UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the period ended: June 30, 1996
Commission file number: 0-24820
VIDEO SENTRY CORPORATION
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1679157
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
6365 CARLSON DRIVE, EDEN PRAIRIE, MN 55346
(Address of principal executive offices)
(612) 934-9900
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve (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 ninety (90) days.
Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value - 4,841,962 shares as of July 31, 1996.
Total number of pages: 15
Exhibit index on page: 12
VIDEO SENTRY CORPORATION
FORM 10-QSB
SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
INDEX
PART I -- FINANCIAL INFORMATION PAGE
Item 1 -- Financial Statements 3
Item 2 -- Management's Discussion and Analysis 7
of Financial Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 10
Item 2 -- Changes in Securities 10
Item 3 -- Defaults Upon Senior Securities 10
Item 4 -- Submission of Matters to a Vote of Security Holders 10
Item 5 -- Other Information 10
Item 6 -- Exhibits and Reports on Form 8K 10
Signatures 11
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEETS
VIDEO SENTRY CORPORATION
June 30, December 31,
1996 1995
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 150,609 $ 221,606
Accounts Receivable 1,781,517 2,595,939
Inventory 2,603,836 2,552,706
Prepaid Expenses 112,922 106,775
----------- -----------
Total Current Assets 4,648,884 5,477,026
Property and Equipment:
Office Furniture and Equipment 554,300 553,399
Production Equipment 110,216 97,441
----------- -----------
664,516 650,840
Less Accumulated Depreciation (257,096) (164,360)
----------- -----------
407,420 486,480
Other Assets:
Patent and Organizational Costs (less
amortization of $29,528 and $25,328) 12,482 16,682
Software Development Costs 711,401 635,223
----------- -----------
723,883 651,905
----------- -----------
TOTAL ASSETS $ 5,780,187 $ 6,615,411
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 1,732,074 $ 2,223,969
Notes Payable 1,658,485 --
Accrued Expenses 305,251 464,905
Customer Deposits 10,000 28,013
----------- -----------
Total Current Liabilities 3,705,810 2,716,887
Rent Abatement 18,775 22,028
Shareholders' Equity:
Common Stock, $.01 par value, Authorized-10,000,000
shares; Issued and Outstanding June 30, 1996-4,841,962
shares, December 31, 1995-4,727,184 shares 48,420 47,272
Additional Paid-In Capital 7,862,934 7,577,361
Accumulated Deficit (5,855,752) (3,748,137)
----------- -----------
Total Shareholders' Equity 2,055,602 3,876,496
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,780,187 $ 6,615,411
=========== ===========
Note: Balance Sheet at December 31, 1995 derived from audited financial statements at that date.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (UNAUDITED)
VIDEO SENTRY CORPORATION
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 317,673 $ 2,974,000 $ 1,395,132 $ 5,267,542
Cost of Sales 965,220 2,236,946 2,166,175 3,972,876
----------- ----------- ----------- -----------
Gross Profit (647,547) 737,054 (771,043) 1,294,666
Operating Expenses:
Research, Development, Engineering 118,396 141,416 244,081 272,821
Sales and Marketing 165,987 176,170 372,246 280,213
General and Administrative 398,896 327,741 686,468 600,638
----------- ----------- ----------- -----------
683,279 645,327 1,302,795 1,153,672
----------- ----------- ----------- -----------
Operating Income (Loss) (1,330,826) 91,727 (2,073,838) 140,994
Interest Income 0 33,148 104 81,361
Interest Expense (31,848) -- (33,880) --
----------- ----------- ----------- -----------
Pre-Tax Income (Loss) (1,362,674) 124,875 (2,107,614) 222,355
Income Tax Expense -- -- -- 450
----------- ----------- ----------- -----------
Net Income (Loss) $(1,362,674) $ 124,875 $(2,107,614) $ 221,905
=========== =========== =========== ===========
Net Income (Loss) Per Share $ (0.28) $ 0.02 $ (0.44) $ 0.04
=========== =========== =========== ===========
Weighted Average Shares
and Share Equivalents 4,822,117 5,224,329 4,791,629 5,150,406
=========== =========== =========== ===========
See notes to condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (UNAUDITED)
VIDEO SENTRY CORPORATION
Six Months Ended
June 30
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Operating Activities:
Net Income (Loss) $(2,107,614) $ 221,905
Non-Cash Expenses Included in Income:
Depreciation and Amortization 96,936 46,282
Rent Abatement (3,253) 3,403
Changes in Operating Assets & Liabilities:
(Increase) Decrease in Accounts Receivable 814,422 (1,962,722)
(Increase) Decrease in Inventories and Prepaids (57,277) (507,049)
Increase (Decrease) in Accounts Payable and Accruals (651,549) 574,504
Increase (Decrease) in Customer Deposits (18,013) (97,497)
----------- -----------
Net Cash Used in Operating Activities (1,926,348) (1,721,174)
Investing Activities:
Purchases of Property & Equipment (13,676) (231,127)
Purchases of Investments -- (1,317,032)
Maturity of Investments -- 799,851
Purchased Software Development (76,179) (534,708)
----------- -----------
Net Cash Used in Investing Activities (89,855) (1,283,016)
Financing Activities:
Net Borrowings from Notes Payable 1,658,485 --
Proceeds from Exercise of Stock Options 286,721 182,733
----------- -----------
Net Cash Provided by Financing Activities 1,945,206 182,733
----------- -----------
Net Decrease in Cash and Cash Equivalents (70,997) (2,821,457)
Cash & Cash Equivalents at Beginning of Period 221,606 2,902,536
----------- -----------
Cash and Cash Equivalents at End of Period $ 150,609 $ 81,079
=========== ===========
See notes to condensed financial statements.
</TABLE>
VIDEO SENTRY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 1996
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-QSB and Item 10 of Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month and six month periods ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1995.
NOTE 2 - INVENTORIES
Inventories consist primarily of raw materials, components and assembled
components on site.
NOTE 3 - SOFTWARE COSTS
The Company capitalizes software costs purchased from outside parties for its
point-of-sale product. The Company will amortize software costs based on units
sold or straight-line over three years, which ever is less. Amortization will
begin when the software product is tested and complete and the Company begins
selling the product.
NOTE 4 - WARRANTY COSTS
The Company's warranty policy generally provides for one year coverage on
defective equipment. Warranty costs are recorded as period costs when incurred.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Second Quarter and Six Months Ended June 30, 1996)
RESULTS OF OPERATIONS
SALES. Sales for the second quarter ended June 30, 1996 were $318,000, a
decrease of 89% compared to sales of $2,974,000 for the second quarter of 1995.
For the six monthes ended June 30, 1996 sales were $1,395,000, a decrease of 73%
compared to sales of $5,268,000 for the first half of 1995. The decrease in
sales was due to unexpected delays in the ability of several existing customers
to move forward during the first and second quarters and the difficulty that the
Company has had in generating business with new customers due to significant
turnover of its sales force. The Company is in the process of hiring and
training new sales people. For the first half of 1996, approximately 85% of
total sales were to two customers with multiple locations. The Company expects
sales to these customers to be a smaller, but still significant, percentage of
total sales in the remainder of 1996, as sales to other customers increase.
GROSS PROFIT. Gross profit for the second quarter of 1996 was ($648,000),
compared to $737,000 for the second quarter of 1995. Gross profit for the first
six months of 1996 was ($771,000), compared to $1,295,000 for the first half of
1995. The decrease in gross profit for the second quarter and first six months
of 1996 was due to the decrease in sales and related installation activity,
higher manufacturing overhead and higher service costs as the Company increased
its service organization to support the increased number of installed customer
sites. While the gross profit and related gross profit margin were negative for
the second quarter and first half of 1996, the direct material margin for those
periods was 34.7% and 38.2%, respectively, compared to 31.6% and 32.6% for the
second quarter and first half of 1995, respectively, as the Company has been
able to reduce direct material costs on its new SentryVision system. The
decrease in the Company's gross profit margin for 1996 was due to the lower
level of sales with which to leverage the fixed manufacturing, installation and
service department costs included in cost of sales. The decrease in the gross
profit margin was also due to the Company's increased investment in customer
support and training capabilities. The Company expects that the reduced material
costs on its new SentryVision system and its installation process should provide
an increase in the gross profit margin as sales increase.
OPERATING EXPENSES. Operating expenses for the second quarter of 1996 were
$683,000, an increase of 6% compared to $645,000 for the second quarter of 1995.
For the first six months of 1996, operating expenses were $1,303,000, an
increase of 13% over the first half of 1995. Research, development and
engineering expenses decreased 16% in the second quarter and 11% in the first
half of 1996, since the Company completed development of its second generation
system in 1995. Sales and marketing expenses decreased 6% in the second quarter
of 1996 due to turnover of the Company's sales force. In late 1995, the Company
expanded its sales efforts to identify new customers and further penetrate
existing markets and hired additional sales personnel, resulting in an increase
of 33% in sales and marketing expenses for the first half of 1996 compared to
the first half of 1995. General and administrative expenses increased 22% in the
second quarter and 14% for the first half of 1996 due to the addition of
management personnel and higher insurance and bad debt costs. Operating expenses
as a percentage of sales were 215% for the second quarter and 93% for the first
half of 1996, compared to 22% for both the second quarter and first half of 1995
and 35% for all of 1995. The increase as a percentage of sales in 1996 was due
to the lower level of sales and the increase in operating expenses compared to
1995.
INTEREST INCOME (EXPENSE). Net interest expense was $32,000 for the second
quarter and $34,000 for the first half of 1996, compared to interest income of
$33,000 for the second quarter and $81,000 for the first half of 1995. The
Company earned interest income in 1995 from the investment of its cash balances.
NET INCOME (LOSS). Net loss for the second quarter of 1996 was $1,363,000, or
$.28 per share, compared to net income of $125,000, or $.02 per share, for the
second quarter of 1995. Net loss for the first six months of 1996 was
$2,108,000, or $.44 per share, compared to net income of $222,000, or $.04 per
share, for the first half of 1995. The net losses were the result of the
significant decrease in sales and gross profit and the increase in operating
expenses for those periods.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through private and
public sales of Common Stock for which the Company has received an aggregate of
$7,600,000 in net proceeds and borrowings under a line of credit and notes
payable. Working capital at June 30, 1996 was $943,000.
In March 1996, the Company entered into a $2,500,000 working capital line of
credit with a bank. The line of credit is secured by substantially all the
assets of the Company and the personal guarantee of the Company's President. The
line of credit accrues interest at a rate equal to 3% above the bank's reference
rate and matures in March 1998. Borrowing availability under the line of credit
is based on 80% of eligible accounts receivable and a maximum of $250,000 of
inventory. At June 30, 1996, the loan balance under the line of credit was
$1,027,000 and remaining availability was minimal. Eligible accounts receivable
increase as customer installations are completed and final billings are made. In
May 1996, the Company received $500,000 under a revolving promissory note from
Robert D. Furst, Jr., one of the Company's directors, which bears interest at
10% and is secured by all of the assets of the Company. In July 1996, the
Company received $250,000 under a revolving promissory note from an investor,
which bears interest at 10% and is secured by all of the assets of the Company.
Both revolving promissory notes are subordinated to the bank line of credit.
During the first six months of 1996, cash used in operations was primarily for
payments to vendors and to fund the operating loss. The Company also invested
$76,000 in purchased software costs for its point of sale system during the
first half of 1996.
The Company anticipates that its working capital needs will continue to increase
due to operating losses and the expected growth in the business and expects that
it will need to raise additional capital through debt or equity financing. There
is no assurance that such additional financing will be available when needed or
on terms which are acceptable to the Company.
The Company has not been significantly impacted by inflation since its inception
and did not have any material commitments for fixed assets as of June 30, 1996.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on June
18, 1996. The following matters were submitted to a vote of
the shareholders at the Annual Meeting.
Election of Directors. The following persons were elected to
serve as directors for a term of one year: Andrew L. Benson,
Robert D. Furst, Dennis R. Johnson and Jean R. Stiegemeier.
Approval of the 1995 Employee Stock Purchase Plan. (2,215,831
votes FOR, 34,700 votes AGAINST, and 245,471 votes ABSTAINED)
Ratification of Appointment of Ernst & Young LLP as
independent auditors. (2,320,802 votes FOR, 4,700 votes
AGAINST, and 170,500 votes ABSTAINED)
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
See Exhibit Index on page following signatures
b. Reports on Form 8-K
No reports on Form 8-K were filed during the three
months ended June 30, 1996.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VIDEO SENTRY CORPORATION
(Registrant)
August 14,1996 /s/ Andrew L. Benson
- ------------------------- ----------------------------------------
Date Andrew L. Benson
President and
Chief Executive Officer
August 14, 1996 /s/ Ronald W. McClurg
- ------------------------- ----------------------------------------
Date Ronald W. McClurg
Chief Financial Officer and
Secretary
EXHIBIT INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ---------------------- -------------------------------------------------------- ------------------
<S> <C> <C>
10.1 Revolving Secured Promissory Note dated May 24, 1996 13
between the Company and Robert D. Furst, Jr.
10.2 Security Agreement dated May 24, 1996 between the 14
Company and Robert D. Furst, Jr.
11.1 Computation of Net Income (Loss) per share 15
</TABLE>
EXHIBIT 10.1
REVOLVING SECURED
PROMISSORY NOTE
Face Amount: $500,000.00 Date: May 24, 1996
FOR VALUE RECEIVED, Video Sentry Corporation, a Minnesota corporation,
("Maker") promises to pay to the order of Robert D. Furst, Jr. ("Holder"), the
principal sum of up to Five Hundred Thousand and 00/100 ($500,000.00) Dollars,
or so much as is advanced to Maker by Holder from time to time and remains
outstanding on the due date of this Note as shown by the Holder's records. The
Promissory Note shall bear interest on any outstanding principal amount at a
rate of 10 percent per annum, compounded annually.
The principal amount of this Note, plus any accrued interest, shall be
due upon demand of Holder. Payments shall be credited first to interest and
remainder to principal. The Maker's obligations hereunder shall include the
following terms and conditions:
1. Prepayment. The Maker of this Note shall have the right to prepay
all or any part of the balance due at any time prior to maturity without
penalty.
2. Waiver. Maker waives presentment for payment, demand, protest,
notice of protest, notice of dishonor and notice of nonpayment of this
Promissory Note. Maker further agrees to pay all costs of collection, including
attorney's fees, in case any payment due on this Promissory Note shall not be
made when due or other default occurs.
3. Default. Upon default of the payment of any installment of principal
or interest of this Note when due the Holder shall, at his option, have the
right to declare the entire indebtedness hereby evidenced immediately due and
payable.
4. Security. This Note is secured by all inventory, accounts
receivable, contract rights and all other assets of Maker and all proceeds and
products of the foregoing collateral. Such security interest shall be evidenced
by a standard security agreement and financing statement.
6. Miscellaneous. This Note shall be interpreted in accordance with the
laws of the State of Minnesota and shall be binding upon, and inure to the
benefit of, the parties and their respective heirs, executors, administrators,
successors, and assigns.
VIDEO SENTRY CORPORATION
BY /s/ Andrew L. Benson
------------------------------
Andrew L. Benson
Its President
EXHIBIT 10.2
SECURITY AGREEMENT
Video Sentry Corporation whose address is 6365 Carlson Drive, Eden Prairie in
the County of Hennepin, State of Minnesota (hereinafter called "Debtor" whether
one or more) does hereby grant unto Robert D. Furst, Jr. (hereinafter called
"Secured Party"), a security interest in the following described property
(hereinafter called "Collateral"): (Check and complete where applicable)
[X] (a) All inventory of Debtor now owned or hereafter acquired which
is held for sale or lease or is held as raw-materials, work in
process or materials used in connection with Debtor's
business;
[X] (b) All accounts of Debtor now existing or hereafter at any time
acquired (and if specific amounts the same are listed on
Schedule A hereto attached and made a part hereof);
[X] (c) All contract rights of Debtor now existing or hereafter at any
time arising;
[X] (d) Other: all other assets of Debtor
[X] (e) All proceeds and products of the foregoing,
to secure prompt payment to Secured Party at the address stated above of a note
or notes dated May 24, 1996 executed by Debtor to Secured Party in the sum of $
Five Hundred Thousand Dollars ($500,000) with interest as provided therein, and
any and all extensions and renewals thereof, and any and all future advance made
by Secured Party to Debtor at Secured Party's option, together with all other
liabilities of each Debtor to Secured Party (primarily, secondarily, direct,
contingent, sole, joint, or several) due or to become due or which may be
hereafter contracted or acquired and the performance by Debtor of all the terms
and conditions of this Security Agreement (hereinafter referred to as
"Obligations").
DEBTOR WARRANTS, REPRESENTS AND AGREES THAT:
1. Debtor is the owner of the Collateral, or will be the owner of the
Collateral to be acquired after the date hereof, free of all liens, encumbrances
and security interests except the security interest hereby created, and has
authority to execute this agreement. The accounts are genuine and enforceable,
and there are no offsets, counterclaims, or defenses to any of them.
2. Debtor's inventory, books, records, contract rights and other
property above specified relating to the Collateral are or will be kept at the
above address unless a different address is sown in the following space
______________________________ and Debtor will not without the prior written
consent of Secured Party remove or permit the same to be removed from the
location or locations set forth above.
THIS AGREEMENT IS SUBJECT TO THE TERMS PRINTED ON THE REVERSE SIDE
HEREOF, WHICH ARE MADE A PART HEREOF.
Dated May 24, 1996
VIDEO SENTRY CORPORATION
By /s/ Andrew L. Benson President
------------------------------ --------------------------------
By
-----------------------------
EXHIBIT 11.1
<TABLE>
<CAPTION>
COMPUTATION OF NET INCOME (LOSS) PER SHARE
VIDEO SENTRY CORPORATION
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
PRIMARY:
<S> <C> <C> <C> <C>
Weighted average shares outstanding 4,822,117 4,675,352 4,791,629 4,625,628
Net effect of dilutive stock options and
warrants - based on treasury stock
method using average market price -- 548,977 -- 524,778
----------- ----------- ----------- -----------
TOTAL 4,822,117 5,224,329 4,791,629 5,150,406
=========== =========== =========== ===========
Net Income (Loss) $(1,362,674) $ 124,875 $(2,107,614) $ 221,905
=========== =========== =========== ===========
Net Income (Loss) per share $ (0.28) $ 0.02 $ (0.44) $ 0.04
=========== =========== =========== ===========
FULLY DILUTED:
Weighted average shares outstanding 4,822,117 4,675,352 4,791,629 4,625,628
Net effect of dilutive stock options and
warrants - based on treasury stock
method using ending market price
if higher than average market price -- 548,977 -- 524,778
----------- ----------- ----------- -----------
TOTAL 4,822,117 5,224,329 4,791,629 5,150,406
=========== =========== =========== ===========
Net Income (Loss) $(1,362,674) $ 124,875 $(2,107,614) $ 221,905
=========== =========== =========== ===========
Net Income (Loss) per share $ (0.28) $ 0.02 $ (0.44) $ 0.04
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000889927
<NAME> VIDEO SENTRY CORP.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 150,609
<SECURITIES> 0
<RECEIVABLES> 1,781,517
<ALLOWANCES> 0
<INVENTORY> 2,603,836
<CURRENT-ASSETS> 4,648,884
<PP&E> 664,516
<DEPRECIATION> 257,096
<TOTAL-ASSETS> 5,780,187
<CURRENT-LIABILITIES> 3,705,810
<BONDS> 0
0
0
<COMMON> 48,420
<OTHER-SE> 7,862,934
<TOTAL-LIABILITY-AND-EQUITY> 5,780,187
<SALES> 1,395,132
<TOTAL-REVENUES> 1,395,132
<CGS> 2,166,175
<TOTAL-COSTS> 2,166,175
<OTHER-EXPENSES> 1,302,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,776
<INCOME-PRETAX> (2,107,614)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,107,614)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,107,614)
<EPS-PRIMARY> (.44)
<EPS-DILUTED> (.44)
</TABLE>
