such shares of Sentry Common Stock multiplied by the
average of the closing prices for a share of Common Stock during the twenty
trading-day period before the closing date of such Acquisition.
MANDATORY REDEMPTION. On February 12, 2001 (the "Mandatory Redemption
Date"), so long as any shares of the Class A Preferred Stock shall be
outstanding, Sentry shall redeem any issued and outstanding Class A Preferred
Stock at the then applicable Redemption Price, together with accrued and unpaid
dividends, if any, thereon, for cash or Common Stock, at Sentry's option. If
funds are not legally available for the payment of the Mandatory Redemption and
the Company does not issue Common Stock to pay the Redemption Price, each
outstanding share of Class A Preferred Stock shall automatically convert into a
subordinated promissory note payable one year from the Mandatory Redemption Date
and bearing interest at a rate of 6% per annum. The notes shall be subordinated
to the prior payment in full of all senior indebtedness, as defined in the
Certificate of Designation.
For additional information with respect to the Class A Preferred Stock, see
Note 1 to the Consolidated Financial Statements.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth selected consolidated historical financial data
of the Company for the years ended December 31, 1995, 1996, 1997, 1998 and 1999.
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 prior to February 12, 1997 and include the
results of operations of Video Sentry after that date. 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)
Year Ended December 31,
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- -------
SUMMARY OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Sales, service, rentals and other......... $17,361 $18,612 $21,996 $26,364 $20,198
Sales to Sensormatic...................... 12,043 4,651 2,570 1,792 2,083
Total revenues............................ 29,404 23,263 24,566 28,156 22,281
Cost of sales............................. 14,425 11,935 12,882 14,412 13,103
Customer service expenses................. 3,235 2,932 4,772 6,253 5,457
Selling, general and administrative
expenses.................................. 8,235 7,345 9,629 10,118 9,169
Write-off of in-process research and
development........................... - - 13,200 - -
Restructuring and impairment charges....... - - - - 3,026
Gain on sale of assets.................... - 2,462 - - 503
Income (loss) before income taxes......... 1,941 1,847 (17,743) (4,483) (11,034)
Net income (loss)......................... 1,731 1,183 (17,917) (4,504) (11,034)
Preferred stock dividends................. - - 1,067 1,263 1,326
Net income (loss) available to
common shareholders................... 1,731 1,183 (18,984) (5,767) (12,360)
Net income (loss) per common share:
basic................................. 0.37 0.25 (2.08) (0.59) (1.27)
diluted............................... 0.35 0.23 (2.08) (0.59) (1.27)
SELECTED BALANCE SHEET DATA:
Working capital........................... $11,326 $18,076 $12,415 $12,668 $6,290
Total assets.............................. 29,338 32,857 35,937 33,496 22,007
Property, plant and equipment, net........ 9,081 7,288 6,948 4,348 3,934
Obligations under capital leases.......... 748 3,546 3,313 3,241 3,058
Redeemable cumulative preferred stock..... - - 25,254 26,517 27,843
Total common shareholders' equity (deficit) 22,669 25,248 1,792 (3,975) (16,335)
See the notes to the Consolidated Financial Statements included elsewhere
herein.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Consolidated revenues were 21% lower in the year ended December 31, 1999
than in the year ended December 31, 1998. Revenues from customers other than
Sensormatic were $20,198,000 or 91% of total revenues as compared to $26,364,000
or 94% of total revenues in the prior year. This represents a 23% decrease in
revenues from non-Sensormatic customers in 1999 over the prior year. The backlog
of unfilled orders, expected to be delivered within twelve months, was $3.2
million at December 31, 1999 compared to $4.2 million at December 31, 1998. The
reduction in backlog is primarily due to weak sales in the fourth quarter of
1999. Total revenues for the periods presented are broken out as follows:
1999 1998 CHANGE
---- ---- ------
(in thousands)
EAS $8,983 $9,555 (6%)
CCTV 7,565 6,892 10%
SentryVision(R) 1,846 6,151 (70%)
3M library products 1,056 1,833 (42%)
- ----- ----- ---
Total sales 19,450 24,431 (20%)
Service revenues and other 2,831 3,725 (24%)
----- ----- ---
Total revenues $22,281 $28,156 (21%)
======= ======= ===
The decrease in sales in 1999 is attributed to a slow-down in the number of
orders placed by both the Company's existing customer base as well as new
prospective customers, resulting in a significant decline in sales during the
period. Management believes that revenues were also negatively impacted by the
Company's announcement in the third quarter that it retained an investment
banking firm for a possible corporate transaction, which created uncertainties
for the Company's customers regarding the Company's future. The decline in
SentryVision(R) and the increase in CCTV was primarily related to the decision
by one of the Company's major SentryVision(R) customers to purchase conventional
CCTV for the bulk of its security product orders for 1999.
Sensormatic continued to purchase certain EAS products from the Company for
sale outside of North America. Sales to Sensormatic increased by 16% to $2.1
million in 1999 as compared to $1.8 million in 1998. Sensormatic has indicated
it will continue to purchase certain EAS products from the Company in the
future.
In 1999, there was a decline in service revenues and other of 24% or $0.9
million. Service and maintenance revenues increased $0.3 million in 1999 due to
a higher base of SentryVision(R) systems no longer covered by the free warranty
period. This increase was offset by $1.2 million in engineering fees from 3M for
the design and development of a new EAS library system which were included in
other revenues in 1998.
Cost of sales to customers other than Sensormatic were 63% of such sales in
1999 as compared to 55% in 1998, excluding special charges described below. The
increase in the percentage in the current year as compared to the previous year
is a result of a combination of factors including: (i) increased scrap and
rework costs associated with quality related issues in the SentryVision(R)
product line; (ii) increased sales of CCTV products which result in higher
product costs than the SentryVision(R) product line; and (iii) higher EAS
product costs due to continued lower machine output levels on equipment
transferred from the Puerto Rico plant. In addition, as part of the Company's
restructuring plan, and in line with its revised future business plans, Sentry
included in cost of sales special charges of $2.1 million and $.8 million in
1999 and 1998, respectively. These amounts primarily represented provisions for
obsolete or excess inventory required as a result of modifications and upgrades
made to the Company's various product lines.
Customer service expenses decreased 13% in 1999 as compared to 1998 due
primarily to a reduction in the number of installers and service technicians.
This was a result of lower number of SentryVision(R) installations in 1999 which
take longer to install than the Company's other products.
Selling, general and administrative expenses decreased 9% to $9.2 million
in 1999 from $10.1 million in 1998 primarily as a result of the savings through
the consolidation of facilities. Included in the amounts for in 1998 were $0.4
million of costs related to the consolidation of facilities, including the
write-down of one of the facilities to net realizable value, employee separation
costs and the net losses on the disposal of excess equipment.
The Company's research and development costs decreased by 4% in 1999 as
compared to 1998. The primary emphasis in the current year has been directed
towards improvements to the SentryVision(R) system, improvements in the
manufacturing methods related to the products transferred from Puerto Rico to
New York and the design and development of a new series of 8 MHz RF EAS systems.
Net interest expense increased by $25,000 in 1999 over 1998 primarily due
to higher net borrowings under the Company's revolving credit agreement.
During the first quarter of 1999, the Company sold its Puerto Rico
manufacturing facility and Illinois design center for net cash proceeds of
approximately $2.2 million that resulted in a net gain on the sale of $503,000.
During the fourth quarter of 1999, faced with continued losses and
SentryVision(R) sales below projected levels, management authorized and
committed the Company to undertake significant downsizing and operational
changes, which resulted in restructuring and special charges of $3.0 million.
These charges included involuntary termination costs of $.6 million and
workforce reductions of approximately 23% across almost all operating
departments. In addition, the Company incurred non-cash charges of $2.4 million
related to a write-down of goodwill based on revised estimates of future sales
of SentryVision(R). (See Note 18 to the Consolidated Financial Statements.)
The gain of $0.5 million on the sale of the Puerto Rico facility was
subject to a capital gains tax of 20%. This amount was offset by certain
refundable income taxes available to the Company from overpayments in previous
years resulting in no tax provision in 1999. Sentry's income taxes in 1998
represent a provision on the cumulative earning of the Puerto Rico manufacturing
operations that were closed at the end of that year.
As a result of the foregoing, Sentry had a net loss of $11,034,000 in the
year ended in December 31, 1999 as compared to a net loss of $4,504,000 in the
year ended December 31, 1998.
Preferred stock dividends of $1,326,000 have been recorded in 1999 as
compared to $1,263,000 in 1998. Dividends accrued through February 12, 1999 were
paid-in-kind as of that date. In connection with the waiver of certain financial
covenants under the Company's agreement with its commercial lender, the Company
is restricted from paying cash dividends, including the cash dividend on its
Class A Preferred Stock which would otherwise have been payable in August of
1999. Under the terms of the Class A Preferred Stock, the dividends will
cumulate and Class A Preferred Stockholders, voting as a class, will be entitled
to elect two additional directors to the Company's Board.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Consolidated revenues were 15% higher in the year ended December 31, 1998
than in the year ended December 31, 1997. Revenues from customers other than
Sensormatic were $26,364,000 or 94% of total revenues as compared to $20,820,000
or 85% of total revenues in the prior year. This represents a 27% increase in
revenues from non-Sensormatic customers in 1998 over the prior year. The backlog
of unfilled orders was $4.1 million at December 31, 1998 compared to $10.3
million at December 31, 1997. The reduction in backlog is primarily due to the
timing of blanket orders received from its major customers as of year end.
Sales increased 26% primarily as a result of higher sales of conventional
CCTV products that increased 90% to $6.9 million or 30% of sales in 1998 as
compared to $3.6 million or 20% of sales in 1997. Sales of the SentryVision(R)
traveling CCTV surveillance systems increased 43% to $6.2 million or 27% of
sales in 1998 as compared to $4.3 million or 24% of sales in the previous year.
EAS system sales decreased slightly to $7.6 million from $7.7 million
representing 34% and 43% of sales in 1998 and 1997, respectively. Sales of 3M
library systems decreased 17% to $1.9 million or 9% of sales as compared to $2.3
million or 13% in 1997. The Company continued its efforts to market CCTV and
SentryVision(R) systems to parking garages, transportation centers, retail and
distribution centers, correctional facilities and educational market segments.
EAS and 3M library system sales declined as a result of both competitive
pressures and continued marketing focus on CCTV products.
Although the supply agreement with Sensormatic expired and minimum purchase
obligations ended as of June 30, 1997, Sensormatic continued to purchase certain
EAS products from the Company at substantially similar margins. Sales to
Sensormatic decreased by 30% to $1.8 million in 1998 as compared to $2.6 million
in 1997.
The decline in service revenues and other of 8% or $0.3 million was
primarily related to a decrease in service billings from the EAS customer base.
Included in other revenues in 1998 were $1.2 million in engineering fees from 3M
for the design and development of a new EAS library system. In 1997, other
revenues included $1.2 million representing the cumulative profits on the
shortfall on minimum orders under the supply agreement with Sensormatic.
During 1998, Sentry embarked on a program to reduce operating and
manufacturing costs through the consolidation of facilities company-wide. The
most significant portions of the program included the relocation of its CCTV
design center from Illinois to its corporate headquarters in New York, which was
completed in the second quarter, and the closing of its Puerto Rico
manufacturing plant, which was completed before year end. The Puerto Rico
facility was originally established in 1985 as a low cost operation for the
labor-intensive manufacturing of Knogo's worldwide supply of EAS tags and, in
later years, detection systems. Primarily as a result of the 1994 acquisition by
Sensormatic of Knogo's international EAS business, sales of EAS tags and systems
declined resulting in excess capacity in the Puerto Rico plant. Additionally,
technological advances made in the EAS products and in the CCTV products
acquired in the merger with Video Sentry Corporation resulted in a lower labor
content in all of the Company's manufactured products. Manufacturing operations
previously performed in Puerto Rico have been transferred to available space in
its New York distribution center. Management believes that the New York facility
will have more than sufficient production capacity to meet Sentry's projected
future growth. The overall cost of these facility consolidations was $1.2
million in 1998. Of such charges, $0.8 million was included in cost of sales
relating to costs to move inventory and manufacturing equipment, hiring and
training costs and certain inventory write-downs and $0.4 million was included
in selling, general and administrative expenses related to the write-down of one
of our facilities to net realizable value, employee separation costs and the net
losses on the disposal of excess equipment.
Cost of sales to customers other than Sensormatic and excluding the
consolidation of facility charges above were 55% of such sales in 1998 as
compared to 62% in 1997. The reduction in percentage in 1998 is primarily
attributable to better product sourcing and engineering improvements in the CCTV
and SentryVision(R) product lines.
Customer service expenses increased 31% in 1998 as compared to 1997 due to
a higher number of customer service representatives required to install and
maintain the increasing CCTV and SentryVision(R) customer base.
Selling, general and administrative expenses increased 5% to $10.1 million
from $9.6 million but decreased as a percentage of total revenues to 36% from
39% in 1998 and 1997, respectively. The increase in spending in 1998 is
primarily related to the consolidation of facilities charges noted above, higher
warranty and financing costs offset by lower sales and marketing expenses.
The Company's research and development costs decreased by 19% in 1998 as
compared to 1997. Efforts in 1998 were primarily directed towards improvements
in the Sentry Vision(R) systems and the design and development of a new EAS
library system for 3M.
At the consummation of the merger in the first quarter of 1997, Sentry
recorded for that period a non-recurring charge of $13,200,000 relating to
purchased in-process research and development. The amount was based on the
purchase price allocation and a valuation of existing technology and technology
in-process. The charge for in-process research and development equaled its
estimated current fair value based on the risk adjusted cash flows of
specifically identified technologies for which the technological feasibility has
not been established and alternative future uses did not exist.
Net interest expense increased by $345,000 in 1998 over 1997 primarily due
to borrowings under the Company's revolving credit agreement, which became
effective at the beginning of 1998.
Sentry's income taxes in 1998 and 1997 represented provisions on the
cumulative earnings of the Puerto Rico manufacturing which were not able to be
offset by operating losses of other subsidiaries.
As a result of the foregoing, Sentry had a net loss of $4,504,000 in the
year ended in December 31, 1998 as compared to a net loss of $17,917,000 in the
year ended December 31, 1997.
Preferred stock dividends of $1,263,000 and $1,067,000 have been accrued in
1998 and 1997, respectively. These amounts have been paid-in-kind as of February
12, 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs over the last three years have been related
to working capital, acquisitions and, to a lesser extent, capital expenditures.
During this time, it has met these liquidity needs primarily through the
proceeds from borrowings under its revolving credit facility, the sale of its
Puerto Rico and Illinois facilities and the sale and leaseback transaction
involving its corporate headquarters.
The Company has a secured revolving credit facility with GE Capital
Corporation, which permits borrowings of up to a maximum of $8 million, subject
to availability under a borrowing base formula consisting of accounts receivable
and inventories. The credit agreement expires on December 31, 2001. The facility
is secured by a lien on substantially all of the Company's assets. At December
31, 1999, the Company had availability of $3,582,000 and borrowings of
$3,075,000 under the facility.
Sentry will require liquidity and working capital to finance increases in
receivables and inventory associated with sales growth and, to a lesser extent,
for capital expenditures. The Company has no material capital expenditure or
purchase commitments as of December 31, 1999.
The Company anticipates that current cash reserves, cash generated by
operations and cash obtained under its existing line of credit should be
sufficient to meet the Company's working capital requirements as well as future
capital expenditure requirements, over the next twelve months. In addition, on
April 11, 2000 the Company obtained an understanding from a group of investors
that they are prepared to provide standby debt financing on a short term basis
for an amount up to $1,000,000. Any amounts borrowed would be subordinated to
the Company's revolving line of credit. This group of investors includes a
member of the Company's Board of Directors.
YEAR 2000 UPDATE
Many existing computer programs were designed and developed without
considering the upcoming change in the century, which could lead to the failure
of computer applications or create erroneous results by or at the Year 2000. On
January 1, 2000, any computer system or other equipment using date sensitive
software that uses only two digits to represent the year may recognize "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices, or engage
in similar activities.
Using internal and external resources, the Company analyzed and assessed
its business systems, including computer systems, PC's and network hardware,
telephone systems, production process controllers, access control, office
equipment and the product it sells.
Upgrades to both mid-range and network computer hardware, operating systems
and related infrastructures were completed before the end of 1999 and are now
Year 2000 compliant. All critical application software was reviewed and Year
2000 compliant versions were obtained. The Company completed the process of
retrofitting custom modifications to the upgraded versions. All applications
with forward scheduling impact are now considered to be Year 2000 compliant. The
Company believes its manufactured products are Year 2000 compliant.
As of the date of this filing, the Company has not experienced any Year
2000 issues arising from its systems or those of its material vendors or
suppliers. Failure by these third parties to be Year 2000 compliant may
adversely affect, among other things, the Company's production, revenue and the
timing of cash receipts. The Company continues to maintain contact with its
critical suppliers, financial institutions and other entities to determine the
Year 2000 readiness of its material business relationships. If there are ongoing
Year 2000 issues that arise at a later date, the Company has contingency plans
in place to address these issues.
The Company incurred approximately $346,000 of costs to date related to the
Year 2000 program and does not expect to incur any material costs in the future.
Approximately $247,000 was incurred in 1999 and $99,000 in 1998.
In light of the Company's efforts, the Year 2000 issue has had no material
adverse effect to date on the business or results of operations and is not
expected to have a material impact on the Company's financial condition.
However, there can be no assurances that the Company or any third parties will
not have ongoing Year 2000 issues that may arise in the future which could
affect the financial statement results.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which established standards for
accounting and reporting for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In June 1999, the FASB issued SFAS No. 137, which deferred the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
INFLATION
The Company does not consider inflation to have a material impact on the
results of operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other sections of this Annual Report on Form 10-K
contain "forward-looking statements" (as defined in the Private Securities
Litigation Reform Act of 1995 or the "PSLRA") that are based on current
expectations, estimates and projections about the industry in which the Company
operates, as well as management's beliefs and assumptions. Words such as
"expects," "anticipates" and "believes" and variations of such words and similar
expressions generally indicate that a statement is forward-looking. The Company
wishes to take advantage of the "safe harbor" provisions of the PSLRA by
cautioning readers that many important factors discussed below, among others,
may cause the Company's results of operations to differ from those expressed in
the forward-looking statements. These factors include: (i) the risk inherent in
the relatively small number of Video customers, such that any delay or
cancellation of orders from one or more of its customers may have a material
adverse effect on the Company's financial condition; (ii) the risk that
anticipated growth in the demand for the Company's products in the retail,
commercial and industrial sectors will not develop as expected, whether due to
competitive pressures in these markets or to any other failure to gain market
acceptance of the Company's products; (iii) the risk that anticipated revenue
growth through the domestic and international dealers programs does not develop
as expected; (iv) the risk that the Company may not find sufficient qualified
subcontractors to provide future installation services; (v) the risk that the
Company will not be able to retain key personnel due to its current financial
condition and (vi) 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".
<PAGE>
ITEMS 8 AND 14(A)(1) AND 14(A)(2). FINANCIAL STATEMENTS.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 30
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1999 and 1998 31
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 32
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 33
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 34
Notes to Consolidated Financial Statements 35
SCHEDULE II - Valuation and Qualifying Accounts 48
<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, 1999 and 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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 financial position of Sentry Technology Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 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.
/s/ Deloitte & Touche LLP
Jericho, New York
April 11, 2000
<PAGE>
<TABLE>
<CAPTION>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(In Thousands, Except Par Value Amounts)
- ----------------------------------------
ASSETS 1999 1998
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 951 $ 873
Accounts receivable, less allowance for doubtful
accounts of $683 and $651, respectively 6,838 9,308
Net investment in sales-tupe leases - current portion 393 574
Inventories 5,258 7,382
Prepaid expenses and other current assets 166 371
Assets held for sale (Note 16) - 1,691
------- ------
Total current assets 13,606 20,199
NET INVESTMENT IN SALES-TYPE LEASES -
Noncurrent portion 108 466
SECURITY DEVICES ON LEASE - Net 66 65
PROPERTY, PLANT AND EQUIPMENT - Net 3,934 4,348
GOODWILL AND OTHER INTANGIBLES, including patent costs,
less accumulated amortization of $4,882 and $3,292
respectively 4,227 8,222
OTHER ASSETS 66 196
------- -------
$22,007 $33,496
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 3,075 $ 2,765
Accounts payable 1,088 1,257
Accrued liabilities 2,769 3,080
Obligations under capital leases -- current portion 165 180
Deferred income 219 249
------- -------
Total current liabilities 7,316 7,531
OBLIGATIONS UNDER CAPITAL LEASES - Noncurrent portion 2,893 3,061
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARY 290 362
------- -------
Total liabilities 10,499 10,954
COMMITMENTS AND CONTINGENCIES (Notes 1 and 13)
REDEEMABLE CUMULATIVE PREFERRED STOCK 27,843 26,517
COMMON SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value; authorized 40,000
shares, issued and outstanding 9,751 and 9,751 shares
respectively 10 10
Additional paid-in capital 14,196 15,522
Accumulated deficit (30,541) (19,507)
------- -------
Total common shareholder's equity (deficit) (16,335) ( 3,975)
------- -------
$22,007 $33,496
======= =======
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDAIRIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Thousands, Except per Share Amounts)
- -----------------------------------------------
REVENUES: 1999 1998 1997
<S> <C> <C> <C>
Sales $ 17,366 $ 22,639 $ 17,965
Sales to Sensormatic 2,083 1,792 2,570
Sevice revenues and other 2,832 3,725 4,031
-------- -------- -------
22,281 28,156 24,566
-------- -------- -------
COSTS AND EXPENSES:
Cost of sales 13,103 13,200 11,177
Cost of sales to Sensormatic 1,236 1,212 1,705
Customer services expenses 5,457 6,253 4,772
Selling, general and administrative expenses 9,169 10,118 9,629
Research and development 1,289 1,343 1,658
Purchased in-process research and development (Note 1) - - 13,200
Restructuring and Impairment charges (Note 18) 3,026 - -
Interest expense 538 513 168
-------- ------- -------
33,818 32,639 42,309
-------- ------- -------
OPERATING LOSS (11,537) ( 4,483) (17,743)
OTHER INCOME - Gain on sale of assests (Note 16) 503 - -
-------- ------- -------
LOSS BEFORE INCOME TAXES (11,034) ( 4,483) (17,743)
INCOME TAXES - 21 174
-------- -------- --------
NET LOSS (11,034) ( 4,504) ( 17,917)
PREFERRED STOCK DIVIDEDS 1,326 1,263 1,607
-------- -------- --------
NET LOSS ATTRIBUTED TO
COMMON SHAREHOLDERS $(12,360) $( 5,767) $(18,984)
======== ======== ========
NET LOSS PER COMMON SHARE
Basic $ (1.27) $ (0.59) $ (2.08)
======== ======== ========
Diluted $ (1.27) $ (0.59) $ (2.08)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES:
Basic 9,751 9,751 9,114
======== ======== ========
Diluted 9,751 9,751 9,114
======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Thousands)
RETAINED TOTAL REDEEMABLE
ADDITIONAL EARNINGS COMMON CUMULATIVE
COMMON STOCK PAID-IN (ACCUMULATED) SHAREHOLDERS' PREFERRED
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT) STOCK
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 4,802 $ 5 $ 22,329 $ 2,914 $ 25,248 $ --
Net loss and comprehensive loss -- -- -- (17,917) (17,917) --
Shares issued to Video Sentry
shareholders in connection with
the merger (Note 1) 4,842 5 19,449 -- 19,454 --
Preferred shares issued to former
Knogo N.A. shareholders in
connection with the merger (Note 1) -- -- (24,009) -- (24,009) 24,009
Shares issued to employee benefit
plan 28 -- 83 -- 83 --
Repayment of obligations under
Section 16(b) of the Securities
and Exchange Act of 1934 -- -- 15 -- 15 --
Preferred stock dividends
(Note 1) -- -- (1,067) -- (1,067) 1,067
Exercise of stock options and
warrants 79 -- (15) -- (15) 178
------- ------ -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 9,751 10 16,785 (15,003) 1,792 25,254
Net loss and comprehensive loss -- -- -- (4,504) (4,504) --
Preferred stock dividends (Note 1) -- -- (1,263) -- (1,263) 1,263
------- ------ -------- -------- -------- --------
BALANCE, DECEMBER 31,1998 9,751 10 15,522 (19,507) (3,975) 26,517
Net loss and comprehensive loss -- -- -- (11,034) (11,034) --
Preferred stock dividends
(Note 1) -- -- (1,326) -- (1,326) 1,326
------- ------ -------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 9,751 $ 10 $ 14,196 $(30,541) $(16,335) $ 27,843
======= ====== ======== ======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Thousands)
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(11,034) $ (4,504) (17,917)
Adjustments to reconcile net loss to
net cash used in operating activities:
Write-off of purchased in-process research
and development -- -- 13,200
Gain on sale of assets (503) -- --
Depreciation and amortization of security
devices and property, plant and equipment 744 1,106 1,166
Amortization of intangibles and other assets 1,594 1,596 1,570
Deferred income taxes -- -- 174
Provision for bad debts 192 2 73
Loss on impairment of assets 2,440 145 --
Changes in operating assets and liabilities:
Accounts receivable 2,278 (2,987) 537
Net investments in sales-type leases 539 421 1,240
Inventories 2,124 915 (485)
Prepaid expenses and other assets 263 165 443
Accounts payable and accrued liabilities (480) (375) (620)
Deferred lease rentals (30) (172) 169
-------- -------- -------
Net cash used in operating activities (1,873) (3,688) (450)
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments made to acquire Video Sentry Corporation -- -- (2,417)
Purchase of property, plant and equipment - net (294) (94) (288)
Proceeds from sale of assets 2,182 -- --
Security devices on lease (25) 5 (2)
Intangibles (39) (22) (52)
-------- -------- -------
Net cash provided by (used in) investing
activities 1,824 (111) (2,759)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under the revolving line of credit 310 2,765 --
Repayment of acquired debt -- -- (2,136)
Proceeds from shareholder repayment of
obligations under Section 16(b) of the
Securities Exchange Act of 1934 -- -- 15
Repayment of obligations under capital leases (183) (239) (428)
Exercise of stock options and warrants -- -- 163
Other -- -- 83
-------- -------- -------
Net cash provided by (used in) financing
activities 127 2,526 (2,303)
-------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 78 (1,273) (5,512)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 873 2,146 7,658
-------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 951 $ 873 2,146
======== ======== =======
Cash paid during the period for:
Interest $ 577 $ 509 310
Income taxes $ -- $ 21 --
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred for the
purchase of building, office equipment and
other assets $ -- $ 167 $ 165
======== ======= ========
Common stock issued to acquire Video Sentry
Corporation $ -- $ -- $ 19,454
======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Sentry Technology Corporation ("Sentry") a 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.
Prior to the merger, Video Sentry was engaged in the design, development
and marketing of a traveling closed circuit television security
surveillance system throughout the United States.
Pursuant to the merger agreement, Sentry issued one share of common
stock for each one share of Video Sentry common stock outstanding at the
effective time of the merger. Sentry also issued one share of common
stock and one share of Class A Preferred Stock for each 1.2022 shares of
Knogo N.A. 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 $5.00 per
preferred share. The preferred stock is non convertible, but the
redemption price may, in certain circumstances, be paid in common stock
at Sentry's option. The total number of Sentry preferred shares
authorized is 10,000,000. Undeclared and unpaid cumulative dividends
totaled approximately $1,176,000 as of December 31, 1999.
The merger was accounted for under the purchase method of accounting
and, accordingly, the acquired assets and assumed liabilities were
recorded at their estimated fair market values at the date of
acquisition. Goodwill and other intangible assets in the amount of
approximately $10,950,000 were capitalized and nonrecurring charges of
approximately $13,200,000 relating to in-process research and
development were expensed. The goodwill and other intangibles are being
amortized using the straight-line method over a useful life of seven
years (see Note 18). Although Video Sentry shareholders had a majority
voting interest in Sentry based upon their common stock ownership
percentage, generally accepted accounting principles required
consideration of a number of factors, in addition to voting interest, in
determining the acquiring entity for purposes of purchase accounting
treatment. Such other factors which were considered included: (i) key
Sentry management positions were 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 Sentry; and
(iii) the market value of the securities received by the former holders
of Knogo N.A. Common Stock significantly exceeded the market value of
the securities received by the former holders of Video Sentry Common
Stock. As a result of these other factors, and solely for accounting and
financial reporting purposes, the merger was accounted for as a reverse
acquisition of Video Sentry 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 include the results of
operations of Video Sentry after the Effective Date.
The following unaudited pro forma information for the year ended
December 31, 1997 includes the operations of the Company and Video
Sentry Corporation as if the merger has occurred on January 1, 1997.
This pro forma information gives effect to the amortization expense
associated with goodwill and other intangible asset acquired, dividends
accrued on the Sentry Class A Preferred Stock, adjustments related to
the fair market value of the assets acquired and liabilities assumed,
and the related income tax effects. In addition, this pro forma
information excludes the effect of the one-time charges totaling
$13,200,000 relating to purchased research and development.
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS) 1997
Revenues $24,619
=======
Net loss $ 5,378
=======
Net loss attributed to common shareholders $ 6,596
=======
Net loss per common share $(0.68)
=======
Weighted average common shares 9,684
=======
2. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - The Company is engaged in one segment and line of business,
the design, manufacture, distribution, installation and service of
systems designed to be used by retailers to deter shoplifting and
employee theft and by commercial manufacturing and governmental
customers to protect people and assets. Other than sales to Sensormatic,
sales to customers outside the United States were not significant. Sales
to Sensormatic were shipped to locations in Western Europe.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned and majority
owned subsidiaries. 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. For sales-type leases, revenue is
recognized 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.
For operating leases, 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.
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.
Included in accounts receivable at December 31, 1999 and 1998 is
unbilled accounts receivable of $1,127,000 and $2,847,000, respectively.
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 17
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 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,
revolving line of credit, accounts payable and obligations under capital
leases) approximate their fair value at December 31, 1999 and 1998 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 INCOME - Deferred income 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.
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."
FOREIGN CURRENCY TRANSLATION - The functional currency of the Company's
foreign entity is the US dollar. Unrealized foreign exchange transaction
gains and (losses) are included in selling, general and administrative
expenses and amounted to approximately $35,000, ($120,000) and
($111,000) for the years ended December 31, 1999, 1998 and 1997,
respectively.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which established standards for
accounting and reporting for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. In June 1999, the FASB issued
SFAS No. 137, which deferred the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000.
RECLASSIFICATIONS - Certain prior year balances have been reclassified
to conform with current year classifications.
3. FINANCIAL CONDITION AND LIQUIDITY
The Company anticipates that current cash reserves, cash generated by
operations and cash obtained under its existing line of credit should be
sufficient to meet the Company's working capital requirements, as well
as future capital expenditure requirements, over the next twelve months.
In addition, the Company has obtained an understanding from a group of
investors on April 11, 2000 that they are prepared to provide standby
debt financing on a short-term basis for an amount up to $1 million. Any
amounts borrowed would be subordinated to the Company's revolving line
of credit described in Note 9. This group of investors includes a member
of the Company's Board of Directors.
4. 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 2003. The net investment in sales-type leases
consist of:
DECEMBER 31,
1999 1998
(IN THOUSANDS)
Minimum lease payments receivable $ 570 $1,204
Allowance for uncollectible minimum lease payments (29) (60)
Unearned income (40) (120)
Unguaranteed residual value - 16
--------- --------
Net investment 501 1,040
Less current portion 393 574
--------- --------
Noncurrent portion $ 108 $ 466
========= ========
The future minimum lease payments receivable under sales-type leases and
noncancellable operating leases are as follows:
SALE-TYPE OPERATING
YEAR ENDING LEASES LEASES
DECEMBER 31, (IN THOUSANDS)
2000 $ 445 $ 76
2001 82 39
2002 43 6
2003 - 7
-------- -------
$ 570 $ 128
======== =======
5. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
1999 1998
(IN THOUSANDS)
Raw materials $ 2,333 $2,497
Work-in-process 1,482 3,058
Finished goods 1,443 1,827
-------- -------
$ 5,258 $7,382
======== =======
Reserves for excess and obsolete inventory totaled $3,404,000 and
$1,318,000 as of December 31, 1999 and 1998, respectively, and have been
included as a component of the above amounts.
6. SECURITY DEVICES ON LEASE
Security devices are stated at cost and are summarized as follows:
DECEMBER 31,
1999 1998
(IN THOUSANDS)
Security devices on lease $ 122 $ 154
Less allowance for depreciation 56 89
-------- -------
$ 66 $ 65
======== =======
Depreciation expense in 1999 and 1998 totaled $24,000 and $81,000,
respectively.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are summarized as
follows:
ESTIMATED USEFUL DECEMBER 31,
LIVES (YEARS) 1999 1998
(IN THOUSANDS)
Building 20 $3,033 $3,033
Machinery and equipment 3-10 2,567 2,613
Furniture, fixtures and office equipment 3-10 3,675 3,433
Leasehold improvements 5-10 290 250
--------- --------
9,565 9,329
Less allowance for depreciation 5,631 4,981
--------- --------
$3,934 $4,348
========= ========
Depreciation expense in 1999 and 1998 totaled $720,000 and $1,025,000,
respectively.
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
1999 1998
(IN THOUSANDS)
Accrued salaries, employee benefits and payroll taxes $1,321 $ 979
Accrued installation costs 119 549
Accrued termination costs 586 -
Other accrued liabilities 743 1,552
--------- --------
$2,769 $3,080
========= ========
9. REVOLVING LINE OF CREDIT
The Company has a revolving line of credit with a financial institution
for maximum borrowings of $8 million through December 31, 2001, which
are subject to certain limitations based on a percentage of eligible
accounts receivable and inventories as defined in the agreement.
Interest is payable monthly at the lender's Index Rate, as defined (5.6%
at December 31, 1999), plus 4.5% per annum. The Company is required to
pay a commitment fee of 0.375% per annum on any unused portion of the
credit facility. Borrowings under the line are secured by substantially
all of the Company's assets. The terms of the agreement, among other
matters, requires the Company to maintain certain minimum net worth
levels and places restrictions on capital expenditures and prohibits the
payment of dividends (other than dividends on the Series A Preferred
Stock described in Note 1). The Company had borrowings on the line of
credit totaling $3,075,000 and $2,765,000 for the years ended December
31, 1999 and 1998, respectively.
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 $137,000. 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, ACCOUNTING FOR
LEASES. 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 (in thousands):
YEAR ENDING
DECEMBER 31,
2000 $ 155
2001 155
2002 155
2003 155
2004 155
Thereafter 1,863
--------
$ 2,638
========
Rent expense for 1999, 1998 and 1997 was $148,000 per year.
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 2003.
Minimum annual rentals are as follows (in thousands):
YEAR ENDING
DECEMBER 31,
2000 $ 501
2001 445
2002 445
2003 387
2004 376
Thereafter 4,509
--------
6,663
Less amount representing interest 3,605
--------
Present value of minimum rentals 3,058
Less current portion 165
--------
Noncurrent portion $2,893
========
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 net book value of the building was $2,578,000 and
$2,730,000 at December 31, 1999 and 1998, respectively. 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 Company is currently in default on its capital lease obligation
relating to the sale-leaseback transaction. The terms of the agreement
require the Company to maintain certain minimum net worth levels which
have not been achieved. The Company intends to renegotiate the terms of
the covenants to correct the default. The capital lease obligation
associated with the building of $2,758,000 is included within noncurrent
liabilities at December 31, 1999.
Computer and office equipment and related items under capital leases are
included in property and equipment and other assets with a gross value
of $1,178,000 at December 31, 1999 and 1998, and a net book value of
$236,000 and $415,000 at December 31, 1999 and 1998, respectively.
11. COMMON SHAREHOLDERS' EQUITY
a. EARNINGS PER SHARE ("EPS") - Basic EPS is determined by using the
weighted average number of common shares outstanding during each
period. Diluted EPS further assumes the issuance of common shares
for all dilutive potential common shares outstanding. The
calculations for earnings per share are as follows:
1999 1998 1997
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net loss $(11,034) $(4,504) $(17,917)
Preferred stock dividends (1,326) (1,263) (1,067)
--------- --------- ---------
Net loss attributed to
common shareholders $(12,360) $(5,767) $(18,984)
========= ========= =========
Weighted average common
shares 9,751 9,751 9,114
========= ========= =========
Basic and diluted EPS $ (1.27) $ (0.59) $ (2.08)
========= ========= =========
Since the Company has a net loss for all years presented, the
effect of common stock options and warrants would be
antidilutive.
b. STOCK OPTIONS - In February 1997, the Company adopted the 1997
Stock Incentive Plan of Sentry Technology Corporation (the "1997
Plan"). The 1997 Plan provides for grants up to 2,250,000 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 nonqualified 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. All
outstanding stock options were issued at not less than the fair
value of the related common stock at the date of grant. At
December 31, 1999, 2,214,233 common shares were reserved for
issuance in connection with the exercise of stock options.
In October 1999, the Company issued 200,000 non-qualified stock
options to the Interim Chief Executive Officer at the price of
$0.19 per share which was the fair value on the date of grant.
The options are fully vested at December 31, 1999.
Stock option transactions for the years ended December 31, 1999,
1998 and 1997 are as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
Balance, January, 1997 552,072 $4.26
Granted 679,500 3.07
Exercised (35,767) 3.17
Canceled (161,988) 5.23
------------- ------
Balance, December 31, 1997 1,033,817 3.36
Granted 463,700 2.15
Exercised - -
Canceled (328,156) 2.32
------------- ------
Balance, December 31, 1998 1,169,361 3.17
Granted 836,500 0.52
Exercised - -
Canceled (350,102) 1.36
------------- ------
Balance, December 31, 1999 1,655,759 $2.21
============= ======
In connection with the merger described in Note 1, employees and
directors who held options to purchase Knogo N.A. common stock
were granted substitute options ("Substitute Knogo N.A. Options")
under the 1998 Plan to purchase an aggregate of 552,072 shares of
Sentry Common Stock and 552,072 shares of Sentry Class A
Preferred Stock at prices determined pursuant to the formula set
forth in the Merger Agreement. Employees and directors who held
outstanding options to purchase Video Sentry common stock were
granted substitute options under the 1998 Plan to purchase
195,000 shares of Sentry Common Stock at prices determined
pursuant to the formula set forth in the Merger Agreement.
At December 31, 1999, options to purchase 1,655,759 shares of
common stock were outstanding at exercise prices ranging from
$0.19 to $8.42. At December 31, 1999, options to purchase an
aggregate of 852,459 (which include 450,759 outstanding and
exercisable substitute Knogo N.A. options) common shares were
vested and currently exercisable at a weighted average exercise
price of $3.70 and an additional 803,300 options vest at dates
extending through the year 2009. At December 31, 1999, options
for 758,474 common shares were available for future grants.
As discussed in Note 2, the Company accounts 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,
as all options have been granted at exercise prices equal to fair
market value on the date of grant, 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, 110.9% in 1999, 81.6% in 1998, and 74.3% in 1997;
risk free interest rates, 4.8% in 1999, 5.5% in 1998, and 6.5% in
1997; 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 1999, 1998, and 1997 awards had been amortized
to expense over the vesting period of the awards, pro forma net
loss attributed to common shareholders would have been
$(12,889,000) (($1.32) per diluted share) in 1999, $(6,159,000)
(($0.63) per diluted share) in 1998, and $(19,324,000) (($2.12)
per diluted share) in 1997. However, the impact of outstanding
nonvested stock options granted prior to 1995 has been excluded
from the pro forma calculation; accordingly, the 1999, 1998 and
1997 pro forma adjustments are not indicative of future period
pro forma adjustments, when the calculation will apply to all
applicable stock options.
c. WARRANTS - At December 31, 1998, warrants to purchase 287,500
shares of common stock were outstanding at exercise prices
ranging from $3.38 to $4.95. Such warrants expired in 1999.
12. INCOME TAXES
The components of the Company's income tax provisions are as follows:
1999 1998 1997
Current:
Federal $ - $ - $ -
State - - -
Puerto Rico - 21 -
------- ------- ------
21
Deferred:
Puerto Rico - - 174
------- ------- ------
- - 174
------- ------- ------
$ - $ 21 $ 174
======= ======== ======
The reconciliation between total tax expense and the expected U.S.
Federal income tax is as follows:
1999 1998 1997
(IN THOUSANDS)
Expected tax expense (benefit) at 34% $(3,752) $(1,524) $(6,033)
Add (deduct):
Nondeductible expenses 1,422 590 5,024
U.S. losses producing no tax benefit 2,330 866 767
Benefits of nontaxable income of
Puerto Rico subsidiary/losses producing
no tax benefit - 107 242
Other - (18) 174
--------- -------- --------
$ - $ 21 $ 174
========= ======== ========
Significant components of deferred tax assets and liabilities at
December 31, 1999 and 1998 are comprised of:
DEFERRED TAX ASSETS (LIABILITIES)
1999 1998
(IN THOUSANDS)
ASSETS:
Account receivable $ 253 $ 241
Inventories 1,251 488
Accrued liabilities 184 203
Property, plant and equipment 77 64
Intercompany transactions - 12
Net operating loss carryforwards 7,113 5,139
Tax credit carryforwards 209 209
--------- ----------
Gross deferred tax assets 9,087 6,356
Less valuation allowance 9,057 6,337
--------- ----------
30 19
--------- ----------
LIABILITIES:
Tollgate taxes (30) (19)
--------- ----------
Gross deferred tax liabilities (30) (19)
--------- ----------
Net deferred tax asset (liability) $ - $ -
========= ==========
The increase in the valuation allowance for the years ended December 31,
1999 and 1998 was primarily attributable to the increase in net
operating loss carryforwards for which realization was not more likely
than not.
Through 1998, the Company operated a Puerto Rico manufacturing
subsidiary which was exempt from Federal income taxes under Section 936
of the Internal Revenue Code (as amended under the Small Business Job
Protection Act of 1996). 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 provided for a 90% exemption from Puerto Rico taxes. The
Company provided 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. had a supply agreement in which
Sensormatic was obligated to purchase products from Knogo N.A. in
the amount of $4,000,000 in 1997. Such products were priced to
yield Knogo N.A. a 35% gross margin. In 1997, 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. Although the
supply agreement officially expired and minimum purchase
obligations ended as of June 30, 1997, Sensormatic continued to
purchase these products at similar margins from the Company.
Included in accounts receivable at December 31, 1999 and 1998 are
amounts due from Sensormatic of $269,000 and $162,000,
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 certain Knogo products which existed prior to 1995 within
the Knogo N.A. territory, and Sensormatic has such right
elsewhere, except that Knogo N.A. and Sensormatic each have the
right to develop and market the SuperStrip technology in the
Knogo N.A. territory.
d. 401(K) PLAN - In January 1997, the Company adopted the Sentry
Technology Corporation 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 limitations, 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 $123,000, $130,000, and $215,000 to the Plan for
the years ended December 31, 1999, 1998 and 1997, respectively.
e. EMPLOYMENT AGREEMENTS - The Company and several key executives
entered into employment agreements with remaining terms of one to
two years for which the Company will have a minimum commitment of
$367,000.
14. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS
The Company grants credit to customers who are principally in the retail
industry and libraries. During 1999, 1998 and 1997, revenues from a
single customer represented approximately 19%, 22% and 18% of total
revenues, respectively. During 1999 and 1997, revenues from a different
customer represented 14% and 13% of total revenues. No other customer
accounted for more than 10% of total revenues for fiscal 1999, 1998 and
1997.
15. JOINT VENTURE
The Company has a controlling interest in K&M Converting Corp. ("KMCC"),
a joint venture with Marian Rubber Products Co., Inc. ("Marian"). KMCC
is the exclusive converter of magnetic material into disposable targets
or labels used in the Company's EAS systems. The acquisition of the
joint venture 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.
16. OTHER INCOME - SALE OF ASSETS
In February 1999, the Company sold its Puerto Rico manufacturing
facility and Illinois CCTV design center and related land for net
proceeds of approximately $2.2 million. At December 31, 1998, included
in assets held for sale was approximately $1.7 million representing the
net carrying amount of these properties. A gain of $503,000 representing
the excess of the net proceeds over the carrying value of these
properties was recognized in the first quarter of 1999.
17. REVENUE BY PRODUCT LINE
Revenues by product line are as follows:
1999 1998 1997
(IN THOUSANDS)
EAS $ 8,983 $ 9,555 $10,249
CCTV 7,565 6,892 3,623
SentryVision(R) 1,846 6,151 4,322
3M library products 1,056 1,833 2,341
Service revenues and other 2,831 3,725 4,031
----------- --------- ---------
Total revenues $ 22,281 $ 28,156 $24,566
=========== ========= ========
18. RESTRUCTURING AND IMPAIRMENT OF ASSETS
During the fourth quarter of 1999, faced with continued losses and
SentryVision(R) sales below projected levels, management authorized and
committed the Company to undertake significant downsizing and
operational changes, which resulted in restructuring and impairment
charges of $3.0 million. These charges included involuntary termination
costs of $0.6 million and workforce reductions of approximately 23%
across almost all operating departments. In addition, in conjunction
with the development of its revised business plan, the Company recorded
a noncash charge of $2.4 million relating to the impairment of goodwill.
This impairment charge was calculated by comparing future discounted net
cash flows to the goodwill's carrying value. Factors leading to the
impairment were a combination of historical losses and insuficient
estimated future cash flows from the SentryVision(R) system.
******
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ---------- --------- -------- ---------
ADDITIONS
---------
CHARGED TO
DESCRIPTIONS BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING COST AND ACCOUNTS/ DEDUCTIONS/ AT END OF
OF YEAR EXPENSES DESCRIBE DESCRIBE YEAR
(1) (2)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful accounts $ 651 $ 192 $ 26 $ 186 $ 683
====== ====== ===== ====== ======
Allowance for uncollectible minimum lease payments $ 60 $ (31) $ 29
====== ====== ===== ====== ======
Reserve for excess and obsolete inventory $1,318 $2,434 $ 348 $3,404
====== ====== ===== ====== ======
Year ended December 31, 1998:
Allowance for doubtful accounts $ 752 $ 2 $ 11 $ 114 $ 651
====== ====== ===== ====== ======
Allowance for uncollectible minimum lease payments $ 86 $ (26) $ 60
====== ======= ===== ====== ======
Reserve for excess and obsolete inventory $1,246 $ 328 $ 256 $1,318
====== ====== ===== ====== ======
Year ended December 31, 1997:
Allowance for doubtful accounts $ 719 $ 73 $ 8 $ 48 $ 752
====== ======= ===== ====== ======
Allowance for uncollectible minimum lease payments $ 157 $ (71) $ 86
====== ====== ===== ====== ======
Reserve for excess and obsolete inventory $1,691 $ 444 $ 889 $1,246
====== ====== ===== ====== ======
(1) Recoveries of accounts written off.
(2) Amounts written off>
</TABLE>
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 COMPANY.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Part III information will be set forth in the Company's definitive proxy
statement for the Company's 2000 Annual Meeting of Stockholders.
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 the Company and its
subsidiaries for the year ended December 31, 1999 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. Incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-4 (No.
333-20135).
10.2 Retirement Savings 401(k) Plan. Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on Form
S-4 (No. 333-20135).
10.3 Employment Agreement, dated as of February 12, 1997, between
the Company and Thomas A. Nicolette. Incorporated by reference
to Exhibit 10.1 to the Company's Registration Statement on Form
S-4 (No. 333-20135)
10.4 Employment Agreement, dated as of February 12, 1997, between
the Company and Peter J. Mundy. Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-4 (No. 333-20135).
10.5 Employment Agreement, dated as of February 12, 1997, between
the Company and Peter Y. Zhou. Incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on Form
S-4 (No. 333-20135).
10.6 Employment Agreement, dated as of March 1, 1998, between the
Company and John Whiteman. Incorporated by reference to Exhibit
10.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
10.15 Consulting Agreement, dated as of October 15, 1999, between the
Company and Restoration Management Company, LLC. Incorporated
by reference to Exhibit 10.15 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999.
10.16 Amendment to Consulting Agreement dated as of November 9, 1999
between the Company and Restoration Management Company, LLC.
OTHER EXHIBITS:
2.1 Amended and Restated Agreement and Plan of Reorganization and
Merger, dated as of November 27, 1996 among Video 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 Company's
Registration Statement on Form S-4 (No. 333-20135).
3.1 Amended and Restated Certificate of Incorporation of the
Company, together with Form of Certificate of Designations of
Sentry Technology Corporation Class A Preferred Stock.
Incorporated by reference to Exhibit 3.1 to Company's
Registration Statement on Form S-4 (No. 333-20135).
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2
to Company's Registration Statement on Form S-4 (No.
333-20135).
10.7 Loan Agreement and related agreements among the Company, Knogo
North America Inc., Video Sentry Corporation and General
Electric Capital Corporation. Incorporated by reference to
Exhibit 10.7 to the Company's annual report on Form 10-K for
fiscal 1997.
10.8 Contribution and Divestiture Agreement dated December 29, 1994
between Knogo Corporation and Knogo North America Inc.
Incorporated by reference to Exhibit 10.8 to the Company's
annual report on Form 10-K for fiscal 1997.
10.9 License Agreement dated December 29, 1994 between Knogo
Corporation and Knogo North America Inc. Incorporated by
reference to Exhibit 10.9 to the Company's annual report on
Form 10-K for fiscal 1997.
10.10 Lease Agreement dated December 24, 1996 between Knogo North
America Inc. and NOG (NY) QRS 12-23, Inc. Incorporated by
reference to Exhibit 10.10 to the Company's annual report on
Form 10-K for fiscal 1997.
10.11 Distribution Agreement dated March 26, 1996 between Knogo North
America Inc. and Minnesota Mining and Manufacturing Company.
Incorporated by reference to Exhibit 10.11 to the Company's
annual report on Form 10-K for fiscal 1997.
10.12 First Amendment and Waiver to the Loan and Security Agreement
Between the Company and General Election Capital Corporation
Dated June 30, 1998. Incorporated by reference to Exhibit 10.12
to the Company's quarterly report on Form 10-Q for the quarter
ended June 30, 1998.
10.13 Amendment No. 1 dated December 22, 1998, to the Distribution
Agreement dated March 26, 1996 between Knogo North America Inc.
and Minnesota Mining and Manufacturing Company. Incorporated
by reference to Exhibit 10.13 to the Company's annual report
on Form 10-K for fiscal 1998.
10.14 Second Amendment and Third Waiver to the Loan and Security
Agreement between the Company and General Electric Capital
Corporation dated May 12, 1999. Incorporated by reference to
Exhibit 10.12 to the Company's quarterly report on Form 10-Q
for the quarter ended June 30, 1999.
10.17 Third Amendment to the Loan and Security Agreement dated
December 29, 1999.
10.18 Standby Debt Financing Letter by Furst Capital Partners, LLC
21 Subsidiaries of the Company. Incorporated by reference to
Exhibit 21 to the Company's annual report on Form 10-K for
fiscal 1997.
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
(b) No reports on Form 8-K were filed for the Company during the relevant
period.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SENTRY TECHNOLOGY CORPORATION
By: /S/ PETER J. MUNDY
-----------------------
Peter J. Mundy
Vice President-Finance,
Chief Financial Officer,
Secretary and Treasurer
Dated: April 14, 2000
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/ ANTHONY H.N. SCHNELLING Interim Chief Executive Officer
- ----------------------------------
Anthony H.N. Schnelling
/S/ PETER J. MUNDY Vice President-Finance,
- ----------------------------------
Peter J. Mundy Chief Financial and Accounting
Officer, Secretary and Treasurer
/S/ WILLIAM A. PERLMUTH Chairman of the Board of Directors
- ----------------------------------
William A. Perlmuth
/S/ ROBERT L. BARBANELL Director
- ----------------------------------
Robert L. Barbanell
/S/ ROBERT D. FURST, JR. Director
- ----------------------------------
Robert D. Furst, Jr.
/S/ PAUL D. MELLIN Director
- ----------------------------------
Paul D. Mellin
/S/ THOMAS A. NICOLETTE Director
- ----------------------------------
Thomas A. Nicolette
Dated: April 14, 2000
EXHIBIT 10.16
AMENDMENT
Whereas, Restoration Management Company, LLC ("Restoration") entered into
an agreement with Sentry Technology Corporation (the "Company") as of October
15, 1999 pursuant to which Restoration agreed to provide certain operational and
financial consulting services to the Company (the "Agreement"); and
WHEREAS, certain options issuable to Restoration at the time that the
Agreement was entered into were referred to in the Agreement as "incentive stock
options"; and
WHEREAS, the Company and Restoration wish to amend the Agreement in
accordance with the terms hereof;
NOW, THEREFORE, the undersigned hereby amend the Agreement as follows:
1. The words "incentive stock options" in the first sentence of Section
5(v) of the Agreement are hereby deleted and in their place is substituted the
words "non-qualified stock options".
2. The word "Restoration" in the first sentence of Section 5(v) of the
Agreement is hereby deleted and in its place is substituted the word "Anthony
H.N. Schnelling".
3. The following sentence shall be inserted immediately following the first
sentence of Section 5(v) of the Agreement:
Such options may be assigned or transferred only to an
employee or consultant of the Company or such employee or
consultant's family members as defined in Section A(1)(a)(5)
of the General Instructions to Form S-8 of the Securities Act
of 1933.
4. Section 5 of the Agreement shall be amended to add a subsection (viii)
which shall state as follows:
The Company shall prepare and file with the Securities and
Exchange Commission, within 20 days following the filing of
its annual report on Form 10K for the year ended December 31,
1999, a registration statement on Form S-8 including a reoffer
prospectus with respect to the shares of common stock issuable
upon exercise of the options issued pursuant to the Agreement
and shall use its best efforts to cause such registration
statement to become effective and remain effective during the
term of such options plus, if such options are exercised in
whole or in part, for one year after such exercise.
<PAGE>
IN WITNESS WHEREOF, the undersigned have signed this Amendment as of
the 9th day of November, 1999.
SENTRY TECHNOLOGY CORPORATION
By: /s/ William A. Perlmuth
---------------------------
William A. Perlmuth
Chairman of the Board
RESTORATION MANAGEMENT COMPANY, LLC
By: /s/ Anthony H. N. Schnelling
------------------------------
Anthony H.N. Schnelling
Managing Director
EXHIBIT 10.7
THIRD AMENDMENT TO THE LOAN AND SECURITY AGREEMENT
Third Amendment dated as of December 29, 1999 (this "Amendment") to the
Loan and Security Agreement, dated as of December 31, 1997 (as amended,
restated, supplemented and modified, the "LOAN AGREEMENT"), among GENERAL
ELECTRIC CAPITAL CORPORATION, a New York corporation ("LENDER") and KNOGO NORTH
AMERICA INC., a Delaware corporation ("BORROWER"), and the other Credit Parties
executing this Amendment.
WITNESSETH :
WHEREAS, Borrower and Lender are parties to the Loan Agreement pursuant to
which Lender provides Borrower with certain financial accommodations;
WHEREAS, Borrower has requested that Lender amend certain provisions of the
Loan Agreement and Lender is willing to do so on the terms and conditions set
forth herein;
NOW, THEREFORE, in consideration of the premises, the covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties do hereby
agree that all capitalized terms used herein shall have the meanings ascribed
thereto in the Loan Agreement and do hereby further agree as follows:
STATEMENT OF TERMS
1. AMENDMENT TO LOAN AGREEMENT. Subject to the Satisfaction of the
conditions precedent set forth in Section 3 below, the Loan Agreement is hereby
amended as follows:
(a) Section 1.5(a) is amended in its entirety to provide as follows:
"(a) Borrower shall pay interest to Lender on the aggregate
outstanding Revolving Credit Advances at a floating rate equal to the Index Rate
plus four and one-half percent (4.50%) per annum (the "Revolving Credit Rate");
PROVIDED, HOWEVER, if no Default shall have occurred and be continuing,
effective on the first calendar month that occurs more than five (5) Business
Days after delivery of the audited Financial Statements for the Fiscal Year
ending December 31, 2000 and a compliance certificate signed by the Chief
Financial Borrower which indicates that Sentry and its Subsidiaries on a
consolidated basis have a Fixed Charge Coverage for such Fiscal Year equal to or
greater than 1.0 to 1.0, the Revolving Credit Rate shall be reduced to the sum
of the Index Rate plus (a) four percent (4.00%) if such Fixed Charged Coverage
is 1.2 to 1.0 or greater or (b) four and one-quarter percent (4.25%) if such
Fixed Charge Coverage is equal to or greater than 1.0 to 1.0 but less than 1.2
to 1.0."
(b) Schedule A to the Loan Agreement is amended as follows:
(i) The following defined terms are amended in their entirety to
provide as follows:
"Borrowing Base" shall mean at any time an amount equal to the
sum at such time of:
A) the sum of (A) 80% (or such lesser percentage as may be
specified by Lender from time to time by written notice to Borrower)
of the value (as determined by Lender) of the Eligible Accounts (other
than Eligible Deferred Accounts) of Borrower and Video PLUS (B) the
lesser of (i) $1,000,000 or (ii) 70% (or such lesser percentage as may
be specified by Lender from time to time by written notice to
Borrower) of the value (as determined by Lender) of the Eligible
Deferred Accounts of Borrower; provided that Lender (without limiting
its rights to otherwise reduce the foregoing percentage) shall reduce
the foregoing percentages (the "Accounts Advance Rates") by one
percentage point for each percentage point that the dilution of the
Accounts of Borrower (calculated as the average dilution from the
Accounts Receivable Roll Forward Analysis (Exhibit E) over the most
recent three months) exceeds ten percent (10%); provided, that in the
event the Accounts Advance Rates are so reduced and dilution of the
Accounts of Borrower (calculated as the average dilution from the
Accounts Receivable Roll Forward Analysis (Exhibit E) over the most
recent three months) decreases to ten percent (10%) or less then
Lender shall increase the Accounts Advance Rates by one percentage
point for each percentage point of such decrease except that in no
event shall the Accounts Advance Rates exceed the percentages set
forth above; PLUS
B) the lesser of (i) the Inventory Maximum Amount or (ii) the sum
of 25% (or such lesser percentage as may be specified by Lender from
time to time by written notice to Borrower) of the value of the
Eligible Inventory of Borrower and Video consisting of raw material,
finished goods and work-in-process consisting of component parts that
could be sold as finished goods, in each case as determined by Lender,
valued on a first-in, first-out basis (at the lower of cost or
market); PLUS
C) the Special Advance Amount.
"Stated Expiry Date" shall mean December 31, 2001.
(ii) The following defined terms are inserted in the appropriate
alphabetical order:
"Inventory Appraisal" shall mean an appraisal of the Inventory of
Borrower and Video prepared by an appraiser satisfactory to
Lender which is satisfactory in all respects to Lender.
"Inventory Maximum Amount" shall mean (a) upon receipt by Lender
of the Inventory Appraisal, $1,500,000 and (b) at all other
times, $500,000.
"Special Advance Amount" shall mean (a) for the period commencing
on the Third Amendment Effective Date and ending on the earlier
of (i) January 31, 2000 or (ii) receipt by Lender of the
Inventory Appraisal, $250,000 and (b) at all other times, $0.
"Third Amendment" shall mean the Third Amendment to Loan and
Security Agreement dated as of December 29, 1999 among Lender and
Credit Parties.
"Third Amendment Effective Date" shall have the meaning given to
the term "Effective Date" in the Third Amendment.
(iii) The defined term "Eligible Inventory" is amended by
amending clause (i) in its entirety to provide as follows:
"(i) does not consist of raw materials, finished goods or
work-in-process consisting of component parts that could be sold
as finished goods."
(c) Schedule E is amended as follows:
(i) The second sentence of Paragraph 1 is amended by replacing
the percentage ".25%" with the percentage ".375%".
(ii) The first sentence of paragraph 5 is amended in its entirety
to provide as follows:
"PREPAYMENT FEE:
For the Revolving Credit Loan, an amount equal to the Maximum
Amount multiplied by:
2% if Lender's obligation to make further Revolving Credit
Advances or incur additional Letter of Credit Obligations is
terminated (voluntarily by Borrower, upon Default or otherwise) on or
after the first anniversary of the Closing Date and on or before the
third anniversary of the Closing Date, payable on the Commitment
Termination Date; or
1% if Lender's obligation to make further Revolving Credit
Advances or incur additional Letter of Credit Obligations is
terminated (voluntarily by Borrower, upon Default or otherwise) after
the third anniversary of the Closing Date payable on the Commitment
Termination Date."
(iii) Paragraph 6 is amended in its entirety to provide as
follows:
"Audit Fees: Borrower will reimburse Lender at Lender's then
applicable rate per person per day (not to exceed $750 per
person per day) plus out-of-pocket expenses for the audit
reviews, field examinations and collateral examinations."
(d) Schedule G is amended as follows:
(i) Paragraph 2 is amended in its entirety to provide as
follows:
"MINIMUM NET WORTH. Sentry and its Subsidiaries on a
consolidated basis shall at the end of each Fiscal Month
have a Net Worth of not less than an amount equal to (x) the
amount of the Net Worth of Sentry and its Subsidiaries on a
consolidated basis for the Fiscal Year ending December 31,
1999 minus (y) $3,000,000.
(ii) Paragraph 3 entitled "Fixed Charge Coverage Ratio" is
amended in its entirety to provide as follows:
"3. Intentionally Omitted"
(iii) Paragraph 4 is amended in its entirety to provide as
follows:
"4. CAPITAL EXPENDITURES. Sentry and its Subsidiaries on a
consolidated basis shall not make aggregate Capital
Expenditures in any Fiscal Year in excess of $250,000."
(iv) Paragraph 5 entitled "Working Capital Ratio" is amended
in its entirety to provide as follows:
"5. Intentionally Omitted"
(e) Exhibit B to the Loan Agreement is replaced with Exhibit B
to this Amendment.
(f) The Transaction Summary is amended to reflect the terms set
forth in this Amendment.
2. REPRESENTATIONS AND WARRANTIES. To induce Lender to enter into this
Amendment, each Credit Party hereto hereby warrants, represents and covenants to
Lender that except as they relate to paragraphs 3 and 4 of Exhibit E to that
certain Sale and Leaseback Agreement dated as of December 24, 1996 between NOG
(NY) QRS 12-23, Inc. ("NOG") and Borrower (the "Lease"): (a) each representation
and warranty of the Credit Parties set forth in the Loan Agreement is hereby
restated and reaffirmed as true and correct on and as of the date hereof after
giving affect to this Amendment as if such representation or warranty were made
on and as of the date hereof (except to the extent that any such representation
or warranty expressly relates to a prior specific date or period in which case
it is true and correct as of such prior date or period), and no Default or Event
of Default has occurred and is continuing as of this date under the Loan
Agreement after giving effect to this Amendment; and (b) each Credit Party
hereto has the power and is duly authorized to enter into, deliver and perform
this Amendment, and this Amendment is the legal, valid and binding obligation of
such Credit Party enforceable against it in accordance with its terms. Borrower
agrees to provide Lender with copies of all communications between Borrower and
NOG relating to the Lease. Borrower agrees to provide an updated Disclosure
Schedule (3.14) Intellectual Property on or before January 15, 2000.
3. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT. The
effectiveness (the "Effective Date") of this Amendment is subject to the
fulfillment of the following conditions precedent:
(a) Lender shall have received one or more counterparts of this
Amendment duly executed and delivered by the Credit Parties
hereto;
(b) Any and all guarantors of the Obligations shall have consented to
the execution, delivery and performance of this Amendment and all
of the transactions contemplated hereby by signing one or more
counterparts of this Amendment in the appropriate space indicated
below and returning same to Lender; and
(c) Borrower shall have paid to Lender an Amendment Fee in the amount
of $25,000.
4. CONTINUING EFFECT OF LOAN AGREEMENT. Except as expressly amended and
modified hereby, the provisions of the Loan Agreement, and the Liens granted
thereunder, are and shall remain in full force and effect and the waiver set
forth herein shall be limited precisely as drafted and shall not constitute a
waiver of any other provisions of the Loan Agreement.
5. COUNTERPARTS. This Amendment may be executed in multiple counterparts
each of which shall be deemed to be an original and all of which when taken
together shall constitute one and the same instrument.
6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE WITHOUT REGARD TO THE PRINCIPLES
THEREOF REGARDING CONFLICTS OF LAWS.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year specified at the beginning
hereof.
KNOGO NORTH AMERICA INC.,
AS BORROWER
By: /s/ Peter J. Mundy
--------------------------
Name: Peter J. Mundy
Title: V.P. - CFO
SENTRY TECHNOLOGY CORPORATION,
AS CREDIT PARTY
By: /s/ Peter J. Mundy
-----------------------------
Name: Peter J. Mundy
Title: V.P. - CFO
VIDEO SENTRY CORPORATION,
AS CREDIT PARTY
By: /s/ Peter J. Mundy
------------------------------
Name: Peter J. Mundy
Title: V.P. - CFO
KNOGO CARIBE, INC.,
AS CREDIT PARTY
By: /s/ Peter J. Mundy
--------------------------------
Name: Peter J. Mundy
Title: V.P. - CFO
GENERAL ELECTRIC CAPITAL CORPORATION,
AS LENDER
By: /s/ Philip Carfora
--------------------------------
Name: Philip Carfora
Title: Duly Authorized Signatory
<PAGE>
CONSENT OF GUARANTORS
Each of the undersigned guarantors does hereby consent to the execution,
delivery and performance of the within and foregoing Amendment and confirms the
continuing effect of such guarantor's guarantee of the Obligations after giving
effect to the foregoing Amendment.
IN WITNESS WHEREOF, each of the undersigned guarantors has executed this
Consent to Guarantors as of the day and year first above set forth.
GUARANTORS:
SENTRY TECHNOLOGY CORPORATION
By: /s/ Peter J. Mundy
--------------------------------
Name: Peter J. Mundy
Title: V.P. CFO
VIDEO SENTRY CORPORATION
By: /s/ Peter J. Mundy
--------------------------------
Name: Peter J. Mundy
Title: V.P. CFO
KNOGO CARIBE, INC.
By: /s/ Peter J. Mundy
--------------------------------
Name: Peter J. Mundy
Title: Treasurer
EXHIBIT 10.18
FIRST CAPITAL PARTNERS, LLC
MERCHANT AND INVESTMENT BANKERS
3900 WALDEN ROAD
DEEPHAVEN, MINNEOSTA 55391
TELEPHONE: (212) 475-1666
TELEPHONE: (212) 475-0579
April 11, 2000
Mr. Anthony Schnelling, President
Sentry Technology Corporation
350 Wireless Blvd
Hauppauge, NY 11788
Dear Anthony:
I wish to confirm that I, individually and as part of a group of investors,
would be willing to make available to Sentry Technology Corporation (Sentry) up
to $1,000,000 for a period of up to 6 months from the date of first draw. It is
our understanding that the funds we are prepared to make available are to be
used by Sentry for corporate purposes.
We are prepared to make such funds available on a revolving basis, subordinated
and subject to the approval of Sentry's secured lender, General Electric Capital
Corporation ("GECC"), and its willingness to allow repayment provided there is,
at such time as final repayment is contemplated, availability under GECC's
outstanding facility.
I represent that I am a director of Sentry and that I and any members of the
group of investors who would participate in making this loan to Sentry are
Accredited Investors within the meaning of Regulation D under the Securities Act
of 1933. Furthermore, we have satisfied ourselves, after having had sufficient
opportunity to ask questions of Sentry management, of the suitability of our
investment in Sentry.
We represent that we have sufficient funds available in the form of US Treasury
securities or other readily marketable instruments to be able to fund the loan
contemplated hereby without the need on our part to obtain additional financing.
This arrangement is subject to the negotiation of final terms and the execution
of definitive documentation.
Sincerely,
/s/ ROBERT D. FURST
Robert D. Furst
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.'s
333-58139, 333-34867 and 333-34929 of Sentry Technology Corporation each on Form
S-8 of our report dated April 10, 2000, appearing in this Annual Report on Form
10-K of Sentry Technology Corporation for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE
Jericho, New York
April 11, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FIANANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 951
<SECURITIES> 0
<RECEIVABLES> 7,521
<ALLOWANCES> 683
<INVENTORY> 5,258
<CURRENT-ASSETS> 13,606
<PP&E> 9,565
<DEPRECIATION> 5,631
<TOTAL-ASSETS> 22,007
<CURRENT-LIABILITIES> 7,316
<BONDS> 2,893
27,843
0
<COMMON> 10
<OTHER-SE> (16,345)
<TOTAL-LIABILITY-AND-EQUITY> 22,007
<SALES> 19,449
<TOTAL-REVENUES> 22,281
<CGS> 14,339
<TOTAL-COSTS> 15,723
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</TABLE>
