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, 2000
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
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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:
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Common 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 29, 2001, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $1.4 million based upon the
closing price of such securities on the OTC Bulletin Board on that date. At
March 29, 2001, the Registrant had outstanding 61,467,872 shares of Common
Stock.
Documents Incorporated by Reference
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None.
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PART I
Item 1. Business.
Formation of the Company; General
Sentry Technology Corporation ("Sentry") was formed in connection with the
February 1997 merger of Knogo North America Inc., a Delaware corporation, and
Video Sentry Corporation, a Minnesota corporation. As a result of the merger, we
became 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, 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
Our 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 we
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, we were not permitted to market our EAS products outside
of the United States and Canada. The non-compete provision expired at the end of
1999.
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We recognized that, because of our continuing operating losses and the
depletion of our tangible assets to fund ongoing operations, our ability to
continue to market our existing SentryVision(R) and EAS products and to develop
new products and product extensions to allow us to remain competitive would
require additional investment.
On January 8, 2001, Dutch A&A Holding B.V. ("Dutch A&A") acquired
23,050,452 shares of the Company's common stock for $3.0 million, $1.0 million
of which was paid in January 2001, and the remaining balance is due in equal
$1.0 million installments on April 30, 2001 and July 31, 2001. Dutch A&A is a
Netherlands company which, through its subsidiaries, is in the business of
development, manufacture, sale and distribution of various kinds of
identification, access control, anti-theft electronic article surveillance,
closed circuit television surveillance products and accessories.
Dutch A&A currently owns 37.5 percent of the outstanding common stock of
the Company. At any time prior to January 8, 2002, Dutch A&A may increase its
ownership of the Company's common stock to a total of 51 percent of the shares
of common stock then outstanding. If the average market value of the Company's
common stock, measured over any ten-day trading period during the one year
period following January 8, 2001, is at least $15.0 million, the purchase price
for the additional shares shall be determined by multiplying the actual number
of shares to be purchased by $.001; otherwise, the purchase price will be $1.5
million. At any time prior to January 8, 2003, Dutch A&A may increase its
ownership of the Company's common stock to a total of 60 percent of the shares
of common stock then outstanding. The purchase price for the additional shares
shall be determined as follows: If the average market value of the common stock,
measured over a ten-day period during the two years preceding January 8, 2003,
is at least $25.0 million, the purchase price shall be determined by multiplying
the actual number of shares to be purchased by $.001. If Dutch A&A previously
exercised its right to acquire shares increasing its investment to 51 percent of
the Company's common stock, but the average market value test was not met at the
time of the second purchase, then the purchase price shall be $3.5 million;
otherwise the purchase price shall be $5.0 million. As a condition to the
investment by Dutch A&A, the stockholders of the Company elected three nominees
of Dutch A&A to the Board of Directors at a Special Meeting of Stockholders on
December 8, 2000. If Dutch A&A has not acquired 51 percent of the Company's
common stock by January 8, 2003, one of the three nominees of Dutch A&A will
resign and be replaced, with the consent of Dutch A&A, by a nominee of the
directors of the Company who are not nominated by Dutch A&A.
In addition to the election of three nominees of Dutch A&A to the Board of
Directors, other matters which were approved at the December 8, 2000 Special
Meeting of Stockholders, and became effective as of January 8, 2001, were
proposals to amend the Company's certificate of incorporation to: (i) permit the
payment of a dividend of additional shares of Class A Preferred Stock at the
rate of 0.075 shares of Class A Preferred Stock for each share of Class A
Preferred Stock held; (ii) to reclassify Class A Preferred Stock into shares of
common stock on a ratio of five shares of common stock for each share of Class A
Preferred Stock outstanding; and (iii) to increase the number of the Company's
authorized shares of common stock to 140,000,000.
In addition, on December 28, 2000, our Board of Directors increased the
number of Directors from five to seven effective upon the closing of the Dutch
A&A investment.
The SentryVision(R) System
SentryVision(R) refers to our family of traveling CCTV surveillance
systems. Over the years, Video has developed various generations of traveling
CCTV surveillance systems including the H-System, OH-System, the original
SentryVision(R) and currently the new and improved SmartTrack system.
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Unlike our previous products, our recently developed SentryVision(R)
SmartTrack system features one or two state-of-the-art pan, tilt and zoom
("PTZ") domes providing for 360(degree) unobstructed views to eliminate most
blind spots. Additionally, SmartTrack utilizes sophisticated software that
provides six tours and up to 60 presets per camera carriage to allow
programmable viewing and recording with or without an operator. The improvements
made to the carriage will make the new SmartTrack system the fastest and most
reliable traveling CCTV surveillance system in the history of SentryVision(R)
products offerings. SmartTrack will be our premier product going forward,
replacing all previous generations of SentryVision(R) products.
Video's proprietary CCTV system, called SentryVision(R), is designed to
provide enhanced loss 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.
SentryVision(R) may also be employed in a broad range of operational and process
monitoring applications in commercial manufacturing and industrial settings. As
of December 31, 2000, 1,073 SentryVision(R) systems had been installed in
approximately 464 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 2000, the Company's international distributors installed 47
SentryVision(R) systems in 21 customer locations in Western Europe, Latin
America and South Africa. We believe that, by providing expanded surveillance
coverage and enhanced flexibility to select the locations watched,
SentryVision(R) has 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, we believe SentryVision(R) is a cost-effective solution which can improve
the operations of our customers.
SentryVision(R) 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 one or two
PTZ CCTV cameras, electronic transmission components and motor drives. The
carriage track and enclosure are designed to custom lengths for more complete
viewing. 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, we have identified a number of specific market
segments for which SentryVision(R) is 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.
SentryVision(R) 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
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and which integrate the customer's existing surveillance equipment (PTZ dome and
fixed-mount cameras) with SentryVision(R). 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, SentryVision(R) 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 pan,
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, retailers have integrated SentryVision(R) 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 735 systems in more than 289 store
locations for seven customers in the home center segment of the
retail market. Typical of our customers in this market are Lowe's
Home Centers, a 670 store chain, and Mills Fleet Farm, a 29 store
regional hardware, home supply and discount retail chain. Both
companies required systems for total floor coverage. We applied
different solutions to this common problem 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 96 systems for
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 31 systems in 29 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.
Industrial Market Applications
o Distribution Centers. Video also provides loss prevention
surveillance for distribution centers and warehouses, and has
installed 80 systems in distribution centers for 35 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.
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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, Federal Express, UPS, Wyeth-Ayerst Labs, USF
Logistics and Thompson Electronics.
o Internet Data Centers In 2000, Video began marketing SentryVision(R)
systems to internet data centers (IDC's). Most IDC's are full
service business internet providers with state-of-the-art systems
that host, monitor and maintain mission-critical web-sites,
e-commerce platforms and business applications for small to medium
sized businesses. SentryVision(R) systems are used to heighten
security through remote video monitoring. Recent installations
include FirstWorld Communications, Inc. and The Discovery Channel.
Institutional Market Applications
o Parking, Corrections, and Government Institutions. We have 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, Michigan, 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 and US Immigration Service.
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, we can provide our
customers with state-of-the-art equipment for specific applications at favorable
costs. We believe that, while less profitable than SentryVision(R) and
traditional EAS products, the CCTV products complement our 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 we believe 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. We have received
indications that our largest single SentryVision(R) customer, Lowe's Home
Centers, continues to project that the bulk of its orders in 2001 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
multiplexer, and eliminating the videotape. Video markets a remote video
transmission system with software developed by Prism Video, Inc., a third-party
vendor. In 2000, Sentry received orders for remote
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video transmission systems from customers in the retail, industrial and school
markets and completed a 150 store chain-wide rollout for a customer in the home
center market.
We continue 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, Emery Air
Freight and Airborne Express. 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 2000, we 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 Digital Recording and Remote Video
Transmission becoming attractive options for large school districts.
Our largest single school CCTV installation was at the Norristown (PA)
High School with 111 cameras, digital recording and using fiber optic cabling.
It is an advanced cost effective system with video from all cameras instantly
accessible on their network. The contract value was approximately $0.3 million.
We estimate the US retail CCTV market to be approximately $400 million per
year. Comparable estimates for the institutional and industrial CCTV markets are
$130 million and $260 million per year, respectively. The North American market
for CCTV products is growing at an estimated rate of 8 percent 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.
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The U.S. market for retail EAS systems and tags is estimated by industry
sources at $570 million and is growing at an estimated rate of 8 percent per
year.
At December 31, 2000, the approximate number of EAS Systems sold or leased
by Knogo and its predecessors exceeded 24,325.
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
9
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, 2000, approximately
17 percent were attributable to SentryVision(R), 39 percent to CCTV, 39 percent
to EAS and 5 percent to 3M library security systems. For the year ended December
31, 1999, approximately 13 percent were attributable to SentryVision(R), 39
percent to CCTV, 42 percent to EAS, and 6 percent to 3M library security
systems. For the year ended December 31, 1998, approximately 18 percent were
attributable to SentryVision(R), 28 percent to CCTV, 47 percent to EAS and 7
percent to 3M library security systems.
Major Customers
Although the composition of our largest customers has changed from year to
year, a significant portion of our revenues has been attributable to a limited
number of major customers. In 2000, 1999 and 1998, Lowe's Home Centers accounted
for 14%, 9% and 22%, respectively, of total revenues. In 2000 and 1999, Goody's
Family Clothing accounted for 15% and 14% respectively, of total revenues. While
we believe that one or more major customers could account for a significant
portion of our sales for at least the next two years, we anticipate that our
customer base will continue to expand and that in the future we will be less
dependent on major customers.
Production
In October 1998, we ceased manufacturing at our Cidra, Puerto Rico
facility and consolidated all manufacturing and assembly at our 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
10
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 additional 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 our 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 and antenna coils for the tags to Knogo's
specifications. Through product redesign efforts, final assembly machines were
modified to reduce production complexities. As a result, increased production
run rates of this product have been 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. Our policy is to
maintain Knogo's inventory at a level that is sufficient to meet projected
demand for its products. We do not anticipate any difficulties in continuing to
obtain suitable components for Knogo at competitive prices in sufficient
quantities as and when needed.
Marketing
We market our products for Video and Knogo, jointly, through the direct
efforts of approximately 13 salespersons located in select metropolitan areas
across the United States and Canada, as well as through a network of over 200
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 our Website which
has been recently updated to provide enhanced product and market oriented
information.
Video
To date, most 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.
11
While most of the current SentryVision(R) and conventional CCTV sales have
been made to home centers, retail chains and distribution centers, our marketing
plan for Video also emphasized a dealer program for institutional and industrial
prospects.
Beginning in mid-1998, we 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, we are able to reach a far larger
number of SentryVision(R) prospects and penetrate the market more rapidly. The
program has generated much interest through trade advertising, direct mail and
trade show participation. By the end of 2000, non-exclusive contractual
relationships with over 200 security dealers were established. These and
additional dealers are expected to generate significant SentryVision(R)
installations in industrial and institutional facilities in 2001.
Recently we signed an agreement to sell SentryVision(R) through
Professional Security Association (PSA), a group of 200 dealers with combined
annual sales of approximately $800 million. PSA will promote SentryVision(R)
through its CCTV integrators.
In addition, we market 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. We
sell our 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, 2000, we had signed distribution agreements
for Canada, UK, France, Russia, South Africa, Poland and Mexico.
During 2000, Video placed in service 84 SentryVision(R) systems and 3,424
CCTV cameras and peripherals, as compared to 58 SentryVision(R) systems and
5,066 CCTV cameras and peripherals in 1999, and 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.
We also market 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, 2000, 1999 and 1998, Knogo
placed in service 347, 439 and 439, respectively, 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 8MHz P-2000 RF system designed for both hard and
soft good customers. The P-2000 system is economical and self-installable by the
customer. 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
12
Systems, Inc. They will be targeted to a broad range of mass merchandise,
apparel, drug 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 featured 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, we designed and developed for 3M a
new library specific magnetic EAS system which in turn was 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 exchange for
these agreements, we agreed not to compete against 3M for sales and service of
EAS Systems in the library market until March 2004.
Dutch A&A Security Products
In February 2001, we introduced a new EAS system manufactured by Dutch
A&A, that is housed in slender self-contained plexiglass panels. The new 9000 PL
8.2 MHz system provides retailers with clear lines of sight at the front end
along with the durability of solid plexiglass. The panels can be custom printed
with the retailer's logo for enhanced image and trade name awareness. The
system's electronics which are built-in to the base of the plexiglass antenna
provide detection of 8.2 MHz labels and hard tags in aisles up to six feet wide.
The 9000 PL system is offered in both single and dual aisle configurations and
is compatible with all existing 8.2 MHz tags and checkout accessories. The
plexiglass RF system is the first in a series of new products being brought to
market by the Company as a result of a distribution agreement with Dutch A&A. In
the future, we will also sell Dutch A&A products in the proximity access control
and RFID markets.
Backlog
Our backlog of orders was approximately 5.8 million at December 31, 2000
as compared with approximately $3.2 million at December 31, 1999 and $4.1
million at December 31, 1998. The increase is due primarily to a large sale to a
new customer in a new market, and a change in accounting. In 2000, we recognized
revenue based upon installation rather than upon shipment as was the policy in
previous years. We anticipate that substantially all of the backlog present at
the end of 2000 will be delivered during 2001.
Seasonal Aspects of the Business
Our current customers are primarily dependent on retail sales which are
seasonal and subject to significant fluctuations which are difficult to predict.
In our experience, orders and installations are generally the lowest in the
first quarter of each year.
Service
Installation services are performed by our 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
13
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, we offer
our 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
several 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, we 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 we expanded
our program of hiring local sub-contractors for installation work and refocused
our employee efforts on service and maintenance work.
A great deal of our efforts were directed at servicing the existing
SentryVision(R) systems, as reliability problems were not completely resolved.
Our 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 our focus 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 qualified contractors was
established. In the second half of 1999, we released 34 installation employees
and retained only our most technically skilled employees. We intend to continue
to focus on EAS, SentryVision(R) and CCTV technical service and maintenance and
continue to expand our contractor network for installation work.
This strategy has resulted in significant cost savings. In addition, we
retain our reputation of technical expertise within the industry and management
efforts can be focused on increased electronics training for our employees,
distributors and sub-contractors.
Throughout 2000, we added 16 Service Partners and installation contractors
in 20 key market areas. In total, we have more than 60 factory trained service
technicians in the field to augment service provided by Company employees. Many
of these partners are factory trained and have contractual commitments to
provide prompt, quality service at our direction. The field service management
structure was also modified so that two of our most experienced managers will
focus exclusively on quality control with our service partners.
In addition, our Call Center was reorganized and a new supervisor
appointed. Technical support functions were transferred to our Design Center
personnel and all service requests are now screened extensively via telephone.
Initial results have been highly successful in lowering the number of on-site
visits required to resolve service issues.
Logistics issues were also examined and advance part shipments are now
routine to avoid the expense of potential second visits.
Customer service is a priority and we are focused on continued
improvements in 2001. With the introduction of the new and more reliable
SentryVision(R) SmartTrack System, we expect sales to increase. We anticipate
that increased installation and service work can be supported by the existing
headcount and infrastructure.
14
Competition
We operate 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. We compete 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 our 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, we are 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 our 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 promoted 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
Although patent protection is advantageous to Sentry, we do not consider
any single patent or patent license we own or hold to be material to our
operations, but we believe that our competitive position ultimately will depend
on our experience, know-how and proprietary data, engineering, marketing and
service capabilities and business reputation, all of which are outside the scope
of patent protection.
Video
Video has a United States patent covering 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 received in 2000 for
improvements made to the original technology which has been incorporated into
the SmartTrack product. Video also has received a corresponding European patent
and nine foreign country patents. We also have pending four patents for
additional corresponding foreign patents. We intend 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.
We are 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
15
terms of such licenses would be acceptable to the Company. In addition, we 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 we intend to continue to seek to protect Video's proprietary technology
and developments through patents, trademark registration, trade secret laws and
confidentiality agreements, we do not rely on such protection to establish and
maintain Video's position in the marketplace. 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.
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.
Research and Development
At December 31, 2000, Sentry had 6 employees located in the United States
engaged full-time in research and engineering and product development. We may
from time to time retain consultants for specific project assistance. For the
years ended December 31, 2000, 1999 and 1998, approximately $0.9 million, $1.3
million, and $1.3 million, respectively, was expended on Company-sponsored
research.
Responding to high numbers of service calls for systems in the field, the
majority of our research and development expenditures in 2000 was directed
towards improving the reliability and performance of the Sentry Vision(R)
product line. Enhancements were made to the mechanical, electrical and optical
portions of the system. These changes were so significant that they led to the
design of a completely new product called SmartTrack. Extensive software
enhancements were built in to provide programmability, user friendliness and
field service diagnostics.
The mechanical aspects of the systems were designed around one or two
360(degree) pan, tilt and zoom camera modules. Electronics were redesigned for
easier serviceability. Reliability and video quality were also improved.
SmartTrack has been field tested in the fourth quarter of 2000 and
customer response has been very positive. Full production of this new system
will begin in the second quarter of 2001. SmartTrack will replace earlier
generations in our line of Sentry Vision(R) products.
In addition to the creation of SmartTrack, our engineers worked on
continued enhancements to our Magnetic EAS systems during 2000.
16
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.
We believe we are in material compliance with applicable United States,
state and local laws and regulations relating to the protection of the
environment.
Industry Canada, the department of the Canadian federal government that
regulates and licenses the radio frequency spectrum in Canada, has brought to
our attention that several hundred of the units of the earlier generation of
Ranger 1 and 2 EAS devices sold by our Knogo subsidiary to retailers in Canada
do not comply with the relevant Industry Canada technical standards, and may
cause interference to other users of the radio spectrum. Industry Canada has
written to the customers concerned to apprise them of the situation, and to
demand that the non-compliant devices be removed or replaced with compliant
ones. The Company has been working with Industry Canada officials and the
retailers concerned to put in place a replacement program and a schedule that
will satisfy both the retailers and Industry Canada. A number of these retailers
have subsequently upgraded to compliant EAS devices, and discussions are
continuing with others. Under the Radiocommunication Act (Canada) (the "Act")
which it administers, Industry Canada has extensive powers to, among other
measures, confiscate radio equipment that is non-compliant, and to initiate
prosecutions for alleged violations of the regulatory provisions in the Act.
However, Industry Canada's normal practice is to use co-operative approaches to
problems of technical non-compliance or radio interference, and to work with the
parties concerned to resolve such problems within a reasonable time frame. We
believe our efforts to date, and the efforts we are continuing to make, in
co-operating with Industry Canada concerning the Ranger 1 and 2 problems will
satisfy Industry Canada without the need for the latter to invoke its powers
under the Act. Several of our customers have indicated, however, that they may
pursue legal remedies against us in connection with their non-compliant EAS
devices.
Employees
At December 31, 2000, the Company and its subsidiaries employed 131
full-time employees, of whom 20 were employed in administrative and clerical
capacities, 6 in engineering, research and development, 33 in production, 23 in
marketing and sales and 49 in customer service and support. None of our
employees are employed pursuant to collective bargaining agreements. We believe
that our relations with employees are good.
Item 2. Properties.
17
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, we 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 we are involved in ordinary, routine litigation incidental to our
business, we are 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.
On December 8, 2000, the Company conducted a Special Meeting of
Stockholders at which the following matters were voted upon:
1. A proposal to amend the Company's certificate of incorporation to permit
the payment of a dividend of additional shares of Class A Preferred Stock
at the rate of 0.075 shares of Class A Preferred Stock for each share of
Class A Preferred Stock held. A total of 5,284,947 Common votes and
4,016,671 Preferred votes were cast on this proposal. This proposal
received the approval of at least a majority of the outstanding Common and
at least two-thirds of the outstanding Preferred entitled to vote, and
passed. The result of the vote on this proposal was as follows:
In Favor Against Abstained
-------- ------- ---------
Common Stock 5,126,474 139,881 18,592
Preferred Stock 3,748,262 254,998 13,411
2. A proposal to amend the Company's certificate of incorporation to
reclassify Class A Preferred Stock into shares of common stock on a ratio
of five shares of common stock for each share of Class A Preferred Stock
outstanding, and to increase the number of the Company's authorized shares
of common stock to 140,000,000. A total of 5,192,755 Common votes and
4,016,671 Preferred votes were cast on this proposal. This proposal
received the approval of at least the majority of the outstanding Common,
and at least two-thirds of the outstanding Preferred, and passed. The
result of the vote on this proposal was as follows:
In Favor Against Abstained
-------- ------- ---------
Common Stock 5,001,276 153,230 38,249
Preferred Stock 3,740,931 262,648 13,092
3. A proposal to amend the Company's certificate of incorporation to
eliminate the classification of the Company's Board of Directors from
three classes to a single class. A total of 5,192,755 votes were cast on
this proposal, of which 5,003,612 voted in favor of the proposal, 153,562
voted against and 35,581 abstained. This proposal did not receive the
required 80% of the outstanding shares of Common Stock, and therefore did
not pass
18
4. The following individuals were elected to the Company's Board of
Directors: Peter Murdoch, Cor S.A. De Nood, Anthony H.N. Schnelling and
Robert D. Furst, Jr. The result of the election of directors was as
follows:
For Against Withheld Abstained
--------- ------- -------- ---------
Mr. Murdoch 5,126,474 -- 66,281 --
Mr. De Nood 5,126,474 -- 66,281 --
Mr. Schnelling 5,126,474 -- 66,281 --
Mr. Furst 5,126,474 -- 66,281 --
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 until March 31, 2000 and thereafter as reported on
the over-the-counter bulletin board.
Stock Prices
------------
High Low Close
---- --- -----
1999
First Quarter .......... $ 0.688 $ 0.313 $ 0.313
Second Quarter ......... 0.688 0.250 0.500
Third Quarter .......... 0.688 0.250 0.250
Fourth Quarter ......... 0.313 0.063 0.094
2000
First Quarter .......... $ 0.688 $ 0.156 $ 0.250
Second Quarter ......... 0.500 0.063 0.094
Third Quarter .......... 0.250 0.063 0.141
Fourth Quarter ......... 0.250 0.045 0.063
2001
First Quarter .......... $ 0.085 $ 0.040 $ 0.050
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 did not satisfy the current Amex guidelines for continued listing.
The Company's Common Stock is now quoted on the OTC Bulletin Board ("OTCBB")
using the symbol SKVY. The Company's Class A Preferred Stock ("SKVYP") traded on
the OTCBB prior to its redemption effective January 8, 2001.
(b) Holders of Common Stock.
19
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, 2001, the Company had 61,467,872 shares of
Common Stock issued and outstanding, which were held by 256 holders of record
and approximately 2,900 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.
(d) Redemption of Class A Preferred Stock.
At a special meeting of shareholders held on December 8, 2000, a proposal
was adopted to pay a one-time stock dividend of .075 of a share of preferred
stock to preferred stockholders on the effective date of the Dutch A&A
investment, and immediately thereafter each share of preferred stock was
reclassified into five shares of common stock. The Dutch A&A investment took
place on January 8, 2001, at which time the preferred shares were reclassified
into 28,666,660 shares of common stock.
For additional information with respect to the Class A Preferred Stock,
see Note 1 to the Consolidated Financial Statements.
Item 6. Selected Financial Data
The table below sets forth selected consolidated historical financial data
of the Company for the years ended December 31, 1996, 1997, 1998, 1999 and 2000.
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 includes 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.
(Amounts in thousands except for per share data)
Year Ended December 31,
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Selected Statement of Operations Data:
Sales, service, rentals and other ................... $ 18,612 $ 21,996 $ 26,364 $ 20,198 $ 18,259
Sales to Sensormatic ................................ 4,651 2,570 1,792 2,083 1,606
Total revenues ...................................... 23,263 24,566 28,156 22,281 19,865
Cost of sales ....................................... 11,935 12,882 14,412 14,339 11,120
Customer service expenses ........................... 2,932 4,772 6,253 5,457 4,464
Selling, general and administrative
expenses ...................................... 7,345 9,629 10,118 9,169 7,576
20
(Amounts in thousands except for per share data)
Year Ended December 31,
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Purchased in-process research and
development ..................................... -- 13,200 -- -- --
Restructuring and impairment charges ................ -- -- -- 3,026 2,981
Gain on sale of assets .............................. 2,462 -- -- 503 --
Income (loss) before income taxes ................... 1,847 (17,743) (4,483) (11,034) (7,821)
Income (loss) before cumulative effect
of change in accounting principal ............. 1,183 (17,917) (4,504) (11,034) (7,821)
Cumulative effect of change in accounting
principal ..................................... -- -- -- -- 301
Net income (loss) ................................... 1,183 (17,917) (4,504) (11,034) (8,122)
Preferred stock dividends ........................... -- 1,067 1,263 1,326 1,337
Net income (loss) available to
common shareholders ............................. 1,183 (18,984) (5,767) (12,360) (9,459)
Net income (loss) per common share:
Basic ........................................... 0.25 (2.08) (0.59) (1.27) (0.97)
Diluted ......................................... 0.23 (2.08) (0.59) (1.27) (0..97)
Selected Balance Sheet Data:
Working capital ..................................... $ 18,076 $ 12,415 $ 12,668 $ 6,290 $ 2,173
Total assets ........................................ 32,857 35,937 33,496 22,007 13,845
Property, plant and equipment, net .................. 7,288 6,948 4,348 3,934 3,324
Obligations under capital leases .................... 3,546 3,313 3,241 3,058 2,892
Redeemable cumulative preferred stock ............... -- 25,254 26,517 27,843 29,180
Total common shareholders' equity (deficit) ......... 25,248 1,792 (3,975) (16,335) (25,794)
See the notes to the Consolidated Financial Statements included elsewhere
herein.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Consolidated revenues were 11% lower in the year ended December 31, 2000
than in the year ended December 31, 1999. We anticipated some of the reductions
due to the downsizing of the sales and promotional budgets due to our fiscal
constraints. However, delays in the installation schedules of our major
customers also impacted reported revenues. The backlog of orders, which we
expect to deliver within twelve months, was $5.8 million at December 31, 2000
compared to $3.1 million at December 31, 1999. Revenues from third party
customers, other than Sensormatic, were 92% of total revenues in 2000 as
compared to 91% in 1999. Total revenues for the periods presented are broken out
as follows:
2000 1999 Change
---- ---- ------
(in thousands)
EAS $ 7,545 $ 8,983 (16%)
CCTV 6,574 7,565 (13%)
SentryVisionO 1,981 1,846 7%
3M library products 1,103 1,056 4%
------- ------- ----
Total sales 17,203 19,450 (12%)
Service revenues and other 2,662 2,831 (6%)
------- ------- ----
Total revenues $19,865 $22,281 (11%)
======= ======= ====
The decline in EAS sales in 2000 is a result of lower sales of our
magnetic products and lower
21
OEM sales to Sensormatic. The decline in CCTV was primarily related to a
decrease in sales to one of our major customers. While we have improved
SentryVision(R)'s reliability and performance through technical modifications,
it is still plagued by ongoing customer perception issues which resulted in no
substantial sales increases.
Cost of sales were 59% in 2000 as compared to 63% in 1999, excluding
special charges described below. Lower scrap and rework costs relating to the
SentryVision(R) product line and better production efficiencies in our
manufacturing operations were the primary cause of the decrease in the
percentage in the current year. In addition, as part of our restructuring plan
initiated in 1999, and in line with our future business plans, Sentry included
in cost of sales, special charges of $1.0 million in 2000 and $2.1 million in
1999. These amounts primarily represented provisions for obsolete or excess
inventory. In 2000, the charges were a result of a combination of the
introduction of SmartTrack which will replace earlier generation SentryVision(R)
systems and the substitution of certain Dutch A&A systems which will replace
systems in our EAS product lines. In 1999, the charges were required as a result
of modifications and upgrades made to the Company's various product lines.
Customer service expenses decreased 18% in 2000 as compared to 1999 due
primarily to a reduction in the number of customer service representatives as a
result of our restructuring of operations, which took place at the end of 1999.
Selling, general and administrative expenses decreased 17% to $7.6 million
in 2000 from $9.2 million in 1999 primarily as a result of the savings from a
reduced infrastructure, lower sales promotion expenses and lower amortization of
goodwill.
Research and development costs were 33% lower in 2000 when compared to the
previous year due to a 50% reduction in headcount and a more focused effort on
product support. The primary emphasis in the current year has been directed
towards the development of the new SentryVision(R) SmartTrack system.
Net interest expense increased by $0.1 million in 2000 over 1999 primarily
due to higher average borrowings under the Company's revolving credit agreement
and higher interest rates.
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 $0.5
million.
In February 1997, we acquired the SentryVision(R) product line through the
merger with Video Sentry Corporation and assigned a value of $4.4 million to its
patent and existing technology. At that time, we assigned a seven-year life to
the technology. After the merger, we encountered severe liquidity problems due
to declining sales of this premier product due to design faults, repeated
repairs and the customer's perception that SentryVision(R) was a costly and
unreliable product. The cost of conventional CCTV products also declined during
that period and added features made these systems more competitive when compared
to SentryVision(R). In addition, several competitors, including the industry's
leader - Sensormatic, produced their own cable free traveling camera systems
that competed directly with us. We considered pursuing a claim for patent
infringement against Sensormatic but decided not to pursue the claim at this
time. The changes we made were so significant from the original traveling CCTV
system acquired that they became the basis for a new product, which we have
named SmartTrack. With the development of the SentryVision(R) SmartTrack system
completed in the fourth quarter of 2000, we re-assessed the remaining carrying
value of the intangible assets related to the original SentryVision(R) products.
Based on our review of the technological developments in the marketplace, we
determined that the original traveling CCTV surveillance system goodwill and
related patents no longer provide us with a competitive
22
advantage, and as a result, we recorded an impairment charge of approximately
$3.0 million related to these assets. These impairment charges were 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
insufficient estimated future cash flows from the SentryVision(R) system.
During the fourth quarter of 1999, faced with continued losses and sales
of the original SentryVision(R) below projected levels, we undertook 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, we incurred non-cash charges of $2.4 million
related to a write-down of goodwill based on revised estimates of future sales
of the original SentryVision(R) product. (See Note 18 to the Consolidated
Financial Statements.)
Due to net losses, we have not provided for income taxes in either of the
periods presented.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. In accordance with SAB 101, we have changed our accounting method
for recognizing revenue on the sale of equipment where post-shipment obligations
exist. Previously, we recognized revenue for equipment when title transferred,
generally upon shipment. Beginning with the first quarter of year 2000, we began
recognizing revenue when installation is complete or other post-shipment
obligations have been satisfied. The cumulative effect of the change in
accounting method is a non-cash reduction in net earnings of $0.3 million, or
$0.03 per share.
As a result of the foregoing, Sentry had a net loss of $8.1 million in the
year ended in December 31, 2000 as compared to a net loss of $11.0 million in
the year ended December 31, 1999.
We recorded preferred stock dividends of $1.3 million in both 2000 and
1999. 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
agreement with our commercial lender, we were not allowed to pay cash dividends,
including the cash dividend on our preferred stock which would otherwise have
been payable in August of 1999 and February 2000. At a special meeting of
shareholders held on December 8, 2000, a proposal was adopted to pay a one-time
stock dividend of .075 of a share of preferred stock to preferred stockholders
on the effective date of the Dutch A&A investment, and immediately thereafter to
reclassify each share of preferred stock into five shares of common stock. The
Dutch A&A investment took place on January 8, 2001.
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%)
23
1999 1998 Change
---- ---- ------
(in thousands)
CCTV 7,565 6,892 10%
SentryVisionO 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 $22281 $ 28156 (21%)
======= ======= ====
We attribute the decrease in sales in 1999 to a slow-down in the number of
orders placed by both our existing customer base as well as new prospective
customers, resulting in a significant decline in sales during the period. We
believe that our announcement in the third quarter that we retained an
investment banking firm for a possible corporate transaction also negatively
impacted our revenues by creating uncertainties for our customers regarding our
future. The decision by one of our major SentryVision(R) customers to purchase
conventional CCTV for the bulk of its security product orders for 1999 primarily
caused the decline in SentryVision(R) and the increase in CCTV.
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.
In 1999, service revenues and other revenues declined by 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 our 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 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.
Our research and development costs decreased by 4% in 1999 as compared to
1998. The primary emphasis in the current year was 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 8 MHz RF EAS system.
24
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, we sold our Puerto Rico manufacturing
facility and Illinois design center for net cash proceeds of approximately $2.2
million, which resulted in a net gain on the sale of $0.5 million.
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.
During the fourth quarter of 1999, faced with continued losses and
SentryVision(R) sales below projected levels, we undertook 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.)
As a result of the foregoing, Sentry had a net loss of $11.0 million in
the year ended in December 31, 1999 as compared to a net loss of $4.5 million in
the year ended December 31, 1998.
We recorded preferred stock dividends of $1.3 million in 1999 and 1998.
Dividends accrued through February 12, 1999 were paid-in-kind as of that date.
Liquidity and Capital Resources
As a result of the continued reduced revenue levels, decreased financial
position and recurring operating losses, we initiated actions in 1999 which
included, among others, (a) reducing the number of employees, (b) attempting to
improve our working capital, (c) closing and/or consolidating some of our
facilities, (d) consolidating some administrative functions, and (e) evaluating
certain business lines to ensure that our resources are deployed in the more
profitable operations. Our initial efforts to rationalize our operations
commenced in the fourth quarter of 1999. Through 2000, the results of these
efforts were not sufficient to prevent significant operating losses. During
2000, we primarily funded our operations through borrowings under our revolving
credit facility, including an amendment to our borrowing base formula that
provided for increased availability by up to $0.5 million through 2000, with
periodic reductions until July 2001 when the excess facility expires. We were
increasingly dependent upon future transactions, including the timely release of
backlog orders from customers and subsequent cash collections, in order to
generate sufficient cash flows and return to profitability. We had sold all
available assets to raise cash to finance our operations. We were, therefore,
increasingly dependent on borrowings under our revolving credit facility to
finance our cash requirements.
To strengthen our financial position, we continued to solicit other
businesses within the security industry to ascertain the level of interest in a
possible joint venture or equity investment. Since October of 1999, several
parties had indicated interest in investment or merger with our company. In
February 2000 we began discussions with Dutch A&A about a possible transaction.
After many discussions and the exchange of information, we announced on August
8, 2000 that we had entered into an agreement pursuant to which Dutch A&A would
invest $3 million in newly issued shares of our common stock. For
25
this investment, Dutch A&A would receive 37.5% of our common stock then
outstanding on a fully-diluted basis, after giving effect to the
reclassification of our preferred stock into common stock. In addition, Dutch
A&A has the right to acquire additional shares during the two year period
following the closing, up to an aggregate holding of 60% of the common stock
then outstanding. The transaction was conditioned upon our shareholders'
approval, including approval by our preferred and common stockholders, each
voting as a class, to amend our certificate of incorporation to: (i) permit the
payment of a dividend of additional shares of Class A Preferred Stock at a rate
of 0.075 shares of Class A Preferred Stock for each share of Class A Preferred
Stock held; and (ii) to reclassify the Class A Preferred Stock into shares of
common stock at a ratio of five shares of common stock for each share of Class A
Preferred Stock outstanding, and (iii) to increase the number of the authorized
shares of common stock to 140,000,000. At the Special Meeting held on December
8, 2000, the shareholders approved these amendments.
On January 8, 2001, Dutch A&A acquired 23,050,452 shares of our common
stock for $3.0 million, $1.0 million of which was paid in January 2001, and the
remaining balance is due in equal $1.0 million installments on April 30, 2001
and July 31, 2001. The consummation of this transaction has substantially
enhanced our liquidity and financial condition.
To further address the continuing losses, our business plan for 2001
includes the following:
o Addition of new products, including high-end EAS systems and
disposable tags and labels, proximity access control and RFID,
through a distribution agreement with Dutch A&A.
o Introduction of SmartTrack, our new entry in the
SentryVision(R) family of products.
o Hiring of a seasoned dealer manager for promotion of
SmartTrack in the U.S. marketplace.
o Transferring of management of our international dealer program
to Dutch A&A, which currently sells products in approximately
50 countries worldwide.
o Sharing of marketing resources with Dutch A&A.
o Reductions in trade show activity and a refocus on expanding
business with existing customers.
o Continuation and expansion of our Service Partner program to
augment service provided by our employees.
o Benefit from workforce reductions which took place in the last
quarter of 2000.
o Further subletting of office space in our corporate offices.
o Additional cost cutting measures.
o Simplified our capital structure to include one class of
equity and the elimination of preferred dividends.
We have a revolving credit facility with GE Capital Corporation that
permits us to borrow up to $8 million, subject to availability, under a
borrowing formula based on accounts receivable and inventories. The credit
agreement expires on December 31, 2001. The facility is secured by a lien on
substantially all of our assets. At December 31, 2000, we had borrowings of
approximately $2.9 million, the maximum amount available under the facility. We
expect to renew or replace the facility at the end of 2001.
We 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. We had no material capital expenditure or purchase
commitments as of December 31, 2000.
We believe that current cash reserves and cash generated by operations,
together with borrowings under the revolving credit facility and the cash from
the Dutch A&A investment, will be sufficient to
26
meet our working capital and future capital expenditure requirements over the
next twelve months.
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.
Sentry has adopted SFAS No. 133, as amended, in the first quarter of 2001, and
the impact was not material..
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 herein, 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 that any
delay or cancellation of orders from one or more of Sentry's two major 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 Service Partners 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."
Item 8. Financial Statements and Supplementary Data.
27
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6 - F-19
SCHEDULE II - Valuation and Qualifying Accounts F-20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Sentry Technology Corporation
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Sentry
Technology Corporation and subsidiaries as of December 31, 2000 and 1999 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
item 14(a)(2). These financial statements and the financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the consolidated financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company has
changed its accounting method for recognizing revenue on the sale of equipment
where post-shipment obligations exist.
/s/ Deloitte & Touche LLP
Jericho, New York
March 27, 2001
F-1
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(In Thousands, Except Par Value Amounts)
2000 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 927 $ 951
Accounts receivable, less allowance for doubtful accounts
of $890 and $683, respectively 3,178 6,838
Net investment in sales-type leases - current portion 84 393
Inventories 5,274 5,258
Prepaid expenses and other current assets 202 166
-------- --------
Total current assets 9,665 13,606
NET INVESTMENT IN SALES-TYPE LEASES - Noncurrent portion 100 108
SECURITY DEVICES ON LEASE - Net 36 66
PROPERTY, PLANT AND EQUIPMENT - Net 3,324 3,934
GOODWILL AND OTHER INTANGIBLES, including patent costs,
less accumulated amortization of $298 and $4,882, respectively 247 4,227
OTHER ASSETS 473 66
-------- --------
$ 13,845 $ 22,007
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 2,920 $ 3,075
Accounts payable 1,463 1,088
Accrued liabilities 2,633 2,769
Obligations under capital leases - current portion 124 165
Deferred income 352 219
-------- --------
Total current liabilities 7,492 7,316
OBLIGATIONS UNDER CAPITAL LEASES - Noncurrent portion 2,768 2,893
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 199 290
-------- --------
Total liabilities 10,459 10,499
COMMITMENTS AND CONTINGENCIES (Notes 1 and 13)
REDEEMABLE CUMULATIVE PREFERRED STOCK 29,180 27,843
COMMON SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value; authorized 40,000 shares,
issued and outstanding 9,751 and 9,751 shares, respectively 10 10
Additional paid-in capital 12,859 14,196
Accumulated deficit (38,663) (30,541)
-------- --------
Total common shareholders' equity (deficit) (25,794) (16,335)
-------- --------
$ 13,845 $ 22,007
======== ========
See notes to consolidated financial statements.
F-2
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In Thousands, Except per Share Amounts)
2000 1999 1998
REVENUES:
Sales $ 17,203 $ 19,449 $ 24,431
Service revenues and other 2,662 2,832 3,725
-------- -------- --------
19,865 22,281 28,156
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales 11,120 14,339 14,412
Customer services expenses 4,464 5,457 6,253
Selling, general and administrative expenses 7,576 9,169 10,118
Research and development 862 1,289 1,343
Restructuring and impairment charges (Note 18) 2,981 3,026 --
Gain on sale of assets (Note 16) -- (503) --
-------- -------- --------
27,003 32,777 32,126
-------- -------- --------
OPERATING LOSS (7,138) (10,496) (3,970)
INTEREST EXPENSE 683 538 513
-------- -------- --------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT ON CHANGE IN ACCOUNTING PRINCIPLE (7,821) (11,034) (4,483)
INCOME TAXES -- -- 21
-------- -------- --------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (7,821) (11,034) (4,504)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNT
PRINCIPLE 301 -- --
-------- -------- --------
NET LOSS (8,122) (11,034) (4,504)
PREFERRED STOCK DIVIDENDS 1,337 1,326 1,263
-------- -------- --------
NET LOSS ATTRIBUTED TO COMMON
SHAREHOLDERS $ (9,459) $(12,360) $ (5,767)
======== ======== ========
NET LOSS PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE:
Basic and diluted $ (0.94) $ (1.27) $ (0.59)
======== ======== ========
NET LOSS PER COMMON SHARE:
Basic and diluted $ (0.97) $ (1.27) $ (0.59)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES:
Basic and diluted 9,751 9,751 9,751
======== ======== ========
See notes to consolidated financial statements.
F-3
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In Thousands)
Retained Total Redeemable
Additional Earnings Common Cumulative
Common Stock Paid-In (Accumulated Shareholders' Preferred
Shares Amount Capital Deficit) Equity (Deficit) Stock
BALANCE, JANUARY 1, 1998 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
Net loss and comprehensive loss -- -- -- (8,122) (8,122) --
Preferred stock dividends (Note 1) -- -- (1,337) -- (1,337) 1,337
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2000 9,751 $ 10 $ 12,859 $(38,663) $(25,794) $ 29,180
======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
F-4
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In Thousands)
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,122) $(11,034) $ (4,504)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on sale of assets -- (503) --
Depreciation and amortization of security devices and property,
plant and equipment 632 744 1,106
Amortization of intangibles and other assets 1,010 1,594 1,596
Provision for bad debts 224 192 2
Loss on impairment of assets 2,981 2,440 145
Changes in operating assets and liabilities:
Accounts receivable 3,436 2,278 (2,987)
Net investment in sales-type leases 317 539 421
Inventories (16) 2,124 915
Prepaid expenses and other assets (534) 263 165
Accounts payable and accrued liabilities 239 (480) (375)
Deferred lease rentals 133 (30) (172)
-------- -------- --------
Net cash provided by (used in) operating activities 300 (1,873) (3,688)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment - net 23 (294) (94)
Proceeds from sale of assets -- 2,182 --
Security devices on lease (15) (25) 5
Intangibles (11) (39) (22)
-------- -------- --------
Net cash provided by (used in) investing activities (3) 1,824 (111)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under the revolving line of credit (155) 310 2,765
Repayment of obligations under capital leases (166) (183) (239)
-------- -------- --------
Net cash provided by (used in) financing activities (321) 127 2,526
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (24) 78 (1,273)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 951 873 2,146
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 927 $ 951 $ 873
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 680 $ 577 $ 509
======== ======== ========
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
======== ======== ========
See notes to consolidated financial statements.
F-5
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
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 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 $2,513,000 as of
December 31, 2000.
Subsequent to year-end, the Company entered into a capital transaction
with Dutch A&A Holding BV ("Dutch A&A") (See Note 19).
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 and Change in Accounting Principle - The Company
manufactures security devices which it offers for sale or lease. In
December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements.
F-6
The SAB summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in the financial
statements.
In accordance with SAB 101, the Company has changed its accounting method
for recognizing revenue on the sale of equipment where post-shipment
obligations exist. Previously, the Company recognized revenue for
equipment when title transferred, generally upon shipment. Beginning with
the first quarter of year 2000, the Company began recognizing revenue when
installation is complete or other post-shipment obligations have been
satisfied. The cumulative effect of the change in accounting method is a
non-cash increase in net loss of $301,000, or $0.03 per share for the year
ended December 31, 2000. Had the Company adopted the provisions of SAB 101
at January 1, 1998, the effect on the consolidated financial statements
would have resulted in a decrease in net loss of approximately $367,000
for the year ended December 31, 1999 and an increase in net loss of
approximately $414,000 for the year ended December 31, 1998.
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, 2000 and 1999 is unbilled
accounts receivable of $77,000 and $1,127,000, 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.
Goodwill and Intangible Assets - Goodwill, which represents the excess of
the purchase price over the fair value of the net assets acquired, is
being amortized over seven years, on a straight-line basis. Cost and
expenses incurred in obtaining patents are amortized over the remaining
life of the patents, not exceeding 17 years, on a straight-line basis. The
Company reviews goodwill and certain identifiable intangibles for
impairment (see Note 18).
F-7
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, 2000 and 1999 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 ($31,000), $35,000 and ($120,000)
for the years ended December 31, 2000, 1999 and 1998, respectively.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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.
Reclassifications - Certain prior year balances have been reclassified to
conform with current year classifications.
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. 138,
which deferred the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. The Company has adopted SFAS No. 133 in the
first quarter of 2001 and does not expect a material impact on the
Company's consolidated financial statements.
F-8
3. FINANCIAL CONDITION AND LIQUIDITY
The Company has incurred reduced revenue levels, decreased financial
position and recurring operating losses over the past several years. To
strengthen the Company's financial position, a number of activities have
been initiated including:
o Investment of $3 million in newly issued shares of the Company's
common stock by Dutch A&A. See Note 19 for details. The transaction
with Dutch A&A will allow the Company to introduce new products,
share resources and simplify the Company's capital structure.
o Improvements in existing products and service capabilities
o Various cost cutting and cost saving initiatives
As a result of these activities, the Company anticipates that current cash
reserves, cash obtained pursuant to the Dutch A&A transaction, existing
lines of credit and cash generated by operations should be sufficient to
meet the Company's working capital requirements, as well as future capital
expenditure requirements, over the next twelve months.
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,
2000 1999
(In Thousands)
Minimum lease payments receivable $ 215 $ 570
Allowance for uncollectible minimum lease payments (10) (29)
Unearned income (21) (40)
----- -----
Net investment 184 501
Less current portion 84 393
----- -----
Noncurrent portion $ 100 $ 108
===== =====
The future minimum lease payments receivable under sales-type leases and
noncancellable operating leases are as follows:
Sales-Type Operating
Year Ending Leases Leases
December 31, (In Thousands)
2001 $103 $ 70
2002 73 26
2003 39 4
2004 -- 4
---- ----
$215 $104
==== ====
F-9
5. INVENTORIES
Inventories consist of the following:
December 31,
2000 1999
(In Thousands)
Raw materials $1,479 $2,333
Work-in-process 2,259 1,482
Finished goods 1,536 1,443
------ ------
$5,274 $5,258
====== ======
Reserves for excess and obsolete inventory totaled $3,354,000 and
$3,404,000 as of December 31, 2000 and 1999, 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,
2000 1999
(In Thousands)
Security devices on lease $ 85 $ 122
Less allowance for depreciation 49 56
------ ------
$ 36 $ 66
====== ======
Depreciation expense in 2000, 1999 and 1998 totaled $45,000, $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) 2000 1999
(In Thousands)
Building 20 $ 3,033 $ 3,033
Machinery and equipment 3-10 2,189 2,567
Furniture, fixtures and
office equipment 3-10 3,680 3,675
Leasehold improvements 5-10 290 290
-------- --------
9,192 9,565
Less allowance for depreciation 5,868 5,631
-------- --------
$ 3,324 $ 3,934
======== ========
Depreciation expense in 2000, 1999 and 1998 totaled $587,000, $720,000 and
$1,025,000, respectively.
F-10
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
2000 1999
(In Thousands)
Accrued salaries, employee benefits and
payroll taxes $ 615 $ 715
Customer deposits 690 231
Accrued termination costs 228 606
Other accrued liabilities 1,100 1,217
-------- --------
$ 2,633 $ 2,769
======== ========
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 (6.65% at December
31, 2000), 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. The Company had borrowings on the line of credit totaling
$2,920,000 and $3,075,000 as of December 31, 2000 and 1999, respectively.
10. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
In December 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,
2001 $ 155
2002 155
2003 155
2004 155
2005 155
Thereafter 1,709
-------
$ 2,484
=======
Rent expense for 2000, 1999 and 1998 was $155,000, $148,000 and $148,000
per year, respectively.
F-11
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,
2001 $ 445
2002 445
2003 387
2004 376
2005 376
Thereafter 4,133
-------
6,162
Less amount representing interest 3,270
-------
Present value of minimum rentals 2,892
Less current portion 124
-------
Noncurrent portion $ 2,768
=======
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 $2,427,000 and
$2,578,000 at December 31, 2000 and 1999, 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 11%.
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, 2000 and 1999, and a net book value of $130,000
and $236,000 at December 31, 2000 and 1999, respectively.
F-12
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:
2000 1999 1998
(In Thousands,
Except per Share Amounts)
Net Loss:
Loss before cumulative effect of accounting
change $ (7,821) $(11,034) $ (4,504)
Effect of preferred stock dividends (1,337) (1,326) (1,263)
-------- -------- --------
(9,158) (12,360) (5,767)
Cumulative effect of accounting change (301) -- --
-------- -------- --------
Net loss attributed to common shareholders $ (9,459) $(12,360) $ (5,767)
Weighted Average Common Shares 9,751 9,751 9,751
-------- -------- --------
Basic and Diluted Earnings per Common Share:
Before cumulative effect of accounting change $ (0.94) $ (1.27) $ (0.59)
Cumulative effect of accounting change (0.03) -- --
-------- -------- --------
Basic and Diluted earnings per Common Share $ (0.97) $ (1.27) $ (0.59)
======== ======== ========
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 normally become
exercisable at a rate of 20% per year over a five-year period and
expire ten years from the date of grant. However, options granted to
management in 2000 vested one-third immediately, one-third after six
months and one-third one year from 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, 2000,
2,414,233 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, 2000.
F-13
Stock option transactions for the years ended December 31, 2000, 1999 and
1998 are as follows:
Weighted Average
Number Exercise
of Shares Price
Balance, January 1, 1998 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 848,500 0.52
Exercised -- -
Canceled (359,602) 1.34
---------- ------
Balance, December 31, 1999 1,658,259 2.21
Granted 612,000 0.07
Exercised -- --
Canceled (255,886) 2.66
---------- ------
Balance, December 31, 2000 2,014,373 $ 1.50
========== ======
Significant option groups outstanding at December 31, 2000 and related
option price and life information were as follows:
Weighted Average
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
----------- ----------- ---------------- -----------
$ 8.42 1,664 5.00 1,664
6.31 171,354 5.15 171,354
3.61 1,331 4.47 1,331
3.01 43,256 4.01 43,256
3.00 45,000 6.13 27,000
3.00 15,000 6.62 9,000
2.40 124,771 3.94 124,771
2.38 253,000 6.19 151,800
2.37 130,000 7.02 52,000
2.37 12,000 7.12 4,800
2.31 499 .01 499
2.00 34,500 7.02 13,800
1.70 998 1.50 998
0.62 357,000 8.04 71,400
0.62 12,000 8.13 2,400
0.31 12,000 9.12 2,400
0.19 200,000 8.75 200,000
0.07 600,000 9.54 200,002
--------- ==== ---------
2,014,373 6.83 1,078,475
========= ==== =========
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.
F-14
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, 2000, options to purchase 2,014,373 shares of common stock
were outstanding at exercise prices ranging from $0.07 to $8.42. At
December 31, 2000, options to purchase an aggregate of 1,078,475 (which
include 343,873 outstanding and exercisable substitute Knogo N.A. options)
common shares were vested and currently exercisable at a weighted average
exercise price of $2.11 and an additional 935,898 options vest at dates
extending through the year 2010. At December 31, 2000, options for 399,860
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
weighted average fair value of the options granted for the year ended
December 31, 2000, 1999 and 1998 is estimated at $0.06, $0.42, and $1.29,
using the Black-Scholes option pricing model with the following weighted
average assumptions: expected life of five years; stock volatility, 260.5%
in 2000, 110.9% in 1999, and 81.6% in 1998; risk free interest rates, 6.2%
in 2000, 4.8% in 1999, and 5.5% in 1998, 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 2000, 1999 and 1998 awards had been amortized
to expense over the vesting period of the awards, pro forma net loss
attributed to common shareholders would have been $(9,929,000) (($1.02)
per diluted share) in FY 2000, $(12,889,000) (($1.32) per diluted share)
in 1999, and $(6,159,000) (($0.63) per diluted share) in 1998. However,
the impact of outstanding nonvested stock options granted prior to 1995
has been excluded from the pro forma calculation; accordingly, the 2000,
1999 and 1998 pro forma adjustments are not indicative of future period
pro forma adjustments, when the calculation will apply to all applicable
stock options.
F-15
12. INCOME TAXES
The components of the Company's income tax provisions are as follows:
2000 1999 1998
(In Thousands)
Current:
Federal $ -- $ -- $ --
State -- -- --
Puerto Rico -- -- 21
----- ----- -----
-- -- 21
----- ----- -----
Deferred:
Puerto Rico -- -- --
----- ----- -----
-- -- 21
----- ----- -----
$ -- $ -- $21
===== ===== =====
The reconciliation between total tax expense and the expected U.S. Federal
income tax is as follows:
2000 1999 1998
(In Thousands)
Expected tax expense (benefit) at 34% $(2,761) $(3,752) $(1,524)
Add (deduct):
Nondeductible expenses 386 1,422 590
U.S. losses producing no tax benefit 2,375 2,330 866
Benefits of nontaxable income of
Puerto Rico subsidiary/losses
producing no tax benefit -- -- 107
Other -- -- (18)
------- ------- -------
$ -- $ -- $ 21
======= ======= =======
Significant components of deferred tax assets and liabilities at December
31, 2000 and 1999 are comprised of:
Deferred Tax Assets
(Liabilities)
2000 1999
(In Thousands)
Assets:
Accounts receivable $ 329 $ 253
Inventories 1,241 1,251
Accrued liabilities 197 184
Property, plant and equipment 91 77
Net operating loss carryforwards 8,655 7,113
Tax credit carryforwards 209 209
-------- --------
Gross deferred tax assets 10,722 9,087
Less valuation allowance 10,692 9,057
-------- --------
30 130
-------- --------
Liabilities:
Tollgate taxes (30) (30)
-------- --------
Gross deferred tax liabilities (30) (30)
-------- --------
Net deferred tax asset (liability) $ -- $ --
======== ========
F-16
The increase in the valuation allowance for the years ended December 31,
2000 and 1999 was primarily attributable to the increase in net operating
loss carryforwards. A full valuation allowance has been recorded against
the net deferred tax assets because it is more likely than not that such
asset will not be realized in the foreseeable future.
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. 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.
b. 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 $117,000, $123,000, and
$130,000 to the Plan for the years ended December 31, 2000, 1999 and
1998, respectively.
c. 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
$445,000.
14. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS
The Company grants credit to customers who are principally in the retail
industry and libraries. During 2000, 1999 and 1998, revenues from a single
customer represented approximately 14%, 19% and 22% of total revenues,
respectively. During 2000 and 1999, revenues from a different customer
represented 15% and 14% of total revenues, respectively. No other customer
accounted for more than 10% of total revenues for fiscal 2000, 1999 and
1998.
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.
F-17
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. 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:
2000 1999 1998
(In Thousands)
EAS $ 7,545 $ 8,983 $ 9,555
CCTV 6,574 7,565 6,892
SentryVision(R) 1,981 1,846 6,151
3M library products 1,103 1,056 1,833
Service revenues and other 2,662 2,831 3,725
------- ------- -------
Total revenues $19,865 $22,281 $28,156
======= ======= =======
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.
In the fourth quarter of 2000, the Company reassessed the carrying value
of the goodwill and related patents generated from the Video Sentry merger
as a result of the introduction of SmartTrack, the next generation in the
SentryVision(R) family of products. Based on a review of the technological
developments in the marketplace, the Company has determined that the
goodwill and related patents associated with the Company's original
traveling CCTV surveillance system no longer provides the Company with a
competitive advantage. As a result, the Company recorded an impairment
charge of $2,981,000 for the year ended December 31, 2000.
These impairment charges were 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 insufficient
estimated future cash flows from the SentryVision(R) system.
19. SUBSEQUENT EVENTS
On January 8, 2001, Dutch A&A Holding BV ("Dutch A&A") acquired 23,050,452
shares of the Company's common stock for $3 million, $1 million of which
was paid in January 2001 and the remaining balance is due in equal $1
million installments on April 30th and July 31, 2001. Dutch A&A is a
Netherlands company which, through its subsidiaries, is in the business of
development,
F-18
manufacture, sale and distribution of various kinds of identification,
access control, anti-theft electronic article surveillance, closed-circuit
television surveillance and accessories.
As of January 8, 2001, Dutch A&A owns 37.5% of the outstanding common
stock of the Company. At any time prior to January 8, 2002, Dutch A&A may
increase its ownership of the Company's common stock to a total of 51% of
the shares of common stock then outstanding. If the average market value
of the Company's common stock, measured over any 10-day trading period
during the one year-period following January 8, 2001, is at least $15.0
million, the purchase price for the additional shares shall be determined
by multiplying the actual number of shares to be purchased by $.001;
otherwise, the purchase price will be $1.5 million. At any time prior to
January 8, 2003, Dutch A&A may increase its ownership of the Company's
common stock to a total of 60% of the shares of common stock then
outstanding. The purchase price for the additional shares shall be
determined as follows: If the average market value of the common stock,
measured over a 10-day period during the two years preceding January 8,
2003, is at least $25 million, the purchase price shall be determined by
multiplying the actual number of shares to be purchased by $.001. If Dutch
A&A previously exercised its right to acquire shares increasing its
investment to 51% of the Company's common stock, but the average market
value test was not met at the time of the second purchase, then the
purchase price shall be $3.5 million; otherwise the purchase price shall
be $5.0 million. As a condition to the investment by Dutch A&A, the
stockholders of the Company elected three nominees of Dutch A&A to the
Board of Directors at a Special Meeting of Stockholders on December 8,
2000. If Dutch A&A has not acquired 51% of the Company's common stock by
January 8, 2003, one of the three nominees of Dutch A&A will resign and be
replaced, with the consent of Dutch A&A, by a nominee of the directors of
the Company who are not nominated by Dutch A&A.
In addition to the election of three nominees of Dutch A&A to the Board of
Directors, other matters which were approved at the December 8, 2000
Special Meeting of Stockholders and became effective on January 8, 2001
were amendments to the Company's certificate of incorporation to: (i)
permit the payment of a dividend of additional shares of Class A Preferred
Stock at the rate of 0.075 shares of Class A Preferred Stock for each
share of Class A Preferred Stock held; (ii) to reclassify Class A
Preferred Stock into shares of common stock on a ratio of five shares of
common stock for each share of Class A Preferred Stock outstanding; and
(iii) to increase the number of the Company's authorized shares of common
stock to 140,000,000.
Also, on December 28, 2000, the Board of Directors increased the number of
directors from five to seven effective upon the closing of the Dutch A&A
investment.
The reclassification of the Class A Preferred Shares will result in a
return to the common shareholders of $27.2 million which will be recorded
in the first quarter of 2001.
******
F-19
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2000, 1999 AND 1998
(In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
Charged to
Balance at Charged to Other Balance
Beginning Cost and Accounts/ Deductions/ at End of
of Year Expenses Describe(1) Describe(2) Year
Descriptions
Year ended December 31, 2000:
Allowance for doubtful accounts $ 683 $ 224 $ 42 $ 59 $ 890
------- ------- ------- ------- -------
Allowance for uncollectible minimum lease payments $ 29 $ (19) $ 10
------- ------- -------
Reserve for excess and obsolete inventory $ 3,404 $ 1,186 $ 1,236 $ 3,354
------- ------- ------- -------
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
------- ------- ------- -------
(1) Recoveries of accounts written off.
(2) Amounts written off.
F-20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
The following sets forth information regarding the persons serving as
Directors of Sentry:
Peter L. Murdoch, age 47, has been the President and Chief Executive
Officer, Director and Chairman of the Board since January 8, 2001. He is also
the President of ID Security Systems Canada Inc. Mr. Murdoch has extensive
experience in the retail security industry as well as in the sales of
technology-based products. He has been Managing Director of ID Security Systems
North America since its inception in 1987. Beginning in 1997 he has served as
member of the management committee of Dutch A&A Holding B.V. Prior to joining ID
Security Systems, Mr. Murdoch was Vice President of Sales for Catalyst
International Business Systems. He is an economics graduate from the University
of Western Ontario. Mr. Murdoch's term as a Director expires at the 2003 Annual
Meeting.
Willem Angel, age 68, has been a Director of Sentry Technology since
January 8, 2001. Mr. Angel was appointed to the Board of Directors when it was
expanded from five to seven members. Mr. Angel is Chairman & C.E.O. Dutch A&A
Holding B.V. and has a long history in the EAS and identification business
dating to the start of ID Engineering in 1970. In 1977 he co-founded ID
Engineering Europe creating an EAS manufacturing and sales organization serving
Western Europe. In 1987, his company expanded into Canada, opening ID Security
Systems Canada Inc, leading to the creation of Dutch A&A Holding in 1989 and the
Dialoc International in 1991 which manufactures and markets EAS, Access Control,
and RFID products to dealers and distributors worldwide. Mr. Angel's term as a
Director expires at the 2001 Annual Meeting.
Cor S.A. De Nood, age 56, has been a Director of Sentry Technology since
January 8, 2001. Mr. De Nood is the Vice President and Chief Technical Officer
of Dutch A&A Holding B.V. In 1977, he co-founded the ID Engineering Europe,
Dutch A&A Holding B.V. in 1989 and Dialoc International B.V. in 1991. As
co-founder of ID Engineering, Cor de Nood has more than 30 years of experience
developing, designing, and manufacturing EAS and identification systems. In his
capacity as Chief Technical Officer of Dutch A&A, Mr. De Nood has developed key
ongoing relationships with Philips Electronics, TNO (the Dutch research council)
and the University of Eindhoven which greatly assist his companies in developing
products and pursuing fundamental research projects. Mr. De Nood's term as a
Director expires at the 2003 Annual Meeting.
Robert D. Furst, Jr., age 48, has been a Director of Sentry Technology
since its inception. Prior thereto he was a Director of Video Sentry
Corporation, our predecessor, from January 1993 until February 1997. He was
Chairman of the Board of Video Sentry from July 1996 and Chief Executive Officer
from August 1996 until February 1997. Mr. Furst was one of the original
shareholders of Video Sentry. He is also the founder and owner of Furst Capital
Management, a firm specializing in trading government and equity securities as
well as commodity futures. Mr. Furst is a member of the Chicago Board of Trade
and has been a securities and commodities trader since 1980. Together with Mr.
Perlmuth, Mr. Furst is one of the two continuing directors on the Board of
Directors after the completion of the Dutch A&A Investment. Mr. Furst's term as
a Director expires at the 2001 Annual Meeting.
Jonathan G. Granoff, age 50, has been a Director of Sentry Technology
since January 8, 2001. Mr. Granoff was appointed to the Board of Directors when
it was expanded from five to seven members. Mr. Granoff is the President of the
Global Security Institute and United Nations representative for
28
Lawyers Alliance for World Security. He is also Chairman of the American Bar
Association Committee on Arms Control and Disarmament. Mr. Granoff has been in
the practice of law since 1979. Formerly Mr. Granoff served at Nutri Systems
Inc. as an attorney and Director of Franchising. Mr. Granoff's term as a
Director expires at the 2002 Annual Meeting.
William A. Perlmuth, age 70, has been a Director of Sentry Technology
since January 1997 and served as Chairman until January 8, 2001. Prior thereto,
Mr. Perlmuth served as a Director of several of our predecessors from 1979 to
February 1997. Mr. Perlmuth has been a partner in the law firm of Stroock &
Stroock & Lavan LLP in New York, New York for more than five years and is
presently of counsel to such firm. Such firm and Mr. Perlmuth have performed
legal services for us. The aggregate amount of fees we paid to Stroock & Stroock
& Lavan LLP was less than 5% of the law firm's gross revenues for the last
fiscal year. We believe that the billing rates for the foregoing legal services
were no less favorable to us than could have been obtained from unaffiliated New
York City based law firms for comparable services. Together with Mr. Furst, Mr.
Perlmuth is one of the two continuing directors on the Board of Directors
following the completion of the Dutch A&A Investment Mr. Perlmuth's term as a
Director expires at the 2002 Annual Meeting.
Executive Officers
The following sets forth information regarding the persons serving as
executive officers of the Company:
Name Age Office
---- --- ------
Peter L. Murdoch........ 47 Our President and Chief Executive
Officer since January 8, 2001. He is
also President of ID Security Systems.
Mr. Murdoch has extensive experience in
the retail security industry as well as
in the sales of technology-based
products. He was Managing Director of ID
Systems North America since its
inception in 1987. Beginning in 1997 he
has served as member of the management
committee of Dutch A&A Holding B.V.
Prior to joining ID Systems, Mr. Murdoch
was Vice President of Sales for Catalyst
International Business Systems. He is an
economics graduate from the University
of Western Ontario.
Peter J. Mundy.......... 44 Our Vice President-Finance and Chief
Financial Officer. Mr. Mundy also serves
as our Secretary and Treasurer. Mr.
Mundy was Vice President - Finance,
Chief Financial Officer, Secretary and
Treasurer of Knogo North America Inc.
from December 1994. Prior thereto, Mr.
Mundy served as an officer of Knogo
Corporation where he was Vice President
- Corporate Controller from May 1994
and, prior to such time, Corporate
Controller and Controller since 1982.
Mr. Mundy is a Certified Public
Accountant.
John F. Whiteman........ 42 Mr. Whiteman became our Senior Vice
President - Sales and Marketing in
January 1998. Prior thereto he was
29
Senior Vice President - Sales and
Marketing of Knogo North America Inc.
since January 1997; Vice President Sales
- West of Knogo North America Inc. and
Knogo Corporation from 1994 to 1996;
and, prior to such time, served in
various sales positions with Knogo
Corporation since 1986.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers, Directors and persons who own more than 10% of
a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the American Stock Exchange. Officers, Directors and greater than
ten-percent Stockholders are required by Securities and Exchange Commission
regulations to furnish the Company with copies of all such reports they file.
Based solely on a review of the copies of such reports furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the fiscal year ended December 31, 2000, all Section 16(a)
filing requirements applicable to its officers, Directors and greater than
ten-percent beneficial owners were complied with.
Item 11. Executive Compensation.
Summary Compensation Table
The following table summarizes the compensation for our fiscal year ended
December 31, 2000 of our Chief Executive Officer and each of three of our other
executive officers:
Long-Term All Other
Annual Compensation Compensation Compensation (1)
------------------- ------------ ----------------
Securities
Name and Underlying
Principal Position Year Salary Bonus Options (#)
- ------------------ ---- ------ ----- -----------
Anthony H.N. Schnelling 2000 $240,000(2) -- -- --
Interim President and CEO 1999 50,000 200,000 --
Thomas A. Nicolette, 2000 102,377 -- -- $ 3,071
Senior Executive Officer(3) 1999 206,941 -- 75,000 4,800
1998 198,380 -- 50,000 4,800
Peter J. Mundy, 2000 126,970 $ 25,394(4) 150,000 4,568
Vice President - Finance, 1999 124,165 -- 35,000 3,725
Secretary and Treasurer 1997 119,028 -- 20,000 3,571
John F. Whiteman 2000 155,906 31,181(4) 150,000 5,100
Sr. Vice President Sales and 1999 152,462 -- 50,000 4,574
Marketing 1997 145,476 -- 30,000 4,364
30
(1) Amounts shown consist of our matching contributions under the Retirement
Savings 401(k) Plan.
(2) Compensation to Mr. Schnelling was paid to Bridge Associates, LLC, of
which he is a member and managing director. Mr. Schnelling resigned on
January 8, 2001.
(3) Mr. Nicolette, who was our CEO until October 15, 1999, resigned as our
employee effective June 12, 2000. Under the terms of the settlement
agreement, Nicolette Consulting Group, Limited will receive $17,500 per
month from 6/00 - 12/00, $7,500 from 1/01 - 4/01, $17,500 from 5/01 - 7/01
and $24,167 from 8/01 - 1/02. In addition, stock options previously
granted to him were vested. All of such options expire at various times
through January 7, 2003.
(4) Amounts represent retention bonuses paid on December 31, 2001.
As to various items of personal benefits, we have concluded that the
aggregate amount of such benefits with respect to each individual does not
exceed the lesser of $50,000 or 10% of the annual salary and bonus reported in
the table for such individual.
Options Granted in Last Fiscal Year
The following table sets forth certain information concerning options granted
during 2000 to each person named in the Summary Compensation Table:
Number Of Potential Realizable Value At Assumed
Securities % Of Total Annual Rate Of Stock Price
Underlying Granted To Appreciation For Option Term(2)(3)
Options Employees In Exercise Expiration -------------------------------------
Name Granted 2000 Price (1) Date 5% 10%
- ---- --------- ------------ --------- ---------- ------- -------
Anthony H.N. Schnelling -- -- -- -- -- --
Thomas A. Nicolette -- -- -- -- -- --
Peter J. Mundy 150,000 25% 0.065 7/17/10 $ 6,133 $15,542
John F. Whiteman 150,000 25% 0.065 7/17/10 6,133 15,512
(1) These options were granted with an exercise price equal to the market
value of the common stock on the date of the grant. All options granted
were incentive stock options of which one-third vest immediately,
one-third after six months and one-third a year from the date of grant.
These options expire after 10 years.
(2) Represents a gain that would be realized assuming the options were held
until expiration and the stock price increased at compounded rates of 5%
and 10% from the base price per share.
(4) The dollar amounts under these columns use the 5% and 10% rates of
appreciation required by the Securities and Exchange Commission. This
presentation is not intended to forecast possible future appreciation of
our common stock.
31
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year End Option
Values
The following table sets forth for each of the persons named in the
Summary Compensation Table the number of options exercised during 2000 and
the amount realized by each such officer. In addition, the table shows the
number of options that the named executive officer held as of December 31,
2000, both exercisable (E) and unexercisable (U), and the value of such
options as of that date.
Number Of Unexercised Value Of Unexercised In The
Options At Year-End (#) Money Options At Year End ($)
Shares
Acquired On Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- ------------ ------------ ------------- -------------
Anthony H.N. Schnelling -- -- E 200,000 E --
U -- U --
Thomas A. Nicolette -- -- E 397,185 E --
U -- U --
Peter J. Mundy -- -- E 159,703 E --
U 156,000 U --
John F. Whiteman -- -- E 114,716 E --
U 174,000 U --
- ----------
Compensation Of Directors
Directors who are also our full-time employees receive no additional
compensation for their services as Directors. In 2000, each non-employee
Director received $12,000 annually for services on our Board and $1,000 per
Board meeting (other than telephonic meetings) attended. In response to Sentry's
financial condition, the Directors agreed to waive their annual retainer for
2001.
In addition, each non-employee Director is eligible to participate in our
1997 Stock Incentive Plan. On February 14, 2000, each non-employee Director, at
that time, received a grant of options to purchase 3,000 shares of our common
stock at an exercise price of $0.3125, vesting in equal portions over a
five-year period. On February 20, 2001, each non-employee Director, at that
time, received a grant of options to purchase 30,000 shares of our common stock
at an exercise price of $0.0625, vesting in equal portions over a three-year
period.
Employment Agreements And Compensation Of Executive Officers; Change Of Control
Arrangements
Anthony H.N. Schnelling is a principal of Bridge Associates, LLC, or
"Bridge Associates." Prior to its name change in August 2000, Bridge Associates
was known as Restoration Management Company, LLC. We retained Bridge Associates
in October 1999 to assist in our efforts to reduce operating expenditures, to
return to profitability, and to further our efforts to find an acquisition
partner or strategic investor. Mr. Schnelling was appointed interim President
and Chief Executive Officer to facilitate the
32
performance of Bridge Associates' services to us.
Compensation paid to Bridge Associates was negotiated at arm's length. In
connection with the negotiation, Bridge Associates, through Mr. Schnelling,
requested and was granted an option to purchase 200,000 shares of our common
stock at an exercise price of $0.188 (which was the fair market value of our
common stock on the date of grant). In granting this option, our Board of
Directors took into account the nature of the task Bridge Associates was
expected to perform, the cash fee being paid to Bridge Associates, and the fact
that the option would have no value to Bridge Associates unless our stock price
increased.
Bridge Associates initially received $20,000 per month for services of Mr.
Schnelling, and additional fees if other Bridge Associates personnel performed
services for us. Beginning August 1, 2000, this compensation arrangement was
changed. Bridge Associates was compensated at the rate of $30,000 per month for
all services rendered by all Bridge Associates personnel, including the services
of Mr. Schnelling. Mr. Schnelling resigned as a Director of the Company on March
2, 2001.
The Board has set Mr. Murdoch's compensation, in the capacity of
President, at an annual salary of $150,000 per year for a term of one year
beginning January 8, 2001. In addition, he received options for 2,000,000 shares
of Sentry common stock at an option price of $0.06 per share. These options
shall be exercisable at any time within five years from the date of employment.
Our Board of Directors approves the compensation paid to our other
executive officers, approving or disapproving the recommendation of the Chief
Executive Officer. The Board of Directors also determines the amount of shares
and exercise prices for any stock option grants under our 1997 Stock Incentive
Plan, and the amount of our matching contribution percentage under our
Retirement Savings 401(k) Plan, respectively.
Currently, two of our executive officers are compensated pursuant to
written employment agreements providing for a base salary. These agreements
provide for annual salary increases intended to maintain the executive's base
salary against increases in the cost of living as measured by the United States
Department of Labor.
The employment agreements of Messrs. Mundy and Whiteman renew
automatically on January 8 for one-year terms. After cost-of-living adjustments,
their annual salaries are presently $131,160 and $161,051, respectively.
The employment agreements of Messrs. Mundy and Whiteman also provide that
in the event of a change in control, the term of each of their employment will
be automatically extended for a period of one year, following the date of such
change in control. Following such change in control, each of such persons will
have the right to terminate his employment for good reason, as defined, while
continuing to receive the salary and bonus otherwise payable thereunder for the
remainder of the employment term. Additionally, the employment agreements
provide that in the event of a change in control all options held by the
employee, whether or not then vested, would fully vest. If the change in control
was not approved by a majority of the Existing Directors (as defined in our
Certificate of Incorporation), each such officer would be entitled to receive,
for each option for which the exercise price is less than the market price of
our common stock, cash in cancellation of such options in an amount equal to
such difference.
On July 17, 2000, we established a retention arrangement for several of
our senior officers, including Messrs. Mundy and Whiteman. They each were
entitled to receive a bonus payment equal to 20% of his annual base compensation
if he were our employee on the earlier of December 31, 2000 or the closing of
the Dutch A&A Investment. These amounts were paid on December 31, 2000. Each
also received a grant of 150,000 options to purchase our common stock at $0.065
per share. These options
33
initially were to vest one-third on grant, one-third six months from the date of
grant, and the remainder on July 17, 2001. As a result of the change of control,
these options are now fully vested.
The Board of Directors endorses the view that the value of compensation
paid to our executive officers, and the Chief Executive Officer in particular,
should be closely linked to increases in the value of our common stock.
Accordingly, our Board supports option awards under our 1997 Stock Incentive
Plan and participation by executive officers in the Retirement Savings 401(k)
Plan, which includes our common stock fund among its investment alternatives. A
substantial portion of the total compensation of the executive officers,
including the Chief Executive Officer, is wholly dependent on increases in the
value of our common stock.
The number of stock options granted to executive officers is not
determined by reference to any formulas but is determined by the Board's
evaluation of the particular officer's ability to influence our long-term growth
and profitability. Our Board also considers our performance against certain of
its competitors, its general performance against internal goals established by
management, and the executive's relative contribution thereto. To provide
further incentive to our senior executive officers, options granted in 1998 were
granted at exercise prices in excess of the then current market value of our
common stock.
34
Performance Graph
[The following information was depicted as a line graph in the printed material]
2/13/97 12/31/97 12/31/98 12/31/99 12/31/00
Sentry Technology Corporation $100 $ 43 $ 18 $ 3 $ 2
S&P 600 Small Cap Index $100 $123 $120 $134 $149
S&P Elec. Equip. Index $100 $131 $174 $258 $238
35
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the beneficial ownership of our common
stock and Class A Preferred Stock at March 29, 2001, as to each (i) beneficial
owner of five percent or more of the common stock, (ii) Sentry Director, (iii)
executive officer of Sentry, and (iv) all Directors and executive officers as a
group. On March 28, 2001, 61,467,872 shares of common stock were outstanding.
Name and Address of Beneficial Owners Shares of Percent
- ------------------------------------- common stock of Class(1)
------------ -----------
Dutch A&A Holding B.V.
Galvinstraat 24
P.O. Box 311
3840 AH Harderwijk
The Netherlands 23,050,452 37.5%
Walter & Edwin Schloss
Associates L.P.
350 Park Avenue
New York, NY 10022 4,095,958 6.7%
Shares of Percent
Directors and Executive Officers Common stock of Class(1)
- -------------------------------- ------------ -----------
Peter L. Murdoch(5) 2,021,500(2) 3.2%
Peter J. Mundy 865,185(3) 1.4%
John F. Whiteman 560,743(4) *
Willem Angel(5) -- *
Cor S. A. De Nood(5) -- *
Jonathan G. Granoff 60,000 *
William A. Perlmuth
c/o Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, NY 10038 6,183,944(6) 10.0%
Robert D. Furst, Jr.
3900 Walden Road 1,373,756(7) 2.2%
Deephaven, MN 55391
All Sentry Directors and executive officers as a group (8 persons) 11,065,129(8) 17.1%
- ----------
* Less than one percent
(1) Based on 61,467,872 shares of common stock outstanding as of March 28,
2001. Each figure showing the percentage of outstanding shares
beneficially owned has been calculated by treating as outstanding and
owned the shares of common stock which could be purchased by the indicated
person within 60 days upon the exercise of stock options.
(2) Includes 2,000,000 shares of common stock issuable upon the exercise of
stock options exercisable within 60 days of the date hereof.
(3) Includes 669,218 shares of common stock issuable upon the exercise of
stock options exercisable within 60 days from the date hereof.
36
(4) Includes 382,296 shares of common stock issuable upon the exercise of
stock options exercisable within 60 days of the date hereof.
(5) Excludes shares of Common Stock owned by Dutch A&A of which Messrs.
Murdoch, Angel and De Nood are shareholders.
(6) Consists of (a) 5,199,499 shares of common stock held by Mr. Perlmuth as
Executor of the Estate of Arthur J. Minasy, (b) 877,517 shares of common
stock held by Mr. Perlmuth as trustee under trusts for the benefit of Mr.
Minasy's adult children, and (c) 23,037 shares of common stock
beneficially owned by Mr. Perlmuth. Also includes 83,892 shares of common
stock issuable upon the exercise of stock options exercisable within 60
days from the date hereof. Under the policies of the law firm of which he
is of counsel, Mr. Perlmuth will share any economic benefits of the
options with the other members of such firm.
(7) Includes 24,000 shares of common stock issuable upon the exercise of stock
options exercisable within 60 days from the date hereof.
(8) Includes 3,159,406 shares of common stock issuable upon the exercise of
stock options exercisable within 60 days from the date hereof.
Item 13. Certain Relationships and Related Transactions.
On January 8, 2001, the Company and Dutch A&A entered into a Distribution
Agreement by which each of them obtained the non-exclusive right to purchase and
sell the other's products. This Agreement is terminable by either party upon 60
days advance notice.
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, 2000 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 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.
10.14 Consulting Agreement, dated as of October 15, 1999, between the
Company and Restoration Management Company, LLC. Incorporated by
reference to Exhibit 10.15 to
37
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
10.15 Amendment to Consulting Agreement dated as of November 9, 1999
between the Company and Restoration Management Company, LLC,
incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
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).
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
38
10.12 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.
10.13 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.
10.16 Third Amendment to the Loan and Security Agreement dated December
29, 1999, between General Electric Capital Corporation and Knogo
North America, Inc., incorporated by reference to Exhibit 10.17 to
Company's annual report on Form 10-K for fiscal 1999.
10.17 Standby Debt Financing Letter by Furst Capital Partners, LLC,
incorporated by reference to Exhibit 10.18 to Company's annual
report on Form 10-K for fiscal 1999.
10.18 First Amendment, dated September 18, 2000, to Lease Agreement (dated
December 24, 1996) between the Company and NOG (NY) QRS 12-23, Inc.,
incorporated by reference to Exhibit 10.19 to Company's Registration
Statement on Form S-4 (No. 333-47018).
10.19 Agreement between the Company, Thomas Nicolette, and Nicolette
Consulting Group, Ltd., dated June 12, 2000, incorporated by
reference to Exhibit 10.20 to Company's Registration Statement on
Form S-4 (No. 333-47018).
10.20 Warrant between the Company and General Electric Capital
Corporation, dated May 11, 2000 for 100,000 shares at $0.18 per
share, incorporated by reference to Exhibit 10.21 to Company's
Registration Statement on Form S-4 (No. 333-47018).
10.21 Warrant between the Company and NOG (NY) QRS 12-23, Inc., dated
September 13, 2000, for 150,000 shares at $0.125 per share,
incorporated by reference to Exhibit 10.22 to Company's Registration
Statement on Form S-4 (No. 333-47018).
10.22 Fourth Amendment and Consent to the Loan and Security Agreement,
dated May 11, 2000, between General Electric Capital Corporation and
Knogo North America, Inc., incorporated by reference to Exhibit
10.23 to Company's Registration Statement on Form S-4 (No.
333-47018).
10.23 Fifth Amendment and Consent to the Loan and Security Agreement,
dated August 24, 2000, between General Electric Capital Corporation
and Knogo North America, Inc., incorporated by reference to Exhibit
10.24 to Company's Registration Statement on Form S-4 (No.
333-47018).
10.24 Sixth Amendment and Consent to the Loan and Security Agreement,
dated September 1, 2000 between General Electric Capital Corporation
and Knogo North America, Inc., incorporated by reference to Exhibit
10.25 to Company's Registration Statement on Form S-4 (No.
333-47018).
10.25 Seventh Amendment and Consent to the Loan and Security Agreement,
dated September
39
1, 2000 between General Electric Capital Corporation and Knogo North
America, Inc.
10.26 Securities Purchase Agreement, dated August 8, 2000, between Sentry
Technology Corporation and Dutch A&A, incorporated by reference to
Exhibit 10.1 to Company's Current Report on Form 8-K, dated August
10, 2000.
10.27 Distribution Agreement, dated January 8, 2001, between Sentry and
Dutch A&A, incorporated by reference to Exhibit B of Exhibit 10.1 to
the Company's Current Report on Form 8-K, dated August 10, 2000.
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) Reports on Form 8-K.
On January 22, 2001, the Company filed a current report on Form 8-K with
respect to the purchase by Dutch A&A of 23,050,452 shares of the Company's
common stock.
On March 8, 2001, the Company filed a current report on Form 8-K with
respect to the resignation of Anthony H.N. Schnelling as a Director of the
Company.
40
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: March 31, 2001
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/ Peter L. Murdoch Chief Executive Officer and Director
- ------------------------------
Peter L. Murdoch
/s/ Peter J. Mundy Vice President-Finance,
- ------------------------------ Chief Financial and Accounting Officer,
Peter J. Mundy Secretary and Treasurer
/s/ William A. Perlmuth Director
- ------------------------------
William A. Perlmuth
/s/ Willem Angel Director
- ------------------------------
Willem Angel
/s/ Robert D. Furst, Jr. Director
- ------------------------------
Robert D. Furst, Jr.
/s/ Jonathan G. Granoff Director
- ------------------------------
Jonathan G. Granoff
/s/ Cor S.A. De Nood Director
- ------------------------------
Cor S.A. De Nood
Dated: March 31, 2001
41
EXHIBIT INDEX
10.25 Seventh Amendment and Consent to the Loan and Security Agreement,
dated September 1, 2000 between General Electric Capital Corporation
and Knogo North America, Inc.
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
42