As filed with the Securities and Exchange Commission on January 21, 1997
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
SENTRY TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
---------------------------
Delaware 3699 96-11-3349733
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
---------------------------
350 Wireless Boulevard
Hauppauge, New York 11788
516-232-2100
(Address, including ZIP code, and telephone number, including area code,
of registrant's principal executive offices)
---------------------------
Peter J. Mundy
Vice President and Chief Financial Officer
350 Wireless Boulevard
Hauppauge, New York 11788
516-232-2100
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
Copies to:
Robert M. Smith David H. Kaufman
Dewey Ballantine Stroock & Stroock & Lavan
333 South Hope Street, Suite 3000 7 Hanover Square
Los Angeles, CA 90071 New York, New York 10004
---------------------------
Approximate date of commencement of proposed sale of the securities to
the public: Upon consummation of the transactions described herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: |_|
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Proposed maximum Proposed maximum
Title of each class of Amount to be offering price aggregate Amount of
securities to be registered registered(1) per share(2) offering price(2) registration fee(4)
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value............... 9,643,685 $3.89 $37,549,332.11 $11,378.59
- ----------------------------------------------------------------------------------------------------------------------------------
Class A Preferred Stock, $0.001 par value ... 4,801,723 None(3) None(3) None(3)
===================================================================================================================================
<FN>
(1) Based upon the maximum number of shares expected to be issued in connection
with the transactions described herein.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(f)(1). The proposed maximum aggregate offering
price is based upon the sum of (a) the product of (i) $2.75 (the average of
the bid and asked prices of Video Common Stock on January 16, 1997 on the
NASDAQ Stock Market's SmallCap Market) times (ii) 5,666,076 (the sum of the
number of shares of Video Common Stock outstanding plus the number of
shares of Video Common Stock issuable prior to the Effective Time upon the
exercise of options and warrants to purchase Video Common Stock) and (b)
the product of (i) $5.50 (the average of the high and low prices of Knogo
Common Stock on January 16, 1997 on the Consolidated Reporting System)
times (ii) 3,994,113 (the sum of the number of shares of Knogo Common Stock
outstanding plus the number of shares of Knogo Common Stock issuable prior
to the Effective Time upon the exercise of options to purchase Knogo Common
Stock). The proposed maximum offering price per share is based upon the
proposed maximum aggregate offering price divided by the amount to be
registered.
(3) For purposes of calculating the registration fee, no separate consideration
will be received for the Class A Preferred Stock issuable pursuant to the
transactions described herein. For purposes of such calculation, the full
market value of the securities being exchanged for the Common Stock and the
Class A Preferred Stock has been ascribed to the Common Stock.
(4) Pursuant to Rule 457(b), the registration fee hereunder is offset by the
fee of $9,043.49 previously paid on November 29, 1996 in connection with
the filing with the Commission of the preliminary proxy material relating
to the transactions described herein.
</FN>
---------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
VIDEO SENTRY CORPORATION LOGO
Dear Video Sentry Owner:
You are cordially invited to attend a Special Meeting of Shareholders
(the "Video Meeting") of Video Sentry Corporation ("Video") to be held on
February 6, 1997, at 10:00 a.m. at the offices of Winthrop & Weinstine, 3000
Dain Bosworth Plaza, 60 South Sixth Street, Minneapolis, Minnesota.
At the Video Meeting, you will be asked to approve the merger of Video
and Knogo North America Inc. ("Knogo") pursuant to an Amended and Restated
Agreement and Plan of Reorganization and Merger, dated as of November 27, 1996,
as amended by Amendment No. 1 to Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of January 10, 1997 (collectively, the
"Merger Agreement").
Upon completion of this merger:
o Video and Knogo will become wholly-owned subsidiaries of a new
holding company named Sentry Technology Corporation ("Sentry");
o each outstanding share of Video Common Stock will be converted into
the right to receive one share of Sentry Common Stock; and
o each 1.2022 outstanding shares of Knogo Common Stock will be
converted into the right to receive one share of Sentry Common Stock
plus one share of Sentry Class A Preferred Stock.
A detailed description of the Merger Agreement and the proposed merger
are set forth in the accompanying Joint Proxy Statement/Prospectus, which you
should read carefully.
After careful consideration, your Board of Directors has determined
that the transactions contemplated by the Merger Agreement are in the best
interests of the shareholders of Video. Accordingly, the Board has approved the
Merger Agreement and recommends that all Video shareholders vote for its
approval. I firmly believe, as does your entire Board of Directors, that
combining the complementary business, management and financial resources of
Video and Knogo will create a company that is even better positioned to meet the
increased challenges of the security, surveillance and theft detection
industries.
Your vote is important. Failure to vote or to return your proxy card
will have the same effect as a vote against the merger. Therefore, whether or
not you plan to attend the Video Meeting in person and regardless of the number
of shares you own, I urge you to complete, sign and date the enclosed proxy card
and return it in the enclosed prepaid envelope as soon as possible. You may, of
course, attend the Video Meeting and vote in person, even if you have previously
returned your proxy card.
Sincerely yours,
Robert D. Furst, Jr.
Chairman and
Chief Executive Officer
January 23, 1997
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY
VIDEO SENTRY CORPORATION
6365 Carlson Drive
Eden Prairie, Minnesota 55346
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
February 6, 1997
----------------
A Special Meeting of Shareholders of Video Sentry Corporation, a
Minnesota corporation ("Video"), will be held starting at 10:00 a.m., local
time, on February 6, 1997, at the offices of Winthrop & Weinstine, 3000 Dain
Bosworth Plaza, 60 South Sixth Street, Minneapolis, Minnesota (the "Video
Meeting"). Attendance at the Video Meeting will be limited to shareholders of
record on January 10, 1997, or their proxies, beneficial owners having evidenced
ownership on that date, and invited guests of Video.
The purposes of the meeting are:
1. To consider and vote upon a proposal (the "Video Proposal")
to approve and adopt an Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of November 27, 1996, as amended by
Amendment No. 1 to Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of January 10, 1997 (collectively,
the "Merger Agreement"), among Video, Knogo North America Inc., a
Delaware corporation ("Knogo"), Sentry Technology Corporation, a
Delaware corporation ("Sentry"), Viking Merger Corp., a Minnesota
corporation and a wholly-owned subsidiary of Sentry ("Video Merger
Corp."), and Strip Merger Corp., a Delaware corporation and a
wholly-owned subsidiary of Sentry ("Knogo Merger Corp."). The Merger
Agreement contemplates, among other things, that (a) Video Merger Corp.
will be merged with and into Video, and Knogo Merger Corp. will be
merged with and into Knogo, with the result that Video and Knogo each
will become wholly-owned subsidiaries of Sentry, (b) each outstanding
share of Video common stock, par value $0.01 per share ("Video Common
Stock"), will be converted into the right to receive one share of
Sentry common stock, par value $0.001 per share ("Sentry Common
Stock"), and (c) each outstanding 1.2022 shares of Knogo common stock,
par value $0.01 per share, will be converted into the right to receive
one share of Sentry Common Stock plus one share of Class A Preferred
Stock of Sentry, par value $0.001 per share; and
2. To transact such other business as may properly come before
the Video Meeting or at any adjournments or postponements thereof.
The terms of the Video Proposal and the Sentry Common Stock to be
issued in connection therewith are described in detail in the accompanying Joint
Proxy Statement/Prospectus. To ensure that your vote will be counted, please
complete, date and sign the enclosed proxy card and return it promptly in the
enclosed postage-paid envelope, whether or not you plan to attend the Video
Meeting. You may revoke your proxy in the manner described in the accompanying
Joint Proxy Statement/Prospectus at any time before it is voted at the Video
Meeting.
Holders of record of shares of Video Common Stock at the close of
business on January 10, 1997, the record date for the Video Meeting, are
entitled to notice of and to vote at the Video Meeting or at any postponements
or adjournments thereof. The affirmative vote of the holders of a majority of
the outstanding shares of Video Common Stock is required to approve the Video
Proposal.
By Order of the Board of Directors
Ronald W. McClurg
Secretary
Eden Prairie, Minnesota
January 23, 1997
IMPORTANT
Whether or not you plan to attend the Video Meeting in person, please
complete, sign, date and return the enclosed Proxy Card as soon as possible. A
return envelope is provided for your convenience. You may revoke your Proxy at
any time before it is voted by delivering to the Secretary of Video at 6365
Carlson Drive, Eden Prairie, Minnesota 55346 a signed notice of revocation or a
later dated signed Proxy Card or by attending the Video Meeting and voting in
person.
DO NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARD.
[KNOGO LOGO]
Dear Knogo Stockholder:
You are cordially invited to attend a Special Meeting of stockholders
of Knogo North America Inc. ("Knogo") to be held at 11:00 a.m., New York time,
on February 6, 1997 at Knogo's corporate headquarters, 350 Wireless Boulevard,
Hauppauge, New York (the "Knogo Meeting"). I hope that you will be present or
represented by proxy at this important meeting.
At the Knogo Meeting, you will be asked to approve the Amended and
Restated Agreement and Plan of Reorganization and Merger, dated as of November
27, 1996, as amended by Amendment No. 1 to Amended and Restated Agreement and
Plan of Reorganization and Merger, dated as of January 10, 1997 (collectively,
the "Merger Agreement"), among Knogo, Video Sentry Corporation ("Video"), Sentry
Technology Corporation ("Sentry"), Viking Merger Corp. and Strip Merger Corp.
As more fully set forth in the Merger Agreement and the Joint Proxy
Statement/Prospectus which accompany this letter, the Boards of Directors of
Knogo and Video have agreed on a merger between their two companies. The Boards
believe that the merger will strengthen the business prospects of both companies
and as a result will benefit their stockholders. I urge you to carefully read
the accompanying materials as you consider your vote on the merger.
When the merger is completed, Knogo and Video will become wholly-owned
subsidiaries of Sentry. Sentry is a holding company that was recently formed for
purposes of the proposed merger. After the merger, Sentry will be headquartered
in Hauppauge, New York.
As a result of the merger, each 1.2022 outstanding shares of Knogo
common stock will be converted into the right to receive one share of Sentry
common stock plus one share of Sentry Class A preferred stock. Each outstanding
share of Video common stock will be converted into the right to receive one
share of Sentry common stock.
The Board of Directors of Knogo has received the written opinion, dated
October 10, 1996, of Knogo's financial advisor, Donald & Co. Securities Inc.
that as of such date and based upon and subject to certain matters stated
therein, the consideration to be received in the merger by Knogo stockholders is
fair to such holders from a financial point of view. Such opinion was confirmed
as of January 21, 1997.
Your Board of Directors, after careful consideration, has approved the
Merger Agreement and the transactions contemplated thereby. Your Board believes
that the merger is fair to and in the best interests of Knogo stockholders. As
such, your Board of Directors unanimously recommends that you vote FOR approval
of the Merger Agreement and the transactions contemplated thereby.
Knogo stockholders are entitled to vote all shares of Knogo common
stock held by them on January 10, 1997, which is the record date for the Knogo
Meeting.
YOUR VOTE IS VERY IMPORTANT. Regardless of the number of shares you may
own, it is important that they are represented and voted. If you fail to return
the enclosed proxy card, the effect in most cases will be a vote against the
merger. Therefore, whether or not you plan to attend the Knogo Meeting, please
sign, date and mail, as soon as possible, your proxy card in the return envelope
provided. If you sign, date and mail your proxy card without indicating how you
want to vote, your vote will be counted as a vote in favor of the merger. You
may, of course, attend the Knogo Meeting and vote in person, even if you have
previously returned a proxy card.
Your cooperation is appreciated.
Sincerely,
THOMAS A. NICOLETTE
President and Chief Executive Officer
January 23, 1997
KNOGO NORTH AMERICA INC.
350 Wireless Boulevard
Hauppauge, New York 11788
------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 6, 1997
------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Knogo
North America Inc. ("Knogo") will be held at Knogo's corporate headquarters, 350
Wireless Boulevard, Hauppauge, New York, on February 6, 1997, at 11:00 a.m., New
York time (the "Knogo Meeting"), for the following purposes:
1. To consider and vote on a proposal (the "Knogo Merger
Proposal") to approve and adopt the Amended and Restated Agreement and
Plan of Reorganization and Merger, dated as of November 27, 1996, as
amended by Amendment No. 1 to Amended and Restated Agreement and Plan
of Reorganization and Merger, dated as of January 10, 1997
(collectively, the "Merger Agreement"), among Video Sentry Corporation,
a Minnesota corporation ("Video"), Knogo, Sentry Technology
Corporation, a Delaware corporation recently formed to act as a holding
company ("Sentry"), Viking Merger Corp., a Minnesota corporation
("Video Merger Corp."), and Strip Merger Corp., a Delaware corporation
("Knogo Merger Corp."), and the transactions contemplated by the Merger
Agreement, pursuant to which:
(a) Knogo Merger Corp. will be merged with and into
Knogo, leaving Knogo as a wholly-owned subsidiary of Sentry
(the "Knogo Merger");
(b) Video Merger Corp. will be merged with and into
Video, leaving Video as a wholly- owned subsidiary of Sentry
and a sister corporation of Knogo (the "Video Merger" and,
collectively with the Knogo Merger, the "Merger");
(c) Each 1.2022 shares of common stock of Knogo, par
value $0.01 per share (the "Knogo Common Stock"), outstanding
at the effective time of the Knogo Merger will be converted
into the right to receive merger consideration in the form of
one share of common stock of Sentry, par value $0.001 per
share (the "Sentry Common Stock"), and one share of Class A
preferred stock of Sentry, par value $0.001 per share, as more
fully described in the accompanying Joint Proxy
Statement/Prospectus;
(d) Each share of common stock of Video, par value
$0.01 per share, outstanding at the effective time of the
Video Merger will be converted into the right to receive
merger consideration in the form of one share of Sentry Common
Stock, as more fully described in the accompanying Joint Proxy
Statement/Prospectus;
subject to and as more fully described in the Merger Agreement, the
full text of which is attached hereto as Appendix A to the accompanying
Joint Proxy Statement/Prospectus; and
2. To transact such other business as may properly come before
the Knogo Meeting or any adjournment thereof.
Only holders of Knogo Common Stock of record at the close of business
on January 10, 1997 (the "Knogo Record Date") are entitled to notice of and to
vote at the Knogo Meeting or any adjournments or postponements thereof. Approval
of the matters to be voted upon in connection with the Knogo Merger requires the
affirmative
vote of a majority of the outstanding shares of Knogo Common Stock entitled to
vote thereon, in person or by proxy, at the Knogo Meeting.
By Order of the Board of Directors,
PETER J. MUNDY
Secretary
Hauppauge, New York
January 23, 1997
PLEASE MARK, SIGN, DATE AND RETURN THE ACCOMPANYING FORM OF PROXY AS
PROMPTLY AS POSSIBLE IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN
TO ATTEND THE KNOGO MEETING. YOUR PROXY MAY BE REVOKED, EITHER IN
WRITING OR BY VOTING IN PERSON AT THE KNOGO MEETING, AT ANY TIME PRIOR
TO THE EXERCISE OF THE PROXY.
THE BOARD OF DIRECTORS OF KNOGO UNANIMOUSLY RECOMMENDS THAT KNOGO STOCKHOLDERS
VOTE TO APPROVE THE MATTERS TO BE VOTED UPON AT THE KNOGO MEETING.
PLEASE DO NOT SEND IN ANY SHARE CERTIFICATES AT THIS TIME.
[LOGO] [LOGO]
VIDEO SENTRY CORPORATION KNOGO NORTH AMERICA INC.
JOINT PROXY STATEMENT
For Special Meetings of
Shareholders of Video Sentry Corporation
and
Stockholders of Knogo North America Inc.
to be held February 6, 1997
---------------------
[NEW LOGO]
Sentry Technology Corporation
PROSPECTUS
This Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus") is being furnished to holders of common stock of Video
Sentry Corporation, a Minnesota corporation ("Video"), in connection with the
solicitation of proxies by the Board of Directors of Video (the "Video Board")
for use at its special meeting of shareholders to be held on February 6, 1997,
or any adjournment or postponement thereof (the "Video Meeting"), and to holders
of common stock of Knogo North America Inc., a Delaware corporation ("Knogo"),
in connection with the solicitation of proxies by the Board of Directors of
Knogo (the "Knogo Board") for use at its special meeting of stockholders to be
held on February 6, 1997, or any adjournment or postponement thereof (the "Knogo
Meeting," and together with the Video Meeting, the "Special Meetings").
The Video Meeting has been called to consider and vote upon a proposal
(the "Video Proposal") to approve and adopt an Amended and Restated Agreement
and Plan of Reorganization and Merger, dated as of November 27, 1996, as amended
by Amendment No. 1 to Amended and Restated Agreement and Plan of Reorganization
and Merger, dated as of January 10, 1997 (collectively, the "Merger Agreement"),
by and among Video, Knogo, Sentry Technology Corporation, a Delaware corporation
("Sentry"), Viking Merger Corp., a Minnesota corporation and a wholly-owned
subsidiary of Sentry ("Video Merger Corp."), and Strip Merger Corp., a Delaware
corporation and a wholly-owned subsidiary of Sentry ("Knogo Merger Corp."),
which provides that, among other things, Video Merger Corp. will merge with and
into Video (the "Video Merger"), as a result of which Video will become a
wholly-owned subsidiary of Sentry.
The Knogo Meeting has been called to consider and vote upon a proposal
(the "Knogo Proposal"), to approve and adopt the Merger Agreement, which
provides that, among other things, Knogo Merger Corp. will merge with and into
Knogo (the "Knogo Merger"), as a result of which Knogo will become a
wholly-owned subsidiary of Sentry.
The reorganization of the business of Video and Knogo contemplated by
the Merger Agreement is referred to herein as the "Merger." As a result of the
Merger, each of Video and Knogo will become a wholly-owned subsidiary of Sentry.
This Joint Proxy Statement/Prospectus also serves as a prospectus of
Sentry with respect to up to (i) 9,643,685 shares of common stock, par value
$0.001 per share (the "Sentry Common Stock"), that will be issued to holders of
outstanding shares of Video Common Stock, par value $0.01 per share (the "Video
Common Stock"), upon consummation of the Video Merger and to holders of
outstanding shares of Knogo Common Stock, par value $0.01 per share (the "Knogo
Common Stock"), upon consummation of the Knogo Merger, and (ii) 4,801,723 shares
of Class A Preferred Stock of Sentry, par value $0.001 per share (the "Sentry
Class A Preferred Stock"), that will be issued to holders of outstanding shares
of Knogo Common Stock upon consummation of the Merger. See "THE MERGER AGREEMENT
- -- Conversion of Video Common Stock" and "THE MERGER AGREEMENT -- Conversion of
Knogo Common Stock."
This Joint Proxy Statement/Prospectus and accompanying form of proxy
are first being mailed to the shareholders of Video and the stockholders of
Knogo on or about January 23, 1997.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is January 21, 1997.
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION ..................................................... v
SUMMARY ................................................................... 1
The Companies ........................................................ 1
The Special Meetings ................................................. 1
The Merger Agreement ................................................. 2
The Merger ........................................................... 4
Risk Factors ......................................................... 5
Summary Selected Historical and Unaudited Pro Forma
Combined Condensed Financial Information ............................. 6
Comparative Per Share Data ........................................... 9
Comparative Market Prices and Dividends .............................. 10
Listing of Sentry Common Stock and Sentry Class A Preferred Stock .... 10
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS ................. 11
RISK FACTORS .............................................................. 11
Risks Relating to the Merger ......................................... 11
Risks Relating to Sentry ............................................. 12
THE SPECIAL MEETINGS ...................................................... 19
Times and Places; Purposes ........................................... 19
Voting Rights; Votes Required for Approval ........................... 19
Proxies .............................................................. 20
THE MERGER ................................................................ 22
Certain Effects of the Merger Upon Video ............................. 22
Certain Effects of the Merger Upon Knogo ............................. 22
Background ........................................................... 22
Recommendation of Video Board; Video's Reasons for the Merger ........ 25
Recommendation of Knogo Board; Knogo's Reasons for the Merger ........ 26
Fairness Opinions .................................................... 28
Interests of Certain Persons in the Merger ........................... 34
Accounting Treatment ................................................. 36
Certain Federal Income Tax Consequences .............................. 36
Stock Exchange Listing ............................................... 39
Federal Securities Laws Consequences ................................. 39
Dissenters' Rights ................................................... 40
THE MERGER AGREEMENT ...................................................... 44
The Mergers .......................................................... 44
Conversion of Video Common Stock ..................................... 44
Conversion of Knogo Common Stock ..................................... 45
Exchange Procedure ................................................... 45
Certain Representations and Warranties ............................... 46
Certain Covenants .................................................... 46
Closing Conditions ................................................... 50
Termination .......................................................... 50
BUSINESS OF VIDEO ......................................................... 52
General .............................................................. 52
Business Strategy .................................................... 52
Market Overview ...................................................... 53
Current Products ..................................................... 54
Customer Applications ................................................ 55
i
Page
----
Customers ............................................................ 56
Sales, Marketing and Customer Service ................................ 57
Product Development .................................................. 57
Manufacturing and Installation ....................................... 58
Competition .......................................................... 58
Patents and Intellectual Property .................................... 58
Employees ............................................................ 59
Facilities ........................................................... 59
Legal Proceedings .................................................... 59
Committees of the Board of Directors ................................. 59
Director Compensation ................................................ 59
Executive Compensation ............................................... 60
Employment Agreements ................................................ 60
Stock Options ........................................................ 60
Stock Purchase Plan .................................................. 61
Profit Sharing Plan .................................................. 61
Indemnification and Waiver of Director Liability ..................... 61
VIDEO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................. 62
Overview ............................................................. 62
Results of Operations ................................................ 62
Net Operating Loss Carryforward ...................................... 64
Liquidity and Capital Resources ...................................... 64
Inflation ............................................................ 65
VIDEO SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ...... 66
CERTAIN TRANSACTIONS OF VIDEO ............................................. 67
BUSINESS OF KNOGO ......................................................... 68
General .............................................................. 68
EAS Systems .......................................................... 69
Other Loss Prevention Products ....................................... 70
Production ........................................................... 70
Marketing ............................................................ 71
Service .............................................................. 72
Competition .......................................................... 72
Patents and Other Intellectual Property .............................. 72
Research and Development ............................................. 73
Regulation ........................................................... 73
Employees ............................................................ 73
Director Compensation ................................................ 73
Executive Compensation ............................................... 74
Summary Compensation Table ........................................... 75
Knogo Options Granted in Last Fiscal Year ............................ 75
Knogo Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values ................................... 76
Knogo Executive Employment Agreements; Change In Control Arrangements 76
Properties ........................................................... 77
Legal Proceedings .................................................... 77
KNOGO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................. 78
Results of Operations ................................................ 78
Liquidity and Capital Resources ...................................... 81
Inflation ............................................................ 82
ii
Page
----
Recent Accounting Pronouncements........................................ 82
KNOGO SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................................................ 83
CERTAIN TRANSACTIONS OF KNOGO................................................ 84
BUSINESS OF SENTRY........................................................... 85
MANAGEMENT OF SENTRY......................................................... 86
Directors............................................................... 86
Compensation of Directors............................................... 87
Committees of the Board of Directors.................................... 87
Officers................................................................ 88
Sentry Employment Agreements and Compensation of Executive Officers..... 88
Sentry 1997 Stock Incentive Plan........................................ 89
Sentry Retirement Savings 401(k) Plan................................... 95
SENTRY SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................................................ 96
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION.................. 97
SELECTED HISTORICAL FINANCIAL INFORMATION OF VIDEO........................... 98
SELECTED HISTORICAL FINANCIAL INFORMATION OF KNOGO........................... 99
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS..................100
COMPARISON OF STOCKHOLDERS' RIGHTS WITH RESPECT TO SENTRY AND VIDEO..........106
COMPARISON OF STOCKHOLDERS' RIGHTS WITH RESPECT TO SENTRY AND KNOGO..........113
DESCRIPTION OF SENTRY CAPITAL STOCK..........................................114
Authorized Capital Stock................................................114
Common Stock............................................................114
Preferred Stock.........................................................115
Certain Charter and By-Law Provisions ..................................118
Transfer Agent and Registrar............................................119
LEGAL MATTERS................................................................120
EXPERTS......................................................................120
FUTURE STOCKHOLDER PROPOSALS.................................................120
iii
APPENDIX A - Amended and Restated Agreement and Plan of Reorganization and
Merger, dated as of November 27, 1996, together with Amendment No.
1 to Amended and Restated Agreement and Plan of Reorganization and
Merger, dated as of January 10, 1997 among Video Sentry
Corporation, Knogo North America Inc., Sentry Technology
Corporation, Viking Merger Corp. and Strip Merger Corp.
APPENDIX B - Fairness Opinion of Alex. Brown & Sons Incorporated
APPENDIX C - Fairness Opinion of Donald & Co. Securities Inc.
APPENDIX D - Section 302A.473 of the Minnesota Business Corporation Act
APPENDIX E - Section 262 of the Delaware General Corporation Law
APPENDIX F - Form of Amended and Restated Certificate of Incorporation of
Sentry; Form of Certificate of Designations of Sentry Class A
Preferred Stock
APPENDIX G - Form of Bylaws of Sentry
APPENDIX H - Form of Proxy of Video Sentry Corporation
APPENDIX I - Form of Proxy of Knogo North America Inc.
iv
No person has been authorized to give any information or make any
representation not contained in this Joint Proxy Statement/Prospectus and, if so
given or made, such information or representation must not be relied upon as
having been authorized. This Joint Proxy Statement/Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than those to which it relates or an offer to sell or a solicitation of an
offer to buy any securities in any jurisdiction in which, or to any person to
whom, it is unlawful to make such offer or solicitation. Neither the delivery of
this Joint Proxy Statement/Prospectus nor the sale of any securities hereunder
shall, under any circumstances, create an implication that there has been no
change in the affairs of Video or Knogo since the date hereof or that the
information herein is correct as of any time subsequent to its date.
AVAILABLE INFORMATION
Video and Knogo are each subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the
following Regional Offices of the Commission: Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. Copies of certain
Commission filings may also be obtained through commercial document retrieval
services and through the Commission's Web site located at http://www.sec.gov.
Video Common Stock is listed on the NASDAQ Stock Market's SmallCap Market (the
"NASDAQ SmallCap") and such material may be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006. Knogo Common Stock is listed on the American Stock
Exchange (the "AMEX") and such material may be inspected at the offices of the
AMEX, 86 Trinity Place, New York, New York 10006. After consummation of the
Merger, Video and Knogo will no longer file reports, proxy statements or other
information with the Commission. Instead, such information would be provided, to
the extent required, in filings made by Sentry.
Sentry has filed with the Commission a registration statement on Form
S-4 under the Securities Act of 1933, as amended (the "Act"), relating to shares
of Sentry Common Stock and Sentry Class A Preferred Stock that are proposed to
be issued in connection with the Merger to holders of Video Common Stock and
Knogo Common Stock (together with all amendments, exhibits and schedules
thereto, the "Registration Statement"). See "THE MERGER AGREEMENT -- Conversion
of Video Common Stock" and "THE MERGER AGREEMENT -- Conversion of Knogo Common
Stock." This Joint Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement filed by Sentry with the
Commission, certain portions of which are omitted in accordance with the rules
and regulations of the Commission. Such additional information is available for
inspection and copying at the offices of the Commission. Statements contained in
this Joint Proxy Statement/Prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
v
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SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Joint Proxy Statement/Prospectus. This summary is
not intended to be complete and is qualified in its entirety by the more
detailed information contained elsewhere in this Joint Proxy
Statement/Prospectus, the Appendices hereto and the documents referred to
herein. Shareholders of Video and stockholders of Knogo are urged to review this
entire Joint Proxy Statement/Prospectus carefully, including the Appendices
hereto and such other documents.
The Companies
Video. Video designs, manufactures and markets a patented traveling
closed circuit television ("CCTV") surveillance system which continues to be the
only proven, commercially accepted traveling CCTV system available. This system
provides complete coverage for retail register lanes and aisles, stockrooms,
shipping and receiving, distribution, industrial and commercial facilities and
for parking garages. The system consists of one or two pan/tilt/zoom ("PTZ")
cameras. The patented traveling CCTV system, along with other complementary
products provided by Video, have proven well suited for loss prevention and
theft detection in retail stores, home centers, distribution centers, parking
garages, commercial/industrial and other applications. Video was founded in 1990
and made its first sales in 1992. The mailing address of Video's principal
executive office is 6365 Carlson Drive, Eden Prairie, Minnesota, 55346; its
telephone number is (612) 934-9900. See "BUSINESS OF VIDEO."
Knogo. Knogo designs, manufactures, sells, installs and services a
complete line of electronic article surveillance ("EAS") equipment in the United
States, Canada and Puerto Rico. Knogo's products are primarily used 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 and sporting goods stores. 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 for patient control, in hospitals for control of linen supplies and in a
variety of other hard goods applications. Knogo was formed in August 1994 as
part of a spin-off transaction. Knogo's corporate predecessor had been in
business for nearly 30 years. The mailing address of Knogo's principal executive
office is 350 Wireless Boulevard, Hauppauge, New York 11788; its telephone
number is (516) 232-2100. See "BUSINESS OF KNOGO."
Sentry. Sentry is a newly formed Delaware corporation and a
wholly-owned subsidiary of Video that has not, to date, conducted any activities
other than those incident to its formation, its execution of the Merger
Agreement, its participation in the preparation of this Joint Proxy
Statement/Prospectus and other actions taken in contemplation of the
consummation of the Merger. As a result of the Merger, Video Merger Corp. and
Knogo Merger Corp., wholly-owned subsidiaries of Sentry, will merge with and
into Video and Knogo, respectively, and Video and Knogo will become wholly-owned
subsidiaries of Sentry. Accordingly, the business of Sentry will be the business
currently conducted by Video and Knogo. Upon consummation of the Merger (the
"Effective Time"), the mailing address of Sentry's principal executive offices
will be 350 Wireless Boulevard, Hauppauge, New York 11788; its telephone number
will be (516) 232-2100. See "BUSINESS OF SENTRY."
The Special Meetings
Video. The Video Meeting will be held at the offices of Winthrop &
Weinstine, 3000 Dain Bosworth Plaza, 60 South Sixth Street, Minneapolis,
Minnesota on February 6, 1997, starting at 10:00 a.m., local time. See "THE
SPECIAL MEETINGS." At the Video Meeting, holders of Video Common Stock will be
asked to approve and adopt the Video Proposal. The Merger Agreement is attached
hereto as Appendix A. See "THE MERGER" and "THE MERGER AGREEMENT."
Holders of record of Video Common Stock at the close of business on
January 10, 1997 (the "Video Record Date") have the right to receive notice of
and to vote at the Video Meeting. On the Video Record Date, there were 4,841,962
shares of Video Common Stock outstanding and entitled to vote. Each share of
Video Common Stock is entitled to one vote on each matter that is properly
presented to shareholders for a vote at the Video Meeting.
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Under Video's Amended and Restated Bylaws (the "Video Bylaws") and the Minnesota
Business Corporation Act (the "Minnesota Act"), the affirmative vote of the
holders of a majority of the outstanding shares of Video Common Stock is
required to approve and adopt the Video Proposal.
As of the Video Record Date, directors and executive officers of Video
as a group beneficially owned 1,226,575 shares of Video Common Stock, or
approximately 24.2% of those shares outstanding as of the Video Record Date.
Video has been advised that all of its directors and executive officers intend
to vote their shares in favor of the Video Proposal. Certain Video shareholders
holding an aggregate of approximately 20.6% of the shares of outstanding Video
Common Stock have entered into Support/Voting Agreements with Knogo, under which
these shareholders have promised to vote in favor of the Merger and the Merger
Agreement at the Video Meeting. See "THE SPECIAL MEETINGS -- Voting Rights;
Votes Required for Approval -- Video."
Knogo. The Knogo Meeting will be held at Knogo's Corporate
headquarters, 350 Wireless Boulevard, Hauppauge, New York, on February 6, 1997,
starting at 11:00 a.m. local time. See "THE SPECIAL MEETINGS." At the Knogo
Meeting, holders of Knogo Common Stock will be asked to approve and adopt the
Knogo Proposal. The Merger Agreement is attached hereto as Appendix A. See "THE
MERGER" and "THE MERGER AGREEMENT."
Holders of record of Knogo Common Stock at the close of business on
January 10, 1997 (the "Knogo Record Date") have the right to receive notice of
and to vote at the Knogo Meeting. On the Knogo Record Date, there were 5,772,632
shares of Knogo Common Stock outstanding and entitled to vote. Each share of
Knogo Common Stock is entitled to one vote on each matter that is properly
presented to stockholders for a vote at the Knogo Meeting. Under Knogo's Bylaws
and the Delaware General Corporation Law (the "DGCL"), the affirmative vote of
the holders of a majority of the outstanding shares of Knogo Common Stock is
required to approve and adopt the Knogo Proposal.
As of the Knogo Record Date, directors and executive officers of Knogo
as a group beneficially owned 1,392,344 shares of Knogo Common Stock, or
approximately 23.5% of those shares outstanding as of the Knogo Record Date.
Knogo has been advised that all of its directors and executive officers intend
to vote their shares in favor of the Knogo Proposal. Certain Knogo stockholders
holding an aggregate of approximately 32% of the outstanding shares of Knogo
Common Stock have entered into Support/Voting Agreements with Video, under which
these stockholders have promised to vote in favor of the Merger and the Merger
Agreement at the Knogo Meeting. See "THE SPECIAL MEETINGS -- Voting Rights;
Votes Required for Approval -- Knogo."
The Merger Agreement
General. The Merger Agreement provides, among other things, for: (a)
the merger of Video Merger Corp. with and into Video, which will result in
Video, as the surviving corporation, becoming a wholly-owned subsidiary of
Sentry, and (b) the merger of Knogo Merger Corp. with and into Knogo, which will
result in Knogo, as the surviving corporation, becoming a wholly-owned
subsidiary of Sentry.
Consideration to be Received by Video Shareholders in the Merger. Upon
consummation of the Merger, each outstanding share of Video Common Stock will be
converted into the right to receive one share of Sentry Common Stock. Each share
of Video Common Stock which is held in the treasury of Video ("Video Treasury
Stock") will be canceled and cease to exist. See "THE MERGER AGREEMENT --
Conversion of Video Common Stock." For a description of the Sentry Common Stock,
see "DESCRIPTION OF SENTRY CAPITAL STOCK." For a summary of the principal
differences between the rights of holders of Sentry Common Stock and holders of
Video Common Stock, see "COMPARISON OF STOCKHOLDERS' RIGHTS WITH RESPECT TO
SENTRY AND VIDEO."
AT THE EFFECTIVE TIME, EACH SHARE OF VIDEO COMMON STOCK SHALL REPRESENT
THE RIGHT TO RECEIVE AN EQUIVALENT NUMBER OF SHARES OF SENTRY COMMON STOCK.
HOLDERS OF VIDEO COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING
VIDEO COMMON STOCK WITH THE ENCLOSED PROXY CARD.
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2
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Consideration to be Received by Knogo Stockholders in the Merger. Upon
consummation of the Merger, each outstanding 1.2022 shares of Knogo Common Stock
will be converted into the right to receive one share of Sentry Common Stock and
one share of Sentry Class A Preferred Stock, which has a face value per share of
$5.00 (the "Face Value"). Each share of Knogo Common Stock which is held in the
treasury of Knogo ("Knogo Treasury Stock") will be canceled and cease to exist.
See "THE MERGER AGREEMENT -- Conversion of Knogo Common Stock." For a
description of the Sentry Common Stock and the Sentry Class A Preferred Stock,
see "DESCRIPTION OF SENTRY CAPITAL STOCK." For a summary of the principal
differences between the rights of holders of Sentry Common Stock and holders of
Knogo Common Stock, see "COMPARISON OF STOCKHOLDERS' RIGHTS WITH RESPECT TO
SENTRY AND KNOGO."
AT THE EFFECTIVE TIME, EACH 1.2022 SHARES OF KNOGO COMMON STOCK SHALL
REPRESENT THE RIGHT TO RECEIVE ONE SHARE OF SENTRY COMMON STOCK AND ONE SHARE OF
SENTRY CLASS A PREFERRED STOCK. HOLDERS OF KNOGO COMMON STOCK SHOULD NOT SEND
ANY CERTIFICATES REPRESENTING KNOGO COMMON STOCK WITH THE ENCLOSED PROXY CARD.
Exchange of Shares. At or prior to the Effective Time, Video and Knogo
will jointly appoint an exchange agent (the "Exchange Agent") to effect the
exchange of certificates (i) representing shares of Video Common Stock for
certificates representing shares of Sentry Common Stock, and (ii) representing
shares of Knogo Common Stock for certificates representing shares of Sentry
Common Stock and Sentry Class A Preferred Stock.
No fractional shares of Sentry Common Stock will be issued pursuant to
the Merger. Fractional interests in Sentry Common Stock and Sentry Class A
Preferred Stock will be aggregated and sold by the Exchange Agent on behalf of
stockholders who would otherwise have been entitled to receive such fractional
shares as soon as practicable after the Effective Time. Upon such sale, the
Exchange Agent will deliver to each stockholder who would otherwise have been
entitled to receive a fraction of a share of Sentry Common Stock and/or Sentry
Class A Preferred Stock, as the case may be, a cash payment (without interest)
representing such stockholder's proportionate interest in the net proceeds from
the sale. See "THE MERGER AGREEMENT -- Exchange Procedure."
Conditions to the Merger. The obligations of Video and Knogo to
consummate the Merger are subject to the fulfillment of various conditions,
including, among others: (i) the effectiveness of the Registration Statement and
the absence of any stop order suspending the effectiveness thereof and no
proceeding for that purpose having been initiated by the Commission; (ii)
approval by the stockholders of both Video and Knogo; and (iii) listing of the
Sentry Common Stock and the Sentry Class A Preferred Stock on the NASDAQ Stock
Market's National Market ("NASDAQ") or a national securities exchange, subject
only to official notice of issuance. See "THE MERGER AGREEMENT -- Closing
Conditions."
Termination of the Merger Agreement. The Merger Agreement is subject to
termination at the option of either Video or Knogo if: (i) the Merger is not
consummated on or before April 8, 1997 (and prior to such time by the mutual
consent of Video and Knogo), (ii) the Merger is barred by law, (iii) the Merger
Agreement is not approved by Video's shareholders or Knogo's stockholders, (iv)
either the Video Board or the Knogo Board shall have withdrawn or modified, in a
manner adverse to the other party, its approval or recommendation of the Merger
Agreement or the Merger, (v) either the Video Board or the Knogo Board solicits,
directly or indirectly, any proposal with respect to a merger, acquisition or
similar transaction involving the purchase of a significant portion of the stock
or assets of their respective company (a "Merger Proposal"), or (vi) a Merger
Proposal is made which the Video Board or the Knogo Board, as the case may be,
determines it must accept in the exercise of its fiduciary duties to its
shareholders. The Merger Agreement may be terminated by Knogo, at any time prior
to the Effective Time, if: (a) there has been a breach by Video of any
representation or warranty in the Merger Agreement which would have, or which
would be reasonably likely to have, a material adverse effect on Video; or (b)
there has been a material breach by Video of any of the covenants or agreements
in the Merger Agreement which is not curable or not cured within 30 days after
written notice of the breach. The Merger Agreement may be terminated by Video,
at any time prior to the Effective Time, if: (x) there has been a breach by
Knogo of any representation or warranty in the Merger Agreement which would
have, or which would be reasonably likely to have, a material adverse effect on
Knogo; or (y) there has been a material breach by Knogo of any of the covenants
or agreements in the Merger
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3
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Agreement which is not curable or not cured within 30 days after written notice
of the breach. See "THE MERGER AGREEMENT -- Termination."
Termination Fee. If a Merger Proposal is made for or solicited by
Knogo, or the Knogo Board withdraws or modifies, in a manner adverse to Video,
its approval or recommendation of the Merger Agreement or the Merger, and
thereafter (i) the Merger Agreement is terminated by Video or Knogo and (ii)
within six months of the termination, Knogo is a party to a merger, acquisition
or similar transaction involving the purchase of a significant portion of the
stock or assets of Knogo, then Knogo must pay Video for fees and expenses Video
has incurred up to $750,000, exclusive of the sharing of costs and expenses
related to this Joint Proxy Statement/ Prospectus. See "THE MERGER AGREEMENT --
Termination -- Termination Fee." If a Merger Proposal is made for or solicited
by Video, or the Video Board withdraws or modifies, in a manner adverse to
Knogo, its approval or recommendation of the Merger Agreement or the Merger, and
thereafter (x) the Merger Agreement is terminated by Video or Knogo and (y)
within six months of the termination, Video is a party to a merger, acquisition
or similar transaction involving the purchase of a significant portion of the
stock or assets of Video, then Video must pay Knogo for fees and expenses Knogo
has incurred up to $750,000, exclusive of the sharing of costs and expenses
related to this Joint Proxy Statement/Prospectus. See "THE MERGER AGREEMENT --
Termination -- Termination Fee."
The Merger
Ownership of Sentry After the Merger. Immediately following the Merger,
(i) the former holders of Video Common Stock will collectively hold 4,841,962
shares (approximately 50.2%) of the issued and outstanding shares of Sentry
Common Stock and (ii) the former holders of Knogo Common Stock will collectively
hold 4,801,723 shares (approximately 49.8%) of the issued and outstanding shares
of Sentry Common Stock. In addition, the former holders of Knogo Common Stock
will collectively hold 4,801,723 shares of Sentry Class A Preferred Stock.
Recommendation of Video Board; Video's Reasons for the Merger. The
Video Board, by unanimous vote, has determined that the Merger is in the best
interests of the holders of Video Common Stock and recommends that holders of
Video Common Stock vote in favor of the Video Proposal. The decision of the
Video Board to enter into the Merger Agreement and to recommend that
shareholders vote in favor of the Video Proposal is based upon its evaluation of
a number of factors including, among others, the oral opinion (subsequently
confirmed in writing) of Alex. Brown & Sons Incorporated ("Alex. Brown"),
Video's investment banker in connection with the Merger, that the Merger is fair
from a financial point of view to the shareholders of Video. See "THE MERGER --
Recommendation of Video Board; Video's Reasons for the Merger" and "THE MERGER
- -- Fairness Opinions -- Opinion of Video's Investment Banker."
Recommendation of Knogo Board; Knogo's Reasons for the Merger. The
Knogo Board, by unanimous vote, has determined that the Merger is in the best
interests of the holders of Knogo Common Stock and recommends that holders of
Knogo Common Stock vote in favor of the Knogo Proposal. The decision of the
Knogo Board to enter into the Merger Agreement and to recommend that
stockholders vote in favor of the Knogo Proposal is based upon its evaluation of
a number of factors including, among others, the opinion of Donald & Co.
Securities Inc. ("Donald & Co.") that the consideration to be received by the
holders of Knogo Common Stock in the Knogo Merger is fair from a financial point
of view. See "THE MERGER -- Recommendation of Knogo Board; Knogo's Reasons for
the Merger" and "THE MERGER -- Fairness Opinions -- Opinion of Knogo's
Investment Banker."
Interest of Certain Persons in the Merger; Management of Sentry After
the Merger. Certain members of the managements of Video and Knogo and the Video
Board and Knogo Board have certain interests in the Merger that are different
from, or in addition to, the interests of shareholders of Video and Knogo
generally. Pursuant to the Merger Agreement, Video and Knogo will each designate
certain executive officers of Sentry. The executive officers of Sentry after the
Merger will include Thomas A. Nicolette as President and Chief Executive
Officer, Andrew L. Benson as Vice President with responsibility for the
marketing of CCTV products, Peter J. Mundy as Chief Financial Officer and Peter
Y. Zhou as Vice President - Technology. At present, Mr. Benson is the President
of Video, Mr. Nicolette is the President and Chief Executive Officer of Knogo,
Mr. Mundy is the Vice President - Finance, Chief Financial Officer, Secretary
and Treasurer of Knogo and Dr. Zhou is the Vice President -
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4
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Technology of Knogo. In addition, it is anticipated that Mr. Nicolette, a
director of Knogo, William A. Perlmuth, a director of Knogo, Robert D. Furst,
Jr., Chairman of the Board and Chief Executive Officer of Video, Mr. Benson, a
director of Video, and Robert L. Barbanell will become directors of Sentry, with
Mr. Perlmuth serving as Chairman of the Board. See "THE MERGER -- Interests of
Certain Persons in the Merger."
Accounting Treatment. The Merger will be accounted for under the
"purchase" method of accounting in accordance with generally accepted accounting
principles. See "THE MERGER -- Accounting Treatment."
Opinions of Investment Bankers. On October 10, 1996, Alex. Brown
rendered to the Video Board its oral opinion (subsequently confirmed in writing)
to the effect that, as of such date, the Merger is fair to the holders of Video
Common Stock from a financial point of view. The full text of the written
opinion of Alex. Brown, confirmed as of the date of this Joint Proxy
Statement/Prospectus, which sets forth assumptions made, factors considered and
limitations on the review undertaken by Alex. Brown, is included as Appendix B
to this Joint Proxy Statement/Prospectus. Video shareholders are urged to read
such opinion carefully in its entirety. See "THE MERGER -- Fairness Opinions --
Opinion of Video's Investment Banker."
On October 10, 1996, Donald & Co. rendered to the Knogo Board its
written opinion to the effect that, as of such date, the Merger is fair to the
holders of Knogo Common Stock from a financial point of view. The full text of
the written opinion of Donald & Co., confirmed as of the date of this Joint
Proxy Statement/Prospectus, which sets forth assumptions made, factors
considered and limitations on the review undertaken by Donald & Co., is included
as Appendix C to this Joint Proxy Statement/Prospectus. Knogo stockholders are
urged to read such opinion carefully in its entirety. See "THE MERGER --
Fairness Opinions -- Opinion of Knogo's Investment Banker."
Certain Federal Income Tax Consequences. It is a condition to the
consummation of the Merger that Video receive an opinion of Dewey Ballantine,
special counsel to Video, based upon reasonably requested representation letters
and dated the Closing Date, to the effect that the Video Merger will be treated
for Federal income tax purposes as a reorganization described in Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code") and/or as a
transfer of property to Sentry by holders of shares of Video Common Stock
governed by Section 351 of the Code. It is a condition to the consummation of
the Knogo Merger that Knogo receive an opinion of Stroock & Stroock & Lavan,
counsel to Knogo, based upon reasonably requested representation letters and
dated the Closing Date, to the effect that the Knogo Merger will be treated for
Federal income tax purposes as a transfer of property to Sentry by holders of
Knogo Common Stock governed by Section 351 of the Code.
Assuming that the Video Merger and the Knogo Merger are treated for
Federal income tax purposes in accordance with those opinions, in general, no
gain or loss will be recognized by a holder of Video Common Stock who exchanges
such stock solely for Sentry Common Stock pursuant to the Merger, except that
gain or loss may be recognized with respect to cash received in lieu of
fractional shares. Similarly, in general, no gain or loss will be recognized by
a holder of Knogo Common Stock who exchanges such stock solely for Sentry Common
Stock and Sentry Class A Preferred Stock pursuant to the Merger, except that
gain or loss may be recognized with respect to cash received in lieu of
fractional shares. See "THE MERGER -- Certain Federal Income Tax Consequences."
Dissenters' Rights. Holders of Video Common Stock who do not vote in
favor of the Video Proposal and who have properly complied with Section 302A.473
of the Minnesota Act will be entitled to dissenters' rights. Holders of Knogo
Common Stock will not be entitled to appraisal rights because the Knogo Common
Stock is listed on a national securities exchange and the Knogo stockholders
will receive as consideration for the Knogo Common Stock, shares of Sentry
Common Stock and Sentry Class A Preferred Stock which also will be listed on a
national securities exchange or NASDAQ. However, should either or both of the
Sentry Common Stock or Sentry Class A Preferred Stock not be listed on a
national securities exchange or NASDAQ, Knogo stockholders who do not vote in
favor of the Knogo Proposal and who have properly complied with Section 262 of
the DGCL will be entitled to appraisal rights. See "THE MERGER -- Dissenters'
Rights."
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5
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Risk Factors
See "RISK FACTORS" beginning on page 11 hereof for information that
should be considered by shareholders of Video and stockholders of Knogo.
Summary Selected Historical and Unaudited Pro Forma
Combined Condensed Financial Information
Video Historical Financial Information
The following table sets forth summary historical financial information
of Video for the periods indicated which has been derived from Video's audited
and unaudited financial statements. Unaudited interim data reflects, in the
opinion of Video's management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of results
for such interim periods. Results of operations for unaudited interim periods
are not necessarily indicative of results which may be expected for any other
interim or annual period. The summary historical financial information should be
read in conjunction with "VIDEO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "SELECTED HISTORICAL FINANCIAL
INFORMATION OF VIDEO" and the Financial Statements of Video and the notes
thereto included elsewhere in this Joint Proxy Statement/Prospectus.
(In thousands, except per share data)
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ -----
Statement of Operations
Data:
Sales ........................ $ -- $ 257 $ 744 $ 4,241 $ 8,610 $ 7,768 $ 2,000
Cost of sales ................ -- 188 564 3,440 7,343 5,899 3,085
Gross margin ................. -- 69 180 801 1,267 1,869 (1,085)
Operating expenses ........... 231 663 1,048 1,549 3,046 1,951 1,867
Net income (loss) ............ (231) (599) (916) (847) (1,681) 12 (3,035)
Net income (loss) per
share(1) ..................... (0.16) (0.30) (0.38) (0.31) (0.36) 0.00 (0.63)
Weighted average number
of shares outstanding(1) ..... 1,400 2,012 2,388 2,748 4,674 5,208 4,809
Balance Sheet Data:
(at end of period)
Working capital (deficit) .... $ (142) $ (195) $(1,047) $ 5,163 $ 2,760 $ 4,531 $ 41
Total assets ................. 45 294 491 6,342 6,615 7,562 5,251
Total shareholders' equity
(deficit) .................... (120) (123) (959) 5,349 3,876 5,570 1,128
<FN>
- ----------------------------
See the notes to the Financial Statements included elsewhere herein.
(1) Computed on the basis described in Note 1 of Notes to Financial
Statements of Video.
</FN>
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Knogo Historical Financial Information
The following table sets forth summary historical consolidated
financial information of Knogo for the periods indicated which has been derived
from Knogo's audited and unaudited financial statements. Unaudited interim data
as of September 30, 1995 and 1996 and for the nine months then ended reflects,
in the opinion of Knogo's management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of results
for such interim periods. Results of operations for unaudited interim periods
are not necessarily indicative of results which may be expected for any other
interim or annual period. The summary historical financial information should be
read in conjunction with "KNOGO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "SELECTED HISTORICAL FINANCIAL
INFORMATION OF KNOGO" and the Consolidated Financial Statements of Knogo and the
notes thereto included elsewhere in this Joint Proxy Statement/Prospectus.
(In thousands, except for per share data)
Year ended the last Ten Months Ended Year Ended Nine Months Ended
day of February December 31, December 31, September 30,
1992 1993 1994 1994 1995 1995 1996
------ ------ ------ ----------------- ---------------- -------- ------
Summary of Operations Data:
Sales of security devices and
related interest income, service
rentals and other .................. $ 24,242 $ 22,592 $ 18,243 $ 13,724 $ 17,361 $ 13,327 $ 14,190
Sales to affiliates/Sensormatic ..... 9,734 10,072 11,375 6,957 12,043 9,062 3,990
-------- -------- -------- -------- -------- -------- --------
Total revenues ...................... 33,976 32,664 29,618 20,681 29,404 22,389 18,180
Cost of sales ....................... 16,832 16,697 14,631 10,041 14,425 11,168 9,398
Customer service expenses ........... 4,046 3,969 3,984 3,353 3,235 2,621 2,197
Selling, general and
administrative expenses ............ 11,926 9,819 9,227 9,548 8,235 6,143 5,387
Income (loss) before income taxes ... (738) 1,148 762 (2,858) 1,941 1,265 2,655**
Net income (loss) ................... (1,057) 624 123 (2,833) 1,731 1,075 1,991
Net income per share ................ * * * * 0.29 0.18 0.33
Selected Balance Sheet Data:
(at end of period)
Total assets ........................ $ 36,193 $ 33,546 $ 34,583 $ 26,522 $ 29,338 $ 28,257 $ 30,485
Property, plant and equipment, net .. 13,753 13,092 12,830 9,842 9,081 9,222 8,950
Long term bank debt ................. -- -- -- -- -- -- --
Obligations under capital leases .... -- 797 688 945 748 763 587
Total shareholders' equity .......... 32,056 28,308 27,055 20,888 22,669 21,953 24,858
<FN>
See the notes to the Consolidated Financial Statements of Knogo included
elsewhere herein.
* Historical per share data for earnings and dividends have not been
presented for periods prior to the year ended December 31, 1995 as
Knogo was not a publicly-held company during these periods.
** Includes gain on sale of assets of $2,462.
</FN>
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7
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Sentry Unaudited Pro Forma Combined Condensed Financial Information
The summary unaudited pro forma combined condensed financial
information of Sentry has been derived from, or prepared on a basis consistent
with, the unaudited pro forma combined condensed financial statements included
elsewhere in this Joint Proxy Statement/Prospectus. This data is presented for
illustrative purposes only and is not necessarily indicative of the combined
results of operations or financial position that would have occurred if the
Merger had occurred at the beginning of each period presented or on the dates
indicated, nor is it necessarily indicative of the future operating results or
financial position of Sentry.
(In thousands, except for per share data)
Year Ended Nine Months Ended
December 31, September 30,
1995 1996
------------------------ ---------------
Summary of Operations Data:
Total revenues...................................... $38,014 $20,180
Cost of sales....................................... 25,003 14,680
Selling, general and administrative expenses........ 10,654 6,918
Amortization of goodwill and other intangibles...... 1,125 844
Income (loss) before income taxes................... (845) (1,209)
Net income (loss)................................... (995) (1,305)
Net income (loss) available to common
shareholders........................................ (2,207) (2,254)
Net income (loss) per share......................... (0.23) (0.24)
Selected Balance Sheet Data:
(at end of period)
Total assets........................................ $43,512
Property, plant and equipment, net.................. 9,220
Long term bank debt................................. --
Obligations under capital leases.................... 587
Total shareholders' equity.......................... 7,102
- --------------------------------------------------------------------------------
8
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Comparative Per Share Data
Set forth below are historical net income (loss) per share, cash
dividends per share and book value per share data of Video and Knogo, and
unaudited pro forma combined per share data of Sentry. The data set forth below
should be read in conjunction with the Video and Knogo audited financial
statements and unaudited interim financial statements, including the notes
thereto, which are included elsewhere in this Joint Proxy Statement/Prospectus.
The data should also be read in conjunction with the unaudited pro forma
combined condensed financial statements, including the notes thereto, included
elsewhere in this Joint Proxy Statement/Prospectus.
Video Knogo
----------------------------------------- -----------------------------------------
Nine Months Year Ended or Nine Months Year Ended or
Ended or as of December Ended or as of December
as of September 31, as of September 31,
30, 1996 1995 30, 1995
1996
-------------------- ------------------ -------------------- -------------------
Historical:
Net Income (Loss) $(0.63) $(0.36) $0.33 $0.29
Per Share
Cash Dividends Per -- -- -- --
Share
Book Value Per 0.24 0.82 4.31 3.96
Share
Sentry
-----------------------------------------
Nine Months Year Ended or
Ended or as of December
as of September 31,
30, 1996 1995
-------------------- ------------------
Pro Forma Combined (a):
Net Income (Loss) $(0.24) $(0.23)
Per Share
Cash Dividends Per -- --
Share
Pro Forma Equivalents (b):
Net Income $(0.20) $(0.19)
(Loss) Per Share
Cash Dividends Per -- --
Share
Book Value Per 0.62 N/A
Share
<FN>
- ---------------------------
(a) The unaudited pro forma combined condensed statement of operations for
the nine months ended September 30, 1996 was prepared based upon the
statement of operations of each of Video and Knogo for the nine months
ended September 30, 1996. The unaudited pro forma combined condensed
statement of operations for the year ended December 31, 1995 was
prepared based upon the statements of operations of each of Video and
Knogo for the year ended December 31, 1995. The unaudited pro forma
combined condensed balance sheet was prepared based upon the balance
sheets of each of Video and Knogo as of September 30, 1996.
- --------------------------------------------------------------------------------
9
- --------------------------------------------------------------------------------
(b) Sentry pro forma equivalents represent the unaudited pro forma combined
net income (loss) per share, cash dividends per share, and book value
per share calculated on the basis of a 1 to 1.2022 exchange ratio.
</FN>
Comparative Market Prices and Dividends
Video Common Stock is listed on the NASDAQ SmallCap under the symbol
VSEN. Knogo's Common Stock is listed on the AMEX under the symbol KNA.
On October 10, 1996, the last full trading day preceding public
announcement of the proposed Merger, the closing price per share of Video Common
Stock on the NASDAQ SmallCap was $4 3/8 and the closing price per share of Knogo
Common Stock on the AMEX was $8 15/16. On January 17, 1997, the most recent
practicable date prior to the printing of this Joint Proxy Statement/Prospectus,
the closing price per share of Video Common Stock on the NASDAQ SmallCap was
$2 7/8 and the closing price per share of Knogo Common Stock on the AMEX was
$5 1/2. See "COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION."
Holders of Video Common Stock and Knogo Common Stock are urged to
obtain current market quotations prior to making any decision with respect to
the Merger.
The payment of future dividends on Sentry Common Stock will be a
business decision to be made by the Board of Directors of Sentry (the "Sentry
Board") from time-to-time based upon the results of operations and the financial
condition of Sentry and such other factors as the Sentry Board considers
relevant. Sentry has not paid, and does not presently intend to pay or consider
the payment of, any cash dividends on the Sentry Common Stock. See "COMPARATIVE
PER SHARE MARKET PRICE AND DIVIDEND INFORMATION." Pursuant to the terms of the
Merger Agreement, Sentry is required to pay certain annual or semi-annual
dividends on the Sentry Class A Preferred Stock. For the first two years
following the Merger, Sentry shall pay such dividends by delivering additional
shares of Sentry Class A Preferred Stock. See "DESCRIPTION OF SENTRY CAPITAL
STOCK -- Preferred Stock -- Class A Preferred Stock."
Listing of Sentry Common Stock and Sentry Class A Preferred Stock
Sentry expects to apply for the listing of Sentry Common Stock and
Sentry Class A Preferred Stock on the AMEX, and it is anticipated that such
shares will trade on such exchange upon official notice of issuance under the
symbols SKV and SKV.Pr.A, respectively. It is a condition to consummation of the
Merger that the shares of Sentry Common Stock and Sentry Class A Preferred Stock
to be issued to Video and Knogo shareholders, as applicable, in connection with
the Merger shall have been approved for listing on NASDAQ, or a national
securities exchange, subject only to official notice of issuance. See "THE
MERGER -- Stock Exchange Listing."
- --------------------------------------------------------------------------------
10
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained under "VIDEO MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "KNOGO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," such as those relating to Video's anticipated reduction in material
and installation costs on its new SentryVision system and Knogo's anticipated
replacement of sales to Sensormatic (as defined) under the Supply Agreement (as
defined) with increased sales to third parties, certain statements under
"BUSINESS OF VIDEO" and "BUSINESS OF KNOGO", such as those relating to Video's
plans to increase penetration of the domestic retail market and to expand into
international markets and Knogo's anticipated growth in the supermarket and
computer industry markets, and other statements contained herein regarding
matters that are not historical facts, are forward-looking statements (as such
term is defined in the Act). Because such forward-looking statements include
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, those
discussed under "RISK FACTORS."
RISK FACTORS
The following risk factors should be considered by holders of Video
Common Stock and Knogo Common Stock in evaluating whether to approve the Merger
Agreement and thereby become holders of Sentry Common Stock and Sentry Class A
Preferred Stock, as applicable. These factors should be considered in
conjunction with the other information included elsewhere in this Joint Proxy
Statement/Prospectus. In evaluating Video's, Knogo's and Sentry's business,
prospective investors should carefully consider the following factors in
addition to the other information presented in this Joint Proxy
Statement/Prospectus.
Risks Relating to the Merger
Integration of Certain Operations
The managements of Video and Knogo have entered into the Merger
Agreement with the expectation that the Merger will result in beneficial
synergies for Video and Knogo. See "THE MERGER -- Recommendation of Video Board;
Video's Reasons for the Merger" and "THE MERGER -- Recommendation of Knogo
Board; Knogo's Reasons for the Merger." Achieving the anticipated benefits of
the Merger will depend in part upon whether the integration of the two
companies' businesses is accomplished in an efficient and effective manner, and
there can be no assurance that this will occur. The combination of the two
companies will require, among other things, integration of the companies'
respective product offerings and technology and coordination of their research
and development, sales and marketing and financial reporting efforts. There can
be no assurance that such integration will be accomplished smoothly or
successfully. If significant difficulties are encountered in the integration of
the existing product lines and technology, resources could be diverted from new
product development, resulting in delays in new product introductions. The
integration of the product lines could also cause confusion or dissatisfaction
among existing customers of Video and Knogo. The difficulties of such
integration may be increased by the necessity of coordinating geographically
separated organizations with distinct cultures. The integration of certain
operations following the Merger will require the dedication of management and
other personnel resources which may temporarily distract attention from the
day-to-day business of Sentry. Failure to successfully accomplish the
integration of the two companies' operations could have a material adverse
effect on Sentry's business, financial condition or results of operations.
Distributors, Resellers and Customers
There can be no assurance that distributors, resellers and customers of
Video or Knogo will continue their current buying patterns without regard to the
announced Merger. In particular, certain present and potential distributors and
customers may defer purchasing decisions as they evaluate Sentry's future
product strategy. Any such deferrals could have a material adverse effect on
Sentry's business, financial condition or results of operations.
11
Fixed Exchange Ratio
Under the terms of the Merger Agreement, each one share of Video Common
Stock issued and outstanding at the Effective Time will be converted into the
right to receive one share of Sentry Common Stock and each 1.2022 shares of
Knogo Common Stock issued and outstanding at the Effective Time will be
converted into the right to receive one share of Sentry Common Stock and one
share of Sentry Class A Preferred Stock. Although the merger consideration to be
received by the holders of Video Common Stock and Knogo Common Stock was based
upon the trading prices of Knogo Common Stock and Video Common Stock,
respectively, at the time the Merger was negotiated, the Merger Agreement does
not contain any provisions for adjustment of the merger consideration based on
fluctuations in the price of Knogo Common Stock or Video Common Stock.
Accordingly, the value of the Sentry Common Stock and Sentry Class A Preferred
Stock, as applicable, to be received by the stockholders of Video and Knogo, as
the case may be, upon the Merger could be affected by the market price of Video
Common Stock and Knogo Common Stock at the Effective Time. There can be no
assurance that the market price of a share of Sentry Common Stock on and after
the Effective Time will not be lower than the market price of a share of Video
Common Stock prior to the Effective Time. There also can be no assurance that
the combined value of the market price on and after the Effective Time of a
share of Sentry Common Stock and a share of Sentry Class A Preferred Stock will
not be lower than the market price of each 1.2022 outstanding shares of Knogo
Common Stock prior to the Effective Time. On October 10, 1996, the date on which
the Merger was announced, the closing per share sale price of Knogo Common Stock
was $8 15/16. On such date the closing per share sale price of Video Common
Stock was $4 3/8. On January 17, 1997, the most recent practicable date prior to
the printing of this Joint Proxy Statement/Prospectus, the closing per share
sale price of Knogo Common Stock was $5 1/2. On such date the closing per share
sale price of Video Common Stock was $2 7
/8. Holders of Video Common Stock and
Knogo Common Stock are urged to obtain current market quotations prior to making
a decision with respect to the Merger.
Listing of Sentry Common Stock and Sentry Class A Preferred Stock
It is a condition to the Merger that the Sentry Common Stock and the
Sentry Class A Preferred Stock be listed on NASDAQ, or a national securities
exchange. There can be no assurances that Knogo and Video will not waive the
listing of either or both of the Sentry Common Stock and the Sentry Class A
Preferred Stock, if such listing is not available. If either such listing were
to be waived and the Merger consummated, holders of Knogo Common Stock would be
entitled to appraisal rights which they would not otherwise be entitled to. See
"THE MERGER -- Dissenters' Rights -- Knogo."
Transaction Charges
Video and Knogo anticipate that Sentry will incur significant
Merger-related expenses including investment advisory fees, legal and accounting
expenses and other transaction costs. These costs are expected to total
$2,350,000 and are expected to be capitalized as part of the purchase price and
amortized over a seven year period following the Merger.
Risks Relating to Sentry
Absence of Public Trading Market; Possible Volatility of Stock Price
There is not currently a public trading market for the Sentry Common
Stock or the Sentry Class A Preferred Stock and there can be no assurance as to
the establishment or continuity of any such market. Sentry expects to apply to
have the Sentry Common Stock and the Sentry Class A Preferred Stock listed for
quotation on NASDAQ, or a national securities exchange. There can be no
assurance either as to the price at which trading in the Sentry Common Stock or
the Sentry Class A Preferred Stock will occur after the Merger or that such
prices will not be below the book value per share of the Sentry Common Stock or
the Sentry Class A Preferred Stock, as applicable. Future announcements
concerning Sentry or its competitors, quarterly variations in operating results
and announcements concerning significant contracts, among other factors, could
cause the market price of the Sentry Common Stock and/or the Sentry Class A
Preferred Stock to fluctuate substantially.
12
No Cash Dividends
Neither Video nor Knogo has paid dividends on its common shares in the
past. Sentry does not intend to consider the payment of any cash dividends on
the Sentry Common Stock or the Sentry Class A Preferred Stock in the foreseeable
future, except as required by the Merger Agreement and Sentry's Amended and
Restated Certificate of Incorporation and Certificate of Designation for the
Sentry Class A Preferred Stock (such certificates, collectively, the "Sentry
Certificate of Incorporation"). See "DESCRIPTION OF SENTRY CAPITAL STOCK --
Preferred Stock -- Class A Preferred Stock" and "RISK FACTORS -- Capital
Requirements."
Control by Existing Officers and Directors
Upon completion of this Merger, the directors and executive officers of
Video in the aggregate will beneficially own shares of Sentry Common Stock
representing approximately 12.4% of the voting power of all of Sentry's then
outstanding voting securities. Because of such ownership, the current officers
and directors of Video may be able to substantially influence the affairs of
Sentry, including the election of the Sentry Board. See "MANAGEMENT OF SENTRY"
and "SENTRY SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Immediately following the Merger, directors and officers of Knogo in
the aggregate will beneficially own shares of Sentry Common Stock, including
shares held by William A. Perlmuth, as Executor of the Estate of Arthur J.
Minasy and as Trustee under trusts for the benefit of Mr. Minasy's adult
children, representing approximately 11.6% of the voting power of all of
Sentry's then outstanding voting securities. Mr. Perlmuth will be Chairman of
the Sentry Board upon consummation of the Merger. Because of such ownership, the
current officers and directors of Knogo may be able to substantially influence
the affairs of Sentry, including the election of the Sentry Board. See
"MANAGEMENT OF SENTRY" and "SENTRY SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
Anti-Takeover Provisions
Certain provisions of the Sentry Certificate of Incorporation and
Sentry Bylaws (the "Sentry Bylaws") may have the effect of making more difficult
an acquisition of control of Sentry in a transaction not approved by the Sentry
Board. See "DESCRIPTION OF SENTRY CAPITAL STOCK." These provisions will include
the ability of Sentry's Board to issue shares of preferred stock in one or more
series and additional shares of authorized but unissued Sentry Common Stock
without further authorization of Sentry stockholders. These provisions generally
are designed to permit Sentry to develop its businesses and foster its long-term
growth without the disruption caused by the threat of a takeover not deemed by
Sentry's Board to be in the best interests of Sentry and its stockholders. These
provisions may also have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of Sentry even though
such a transaction might be economically beneficial to Sentry and its
stockholders. See "DESCRIPTION OF SENTRY CAPITAL STOCK."
Sentry is subject to the provisions of the DGCL which includes
provisions relating to "control share acquisitions" and restricting "business
combinations" with "interested shareholders." Such provisions could have the
effect of discouraging an attempt to acquire control of Sentry. Accordingly,
stockholders may be denied the opportunity to participate in a transaction which
offers a premium to the prevailing market price of the Sentry Common Stock. See
"DESCRIPTION OF SENTRY CAPITAL STOCK."
Dependence on Significant Customers
Although the composition of Video's largest customers has changed from
year-to-year, Video's operations have been materially dependent on a limited
number of significant orders. Five customers accounted for 83% of Video's sales
in 1993, two customers accounted for 81% of Video's sales in 1994, two customers
accounted for 79% of Video's sales in 1995, and two customers accounted for 84%
of Video's sales for the first nine months of 1996. While management expects
Video's customer base to continue to expand, a limited number of large orders
may continue to account for a significant portion of Video's sales during any
given period for the foreseeable future. As such, a delay, reduction or
cancellation of orders from one or more of its significant customers or the loss
of one or more of such customers may have a material adverse effect on Sentry's
financial condition and results of
13
operations and cash flows. See "VIDEO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS OF VIDEO --
Customers."
Competition
The security, theft detection and surveillance industry is highly
competitive. Competing products and services to Video's CCTV system include
conventional fixed-mount or PTZ dome surveillance systems, EAS systems and other
magnetic and electronic devices, and private guard services. Many of the
foregoing products and services provide theft detection and security at a price
which may be lower than the cost of Video's monitoring and surveillance systems.
Similarly, competition in the EAS industry is intense. Potential competitors
include major domestic and international EAS companies, many of which have
substantially greater financial, technical, marketing, sales and other resources
than Knogo. A number of the companies with which Sentry will compete have
substantially greater financial, sales and marketing, and other resources which
may enable them to develop and market competitive surveillance and security
systems. Although management believes that Sentry will be able to compete
effectively based on the capabilities, flexibility and performance of its
products, there can be no assurance that it will compete successfully with its
future competitors. See "BUSINESS OF VIDEO -- Competition" and "BUSINESS OF
KNOGO -- Competition."
Knogo Non-Competition Agreement
When Knogo was spun off from its corporate predecessor, Knogo
Corporation (the "Knogo Predecessor"), Knogo entered into a Contribution and
Divestiture Agreement (the "Divestiture Agreement"), dated as of December 29,
1994 (the "Divestiture Date"). Pursuant to the terms of the Divestiture
Agreement, Knogo is subject until the fifth anniversary of the Divestiture Date,
December 29, 1999, to a non-competition clause with respect to engaging in
certain business activities outside of the United States, Puerto Rico and Canada
(the "Territory"), which may limit Sentry's ability to expand Knogo's existing
business outside the Territory.
Under the non-competition clause, Sentry will not be permitted, outside
of the Territory, to market, distribute, sell, lease, install, service or
maintain any Knogo electronic article surveillance systems, including reusable
tags, disposable labels and accessory products used in such systems, closed
circuit television systems and products, and other products to deter and detect
shoplifting and employee theft, or improvements or successors to any such
product, but in each case only to the extent that the products were marketed,
sold or leased by the Knogo Predecessor prior to the Divestiture Date (such
products, the "Existing Products"). In addition, Sentry may not otherwise engage
in the business of, or activities relating to, manufacturing, marketing,
distributing, selling, leasing, servicing or maintaining or licensing of any of
the Existing Products outside of the Territory. See "BUSINESS OF KNOGO --
Production" and "BUSINESS OF KNOGO -- Competition." The managements of Video and
Knogo believe that the above-described non-competition clause will not, upon
consummation of the Merger, limit the ability of Sentry to market Video products
in any market, geographic or otherwise.
History of Operating Losses; Risk of Significant Fluctuations in Operating
Results
Video incurred operating losses in each of the years 1993, 1994, and
1995 and had an accumulated deficit of $6,753,588 as of September 30, 1996.
Moreover, Video's quarterly operating results have varied and Sentry's may vary
significantly depending on factors such as the timing of significant orders,
seasonality in the retail market, potential rescheduling or cancellation of
orders, research and development expenses associated with new product
introductions, and the timing of new product introductions and upgrades by
Sentry and its competitors. Revenues may be particularly difficult to predict
because of the sales cycle of Video's products, which varies substantially from
customer to customer and market to market. In addition, a significant portion of
Sentry's sales in any given period may be derived from a relatively small number
of orders, and a change, delay or cancellation in any order could result in
large fluctuations in sales for that quarter. Further, delivery lead times for
Video's systems are relatively short. The resulting lack of a significant
backlog may contribute to the unpredictability of Sentry's results of
operations. Video's expense levels have historically been based in part on
expectations of future sales levels, and a shortfall in sales could therefore
result in a disproportionate decrease in Sentry's net income. These factors also
could significantly affect annual results of operations. See "VIDEO MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
"BUSINESS OF VIDEO -- Sales, Marketing and Customer Service."
14
The Statement of Operations of Knogo for the year ended December 31,
1995 and the nine months ended September 30, 1996 included elsewhere in this
Joint Proxy Statement/Prospectus reflect that Knogo had net income of $1,731,000
and $1,991,000, respectively, for such periods. Sentry's ability to realize
earnings in the future will depend in large part on the availability of
opportunities to expand Knogo's customer base, especially in the supermarket and
other sectors which have not historically utilized EAS technology, to improve
existing products and to exploit source tagging technology, as to which no
assurances can be given. See "KNOGO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS OF KNOGO --
Marketing." In addition, see "RISK FACTORS -- Knogo Lost Manufacturing and Sales
Volume" for risks associated with the termination of a supply agreement between
Knogo and Sensormatic Electronics Corporation ("Sensormatic") (with Sensormatic
as successor to the Knogo Predecessor).
Product Concentration; Market Acceptance
Although Video has taken steps to broaden its product offerings, sales
of SentryVision systems and related products and enhancements are expected to
continue to account for a substantial portion of Video's sales for the
foreseeable future. Use of the SentryVision system represents an alternative to
conventional surveillance methods, and future growth will depend upon acceptance
of Video's traveling CCTV system by a broader group of customers. Failure to
achieve broader acceptance would have a material adverse effect on Sentry's
financial condition and results of operations. In addition, any factors
adversely affecting Video's SentryVision system, such as the introduction of
superior competitive products or shifts in the needs of the marketplace, would
have a material adverse effect on Sentry's financial condition and results of
operations. See "BUSINESS OF VIDEO."
Dependence on Proprietary Technology
Video currently holds a United States patent covering certain features
of its traveling camera surveillance system and has applied for corresponding
foreign patents. Sentry may also seek patent protection in the future for
certain aspects of any new systems or features which may be developed. There can
be no assurance that any future patent applications filed by Sentry will result
in issued patents, or that the patent currently held or new patents, if issued,
will be upheld as valid or will provide any significant competitive advantage to
Sentry. Further, if it were determined that another product infringed on Video's
patent, there can be no assurance that Sentry would be financially capable of
enforcing its patent. Although Video is not aware of any infringement of patents
or intellectual property held by third parties, there can be no assurance that
Video is not infringing on the intellectual property rights of others. In
addition, there was an Australian patent covering a device that in some respects
is similar to the SentryVision system. Based upon a review of the Australian
patent, management believes that many of the claims in such patent would be
found invalid in view of prior art and that the current products sold by Video
do not infringe on any valid claims of this patent. There also was an Australian
patent application covering a device that in some respects is similar to the
SentryVision system. Video's patent attorneys have advised Video that the
Australian patent and Australian patent application appear to have lapsed. Video
is also aware of a British patent application from a third party disclosing
aspects of a device which is in some respects similar to the system. Video's
patent attorneys have advised Video that the British patent application appears
to have lapsed. Although there can be no assurance as to the effectiveness of
such measures, Sentry intends to protect its current and future products through
all legal means available, including patents, the registration of trademarks and
trade names, copyrights and confidentiality agreements. See "BUSINESS OF VIDEO
- -- Patents and Intellectual Property."
Knogo has certain proprietary technologies for which patents have been
obtained or applied. No assurance can be given that such patent protection can
be obtained for all such technologies or, if obtained, that it will not be
challenged, invalidated or circumvented, that competitors will not independently
develop or patent technologies that are substantially equivalent to or superior
to Knogo's technologies or that any of Knogo's developmental technologies can be
successfully commercialized.
Knogo has entered into a License Agreement (the "License Agreement"),
dated as of December 29, 1994, pursuant to which Knogo and Sensormatic have
granted to each other certain perpetual fully-paid licenses to use certain
patents and technology, including improvements thereof. See "BUSINESS OF KNOGO
- -- Patents and Other Intellectual Property."
15
Dependence on Key Personnel
Video's and Knogo's operations have been materially dependent upon the
services of certain key executive officers, the loss of whom could have a
material adverse effect on Sentry. Although Knogo has entered into employment
contracts with its three most senior executive officers and Video has entered
into a non-compete contract with its president, there can be no assurance that
Sentry will be able to retain or replace the members of its current management
or that it will successfully attract and retain qualified management,
engineering and sales personnel in the future. See "MANAGEMENT OF SENTRY."
Limitations on Director Liability
Sentry's Certificate of Incorporation will provide, as permitted by the
DGCL, that a director of Sentry shall not be personally liable to Sentry or its
stockholders for monetary damages for breach of fiduciary duty as a director,
with certain exceptions. These provisions may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce the
likelihood of derivative litigation brought by stockholders on behalf of Sentry
against a director. In addition, Sentry's Bylaws will provide for mandatory
indemnification of directors and officers to the fullest extent permitted by the
DGCL.
Capital Requirements
Video's cash flow from operations and its ability to obtain debt
financing, are expected to meet Video's capital requirements through at least
1997. However, if sales and marketing, distribution, and research and
development efforts require more capital than anticipated, or if cash received
from operations should be less than anticipated, Video may need additional
capital in order to maintain its product development and marketing efforts and
expected levels of operations. Knogo's internal forecasts and assumptions
relating to its future operations anticipate that Knogo will have sufficient
cash from operations to meet its cash flow needs for at least the next 12
months, including through the availability of Knogo's $5,000,000 unsecured bank
credit facility or any successor facility. Moreover, Knogo has substantial
unencumbered assets, including property in Cidra, Puerto Rico, Hauppauge, New
York, and Villa Park, Illinois, upon which to base additional financing if
required. In that regard, in December 1996, Knogo completed a sale-leaseback
arrangement with respect to its Hauppauge, New York facility, resulting in the
receipt by Knogo of net proceeds of approximately $4,500,000. In discussions
with Knogo's lender under its present credit facility, such lender has indicated
orally to Knogo's management that it is willing to enter into a revolving credit
facility with Sentry upon completion of the Merger in an amount no less than is
currently provided to Knogo.
There can be no assurance that continued funding, through borrowings,
equity issuances or otherwise, if required by Sentry will be available or, if
available, will be on terms favorable to Sentry. In addition, if Sentry were to
incur substantial additional indebtedness, its ability to respond to changing
financial, business and economic conditions could be adversely affected. In
addition, pursuant to the terms of the Merger Agreement, Sentry is required to
pay certain dividends on the Sentry Class A Preferred Stock. Although for the
first two years following the Merger, Sentry will pay such dividends by
delivering additional shares of Sentry Class A Preferred Stock, such dividends
may ultimately adversely impact Sentry's cash flow. See "DESCRIPTION OF SENTRY
CAPITAL STOCK -- Preferred Stock -- Class A Preferred Stock," "VIDEO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources" and "KNOGO MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Liquidity and Capital Resources."
Acquired In-Process Research and Development
Sentry expects to spend up to 2% of its future revenues to develop
commercially viable products from acquired in-process research and development
and intends to expend such amounts out of its cash flows from operations. Sentry
believes that it will be able to develop such commercially viable products over
the next four years. There can be no assurances, however, that Sentry will be
able to develop such products and/or generate sufficient revenues from such
products to offset such expenditures of future revenues or the write-off of
non-recurring charges of approximately $13.2 million associated with such
acquired in-process research and development.
16
Availability of Components
While Video believes that the parts and manufactured components needed
for the assembly of its products can be produced by and obtained from multiple
sources, Video currently purchases parts and materials from a limited number of
suppliers. In addition, while Knogo has not historically been dependent on any
one supplier or group of suppliers of components for its systems, there can be
no assurance that it will not become so dependent in the future. The inability
to obtain such components on a timely basis would have an adverse effect on
either Video's or Knogo's ability, as applicable, to fill orders in a timely
manner. Any resulting delay in the fulfillment of orders could have a material
adverse impact on Sentry's financial condition and results of operations. See
"BUSINESS OF VIDEO -- Manufacturing and Installation" and "BUSINESS OF KNOGO --
Production."
Business Plan
As part of its business strategy, Video is currently evaluating
distribution channels to facilitate sales of its products internationally.
Future sales of Sentry's systems and products to customers outside of the United
States may expose Sentry to a number of risks inherent in the international
marketplace. Such risks include unpredictable and inconsistent regulatory
requirements, political and economic instability, trade restrictions, changes in
tariffs and taxes, longer payment cycles, difficulties enforcing agreements and
collecting receivables, exchange rate fluctuations, difficulties enforcing
intellectual property rights and compliance with foreign technical standards.
Knogo's present business plan assumes that Knogo's EAS business in all
its product lines should expand as a result of the sole focus of Knogo's
management on the North American business of the Knogo Predecessor. In
particular, Knogo's plan assumes continued expansion in the use of EAS systems
in the supermarket sector, a relatively untapped market among retail users of
loss prevention devices, which sector Knogo believes offers considerable
potential, and in the commercial and industrial sector, including the protection
of high value components in the computer industry. See "BUSINESS OF KNOGO --
Marketing." However, any anticipated growth in these areas is prospective and
there is a risk that market acceptance of EAS products will not develop as
expected. Consequently, there can be no assurance that any such growth will
occur or that if it does occur that it will be sustained.
Knogo Lost Manufacturing and Sales Volume Due To Termination of the Supply
Agreement
Knogo generates a significant portion (41% in 1995 and 22% in the nine
months ended September 30, 1996) of its revenues from production of EAS systems
and products for sale to Sensormatic pursuant to the Supply Agreement. The
Supply Agreement is scheduled to expire on June 30, 1997. There can be no
assurance that Knogo will be able to renew the terms of the Supply Agreement or
to otherwise succeed in expanding its sales sufficiently to replace the
manufacturing and sales volume it will lose upon the expiration of the Supply
Agreement. Consequently, Knogo may have difficulty maintaining profitable
margins in its manufacturing operations. See "BUSINESS OF KNOGO -- Production,"
"BUSINESS OF KNOGO -- Competition" and "KNOGO MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources."
Employment Contracts
The current employment agreements of Thomas A. Nicolette, Peter J.
Mundy and Peter Y. Zhou, each of whom are executive officers of Knogo, provide
that in the event of a Change in Control (as defined in the respective
employment agreement) of Knogo, the term of employment for each of these
officers will be automatically extended for the period ending two years in the
case of Mr. Nicolette's agreement and one year in the case of the other
agreements following the date of such Change in Control. Following such Change
in Control, each such officer will have the right to terminate his employment
for Good Reason (as defined in the respective employment agreement) while
continuing to receive the salary and bonus otherwise payable thereunder for the
remainder of the employment term. Additionally, the employment agreements
provide that in the event of a Change in Control all options held by each such
officer, whether or not then vested, would fully vest. The Knogo Merger will
constitute a Change in Control for purposes of each of these employment
agreements. See "BUSINESS OF KNOGO -- Executive Compensation -- Knogo Executive
Employment Agreements; Change in Control Arrangements." However, each of Messrs.
Nicolette and Mundy and Dr. Zhou has advised Knogo that he intends to enter, as
of the Effective Time, into a new employment agreement with Sentry and, in
connection therewith, to waive his rights under his Knogo
17
employment agreement. Nonetheless, it is anticipated that the new employment
agreements for each such officer, as well as an employment agreement that Andrew
L. Benson is expected to enter into with Sentry, will contain similar change in
control provisions. Any such provisions may have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of Sentry even though such a transaction might be economically beneficial to
Sentry and its stockholders. See "THE MERGER -- Interests of Certain Persons in
the Merger -- Employment Agreements."
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 Knogo, 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. See "BUSINESS OF KNOGO -- Regulation."
Sentry's business plan calls for the sale and use of Sentry's products
in both domestic and international markets. Sentry's products will 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.
18
THE SPECIAL MEETINGS
This Joint Proxy Statement/Prospectus is furnished in connection with
the solicitation of proxies (i) from the holders of Video Common Stock by the
Video Board for use at the Video Meeting and (ii) from the holders of Knogo
Common Stock by the Knogo Board for use at the Knogo Meeting.
Times and Places; Purposes
Video. The Video Meeting will be held at the offices of Winthrop &
Weinstine, 3000 Dain Bosworth Plaza, 60 South Sixth Street, Minneapolis,
Minnesota, on February 6, 1997, starting at 10:00 a.m. local time. At the Video
Meeting, the shareholders of Video will be asked to consider and vote upon the
Video Proposal and such other matters as may properly come before the Video
Meeting. A copy of the Merger Agreement is included as Appendix A to this Joint
Proxy Statement/Prospectus.
Knogo. The Knogo Meeting will be held at Knogo's corporate
headquarters, 350 Wireless Boulevard, Hauppauge, New York, on February 6, 1997,
starting at 11:00 a.m. local time. At the Knogo Meeting, the stockholders of
Knogo will be asked to consider and vote upon the Knogo Proposal and such other
matters as may properly come before the Knogo Meeting. A copy of the Merger
Agreement is included as Appendix A to this Joint Proxy Statement/Prospectus.
Voting Rights; Votes Required for Approval
Video. The Video Board has fixed the close of business, New York Time,
on January 10, 1997, as the Video Record Date. Only holders of record of shares
of Video Common Stock on the Video Record Date are entitled to notice of and to
vote at the Video Meeting. On the Video Record Date, there were 4,841,962 shares
of Video Common Stock outstanding and entitled to vote at the Video Meeting held
by approximately 63 shareholders of record.
Each holder of record, as of the Video Record Date, of Video Common
Stock is entitled to cast one vote per share. The presence, in person or by
proxy, of the holders of a majority of the outstanding shares of Video Common
Stock entitled to vote is necessary to constitute a quorum at the Video Meeting.
Under Video's Bylaws and the Minnesota Act, the affirmative vote, in
person or by proxy, of the holders of a majority of the shares of Video Common
Stock outstanding on the Video Record Date is required to approve and adopt the
Video Proposal.
As of the Video Record Date, directors and executive officers of Video
as a group beneficially owned 1,226,575 shares of Video Common Stock, or
approximately 24.2% of the Video Common Stock as of the Video Record Date. Video
has been advised that all of its directors and executive officers intend to vote
all such shares in favor of the Video Proposal. In connection with the execution
of the Merger Agreement, certain Video shareholders entered into Support/Voting
Agreements, each dated October 10, 1996 (the "Video Support/Voting Agreements"),
with Knogo, pursuant to which the shareholders promised to vote their shares of
Video Common Stock in favor of the Merger and the Merger Agreement at the Video
Meeting. Pursuant to a Video Support/Voting Agreement, Robert D. Furst, Jr.
agreed to vote his shares of Video Common Stock, which account for 16.6% of the
outstanding shares of Video Common Stock. Pursuant to a Video Support/Voting
Agreement, Andrew L. Benson agreed to vote his shares of Video Common Stock,
which account for 4.0% of the outstanding shares of Video Common Stock.
Knogo. The Knogo Board has fixed the close of business, New York Time,
on January 10, 1997, as the Knogo Record Date. Only holders of record of shares
of Knogo Common Stock on the Knogo Record Date are entitled to notice of and to
vote at the Knogo Meeting. On the Knogo Record Date, there were 5,772,632 shares
of Knogo Common Stock outstanding and entitled to vote at the Knogo Meeting held
by approximately 504 stockholders of record.
19
Each holder of record, as of the Knogo Record Date, of Knogo Common
Stock is entitled to cast one vote per share. The presence, in person or by
proxy, of the holders of a majority of the outstanding shares of Knogo Common
Stock entitled to vote is necessary to constitute a quorum at the Knogo Meeting.
Under Knogo's Bylaws and the DGCL, the affirmative vote, in person or
by proxy, of the holders of a majority of the shares of Knogo Common Stock
outstanding on the Knogo Record Date and entitled to vote on the Knogo Proposal
is required to approve and adopt the Knogo Proposal.
As of the Knogo Record Date, directors and executive officers of Knogo
as a group beneficially owned 1,392,344 shares of Knogo Common Stock, or
approximately 23.5% of the Knogo Common Stock as of the Knogo Record Date. Knogo
has been advised that all of its directors and executive officers intend to vote
all such shares in favor of the Knogo Proposal. In connection with the execution
of the Merger Agreement, certain Knogo stockholders entered into Support/Voting
Agreements, each dated or dated as of October 10, 1996 (the "Knogo
Support/Voting Agreements"), with Video, pursuant to which such stockholders
agreed to vote their shares of Knogo Common Stock in favor of the Merger and the
Merger Agreement at the Knogo Meeting. Pursuant to a Knogo Support/Voting
Agreement, William A. Perlmuth, as executor of the Estate of Arthur J. Minasy
(the "Minasy Estate"), agreed to vote the Minasy Estate's shares of Knogo Common
Stock, which account for 15.6% of the outstanding shares of Knogo Common Stock.
Pursuant to a Knogo Support/Voting Agreement, Walter J. Schloss and Edwin W.
Schloss, each acting for the general partner of Walter & Edwin Schloss
Associates L.P. ("Associates"), agreed to vote Associates' shares of Knogo
Common Stock, which account for 11.1% of the outstanding shares of Knogo Common
Stock. Pursuant to a Knogo Support/Voting Agreement, Thomas A. Nicolette agreed
to vote his shares of Knogo Common Stock, which account for 2.4% of the
outstanding shares of Knogo Common Stock.
Proxies
Video. All shares of Video Common Stock represented by properly
executed proxies received prior to or at the Video Meeting and not revoked, will
be voted in accordance with the instructions indicated in such proxies. If no
instructions are indicated on a properly executed returned proxy, such proxy
will be voted "FOR" the Video Proposal. A properly executed proxy marked
"ABSTAIN," although counted for purposes of determining whether there is a
quorum, will not be voted. Accordingly, since the affirmative vote of a majority
of the shares of Video Common Stock outstanding on the Video Record Date is
required for approval of the Video Proposal, a proxy marked "ABSTAIN" will have
the effect of a vote against the Video Proposal. In accordance with NASDAQ
rules, brokers and nominees are precluded from exercising their voting
discretion on the Video Proposal and thus, absent specific instructions from the
beneficial owner of such shares, are not empowered to vote such shares with
respect to the Video Proposal. Therefore, because the affirmative vote of a
majority of the shares of Video Common Stock outstanding on the Video Record
Date is required for approval of the Video Proposal, a broker non-vote with
respect to the Video Proposal will have the effect of a vote against the Video
Proposal. Shares represented by broker non-votes (i.e., shares held by brokers
or nominees which are represented at a meeting but with respect to which the
broker or nominee is not empowered to vote on a particular proposal) will,
however, be counted for purposes of determining whether there is a quorum at the
Video Meeting.
Knogo. All shares of Knogo Common Stock represented by properly
executed proxies received prior to or at the Knogo Meeting and not revoked, will
be voted in accordance with the instructions indicated in such proxies. If no
instructions are indicated on a properly executed returned proxy, such proxy
will be voted "FOR" the Knogo Proposal. A properly executed proxy marked
"ABSTAIN," although counted for purposes of determining whether there is a
quorum, will not be voted. Accordingly, since the affirmative vote of a majority
of the shares of Knogo Common Stock outstanding on the Knogo Record Date is
required for approval of the Knogo Proposal, a proxy marked "ABSTAIN" will have
the effect of a vote against the Knogo Proposal. In accordance with the AMEX
rules, brokers and nominees are precluded from exercising their voting
discretion on the Knogo Proposal and thus, absent specific instructions from the
beneficial owner of such shares, are not empowered to vote such shares on the
Knogo Proposal. Therefore, because the affirmative vote of a majority of the
shares of Knogo Common Stock outstanding on the Knogo Record Date is required
for approval of the Knogo Proposal, a broker non-vote with respect to the Knogo
Proposal will have the effect of a vote against the Knogo Proposal. Shares
represented by broker non-votes will, however, be counted for purposes of
determining whether there is a quorum at the Knogo Meeting.
20
If the stockholder is a participant in Knogo's Retirement Savings
401(k) Plan, then such stockholder's proxy will also serve as a voting
instruction for the trustees of the plan for all accounts registered in the same
name.
It is not expected that any matter not referred to herein will be
presented for action at the Video Meeting or the Knogo Meeting, respectively. If
any other matters are properly brought before the Video Meeting or the Knogo
Meeting, the persons named in the proxies will have discretion to vote on such
matters in accordance with their best judgment. The grant of a proxy will also
confer discretionary authority on the persons named in the proxy as proxy
appointees to vote in accordance with their best judgment on matters incident to
the conduct of the Special Meetings.
General. A shareholder of Video or a stockholder of Knogo may revoke
his or her proxy at any time prior to its use by delivering to the Secretary of
Video or Knogo, as the case may be, a signed notice of revocation or a later
dated signed proxy or by attending the Video Meeting or the Knogo Meeting, as
the case may be, and voting in person. Attendance at the Video Meeting or the
Knogo Meeting will not in itself constitute the revocation of a proxy.
The cost of solicitation of proxies will be paid by Video for the Video
proxies and by Knogo for the Knogo proxies. In addition to solicitation by mail,
proxies may be solicited in person by directors, officers and employees of Video
or Knogo, as the case may be, without additional compensation, and by telephone,
telegram, teletype, facsimile or similar method. Arrangements will be made with
brokerage houses and other custodians, nominees and fiduciaries to send proxy
material to beneficial owners; and Video or Knogo, as the case may be, will,
upon request, reimburse them for their reasonable expenses in so doing. Knogo
has retained Georgesen and Company Inc. to aid in the solicitation of proxies at
a fee of approximately $6,500 plus expenses. To the extent necessary in order to
ensure sufficient representation at the Video Meeting or the Knogo Meeting,
Video or Knogo, as the case may be, may request by telephone or telegram the
return of proxies. The extent to which this will be necessary depends entirely
upon how promptly proxies are returned. Stockholders are urged to send in their
proxies without delay.
HOLDERS OF VIDEO COMMON STOCK AND KNOGO COMMON STOCK SHOULD NOT SEND
ANY CERTIFICATES REPRESENTING SUCH COMMON STOCK WITH THE ENCLOSED PROXY CARD. IF
THE MERGER IS APPROVED, INSTRUCTIONS AND A LETTER OF TRANSMITTAL WILL BE MAILED
AFTER THE EFFECTIVE TIME TO EACH PERSON WHO WAS A HOLDER OF OUTSTANDING VIDEO
COMMON STOCK AND/OR KNOGO COMMON STOCK IMMEDIATELY PRIOR TO THE EFFECTIVE TIME.
VIDEO SHAREHOLDERS AND KNOGO STOCKHOLDERS SHOULD SEND CERTIFICATES REPRESENTING
VIDEO COMMON STOCK AND KNOGO COMMON STOCK, AS THE CASE MAY BE, TO THE EXCHANGE
AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE WITH, THE INSTRUCTIONS AND
LETTER OF TRANSMITTAL.
21
THE MERGER
Certain Effects of the Merger Upon Video
Upon consummation of the Video Merger (the "Video Effective Time"),
Video Merger Corp. will merge with and into Video and in the process Video will
become a wholly-owned subsidiary of Sentry. The name of the surviving subsidiary
will be Video Sentry Corporation.
At the Video Effective Time, by virtue of the Video Merger and without
any further action, each share of Video Common Stock issued and outstanding
immediately prior to the Video Effective Time shall be converted into and shall
represent the right to receive one share of Sentry Common Stock. All shares of
Video Common Stock shall no longer be outstanding and shall automatically be
canceled and extinguished and each certificate which immediately prior to the
Video Effective Time evidenced any shares of Video Common Stock shall thereafter
represent the right to receive (without interest), upon surrender (in accordance
with the terms of the Merger Agreement) of such certificate, shares of Sentry
Common Stock. In addition, at the Video Effective Time, each share of any class
of stock held in Video's treasury shall also be canceled and retired.
Certain Effects of the Merger Upon Knogo
Upon consummation of the Knogo Merger (the "Knogo Effective Time"),
Knogo Merger Corp. will merge with and into Knogo and in the process Knogo will
become a wholly-owned subsidiary of Sentry. The name of the surviving subsidiary
will be Knogo North America Inc.
At the Knogo Effective Time, by virtue of the Knogo Merger and without
any further action, each 1.2022 shares of Knogo Common Stock issued and
outstanding immediately prior to the Knogo Effective Time shall be converted
into and shall represent the right to receive one share of Sentry Common Stock
plus one share of Sentry Class A Preferred Stock. All shares of Knogo Common
Stock shall no longer be outstanding and shall automatically be canceled and
extinguished and each certificate which immediately prior to the Knogo Effective
Time evidenced any shares of Knogo Common Stock shall thereafter represent the
right to receive (without interest), upon surrender (in accordance with the
terms of the Merger Agreement) of such certificate, shares of Sentry Common
Stock and Sentry Class A Preferred Stock in accordance with the ratio described
above. In addition, at the Knogo Effective Time, each share of any class of
stock held in Knogo's treasury shall also be canceled and retired.
Background
Between 1993 and 1995, the managements of Knogo (or the Knogo
Predecessor, as the case may be) and Video met informally several times to
explore mutual business opportunities, relating, among other things, to joint
product distribution, installation and marketing arrangements. However, no
definitive agreements were entered into as a result of these meetings. In early
May 1996, Alex. Brown was engaged by Video to assist Video in reviewing its
financing needs and its strategic alternatives. One of the primary
representatives at Alex. Brown servicing Video had previously served as an
advisor to Knogo while he was employed by Smith Barney Inc., a former financial
advisor to Knogo.
Video's rapid growth in 1994 and 1995 led to quality control problems,
which resulted in a slow down in demand in 1996. The resulting deterioration in
reported financial results made it necessary for Video to raise capital to build
the infrastructure -- both production and marketing -- needed to achieve
profitable growth. The Video Board determined that it would be in the best
interests of its shareholders to seek a merger partner with existing
under-utilized infrastructure rather than to pursue the riskier strategy of
remaining independent and attempting to build such infrastructure itself,
particularly when the capital for such infrastructure was expected to be
expensive. See "BUSINESS OF SENTRY." Preliminary discussions were held with
several potential partners.
The Alex. Brown representative, because of his knowledge of, and
contacts with, Knogo, suggested Knogo to Video as a potential partner. The Video
Board determined that Knogo was the most attractive potential partner due to,
among others, the following factors: (i) Knogo had sufficient excess production
and marketing capacity; (ii) Knogo's product line and business strategy were
well-aligned with those of Video; and (iii) because of the relatively
22
equal pro forma equity distribution of common shares, Video's shareholders would
truly share in the benefits of the Merger and the potential future growth of the
combined entity.
During the summer of 1996, the senior management of Knogo and Video
engaged in preliminary discussions and due diligence to explore a strategic
business alliance between the two companies. By the week of September 9, 1996,
the preliminary discussions had evolved into more serious negotiations. On
September 11, 1996, senior management of both companies met to outline a
proposed business combination. However, the parties did not come to any
meaningful agreement and therefore continued their discussions through the week
of September 16, 1996.
On September 6, 1996, Dennis R. Johnson, a Video director, accompanied
by a representative of Alex. Brown, and Dewey Ballantine, legal advisor to
Video, visited the facilities of Knogo to perform due diligence, examine
documents and discuss Knogo's projections and the assumptions underlying the
projections. Mr. Johnson prepared a memorandum, dated September 7, 1996, to the
Chairman of the Board of Video, Mr. Furst, summarizing his findings.
On September 23, 1996, the senior management of Knogo and Video held
another meeting at which the Video account representative from Alex. Brown was
present. Nearing agreement in principle, the parties engaged in several
telephone conversations during the week of September 23, 1996 and met again on
September 27, 1996. The parties prepared and circulated a preliminary term sheet
dated September 27, 1996, containing some tentative principal terms of the
Merger.
The parties met again on October 1, 1996 and tentatively agreed to the
essential terms of the Merger. As a result of such meeting, the parties prepared
and circulated, on October 2, 1996, a revised term sheet containing the proposed
principal terms of the Merger.
During the week of September 30, 1996, Knogo (x) undertook additional
due diligence with respect to Video, including examination of documents, and
meetings with Video's management to discuss Video's operating history and future
prospects, (y) contacted several investment banks and subsequently retained
Donald & Co. as its financial advisor with respect to the Merger and (z)
circulated the October 2, 1996 draft term sheet and information relating to
Video and its business to Knogo's Board in anticipation of a meeting of Knogo's
Board to review the Merger. During the week of September 30, 1996, Video
undertook additional due diligence with respect to Knogo and circulated the
October 2, 1996 draft term sheet and information relating to Knogo and its
business to Video's Board in anticipation of a meeting of Video's Board to
review the proposed Merger.
From October 1, 1996 through October 10, 1996, members of the senior
management of Video and Knogo, together with their respective legal and
financial advisors, negotiated the terms of the Merger Agreement. During this
period, Mr. Furst, Mr. Benson, Mr. Perlmuth, and Mr. Nicolette negotiated the
terms of the Support/Voting Agreements pursuant to which, among other things,
each agreed to vote shares beneficially owned by them in favor of the Merger.
In negotiating the terms of the proposed Merger, the management of
Video and Knogo took into account various business, tax and legal
considerations. One basic concept on which the parties agreed was that Knogo's
stockholders would receive a preferred position corresponding approximately to
the difference between the net worth that Knogo was contributing to the merged
entity as compared to the net worth being contributed by Video (the "Excess
Knogo Net Worth"). To achieve this, it was agreed that Knogo stockholders would
receive preferred stock with an aggregate face value approximately equal to the
Excess Knogo Net Worth. To arrive at the allocation of common shares, the ratio
of Sentry common shares to Video common shares was first fixed at one to one,
then the total number of Sentry common shares to be received by Knogo
stockholders was determined based upon an analysis of the ratio of Video's
market capitalization to Knogo's market capitalization prior to announcement of
the transaction and approximating that ratio with the ratio of Video's pro forma
portion of Sentry's potential market capitalization to Knogo's pro forma portion
of Sentry's potential market capitalization, plus the value of the Sentry Class
A Preferred Stock to be issued to Knogo stockholders.
On October 7, 1996, a telephonic meeting of the Knogo Board was held to
discuss the proposed transaction with Video. During such meeting, Mr. Nicolette
and Knogo's legal advisors reviewed with the Knogo Board the status of
negotiations with Video and the terms of the proposed transaction. Mr. Nicolette
described Video's
23
business, including, among other things, fluctuations in Video's stock price
since its initial public offering and Video's financial statements and position,
including its indebtedness and intangibles on its balance sheet. Mr. Nicolette
also noted the potential synergies that the combined businesses of Knogo and
Video could produce. In addition, representatives from Stroock & Stroock &
Lavan, legal advisors to Knogo, made a presentation to the Knogo Board with
respect to the fiduciary duties of the Knogo directors relating to the proposed
transaction. A second meeting of the Knogo Board was scheduled for October 10,
1996, and the Knogo Board was provided additional information relating to Video
and the Merger.
On October 10, 1996, a meeting of the Knogo Board was held to further
discuss and consider the proposed transaction with Video and to review the
materials distributed to the Knogo Board after the October 7 meeting. During
such meeting, presentations were made to the Knogo Board by Knogo's senior
management and its financial and legal advisors. Senior management expanded on
the discussions of the October 7, 1996 Knogo Board meeting by making a detailed
presentation of the then current financial and operational condition of Video.
Senior management discussed Video's current product, the Video CCTV surveillance
system, and the product synergies possible between the CCTV system and Knogo's
existing products. Senior management also discussed the fiscal advisability of
the proposed transaction and responded in-depth to numerous questions about
future plans for the combined entity. In addition, Knogo's legal advisors
presented a summary of the terms and provisions of the then current draft of the
Initial Merger Agreement (the "Initial Merger Agreement") and reviewed such
document with the Knogo Board, including the structure and mechanics of the
transaction. Representatives from Donald & Co. made a presentation with respect
to the fairness of the consideration to be received by Knogo stockholders in the
Merger. At such time, Donald & Co. presented to the Knogo Board its written
opinion stating that based upon the assumptions and analysis set forth in such
opinion the consideration to be received by Knogo's stockholders was fair to
such stockholders from a financial point of view. In the course of its
presentation, Donald & Co. reviewed the valuations and methodologies it utilized
in connection with its opinions. See "-- Fairness Opinions -- Opinion of Knogo's
Investment Banker."
After the various presentations and related discussion, the October 10,
1996 meeting was recessed to enable the Knogo Board to further consider the
Merger and until such time as negotiations with Video of the Initial Merger
Agreement could be completed. Such meeting was reconvened via telephone at 4:00
p.m. on October 10, 1996. At that time, the Knogo Board was informed that the
negotiations with Video as to the principal terms of the Initial Merger
Agreement had been finalized. The Knogo Board then unanimously approved the
Initial Merger Agreement and the transactions contemplated thereby and
authorized Knogo's officers to finalize and execute the Initial Merger
Agreement.
Between September 6 and October 10, 1996, Mr. Furst regularly conferred
with each of the Video directors individually as to the status of negotiations
and due diligence with respect to Knogo. The Video Board telephonically held a
special meeting on the morning of October 10, 1996 to consider the proposed
Initial Merger Agreement and the transactions contemplated thereby. At this
meeting, members of Video's senior management, together with Dewey Ballantine,
its legal advisor, and Alex. Brown, its investment banker, reviewed with the
Video Board, among other things, the background of the proposed Merger, Video's
strategic alternatives, financial and valuation analyses of the transaction and
the terms of the Initial Merger Agreement. Materials had been provided to the
Video Board by its advisors in advance and the Video Board reviewed these
materials and questioned its advisors regarding them. Representatives of Dewey
Ballantine and Alex. Brown made presentations to the Video Board and discussed
with the Video Board their views and analyses of various aspects of the proposed
Merger. Dewey Ballantine made a presentation to the Video Board with respect to
the fiduciary duties of the Video directors relating to the proposed
transaction. Alex. Brown delivered its oral opinion (subsequently confirmed in
writing) to the Video Board that, based upon the matters presented to the Video
Board and as set forth in its opinion, as of such date, the Merger is fair to
the holders of Video Common Stock from a financial point of view. The Video
Board then adjourned the special meeting to allow time for the Board members to
consider the transaction, materials and presentations regarding the Merger.
On the afternoon of October 10, 1996, the Video Board reconvened its
special meeting. At that time, the Video Board was informed that the
negotiations with Knogo as to the principal terms of the Initial Merger
Agreement had been finalized. After extensive discussion and consideration, the
Video Board unanimously approved the Initial Merger Agreement and the
transactions contemplated thereby and authorized the execution of the Initial
Merger Agreement.
24
Following adjournment of the Video Board meeting and the Knogo Board
meeting on October 10, 1996, Video and Knogo finalized and executed the Initial
Merger Agreement and then publicly announced the transactions contemplated
thereby.
Following execution of the Initial Merger Agreement on October 10,
1996, but before consummation of the Merger, Video and Knogo amended and
restated the Initial Merger Agreement as of November 27, 1996 (the
"Amendments"). The Amendments modified the term "Hurdle Price" as used in the
Sentry Certificate of Incorporation, such that the Hurdle Price would be
determined one year from the Effective Time and could range from a minimum of
$5.00 to a maximum of $6.50 depending upon the average trading price of the
Common Stock. See "DESCRIPTION OF SENTRY CAPITAL STOCK -- Preferred Stock --
Class A Preferred Stock." The Amendments also eliminated the requirement that
Mr. Furst loan Sentry $575,000, less any amount already loaned by Mr. Furst to
Video under the October 1996 Note (as defined below) from Video to Mr. Furst.
See "VIDEO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Liquidity and Capital Resources" and "CERTAIN
TRANSACTIONS OF VIDEO." In addition, the Amendments eliminated the provision
requiring Sentry to deposit cash with the Exchange Agent to pay shareholders for
fractional interests in Sentry Common Stock and Sentry Class A Preferred Stock.
Instead, fractional interests will be aggregated by the Exchange Agent and sold
on behalf of stockholders who would otherwise have been entitled to receive such
fractional shares as soon as practicable after the Effective Time. The Exchange
Agent will distribute proceeds from such sale to stockholders who otherwise
would receive fractional interests in the Sentry Common Stock and/or Sentry
Class A Preferred Stock, as the case may be. See "THE MERGER AGREEMENT --
Exchange Procedure." Moreover, the Amendments clarified that the Merger is
conditioned, among other things, upon the Sentry Class A Preferred Stock being
listed on NASDAQ or a national securities exchange, subject only to official
notice of issuance. See the "THE MERGER AGREEMENT --Conditions." The Merger
Agreement was amended again on January 10, 1997 to further modify the terms of
the Sentry Class A Preferred Stock in order to satisfy certain listing
requirements of the AMEX.
Recommendation of Video Board; Video's Reasons for the Merger
THE VIDEO BOARD UNANIMOUSLY RECOMMENDS THAT HOLDERS OF VIDEO COMMON
STOCK VOTE FOR THE VIDEO PROPOSAL.
On October 10, 1996, the Video Board received and considered the
presentations of the management of Video and its investment banker and legal
advisor regarding the Merger, and unanimously approved the Initial Merger
Agreement. On November 27, 1996, the Video Board considered the proposed
amendments to the Initial Merger Agreement and unanimously approved such
amendments and the Merger Agreement. THE VIDEO BOARD HAS DETERMINED THAT THE
MERGER IS IN THE BEST INTERESTS OF VIDEO AND ITS SHAREHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS OF VIDEO VOTE FOR THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
In view of the variety of factors considered in connection with its
evaluation of the Merger, the Video Board did not quantify or otherwise attempt
to assign relative weights to the specific factors it considered in reaching its
determination.
In reaching its determination to recommend approval of the Merger
Agreement, the Video Board consulted with Video management, as well as its legal
counsel and investment banker, and considered a number of factors. The Video
Board believes the Merger offers Video and its shareholders a unique opportunity
to create a leading electronic surveillance company which can provide the
critical mass and economies of scale necessary to compete effectively in the
current business environment. The Video Board considered the nature and scope of
the business of Knogo, the access it provides to an established manufacturing,
distribution and service infrastructure, its stable capital structure, the
quality of Knogo's management team, its competitive position and prospects for
further development. The combined operations of Video and Knogo may provide a
proprietary, integrated product line, efficient production and distribution,
reduced operating costs and improved access to capital.
In reviewing Knogo's business, the Video Board took into account the
complementary nature of the businesses of the two companies, which have little
overlap and which present opportunities for cross-utilization and
cross-promotion of assets of each company in the businesses operated by the
other. The Video Board considered that the quality of Knogo's management and the
complementary nature of the two companies' businesses create
25
significant opportunities for development in the companies on a combined basis
without the need for significant restructuring, redirection or asset
dispositions. In addition, the Video Board reviewed a financial comparison of
Video and Knogo and studied the potential impacts of the Merger on the balance
sheet of the new combined company. The Video Board studied the potential effect
on the earnings per share of the new combined company as a result of the Merger.
The Video Board also took into account the historical performance of the common
stock of each of Video and Knogo, as well as the historical price-to-earnings
multiples of the two companies.
The Video Board considered the terms and conditions of the Merger
Agreement, including (i) the conversion ratio of shares of Sentry Common Stock
for shares of Video Common Stock and Knogo Common Stock, which will result in
Video shareholders having voting control, and (ii) the financial costs of
issuance of the Sentry Class A Preferred Stock to Knogo stockholders and the
possibility of the conversion of such stock into Sentry Common Stock.
The Video Board considered the provisions of the Merger Agreement which
prohibit Knogo and its subsidiaries, and their respective directors, officers,
employees and representatives from soliciting or encouraging any Merger Proposal
or, subject to the fiduciary duties of the Knogo Board, from negotiating with
any third parties with respect to a Merger Proposal. The Video Board further
considered the provisions of the Merger Agreement which require Knogo to pay
Video for fees and expenses Video has incurred up to $750,000, exclusive of the
sharing of costs and expenses related to this Joint Proxy Statement/Prospectus,
if a Merger Proposal is made for or solicited by Knogo, or the Knogo Board
withdraws or modifies, in a manner adverse to Video, its approval or
recommendation of the Merger Agreement or the Merger, and thereafter (i) the
Merger Agreement is terminated by Video or Knogo and (ii) within six months of
the termination, Knogo is a party to a merger, acquisition or similar
transaction involving the purchase of a significant portion of the stock or
assets of Knogo.
The Video Board considered the oral opinion of Alex. Brown rendered on
October 10, 1996 (and subsequently confirmed in writing), that the Merger is
fair to the holders of Video Common Stock from a financial point of view. A copy
of Alex. Brown's written opinion to the Video Board, dated the date of this
Joint Proxy Statement/Prospectus, which confirms the opinion of Alex. Brown
dated October 10, 1996, is attached hereto as Appendix B and is incorporated
herein by reference. See "-- Fairness Opinions -- Opinion of Video's Investment
Banker." In addition, the Video Board considered the presentation of Alex. Brown
made at the Video Board meeting held on October 10, 1996.
Recommendation of Knogo Board; Knogo's Reasons for the Merger
THE KNOGO BOARD UNANIMOUSLY RECOMMENDS THAT HOLDERS OF KNOGO COMMON
STOCK VOTE FOR THE KNOGO PROPOSAL.
At meetings of the Knogo Board held on October 7, 1996 and October 10,
1996, the Knogo Board received and considered presentations of the senior
management of Knogo and its legal and financial advisors regarding the Merger.
At the resumption of its meeting on October 10, 1996, the Knogo Board
unanimously approved the Initial Merger Agreement and the transactions
contemplated thereby and authorized the officers of Knogo to finalize and
execute the Initial Merger Agreement and to prepare, execute and deliver any
amendments thereto as may be deemed necessary or appropriate by such officers,
in each case in such form as the officer or officers executing the same, with
and upon advice of counsel, may approve. THE KNOGO BOARD HAS DETERMINED THAT THE
MERGER IS IN THE BEST INTERESTS OF KNOGO AND ITS STOCKHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF KNOGO VOTE FOR THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
In its evaluation of the Merger, the Knogo Board considered a variety
of factors including presentations to such Board by Knogo's management and its
financial and legal advisors. In view of the variety of factors considered by
the Knogo Board in reaching its determination, it did not quantify or otherwise
attempt to assign relative weights to the specific factors it considered in
reaching its determination.
Knogo has from time-to-time considered various strategic alternatives
to maximize shareholder value. Knogo believes one important factor affecting
shareholder value is Knogo's ability to offer a comprehensive line of
security-related products. A more comprehensive product line will, in
management's view, permit Knogo to compete more effectively with its principal
competitors, some of which are larger and have substantially greater
26
capital resources than Knogo. Many of Knogo's competitors offer CCTV products as
components of their integrated product lines. Therefore, one of Knogo's major
strategic goals has been to make available to Knogo's customers a proprietary
CCTV product that would not only diversify Knogo's existing product lines but
would also be available as an integrated component of Knogo's other product
offerings. Knogo's management believes that the CCTV market provides a solid
growth opportunity with expanding applications and has, therefore, desired to
increase its presence in the CCTV market. In pursuing this goal, however, Knogo
has been particularly concerned that any CCTV product which it offers not
compromise the high standard and reputation for quality and service which
Knogo's existing products have established. As a result, although Knogo has at
various times considered other CCTV products, none of these was deemed a
suitable candidate to become Knogo's proprietary product offering. Instead,
Knogo has for the past four years elected to act as a system integrator and
installer of non-proprietary CCTV products acquired from third parties. Knogo
was ultimately presented with the opportunity to meet this business development
objective when it was introduced to Video. Having reviewed several CCTV products
in the marketplace, Knogo believes that an alliance with Video would permit
Knogo to offer a proprietary and technologically innovative CCTV product that
would compete well with the CCTV products offered by Knogo's competitors.
In evaluating Video's business, Knogo has found several potential
synergies with its own business. First, Knogo is keen to continue to introduce
quality products into its product lines. Knogo believes that Video's products
compare favorably to the high quality products that Knogo provides to its
customers. In reaching this determination, Knogo's management has relied in part
on the experiences of its own sales and service staff with Video's products.
Knogo's staff has had some limited experience in installing Video's products.
Based on their exposure to Video's products, Knogo's staff members have been
favorably disposed toward Video's product line.
Second, Knogo believes that it has financial resources and an
operational infrastructure that Knogo and Video can collectively exploit to
permit Video's products, and any enhancements thereto, to more rapidly achieve
success in the marketplace. Knogo believes that its operating infrastructure is
currently underutilized by Knogo's existing product offerings. Knogo believes
that at present it can easily promote and offer new products within its existing
operational capacity. In addition, although Knogo has been increasing its
third-party sales, such sales may not grow as rapidly as necessary for Knogo to
utilize its excess operational capacity, particularly after Knogo's Supply
Agreement with Sensormatic terminates. See "BUSINESS OF KNOGO -- Production" and
"BUSINESS OF KNOGO -- Competition." In this regard, Knogo expects that, through
its extensive manufacturing, marketing and distribution capabilities, Knogo can
fundamentally assist Video with the production and sale of Video's products.
In addition to its day-to-day operational capacity, Knogo believes that
it can offer Video access to Knogo's technological expertise. In the judgment of
its management, Knogo can readily adapt the technological expertise it has
developed in the EAS area to assist Video in the research and development of
further innovations to Video's existing CCTV product line. Due to its resources,
Knogo may well be able to assist Video in developing more innovative and cost
effective CCTV solutions for the benefit of both their customers.
Knogo's management believes that the Knogo and Video businesses
complement each other. The Merger provides Knogo and Video access to a wider
array of products and customers in the anti-theft and security fields and the
resources with which to exploit the increased sales of such products to such
customers. The combination of Knogo's and Video's businesses is, therefore,
expected to accelerate the strategic growth plans of both companies.
The Knogo Board considered the business opportunity presented by the
Merger, noting, in particular, the belief of Knogo's management that the CCTV
market presents prospects for growth and expansion. In this light, the Knogo
Board reviewed the terms of the Merger Agreement, including, among other things,
the consideration to be received by Knogo stockholders and Video shareholders.
In evaluating such consideration, the Knogo Board weighed the opinion of Donald
& Co. (including the underlying analysis and assumptions) that the consideration
to be received by Knogo stockholders in the Merger is fair to such stockholders
from a financial point of view. In addition, the Knogo Board considered the
provisions of the Merger Agreement which prohibit Video and its subsidiaries,
and their respective directors, officers, employees and representatives from
soliciting or encouraging any Merger Proposals or, subject to the fiduciary
duties of the Video Board, from negotiating with any third parties with respect
to a Merger Proposal. The Knogo Board further considered the provisions of the
Merger Agreement which require Video to pay Knogo for fees and expenses Knogo
has incurred up to $750,000, exclusive of the sharing of costs and expenses
related to this Joint Proxy Statement/Prospectus, if a Merger Proposal is made
for or solicited by Video, or the Video Board withdraws or modifies, in a manner
adverse to Knogo, its approval or
27
recommendation of the Merger Agreement or the Merger, and thereafter (i) the
Merger Agreement is terminated by Knogo or Video and (ii) within six months of
the termination, Video is a party to a merger, acquisition or similar
transaction involving the purchase of a significant portion of the stock or
assets of Video. Based on its thorough review of the facts, the Knogo Board
unanimously concluded that the Merger complements Knogo's long-term development
goals and that it is expected to produce favorable results for Knogo and its
stockholders.
Fairness Opinions
Opinion of Video's Investment Banker
Video retained Alex. Brown on April 25, 1996 to act as Video's
financial advisor in connection with the Merger, including rendering its opinion
to the Video Board as to the fairness to Video's shareholders, from a financial
point of view, of the exchange ratio used (the "Exchange Ratio") to convert
Video Common Stock to Sentry Common Stock.
At the October 10, 1996 meeting of the Video Board, representatives of
Alex. Brown rendered to the Video Board its oral opinion with respect to the
Merger, subsequently confirmed in writing as of the same date, that as of such
date, and subject to the assumptions made, matters considered and limitations
set forth in such opinion and summarized below, the Exchange Ratio was fair,
from a financial point of view, to Video's shareholders. The opinion was updated
by delivery of a written opinion dated as of the date of this Joint Proxy
Statement/Prospectus. No limitations were imposed by the Video Board upon Alex.
Brown with respect to the investigations made or procedures followed by it in
rendering its opinion.
The full text of Alex. Brown's written opinion dated as of the date of
this Joint Proxy Statement/Prospectus (the "Alex. Brown Opinion"), which sets
forth, among other things, assumptions made, matters considered and limitations
on the review undertaken, is attached hereto as Appendix B and is incorporated
herein by reference. Video's shareholders are urged to read the Alex. Brown
Opinion in its entirety. Alex. Brown did not recommend to Video that any
specific exchange ratios constituted the appropriate Exchange Ratio for the
Merger. The Alex. Brown Opinion is directed to the Video Board, addresses only
the fairness of the Exchange Ratio to Video's shareholders from a financial
point of view and does not constitute a recommendation to any Video shareholder
as to how such shareholder should vote at the Video Meeting. The Alex. Brown
Opinion was rendered to the Video Board for its consideration in determining
whether to approve the Merger Agreement. The discussion of the Alex. Brown
Opinion in this Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of the Alex. Brown Opinion.
In connection with the Alex. Brown Opinion, Alex. Brown reviewed
certain publicly available financial and other information concerning Video and
Knogo and certain internal analyses and other information furnished to it by
Video and Knogo. Alex. Brown also held discussions with the members of the
senior managements of Video and Knogo regarding the businesses and prospects of
their respective companies and the joint prospects of a combined company. In
addition, Alex. Brown (i) reviewed the reported prices and trading activity for
the common stock of both Video and Knogo, (ii) compared certain financial and
stock market information for Video and Knogo with similar information for
selected companies whose securities are publicly traded, (iii) reviewed the
financial terms of selected recent business combinations which it deemed related
in whole or in part, (iv) reviewed the terms of the Merger Agreement and certain
related documents, and (v) performed such other studies and analyses and
considered such other factors as it deemed appropriate.
In conducting its review and arriving at its opinion, Alex. Brown
assumed and relied upon, without independent verification, the accuracy,
completeness and fairness of the information furnished to or otherwise reviewed
by or discussed with it for purposes of rendering its opinion. With respect to
the financial projections of Video and Knogo and other information relating to
the prospects of Video and Knogo provided to Alex. Brown by each company, Alex.
Brown assumed that such projections and other information were reasonably
prepared and reflected the best currently available judgments and estimates of
the respective managements of Video and Knogo as to the likely future financial
performances of their respective companies and of the combined entity. The
financial projections of Video and Knogo that were provided to Alex. Brown were
utilized and relied upon by Alex. Brown in the Pro Forma Merger Valuation
summarized below. Alex. Brown assumed, with the consent of Video, that the
Merger will qualify as a tax-free reorganization for federal income tax
purposes. Alex. Brown did not make, and was not provided with, an independent
evaluation or appraisal of the assets of Video and Knogo, nor has Alex.
28
Brown been furnished with any such evaluations or appraisals. The Alex. Brown
Opinion is based on market, economic and other conditions as they existed and
could be evaluated as of the date of such opinion letter.
The following is a summary of the analyses performed and factors
considered by Alex. Brown in connection with rendering the Alex. Brown Opinion.
Historical Financial Position. In rendering its opinion, Alex. Brown
reviewed and analyzed the historical and current financial condition of each of
Video and Knogo which included among other things (i) an assessment of recent
financial statements; (ii) an analysis of revenue growth, margin trends and
other operating performance indicators; and (iii) the companies' capital
structures.
Historical Stock Price Performance. Alex. Brown reviewed and analyzed
the daily closing per share market prices and trading volume for Video Common
Stock, from October 21, 1994 to October 7, 1996 and, for Knogo Common Stock,
from January 3, 1995 to October 7, 1996. In addition, Alex. Brown reviewed the
daily closing per share market prices and trading volume for Video and Knogo
over the period from October 6, 1995 to October 7, 1996. Alex. Brown also
reviewed the daily closing per share market prices of the Video Common Stock and
Knogo Common Stock and compared the movement of such daily closing prices with
the movement of the NASDAQ composite average over the period from October 9,
1995 through October 7, 1996. Alex. Brown noted that, on a relative basis, Video
and Knogo each underperformed the NASDAQ composite average and that Knogo
outperformed Video for this period. Over the one year period from October 10,
1995 through October 7, 1996, Knogo Common Stock price moderately outperformed
Video Common Stock price. This information was presented to give the Video Board
background information regarding the respective stock prices of Video and Knogo
over the periods indicated.
Pro Forma Merger Valuation. Alex. Brown analyzed the implied share
price of the combined entity based on the terms of the transaction and the
individual market values of both Video and Knogo. To do so, Alex. Brown combined
the equity market capitalizations of both companies as of October 8, 1996,
subtracted the aggregate amount of the Sentry Class A Preferred Stock (assumed
for purposes of this analysis to have a market value of 90% of its Face Value),
and divided the resulting implied common equity value of Sentry by the pro forma
number of Sentry common shares, the net result of which was an implied Sentry
share price of $4.33 (the "Arithmetic Price"). Alex. Brown noted that this price
ignored the market value of the synergies which were expected to be created by
the transaction. An implied total equity value ("Implied Total Equity Value")
for both Video and Knogo was derived by multiplying the Arithmetic Price by the
pro forma issued common shares outstanding for each company resulting from the
Merger plus those options deemed exercisable at the Arithmetic Price, in
addition to the discounted value of the preferred stock issued. An implied
enterprise value ("Implied Enterprise Value") for each of Video and Knogo was
derived by adding the Implied Total Equity Values of each company to the pro
forma debt of each company as of December 31, 1996. The Implied Total Equity
Value for both Video and Knogo was divided by their respective total current
outstanding common shares prior to the Merger, to produce an implied equity
value per share ("Implied Equity Value") for each. The implied premium
represented by the Implied Equity Value less the value of options deemed
exercisable at the Arithmetic Price of each of Video and Knogo was calculated
based on the one month average price through October 8, 1996 for Video of $3.41
and Knogo of $7.41. Based on this analysis, the calculated implied premium to
the one month average price of Video and Knogo was 27.1% and (0.9%),
respectively.
From the derived implied equity values and implied enterprise values
described above, implied transaction multiples were calculated. Financial
information used in connection with the multiples provided below with respect to
Video and Knogo was based on the latest reported 12 month period as derived from
publicly available information; estimated calendar year 1996 figures were based
on management's projections for Video and published investment banking research
on Knogo for Knogo. Such financial information included, among other things,
ratios of Implied Enterprise Value to revenues, earnings before interest
expense, income taxes and depreciation and amortization ("EBITDA") and earnings
before interest expense, and income taxes ("EBIT"), each for the latest reported
12 month period as derived from publicly available information; and ratios of
the Implied Total Equity Value to net income, for the latest reported 12 month
period as derived from publicly available information, and book value, as of
June 30, 1996. Alex. Brown noted that, on a trailing 12 month basis, the
multiple of Implied Enterprise Value to revenues was 5.2x for Video and 1.6x for
Knogo; the multiple of Implied Enterprise Value to EBITDA was negative and
therefore not meaningful for Video and 17.3x for Knogo; the multiple of Implied
Enterprise value to EBIT was not meaningful for Video and 32.9x for Knogo. For
estimated 1996 figures, the
29
multiple of Implied Enterprise Value to revenues was 6.3x for Video and 1.6x for
Knogo; the multiple of Implied Enterprise Value to EBITDA was not meaningful for
Video and 25.9x for Knogo; the multiple of Implied Enterprise Value to EBIT was
not meaningful for Video and 42.1x for Knogo. Alex. Brown further noted that the
multiple of Implied Equity Value to trailing 12 month net income was not
meaningful for Video and 35.6x for Knogo, and to estimated 1996 figures, not
meaningful for Video and 53.7x for Knogo; the multiple of Implied Equity Value
to book value was 10.6x for Video and 1.7x for Knogo.
Contribution Analysis. Alex. Brown analyzed the relative contributions
of Video and Knogo, as compared to the pro forma income statement of the
combined company, based on the latest reported 12 month period. This analysis
showed that on a pro forma combined basis, based on the 12 month period ended
June 30, 1996 for Video and Knogo, Video and Knogo would account for
approximately 15.0% and 85.0% respectively, of the combined company's pro forma
revenue and approximately 7.7% and 92.3% respectively, of the combined company's
pro forma book value. Because Video was operating at a loss, multiples of
EBITDA, EBIT and EPS were not meaningful for comparison purposes.
Analysis of Selected Publicly Traded Companies. This analysis examines
a company's valuation in the public market as compared to the valuation in the
public market of other selected publicly traded companies. Alex. Brown compared
certain financial information (based on the commonly used valuation measurements
described below) relating to Video and Knogo to certain corresponding
information from two groups of publicly traded related companies (the first
group consisting of two EAS companies: Sensormatic and Checkpoint Systems, Inc.
("Checkpoint") (collectively, the "Selected EAS Companies"); and the second
group consisting of two CCTV companies: Vicon Industries, Inc. and Ultrak, Inc.
(collectively, the "Selected CCTV Companies")). Such financial information
included, among other things, (i) common equity market valuation; (ii) operating
performance; (iii) ratios of common equity market value as adjusted for debt and
cash ("Enterprise Value") to revenues, EBITDA, EBIT, each for the latest
reported 12 month period and derived from publicly available information; and
(iv) ratios of trading common share value ("Equity Value") to earnings. Alex.
Brown noted that because each of the selected groups consisted of only two
companies, it was difficult to draw conclusions from this analysis. The
financial information used in connection with the multiples provided below with
respect to Video, Knogo, the Selected EAS Companies and the Selected CCTV
Companies was based on the latest reported 12 month period as derived from
publicly available information. Estimated earnings figures for Video, the
Selected CCTV Companies and the Selected EAS Companies for calendar years 1996
and 1997 were based on the Institutional Brokers Estimate System ("I/B/E/S");
Knogo estimated earnings for calendar years 1996 and 1997 was based on published
investment banking research on Knogo. Alex. Brown noted that, on a trailing 12
month basis, the multiple of Enterprise Value to revenues was 5.2x for Video
compared to a range of 0.3x to 2.7x, with a mean of 1.5x, for the Selected CCTV
Companies, and 1.6x for Knogo compared to a range of 1.7x to 3.5x, with a mean
of 2.6x, for the Selected EAS Companies; the multiple of Enterprise Value to
EBITDA was not meaningful for Video compared to a range of 12.8x to 32.6x, with
a mean of 22.7x, for the Selected CCTV Companies, and 17.3x for Knogo compared
to a range of 15.2x to 22.6x, with a mean of 18.9x for the Selected EAS
Companies; and the multiple of Enterprise Value to EBIT was not meaningful for
Video compared to a range of 19.6x and 37.0x, with a mean of 28.3x, for the
Selected CCTV Companies, and 32.9x for Knogo, compared to a range of 32.7x to
33.9x, with a mean of 33.3x, for the Selected EAS Companies. Alex. Brown further
noted that the multiple of Equity Value to trailing 12 month earnings was not
meaningful for Video, compared to a range of not meaningful to 55.8x, for the
Selected CCTV Companies, and 35.6x for Knogo, compared to a range of 47.2x to
62.7x, with a mean of 55.0x, for the Selected EAS Companies; the multiple of
Equity Value to calendar year 1996 earnings was not meaningful for Video,
compared to a range of not available to 42.0x for the Selected CCTV Companies,
and 53.7x for Knogo, compared to a range of 35.5x to 42.5x, with a mean of
39.0x, for the Selected EAS Companies; and the multiple of Equity Value to
calendar year 1997 earnings was not available for Video, compared to a range of
not available to 26.3x for the Selected CCTV Companies, and 16.6x for Knogo,
compared to a range of 18.0x to 28.4x, with a mean of 23.2x, for the Selected
EAS Companies. As a result of the foregoing procedures, Alex. Brown noted that
the implied multiples for Video were in general higher than the range of the
multiples for the Selected CCTV Companies and the implied multiples for Knogo
were moderately lower than the range of the multiples for the Selected EAS
Companies, results which Alex. Brown deemed to support the fairness of the
Exchange Ratio.
Analysis of Selected Precedent Transactions. Alex. Brown reviewed the
financial terms, to the extent publicly available, of eight completed mergers
and acquisitions since February 17, 1991 in the following areas: CCTV
transactions (the "Selected CCTV Transactions") and EAS transactions (the
"Selected EAS Transactions"). Alex. Brown calculated various financial multiples
based on certain publicly available information for each of the
30
Selected CCTV Transactions and the Selected EAS Transactions and compared them
to corresponding financial multiples of Video and Knogo, based on the Arithmetic
Price's application to the companies' respective financial performances. The
five EAS transactions reviewed, in reverse chronological order of public
announcement, were: Actron Group Ltd./Checkpoint (October 12, 1995), Knogo
Corporation/Sensormatic (August 15, 1994), ID Systems International
BV/Checkpoint (May 3, 1993), Security Tag Systems, Inc./Sensormatic (September
30, 1992) and ALP Division (ASH PLC)/Sensormatic (July 29, 1992). The three CCTV
transactions reviewed, in reverse chronological order of public announcement,
were: Burle Industries, Inc./Philips NV (March 6, 1995), Robot Research,
Inc./Sensormatic (August 30, 1993) and American Dynamics/Sensormatic (February
17, 1991). Because all of the CCTV acquisitions involved relatively small
private companies, none of the operating data for the targets was available and
thus acquisition multiples were not available. Similarly, because several of the
EAS acquisitions involved relatively small private companies, several of the
acquisition multiples were not available. Alex. Brown noted that the multiple of
Enterprise Value to trailing 12 month revenues was 5.2x for Video while no
acquisition multiples were available for the Selected CCTV Transactions, and
1.6x for Knogo versus a range of 1.1x to 2.2x, with a mean of 1.8x, for the
Selected EAS Transactions; the multiple of Enterprise Value to trailing 12 month
EBITDA was not meaningful for Video and 17.3x for Knogo versus a range of 9.5x
to 11.5x, with a mean of 10.5x, for the Selected EAS Transactions; and the
multiple of Enterprise Value to trailing 12 month EBIT was not meaningful for
Video and 32.9x for Knogo versus a range of 12.2x to 19.7x, with a mean of
16.0x, for the Selected EAS Transactions. Alex. Brown further noted that the
multiple of Equity Value times the total outstanding common shares to trailing
12 month net income was not meaningful for Video and 35.6x for Knogo versus the
only available multiple of 36.5x, for the Selected EAS Transactions. Alex. Brown
also noted that the multiple of Equity Value times the total outstanding common
shares to June 30, 1996 book value was 10.6x for Video while no transaction
multiples were available for the Selected CCTV Transactions and 1.7x for Knogo
versus a range of 1.6x to 3.5x, with a mean of 2.3x, for the Selected EAS
Transactions. All multiples for the Selected CCTV Transactions and the Selected
EAS Transactions were based on public information available at the time of
announcement of such transaction, without taking into account differing market
and other conditions during the five year period during which the Selected CCTV
Transactions and the Selected EAS Transactions occurred. Despite the relatively
small universe of available data points, Alex. Brown considered the fact that
the implied multiples of revenue and book value for Knogo were within the ranges
paid in the Selected EAS Transactions to support the fairness of the Exchange
Ratio.
No company used in the analysis of selected publicly traded companies
nor any transaction used in the analysis of selected precedent transactions
summarized above is identical to Video, Knogo or the Merger. Accordingly, such
analyses must take into account differences in the financial and operating
characteristics and other factors that would affect the public trading value and
acquisition value of the Selected CCTV Companies and the Selected EAS Companies
and the Selected CCTV Transactions and the Selected EAS Transactions,
respectively.
While the foregoing summary describes all analyses and factors that
Alex. Brown deemed material in its presentation to the Video Board, it is not a
comprehensive description of all analyses and factors considered by Alex. Brown.
The preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the applications of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Alex. Brown believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors considered
by it, without considering all analyses and factors, would create an incomplete
view of the evaluation process underlying the Alex. Brown Opinion. In performing
its analyses, Alex. Brown considered general economic, market and financial
conditions and other matters, many of which are beyond the control of Video and
Knogo. The analyses performed by Alex. Brown are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than those suggested by such analyses. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Additionally,
analyses relating to the value of a business do not purport to be appraisals or
to reflect the prices at which the business actually may be sold. Furthermore,
no opinion is being expressed as to the prices at which shares of Sentry Common
Stock may trade at any future time.
Pursuant to a letter agreement dated April 25, 1996 between Video and
Alex. Brown, the fees to date payable to Alex. Brown for rendering the Alex.
Brown Opinion have been $200,000 and, upon consummation of the Merger, Alex.
Brown will receive a transaction fee of approximately $800,000 (subject to
certain possible adjustments). In addition, Video has agreed to reimburse Alex.
Brown for its reasonable out-of-pocket expenses incurred in connection with
rendering financial advisory services, including fees and disbursements of its
legal
31
counsel. Video has agreed to indemnify Alex. Brown and its directors, officers,
agents, employees and controlling persons, for certain costs, expenses, losses,
claims, damages and liabilities related to or arising out of its rendering of
services under its engagement as financial advisor.
The Video Board retained Alex. Brown to act as its advisor based upon
Alex. Brown's qualifications, reputation, experience and expertise. Alex. Brown,
as a customary part of its investment banking business, is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwriting, private placements and valuations for
estate, corporate and other purposes. Alex. Brown regularly publishes research
reports regarding the businesses and securities of publicly traded companies in
the industrial technology industry. Alex. Brown may actively trade the
securities of both Video and Knogo for its own account and for the account of
its customers and, accordingly, may at any time hold a long or short position in
such securities.
Opinion of Knogo's Investment Banker
Donald & Co. was asked by Knogo to render its opinion to the Knogo
Board as to the fairness to the public stockholders of Knogo, from a financial
point of view, of the consideration (the "Consideration") to be received by such
shareholders pursuant to the Merger. Donald & Co.'s engagement was limited to
such opinion.
On October 10, 1996, Donald & Co. advised the Knogo Board in writing
that based upon and subject to the matters set forth in such writing, as of such
date, the Consideration was fair, from a financial point of view, to the holders
of outstanding shares of Knogo Common Stock. The October 10, 1996 opinion was
updated by delivery of a written opinion dated as of the date of this Joint
Proxy Statement/Prospectus (together, the "Donald & Co.
Opinion").
A copy of the Donald & Co. Opinion is attached hereto as Appendix C.
Knogo stockholders are urged to read the opinion carefully and in its entirety
for assumptions made, matters considered, procedures followed and limits of the
review undertaken by Donald & Co. The summary of the Donald & Co. Opinion set
forth in this Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion. The Donald & Co. Opinion was
prepared for the Knogo Board, is directed only to the fairness to the Knogo
stockholders as of the date of this Joint Proxy Statement/Prospectus, from a
financial point of view, of the consideration to be given to Knogo stockholders
pursuant to the Merger Agreement, and does not constitute a recommendation to
any stockholder as to how to vote at the Knogo Meeting. Additionally, Donald &
Co.'s opinion does not express an opinion as to the price or trading range at
which Sentry's securities will trade subsequent to the date of its opinion.
In connection with its opinion, Donald & Co. (i) reviewed a draft
Merger Agreement (in substantially the same form as the Initial Merger Agreement
and the Amended and Restated Merger Agreement); (ii) reviewed and analyzed
certain publicly available information concerning Video and Knogo, including
Commission filings of each company; (iii) reviewed and analyzed certain internal
financial and operating information with respect to the business, operations and
prospects of Video furnished to Donald & Co. by Video; (iv) reviewed and
analyzed certain internal financial and operating information with respect to
the business, operations and prospects of the combined companies furnished to
Donald & Co. by Knogo; (v) reviewed and analyzed certain financial forecasts of
Video and Knogo prepared by their respective managements; (vi) discussed the
past and current operations and financial condition and the prospects of Video
with senior management of both Knogo and Video; (vii) discussed with senior
management of Knogo the strategic and operating benefits anticipated from the
Merger, (viii) reviewed the price and trading histories of Video stock and Knogo
securities; (ix) compared the financial positions and operating results of Video
and Knogo with those of publicly traded companies it deemed relevant; (x)
reviewed the patent position of Video and discussed the competitive position of
such patent with management of Video; (xi) reviewed information concerning the
present and future prospects of the EAS and CCTV industry; (xii) compared
certain financial terms of the Merger to certain financial terms of selected
other business combinations it deemed relevant; and (xiii) analyzed the pro
forma and projected financial effect of the combined entity as reflected in
documents provided by management of Knogo.
In analyzing the valuation of the Consideration, Donald & Co. also
considered other factors not necessarily included in the financial analyses
discussed below. Of particular importance was Video's patent covering the
SentryVision surveillance system which expires in 2010. Donald & Co. was advised
that Video is pursuing additional U.S. patent grants for the SentryVision
system, and has filed international patent applications for which
32
it is awaiting approval. It was Donald & Co.'s understanding that the currently
existing patent protection creates a substantial obstacle to competitive CCTV
products seeking to use a similar technology. Donald & Co. also considered the
benefit to Knogo common stockholders of the preferred stock of the combined
companies which have dividend, redemption and liquidation features. The
liquidation right approximates Knogo's existing stockholder's equity. Finally,
Donald & Co. placed reliance on the desirability of EAS companies, such as
Knogo, having a CCTV capability.
Donald & Co. assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by it for purposes of
its opinion. With respect to financial projections, Donald & Co. assumed that
they had been reasonably prepared on bases reflecting the best currently
available information and judgments of the future financial performance of the
combined companies. Donald & Co. has not made an independent valuation or
appraisal of the assets or liabilities of Video, nor has it been furnished with
any such valuations or appraisals. Donald & Co. has also assumed the Merger will
be accounted for as a purchase in accordance with generally accepted accounting
principles. The Donald & Co. Opinion is necessarily based on financial,
economic, market and other conditions as they existed on, and information made
available to it as of, the date of the opinion.
The following is a brief summary of certain of the financial analyses
utilized by Donald & Co. in connection with providing its opinion to the Knogo
Board.
Public Market Capitalization Method. This method compares market
capitalization of Knogo to Video based on the stock price as quoted on AMEX for
Knogo of $8.0625 and as quoted on the NASDAQ SmallCap for Video of $4.375, each
as of the close of business on October 9, 1996. Based on such prices and the
outstanding number of shares, and the in-money options of each company, the
market capitalization of Knogo was $51,100,000 and Video was $22,628,000. Since
the Knogo stockholders are to receive approximately two-thirds of the economic
benefit of the combined company, Donald & Co. believes that the market
capitalization of the combined company is $76,652,000. This resulted in a
premium in excess of the combined separate market capitalization of the two
entities of between 9.7% to 16.1%. Even if the entire premium were attributable
to the Video shares, Donald & Co. believes such premium to be reasonable in the
circumstances. All of such premium, however, cannot be allocated to the Video
shares since a portion of the premium must be attributable to the preferred
shares to be received by the Knogo stockholders.
Market Capitalization to Net Tangible Book Value Method. Donald & Co.
analyzed the ratio of market capitalization to the tangible net worth of
Sensormatic and Checkpoint. These two companies are most comparable to the
combined company because each is engaged in the EAS industry and has made one or
more acquisitions of CCTV companies. Sensormatic and Checkpoint market
capitalization was 3.7 and 11 times their tangible net worth, respectively.
Donald & Co. utilized the more conventional Sensormatic multiples to arrive at a
value of $88 million for the combined company. This reflected a premium to Video
shareholders which Donald & Co. believes to be within the range of fairness.
Capitalization of Net Profit Method. Donald & Co. performed a
discounted net profit analysis of the combined companies based on pro forma
fiscal 1997 to 2001 and net profit projections provided by the management of
Knogo. In performing its analysis, Donald & Co. applied discount rates ranging
from 12% to 16% and determined present value of such projected net income for
each discount. The result was added to pro forma net tangible book value of
Sentry as provided by Knogo. This method produced an average valuation of $74.6
million. Donald & Co. found the valuation and the resulting interest of Knogo
stockholders in the Consideration to be within the range of fairness.
Comparable Mergers & Acquisitions Transaction Method. This method
encompasses an analysis of comparable acquisitions in the industry, including
several involving either Sensormatic or Checkpoint and the acquisition of a CCTV
company. A review of comparable acquisitions indicates that EAS Companies have
been willing to pay substantial premiums for acquisitions to enter into or
expand a position in the CCTV market. In these situations there was no
correlation between earnings and consideration. For example, Sensormatic
completed acquisitions in 1991 and 1992 that were in fact dilutive to its
current earnings. This was also the case with the Checkpoint acquisitions of
Alarmex and Actron, both CCTV companies. In light of the apparent premium paid
for entry into the CCTV market and to the extent that prior purchasers have been
willing to dilute current earnings, Donald & Co. believes that the premium
considered in this transaction is well within the fiscal parameters obtained
33
in prior transactions. Donald & Co. also noted that comparable acquisition
analysis in the EAS industry is difficult due to the lack of mature companies.
Donald & Co. is aware of the sale of only one established public EAS industry
entity in recent years. The acquisition price in that instance was 36.5 times
net income. This is a multiple substantially higher than that ordinarily applied
to growing technology companies. Donald & Co. believes its analysis of
acquisition prices supports the payment of a substantial premium by an EAS
Company that is acquiring a company engaged in the CCTV industry.
Donald & Co. is an investment banking firm and is continually engaged
in the valuation of businesses and securities in connection with negotiated
underwritings, secondary distributions of securities, private placements, and
valuations for corporate and other purposes, including mergers and acquisitions.
Donald & Co. has not provided investment banking services to Knogo prior to its
engagement described herein. Donald & Co. does not make a market in either Video
or Knogo Common Stock. However, as a full service securities firm, Donald & Co.
may from time-to-time effect transactions for its own account or the accounts of
customers and hold positions in securities of Video and Knogo. Donald & Co. has
been paid a fee of $35,000 for its services regarding the Merger, an additional
fee, in an amount to be determined, for the update of its opinion, plus the
reimbursement of its accountable out-of-pocket expenses. Donald & Co.'s fees
were not and will not be contingent on the conclusion reached in its opinion.
Knogo has agreed to indemnify Donald & Co. and its directors, officers, agents,
employees and controlling persons for certain costs, expenses, losses, claims,
damages and liabilities related to or arising out of its rendering of services
under its engagement as financial advisor to Knogo.
The summary set forth above does not purport to be a complete
description of the analyses performed by Donald & Co. in arriving at its
opinion. The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Donald & Co.
believes that its analyses and the summary set forth above must be considered as
a whole and that selecting portions of its analyses, without considering all
analyses, or of the above summary, without considering all factors and analyses,
could create an incomplete view of the process underlying the analyses performed
by Donald & Co. in connection with the preparation of its opinion letter. In
performing its analyses, Donald & Co. made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Video and Knogo. The analyses
performed by Donald & Co. are not necessarily indications of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. In addition, analyses relating to value of a
business do not purport to be appraisals or to reflect the prices at which
businesses actually may be sold.
Interests of Certain Persons in the Merger
In considering the respective recommendations of the Video Board and
the Knogo Board with respect to the Merger Agreement and the transactions
contemplated thereby, shareholders of Video and stockholders of Knogo should be
aware that certain members of the management of Video and Knogo and the Video
Board and the Knogo Board have certain interests in the Merger that are
different from, or in addition to, the interests of shareholders of Video and
stockholders of Knogo generally.
Video
Directors and Officers. Two of the current directors of Video, Robert
D. Furst, Jr. and Andrew L. Benson, will become directors of Sentry. See
"MANAGEMENT OF SENTRY -- Directors." In addition, certain executive officers of
Video, including Mr. Benson, will become executive officers of Sentry. See
"MANAGEMENT OF SENTRY -- Officers."
Mr. Furst, Chairman of the Video Board, is the beneficial owner of
976,672 shares (approximately 19.5% of the shares outstanding) of Video Common
Stock. Mr. Benson, President of Video, is the beneficial owner of 194,278 shares
(approximately 4.0% of the shares outstanding) of Video Common Stock.
As of the Video Record Date, the directors and executive officers of
Video, and their affiliates, as a group, beneficially own approximately 24.2% of
the outstanding shares of Video Common Stock entitled to vote at the Video
Meeting. All of such persons have advised Video that they intend to vote "FOR"
the approval and adoption of the Merger Agreement and the consummation of the
transactions contemplated thereby. Such shares will be converted in the Merger
on the same terms and conditions as apply to all shares of Video Common Stock.
34
Employee Stock Option Programs and Warrants. At the Effective Time,
each outstanding option or warrant to purchase shares of Video Common Stock (a
"Video Option" or "Video Warrant," respectively) shall be assumed by Sentry in
such manner that it is converted into an option or warrant to purchase the same
number of shares of Sentry Common Stock at the same exercise price. Each Video
Option or Video Warrant assumed by Sentry will have the same terms and
conditions as then are applicable to such Video Option or Video Warrant. As of
December 31, 1996, directors and executive officers of Video held outstanding
Video Options and/or Video Warrants to purchase 262,682 shares of Video Common
Stock at exercise prices ranging from $1.17 to $6.75 per share.
Knogo
Directors and Officers of Sentry. Two of the current directors of
Knogo, Thomas A. Nicolette and William A. Perlmuth, will become directors of
Sentry, with Mr. Perlmuth serving as Chairman of the Board. See "MANAGEMENT OF
SENTRY -- Directors." In addition, certain executive officers of Knogo,
including Mr. Nicolette, Peter J. Mundy and Peter Y. Zhou, will become executive
officers of Sentry. See "MANAGEMENT OF SENTRY -- Officers."
Mr. Perlmuth, a director of Knogo, is the beneficial owner of 1,077,227
shares (approximately 18.2% of the shares outstanding) of Knogo Common Stock,
consisting of 902,527 shares held by Mr. Perlmuth as Executor of the Estate of
Mr. Arthur J. Minasy, the former Chairman and Chief Executive Officer of the
Company, 156,300 shares held by Mr. Perlmuth as trustee under trusts for the
benefit of Mr. Minasy's adult children, 4,000 shares beneficially owned by Mr.
Perlmuth, and 14,400 shares issuable upon the exercise of stock options.
As of the Knogo Record Date, the directors and executive officers of
Knogo, and their affiliates, as a group, beneficially own approximately 23.5% of
the outstanding shares of Knogo Common Stock entitled to vote at the Knogo
Meeting, including the shares held by Mr. Perlmuth as Executor of the Minasy
Estate and as the trustee under trusts for the benefit of Mr. Minasy's adult
children as described in the preceding paragraph. All of such persons have
advised Knogo that they intend to vote "FOR" the approval and adoption of the
Merger Agreement and the consummation of the transactions contemplated thereby.
Such shares will be converted in the Merger on the same terms and conditions as
apply to all shares of Knogo Common Stock.
Employee Stock Option Programs. At the Effective Time, each outstanding
option or right to purchase shares of Knogo Common Stock (a "Knogo Option") will
be assumed by Sentry in such manner that it is converted into an option to
purchase shares of Sentry Common Stock and Sentry Class A Preferred Stock, as
provided below. Following the Effective Time, each such Knogo Option will be
exercisable upon the same terms and conditions as are in effect for such Knogo
Option at the Effective Time, except that Knogo Options exercisable for 1.2022
shares of Knogo Common Stock will be converted into an option to purchase one
share of Sentry Common Stock and one share of Sentry Class A Preferred Stock,
(ii) the exercise price of such Knogo Option will be equal to the exercise price
of such option as of the date of the Merger Agreement divided by the Knogo
Common Stock Consideration (as defined in the Merger Agreement) (before any
adjustment relating to proration) and (iii) all such options shall vest at the
Effective Time. As of December 31, 1996, directors and executive officers of
Knogo held outstanding Knogo Options to purchase 476,500 shares of Knogo Common
Stock at exercise prices ranging from $1.72 to $7.00 per share.
Employment Agreements
The current employment agreements of Mr. Nicolette, Mr. Mundy and Dr.
Zhou provide that in the event of a Change in Control of Knogo, the term of
employment for each of these officers will be automatically extended for the
period ending two years in the case of Mr. Nicolette's agreement and one year in
the case of the other agreements following the date of such Change in Control.
Following such Change in Control, each such officer will have the right to
terminate his employment for Good Reason while continuing to receive the salary
and bonus otherwise payable thereunder for the remainder of the employment term.
Additionally, the employment agreements provide that in the event of a Change in
Control all options held by each such officer, whether or not then vested, will
fully vest. The Merger will constitute a Change in Control for purposes of such
employment agreements. However, in connection with the Merger, such existing
Knogo employment agreements are expected to be terminated by mutual agreement
and, as of the Effective Time, Messrs. Nicolette and Mundy and Dr. Zhou are each
expected to enter into new employment agreements with Sentry and, in connection
therewith, to waive their rights under their Knogo employment agreements.
Nonetheless, it is anticipated that the new employment agreements for each such
officer,
35
as well as an employment agreement that Andrew L. Benson is expected to enter
into with Sentry, will contain similar change in control provisions. Any such
provisions may have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of Sentry even though
such a transaction might be economically beneficial to Sentry and its
stockholders.
Indemnification and Liability Insurance
Indemnification. The Merger Agreement provides that, from the Effective
Time through the later of the sixth anniversary of the Effective Time and the
expiration of any applicable statute of limitations, Sentry will indemnify,
defend and hold harmless, to the fullest extent that Knogo would have been
permitted under applicable law, each person who is at the date of the Merger
Agreement, or has been at any time prior to such date, an officer or director of
Video or Knogo (individually, an "Indemnified Party" and collectively, the
"Indemnified Parties"), against all losses, claims, damages, liabilities, costs
or expenses (including attorneys' fees), judgments, fines, penalties and amounts
paid in settlement in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to acts or omissions, or alleged acts
or omissions, by them in their capacities as such occurring at or prior to the
Effective Time. The Merger Agreement also requires that the provisions of
Knogo's Certificate of Incorporation and Knogo's Bylaws providing for
exculpation of director and officer liability and for indemnification of the
Indemnified Parties be maintained in such documents of Sentry, Video Merger
Corp. and Knogo Merger Corp.
Directors' and Officers' Liability Insurance. The Merger Agreement
provides that, for a period of six years after the Effective Time, directors'
and officers' liability insurance will be maintained covering the Indemnified
Parties who are currently covered, in their capacities as directors and officers
by a carrier providing at least the same coverage as the directors' and
officers' liability insurance currently maintained by Knogo on terms no less
favorable to the beneficiaries.
Accounting Treatment
The Merger will be accounted for under the purchase method of
accounting, in accordance with generally accepted accounting principles, as a
reverse merger pursuant to which Video is acquired by Knogo. Under the purchase
method of accounting, the purchase price of $21,804,000 (estimated based on the
equity of Video at September 30, 1996), including direct costs of the Merger,
will be allocated to the assets acquired and liabilities assumed based upon
their estimated relative fair values. Under the purchase method of accounting,
goodwill and other intangibles in the amount of approximately $7,846,000 will be
capitalized and non-recurring charges of approximately $13,200,000 relating to
in-process research and development will be recorded in the quarter the Merger
is consummated. These amounts are estimates based on a preliminary purchase
price allocation and valuation of existing technology and technology in process.
The financial statements of Knogo will become the historical financial
statements of Sentry. The results of Sentry operations will include the results
of operations of Video and Knogo commencing at the Effective Time.
The Unaudited Pro Forma Combined Condensed Financial Statements
appearing elsewhere in this Joint Proxy Statement/Prospectus are based upon
certain assumptions and allocate the purchase price to assets and liabilities
based upon preliminary estimates of their respective fair values. The unaudited
pro forma adjustments and combined amounts are included for informational
purposes only. If the Merger is consummated, Sentry's financial statements will
reflect effects of acquisition adjustments only from the Effective Time. The
actual allocation of the purchase price may differ significantly from the
allocation reflected in the Unaudited Pro Forma Combined Condensed Financial
Statements. The amortization of goodwill and other intangibles after the Merger
will have an adverse effect on the results of operations of Sentry.
Certain Federal Income Tax Consequences
The following is a summary of certain Federal income tax considerations
applicable to (i) holders of Video Common Stock who, pursuant to the Video
Merger, exchange their Video Common Stock solely for Sentry Common Stock and
(ii) holders of Knogo Common Stock who, pursuant to the Knogo Merger, exchange
their Knogo Common Stock solely for Sentry Common Stock and Sentry Class A
Preferred Stock. Consummation of the Video Merger is conditioned upon the
receipt by Video of an opinion of Dewey Ballantine, special counsel to Video,
based upon reasonably requested representation letters and dated the Closing
Date, to the effect that the Video Merger will be
36
treated for Federal income tax purposes as a reorganization described in Section
368(a) of the Code and/or as a transfer of property to Sentry by holders of
Video Common Stock governed by Section 351 of the Code. The portion of the
summary below under "-- Treatment of Holders of Video Common Stock -- Exchange
of Video Common Stock for Sentry Common Stock" and "-- Treatment of Holders of
Video Common Stock -- Cash in Lieu of Fractional Shares" assumes that the Video
Merger will be treated in accordance with the opinion of Dewey Ballantine
described above and, in the opinion of Dewey Ballantine, accurately describes
the material Federal income tax consequences for such holders of Video Common
Stock. Consummation of the Knogo Merger is conditioned upon the receipt by Knogo
of an opinion of Stroock & Stroock & Lavan, counsel to Knogo, based upon
reasonably requested representation letters and dated the Closing Date, to the
effect that the Knogo Merger will be treated for Federal income tax purposes as
a transfer of property to Sentry by holders of Knogo Common Stock governed by
Section 351 of the Code. The portion of the summary below under "-- Treatment of
Holders of Knogo Common Stock" assumes that the Knogo Merger will be treated in
accordance with the opinion of Stroock & Stroock & Lavan described above and, in
the opinion of Stroock & Stroock & Lavan, the discussion under the subheadings
"--Exchange of Knogo Common Stock for Sentry Common Stock and Sentry Class A
Preferred Stock" and "-- Cash in Lieu of Fractional Shares" below accurately
describe the material Federal income tax consequences for such holders of Knogo
Common Stock.
The following summary is based upon the provisions of the Code,
applicable Treasury Regulations thereunder, judicial decisions and current
administrative pronouncements. The summary does not address all aspects of
Federal income taxation that may be important to particular taxpayers in light
of their personal investment circumstances or to taxpayers subject to special
treatment under the Federal income tax laws (including certain financial
institutions, insurance companies, foreign persons, tax-exempt entities, dealers
in securities and holders who acquired their Video Common Stock or Knogo Common
Stock pursuant to the exercise of employee stock options or otherwise as
compensation) and does not address any aspect of state, local or foreign
taxation. The summary also assumes that the Video Common Stock and the Knogo
Common Stock will be held as capital assets at the Effective Time.
No rulings have been or will be requested from the Internal Revenue
Service (the "IRS") with respect to any of the matters discussed herein, and the
opinions of counsel described herein are not binding on the IRS. There can be no
assurance that future legislation, regulations, administrative rulings or court
decisions will not adversely affect the accuracy of the statements contained
herein.
Treatment of Holders of Video Common Stock
Exchange of Video Common Stock for Sentry Common Stock. A holder of
Video Common Stock who, pursuant to the Video Merger, exchanges Video Common
Stock solely for Sentry Common Stock will not recognize gain or loss upon such
exchange. However, such holder may recognize gain or loss with respect to the
disposition of fractional shares (as discussed below). The tax basis of the
Sentry Common Stock received by such holder will be equal to the tax basis of
the Video Common Stock surrendered (less any basis allocable to fractional
shares) and the holding period of the Sentry Common Stock will include the
holding period of the Video Common Stock surrendered.
Cash in Lieu of Fractional Shares. A holder of Video Common Stock who
receives cash in lieu of fractional shares of Sentry Common Stock will be
treated as having received such fractional shares pursuant to the Video Merger
and then as having exchanged such fractional shares for cash. Any gain or loss
attributable to fractional shares generally will be capital gain or loss. The
amount of such gain or loss will be equal to the difference between the ratable
portion of the tax basis of the Video Common Stock surrendered in the Video
Merger that is allocated to such fractional shares and the cash received in lieu
thereof. Any such capital gain or loss will constitute long-term capital gain or
loss if the Video Common Stock has been held by the holder for more than one
year at the Effective Time.
Treatment of Holders of Knogo Common Stock
Exchange of Knogo Common Stock for Sentry Common Stock and Sentry Class
A Preferred Stock. A holder of Knogo Common Stock who, pursuant to the Knogo
Merger, exchanges Knogo Common Stock solely for Sentry Common Stock and Sentry
Class A Preferred Stock will not recognize gain or loss upon such exchange.
However, such holder may recognize gain or loss with respect to the disposition
of fractional shares (as discussed below). The
37
aggregate tax basis (the "Aggregate Basis") of the Sentry Common Stock and
Sentry Class A Preferred Stock received by a Knogo stockholder will equal the
tax basis of the Knogo Common Stock surrendered, less any basis allocable to
fractional shares. The Aggregate Basis is allocated between the Sentry Common
Stock and Sentry Class A Preferred Stock in proportion to the fair market value
of each class of stock as of the date of the Knogo Merger. The holding period of
the Sentry Common Stock and Sentry Class A Preferred Stock received in the Knogo
Merger will include the holding period of the Knogo Common Stock surrendered.
Cash in Lieu of Fractional Shares. A holder of Knogo Common Stock who
receives cash in lieu of fractional shares of Sentry Common Stock or Sentry
Class A Preferred Stock will be treated as having received such fractional
shares pursuant to the Knogo Merger and then as having exchanged such fractional
shares for cash. Any gain or loss attributable to fractional shares generally
will be capital gain or loss. The amount of such gain or loss will be equal to
the difference between the ratable portion of the tax basis of the Knogo Common
Stock surrendered in the Knogo Merger that is allocated to such fractional
shares and the cash received in lieu thereof. Any such capital gain or loss will
constitute long-term capital gain or loss if the Knogo Common Stock has been
held by the holder for more than one year at the Effective Time.
Section 306 Stock. Section 306 of the Code provides special rules for
the treatment of gain recognized on the sale or redemption of certain "Section
306 Stock." If the Sentry Class A Preferred Stock received in the Knogo Merger
is considered Section 306 Stock, gain on the sale or disposition of the Sentry
Class A Preferred Stock will generally be ordinary income to the extent of
Knogo's earnings and profits as of the date of the Knogo Merger. A disposition
under Section 306 includes, among other things, pledges of stock under certain
circumstances, particularly when the pledgee can look only to the stock itself
as its security. In addition, if the Sentry Class A Preferred Stock is
considered Section 306 Stock, a redemption of the Sentry Class A Preferred Stock
will be treated as a dividend to the extent of Sentry's earnings and profits as
of the date of the redemption. However, certain exceptions may apply to avoid
the ordinary income/dividend treatment described above.
The Sentry Class A Preferred Stock may be Section 306 Stock if it is
considered stock other than "common stock" of Sentry. The determination of
whether the Sentry Class A Preferred Stock is considered common stock for
Section 306 purposes is an inherently factual question. Normally, stock is
treated as other than common stock if it is limited as to its share of dividends
and liquidation proceeds, and does not otherwise participate in corporate growth
to any significant extent. The Sentry Class A Preferred Stock shares in all
dividends distributed on the Sentry Common Stock, shares in the liquidation
proceeds with the Sentry Common Stock, and has the ability to significantly
participate in the future growth of Sentry as a result of the terms upon which
the Sentry Class A Preferred Stock may be redeemed. Thus, because of these
inherent equity features, Sentry intends to treat the Sentry Class A Preferred
Stock as common stock for Section 306 purposes, and therefore not subject to the
special tax treatment provided under Section 306 of the Code. However, there can
be no assurances that the IRS will not successfully challenge this
characterization. The discussion below under the heading "Redemption or
Conversion of Sentry Class A Preferred Stock" assumes that the Sentry Class A
Preferred Stock is not treated as Section 306 Stock.
Section 305. Under Section 305 of the Code, certain distributions and
deemed distributions of stock in a corporation are treated as taxable dividends
to the holders of the underlying stock. Under these provisions, if the Sentry
Class A Preferred Stock is not considered common stock for Section 305 purposes
and the fair market value of the Sentry Class A Preferred Stock as of the date
of the Knogo Merger is deemed to be less than its Face Value by more than a
statutorily defined de minimis amount, a Knogo stockholder will be required to
accrue annually, as a distribution of stock, the difference between the fair
market value and the Face Value of the Sentry Class A Preferred Stock based on a
constant yield method. In addition, if the Sentry Class A Preferred Stock is not
considered common stock for Section 305 purposes, (i) the potential value
attributable to fluctuations in the Deemed Value (as defined) may also have to
be accrued annually, as a stock distribution, prior to receipt and (ii) a
distribution of additional shares of Sentry Class A Preferred Stock to holders
of Sentry Class A Preferred Stock may be a taxable dividend. Any such deemed or
actual stock distribution will be taxable as a dividend to the extent it does
not exceed Sentry's current and accumulated earnings and profits. The
determination of whether the Sentry Class A Preferred Stock is considered common
stock for Section 305 purposes is an inherently factual question. Based on the
same factors described above in connection with the discussion of Section 306
Stock, Sentry intends to treat the Sentry Class A Preferred Stock as common
stock for Section 305 purposes, and not subject to the foregoing consequences.
However, there can be no assurances that the IRS will not successfully challenge
this characterization. Moreover, even if the Sentry Class A Preferred Stock is
considered common stock, a distribution
38
of additional shares of Sentry Class A Preferred Stock to holders of the Sentry
Class A Preferred Stock within 36 months of the distribution of money or Sentry
Common Stock to holders of Sentry Common Stock may be treated as a taxable
dividend to the extent it does not exceed Sentry's current and accumulated
earnings and profits.
Redemption or Conversion of Sentry Class A Preferred Stock. Upon a
redemption of shares of Sentry Class A Preferred Stock in exchange for cash or
for Subordinated Notes, a holder will be treated as having disposed of such
Sentry Class A Preferred Stock in a transaction subject to the provisions of
Section 302 of the Code. Accordingly, such holder will (i) recognize capital
gain or loss equal to the difference between the amount received on the
redemption and such holder's tax basis for such shares of Sentry Class A
Preferred Stock or (ii) be treated as having received a distribution under
Section 301 of the Code (which will be taxed as a dividend to the extent of such
holder's share of Sentry's then current or accumulated earnings and profits),
depending upon whether and to what extent such holder owns, or is deemed to own
(under prescribed rules of attribution), shares of Sentry Common Stock or Sentry
Class A Preferred Stock immediately after the redemption.
A holder whose shares of Sentry Class A Preferred Stock are converted
into shares of Sentry Common Stock generally will not recognize gain or loss
upon such conversion. In such event, a holder's tax basis for such shares of
Sentry Common Stock will be equal to such holder's tax basis for the shares of
Sentry Class A Preferred Stock which were converted into such Sentry Common
Stock, and the holding period for such Sentry Common Stock will include the
holding period for such Sentry Class A Preferred Stock.
Notwithstanding the foregoing discussion, it is possible, although not
entirely clear, that upon either a redemption or conversion of shares of Sentry
Class A Preferred Stock, a holder of such Class A Preferred Stock may be treated
as having received a dividend distribution to the extent that any portion of the
cash, Subordinated Notes or Sentry Common Stock received on the redemption or
conversion is received in respect of any non-previously taxed accrued but unpaid
(including any amounts paid in the form of additional shares of Sentry Class A
Preferred Stock) dividends on such Sentry Class A Preferred Stock. In such
event, the tax consequences described above generally will apply to the
remaining portion of the cash, Subordinated Notes or Sentry Common Stock
received on the redemption or conversion.
Reporting Requirements
Each holder of Knogo Common Stock that receives Sentry Common Stock in
the Knogo Merger and each holder of Video Common Stock that receives Sentry
Common Stock in the Video Merger will be required to retain records and file
with such holder's Federal income tax return a statement setting forth certain
facts relating to the Video Merger and Knogo Merger.
THE FOREGOING FEDERAL INCOME TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY, IS
NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND MAY NOT APPLY TO ALL HOLDERS OF
VIDEO COMMON STOCK OR TO ALL HOLDERS OF KNOGO COMMON STOCK. HOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE MERGERS, INCLUDING, WITHOUT LIMITATION, THE APPLICATION AND EFFECT OF
FOREIGN, STATE, LOCAL OR OTHER TAX LAWS.
Stock Exchange Listing
Sentry expects to apply for the listing of Sentry Common Stock and
Sentry Class A Preferred Stock on the AMEX under the symbols SKV and SKV.Pr.A,
respectively. It is a condition to the Merger that the shares of Sentry Common
Stock and the Sentry Class A Preferred Stock to be issued to Knogo stockholders
and Video shareholders, as applicable, in connection with the Merger shall have
been approved for listing on NASDAQ, or a national securities exchange, subject
only to official notice of issuance.
Federal Securities Laws Consequences
All shares of Sentry Common Stock received by Video shareholders and
shares of Sentry Common Stock and Sentry Class A Preferred Stock received by
Knogo stockholders in the Merger will be freely transferable, except that shares
of Sentry Common Stock and Sentry Class A Preferred Stock received by persons
who are deemed to be "affiliates" (as such term is defined under the Act) of
Video or Knogo, as the case may be, prior to
39
the Merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 promulgated under the Act (or Rule 144 in the case of
such persons who become affiliates of Sentry) or as otherwise permitted under
the Act. Persons who may be deemed to be affiliates of Video, Knogo or Sentry
generally include individuals or entities that control, are controlled by, or
are under common control with, such party and may include certain officers and
directors of such party as well as principal stockholders of such party. The
Merger Agreement requires Video and Knogo to use reasonable efforts to deliver
or cause to be delivered to Sentry, prior to the Closing Date, from each Video
or Knogo affiliate, a letter agreement to the effect that such person will not
offer or sell or otherwise dispose of any of the shares of Sentry Common Stock
and Sentry Class A Preferred Stock issued to such persons in or pursuant to the
Merger in violation of the Act or the rules and regulations promulgated by the
Commission thereunder.
Dissenters' Rights
Video. The following summary does not purport to be a complete
statement of the rights of dissenting shareholders under Sections 302A.471 and
302A.473 of Minnesota Act, and is qualified in its entirety by reference to said
section, copies of which are attached as Appendix D to this Joint Proxy
Statement/Prospectus.
Subject to certain conditions, holders of Video Common Stock who are
entitled to vote at the Video Meeting have the right under Minnesota Act Section
302A.471 to object to the terms of the Merger, and if the Merger is consummated,
to receive the fair value of their shares immediately before the Effective Time.
Such rights are referred to herein as "Dissenters' Rights," and the Video Common
Stock with respect to which such rights are exercised are referred to as
"Dissenting Shares." A shareholder may not assert Dissenters' Rights with
respect to less than all shares owned by such shareholder.
A vote against the Merger is not sufficient to perfect Dissenters'
Rights. As required by Minnesota Act Section 302A.473, any person who desires to
exercise his Dissenters' Rights with respect to his Video Common Stock must take
each of the following three actions:
(a) The shareholder must file with Video, prior to the vote of
Video shareholders on the Merger Agreement, a written notice of intent
to demand the fair value of his shares; and
(b) The shareholder must not vote his shares in favor of the
Merger Agreement; and
(c) Within 30 days of receiving notice of procedure from Video
or Knogo (sent after shareholder approval of the Merger Agreement), the
shareholder must make written demand on Video stock determined as of
the day prior to the date on which the vote to approve the Merger
Agreement was taken. The demand must state the date on which the
shareholder acquired the shares, and the shareholder must deposit all
share certificates with Video at such time.
After the Merger takes effect, or after Video receives a valid demand
for payment, Video will remit to each dissenting shareholder who has complied
with the above requirements the amount Video estimates to be the fair value of
the shares, plus interest. Such payment will be accompanied by financial
statements for Video and a description of the basis for the fair value
determination. Video may withhold any such remittance from a person who was not
a shareholder on the date the Merger was first announced to the public.
If a dissenting shareholder believes that the amount remitted is less
than the fair value of the shares, plus interest, such dissenting shareholder
may, within 30 days after Video mails such remittance, give written notice to
Video of his own estimate of fair value, and demand payment of the difference.
Any dissenting shareholder who does not file such notice and demand for payment
of difference will only be entitled to receive the amount remitted by Video.
If Video receives such notice and demand for payment of difference,
Video shall, within 60 days of receipt of such demand, either (a) pay the amount
demanded, (b) pay an amount agreed to by such dissenting shareholder, or (c)
file in court a petition requesting court determination of the fair value of the
shares, plus interest. Any such petition must be filed with the Minnesota
District Court in Hennepin County, Minnesota. In addition to the fair value of
the shares, the court shall determine whether such dissenting shareholder has
complied with all procedural requirements.
40
Dissenters' Rights cannot be validly exercised by persons other than
the record holders of Video Common Stock, regardless of the beneficial ownership
thereof. Persons who are beneficial owners of Video Common Stock, but whose
shares are held of record by another person, such as a broker, bank or nominee,
should instruct the record holder to follow the procedure outlined in this
section if they wish to dissent from the Merger with respect to their Video
Common Stock.
Failure to follow the steps required by Section 302A.473 for perfecting
Dissenters' Rights may result in the loss of such rights. In view of the
complexity of the provisions of Section 302A.473, shareholders of Video who are
considering dissenting from the Video Proposal should consult their own legal
advisors.
Knogo. It is a condition to the Merger that the Sentry Common Stock and
the Sentry Class A Preferred Stock be listed on NASDAQ, or a national securities
exchange. If both such classes of Sentry stock are so listed, holders of Knogo
Common Stock will not be entitled to appraisal rights because the Knogo Common
Stock also is listed on a national securities exchange.
In the event that Knogo and Video waive one or both of the conditions
to the Merger that the Sentry Common Stock and the Sentry Class A Preferred
Stock be listed on NASDAQ or a national securities exchange (collectively, the
"Listing Condition"), holders of record of Knogo Common Stock who do not vote in
favor of the Knogo Proposal and who otherwise comply with the applicable
statutory procedures summarized herein will be entitled to appraisal rights
under Section 262 of the DGCL ("Section 262"). A person having a beneficial
interest in shares of Knogo Common Stock held of record in the name of another
person, such as a broker or nominee, must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner to
perfect appraisal rights.
The following discussion is not a complete statement of the law
pertaining to appraisal rights under the DGCL and is qualified in its entirety
by the full text of Section 262 which is reprinted in its entirety as Appendix
E. All references in Section 262 and this summary to a "stockholder" or "holder"
are to the record holder of the shares of Knogo Common Stock as to which
appraisal rights are asserted.
Under the DGCL, if the Listing Condition is waived, holders of shares
of Knogo Common Stock ("Appraisal Shares") who follow the procedures set forth
in Section 262 will be entitled to have their Appraisal Shares appraised by the
Delaware Chancery Court and to receive payment in cash of the "fair value" of
such Appraisal Shares, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, as determined by such court.
Under Section 262, where a proposed Merger is to be submitted for
approval at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, must notify each of its stockholders who was such on the
record date for such meeting with respect to shares to which appraisal rights
are available, that appraisal rights are so available, and must include in such
notice a copy of Section 262.
This Joint Proxy Statement/Prospectus constitutes such notice to the
holders of Appraisal Shares and the applicable statutory provisions of the DGCL
are attached to this Joint Proxy Statement/Prospectus as Appendix E. Any
stockholder who wishes to exercise such appraisal rights or who wishes to
preserve his right to do so should review the following discussion and Appendix
E carefully, because failure to timely and properly comply with the procedures
specified will result in the loss of appraisal rights under the DGCL.
A holder of Appraisal Shares wishing to exercise such holder's
appraisal rights (a) must not vote in favor of the Knogo Proposal and (b) must
deliver to Knogo prior to the vote on the Knogo Proposal at the Knogo Meeting to
be held on February 6, 1997, a written demand for such holder's Appraisal
Shares. A holder of Appraisal Shares wishing to exercise such holder's appraisal
rights must be the record holder of such Appraisal Shares on the date the
written demand for appraisal is made and must continue to hold such Appraisal
Shares of record until the consummation of the Merger. Accordingly, a holder of
Appraisal Shares who is the record holder of Appraisal Shares on the date the
written demand for appraisal is made, but who thereafter transfers such
Appraisal Shares prior to the consummation of the Merger, will lose any right to
appraisal in respect of such Appraisal Shares. If, as management expects, the
Listing Condition is satisfied, any demand so made will be of no effect.
41
Only a holder of record of Appraisal Shares is entitled to assert
appraisal rights for the Appraisal Shares registered in that holder's name. A
demand for appraisal should be executed by or on behalf of the holder of record,
fully and correctly, as such holder's name appears on such holder's stock
certificates. If the Appraisal Shares are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity, and if the Appraisal Shares are owned of record
by more than one person as in a joint tenancy or tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized agent,
including one or more joint owners, may execute a demand for appraisal on behalf
of a holder of record; however, the agent must identify the record owner or
owners and expressly disclose the fact that, in executing the demand, the agent
is agent for such owner or owners. A record holder such as a broker who holds
Appraisal Shares as nominee for several beneficial owners may exercise appraisal
rights with respect to the Appraisal Shares held for one or more beneficial
owners while not exercising such rights with respect to the Appraisal Shares
held for other beneficial owners; in such case, the written demand should set
forth the number of Appraisal Shares as to which appraisal is sought. When no
number of Appraisal Shares is expressly mentioned the demand will be presumed to
cover all Appraisal Shares held in the name of the record owner. Stockholders
who hold their Appraisal Shares in brokerage accounts or other nominee forms and
who wish to exercise appraisal rights are urged to consult with their brokers to
determine the appropriate procedures for the making of a demand for appraisal by
such a nominee.
All written demands for appraisal should be sent or delivered to Knogo
North America Inc., 350 Wireless Boulevard, Hauppauge, New York 11788,
Attention: Secretary.
Within 10 days after the consummation of the Merger, but only if the
Listing Condition has been waived, Sentry will notify each stockholder who has
properly asserted rights under Section 262 and has not voted in favor of the
Knogo Proposal of the date the Merger became effective.
Within 120 days after the consummation of the Merger, but not
thereafter and only if the Listing Condition has been waived, Sentry or any
stockholder who has complied with the statutory requirements summarized above
may file a petition in the Delaware Chancery Court demanding a determination of
the fair value of the Appraisal Shares. Sentry is under no obligation to and has
no present intention to file a petition with respect to the appraisal of the
fair value of the Appraisal Shares. Accordingly, it is the obligation of the
stockholders to initiate all necessary action to perfect their appraisal rights
within the time prescribed in Section 262.
Within 120 days after the consummation of the Merger, but only if the
Listing Condition has been waived, any stockholder who has complied with the
requirements for exercise of appraisal rights will be entitled, upon written
request, to receive from Sentry a statement setting forth the aggregate number
of Appraisal Shares not voted in favor of adoption of the Knogo Proposal and
with respect to which demands for appraisal have been received and the aggregate
number of holders of such Appraisal Shares. Such statements must be mailed
within ten days after a written request therefor has been received by Sentry.
If the Listing Condition has been waived and a petition for an
appraisal is timely filed, after a hearing on such petition, the Delaware
Chancery Court will determine the stockholders entitled to appraisal rights and
will appraise the fair value of their Appraisal Shares, exclusive of any element
of value arising from the accomplishment or expectation of the Merger, together
with a fair rate of interest, if any, to be paid upon the amount determined to
be the fair value. Stockholders considering seeking appraisal should be aware
that the fair value of their Appraisal Shares as determined under Section 262
could be more than, the same as or less than the value of the consideration they
would receive pursuant to the Merger Agreement if they did not seek appraisal of
their Appraisal Shares and that investment banking opinions as to fairness from
a financial point of view are not necessarily opinions as to fair value under
Section 262. The Delaware Supreme Court has stated that proof of value by any
techniques or methods which are generally considered acceptable in the financial
community and otherwise admissible in court should be considered in the
appraisal proceedings.
The Delaware Chancery Court will determine the amount of interest, if
any, to be paid upon the amounts to be received by persons whose Appraisal
Shares have been appraised. The costs of the action may be determined by the
Delaware Chancery Court and taxed upon the parties as the Delaware Chancery
Court deems equitable. The Delaware Chancery Court may also order that all or a
portion of the expenses incurred by any stockholder in connection with an
appraisal, including, without limitation, reasonable attorneys fees and the fees
and expenses of
42
experts utilized in the appraisal proceeding, be charged pro rata against the
value of all the Appraisal Shares entitled to appraisal.
If the Listing Condition has been waived, any holder of Appraisal
Shares who had duly demanded an appraisal in compliance with Section 262 will
not, after the consummation of the Merger, be entitled to vote the Appraisal
Shares subject to such demand for any purpose or be entitled to the payment of
dividends or other distributions on those Appraisal Shares (except dividends or
other distributions payable to holders of record of Appraisal Shares as of a
record date prior to the consummation of the Merger).
If any stockholder who properly demands appraisal of his Appraisal
Shares under Section 262 fails to perfect, or effectively withdraws or loses,
his right to appraisal, as provided in the DGCL the Appraisal Shares of such
stockholder will be converted into the right to receive the consideration
receivable with respect to such Appraisal Shares in accordance with the Merger
Agreement. A stockholder will fail to perfect, or effectively lose or withdraw,
his right to appraisal if, among other things, no petition for appraisal is
filed within 120 days after the consummation of the Merger, or if the
stockholder delivers to Sentry a written withdrawal of his demand for appraisal.
Any such attempt to withdraw an appraisal demand more than 60 days after the
consummation of the Merger will require the written approval of Sentry.
Failure to follow the steps required by Section 262 for perfecting
appraisal rights may result in the loss of such rights (in which event a
stockholder will be entitled to receive the consideration receivable with
respect to such Appraisal Shares in accordance with the Merger Agreement). In
view of the complexity of the provisions of Section 262, stockholders of Knogo
who are considering dissenting from the Knogo Proposal should consult their own
legal advisors.
43
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the full and complete text of the
Merger Agreement.
The Mergers
Pursuant to the Merger Agreement and subject to the terms and
conditions thereof, Video Merger Corp. and Knogo Merger Corp. will be merged
with and into Video and Knogo, respectively. As a result of the Merger, Video
and Knogo will become wholly-owned subsidiaries of Sentry. As part of the
Merger, shareholders of Video and Knogo will receive the consideration described
below.
Subject to the terms and conditions of the Merger Agreement, the
closing of the transactions contemplated thereby will take place as promptly as
practicable following the satisfaction or, if permissible, waiver of the
conditions set forth in the Merger Agreement unless another date or time is
agreed to in writing by Video and Knogo (such date referred to herein as the
"Closing Date"). The merger of Video Merger Corp. with and into Video will
become effective upon the filing of an articles of merger (the "Articles of
Merger") with the Secretary of State of the State of Minnesota in accordance
with applicable provisions of the Minnesota Act, or at such later time as may be
specified in the Articles of Merger in accordance with applicable law. The
merger of Knogo Merger Corp. with and into Knogo will become effective upon the
filing of a certificate of merger (the "Certificate of Merger") with the
Secretary of State of the State of Delaware in accordance with applicable
provisions of the DGCL, or at such later time as may be specified in the
Certificate of Merger in accordance with applicable law. Video and Knogo have
each agreed to use their best efforts to ensure that the Video Effective Time
and the Knogo Effective Time will occur upon the same date and at the same time.
Conversion of Video Common Stock
Upon consummation of the Video Merger, pursuant to the Merger
Agreement, (i) each share of Video Common Stock issued and outstanding at the
Video Effective Time will be converted into and represent the right to receive
one share of Sentry Common Stock, (ii) upon such conversion all shares of Video
Common Stock will be canceled and cease to exist, and (iii) each share of Video
Common Stock held in Video's treasury will be canceled and retired without
payment of any consideration therefor.
HOLDERS OF VIDEO COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES
REPRESENTING VIDEO COMMON STOCK WITH THE ENCLOSED PROXY CARD. IF THE TRANSACTION
IS APPROVED, INSTRUCTIONS AND A LETTER OF TRANSMITTAL WILL BE MAILED AFTER THE
EFFECTIVE TIME TO EACH PERSON WHO WAS A HOLDER OF OUTSTANDING VIDEO COMMON STOCK
IMMEDIATELY PRIOR TO THE VIDEO EFFECTIVE TIME. VIDEO SHAREHOLDERS SHOULD SEND
CERTIFICATES REPRESENTING VIDEO COMMON STOCK TO THE EXCHANGE AGENT ONLY AFTER
THEY RECEIVE, AND IN ACCORDANCE WITH, THE INSTRUCTIONS AND LETTER OF
TRANSMITTAL.
Video Stock Options. As provided in the Merger Agreement, at the Video
Effective Time, all outstanding options and other rights to acquire shares
granted to employees under any stock option or purchase plan, program or similar
arrangement of Video and, with respect to employees and non-employees, all
outstanding warrants to purchase shares of Video Common Stock, whether or not
such options or warrants are then exercisable or vested, will be assumed by
Sentry and shall be exercisable upon the same terms and conditions as under the
applicable warrant or option, except that (i) each such option or warrant will
be exercisable for that whole number of shares of Sentry Common Stock (to the
nearest share) into which the number of shares of Video Common Stock subject to
such option or warrant immediately prior to the Effective Time would be
converted under the Merger Agreement, (ii) the option exercise price or warrant
exercise price per share of Sentry Common Stock will be an amount equal to the
option exercise price or warrant exercise price per share of Video Common Stock
in effect immediately prior to the Video Effective Time divided by the Video
Merger Consideration (as defined in the Merger Agreement) (rounded upwards to
the nearest full cent). No payment will be made for fractional interests. Except
as provided in the Merger Agreement or as otherwise agreed to by the parties and
to the extent permitted by the option plans,
44
the option plans of Video will terminate as of the Video Effective Time and any
rights under any provisions in any other plan, program or arrangement providing
for the issuance or grant by Video of any interest in respect of the capital
stock of Video will be canceled. See "THE MERGER -- Interests of Certain Persons
in the Merger -- Video --Employee Stock Option Programs."
Conversion of Knogo Common Stock
Upon consummation of the Knogo Merger, pursuant to the Merger
Agreement, (i) each 1.2022 shares of Knogo Common Stock issued and outstanding
at the Knogo Effective Time will be converted into and represent the right to
receive (a) one share of Sentry Common Stock and (b) one share of Sentry Class A
Preferred Stock, (ii) upon such conversion all shares of Knogo Common Stock will
be canceled and cease to exist, and (iii) each share of Knogo Common Stock held
in Knogo's treasury will be canceled and retired without payment of any
consideration therefor.
HOLDERS OF KNOGO COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES
REPRESENTING KNOGO COMMON STOCK WITH THE ENCLOSED PROXY CARD. IF THE TRANSACTION
IS APPROVED, INSTRUCTIONS AND A LETTER OF TRANSMITTAL WILL BE MAILED AFTER THE
EFFECTIVE TIME TO EACH PERSON WHO WAS A HOLDER OF OUTSTANDING KNOGO COMMON STOCK
IMMEDIATELY PRIOR TO THE KNOGO EFFECTIVE TIME. KNOGO STOCKHOLDERS SHOULD SEND
CERTIFICATES REPRESENTING KNOGO COMMON STOCK TO THE EXCHANGE AGENT ONLY AFTER
THEY RECEIVE, AND IN ACCORDANCE WITH, THE INSTRUCTIONS AND LETTER OF
TRANSMITTAL.
Knogo Stock Options. As provided in the Merger Agreement, at the Knogo
Effective Time, all outstanding options and other rights to acquire shares
granted to employees under any stock option or purchase plan, program or similar
arrangement of Knogo, whether or not such options are then exercisable or
vested, will be assumed by Sentry, and shall be exercisable upon the same terms
and conditions as under the applicable option, except that (A)(i) each option
will be exercisable for that whole number of shares of Sentry Common Stock (to
the nearest share) into which the number of shares of Knogo Common Stock subject
to such option immediately prior to the Effective Time would be converted under
the Merger Agreement, (ii) each option will be exercisable for that whole number
of shares of Sentry Class A Preferred Stock (to the nearest share) into which
the number of shares of Knogo Common Stock subject to such option immediately
prior to the Effective Time would be converted under the Merger Agreement,
provided that if all of the issued and outstanding Sentry Class A Preferred
Stock has been theretofore redeemed or converted in the manner set forth in the
Sentry Certificate of Incorporation, then in lieu of the Sentry Class A
Preferred Stock, the holders of such options will receive the same consideration
paid to the holders of Sentry Class A Preferred Stock upon such redemption or
conversion and (iii) all such options shall vest at the Effective Time, and (B)
the option exercise price per share of Sentry Common Stock (including Sentry
Class A Preferred Stock) will be an amount equal to the option exercise price
per share of Knogo Common Stock of such option in effect immediately prior to
the Knogo Effective Time divided by the Knogo Common Stock Consideration (as
defined in the Merger Agreement) (rounded upwards to the nearest full cent). No
payment will be made for fractional interests. Except as provided in the Merger
Agreement or as otherwise agreed to by the parties, and to the extent permitted
by the option plans, the option plans of Knogo will terminate as of the Knogo
Effective Time and any rights under any provisions in any other plan, program or
arrangement providing for the issuance or grant by Knogo of any interest in
respect of the capital stock of Knogo will be canceled. See "THE MERGER --
Interests of Certain Persons in the Merger -- Knogo -- Employee Stock Option
Programs."
Exchange Procedure
As of the Effective Time, Sentry shall deposit certificates
representing the shares of Sentry Common Stock and Sentry Class A Preferred
Stock with the Exchange Agent for the benefit of the holders of Video Common
Stock and Knogo Common Stock, for exchange in accordance with the Merger
Agreement. Promptly after the Effective Time, instructions and a letter of
transmittal will be mailed to each person who was a holder of an outstanding
share of Video Common Stock immediately prior to the Video Effective Time and to
each person who was a holder of an outstanding share of Knogo Common Stock
immediately prior to the Knogo Effective Time.
Dividends. No dividends or other distributions declared on Sentry
Common Stock or Sentry Class A Preferred Stock after the Effective Time will be
paid with respect to any shares of Video Common Stock or Knogo
45
Common Stock represented by a Video Common Stock certificate ("Video
Certificate") or Knogo Common Stock certificate ("Knogo Certificate"), until
such Video Certificate or Knogo Certificate is surrendered for exchange
according to the procedures described above and in the Merger Agreement and the
letter of transmittal.
Fractional Shares. No fractional shares of Sentry Common Stock or
Sentry Class A Preferred Stock will be issued pursuant to the Video Merger or
the Knogo Merger. Each record holder of shares of Video Common Stock or Knogo
Common Stock exchanged pursuant to the Merger who would otherwise have been
entitled to receive a fraction of a share of Sentry Common Stock and/or Sentry
Class A Preferred Stock, as the case may be (after taking into account all
shares of Video Common Stock or Knogo Common Stock delivered by such holder),
shall receive, in lieu thereof, a cash payment (without interest) representing
such record holder's proportionate interest in the net proceeds from the sale by
the Exchange Agent (following the deduction of applicable transaction costs
other than of the Exchange Agent, Video, Knogo or Sentry), for the accounts of
all such record holders, of the shares of Sentry Common Stock and/or Sentry
Class Preferred Stock, as the case may be, representing all such fractions. Such
sale shall be made as soon as practicable after the Effective Time.
Adjustment of Merger Consideration. In the event that, (i) subsequent
to the date of the Merger Agreement but prior to the Video Effective Time, the
outstanding shares of Video shall have been changed into a different number of
shares or a different claim as a result of a stock split, reverse stock split,
stock dividend, subdivision, reclassification, split, combination, exchange,
recapitalization or other similar transaction, or (ii) subsequent to the date of
the Merger Agreement but prior to the Knogo Effective Time, the outstanding
shares of Knogo shall have been changed into a different number of shares or a
different claim as a result of a stock split, reverse stock split, stock
dividend, subdivision, reclassification, split, combination, exchange,
recapitalization or other similar transaction, then the merger consideration
shall be appropriately adjusted.
Certain Representations and Warranties
The Merger Agreement contains customary representations and warranties
by both Video and Knogo as to, among other things: (i) due organization,
corporate power and good standing; (ii) authorized capital stock; (iii)
ownership of subsidiaries; (iv) lack of certain investments or interests; (v)
the lack of voting trusts and shareholder agreements; (vi) authority and power
to execute the Merger Agreement; (vii) the absence of governmental consent
requirements; (viii) approval by the respective Boards of the Support/Voting
Agreements; (ix) the compliance of the Merger with charters, bylaws and the law;
(x) the absence of certain material defaults or violations; (xi) the filing of
certain documents with the Commission; (xii) the accuracy of financial
statements; (xiii) the absence of untrue statements of material facts and
inclusion of material facts in the Joint Proxy Statement/Prospectus and
Registration Statement; (xiv) compliance with all laws; (xv) the absence of
material changes or events; (xvi) the absence of material undisclosed
liabilities; (xvii) the absence of certain litigation; (xviii) the absence of
material liabilities related to employee benefit plans; (xix) tax matters; (xx)
the ownership of intellectual property; (xxi) the absence of material labor
disputes; (xxii) brokerage and finder's fees; (xxiii) fairness opinions; (xxiv)
Code Section 351/reorganization tax treatment; (xxv) lack of ownership of
shares; and (xxvi) formation of the Merger subsidiaries.
Certain Covenants
Conduct of Business Pending the Reorganization. Pursuant to the Merger
Agreement, Video and Knogo have made various customary covenants relating to the
Merger. Knogo and Video have agreed that, prior to the Effective Time, Knogo,
Video, and their significant subsidiaries will conduct their operations
according to their usual, regular and ordinary course of business.
Access; Confidentiality. Knogo and Video have agreed: (i) from the date
of the Merger Agreement until the Effective Time, to give one another and their
respective authorized representatives reasonable access to their respective
executive officers, properties, books and records, and to furnish one another
and their respective authorized representatives with such financial and
operating data and other information concerning the businesses and properties of
Video and Knogo as they may from time to time reasonably request; and (ii) that
each of Video, Sentry, Video Merger Corp., Knogo Merger Corp. and Knogo will
hold and treat all documents and information concerning each entity furnished to
one another in connection with the transactions contemplated by the Merger
Agreement confidential in accordance with the Confidentiality Agreements dated
July 11, 1996 and September 6, 1996, between Knogo and Video.
46
Meetings of Stockholders. Knogo and Video have agreed that: (i) each of
Video and Knogo will take all action necessary to convene a meeting of their
respective stockholders as promptly as practicable to consider and vote upon the
approval of the Merger Agreement and the transactions contemplated thereby; (ii)
the Board of Directors of each of Video and Knogo shall recommend such approval
and each shall take all lawful action to solicit such approval, including,
without limitation, timely mailing of the Joint Proxy Statement/Prospectus; and
(iii) Video, as sole stockholder of Sentry, and Sentry, as sole stockholder of
Video Merger Corp. and Knogo Merger Corp., shall as promptly as practicable duly
approve the Merger Agreement and the transactions contemplated thereby.
Reasonable Efforts. Knogo and Video have agreed that each of the
parties shall act in good faith and use commercially reasonable efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective the transactions
contemplated by the Merger Agreement as soon as practicable, including such
actions or things as any other party may reasonably request in order to cause
any of the conditions to such other party's obligation to consummate the
transactions contemplated by the Merger Agreement to be fully satisfied. Without
limiting the foregoing, the parties have agreed to consult and fully cooperate
with and provide assistance to each other in the preparation and filing with the
Commission of the Joint Proxy Statement/Prospectus, and any necessary amendments
or supplements thereto and seeking to have the Joint Proxy Statement/Prospectus
cleared by the Commission as soon as reasonably practicable after filing.
Public Announcements. Knogo and Video have agreed that Knogo, Video,
Sentry, Video Merger Corp. and Knogo Merger Corp. will consult with one another
prior to issuing any releases or otherwise making any public statements with
respect to the transactions contemplated in the Merger Agreement and shall not
issue any such press releases or make any public statements prior to such
consultation, except as may be required by applicable law or any listing
agreement with a national securities exchange by which such party is bound.
Merger Proposals. Knogo and Video have agreed that, except as
contemplated in the Merger Agreement, each of Knogo and Video will not (and
shall use reasonable efforts to cause its officers, directors and employees and
any investment banker, attorney, accountant, or other agent retained by it not
to) solicit any Merger Proposal (and, any such transaction, a "Merger
Transaction") or provide any non-public information concerning the respective
company to any third party in connection with a Merger Proposal. However, Knogo
and Video may furnish information or cause information to be furnished to, and
may participate in discussions and negotiations directly or through their
respective representatives and enter into an agreement relating to a Merger
Proposal with, any third party who makes an unsolicited proposal or offer to it,
if the Knogo Board or Video Board determines in good faith, after consultation
with outside counsel, that the failure to consider such proposal or offer could
reasonably be deemed to cause its directors to breach their fiduciary duties
under applicable law. In addition, nothing contained in the Merger Agreement
prohibits Knogo or Video and their respective directors from (i) issuing a press
release or otherwise publicly disclosing the terms of any Merger Proposal, (ii)
taking and disclosing to its stockholders any position, and making related
filings with the Commission, as required by Rules 14e-2 and 14d-9 under the
Exchange Act with respect to any tender offer or (iii) taking any action and
making any disclosure to its stockholders which the Knogo Board or Video Board
determines in good faith, after consultation with outside counsel, would likely
be required to be taken or made under applicable law (including, without
limitation, laws relating to the fiduciary duties of directors). In the event
Knogo or Video receives a Merger Proposal, each party has agreed to promptly
inform the other party as to the receipt of such Merger Proposal, unless the
Knogo Board or Video Board determines, after consultation with outside counsel,
that giving such notice could reasonably be deemed to cause its directors to
breach their fiduciary duties under applicable law.
Registration Statement and Joint Proxy Statement/Prospectus. Knogo and
Video have agreed that: (i) Knogo and Video shall promptly furnish all
information as may be required for inclusion in the Registration Statement; (ii)
Video and Knogo shall cooperate and promptly prepare, and Video shall file with
the Commission as soon as practicable, the Registration Statement; (iii) Video
shall use reasonable efforts, and Knogo will cooperate with Video, to have the
Registration Statement declared effective by the Commission as promptly as
practicable; (iv) Video shall use reasonable efforts to obtain, prior to the
effective date of the Registration Statement, all necessary state securities law
or "blue sky" permits or approvals required to consummate the transactions
contemplated by the Merger Agreement; (v) if at any time prior to the Effective
Time, any information pertaining to Knogo or Video contained in or omitted from
the Registration Statement makes such information false or misleading, Knogo and
Video shall promptly inform the other party and provide such other party with
information necessary to make the statements contained therein not misleading;
and (vi) no amendment or supplement to the Joint Proxy Statement/Prospectus will
be made by Video or Knogo without the approval of the other party.
47
Listing Application. Knogo and Video have agreed that Video shall
promptly prepare and submit to NASDAQ, or a national securities exchange,
listing applications covering the shares of Sentry Common Stock and Sentry Class
A Preferred Stock issuable in the Merger, and shall use its best efforts to
obtain, prior to the Effective Time, approval for the listing of such stock,
subject to official notice of issuance.
Affiliate Letters. Knogo and Video have agreed that: (i) at least 30
days prior to the Closing Date, Knogo and Video shall deliver to each other a
list of names and addresses of those persons who were, in their respective
reasonable judgments, at the record date for the Knogo Meeting or Video Meeting,
as the case may be, "affiliates" of either Knogo or Video (each such person, a
"Knogo Affiliate" or "Video Affiliate," respectively) within the meaning of Rule
145 of the rules and regulations promulgated under the Act; (ii) Knogo and Video
shall provide each other with such information and documents as each shall
reasonably request for purposes of reviewing such list; (iii) Knogo and Video
shall use reasonable efforts to deliver or cause to be delivered to each other,
prior to the Closing Date, from each of the Knogo Affiliates and Video
Affiliates, as the case may be, identified in the foregoing list, an Affiliate
Letter (in the form attached to the Merger Agreement); and (iv) Sentry shall be
entitled to place legends as specified in such Affiliate Letters on the
certificates evidencing any Sentry Common Stock to be received by such Knogo
Affiliates and Video Affiliates, as the case may be, pursuant to the terms of
the Merger Agreement, and to issue appropriate stop transfer instructions to the
transfer agent for the Sentry Common Stock, consistent with the terms of such
Affiliate Letters.
D&O Indemnification and Insurance. Knogo and Video have agreed that:
(a) from the Effective Time through the later of (i) the sixth anniversary of
the date on which the Effective Time occurs and (ii) the expiration of any
statute of limitations applicable to any claim, action, suit, proceeding or
investigation referred to below, Sentry shall, or shall cause the Video
Surviving Corporation (as defined in the Merger Agreement) and Knogo Surviving
Corporation (as defined in the Merger Agreement) to, indemnify and hold harmless
each present and former officer, director, employee or agent of Knogo, Video and
Sentry, including, without limitation, each person controlling any of the
foregoing persons (the "Indemnified Parties"), against all claims, losses,
liabilities, damages, judgments, fines, fees, costs or expenses, including,
without limitation, attorneys' fees and disbursements (collectively, "Costs"),
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of or pertaining to matters existing or occurring at or prior to the
Effective Time (including, without limitation, the Merger Agreement and the
transactions and actions contemplated thereby), whether asserted or claimed
prior to, at or after the Effective Time, to the fullest extent permitted under
applicable law and the Certificate of Incorporation, as amended, or Bylaws of
Knogo or indemnification agreements in effect on the date of the Merger
Agreement, including provisions relating to advancement of expenses incurred in
the defense of any claim, action, suit, proceeding or investigation. Without
limiting the foregoing, in the event that any claim, action, suit, proceeding or
investigation is brought against an Indemnified Party (whether arising before or
after the Effective Time), the Indemnified Party may retain counsel satisfactory
to such Indemnified Party, and Sentry shall, or shall cause the Video Surviving
Corporation and Knogo Surviving Corporation to, advance the fees and expenses of
such counsel for the Indemnified Party in accordance with the Certificate of
Incorporation, as amended, or Bylaws of Knogo in effect on the date of the
Merger Agreement; (b) Sentry shall, or shall cause the Video Surviving
Corporation and Knogo Surviving Corporation, to keep in effect in its
Certificate of Incorporation and Bylaws, provisions of Knogo providing for
exculpation of director and officer liability and its indemnification of the
Indemnified Parties to the fullest extent permitted under the DGCL, which
provisions shall not be amended except as required by applicable law or except
to make changes permitted by law that would enlarge the Indemnified Parties'
right to indemnification; (c) Sentry shall maintain, or shall cause the Video
Surviving Corporation and Knogo Surviving Corporation to maintain, with respect
to matters occurring at, prior to or subsequent to the Effective Time, at no
expense to the beneficiaries, directors' and officers', liability insurance
("D&O Insurance") for the Indemnified Parties, issued by a carrier or carriers
assigned a claims-paying ability rating by A.M. Best & Co. of "A (Excellent)" or
higher, providing at least the same coverage as the D&O Insurance currently
maintained by Knogo and containing terms and conditions which are no less
favorable to the beneficiaries, for a period of at least six years from the
Effective Time. In the event any claim is made against present or former
directors, officers or employees of Knogo or Video that is covered or
potentially covered by insurance, neither Sentry, the Video Surviving
Corporation nor the Knogo Surviving Corporation shall do anything that would
forfeit, jeopardize, restrict or limit the insurance coverage available for that
claim until the final disposition thereof; (d) notwithstanding anything stated
in the Merger Agreement to the contrary, if any claim, action, suit,
48
proceeding or investigation (whether arising before, at or after the Effective
Time) is made against any Indemnified Party, on or prior to the sixth
anniversary of the Effective Time, the provisions concerning D&O Insurance and
indemnification shall continue in effect until the final disposition of such
claim, action, suit, proceeding or investigation; (e) the covenant concerning
D&O Insurance and indemnification is intended to be for the benefit of, and
shall be enforceable by, each of the Indemnified Parties and their respective
heirs and legal representatives. The indemnification provided for in the Merger
Agreement shall not be deemed exclusive of any other rights to which an
Indemnified Party is entitled, whether pursuant to law, contract or otherwise.
Sentry shall pay all expenses, including attorneys' fees, that may be incurred
by any Indemnified Party in enforcing the indemnity and other obligations
provided for in the covenant concerning D&O Insurance and indemnification; (f)
in the event that Sentry or the Video Surviving Corporation or the Knogo
Surviving Corporation or any of their respective successor or assigns (1)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(2) transfers or conveys all or substantially all of its properties and assets
to any person, then, and in each such case, to the extent necessary to
effectuate the purposes of the covenant concerning D&O Insurance and
indemnification, proper provision shall be made so that the successors and
assigns of Sentry or the Video Surviving Corporation or the Knogo Surviving
Corporation shall succeed to the obligations set forth in the covenant and none
of the actions described in clauses (1) or (2) above shall be taken until such
provision is made.
Employee Benefits. Knogo and Video have agreed that: (a) from and after
the Effective Time, Sentry, the Video Surviving Corporation and the Knogo
Surviving Corporation and their respective affiliates will honor in accordance
with their terms all existing employment, severance, consulting and salary
continuation agreements (i) between Knogo and any of its current or former
officers, directors, employees or consultants, and (ii) between Video and any of
its current or former officers, directors, employees or consultants; (b) Sentry
agrees that, for a three year period after the Effective Time, it shall provide,
or shall cause the Video Surviving Corporation and the Knogo Surviving
Corporation to provide, those persons who, prior to the Effective Time, were
employees of Knogo ("Knogo Employees") or Video ("Video Employees") with
employee plans and programs which provide benefits that are no less favorable in
the aggregate to those provided to other employees of Sentry of comparable
status and seniority. With respect to such benefits, past service, compensation
and expense credits of such Knogo Employees and Video Employees shall be
recognized for all purposes under such plans (including, but not limited to,
participation, eligibility vesting and calculation benefits), and each employee
or fringe benefit plan or program available to Knogo Employees or Video
Employees as contemplated in the Merger Agreement shall be applied to such Knogo
Employees and Video Employees, respectively; and (c) in the event that Sentry or
the Video Surviving Corporation or the Knogo Surviving Corporation or any of
their respective successors or assigns (i) consolidates with or merges into any
other person and shall not be the continuing or surviving corporation or entity
of such consolidation or merger or (ii) transfers or conveys all or
substantially all of its properties and assets to any person, then, and in each
such case, to the extent necessary to effectuate the purposes of the covenant
concerning employee benefits, proper provision shall be made so that the
successors and assigns of Sentry or the Video Surviving Corporation and the
Knogo Surviving Corporation shall succeed to the obligations set forth in that
section and none of the actions described in clauses (i) or (ii) above shall be
taken until such provision is made.
Expenses. Knogo and Video have agreed that whether or not the Video
Merger or the Knogo Merger is consummated, all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated in it
(including, without limitation, fees and disbursements of counsel, financial
advisors and accountants) shall be borne by the party which incurs such cost or
expense. However, if the Merger Agreement is terminated pursuant to the
provisions regarding termination as a result of the willful and material
misrepresentation by a party or the willful and material breach by a party of
any of its covenants or arrangements set forth in the Merger Agreement, such
party shall pay the costs and expenses incurred by the other party in connection
with the Merger Agreement. Furthermore, all costs and expenses related to the
preparation, printing, filing and mailing of the Joint Proxy
Statement/Prospectus and all Commission filing fees incurred in connection with
the Joint Proxy Statement/Prospectus shall be borne equally by Knogo and Video.
Cancellation of Sentry Common Stock. Knogo and Video have agreed that,
as of the Effective Time, all authorized Sentry Common Stock issued and
outstanding immediately prior to the Effective Time shall automatically be
canceled and extinguished and shall cease to exist.
49
Closing Conditions
Conditions to Obligations of Each Party to Effect the Reorganization.
The obligations of Video and Knogo to effect the Merger are conditioned on the
fulfillment of the following: (i) stockholder approval; (ii) the absence of an
injunction prohibiting, enjoining, or otherwise restraining consummation of the
Mergers; (iii) the effectiveness of the Registration Statement; and (iv) the
approval of Sentry Common Stock and Sentry Class A Preferred Stock to be issued
to Video shareholders and Knogo stockholders, as applicable, for listing on
NASDAQ or a national securities exchange.
Conditions Precedent to the Obligations of Knogo. The obligation of
Knogo to effect the Knogo Merger is also subject to the satisfaction at or prior
to the Effective Time of each of the following additional conditions, unless
waived by Knogo: (i) the accuracy of all representations and warranties made by
Video, Sentry, Video Merger Corp. and Knogo Merger Corp.; (ii) the compliance by
each of Video, Sentry, Video Merger Corp. and Knogo Merger Corp. with all
obligations and agreements, and covenants contained in the Merger Agreement
prior to the Effective Time; (iii) Knogo's receipt of such certificates of
Video, Sentry, Video Merger Corp. and Knogo Merger Corp., dated the Closing
Date, signed by an executive officer of Video, Sentry, Video Merger Corp. and
Knogo Merger Corp. to evidence satisfaction of the conditions set forth
concerning conditions of closing; and (iv) Knogo's receipt of the opinion of
Stroock & Stroock & Lavan, counsel to Knogo, based upon reasonably requested
representation letters and dated the Closing Date, to the effect that the Knogo
Merger will be treated for federal income tax purposes as a transfer of property
to Sentry by holders of Knogo Common Stock governed by Section 351 of the Code.
Conditions Precedent to the Obligations of Video, Sentry, Video Merger
Corp. and Knogo Merger Corp. The obligation of Video, Sentry, Video Merger Corp.
and Knogo Merger Corp. to effect the Merger is also subject to the satisfaction
at or prior to the Effective Time of each of the following additional
conditions, unless waived by Video: (i) the accuracy of all representations and
warranties made by Knogo; (ii) the compliance by Knogo with all obligations and
agreements, and covenants contained in the Merger Agreement prior to the
Effective Time; (iii) Video's receipt of such certificate of Knogo, dated the
Closing Date, signed by an executive officer of Knogo to evidence satisfaction
of the conditions set forth concerning conditions of closing; and (iv) Video's
receipt of the opinion of Dewey Ballantine, special counsel to Video, based upon
reasonably requested representation letters and dated the Closing Date, to the
effect that the Video Merger will be treated for federal income tax purposes as
a reorganization described in Section 368(a) of the code and/or as a transfer of
property to Sentry by holders of shares of Video Common Stock governed by
Section 351 of the Code.
Termination
Termination. Knogo and Video have agreed that the Merger Agreement may
be terminated and the Merger may be abandoned at any time (notwithstanding
approval of the Knogo Merger by the stockholders of Knogo and the Video Merger
by the shareholders of Video, if required by applicable provisions of the DGCL
and the Minnesota Act), prior to the Effective Time: (a) by mutual written
consent of Knogo and Video; (b) by either Knogo or Video, if the Effective Time
shall not have occurred on or before 180 days from the date of the Merger
Agreement, provided that the right to terminate the Merger Agreement under this
clause (b) shall not be available to any party whose misrepresentation in the
Merger Agreement or whose failure to perform any of its covenants and agreements
or to satisfy any obligation under the Merger Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date; (c) by
either Knogo or Video, if (i) any court of competent jurisdiction or other
governmental or regulatory body shall have issued any judgment, injunction,
order or decree prohibiting, enjoining or otherwise restraining the transactions
contemplated by the Merger Agreement and such judgment, injunction, order or
decree shall have become final and nonappealable (provided, that the party
seeking to terminate the Merger Agreement pursuant to this clause (c) shall have
used commercially reasonable efforts to remove such judgment, injunction, order
or decree) or (ii) any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority after the date of the Merger Agreement
which prohibits the consummation of the Merger shall be in effect; (d) by either
Knogo or Video, if the Merger Agreement is not adopted or the Video Merger or
the Knogo Merger is not approved by the shareholders of Video or the
stockholders of Knogo as required in the Merger Agreement; (e) by either Knogo
or Video, if there shall have been a material breach of any representation,
warranty or material covenant or agreement on the part of the other, which is
not cured after thirty (30) days' written notice by the breaching company to the
other; (f) by either Video or Knogo, if (i) the Knogo Board shall withdraw or
modify in a manner adverse to Video its approval or recommendation of the Knogo
Merger
50
or shall have resolved to do any of the foregoing pursuant to the covenant
concerning Merger Proposals or (ii) any person or group of persons shall have
made a Merger Proposal that the Knogo Board determines in good faith, after
consultation with outside counsel, that the failure to accept such Merger
Proposal could reasonably be deemed to cause the members of the Knogo Board to
breach their fiduciary duties under applicable law; and (g) by either Knogo or
Video, if (i) the Video Board shall withdraw or modify in a manner adverse to
Knogo its approval or recommendation of the Video Merger or shall have resolved
to do any of the foregoing pursuant to the covenant concerning Merger Proposals
or (ii) any person or group of persons shall have made a Merger Proposal that
the Video Board determines in good faith, after consultation with outside
counsel, that the failure to accept such Merger Proposal could reasonably be
deemed to cause the members of the Video Board to breach their fiduciary duties
under applicable law.
Termination Fee. Knogo and Video have agreed that, provided that
neither Video, Sentry, Video Merger Corp. nor Knogo Merger Corp. shall be in
breach of their respective obligations under the Merger Agreement, if (a) the
Knogo Board shall withdraw or modify in a manner adverse to Video its approval
or recommendation of the Knogo Merger or shall have resolved to do any of the
foregoing pursuant to the covenant concerning Merger Proposals and (b) Video or
Knogo shall have terminated the Merger Agreement by its Board either withdrawing
its approval of the Merger or accepting a Merger Proposal, and (c) within six
months of any such termination, Knogo shall have consummated a Merger
Transaction, then Knogo will pay, or reimburse Video for, all reasonable fees
and expenses incurred by Video and its affiliates in connection with the Merger
and the consummation of the transactions contemplated by the Merger Agreement,
in an amount not to exceed $750,000 in the aggregate, in addition to the amount
otherwise payable pursuant to the above proviso concerning related costs and
expenses. Similarly, provided that Knogo shall not be in breach of its
obligations under the Merger Agreement, if (a) the Video Board shall withdraw or
modify in a manner adverse to Knogo its approval or recommendation of the Video
Merger or shall have resolved to do any of the foregoing pursuant to the
covenant concerning Merger Proposals and (b) Knogo or Video shall have
terminated the Merger Agreement by its Board either withdrawing its approval of
the Merger or accepting an alternative Merger Proposal, and (c) within six
months of any such termination, Video shall have consummated a Merger
Transaction, then Video will pay, or reimburse Knogo for, all reasonable fees
and expenses incurred by Knogo and its affiliates in connection with the Merger
and the consummation of the transactions contemplated by the Merger Agreement,
in an amount not to exceed $750,000 in the aggregate, in addition to the amount
otherwise payable pursuant to the above proviso concerning related costs and
expenses.
51
BUSINESS OF VIDEO
General
Video designs, manufactures, markets and installs a programmable
traveling CCTV system that delivers a high quality video picture which is used
in a wide variety of applications. This proprietary system, called SentryVision,
is well suited for loss prevention surveillance in retail stores and
distribution centers and security surveillance for monitoring and deterring
illegal and unsafe activities in a variety of other locations such as parking
garages, correctional facilities and public transit terminals. Video's system
may also be employed in a broad range of operational and process monitoring
applications in commercial manufacturing and industrial settings. As of
September 30, 1996, Video's system had been installed in approximately 250
customer locations nationwide. Current customers include Lowe's Home Centers,
Target Stores, Eckerd Corporation, Mills Fleet Farm, Estee Lauder and TJ Maxx.
Video believes that by expanding surveillance coverage its systems have enabled
customers to significantly reduce inventory shrinkage, increase shoplifter
apprehension rates and improve merchandising flexibility. Based on the price of
its system and the experience of its customers to date, Video believes its
system is a cost-effective loss prevention solution which can improve the
profitability of its customers.
Management believes that Video's SentryVision system is the only
proven, commercially accepted, traveling CCTV system currently available. The
SentryVision system consists of two CCTV cameras mounted on a camera carriage
assembly designed to move horizontally through a tinted enclosure that conceals
the camera's location. The system's unique, cable-free design allows the camera
to move freely and rapidly through the enclosure while transmitting a continuous
video signal to provide increased surveillance coverage. Video believes the
major advantage of its traveling surveillance system over conventional
fixed-mount or PTZ dome surveillance cameras is the system's ability to provide
uninterrupted security monitoring and surveillance over large areas and over
areas which have numerous visual obstructions, often at a lower system cost. The
SentryVision system permits the monitoring of activities in areas that
traditionally have been difficult to monitor, such as aisles with overhead
signs, hidden corridors, areas between vehicles, and other obstructed areas. The
system is configured to meet each customer's specific surveillance needs and is
often integrated with the customer's existing peripheral surveillance equipment.
Business Strategy
Video's strategy is to provide its customers with innovative
surveillance solutions through the application of high quality products
supported by outstanding customer service. To continue its growth, Video plans
to:
o Increase Penetration of the Domestic Retail Sector. Video
plans to continue its focus on increasing sales to new and
existing customers in the domestic retail market sector. Video
believes it has established itself as an emerging leader for
innovative loss prevention surveillance systems in retail
stores and distribution centers. Video expects that increased
direct sales resources and positive reports from customers
regarding reductions in inventory shrinkage achieved through
the use of the SentryVision system will enable Video to
continue to expand its share of the retail loss prevention
market.
o Establish International Marketing and Distribution. Video
believes the international market for surveillance products
presents a significant opportunity for growth. In order to
capitalize on this opportunity, Video is currently evaluating
distribution channels to facilitate sales of its products
abroad.
o Leverage Installed Base. Video intends to leverage its growing
base of installed systems and increase customer loyalty by
introducing new products and enhancements which are compatible
with the SentryVision system and provide additional
surveillance capabilities. For example, Video recently
developed a point of sale ("POS") surveillance system which
uses information from a retailer's cash register systems to
control cashier surveillance by the SentryVision system.
o Pursue Opportunities in Additional Surveillance Markets. Video
believes that its traveling CCTV system provides surveillance
capabilities which are superior to traditional fixed-mount or
PTZ dome systems and can be used effectively in a wide variety
of applications. Examples of such
52
additional markets include operational surveillance in
industrial, retail and correctional facilities; security
surveillance in airports, subways, bus terminals and parking
garages; and process surveillance in commercial manufacturing
where environment and automation require advanced monitoring
systems.
o Develop New Products. Video intends to continue to enhance its
current products and develop innovative new products through
internal research and development and potentially through
strategic acquisitions or alliances which will allow a faster
and/or more cost-effective market introduction of additional
products and enhancements. Video recently acquired an
exclusive perpetual license for the technology that has
enabled a more rapid development of its innovative real-time
POS system.
Market Overview
A variety of security surveillance, theft detection and monitoring
systems are currently used in a broad range of applications and settings.
Historically video surveillance has been limited to fixed-mount or PTZ dome
systems in which the camera is mounted in a fixed location. Management believes
that the SentryVision system, which permits the cameras to move laterally within
an enclosure that conceals the camera's location, offers superior performance
and flexibility in a number of video surveillance and monitoring markets,
including loss prevention surveillance, security surveillance and operation and
process monitoring.
Loss Prevention Surveillance. Loss prevention surveillance cameras have
long been used by retailers and other businesses to control losses from
shoplifting and employee theft. According to the results of the 1996 National
Retail Security Survey, Final Report published by the University of Florida (the
"NRSS"), the surveyed retailers (which included 311 total respondents) lost an
average of 1.87% of their total sales to inventory shrinkage in 1995,
attributable primarily to employee theft, shoplifting and administrative error.
The NRSS excluded restaurants, bars, vehicle dealers, auto service stations and
direct catalog sales segments of the retail industry from the survey. Video
believes that this translates into a total inventory shrinkage level in 1995 of
approximately $25 billion for the surveyed segments of the United States retail
market.* The NRSS further reports that the average retail loss prevention budget
for the surveyed companies equalled 0.62% of annual retail sales. Video believes
that this translates into approximately $8 billion spent in 1995 on loss
prevention in the surveyed segments of the United States retail market.
According to the NRSS, CCTV was the most often used loss prevention system, and
those surveyed indicated that, in addition to increasing security personnel,
they were likely to increase usage in technologically advanced systems such as
CCTV, POS/CCTV interfacing and electronic anti-shoplifting products. Video
believes that retailers, many of whom operate on small margins, will continue to
place greater emphasis on inventory shrinkage control as a means of improving
profits, and will be attracted to the SentryVision system as a cost-effective,
technologically advanced means of loss prevention.
Many large retail stores are characterized by numerous aisles, tall
shelves, hanging signs and other visual obstructions. Such stores also have
multiple checkout lanes located in the front of the store. These store
configurations, which are designed to maximize the utilization of retail space,
create a number of surveillance and loss prevention challenges. For example,
conventional surveillance techniques often provide incomplete coverage, which
can result in fewer apprehensions of shoplifters. Similarly, multiple
fixed-mount cameras are necessary to effectively monitor employee theft at each
cash register. Retailers also encounter theft related losses in warehouses and
large distribution centers. Distribution centers often encompass very large
areas, have high ceilings and tall product shelves, and include numerous
unsupervised areas where theft can occur. As such, these areas are well suited
for a traveling surveillance system which can be controlled to maximize the
coverage area.
Security Surveillance. Security surveillance cameras are used to
provide personal security in stairwells, elevators, parking garages and other
secluded areas, as well as for general security in convenience stores, around
- --------
* Based upon an estimated 1995 retail sales total of approximately $1.339
trillion for the segments of the retail industry included in the NRSS, as
derived from sales information contained in the U.S. Census Bureau, Current
Business Reports, Series BR/94-RV, Combined Annual and Revised Retail Trade,
January 1985 Through December 1994, Washington, D.C. 1995.
53
building perimeters, and in government, banking and large office facilities. In
these applications, a traveling camera carriage allows the user to view into
areas where conventional fixed-mount or PTZ dome cameras are unable to provide
the same coverage. Video believes there are numerous markets for a traveling
CCTV system in general security surveillance. For example, correctional
facilities may use such systems to conduct visual cellblock tours and monitor
dining halls and corridors. Such applications could provide increased
flexibility, more efficient use of guard staffing, and a safer and more secure
means of performing routine patrols and tour functions. In addition, the size
and linear designs of the terminals and other internal areas of most major
airport facilities lend themselves to a traveling surveillance system,
particularly one capable of working in conjunction with conventional peripheral
alarm and access control systems.
Operational and Process Monitoring. Operational and process
surveillance cameras are used to monitor specific activities, including
manufacturing and assembly line operations, to ensure quality control, employee
safety and fast identification and repair of problem areas. Many manufacturing
and assembly line operations cover large areas and include operations which are
not readily accessible to human inspection. Multiple stationary surveillance
cameras and/or on-site monitoring personnel can be expensive and may not provide
the desired level of monitoring and control. In these environments, a traveling,
pre-programmed or manually controlled camera may offer a number of innovative
monitoring solutions.
Current Products
Video's system consists of a camera carriage unit, a continuous tinted
enclosure and electronic control equipment. The carriage unit moves within the
enclosure and carries two pan/tilt/zoom CCTV cameras, electronic transmission
components and a motor drive. The carriage track and enclosure are designed to
specific custom lengths and may include corners with cornering camera carriages
for more complete viewing. Using Video's patented transmission technology, the
carriage unit transmits a video signal from the camera(s) through two copper
conductors running inside the enclosure to a receiver unit located at one end of
the carriage track. The copper conductors also carry power to the camera
carriage, eliminating the need for power or communication cables. From the
receiver unit, the video signals are relayed to a central monitoring location by
wire or fiber optics, where a system operator can position or move the camera
carriage to obtain the best vantage point while viewing and recording the
continuous, live video pictures. The system design supports conventional
peripheral devices, such as videocassette recorders, alarm inputs, pan/tilt/zoom
camera and lens control, monochrome or color cameras, and voice intercom
systems.
The SentryVision system typically employs two cameras facing opposite
directions and operates at variable speeds up to 15 feet per second. The system
is designed to allow three control modes: manual control, automatic patrol, or
automated control. In the manual control mode, the combination of carriage
movement, camera pan, tilt and zoom features, and the ability to view from each
side of the enclosure, enables the user to manually follow and record persons
engaging in suspected activities from a central control station. When engaged in
the automatic patrol mode, the carriage will automatically travel through
pre-programmed "tours" of a facility, affording precise camera views of intended
target locations. Video anticipates that tours may be programmed for full
end-to-end facility observation, random view facility observation, or
user-defined facility observation with a series of stops at precise locations
focusing on precise views. Under an automated control mode, the system would be
operated as a component in an automated control system. This configuration
enables the system to respond to control commands provided externally to the
system through a serial interface port. In addition, the SentryVision system
utilizes the RS-232 communication protocol, which allows Video's carriage
control to be integrated with any industry standard controller.
The SentryVision carriage was designed and manufactured to provide a
number of different options and features that can be applied to customer
specific applications. Available options include 30 degree panning, black and
white (low light) cameras and 10x or 12x lens upgrades. These features are
offered to customers as value-added upgrades to the standard carriage.
Video is in the process of developing a unique POS video control system
which utilizes the automated control mode of the SentryVision system. This
automated control system is designed to extract transaction information from
on-site retail POS terminals, monitor the transactions for exceptions to
standard transactions, analyze occurrences of repeated exceptions for abnormal
activity by specific cashiers, and then trigger the SentryVision system to
capture the suspect activity on video tape, overlaying real-time register
transaction
54
information on the closed circuit video picture. The SentryVision system's
ability to provide precise overhead views of register terminals when
automatically triggered by POS activity will differentiate this product in the
market. Video's POS system has been installed in a store for customer testing.
Customer Applications
Retail Market Applications. Video sold its first systems in 1992 for
installation in parking garage security surveillance applications, but quickly
moved its market focus into the retail sector. In this sector, Video has
identified a number of specific market segments for which its SentryVision
systems are well suited for loss prevention surveillance, including home
centers, mass merchandise chains, supermarkets and drug stores, as well as
related distribution centers. The key application is inventory loss prevention
in the stores, stock rooms and distribution centers. In addition, fraud
detection at the cash registers is a major new application area with the
introduction of Video's POS system.
Video's system is typically installed in retail stores which use a
checkout area at the front of the store and product display configurations and
high merchandise shelving which form rows and aisles. Video specializes in
designing system applications which are customized to fit a customer's specific
needs and which integrate the customer's existing surveillance equipment (PTZ
dome and fixed-mount cameras) with the SentryVision system. The flexibility of
the system allows the customer to specify target-coverage areas ranging from
stock rooms to total store coverage and focus on shoplifting or employee theft.
The SentryVision system is installed near the ceiling along the rows of cash
registers and between the ends of the merchandise aisles. This allows the
retailer to easily observe both the cash handling activities of cashiers in the
checkout area and customer activities between the merchandise rows, despite the
presence of hanging signs and other obstructions. The entire sales floor can be
monitored efficiently by focusing up and down the aisles and by moving the
carriage horizontally from aisle to aisle, or from cash register to cash
register. In addition, with the use of camera tilt and zoom lens features,
activities in each area can be monitored in greater detail. Results from Video's
current installations indicate significant improvements in detecting shoplifting
and employee theft. Customers using Video's system have reported significant
reductions in theft-related inventory shrinkage. Video is expanding its product
line for loss prevention surveillance in retail stores by adding its innovative
POS video surveillance system.
o Home Centers. Video has installed systems in 155 store
locations for four customers in the home center segment of the
retail market. Home centers represent Video's fastest growing
market segment. In the past three years, Video's system has
been installed in 130 locations for Lowe's Home Centers, a 387
store chain, and in 23 locations for Mills Fleet Farm, a 32
store regional hardware, home supply and discount retail
chain. Both companies required systems for total floor
coverage, with Lowe's Home Centers choosing to integrate track
cameras with PTZ dome and fixed-mount cameras, while Mills
Fleet Farm chose to use only the track camera system. Video
received Security magazine's "Best" award for New Security
Installation in June 1994 for its installation in the Mills
Fleet Farm store in Brooklyn Park, Minnesota. In addition
Mills Fleet Farm has one store with Video's POS system
integrated with a SentryVision system over the cash registers.
According to industry publications, the home centers market
consists of approximately 5,000 companies operating 20,000
stores in the United States, with the top nine companies
operating over 5,000 stores. Typical systems for home centers
installations range in price from $20,000 to $30,000 for
smaller stores and from $80,000 to $150,000 for larger stores
requiring more carriage runs to provide adequate coverage.
o Mass Merchandise Chains. Video has installed systems in 23
store locations for six customers in this segment, including
Target Stores and TJ Maxx. The targeted coverage varies
extensively in these installations from only stock rooms to
total store coverage. According to industry publications, in
1995 the mass merchandise market in the United States had
approximately 140 companies operating over 9,000 store
locations, with the top nine companies operating approximately
7,500 of these stores. Typical systems for mass merchandise
stores range in price from $20,000 to $30,000 for smaller
stores or target coverage areas and from $90,000 to $130,000
for large systems.
55
o Supermarkets. Video has installed systems in 19 store
locations for seven supermarket customers. The targeted
coverage in most of these installations has been the entire
retail space. The supermarket segment of the market is very
fragmented in the United States. According to industry
publications, in 1995 approximately 2,000 companies operated
over 34,000 stores, with over half of those companies having
fewer than four stores. The top 26 companies operate
approximately half of the total stores. Typical systems for
supermarket installations range in price from $15,000 to
$20,000 for smaller stores to $40,000 to $50,000 for larger
stores.
o Drug Stores. Video has installed 24 systems for two drug store
customers, including a major national drug store chain of
approximately 1,750 stores. The targeted coverage area for
this customer is the entire store. According to industry
publications, in 1995 the drug store market consisted of
approximately 1,400 companies operating approximately 21,000
stores. Typical systems for the drug store market range in
price from $15,000 to $25,000 for smaller stores and from
$40,000 to $50,000 for larger stores.
o Distribution Centers. Video also provides loss prevention
surveillance for retail distribution centers and warehouses,
and has installed systems in 27 distribution centers for 14
different customers. Traveling through a facility from an
overhead position, Video's system can monitor activities
occurring between the stacked rows of cartons or lines of
hanging garments. The system can also move a surveillance
camera into position to monitor shipping and receiving docks
and parked delivery trucks. To achieve surveillance
capabilities equivalent to those of the SentryVision system, a
conventional PTZ dome system or fixed-mount CCTV camera would
have to be installed at every desired vantage point, requiring
numerous cameras, additional equipment and wiring and
increased installation and operating costs. Even though the
potential number of retail distribution centers is much
smaller than the related number of store locations, management
believes that such distribution center installations, in
addition to providing an important revenue source, provide a
potential point of entry into the retail stores of a number of
major retailers. Typical systems for distribution center
installations range in price from $40,000 to $50,000 for a
small system to over $200,000 for a large system.
o Security Surveillance. Video has installed systems in three
parking garages for two customers. The coverage area is the
total parking ramp including in and around the parked cars. In
addition, Video has installed one system in a bus terminal to
provide coverage of the maintenance area of the garage. Video
has made proposals to correctional facilities, airport
terminals, airport baggage handling and baggage claim areas as
well as airport parking facilities.
While the security surveillance and operation and process monitoring
markets may significantly benefit from the increased security, surveillance and
monitoring provided by Video's system, such applications have been limited to
date. Management believes future orders in these additional markets may be
characterized by long lead times between proposals and shipments, and that
marketing and other related expenses may be incurred in periods prior to the
recognition of any matching sales.
Customers
Video's customers include five of the top 20 United States retailers.
According to the July 1995 issue of STORES magazine, the top 20 retailers have
approximately 45,000 stores. Video's strategy is to build on its initial retail
sales by implementing a direct sales program targeting the retail market,
including the top 100 United States retailers.
Although the composition of Video's largest customers has changed from
year to year, a significant portion of Video's sales has been attributable to a
limited number of major customers in each of the past two years and during the
first nine months of 1996. Lowe's Home Centers and Mills Fleet Farm accounted
for 33% and 48%, respectively, of Video's sales in 1994 and 67% and 12% in 1995.
For the nine months ended September 30, 1996, Lowe's Home Centers and TJ Maxx
accounted for 69% and 15%, respectively of Video sales. No other customers
accounted for more than 10% of Video's sales during 1994, 1995 or the nine
months ended September 30, 1996. While Video believes that one or more major
customers could account for a significant portion of its sales for at
56
least the next two years, management anticipates that its customer base will
continue to expand and that in the future Video will be less dependent on major
customers.
Sales, Marketing and Customer Service
Video's products are currently marketed by Video's direct sales force.
Video's systems are marketed in the United States primarily through the efforts
of Video's President and one direct salesperson. Video intends to focus the
majority of its direct sales effort to further penetrate loss prevention
applications in the retail sector. Video believes that additional sales
personnel will increase its exposure in other market areas such as security,
operational and process monitoring.
Video also uses a variety of other marketing techniques, including
membership in trade associations, advertising in trade publications and targeted
direct mailing. Video intends to continue to participate in national trade shows
and to use promotional video tape demonstrations of Video's products.
Video currently has a 15 person customer service and technical support
staff. Customer service, maintenance and repairs are also provided by Video's
installation technicians and third-party subcontractors. Video operates a
24-hour customer service telephone message center to receive and respond to
customer questions and service requests. Video also offers its customers an
annual maintenance program.
Delivery lead times for Video's systems are relatively short.
Accordingly, Video believes that its backlog at any given point in time is not a
reliable indicator of future sales. The absence of a significant backlog may
contribute to unpredictability of Video's results of operations.
Product Development
Research and development is conducted by Video's engineering, technical
and support staff, and by independent contractors. Video's expenditures for
research, development and engineering were $351,892, $606,882, $320,514 during
the years ended December 31, 1994, 1995 and the nine months ended September 30,
1996, respectively. To date, Video's research and development efforts have
focused on developing and improving its traveling CCTV security surveillance
system and incorporating POS controls into the system.
During 1995, Video completed development of its second generation
product known as the SentryVision system. This system is a microprocessor-driven
product which employs the same video signal transmission technology used in
Video's previous traveling system. The significant advancements of SentryVision
include precise carriage position control, programmable camera movement and
positioning, increased carriage speed control, a downsized enclosure and added
cornering capabilities. A key addition provided in the system is a serial
communication and control interface which enables control of the system by
various external devices. In addition to the improved performance, this system
is designed for reduced material, assembly, installation and service costs.
The third generation of the SentryVision system ("SentryVision II") is
currently in the research and development stage and is expected to replace the
existing SentryVision system. SentryVision II is intended to offer broader
applications in domestic markets, increased product compatibility for
international markets, quality enhancements, substantial reductions in
production costs, enhanced video performance and an upgraded software features.
Video's other major research and development effort occurring during
the past eighteen months is its POS control system. This system integrates POS
control technology with the serial control interface provided with the
SentryVision system. The development effort to date has included adaptations of
its POS technology to large retail store environments, graphical user interface
software for user programmability, exception analysis algorithms for prediction
of abnormal transaction behavior and integration into the SentryVision system.
The resulting combination will be a fully programmable real-time POS video
control system.
Research and development activities scheduled for the remainder of 1996
and through 1997 include developing additional enhancements and features to the
SentryVision system including motion detection capabilities, increasing
compatibility of the POS video control system with a broader range of register
types and designing a
57
SentryVision dome camera. The SentryVision dome camera will be designed to
incorporate Video's video picture and power transmission technology into a PTZ
dome camera.
Manufacturing and Installation
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. 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 Video's facilities in Eden Prairie, Minnesota. System components and parts
included cameras, circuit boards, electric motors and a variety of machined
parts. Each system component undergoes a quality assurance check by Video prior
to its shipment to an installation site. Video is not subject to any state or
federal environmental laws, regulations or obligations to obtain related
licenses or permits in connection with its manufacturing and assembly
operations.
Product installation is conducted by Company personnel or pre-qualified
installation subcontractors who are managed by Video's project management staff.
Installations typically take from three days to three weeks and consist of
mounting the enclosures, installing the controller unit, installing the carriage
assembly, and connecting control and transmission cables to the central
monitoring location. Items such as high voltage power termination wiring are
typically the responsibility of the end user.
Competition
The security, surveillance and theft detection industries are highly
competitive. Video's system competes with conventional PTZ dome and fixed-mount
CCTV systems, electronic article surveillance tagging systems and other magnetic
and electronic devices, private guard services and burglar alarms. Video's
competitors include Checkpoint Systems, Burle Industries, Inc., Pelco
Manufacturing, Inc., Vicon Industries, Inc., Sensormatic Electronics
Corporation, Ultrak, Inc. and Panasonic Broadcast and Television Systems
Company. Many of these competitors, and potential competitors, are established
companies with significantly greater financial, sales and marketing and other
resources than Video. Management believes that Video's SentryVision system is
the only proven, commercially accepted traveling CCTV system currently
available. Video expects to compete effectively in the market for surveillance
and loss prevention systems on the basis of superior performance, design and
engineering and by offering greater and more detailed visual coverage than
conventional CCTV systems.
Patents and Intellectual Property
Video currently holds a United States patent expiring in 2010, which
covers the cable free transmission of the video signal to and from the carriage.
This technology prevents degradation of the video signal which can result from
movement and prolonged friction caused by the carriage. Video has also applied
for corresponding foreign patents. Video intends to seek patent protection on
specific aspects of the SentryVision system. In addition, Video intends to seek
patent protection in the future for certain aspects of new systems which may be
developed. There can be no assurance that any patents applied for will be
issued, or that the patent currently held, or new patents, if issued, will be
valid if contested or will provide any significant competitive advantage to
Video.
Video is not aware of any infringement of patents or intellectual
property held by third parties. However, if Video is determined to have
infringed on the rights of others, Video may be required to obtain licenses from
such other parties. There can be no assurance that the persons or organizations
holding desired technology would grant licenses at all or, if licenses were
available, that the terms of such licenses would be acceptable to Video. In
addition, Video could be required to expend significant resources to develop
non-infringing technology.
Video is aware of an Australian patent and an Australian patent
application describing certain aspects of a product which in some respects is
similar to the SentryVision system. Video's patent attorneys have advised Video
that the Australian patent and Australian patent application appear to have
lapsed. To Video's knowledge, the holder of the Australian patent is not
currently marketing, within the United States or Europe, the product covered by
the Australian patent. In addition, no issued patents or patent applications
corresponding to the Australian patent or the Australian patent application have
been uncovered in the United States or any other foreign country. See "RISK
FACTORS -- Risks Relating to Sentry - Dependence on Proprietary Technology."
58
Video is also aware of a British patent application from a third party
disclosing aspects of a device which is in some respects similar to the
SentryVision system. Video's patent attorneys have advised Video that the
British patent application appears to have lapsed. In addition, no issued
patents or patent applications corresponding to the British patent application
have been uncovered in the United States or any other foreign country. To
Video's knowledge, the applicant is not currently marketing the product
described in the application. See "RISK FACTORS --Risks Relating to Sentry -
Dependence on Proprietary Technology."
Video also intends to rely on the registration of trademarks and
tradenames, as well as on trade secret laws and confidentiality agreements with
its employees. While Video intends to continue to seek to protect its
proprietary technology and developments through patents, trademark registration,
trade secret laws and confidentiality agreements, it does not rely on such
protection to establish and maintain its position in the marketplace. Video's
management believes that improvement of its 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.
Employees
As of December 31, 1996, Video had 32 full-time employees, consisting
of 12 in installation and scheduling, two in engineering, research and
development and technical support, 12 in customer service, three in sales and
marketing, one in materials management, and two in accounting and senior
management positions. Video's employees are not represented by a labor union or
covered by a collective bargaining agreement and Video believes employee
relations are good.
Facilities
Video is headquartered in a leased office, assembly and warehouse
facility of approximately 13,000 square feet in Eden Prairie, Minnesota. The
lease for the facility expires March 31, 1999.
Legal Proceedings
There are no material legal proceedings pending or, to the knowledge of
management, threatened against Video.
Committees of the Board of Directors
The Video Board has established an Audit Committee and a Compensation
Committee, each of which consists of Mr. Furst, Dennis R. Johnson and Jean R.
Stiegemeier. The Audit Committee recommends engagement of the independent
auditors, considers fee arrangement and scope of the audit, reviews the
financial statements and the independent auditors report, considers comments
made by Video's independent auditors with respect to its internal control
structure, and reviews internal accounting procedures and controls with Video's
financial and accounting staff. The Compensation Committee establishes and
executes compensation policy and programs for Video's executives and employees.
Director Compensation
Video has granted non-qualified stock options under the Video Sentry
Corporation Amended and Restated 1993 Stock Option Plan (the "Video Plan") to
its directors who are not employees of Video in connection with their service as
directors, as follows: Mr. Furst has been granted an option for the purchase of
30,000 shares; Mr. Johnson has been granted options for the purchase of 10,000
shares; and Mr. Stiegemeier has been granted options for the purchase of 37,500
shares, of which 30,000 were granted in connection with a consulting agreement
and 7,500 were granted in connection with his service as a director. Such
options expire five years from the date of grant.
As of December 31, 1996, Mr. Stiegemeier's options were exercisable as
to 30,000 shares at an exercise price of $2.50 per share and as to 5,625 shares
at an exercise price of $3.60 per share; Mr. Furst's options were exercisable as
to 30,000 shares at an exercise price of $1.33 per share; and Mr. Johnson's
options were exercisable as to 10,000 shares at an exercise price of $5.13 per
share. Each of such options expires five years from the date
59
of grant. Directors of Video are elected annually to serve until the next annual
meeting of shareholders or until their successors are duly elected. Directors of
Video currently receive no cash compensation for their services as directors.
See "CERTAIN TRANSACTIONS OF VIDEO."
Executive Compensation
The following table sets forth the compensation paid to Video's
President and Chief Executive Officer or accrued by Video for services rendered
during the years ended December 31, 1994 and 1995:
Annual Compensation
-------------------- All Other
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- ------ ----- ------------
Andrew L. Benson, Chief 1994 $ 84,436 -- --
Executive Officer and President
Andrew L. Benson, President 1995 128,365 -- --
Michael J. Lindseth(1) 1995 71,635 -- --
<FN>
- --------------
(1) Mr. Lindseth served as Chief Executive Officer from July 1995 until
January 1996.
</FN>
No officer of Video, including the Chief Executive Officer, received
more than $100,000 in salaries and bonuses during the year ended December 31,
1994.
Employment Agreements
Mr. Benson continues to serve as Video's President with a 1996 base
salary of $125,000. Mr. Benson has entered into a non-compete agreement with
Video which provides that he may not compete with Video for a period of two
years from the date of his resignation or termination, and that upon any
resignation or termination for any reason, Mr. Benson is entitled to receive his
base salary for the entire two year period.
Stock Options
The Video Plan was adopted by the Video Board and approved by the
shareholders in 1994. The Video Plan permits the granting of awards to directors
and employees of Video in the form of stock options. Stock options granted under
the Video Plan may be "incentive stock options" meeting the requirements of
Section 422 of the Code, or non-qualified options which do not meet the
requirements of Section 422. The Video Plan provides that the exercise price of
all incentive and non-qualified stock options granted under the Video Plan must
be at least 100% and 85%, respectively, of the fair market value of Video Common
Stock at the date of grant. The Video Plan currently provides that the Video
Board may grant options to purchase up to an aggregate of 880,000 shares of
Video Common Stock. As of October 31, 1996, an aggregate of 195,000 shares were
subject to outstanding stock options under the Video Plan at exercise prices
ranging from $1.33 to $11.62 per share, and 355,000 shares were available for
future option grants.
The Video Plan is administered by the Video Board and, as to executive
officers, by the Compensation Committee. The Video Plan gives broad powers to
the Board and the Compensation Committee, as the case may be, to administer and
interpret the Video Plan, including the authority to select the individuals to
be granted options and to prescribe the particular form and conditions of each
option granted. Options may be granted pursuant to the Video Plan through
January 2003. The Video Plan may be terminated earlier by the Video Board in its
sole discretion.
Video has reserved an aggregate of 880,000 shares for issuance under
the Video Plan. At December 31, 1996, options to purchase 195,000 shares were
outstanding under the Video Plan, 355,000 shares were available for future
grants and options for the purchase of 330,000 shares had been exercised. In
addition, Video has warrants outstanding for the purchase of 454,114 shares of
Common Stock, including the Warrants to purchase 101,000
60
shares issued to Summit Investment Corporation ("Summit") and certain Summit
affiliates (the "Summit Warrants") and warrants to purchase 186,500 shares
issued to Summit, certain affiliates of Summit and certain individuals
(collectively with the Summit Warrants, the "Warrants") in connection with
Video's initial public offering. The Warrants entitle the holders thereof to
certain incidental registration rights upon the filing of a registration
statement by Video and certain demand registration rights.
The Summit Warrants were issued in connection with the placement and
sale of Video's promissory notes in 1994. The exercise price for each Summit
Warrant is $3.375 per share. The Summit Warrants are exercisable at any time
during the five year period from and after the date the Summit Warrants were
issued (the "Warrant Term") and provide the holders thereof or the shares of
Common Stock issuable upon exercise of the Summit Warrants certain rights with
respect to registration under the Act. Each such holder has the right to include
any of the shares issuable on exercise of the Summit Warrants in any
registration statement filed by Video in connection with any public offering by
Video for its own account of shares of Video's Common Stock during the Warrant
Term, unless the principal underwriter with respect to such proposed public
offering determines in good faith and in writing that such inclusion would not
be advisable or detrimental to the success of the offering.
Stock Purchase Plan
In June 1995, the Video Board adopted the Video Employee Stock Purchase
Plan (the "Video Stock Purchase Plan") subject to approval by the shareholders
of Video at Video's 1996 annual shareholders' meeting. The Video Stock Purchase
Plan permits eligible employees to make voluntary contributions through payroll
deductions to be used to purchase stock from Video on an annual basis at a price
equal to the lesser of 85% of the fair market value of a share of Video Common
Stock at the beginning of the plan year or at the purchase date. An aggregate of
100,000 shares have been reserved for issuance under the Video Stock Purchase
Plan. No shares of Video Common Stock have been issued under, and no person is
currently participating in, the Video Stock Purchase Plan.
Profit Sharing Plan
In 1993, Video established the Video Sentry Corporation Retirement Plan
which covers substantially all employees meeting the eligibility requirements.
Contributions to the plan are determined by the Video Board on an annual basis.
The plan contains a provision for a deferred compensation plan under Section
401(k) of the Code for eligible employees. No contributions have been made by
Video to the plan to date.
Indemnification and Waiver of Director Liability
Section 302A.521 of the Minnesota Act provides that officers and
directors of Video have the right to indemnification for Video for liability
arising out of certain actions. Such indemnification may be available for
liabilities arising in connection with this Registration Statement. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers or persons controlling Video pursuant to such
indemnification provisions, Video has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the Act
and is therefore unenforceable.
Video has adopted in its Articles of Incorporation a provision which
limits personal liability for breach of the fiduciary duty of its directors to
the extent provided by 302A of the Minnesota Act. Such provision eliminates the
personal liability of directors for damages occasioned by breach of fiduciary
duty, except for liability based on a director's breach of the duty of loyalty
to Video or its shareholders, liability for acts or omissions not in good faith,
liability for acts or omissions involving intentional misconduct or knowing
violation of law, liability based on payments or improper dividends, liability
based on violations of state securities laws, liability for any transaction from
which the director derived an improper personal benefit, and liability for acts
occurring prior to the date such provision was added.
61
VIDEO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Video designs and markets a programmable traveling CCTV system that
delivers a high quality video picture and which is used in a wide variety of
applications. This proprietary system, called SentryVision, is well suited for
loss prevention surveillance in retail stores and distribution centers and
security surveillance for monitoring and deterring illegal and unsafe activities
in a variety of other locations such as parking garages, correctional facilities
and public transit terminals. Video was formed on September 10, 1990, and from
its date of inception through December 31, 1991, Video devoted substantially all
of its efforts to the design and development of its original traveling
surveillance camera. In May 1991, Video filed an application for a United States
patent covering certain aspects of its system, and on August 3, 1993, a patent
was granted. Video recognized its initial sales during 1992, and introduced its
second generation product, the SentryVision system, in March 1995. Video
recognizes revenue for its systems at the time of shipment. Revenue for
installation is recorded when the system is installed and is netted against the
costs of installation included in cost of sales.
Results of Operations
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Sales. Sales for the nine months ended September 30, 1996, were
$2,000,000, a decrease of 74% compared to sales of $7,768,000 for the first nine
months of 1995. The decrease in sales was due to delays in the ability of
several new and existing customers to move forward with purchasing decisions, in
part as a result of initial quality issues with respect to vendor-supplied
components for the SentryVision system, which was introduced in 1995. Although
the quality issues have been corrected and new vendors selected, these issues
have affected 1996 sales. The decrease in sales was also due to significant
turnover of Video's sales force. Video has hired and is training new sales
people. For the first nine months of 1996, approximately 84% of total sales were
to two customers with multiple locations. One of these customers accounted for
approximately 69% of total sales. Video expects sales to this customer to be a
significant percentage of total sales during the remainder of 1996.
Gross Profit. Gross loss for the first nine months of 1996 was
($1,085,000), compared to gross profit of $1,869,000 for the first nine months
of 1995. The decrease in gross profit for the first nine months of 1996 was due
to the significant decrease in sales and related installation activity, higher
unabsorbed manufacturing overhead and higher warranty and service costs as Video
increased its service organization to support the increased number of installed
customer sites. The decrease in Video's gross profit margin for 1996 was due to
the lower level of sales with which to leverage the fixed manufacturing,
installation and service department costs included in cost of sales. The
decrease in the gross profit margin was also due to Video's increased investment
in customer support and training capabilities. Video expects that the reduced
material costs of its new SentryVision system and its installation process
should provide an increase in the gross profit margin when sales increase.
Operating Expenses. Operating expenses for the first nine months of
1996 were $1,867,000, a decrease of 4% as compared to the first nine months of
1995. Research, development and engineering expenses decreased 31% in the first
nine months of 1996, since Video completed development of its second generation
system in 1995. General and administrative expenses increased 7% for the first
nine months of 1996 due to the addition of management personnel and higher
insurance and bad debt costs compared to the first nine months of 1995.
Operating expenses as a percentage of sales were 93% for the first nine months
of 1996, compared to 25% for the first nine months of 1995. The increase in
operating expenses as a percentage of sales in 1996 was due to the lower level
of sales compared to 1995.
Interest Expense. Net interest expense was $83,000 for the first nine
months of 1996, compared to net interest income of $95,000 for the first nine
months of 1995. Video earned interest income in 1995 from the investment of its
cash balances.
Net Loss. Net loss for the first nine months of 1996 was $3,035,000, or
$0.63 per share, compared to net income of $12,000, or $0.00 per share (rounded
to the nearest cent) for the first nine months of 1995. The net loss in 1996 was
the result of a significant decrease in sales and gross profit for that period.
62
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Sales. Sales were $8,610,000 in 1995, an increase of 103% compared to
$4,241,000 in 1994. The increase in sales was due to the increased acceptance in
the marketplace of the system which resulted in an increase in the number of
systems sold and shipped to new and existing customers. For 1995, 67% of total
sales were to a single customer with multiple locations. Video expects sales to
this customer to be a smaller percentage of total sales in the future, as
shipments under this initial contract are fulfilled and sales to other customers
increase.
Gross Profit. Gross profit was $1,268,000 in 1995, an increase of 58%,
compared to $801,000 in 1994 due to the increase in sales. The gross profit
margin was 14.7% in 1995, compared to 18.9% in 1994. The decrease in Video's
gross profit margin in 1995 was due primarily to a single contract involving
system configurations with an unusually high third party equipment content.
Video realizes a substantially lower gross profit margin on third party
peripheral equipment which it integrates with its own proprietary products.
Video expects that in the future, sales will include a smaller percentage of
lower margin third party peripheral equipment. The decrease in the gross profit
margin was also due to higher installation and training costs as Video's
employees and subcontractors learned to install the SentryVision system and
higher service costs as Video corrected initial quality problems with vendor
supplied components for the new system. Video has been able to reduce costs on
its new SentryVision system and its installation process which should provide an
increase in the gross profit margin in the future.
Operating Expenses. Operating expenses were $3,046,000 in 1995, an
increase of 97%, compared to $1,549,000 in 1994. However, included in operating
expenses in 1995 were non-recurring costs of $207,000 related to a canceled
offering of common stock and severance costs of $115,000 related to the
resignation of Video's then chief executive officer. Research development and
engineering expenses increased 72% in 1995 as Video completed development of its
second generation system, began developing its POS control system, and increased
overall engineering activities and personnel. Sales and marketing expenses
increased 131% in 1995 as Video expanded its sales efforts to identify new
customers and further penetrate existing markets. General and administrative
expenses increased 53% in 1995 with the addition of management and
administrative personnel to support the increase in sales, combined with the
added costs of being a publicly-held company and additional leased office space.
Interest Income. Net interest income was $98,000 in 1995, compared to
net interest expense of $99,000 in 1994. Video earned interest income in 1995
from the investment of its cash balances.
Net Loss. The net loss in 1995 was $1,681,000, or $0.36 per share,
compared to a net loss of $847,000, or $0.31 per share in 1994. The 1995 loss,
which occurred during the fourth quarter, was the result of reduced revenues
from product sales and reduced installation activity during the quarter. Video
experienced unexpected delays in the ability of three existing customers to move
forward, primarily due to weaker than expected holiday sales and, in one case,
delays as a result of major organizational changes from a recently completed
acquisition. The loss also includes the severance costs for Video's former chief
executive officer and the costs related to a canceled secondary offering.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Sales. Sales were $4,241,000 in 1994, an increase of 470%, compared to
$744,000 in 1993. The increase in sales was due to the increased acceptance in
the marketplace of the system which resulted in the sale of 61 systems in 1994
compared to the sale of 12 systems in 1993. Each year also included revenues
from long-term contracts with a single customer which were recognized as
installations were completed. In 1994, sales totaling $343,000 related to a
contract commenced in 1994 that carried over to 1995, and in 1993, sales
totaling $266,000 related to a contract commenced in 1992 that carried over to
1993.
Gross Profit. Gross profit was $801,000 in 1994, an increase of 345%,
compared to $180,000 in 1993. Gross profit margin was 18.9% in 1994, compared to
24.2% in 1993. The decrease in the 1994 gross profit margin was caused by
several factors. While Video was able to reduce the overall material cost of the
system, installation costs increased. During the last quarter of 1994, Video
began installing more systems using its own personnel rather than utilizing
subcontractors. As a result, there were start-up costs associated with the
installation process which negatively impacted the gross profit margin. Video
entered into a contract with one customer for the installation of systems in a
minimum of 70 stores, which has been increased at the customer's option to 100
stores. The
63
installation configurations for these stores included a significant amount of
third party peripheral equipment integrated with Video's system. Because the
gross profit margin realized on third party peripheral equipment is
substantially below the gross profit margin realized on Video's equipment, the
high proportion of sales under that contract compared to overall sales
negatively impacted the gross profit margin in 1994.
Operating Expenses. Operating expenses were $1,549,000 in 1994, an
increase of 48%, compared to $1,048,000 in 1993. During 1994, Video hired
additional personnel to handle the increase in sales. Total employee levels
increased to 26 at the end of 1994 from seven at the end of 1993. Research,
development and engineering expenses increased 73% in 1994. The increase was
primarily due to the research and development expenses associated with
SentryVision, Video's second generation system, as well as an increase in
overall engineering activities and personnel. Sales and marketing expenses
increased by only 5% as Video focused on targeted customers rather than a
broad-based sales and marketing effort. General and administrative expenses
increased 68% in 1994 primarily due to the hiring of additional management and
administrative personnel, additional expenses as a result of being a
publicly-held company and expansion of leased office space.
Interest Expense. Interest expense was $132,966 in 1994 compared to
$48,399 in 1993. Prior to Video's 1994 initial public offering of Video Common
Stock, expanded operations required additional borrowings during the year. Such
additional borrowings included $1,560,000 of 10% unsecured notes payable which
were issued in March 1994, as well as borrowings under a bank credit facility
that was in place during the year. The proceeds from the initial public offering
were received in October 1994, and a portion of the proceeds therefrom were used
to retire the then outstanding debt and related accrued interest.
Interest Income. Interest income was $34,000 in 1994 as a result of the
investment of the remaining net proceeds from the initial public offering in
interest bearing marketable securities.
Net Loss. Net loss was $847,000 in 1994, or $0.31 per share, compared
to a net loss of $916,000, or $0.38 per share, in 1993.
Net Operating Loss Carryforward
As of September 30, 1996, Video had a net operating loss carryforward
of approximately $6,300,000, which may be used to offset future taxable income,
if any, through December 31, 2011. Management believes that, following the
Merger, the utilization of such net operating loss carryforwards may be subject
to significant limitations.
Liquidity and Capital Resources
To date, Video has financed its operations primarily through private
and public sales of Video Common Stock for which Video has received an aggregate
of $7,600,000 in net proceeds, and borrowings under a line of credit and notes
payable. Working capital at November 30, 1996 was ($425,867).
In March 1996, Video entered into a $2,500,000 working capital line of
credit with Republic Acceptance Corporation. The line of credit is secured by
substantially all the assets of Video and the personal guarantee of Video's
President. The line of credit accrues interest at a rate equal to 3% above the
bank's reference rate and matures in March 1998. Borrowing availability under
the line of credit is based on 80% of eligible accounts receivable and a maximum
of $250,000 of inventory. At December 31, 1996, the loan balance under the line
of credit was $796,389 and remaining availability was minimal. Eligible accounts
receivable increase as customer installations are completed and final billings
are made.
In May 1996, Video received $500,000 under a promissory note (the "May
1996 Note") from Mr. Furst, one of Video's directors, with interest at 10% and
secured by all of the assets of Video. In July 1996, Video received $250,000
under a promissory note (the "July 1996 Note") from an investor, with interest
at 10% and secured by all of the assets of Video. In September 1996, Video
received $1,000,000 under a promissory note (the "September 1996 Note") from
another investor, which bears interest at 10%, matures in January 1997 and is
secured by all of the assets of Video. The September 1996 Note is subordinated
to the bank line of credit. Both the May 1996 Note and the July 1996 Note were
repaid in full in September 1996 with proceeds from the September 1996 Note. In
October and November 1996, Video received an aggregate of $250,000 from Mr.
Furst under a
64
promissory note (the "October 1996 Note") which allows Video to borrow up to
$500,000, with interest at 10%, and which matures in January 1997. This
promissory note is secured by all of the assets of Video and is subordinated to
Video's bank line of credit. As soon as practicable after the Effective Time,
Video will pay off the September 1996 Note and the October 1996 Note with funds
advanced to Video from Knogo.
During the first nine months of 1996, cash used in operations was
primarily for payments to vendors and to fund the operating loss. Video also
invested $76,000 in purchased software costs for its point of sale system during
the first nine months of 1996.
Video anticipates that its working capital needs will continue to
increase due to operating losses and the expected growth in the business and
expects that it will need to raise additional capital through debt or equity
financing. There is no assurance that such additional financing will be
available when needed or on terms which are acceptable to Video. Video believes
that its anticipated capital needs will be satisfied as a result of the
completion of the Merger. At, or shortly after, the consummation of the Merger,
Sentry intends to enter into a new credit arrangement with Knogo's present
lender, Fleet Bank, and thereafter to make advances to each of Video and Knogo
as the businesses of the two subsidiaries may require. Knogo's current bank
credit facility consists of a $5 million dollar line of credit with Fleet Bank
which, by its current terms, would be terminated upon consummation of the
Merger. However, based upon discussions between Knogo's management and senior
lending officers at Fleet Bank, Sentry believes that a new facility will be made
available to it, to take effect after the Merger, for at least the same amount,
and on substantially the same terms, as are currently available to Knogo. Such
facility would be secured by a lien on substantially all of the assets of Sentry
and its subsidiaries. It is expected that Knogo will make an advance of $2
million to Video upon consummation of the Merger to permit Video to repay
certain existing indebtedness.
Inflation
Video has not been significantly impacted by inflation since its
inception. Video did not have any material commitments for fixed assets as of
September 30, 1996.
65
VIDEO SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of shares of Video Common Stock by each director of Video, by the
President and Chief Executive Officer, by all directors and executive officers
of Video as a group, and by each shareholder who is known by Video to own more
than 5% of outstanding Video Common Stock as of December 31, 1996.
Percentage of
Number of Shares Common Stock
Beneficial Owner Beneficially Owned(1) Outstanding(2)
---------------- --------------------- --------------
Robert D. Furst, Jr. (3) 976,672 19.5%
6365 Carlson Drive
Eden Prairie, Minnesota 55346
Andrew L. Benson 194,278 4.0%
6365 Carlson Drive
Eden Prairie, Minnesota 55346
Ronald W. McClurg 10,000 *
6365 Carlson Drive
Eden Prairie, Minnesota 55346
Perkins Capital Management (4) 291,150 6.0%
730 East Lake Street
Wayzata, Minnesota 55391
Dennis R. Johnson (3) 10,000 *
6365 Carlson Drive
Eden Prairie, Minnesota 55346
Jean R. Stiegemeier (3) 35,625 *
11201 Hampshire Avenue South
Bloomington, Minnesota 55438
All directors and executive (5) 1,226,575 24.2%
officers as a group (5 persons,
including those named above)
<FN>
- ---------------------------
* Less than one percent.
(1) Each person has sole voting and sole dispositive power with respect to
all outstanding shares, except as noted.
(2) Based on 4,841,962 shares outstanding as of December 31, 1996. Each
figure showing the percentage of outstanding shares beneficially owned
has been calculated by treating as outstanding and owned the shares
which could be purchased by the indicated person within 60 days upon
exercise of stock options.
(3) Includes shares which could be purchased upon the exercise of existing
options and warrants which are currently exercisable or which will
become exercisable within 60 days of December 31, 1996, as follows: Mr.
Furst (175,182 shares); Mr. Johnson (10,000 shares); Mr. McClurg
(10,000 shares); and Mr. Stiegemeier (35,625 shares).
(4) According to its most recent Schedule 13F on file, dated September 30,
1996, Perkins Capital Management reported sole voting power with
respect to 6,500 shares, and sole dispositive power with respect to
291,150 shares.
(5) Includes 230,807 shares which could be purchased upon the exercise of
existing option and warrants which are currently exercisable or which
will become exercisable within 60 days of December 31, 1996.
</FN>
66
CERTAIN TRANSACTIONS OF VIDEO
Between October 1992 and February 1994, Robert D. Furst, Jr., a
director and principal shareholder of Video, made loans and advances to Video in
the aggregate principal amount of approximately $890,000. Prior to August 1993,
such loans to Video were evidenced in part by a series of promissory notes, each
bearing an annual interest rate of 10%. On August 3, 1993, Video and Mr. Furst
entered into a revolving line of credit agreement (the "Credit Agreement") and a
security agreement pursuant to which Mr. Furst agreed to loan Video up to
$500,000 at an annual interest rate of 10%. Pursuant to the security agreement,
repayment of advances made under the Credit Agreement was secured by all of the
assets of Video. Upon the execution of the Credit Agreement, the then
outstanding balance of the prior loans and advances in the aggregate amount of
$469,500 was transferred to, and incorporated into, the Credit Agreement. Video
made periodic repayments of principal and interest between December 1992 and
January 1994 in the aggregate amount of approximately $310,250, which were
applied first to interest and then to principal. In 1993, Video also repaid
$11,000 borrowed from Mr. Furst pursuant to a non-interest bearing promissory
note dated October 15, 1991 which was not included in the Credit Agreement. In
April 1994, Video used approximately $623,000 of the proceeds from a $1,500,000
debt issuance to repay, in full, approximately $615,000 of principal and
approximately $8,000 of interest then owing to Mr. Furst under the Credit
Agreement, and the Credit Agreement was terminated.
In connection with the loans to Video described above, Video granted
warrants to Mr. Furst for the purchase of 145,182 shares of Video Common Stock.
Such warrants range in exercise price from $1.17 per share to $2.00 per share,
are currently exercisable in full, and expire between October 1997 and September
1998. To date, Mr. Furst has not exercised any of the warrants. In addition, Mr.
Furst was granted an option to purchase 73,530 shares at an exercise price of
approximately $0.31 per share which he exercised in full in December 1992 for an
aggregate purchase price of $22,914.
In May 1996, Video received a loan of $500,000 from Mr. Furst pursuant
to the May 1996 Note. This amount was repaid with proceeds from the September
1996 Note. See "Video Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Pursuant to the October 1996 Note, Mr. Furst has agreed to extend up to $500,000
of credit to Video through December 31, 1996, at an annual interest rate of 10%
in order to fund Video's ongoing cash needs. As of December 31, 1996, Mr. Furst
had advanced $250,000 to Video under the October 1996 Note. As soon as
practicable after the Effective Time, Video will pay off the September 1996 Note
and the October 1996 Note with funds advanced to Video from Knogo.
In September 1993, Video entered into a three year consulting agreement
with Jean R. Stiegemeier, a director of Video, pursuant to which Mr. Stiegemeier
agreed to provide consulting services in the form of corporate strategic
planning upon Video's request. In exchange for providing such services, Video
granted Mr. Stiegemeier an option to purchase 30,000 shares of Video Common
Stock at $2.50 per share. Such option is currently exercisable with respect to
15,000 shares and becomes exercisable as to an additional 7,500 shares in each
of September 1995 and 1996.
Video believes that all prior transactions between Video and its
officers, directors, or other affiliates of Video were on terms no less
favorable to Video than could have been obtained from unaffiliated third parties
on an arm's length basis. All future transactions with directors, officers or
shareholders holding more than 5% of outstanding Video Common Stock or
affiliates of any such persons, will be made for bona fide business purposes and
will be on terms no less favorable to Video than could be obtained from an
unaffiliated third party and will be approved by a disinterested majority of
Video's independent outside directors.
67
BUSINESS OF KNOGO
General
Knogo was created in connection with an Amended and Restated Agreement
and Plan of Merger (the "Sensormatic Merger Agreement"), dated as of August 14,
1994, among Sensormatic, the Knogo Predecessor and Knogo. Pursuant to the
Sensormatic Merger Agreement, the Knogo Predecessor merged with and into
Sensormatic on December 29, 1994 (the "Sensormatic Merger"). Immediately prior
to the Sensormatic Merger, the Knogo Predecessor contributed to Knogo all of the
Knogo Predecessor's operations in the Territory and distributed one share of
common stock of Knogo for each share of common stock of the Knogo Predecessor
held of record immediately prior to the Sensormatic Merger (the "Spinoff").
Certain information in this Joint Proxy Statement/Prospectus is
presented as if the Sensormatic Merger and Spinoff were consummated on March 1,
1991. In addition, at the time of the Spinoff, Knogo changed its fiscal year end
from February 28 to December 31.
Knogo is engaged in the design, manufacture, sale, installation and
servicing of a complete line of EAS equipment. Knogo operates a 68,000 square
foot office, research, engineering and distribution facility in Hauppauge, New
York, a 55,000 square foot manufacturing facility in Cidra, Puerto Rico, and a
6,000 square foot office in suburban Chicago, Illinois. Knogo was incorporated
in Delaware in August 1994, while its corporate predecessor had been in business
for nearly 30 years. Knogo's executive offices are located at 350 Wireless
Boulevard, Hauppauge, New York 11788 and its telephone number is (516) 232-2100.
The EAS systems which Knogo manufactures are based upon three distinct
technologies. One system, the Swept Radio Frequency ("Swept RF") system, uses
medium frequency transmissions in the two to nine megahertz range. The second
system, the Dual Radio Frequency ("Dual RF") system, uses ultra-high frequency
radio signals in the 902 megahertz and 928 megahertz bands. The third system,
Micro-Magnetics ("MM"), uses very low frequency electromagnetic signals in the
range of 218 hertz to 9 kilohertz. Knogo also manufactures a non-electronic
dye-stain pin ("KnoGlo(TM)"). In addition, Knogo markets a closed circuit video
system, or ("CCVS"), known as "The KNOGO Surveillor(TM)." Effective April 1,
1996, Knogo became an authorized distributor of the library security systems and
related products of Minnesota Mining and Manufacturing Company ("3M").
Of Knogo's bookings in the Territory for the nine months ended
September 30, 1996 approximately 28% were attributable to the MM System, 16% to
the Swept RF system, 16% to the Dual RF system, 2% to the KnoGlo(TM) system, 15%
to the 3M library security systems and 23% to the CCVS system. For the year
ended December 31, 1995 approximately 48% were attributable to the MM system,
21% to the Swept RF system, 13% to the Dual RF system, 2% to the KnoGlo(TM)
system, 4% to the Express system (a self-check system for libraries ("Express")
which was sold by Knogo in March 1996) and 12% to the CCVS system. For the 10
month period ended December 31, 1994, and the year ended February 28, 1994,
respectively, approximately 20% and 40% of Knogo's bookings in the Knogo
Territory were attributable to the Swept RF system, 23% and 19% to the Dual RF
system, 43% and 32% to the MM system, 3% and 2% to the KnoGlo(TM) system, and
11% and 7% to the CCVS system, respectively. Knogo's bookings represent the
gross value of orders accepted.
The principal application of Knogo's products is to detect and deter
shoplifting and employee theft in supermarket, department, discount, specialty
and various other types of retail stores including bookstores, video, liquor,
drug, shoe, sporting goods and other stores. The use of these products reduces
inventory shrinkage by deterring shoplifting, increases sales potential by
permitting the more open display of greater quantities of merchandise, reduces
surveillance responsibilities of sales and other store personnel and, as a
result, increases profitability for the retailer. In addition, Knogo's EAS
systems are used in non-retail establishments to detect and deter theft, in
office buildings to control the loss of office equipment and other assets, in
nursing homes and hospitals for both asset and patient protection, and in a
variety of other hard goods applications.
Knogo has continued to devote resources to the development of its EAS
business in the supermarket sector, a relatively untapped market among retail
users of loss prevention devices. While revenues in this market have been
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modest relative to those produced in Knogo's traditional markets, Knogo believes
that this market offers considerable potential for growth.
Knogo has also devoted resources to the development of its asset
protection business in non-traditional areas, particularly in the area of
manufactured hard goods such as printed circuit boards, computer processor and
memory chips and related components. While no significant revenue has been
received to date in connection with this line of business, Knogo believes the
potential for growth in this market is considerable.
EAS Systems
EAS systems consist of detection devices which are triggered when
articles or persons tagged with wafers or tags pass through the detection
device. The principal application of the Swept RF and Dual RF systems is to
detect and deter theft of soft goods such as clothing, while the MM systems are
primarily used to detect and deter the theft of hard goods including packaged
goods and books.
At September 30, 1996, the approximate number of Knogo's Swept RF and
Dual RF systems sold or leased in the Knogo Territory exceeded 13,200. At that
date, the approximate number of Knogo's MM systems sold or leased in the Knogo
Territory exceeded 9,100.
Swept and Dual Radio Frequency Detection Systems
Knogo manufactures and distributes the Swept RF system, the principal
application of which is to detect and deter shoplifting and employee theft of
clothing in retail establishments. Knogo also manufactures and distributes the
Dual RF system, a particularly useful and cost efficient EAS system for
soft-goods retail stores with wide mall-type exit areas which ordinarily would
require multiple Swept RF systems for adequate protection. The Swept RF and Dual
RF systems consist of radio signal transmission and monitoring equipment
installed at exits of protected areas, such as doorways, elevator entrances and
escalator ramps. The devices are generally located in panels or pedestals
anchored to the floor for a vertical arrangement or mounted in or suspended from
the ceiling and mounted in or on the floor for a horizontal arrangement. The
panels or pedestals are designed to harmonize with the decor of the store. The
monitoring equipment is activated by tags, containing electronic circuitry,
attached to merchandise transported through the monitored zone. The circuitry in
the tag interferes with the radio signals transmitted through the monitoring
system, thereby triggering alarms, flashing lights or indicators at a central
control point, or the transmission of an alarm directly to the security
authorities. By means of multiple installations of horizontal Swept RF systems
or installation of one or more Dual RF system, Knogo has the ability to protect
any size entrance or exit.
Tags are manufactured in a variety of sizes and types and are attached
directly to the articles to be protected by means of specially designed fastener
assemblies. A tag is removed from the protected article, usually by a clerk at
the checkout desk, by use of a decoupling device specially designed to
facilitate the removal of the fastener assemblies with a minimum of effort.
Removal of the tag without a decoupler is very difficult and unauthorized
removal will usually damage the protected article and thereby reduce its value
to a shoplifter. Optional reminder stations automatically remind the store
clerk, by means of audiovisual indicators, to remove the tag when the article is
placed on the cashier's desk.
Swept RF and Dual RF systems generally have an economic useful life of
six years (although many of Knogo's systems have been operating for longer
periods), have a negligible false alarm rate and are adaptable to meet the
diversified article surveillance needs of individual retailers.
Magnetic Detection Systems
The primary application of MM systems is to detect and deter theft in
"hard goods" applications such as supermarkets, bookstores and in other
specialty stores such as video, drug, liquor, shoe, record, sporting goods and
similar stores.
MM systems use detection monitors which are activated by
electromagnetically sensitized strips. The MM targets are typically attached to
the articles to be protected when price tags are affixed and are easily
camouflaged on a wide array of products. The detection monitors used by the MM
systems are installed at three to five foot
69
intervals at the exits of protected areas. The magnetic targets can be supplied
in many forms and are attractively priced, making them suitable for a variety of
retail applications. In addition, the MM targets can be manufactured to be
activated and deactivated repeatedly while attached to the articles to be
protected, which is a particularly desirable feature for use with items such as
books, compact discs, CD Roms and videotapes, which may be "checked- out" and
later returned. Accurate deactivation is also very important when the item to be
protected is a personal accessory that will be carried by its owner from place
to place, such as pocket books, pens, lipstick, shoes and camera film and
cameras.
The MM system offers retailers several features not available in Swept
RF and Dual RF systems. Since the target is very small, relatively inexpensive
and may be inserted at the point of manufacture or packaging, it provides
retailers with a great deal of flexibility and is practical for permanent
attachment to a wide variety of hard goods, especially low profit-margin
products. The target can be automatically deactivated at check-out, eliminating
the risk of triggering alarms when merchandise leaves the store and saving sales
personnel valuable time. Since the targets can be incorporated directly into a
price tag, they are convenient to use.
While targets are typically attached by the retailer at the point of
sale, the practices of applying the target at the distribution point ("Source
Tagging"), or within the protected item ("Source Imbedding"), are increasing.
This program, Universal Source Protection ("USP"), reduces significantly the
retailer's target purchase and application costs, while increasing the
anti-theft effectiveness of the system. As part of the Spinoff, Knogo acquired
the U.S. and Canadian patents for a new MM strip developed by the Knogo
Predecessor, trade named "SuperStrip(TM)," whose small size, unique physical,
mechanical and detection properties, compatibility with earlier generation MM
systems and low cost make it an ideal candidate for either Source Tagging or
Source Imbedding.
Other Loss Prevention Products
KnoGlo(TM)
KnoGlo(TM), a non-electronic, dye-stain pin, releases an indelible
liquid when tampered with. Used with passive locking mechanisms without
electronics, KnoGlo(TM) is often a retailer's first step in loss prevention.
KnoGlo(TM) is also employed in stores with EAS systems as an extra layer of
protection. Such protection is useful in problem areas (near mall door openings,
for example,) or where users must maximize selling space.
Closed Circuit Video Systems
"The KNOGO Surveillor(TM)" enhances the protection of retail stores
from shoplifting and employee theft by providing retailers with optical
surveillance of the premises. Knogo believes that, while less profitable than
traditional EAS products, the CCVS complements its other EAS systems and
provides retailers with further protection against internal employee theft and
external shoplifting activities. The CCVS can also be electronically connected
to the EAS system, causing a video record to be generated when an alarm is
indicated. Knogo does not manufacture its Surveillor(TM) product, but installs
it from parts purchased from Knogo's vendors.
Production
Knogo produces at its facilities in Cidra, Puerto Rico and, to a lesser
extent, Hauppauge, New York, or purchases through suppliers, its Swept RF, Dual
RF and MM, KnoGlo(TM), and CCVS systems or their components. Production consists
of assembling electronic and mechanical components and printed circuitry which
Knogo purchases from various suppliers. Knogo's specially designed tools,
plastic cases for the tags, and the target bands used in Knogo's system for
patient and personnel control, are produced to Knogo's specifications by
independent contractors using existing molds and tooling. Knogo is not dependent
on any one supplier or group of suppliers of components for its systems. Knogo's
policy is to maintain its inventory at a level which is sufficient to meet
projected demand for its products. Knogo does not anticipate any difficulties in
continuing to obtain suitable components at competitive prices in sufficient
quantities as and when needed.
Knogo manufactures and sells to Sensormatic certain electronic article
surveillance products pursuant to a Supply Agreement, dated as of December 29,
1994 (the "Supply Agreement"). Under the Supply Agreement, for a period of 30
months after December 29, 1994, products valued at a minimum of $24 million are
required to be supplied to Sensormatic's operations outside North America. Once
the Supply Agreement terminates, Knogo will
70
have to replace the lost volume in order to maintain profitable margins in its
manufacturing operations. See "Knogo Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."
In January 1996, Knogo acquired a controlling interest in K&M
Converting Corp. ("KMCC"). KMCC is a joint venture entered into with Marian
Rubber Products Co., Inc. ("Marian"). KMCC is the exclusive converter of
magnetic material into disposable targets or labels used in Knogo's EAS systems.
Marketing
Knogo markets its products through the direct efforts of approximately
24 salespersons located in selected metropolitan areas across the United States
and Canada. Knogo's customers include some of the major retail stores and store
chains in North America.
Knogo's EAS systems are marketed on both a direct sales and lease
basis, with direct sales representing approximately 84% of the business. The
terms of the standard leases are generally from one to five years. The sales
prices and lease rates vary based upon the type of system purchased or leased,
number and types of targets included, the sophistication of the system employed
and, in the case of a lease, its term. In the case of the MM systems, detection
targets which are permanently attached to the item to be protected are sold to
the customer even when the system is leased. Therefore, in the case of either a
sale or lease of an MM system, as the customer replenishes its inventory,
additional targets will be required for those items to be protected. Knogo also
markets a more expensive, removable, reusable detection tag for use with its MM
systems on certain products such as clothing and other soft goods.
In keeping with industry practices, Knogo also selectively offers EAS
systems on a deferred billing arrangement and, in some instances, on a
short-term introductory basis. At the end of such period the retailer has the
option to lease or purchase the equipment.
During the nine months ended September 30, 1996, Knogo placed in
service in the Territory approximately 800 Swept RF, Dual RF, and MM systems.
Knogo does not believe that the loss of any one customer would have a material
adverse effect on its business.
Knogo believes that the supermarket industry is a major potential
market in North America for EAS systems, and believes its technology and service
capabilities give it an important advantage in the supermarket sector.
Historically, the supermarket industry in North America has been
reluctant to accept EAS for a number of reasons. Knogo believes these include:
relatively high product turnover, low average selling prices and low profit
margins that have made the cost of targets and tagging appear prohibitive; the
belief on the part of supermarket management that theft was a relatively low
percent of costs; and the desire to not slow the checkout process and thus
increase labor expense or customer dissatisfaction. However, as bar code
scanning and other management and accounting systems improved in supermarkets,
supermarket managements were able to see that theft of a relatively narrow range
of products, namely health and beauty products, wine and liquor, cigarettes,
film, batteries and meats, were causing most of the loss of margin from theft,
and that protection of these products could in fact be economical. All EAS
suppliers have devoted considerable resources to this market area with
increasingly positive results, measured in terms of the supermarket industry
trade press, customer interest and installations. As the installed base of EAS
systems in supermarkets grows, theft will shift to unprotected stores. This, and
a proven financial return on investment, may increase demand rapidly.
Knogo's management believes that its ability to compete in the
supermarket sector is enhanced by several factors. First, there is no entrenched
EAS industry leader in this sector because it is a new market segment. Second,
Knogo believes that its technology has feature/benefit advantages over the
systems of some of its competitors. Third, the supermarket industry, for the
most part, is made up of regional companies which will not need an EAS supplier
that is equally established in all parts of North America.
71
Knogo believes the library market continues to be a significant growth
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. Knogo believes that this strategic alliance will strengthen
service to library customers.
The agreement, effective April 1, 1996, permits Knogo to act as a
distributor of all of 3M's library products, including the 3M Tattle-Tape(TM)
Security Strips, detection systems, 3M SelfCheck System hardware and software
and other 3M library materials flow management products and accessories to
public, academic and government libraries. In addition, under the agreement 3M
provides service and installation for all new and existing Knogo library
customers throughout North America.
In September 1995, Knogo and Asset Management Technologies ("AMT"), a
loss prevention consultant to the computer industry, signed an exclusive
marketing agreement to provide EAS technology services to the computer industry.
Profits in the computer industry are often threatened by the theft of computer
components, processor chips, memory modules ("SIMMS") and hard drives. An
estimated 80% of the thefts are perpetrated by employees stealing from computer
and computer component manufacturers and distributors. Knogo and AMT believe
that the integration of Knogo's EAS system into an overall loss prevention
program in the computer industry would significantly curb such thefts. Knogo's
marketing efforts in this area include the introduction of SecureBoard(TM) which
Knogo's management believes is the first EAS technology specifically engineered
to meet the requirements of the computer and electronics industry.
SecureBoard(TM) EAS Technology extends Knogo's expertise in loss
prevention technology to the computer and electronics industry. Using this
technology, licensed KNOGO ENABLED(TM) board manufacturers can embed EAS
material into an internal layer of a printed circuit board, making
SecureBoard(TM) the first EAS system to be compatible with high volume printed
circuit board manufacturing processes. The resulting board has built-in theft
prevention. Because the EAS material is deposited onto an internal layer of the
board, it cannot be removed without destroying the board. SecureBoard(TM) is
also compatible with magnetic detection systems already available from major EAS
manufacturers, including Knogo. Knogo intends to license its technology to these
manufacturers in return for royalty payments. No significant revenue was
produced from this market in 1996.
Service
Installation, repair and maintenance services are performed primarily
by Knogo's personnel. All products sold or leased are covered either by a short
warranty period or an extended warranty period. Knogo also offers to its
customers the option of entering into a maintenance contract with Knogo or
paying for service on a per call basis.
Competition
Knogo operates in a highly competitive market with many companies
engaged in the business of furnishing security services designed to protect
against shoplifting and theft. In addition to EAS systems using the concept of
tagged merchandise, such services use, among other things, closed circuit video
systems, mirrors, guards, private detectives and combinations of the foregoing.
Knogo competes principally on the basis of the nature and quality of its
products and the adaptability of these products to meet specific customer needs
and price requirements.
To Knogo's knowledge, there are several other companies that market,
directly or through distributors, EAS equipment to retail stores in the
Territory, of which Sensormatic and Checkpoint are Knogo's principal
competitors. Many of Knogo's competitors have far greater financial resources,
more experienced marketing organizations and a greater number of employees in
the Territory than Knogo.
In connection with the Spinoff and Sensormatic Merger, Knogo agreed
with Sensormatic that Knogo will not compete with Sensormatic in areas outside
of the Territory through the period ending December 29, 1999.
Patents and Other Intellectual Property
Knogo has 24 United States and Canadian patents and eight patent
applications (four in the United States and four in Canada) relating to (i) the
method and apparatus for the detection of movement of articles and persons and
accessory equipment employed by Knogo in its Swept RF, Dual RF and MM systems,
(ii) various specific improvements used in Knogo's Swept RF, Dual RF and MM
systems and (iii) various electrical theft detection
72
methods, apparatus and improvements not presently used in any of Knogo's EAS
systems. Although patent protection is advantageous to Knogo, management does
not consider any single patent or patent license owned or held by it to be
material to Knogo's operations, but believes that Knogo's competitive position
ultimately will depend on its experience, know-how and proprietary data,
engineering, marketing and service capabilities and business reputation, all of
which are outside the scope of patent protection.
Sensormatic and Knogo license certain patent rights and technology of
the Knogo Predecessor to each other, for use in their respective territories,
pursuant to the License Agreement dated December 29, 1994, entered into in
connection with the Sensormatic Merger. In addition, Sensormatic has rights to
manufacture and sell SuperStrip within the Territory.
Research and Development
At December 31, 1996, Knogo had 18 employees located in the United
States engaged either full or part- time in research and engineering and product
development. Knogo may from time to time retain consultants for specific project
assistance. Because of the importance to Knogo of products to better serve the
North American market and the improvement of its existing EAS products, Knogo
engages in company-sponsored research and engineering relating to the completion
of new products and the improvement of its existing EAS products. For the nine
month period ended September 30, 1996 and year ended December 31, 1995,
approximately $1,069,000 and $1,537,000 respectively was expended on
Knogo-sponsored research.
Knogo is focusing its research, development and engineering efforts on
those projects with the most potential for market growth in the Territory.
During 1995 and 1996, Knogo re-engineered and newly designed the Knoscape(TM)
line of electronic article surveillance systems. Offered in both magnetic and
radio frequency versions, these new systems feature digital signal processing
and ease of installation and maintenance and the aesthetic design Knogo's
customers desire. Other areas of research include new types of magnetic target
materials and its application in the protection of high-theft computer
components and the development of a new 8 mhz Swept RF system. In addition,
Knogo has designed new accessories including the deluxe desktop deactivator,
dual function hand stamp, Swept RF verifier/deactivator and an automatic label
applicator.
Regulation
Because Knogo's EAS systems use radio transmission and electromagnetic
wave principles, such systems are subject to regulation by the 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 Knogo, 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.
Knogo believes it is in material compliance with applicable United
States, state and local laws and regulations relating to the protection of the
environment.
Employees
At December 31, 1996, Knogo employed 238 full-time employees, of whom
three were engaged in executive capacities, 49 in administrative and clerical
capacities, 18 in engineering, research and development, 77 in production, 35 in
marketing and sales and 51 in customer service. Knogo believes that its
relations with its employees are good. None of Knogo's employees are employed
pursuant to collective bargaining agreements.
Director Compensation
Each director receives a fee of $5,000 per annum and $1,000 for each
meeting attended.
Under the terms of Knogo's 1994 Stock Incentive Plan (the "Knogo 1994
Plan"), each non-employee director receives an automatic, annual grant of an
option to purchase 2,000 shares of Knogo Common Stock at fair
73
market value on the date of grant. Each option becomes exercisable cumulatively
as to 20% of the shares on each of the first five anniversaries of the date of
grant and has a duration of 10 years.
Executive Compensation
The Compensation Committee of Knogo's Board has the responsibility for
setting the compensation paid to the Chief Executive Officer and for final
approval of the compensation paid to the other executive officers of Knogo,
approving or disapproving the recommendation of the Chief Executive Officer. The
Compensation Committee, which is comprised of the three non-employee directors
of Knogo, determines the amount of shares and exercise prices for any stock
option grants under the Knogo 1994 Plan, and the amount of Knogo's matching
contribution percentage under Knogo's Retirement Savings 401(k) Plan,
respectively.
Currently, Knogo's executive officers, including the Chief Executive
Officer, 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. However, in lieu of
cost-of-living salary increases in 1995, the executive officers, including the
Chief Executive Officer, received grants of options to purchase Knogo Common
Stock under the Knogo 1994 Plan.
Stock Option and Other Equity Plans
The Committee endorses the view that the value of compensation paid to
its executive officers, and the Chief Executive Officer in particular, should be
closely linked to increases in the value of Knogo Common Stock. Accordingly, the
Committee supports option awards under the Knogo 1994 Plan and participation by
executive officers in the Retirement Savings 401(k) Plan, which includes a
Company 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 Knogo Common
Stock.
The number of stock options granted to executive officers is not
determined by reference to any formulas but is determined by the Compensation
Committee's evaluation of the particular officer's ability to influence the
long-term growth and profitability of Knogo. The Committee also considers
Knogo's performance against certain of its competitors, its general performance
against internal goals established by management, and the executive's relative
contribution thereto.
74
Summary Compensation Table
The following table summarizes the compensation for Knogo's fiscal year
ended December 31, 1995 (Knogo having been organized late in 1994) of Knogo's
Chief Executive Officer and each of Knogo's two other executive officers:
Annual Long-Term All Other
Compensation Compensation Compensation(1)
----------------------- ------------ ---------------
Securities
Name and Underlying
Principal Position Year Salary($) Bonus($) Options (#) ($)
------------------ ---- --------- -------- ----------- ---
Thomas A. Nicolette,
President and CEO 1995 $150,000 -- 107,000(2) 4,386
Peter J. Mundy,
Vice President-Finance,
Secretary and Treasurer 1995 $103,800 -- 45,000(2) 3,223
Dr. Peter Y. Zhou,
Vice President - Technology 1995 $120,000 -- 45,000(2) 3,649
<FN>
- --------------
(1) Amounts shown consist of Knogo's matching contributions under the
Retirement Savings 401(k) Plan.
(2) Includes options granted late in 1994 in connection with Knogo's
Spinoff from the Knogo Predecessor.
</FN>
As to various items of personal benefits, Knogo has concluded that the
aggregate amount of such benefits with respect to each individual does not
exceed the lesser of $50,000 or 10% of the annual salary and bonus reported in
the table for such individual.
Knogo Options Granted in Last Fiscal Year
The following table sets forth certain information concerning options
granted during 1995 to each executive officer named in the Summary Compensation
Table under the Knogo 1994 Plan:
Potential Realizable Value at
Number of Assumed Annual Rates of
Securities % of Stock Price Appreciation for
Underlying Total Option
Options Granted Term ($)
Granted in Exercise Expiration -------------------------------
Name (#) 1995 Price ($) Date 0% 5% 10%
- -----------------------------------------------------------------------------------------------------------------
Thomas A. Nicolette (1) 100,000 18.9% $2.00 December 6, 2004 -- 125,780 318,750
7,000 1.3% $2.50 January 3, 2005 -- 11,005 27,891
(2) 47,000 8.9% $1.72 November 1, 2000 -- 26,442 59,871
Peter J. Mundy (1) 40,000 7.5% $2.00 December 6, 2004 -- 50,312 127,500
5,000 0.9% $2.50 January 3, 2005 -- 7,861 19,922
(2) 13,500 2.5% $1.72 November 1, 2000 -- 7,595 17,140
Dr. Peter Y. Zhou (1) 40,000 7.5% $2.00 December 6, 2004 -- 50,312 127,500
5,000 0.9% $2.50 January 3, 2005 -- 7,861 19,922
(2) 6,000 1.1% $1.72 November 1, 2000 -- 3,376 7,618
<FN>
- ---------------
(1) Options granted in December 1994 in connection with employment
agreement.
(2) Options issued in substitution for Knogo Corporation stock options in
connection with the Spinoff of Knogo from the Knogo Predecessor.
</FN>
75
Knogo Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values
The following table sets forth for each of the named executive officers
the number of options exercised during 1995 and the amount realized by each such
officer. In addition, the table shows the number of options that the named
executive officer held as of December 31, 1995, both exercisable (E) and
unexercisable (U), and the value of such options as of that date.
Number of Value of
Unexercised Unexercised in-the-
Options at Year-End Money Options at
Shares (#) Year-End ($)
Acquired
on Exercise Value Exercisable/ Exercisable/
Name (#) Realized ($) Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------------------
Thomas A. Nicolette 17,000 89,760 E 50,000 E 258,400
U 87,000 U 431,500
Peter J. Mundy 10,000 52,800 E 11,500 E 58,480
U 37,000 U 182,500
Dr. Peter Y. Zhou -- -- E 14,000 E 71,680
U 37,000 U 182,500
Knogo Executive Employment Agreements; Change In Control Arrangements
The employment agreement between Knogo and Mr. Nicolette, entered into
on December 29, 1994, is for a term of three years, subject to automatic
extensions for successive 24 month periods until terminated by either party. The
agreement provided for Mr. Nicolette's annual compensation at an initial rate of
$150,000 per year, the use of an automobile and the receipt of life insurance in
the amount of $1,000,000. In connection with his employment, in December, 1994,
Mr. Nicolette also received options under the Knogo 1994 Plan to acquire 100,000
shares of Knogo Common Stock. The options are exercisable at $2.00 per share and
vest over a five year period. On December 29, 1994, Knogo and Mr. Mundy and Dr.
Zhou entered into employment agreements for a term of one year, subject to
automatic extension for successive one year periods until terminated by either
party. The employment agreements of Mr. Mundy and Dr. Zhou provide for annual
salaries of $103,800 and $120,000, respectively. Additionally, Mr. Mundy and Dr.
Zhou received options to acquire 40,000 shares each of Knogo Common Stock on
terms similar to those granted to Mr. Nicolette. The employment agreements of
Messrs. Nicolette and Mundy and Dr. Zhou each provide for a cost of living
adjustment to the base annual salary of each executive based on the percentage
increase of the Consumer Price Index. Cost of living increases were not taken in
1995 and 1996.
The employment agreements of Messrs. Nicolette and Mundy and Dr. Zhou
provide that in the event of a Change in Control of Knogo, the term of their
employment will be automatically extended for the period ending two years in the
case of Mr. Nicolette's agreement and one year in the case of the other
agreements, following the date of such Change in Control. Following such Change
in Control, each of such persons will have the right to terminate his employment
for Good Reason while continuing to receive the salary and bonus otherwise
payable thereunder for the remainder of the employment term. Additionally, the
employment agreements provide that in the event of a Change in Control all
options held by each of such persons, whether or not then vested, would fully
vest. If the Change in Control was not approved by a majority of the Continuing
Directors (as defined in Knogo's Amended and Restated Certificate of
Incorporation), each such officer would be entitled to receive cash in
cancellation of such options in an amount equal to the difference between the
exercise price of such options and the market price of Knogo's Common Stock at
the time of cancellation.
76
Properties
Knogo's principal executive offices, East Region office and United
States production, research and development and distribution facilities are
located in Hauppauge, New York, in a 68,000 square foot facility leased by
Knogo. Knogo owns a 55,000 square foot manufacturing facility in Cidra, Puerto
Rico and a one story building consisting of approximately 6,000 square feet in
Villa Park, Illinois, where its West Region office is located. Knogo also leases
other office and warehouse space as required in the Territory but does not
regard any of such space as material to Knogo's business.
Knogo, in December 1996, completed a sale/leaseback transaction for its
Hauppauge, New York facility resulting in the receipt by Knogo of net proceeds
of approximately $4,500,000.
Legal Proceedings
Although Knogo is involved in ordinary, routine litigation incidental
to its business, it is not presently a party to any other legal proceeding, the
adverse determination of which, either individually or in the aggregate, would
be expected to have a material adverse affect on Knogo's business or financial
condition.
77
KNOGO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Nine Months Ended September 30, 1996 Compared with Nine Months Ended September
30, 1995
Consolidated revenues were 19% lower in the nine month period ended
September 30, 1996 than in the nine month period ended September 30, 1995.
Revenues from third-party customers in the current period were $13,548,000 or
75% of total revenues as compared to $13,327,000 or 60% of total revenues in the
prior year period. The increase in the current period is attributable to higher
sales in the retail and 3M library market segments. Revenues in the first nine
months of 1996 include a new contract with a retail customer. Under this new
contractual arrangement, if certain store shrinkage reductions are met through
the use of Knogo's equipment over a period of two years, the contract revenue
amount would approximate $3 million. If store shrinkage reductions are not met,
the customer has the option to purchase the equipment for $1.5 million which
represents the minimum lease payments under the fixed, non-cancelable lease
term. However, all of the equipment costs have been recorded in the cumulative
nine month period resulting in a significantly lower cumulative gross margin
associated with that sale. Successful shrinkage reductions will result in future
revenues with substantially no additional costs. Sales under the Supply
Agreement with Sensormatic in the nine month period ended September 30, 1996
were $3,990,000 or 22% of total revenues as compared to $9,062,000 or 41% of
total revenues in the same period of 1995. Under the terms of the Supply
Agreement, the Company expected a reduction of approximately $1 million in
revenues per quarter in 1996 compared to 1995. However, in the nine month period
ending September 30, 1996, Sensormatic did not meet its minimum order amounts.
Accordingly, in accordance with the Supply Agreement, the Company recorded in
revenues $642,000, which represents the cumulative profits on the shortfall.
Sales represented 91% and service and rental income 9% of total revenues in 1996
as compared to 92% and 8% in 1995.
Cost of sales was 52% of total revenues in the nine month period ended
September 30, 1996 as compared to 50% in the same period in the previous year.
The cost of sales percentage is impacted by several factors, including the mix
of products sold to its own third-party customers and the amount of sales to
Sensormatic under the Supply Agreement. In the nine month period of 1996, Knogo
sold a higher percentage of CCVS equipment and 3M library products to its
third-party customers than in the same period in 1995. These products are not
manufactured directly by Knogo and carry lower margins than the traditional EAS
products it does produce. In the first nine months of 1996 cost of sales was
also impacted by the higher initial costs recorded on the large retail sale
noted above. During 1996, there was a substantially lower amount of sales to
Sensormatic than in 1995. The gross margin on these sales is fixed at 35% under
the Supply Agreement. Margins on future sales will be dependent upon product mix
and sales volume under the Supply Agreement.
Customer service expenses were lower in the first nine months of 1996
as compared to 1995. This is a result of permanent staff reductions due to more
efficient installations and fewer service calls primarily attributable to the
transfer of its library maintenance obligations to 3M.
The decrease in selling, general and administrative expenses in the
first nine months of 1996 as compared to 1995 is primarily a result of ongoing
cost control measures, lower sales promotional expenses and lower required bad
debt provisions.
Research and development costs were lower in dollar value in the 1996
period but substantially the same as a percentage of revenues in both periods
presented. The 1995 period included higher prototype costs particularly
associated with the development of the Express library self-patron check-out
system which was part of the technology sale to 3M in the first quarter of 1996.
Knogo's interest income was $125,000 in the nine month period ended
September 30, 1996 as compared to $43,000 in the corresponding period in 1995.
The increase is due to the investment of proceeds from the sale of assets at the
end of the first quarter. These amounts are shown net of interest expense of
$61,000 and $69,000 in the respective 1996 and 1995 periods relating to payments
on capitalized leases for Knogo's computer equipment.
78
In 1996, Knogo sold certain assets to 3M, consisting of patents and
technology, for a purchase price of $3 million. The proceeds, net of certain
costs including patent costs, inventory write downs, new product training costs,
legal and other costs, resulted in a gain of approximately $2.5 million which is
included in the nine month period of 1996. See Note 14 of Knogo's Consolidated
Financial Statements.
Knogo's effective tax rate is 25% for 1996 as compared to 15% in 1995.
The increase in the rate was primarily related to the tax on the gain on the
sale of assets in 1996 which will be taxed at the statutory federal tax rate and
will represent a significant proportion of the taxable income in the current
year. The lower rate in 1995 was primarily due to the normal provisions on the
earnings of the Puerto Rico manufacturing operations.
As a result of the foregoing, Knogo had net income of $1,991,000 in the
nine months ended September 30, 1996 as compared to $1,075,000 in the nine
months ended September 30, 1995.
Year Ended December 31, 1995 Compared with Ten Months Ended December 31, 1994
Knogo was created and its shares distributed to the stockholders of the
Knogo Predecessor as part of a transaction which closed on December 29, 1994. As
a result, the comparable period for the prior year is the 10 months ended
December 31, 1994. Knogo has not adjusted prior year amounts for purposes of
management's discussion and analysis due to the significance of the above
transaction on Knogo's operations. See Note 1 to Knogo's Consolidated Financial
Statements for the basis of presentation of prior year amounts.
Consolidated revenues for the year ended December 31, 1995 were $29.4
million as compared to $20.7 million for the 10 months ended December 31, 1994
reflecting an increase of $8.7 million over the previous period.
Sensormatic purchased $12 million of product for sale outside of the
Territory in the year ended December 31, 1995, as agreed in accordance with the
Supply Agreement (See Note 13b to Knogo's Consolidated Financial Statements). In
the 10 month period ended December 31, 1994, sales to the Knogo Predecessor's
international affiliates of $7 million were lower than in prior periods
primarily due to customer uncertainties relating to the pending Sensormatic
Merger and related transactions. In accordance with the Supply Agreement,
minimum revenues from Sensormatic are expected to decrease to $8 million in 1996
and $4 million in 1997. While Knogo is amenable to sales of products in excess
of Sensormatic's minimum amounts, it has received no firm commitment from
Sensormatic to do so at this time. Knogo anticipates replacing these future
revenues with continued growth in its core markets with other customers.
Revenues from customers other than Sensormatic were $3.6 million higher
in the year ended December 31, 1995 than in the 10 month period ended December
31, 1994. During 1995, Knogo increased its penetration into the supermarket and
library markets while sales to the traditional retail markets remained strong.
There were no significant revenues from sales to the computer manufacturing
industry in 1995.
Revenues by product line to customers other than Sensormatic in 1995
were 50% Magnetics, 21% Swept RF, 14% Dual RF, 2% KnoGlo, 3% Express and 10%
CCVS, compared to 38%, 34%, 15%, 2%, 0% and 11% respectively in the 10 month
period ended December 31, 1994. Revenues from sales to Sensormatic by product
line were 57% MM, 40% Swept RF, 0% Dual RF and 3% KnoGlo as compared to 56%,
40%, 3% and 1% respectively in sales to the Knogo Predecessor's affiliates in
the 10 month period ended December 31, 1994.
Cost of security devices sold, as a percentage of sales of security
devices and related interest income, remained constant at 45% in both the year
ended December 31, 1995 and the 10 months ended December 31, 1994 despite the
increase in product mix towards MM. Traditionally, the MM product line carried
lower margins than the Swept RF products. However, during 1995, Knogo was able
to improve the margin on MM through a combination of higher selling prices,
particularly through higher library sales, as well as lower costs associated
with product design changes and overall manufacturing efficiencies.
In accordance with the Supply Agreement, sales to Sensormatic in 1995
were priced to yield a 35% gross margin. In the 10 months ended December 31,
1994 cost of sales to affiliates was variable based on product mix.
Customer service expenses include the costs of installing new systems
and maintaining previously installed systems. Total expenses were lower in the
year ended December 31, 1995 than in the 10 months ended
79
December 31, 1994 due to a reduction in the number of customer service
engineers, a greater utilization of their time and cost cutting measures related
to their travel.
Selling, general and administrative expenses in the year ended December
31, 1995 were $1.3 million lower than in the 10 month period ended December 31,
1994. The reduction is a result of a decrease in executive and administrative
staff, lower employee benefit costs, budgeted expense reductions and lower bad
debts provisions. The prior 10 month period also included allocated corporate
costs including costs related to the Sensormatic Merger of $1,575,000 and
$186,000 of the death benefit paid to the estate of a former executive.
Research and development increased by $1.1 million in 1995 over the
allocated costs in the 10 month period ended December 31, 1994. In 1995, Knogo
directed 100% of its research and engineering efforts towards products for the
North American market. As a result of these efforts, Knogo has been introducing
in 1996 a re-engineered and newly designed Knoscape(TM) line of electronic
article surveillance systems. Ongoing existing product development also
contributed towards lower costs, primarily in the Magnetics product line, during
the year.
Interest expense relates to certain capitalized computer and office
equipment leases in both periods and is shown net of interest income of $59,000
in 1995 and $7,000 in 1994.
Knogo had an effective tax rate in 1995 of 11% primarily as a result of
the tax benefits associated with the earnings of the Puerto Rico manufacturing
operations. In the 10 months ended December 31, 1994, the tax benefit was
primarily the result of the settlement of previous years tax audits offset by
the normal provisions on the earnings of the Puerto Rico manufacturing
operations.
As a result of the foregoing, Knogo had net income of $1,731,000 in the
year ended December 31, 1995 compared to a net loss of $2,833,000 in the 10
month period ended December 31, 1994.
Ten Months Ended December 31, 1994 compared with the Year Ended February 28,
1994
Consolidated revenues for the 10 months ended December 31, 1994 were
$20.7 million as compared to $29.6 million for the year ended February 28, 1994,
reflecting a decrease of $8.9 million over the previous period.
Revenues from third party customers were lower due to a plan that was
put in place in the previous year to reduce the number of sales account
representatives to more sharply focus the selling effort on targeted markets and
to reduce expenses. The short term effect of this plan was a decline in revenues
from traditional sources, particularly in soft goods, which were not yet
replaced by revenues from the redirected effort. In response to the increased
selling effort and trade advertising, systems were placed in 33 supermarket
locations on either a test or trial order basis during the 10 months ended
December 31, 1995. Successful conversion of many of these tests and trials into
revenue producing orders began in the calendar 1994 year.
Sales to affiliates were lower in the 10 months ended December 31, 1994
compared to the year ended February 28, 1994 for various reasons. In the
beginning of the year, Knogo experienced certain technical problems relating to
the improved magnetic systems developed for supermarkets resulting in the delay
of orders. In the latter part of the period the reduction continued due to
customer uncertainties relating to the pending Sensormatic Merger and related
transactions.
Revenues by product line to third party customers in the 10 month
period ended December 31, 1994 were 38% Magnetics, 34% Swept RF, 15% Dual RF, 2%
KnoGlo(TM), and 11% CCVS, compared to 32%, 36%, 19%, 3%, and 10%, respectively,
in fiscal 1994. Revenues from sales to affiliates by product line in the 10
month period ended December 31, 1994 were 56% MM, 40% Swept RF, 3% Dual RF, 1%
KnoGlo(TM) and 0% CCVS compared to 64%, 31%, 1%, 3%, and 1%, respectively, in
fiscal 1994.
As a percentage of sales of security devices and related interest
income, the cost of security devices sold decreased from 47% in fiscal 1994 to
45% in the 10 months ended December 31, 1994. Increased margins primarily were
due to higher selling prices in the CCVS product line, lower costs and product
improvements in Magnetics and lower inventory provisions.
80
Customer service expenses, while lower in the 10 month period due to
lower sales volumes, would have been slightly higher on an annualized basis than
in the previous fiscal year. This was primarily a result of the learning curve
associated with new installations in the supermarket sector.
Cost of sales to affiliates increased to 71% in the current period as
compared to 65% in fiscal 1994 primarily as a result of the change in mix of
products sold.
Selling, general and administrative expenses in the 10 month period
ending December 31, 1994 were $321,000 higher than in the year ended February
28, 1994. The increase was due to higher allocated corporate costs, including
costs of $1,575,000 related to the Sensormatic Merger and a portion ($186,000)
of the death benefit payable to the estate of Arthur J. Minasy, the former
Chairman of the Board and Chief Executive Officer of the Knogo Predecessor who
died in May 1994. Knogo also incurred higher sales promotion costs associated
with development of new products intended for the supermarket and library
markets. These costs were offset in part by reductions in the sales staff.
Allocated research and development costs were lower than in the
previous fiscal year due to a greater effort of the Knogo Predecessor's research
department placed on the development of products for the European marketplace.
Interest expense was lower in the current fiscal period because the
amount included in fiscal 1994 included interest relating to the settlement of
various tax audits.
Knogo's tax benefit in the 10 month period ended December 31, 1994 and
tax provision in the year ended February 28, 1994 were related to the normal
provisions on the earnings of the Puerto Rico manufacturing operations, offset
by settlements of previous years tax audits.
As a result of the foregoing, Knogo had a net loss of $2,833,000 in the
10 months ended December 31, 1994 compared to a net profit in fiscal 1994 of
$123,000.
Liquidity and Capital Resources
Knogo's financial position is strong, with $2.5 million in cash and
cash equivalents, shareholders' equity of approximately $25 million and no bank
debt. In addition, Knogo's working capital increased by $3.1 million in the nine
months ended September 30, 1996.
Knogo has a $5 million unused and unsecured revolving credit and term
loan agreement which is described more fully in Note 9 to the Consolidated
Financial Statements of Knogo included elsewhere in the Joint Proxy
Statement/Prospectus. During the year, Knogo was able to fund substantially all
of its working capital needs and capital expenditures through existing cash
resources and the proceeds from the sale of assets of 3M.
Knogo's Supply Agreement with Sensormatic is scheduled to expire by its
terms on June 30, 1997. Since entering into the Supply Agreement on December 29,
1994, Knogo has generated a significant portion (41% in 1995 and 22% in the nine
months ended September 30, 1996) of its revenues from production of EAS products
for sale to Sensormatic pursuant to the Supply Agreement. There can be no
assurance that Knogo will be able to renew the terms of the Supply Agreement or
to otherwise succeed in expanding its sales sufficiently to replace the
manufacturing and sales volume it will lose upon the expiration of the Supply
Agreement. Consequently, Knogo may have difficulty maintaining profitable
margins in its manufacturing operations.
At, or shortly after, the consummation of the Merger, Sentry intends to
enter into a new credit arrangement with Knogo's present lender, Fleet Bank, and
thereafter to make advances to each of Video and Knogo as the businesses of the
two subsidiaries may require. Knogo's current bank credit facility consists of a
$5 million dollar line of credit with Fleet Bank which, by its current terms,
would be terminated upon consummation of the Merger. However, based upon
discussions between Knogo's management and senior lending officers at Fleet
Bank, Sentry believes that a new facility will be made available to it, to take
effect after the Merger, for at least the same amount, and on substantially the
same terms, as are currently available to Knogo. Such facility would be secured
by a lien on substantially all of the assets of Sentry and its subsidiaries. In
December 1996, Knogo completed a sale-leaseback arrangement with respect to its
Hauppauge, New York facility, resulting in the receipt by Knogo of net
81
proceeds of approximately $4.5 million. It is expected that Knogo will make an
advance of $2 million out of the proceeds from the sale/leaseback transaction to
Video upon consummation of the Merger to permit Video to repay certain existing
indebtedness.
Despite the expiration of the Supply Agreement, Knogo anticipates that
current cash reserves, cash generated by operations and cash obtained under the
bank credit facility expected to be entered into by Sentry will be adequate to
finance Knogo's anticipated working capital requirements as well as future
capital expenditure requirements for at least the next 12 months.
Inflation
Knogo does not consider inflation to have a material impact on the
results of operations.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123, "Accounting for Stock-Based Compensation," which must
be adopted by Knogo in fiscal 1996. Knogo has chosen not to implement the fair
value based accounting method for employee stock options, but has elected to
disclose, commencing with its fiscal 1996 Annual Report, the pro forma net
income and net income per share as if such method had been used to account for
stock-based compensation costs as described in Statement No. 123.
82
KNOGO SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
At the close of business on December 31, 1996, Knogo had outstanding
5,772,632 shares of Common Stock, par value $0.01 per share, each of which
entitles the holder to one vote. Voting is not cumulative.
The following table provides information at December 31, 1996, with
respect to (i) any person known to Knogo to be the beneficial owner of five
percent or more of the shares of Knogo Common Stock, (ii) each director of
Knogo, (iii) each of the three executive officers and (iv) all directors and
executive officers as a group. For the purpose of computing the percentage of
the shares of Knogo Common Stock owned by each person or group listed in this
table, any shares not outstanding which are subject to options exercisable
within 60 days have been deemed to be outstanding and owned by such person or
group, but have not been deemed to be outstanding for the purpose of computing
the percentage of the shares of Knogo Common Stock owned by any other person.
This table does not include options which will vest as a result of the Merger.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership (1) Percent of Class
---------------- ------------------------ -----------------
Walter & Edwin Schloss Associates L.P.
52 Vanderbilt Avenue
New York, New York 10017 641,500(2) 11.1%
Dimensional Fund Advisors
1299 Ocean Avenue
Suite 650
Santa Monica, California 90401 337,900(3) 5.9%
Frank M. Corso 15,900(4) *
William A. Perlmuth
c/o Stroock & Stroock & Lavan
7 Hanover Square
New York, New York 10004 1,077,227(5) 18.2%
Robert E. Vandermark 15,520(4) *
Thomas A. Nicolette 208,574(6) 3.5%
Peter Y. Zhou 33,433(7) *
Peter J. Mundy 44,690(8) *
All directors and executive officers as a
group (6 persons) 1,392,344(9) 23.5%
<FN>
- ---------------------------
* Less than one percent.
(1) Unless otherwise indicated, beneficial ownership disclosed consists of
sole voting and investment power.
(2) Includes 8,500 shares beneficially owned solely by Mr. Walter J.
Schloss and 7,000 shares beneficially owned solely by Mr. Edwin W.
Schloss.
(3) According to information provided by Dimensional Fund Advisors Inc.
("Dimensional"), Dimensional is a registered investment advisor and is
deemed to have beneficial ownership of shares of Knogo, all of which
shares are held in portfolios of DFA Investment Dimensions Group Inc.,
a registered open-end investment company, the DFA Investment Trust
Company, a registered open-end investment company, or the DFA Group
Trust and the DFA Participating Group Trust, investment vehicles for
qualified employee benefit plans, all of which Dimensional serves as
investment manager. Dimensional disclaims beneficial ownership of such
shares.
(4) Includes 14,400 shares issuable upon the exercise of stock options
exercisable within 60 days from the date hereof.
(5) Consists of (a) 902,527 shares held by Mr. Perlmuth as Executor of the
Estate of Arthur J. Minasy, (b) 156,300 shares held by Mr. Perlmuth as
trustee under trusts for the benefit of Mr. Minasy's adult children,
and (c) 4,000 shares beneficially owned by Mr. Perlmuth. Also includes
14,400 shares issuable upon the exercise of stock options exercisable
within 60 days from the date hereof. Under the policies of the law firm
of which he is a member, Mr. Perlmuth will share any economic benefits
of the options with the other members of such firm.
(6) Excludes 50,000 shares held by a trust for the benefit of Mr.
Nicolette's wife, as to which shares Mr. Nicolette disclaims beneficial
ownership. Includes 90,000 shares held by Mr. Nicolette as co-trustee
under trusts for the benefit of his minor children and as to which
shares Mr. Nicolette disclaims beneficial ownership. Also includes
71,400 shares issuable upon the exercise of stock options exercisable
within 60 days from the date hereof.
(7) Includes 17,000 shares issuable upon the exercise of stock options
exercisable within 60 days from the date hereof.
(8) Includes 20,500 shares issuable upon the exercise of stock options
exercisable within 60 days from the date hereof.
(9) Includes 152,100 shares issuable upon the exercise of stock options
exercisable within 60 days from the date hereof.
</FN>
83
CERTAIN TRANSACTIONS OF KNOGO
During the fiscal year ended December 31, 1995, the firm of Stroock &
Stroock & Lavan, of which William A. Perlmuth, a director of Knogo (and the
Executor of the Minasy Estate, a principal stockholder of Knogo), is a member,
rendered services as general counsel to Knogo and received fees for such
services. During such period Frank Mitchell Corso, P.C., a law firm of which
Mr. Frank M. Corso, a director of Knogo, is a partner, also rendered legal
services to Knogo and received fees for such services. The fees received by each
law firm constituted less than 5% of the gross revenues received by such firm
during its most recent fiscal year. Mr. Perlmuth and Mr. Corso each also serve
on the Compensation Committee of the Knogo Board.
84
BUSINESS OF SENTRY
Sentry, the newly formed holding company of Video and Knogo, has not
conducted any business activities to date, other than those incident to its
formation, its execution of the Merger Agreements and related agreements and its
participation in the preparation of this Joint Proxy Statement/Prospectus.
Immediately following the consummation of the Merger, Sentry will become a
holding company for Video and Knogo and their respective subsidiaries.
Accordingly, the business of Sentry, through its wholly-owned subsidiaries Video
and Knogo and their respective subsidiaries, will be the businesses currently
conducted by Video and Knogo and their respective subsidiaries. See "Business of
Video" and "Business of Knogo."
It is expected that by combining the businesses and operations of Knogo
and Video, Sentry will be able to offer a more comprehensive product line of
security-related products than either company could alone. In addition to
benefiting from the consolidation of Knogo's existing EAS product line with
Video's traveling CCTV system, the combined company is expected to benefit from
several potential synergies between the two businesses and their operations.
Sentry believes that Knogo has an operational infrastructure that Knogo and
Video, collectively, can exploit to permit Video's products, and any
enhancements thereto, to more rapidly achieve success in the marketplace. Sentry
believes that Knogo's operating infrastructure is currently underutilized by
Knogo's existing product offerings. Sentry believes that, at present, Knogo can
easily promote and offer new products within its existing operational capacity.
In addition, although Knogo has been increasing its third-party sales, such
sales may not grow as rapidly as necessary for Knogo to utilize its excess
operational and manufacturing capacity, particularly after Knogo's Supply
Agreement with Sensormatic terminates in June 1997. See "Business of Knogo --
Production" and "Business of Knogo -- Competition." In this regard, Sentry
expects that through a consolidation of Knogo's extensive manufacturing,
marketing and distribution capacities with those of Video, Knogo can
fundamentally assist Video with the production and sale of Video's products. For
example, Sentry believes that it will be able to use the existing installation
and service personnel of Knogo located throughout the United States, Canada and
Puerto Rico, thereby avoiding some of the employee transportation and housing
costs associated with each installation. Sentry also believes that by using
Knogo's excess manufacturing capacity to manufacture components of Video's
systems, Sentry will be able to reduce the number of components manufactured by
contract manufacturers and increase the quality of manufacture as well as the
manufacturing margin realized on its goods.
In addition to exploiting the synergies resulting from Knogo's
operational and manufacturing capacities, Sentry believes that Knogo can offer
Video access to Knogo's technological expertise. Sentry believes that Knogo can
readily adapt the technological expertise that it has developed in the EAS area
to assist Video in the research and development of further innovations to
Video's existing CCTV product line. Due to Knogo's resources, it may well be
able to assist Video in developing more innovative and cost effective CCTV
solutions for the benefit of both of their customers.
Sentry believes that the Knogo and Video businesses complement each
other. As a combined entity, Sentry will permit Video and Knogo access to a
wider array of products and customers in the anti-theft and security fields and
the resources with which to exploit the increased sales of such products to such
customers. Moreover, Sentry expects that, as a combined entity, it will benefit
from general economies of scale and reduction of inefficiencies in areas of
duplicative or underutilized operations. The combination of Knogo's and Video's
businesses is, therefore, expected to accelerate the strategic growth plans, and
eventually the revenues, of both companies.
85
MANAGEMENT OF SENTRY
Directors
The following table sets forth information as to the persons who are
expected to serve as directors of Sentry following the Merger.
Business Experience During the
Name Age Past Five Years and Other Information
---- --- --------------------------------------
William A. Perlmuth................ 67 Has been a director of Knogo since its inception. Prior thereto, Mr.
Perlmuth served as a director of the Knogo Predecessor from 1979
to December 1994. Mr. Perlmuth has been a partner in the law
firm of Stroock & Stroock & Lavan in New York, New York for
more than five years. Such firm and Mr. Perlmuth have performed
legal services for Knogo since its inception and are expected to
perform legal services for Sentry following the Merger. The
aggregate amount of fees paid by Knogo to Stroock & Stroock &
Lavan was less than 5% of the law firm's gross revenues for the
last fiscal year. Knogo believes that the billing rates for the
foregoing legal services were no less favorable to Knogo than could
have been obtained from unaffiliated parties for comparable
services.
Thomas A. Nicolette................ 46 Has been President, Chief Executive Officer and a director of
Knogo since its inception in August 1994. Prior thereto, Mr.
Nicolette served in various capacities at the Knogo Predecessor,
where he was Chief Executive Officer from May 1994 to December
1994; President and Chief Operating Officer from 1990 to May
1994; President of the North America Division from 1989 to 1990;
Vice President from 1986 to 1990; and a Director from 1987 to
December 1994. Mr. Nicolette is a member of the Board of
Trustees of WLIW, the Long Island-based affiliate of the Public
Broadcasting System.
Robert D. Furst, Jr................ 44 Has been a director of Video since January 1993, Chairman of the
Board since July 1996 and Chief Executive Officer since August
1996. Mr. Furst was one of the original shareholders of Video. He
is the founder and owner of Furst Capital Management, a firm
specializing in trading government and equity securities as well as
commodity futures. Mr. Furst is a member of the Chicago Board
of Trade and has been a securities and commodities trader since
1980. Mr. Furst currently serves on the Boards of Directors of
NOW Technologies, Inc., a privately-held manufacturer of chemical
packaging and dispensing systems serving the semiconductor
industry; Lucht, Inc., a privately-held manufacturer of high volume
photographic printers and other equipment; and Neighborhood
Marketing Corporation, a privately-held consumer promotion and
data base marketing company utilizing proprietary patented
technologies.
86
Andrew L. Benson................... 41 Is the founder and President of Video, served as it Chairman of the
Board between 1990 and July 1996 and its Chief Executive Officer
between 1990 and 1995, and has been a director of Video since its
inception. Mr. Benson served as Video's Treasurer until June 1994
and Secretary until August 1994. From May 1988 to August 1990,
Mr. Benson was President of Assets Protection, Inc., a Minnesota
private detective agency which he founded. From 1983 to 1988,
Mr. Benson held several security-related management positions with
various companies, including Pinkerton, Inc. and Norwest Bank
Minnesota, N.A., Minneapolis, Minnesota.
Robert L. Barbanell................ 66 Has been President of Robert L. Barbanell Associates, Inc., a
financial consultancy firm, since July 1994. Prior thereto, Mr.
Barbanell served in various capacities at Bankers Trust New York
Corporation, where he was Managing Director of the European
Merchant Bank of Bankers Trust International PLC from 1991 to
1994; Managing Director of BT Securities Corporation from 1989
to 1991; Managing Director of Bankers Trust Company from 1986
to 1989; Senior Vice President of Bankers Trust Company from
1981 to 1986. Prior to his service with Bankers Trust, Mr.
Barbanell served in various executive capacities at Amcon Group,
Inc. and GI Export Corporation. Mr. Barbanell currently serves on
the Boards of Directors of Marine Drilling Companies, Inc., Kaye
Group, Inc. and Cantel Industries, Inc.
The term of office of Mr. Barbanell will expire at Sentry's annual
meeting of stockholders to be held in 1998. The terms of office of Messrs.
Benson and Perlmuth will expire at Sentry's annual meeting of stockholders to be
held in 1999 and of Messrs. Furst and Nicolette at the annual meeting of
stockholders to be held in 2000.
Compensation of Directors
Directors who are also full-time employees of Sentry will receive no
additional compensation for their services as directors. Each non-employee
director will initially receive $12,000 annually for services on the Sentry
Board and $1,000 per Sentry Board meeting attended. In addition, each
non-employee director who is a member of any committee of the Sentry Board shall
receive $500 for attendance at any meeting of such committee which is held
neither immediately before nor immediately after a Sentry Board meeting;
provided, however, that the chairman of the compensation and audit committee of
the Sentry Board shall receive $1,000 for attendance at any such separately held
meeting of the compensation and audit committee and $500 for attendance at any
meeting of such committee held either immediately before or immediately after a
Sentry Board meeting.
In addition, each non-employee director will be eligible to participate
in the 1997 Stock Incentive Plan of Sentry. Pursuant to this plan, options to
purchase 15,000 shares of Sentry Common Stock will be granted to each such
director at the time such director first joins the Sentry Board. Messrs.
Perlmuth, Furst and Barbanell are each expected to be granted such options as of
the Effective Time. In addition, thereafter, options to purchase shares of
Sentry Common Stock may be granted to any of the directors at the discretion of
the Sentry Board. All such options will be granted at fair market value and
become exercisable over five years beginning on the first anniversary of the
date of grant.
Committees of the Board of Directors
The Sentry Board of Directors will have two standing committees: a
Compensation Committee and an Audit Committee. At least a majority of the
members of the Audit Committee shall be Directors of Sentry who are neither
officers nor employees of Sentry.
87
Officers
Set forth below are the names and titles of certain of the persons who
are expected to serve as executive officers of Sentry following the Merger.
Name Age Office
---- --- ------
Thomas A. Nicolette................. 46 President and Chief Executive Officer of Sentry. Mr. Nicolette has
been President, Chief Executive Officer and a director of Knogo
since its inception in August 1994 and continues in those positions.
Prior thereto, Mr. Nicolette served in various capacities at the Knogo
Predecessor, where he was Chief Executive Officer from May, 1994
to December, 1994; President and Chief Operating Officer from 1990
to May, 1994; President of the North America Division from 1989 to
1990; Vice President from 1986 to 1990; and a Director from 1987
to December, 1994. Mr. Nicolette is a member of the Board of
Trustees of WLIW, the Long Island-based affiliate of the Public
Broadcasting System.
Andrew L. Benson.................... 41 Vice President, CCTV Systems of Sentry. Mr. Benson has been
President and a director of Video since its inception and continues in
those positions, and served as it Chairman of the Board between
1990 and July 1996 and Chief Executive Officer between 1990 and
1995. Mr. Benson, a director of Video, served as Video's Treasurer
until June 1994 and Secretary until August 1994. From May 1988 to
August 1990, Mr. Benson was President of Assets Protection, Inc., a
Minnesota private detective agency which he founded. From 1983 to
1988, Mr. Benson held several security-related management positions
with various companies, including Pinkerton, Inc. and Norwest Bank
Minnesota, N.A., Minneapolis, Minnesota.
Peter J. Mundy...................... 40 Chief Financial Officer of Sentry. Mr. Mundy has been Vice
President - Finance, Chief Financial Officer, Secretary and Treasurer
of Knogo since December 1994 and continues in those positions.
Prior thereto, Mr. Mundy served as an officer of the Knogo
Predecessor, where he was Vice President-Corporate Controller from
May 1994 and, prior to such time, Corporate Controller for more
than five years. Mr. Mundy is a Certified Public Accountant.
Peter Y. Zhou....................... 57 Vice President - Technology of Sentry. Dr. Zhou has been Senior
Vice President - Technology of Knogo since December 1994 and
continues in that position. Prior thereto, Dr. Zhou served as an
officer of the Knogo Predecessor where he was Senior Vice
President-Technology from 1992 and Vice President-Research from
1988.
Sentry Employment Agreements and Compensation of Executive Officers
As of the Effective Time, the employment agreements with Knogo of
Messrs. Nicolette and Mundy and Dr. Zhou will terminate and it is anticipated
that new employment agreements will be entered into with Sentry by each of
Messrs. Nicolette and Mr. Mundy and Dr. Zhou, on substantially similar terms to
those contained in their
88
current employment agreements with Knogo. In addition, Sentry and Mr. Benson
have agreed in principle to enter into an employment agreement on terms similar
to those contained in the agreements with Mr. Mundy and Dr. Zhou.
The employment agreement between Sentry and Mr. Nicolette is expected
to be for a term of four years. In addition to establishing Mr. Nicolette's
annual compensation of $200,000 per year, together with an opportunity to
receive up to an additional 50% of such amount, based upon certain
performance-based criteria, the use of an automobile and the receipt of life
insurance in the amount of $1,000,000, the agreement is expected to provide that
Sentry will grant to Mr. Nicolette options to acquire 100,000 shares of Sentry
Common Stock, with such options vesting at 20% per annum during the five year
period commencing on the date of the grant thereof. The employment agreements of
Messrs. Benson and Mundy and Dr. Zhou are each expected to be for a term of two
years. The employment agreements of Mr. Mundy and Dr. Zhou are expected to
provide for annual salaries of $120,000 and $130,000, respectively. In addition
to their annual salaries, Mr. Mundy and Dr. Zhou shall each be entitled to
receive options to purchase 40,000 shares of Sentry Common Stock, with such
options vesting at 20% per annum during the five year period commencing on the
respective dates of grant thereof. Mr. Benson's agreement is expected to provide
for an annual base salary in an amount equal to one percent (1%) of the gross
sales of Sentry's CCTV division up to the budgeted amount for such division
established yearly by the Sentry Board, together with an opportunity to receive
an additional 0.2% of the gross sales of the CCTV division based on certain
performance- based criteria. Mr. Benson shall have the option to receive an
advance against his base salary of up to $125,000 per annum. In addition to his
salary, Mr. Benson shall be entitled to receive options to acquire 50,000 shares
of Sentry Common Stock, with (x) 50% of such options vesting on the first
anniversary of the grant thereof and (y) the remaining 50% of such options
vesting (i) on the second anniversary of the grant thereof if the sales of
Sentry's CCTV division meet or exceed the amount budgeted by the Sentry Board
for Mr. Benson's first year of employment with Sentry or (ii) at 20% per annum
during the four year period following such first anniversary if such CCTV sales
do not exceed such budgeted amount. The employment agreements of Messrs.
Nicolette and Mundy and Dr. Zhou each are expected to provide for a cost of
living adjustment to the base annual salary of each such executive calculated
based upon the percentage increase of the Consumer Price Index (as defined in
such agreements).
The employment agreements of Messrs. Nicolette, Benson and Mundy and
Dr. Zhou are expected to provide that in the event of a change in control of
Sentry, the term of each of their employment will be automatically extended for
the period ending two years in the case of Mr. Nicolette's agreement and one
year in the case of each of the other agreements, following the date of such
change in control. Following such change in control, each of such persons will
have the right to terminate his employment for good reason while continuing to
receive the salary and bonus otherwise payable thereunder for the remainder of
the employment term. Additionally, the employment agreements are expected to
provide that in the event of a change in control all options held by each of
such person, whether or not then vested, would fully vest. If the change in
control was not approved by a majority of the Existing Directors (as defined in
the Sentry Certificate of Incorporation), each such officer would be entitled to
receive cash in cancellation of such options in an amount equal to the
difference between the exercise price of such options and the market price of
Sentry's Common Stock at the time of cancellation.
Sentry 1997 Stock Incentive Plan
As of the Effective Time, Sentry will have adopted the Sentry
Technology Corporation 1997 Stock Incentive Plan (the "1997 Plan") which is
comparable to Knogo's current 1994 Stock Incentive Plan. Pursuant to the terms
of the 1997 Plan, an aggregate of 2,250,000 shares of Sentry Common Stock will
be issuable upon the exercise of options granted or which may be granted under
such Plan. Pursuant to the Merger Agreement, at the Effective Time of the
Merger, options to purchase 370,000 shares of Sentry Common Stock will be
substituted for existing Video employee stock options, and options to purchase
564,548 shares of Sentry Common Stock and 564,548 shares of Sentry Class A
Preferred Stock will be substituted for existing Knogo employee stock options.
The following is a summary of the principal provisions of the 1997 Plan.
General
The purpose of the 1997 Plan is to encourage Sentry's key employees and
directors to acquire a larger proprietary interest in Sentry, and to provide
incentives to put forth maximum efforts for the success of Sentry's business,
and thereby stimulate the efforts of such key employees and directors on
Sentry's behalf.
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The 1997 Plan is administered by the Sentry Board. All key employees,
as may be determined by the Sentry Board from time to time, are eligible to
participate in the 1997 Plan. Under the 1997 Plan, directors of Sentry who are
not also employees of Sentry are eligible to receive awards under the 1997 Plan;
however, no member of the Sentry Board may vote with respect to any
determination that relates to an award to be granted to, or which is held by,
such member (unless the determination relates to all outstanding awards of the
same type).
Awards may be granted by the Sentry Board to eligible employees and
directors in the form of stock options, restricted stock awards, phantom stock
awards or stock appreciation rights ("Incentive Awards"). Stock options may be
granted as "incentive stock options" (as defined under Section 422 of the Code)
or as non-qualified stock options (except that incentive stock options can only
be granted to employees).
The aggregate number of shares of Sentry Common Stock that may be the
subject of Incentive Awards under the 1997 Plan may not exceed 2,250,000;
provided, that rights that are exercisable as an alternative to an option (as
described below) will not be subject to the foregoing limitation. In addition,
up to 564,548 shares of Sentry Class A Preferred Stock may be subject to options
granted under the 1997 Plan in substitution for Knogo Stock Options. See "The
Merger -- Conversion of Knogo Common Stock -- Knogo Stock Options."
The exercise price under an incentive stock option or a non-qualified
stock option is fixed by the Sentry Board on the date of grant; however, the
exercise price under an incentive stock option must be at least equal to the
fair market value of Sentry Common Stock on the date of grant of the option.
Stock options and stock appreciation rights are exercisable for a
duration of ten years from the date of grant. Options and stock appreciation
rights are exercisable at such rate and times as may be fixed by the Sentry
Board on the date of grant. The holder of a stock option granted in connection
with an alternative stock appreciation right (which is described below) is
entitled to exercise such option only by surrendering the alternative stock
appreciation right with respect to the same number of shares as to which such
option is exercised, and to receive payment thereof. The aggregate fair market
value (determined at the time the option is granted) of Sentry Common Stock with
respect to which incentive stock options are exercisable for the first time by a
participant during any calendar year (under all stock option plans of Sentry and
its subsidiaries) cannot exceed $100,000; to the extent that this limitation is
exceeded, such excess options are treated as non-qualified stock options for
purposes of the 1996 Plan and the Code. Non-qualified options are not subject to
the $100,000 limitation and are not included in determining whether the $100,000
limitation has been exceeded.
At the time a stock option is granted, the Sentry Board may, in its
sole discretion, designate whether the stock option is to be considered an
incentive stock option or a non-qualified stock option. Stock options with no
such designation shall be deemed incentive stock options to the extent that the
$100,000 limit described above is met and such options satisfy the relevant
conditions under the Code.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to Sentry of shares of Sentry Common Stock already owned by
the option holder, by a "cashless" exercise method with a designated broker, or
by such other method as the Sentry Board may permit from time to time.
A stock appreciation right may be granted either independently, or in
connection with, a stock option at the time of grant. A stock appreciation right
granted in connection with a stock option is exercisable (a) only to the extent
that the related stock option is exercisable and (b) either in conjunction with,
or as an alternative to, the exercise of the related option. A stock
appreciation right is the right to receive an amount equal to the excess (or a
portion of the excess, as determined by the Sentry Board at the time of grant),
of the fair market value of a share of Sentry Common Stock on the date of
exercise over (i) the fair market value of a share of Sentry Common Stock on the
date of grant, in the case of a stock appreciation right granted independently
of any stock option, or (ii) the exercise price of the related stock option, in
the case of a stock appreciation right granted in connection with a stock option
(which excess is referred to as the "Spread"). The holder of a conjunctive stock
appreciation right granted in connection with a stock option is deemed to have
exercised the right at the same time, and to the same extent that, the related
stock option is exercised. The holder of an alternative stock appreciation right
granted in connection with a stock option is entitled to exercise such right
only by surrendering the related stock option with respect to the same number of
shares as to which such stock appreciation right is exercised, and to receive
payment therefor. The number of shares with respect to which an alternative
stock option is surrendered are not available for future grants
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of Incentive Awards. The Sentry Board may limit the amount payable upon the
exercise of any stock appreciation right.
At the election of the holder, but subject to disapproval of such
election by the Sentry Board, distribution of the amount payable upon the
exercise of a stock appreciation right may be made in shares of Sentry Common
Stock, valued at their fair market value on the date of exercise of the stock
appreciation right, or in cash, or in a combination of cash and shares.
Stock options and stock appreciation rights become immediately
exercisable in full upon the retirement of the holder after reaching the age of
65, upon the disability or death of the holder while in the employ or service of
Sentry or a subsidiary, upon a Change of Control (for purposes of this section,
used as defined in the 1997 Plan) while the holder is employed by, or serving as
a director of, Sentry or a subsidiary or upon the occurrence of such special
circumstances as in the opinion of the Sentry Board merit special consideration.
However, no options or rights may be exercised earlier than six months following
the date of grant.
Stock options and stock appreciation rights terminate at the end of the
third business day following the holder's termination of employment or service.
This period is extended to three months in the case of the holder's retirement
or disability, and six months in the case of the holders death, in which case
the stock option and/or stock appreciation right is exercisable by the holder's
estate.
The Sentry Board may grant restricted stock awards to eligible
individuals. A restricted stock award is the issuance of shares of Sentry Common
Stock or the grant of the right to purchase Sentry Common Stock at a price
determined by the Sentry Board. Such shares of Sentry Common Stock, when and if
issued, are subject to transfer restrictions determined by the Sentry Board in
its sole discretion, and subject to substantial risk of forfeiture unless and
until specific conditions established by the Sentry Board at the time of grant
are met. Such conditions may be based on continuing employment or service or
achievement of pre-established performance objectives, or both, as determined by
the Sentry Board. Unless the holder of a restricted stock award ceases to be an
employee or director of Sentry or a subsidiary (for reasons other than those
described below), the transfer restrictions imposed upon restricted stock awards
will lapse in accordance with a schedule or other conditions as are determined
by the Sentry Board. All restrictions immediately cease upon the death or
disability of the holder, upon a Change of Control while the holder is employed
by, or serving as a director of, Sentry or a subsidiary or upon the occurrence
of such special circumstances as in the opinion of the Sentry Board merit
special consideration.
Payment of the purchase price for restricted shares is made in cash, by
check, or by such other methods as the Sentry Board may permit.
Certificates for the shares of Sentry Common Stock granted or purchased
pursuant to a restricted stock award are issued in the name of the holder
thereof, but the certificates are retained by Sentry for the holder's account
and are not delivered to the holder until such time as the restrictions imposed
on the transfer of such shares have lapsed. The holder of a restricted stock
award has the right to vote the shares of Sentry Common Stock registered in his
or her name. Dividends and distributions (including stock dividends and
distributions in the event of a split-up, conversion, exchange, reclassification
or substitution) with respect to such shares may be retained by Sentry for the
holder's account, to be distributed to the holder at the time, and to the extent
that, the restrictions imposed on the transfer of such shares shall have lapsed.
The Sentry Board may grant phantom stock awards to eligible
individuals. A phantom stock award entitles the holder to receive payment from
Sentry, upon the expiration of a vesting period, in an amount equal to (i) the
fair market value of one share of Sentry Common stock on the date of such
expiration, multiplied by (ii) the number of units of phantom stock credited to
the holder pursuant to such award and as to which the vesting period has
expired. Payment of such amount may be made in the form of cash, or shares of
Sentry Common Stock, or a combination of cash or shares, pursuant to such terms
and conditions as are determined by the Sentry Board. The vesting period
generally expires in accordance with a schedule or other conditions as are
determined by the Sentry Board; however, the vesting period completely expires,
and all amounts become payable immediately upon the death or disability of the
holder, upon a Change of Control while the holder is employed by, or serving as
a director of, Sentry or a subsidiary or upon the occurrence of such special
circumstances as in the opinion of the Sentry Board merit special consideration.
91
The holder of a phantom stock award is credited with amounts equal to
the dividends payable with respect to the same number of shares of Sentry Common
Stock as the number of phantom stock units credited under the award; however,
such dividend-equivalent amounts may be retained by Sentry for the holder's
account, to be distributed to the holder at the time, and to the extent that,
the vesting period with respect to such number of units shall have expired.
Each Incentive Award (other than grants of restricted stock) contains
anti-dilution provisions which will automatically adjust the number of shares
subject to Incentive Awards in the event of a stock dividend, split-up,
conversion, exchange, reclassification or substitution. In the event of any
other change in the corporate structure or outstanding shares of Sentry Common
Stock, the Sentry Board may make such equitable adjustments to the number of
shares and the class of shares available under the 1997 Plan or to any
outstanding Incentive Awards as it shall deem appropriate to prevent dilution or
enlargement of rights. Notwithstanding the preceding, in the event of a
termination of employment or service in connection with a Change of Control if
such Change of Control is not approved by a majority of the Existing Directors
(as defined in Sentry's Certificate of Incorporation), such holder shall be
entitled to receive an amount of cash in lieu of shares of Sentry Common Stock
upon the exercise of such options.
Sentry shall obtain such consideration for granting Incentive Awards
under the 1997 Plan as the Sentry Board in its discretion may request.
Each Incentive Award may be subject to provisions to assure that any
exercise or disposition of Sentry Common Stock will not violate the securities
laws.
No Incentive Award may be granted under the 1997 Plan after January 14,
2007.
The Sentry Board may at any time withdraw or amend the 1997 Plan and
may, with the consent of the affected holder of an outstanding Incentive Award,
at any time withdraw or amend the terms and conditions of outstanding Incentive
Awards. Any amendment which would increase the number of shares issuable
pursuant to Incentive Awards or change the class of individuals to whom
Incentive Awards may be granted shall be subject to the approval of the
stockholders of Sentry within one year of such amendment.
The 1997 Plan and all awards thereunder (other than options granted in
substitution for Knogo and Video options) are conditioned upon approval of the
1997 Plan by the stockholders of Sentry within one year after its date of
adoption by the Sentry Board.
Federal Income Tax Consequences of the 1997 Plan
The Federal income tax consequences to an individual who receives
incentive stock options generally will, under current law, be as follows:
An individual will not realize any income upon the grant or exercise of
an incentive stock option. If the individual disposes of the shares of Sentry
Common Stock acquired upon the exercise of an incentive stock option more than
two years after the date the option is granted and more than one year after
Sentry Common Stock is transferred to him or her, the individual will realize
long-term capital gain in an amount equal to the excess, if any, of his or her
selling price for the shares over the option exercise price. In such case,
Sentry will not be entitled to any tax deduction resulting from the issuance or
sale of the shares. If the individual disposes of the shares of Sentry Common
Stock acquired upon the exercise of an incentive stock option prior to the
expiration of two years from the date the option is granted, or one year from
the date Sentry Common Stock is transferred to him or her, any gain realized
will be taxable at such time as follows: (a) as ordinary income to the extent of
the difference between the option exercise price and the lesser of the fair
market value of the shares on the date the option was exercised or the amount
realized from such disposition, and (b) as capital gain to the extent of any
excess over the amount described in clause (a), which excess shall be treated as
short-term or long-term capital gain depending upon the holding period of Sentry
Common Stock. In such case, Sentry may claim an income tax deduction (as
compensation) for the amount taxable to the individual as ordinary income.
In general, the difference between the fair market value of Sentry
Common Stock at the time the incentive stock option is exercised and the option
exercise price will constitute an item of adjustment, for purposes of
92
determining alternative minimum taxable income, and under certain circumstances
may be subject, in the year in which the option is exercised, to the alternative
minimum tax.
If an individual uses shares of Sentry Common Stock which he or she
owns to pay, in whole or in part, the exercise price for shares acquired
pursuant to an incentive stock option, (a) the holding period for the newly
issued shares of Sentry Common Stock equal in value to the old shares which were
surrendered upon the exercise shall include the period during which the old
shares were held, (b) the individual's basis in such newly issued shares will be
the same as his or her basis in the old shares surrendered and (c) no gain or
loss will be recognized by the individual on the old shares surrendered.
However, if any individual uses shares previously acquired pursuant to the
exercise of an incentive stock option to pay all or part of the exercise price
under an incentive stock option, such tender will constitute a disposition of
such previously acquired shares for purposes of the one-year (or two-year)
holding period requirement applicable to such incentive stock option and such
tender may be treated as a taxable exchange.
The Federal income tax consequences to an individual who receives
non-qualified stock options generally will, under current law, be as follows:
An individual will not realize any income at the time the option is
granted. Generally, an individual will realize ordinary income, at the time the
option is exercised in a total amount equal to the excess of the then fair
market value of Sentry Common Stock acquired over the exercise price. However,
Section 83 of the Code provides that, if a director, officer or principal
stockholder (i.e., an owner of more than 10% of the outstanding shares of Sentry
Common Stock) receives shares pursuant to the exercise of a non-qualified stock
option, he or she is not required to recognize any income until the date on
which such shares can be sold at a profit without liability under Section 16(b)
of the Exchange Act. At such time, the director, officer or principal
stockholder will realize income equal to the amount by which the then fair
market value of the shares acquired pursuant to the exercise of such option
exceeds the price paid for such shares. Alternatively, a director, officer or
principal stockholder who would not otherwise be taxed at the time the shares
are transferred may file a written election within 30 days with the Internal
Revenue Service, to be taxed as of the date of transfer, on the difference
between the then fair market value of the shares and the price paid for such
shares.
All income realized upon the exercise of a non-qualified stock option
will be taxed as ordinary income. Sentry generally will be entitled to a tax
deduction (as compensation expense) for the amount taxable to an individual
(including a director, officer and principal stockholder) upon the exercise of a
non-qualified stock option, as described above, in the same year as those
amounts are taxable to the individual.
Shares of Sentry Common Stock issued pursuant to the exercise of a
non-qualified stock option generally will constitute a capital asset in the
hands of an individual and will be eligible for capital gain or loss treatment
upon any subsequent disposition. The holding period of an individual will
commence upon the date he or she recognizes income with respect to the issuance
of such shares, as described above. The individual's basis in the shares will be
equal to the greater of their fair market value as of that date or the amount
paid for such shares. If, however, he or she uses shares of Sentry Common Stock
which he or she owns to pay, in whole or in part, the exercise price for shares
acquired pursuant to the exercise of a non-qualified stock option, (a) the
holding period for the newly issued shares of Sentry Common Stock equal in value
to the old shares which were surrendered upon the exercise shall include the
period during which the old shares were held, (b) the basis in such newly issued
shares will be the same as his or her basis in the surrendered shares, (c) no
gain or loss will be realized by the individual on the old shares surrendered,
and (d) the individual will realize ordinary income in an amount equal to the
fair market value of the additional number of shares received over and above the
number of old shares surrendered.
The Federal income tax consequences to an individual who receives
restricted stock awards generally will, under current law, be as follows:
An individual will not realize any income when the right to acquire
shares subject to restricted stock awards ("Restricted Shares") is granted, or
when the certificates for the Restricted Shares themselves are registered in his
or her name. The individual will realize ordinary income as and when the
Restricted Shares are no longer subject to a substantial risk of forfeiture
(which risk of forfeiture includes the restrictions imposed by Section 16(b) of
the Exchange Act), in an amount equal to the difference between the fair market
value of the Restricted Shares as of such date and the price he or she paid for
such shares. Alternatively, the individual can file a written election with
93
the Internal Revenue Service, no more than 30 days after the certificates for
the Restricted Shares are issued, to be taxed as of the date of issuance on the
difference between the then fair market value of the Restricted Shares and the
price he or she paid for such shares. Once the individual has realized ordinary
income with respect to the Restricted Shares, any subsequent increase in the
value of the Restricted Shares generally will be taxed when the shares are sold
as long-term or short-term capital gain depending on how long the Restricted
Shares are held. The individual's holding period with respect to the Restricted
Shares will begin on the date he or she realizes ordinary income with respect to
the Restricted Shares and the basis in the shares will be equal to their then
fair market value. Sentry generally will be entitled to a tax deduction when,
and to the extent, ordinary income is realized by the individual with respect to
such shares. Any dividends or other distributions paid on the Restricted Shares
generally will be taxable when distributed to the individual.
An individual will be subject to tax, at ordinary income rates, on the
amount of cash and the fair market value of any property received upon the
exercise of any stock appreciation rights or upon the expiration of the vesting
period under a phantom stock award. Sentry generally will be entitled to a tax
deduction equal to the amount includible in the individual's income.
In addition to the Federal income tax consequences discussed above,
Section 280G of the Code provides that if an officer, stockholder or highly
compensated individual receives a payment which is in the nature of compensation
and which is contingent upon a change of control of the employer, and such
payment equals or exceeds three times his or her "base salary" (as hereinafter
defined), then any amount received in excess of the base salary shall be
considered an "excess parachute payment." An individual's "base salary" is equal
to his or her average annual compensation over the five-year period (or period
of employment, if shorter) ending with the close of the individual's taxable
year immediately preceding the taxable year in which the change of control
occurs. If the taxpayer establishes, by clear and convincing evidence, that an
amount received is reasonable compensation for past or future services, all or a
portion of such amount may be deemed not to be an excess parachute payment. If
any payments made under the 1997 Plan in connection with a change of control of
Sentry constitute excess parachute payments with respect to any individual, then
in addition to any income tax which would otherwise be owed on such payment, the
individual will be subject to an excise tax equal to 20% of such excess
parachute payment and Sentry will not be entitled to any tax deduction to which
it otherwise would have been entitled with respect to such excess parachute
payment.
Section 280G provides that payments made pursuant to a contract entered
into within one year of the change of control are presumed to be parachute
payments unless the individual establishes, by clear and convincing evidence,
that such contract was not entered into in contemplation of a change in control.
In addition, the General Explanation of the Tax Reform Act of 1984 prepared by
the Staff of the Joint Committee on Taxation indicates that the grant of an
Incentive Award within one year of the change of control or the acceleration of
an Incentive Award because of a change of control may be considered a parachute
payment, in an amount equal to the value of the Incentive Award, as the case may
be. Pursuant to proposed regulations issued by the Treasury Department under
Section 280G, the acceleration of non-qualified stock option, stock appreciation
rights, a restricted stock award or phantom stock award because of a change of
control is considered a parachute payment in an amount equal to the value of the
accelerated portion of the option, rights or award. Even if the grant of an
Incentive Award within one year of the change of control or the acceleration of
an Incentive Award is not a parachute payment for purposes of Section 280C, the
exercise of a stock option or stock appreciation right granted within one year
of the change of control or the exercise of the accelerated portion of a stock
option or stock appreciation right may result in a parachute payment, in an
amount equal to the excess of the fair market value of the shares received upon
exercise of the option over the exercise price (or the cash or fair market value
of shares received upon the exercise of stock appreciation rights). Payments
received for the cancellation of an Incentive Award because of a change of
control may also result in parachute payments.
Under Section 162(m) of the Code, publicly held companies may not
deduct compensation for certain individuals to the extent that such compensation
exceeds for an individual for the taxable year. The $1 million limitation
applies to Sentry's Chief Executive Officer and Sentry's two other executive
officers. Compensation which is performance based (as defined in the Code and
rules and regulations thereunder) however, is not counted as subject to the
deductibility limitation of Section 162(m) of the Code. Income pursuant to stock
options, rights, restricted stock awards and phantom stock awards under the 1997
Plan would be subject to the deductibility limitations of Section 162(m) of the
Code.
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The foregoing summary with respect to federal income taxation does not
purport to be complete and reference is made to the applicable provisions of the
Code.
Sentry Retirement Savings 401(k) Plan
As of the Effective Time Sentry will have adopted and become the
sponsor of the Sentry Technology Corporation Retirement Savings 401(k) Plan (the
"Sentry Savings Plan"), formerly the Knogo North America Inc. Retirement Savings
401(k) Plan (the "Knogo Savings Plan"), which is intended to be a qualified plan
under Sections 401(a) and 401(k) of the Code. All employees of Sentry are
eligible to participate in the Sentry Savings Plan following the date any such
employee attains the age of twenty-one and completes one year of service with
Sentry. Prior service with Knogo and Video will be credited for all purposes
under the Sentry Savings Plan. Each participant may elect to defer the receipt
of between 1% and 10% of such participant's compensation (a "Deferral Election")
and have Sentry contribute such compensation to the Sentry Savings Plan, on such
participant's behalf, up to an annual statutory limitation. For 1996, a
participant cannot elect to defer more than $9,500. This amount is adjusted by
the Secretary of the Treasury to reflect increases in the cost of living.
An eligible employee may also elect to defer from 1% to 10% of his or
her compensation on an after-tax basis (an "After-Tax Contribution") and have
Sentry contribute such compensation to the Sentry Savings Plan, on such
participant's behalf. An eligible employee may not elect to defer more than 15%
of such participant's compensation as to both the participant's Deferral
Election and After-Tax Contributions.
In addition to the contribution made pursuant to each participant's
Deferral Election and any After-Tax Contributions, Sentry will make a matching
contribution (a "Matching Contribution") in an amount equal to a percentage of
the participant's Deferral Election designated by the Compensation Committee of
the Sentry Board. Sentry may also contribute a discretionary matching
contribution (a "Discretionary Matching Contribution") and discretionary
non-matching contribution (a "Discretionary Non-Matching-Contribution") for any
plan year which will be conditioned upon the participant being an active
employee as of December 31 of the year, except in cases of an approved leave of
absence, death or normal, early or disability retirement.
Sentry's Matching Contributions, Discretionary Matching Contributions,
Discretionary Non-Matching Contributions and earnings thereon will become
nonforfeitable at a 20% rate for each year of service completed by the
participant, so that the participant will be fully vested upon completing five
years of service. However, such contributions will become fully vested
regardless of years of service if the participant's employment terminates by
reason of retirement, disability or death. A participant is always 100% vested
in such participant's other benefits under the Sentry Savings Plan.
All of the contributions under the Sentry Savings Plan will be held in
trust (the "Trust") and allocated to one or more accounts maintained on behalf
of each participant (the "Accounts"). The Trust will be divided into four
investment vehicles, including the Sentry Common Stock Fund. When an eligible
employee becomes a participant, the employee can elect (in multiples of 5%) to
have all or part of the Participant's Elective Deferrals and After-Tax
Contributions invested in one or more of the funds. The Matching Contribution,
Discretionary Matching Contributions and Discretionary Non-Matching
Contributions will automatically be invested in the Sentry Common Stock Fund.
Any dividends paid on shares of Sentry Common Stock in said Fund will be
reinvested in additional shares of Sentry Common Stock.
When a participant stops working for Sentry for any reason, the
participant will be entitled to receive an amount equal to the vested value of
such participant's accounts. A participant's benefit will be paid to such
participant, or, in the case of his or her death, to such participant's
beneficiary, in a lump sum payable in either cash or Sentry Common Stock, to the
extent that any funds have been invested in Sentry's Common Stock Fund under the
Sentry Savings Plan. Also, all or a part of certain amounts contributed to the
Sentry Savings Plan may be withdrawn, in the case of financial hardship.
Finally, a participant may borrow the invested amounts allocated to such
participant's account, up to certain specified limits. Interest will be payable
to the Sentry Savings Plan on any amounts borrowed.
The Sentry Savings Plan will be administered by the Committee. The
expenses of administering the Sentry Savings Plan will be paid by the Sentry
Savings Plan, unless Sentry elects to pay such expenses directly.
95
SENTRY SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the anticipated beneficial ownership of
Sentry Common Stock, after giving effect to the Merger, as to each person
expected to be (i) the beneficial owner of five percent or more of the shares of
Sentry Common Stock, (ii) a Sentry director, (iii) an executive officer of
Sentry and (iv) all persons expected to be Sentry directors and executive
officers, as a group. This table includes shares subject to options which will
vest as a result of the Merger.
Name Number of Shares Percent of Class(1)
---- ---------------- -------------------
Thomas A. Nicolette 336,242(2) 3.4%
Peter J. Mundy 91,241(3) *
Andrew L. Benson 194,278 2.0%
Peter Y. Zhou 84,372(4) *
William A. Perlmuth 902,368(5) 9.3%
Robert D. Furst, Jr. 976,672(6) 10.0%
Walter & Edwin Schloss Associates L.P. 533,605(7) 5.5%
All Sentry directors and executive
officers as a group 2,585,173(8) 25.4%
- ---------------------------
* Less than one percent
(1) Based on 9,643,685 shares outstanding as of the completion of the
Merger. Each figure showing the percentage of outstanding shares
beneficially owned has been calculated by treating as outstanding and
owned the shares which could be purchased by the indicated person
within 60 days upon exercise of stock options.
(2) Excludes 41,590 shares held by a trust for the benefit of Mr.
Nicolette's wife, as to which shares Mr. Nicolette disclaims beneficial
ownership. Includes 74,862 shares held by Mr. Nicolette as co-trustee
under trusts for the benefit of his minor children and as to which
shares Mr. Nicolette disclaims beneficial ownership. Also includes
197,138 shares issuable upon the exercise of stock options exercisable
within 60 days from the date hereof. Also includes 25,001 shares
resulting from the conversion of shares of Video Common Stock owned by
Mr. Nicolette prior to the Merger.
(3) Includes 73,615 shares issuable upon the exercise of stock options
exercisable within 60 days from the date hereof.
(4) Includes 70,703 shares issuable upon the exercise of stock options
exercisable within 60 days from the date hereof.
(5) Consists of (a) 750,729 shares held by Mr. Perlmuth as Executor of the
Estate of Arthur J. Minasy, (b) 130,011 shares held by Mr. Perlmuth as
trustee under trusts for the benefit of Mr. Minasy's adult children,
and (c) 3,327 shares beneficially owned by Mr. Perlmuth. Also includes
18,299 shares issuable upon the exercise of stock options exercisable
within 60 days from the date hereof. Under the policies of the law firm
of which he is a member, Mr. Perlmuth will share any economic benefits
of the options with the other members of such firm.
(6) Includes 175,182 shares which could be purchased upon the exercise of
existing options and warrants which are currently exercisable or which
will become exercisable within 60 days from the date hereof.
(7) Includes 7,070 shares beneficially owned solely by Mr. Walter J.
Schloss and 5,822 shares beneficially owned solely by Mr. Edwin W.
Schloss.
(8) Includes 534,937 shares which could be purchased upon the exercise of
existing options and warrants which are currently exercisable or which
will become exercisable within 60 days from the date hereof.
96
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
The Video Common Stock is listed on the NASDAQ SmallCap under the
symbol VSEN. The Knogo Common Stock is listed on the AMEX under the symbol KNA.
The table below sets forth, for the calendar quarters indicated, the
reported high and low sales prices of Video Common Stock and Knogo Common Stock
as reported on the NASDAQ SmallCap and AMEX, respectively, in each case based on
published financial sources, and the dividends declared on such stock.
The Video Common Stock began trading on the NASDAQ SmallCap on October
21, 1994. Prior to such date, there was no public market for the Video Common
Stock. The Knogo Common Stock began trading on the AMEX on January 3, 1995.
Prior to such date, there was no public market for the Knogo Common Stock.
Video Common Stock Knogo Common Stock
----------------------------------- ------------------------------
High Low Dividends High Low Dividends
---- --- --------- ---- --- ---------
1994
Fourth Quarter (beginning
October 21, 1994).................. $ 6 $ 4-1/4 -- -- -- --
1995
First Quarter (beginning
January 3, 1995, with
respect to Knogo).................. 7-3/4 5 -- $ 3-3/8 $ 2-1/2 --
Second Quarter .................... 12-7/8 6-3/8 -- 4-3/8 2-3/8 --
Third Quarter ..................... 14-1/8 11-1/8 -- 8-1/16 3-11/16 --
Fourth Quarter .................... 13-1/4 7-1/4 -- 7-7/16 5-9/16 --
1996
First Quarter .................... 9-1/2 5-1/8 -- 7-7/8 5-7/8 --
Second Quarter .................... 9-3/8 5-7/8 -- 14-1/2 9-1/2 --
Third Quarter ..................... 7-1/8 2-1/8 -- 8-5/8 7 --
Fourth Quarter..................... 5 1-3/4 -- 9-3/8 4-3/8 --
<FN>
- ---------------------------
On October 10, 1996, the last full trading day prior to the public
announcement of the proposed Merger, the closing price on the NASDAQ SmallCap
was $4-3/8 per share of Video Common Stock and on the AMEX was $8-5/16 per
share of Knogo Common Stock. On January 17, 1997, the most recent practicable
date prior to the printing of this Joint Proxy Statement/Prospectus, the closing
price on the NASDAQ SmallCap was $2-7/8 per share of Video Common Stock and on
the AMEX was $5-1/2 per share of Knogo Common Stock. Holders of Video Common
Stock and Knogo Common Stock are urged to obtain current market quotations prior
to making any decision with respect to the Merger.
</FN>
The payment of future dividends on Sentry Common Stock will be a
business decision to be made by the Board of Directors of Sentry from
time-to-time based upon the results of operations and financial condition of
Sentry and such other factors as the Sentry Board of Directors considers
relevant. Sentry has not paid, and does not presently intend to pay or consider
the payment of, any cash dividends on the Sentry Common Stock. Pursuant to the
terms of the Merger Agreement, Sentry is required to pay certain annual or
semiannual dividends on the Sentry Class A Preferred Stock as more fully
described under "Description Of Sentry Capital Stock -- Preferred Stock -- Class
A Preferred Stock."
97
SELECTED HISTORICAL FINANCIAL INFORMATION OF VIDEO
The following table sets forth selected historical financial
information of Video and has been derived from and should be read in conjunction
with Video's audited financial statements and unaudited interim financial
statements, including the notes thereto, which are contained elsewhere in this
Joint Proxy Statement/Prospectus. Unaudited interim data reflects, in the
opinion of Video's management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of results
for such interim periods. Results of operations for unaudited interim periods
are not necessarily indicative of results which may be expected for any other
interim or annual period.
(In thousands, except per share data)
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
Statement of Operations
Data:
Sales $ -- $ 257 $ 744 $ 4,241 $ 8,610 $ 7,768 $ 2,000
Cost of sales -- 188 564 3,440 7,343 5,899 3,085
Gross margin -- 69 180 801 1,267 1,869 (1,085)
Operating expenses 231 663 1,048 1,549 3,046 1,951 1,867
Net income (loss) (231) (599) (916) (847) (1,681) 12 (3,035)
Net income (loss) per (0.16) (0.30) (0.38) (0.31) (0.36) 0.00 (0.63)
share(1)
Weighted average number
of shares outstanding(1) 1,400 2,012 2,388 2,748 4,674 5,208 4,809
Balance Sheet Data:
(at end of period)
Working capital (deficit) $ (142) $ (195) $(1,047) $ 5,163 $ 2,760 $ 4,531 $ 41
Total assets 45 294 491 6,342 6,615 7,562 5,251
Total shareholders' equity
(deficit) (120) (123) (959) 5,349 3,876 5,570 1,128
<FN>
- -----------------
See the notes to the Financial Statements included elsewhere herein.
(1) Computed on the basis described in Note 1 of Notes to Financial
Statements of Video.
</FN>
98
SELECTED HISTORICAL FINANCIAL INFORMATION OF KNOGO
Knogo was incorporated in August 1994. However, information with
respect to the historical results of operations of Knogo is presented as if the
Spinoff and Merger with Sensormatic Electronics Corporation were consummated as
of March 1, 1991. The table below sets forth selected historical consolidated
financial information of Knogo for each of the three years in the period ended
February 28, 1994, the ten month period ended December 31, 1994, the year ended
December 31, 1995 and the nine months period ended September 30, 1995 and 1996.
This selected historical consolidated financial information includes certain
assets and liabilities of Knogo, on a historical basis, relating to Knogo's
operations in the United States, Canada and Puerto Rico. The selected historical
consolidated financial information for the year ended February 28, 1994, the 10
month period ended December 31, 1994 and the year ended December 31, 1995 have
been derived from the audited financial statements of Knogo contained elsewhere
in this Joint Proxy Statement/Prospectus. The selected historical consolidated
information for the year ended February 29, 1992 and February 28, 1993 and as of
February 28, 1994 has been derived from the audited financial statements of
Knogo not included in this Joint Proxy Statement/Prospectus. The selected
historical consolidated financial information as of February 28, 1992 has been
derived from the unaudited financial statements of Knogo not included in this
Joint Proxy Statement/Prospectus. The selected historical consolidated financial
information for the nine month periods ended September 30, 1995 and 1996 have
been derived from the unaudited financial statements of Knogo included elsewhere
in this Joint Proxy Statement/Prospectus. In the opinion of management, the
unaudited consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for such
periods. The results for the interim periods are not necessarily indicative of
the results for the related full fiscal year. The selected historical
consolidated information should be read in conjunction with, and is qualified in
its entirety by, the Consolidated Financial Statements of Knogo and the notes
thereto and the other financial information included elsewhere in this Joint
Proxy Statement/Prospectus.
(Amounts in thousands except for per share data)
Year ended the last Ten Months Ended Year Ended Nine Months Ended
day of February December 31, December 31, September 30,
---------------------------- ------------ ------------ ----------------
1992 1993 1994 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
Summary of Operations Data:
Sales of security devices and
related interest income, service
rentals and other ..................$ 24,242 $ 22,592 $ 18,243 $ 13,724 $ 17,361 $ 13,327 $ 14,190
Sales to affiliates/Sensormatic ..... 9,734 10,072 11,375 6,957 12,043 9,062 3,990
Total revenues ...................... 33,976 32,664 29,618 20,681 29,404 22,389 18,180
Cost of sales ....................... 16,832 16,697 14,631 10,041 14,425 11,168 9,398
Customer service expenses ........... 4,046 3,969 3,984 3,353 3,235 2,621 2,197
Selling, general and
administrative expenses ............ 11,926 9,819 9,227 9,548 8,235 6,143 5,387
Income (loss) before income
taxes ............................. (738) 1,148 762 (2,858) 1,941 1,265 2,655**
Net income (loss) ................... (1,057) 624 123 (2,833) 1,731 1,075 1,991
Net income per share ................ * * * * 0.29 0.18 0.33
Selected Balance Sheet Data:
(at end of period)
Total assets ........................$ 36,193 $ 33,546 $ 34,583 $ 26,522 $ 29,338 $ 28,257 $ 30,485
Property, plant and equipment,
net ............................... 13,753 13,092 12,830 9,842 9,081 9,222 8,950
Long term bank debt ................. -- -- -- -- -- -- --
Obligations under capital leases .... -- 797 688 945 748 763 587
Total stockholders' equity .......... 32,056 28,308 27,055 20,888 22,669 21,953 24,858
<FN>
See the notes to the Consolidated Financial Statements of Knogo included
elsewhere herein.
* Historical per share data for earnings and dividends have not been
presented for periods prior to the year ended December 31, 1995 as
Knogo was not a publicly-held company during these periods.
** Includes a gain on the sale of assets of $2,462.
</FN>
99
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial
statements give effect to the Merger on a purchase accounting basis based on the
fair market value of Video's Common Stock at a price of $4.02 per share, the
estimated fair market value of the stock for a reasonable period before and
after October 10, 1996, the announcement date of the Merger. Upon consummation
of the Merger, shareholders of Knogo will own approximately 4,802,000 shares of
Sentry Common Stock based on an Exchange Ratio of 1.2022 shares of Knogo Common
Stock in exchange for each share of Sentry Common Stock, or approximately 49.8%
of the issued and outstanding Sentry Common Stock, plus one share of Sentry
Class A Preferred Stock. Video shareholders will own approximately 4,842,000
shares of Sentry Common Stock, or approximately 50.2% of the issued and
outstanding Sentry Common Stock. Although Video shareholders will have a
majority voting interest in Sentry based upon their common stock ownership
percentage, GAAP requires consideration of a number of factors, in addition to
voting interest, in determining the acquiring entity for purposes of purchase
accounting treatment. Such other factors to be considered include: (i) key
Sentry management positions will be held by individuals currently holding
similar such positions in Knogo; (ii) the assets, revenues and net earnings of
Knogo significantly exceed those of Video; and (iii) the market value of the
securities to be received by the former holders of Knogo Common Stock
significantly exceeds the market value of the securities to be received by the
former holders of Video Common Stock. As a result of these other factors, and
solely for accounting and financial reporting purposes, the Merger will be
accounted for as a reverse acquisition of Video by Knogo. Accordingly, the pro
forma financial information presented herein is the historical financial
statements of Knogo with purchase accounting adjustments to reflect the
acquisition of Video.
The pro forma combined condensed balance sheet assumes the Merger took
place on September 30, 1996, whereby Sentry acquired all of the outstanding
Video Common Stock at its fair value plus direct costs incurred, which are
estimated to be approximately $2,350,000. The pro forma combined condensed
statements of operations present Knogo's historical condensed consolidated
statements of operations for the fiscal year ended December 31, 1995 and the
nine months ended September 30, 1996 with Video's condensed statements of
operations for the same periods adjusted to give effect to the Merger as if the
Merger occurred on January 1, 1995. Unaudited Pro Forma Combined Condensed
Financial Information presented herein reflects the adjustments for (i) the
estimated allocation of purchase price to the assets acquired, including
goodwill and other intangibles, (ii) the write-off of non-recurring charges
related to in-process research and development, and (iii) the effect of
recurring charges related to the Merger, primarily the amortization of goodwill
and other intangibles. The Unaudited Pro Forma Combined Condensed Financial
Statements do not reflect any expected cost savings as a result of the Merger.
Knogo and Video are reviewing certain opportunities to reduce combined costs and
plan to eliminate duplicative operations. See "Business of Sentry." The annual
cost savings associated with reducing duplicative operating expenses is
estimated to be approximately $1,400,000 for the year ended December 31, 1995
and $890,000 for the nine months ended September 30, 1996. Under the purchase
accounting method, goodwill and other intangibles in the amount of approximately
$7,846,000 will be capitalized and non-recurring charges of approximately
$13,200,000 relating to in-process research and development will be expensed and
recorded in the quarter the Merger is consummated. These amounts are estimated
based on a preliminary purchase price allocation and a valuation of existing
technology and technology in-process. For a discussion of Video's in-process
research and development, see "Business of Video -- Product Development." The
fair market value of Video's technology was determined utilizing a discounted
cash flow approach at a discount rate of 15%. The charge for in-process research
and development equaled its estimated current fair value based on risk adjusted
cash flows of specifically identified technologies for which technological
feasibility has not yet been established and alternative future uses did not
exist. The actual amounts recorded will vary based upon completion of the final
purchase price allocations and valuation. The amortization of goodwill and other
intangibles after the Merger will have an adverse effect on the results of
operations of Sentry. See "Risk Factors -- Risks Related to the Merger."
The pro forma combined condensed financial statements are presented for
illustrative purposes only and are not necessarily indicative of either the
financial position or results of operations which would have been achieved had
the Merger been consummated on the dates described above and should not be
construed as representations of future operations.
These pro forma combined condensed financial statements are based on,
and should be read in conjunction with, the historical financial statements and
the related notes thereto of Knogo and Video, which are included elsewhere in
this Joint Proxy Statement/Prospectus.
100
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(in thousands)
Pro Forma Pro Forma
Knogo Video Adjustments Combined
----- ----- ----------- --------
ASSETS
CURRENT ASSETS
Cash $ 2,482 $ 99 $ -- $ 2,581
Accounts receivable 7,243 1,541 -- 8,784
Net investment in sales-type leases - current
portion 1,840 -- -- 1,840
Inventories 6,798 2,399 -- 9,197
Prepaid expenses and other current assets 504 110 -- 614
------- ------- ------- -------
Total current assets 18,867 4,149 23,016
NET INVESTMENT IN SALES-TYPE LEASES-
non-current portion 1,395 -- -- 1,395
SECURITY DEVICES ON LEASE, net 345 -- -- 345
PROPERTY, PLANT AND EQUIPMENT, net 8,950 370 (100)(a) 9,220
GOODWILL AND OTHER INTANGIBLES 349 732 7,876 (b) 8,957
OTHER ASSETS 579 -- -- 579
------- ------- ------- -------
$30,485 $ 5,251 $ 7,776 $43,512
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 999 $ 1,660 $ -- $2,659
Notes payable -- 2,110 -- 2,110
Accrued liabilities 2,834 323 2,650 (c)(d) 5,807
Obligations under capital leases - current portion 304 - -- 304
Deferred revenue 313 14 -- 327
------- ------- ------- -------
Total current liabilities 4,450 4,107 2,650 11,207
OTHER LONG-TERM LIABILITIES 283 16 -- 299
DEFERRED INCOME TAXES 435 -- -- 435
MINORITY INTEREST IN SUBSIDIARY 459 -- -- 459
REDEEMABLE CUMULATIVE PREFERRED STOCK -- -- 24,010 (e) 24,010
SHAREHOLDERS' EQUITY
Common stock and additional paid-in capital 21,136 7,911 (12,467)(e) 16,580
Retained earnings/ (Accumulated deficit) 3,722 (6,783) (6,417)(f)(g) (9,478)
------- ------- -------- -------
24,858 1,128 (18,884) 7,102
------- ------- -------- -------
$30,485 $ 5,251 $ 7,776 $43,512
======= ======= ======== =======
<FN>
See accompanying notes to unaudited pro forma combined condensed financial statements.
</FN>
101
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(in thousands)
Pro Forma Pro Forma
Knogo Video Adjustments Combined
----- ----- ----------- --------
REVENUES $29,404 $ 8,610 $ -- $38,014
COSTS AND EXPENSES
Cost of sales 17,660 7,343 -- 25,003
Selling, general and administrative expenses 8,235 2,439 (20)(i) 10,654
Amortization of goodwill and other intangibles -- -- 1,125 (h) 1,125
Research and development 1,537 607 -- 2,144
Interest (income) expense 31 (98) -- (67)
------- ------ ------- -------
27,463 10,291 1,105 38,859
------- ------ ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,941 (1,681) (1,105) (845)
PROVISION FOR INCOME TAXES 210 -- (60)(j) 150
------- ------ ------- -------
NET INCOME (LOSS) 1,731 (1,681) (1,045) (995)
PREFERRED STOCK DIVIDENDS -- -- (1,212)(k) (1,212)
------- ------ ------ ------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 1,731 $(1,681) $(2,257) $(2,207)
======= ======= ======= =======
NET INCOME (LOSS) PER SHARE $ 0.29 $ (0.36) $ (0.23)
======= ======= =======
WEIGHTED AVERAGE COMMON SHARES 5,887 4,674 9,400
======= ======= =======
<FN>
See accompanying notes to unaudited pro forma combined condensed financial statements.
</FN>
102
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(in thousands)
Pro Forma Pro Forma
Knogo Video Adjustments Combined
------- ------- ----------- --------
REVENUES $18,180 $ 2,000 $ -- $20,180
COSTS AND EXPENSES
Cost of sales 11,595 3,085 -- 14,680
Selling, general and administrative expenses 5,387 1,546 (15)(i) 6,918
Amortization of goodwill and other intangibles -- -- 844 (h) 844
Research and development 1,069 321 -- 1,390
Interest (income) expense (64) 83 -- 19
------- ------- ------- -------
17,987 5,035 829 23,851
------- ------- ------- -------
OPERATING PROFIT (LOSS) 193 (3,035) (829) (3,671)
OTHER INCOME 2,462 -- -- 2,462
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 2,655 (3,035) (829) (1,209)
PROVISION FOR INCOME TAXES 664 -- (568)(j) 96
------- ------- ------- -------
NET INCOME (LOSS) 1,991 (3,035) (261) (1,305)
PREFERRED STOCK DIVIDENDS -- -- (949)(k) (949)
------- ------- ------- -------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 1,991 $(3,035) $(1,210) $(2,254)
======= ======= ======= =======
NET INCOME (LOSS) PER SHARE $ 0.33 $ (0.63) $ (0.24)
======= ======= =======
WEIGHTED AVERAGE COMMON SHARES 6,101 4,809 9,604
======= ======= =======
<FN>
See accompanying notes to unaudited pro forma combined condensed financial statements.
</FN>
103
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Under purchase accounting, the total purchase price was allocated to
Video's assets and liabilities based upon their relative fair values.
Allocations are subject to valuations as of the date of the acquisition based
upon appraisal and other studies which are not yet completed. The purchase price
and preliminary allocation of the purchase price to assets purchased and
liabilities assumed are as follows:
(Dollars in
Thousands)
Purchase price $19,454
Acquisition costs 2,350
--------
Total estimated purchase price $21,804
========
Historical net book value $ 1,128
Estimated write-down of property, plant and equipment (100)
Liability for restructuring and integration costs (300)
Goodwill and other intangibles 7,876
In-process research and development 13,200
--------
$21,804
========
The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect
to the following pro forma adjustments:
(a) Represents the write-down of property, plant and equipment to its
estimated fair value at the balance sheet date.
(b) Represents goodwill and other intangible assets resulting from the
Merger to be amortized over a seven year useful life.
(c) The Company expects to incur costs of approximately $300,000 in
connection with the implementation of a formal plan to reduce
duplicative operating expenses. The charge primarily relates to costs
associated with combining the operations of the two companies and
includes severance benefits, closure of duplicate and excess facilities
and other expenses related to the Merger. This amount is a preliminary
estimate only and therefore is subject to change.
(d) Represents an accrual of approximately $2,350,000 for direct costs
related to the Merger.
(e) As of September 30, 1996, Knogo had outstanding approximately 5,773,000
shares of common stock and Video had outstanding approximately
4,842,000 shares of common stock. Based upon the Exchange Ratio
described above, as of September 30, 1996, Sentry would issue
approximately 4,802,000 shares of Sentry Common Stock plus
approximately 4,802,000 shares of Sentry Class A Preferred Stock in
exchange for all the outstanding shares of Knogo Common Stock and would
issue approximately 4,842,000 shares of Sentry Common Stock in exchange
for all the outstanding shares of Video Common Stock.
(f) Represents the elimination of Video's historical accumulated deficit.
(g) Represents the write-off of acquired in-process research and
development upon the consummation of the Merger currently estimated to
be $13,200,000. The actual amount of the write-off is subject to change
based on the completion of the valuation of existing technology and
technology in-process. This adjustment is excluded from the Unaudited
Pro Forma Combined Condensed Statement of Operations due to the
non-recurring nature of this expense.
104
The Unaudited Pro Forma Combined Condensed Statements of Operations give effect
to the following pro forma adjustments:
(h) Represents the amortization of goodwill and other intangibles
calculated as of January 1, 1995 over an estimated useful life of seven
years. Goodwill and other intangibles and the related amortization
expense are subject to possible adjustment resulting from the
completion of the final purchase price adjustments and the valuation
analysis.
(i) Represents the adjustment to depreciation expense based on the
estimated fair value of property, plant and equipment at January 1,
1995 over the current estimated useful lives.
(j) Represents the adjustment to income tax expense based on pro forma
income before income taxes. The provision for income taxes on a pro
forma combined basis primarily reflects the income taxes payable on
Sentry's earnings generated in Puerto Rico that cannot be offset
against Sentry's U.S. operations.
(k) Represents dividends accrued on the Sentry Class A Preferred Stock. The
Sentry Class A Preferred Stock dividends are cumulative non-cash,
payment-in-kind dividends, payable at a rate of 5% per annum of the $5
face value per share.
105
COMPARISON OF STOCKHOLDERS' RIGHTS WITH RESPECT TO SENTRY AND VIDEO
In connection with the Merger, the Video shareholders will be
converting their shares of Video Common Stock into shares of Sentry Common
Stock. The charter and bylaws of Sentry differ from those of Video in several
significant respects. Sentry is a Delaware corporation and Video is a Minnesota
corporation and because of the differences between the DGCL and the Minnesota
Act the rights of a holder of Video Common Stock differ from the rights of a
holder of Sentry Common Stock. Below is a summary of some of the important
differences between the charter documents of Sentry and Video and between the
DGCL and the Minnesota Act. It is not practical to summarize all of such
differences in this Joint Proxy Statement/Prospectus, but some of the principal
differences which could materially affect the rights of shareholders include the
following:
Liability and Indemnification
The DGCL permits a corporation's certificate of incorporation to limit
a director's exposure to monetary liability for breach of duty except for (a) a
breach of duty of loyalty, (b) failure to act in good faith, (c) intentional
misconduct, (d) violation of law or willful or negligent violation of certain
provisions in the DGCL imposing certain requirements with respect to stock
repurchases, redemptions and dividends or (e) for any other transactions from
which the directors derive an improper personal benefit. The Sentry Certificate
of Incorporation does contain such a provision limiting a director's liability
for monetary damages for breach of fiduciary duty to the fullest extent
permitted by the DGCL, and provides that any repeal or modification by the
stockholders of the limitation on director liability will not adversely affect
any right or protection existing at the time of such repeal or modification.
The Minnesota Act permits a corporation's articles of incorporation to
limit or eliminate a directors' liability for monetary damages for breach of
fiduciary duty except for (a) any breach of the duty of loyalty, (b) failure to
act in good faith, (c) intentional misconduct, (d) knowing violation of law, (e)
illegal distributions, (f) any transaction from which the director derived an
improper personal benefit, or (g) any act or omission occurring prior to the
effective date of the provision in the articles of incorporation limiting or
eliminating liability. Video's Articles of Incorporation include a provision
eliminating a director's liability to the fullest extent permitted by the
Minnesota Act.
The DGCL permits a corporation to indemnify its directors and officers
against expense, judgments, fines and amounts paid in settlement incurred by
them in connection with any pending, threatened or completed action or
proceeding. The Sentry Bylaws provide that Sentry shall indemnify its directors,
officers, other employees, and agents to the fullest extent permitted by law.
The Sentry Bylaws also permit it to secure insurance on behalf of an officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether the DGCL would permit
indemnification.
The Minnesota Act requires a corporation to indemnify its directors,
officers, and employees who are made or threatened to be made party to a
proceedings by reasons of the former or present capacity of the director,
officer or employees, against judgments, penalties, fines, settlements and
reasonable expenses, the Minnesota Act permits a corporation to prohibit or
limit indemnification by so providing in its Articles of Incorporation or its
Bylaws. Video has not limited the statutory indemnification in its articles of
incorporation, however, and its Bylaws state that Video shall indemnify such
persons for such expenses and liabilities, in such manner, under such
circumstances, and to such extent, as may be required or permitted as are
provided by law.
Dividends
The DGCL generally permits dividends to be paid out of any surplus,
defined as the excess of the net assets of the corporation over the amount
determined to be the capital of the corporation by the board of directors (which
amount cannot be less than the aggregate par value of all issued shares of
capital stock). The DGCL also permits a dividend to be paid out of net profits
of the current or the proceeding fiscal years, or both, unless net assets are
less than the capital of all outstanding shares of preferred stock.
106
Under the Minnesota Act a corporation may make a distribution only if
the board of directors has determined that the corporation is able, and the
corporation is in fact able, to pay its debts in the ordinary course of business
after making the distribution. A distribution may be made to holders of a class
or series of shares only if all amounts payable to holders of shares having a
preference are paid (except for those having waived rights to payment) and if
payment of such distribution does not reduce the net assets of the corporation
below the aggregate preferential amount payable upon liquidation (unless the
distribution is made to shareholders in the order of and to the extent of their
respective priorities). Although Video's Articles of Incorporation and Bylaws
provide that its directors may declare dividends whenever and in such amounts
as, in their opinion, the condition and affairs of the company shall render
advisable, Video is currently prohibited from paying dividends under its
Financing Agreement, dated March 29, 1996, with Republic Acceptance Corporation.
Accordingly, Sentry's ability to legally pay dividends may differ in
certain circumstances from that of Video. Sentry has not paid any cash dividends
on its equity securities and the Sentry Board currently intends to retain all
earnings for use in Sentry's business.
Special Meetings of the Stockholders
The DGCL provides that special meetings of the stockholders may be
called by the board of directors or by such other person or persons as may be
authorized in the certificate of incorporation or bylaws. Presently the Sentry
Bylaws provide that the special meetings may be called by a majority of the
Board of Directors or by the Chairman of the Board.
The Minnesota Act provides that special meetings of the shareholders
may be called by the chief executive officer; the chief financial officer; two
or more directors, any person authorized in the articles of incorporation or the
bylaws to do so; or a shareholder or shareholders holding 10% or more of the
voting power of all shares entitled to vote (except in the case of special
shareholder meetings called to address any action related to facilitating or
effecting a business combination, which requires a shareholder or shareholders
holding 25% or more of the voting power). Video's Bylaws provide that the
special meetings may be called in accordance with Minnesota law.
Charter Amendments
The DGCL requires that amendments to a certificate of incorporation be
approved by the affirmative vote of stockholders entitled to cast at least a
majority of the votes which all stockholders are entitled to cast, unless the
certificate of incorporation requires approval by a greater proportion of votes.
In addition, an amendment must be separately approved by a majority vote of all
outstanding shares of any class, whether or not otherwise entitled to vote, if
the amendment would increase or decrease the aggregate number of authorized
shares of such class, increase or decrease the par value of the shares of such
class, or change the powers, preferences or special rights of the shares of such
class so as to affect them adversely.
The Minnesota Act is similar to the DGCL, and entitles holders of
shares of a class or series to vote as a class or series on certain amendments,
including amendments which would (a) change the number of authorized shares of
such class or series, (b) change or adversely affect the rights and preferences
of such class or series, (c) create a new class or series of shares with rights
and preferences prior and superior to such class or series, or (d) rights and
preferences of a class or series with prior and superior rights and preferences
to such class or series.
Preemptive Rights
Under the DGCL, security holders of a corporation only have such
preemptive rights as may be provided in the corporation's certificate of
incorporation. The Sentry Certificate of Incorporation does not provide any
preemptive rights to any security holders.
The Minnesota Act provides that all security holders are entitled to
preemptive rights unless the articles of incorporation specifically deny or
limit preemptive rights. Video's Articles of Incorporation specifically deny
preemptive rights to its security holders.
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Voting Rights Generally
Under both the DGCL and the Minnesota Act, the affirmative vote of the
majority of shares present in person or represented by proxy at a duly held
meeting at which a quorum is present and entitled to vote on the subject matter
is deemed to be the act of the stockholders, unless the DGCL, the Minnesota Act,
the Sentry Certificate of Incorporation, the Sentry Bylaws, Video's Articles of
Incorporation or Video's Bylaws specify a different voting requirement.
The Sentry Certificate of Incorporation does not contain any super
majority voting requirements. The Sentry Certificate of Incorporation provides
for one class of Common Stock.
Except as may be otherwise provided in a preferred stock designation,
each holder of Sentry Common Stock will be entitled to one vote on each matter
submitted to a vote at a meeting of stockholders for each share of Sentry Common
Stock held of record by such holder as of the record date for such meeting. The
Sentry Bylaws provide that the holders of a majority of the stock issued and
outstanding and entitled to vote at such meeting, present in person or
represented by proxy, will constitute a quorum at all meetings of the
stockholders for the transaction of business thereat.
Video's Bylaws provide that the affirmative vote of the holders of the
greater of (1) a majority of the voting power of the shares present and entitled
to vote on the particular item of business, or (2) a majority of the voting
power of the minimum number of the shares entitled to vote that would constitute
a quorum for the transaction of business at the meeting is deemed to be the act
of the shareholders.
Action by Written Consent
Under the DGCL, unless otherwise provided in a corporation's
certificate of incorporation, any action that may be taken at any annual or
special meeting of stockholders may be taken without a meeting and without prior
notice, if a consent in writing, setting forth the action so taken, is signed by
the holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or taken such action at a meeting at
which all shares entitled to vote thereon were present and voted.
The Sentry Certificate of Incorporation does not permit the
stockholders of the corporation to take action by written consent.
Under the Minnesota Act, any action required or permitted to be taken
in any meeting of the shareholders may be taken without a meeting by a written
action signed by all of the shareholders. Any action required or permitted to be
taken by the board of directors may be taken by written action signed by all of
the directors, however, if a company's articles of incorporation so provides,
any action other than an action requiring shareholder approval may be taken by
written action signed by the number of directors that would be required to take
the same action at a meeting of the board of directors which all directors were
present. Video's Articles of Incorporation permit the Video Board to take
written action that is signed by less than all of the directors under the
circumstances permitted by the Minnesota Act.
Voting in the Election of Directors
In an election of directors for corporations for which cumulative
voting is provided, each share of stock normally having one vote is entitled to
a number of votes equal to the number of directors to be elected. A stockholder
may then cast all such votes for a single candidate or may allocate them among
as many candidates as the stockholder may choose. Without cumulative voting, the
holders of a majority of shares voting in the election of directors would have
the power to elect all the directors to be elected, and no person could be
elected without the support of holders of a majority of the shares.
Under the DGCL, cumulative voting is not mandatory and cumulative
voting rights must be provided in a corporation's certificate of incorporation
if stockholders are to be entitled to cumulative voting rights. The DGCL
requires that elections of directors be by written ballot, unless otherwise
provided in a corporation's certificate of incorporation.
108
The Sentry Certificate of Incorporation and Bylaws do not require the
election of directors by written ballot. The Sentry Certificate of Incorporation
does not provide for cumulative voting.
Under the Minnesota Act, cumulative voting for the election of
directors is required unless specifically limited or denied in the articles of
incorporation. Video's Articles of Incorporation specifically deny cumulative
voting rights to the Video shareholders.
Number and Qualification of Directors
Under the DGCL, the minimum number of directors is one. The DGCL
permits the board of directors alone to change the authorized number, or the
range, of directors by amendment to the bylaws, unless the directors are not
authorized in the certificate of incorporation, in which case a change in the
number of directors may be made only upon approval of such change by the
stockholders. The Sentry Board currently consists of five directors who shall be
elected by the holders of Sentry Common Stock with each share entitled to one
vote per share.
Under the Minnesota Act, the minimum number of directors is one and the
only qualification for directors is that they must be natural persons. The
Minnesota Act permits the number of directors to be fixed by the articles of
incorporation or bylaws, and the number of directors may be increased or
decreased by the shareholders or the board of directors in the manner permitted
by the articles of incorporation or bylaws. Video's Bylaws require the
shareholders or Video Board to establish the number of directors and permits the
number of directors to be increased or decreased by either the shareholders or
the Video Board from time-to-time, provided that the Video Board may not
decrease the number of directors below the number last designated by the
shareholders.
Classification of Board
A classified board is one in which a certain number, but not all, of
the directors are elected on a rotating basis each year. This method of electing
directors makes changes in the composition of the board of directors, and thus a
potential change in control of a corporation, a lengthier and more difficult
process.
The DGCL permits, but does not require, a classified board of
directors, with staggered terms under which one-half or one-third of the
directors are elected for terms of two or three years, respectively.
The Sentry Certificate of Incorporation provides for a classified Board
of Directors. Directors will be classified, with respect to the time for which
they severally hold office, into three classes, as nearly equal in number as
possible, designated Class I, Class II and Class III. Directors first appointed
to Class I will hold office for a term expiring at the first annual meeting
following the filing of the Sentry Certificate of Incorporation; directors first
appointed to Class II will hold office for a term expiring at the second annual
meeting following the filing of the Sentry Certificate of Incorporation;
directors first appointed to Class III will hold office for a term expiring at
the third annual meeting following the filing of the Sentry Certificate of
Incorporation.
The Minnesota Act permits, but does not require, a classified board of
directors, with the terms of any such classes to be provided for in the articles
of incorporation and bylaws. Neither Video's Articles of Incorporation or Bylaws
provide for the division of the Video Board into separate classes.
Removal of Directors
Under the DGCL, a director of a corporation that does not have a
classified board of directors or cumulative voting may be removed with or
without cause with the approval of a majority of the outstanding shares entitled
to vote at an election of directors. In the case of a corporation having
cumulative voting, if less than the entire board is to be removed, a director
may not be removed without cause unless the number of shares voted against such
removal would not be sufficient to elect the director under cumulative voting. A
director of a corporation with a classified board of directors may be removed
only for cause, unless the certificate of incorporation otherwise provides.
The Sentry Certificate of Incorporation provides for a classified board
of directors; therefore a Sentry director may be removed only with cause. In
addition, the Sentry Certificate of Incorporation provides that a director may
109
be removed for cause only upon the affirmative vote of the holders of at least
80% of the stock entitled to vote thereon.
Under the Minnesota Act, a director of a corporation that does not have
cumulative voting may be removed with or without cause with the approval of the
holders of a majority of the outstanding shares entitled to vote at an election
of directors. In the case of a corporation having cumulative voting, if less
than the entire board is to be removed, a director may not be removed without
cause unless the number of shares voted against such removal would not be
sufficient to elect the director under cumulative voting. Since Video's Articles
of Incorporation do not permit cumulative voting, the holders of a majority of
the shares of Special Meeting may remove a Video director at any time. Under the
Minnesota Act, a director may be removed by the affirmative vote of a majority
of the directors present at a meeting of the board of directors with or without
cause if that director was named by the board to fill a vacancy and was not
subsequently re-elected by the shareholders.
Filling Vacancies on the Board of Directors
Under the DGCL, vacancies and newly created directorships may be filled
by a majority of the directors then in office, although less than a quorum,
unless otherwise provided in the certificate of incorporation or bylaws.
However, if the certificate of incorporation directs that a particular class is
to elect such director, such vacancy may be filled only by the other directors
elected by such class. If, at the time of filling any vacancy or newly created
directorship, the directors then in office constitute less than a majority of
the whole board as constituted immediately prior to such increase, the Delaware
Court of Chancery may, upon application of stockholders holding at least 10% of
the total number of shares outstanding having the right to vote for such
directors, order an election to be held to fill any such vacancies or newly
created directorship or to replace the directors chosen by the directors then in
office.
Sentry's Board of Directors currently consist of five directors who
shall be elected by the holders of Sentry Common Stock with each share of Sentry
Common Stock entitled to one vote per share.
Under the Minnesota Act, unless different rules for filling vacancies
are provided for in the articles of incorporation or bylaws, vacancies on the
board of directors resulting in the death, resignation, removal or
disqualification of a director may be filled by the affirmative vote of a
majority of the remaining directors, even though less than a quorum, and
vacancies resulting from a newly-created directorship may be filled by the
affirmative vote of a majority of the directors serving at the time of the
increase. The shareholders may also elect a new director to fill a vacancy that
is created by the removal of a director by the shareholders. Neither Video's
Articles of Incorporation nor Bylaws created different rules for the filling of
vacancies on the Video Board.
Transactions Involving Directors
Under the DGCL, no contract or transaction between a corporation and
one or more of its directors or officers, or between a corporation and any other
entity in which one or more of its directors or officers are directors or
officers, or have a financial interest, is void or voidable if (i) the material
facts as to the director's or officer's relationship or interest and as to the
contract or transaction are disclosed or known to the board of directors or
committee, which authorizes the contract or transaction by the affirmative vote
of a majority of the disinterested directors; (ii) the material facts as to the
director's or officer's relationship or interest and as to the contract or
transaction are disclosed or known to the stockholders entitled to vote thereon,
and the contract or transaction is specifically approved by the stockholders; or
(iii) the contract or transaction is fair as to the corporation as of the time
it is authorized, approved or ratified by the board of directors, a committee
thereof, or the stockholders. A corporation may make loans to, guarantee the
obligations of or otherwise assist its officers or other employee and those of
this subsidiaries, including directors who are also officers or employees, when
such action, in the judgment of the directors, may reasonably be expected to
benefit the corporation.
Under the Minnesota Act, no contract or transaction between a
corporation and one or more of its directors, or between a corporation and any
other entity in which one or more of its directors are directors or officers, or
have a financial interest, is void or voidable if (i) the material facts as to
the director's relationship or interest and as to the contract or transaction
are disclosed or known to the board of directors or committee, which authorizes
the contract or transaction by the affirmative vote of a majority of the
disinterested directors; (ii) the material facts as to the director's
relationship or interest and to the contract or transaction are disclosed or
known to the shareholders
110
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by (a) the holders of two-thirds of the shares owned by
persons other than the interested director or directors, or (b) the holders of
all of the outstanding shares by the shareholders; or (iii) the contract or
transaction is fair and reasonable as to the corporation as of the time it is
authorized, approved or ratified by the board of directors, a committee thereof,
or the shareholders.
Mergers, Tender Offers and Sales or Substantially All of a Corporation's Assets
Under the DGCL, the principal terms of a merger generally require the
approval of the stockholders of each of the merging corporations, but do not
require the approval of the stockholders of any parent corporation, even when
the parent corporation's securities are to be used as consideration for the
merger. Unless otherwise required in a corporation's certificate of
incorporation, the DGCL does not require a stockholder vote of the surviving
corporation in a merger if (i) the merger agreement does not amend the existing
certificate of incorporation, (ii) each share of the surviving corporation
outstanding before the merger is an identical outstanding or treasury share
after the merger, and (iii) either no shares of the surviving corporation and no
securities convertible into such stock are to be issued in the merger or the
number of shares to be issued by the surviving corporation in the merger does
not exceed 20% of the shares outstanding immediately prior to the merger. A
disposition of substantially all of a corporation's assets requires the approval
of the outstanding shares of the corporation.
Under the Minnesota Act, the principal terms of a merger generally
require the approval of the holders of a majority of the shareholders of each of
the merging corporations, but do not require the approval of the shareholders of
any parent corporation, even when the parent corporation's securities are to be
used as consideration for the merger. Unless otherwise required in a
corporation's articles of incorporation, the Minnesota Act does not require a
shareholder vote of the surviving corporation in a merger if (i) the merger
agreement does not amend the existing articles of incorporation; (ii) each share
of the surviving corporation outstanding before the merger is an identical
outstanding share after the merger; and (iii) either no shares of the surviving
corporation and no securities convertible into stock are to be issued in the
merger or the number of shares to be issued by the surviving corporation in the
merger does not exceed 20% of the shares outstanding immediately prior to the
merger. Under the Minnesota Act, a disposition of substantially all of a
corporation's assets requires the approval of the holders of a majority of the
outstanding shares of the corporation.
Appraisal Rights
Under the DGCL, the right to receive the fair market value of
dissenting shares is made available to stockholders of a constituent corporation
in a merger or consolidation effected under the DGCL. Dissenters' rights of
appraisal are not available (i) with respect to the sale, lease or exchange of
all or substantially all of the assets of a corporation, (ii) with respect to a
merger or consolidation by a corporation the shares of which are either listed
on a national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or are held of record by more than 2,000 holders if
such stockholders receive only shares of the surviving corporation or shares of
any other corporation which are either listed on a national securities exchange
or held of record by more than 2,000 holders, plus cash in lieu of fractional
shares, or (iii) to stockholders of a parent corporation that is not itself a
constituent corporation in a merger transaction.
The Sentry Certificate of Incorporation and the Sentry Bylaws do not
contain any additional provisions relating to dissenters' rights of appraisal.
For a description of appraisal rights provided by the Minnesota Act in
the event of a merger, see "THE MERGER -- Dissenters' Rights." The Minnesota Act
also makes appraisal rights available to dissenting shareholders in the event of
certain actions including: (i) an amendment of the articles of incorporation
that materially and adversely affects the rights and preferences of the shares
of the dissenting shareholder in certain respects; (ii) a sale or transfer of
all or substantially all of the assets of the corporation; and (iii) any other
corporation action with respect to which the corporation's articles of
incorporation or bylaws given dissenting shareholders the right to obtain
payment for their shares. Video's Articles of Incorporation and Bylaws do not
grant any other appraisal rights.
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Anti-Takeover Provisions; Transactions with Interested Stockholders
Section 203 of the DGCL ("Section 203"), subject to certain exceptions,
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder (as defined below) owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (x)
by persons who are directors and also officers and (y) by employee stock plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to such date, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder. Section 203 defines a business combination to include:
(i) any merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the corporation; (iii)
subject to certain exceptions, any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the receipt
by the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an "interested stockholder" as any entity or person
beneficially owning fifteen percent or more of the outstanding voting stock of
the corporation and any entity or person affiliated with or controlling or
controlled by such entity or person. A Delaware corporation may elect not to be
subject to Section 203 by having its stockholders approve an amendment to its
certificate of incorporation or bylaws to such effect. Sentry has not made such
an election and, therefore, Section 203 may have an anti-takeover effect with
respect to Sentry.
The Minnesota Act requires approval by the disinterested shareholders
of any "control share acquisition" of stock of an "issuing public corporation"
if an acquiror exceeds specified levels of ownership (20%, 33 1/3% and 50%) of
the stock of the target corporation. This provision essentially requires a proxy
contest to approve such share acquisitions and delays the acquiror's purchase up
to 55 days while a special shareholders' meeting is held to vote on the
acquisition. The definition of "control share acquisition" excludes cash tender
offers for all outstanding shares if the offer has been approved in advance by
the board of directors of the target corporation, and acquisition by employee
benefit plans.
The Minnesota Act restricts transactions with a shareholder
("interested shareholder") acquiring 10% or more of the shares of a publicly
held (i.e., subject to the reporting requirements of the Exchange Act) "issuing
public corporation" unless the share acquisition or the transaction has been
approved by the corporation's board of directors prior to the acquisition of the
10% interest. An "issuing public corporation" is a corporation which has at
least 50 shareholders. For four years after the 10% threshold is exceeded
(absent prior board approval), the corporation cannot enter into a merger, sale
of substantial assets, loan, substantial issuance of stock, plan of liquidation
or reincorporation involving the interested shareholder or its affiliates.
Dissolution
Under the DGCL, unless the board of directors approves a proposal to
dissolve a corporation, the dissolution must be approved by stockholders holding
100% of the total voting power of the corporation. If the dissolution is
initiated by the board of directors, it need only be approved by a majority of
the corporation's stockholders.
Under the Minnesota Act, shareholders holding 50% or more of the total
voting power may authorize a corporation's dissolution, with or without the
approval of the corporation's board of directors.
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COMPARISON OF STOCKHOLDERS' RIGHTS WITH RESPECT TO SENTRY AND KNOGO
The following is a summary of certain differences between holders of
Sentry capital stock and holders of Knogo capital stock. The following
discussion is not intended to be complete and is qualified by reference to the
DGCL, the certificates of incorporation (including each certificate of
designations forming a part thereof) and bylaws of each of Sentry and Knogo.
Copies of the Sentry Certificate of Incorporation and Sentry Bylaws, in
substantially the forms to be adopted at the Effective Time, are attached to
this Joint Proxy Statement/Prospectus as Appendices F and G, respectively.
Sentry and Knogo are both organized under the laws of the State of
Delaware. Any differences, therefore, in the rights of holders of (i) Sentry
Common Stock and/or Sentry Class A Preferred Stock and (ii) Knogo Common Stock
arise primarily from differences in the respective certificates of incorporation
and bylaws of Sentry and Knogo. The Sentry Certificate of Incorporation and
Sentry Bylaws are substantially similar to the Amended and Restated Certificate
of Incorporation and Bylaws, respectively, of Knogo, except for certain matters
described below.
Authorized Capital and Par Value
The total number of authorized shares of capital stock of Knogo is
13,000,000 consisting of 10,000,000 shares of Knogo Common Stock and 3,000,000
shares of preferred stock, which preferred stock may be issued in one or more
series with such designation, relative powers, preferences, and rights and
qualifications, limitations, or restrictions, as the Knogo Board may determine.
The authorized capital stock of Sentry is described under "DESCRIPTION OF SENTRY
CAPITAL STOCK."
The par value of the Knogo Common Stock is $0.01 per share. The par
value of each of the Sentry Common Stock and the Sentry Class A Preferred Stock
is $0.001 per share. The principal effect of this change will be to somewhat
increase the amount that Sentry will have available to pay dividends or
repurchase or redeem stock. Except as set forth below and under "DESCRIPTION OF
SENTRY CAPITAL STOCK -- Preferred Stock -- Class A Preferred Stock" and in
Sentry's Certificate of Incorporation, Sentry does not currently intend to adopt
dividend and stock repurchase policies different from those of Knogo.
Sentry Class A Preferred Stock
As described above, Knogo's Amended and Restated Certificate of
Incorporation authorizes Knogo to issue blank check preferred stock; however, to
date, no series of preferred stock has been issued by Knogo. In contrast,
Sentry, which is also authorized to issue blank check preferred stock, is
designating a series of preferred stock, the Sentry Class A Preferred Stock,
which will be issued to holders of Knogo Common Stock as part of the Merger.
The terms of the Sentry Class A Preferred Stock, including the payment
of certain dividends thereon, are set forth in the Certificate of Designation
with respect to such stock, a copy of which, in substantially the form to be
adopted at the Effective Time, is attached to this Joint Proxy
Statement/Prospectus as part of Appendix F, and is summarized under "DESCRIPTION
OF SENTRY CAPITAL STOCK -- Preferred Stock -- Class A Preferred Stock."
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DESCRIPTION OF SENTRY CAPITAL STOCK
The summary of the terms of the stock of Sentry set forth below does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Sentry Certificate of Incorporation and the Sentry Bylaws.
Authorized Capital Stock
Under the Sentry Certificate of Incorporation, the total number of
shares of all classes of stock that Sentry has authority to issue is 50,000,000
shares, of which 40,000,000 are shares of Sentry Common Stock and 10,000,000 are
shares of Sentry Preferred Stock. Of the Sentry Preferred Stock, 6,000,000
shares have been designated Sentry Class A Preferred Stock with a face value of
$5.00 per share.
Common Stock
Holders of Sentry Common Stock will be entitled to one vote per share
on all matters voted on generally by the stockholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any series of Sentry Preferred Stock, the holders of such shares will
possess all voting power. The Sentry Certificate of Incorporation does not
provide for cumulative voting for the election of directors. Thus, under the
DGCL, the holders of more than one-half of the outstanding shares of Sentry
Common Stock generally will be able to elect all the directors of Sentry then
standing for election and holders of the remaining shares will not be able to
elect any director.
Subject to any preferential rights of any series of Sentry Preferred
Stock, holders of shares of Sentry Common Stock will be entitled to receive
dividends on such stock out of assets legally available for distribution when,
as and if authorized and declared by the Sentry Board and to share ratably in
the assets of Sentry legally available for distribution to its stockholders in
the event of its liquidation, dissolution or winding up.
Holders of Sentry Common Stock will have no preferences, preemptive,
conversion or exchange rights.
Under certain circumstances, the holders of at least 80% of the
outstanding voting stock of Sentry must approve (a) any merger or consolidation
with, any disposal of a substantial part of the assets of Sentry or any
subsidiary to, or any issuance or sale by Sentry or a subsidiary of any stock of
Sentry or a subsidiary to, a beneficial owner of 5% or more of the outstanding
voting stock of Sentry, unless such transaction is approved by the Sentry Board
and a majority of the directors so approving are continuing directors (as
defined in the Sentry Certificate of Incorporation), (b) any dissolution of
Sentry, any offer by Sentry to purchase its shares, or any reclassification,
recapitalization or other transaction designed to decrease the number of holders
of shares of Sentry's voting stock, if any person or entity is then the
beneficial owner of 5% or more of the outstanding voting stock of Sentry, unless
such action is approved by the Sentry Board and a majority of the directors so
approving are continuing directors, (c) any change in the provisions of the
Sentry Certificate of Incorporation or the Sentry Bylaws regarding the number,
classification, term of office, qualifications, election and removal of
directors and the filling of vacancies and newly created directorships, or the
provision to the effect that stockholders of Sentry may not take action by
written consent, or any changes in the provisions of the Sentry Certificate of
Incorporation regarding the limitation of liability of directors or the
indemnification of officers and directors, unless such change is submitted to
the stockholders with the unanimous recommendation of the entire Sentry Board,
or (d) any amendment to the foregoing supermajority voting requirements, unless
such amendment is submitted to the stockholders with the unanimous
recommendation of the entire Sentry Board.
Certain of the foregoing provisions of the Sentry Certificate of
Incorporation may make more difficult, and therefore discourage, attempts to
acquire control of Sentry through acquisitions of shares of Sentry Common Stock
or otherwise, in transactions not approved by the Sentry Board. As a result of
these provisions, transactions or proposed transactions which might have the
short-term effect of increasing the market price of Sentry Common Stock may be
discouraged, and management of Sentry may be able to resist changes which the
stockholders might otherwise have the power to impose. The division of the
Sentry Board into three classes could discourage third parties from seeking to
acquire control of such Board and could impede proxy contests or other attempts
to change Sentry's management.
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Preferred Stock
The Sentry Board is authorized to issue shares of Sentry Preferred
Stock, in one or more series or classes, and to fix for each such series voting
powers and such preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions as are
permitted by the DGCL. The Sentry Board could authorize the issuance of shares
of Sentry Preferred Stock with terms and conditions which could discourage a
takeover or other transaction that holders of some or a majority of shares of
Sentry Common Stock might believe to be in their best interests or in which such
holders might receive a premium for their shares of stock over the then market
price of such shares.
Class A Preferred Stock.
The Sentry Class A Preferred Stock shall, with respect to dividend
rights and rights on liquidation, winding up or dissolution, rank on parity
with, or junior to, as the case may be, any other classes or series of Preferred
Stock established by the Sentry Board. Such other classes or series of Preferred
Stock shall specifically provide that such class or series shall rank on parity
with, or senior to, the Sentry Class A Preferred Stock with respect to dividend
rights and rights on liquidation, winding up or dissolution. Furthermore, such
Sentry Class A Preferred Stock shall, except as described below, rank prior to
any other equity securities of Sentry with respect to dividend rights and rights
on liquidation, winding up or dissolution (all of such equity securities of
Sentry to which the Sentry Class A Preferred Stock ranks prior, including the
Common Stock, are at times collectively referred to herein as the "Junior
Stock").
The annual dividend rate on each share of the Sentry Class A Preferred
Stock shall be fixed at five percent (5%) of the Face Value, payable as
described below (the "Dividend"). The holders of shares of the Sentry Class A
Preferred Stock shall be entitled to receive Dividends on the following dates
(each, a "dividend payment date"): February 6, 1998 and 1999, August 6, 1999 and
2000, February 6, 2000 and 2001; the 12 month period ending on each of the first
two dividend payment dates is an "annual dividend period," the six month period
ending on each of the next four dividend payment dates is a "semi-annual
dividend period," and each such annual dividend period or semi-annual dividend
period is a "dividend period." Dividends (whether or not declared) shall be
payable in additional shares of the Sentry Class A Preferred Stock during the
two annual dividend periods ending on the first two dividend payment dates
subsequent to issuance of the Sentry Class A Preferred Stock, such that holders
shall receive a Dividend of 1/20th of a share of Sentry Class A Preferred Stock
for each share of Sentry Class A Preferred Stock held. Thereafter, the holders
of shares of the Sentry Class A Preferred Stock shall be entitled to receive, in
preference to dividends on the Junior Stock, and whether or not declared the
Dividend (including any Dividend accrued and unpaid) payable in cash, out of
funds legally available for the payment of dividends, such that holders shall
receive a Dividend of $0.25 for each share of Sentry Class A Preferred Stock
held, which Dividend shall accrue semi-annually and be due in equal installments
on each of the last four dividend payment dates. Each additional share of the
Sentry Class A Preferred Stock issued as a Dividend shall be valued at the Face
Value. All Dividends paid with respect to shares of the Sentry Class A Preferred
Stock pursuant to this paragraph shall be paid pro rata to the holders entitled
thereto.
Whenever, at any time or times, any Dividend payable shall be in
arrears, the holders of the outstanding shares of Sentry Class A Preferred Stock
shall have the right, voting separately as a class, to elect two directors of
Sentry no later than two years after such Dividend shall be, and continue, in
arrears. Upon the vesting of such right of the holders of Sentry Class A
Preferred Stock, the maximum authorized number of members of the Sentry Board
shall automatically be increased by two and the two vacancies so created shall
be filled by vote of the holders of the outstanding shares of Sentry Class A
Preferred Stock. The right of the holders of Sentry Class A Preferred Stock to
elect two members of the Sentry Board as aforesaid shall continue until such
time as all Dividends in arrears shall have been paid in full, at which time
such right shall terminate, except as herein or by law expressly provided,
subject to revesting in the event of each and every subsequent default of the
character above described.
If the Sentry Board declares, and Sentry pays or sets funds apart for
payment of, any dividend on any of the Junior Stock, the holders of the Sentry
Class A Preferred Stock shall share equally, share and share alike, in the
distribution of any and all dividends declared on such Junior Stock, provided
that for this purpose each share of Sentry Class A Preferred Stock shall be
treated as one share of such Junior Stock.
115
Adjustment of Hurdle Price. To preserve the actual or potential
economic value of the Sentry Class A Preferred Stock, if at any time after the
date of the Sentry Certificate of Incorporation, there shall be any change in
the Sentry Common Stock, whether by reason of stock dividends, stock splits,
recapitalizations, mergers, consolidations, combinations or exchanges of
securities, split-ups, split-offs, spin-offs, liquidations, other similar
changes in capitalization, any distribution or issuance of cash, assets,
evidences of indebtedness or subscription rights, options or warrants to holders
of Sentry Common Stock (other than regular cash dividends) or otherwise, then,
in each such event the Sentry Board shall make such appropriate adjustments in
the Hurdle Price (as defined below) such that following such adjustments, such
event shall not have had the effect of increasing, reducing or limiting the
benefits the holders of shares of Sentry Class A Preferred Stock would have had
absent such event.
The "Deemed Value" equals the Face Value plus the amount by which the
Closing Price (as defined below) exceeds the Hurdle Price (as defined below) on
the date of the relevant event. The "Hurdle Price" shall mean the amount that is
the average of the closing prices for a share of Sentry Common Stock on the 20
consecutive trading days ending on the trading date last preceding the first
anniversary of the Effective Time; provided, however, that in no event shall the
Hurdle Price be less than $5.00 or more than $6.50, such that (x) if such
average amount is less than $5.00, the Hurdle Price shall equal $5.00 and (y) if
such average amount is more than $6.50, the Hurdle Price shall equal $6.50. The
Hurdle Price is subject to certain adjustments in the event of certain changes
to the Sentry Common Stock to preserve the actual or potential economic value of
the Sentry Class A Preferred Stock. The "Closing Price" equals the average of
the closing prices for a share of Sentry Common Stock on the 20 consecutive
trading days ending on the trading date last preceding an optional redemption
date, the Mandatory Redemption Date (as defined below), the date of any
liquidation, dissolution or winding up of the affairs of Sentry, the closing
date of an Acquisition (as defined below), or the price per share of the Sentry
Common Stock issued in a Public Offering (as defined below), as the case may be,
as reported on NASDAQ, or if such closing prices shall not be reported on
NASDAQ, the average of the closing prices, regular way, for a share of such
security on the principal national securities exchange on which such security is
listed on such 20 consecutive trading days, or if such security is not listed on
any national securities exchange, the average of the mean between the closing
bid and asked prices of a share of such security on such 20 consecutive trading
days as reported, or if such prices shall not be so reported, as the same shall
be reported by the National Quotation Bureau, Incorporated or, in all other
cases, the value set in good faith by the Sentry Board.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of Sentry, the holders of
shares of the Sentry Class A Preferred Stock then outstanding shall be entitled
to be paid out of the assets of Sentry available for distribution to its
stockholders an amount in cash for each share outstanding equal to (i) the
Deemed Value, which as used herein shall equal the Face Value plus the amount by
which the Closing Price exceeds the Hurdle Price on the date of the relevant
event, on the date of such an event plus (ii) an amount in cash equal to all
accrued but unpaid Dividends thereon, plus additional dividends on unpaid
Dividends accrued prior to the commencement of the then-current dividend period,
to the date fixed for liquidation, before any payment shall be made or any
assets distributed to the holders of any of the Junior Stock. If the assets of
Sentry are not sufficient to pay in full the liquidation payments payable to the
holders of outstanding shares of the Sentry Class A Preferred Stock and any
other class or series of the Sentry Preferred Stock having liquidation rights on
parity with the shares of the Sentry Class A Preferred Stock, then the holders
of all such shares shall share ratably in such distribution of assets in
accordance with the amount which would be payable on such distribution if the
amounts to which the holders of outstanding shares of the Sentry Class A
Preferred Stock and the holders of outstanding shares of such other series of
the Sentry Preferred Stock are entitled were paid in full.
The liquidation payment with respect to each fractional share of the
Sentry Class A Preferred Stock outstanding, if any, shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each outstanding
share of the Sentry Class A Preferred Stock.
Notwithstanding any other provision of the Sentry Certificate of
Incorporation, in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of Sentry, the holders of Sentry Class
A Preferred Stock shall receive the greater of (x) an amount in cash equal to
the Deemed Value on the date of the event plus an amount in cash equal to all
accrued but unpaid Dividends thereon, plus additional dividends on unpaid
Dividends accrued prior to commencement of the then-current dividend period, to
the date fixed for liquidation, or (y) the amount which would be the liquidation
payment per share of Sentry Common Stock if the Sentry Class A Preferred Stock
were effectively redeemed for Sentry Common Stock prior to such liquidation, for
which purpose the Sentry Class A Preferred Stock shall be treated as
representing an equal number of shares of Sentry Common Stock.
116
Redemption.
Optional Redemption. Prior to the first anniversary of the date of
issuance of the Sentry Class A Preferred Stock, Sentry shall not redeem the
Sentry Class A Preferred Stock. Subject to the preceding sentence and the
mandatory redemption provisions in the Sentry Certificate of Incorporation,
Sentry may, at its option, redeem the Sentry Class A Preferred Stock for cash at
any time in whole at the Deemed Value, together with accrued and unpaid
Dividends, if any, thereon. If Sentry completes a Public Offering (as defined
below) or an Acquisition (as defined below) more than 35 days prior to the
Mandatory Redemption Date (as defined below), then Sentry may, at its option,
redeem the Sentry Class A Preferred Stock for Sentry Common Stock at the Deemed
Value.
"Public Offering" means an underwritten public offering of Sentry
Common Stock with net proceeds resulting therefrom in excess of $12,000,000.
"Acquisition" means an acquisition by Sentry of property of or securities issued
by a third party in which the consideration paid by Sentry (i) consists, in
whole or in part, of shares of Sentry Common Stock and (ii) the aggregate value
of such shares of Sentry Common Stock exceeds $12,000,000; provided that such
aggregate value shall be based upon the number of such shares of Sentry Common
Stock multiplied by the Closing Price as of the closing date of such
Acquisition.
Mandatory Redemption. On the fourth anniversary of the date of issuance
of the Sentry Class A Preferred Stock (the "Mandatory Redemption Date"), so long
as any shares of the Sentry Class A Preferred Stock shall be outstanding, Sentry
shall redeem any issued and outstanding Sentry Class A Preferred Stock at the
Deemed Value, together with accrued and unpaid Dividends, if any, thereon, for
cash (to the extent Sentry shall have funds legally available for such payment)
or Sentry Common Stock, at Sentry's option. The price of such Sentry Common
Stock shall be its Closing Price.
Acquired Shares. Shares of the Sentry Class A Preferred Stock which
have been issued and reacquired in any manner, including shares purchased or
redeemed, shall (upon compliance with any applicable provisions of the laws of
the State of Delaware) have the status of authorized and unissued shares of
Preferred Stock undesignated as to class or series and may be redesignated and
reissued as part of any class or series of the Preferred Stock; provided,
however, that no such issued and reacquired shares of the Sentry Class A
Preferred Stock shall be reissued or sold as Sentry Class A Preferred Stock.
Conversion to Notes. To the extent that funds are not legally available
on the Mandatory Redemption Date for the payment in cash for the mandatory
redemption of the Sentry Class A Preferred Stock, and Sentry does not issue
Sentry Common Stock as payment for such mandatory redemption, as required in the
Sentry Certificate of Incorporation, each outstanding share of Sentry Class A
Preferred Stock shall automatically convert (the "Conversion") into a
subordinated note (the "Subordinated Note") given by Sentry for the benefit of
the holder thereof. Each Subordinated Note shall be in a principal amount equal
to the Deemed Value plus accrued and unpaid Dividends. The Subordinated Notes
(i) shall bear interest at a rate of six percent (6%) per annum, (ii) shall
mature at the end of one year from the date of Conversion, and (iii) upon
maturity, shall become due and payable as to any outstanding principal and
interest.
At the time of the Conversion, the holders of the Subordinated Notes
shall have the right, voting separately as a class, to elect one director of
Sentry. Upon the vesting of such right of the holders of the Subordinated Notes,
the maximum authorized number of members of the Sentry Board shall automatically
be increased by one, and the one vacancy so created shall be filled by vote of
the holders of the Subordinated Notes. The right of the holders of the
Subordinated Notes to elect a member of the Sentry Board as aforesaid shall
continue until such time as the Subordinated Notes have been paid in full, at
which time such right shall terminate, except as herein or by law expressly
provided.
Voting Rights. The holders of record of shares of the Sentry Class A
Preferred Stock shall not be entitled to any voting rights except as provided by
law or otherwise specifically provided in the Sentry Certificate of
Incorporation.
Consent. No consent of holders of the Sentry Class A Preferred Stock
shall be required for (a) the creation of any indebtedness of any kind of
Sentry, (b) the creation of any class of stock of Sentry ranking junior as to
dividends and upon liquidation to the Sentry Class A Preferred Stock, or (c) any
increase or decrease in the amount of authorized Common Stock. The consent of
the holders of two-thirds of the outstanding shares of the Sentry Class
117
A Preferred Stock shall be required for the creation of any class of preferred
stock ranking senior in preference to the Sentry Class A Preferred Stock. The
consent of the holders of a majority of the outstanding shares of the Sentry
Class A Preferred Stock shall be required for the creation of any class of
preferred stock ranking equal in preference to the Sentry Class A Preferred
Stock.
Amendments. The Sentry Board reserves the right by subsequent amendment
of the Sentry Certificate of Incorporation from time-to-time to decrease the
number of shares which constitute the Sentry Class A Preferred Stock (but not
below the number of shares thereof then outstanding and required for the payment
of Dividends).
Certain Charter and By-Law Provisions
Classified Board of Directors
The Sentry Certificate of Incorporation provides for the Sentry Board
to be divided into three classes of Directors serving staggered three-year
terms. As a result, approximately one-third of the Sentry Board will be elected
each year.
This provision could prevent a party who acquires control of a majority
of the outstanding voting stock from obtaining control of the Sentry Board until
the second annual stockholders' meeting following the date the acquiror obtains
the controlling stock interest, and thus could have the effect of discouraging a
potential acquiror from making a tender offer or otherwise attempting to obtain
control of Sentry. Accordingly, this provision could increase the likelihood
that incumbent Sentry Directors will retain their positions.
Number of Directors; Removal; Vacancies
The Sentry Certificate of Incorporation provides that the number of
Directors shall be determined from time to time by majority of the Sentry Board,
provided that in no event shall such number be less than three. The Sentry
Bylaws provide that the Sentry Board shall have the right to fill vacancies
including vacancies created by expansion of the Sentry Board.
The Sentry Certificate of Incorporation further provides that Sentry
Directors may be removed only for cause and then only at any annual meeting or
special meeting of the stockholders, the notice of which states that the removal
of a Director or Directors is among the purposes of the meeting, and only by the
affirmative vote of the holders of at least 80% of the voting stock, voting
together as a single class. This provision, in conjunction with the provision of
the Sentry Bylaws authorizing the Sentry Board to fill vacant directorships,
would prevent stockholders from removing incumbent Sentry Directors without
cause and filling the resulting vacancies with their own nominees.
Stockholder Action by Unanimous Consent; Special Meetings
The Sentry Certificate of Incorporation provides that any action
required or permitted to be taken by the stockholders of Sentry must be effected
at a duly called annual or special meeting of stockholders of Sentry and may not
be effected by any consent in writing of such stockholders. Special meetings of
stockholders of Sentry may be called only by the Chairman of the Board or the
Secretary of Sentry within 10 calendar days after receipt of the written request
of a majority of the total number of Directors which Sentry would have if there
were no vacancies. At an annual meeting or special meeting of stockholders of
Sentry, only such business will be conducted or considered as has been brought
before such meeting in the manner provided in the Sentry Bylaws.
Advance Notice for Raising Business or Making Nominations at Meetings
The Sentry Bylaws establish an advance notice procedure for business
being brought before an annual meeting of stockholders of Sentry by the
stockholders and for nominations by the stockholders of candidates for election
as Sentry Directors at an annual meeting or a special meeting called for the
purpose of electing such Directors. Subject to applicable law, including,
without limitation, Rule 14a-8 under the Exchange Act, only such business may be
conducted at an annual meeting as has been brought before the meeting by, or at
the direction of, the Sentry Board, or by a stockholder who has given to the
Secretary of Sentry timely written notice, in proper form, of the stockholder's
intention to bring that business before the meeting. In addition, only persons
who are
118
nominated by, or at the direction of the Sentry Board, or who are nominated by a
stockholder who has given timely written notice, in proper form, to the
Secretary of Sentry prior to a meeting at which Sentry Directors are to be
elected will be eligible for election as Directors of Sentry.
To be timely, notice of nominations or other business to be brought
before an annual meeting must be received by the Secretary of Sentry not less
than 60 nor more than 90 days prior to the meeting; however, if the date of the
meeting is first publicly announced or disclosed less than 75 days prior to the
date of the meeting, notice shall be given not more than 10 days after such date
is first announced or disclosed. Similar advance notice requirements are
applicable to nominations to be brought before a special meeting called for the
purpose of electing Directors.
Amendment of Certain Charter and By-Laws Provisions
The Sentry Certificate of Incorporation provides that the Sentry Board
may adopt, amend, or repeal any provision of the Sentry Bylaws. Any Bylaw made
by the Sentry Board may be amended or repealed by the Sentry Board or by the
stockholders in the manner provided in the Sentry Bylaws. Notwithstanding the
foregoing, certain Sentry Bylaws may not be amended or repealed by the
stockholders, and no provision inconsistent therewith may be adopted by the
stockholders, without the affirmative vote of the holders of at least 80% of the
voting stock, voting together as a single class. The Sentry Bylaws may be
amended or repealed at any time, either at any meeting of stockholders, provided
that any amendment or supplement proposed to be acted upon at any such meeting
has been described or referred to in the notice of such meeting, or at any
meeting of the Sentry Board, provided that no amendment adopted by the Sentry
Board may vary or conflict with any amendment adopted by the stockholders.
Transfer Agent and Registrar
The principal transfer agent and registrar for Sentry Common Stock and
Sentry Class A Preferred Stock will be American Stock Transfer Company.
119
LEGAL MATTERS
The validity of the Sentry Common Stock and Sentry Class A Preferred
Stock to be issued in connection with the Merger will be passed upon by Dewey
Ballantine.
Dewey Ballantine, counsel for Video, and Stroock & Stroock & Lavan,
counsel for Knogo, have delivered opinions concerning certain Federal income tax
consequences of the Merger.
EXPERTS
The financial statements of Video at December 31, 1994 and 1995, and
for each of the three years in the period ended December 31, 1995, included in
this Joint Proxy Statement/Prospectus, which is referred to and made a part of
this Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Knogo as of December 31, 1994
and 1995 and for the year ended February 28, 1994, the 10 months ended December
31, 1994 and the year ended December 31, 1995 included in this Joint Proxy
Statement/Prospectus and the related financial statement schedule included
elsewhere in the Registration Statement, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the Registration Statement (which report expresses an unqualified
opinion and includes an explanatory paragraph referring to Knogo's and the Knogo
Predecessor's consummation of Merger and Divestiture Agreements with
Sensormatic), and have been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
FUTURE STOCKHOLDER PROPOSALS
If the Merger is consummated, the first annual meeting of the public
stockholders of Sentry after such consummation is expected to be held in May
1998. If the Merger is not consummated, the 1997 annual meeting of the
shareholders of Video is expected to be held on or about June 1997 and the 1997
annual meeting of the stockholders of Knogo is expected to be held on or about
May 1997.
Subject to the foregoing, if any Sentry stockholder intends to present
a proposal at the 1998 Sentry annual meeting and wishes to have such proposal
considered for inclusion in the proxy materials for such meeting, such holder
must submit the proposal to the Secretary of Sentry in writing so as to be
received at the executive offices of Sentry by January 15, 1998. Such proposals
must also meet the other requirements of the rules of the Commission relating to
stockholders' proposals. In the event the Merger is not consummated, the only
stockholder proposals eligible to be considered for inclusion in the proxy
materials for the 1997 annual meetings of Video and Knogo will be those which
have been duly submitted to the Secretary of Video by February 1, 1997 or the
Secretary of Knogo by December 5, 1996, as the case may be, as provided in the
respective 1996 Annual Meeting Proxy Statements of Video and Knogo. To be
properly presented at the 1998 Sentry annual meeting, a proposal must meet the
procedural and other requirements set forth in the Bylaws of Sentry. See
Appendix G to this Joint Proxy Statement/Prospectus.
120
Video Sentry Corporation
Financial Statements
Contents
Report of Independent Auditors...............................................F-2
Audited Financial Statements
Balance Sheets...............................................................F-3
Statements of Operations.....................................................F-4
Statement of Changes in Shareholders' Equity.................................F-5
Statements of Cash Flows.....................................................F-6
Notes to Financial Statements................................................F-7
F-1
Report of Independent Auditors
Board of Directors and Shareholders
Video Sentry Corporation
Eden Prairie, Minnesota
We have audited the accompanying balance sheets of Video Sentry Corporation as
of December 31, 1994 and 1995, and the related statements of operations, changes
in shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Video Sentry Corporation at
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Eden Prairie, Minnesota
February 27, 1996, except for Note 12
as to which the date is March 26, 1996
F-2
Video Sentry Corporation
Balance Sheets
December 31,
---------------------------------------------- September 30,
1994 1995 1996
--------------------- ---------------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $2,902,536 $ 221,606 $ 99,002
Investments 799,851 -- --
Accounts receivable:
Trade 1,656,464 2,555,490 1,540,468
Officer 29,418 40,449 --
Inventories 629,267 2,552,706 2,399,035
Prepaid insurance and deposits 117,940 106,775 110,161
------------ ------------ -----------
Total current assets 6,135,476 5,477,026 4,148,666
Property and equipment:
Office furniture and equipment 184,597 553,399 554,300
Production equipment 42,629 97,441 116,261
------------ ------------ -----------
227,226 650,840 670,561
Less accumulated depreciation 45,962 164,360 300,259
------------ ------------ -----------
181,264 486,480 370,302
Patent and organizational costs (less
amortization of: 1994--$16,928, 1995--$25,328
and 1996--$30,552) 25,082 16,682 11,458
Software costs -- 635,223 720,790
------------- ------------ ------------
25,082 651,905 732,248
------------- ------------ ------------
Total assets $ 6,341,822 $ 6,615,411 $ 5,251,216
============= ============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 674,139 $ 2,223,969 $ 1,659,538
Notes payable -- -- 2,110,180
Customer deposits 97,497 28,013 14,000
Accrued liabilities 200,913 464,905 323,658
------------- ------------ ------------
Total current liabilities 972,549 2,716,887 4,107,286
Rental abatement 20,515 22,028 16,163
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 10,000,000;
Issued and outstanding shares --
1994--4,552,684, 1995--4,727,184,
1996--4,841,962 45,527 47,272 48,420
Additional paid-in capital 7,370,411 7,577,361 7,862,934
Accumulated deficit (2,067,180) (3,748,137) (6,783,587)
------------- ------------ ------------
Total shareholders' equity 5,348,758 3,876,496 1,127,767
------------- ------------ ------------
Total liabilities and shareholders' equity $ 6,341,822 $ 6,615,411 $ 5,251,216
============= ============ ============
<FN>
See accompanying notes.
</FN>
F-3
Video Sentry Corporation
Statements of Operations
Nine Months Ended
Year ended December 31, September 30,
-------------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
(Unaudited)
Sales $ 743,734 $4,241,096 $ 8,610,316 $7,768,362 $ 2,000,382
Cost of sales 563,760 3,440,056 7,342,784 5,899,273 3,085,708
----------- ----------- ----------- ---------- -----------
Gross margin 179,974 801,040 1,267,532 1,869,089 (1,085,326)
Operating expenses:
Research, development and
engineering 203,693 351,892 606,882 467,151 320,514
Selling and marketing 353,241 370,650 855,206 546,610 543,537
General and administrative 490,941 826,002 1,262,370 938,173 1,002,918
Offering costs and officer severance -- -- 321,646 -- --
----------- ----------- ----------- ---------- -----------
Total operating expenses 1,047,875 1,548,544 3,046,104 1,951,934 1,866,969
----------- ----------- ------------ ----------- -----------
Operating loss (867,901) (747,504) (1,778,572) (82,845) (2,952,295)
Other income (expense):
Interest expense (48,399) (132,966) (1,859) (1,757) (83,259)
Interest income -- 33,511 99,474 96,967 104
----------- ----------- ----------- ---------- -----------
(48,399) (99,455) 97,615 95,210 (83,155)
----------- ----------- ----------- ---------- -----------
Net income (loss) $ (916,300) $ (846,959) $(1,680,957) $ 12,365 $(3,035,450)
============ =========== =========== =========== ===========
Net income (loss) per share $ (0.38) $ (0.31) $ (0.36) $ 0.00 $ (0.63)
============ =========== =========== =========== ===========
Weighted average number of shares
outstanding 2,387,823 2,747,609 4,673,759 5,207,965 4,808,529
============ =========== =========== =========== ===========
<FN>
See accompanying notes.
</FN>
F-4
Video Sentry Corporation
Statement of Changes in Shareholders' Equity
Common Stock Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
--------- --------- ------------- ------------ ------------
Balance January 1, 1993 2,222,884 $22,229 $ 158,286 $ (303,921) $ (123,406)
Stock options exercised 64,800 648 65,448 -- 66,096
Options and warrants
issued for services -- -- 14,163 -- 14,163
Net loss -- -- -- (916,300) (916,300)
---------- --------- ------------- ------------ ------------
Balance December 31, 1993 2,287,684 22,877 237,897 (1,220,221) (959,447)
Options and warrants
issued for services -- -- 16,950 -- 16,950
Stock options exercised 71,250 712 91,100 -- 91,812
Stock warrants exercised 49,000 490 164,885 -- 165,375
Initial public offering of
common stock--net of
expenses of $1,161,837 2,144,750 21,448 6,859,579 -- 6,881,027
Net loss -- -- -- (846,959) (846,959)
---------- --------- ------------- ------------ ------------
Balance December 31, 1994 4,552,684 45,527 7,370,411 (2,067,180) 5,348,758
Stock options exercised 129,500 1,295 156,550 -- 157,845
Stock warrants exercised 45,000 450 50,400 -- 50,850
Net loss -- -- -- (1,680,957) (1,680,957)
---------- --------- ------------- ------------ ------------
Balance December 31, 1995 4,727,184 47,272 7,577,361 (3,748,137) 3,876,496
Stock options exercised 114,778 1,148 285,573 -- 286,721
Net loss -- -- -- (3,035,450) (3,035,450)
---------- --------- ------------- ------------ ------------
Balance September 30, 1996
(unaudited) 4,841,962 $48,420 $7,862,934 $(6,783,587) $1,127,767
========== ========= ============= ============ ============
<FN>
See accompanying notes.
</FN>
F-5
Video Sentry Corporation
Statements of Cash Flows
Nine Months Ended
Year ended December 31, September 30,
----------------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------ ------------- -------------- -------------
(Unaudited)
Operating activities:
Net income (loss) $(916,300) $ (846,959) $(1,680,957) $ 12,365 $(3,035,450)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 18,160 35,598 126,798 81,569 141,124
Stock options and warrants issued for
services 14,163 16,950 -- -- --
Rental abatement -- -- 1,513 2,269 (5,865)
Changes in operating assets and liabilities:
Accounts receivable (26,964) (1,658,768) (910,057) (1,662,610) 1,055,470
Inventories and prepaids (230,102) (392,418) (1,912,274) (1,276,290) 150,286
Accounts payable and accrued
liabilities 151,563 431,489 1,813,822 1,089,828 (705,769)
Customer deposits 449,659 (387,217) (69,484) (92,997) (14,013)
---------- ------------ ------------ ------------ ------------
Net cash used in operating activities (539,821) (2,801,325) (2,630,639) (1,845,866) (2,414,217)
Investing activities:
Purchase of property and equipment (27,741) (143,726) (423,614) (345,820) (19,721)
Purchase of investments -- (799,851) (875,149) (1,317,032) --
Maturity of investments -- -- 1,675,000 2,116,883 --
Purchased software costs -- -- (635,223) (590,520) (85,567)
Patent costs (7,915) (10,855) -- -- --
---------- ------------ ------------ ------------ ------------
Net cash used in investing activities (35,656) (954,432) (258,986) (136,489) (105,288)
Financing activities:
Net borrowings from (repayment of)
notes payable 432,096 (487,096) -- -- 2,110,180
Proceeds from issuance of unsecured
notes payable -- 1,560,000 -- -- --
Repayment of notes payable -- (1,575,000) -- -- --
Net proceeds from issuance of common
stock 66,096 6,881,027 -- -- --
Proceeds from exercise of options
and warrants -- 257,187 208,695 208,695 286,721
---------- ------------ ------------ ------------ ------------
Net cash provided by financing activities 498,192 6,636,118 208,695 208,695 2,396,901
---------- ------------ ------------ ------------ ------------
Net (decrease) increase in cash (77,285) 2,880,361 (2,680,930) (1,773,660) (122,604)
Cash and cash equivalents at beginning of
year 99,460 22,175 2,902,536 2,902,536 221,606
---------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year $ 22,175 $ 2,902,536 $ 221,606 $ 1,128,876 $ 99,002
========== ============ ============ =========== ============
<FN>
See accompanying notes.
</FN>
F-6
Video Sentry Corporation
Notes to Financial Statements
December 31, 1995
(Unaudited with respect to September 30, 1996
and the nine month periods ended September 30, 1995 and 1996)
1. Summary of Significant Accounting Policies
Nature of Business
Video Sentry Corporation (the "Company"), incorporated in Minnesota on September
10, 1990, is engaged in the design, development and marketing of a traveling
closed circuit television ("CCTV") security surveillance system ("system")
throughout the United States.
Revenue and Cost Recognition
The Company recognizes revenue for its systems at the time of shipment. Revenue
for installation is recorded when the system is installed and is netted against
the costs of installation included in cost of sales.
Cash Equivalents
The Company considers all highly liquid investments (U.S. Government securities)
with a maturity date of 90 days or less to be cash equivalents. Cash equivalents
are stated at cost which approximates fair market value.
Investments
Investments consist of U.S. government securities with maturities of less than
one year and are stated at cost which approximates fair market value.
Allowance for Uncollectible Accounts
The Company provides a specific reserve for uncollectible accounts when
collection of an account becomes doubtful. No reserve was deemed necessary as of
December 31, 1995 or 1994.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist primarily of purchased parts and components.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which range
from two to seven years.
F-7
Video Sentry Corporation
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Other Assets
Patent costs and organizational costs are amortized over 60 months using the
straight-line method.
Software Costs
The Company capitalizes software costs purchased from outside parties for its
point-of-sale product. The Company will amortize software costs on a
straight-line basis over a maximum of three years or based on units sold,
whichever is shorter. Amortization will begin when the software product is
tested and complete.
Income Taxes
Income taxes will be provided using the liability method. Deferred income taxes
will be provided for temporary differences between financial reporting and tax
bases of assets and liabilities.
Warranty
The Company's warranty policy generally provides for one-year coverage on
defective equipment. Estimated warranty costs are recorded when revenues are
recognized.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) and related interpretations in accounting for
its stock options. Under APB 25, when the exercise price of stock options equals
the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company has not determined the impact of the new statement on
its financial statements.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
F-8
Video Sentry Corporation
Notes to Financial Statements (continued)
Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares and common share equivalents, if dilutive, outstanding during the periods
presented. For periods prior to October 1994 (the initial public offering), the
net loss per share amounts give effect to the application of Securities and
Exchange Commission Staff Accounting Bulletin ("SAB") No. 83. Pursuant to SAB
No. 83, the common stock equivalent shares granted at exercise prices less than
the initial public offering price during the twelve months immediately preceding
the initial public offering have been included in the determination of shares
used in the calculation of net loss per share as if they were outstanding for
all periods up to the initial public offering date.
Interim Financial Information
The financial statements for the nine months ended September 30, 1995 and 1996
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. These statements are unaudited but, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments and accruals) necessary for a fair presentation of the financial
information set forth herein.
2. Notes Payable
In March 1994, the Company issued $1,560,000 of 10% unsecured notes payable
which were due in March 1995 or upon the closing of an initial public offering
of the Company's Common Stock. The unsecured notes were repaid in October 1994
from the proceeds of the Company's initial public offering of Common Stock.
Interest paid was $37,535, $145,142, $1,859, $1,757 and $72,443 during the years
ended December 31, 1993, 1994, 1995 and the nine months ended September 30, 1995
and 1996, respectively.
3. Customer Deposits
In 1993, the Company entered into a contract for the sale and installation of
its system in twelve retail stores. As part of the contract, the purchaser was
required to pay a deposit of $440,000. During 1994, one-twelfth of the deposit
was applied to the purchase price of each store's system when billed. As of
December 31, 1994, ten stores had been billed and as of December 31, 1995, all
stores had been billed and no deposit remained on this purchase order.
4. Income Taxes
At December 31, 1995 and September 30, 1996, the Company had net operating loss
carryforwards of approximately $3,400,000 and $6,300,000, respectively, which
are available to offset future taxable income and expire in varying amounts
through 2010. These carryforwards are subject to the limitations of Internal
Revenue Code section 382. This section provides that limitations on the
availability of net operating losses to offset current taxable income result
when an ownership change has occurred for federal tax purposes.
F-9
Video Sentry Corporation
Notes to Financial Statements (continued)
4. Income Taxes (continued)
Deferred income taxes reflect the effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
amounts used for income tax purposes. The components of the Company's deferred
taxes are as follows:
December 31, September 30,
1994 1995 1996
--------- ------------ -----------
Deferred tax assets:
Net operating loss carryforwards $ 570,000 $ 1,100,000 $ 2,048,000
Warranty reserve 44,000 19,000 61,000
Other 17,000 41,000 76,000
--------- ------------ -----------
631,000 1,160,000 2,185,000
Deferred tax liabilities:
Other (16,000) (13,000) (25,000)
--------- ------------ -----------
Net deferred tax assets before valuation
allowance 615,000 1,147,000 2,160,000
Less valuation allowance (615,000) (1,147,000) (2,160,000)
--------- ------------ -----------
Net deferred tax assets $ -- $ -- $ --
========= ============ ===========
The valuation allowance was provided as the recoverability of the deferred tax
assets is dependent on future taxable income.
5. Lease Commitments
The Company leases its office and manufacturing facility under a lease which
runs through March 31, 1999. The Company is recognizing the benefit ofcertain
abatements made by the landlord over the life of the lease on a straight-line
basis.
The Company also leases automobiles, trucks and warehouse facilities under
operating lease agreements with an initial term of more than one year at their
inception.
Future minimum annual lease payments for all of the above leases are as follows:
Year ending December 31:
1996 $124,000
1997 106,000
1998 89,000
1999 19,000
--------
$338,000
========
F-10
Video Sentry Corporation
Notes to Financial Statements (continued)
Total expense for the operating leases, including operating expenses, was
approximately $30,000, $90,000, $168,000, $131,000 and $123,000 for the years
ended December 31, 1993, 1994 and 1995 and the nine months ended September 30,
1995 and 1996, respectively.
6. Common Stock
Stock Split
In March 1994, the Company's Board of Directors authorized a three-for-two stock
split effected in the form of a stock dividend. Accordingly, all share, per
share, and stock option and warrant information has been retroactively adjusted
to reflect the stock split.
Change in Authorized Shares
In March 1994, the Company's shareholders approved an increase in the authorized
shares of Class A Common Stock to 10,000,000 shares.
Prior to June 30, 1994, the Company was authorized to issue Class A common
stock, which was voting stock, and Class B common stock, which was non-voting
stock. On June 30, 1994, the Company's shareholders approved the elimination of
the Class A and Class B Common Stock and authorized 10,000,000 shares of a
single class of Common Stock, $.01 par value. All issued Class A and Class B
Common Stock were converted to the new single-class common stock on a
one-for-one basis.
Initial Public Offering
In October and November 1994, the Company sold 2,144,750 shares of Common Stock
at $3.75 per share in an initial public offering of Common Stock.
Stock Options
The Company has a stock option plan for key employees, directors, consultants
and independent contractors. The exercise price for incentive stock options
granted may not be less than the fair value of the shares on the date of grant,
except for 10% shareholders, in which case the exercise price may not be less
than 110% of the fair market value. For non-qualified stock options the exercise
price may not be less than 85% of the fair market value on the date of grant.
The term for options granted under the plan may not exceed 10 years from the
date of grant, or five years in the case of incentive stock options granted to
10% shareholders.
The Company has also granted non-qualified options to various individuals
outside of the Plan, all of which were granted at a price equal to the fair
market value of the shares at the date of grant as determined by the Board of
Directors.
F-11
Video Sentry Corporation
Notes to Financial Statements (continued)
6. Common Stock (continued)
The following table summarizes option activity:
Shares
Available Options Options Price
for Grant Outstanding Exercisable Per Share
--------------------------------------------------------------------------------
Balance January 1, 1994 116,500 378,750 177,750 $ .93 - $ 1.36
Shares reserved 80,000 -- -- --
Granted or became exercisable (172,500) 172,500 93,375 3.60 - 5.63
Exercised -- (71,250) (71,250) 1.13 - 1.33
Canceled 24,750 (24,750) (1,500) 1.33
-------- --------- ---------
Balance December 31, 1994 48,750 455,250 198,375 .93 - 5.63
Shares reserved 400,000 -- -- --
Granted or became exercisable (435,000) 435,000 136,875 6.75 - 13.56
Exercised -- (131,500) (131,500) .93 - 3.60
Canceled 51,250 (66,250) (15,000) 1.13 - 5.63
--------- --------- ---------
Balance December 31, 1995 65,000 692,500 188,750 1.33 - 13.56
Granted (230,000) 230,000 165,625 5.13 - 7.38
Exercised -- (207,500) (207,500) 1.33 - 8.00
Canceled 520,000 (520,000) (13,750) 1.88 - 13.56
-------- --------- ---------
Balance September 30, 1996 (unaudited) 355,000 195,000 133,125 1.33 - 11.63
======== ========= =========
Stock Warrants
Warrants for the purchase of up to 150,000 shares of Common Stock were issued in
connection with the sale of unsecured notes in March 1994. The warrants are
exercisable for a period of five years from the date of issuance, and have an
exercise price of $3.38 per share. During 1994, warrants for the purchase of
49,000 shares of Common Stock were exercised.
For a nominal consideration, a warrant was issued to the underwriter of the
Company's initial public offering for the purchase of up to 186,500 shares of
Common Stock at a price of $4.95 per share. The warrant is exercisable for a
period of four years commencing October 21, 1995.
F-12
Video Sentry Corporation
Notes to Financial Statements (continued)
6. Common Stock (continued)
In addition to the above warrants, at December 31, 1995 the Company had
exercisable outstanding warrants to purchase 166,614 shares of Common Stock as
follows:
Price
Shares Per Share
-----------------------------------
Year expires:
1997 42,864 $1.17
1998 37,500 1.33
1998 86,250 2.00
166,614 $1.17-$2.00
7. Settlement Agreement with Terminated Employee
In February 1993, the Company reached an agreement with a terminated employee to
resolve, settle and discharge all claims of the Company arising out of the
employment relationship with the Company. As part of the agreement, a 10-year
option, which is not subject to terms of the stock option plan, was granted to
purchase 37,500 shares of Common Stock at $.93 per share. The option was
exercised in February 1995.
8. Major Customers
The Company sells its product to large commercial enterprises in need of
security surveillance systems. Its major customers to date have been primarily
large retailers. The Company performs credit evaluations and does not require
collateral of its customers.
The Company recorded sales to certain customers comprising more than 10% of
total sales as follows:
Nine Months Ended
Year Ended December 31, September 30,
----------------------------- ---------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Customer A.......... 36% 8% 2% 2% --
B.......... 11 48 12 13 1%
C.......... -- 33 67 65 69
D.......... 10 3 1 1 2
E.......... 12 3 9 10 --
F.......... 14 -- -- -- --
G.......... -- 5 1 1 15
Others............... 17 -- 8 8 13
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
F-13
Video Sentry Corporation
Notes to Financial Statements (continued)
9. Profit Sharing Plan
The Company has a Profit Sharing Plan (the Plan) which covers substantially all
employees meeting the eligibility requirements. Contributions to the Plan are
determined by the Board of Directors on an annual basis. The Plan contains a
provision for a deferred compensation plan under Section 401(k) of the Internal
Revenue Code for eligible employees. No contributions have been made by the
Company to the Plan.
10. Employee Stock Purchase Plan
In 1995, the Company has established an Employee Stock Purchase Plan and has
reserved 100,000 shares of Common Stock for future issuance. The Board of
Directors has approved the plan, subject to shareholder approval at the next
annual meeting. As of December 31, 1995, no shares had been issued under the
plan.
11. Offering Costs and Officer Severance
During 1995, the Company proposed to offer additional shares of its Common Stock
to the public. The proposed offering was subsequently canceled and, as a result,
the Company expensed $207,000 of related costs.
In January 4, 1996, the Chief Executive Officer of the Company resigned.
Pursuant to his employment agreement, this individual received severance of
$115,000. This amount was expensed in December 1995.
12. Management's Plan and Subsequent Event
During 1995, the Company spent approximately $2,631,000 on operations and
incurred a net loss of approximately $1,681,000. In order to meet its cash
requirements and fund planned operations, the Company entered into a $2.5
million working capital revolving line of credit with a bank in March 1996. The
line of credit is secured by substantially all of the Company's assets and the
personal guarantee of the Company's President. The line of credit accrues
interest at a rate equal to 3% above the bank's reference rate and matures in
March 1998. The Company expects the proceeds from the line of credit and other
financing agreements will be sufficient to fund its operating expenses and
capital requirements through 1996.
13. Subsequent Events (Unaudited)
In May and July 1996, the Company entered into promissory notes with the Chief
Executive Officer of and an investor in the Company for $500,000 and $250,000,
respectively. The notes payable bear interest at 10% per annum and are secured
by all of the assets of the Company. The notes were repaid in September 1996.
In September 1996, the Company entered into a promissory note with a shareholder
of the Company for $1,000,000. The note payable bears interest at 10% per annum
and is secured by all of the assets of the Company. The note payable is
subordinated to the working capital revolving line of credit (see Note 12).
In October 1996, the Company received $125,000 from the Chief Executive Officer
of the Company under a promissory note which allows the Company to borrow up to
$500,000. The note payable bears interest at 10% per annum and is secured by all
of the assets of the Company. The note payable is subordinated to the working
capital revolving line of credit (see Note 12).
F-14
KNOGO NORTH AMERICA INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report F-16
Consolidated balance sheets - December 31, 1994 and 1995 F-17
and September 30, 1996 (unaudited)
Consolidated statements of operations - year ended F-18
February 28, 1994, ten months ended December 31, 1994,
year ended December 31, 1995 and the nine
months ended September 30, 1995 (unaudited)
and 1996 (unaudited)
Consolidated statements of shareholders' equity - F-19
year ended February 28, 1994, ten months ended
December 31, 1994, year ended December 31, 1995 and the
nine months ended September 30, 1996 (unaudited)
Consolidated statements of cash flows - year ended F-20
February 28, 1994, ten months ended December 31, 1994,
year ended December 31, 1995 and the nine
months ended September 30, 1995 (unaudited) and 1996 (unaudited)
Notes to consolidated financial statements F-22
SCHEDULE II - F-33
Valuation and Qualifying Accounts
F-15
INDEPENDENT AUDITORS' REPORT
Board of Directors
Knogo North America Inc.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Knogo North
America Inc. and subsidiaries as of December 31, 1994 and 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year ended February 28, 1994, the ten months ended December 31, 1994 and the
year ended December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Knogo North America
Inc. and subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for the year ended February 28, 1994, the ten
months ended December 31, 1994 and the year ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, on December 29,
1994 the Company and Knogo Corporation consummated Merger and Divestiture
Agreements with Sensormatic Electronics Corporation.
DELOITTE & TOUCHE LLP
Jericho, New York
February 23, 1996
(March 22, 1996 as to Note 14c,
October 10, 1996 as to Note 14b and
December 24, 1996 as to Note 14d)
F-16
KNOGO NORTH AMERICA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(in thousands, except par value amounts)
December 31, December 31, September 30,
1994 1995 1996
--------------- -------------- -------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 1,258 $ 409 $ 2,482
Accounts receivable, less allowance for doubtful accounts
of $862, $931 and $770, respectively 4,742 9,599 7,243
Net investment in sales-type leases - current portion 561 778 1,840
Inventories 6,335 5,954 6,798
Prepaid expenses and other current assets 1,461 496 504
-------- --------- ---------
Total current assets 14,357 17,236 18,867
NET INVESTMENT IN SALES-TYPE LEASES -
non-current portion 1,240 1,753 1,395
SECURITY DEVICES ON LEASE, net 512 399 345
PROPERTY, PLANT AND EQUIPMENT, net 9,842 9,081 8,950
INTANGIBLES, including patent costs, less accumulated
amortization of $518, $359 and $403, respectively 275 236 349
OTHER ASSETS 296 633 579
------- ------- -------
$26,522 $29,338 $30,485
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 759 $ 2,194 $ 999
Accrued liabilities 3,473 3,070 2,834
Obligations under capital leases - current portion 245 277 304
Deferred lease rentals 321 369 313
------- ------- -------
Total current liabilities 4,798 5,910 4,450
OBLIGATIONS UNDER CAPITAL LEASES - non-current
portion 700 471 283
DEFERRED INCOME TAXES 136 288 435
MINORITY INTEREST IN SUBSIDIARY -- -- 459
COMMITMENTS AND CONTINGENCIES
(Notes 12, 13 and 14)
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 3,000
shares; none issued
Common stock, $.01 par value; authorized 10,000 shares,
issued and outstanding 5,648, 5,720 and 5,773 shares,
respectively 56 57 58
Additional paid-in capital 20,832 20,881 21,078
Retained earnings -- 1,731 3,722
------- ------- -------
20,888 22,669 24,858
------- ------- -------
$26,522 $29,338 $30,485
======= ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
F-17
KNOGO NORTH AMERICA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
(in thousands)
Nine Months Ended
Year Ended Ten Months Ended Year Ended September 30,
February 28, December 31, December 31, ---------------------------
1994 1994 1995 1995 1996
-------------- --------------- ------------ ----------- ---------
REVENUES (Unaudited)
Sales of security devices and related
interest income $ 15,385 $ 11,402 $ 14,625 $ 11,448 $ 11,932
Sales to Sensormatic/affiliates 11,375 6,957 12,043 9,062 3,990
Service revenues and other 2,858 2,322 2,736 1,879 2,258
-------- -------- -------- -------- --------
29,618 20,681 29,404 22,389 18,180
-------- -------- -------- -------- --------
COSTS AND EXPENSES
Cost of security devices sold 7,283 5,078 6,630 5,186 6,805
Cost of sales to Sensormatic/affiliates 7,348 4,963 7,795 5,982 2,593
Customer services expenses 3,984 3,353 3,235 2,621 2,197
Selling, general and administrative
expenses 9,227 9,548 8,235 6,132 5,387
Research and development 655 483 1,537 1,177 1,069
Interest (income) expense 359 114 31 26 (64)
-------- -------- -------- -------- --------
OPERATING PROFIT (LOSS) 762 (2,858) 1,941 1,265 193
OTHER INCOME - Gain on sale of assets -- -- -- -- 2,462
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES 762 (2,858) 1,941 1,265 2,655
INCOME TAXES (BENEFIT) 639 (25) 210 190 664
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 123 $ (2,833) $ 1,731 $ 1,075 $ 1,991
======== ======== ======== ======== ========
NET INCOME PER SHARE $ * $ * $ .29 $ .18 $ .33
======== ======== ======== ======== ========
WEIGHTED AVERAGE COMMON
SHARES * * 5,887 5,856 6,101
======== ======== ======== ======== ========
<FN>
* Historical per share data for net income (loss) for the year ended February
28, 1994 and the ten months ended December 31, 1994 has not been presented as
Knogo North America Inc. was not a publicly-held company during these
periods.
See notes to consolidated financial statements.
</FN>
F-18
KNOGO NORTH AMERICA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(in thousands)
Common Stock Additional Due Total
----------------------- Paid-In Retained From Shareholders'
Shares Amount Capital Earnings Affiliates Equity
-------- --------- ----------- ---------- ------------- -------------
BALANCE
MARCH 1, 1993 -- $ -- $ 32,991 $ -- $ (4,683) $ 28,308
Net income -- -- 123 -- -- 123
Transactions with affiliates -- -- -- -- (842) (842)
Equity adjustments resulting
from Merger and Divestiture -- -- (534) -- -- (534)
-------- -------- -------- -------- -------- --------
BALANCE,
FEBRUARY 28, 1994 -- -- 32,580 -- (5,525) 27,055
Net loss -- -- (2,833) -- -- (2,833)
Transactions with affiliates -- -- -- -- (1,953) (1,953)
Equity adjustments resulting
from Merger and Divestiture -- -- 1,742 -- -- 1,742
Revaluation of corporate
headquarters -- -- (3,123) -- -- (3,123)
Establishment of Knogo
N.A. and distribution of
common stock 5,648 56 (7,534) -- 7,478 --
-------- -------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1994 5,648 56 20,832 -- -- 20,888
Net income -- -- -- 1,731 -- 1,731
Final distribution of common
stock 34 -- (16) -- -- (16)
Exercise of stock options 38 1 65 -- -- 66
-------- -------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1995 5,720 57 20,881 1,731 -- 22,669
Net income (unaudited) -- -- -- 1,991 -- 1,991
Exercise of stock options
(unaudited) 53 1 197 -- -- 198
-------- -------- --------- -------- -------- ---------
BALANCE, SEPTEMBER 30,
1996 (unaudited) 5,773 $ 58 $ 21,078 $ 3,722 $ -- $ 24,858
======== ======== ========= ========= ======== =========
<FN>
See notes to consolidated financial statements.
</FN>
F-19
KNOGO NORTH AMERICA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(in thousands)
Ten Nine
Year Ended Months Ended Year Ended Months Ended
February 28, December 31, December 31, September 30,
1994 1994 1995 1995 1996
------------ ------------- ------------- ---------- --------
(Unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ 123 $ (2,833) $1,731 $ 1,075 $ 1,991
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization of security
devices and property, plant and
equipment 1,245 1,114 1,103 830 847
Amortization of intangibles 97 67 64 29 44
Deferred income taxes (147) (220) 152 126 147
Provision for bad debts 666 661 352 307 69
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable 848 282 (5,209) (3,514) 2,287
(Increase) decrease in net investment in
sales-type leases 1,160 217 (730) (861) (704)
Decrease (increase) in inventories (789) 2,218 381 1,508 (708)
Decrease (increase) in prepaid
expenses and other assets (141) (901) 628 135 182
Increase (decrease) in accounts payable
and accrued liabilities 2,547 (2,509) 1,032 591 (1,431)
Increase (decrease) in deferred lease
rentals (1) 52 48 135 (56)
Increase in due from affiliates (842) (1,953) -- -- --
======== ======== ====== ======= =======
Net cash (used in) provided by
operating activities 4,766 (3,805) (448) 361 2,668
======== ======== ====== ======= =======
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property, plant and equipment, net (640) (565) (202) (153) (438)
Decrease (increase) in security devices on
lease (261) (278) 21 71 (85)
Increase in intangibles (19) (11) (25) (21) (25)
======== ======== ====== ======= =======
Net cash used in investing activities (920) (854) (206) (103) (548)
======== ======== ====== ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
F-20
KNOGO NORTH AMERICA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(in thousands)
Ten Nine
Year Ended Months Ended Year Ended Months Ended
February 28, December 31, December 31, September 30,
1994 1994 1995 1995 1996
-------------- ------------ ------------- ---------- -------
(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
Equity adjustments resulting from
Merger and Divestiture (534) 1,742 -- -- --
Repayment of obligations under capital
leases (149) (156) (245) (182) (113)
Exercise of stock options -- -- 66 -- 66
Other -- -- (16) (10) --
------- ------- ------- ------- -------
Net cash (used in) provided by
financing activities (683) 1,586 (195) (192) (47)
------- ------- ------- ------- -------
(DECREASE) INCREASE IN CASH 3,163 (3,073) (849) 66 2,073
CASH, at beginning of period 1,168 4,331 1,258 1,258 409
------- ------- ------- ------- -------
CASH, at end of period $ 4,331 $ 1,258 $ 409 $ 1,324 $ 2,482
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 72 $ 103 $ 86 $ 65 $ 60
======= ======= ======= ======= =======
Income taxes $ 354 $ 645 $ 26 $ 23 $ 83
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligation incurred for
the purchase of office equipment and
other assets $ 40 $ 413 $ 48 $ -- $ 48
======= ======= ======= ======= =======
(Concluded)
<FN>
See notes to consolidated financial statements.
</FN>
F-21
KNOGO NORTH AMERICA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 28, 1994, TEN MONTHS ENDED DECEMBER 31, 1994, YEAR ENDED
DECEMBER 31, 1995 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(Information as it relates to the nine months ended September 30, 1995 and 1996
is unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Knogo North America Inc. and subsidiaries ("Knogo N.A." or the
"Company") was formerly a wholly owned subsidiary of Knogo Corporation
("Old Knogo"). The Company was incorporated in Delaware on August 12,
1994 and was established in connection with the consummation of the
transactions described below .
On December 29, 1994, (the "Divestiture Date") Old Knogo and Knogo N.A.
consummated a Merger Agreement and a Divestiture Agreement with
Sensormatic Electronics Corporation ("Sensormatic") whereby immediately
prior to Old Knogo being merged into Sensormatic (the "Merger"), Old
Knogo contributed to Knogo N.A., certain assets and liabilities
relating to its operations in the United States, Canada and Puerto Rico
(the "Divestiture Agreement"). Pursuant to the Merger each share of Old
Knogo common stock was converted into .5513 shares of Sensormatic
common stock. Pursuant to the Divestiture Agreement, Old Knogo
shareholders received one share of Knogo N.A. common stock for each
share of Old Knogo stock held. At the Divestiture Date, the Company
changed its fiscal year end from February 28 to December 31.
The accompanying consolidated financial statements include certain
assets and liabilities of Old Knogo, on an historical basis, relating
to Old Knogo's operations in the United States, Canada and Puerto Rico
("Knogo N.A. Territory"). Pursuant to the Merger and Divestiture
Agreements, the net worth of Knogo N.A. was adjusted to a target net
worth of approximately $24 million (the "Target Net Worth"), based on
the historical carrying value of Old Knogo's assets and liabilities at
the Divestiture Date. The Target Net Worth was achieved at the
Divestiture Date by a combination of inventory transfers and a
receivable due from Sensormatic. The Target Net Worth was then adjusted
to reflect the revaluation of Knogo N.A.'s corporate headquarters (see
Note 6).
As a result of the Merger and Divestiture Agreements, certain
adjustments to the equity accounts of the Company were required.
Certain assets and liabilities have been allocated between Knogo N.A.
and Old Knogo based on the terms of the Merger and Divestiture
Agreements. These allocations are presented in the consolidated
statements of shareholders' equity as equity adjustments resulting from
the Merger and Divestiture. Transactions with affiliates represent the
net change in balances between the Company and Old Knogo and its
international subsidiaries. In addition, Knogo N.A.'s corporate
headquarters was revalued from Old Knogo's historical carrying value.
Certain expenses reflected in the consolidated statements of operations
for the year ended February 28, 1994 and the ten months ended December
31, 1994 include corporate allocations from Old Knogo, which were based
on specific personnel, space, estimates of time spent to provide
services, or other appropriate bases. These allocations include
financial reporting, personnel, insurance, legal, information
management, and other miscellaneous services. Included in selling,
general and administrative expenses were $2,163,000 and $2,983,000, of
allocated corporate expenses for the year ended February 28, 1994 and
the ten months ended December 31, 1994, respectively. Included in
selling, general and administrative expenses for the ten months ended
December 31, 1994 were $1,575,000 in expenses incurred in connection
with the Merger and Divestiture with Sensormatic. In addition, research
and development expenses totaling $557,000 and $382,000, for the year
ended February 28, 1994 and the ten months ended December 31, 1994,
respectively, represent corporate allocations. Management believes the
foregoing allocations were made on a reasonable basis and would
approximate the costs which would have been incurred had the Company
operated on a
F-22
stand-alone basis and in a similar manner. The Company anticipates that
current cash reserves, cash generated by operations, including the
Supply Agreement with Sensormatic (see Note 13) and its available bank
credit facility will be adequate to finance the Company's anticipated
working capital requirements as well as future capital expenditure
requirements for at least the next twelve months.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Business - Knogo N.A. is engaged in only one segment and line of
business, the manufacture, distribution, installation and service of
systems designed to detect the unauthorized movement of articles and
persons. The Company's customers are principally in the retail industry
and libraries.
b. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary,
Knogo Caribe, Inc. All intercompany balances and transactions have been
eliminated in consolidation.
c. Revenue Recognition - The Company manufactures security devices
which it offers for sale or lease. Revenue related to the sale of
equipment is recorded at the time of shipment or upon acceptance by a
third-party leasing company of a customer lease and the related
equipment. In addition, in accordance with Statement of Financial
Accounting Standards No. 13, "Accounting for Leases", lease contracts
which meet the following criteria are accounted for as sales-type
leases: collection is reasonably assured, there are no important
uncertainties, and (l) the present value of the rental payments over
the term of the lease is at least 90% of the fair value of the
equipment or (2) the lease term is equal to 75% or more of the
estimated economic life of the equipment or (3) the lease contains a
bargain purchase option. Under this method, revenue is recognized as a
sale at the time of installation or acceptance by the lessee in an
amount equal to the present value of the required rental payments under
the fixed, noncancellable lease term. The difference between the total
lease payments and the present value is amortized over the term of the
lease so as to produce a constant periodic rate of return on the net
investment in the lease.
The operating method of accounting for leases is followed for lease
contracts not meeting the above criteria. Under this method of
accounting, aggregate rental revenue is recognized over the term of the
lease (usually 12-48 months), which commences with date of installation
or acceptance by the lessee.
The Company has sold certain of its lease receivables subject to
recourse to third-party investors. The uncollected principal balance of
the receivables sold totaled approximately $998,000 and $353,000 at
December 31, 1994 and 1995, respectively. Receivables sold are
supported by the underlying equipment value and credit worthiness of
customers. The Company records reserves for receivables sold which may
be uncollectible.
Service revenues are recognized as earned and maintenance revenues are
recognized ratably over the service contract period. Warranty costs
associated with products sold with warranty protection are estimated
based on the Company's historical experience and recorded in the period
the product is sold.
d. 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.
e. Security Devices on Lease - Security devices on lease are stated at
cost and consist of completed systems which have been installed.
f. 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
F-23
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.
g. Intangibles - Costs and expenses incurred in obtaining patents are
amortized over the remaining life of the patents, not exceeding 17
years, using the straight-line method.
h. Deferred Lease Rentals - Deferred lease rentals consist of amounts
of rentals and maintenance related to operating leases billed or paid
in advance.
i. Income Taxes - The Company accounts for income taxes under Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes.
The Company has computed its provision for income taxes for the ten
months ended December 31, 1994 and the year ended February 28, 1994
assuming that it had operated on a stand-alone basis. Certain amounts
have been allocated to the Company from Old Knogo relating to the
estimated settlement costs of tax examinations.
j. Income Per Common Share - Income per common share is computed using
the weighted average number of common shares outstanding during the
year, plus when dilutive, net additional shares issuable upon exercise
of stock options.
k. Foreign Currency Translation - The functional currency of the
Company's foreign entity is the US dollar. Therefore, assets and
liabilities of the foreign entity is translated using a combination of
current and historical rates. Income and expense accounts are
translated primarily using the average rate in effect during the year.
Unrealized foreign exchange gains and (losses) resulting from the
translation of this entity are included in selling, general and
administrative expenses and amounted to approximately ($164,000),
($46,000) and $20,000 for the year ended February 28, 1994, the ten
months ended December 31, 1994 and the year ended December 31, 1995,
respectively.
l. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
m. Unaudited Interim Financial Statements - In the opinion of
management, the unaudited consolidated financial statements for the
nine months ended September 30, 1995 and 1996 are presented on a basis
consistent with the audited consolidated financial statements and
reflect all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results thereof.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year.
n. Reclassifications - Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform to the 1995
presentation.
F-24
3. NET INVESTMENT IN SALES-TYPE LEASES AND OPERATING LEASE DATA
The Company is the lessor of security devices under agreements expiring
in various years through 2001. The net investment in sales-type leases
consist of:
December 31, December 31, September 30,
1994 1995 1996
------------ ------------ -------------
(in thousands)
Minimum lease payments receivable $ 2,237 $ 3,183 $ 3,700
Allowance for uncollectible minimum
lease payments (111) (159) (185)
Unearned income (355) (523) (310)
Unguaranteed residual value 30 30 30
------- ------- -------
Net investment 1,801 2,531 3,235
Less current portion 561 778 1,840
------- ------- -------
Non-current portion $ 1,240 $ 1,753 $ 1,395
======= ======= =======
The future minimum lease payments receivable under sales-type leases
and noncancellable operating leases are as follows:
Sales-Type Operating
Leases Leases
---------- ---------
(in thousands)
Year Ending December 31,
1996 $ 1,081 $ 368
1997 876 179
1998 590 74
1999 416 15
2000 and thereafter 220 59
------- -----
$ 3,183 $ 695
======= =====
4. INVENTORIES
Inventories consist of the following:
December 31, December 31, September 30,
1994 1995 1996
------------- ------------ -------------
(in thousands)
Raw materials $1,919 $2,692 $2,727
Work-in-process 2,346 1,986 2,374
Finished goods 2,070 1,276 1,697
------ ------ ------
$6,335 $5,954 $6,798
====== ====== ======
Reserves for excess and obsolete inventory totaled $1,343,000,
$1,441,000 and $1,418,000 as of December 31, 1994 and 1995 and
September 30, 1996, respectively and have been included as a component
of the above amounts.
F-25
5. SECURITY DEVICES ON LEASE
Security devices are stated at cost and are summarized as follows:
December 31, December 31,
1994 1995
------------ -----------
(in thousands)
Security devices on lease $ 869 $ 644
Less allowance for depreciation 357 245
----- -----
$ 512 $ 399
===== =====
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are summarized as
follows:
Estimated Useful December 31, December 31,
Live (Years) 1994 1995
----------------- ------------ ------------
(in thousands)
Land $ 3,099 $ 3,099
Building and improvements 25-40 5,826 5,828
Machinery and equipment 3-10 5,765 5,885
Furniture, fixtures and office
equipment 3-10 3,199 3,291
------- -------
17,889 18,103
Less allowance for depreciation 8,047 9,022
------- -------
$ 9,842 $ 9,081
======= =======
As a result of the Merger and Divestitur Agreements (see Note 1), Knogo
N.A.'s corporate headquarters was revalued from Old Knogo's historical
carrying value by $3,123,000 due to the manner and extent that it will
be utilized on a prospective basis.
7. OTHER ASSETS
In January 1995, the Company sold its guest house in Puerto Rico, which
was included in prepaid expenses and other current assets at December
31, 1994, for $800,000 which approximated its carrying value. The
Company holds notes with a present value of $580,000 at December 31,
1995 which are receivable in varying amounts over a five year period.
F-26
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31, December 31,
1994 1995
------------ -------------
(in thousands)
Accrued warranty costs $ 633 $ 659
Accrued salaries, employee benefits
and payroll taxes 609 720
Reserve for recourse sales 526 --
Customer deposits payable 521 466
Other accrued liabilities 1,184 1,225
------ ------
$3,473 $3,070
====== ======
9. LINE OF CREDIT
The Company has a $5 million unsecured revolving credit and term loan
agreement with a bank. Revolving loans may be drawn under this
agreement until May 31, 1997, at which time the borrowings are
convertible into term loans payable in sixteen equal quarterly
installments. All borrowings under the agreement bear interest at the
prime rate or the adjusted Libor rate plus 2%. The Company pays a
commitment fee of 1/4 of 1% on any unused portion of the credit
facility. The terms of the agreement, among other matters, provide
restrictions on additional borrowings, capital expenditures and payment
of dividends and require that the Company maintain certain debt to
worth, quick and interest coverage ratios. There were no borrowings
under this agreement at any time during the year ended December 31,
1995.
10. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases computer equipment and related items under capital
lease arrangements with interest charged at a rate of 9%. Minimum
annual rentals are as follows (in thousands):
Year ending December 31,
1996 $ 336
1997 299
1998 115
1999 102
2000 14
-----
866
Less amount representing interest 118
-----
Present value of minimum rentals 748
Less current portion 277
-----
Non-current portion $ 471
=====
The computer equipment and related items are included in property and
equipment and other assets with a gross value of $1,301,000 and
$1,349,000 at December 31, 1994 and 1995, respectively, and a net book
value of $1,092,000 and $880,000 at December 31, 1994 and 1995,
respectively.
F-27
11. SHAREHOLDERS' EQUITY
a. Stock Option Plan - In November 1994, Knogo N.A. adopted the 1994
Stock Incentive Plan of Knogo North America Inc. (the "1994 Plan"). The
1994 Plan provides for grants up to 725,000 options to purchase the
Company's common stock. Awards may be granted by the stock option
committee to eligible employees in the form of stock options,
restricted stock awards, phantom stock awards or stock appreciation
rights. Stock options may be granted as incentive stock options or
non-qualified stock options. Such options become exercisable at a rate
of 20% per year over a five year period and expire ten years from the
date of grant.
In January 1995, employees and directors who held outstanding options
to purchase Old Knogo common stock were granted substitute options
under the 1994 Plan to purchase an aggregate of 137,700 shares of Knogo
N.A. common stock at prices determined pursuant to the formula set
forth in the Merger Agreement. All remaining options granted in 1995
and 1994 were issued at fair market value at the date of grant.
In addition, approximately 34,000 shares of the Company's common stock
were issued to Old Knogo employees who were not transferred to Knogo
N.A. These shares were distributed in settlement of the cancellation of
their Old Knogo stock options.
Transactions from the date of inception of the 1994 Plan through
December 31, 1995 were as follows:
Shares Under Option
-----------------------------------
Option Price Number of
Per Share Shares
------------ ----------
Balance, February 28, 1994 --
Granted $2.00 250,000
-------
Balance, December 31, 1994 250,000
Granted $1.41 - $7.00 280,200
Exercised $1.41 - $1.92 (38,400)
Canceled $1.72 - $2.54 (67,000)
-------
Balance, December 31, 1995 424,800
=======
As of December 31, 1994 and 1995, options were outstanding at
a weighted average exercise price of $2.00 and $2.27 per share,
respectively, and expire at various dates beginning December 6, 2004.
As of December 31, 1995, options for 261,800 shares were available for
future grants and options for 127,500 shares were exercisable. As of
December 31, 1995, 686,600 shares of common stock were reserved for
issuance in connection with the exercise of stock options.
In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement No. 123, "Accounting For Stock-Based
Compensation," which must be adopted by Knogo N.A. in fiscal 1996.
Knogo N.A. has chosen not to implement the fair value based accounting
method for employee stock options, but has elected to disclose,
commencing with its fiscal 1996 Annual Report, the pro forma net income
and net income per share as if such method had been used to account for
stock-based compensation cost as described in Statement No. 123.
b. Changes in Authorized Capital - In November 1994, the Board of
Directors authorized an increase to the number of common shares to
10,000,000. In November 1994, the Board approved the authorization of
3,000,000 shares of preferred stock, which may be issued by the Board
on such terms and with such rights, preferences and designations as the
Board may determine, without further stockholder action.
F-28
12. INCOME TAXES
The components of the Company's income tax provisions are as follows:
Year Ended Ten Months Ended Year Ended
February 28, December 31, December 31,
1994 1994 1995
----------- ---------------- ------------
(in thousands)
Current:
Federal $ 396 $ -- $ 51
State -- -- 9
Puerto Rico 390 195 (2)
----- ------- -----
786 195 58
----- ------- -----
Deferred:
Federal $ -- $ -- $ --
State -- -- --
Puerto Rico (147) (220) 152
----- ------- -----
(147) (220) 152
----- ------- -----
$ 639 $ (25) $ 210
===== ======= =====
The reconciliation between total tax expense and the expected U.S.
Federal income tax is as follows:
Year Ended Ten Months Ended Year Ended
February 28, December 31, December 31,
1994 1994 1995
----------- ---------------- ------------
(in thousands)
Expected tax expense (benefit) at 34% $ 259 $ (972) $ 660
Add/(deduct):
U.S. losses producing no tax benefit 1,433 1,273 --
Benefit of nontaxable income of
Puerto Rico subsidiary (1,324) (366) (510)
Prior years' estimated tax adjustment 271 40 --
Other -- -- 60
------- ------- -------
$ 639 $ (25) $ 210
======= ======= =======
F-29
Significant components of deferred tax assets and liabilities are
comprised of:
Deferred Tax (Assets) Liabilities
-----------------------------------------------------------
February 28, December 31, December 31,
1994 1994 1995
------------ ------------ ------------
(in thousands)
Assets:
Accounts receivable $ (507) $ (293) $ (372)
Inventories (832) (414) (523)
Accrued liabilities (308) (470) (315)
Property, plant and equipment -- (851) (914)
Security devices on lease (108) (90) --
Intercompany transactions (54) (29) (9)
------- ------- -------
Gross deferred tax assets (1,809) (2,147) (2,133)
Less: Valuation allowance 1,496 2,112 2,101
------- ------- -------
(313) (35) (32)
------- ------- -------
Liabilities:
Tollgate taxes 416 171 311
Property, plant and equipment 253 -- --
Security devices on lease -- -- 9
------- ------- -------
Gross deferred tax liabilities 669 171 320
------- ------- -------
Net deferred tax liability $ 356 $ 136 $ 288
======= ======= =======
The increase in the valuation allowance during the ten months ended
December 31, 1994 was primarily attributable to the revaluation of the
corporate headquarters for book purposes offset by a decrease in
deferred tax assets relating to the inventory reserves and the
allowance for doubtful accounts. The decrease in the valuation
allowance for the year ended December 31, 1995 was due to the decrease
in deferred tax assets for which realization was not more likely than
not.
The Company's Puerto Rico manufacturing subsidiary is exempt from
Federal income taxes under Section 936 of the Internal Revenue Code.
Also, the Company was granted a partial income tax exemption under the
provisions of the Puerto Rico Industrial Incentives Act of 1978 from
the payment of Puerto Rico taxes on income derived from marketing
certain products manufactured by the subsidiary. The grant provides for
a 90% exemption from Puerto Rico taxes until January 1, 2008. The
Company provides tollgate taxes on the earnings of the Puerto Rico
subsidiary which it intends to remit, in the form of a dividend, to the
parent company based upon the applicable rates.
The prior years income tax returns of Old Knogo, including Knogo
Caribe, Inc., are currently being examined by certain taxing
authorities. The Company has recorded its allocated portion of the
estimated settlement costs for these matters. Any further liability,
that may result upon the conclusion of these examinations will be borne
by Sensormatic as a result of the Merger Agreement.
13. COMMITMENTS AND CONTINGENCIES
a. Litigation - The Company is a party to litigation arising in the
normal course of business. Management believes the final disposition of
such matters will not have a material adverse effect on the
consolidated financial statements.
F-30
b. Supply Agreement - Knogo N.A. entered into a supply agreement in
which Sensormatic is obligated to purchase products from Knogo N.A. in
the amount of $12,000,000 during 1995 and an additional $12,000,000
during the ensuing 18 months. Such products are priced to yield Knogo
N.A. a 35% gross margin. Included in accounts receivable at December
31, 1995 are amounts due from Sensormatic of $4,561,000 which were
subsequently collected.
c. License Agreement - Knogo N.A. entered into a license agreement in
which Knogo N.A. has the exclusive right to manufacture and sell
existing Knogo products within the Knogo N.A. territory, and
Sensormatic has such right elsewhere, except that Knogo N.A. and
Sensormatic each have the right to develop and market the SuperStrip
technology in the Knogo N.A. territory.
d. Employment Agreements - The Company and several key executives have
entered into employment agreements for terms of one to two years for
which the Company has a minimum commitment of approximately $524,000.
e. 401(k) Plan - In November 1994, Knogo N.A. adopted the Knogo North
America Inc. Retirement Savings 401(k) Plan (the "Plan"). The Plan
permits eligible employees to make voluntary contributions to a trust,
up to a maximum of 15% of compensation, subject to certain 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 $121,000 to the Plan for the year ended December 31,
1995.
14. SUBSEQUENT EVENTS
a. Formation of Joint Venture - In January 1996, the Company acquired a
controlling interest in K&M Converting Corp. ("KMCC"). KMCC is a newly
established joint venture entered into with Marian Rubber Products Co.,
Inc. ("Marian"). KMCC will be the exclusive converter of magnetic
material into disposable targets or labels used in the Company's EAS
systems. The Company contributed $15,000 in cash, $430,000 in
inventory, and $49,000 in machinery to KMCC and issued 20,000 shares of
Knogo N.A. common stock to Marian in exchange for 50.001% of KMCC.
The acquisition will be accounted for under the purchase method of
accounting and the operating results of KMCC will be included in the
consolidated operating results of the Company beginning in the first
quarter of 1996.
b. Merger with Video Sentry Corporation - On October 10, 1996, the
Company announced that it signed a merger agreement with Video Sentry
Corporation ("Video Sentry") which will result in the Company becoming
a wholly owned subsidiary of a new publicly traded entity called Sentry
Technology Corporation ("Sentry"). Video Sentry Corporation,
headquartered in Minneapolis, Minnesota, is a pioneer in patented
traveling closed circuit television ("CCTV") surveillance systems.
The merger between Knogo and Video Sentry will enable the resulting
entity to offer a more comprehensive line of security products by
combining Knogo's patented EAS technology and renowned customer service
with Video Sentry's patented innovative CCTV systems technology.
The merger agreement provides for Sentry, a newly-formed Delaware
corporation, to issue 1 share of common stock for each 1 share of Video
Sentry common stock outstanding at the effective time of the merger.
Sentry will issue 1 share of common stock and 1 share of Class A
Preferred Stock for each 1.2022 shares of Knogo common stock
outstanding. As contemplated by the merger agreement, the Sentry Class
A Preferred Stock will have 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 will be 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
F-31
from the date of issuance. The redemption price will be equal to $5.00
per preferred share (plus accrued and unpaid dividends as of the
redemption date) plus the amount, if any, by which the market price of
Sentry's common stock at the time of redemption exceeds a hurdle price
based on the price of Sentry Common Stock one year after the Effective
Time. The minimum hurdle price is $5.00 per share and the maximum is
$6.50. The preferred stock is non convertible, but the redemption price
may, in certain circumstances, be paid in common stock at Sentry's
option. Following consummation of the merger, it is anticipated that
there will be approximately 9.6 million shares of Sentry common stock
(50.2% owned by former Video Sentry shareholders and 49.8% owned by
former Knogo shareholders) and 4.8 million shares of Sentry Class A
Preferred Stock outstanding, all owned by former Knogo shareholders.
The merger agreement also provides for Sentry's Board of Directors to
consist initially of two representatives each from Video Sentry and
Knogo, as well as one additional director to be mutually agreed upon
between the parties. Mr. Nicolette will be the CEO of Sentry. Mr.
Benson, the founder and president of Video Sentry, will be Vice
President, CCTV Products. The Knogo and Video Sentry boards have both
unanimously approved the transaction.
It is expected that special shareholder meetings of both companies will
be held in early 1997. Consummation of the merger is subject to
approval by the holders of a majority of the outstanding common stock
of each company. It is intended that the merger qualify as a tax-free
reorganization.
c. Sale of Assets - On March 22, 1996, the Company completed the sale
of certain assets (primarily patents and technology) of its library
security systems business to Minnesota Mining and Manufacturing Company
("3M") for a purchase price of $3 million, paid at closing. In
connection with such sale, Knogo and 3M entered into an agreement
pursuant to which the Company has become a distributor of certain of
3M's library systems products for an initial term of three years and
has agreed not to compete with 3M in the sale of security systems
products (other than closed circuit video systems) in the library
market except as otherwise contemplated by the transaction
documentation. The parties also settled certain patent litigation
between them.
The impact of the transaction resulted in an increase in cash of $3
million and pretax tax gain of approximately $2.5 million in the
quarter ended March 31, 1996. The impact on the Company's historical
revenues and net income from the sale of products covered by the
patents and related technology sold is not material.
d. Sale-Leaseback - On December 24, 1996, the Company completed a
sale-leaseback transaction on the Company's corporate headquarters. The
Company received net proceeds of approximately $4,500,000 which
approximates the carrying value of the land and building. The lease
covers a period of 20 years with quarterly lease payments of $131,000.
The lease agreement allows for an increase in lease payments for years
4-20 based on a formula tied to the Consumer Price Index.
F-32
SCHEDULE II
KNOGO NORTH AMERICA INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- --------------------------- -------- --------
Additions
---------------------------
Charged to
Balance at Charged to Other Balance
beginning of Cost and Accounts Deductions at end of
Descriptions Period Expenses - describe - describe Period
- ------------------------------------- ------------ ---------- ------------ ---------- ----------
Year ended February 28, 1994:
Allowance for doubtful accounts $1,234 $ 666 $51(1) $ 460(2) $1,491
------ ------ ------ --------- ------
Allowance for uncollectible minimum
lease payments 193 (65) -- -- 128
------ ------ ------ --------- ------
Reserve for excess and
obsolete inventory 2,461 477 -- 260(2) 2,678
------ ------ ------ --------- ------
Ten months ended
December 31, 1994: 526(3)
---------
Allowance for doubtful accounts 1,491 661 16(1) 780(2) 862
------ ------ ------ --------- ------
Allowance for uncollectible
minimum lease payments 128 (17) -- -- 111
------ ------ ------ --------- ------
Reserve for excess and
obsolete inventory 2,678 319 -- 1,654(2) 1,343
------ ------ ------ --------- ------
Year ended December 31, 1995:
Allowance for doubtful accounts 862 352 34(1) 317(2) 931
------ ------ ------ --------- ------
Allowance for uncollectible
minimum lease payments 111 48 -- -- 159
------ ------ ------ --------- ------
Reserve for excess and
obsolete inventory $1,343 $ 394 -- $ 296(2) $1,441
------ ------ ------ --------- ------
<FN>
- ---------------------------------------
(1) Recoveries of accounts written off.
(2) Amounts written off.
(3) Reserve charged to accrued liabilities.
</FN>
F-33
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF
REORGANIZATION AND MERGER
by and among
VIDEO SENTRY CORPORATION,
KNOGO NORTH AMERICA INC.,
SENTRY TECHNOLOGY CORPORATION
VIKING MERGER CORP.
and
STRIP MERGER CORP.
Dated as of November 27, 1996
TABLE OF CONTENTS
Page
ARTICLE I SENTRY............................................... 2
1.1 Certificate of Incorporation and Bylaws.............. 2
1.2 Directors and Officers............................... 2
ARTICLE II THE MERGERS.......................................... 2
2.1 The VIDEO Merger..................................... 2
2.2 VIDEO Effective Time................................. 2
2.3 The KNOGO Merger..................................... 3
2.4 KNOGO Effective Time................................. 3
2.5 Certificates of Incorporation and Bylaws............. 3
2.6 Directors and Officers............................... 4
2.7 Effective Time....................................... 4
2.8 Closing.............................................. 4
ARTICLE III CONVERSION OF SHARES................................. 4
3.1 VIDEO Stock.......................................... 4
3.2 KNOGO Stock.......................................... 5
3.3 SENTRY Stock......................................... 6
3.4 VMC Stock............................................ 6
3.5 SMC Stock............................................ 6
3.6 Exchange of Certificates............................. 6
3.7 Adjustment of Merger Consideration................... 11
3.8 VIDEO Stock Options.................................. 11
3.9 KNOGO Stock Options.................................. 12
3.10 Stockholder Approval................................. 12
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF KNOGO.............. 13
4.1 Organization and Qualification....................... 13
4.2 Capitalization....................................... 13
4.3 Authorization and Validity of Agreement.............. 14
4.4 Consents and Approvals............................... 15
4.5 No Violation......................................... 15
4.6 SEC Reports; Financial Statements.................... 16
4.7 Joint Proxy Statement/Prospectus..................... 17
4.8 Compliance with Law.................................. 17
4.9 Absence of Certain Changes........................... 18
4.10 No Undisclosed Liabilities........................... 18
4.11 Litigation........................................... 18
4.12 Employee Benefit Matters............................. 18
4.13 Taxes................................................ 19
4.14 Intellectual Property................................ 20
4.15 Labor Matters........................................ 20
4.16 Brokers and Finders.................................. 20
4.17 Opinion of Financial Advisor......................... 20
4.18 Section 351/Reorganization Treatment................. 20
4.19 VIDEO Shares Ownership............................... 20
i
Page
ARTICLE V REPRESENTATIONS AND WARRANTIES OF VIDEO,
SENTRY, VMC AND SMC.................................. 21
5.1 Organization and Qualification....................... 21
5.2 Capitalization....................................... 21
5.3 Authorization and Validity of Agreement.............. 24
5.4 Consents and Approvals............................... 24
5.5 No Violation......................................... 25
5.6 SEC Reports; Financial Statements.................... 25
5.7 Joint Proxy Statement/Prospectus..................... 26
5.8 Compliance with Law.................................. 26
5.9 Absence of Certain Changes........................... 27
5.10 No Undisclosed Liabilities........................... 27
5.11 Litigation........................................... 27
5.12 Employee Benefit Matters............................. 28
5.13 Taxes................................................ 28
5.14 Intellectual Property................................ 29
5.15 Labor Matters........................................ 29
5.16 Brokers and Finders.................................. 29
5.17 Opinion of Financial Advisor......................... 29
5.18 Section 351/Reorganization Treatment................. 29
5.19 KNOGO Shares Ownership............................... 30
5.20 Operations of SENTRY, VMC and SMC.................... 30
ARTICLE VI COVENANTS............................................ 30
6.1 Conduct of the Business of KNOGO and VIDEO
Pending the Reorganization........................... 30
6.2 Access; Confidentiality.............................. 32
6.3 Meetings of Stockholders............................. 32
6.4 Reasonable Efforts................................... 32
6.5 Public Announcements................................. 33
6.6 Acquisition Proposals................................ 33
6.7 Registration Statement and Joint Proxy
Statement/Prospectus................................. 34
6.8 Listing Application.................................. 35
6.9 Affiliate Letters.................................... 35
6.10 D&O Indemnification and Insurance.................... 36
6.11 Employee Benefits.................................... 37
6.12 Fees and Expenses.................................... 38
6.13 Cancellation of SENTRY Common Stock.................. 39
ARTICLE VII CLOSING CONDITIONS................................... 39
7.1 Conditions to Obligations of Each Party to
Effect the Reorganization............................ 39
7.2 Conditions Precedent to the Obligations of
KNOGO................................................ 40
7.3 Conditions Precedent to the Obligations of
VIDEO, SENTRY, VMC and SMC........................... 41
ARTICLE VIII TERMINATION................................................... 42
8.1 Termination.......................................... 42
ii
Page
8.2 Effect of Termination................................ 43
ARTICLE IX MISCELLANEOUS........................................ 44
9.1 Nonsurvival of Representations, Warranties and
Covenants............................................ 44
9.2 Notices.............................................. 44
9.3 Certain Definitions.................................. 45
9.4 Entire Agreement..................................... 46
9.5 Assignment; Binding Effect........................... 46
9.6 Amendments........................................... 47
9.7 Waiver............................................... 47
9.8 Validity............................................. 47
9.9 Captions............................................. 47
9.10 Counterparts......................................... 47
9.11 Governing Law........................................ 47
iii
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
AND MERGER, dated as of November 27, 1996, (the "Agreement") is by and among
VIDEO SENTRY CORPORATION, a Minnesota corporation ("VIDEO"), KNOGO NORTH AMERICA
INC., a Delaware corporation ("KNOGO"), SENTRY TECHNOLOGY CORPORATION, a
Delaware corporation ("SENTRY"), VIKING MERGER CORP., a Minnesota corporation
and a wholly owned subsidiary of SENTRY formed solely to effectuate the
transactions contemplated hereby ("VMC"), and STRIP MERGER CORP., a Delaware
corporation and wholly owned subsidiary of SENTRY formed solely to effectuate
the transactions contemplated hereby ("SMC").
RECITALS
WHEREAS, the Boards of Directors of VIDEO and KNOGO each have
approved, and deem it advisable and in the best interests of their respective
companies and stockholders to consummate the reorganization and mergers provided
for herein, pursuant to which SENTRY will acquire all of the common stock of
each of VIDEO and KNOGO through mergers of VMC and SMC, subsidiaries of SENTRY,
with and into each of VIDEO and KNOGO, respectively, and accordingly have agreed
to effect the Reorganization (as defined in Section 2.3 below) upon the terms
and subject to the conditions set forth herein;
WHEREAS, it is intended that, for Federal income tax purposes,
(i) the VIDEO Merger (as hereinafter defined) qualify as a reorganization under
the provisions of Section 368(a) of the United States Internal Revenue Code of
1986, as amended, and the regulations thereunder (the "Code") and/or as an
exchange under the provisions of Section 351 of the Code and (ii) that the KNOGO
Merger (as hereinafter defined) qualify as an exchange under the provisions of
Section 351 of the Code;
WHEREAS, KNOGO, VIDEO, SENTRY, VMC and SMC desire to make
certain representations, warranties, covenants and agreements in connection with
this Agreement; and
WHEREAS, on October 10, 1996, the above-named parties entered
into that certain Agreement and Plan of Reorganization and Merger (the "Initial
Merger Agreement"), and the parties thereto and hereto now desire to amend and
restate the Initial Merger Agreement as provided herein.
NOW, THEREFORE, in consideration of the foregoing and of the
respective representations, warranties, covenants and agreements set forth in
this Agreement, the parties hereto hereby agree as follows:
AGREEMENT
ARTICLE I
SENTRY
1.1 Certificate of Incorporation and Bylaws. At the Effective
Time (as defined in Section 2.7), the certificate of incorporation of SENTRY
(the "SENTRY Certificate of Incorporation") shall be in form substantially
similar to Exhibit A attached hereto. At the Effective Time, the Bylaws of
SENTRY (the "SENTRY Bylaws") shall be in form as mutually agreed upon by VIDEO
and KNOGO.
1.2 Directors and Officers. At the Effective Time, the initial
directors of SENTRY shall be as set forth in Exhibit B hereto, each to hold
office in accordance with the SENTRY Certificate of Incorporation and SENTRY
Bylaws until such directors' successors are elected and qualified. The initial
officers of SENTRY shall be as set forth in Exhibit B hereto and shall serve at
the discretion of its Board of Directors in accordance with the SENTRY Bylaws.
ARTICLE II
THE MERGERS; CLOSING
2.1 The VIDEO Merger. Upon the terms and subject to the
conditions of this Agreement and in accordance with applicable provisions of the
Minnesota Business Corporation Act (the "Minnesota Act"), at the VIDEO Effective
Time (as defined in Section 2.2 below), VMC shall be merged with and into VIDEO
(the "VIDEO Merger"). As a result of the VIDEO Merger, the separate corporate
existence of VMC shall cease and VIDEO shall continue as the surviving
corporation of the VIDEO Merger (the "VIDEO Surviving Corporation").
2.2 VIDEO Effective Time. As promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in Article
VII, the parties hereto will cause an articles of merger (the "Articles of
Merger") to be executed and filed with the Secretary of State of the State of
Minnesota in accordance with the Minnesota Act. The VIDEO Merger shall become
effective at such time as the Articles of Merger are filed with the Secretary of
State of the State of Minnesota in accordance with the Minnesota
2
Act, or at such later time as may be specified in the Articles of Merger in
accordance with applicable law (such time and date herein referred to as the
"VIDEO Effective Time"). At the VIDEO Effective Time, the VIDEO Merger shall
have the effects set forth in the applicable provisions of the Minnesota Act.
2.3 The KNOGO Merger. Upon the terms and subject to the
conditions of this Agreement and in accordance with applicable provisions of the
Delaware General Corporation Law (the "DGCL"), at the KNOGO Effective Time (as
defined in Section 2.4 below), SMC shall be merged with and into KNOGO (the
"KNOGO Merger")(together with the VIDEO Merger, the "Reorganization"). As a
result of the KNOGO Merger, the separate corporate existence of SMC shall cease
and KNOGO shall continue as the surviving corporation of the KNOGO Merger (the
"KNOGO Surviving Corporation").
2.4 KNOGO Effective Time. As promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in Article
VII, the parties hereto will cause a certificate of merger (the "Certificate of
Merger") to be executed and filed with the Secretary of State of the State of
Delaware in accordance with the DGCL. The KNOGO Merger shall become effective at
such time as the Certificate of Merger is filed with the Secretary of State of
the State of Delaware in accordance with the DGCL, or at such later time as may
be specified in the Certificate of Merger in accordance with applicable law
(such time and date herein referred to as the "KNOGO Effective Time"). At the
KNOGO Effective Time, the KNOGO Merger shall have the effects set forth in the
applicable provisions of the DGCL.
2.5 Certificates of Incorporation and Bylaws. (a) The
Certificate of Incorporation of VMC as in effect immediately prior to the VIDEO
Effective Time (the "VMC Certificate") shall be the Certificate of Incorporation
of the VIDEO Surviving Corporation immediately after the VIDEO Effective Time.
(b) The Certificate of Incorporation of SMC as in effect
immediately prior to the KNOGO Effective Time (the "SMC Certificate") shall be
the Certificate of Incorporation of the KNOGO Surviving Corporation immediately
after the KNOGO Effective Time.
(c) The Bylaws of VMC as in effect immediately prior to the
VIDEO Effective Time (the "VMC Bylaws") shall be the Bylaws of the VIDEO
Surviving Corporation immediately after the VIDEO Effective Time.
(d) The Bylaws of SMC as in effect immediately prior to the
KNOGO Effective Time (the "SMC Bylaws") shall be the Bylaws of the KNOGO
Surviving Corporation immediately after the KNOGO Effective Time.
3
2.6 Directors and Officers. (a) The directors of VMC
immediately prior to the VIDEO Effective Time shall be the directors of the
VIDEO Surviving Corporation as of the VIDEO Effective Time and until their
successors are duly appointed or elected in accordance with applicable law.
(b) The directors of SMC immediately prior to the KNOGO
Effective Time shall be the directors of the KNOGO Surviving Corporation as of
the KNOGO Effective Time and until their successors are duly appointed or
elected in accordance with applicable law.
(c) The officers of VIDEO immediately prior to the VIDEO
Effective Time shall be the officers of the VIDEO Surviving Corporation as of
the VIDEO Effective Time until their successors are duly appointed or elected in
accordance with applicable law.
(d) The officers of KNOGO immediately prior to the KNOGO
Effective Time shall be the officers of the KNOGO Surviving Corporation as of
the KNOGO Effective Time until their successors are duly appointed or elected in
accordance with applicable law.
2.7 Effective Time. The term "Effective Time" shall mean the
time and date which is (A) the later of (i) the VIDEO Effective Time and (ii)
the KNOGO Effective Time, or (B) such other time and date as may be agreed to in
writing by VIDEO and KNOGO. The parties hereto agree that each will use its best
efforts to ensure that the VIDEO Effective Time and the KNOGO Effective Time
occur upon the same date and at the same time.
2.8 Closing. Unless this Agreement shall have been terminated
pursuant to Article VIII and subject to the satisfaction or, if permissible,
waiver of the conditions set forth in Article VII, the consummation of the VIDEO
Merger, the KNOGO Merger, and the other transactions contemplated hereby (the
"Closing") shall take place at the offices of Dewey Ballantine, 1301 Avenue of
the Americas, New York, New York 10019, as promptly as practicable following the
satisfaction or, if permissible, waiver of the conditions set forth in Article
VII, unless another place, date or time is agreed to in writing by VIDEO and
KNOGO.
ARTICLE III
CONVERSION OF SHARES
3.1 VIDEO Stock. At the VIDEO Effective Time, by virtue of the
VIDEO Merger and without any action on the part of any of the parties hereto or
the holders of any shares of the capital stock of SENTRY, VIDEO OR KNOGO, each
share of VIDEO common stock, par value $0.01 per share (the "VIDEO Shares"),
which is issued and outstanding immediately prior to the VIDEO Effective Time
shall be
4
converted into and represent the right to receive one share of common stock, par
value $0.001 per share, of SENTRY ("SENTRY Common Stock") (the "VIDEO Merger
Consideration"). All such VIDEO Shares shall no longer be outstanding and shall
automatically be canceled and extinguished and shall cease to exist, and each
certificate which immediately prior to the VIDEO Effective Time evidenced any
such VIDEO Shares ("VIDEO Certificates") shall thereafter represent the right to
receive (without interest), upon surrender of such VIDEO Certificate in
accordance with the provisions of Section 3.6, the VIDEO Merger Consideration
multiplied by the number of VIDEO Shares evidenced by such VIDEO Certificate.
The holders of VIDEO Certificates previously evidencing VIDEO Shares outstanding
immediately prior to the VIDEO Effective Time shall cease to have any rights
with respect thereto (including, without limitation, any rights to vote or to
receive dividends and distributions in respect of such VIDEO Shares), except as
otherwise provided herein or by law. At the VIDEO Effective Time, each VIDEO
Share held in VIDEO's treasury immediately prior to the Effective Time shall, by
virtue of the VIDEO Merger, be canceled and retired and cease to exist, without
any conversion thereof. All other classes of VIDEO stock held in treasury shall
also be canceled.
3.2 KNOGO Stock. At the KNOGO Effective Time, by virtue of the
KNOGO Merger and without any action on the part of any of the parties hereto or
the holders of any shares of the capital stock of SENTRY, VIDEO OR KNOGO, each
1.2022 shares of KNOGO common stock, par value $0.01 per share (the "KNOGO
Shares"), which is issued and outstanding immediately prior to the KNOGO
Effective Time shall be converted into and represent the right to receive one
share of SENTRY Common Stock (the "KNOGO Common Stock Consideration"), plus one
share of preferred stock, par value $0.001 per share, of SENTRY ("SENTRY Class A
Preferred Stock"; such SENTRY Class A Preferred Stock having the terms set forth
in Exhibit A attached hereto) (together with the KNOGO Common Stock
Consideration, the "KNOGO Merger Consideration" and with the VIDEO Merger
Consideration, collectively, the "Merger Consideration"). All such KNOGO Shares
shall no longer be outstanding and shall automatically be canceled and
extinguished and shall cease to exist, and each certificate which immediately
prior to the KNOGO Effective Time evidenced any such KNOGO Shares ("KNOGO
Certificates") shall thereafter represent the right to receive (without
interest), upon surrender of such KNOGO Certificate in accordance with the
provisions of Section 3.6, the KNOGO Merger Consideration multiplied by the
number of KNOGO Shares evidenced by such KNOGO Certificate. The holders of KNOGO
Certificates previously evidencing KNOGO Shares outstanding immediately prior to
the KNOGO Effective Time shall cease to have any rights with respect thereto
(including, without limitation, any rights to vote or to receive dividends and
distributions in respect of such KNOGO Shares), except as otherwise provided
herein or by law. At the KNOGO Effective Time, each KNOGO Share held in KNOGO's
treasury immediately prior to the KNOGO Effective Time shall, by virtue of
5
the KNOGO Merger, be canceled and retired and cease to exist, without any
conversion thereof. All other classes of KNOGO stock held in treasury shall also
be canceled.
3.3 SENTRY Stock. At the Effective Time, each share of SENTRY
Common Stock, which immediately prior to the Effective Time is owned by VIDEO,
shall be canceled and extinguished and shall cease to exist and no consideration
shall be delivered with respect thereto.
3.4 VMC Stock. Each share of common stock, par value $.001 per
share, of VMC (the "VMC Common Stock") outstanding immediately prior to the
VIDEO Effective Time shall, by virtue of the VIDEO Merger and without any
further action by the holder thereof, be converted into and become one share of
common stock, par value $.001 per share, of the VIDEO Surviving Corporation (the
"VIDEO Surviving Corporation Common Stock"). Each certificate which immediately
prior to the VIDEO Effective Time represented outstanding shares of VMC Common
Stock shall, on and after the VIDEO Effective Time, be deemed for all purposes
to represent the number of shares of VIDEO Surviving Corporation Common Stock
into which the shares of VMC Common Stock represented by such certificate shall
have been converted pursuant to this Section 3.4.
3.5 SMC Stock. Each share of common stock, par value $.001 per
share, of SMC (the "SMC Common Stock") outstanding immediately prior to the
KNOGO Effective Time shall, by virtue of the KNOGO Merger and without any
further action by the holder thereof, be converted into and become one share of
common stock, par value $.001 per share, of the KNOGO Surviving Corporation (the
"KNOGO Surviving Corporation Common Stock"). Each certificate which immediately
prior to the KNOGO Effective Time represented outstanding shares of SMC Common
Stock shall, on and after the KNOGO Effective Time, be deemed for all purposes
to represent the number of shares of KNOGO Surviving Corporation Common Stock
into which the shares of SMC Common Stock represented by such certificate shall
have been converted pursuant to this Section 3.5.
3.6 Exchange of Certificates. (a) As of the Effective Time,
SENTRY shall deposit, or shall cause to be deposited, with an exchange agent
mutually selected by VIDEO and KNOGO (the "Exchange Agent"), for the benefit of
the holders of VIDEO Shares and KNOGO Shares, for exchange in accordance with
this Article III, certificates representing the shares of SENTRY Common Stock
and SENTRY Class A Preferred Stock (such certificates for shares of SENTRY
Common Stock and SENTRY Class A Preferred Stock, together with any dividends or
distributions with respect thereto (relating to record dates for such dividends
or distributions after the Effective Time), being hereinafter referred to as the
"Exchange Fund") to be issued pursuant to this Article III and paid pursuant to
this Section 3.6 in exchange for outstanding VIDEO Shares and KNOGO Shares.
6
(b) Promptly after the Effective Time, SENTRY shall cause the
Exchange Agent to mail to each holder of record of VIDEO Shares (i) a letter of
transmittal which shall specify that delivery shall be effected, and risk of
loss and title to such VIDEO Shares shall pass, only upon delivery of the VIDEO
Certificates representing such VIDEO Shares to the Exchange Agent and which
shall be in such form and have such other provisions as SENTRY may reasonably
specify and (ii) instructions for use in effecting the surrender of such VIDEO
Certificates in exchange for certificates representing shares of SENTRY Common
Stock and cash in lieu of fractional shares. Upon surrender of a VIDEO
Certificate for cancellation to the Exchange Agent together with such letter of
transmittal, duly executed and completed in accordance with the instructions
thereto, the holder of VIDEO Shares represented by such VIDEO Certificate shall
be entitled to receive in exchange therefor (x) a certificate representing that
number of whole shares of SENTRY Common Stock and (y) a check representing the
amount of cash in lieu of fractional shares (in accordance with Section 3.6(f)
below), if any, and unpaid dividends and distributions, if any, which such
holder has the right to receive in respect of the VIDEO Certificate surrendered
pursuant to the provisions of this Article III, after giving effect to any
required withholding tax, and the VIDEO Shares represented by the VIDEO
Certificate so surrendered shall forthwith be canceled. No interest will be paid
or accrued on the cash in lieu of fractional shares and unpaid dividends and
distributions, if any, payable to holders of VIDEO Shares. In the event of a
transfer of ownership of VIDEO Shares which is not registered in the transfer
records of VIDEO, a certificate representing the proper number of shares of
SENTRY Common Stock, together with a check for the cash to be paid in lieu of
fractional shares (in accordance with Section 3.6(f) below), may be issued to
such a transferee if the VIDEO Certificate representing such VIDEO Shares is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid.
(c) Promptly after the Effective Time, SENTRY shall cause the
Exchange Agent to mail to each holder of record of KNOGO Shares (i) a letter of
transmittal which shall specify that delivery shall be effected, and risk of
loss and title to such KNOGO Shares shall pass, only upon delivery of the KNOGO
Certificates representing such KNOGO Shares to the Exchange Agent and which
shall be in such form and have such other provisions as SENTRY may reasonably
specify and (ii) instructions for use in effecting the surrender of such KNOGO
Certificates in exchange for certificates representing shares of SENTRY Common
Stock, SENTRY Class A Preferred Stock and cash in lieu of fractional shares.
Upon surrender of a KNOGO Certificate for cancellation to the Exchange Agent
together with such letter of transmittal, duly executed and completed in
accordance with the instructions thereto, the holder of KNOGO Shares represented
by such KNOGO Certificate
7
shall be entitled to receive in exchange therefor (x) a certificate representing
that number of whole shares of SENTRY Common Stock, (y) a certificate
representing that number of whole shares of SENTRY Class A Preferred Stock, and
(z) a check representing the amount of cash in lieu of fractional shares (in
accordance with Section 3.6(f) below), if any, and unpaid dividends and
distributions, if any, which such holder has the right to receive in respect of
the KNOGO Certificate surrendered pursuant to the provisions of this Article
III, after giving effect to any required withholding tax, and the KNOGO Shares
represented by the KNOGO Certificate so surrendered shall forthwith be canceled.
No interest will be paid or accrued on the cash in lieu of fractional shares and
unpaid dividends and distributions, if any, payable to holders of KNOGO Shares.
In the event of a transfer of ownership of KNOGO Shares which is not registered
in the transfer records of KNOGO, a certificate representing the proper number
of shares of SENTRY Common Stock and SENTRY Class A Preferred Stock and a check
for the cash to be paid in lieu of fractional shares (in accordance with Section
3.6(f) below), may be issued to such a transferee if the KNOGO Certificate
representing such KNOGO Shares is presented to the Exchange Agent, accompanied
by all documents required to evidence and effect such transfer and to evidence
that any applicable stock transfer taxes have been paid.
(d) Notwithstanding any other provisions of this Agreement, no
dividends or other distributions declared after the Effective Time on SENTRY
Common Stock or SENTRY Class A Preferred Stock shall be paid with respect to any
shares represented by a VIDEO or KNOGO Certificate, as the case may be, until
such Certificate is surrendered for exchange as provided herein. Subject to the
effect of applicable laws, following surrender of any such VIDEO or KNOGO
Certificate, there shall be paid to the holder of the certificates representing
whole shares of SENTRY Common Stock or SENTRY Class A Preferred Stock issued in
exchange therefor, without interest, (i) at the time of such surrender, the
amount of dividends or other distributions with a record date after the
Effective Time theretofore payable with respect to such whole shares of SENTRY
Common Stock or SENTRY Class A Preferred Stock and not paid, less the amount of
any withholding taxes which may be required thereon, and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of SENTRY Common Stock or
SENTRY Class A Preferred Stock, less the amount of any withholding taxes which
may be required thereon.
(e) At or after the VIDEO Effective Time, there shall be no
transfers on the stock transfer books of VIDEO of the VIDEO Shares which were
outstanding immediately prior to the VIDEO Effective Time. At or after the KNOGO
Effective Time, there shall be no transfers on the stock transfer books of KNOGO
of the KNOGO Shares which were outstanding immediately prior to the KNOGO
8
Effective Time. If, after the Effective Time, VIDEO or KNOGO Certificates are
presented to SENTRY, they shall be canceled and exchanged for certificates for
shares of SENTRY Common Stock (and SENTRY Class A Preferred Stock in the case of
KNOGO Shares) and cash in lieu of fractional shares (in accordance with Section
3.6(f) below), if any, deliverable in respect thereof pursuant to this Agreement
in accordance with the procedures set forth in this Article III. Certificates
surrendered for exchange by any person constituting an "affiliate" of KNOGO or
VIDEO for purposes of Rule 145(c) under the Securities Act of 1933, as amended
(the "Securities Act"), shall not be exchanged until SENTRY has received a
written agreement from such person as provided in Section 6.9.
(f) No fractional shares of SENTRY Common Stock or SENTRY
Class A Preferred Stock shall be issued pursuant hereto. As promptly as possible
following the Effective Time, the Exchange Agent shall determine the excess of
(i)(A) the number of full shares of SENTRY Common Stock delivered to the
Exchange Agent by SENTRY pursuant to Section 3.6(a) over (B) the number of full
shares of SENTRY Common Stock to be distributed to the holders of VIDEO Shares
and KNOGO Shares pursuant to Sections 3.6(b) and 3.6(c) (such excess being
herein referred to as the "Excess Common Shares"), and (ii)(A) the number of
full shares of SENTRY Class A Preferred Stock delivered to the Exchange Agent by
SENTRY pursuant to Section 3.6(a) over (B) the number of full shares of SENTRY
Class A Preferred Stock to be distributed to the holders of KNOGO Shares
pursuant to Sections 3.6(c) (such excess being herein referred to as the "Excess
Preferred Shares"). As soon after the Effective Date as practicable, the
Exchange Agent, as agent for the holders of SENTRY Common Stock and SENTRY Class
A Preferred Stock, shall sell the Excess Common Shares and Excess Preferred
Shares at the then prevailing prices on the NASDAQ Stock Market's National
Market ("NASDAQ"), or such other national securities exchange as is applicable,
through one or more member firms of NASDAQ, or other national securities
exchange, as the case may be, in round lots to the extent practicable. SENTRY
shall pay all commissions, transfer taxes and other out-of-pocket transactions
costs, including the expenses and compensation of the Exchange Agent incurred in
connection with such sale of the Excess Common Shares and Excess Preferred
Shares. Until the proceeds of such sale or sales have been distributed to the
holders of SENTRY Common Stock or SENTRY Class A Preferred Stock entitled to
receipt of such proceeds, the Exchange Agent shall hold such proceeds in trust
for those holders of SENTRY Common Stock and SENTRY Class A Preferred Stock. The
Exchange Agent shall determine the portion of the proceeds from the sale of (i)
the Excess Common Shares (the "Excess Common Shares Proceeds") to which each
holder of SENTRY Common Stock is entitled, if any, by multiplying the amount of
the Excess Common Shares Proceeds by a fraction, the numerator of which is the
amount of the fractional share interest to which such holder of SENTRY Common
Stock is entitled, and the denominator of which is the aggregate
9
amount of fractional share interests to which all of the holders of SENTRY
Common Stock are entitled, and (ii) the Excess Preferred Shares (the "Excess
Preferred Shares Proceeds") to which each holder of SENTRY Class A Preferred
Stock is entitled, if any, by multiplying the amount of the Excess Preferred
Shares Proceeds by a fraction, the numerator of which is the amount of the
fractional share interest to which such holder of SENTRY Class A Preferred Stock
is entitled, and the denominator of which is the aggregate amount of fractional
share interests to which all of the holders of SENTRY Class A Preferred Stock
are entitled. As soon as practicable after the sale of the Excess Common Shares
and the Excess Preferred Shares and the determination of the amount of cash, if
any, to be paid to each holder of SENTRY Common Stock and SENTRY Class A
Preferred Stock in lieu of any fractional share interests, the Exchange Agent
shall distribute such amounts to the holders of SENTRY Common Stock and SENTRY
Class A Preferred Stock entitled thereto and who have theretofore delivered
VIDEO Certificates or KNOGO Certificates for SENTRY Company Common Stock and/or
SENTRY Class A Preferred Stock, as the case may be, pursuant to this Article
III.
(g) Any portion of the Exchange Fund (including the proceeds
of any investments thereof and any shares of SENTRY Common Stock and SENTRY
Class A Preferred Stock) that remains unclaimed by the former stockholders of
KNOGO or VIDEO one year after the Effective Time shall be delivered to SENTRY.
Any former stockholder of KNOGO or VIDEO who has not theretofore complied with
this Article III shall thereafter look only to SENTRY for payment of their
shares of SENTRY Common Stock, SENTRY Class A Preferred Stock, cash in lieu of
fractional shares and unpaid dividends and distributions on the SENTRY Common
Stock and SENTRY Class A Preferred Stock deliverable in respect of each VIDEO or
KNOGO Share such stockholder holds as determined pursuant to this Agreement, in
each case, without any interest thereon.
(h) None of VIDEO, KNOGO, SENTRY, VMC, SMC, the Exchange Agent
or any other person shall be liable to any former holder of VIDEO Shares or
KNOGO Shares for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(i) In the event any VIDEO or KNOGO Certificate shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such Certificate to be lost, stolen or destroyed and, if
required by SENTRY, the posting by such person of a bond in such reasonable
amount as SENTRY may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the shares of SENTRY
Common Stock (and SENTRY Class A Preferred Stock in the case of KNOGO Shares)
and cash in lieu of fractional shares (in accordance with Section 3.6(f) below),
and
10
unpaid dividends and distributions on shares of SENTRY Common Stock (and SENTRY
Class A Preferred Stock in the case of KNOGO Shares) as provided in this Section
3.6, deliverable in respect thereof pursuant to this Agreement.
3.7 Adjustment of Merger Consideration. In the event that, (i)
subsequent to the date of this Agreement but prior to the VIDEO Effective Time,
the outstanding shares of VIDEO shall have been changed into a different number
of shares or a different claim as a result of a stock split, reverse stock
split, stock dividend, subdivision, reclassification, split, combination,
exchange, recapitalization or other similar transaction, or (ii) subsequent to
the date of this Agreement but prior to the KNOGO Effective Time, the
outstanding shares of KNOGO shall have been changed into a different number of
shares or a different claim as a result of a stock split, reverse stock split,
stock dividend, subdivision, reclassification, split, combination, exchange,
recapitalization or other similar transaction, then the Merger Consideration
shall be appropriately adjusted.
3.8 VIDEO Stock Options. (a) At the VIDEO Effective Time, all
outstanding options and other rights to acquire shares granted to employees
under any stock option or purchase plan, program or similar arrangement (each,
as amended, an "Option Plan" and, such options and other rights, "Stock
Options") of VIDEO and, with respect to employees and non-employees, all
outstanding warrants to purchase VIDEO Shares (the "Warrants"), whether or not
such Stock Options or Warrants are then exercisable or vested, will be assumed
by SENTRY and shall be exercisable upon the same terms and conditions as under
the applicable Warrant or Option Plan and option agreement issued thereunder,
except that (i) each such Stock Option or Warrant shall be exercisable for that
whole number of shares of SENTRY Common Stock (to the nearest share) into which
the number of VIDEO Shares subject to such Stock Option or Warrant immediately
prior to the Effective Time would be converted under Section 3.1, and (ii) the
option exercise price or Warrant exercise price per share of SENTRY Common Stock
shall be an amount equal to the option exercise price or warrant exercise price
per VIDEO Share of such Stock Option or Warrant in effect immediately prior to
the VIDEO Effective Time divided by the VIDEO Merger Consideration (the option
exercise price or Warrant exercise price per VIDEO Share, as so determined,
being rounded upwards to the nearest full cent). No payment shall be made for
fractional interests.
(b) Except as provided herein or as otherwise agreed to by the
parties and to the extent permitted by the Option Plans, the Option Plans of
VIDEO shall terminate as of the VIDEO Effective Time and any rights under any
provisions in any other plan, program or arrangement providing for the issuance
or grant by VIDEO of any interest in respect of the capital stock of VIDEO shall
be canceled as of the VIDEO Effective Time.
11
3.9 KNOGO Stock Options. (a) At the KNOGO Effective Time, all
outstanding options and other rights to acquire Shares granted to employees
under any Option Plan of KNOGO, whether or not then exercisable or vested, will
be assumed by SENTRY and shall be exercisable upon the same terms and conditions
as under the applicable Option Plan and option agreement issued thereunder,
except that (A)(i) each such Stock Option shall be exercisable for that whole
number of shares of SENTRY Common Stock (to the nearest share) into which the
number of KNOGO Shares subject to such Stock Option immediately prior to the
Effective Time would be converted under Section 3.2, and (ii) each such Stock
Option shall be exercisable for that whole number of shares of SENTRY Class A
Preferred Stock (to the nearest share) into which the number of KNOGO Shares
subject to such Stock Option immediately prior to the Effective Time would be
converted under Section 3.2, provided that if all of the issued and outstanding
SENTRY Class A Preferred Stock has been theretofore redeemed or converted in the
manner set forth in the SENTRY Certificate of Incorporation, attached hereto as
Exhibit A, then in lieu of the SENTRY Class A Preferred Stock, the holders of
such Stock Options shall receive the same consideration paid to the holders of
SENTRY Class A Preferred Stock upon such redemption or conversion, and (B) the
option exercise price per share of SENTRY Common Stock (including SENTRY Class A
Preferred Stock) shall be an amount equal to the option exercise price per KNOGO
Share of such Stock Option in effect immediately prior to the KNOGO Effective
Time divided by the KNOGO Common Stock Consideration (the option exercise price
per KNOGO Share, as so determined, being rounded upwards to the nearest full
cent). No payment shall be made for fractional interests.
(b) Except as provided herein or as otherwise agreed to by the
parties and to the extent permitted by the Option Plans, the Option Plans of
KNOGO shall terminate as of the KNOGO Effective Time and any rights under any
provisions in any other plan, program or arrangement providing for the issuance
or grant by KNOGO of any interest in respect of the capital stock of KNOGO shall
be canceled as of the KNOGO Effective Time.
3.10 Stockholder Approval. (a) This Agreement shall be
submitted for consideration and approval to the holders of VIDEO Shares at a
special meeting of stockholders duly held for such purpose by VIDEO (the "VIDEO
Stockholders' Meeting").
(b) This Agreement shall be submitted for consideration and
approval to the holders of KNOGO Shares at a special meeting of stockholders
duly held for such purpose by KNOGO (the "KNOGO Stockholders' Meeting").
(c) VIDEO and KNOGO shall coordinate with respect to the
timing of the VIDEO Stockholders' Meeting and the KNOGO Stockholders' Meeting
and shall endeavor to hold such meetings on the same day and time and as soon as
practicable after the date
12
hereof. Subject to their fiduciary duties, the respective boards of directors of
VIDEO and KNOGO shall recommend that their respective stockholders approve this
Agreement and the transactions contemplated hereby, and such recommendation
shall be contained in the Joint Proxy Statement/Prospectus (as defined in
Section 6.7) of VIDEO and KNOGO included in the Registration Statement (as
defined in Section 6.7) and distributed to the stockholders of VIDEO and KNOGO
in connection with the VIDEO Stockholders' Meeting and the KNOGO Stockholders'
Meeting.
(d) SENTRY shall take any and all actions necessary for the
proper approvals and authorizations to be adopted by the boards of directors and
stockholders of SENTRY, VMC and SMC, respectively, to effectuate the
transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF KNOGO
Except as set forth in KNOGO's disclosure schedule delivered
to VIDEO in connection with this Agreement (the "KNOGO Disclosure Schedule") or
the KNOGO SEC Documents (as defined in Section 4.6 below), KNOGO hereby
represents and warrants to VIDEO as follows:
4.1 Organization and Qualification. Each of KNOGO and its
subsidiaries (a) is duly incorporated, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization, (b) has
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as it is now being conducted and (c) is in good
standing and duly qualified to do business in each jurisdiction in which the
transaction of its business makes such qualification necessary, except where the
failure to be so organized, existing, qualified and in good standing or to have
such power or authority would not have a Material Adverse Effect (as defined in
Section 9.3(d) below) on KNOGO. True and complete copies of the Certificate of
Incorporation and the By-Laws, as amended to date, of KNOGO and its subsidiaries
have been made available to VIDEO.
4.2 Capitalization. (a) The authorized capital stock of KNOGO
consists of 10,000,000 KNOGO Shares and 3,000,000 shares of preferred stock, par
value $.01 per share (the "KNOGO Preferred Stock"). As of the date of this
Agreement, (i) 5,772,032 KNOGO Shares are issued and outstanding and no KNOGO
Shares are held in treasury, (ii) 678,700 KNOGO Shares are reserved for issuance
pursuant to outstanding Stock Options and 575,300 Shares are reserved for
issuance in respect of future grants of Stock Options and (iii) no shares of
KNOGO Preferred Stock are issued and outstanding. All outstanding KNOGO Shares
are validly issued, fully paid and nonassessable and are not subject to
preemptive
13
rights. Except as disclosed in the KNOGO SEC Documents or in Section 4.2(a) of
the KNOGO Disclosure Schedule, there are no outstanding subscriptions, options,
warrants, calls, rights, commitments or any other agreements to which KNOGO is a
party or by which KNOGO is bound which obligate KNOGO to (i) issue, deliver or
sell or cause to be issued, delivered or sold any additional KNOGO Shares or any
other capital stock of KNOGO or any other securities convertible into, or
exercisable or exchangeable for, or evidencing the right to subscribe for, any
such KNOGO Shares or (ii) purchase, redeem or otherwise acquire any KNOGO Shares
and any other capital stock of KNOGO.
(b) All outstanding KNOGO Shares are duly listed for trading
on the American Stock Exchange ("AMEX").
(c) KNOGO owns, directly or indirectly, all of the outstanding
shares of or other interests in each of its subsidiaries, which subsidiaries are
listed in Section 4.2(c) of the KNOGO Disclosure Schedule. Each of the
outstanding shares of capital stock of each of KNOGO's subsidiaries has been
duly authorized, is validly paid and nonassessable, and is owned, directly or
indirectly, by KNOGO, free and clear of all liens, pledges, security interests,
claims or other encumbrances, except for such liens, pledges, security
interests, claims or encumbrances that would not have a Material Adverse Effect
on KNOGO. Schedule 4.2(c) of the KNOGO Disclosure Schedule sets forth the
following information for each of KNOGO's subsidiaries, if applicable: (i) name
and jurisdiction of incorporation or organization; (ii) authorized capital stock
or share capital; and (iii) number of issued and outstanding shares of capital
stock or share capital.
(d) Except as set forth in Section 4.2(d) of the KNOGO
Disclosure Schedule, KNOGO does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
(e) Except as provided in the KNOGO SEC Documents or in
Section 4.2(e) of the KNOGO Disclosure Schedule, there are no voting trusts or
shareholder agreements to which KNOGO is a party with respect to the voting of
the capital stock of KNOGO.
4.3 Authorization and Validity of Agreement. KNOGO has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby in accordance with the
terms hereof (subject to the approval and adoption of this Agreement and the
KNOGO Merger by the holders of a majority of the outstanding KNOGO Shares, and
the filing and recordation of appropriate merger documents as required by the
DGCL). KNOGO's Board of Directors (the "KNOGO Board") has duly authorized the
execution, delivery and performance of this Agreement by KNOGO, and no other
corporate proceedings on the part
14
of KNOGO are necessary to authorize this Agreement or the transactions
contemplated hereby (other than the approval and adoption of this Agreement and
the KNOGO Merger by the holders of a majority of the outstanding KNOGO Shares).
This Agreement has been duly executed and delivered by KNOGO and, assuming this
Agreement constitutes the legal, valid and binding obligation of VIDEO, SENTRY,
VMC and SMC, constitutes the legal, valid and binding obligation of KNOGO,
enforceable against KNOGO in accordance with its terms, except as may be limited
by any bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance
or other similar laws affecting the enforcement of creditors' rights generally
or by general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
4.4 Consents and Approvals. (a) Neither the execution and
delivery of this Agreement by KNOGO nor the consummation by KNOGO of the
transactions contemplated hereby will require on the part of KNOGO any consent,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, except (i) as may be required in
connection with the applicable requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (ii) pursuant to the
applicable requirements of the Securities Act, the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"), the AMEX on which the KNOGO Shares are
listed, and state securities or "blue sky" laws and state takeover laws, (iii)
the filing and recordation of the Certificate of Merger pursuant to the DGCL and
appropriate documents with the relevant authorities of other states in which
KNOGO is authorized to do business, (iv) as set forth in Section 4.4 of the
KNOGO Disclosure Schedule or (v) where the failure to obtain such consent,
approval, authorization or permit, or to make such filing or notification, would
not have a Material Adverse Effect on KNOGO or prevent the consummation of the
transactions contemplated hereby. The affirmative vote of the holders of a
majority of the outstanding KNOGO Shares is the only vote of the holders of
capital stock of KNOGO necessary to approve the KNOGO Merger.
(b) The KNOGO Board has approved the execution of the
Support/Voting Agreements to be entered into between KNOGO and certain VIDEO
stockholders.
4.5 No Violation. Except as set forth in Section 4.5 of the
KNOGO Disclosure Schedule, assuming the KNOGO Merger has been duly approved by
the holders of a majority of the outstanding KNOGO Shares, neither the execution
and delivery of this Agreement by KNOGO nor the consummation by KNOGO of the
transactions contemplated hereby will (a) conflict with or violate the Articles
of Incorporation, as amended, or By-Laws of KNOGO or any of its subsidiaries,
(b) result in a violation or breach of, constitute a default (with or without
notice or lapse of time, or both) under,
15
give rise to any right of termination, cancellation or acceleration of, or
result in the imposition of any lien, charge or other encumbrance on any assets
or property of KNOGO or any of its subsidiaries pursuant to any note, bond,
mortgage, indenture, contract, agreement, lease, license or other instrument or
obligation to which KNOGO or any of its subsidiaries is a party or by which
KNOGO, any of its subsidiaries, or any of their respective assets or properties
are bound, except for such violations, breaches and defaults (or rights of
termination, cancellation or acceleration or lien or other charge or
encumbrance) as to which requisite waivers or consents have been obtained or
which would not have a Material Adverse Effect on KNOGO or prevent the
consummation of the transactions contemplated hereby or (c) assuming the
consents, approvals, authorizations or permits and filings or notifications
referred to in Section 4.4 and this Section 4.5 are duly and timely obtained or
made and the approval of the KNOGO Merger by the holders of a majority of the
outstanding KNOGO Shares has been obtained, violate any order, writ, injunction,
decree, statute, rule or regulation applicable to KNOGO, any of its subsidiaries
or any of their respective assets and properties, except for such violations
which would not have a Material Adverse Effect on KNOGO or prevent the
consummation of the transactions contemplated hereby.
4.6 SEC Reports; Financial Statements. (a) Since January 1,
1995, KNOGO has filed with the Securities and Exchange Commission (the "SEC")
all forms, reports, schedules, statements and other documents required to be
filed by it with the SEC pursuant to the Exchange Act, the Securities Act and
the SEC's rules and regulations thereunder (collectively, the "KNOGO SEC
Documents"). The KNOGO SEC Documents, including, without limitation, any
financial statements or schedules included therein, at the time filed, or in the
case of registration statements on their respective effective dates, (i)
complied as to form in all material respects with the applicable requirements of
the Exchange Act and the Securities Act, as the case may be, and the applicable
rules and regulations of the SEC thereunder and (ii) did not at the time filed
(or, in the case of registration statements, at the time of effectiveness),
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(b) Each of the consolidated financial statements of KNOGO
(including any related notes thereto) included in the KNOGO SEC Documents
(excluding the KNOGO SEC Documents described in Section 4.7 hereof) comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the period involved (except as may be indicated in
such financial statements or in the notes thereto or,
16
in the case of unaudited financial statements, as permitted by the requirements
of Form 10-Q) and fairly present in all material respects (subject, in the case
of the unaudited statements, to normal year-end adjustments and the absence of
footnotes) the financial position of KNOGO as of the dates thereof and the
results of KNOGO's operations and cash flows for the periods presented therein.
4.7 Joint Proxy Statement/Prospectus. None of the information
supplied by KNOGO to be included in the Joint Proxy Statement/Prospectus or the
Registration Statement will, in the case of the Joint Proxy Statement/Prospectus
or any amendments thereof or supplements thereto, at the time of the mailing of
the Joint Proxy Statement/Prospectus or any amendments thereof or supplements
thereto, and at the time of the KNOGO Stockholders' Meeting, or, in the case of
the Registration Statement, at the time it becomes effective and at the
Effective Time, contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Joint Proxy Statement/Prospectus will comply as to form in
all material respects with the provisions of the Securities Act and the Exchange
Act. Notwithstanding the foregoing, KNOGO makes no representation or warranty
with respect to the statements made in the Joint Proxy Statement/Prospectus
based on information supplied by or on behalf of VIDEO, SENTRY, VMC or SMC or
any of their respective affiliates specifically for inclusion therein.
4.8 Compliance with Law. Except as set forth in the KNOGO SEC
Documents or in Section 4.8 of the KNOGO Disclosure Schedule, neither KNOGO nor
any of its subsidiaries is in violation of any applicable statute, rule,
regulation, decree or order of any governmental or regulatory authority
applicable to KNOGO or its subsidiaries, except for violations which would not
have a Material Adverse Effect on KNOGO. Without limiting the foregoing, except
for matters which would not have a Material Adverse Effect on KNOGO and those
matters disclosed in the KNOGO SEC Documents or in Section 4.8 of the KNOGO
Disclosure Schedule, to the Knowledge of KNOGO, (a) the businesses of KNOGO and
its subsidiaries are being conducted in compliance with applicable Environmental
Laws (as defined below), (b) the businesses of KNOGO and its subsidiaries have
not made, caused or contributed to any material release of any hazardous or
toxic waste or substance into the environment and (c) neither KNOGO nor any of
its subsidiaries is subject to any compliance agreement or settlement agreement
from an alleged violation of Environmental Laws. For purposes hereof,
"Environmental Laws" shall mean all applicable laws relating to pollution or
protection of the environment, including the Resource Conservation and Recovery
Act, the Federal Water Pollution Control Act, the Toxic Substances Control Act
and the Comprehensive Environmental Response, Compensation and Liability Act.
Except as
17
set forth in the KNOGO SEC Documents or in Section 4.8 of the KNOGO Disclosure
Schedule or as contemplated or permitted by this Agreement, KNOGO and its
subsidiaries hold all permits, licenses, exemptions, orders and approvals of
governmental and regulatory authorities necessary for the conduct of their
respective businesses, as now being conducted, except where the failure to hold
permits, licenses, exemptions, orders and approvals would not have a Material
Adverse Effect on KNOGO.
4.9 Absence of Certain Changes. Except as disclosed in the
KNOGO SEC Documents or in Section 4.9 of the KNOGO Disclosure Schedule, since
June 30, 1996 through the date of this Agreement, KNOGO and its subsidiaries
have conducted their respective businesses only in the ordinary course and there
has not been (a) any changes which could have a Material Adverse Effect on
KNOGO; (b) any declaration, setting aside or payment of any dividend or payment
in cash, stock or property or other distribution with respect to KNOGO's capital
stock; (c) any reclassification, combination, split, subdivision, redemption,
purchase or other acquisition, directly or indirectly, of any of KNOGO's capital
stock; (d) any material change in KNOGO's accounting principles, practices or
methods; or (e) any material alteration in the character or conduct of KNOGO's
business from that conducted and contemplated as of June 30, 1996.
4.10 No Undisclosed Liabilities. Except (a) for liabilities
incurred in the ordinary course of business, (b) liabilities incurred in
connection with the transactions contemplated by this Agreement, (c) liabilities
which would not have a Material Adverse Effect on KNOGO and (d) as disclosed in
the KNOGO SEC Documents or as set forth in Section 4.10 of the KNOGO Disclosure
Schedule, from June 30, 1996 until the date of this Agreement, KNOGO and its
subsidiaries had not incurred any material liabilities that would be required to
be reflected in or reserved against a consolidated balance sheet of KNOGO
prepared in accordance with generally accepted accounting principles.
4.11 Litigation. Except as disclosed in the KNOGO SEC
Documents or in Section 4.11 of the KNOGO Disclosure Schedule, there are no
claims, actions, proceedings or governmental investigations pending, nor has
KNOGO or any of its subsidiaries received notice of any threatened, claims,
actions, proceedings or governmental investigations against KNOGO or any of its
subsidiaries by or before any court or other governmental or regulatory body,
which, if adversely determined, would have a Material Adverse Effect on KNOGO.
Neither KNOGO or any of its subsidiaries nor their respective assets is subject
to any outstanding and unsatisfied order, writ, judgment, injunction or decree
which would have a Material Adverse Effect on KNOGO.
4.12 Employee Benefit Matters. All employee benefit plans and
other benefit arrangements covering employees of KNOGO
18
and its subsidiaries (the "KNOGO Benefit Plans") are listed in Section 4.12 of
the KNOGO Disclosure Schedule, except such benefit plans and other benefit
arrangements which are not material. True and complete copies of the KNOGO
Benefit Plans have been made available to VIDEO. To the extent applicable, the
KNOGO Benefit Plans comply in all material respects with the requirements of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
Code, except as disclosed in Section 4.12(a) of the KNOGO Disclosure Schedule,
and any KNOGO Benefit Plan intended to be qualified under Section 401(a) of the
Code has been determined by the Internal Revenue Service (the "IRS") to be so
qualified. No KNOGO Benefit Plan is covered by Title IV of ERISA or Section 412
of the Code. Neither KNOGO nor any of its subsidiaries has incurred any
liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA
with respect to any KNOGO Benefit Plan, except as would not have a Material
Adverse Effect on KNOGO. Except as disclosed in Section 4.12(a) of the KNOGO
Disclosure Schedule, each KNOGO Benefit Plan has been maintained and
administered in all material respects in compliance with its terms and with
ERISA and the Code to the extent applicable thereto. To the Knowledge of KNOGO,
there are no pending, nor has KNOGO or any of its subsidiaries received notice
of any threatened, claims against or otherwise involving any of the KNOGO
Benefit Plans, except as would not have a Material Adverse Effect on KNOGO. All
material contributions required to be made as of the date this Agreement to the
KNOGO Benefit Plans have been made or provided for. Neither KNOGO nor any entity
under "common control" with KNOGO within the meaning of Section 4001 of ERISA
has contributed to, or been required to contribute to, any "multi-employer plan"
(as defined in Sections 3(37) and 4001(a)(3) of ERISA).
4.13 Taxes. Except as disclosed in the KNOGO SEC Documents or
in Section 4.13 of the KNOGO Disclosure Schedule, KNOGO and each of its
subsidiaries (a) have filed all federal, state and foreign tax returns required
to be filed by KNOGO or any of its subsidiaries for tax years ended prior to the
date of this Agreement, except for those tax returns the failure of which to
file would not have a Material Adverse Effect on KNOGO or for which requests for
extensions have been timely filed, and all such returns are complete in all
material respects, (b) have paid or accrued all taxes shown to be due and
payable on such returns, (c) have accrued all such taxes for such periods
subsequent to the periods covered by such returns ending on or prior to the date
hereof and (d) have "open" years for federal income tax returns only as set
forth in the KNOGO SEC Documents or in Section 4.13 of the KNOGO Disclosure
Schedule. There are no liens for taxes on the assets of KNOGO or any of its
subsidiaries, except for liens that would not have a Material Adverse Effect on
KNOGO, and there is no pending, nor has KNOGO or any of its subsidiaries
received notice of any threatened, tax audit, examination, refund litigation or
adjustment in controversy which, if determined adversely, would have a Material
Adverse Effect on KNOGO. Neither KNOGO nor any of
19
its subsidiaries is a party to any agreement providing for the allocation or
sharing of taxes.
4.14 Intellectual Property. To the Knowledge of KNOGO, KNOGO
and its subsidiaries own or possess rights in all patents, trademarks,
tradenames, copyrights and other intellectual property rights used in or
necessary for the conduct of the businesses of KNOGO and its subsidiaries as now
operated (collectively, "KNOGO Intellectual Property"), except where the failure
to own or possess any such KNOGO Intellectual Property would not have a Material
Adverse Effect on KNOGO. Neither KNOGO nor any of its subsidiaries has received
any notice that the products of KNOGO and its subsidiaries, or the use thereof,
violate, infringe or otherwise conflict with the Intellectual Property of third
parties, except for such violations, infringements or conflicts that would not
have a Material Adverse Effect on KNOGO or as disclosed in the KNOGO SEC
Documents or in Section 4.14 of the KNOGO Disclosure Schedule.
4.15 Labor Matters. Neither KNOGO nor any of its subsidiaries
is a party to, or bound by, any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or, to
the Knowledge of KNOGO, threatened against KNOGO or any of its subsidiaries
relating to their respective businesses, except for any such proceeding that
would not have a Material Adverse Effect on KNOGO.
4.16 Brokers and Finders. No broker, finder or investment bank
has acted directly or indirectly for KNOGO, nor has KNOGO incurred any
obligation to pay any brokerage, finder's or other fee or commission in
connection with the transactions contemplated hereby, other than Donald & Co.
Securities, the fees and expenses of which shall be borne by KNOGO.
4.17 Opinion of Financial Advisor. Donald & Co. Securities,
KNOGO's financial advisor, has delivered its opinion, dated the date of this
Agreement, to the KNOGO Board to the effect that, as of such date, the KNOGO
Merger Consideration is fair, from a financial point of view, to the holders of
KNOGO Shares.
4.18 Section 351/Reorganization Treatment. Neither KNOGO nor
any KNOGO subsidiary has taken or failed to take any action or has knowledge of
any fact or circumstance that is reasonably likely to, (i) prevent the KNOGO
Merger from qualifying as an exchange governed by Section 351 of the Code or
(ii) prevent the VIDEO Merger from constituting a reorganization within the
meaning of Section 368(a) of the Code or from qualifying as an exchange governed
by Section 351 of the Code.
4.19 VIDEO Shares Ownership. Except as disclosed in Section
4.19 of the KNOGO Disclosure Schedule, neither KNOGO nor
20
any of its affiliates owns any VIDEO Shares or other securities or rights
convertible, exchangeable or otherwise exercisable into VIDEO Shares.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF VIDEO, SENTRY, VMC AND SMC
Except as set forth in VIDEO's disclosure schedule delivered
to KNOGO in connection with this Agreement (the "VIDEO Disclosure Schedule") or
the VIDEO SEC Documents (as defined in Section 3.6 below), VIDEO, SENTRY, VMC
and SMC hereby represent and warrant to KNOGO as follows:
5.1 Organization and Qualification. Each of VIDEO, SENTRY, VMC
and SMC (a) is duly incorporated, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, (b) has the requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted and (c) is in good standing
and duly qualified to do business in each jurisdiction in which the transaction
of its business makes such qualification necessary, except where the failure to
be so organized, existing, qualified and in good standing or to have such power
or authority would not have a Material Adverse Effect on VIDEO, SENTRY, VMC or
SMC. True and complete copies of the Articles or Certificate of Incorporation,
as the case may be, and the By-Laws as amended to date, of VIDEO and its
subsidiaries have been made available to KNOGO.
5.2 Capitalization. (a) The authorized capital stock of VIDEO
consists of 10,000,000 VIDEO Shares. As of the date of this Agreement, (i)
4,841,962 VIDEO Shares are issued and outstanding and no VIDEO Shares are held
in treasury, (ii) 370,000 VIDEO Shares are reserved for issuance pursuant to
outstanding stock options and 180,000 VIDEO Shares are reserved for issuance in
respect of future grants of stock options and (iii) 454,114 VIDEO Shares are
reserved for issuance pursuant to the warrants set forth in Section 5.2(a) of
the VIDEO Disclosure Schedule (the "Warrants"). All outstanding VIDEO Shares are
validly issued, fully paid and nonassessable and are not subject to preemptive
rights. Except as disclosed in the VIDEO SEC Documents (as defined in Section
5.6) or in Section 5.2(a) of the VIDEO Disclosure Schedule, there are no
outstanding subscriptions, options, warrants, calls, rights, commitments or any
other agreements to which VIDEO is a party or by which VIDEO is bound which
obligate VIDEO to (i) issue, deliver or sell or cause to be issued, delivered or
sold any additional VIDEO Shares or any other capital stock of VIDEO or any
other securities convertible into, or exercisable or exchangeable for, or
evidencing the right to subscribe for, any such VIDEO Shares or (ii) purchase,
21
redeem or otherwise acquire any VIDEO Shares and any other capital stock of
VIDEO.
(b) All outstanding VIDEO Shares are duly listed for trading
on the NASDAQ Stock Market's SmallCap Market (the "NASDAQ SmallCap").
(c) VIDEO owns, directly or indirectly, all of the outstanding
shares of or other interests in each of its subsidiaries, which subsidiaries are
listed in Section 5.2(c) of the VIDEO Disclosure Schedule. Each of the
outstanding shares of capital stock of each of VIDEO's subsidiaries has been
duly authorized, is validly paid and nonassessable, and is owned, directly or
indirectly, by VIDEO, free and clear of all liens, pledges, security interests,
claims or other encumbrances, except for such liens, pledges, security
interests, claims or encumbrances that would not have a Material Adverse Effect
on VIDEO. Schedule 5.2(c) of the VIDEO Disclosure Schedule sets forth the
following information for each of VIDEO's subsidiaries, if applicable: (i) name
and jurisdiction of incorporation or organization; (ii) authorized capital stock
or share capital; and (iii) number of issued and outstanding shares of capital
stock or share capital.
(d) Except as set forth in Section 5.2(d) of the VIDEO
Disclosure Schedule, VIDEO does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
(e) Except as provided in the VIDEO SEC Documents or in
Section 5.2(e) of the VIDEO Disclosure Schedule, there are no voting trusts or
shareholder agreements to which VIDEO is a party with respect to the voting of
the capital stock of VIDEO.
(f) The authorized capital stock of SENTRY consists of
100,000,000 shares of SENTRY Common Stock and 25,000,000 shares of preferred
stock, par value $0.001 per share (the "SENTRY Preferred Stock"). As of the date
of this Agreement, (i) one (1) share of SENTRY Common Stock is issued and
outstanding and no shares of SENTRY Common Stock are held in treasury, (ii) no
shares of SENTRY Common Stock are reserved for issuance pursuant to outstanding
Stock Options and no shares of SENTRY Common Stock are reserved for issuance in
respect of future grants of Stock Options and (iii) no shares of SENTRY
Preferred Stock are issued and outstanding. All outstanding shares of SENTRY
Common Stock are validly issued, fully paid and nonassessable and are not
subject to preemptive rights. There are no outstanding subscriptions, options,
warrants, calls, rights, commitments or any other agreements, other than this
Agreement, to which SENTRY is a party or by which SENTRY is bound which obligate
SENTRY to (i) issue, deliver or sell or cause to be issued, delivered or sold
any additional capital stock of SENTRY or
22
any other securities convertible into, or exercisable or exchangeable for, or
evidencing the right to subscribe for, any such shares of SENTRY Common Stock or
(ii) purchase, redeem or otherwise acquire any capital stock of SENTRY. All of
the shares of SENTRY Common Stock and SENTRY Class A Preferred Stock to be
issued to holders of KNOGO Shares and VIDEO Shares have been duly authorized for
issuance and, when issued in accordance with the VIDEO Merger and the KNOGO
Merger and this Agreement, will be validly issued, fully paid and nonassessable,
and will not be subject to and will not be issued in violation of any preemptive
rights.
(g) The authorized capital stock of VMC consists of 100 shares
of VMC Common Stock. As of the date of this Agreement, (i) one share of VMC
Common Stock is issued and outstanding and no shares of VMC Common Stock are
held in treasury, and (ii) no shares of VMC Common Stock are reserved for
issuance pursuant to outstanding stock options and no shares of VMC Common Stock
are reserved for issuance in respect of future grants of stock options. All
outstanding shares of VMC Common Stock are validly issued, fully paid and
nonassessable and are not subject to preemptive rights. There are no outstanding
subscriptions, options, warrants, calls, rights, commitments or any other
agreements to which VMC is a party or by which VMC is bound which obligate VMC
to (i) issue, deliver or sell or cause to be issued, delivered or sold any
additional shares of VMC Common Stock or any other capital stock of VMC or any
other securities convertible into, or exercisable or exchangeable for, or
evidencing the right to subscribe for, any such shares of VMC Common Stock or
(ii) purchase, redeem or otherwise acquire any shares of VMC Common Stock and
any other capital stock of VMC.
(h) The authorized capital stock of SMC consists of 100 shares
of SMC Common Stock. As of the date of this Agreement, (i) one share of SMC
Common Stock is issued and outstanding and no shares of SMC Common Stock are
held in treasury, and (ii) no shares of SMC Common Stock are reserved for
issuance pursuant to outstanding stock options and no shares of SMC Common Stock
are reserved for issuance in respect of future grants of stock options. All
outstanding shares of SMC Common Stock are validly issued, fully paid and
nonassessable and are not subject to preemptive rights. There are no outstanding
subscriptions, options, warrants, calls, rights, commitments or any other
agreements to which SMC is a party or by which SMC is bound which obligate SMC
to (i) issue, deliver or sell or cause to be issued, delivered or sold any
additional shares of SMC Common Stock or any other capital stock of SMC or any
other securities convertible into, or exercisable or exchangeable for, or
evidencing the right to subscribe for, any such shares of SMC Common Stock or
(ii) purchase, redeem or otherwise acquire any shares of SMC Common Stock and
any other capital stock of SMC.
23
5.3 Authorization and Validity of Agreement. Each of VIDEO,
SENTRY, VMC and SMC has the requisite corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby in accordance with the terms hereof (subject to the approval and adoption
of this Agreement, the VIDEO Merger and the KNOGO Merger by the holders of a
majority of the outstanding VIDEO Shares, SENTRY Common Stock, VMC Common Stock
and SMC Common Stock, as applicable, and the filing and recordation of
appropriate merger documents as required by the DGCL and the Minnesota Act). The
Boards of Directors of VIDEO (the "VIDEO Board"), SENTRY, VMC and SMC,
respectively, and VIDEO, as the sole stockholder of SENTRY, and SENTRY, as the
sole stockholder of VMC and SMC, have duly authorized the execution, delivery
and performance of this Agreement by each of VIDEO, SENTRY, VMC and SMC, and no
other corporate proceedings on the part of either VIDEO, SENTRY, VMC or SMC are
necessary to authorize this Agreement or the transactions contemplated hereby
(other than the approval and adoption of this Agreement, the VIDEO Merger and
the KNOGO Merger by the holders of a majority of the outstanding VIDEO Shares).
This Agreement has been duly executed and delivered by each of VIDEO, SENTRY,
VMC and SMC and, assuming this Agreement constitutes the legal, valid and
binding obligation of KNOGO, constitutes the legal, valid and binding obligation
of each of VIDEO, SENTRY, VMC and SMC, enforceable against each of VIDEO,
SENTRY, VMC and SMC in accordance with its terms, except as may be limited by
any bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally or
by general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
5.4 Consents and Approvals. (a) Neither the execution and
delivery of this Agreement by VIDEO, SENTRY, VMC and SMC nor the consummation by
VIDEO, SENTRY, VMC and SMC of the transactions contemplated hereby will require
on the part of VIDEO, SENTRY, VMC or SMC any consent, approval, authorization or
permit of, or filing with or notification to, any governmental or regulatory
authority, except (i) as may be required in connection with the applicable
requirements of the HSR Act, (ii) pursuant to the applicable requirements of the
Securities Act, the Exchange Act, and the rules and regulations promulgated
thereunder, the NASDAQ SmallCap on which VIDEO Shares are listed, and state
securities or "blue sky" laws and state takeover laws, (iii) the filing and
recordation of the Certificate of Merger, the Articles of Merger and other
merger documents pursuant to the DGCL and the Minnesota Act, (iv) as set forth
in Section 5.4 of the VIDEO Disclosure Schedule or (v) where the failure to
obtain such consent, approval, authorization or permit, or to make such filing
or notification, would not have a Material Adverse Effect on VIDEO, SENTRY, VMC
or SMC or prevent the consummation of the transactions contemplated hereby. The
affirmative vote of the holders of a majority of the outstanding
24
VIDEO Shares is the only vote of the holders of capital stock of VIDEO necessary
to approve the VIDEO Merger.
(b) The VIDEO Board has approved the execution of the
Support/Voting Agreements to be entered into between VIDEO and certain KNOGO
stockholders.
5.5 No Violation. Except as set forth in Section 5.5 of the
VIDEO Disclosure Schedule, assuming the VIDEO Merger has been duly approved by
the holders of a majority of the outstanding VIDEO Shares, neither the execution
and delivery of this Agreement by VIDEO, SENTRY, VMC or SMC nor the consummation
by VIDEO, SENTRY, VMC and SMC of the transactions contemplated hereby will (a)
conflict with or violate the Articles of Incorporation or By-Laws of VIDEO, the
SENTRY Certificate of Incorporation, the SENTRY Bylaws, the VMC Certificate of
Incorporation, the VMC Bylaws, the SMC Certificate of Incorporation, or the SMC
Bylaws, (b) result in a violation or breach of, constitute a default (with or
without notice or lapse of time, or both) under, give rise to any right of
termination, cancellation or acceleration of, or result in the imposition of any
lien, charge or other encumbrance on any assets or property of either of VIDEO,
SENTRY, VMC or SMC pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license or other instrument or obligation to which either of
VIDEO, SENTRY, VMC or SMC is a party or by which either of VIDEO, SENTRY, VMC or
SMC or any of their respective assets or properties are bound, except for such
violations, breaches and defaults (or rights of termination, cancellation or
acceleration or lien or other charge or encumbrance) as to which requisite
waivers or consents have been obtained or which would not have a Material
Adverse Effect on either of VIDEO, SENTRY, VMC or SMC or prevent the
consummation of the transactions contemplated hereby or (c) assuming the
consents, approvals, authorizations or permits and filings or notifications
referred to in Section 5.4 and this Section 5.5 are duly and timely obtained or
made, and the approval of the VIDEO Merger by the holders of a majority of the
outstanding VIDEO Shares has been obtained, violate any order, writ, injunction,
decree, statute, rule or regulation applicable to either of VIDEO, SENTRY, VMC
or SMC or any of their respective assets or properties, except for such
violations which would not in the aggregate have a Material Adverse Effect on
either of VIDEO, SENTRY, VMC or SMC, or prevent the consummation of the
transactions contemplated hereby.
5.6 SEC Reports; Financial Statements. (a) Since September 30,
1994, VIDEO has filed with the SEC all forms, reports, schedules, statements and
other documents required to be filed by it with the SEC pursuant to the Exchange
Act, the Securities Act and the SEC's rules and regulations thereunder
(collectively, the "VIDEO SEC Documents"). The VIDEO SEC Documents, including,
without limitation, any financial statements or schedules included therein, at
the time filed, or in the case of
25
registration statements on their respective effective dates, (i) complied as to
form in all material respects with the applicable requirements of the Exchange
Act and the Securities Act, as the case may be, and the applicable rules and
regulations of the SEC thereunder and (ii) did not at the time filed (or, in the
case of registration statements, at the time of effectiveness), contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements of VIDEO
(including any related notes thereto) included in the VIDEO SEC Documents
(excluding the VIDEO SEC Documents described in Section 5.7 hereof) comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the period involved (except as may be indicated in
such financial statements or in the notes thereto or, in the case of unaudited
financial statements, as permitted by the requirements of Form 10-Q) and fairly
present in all material respects (subject, in the case of the unaudited
statements, to normal year-end adjustments and the absence of footnotes) the
financial position of VIDEO as of the dates thereof and the results of the
VIDEO's operations and cash flows for the periods presented therein.
5.7 Joint Proxy Statement/Prospectus. None of the information
supplied by VIDEO, SENTRY, VMC or SMC to be included in the Joint Proxy
Statement/Prospectus or the Registration Statement will, in the case of the
Joint Proxy Statement/Prospectus or any amendments thereof or supplements
thereto, at the time of the mailing of the Joint Proxy Statement/Prospectus or
any amendments thereof or supplements thereto, and at the time of the VIDEO
Stockholders' Meeting, or, in the case of the Registration Statement, at the
time it becomes effective and at the Effective Time, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Joint Proxy
Statement/Prospectus will comply as to form in all material respects with the
provisions of the Securities Act and the Exchange Act. Notwithstanding the
foregoing, neither VIDEO, SENTRY, VMC nor SMC makes any representation or
warranty with respect to the statements made in the Joint Proxy
Statement/Prospectus based on information supplied by or on behalf of KNOGO or
any of its affiliates specifically for inclusion therein.
5.8 Compliance with Law. Except as set forth in the VIDEO SEC
Documents or in Section 5.8 of the VIDEO Disclosure Schedule, VIDEO is not in
violation of any applicable statute,
26
rule, regulation, decree or order of any governmental or regulatory authority
applicable to VIDEO, except for violations which would not have a Material
Adverse Effect on VIDEO. Without limiting the foregoing, except for matters
which would not have a Material Adverse Effect on VIDEO and those matters
disclosed in the VIDEO SEC Documents or in Section 5.8 of the VIDEO Disclosure
Schedule, to the Knowledge of VIDEO, (a) the business of VIDEO is being
conducted in compliance with applicable Environmental Laws, (b) the business of
VIDEO has not made, caused or contributed to any material release of any
hazardous or toxic waste or substance into the environment and (c) VIDEO is not
subject to any compliance agreement or settlement agreement from an alleged
violation of Environmental Laws. Except as set forth in the VIDEO SEC Documents
or in Section 5.8 of the VIDEO Disclosure Schedule or as contemplated or
permitted by this Agreement, VIDEO holds all permits, licenses, exemptions,
orders and approvals of governmental and regulatory authorities necessary for
the conduct of its businesses, as now being conducted, except where the failure
to hold permits, licenses, exemptions, orders and approvals would not have a
Material Adverse Effect on VIDEO.
5.9 Absence of Certain Changes. Except as disclosed in the
VIDEO SEC Documents or in Section 5.9 of the VIDEO Disclosure Schedule, since
June 30, 1996 through the date of this Agreement, VIDEO has conducted its
business only in the ordinary course and there has not been (a) any changes
which could have a Material Adverse Effect on VIDEO; (b) any declaration,
setting aside or payment of any dividend or payment in cash, stock or property
or other distribution with respect to VIDEO's capital stock; (c) any
reclassification, combination, split, subdivision, redemption, purchase or other
acquisition, directly or indirectly, of any of VIDEO's capital stock; (d) any
material change in VIDEO's accounting principles, practices or methods; or (e)
any material alteration in the character or conduct of VIDEO's business from
that conducted and contemplated as of June 30, 1996.
5.10 No Undisclosed Liabilities. Except (a) for liabilities
incurred in the ordinary course of business, (b) liabilities incurred in
connection with the transactions contemplated by this Agreement, (c) liabilities
which would not have a Material Adverse Effect on VIDEO, SENTRY, VMC or SMC and
(d) as disclosed in the VIDEO SEC Documents or as set forth in Section 5.10 of
the VIDEO Disclosure Schedule, from June 30, 1996 until the date of this
Agreement, VIDEO, SENTRY, VMC and SMC had not incurred any material liabilities
that would be required to be reflected in or reserved against a consolidated
balance sheet of VIDEO prepared in accordance with generally accepted accounting
principles.
5.11 Litigation. Except as disclosed in the VIDEO SEC
Documents or in Section 5.11 of the VIDEO Disclosure Schedule, there are no
claims, actions, proceedings or governmental investigations pending, nor has
VIDEO, SENTRY, VMC or SMC received
27
notice of any threatened, claims, actions, proceedings or governmental
investigations against VIDEO, SENTRY, VMC or SMC by or before any court or other
governmental or regulatory body, which, if adversely determined, would have a
Material Adverse Effect on VIDEO, SENTRY, VMC or SMC. Neither VIDEO, SENTRY, VMC
or SMC nor their respective assets is subject to any outstanding and unsatisfied
order, writ, judgment, injunction or decree which would have a Material Adverse
Effect on VIDEO, SENTRY, VMC or SMC.
5.12 Employee Benefit Matters. All employee benefit plans and
other benefit arrangements covering employees of VIDEO (the "VIDEO Benefit
Plans") are listed in Section 5.12 of the VIDEO Disclosure Schedule, except such
benefit plans and other benefit arrangements which are not material. True and
complete copies of the VIDEO Benefit Plans have been made available to KNOGO. To
the extent applicable, the VIDEO Benefit Plans comply in all material respects
with the requirements of ERISA, the Code, and any VIDEO Benefit Plan intended to
be qualified under Section 401(a) of the Code has been determined by the IRS to
be so qualified. No VIDEO Benefit Plan is covered by Title IV of ERISA or
Section 412 of the Code. VIDEO has not incurred any liability or penalty under
Section 4975 of the Code or Section 502(i) of ERISA with respect to any VIDEO
Benefit Plan, except as would not have a Material Adverse Effect on VIDEO. Each
VIDEO Benefit Plan has been maintained and administered in all material respects
in compliance with its terms and with ERISA and the Code to the extent
applicable thereto. To the Knowledge of VIDEO, there are no pending, nor has
VIDEO received notice of any threatened, claims against or otherwise involving
any of the VIDEO Benefit Plans, except as would not have a Material Adverse
Effect on VIDEO. All material contributions required to be made as of the date
this Agreement to the VIDEO Benefit Plans have been made or provided for.
Neither VIDEO nor any entity under "common control" with VIDEO within the
meaning of Section 4001 of ERISA has contributed to, or been required to
contribute to, any "multi-employer plan" (as defined in Sections 3(37) and
4001(a)(3) of ERISA).
5.13 Taxes. Except as disclosed in the VIDEO SEC Documents or
in Section 5.13 of the VIDEO Disclosure Schedule, VIDEO and each of its
subsidiaries (a) have filed all federal, state and foreign tax returns required
to be filed by VIDEO or any of its subsidiaries for tax years ended prior to the
date of this Agreement, except for those tax returns the failure of which to
file would not have a Material Adverse Effect on VIDEO or for which requests for
extensions have been timely filed, and all such returns are complete in all
material respects, (b) have paid or accrued all taxes shown to be due and
payable on such returns, (c) have accrued all such taxes for such periods
subsequent to the periods covered by such returns ending on or prior to the date
hereof and (d) have "open" years for federal income tax returns only as set
forth in the VIDEO SEC Documents or in Section 5.13 of the VIDEO Disclosure
Schedule. There are no liens for taxes on the
28
assets of VIDEO or any of its subsidiaries, except for liens that would not have
a Material Adverse Effect on VIDEO, and there is no pending, nor has VIDEO or
any of its subsidiaries received notice of any threatened, tax audit,
examination, refund litigation or adjustment in controversy which, if determined
adversely, would have a Material Adverse Effect on VIDEO. Neither VIDEO nor any
of its subsidiaries is a party to any agreement providing for the allocation or
sharing of taxes.
5.14 Intellectual Property. To the Knowledge of VIDEO, VIDEO
owns or possesses rights in all patents, trademarks, tradenames, copyrights and
other intellectual property rights used in or necessary for the conduct of
VIDEO's business as now operated (collectively, "VIDEO Intellectual Property"),
except where the failure to own or possess any such VIDEO Intellectual Property
would not have a Material Adverse Effect on VIDEO. VIDEO has not received any
notice that VIDEO's products or its use thereof violate, infringe or otherwise
conflict with the intellectual property of third parties, except for such
violations, infringements or conflicts that would not have a Material Adverse
Effect on VIDEO or as disclosed in the VIDEO SEC Documents or in Section 5.14 of
the VIDEO Disclosure Schedule.
5.15 Labor Matters. VIDEO is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair labor
practice or labor arbitration proceeding pending or, to the Knowledge of VIDEO,
threatened against VIDEO relating to its business, except for any such
proceeding that would not have a Material Adverse Effect on VIDEO.
5.16 Brokers and Finders. No broker, finder or investment bank
has acted directly or indirectly for either of VIDEO, SENTRY, VMC or SMC, nor
has either of VIDEO, SENTRY, VMC or SMC incurred any obligation to pay any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated hereby, other than Alex. Brown & Sons Incorporated
("Alex Brown"), the fees and expenses of which shall be borne by VIDEO.
5.17 Opinion of Financial Advisor. Alex Brown, VIDEO's
financial advisor, has delivered its opinion, dated the date of this Agreement,
to the VIDEO Board to the effect that, as of such date, the VIDEO Merger
Consideration is fair, from a financial point of view, to the holders of VIDEO
Shares.
5.18 Section 351/Reorganization Treatment. Neither VIDEO nor
any VIDEO subsidiary has taken or failed to take any action or has any knowledge
of any fact or circumstance that is reasonably likely to (i) prevent the VIDEO
Merger from qualifying as at least one of (A) a reorganization described in
Section 368(a) of the Code or (B) an exchange governed by Section 351 of the
Code, or (ii)
29
prevent the KNOGO Merger from qualifying as an exchange governed by Section 351
of the Code.
5.19 KNOGO Shares Ownership. Except as disclosed in Section
5.19 of the VIDEO Disclosure Schedule, neither VIDEO nor any of its affiliates
or subsidiaries owns any KNOGO Shares or other securities or rights convertible,
exchangeable or otherwise exercisable into KNOGO Shares.
5.20 Operations of SENTRY, VMC and SMC. SENTRY, VMC and SMC
have been formed solely for the purpose of engaging in the transactions
contemplated hereby and prior to the Effective Time will have engaged in no
other business activities.
ARTICLE VI
COVENANTS
6.1 Conduct of the Business of KNOGO and VIDEO Pending the
Reorganization. From the date hereof until the Effective Time, each of KNOGO and
VIDEO shall use commercially reasonable efforts to conduct its business in all
material respects only in the ordinary course consistent with past practice, and
to preserve intact its business organization and keep available the services of
its present key officers and employees (provided, that to satisfy the foregoing
obligation, KNOGO and VIDEO shall not be required to make any payments or enter
into or amend any contractual arrangements or understandings, except in the
ordinary course of business consistent with past practice) and, except as
otherwise required by applicable law or as set forth in Section 6.1 of the KNOGO
Disclosure Schedule or the VIDEO Disclosure Schedule, as the case may be,
neither KNOGO nor VIDEO shall, without the prior written consent of the other
party (which consent shall not be unreasonably withheld):
(a) amend its Articles or Certificate of Incorporation, as
amended, as the case may be, or By-Laws;
(b) declare, set aside or pay any dividend or other
distribution or payment in cash, stock or property in respect of its
capital stock, or reclassify, combine, split, subdivide or redeem,
purchase or otherwise acquire, directly or indirectly, any of its
capital stock;
(c) issue, grant, sell or pledge or agree to or authorize the
issuance, grant, sale or pledge of any shares of, or rights of any kind
to acquire any shares of, its capital stock other than KNOGO Shares or
VIDEO Shares issuable upon the exercise of Stock Options and Warrants;
30
(d) in the case of VIDEO, sell, assign or otherwise transfer
the shares of SENTRY Common Stock held by VIDEO;
(e) acquire, sell, transfer, lease or encumber any material
assets except in the ordinary course of business;
(f) adopt a plan of complete or partial liquidation or adopt
resolutions providing for the complete or partial liquidation,
dissolution, consolidation, merger, restructuring or recapitalization;
(g) grant any severance or termination pay to, or enter into
any employment agreement with, any of its executive officers or
directors, other than in the ordinary course of business;
(h) except in the ordinary course of business, increase the
compensation payable or to become payable to its executive officers or
employees, enter into any contract or other binding commitment in
respect of any such increase (other than pursuant to a KNOGO Benefit
Plan or VIDEO Benefit Plan, as the case may be, or policy or agreement
existing as of the date hereof) to, or enter into any severance
agreement with any of its directors, executive officers or other
employees, or establish, adopt, enter into, make any new grants or
awards under or amend, any KNOGO Benefit Plan or VIDEO Benefit Plan, as
the case may be, except as required by applicable law, including any
obligation to engage in good faith collective bargaining, to maintain
tax-qualified status or as may be required by any KNOGO Benefit Plan or
VIDEO Benefit Plan as of the date hereof;
(i) settle or compromise any material claims or litigation or,
except in the ordinary course of business, modify, amend or terminate
any of its material contracts or waive, release or assign any material
rights or claims, or make any payment, direct or indirect, of any
material liability before the same becomes due and payable in
accordance with its terms;
(j) take any action, other than in the ordinary course of
business, with respect to accounting policies or procedures (including
tax accounting policies and procedures), except as may be required by
law or generally accepted accounting principles;
(k) make any material tax election or permit any material
insurance policy naming it as a beneficiary or a loss payable payee to
be canceled or terminated, except in the ordinary course of business;
and
31
(l) authorize or enter into an agreement to do any of
the foregoing.
6.2 Access; Confidentiality. (a) From the date of this
Agreement until the Effective Time, upon reasonable prior notice to VIDEO or
KNOGO, as the case may be, VIDEO and KNOGO shall give one another and their
respective authorized representatives reasonable access during normal business
hours to their respective executive officers, properties, books and records, and
shall furnish one another and their respective authorized representatives with
such financial and operating data and other information concerning the
businesses and properties of VIDEO and KNOGO as VIDEO and KNOGO may from time to
time reasonably request.
(b) Each of VIDEO, SENTRY, VMC, SMC and KNOGO will hold and
treat, and will cause their respective affiliates, agents and other
representatives to hold and treat, all documents and information concerning
VIDEO, SENTRY, VMC, SMC or KNOGO, as the case may be, furnished to one another
or their respective representatives in connection with the transactions
contemplated by this Agreement confidential in accordance with the
Confidentiality Agreements dated July 11, 1996 and September 6, 1996, between
KNOGO and VIDEO, which Confidentiality Agreements shall remain in full force and
effect until termination in accordance with their terms.
6.3 Meetings of Stockholders. Each of VIDEO and KNOGO will
take all action necessary in accordance with applicable law and the Certificates
or Articles of Incorporation, as the case may be, and By-Laws of VIDEO and KNOGO
to convene a meeting of its stockholders as promptly as practicable to consider
and vote upon the approval of this Agreement and the transactions contemplated
hereby. The Board of Directors of each of VIDEO and KNOGO shall recommend such
approval and VIDEO and KNOGO shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing of the Joint Proxy
Statement/Prospectus; provided, that such recommendation or solicitation is
subject to any action (including any withdrawal or change of its recommendation)
taken by, or upon authority of, the KNOGO Board or the VIDEO Board in the
exercise of its good faith judgment as to its fiduciary duties to its
stockholders imposed by law. VIDEO, as sole stockholder of SENTRY, and SENTRY,
as sole stockholder of VMC and SMC, shall as promptly as practicable duly
approve this Agreement and the transactions contemplated hereby.
6.4 Reasonable Efforts. Subject to the terms and conditions of
this Agreement and applicable law, each of the parties shall act in good faith
and use commercially reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement as soon as practicable, including such actions or things as any other
party may reasonably request in order to cause any of
32
the conditions to such other party's obligation to consummate the transactions
contemplated by this Agreement to be fully satisfied. Without limiting the
foregoing, the parties shall (and shall cause their respective subsidiaries, and
use commercially reasonable efforts to cause their respective affiliates,
directors, officers, employees, agents, attorneys, accountants and
representatives, to) consult and fully cooperate with and provide assistance to
each other in (a) the preparation and filing with the SEC of the Joint Proxy
Statement/Prospectus, and any necessary amendments or supplements thereto; (b)
seeking to have the Joint Proxy Statement/Prospectus cleared by the SEC as soon
as reasonably practicable after filing; (c) obtaining all necessary consents,
approvals, waivers, licenses, permits, authorizations, registrations,
qualifications, or other permission or action by, and giving all necessary
notices to and making all necessary filings with and applications and
submissions to, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign (collectively,
"Governmental Entity"), or other person or entity as soon as reasonably
practicable after filing; (d) seeking early termination of any waiting period
under the HSR Act; (e) providing all such information concerning such party, its
subsidiaries and its officers, directors, partners and affiliates and making all
applications and filings as may be necessary or reasonably requested in
connection with any of the foregoing; (f) in general, consummating and making
effective the transactions contemplated hereby; and (g) in the event and to the
extent required, amending this Agreement so that this Agreement, the KNOGO
Merger and the VIDEO Merger comply with the DGCL and the Minnesota Act. Prior to
making any application to or filing with any Governmental Entity or other person
or entity in connection with this Agreement (other than filing under the HSR
Act), each party shall provide the other party with drafts thereof and afford
the other party a reasonable opportunity to comment on such drafts.
6.5 Public Announcements. KNOGO, VIDEO, SENTRY, VMC and SMC
will consult with one another prior to issuing any release or otherwise making
any public statements with respect to the transactions contemplated hereby and
shall not issue any such press release or make any public statement prior to
such consultation, except as may be required by applicable law or any listing
agreement with a national securities exchange by which such party is bound.
6.6 Acquisition Proposals. Except as contemplated hereby, each
of KNOGO and VIDEO agree not to (and shall use reasonable efforts to cause its
officers, directors and employees and any investment banker, attorney,
accountant, or other agent retained by it not to) solicit, directly or
indirectly, any proposal or offer to acquire all or any significant part of its
business and properties or its capital stock, whether by merger, purchase of
assets, tender offer or otherwise (an "Acquisition
33
Proposal" and, any such transaction, an "Acquisition Transaction") or provide
any non-public information concerning the respective company to any third party
in connection with an Acquisition Proposal. Notwithstanding the foregoing, KNOGO
and VIDEO may furnish information or cause information to be furnished to, and
may participate in discussions and negotiations directly or through their
respective representatives and enter into an agreement relating to an
Acquisition Proposal with, any third party (including parties with whom KNOGO
and VIDEO or their respective representatives have had discussions on any basis
on or prior to the date hereof) who makes an unsolicited proposal or offer to
it, if the KNOGO Board or VIDEO Board, as the case may be, determines in good
faith, after consultation with outside counsel, that the failure to consider
such proposal or offer could reasonably be deemed to cause its directors to
breach their fiduciary duties under applicable law. In addition, nothing
contained in this Agreement shall prohibit KNOGO or VIDEO and their respective
directors from (a) issuing a press release or otherwise publicly disclosing the
terms of any Acquisition Proposal, (b) taking and disclosing to its stockholders
any position, and making related filings with the SEC, as required by Rules
14e-2 and 14d-9 under the Exchange Act with respect to any tender offer or (c)
taking any action and making any disclosure to its stockholders which the KNOGO
Board or VIDEO Board, as the case may be, determines in good faith, after
consultation with outside counsel, would likely be required to be taken or made
under applicable law (including, without limitation, laws relating to the
fiduciary duties of directors). In the event KNOGO or VIDEO receives an
Acquisition Proposal, it shall promptly inform the other party as to the receipt
of such Acquisition Proposal, unless the KNOGO Board or VIDEO Board, as the case
may be, determines, after consultation with outside counsel, that giving such
notice could reasonably be deemed to cause its directors to breach their
fiduciary duties under applicable law.
6.7 Registration Statement and Joint Proxy
Statement/Prospectus. KNOGO and VIDEO shall promptly furnish all information as
may be required for inclusion in the Registration Statement on Form S-4 to be
filed with the SEC in connection with the issuance of shares of SENTRY Common
Stock in the Reorganization (the "Registration Statement") and the joint proxy
statement/prospectus which will form a part thereof (the "Joint Proxy
Statement/Prospectus"). VIDEO and KNOGO shall cooperate and promptly prepare and
VIDEO shall file with the SEC as soon as practicable the Registration Statement
under the Securities Act. VIDEO shall use reasonable efforts, and KNOGO will
cooperate with VIDEO, to have the Registration Statement declared effective by
the SEC as promptly as practicable. VIDEO shall use reasonable efforts to
obtain, prior to the effective date of the Registration Statement, all necessary
state securities law or "blue sky" permits or approvals required to consummate
the transactions contemplated by this Agreement. If at any time prior to the
Effective Time, any
34
information pertaining to KNOGO or VIDEO contained in or omitted from the
Registration Statement makes such information false or misleading, KNOGO and
VIDEO shall promptly inform the other party and provide such other party with
information necessary to make the statements contained therein not misleading.
No amendment or supplement to the Joint Proxy Statement/Prospectus will be made
by VIDEO or KNOGO without the approval of the other party.
6.8 Listing Application. VIDEO shall promptly prepare and
submit to NASDAQ, or another nationally recognized exchange, a listing
application covering the shares of SENTRY Common Stock issuable in the
Reorganization, and shall use its best efforts to obtain, prior to the Effective
Time, approval for the listing of such SENTRY Common Stock, subject to official
notice of issuance.
6.9 Affiliate Letters. (a) At least 30 days prior to the
Closing Date, KNOGO shall deliver to VIDEO a list of names and addresses of
those persons who were, in KNOGO's reasonable judgment, at the record date for
the KNOGO Stockholders' Meeting, "affiliates" of KNOGO (each such person, a
"KNOGO Affiliate") within the meaning of Rule 145 of the rules and regulations
promulgated under the Securities Act. KNOGO shall provide VIDEO with such
information and documents as VIDEO shall reasonably request for purposes of
reviewing such list. KNOGO shall use reasonable efforts to deliver or cause to
be delivered to VIDEO, prior to the Closing Date, from each of the KNOGO
Affiliates identified in the foregoing list, an Affiliate Letter in the form
attached hereto as Exhibit C. SENTRY shall be entitled to place legends as
specified in such Affiliate Letters on the certificates evidencing any SENTRY
Common Stock to be received by such KNOGO Affiliates pursuant to the terms of
this Agreement, and to issue appropriate stop transfer instructions to the
transfer agent for the SENTRY Common Stock, consistent with the terms of such
Affiliate Letters.
(b) At least 30 days prior to the Closing Date, VIDEO shall
deliver to KNOGO a list of names and addresses of those persons who were, in
VIDEO's reasonable judgment, at the record date for VIDEO Stockholders' Meeting,
"affiliates" of VIDEO (each such person, a "VIDEO Affiliate") within the meaning
of Rule 145 of the rules and regulations promulgated under the Securities Act.
VIDEO shall provide KNOGO with such information and documents as KNOGO shall
reasonably request for purposes of reviewing such list. VIDEO shall use
reasonable efforts to deliver or cause to be delivered to KNOGO, prior to the
Closing Date, from each of the VIDEO Affiliates identified in the foregoing
list, an Affiliate Letter in the form attached hereto as Exhibit C. SENTRY shall
be entitled to place legends as specified in such Affiliate Letters on the
certificates evidencing any SENTRY Common Stock to be received by such VIDEO
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer
35
agent for the SENTRY Common Stock, consistent with the terms of such Affiliate
Letters.
6.10 D&O Indemnification and Insurance. (a) From the Effective
Time through the later of (i) the sixth anniversary of the date on which the
Effective Time occurs and (ii) the expiration of any statute of limitations
applicable to any claim, action, suit, proceeding or investigation referred to
below, SENTRY shall, or shall cause the VIDEO Surviving Corporation and KNOGO
Surviving Corporation to, indemnify and hold harmless each present and former
officer, director, employee or agent of KNOGO and VIDEO, including, without
limitation, each person controlling any of the foregoing persons (the
"Indemnified Parties"), against all claims, losses, liabilities, damages,
judgments, fines, fees, costs or expenses, including, without limitation,
attorneys' fees and disbursements (collectively, "Costs"), incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of or pertaining
to matters existing or occurring at or prior to the Effective Time (including,
without limitation, this Agreement and the transactions and actions contemplated
hereby), whether asserted or claimed prior to, at or after the Effective Time,
to the fullest extent permitted under applicable law and the Certificate of
Incorporation, as amended, or By-Laws of KNOGO or indemnification agreements in
effect on the date hereof, including provisions relating to advancement of
expenses incurred in the defense of any claim, action, suit, proceeding or
investigation. Without limiting the foregoing, in the event that any claim,
action, suit, proceeding or investigation is brought against an Indemnified
Party (whether arising before or after the Effective Time), the Indemnified
Party may retain counsel satisfactory to such Indemnified Party, and SENTRY
shall, or shall cause the VIDEO Surviving Corporation and KNOGO Surviving
Corporation to, advance the fees and expenses of such counsel for the
Indemnified Party in accordance with the Certificate of Incorporation, as
amended, or By-Laws of KNOGO in effect on the date of this Agreement.
(b) SENTRY shall, or shall cause the VIDEO Surviving
Corporation and KNOGO Surviving Corporation, to keep in effect in its
Certificate of Incorporation and Bylaws, provisions of KNOGO providing for
exculpation of director and officer liability and its indemnification of the
Indemnified Parties to the fullest extent permitted under the DGCL, which
provisions shall not be amended except as required by applicable law or except
to make changes permitted by law that would enlarge the Indemnified Parties'
right to indemnification.
(c) SENTRY shall maintain, or shall cause the VIDEO Surviving
Corporation and KNOGO Surviving Corporation to maintain, with respect to matters
occurring at, prior to or subsequent to the Effective Time, at no expense to the
beneficiaries, directors' and officers', liability insurance ("D&O Insurance")
for the
36
Indemnified Parties, issued by a carrier or carriers assigned a claims-paying
ability rating by A.M. Best & Co. of "A (Excellent)" or higher, providing at
least the same coverage as the D&O Insurance currently maintained by KNOGO and
containing terms and conditions which are no less favorable to the
beneficiaries, for a period of at least six years from the Effective Time. In
the event any claim is made against present or former directors, officers or
employees of KNOGO or VIDEO that is covered or potentially covered by insurance,
neither SENTRY, the VIDEO Surviving Corporation nor the KNOGO Surviving
Corporation shall do anything that would forfeit, jeopardize, restrict or limit
the insurance coverage available for that claim until the final disposition
thereof.
(d) Notwithstanding anything herein to the contrary, if any
claim, action, suit, proceeding or investigation (whether arising before, at or
after the Effective Time) is made against any Indemnified Party, on or prior to
the sixth anniversary of the Effective Time, the provisions of this Section 6.10
shall continue in effect until the final disposition of such claim, action,
suit, proceeding or investigation.
(e) This covenant is intended to be for the benefit of, and
shall be enforceable by, each of the Indemnified Parties and their respective
heirs and legal representatives. The indemnification provided for herein shall
not be deemed exclusive of any other rights to which an Indemnified Party is
entitled, whether pursuant to law, contract or otherwise. SENTRY shall pay all
expenses, including attorneys' fees, that may be incurred by any Indemnified
Party in enforcing the indemnity and other obligations provided for in this
Section 6.10.
(f) In the event that SENTRY or the VIDEO Surviving
Corporation or the KNOGO Surviving Corporation or any of their respective
successor or assigns (i) consolidates with or merges into any other Person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers or conveys all or substantially all of
its properties and assets to any Person, then, and in each such case, to the
extent necessary to effectuate the purposes of this Section 6.10, proper
provision shall be made so that the successors and assigns of SENTRY or the
VIDEO Surviving Corporation or the KNOGO Surviving Corporation shall succeed to
the obligations set forth in this Section 6.10 and none of the actions described
in clauses (i) or (ii) shall be taken until such provision is made.
6.11 Employee Benefits. (a) From and after the Effective Time,
SENTRY, the VIDEO Surviving Corporation and the KNOGO Surviving Corporation and
their respective affiliates will honor in accordance with their terms all
existing employment, severance, consulting and salary continuation agreements
(i) between KNOGO and any of its current or former officers, directors,
employees or consultants, and (ii) between VIDEO and any
37
of its current or former officers, directors, employees or consultants.
(b) SENTRY agrees that, for a three (3) year period after the
Effective Time, SENTRY shall provide, or shall cause the VIDEO Surviving
Corporation and the KNOGO Surviving Corporation to provide, those persons who,
prior to the Effective Time, were employees of KNOGO ("KNOGO Employees") or
VIDEO ("VIDEO Employees") with employee plans and programs which provide
benefits that are no less favorable in the aggregate to those provided to other
employees of SENTRY of comparable status and seniority. With respect to such
benefits, past service, compensation and expense credits of such KNOGO Employees
and VIDEO Employees shall be recognized for all purposes under such plans
(including, but not limited to, participation, eligibility vesting and
calculation benefits), and each employee or fringe benefit plan or program
available to KNOGO Employees or VIDEO Employees as contemplated hereby shall be
applied to such KNOGO Employees and VIDEO Employees, respectively.
(c) In the event that SENTRY or the VIDEO Surviving
Corporation or the KNOGO Surviving Corporation or any of their respective
successors or assigns (i) consolidates with or merges into any other Person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers or conveys all or substantially all of
its properties and assets to any Person, then, and in each such case, to the
extent necessary to effectuate the purposes of this Section 6.11, proper
provision shall be made so that the successors and assigns of SENTRY or the
VIDEO Surviving Corporation or the KNOGO Surviving Corporation shall succeed to
the obligations set forth in this Section 6.11 and none of the actions described
in clauses (i) or (ii) shall be taken until such provision is made.
6.12 Fees and Expenses. (a) Whether or not the VIDEO Merger or
the KNOGO Merger is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby (including, without
limitation, fees and disbursements of counsel, financial advisors and
accountants) shall be borne by the party which incurs such cost or expense;
provided, that if this Agreement is terminated pursuant to Section 8.1 as a
result of the willful and material misrepresentation by a party or the willful
and material breach by a party of any of its covenants or arrangements set forth
herein, such party shall pay the costs and expenses incurred by the other party
in connection with this Agreement; and provided, further, that all costs and
expenses related to the preparation, printing, filing and mailing (as
applicable) of the Joint Proxy Statement/Prospectus and all SEC filing fees
incurred in connection with the Joint Proxy Statement/Prospectus shall be borne
equally by KNOGO, on the one hand, and VIDEO, on the other hand.
38
(b)(i) Notwithstanding the foregoing, provided that neither
VIDEO, SENTRY, VMC nor SMC shall be in breach of their respective obligations
under this Agreement, if (A) the KNOGO Board shall withdraw or modify in a
manner adverse to VIDEO its approval or recommendation of the KNOGO Merger or
shall have resolved to do any of the foregoing pursuant to Section 6.6 and (B)
VIDEO or KNOGO shall have terminated this Agreement pursuant to Section 8.1(g)
and (C) within six months of any such termination, KNOGO shall have consummated
an Acquisition Transaction, then KNOGO agrees that it will pay, or reimburse
VIDEO for, all reasonable fees and expenses incurred by VIDEO and its affiliates
in connection with the Reorganization and the consummation of the transactions
contemplated by this Agreement, in an amount not to exceed $750,000 in the
aggregate, in addition to the amount otherwise payable pursuant to the second
proviso contained in Section 6.12(a) above.
(ii) Notwithstanding the foregoing, provided that KNOGO shall
not be in breach of its obligations under this Agreement, if (A) the VIDEO Board
shall withdraw or modify in a manner adverse to KNOGO its approval or
recommendation of the VIDEO Merger or shall have resolved to do any of the
foregoing pursuant to Section 6.6 and (B) KNOGO or VIDEO shall have terminated
this Agreement pursuant to Section 8.1(h) and (C) within six months of any such
termination, VIDEO shall have consummated an Acquisition Transaction, then VIDEO
agrees that it will pay, or reimburse KNOGO for, all reasonable fees and
expenses incurred by KNOGO and its affiliates in connection with the
Reorganization and the consummation of the transactions contemplated by this
Agreement, in an amount not to exceed $750,000 in the aggregate, in addition to
the amount otherwise payable pursuant to the second proviso contained in Section
6.12(a) above.
6.13 Cancellation of SENTRY Common Stock. As of the Effective
Time, all authorized SENTRY Common Stock issued and outstanding immediately
prior to the Effective Time shall automatically be canceled and extinguished and
shall cease to exist.
ARTICLE VII
CLOSING CONDITIONS
7.1 Conditions to Obligations of Each Party to Effect the
Reorganization. The respective obligations of each party hereto to effect the
VIDEO Merger or the KNOGO Merger, respectively, shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions, any
or all of which may be waived in accordance with Section 9.7 hereof, in whole or
in part, to the extent permitted by applicable law:
39
(a) Stockholder Approval. This Agreement shall have been
adopted, and the VIDEO Merger and KNOGO Merger shall have been approved
in the manner required by applicable law or by the applicable
regulations of any stock exchange or other regulatory body, as the case
may be, by a majority vote of the holders of the outstanding VIDEO
Shares and KNOGO Shares, respectively.
(b) No Injunction. No federal or state governmental or
regulatory body or court of competent jurisdiction shall have enacted,
issued, promulgated or enforced any statute, rule, regulation,
executive order, decree, judgment, preliminary or permanent injunction
or other order which is in effect and which prohibits, enjoins or
otherwise restrains the consummation of the VIDEO Merger or the KNOGO
Merger; provided, that the parties shall use commercially reasonable
efforts to cause any such decree, judgment, injunction or order to be
vacated or lifted.
(c) HSR Act. Any waiting period under the HSR Act applicable
to the Reorganization shall have terminated or otherwise expired.
(d) Registration Statement. The Registration Statement shall
have become effective and shall be effective at the Effective Time, and
no stop order suspending effectiveness of the Registration Statement
shall have been issued, no action, suit, proceeding or investigation by
the SEC to suspend the effectiveness thereof shall have been initiated
and be continuing, and all necessary approvals under state securities
laws relating to the issuance or trading of the SENTRY Common Stock to
be issued to VIDEO and KNOGO stockholders in connection with the
Reorganization shall have been received.
(e) Listing of SENTRY Common Stock. The SENTRY Common Stock
and the Sentry Class A Preferred Stock to be issued to VIDEO and KNOGO
stockholders, as the case may be, in connection with the Reorganization
shall have been approved for listing on NASDAQ, or another nationally
recognized exchange, subject only to official notice of issuance.
7.2 Conditions Precedent to the Obligations of KNOGO. The
obligation of KNOGO to effect the KNOGO Merger is also subject to the
satisfaction at or prior to the Effective Time of each of the following
additional conditions, unless waived by KNOGO:
(a) Accuracy of Representations and Warranties. All
representations and warranties made by VIDEO, SENTRY, VMC and SMC
herein shall be true and correct in all material respects on and as of
the Effective Time, with the same force and effect as though such
representations and warranties had been made on and as of the Effective
Time, except for changes
40
permitted or contemplated by this Agreement and except for
representations and warranties that are made as of a specific date or
time, which shall be true and correct in all material respects only as
of such specific date or time.
(b) Compliance with Covenants. Each of VIDEO, SENTRY, VMC and
SMC shall have performed in all material respects all obligations and
agreements, and complied in all material respects with all covenants,
contained in this Agreement to be performed or complied with by it
prior to or on the Effective Time.
(c) Officer's Certificates. KNOGO shall have received such
certificates of VIDEO, SENTRY, VMC and SMC, dated the Closing Date,
signed by an executive officer of VIDEO, SENTRY, VMC and SMC to
evidence satisfaction of the conditions set forth in this Article V
(insofar as each relates to VIDEO, SENTRY, VMC or SMC) as may be
reasonably requested by KNOGO.
(d) Legal Opinion. KNOGO shall have received the opinion of
Stroock & Stroock & Lavan, special counsel to KNOGO, based upon
reasonably requested representation letters and dated the Closing Date,
to the effect that the KNOGO Merger will be treated for federal income
tax purposes as a transfer of property to SENTRY by holders of KNOGO
Shares governed by Section 351 of the Code.
7.3 Conditions Precedent to the Obligations of VIDEO, SENTRY,
VMC and SMC. The obligation of VIDEO, SENTRY, VMC and SMC to effect the
Reorganization is also subject to the satisfaction at or prior to the Effective
Time of each of the following additional conditions, unless waived by VIDEO:
(a) Accuracy of Representations and Warranties. All
representations and warranties made by KNOGO herein shall be true and
correct in all material respects on and as of the Effective Time, with
the same force and effect as though such representations and warranties
had been made on and as of the Effective Time, except for changes
permitted or contemplated by this Agreement and except for
representations and warranties that are made as of a specific date or
time, which shall be true and correct in all material respects only as
of such specific date or time.
(b) Compliance with Covenants. KNOGO shall have performed in
all material respects all obligations and agreements, and complied in
all material respects with all covenants, contained in this Agreement
to be performed or complied with by it prior to or on the Effective
Time.
(c) Officer's Certificates. VIDEO shall have received such
certificate of KNOGO, dated the Closing Date, signed by
41
an executive officer of KNOGO to evidence satisfaction of the
conditions set forth in this Article V (insofar as each relates to
KNOGO) as may be reasonably requested by VIDEO.
(d) Legal Opinion. VIDEO shall have received the opinion of
Dewey Ballantine, special counsel to VIDEO, based upon reasonably
requested representation letters and dated the Closing Date, to the
effect that the VIDEO Merger will be treated for federal income tax
purposes as a reorganization described in Section 368(a) of the Code
and/or as a transfer of property to SENTRY by holders of VIDEO Shares
governed by Section 351 of the Code.
ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement may be terminated and the
Reorganization may be abandoned at any time (notwithstanding approval of the
KNOGO Merger by the stockholders of KNOGO and the VIDEO Merger by the
stockholders of VIDEO, if required by applicable provisions of the DGCL and the
Minnesota Act), prior to the Effective Time:
(a) by mutual written consent of KNOGO and VIDEO;
(b) by either KNOGO or VIDEO, if the Effective Time shall not
have occurred on or before 180 days from the date hereof; provided,
that the right to terminate this Agreement under this clause (b) shall
not be available to any party whose misrepresentation in this Agreement
or whose failure to perform any of its covenants and agreements or to
satisfy any obligation under this Agreement has been the cause of or
resulted in the failure of the Reorganization to occur on or before
such date;
(c) by either KNOGO or VIDEO, if (i) any federal or state
court of competent jurisdiction or other federal or state governmental
or regulatory body shall have issued any judgment, injunction, order or
decree prohibiting, enjoining or otherwise restraining the transactions
contemplated by this Agreement and such judgment, injunction, order or
decree shall have become final and nonappealable (provided, that the
party seeking to terminate this Agreement pursuant to this clause (c)
shall have used commercially reasonable efforts to remove such
judgment, injunction, order or decree) or (ii) any statute, rule,
regulation or executive order promulgated or enacted by any federal or
state governmental authority after the date of this Agreement which
prohibits the consummation of the Reorganization shall be in effect;
42
(d) by either KNOGO or VIDEO, if this Agreement is not adopted
or the VIDEO Merger or the KNOGO Merger is not approved by the
stockholders of VIDEO or KNOGO as required by Section 7.1;
(e) by VIDEO, if there shall have been a material breach of
any representation, warranty or material covenant or agreement on the
part of KNOGO, which is not cured after thirty (30) days' written
notice by VIDEO to KNOGO; or
(f) by KNOGO, if there shall have been a material breach of
any representation, warranty or material covenant or agreement on the
part of VIDEO, which is not cured after thirty (30) days' written
notice by KNOGO to VIDEO.
(g) by either VIDEO or KNOGO, if (i) the KNOGO Board shall
withdraw or modify in a manner adverse to VIDEO its approval or
recommendation of the KNOGO Merger or shall have resolved to do any of
the foregoing pursuant to Section 6.6 or (ii) any Person or group of
Persons shall have made an Acquisition Proposal that the KNOGO Board
determines in good faith, after consultation with outside counsel, that
the failure to accept such Acquisition Proposal could reasonably be
deemed to cause the members of the KNOGO Board to breach their
fiduciary duties under applicable law.
(h) by either KNOGO or VIDEO, if (i) the VIDEO Board shall
withdraw or modify in a manner adverse to KNOGO its approval or
recommendation of the VIDEO Merger or shall have resolved to do any of
the foregoing pursuant to Section 6.6 or (ii) any Person or group of
Persons shall have made an Acquisition Proposal that the VIDEO Board
determines in good faith, after consultation with outside counsel, that
the failure to accept such Acquisition Proposal could reasonably be
deemed to cause the members of the VIDEO Board to breach their
fiduciary duties under applicable law.
8.2 Effect of Termination. In the event of any termination of
this Agreement pursuant to Section 8.1, this Agreement forthwith shall become
void and of no further force or effect, and no party hereto (or any of its
affiliates, directors, officers, agents or representatives) shall have any
liability or obligation hereunder, except in any such case (a) as provided in
Sections 6.2(b) (Confidentiality), 6.5 (Public Announcements) and 6.12 (Fees and
Expenses), which shall survive any such termination and (b) to the extent such
termination results from the breach by such party of any of its representations,
warranties, covenants or agreements contained in this Agreement.
43
ARTICLE IX
MISCELLANEOUS
9.1 Nonsurvival of Representations, Warranties and Covenants.
None of the representations, warranties, covenants or agreements contained in
this Agreement or in any certificate or other instrument delivered pursuant to
this Agreement shall survive the Effective Time, except for the covenants and
agreements contained in Sections 6.2(b) (Confidentiality), 6.5 (Public
Announcements), 6.10 (D&O Indemnification and Insurance), 6.11 (Employee
Benefits) and 6.12 (Fees and Expenses).
9.2 Notices. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date delivered, mailed or transmitted, and shall be
effective upon receipt, if delivered personally, mailed by registered or
certified mail (postage prepaid, return receipt requested) or sent by fax (with
immediate confirmation) or nationally recognized overnight courier service, as
follows:
(a) if to VIDEO, to:
Video Sentry Corporation
6365 Carlson Drive
Eden Prairie, Minnesota 55346
Attn: Andrew L. Benson, President
Fax: (612) 965-6472
with a copy to:
Dewey Ballantine
333 South Hope Street, 30th Floor
Los Angeles, California 90071
Attn: Robert M. Smith
Fax: (213) 625-0562
(b) if to KNOGO, to:
Knogo North America Inc.
350 Wireless Boulevard
Hauppauge, Long Island, New York 11788-3907
Attn: Thomas A. Nicolette, President
Fax: (516) 232-4750
44
with a copy to:
Stroock & Stroock & Lavan
7 Hanover Square
New York, New York 10004
Attn: David H. Kaufman
Fax: (212) 806-6006
(c) if to SENTRY prior to the Effective Time, to:
Sentry Technology Corporation
c/o Video Sentry Corporation
6365 Carlson Drive
Eden Prairie, Minnesota 55346
Attn: President
Fax: (612) 975-6472
with a copy to:
Dewey Ballantine
333 South Hope Street, 30th Floor
Los Angeles, California 90071
Attn: Robert M. Smith
Fax: (213) 625-0562
(d) if to SENTRY subsequent to the Effective Time, to:
Sentry Technology Corporation
c/o Knogo North America Inc.
350 Wireless Boulevard
Hauppauge, New York 11788-3907
Attn: President
Fax: (516) 232-4750
with a copy to:
Stroock & Stroock & Lavan
7 Hanover Square
New York, New York 10004
Attn: David H. Kaufman
Fax: (212) 806-6006
or to such other Person or address or facsimile number as any party shall
specify by like written notice to the other parties hereto (any such notice of a
change of address to be effective only upon actual receipt thereof).
9.3 Certain Definitions. The following terms, when used
in this Agreement, shall have the following respective meanings:
45
(a) "affiliate" shall have the meaning assigned to such term
in Section 12(b)-2 of the Exchange Act.
(b) "business day" shall have the meaning set forth in Rule
14d-1(c)(6) under the Exchange Act.
(c) "Knowledge" means the actual knowledge of the executive
officers of KNOGO or VIDEO, as the case may be.
(d) "Material Adverse Effect" means, with respect to any
Person, any change or effect which is materially adverse to the
financial condition or results of operations of such Person and its
subsidiaries, taken as a whole, excluding in all cases: (i) events or
conditions generally affecting the industry in which such Person and
its subsidiaries operate or arising from changes in general business or
economic conditions; (ii) any effect resulting from any change in law
or generally accepted accounting principles, which affect generally
entities such as such Person; (iii) events resulting directly or
indirectly from the execution and/or announcement of this Agreement,
including, without limitation, the cancellation or postponement of
customer orders or the absence of new customer sales during the
pendency of the Agreement; and (iv) any effect resulting from
compliance by such Person with the terms of this Agreement.
(e) "Person" means any natural person, corporation, limited
liability company, partnership, unincorporated organization or other
entity.
(f) "subsidiary" of any Person means any other corporation or
entity of which such Person owns, directly or indirectly, stock or
other equity interests having a majority of the votes entitled to be
cast in the election of directors of such corporation or entity under
ordinary circumstances or of which such Person owns a majority
beneficial interest.
9.4 Entire Agreement. This Agreement (including the schedules,
exhibits and other documents referred to herein), together with the
Confidentiality Agreements referred to in Section 4.2(b), constitutes the entire
agreement between and among the parties hereto and supersedes all prior
agreements and understandings, oral and written, between or among any of the
parties with respect to the subject matter hereof.
9.5 Assignment; Binding Effect. Neither this Agreement nor any
of the rights, benefits or obligations hereunder may be assigned, in whole or in
part, by any party (whether by operation of law or otherwise) without the prior
written consent of the other parties hereto. Subject to the preceding sentence,
this Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
46
Nothing in this Agreement, expressed or implied, is intended to confer on any
person other than the parties or their respective successors and assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, other than rights conferred upon third parties under Sections 6.10
and 6.11.
9.6 Amendments. This Agreement may be amended by the parties
at any time prior to the Effective Time; provided, that, after approval of this
Agreement and either the KNOGO Merger or the VIDEO Merger by the stockholders of
VIDEO or KNOGO if required under applicable law, no amendment shall be made
which by law requires further approval by the stockholders of VIDEO and KNOGO,
without such approval. This Agreement may not be amended or modified except by
an instrument in writing signed on behalf of each of the parties hereto.
9.7 Waivers. At any time prior to the Effective Time, VIDEO,
on the one hand, or KNOGO, on the other hand, may, to the extent legally
allowed, (a) extend the time specified herein for the performance of any of the
obligations or other acts of the other, (b) waive any inaccuracies in the
representations and warranties of the other contained herein or in any document
delivered pursuant hereto, or (c) waive compliance by the other with any of the
agreements or covenants of such other party or parties (as the case may be)
contained herein. Any such extension or waiver shall be valid only if set forth
in a written instrument signed on behalf of the party or parties to be bound
thereby. No such extension or waiver shall constitute a waiver of, or estoppel
with respect to, any subsequent or other breach or failure to strictly comply
with the provisions of this Agreement. The failure of any party to insist on
strict compliance with this Agreement or to assert any of its rights or remedies
hereunder or with respect hereto shall not constitute a waiver of such rights or
remedies.
9.8 Validity. The invalidity or unenforceability of any
provisions of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
9.9 Captions. The table of contents and headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
9.10 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
9.11 Governing Law. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of
47
Delaware, without regard to any applicable principles of conflicts of law.
* * *
48
IN WITNESS WHEREOF, the parties have executed this Amended and
Restated Agreement and Plan of Reorganization and Merger as of the date first
above written.
VIDEO SENTRY CORPORATION
By: /s/ Robert D. Furst, Jr.
Name: Robert D. Furst, Jr.
Title: Chairman/CEO
KNOGO NORTH AMERICA INC.
By: /s/ Thomas A. Nicolette
Name: Thomas A. Nicolette
Title: President & CEO
SENTRY TECHNOLOGY CORPORATION
By: /s/ Robert D. Furst, Jr.
Name: Robert D. Furst, Jr.
Title: Chairman/CEO
VIKING MERGER CORP.
By: /s/ Robert D. Furst, Jr.
Name: Robert D. Furst, Jr.
Title: Chairman/CEO
STRIP MERGER CORP.
By: /s/ Robert D. Furst, Jr.
Name: Robert D. Furst, Jr.
Title: Chairman/CEO
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SENTRY TECHNOLOGY CORPORATION
(a Delaware corporation)
FIRST. The name of the corporation is SENTRY TECHNOLOGY CORPORATION
(the "Corporation")
SECOND. The address of the Corporation's registered office in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801. The name of the Corporation's registered agent at such address
is Corporation Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law ("DGCL").
FOURTH. The total number of shares of stock which the Corporation shall
have the authority to issue is one hundred million (100,000,000) shares of
common stock, par value $0.001 per share (the "Common Stock"), and twenty-five
million (25,000,000) shares of preferred stock, par value $0.001 per share (the
"Preferred Stock"), of which six million (6,000,000) shares shall be designated
Class A Preferred Stock (the "Class A Preferred Stock"). Each share of Class A
Preferred Stock shall have a face value of $5.00 (the "Face Value").
I. Common Stock.
A statement of the designations, powers, preferences, rights,
qualifications, limitations and restrictions in respect of the Common Stock is
as follows:
A. Dividends. Subject to the provisions of this Article FOURTH, the
Board of Directors (the "Board") of the Corporation may cause dividends to be
paid to the holders of shares of Common Stock out of funds legally available for
the payment of dividends by declaring an amount per share as a dividend.
B. Liquidation. Subject to the provisions of this Article FOURTH, in
the event of any voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, the holders of shares
A-1
of Common Stock shall be entitled to share in all remaining assets of the
Corporation available for distribution to its stockholders.
C. Voting Rights. Subject to the provisions of this Article FOURTH, and
except as otherwise required by law, each outstanding share of Common Stock
shall be entitled to vote on each matter on which the stockholders of the
Corporation shall be entitled to vote, and each holder of Common Stock shall be
entitled to one vote for each share of such stock held by such holder.
II. Preferred Stock.
Shares of the Preferred Stock may be issued from time to time in one or
more classes or series, each of which class or series shall have such
distinctive designation or title as shall be set forth below or fixed by the
Board prior to the issuance of any shares thereof. Each such class or series of
the Preferred Stock shall be issued for such consideration and shall have such
voting powers, full or limited, or no voting powers, and such preferences and
relative participating optional and other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated in such
resolution providing for the issue of such class or series of the Preferred
Stock as may be adopted from time to time by the Board prior to the issuance of
any shares thereof pursuant to the authority hereby expressly vested in it, all
in accordance with the laws of the State of Delaware. All shares of any one
class or series of the Preferred Stock shall be alike in every particular. The
Board is further authorized to increase or decrease (but not below the number of
such shares of series then outstanding) the number of shares of any series
subsequent to the issuance of shares of that series.
Statements of the designations, powers, preferences, rights,
qualifications, limitations and restrictions in respect of the Class A Preferred
Stock are as follows:
A. Class A Preferred Stock.
1. Rank. The Class A Preferred Stock shall, with respect to
dividend rights and rights on liquidation, winding up or dissolution, rank (i)
on parity with, or junior to, as the case may be, any other class or series of
Preferred Stock established by the Board, the terms of which shall specifically
provide that such class or series shall rank on parity with, or senior to, the
Class A Preferred Stock with respect to dividend rights and rights on
liquidation, winding up or dissolution, and (ii) except as set forth below,
prior to any other equity securities of the Corporation with respect to dividend
rights and rights on liquidation, winding up or dissolution (all of such equity
securities of the Corporation to which the Class A Preferred Stock ranks prior,
including the Common Stock, are at times collectively referred to herein as the
"Junior Stock").
A-2
2. Dividend.
(a) The annual dividend rate on each share of the
Class A Preferred Stock shall be fixed at five percent (5%) of the Face Value,
payable in accordance with this paragraph 2 (the "Dividend"). The holders of
shares of the Class A Preferred Stock shall be entitled to receive Dividends on
the following dates (each, a "dividend payment date"): , 1997/8,
, 1998/9, , 1998/9,
, 1999/2000, , 1999/2000 and
, 2000/2001; the 12 month period ending on each of the first two
dividend payment dates is an "annual dividend period," the six month period
ending on each of the next four dividend payment dates is a "semi-annual
dividend period" and each such annual dividend period or semi-annual dividend
period is a "dividend period." Dividends (whether or not declared) shall be
payable in additional shares of the Class A Preferred Stock during the two
annual dividend periods ending on the first two dividend payment dates
subsequent to issuance of the Class A Preferred Stock, such that holders shall
receive a Dividend of 1/20th of a share of Class A Preferred Stock for each
share of Class A Preferred Stock held. Thereafter, the holders of shares of the
Class A Preferred Stock shall be entitled to receive, in preference to dividends
on the Junior Stock, and whether or not declared the Dividend (including any
Dividend accrued and unpaid) payable in cash, out of funds legally available for
the payment of dividends, such that holders shall receive a Dividend of $0.25
for each share of Class A Preferred Stock held, which Dividend shall accrue
semi-annually and be due in equal installments on each of the last four dividend
payment dates. Dividends shall be paid on the applicable dividend payment date
to the holders of record at the close of business on the date (the "record
date") specified by the Board at the time such Dividend is declared; provided,
however, that such record date shall not be more than 60 days nor less than 10
days prior to the applicable dividend payment date. For the purposes of this
paragraph, each additional share of the Class A Preferred Stock issued as a
Dividend shall be valued at the Face Value. Dividends (whether payable in cash
or in stock) shall be fully cumulative and shall accrue, with additional
payments thereon, from the first day of the dividend period in which such
Dividend may be payable as herein provided on all shares of the Class A
Preferred Stock issued and outstanding on the first day of such dividend period,
except that with respect to the initial dividend period, such Dividend shall
accrue from the date of issue. If the dividend payment date is not a business
day, the dividend payment date shall be the next succeeding business day.
(b) All Dividends paid with respect to shares of
the Class A Preferred Stock pursuant to paragraph 2(a) shall be paid pro rata to
the holders entitled thereto.
A-3
(c) If at any time the Corporation shall have failed
to pay all dividends which have accrued on any outstanding shares of any other
class or series of the Preferred Stock having cumulative dividend rights ranking
on parity with the shares of the Class A Preferred Stock at the times such
dividends are payable or the Corporation shall fail to redeem any of such stock
on the date set for the redemption thereof, no cash Dividend shall be declared
by the Board or paid or set apart for payment by the Corporation on shares of
the Class A Preferred Stock unless prior to or concurrently with such
declaration, payment or setting apart for payment, all accrued and unpaid
dividends on all outstanding shares of such other series of the Preferred Stock
shall have been or be declared, paid or set apart for payment, with additional
payments thereon, if any; provided, however, that in the event such failure to
pay accrued dividends is with respect only to the outstanding shares of the
Class A Preferred Stock and any outstanding shares of any other class or series
of the Preferred Stock having cumulative dividend rights on parity with the
shares of the Class A Preferred Stock, cash dividends may be declared, paid or
set apart for payment, with additional payment thereon, pro rata on shares of
the Class A Preferred Stock and shares of such other class or series of the
Preferred Stock so that the amounts of any cash dividends declared, paid or set
apart for payment on shares of the Class A Preferred Stock and shares of such
other series of the Preferred Stock shall in all cases bear to each other the
same ratio that, at the time of such declaration, payment or setting apart for
payment, all accrued but unpaid cash dividends on shares of the Class A
Preferred Stock and shares of such other series of the Preferred Stock bear to
each other. Any Dividend not paid pursuant to paragraph 2(a) hereof or this
paragraph 2(c) shall be fully cumulative and shall accrue with additional
payments thereon, as set forth in paragraph 2(a) hereof.
(d) (i) Holders of shares of the Class A Preferred
Stock shall be entitled to receive the Dividends provided for in paragraph 2(a)
hereof in preference to and in priority over any dividends other than dividends
paid in Junior Stock upon any of the Junior Stock.
(ii) So long as any shares of the Class A Preferred
Stock are outstanding, the Corporation shall not declare, pay or set
apart for payment any dividend on any of the Junior Stock (other than
dividends paid in such Junior Stock) or make any payment on account of,
or set apart for payment money for a sinking or other similar fund for,
the purchase, redemption or other retirement of, any of the Junior
Stock or any warrants, rights, calls or options exercisable for any of
the Junior Stock, or make any distribution in respect thereof, either
directly or indirectly, and whether in cash, obligations or shares of
the capital stock of the Corporation or other property (other than
distributions or dividends in stock to the holders of such stock), and
shall not permit any
A-4
corporation or other entity directly or indirectly controlled by the
Corporation to purchase or redeem any of the Junior Stock or any
warrants, rights, calls or options exercisable for any of the Junior
Stock, unless prior to or concurrently with such declaration, payment,
setting apart for payment, purchase or distribution, as the case may
be, all accrued and unpaid cash Dividends, including additional
payments thereon, on shares of the Class A Preferred Stock not paid in
accordance with the provisions of paragraph 2(a) hereof shall have been
or be paid and the Corporation shall have redeemed those shares of the
Class A Preferred Stock required to be redeemed theretofore by the
terms hereof.
(e) Subject to the foregoing provisions of this
paragraph 2, the Board may declare and the Corporation may pay or set apart for
payment dividends and other distributions on any of the Junior Stock, and may
purchase or otherwise redeem any of the Junior Stock or any warrants, rights or
options exercisable for any of the Junior Stock; provided, however, that a
decision by the Board to declare a dividend on any of the Junior Stock shall
require approval by that number of directors representing at least 662/3% of the
Board, less any vacancies on the Board. In such event, the holders of the Class
A Preferred Stock and the holders of such Junior Stock shall share equally,
share and share alike, in the distribution of any and all dividends declared on
such Junior Stock, provided that for this purpose each share of Class A
Preferred Stock shall be treated as one share of such Junior Stock.
(f) The Corporation shall not be required to issue
fractional shares of Class A Preferred Stock as a result of the payment of
Dividends. If any fraction of a share of Class A Preferred Stock would be
issuable upon the payment of a Dividend, the Corporation may, in lieu of issuing
such fractional share, pay to such holder for any such fraction of a share an
amount in cash equal to the product obtained by multiplying (i) such fraction by
(ii) the Face Value.
(g) Whenever, at any time or times, any Dividend
payable shall be in arrears, the holders of the outstanding shares of Class A
Preferred Stock shall have the right, voting separately as a class, to elect one
director of the Corporation. Upon the vesting of such right of the holders of
Class A Preferred Stock, the maximum authorized number of members of the Board
shall automatically be increased by one and the one vacancy so created shall be
filled by vote of the holders of the outstanding shares of Class A Preferred
Stock. The right of the holders of Class A Preferred Stock to elect a member of
the Board as aforesaid shall continue until such time as all Dividends in
arrears shall have been paid in full, at which time such right shall terminate,
except as herein or by law expressly provided, subject to revesting in the event
of each and every subsequent default of the character above described. Upon
termination of such special voting rights
A-5
attributable to holders of the Class A Preferred Stock pursuant to this
paragraph, the term of office of any director elected by the holders of shares
of Class A Preferred Stock (any such director, a "Class A Preferred Stock
Director") pursuant to such special voting rights shall immediately terminate
and the number of directors constituting the entire Board shall be reduced by
one. Any Class A Preferred Stock Director may be removed by, and shall not be
removed otherwise than by, a majority vote of the outstanding shares of Class A
Preferred Stock. If the office of any Class A Preferred Stock Director becomes
vacant by reason of death, resignation, retirement, disqualification, removal
from office, or otherwise, a successor who shall hold office for the unexpired
term in respect of which such vacancy occurred shall be elected by the holders
of the outstanding shares of Class A preferred Stock, voting separately as a
class.
3. Adjustment of Hurdle Price.
(a) To preserve the actual or potential economic
value of the Class A Preferred Stock, if at any time after the date of this
Amended and Restated Certificate of Incorporation (the "Certificate"), there
shall be any change in the Common Stock, whether by reason of stock dividends,
stock splits, recapitalizations, mergers, consolidations, combinations or
exchanges of securities, split-ups, split-offs, spin-offs, liquidations, other
similar changes in capitalization, any distribution or issuance of cash, assets,
evidences of indebtedness or subscription rights, options or warrants to holders
of Common Stock (other than regular cash dividends) or otherwise, then, in each
such event the Board shall make such appropriate adjustments in the Hurdle Price
(as defined below) such that following such adjustments, such event shall not
have had the effect of increasing, reducing or limiting the benefits the holders
of shares of Class A Preferred Stock would have had absent such event.
(b) The "Deemed Value" as used herein shall equal the
Face Value plus the amount by which the Closing Price exceeds the Hurdle Price
on the date of the relevant event. The "Hurdle Price" as used herein shall mean
the amount that is the average of the closing prices for a share of Sentry
Common Stock on the 20 consecutive trading days ending on the trading date last
preceding the first anniversary of the filing of this Certificate; provided,
however, that in no event shall the Hurdle Price be less than $5.00 or more than
$6.50, such that (x) if such average amount is less than $5.00 the Hurdle Price
shall equal $5.00, and (y) if such average amount is more than $6.50 the Hurdle
Price shall equal $6.50, subject to adjustment pursuant to paragraph 3 above.
The "Closing Price" as used herein shall mean the average of the closing prices
for a share of Common Stock on the twenty (20) consecutive trading days ending
on the trading date last preceding an optional redemption date, the Mandatory
Redemption Date (as defined below), the date of an event described in paragraph
4(a)
A-6
above or the closing date of an Acquisition (as defined below), as the case may
be, as reported on the National Association of Securities Dealers, Inc.'s
Automated Quotations System ("Nasdaq") or if such closing prices shall not be
reported on Nasdaq, the average of the closing prices, regular way, for a share
of such security on the principal national securities exchange on which such
security is listed on such twenty (20) consecutive trading days, or if such
security is not listed on any national securities exchange, the average of the
mean between the closing bid and asked prices of a share of such security on
such twenty (20) consecutive trading days as reported, or if such prices shall
not be so reported, as the same shall be reported by the National Quotation
Bureau, Incorporated or, in all other cases, the value set in good faith by the
Board.
4. Liquidation Preference.
(a) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, the
holders of shares of the Class A Preferred Stock then outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders an amount in cash for each share outstanding
equal to (i) the Deemed Value on the date of such an event plus (ii) an amount
in cash equal to all accrued but unpaid Dividends thereon, plus additional
dividends on unpaid Dividends accrued prior to the commencement of the
then-current dividend period, to the date fixed for liquidation, before any
payment shall be made or any assets distributed to the holders of any of the
Junior Stock. If the assets of the Corporation are not sufficient to pay in full
the liquidation payments payable to the holders of outstanding shares of the
Class A Preferred Stock and any other class or series of the Preferred Stock
having liquidation rights on parity with the shares of the Class A Preferred
Stock, then the holders of all such shares shall share ratably in such
distribution of assets in accordance with the amount which would be payable on
such distribution if the amounts to which the holders of outstanding shares of
the Class A Preferred Stock and the holders of outstanding shares of such other
series of the Preferred Stock are entitled were paid in full.
(b) The liquidation payment with respect to each
fractional share of the Class A Preferred Stock outstanding, if any, shall be
equal to a ratably proportionate amount of the liquidation payment with respect
to each outstanding share of the Class A Preferred Stock.
(c) For purposes of this paragraph 4, neither the
voluntary sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all the property or
assets of the Corporation nor the consolidation or merger of the Corporation
with one or more other corporations shall be deemed to be a liquidation,
dissolution or
A-7
winding up, voluntary or involuntary, unless such voluntary sale, conveyance,
exchange or transfer shall be in connection with a dissolution or winding up of
the business of the Corporation.
(d) Any sale, lease or conveyance of all or
substantially all of the Corporation's assets or merger or consolidation of the
Corporation which results in the holders of the Common Stock receiving in
exchange for such Common Stock either cash or notes, debentures or other
evidences of indebtedness or obligations to pay cash or preferred stock of the
surviving entity which ranks on parity with the Class A Preferred Stock in
liquidation or dividends shall be deemed to be a liquidation, dissolution or
winding up of the affairs of the Corporation within the meaning of this
paragraph 4. In the cases of merger or consolidation of the Corporation where
holders of the Common Stock receive, in exchange for such Common Stock, common
stock or preferred stock which is junior in liquidation and dividends to the
Class A Preferred Stock in the surviving entity (whether or not such surviving
entity is the Corporation) of such merger or consolidation or preferred stock of
another entity, the Class A Preferred Stock shall be deemed to be preferred
stock of such surviving entity or other entity, as the case may be, with the
same annual dividend rate and equivalent rights to the rights set forth herein
and the merger or consolidation agreement shall expressly so provide. In the
event of a merger or consolidation of the Corporation where the consideration
received by the holders of the Common Stock consists of two or more of the types
of consideration set forth above, the holders of the Class A Preferred Stock
shall be entitled to receive either cash or securities based upon the foregoing
in the same proportion as the holders of the Common Stock of the Corporation are
receiving cash or debt securities, or equity securities in the surviving entity
or another entity.
(e) Notwithstanding paragraph 4(a), in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, the holders of Class A Preferred Stock shall receive
the greater of (i) the amount payable under paragraph 4(a) above or (ii) the
amount which would be the liquidation payment per share of Common Stock if the
Class A Preferred Stock were effectively redeemed for Common Stock prior to such
liquidation, for which purpose the Class A Preferred Stock shall be treated as
representing an equal number of shares of Common Stock.
5. Redemption.
(a) Optional Redemption. Prior to the first
anniversary of the date of issuance of the Class A Preferred Stock, the
Corporation shall not redeem the Class A Preferred Stock. Subject to the
preceding sentence and the requirements of paragraph 5(b) hereof, the
Corporation may, at its option, redeem the Class A Preferred Stock for cash, at
any time in whole at the
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Deemed Value, together with accrued and unpaid Dividends, if any, thereon. If
the Corporation has completed a Public Offering (as defined below) or an
Acquisition more than 35 days prior to the Mandatory Redemption Date, then the
Corporation may, at its option, redeem the Class A Preferred Stock for Sentry
Common Stock, in whole at the Deemed Value, together with accrued and unpaid
Dividends, if any, thereon, subject to the following conditions: (i) the
redemption shall be declared on the closing date of such Public Offering or
Acquisition, (ii) the redemption date shall be fixed no later than 35 days after
such closing date, (iii) for purposes of determining the Deemed Value in the
case of a Public Offering, the Closing Price shall equal the price per share at
which Common Stock is issued in such Public Offering and (iv) for purposes of
determining the Deemed Value in the case of an Acquisition, the Closing Price
shall be determined as of the closing date of such Acquisition. "Public
Offering" as used herein shall mean an underwritten public offering of Common
Stock with net proceeds resulting therefrom in excess of $12,000,000.
"Acquisition" as used herein shall mean an acquisition by the Corporation of
property of or securities issued by a third party in which the consideration
paid by the Corporation (i) consists, in whole or in part, of shares of Common
Stock and (ii) the aggregate value of such shares of Common Stock exceeds
$12,000,000; provided that such aggregate value shall equal the number of such
shares of Common Stock multiplied by the Closing Price as of the closing date of
such Acquisition.
(b) Mandatory Redemption. On the fourth anniversary
of the date of issuance of the Class A Preferred Stock (the "Mandatory
Redemption Date"), so long as any shares of the Class A Preferred Stock shall be
outstanding, the Corporation shall redeem any issued and outstanding Class A
Preferred Stock at the Deemed Value, together with accrued and unpaid Dividends,
if any, thereon, for cash (to the extent the Corporation shall have funds
legally available for such payment) or Common Stock, at Sentry's option. The
price of such Common Stock shall be its Closing Price. To the extent that funds
are not legally available on the Mandatory Redemption Date for the payment in
cash for the mandatory redemption of the Class A Preferred Stock and the
Corporation does not issue Common Stock as payment for such mandatory
redemption, the provisions of paragraph 7 shall apply.
(c) Acquired Shares. Shares of the Class A Preferred
Stock which have been issued and reacquired in any manner, including shares
purchased or redeemed, shall (upon compliance with any applicable provisions of
the laws of the State of Delaware) have the status of authorized and unissued
shares of Preferred Stock undesignated as to class or series and may be
redesignated and reissued as part of any class or series of the Preferred Stock;
provided, however, that no such issued and reacquired shares of the Class A
Preferred Stock shall be reissued or sold as Class A Preferred Stock.
A-9
6. Procedure for Redemption.
(a) Manner of Notice. In the event the Corporation
shall redeem shares of the Class A Preferred Stock, notice of such redemption
shall be given by first class mail, postage prepaid, mailed not less than 30
days nor more than 60 days prior to the redemption date, to each holder of
record of the shares to be redeemed at such holder's address as the same appears
on the stock register of the Corporation. Each such notice shall state (i) the
redemption date; (ii) the aggregate number of shares of the Class A Preferred
Stock to be redeemed; (iii) the redemption payment and to what extent such
redemption payment will be paid in cash and/or Common Stock; (iv) the place or
places where certificates for such shares are to be surrendered for the
redemption payment; and (v) that Dividends on the shares to be redeemed will
cease to accrue on such redemption date.
(b) Effect of Notice; Redemption. Notice having been
mailed as aforesaid, from and after the redemption date (unless default shall be
made by the Corporation in providing money for the payment of the redemption of
the shares so called for redemption), Dividends on the shares of the Class A
Preferred Stock so called for redemption shall cease to accrue, and said shares
shall no longer be deemed to be outstanding, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from the
Corporation the redemption payment) shall cease. Upon surrender in accordance
with said notice of the certificates for any shares so redeemed (properly
endorsed or assigned for transfer, if the Board shall so require and the notice
shall so state), such shares shall be redeemed by the Corporation at the Deemed
Value plus accrued and unpaid Dividends.
7. Conversion to Notes.
(a) To the extent that funds are not legally
available on the Mandatory Redemption Date for the payment in cash for the
mandatory redemption of the Class A Preferred Stock, and the Corporation does
not issue Common Stock as payment for such mandatory redemption, as required
herein, each outstanding share of Class A Preferred Stock shall automatically
convert (the "Conversion") into a subordinated note (the "Subordinated Note")
given by the Corporation for the benefit of the holder thereof. Each
Subordinated Note shall be in a principal amount equal to the Deemed Value plus
accrued and unpaid Dividends. The Subordinated Notes (i) shall bear interest at
a rate of six percent (6%) per annum, (ii) shall mature at the end of one year
from the date of Conversion, and (iii) upon maturity, shall become due and
payable as to any outstanding principal and interest.
(b) At the time of the Conversion, the holders of the
Subordinated Notes shall have the right, voting separately as a class, to elect
one director of the Corporation. Upon the
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vesting of such right of the holders of the Subordinated Notes, the maximum
authorized number of members of the Board shall automatically be increased by
one and the one vacancy so created shall be filled by vote of the holders of the
Subordinated Notes. The right of the holders of the Subordinated Notes to elect
a member of the Board as aforesaid shall continue until such time as the
Subordinated Notes have been paid in full, at which time such right shall
terminate, except as herein or by law expressly provided. Upon termination of
such special voting rights attributable to holders of the Subordinated Notes
pursuant to this paragraph, the term of office of any director elected by the
holders of Subordinated Notes (any such director, a "Subordinated Notes
Director") pursuant to such special voting rights shall immediately terminate
and the number of directors constituting the entire Board shall be reduced by
one. Any Subordinated Notes Director may be removed by, and shall not be removed
otherwise than by, a majority vote of the outstanding Subordinated Notes. If the
office of any Subordinated Notes Director becomes vacant by reason of death,
resignation, retirement, disqualification, removal from office, or otherwise, a
successor who shall hold office for the unexpired term in respect of which such
vacancy occurred shall be elected by a majority of the outstanding Subordinated
Notes, voting separately as a class.
(b) The indebtedness represented by the Subordinated
Notes and the payment of the principal of and any interest on each and all of
the Subordinated Notes shall be subordinate and subject in right of payment to
the prior payment in full of all Senior Indebtedness (as defined below). "Senior
Indebtedness" as used herein shall mean the principal of and premium, if any,
and interest on (a) all indebtedness of the Corporation for money borrowed,
other than Preferred Stock, whether outstanding as of the date hereof or
thereafter created, incurred or assumed, except indebtedness that by the terms
of the instrument or instruments by which such indebtedness was created or
incurred expressly provides that it (i) is junior in right of payment to the
Subordinated Notes or (ii) ranks pari passu with the Subordinated Notes, (b)
amendments, renewals, extensions, modifications, refinancings and refundings of
any such indebtedness and (c) all of the Corporation's trade payables. For
purposes of the preceding sentence, "indebtedness for money borrowed" when used
with respect to the Corporation means: (a) all indebtedness of the Corporation
for money borrowed (including any indebtedness secured by a mortgage,
conditional sales contract or other lien which is (i) given to secure all or
part of the purchase price of property subject thereto, whether given to the
vendor of such property or to another or (ii) existing on property at the time
of acquisition thereof); (b) all indebtedness of the Corporation evidenced by
notes, debentures, bonds or other securities; (c) all lease obligations of the
Corporation which are capitalized on the books of the Corporation in accordance
with generally accepted accounting principles; (d) all indebtedness of others of
the kinds described
A-11
in the preceding clause (c) assumed by or guaranteed in any manner by the
Corporation or in effect guaranteed by the Corporation through an agreement to
purchase, contingent or otherwise; and (e) all renewals, extensions or
refundings of indebtedness of the kinds described in any of the preceding
clauses (a), (b) or (d) and all renewals or extensions of lease obligations of
the kinds described in either of the preceding clauses (c) or (d).
8. Voting Rights. The holders of record of shares of the Class
A Preferred Stock shall not be entitled to any voting rights except as provided
by law or otherwise specifically provided herein.
9. Consent. No consent of holders of the Class A Preferred
Stock shall be required for (a) the creation of any indebtedness of any kind of
the Corporation, (b) the creation of any class of stock of the Corporation
ranking junior as to dividends and upon liquidation to the Class A Preferred
Stock, or (c) any increase or decrease in the amount of authorized Common Stock.
10. Amendments. The Board reserves the right by subsequent
amendment of this Certificate from time to time to decrease the number of shares
which constitute the Class A Preferred Stock (but not below the number of shares
thereof then outstanding and required for the payment of Dividends pursuant to
paragraph 2).
FIFTH. To the full extent permitted by the DGCL or any other applicable
laws presently or hereafter in effect, no director of the Corporation shall be
personally liable to the Corporation or its stockholders for or with respect to
any acts or omissions in the performance of his or her duties as a director of
the Corporation. Any repeal or modification of this Article FIFTH shall not
adversely affect any right or protection of a director of the Corporation
existing immediately prior to such repeal or modification.
SIXTH. Each person who is or was or had agreed to become a director or
officer of the Corporation, or each such person who is or was serving or who had
agreed to serve at the request of the Board or an officer of the Corporation as
an employee or agent of the Corporation or as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other entity
(including the heirs, executors, administrators or estate of such person), shall
be indemnified by the Corporation to the full extent permitted by the DGCL or
any other applicable laws as presently or hereafter in effect. Without limiting
the generality or the effect of the foregoing, the Corporation may adopt bylaws
or enter into one or more agreements with any person which provide for
indemnification greater or different than that provided in this Article or the
DGCL. Any repeal or modification of this Article
A-12
SIXTH shall not adversely affect any right or protection existing hereunder
immediately prior to such repeal or modification.
SEVENTH. The number of directors of the Corporation shall be five (5)
until changed by amendment to this Certificate.
EIGHTH. In furtherance and not in limitation of the rights, powers,
privileges, and discretionary authority granted or conferred by the DGCL or
other statutes or laws of the State of Delaware, the Board is expressly
authorized to make, alter, amend or repeal the bylaws of the Corporation,
without any action on the part of the stockholders, but the stockholders may
make additional bylaws and may alter, amend or repeal any bylaw whether adopted
by them or otherwise. The Corporation may in its bylaws confer powers upon its
Board in addition to the foregoing and in addition to the powers and authorities
expressly conferred upon the Board by applicable law.
NINTH. The Corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provision contained in this
Certificate and other provisions authorized by the laws of the State of Delaware
at the time in force may be added or inserted, in the manner now or hereafter
prescribed herein or by applicable law; and all rights, preferences and
privileges of whatsoever nature conferred upon stockholders, directors or any
other persons whomsoever by and pursuant to this Certificate in its present form
or as hereafter amended are granted subject to this reservation.
A-13
EXHIBIT B
DIRECTORS AND OFFICERS
OF
SENTRY TECHNOLOGY CORPORATION
Sentry directors shall be:
Thomas A. Nicolette
William A. Perlmuth
Andrew L. Benson
Robert D. Furst, Jr.
Robert L. Barbanell
Sentry's officers shall be:
C.E.O. Thomas A. Nicolette
V.P. Andrew L. Benson
C.F.O. Peter J. Mundy
B-1
EXHIBIT C
FORM OF AFFILIATE LETTER
October , 1996
Sentry Technology Corporation
[Address]
[Address]
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed
to be an "affiliate" of , a
corporation (the "Company"), as the term "affiliate" is (i)
defined for purposes of paragraphs (c) and (d) of Rule 145 of the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), or (ii) used in and for purposes of Accounting Series,
Releases 130 and 135, as amended, of the Commission. Pursuant to the terms of
the Agreement and Plan of Reorganization and Merger dated as of October 10, 1996
(the "Merger Agreement"), by and among Video Sentry Corporation, a Minnesota
corporation ("Video"), Knogo North America Inc., a Delaware corporation
("Knogo"), Sentry Technology Corporation, a Delaware corporation ("Sentry"),
Viking Merger Corp., a Minnesota corporation and wholly owned subsidiary of
Sentry ("Viking"), and Strip Merger Corp., a Delaware corporation and wholly
owned subsidiary of Sentry ("Strip"), Viking will be merged with and into Video
and Strip will be merged with and into Knogo (the "Merger").
As a result of the Merger, I may receive shares of the common stock,
par value $0.001 per share, of Sentry (the "Sentry Securities") in exchange for
shares owned by me of the common stock, par value $0.01 per share, of .
I represent, warrant and covenant to Sentry that in the event I
received any Sentry Securities as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of the
Sentry Securities in violation of the Securities Act or the Rules and
Regulations.
B. I have carefully read this letter and the Merger Agreement, and
discussed the requirements of such documents and other applicable limitations
upon my ability to sell, transfer or
C-1
otherwise dispose of the Sentry Securities to the extent I deemed necessary with
my counsel or counsel for the Company.
C. I have been advised that the issuance of Sentry Securities to me
pursuant to the Merger has been registered with the Commission under the
Securities Act on a Registration Statement on Form S-4. However, I have also
been advised that, since at the time the Merger was submitted for a vote of the
stockholders of the Company, I may be deemed to have been an affiliate of the
Company and the distribution by me of the Sentry Securities has not been
registered under the Securities Act, I may not sell, transfer or otherwise
dispose of the Sentry Securities issued to me in the Merger unless (i) such
sale, transfer or other disposition has been registered under the Securities
Act, (ii) such sale, transfer or other disposition is made in conformity with
Rule 145 promulgated by the Commission under the Securities Act, or (iii) in the
opinion of counsel reasonably acceptable to Sentry, or pursuant to a "no action"
letter obtained by the undersigned from the staff of the Commission, such sale,
transfer or other disposition is otherwise exempt from registration under the
Securities Act.
D. I understand that Sentry is under no obligation to register the
sale, transfer or other disposition of the Sentry Securities by me or on my
behalf under the Securities Act or to take any other action necessary in order
to make compliance with an exemption from such registration available.
E. I also understand that stop transfer instructions will be given to
Sentry's transfer agents with respect to the Sentry Securities and that there
will be placed on the certificates for the Sentry Securities issued to me, or
any substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE
TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED
__________________, 1996 BETWEEN THE REGISTERED HOLDER HEREOF AND
SENTRY TECHNOLOGY CORPORATION, A COPY OF WHICH AGREEMENT IS ON FILE AT
THE PRINCIPAL OFFICES OF SENTRY TECHNOLOGY CORPORATION."
F. I also understand that unless the transfer by me of my Sentry
Securities has been registered under the Securities Act or is a sale made in
conformity with the provisions of Rule 145, Sentry reserves the right to place
the following legend on the certificates issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933
C-2
APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE HOLDER NOT WITH A VIEW
TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN
THE MEANING OF THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED
OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs E
and F above shall be removed by delivery of substitute certificates without such
legend if such legend is not required for purposes of the Securities Act or this
Agreement. It is understood and agreed that such legends and the stop orders
referred to above will be removed if (i) two years shall have elapsed from the
date the undersigned acquired the Sentry Securities received in the Merger and
the provisions of Rule 145(d)(2) are then available to the undersigned, (ii)
three years shall have elapsed from the date the undersigned acquired the Sentry
Securities received in the Merger and the provisions of Rule 145(d)(3) are then
available to the undersigned, or (iii) Sentry has received either an opinion of
counsel, which opinion and counsel shall be reasonably satisfactory to Sentry,
or a "no action" letter obtained by the undersigned from the staff of the
Commission, to the effect that the restrictions imposed by Rule 145 under the
Securities act no longer apply to the undersigned.
Execution of this letter should not be considered an admission on my
part that I am an "affiliate" of the Company as described in the first paragraph
of this letter or as a waiver of any rights I may have to object to any claim
that I am such an affiliate on or after the date of this letter.
Very truly yours,
------------------------------------------
Name:
Accepted this day of
October, 1996
SENTRY TECHNOLOGY CORPORATION
By:
Name:
Title:
C-3
AMENDMENT NO. 1 TO AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
AMENDMENT NO. 1 TO AMENDED AND RESTATED AGREEMENT AND PLAN OF
REORGANIZATION AND MERGER (the "Amendment") dated as of January 10, 1997, by and
among VIDEO SENTRY CORPORATION, a Minnesota corporation ("VIDEO"), KNOGO NORTH
AMERICA INC., a Delaware corporation ("KNOGO"), SENTRY TECHNOLOGY CORPORATION, a
Delaware corporation ("SENTRY"), VIKING MERGER CORP., a Minnesota corporation
("VMC"), and STRIP MERGER CORP., a Delaware corporation ("SMC").
RECITALS
WHEREAS, VIDEO, KNOGO, SENTRY, VMC and SMC have each entered into an
Amended and Restated Agreement and Plan of Reorganization and Merger dated
November 27, 1996 (the "Merger Agreement") with respect to the merger of Video
and Knogo; and
WHEREAS, VIDEO, KNOGO, SENTRY, VMC and SMC wish to modify certain of
the provisions of the Merger Agreement.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants, agreements, and undertakings contained herein, the parties hereby
agree as follows:
1. Definition. Capitalized terms used in this Amendment that are defined in the
Merger Agreement shall have the meanings attributed to such terms in the Merger
Agreement, and capitalized terms used in this Amendment that are defined herein
shall have the meanings attributed to such terms herein.
2. Amendments. The provisions of the Amended and Restated Certificate of
Incorporation of Sentry at Exhibit A to the Merger Agreement shall be amended as
follows:
a. Article II, Section A is hereby amended by deleting the first four
sentences of paragraph 2(g), then adding in their place the following four
sentences:
"Whenever at any time or times, any Dividend payable shall
be, and continue, in arrears, the holders of the outstanding
shares of Class A Preferred Stock shall have the right,
voting separately as a class, to elect two directors of the
Corporation, no later than two years after the incurred
default in the payment of the Dividend. Upon the vesting of
such right of the holders
of Class A Preferred Stock, the maximum authorized number of
members of the Board shall automatically be increased by two
and the two vacancies so created shall be filled by vote of
the holders of the outstanding shares of Class A Preferred
Stock. The right of the holders of Class A Preferred Stock
to elect members of the Board as aforesaid shall continue
until such time as all Dividends in arrears shall have been
paid in full, at which time such right shall terminate,
except as herein or by law expressly provided, subject to
revesting in the event of each and every subsequent default
of the character above described. Upon termination of such
special voting rights attributable to holders of the Class A
Preferred Stock pursuant to this paragraph, the term of
office of any directors elected by the holders of shares of
Class A Preferred Stock (any such directors, a "Class A
Preferred Stock Director") pursuant to such special voting
rights shall immediately terminate and the number of
directors constituting the entire Board shall be reduced by
two.
b. Article II, Section A is hereby amended by adding to the end of
paragraph 9 the following sentence:
"The holders of record of shares of the Class A Preferred
Stock shall have the right, voting as a class, to vote on
(i) any change in the rights, privileges or preferences of
the Class A Preferred Stock, provided that a favorable vote
of at least two-thirds of the number of outstanding shares
of the Class A Preferred Stock is required to authorize such
change, (ii) the creation of any additional class of
preferred stock senior to the Class A Preferred Stock,
provided that an affirmative vote of at least two-thirds of
the outstanding shares of the Class A Preferred Stock is
required for the creation of such senior class, and (iii)
the creation of any additional class of preferred stock
equal in preference to the Class A Preferred Stock, provided
that an affirmative vote of at least a majority of the
outstanding shares of the Class A Preferred Stock is
required for the creation of such equal class."
3. Continued Effectiveness of Merger Agreement. Except as amended hereby, the
Merger Agreement shall continue in full force and effect in accordance with the
terms thereof.
4. Waivers; Amendments.
(a) No failure or delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
2
(b) Any provision of this Amendment may be amended or waived if, but
only if, such amendment or waiver is in writing and is signed by the parties
hereto.
5. Severability. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions of this Amendment or affecting the validity or
unenforceability of such provision in any other jurisdiction.
6. Choice of Law. This Amendment shall be construed in accordance with and
governed by the laws of the State of Delaware.
7. Counterparts; Effectiveness. This Amendment may be executed in any number of
counterparts each of which shall be an original with the same effect as if the
signatures thereto and hereto were upon the same instrument.
* * *
3
IN WITNESS WHEREOF, this Amendment No. 1 has been executed and
delivered as of the date first above written.
VIDEO SENTRY CORPORATION
By: /s/ Robert D. Furst, Jr.
------------------------------------
Name: Robert D. Furst, Jr.
Title: Chairman and CEO
KNOGO NORTH AMERICA INC.
By: /s/ Thomas A. Nicolette
------------------------------------
Name: Thomas A. Nicolette
Title: President and CEO
SENTRY TECHNOLOGY CORPORATION
By: /s/ Robert D. Furst, Jr.
------------------------------------
Name: Robert D. Furst, Jr.
Title: President
VIKING MERGER CORP.
By: /s/ Robert D. Furst, Jr.
------------------------------------
Name: Robert D. Furst, Jr.
Title: President
STRIP MERGER CORP.
By: /s/ Robert D. Furst, Jr.
------------------------------------
Name: Robert D. Furst, Jr.
Title: President
4
APPENDIX B
ALEX. BROWN
AMERICA'S OLDEST INVESTMENT BANKING FIRM
ESTABLISHED 1800
October 10, 1996
Video Sentry Corporation
6365 Carlson Drive
Eden Prairie, Minnesota 55346
Dear Sirs:
Video Sentry Corporation ("Video" or the "Company"), Knogo North
America Inc. ("Knogo"), Sentry Technology Corporation ("Sentry"), Viking Merger
Corp., a Minnesota corporation and a wholly-owned subsidiary of Sentry ("Video
Merger Corp."), and Strip Merger Corp., a Delaware corporation and a
wholly-owned subsidiary of Sentry ("Knogo Merger Corp."), have entered into an
Agreement and Plan of Reorganization and Merger dated as of October 10, 1996
(the "Agreement"). Pursuant to the Agreement, Video Merger Corp. shall be merged
with and into Video which shall continue as the surviving corporation of the
merger (the "Video Merger"), and Knogo Merger Corp. shall be merged with and
into Knogo which shall continue as the surviving corporation of the merger (the
"Knogo Merger") (collectively, the "Merger"), and each share of common stock,
par value $0.01 per share, of Video ("Video Common Stock") issued and
outstanding immediately prior to the effective time of the Video Merger will be
converted into one share of common stock, par value $0.001 per share, of Sentry
("Sentry Common Stock") (the "Exchange Ratio"), and each 1.2022 shares of common
stock, par value $0.01 per share, of Knogo ("Knogo Common Stock") issued and
outstanding immediately prior to the effective time of the Knogo Merger will be
converted into one share of Sentry Common stock and one share of Class A
Preferred Stock, par value $0.001 per share of Sentry ("Sentry Class A Preferred
Stock"). We have assumed, with your consent, that the Merger will qualify as a
tax free transaction for federal income tax purposes. You have requested our
opinion as to whether the Exchange Ratio is fair, from a financial point of
view, to Video's stockholders.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of
its investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to the Board of Directors of Video
in connection with the transaction described above and will receive a fee for
our services, a significant portion of which is contingent upon the consummation
of the Merger and a portion of which becomes payable upon the delivery of this
opinion. In the ordinary course of business, Alex. Brown may actively trade the
securities of both the Company and Knogo for our own account and the account of
our customers and, accordingly, may at any time hold a long or short position in
securities of the Company and Knogo.
ALEX. BROWN & SONS INCORPORATED
ONE SOUTH STREET o BALTIMORE, MARYLAND 21202
o TELEPHONE: (410) 727-1700 o TELEX: 198186
Video Sentry Corporation
October 10, 1996
Page 2
In connection with this opinion, we have reviewed certain publicly
available financial information and other information concerning Video and Knogo
and certain internal analyses and other information furnished to us by Video and
Knogo. We have also held discussions with the members of the senior managements
of Video and Knogo regarding the businesses and prospects of their respective
companies and the joint prospects of a combined company. In addition, we have
(i) reviewed the reported prices and trading activity for the Video Common Stock
and Knogo Common Stock, (ii) compared certain financial and stock market
information for Video and Knogo with similar information for certain other
companies whose securities are publicly traded, (iii) reviewed the financial
terms of certain recent business combinations which we deemed comparable in
whole or in part, (iv) reviewed the terms of the Agreement and certain related
documents, and (v) performed such other studies and analyses and considered such
other factors as we deemed appropriate.
We have not independently verified the information described above and
for purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to the information relating to the prospects of
Video and Knogo, we have assumed that such information reflects the best
currently available judgments and estimates of the managements of Video and
Knogo as the likely future financial performances of their respective companies
and of the combined entity. In addition, we have not made nor been provided with
an independent evaluation or appraisal of the assets or liabilities of Video and
Knogo, nor have we been furnished with any such evaluations or appraisals.
We are not expressing our opinion as to the value of Sentry's common
stock when issued pursuant to the Merger or the prices at which Sentry's common
stock will trade subsequent to such issuance. Our opinion is based on market,
economic and other conditions as they exist and can be evaluated as of the date
of this letter. Our opinion expressed herein was prepared for the use of the
Board of Directors of Video and does not constitute a recommendation to any
stockholders as to how such stockholder should vote.
Based upon and subject to the foregoing, it is our opinion that, as of
the date of this letter, the Exchange Ratio is fair, from a financial point of
view, to Video's stockholders.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ Alex. Brown & Sons Incorporated
-----------------------------------
ALEX. BROWN
AMERICA'S OLDEST INVESTMENT BANKING FIRM
ESTABLISHED 1800
January 21, 1997
Video Sentry Corporation
6365 Carlson Drive
Eden Prairie, Minnesota 55346
Dear Sirs:
This letter will serve to confirm that nothing has come to our attention
as of the date hereof which would cause us to change the form or content of
our opinion in the aforementioned letter. The nature and scope of our
investigation, subsequent to October 10, has been more limited than that
conducted in support of the October 10 opinion.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ Alex. Brown & Sons Incorporated
------------------------------------
ALEX. BROWN & SONS INCORPORATED
ONE SOUTH STREET o BALTIMORE, MARYLAND 21202
o TELEPHONE: (410) 727-1700 o TELEX: 198186
APPENDIX C
DONALD & CO. SECURITIES INC.
PARK AVENUE TOWER
65 EAST 55TH STREET, NEW YORK, N.Y. 10022
October 10, 1996
Board of Directors
Knogo North America Inc.
350 Wireless Boulevard
Hauppauge, New York 11788
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from
a financial point of view, to the stockholders of Knogo North America Inc.
("Knogo" or the "Company") in connection with the proposed reorganization and
merger (the "Merger") pursuant to an Agreement and Plan of Reorganization and
Merger (the "Merger Agreement") among the Company, Video Sentry Corporation
("VSC"), Sentry Technology Corporation ("Sentry") and two wholly-owned
subsidiaries of Sentry, Strip Merger Corp. ("SMC") and Viking Merger Corp.
("VMC"). Pursuant to the Merger Agreement, the issued and outstanding shares of
common stock of the Company are to be exchanged at a rate of 1.2022 shares for
(i) one share of Sentry common stock, $.001 par value per share, and (ii) one
share of Sentry Class A preferred stock, $.001 par value per share (the
"Exchange Rate"). We understand that the Merger is intended to qualify as a tax
free reorganization for federal income tax purposes.
In connection with rendering our opinion, we have reviewed and analyzed,
among other things, the following (i) a draft, dated October 9, 1996, of the
Merger Agreement; (ii) certain publicly available information concerning the
Company, including its annual report on Form 10-K for the year ended December
31, 1995 and its quarterly reports on Form 10-Q for the quarters ended March 31,
1996 and June 30, 1996; (iii) certain publicly available information concerning
VSC, including its annual report on Form 10-K for the year ended December 31,
1995 and its quarterly reports on Form 10-Q for the quarters ended March 31,
1996 and June 30, 1996; (iv) certain financial forecasts concerning the business
and organization of the Company, VSC and the post-Merger entity; (v) certain
publicly available information with respect to certain other companies that we
believe to be comparable in certain respects to the Company, VSC and the trading
markets for such other companies' securities; (vi) certain nontechnical
information concerning U.S. patent no. 5,241,380 issued to VSC; (vii) certain
publicly available information concerning the nature and terms and certain other
transactions that we consider relevant to our inquiry; and (viii) the Term Sheet
respecting the Merger. We have discussed the foregoing items and issues,
including business operations, financial conditions and prospects of Knogo, VSC
and the post-Merger entity, with certain officers and employees of the Company
and VSC, as well as other matters we believe relevant to our inquiry. We have
conducted such other studies, analysis, inquiries and investigations, and
considered such other matters, as we deemed relevant and appropriate.
In our review and in rendering our opinion, we have assumed and relied upon
the accuracy and completeness of all information provided to us or publicly
available. We have neither independently verified or assumed responsibility for
verifying any of such information. We have assumed that the financial
projections we have received have been reasonably prepared on a basis reflecting
the best
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Members SIPC, NASD o (212) 872-2000 o 1 (800) 962-WILL o FAX: (212) 832-6384
C-1
currently available estimates and judgments of management as to future financial
performance. We have not made, obtained, or assumed any responsibility for
making or obtaining, any independent evaluations or appraisals of any of the
assets or liabilities of the Company, VSC or the post-Merger entity.
Our opinion is necessarily based on financial, economic, market and other
conditions as they exist on, and information made available to us as of the date
hereof. It should be understood that, although subsequent developments may
affect this opinion, we do not have any obligation to update, revise or reaffirm
this opinion. Furthermore, our opinion does not address the Company's underlying
business decision to effect the Merger, and should not be read as implying any
conclusion as to the price or trading range of the stock of the post-Merger
entity. Our opinion is based on the assumption that the Agreement to be entered
into will conform in all material respects to the draft dated October 9, 1996.
The opinion expressed herein was prepared for the use of the Board of
Directors and does not constitute a recommendation to any stockholder as to how
such stockholder should vote. This letter and our opinion expressed herein are
not be quoted, summarized or referred to, in whole or in part, without our prior
written consent.
Based upon and subject to the foregoing, it is our opinion that as of the
date hereof, the Exchange Rate is fair, from a financial point of view, to the
stockholders of Knogo.
Very truly yours,
DONALD & CO. SECURITIES INC.
By: /s/ STEPHEN A. BLUM
-----------------------------
Stephen A. Blum, President
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DONALD & CO. SECURITIES INC.
Park Avenue Tower
65 East 55th Street, New York, N.Y 10022
January 21, 1997
Board of Directors
Knogo North America, Inc.
350 Wireless Boulevard
Hauppauge, NY 11788
Members of the Board:
You have requested us to update our letter to you of October 10, 1996.
Defined terms therein shall have the same meaning herein.
In connection with our update, we have reviewed (i) the preliminary joint
proxy statements of the Company and VCS submitted to the Securities Exchange
Commission on January 7, 1997 (ii) the executed Agreement, together with any
amendments thereto and/or restatements thereof that were included with the
filing referred to in clause (i) hereof, and (iii) the Quarterly Report on Form
10-Q of the Company for the quarter ended September 30, 1996 filed with the
Securities & Exchange Commission. We have also had conversations with
representatives of the Company to, among other things, confirm that there are no
matters which may have caused the Company to change its forecasts with respect
to the merged entity. We have specifically considered the decline in market
price of the publicly traded securities of the Company and VSC.
Except as set forth in this letter, we have not taken any other steps or
analysis with respect to this update.
This letter will serve to confirm that nothing has come to our attention as
of the date hereof which would cause us to change the form or content of our
opinion contained in the aforesaid letter.
The assumptions, limitations and conditions set forth in the letter shall
continue to apply.
Very truly yours,
DONALD & CO. SECURITIES INC.
/s/ Stephen A. Blum
------------------------------
By: Stephen A. Blum, President
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C-3
APPENDIX D
MINNESOTA Business Corporation Act
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS.--
Subdivision 1. Definitions. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1 up
to and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If a proposed action must be approved by
the shareholders, a shareholder who wishes to exercise dissenters' rights must
file with the corporation before the vote on the proposed action a written
notice of intent to demand the fair value of the shares owned by the shareholder
and must not vote the shares in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer or uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
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MINNESOTA Business Corporation Act
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice was given, but the dissenter retains all other rights of a shareholder
until the proposed action takes effect.
Subd. 5. Payment; return of shares. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting shareholder
who has complied with subdivisions 3 and 4 the amount the corporation estimates
to be the fair value of the shares, plus interest, accompanied by:
(1) the corporation's closing balance sheet and statement of income for
a fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) an estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action dissented
from was first announced to the public or who is dissenting on behalf of a
person who was not a beneficial owner on that date. If the dissenter has
complied with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement of the reason
for withholding the remittance, and an offer to pay to the dissenter the amount
listed in the materials if the dissenter agrees to accept that amount in full
satisfaction.
The dissenter may decline the offer and demand payment under
subdivision 6. Failure to do so entitles the dissenter only to the amount
offered. If the dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel all
transfer restrictions. However, the corporation may again give notice under
subdivision 4 and require deposit or restrict transfer at a later time.
Subd.6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise,
2
MINNESOTA Business Corporation Act
a dissenter is entitled only to the amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Non residents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
3
MINNESOTA Business Corporation Act
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
(Last amended by Ch. 17, L. '93, eff. 8-1-93.)
4
APPENDIX E
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the holders of the surviving corporation as provided in
subsection (f) of 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 268, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the
shares of any class or series of its stock as a result of an amendment
to its certificate of incorporation, any merger or consolidation in
which the corporation is a constituent corporation or the sale of all or
substantially all of the assets of the
E-1
corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for
approval at a meeting of stockholders, the corporation, not less
than 20 days prior to the meeting, shall notify each of its
stockholders who was such on the record date for such meeting with
respect to shares for which appraisal rights are available pursuant
to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the
vote on the merger or consolidation, a written demand for appraisal
of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation shall
not constitute such a demand. A stockholder electing to take such
action must do so by a separate written demand as herein provided.
Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent
corporation, either before the effective date of the merger or
consolidation or within ten days thereafter, shall notify each of
the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be
given by the surviving or resulting corporation to all such holders
of any class or series of stock of a constituent corporation that
are entitled to appraisal rights. Such notice may, and, if given on
or after the effective date of the merger or consolidation, shall,
also notify such stockholders of the effective date of the merger
or consolidation. Any stockholder entitled to appraisal rights may,
within twenty days after the date of mailing of such notice, demand
in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation,
either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of
such constituent corporation that are entitled to appraisal rights
of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20
days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation
that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of
the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given; provided
that, if the notice is given on or after the effective date of the
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merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to
the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court
of Chancery demanding a determination of the value of the stock of all
such stockholders. Notwithstanding the foregoing, at any time within 60
days after the effective date of the merger or consolidation, any
stockholder shall have the right to withdraw his demand for appraisal
and to accept the terms offered upon the merger or consolidation. Within
120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a)
and (d) hereof, upon written request, shall be entitled to receive from
the corporation surviving the merger or resulting from the consolidation
a statement setting forth the aggregate number of shares not voted in
favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of
such shares. Such written statement shall be mailed to the stockholder
within 10 days after written request for such a statement is received by
the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting
corporation, which shall within 20 days after such service file in the
office of the Register in Chancery in which the petition was filed a
duly verified list containing the names and addresses of all
stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
surviving or resulting corporation. If the petition shall be filed by
the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed
for the hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown on the
list at the addresses therein stated. Such notice shall also be given by
1 or more publications at least 1 week before the day of the hearing, in
a newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of
the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal,
the Court shall appraise the shares, determining their fair value
exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair
value. In determining such fair value, the Court shall take into account
all relevant factors. In determining the fair rate of interest, the
Court may consider all relevant factors, including the rate of interest
which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of
the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of
E-3
this section and who has submitted his certificates of stock to the
Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple
or compound, as the Court may direct. Payment shall be so made to each
such stockholder, in the case of holders of uncertificated stock
forthwith, and the case of holders of shares represented by certificates
upon the surrender to the corporation of the certificates representing
such stock. The Court's decree may be enforced as other decrees in the
Court of Chancery may be enforced, whether such surviving or resulting
corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the
circumstances. Upon application of a stockholder, the Court may order
all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorney's fees and the fees and expenses of experts, to be
charged pro rata against the value of all the shares entitled to an
appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as
provided in subsection (d) of this section shall be entitled to vote
such stock for any purpose or to receive payment of dividends or other
distributions on the stock (except dividends or other distributions
payable to stockholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided
in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his
demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of this section or
thereafter with the written approval of the corporation, then the right
of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be
dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting
corporation. (Last amended by Ch. 349, L. '96, eff. 7-1-96.)
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APPENDIX F
CERTIFICATE OF AMENDMENT
AND RESTATEMENT
OF
CERTIFICATE OF INCORPORATION
OF
SENTRY TECHNOLOGY CORPORATION
(Under Sections 242 and 245 of the
Delaware General Corporation Law)
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation")
is SENTRY TECHNOLOGY CORPORATION.
2. The Certificate of Incorporation of the Corporation is hereby
amended and restated in its entirety to read as follows:
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SENTRY TECHNOLOGY CORPORATION
(A Delaware corporation)
FIRST. The name of the corporation is SENTRY TECHNOLOGY CORPORATION
(the "Company").
SECOND. The address of the Company's registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, Delaware
19805. The name of the Company's registered agent at such address is Corporation
Service Company.
THIRD. The purpose of the Company is to engage in any lawful act or
activity for
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which corporations may be organized under the General Corporation Law of the
State of Delaware.
FOURTH. Section 1. Authorized Capital Stock. The Company is authorized
to issue two classes of capital stock, designated Common Stock and Preferred
Stock. The total number of shares of capital stock that the Company is
authorized to issue is 50,000,000 shares, consisting of 40,000,000 shares of
Common Stock, par value $0.001 per share, and 10,000,000 shares of Preferred
Stock, par value $0.001 per share.
Section 2. Preferred Stock. The Preferred Stock may be issued in one or
more series. The Board of Directors of the Company (the "Board") is hereby
authorized to issue the shares of Preferred Stock in such series and to fix from
time to time before issuance the number of shares to be included in any such
series and the designation, relative powers, preferences, and rights and
qualifications, limitations, or restrictions of all shares of such series. The
authority of the Board with respect to each such series will include, without
limiting the generality of the foregoing, the determination of any or all of the
following:
(a) the number of shares of any series and the designation to
distinguish the shares of such series from the shares of all other
series;
(b) the voting powers, if any, and whether such voting powers
are full or limited in such series;
(c) the redemption provisions, if any, applicable to such
series, including the redemption price or prices to be paid;
(d) whether dividends, if any, will be cumulative or
noncumulative, the dividend rate of such series, and the dates and
preferences of dividends on such series;
(e) the rights of such series upon the voluntary or
involuntary dissolution of, or upon any distribution of the assets of,
the Company;
(f) the provisions, if any, pursuant to which the shares of
such series are convertible into, or exchangeable for, shares of any
other class or classes or of any other series of the same or any other
class or classes of stock, or any other security, of the Company or any
other corporation or other entity, and the price or prices or the rates
of exchange applicable thereto;
(g) the right, if any, to subscribe for or to purchase any
securities of the Company or any other corporation or other entity;
(h) the provisions, if any, of a sinking fund applicable to
such series; and
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(i) any other relative, participating, optional, or other
special powers, preferences, rights, qualifications, limitations, or
restrictions thereof;
all as may be determined from time to time by the Board and stated in the
resolution or resolutions providing for the issuance of such Preferred Stock
(collectively, a "Preferred Stock Designation").
Section 3. Common Stock. Except as may otherwise be provided in a
Preferred Stock Designation, the holders of Common Stock will be entitled to one
vote on each matter submitted to a vote at a meeting of stockholders for each
share of Common Stock held of record by such holder as of the record date for
such meeting.
FIFTH. The Board may make, amend, and repeal the By-Laws of the
Company. Any By-Law made by the Board under the powers conferred hereby may be
amended or repealed by the Board or by the stockholders in the manner provided
in the By-Laws of the Company. Notwithstanding the foregoing and anything
contained in this Amended and Restated Certificate of Incorporation to the
contrary, By-Laws 3, 8, 10, 11, 12, 13, and 39 may not be amended or repealed by
the stockholders, and no provision inconsistent therewith may be adopted by the
stockholders, without the affirmative vote of the holders of at least 80% of the
Voting Stock, voting together as a single class. The Company may in its By-Laws
confer powers upon the Board in addition to the foregoing and in addition to the
powers and authorities expressly conferred upon the Board by applicable law. For
the purposes of this Amended and Restated Certificate of Incorporation, "Voting
Stock" means stock of the Company of any class or series entitled to vote
generally in the election of Directors. Notwithstanding anything contained in
this Amended and Restated Certificate of Incorporation to the contrary, the
affirmative vote of the holders of at least 80% of the Voting Stock, voting
together as a single class, is required to amend or repeal, or to adopt any
provisions inconsistent with, this Article Fifth.
SIXTH. Subject to the rights of the holders of any series of Preferred
Stock:
(a) any action required or permitted to be taken by the
stockholders of the Company must be effected at a duly called annual or
special meeting of stockholders of the Company and may not be effected
by any consent in writing of such stockholders; and
(b) special meetings of stockholders of the Company may be
called only by (i) the Chairman of the Board (the "Chairman") or (ii)
the Secretary of the Company (the "Secretary") within 10 calendar days
after receipt of the written request of a majority of the total number
of Directors which the Company would have if there were no vacancies
(the "Whole Board").
At any annual meeting or special meeting of stockholders of the Company, only
such business will be conducted or considered as has been brought before such
meeting in the
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manner provided in the By-Laws of the Company. Notwithstanding anything
contained in this Amended and Restated Certificate of Incorporation to the
contrary, the affirmative vote of at least 80% of the Voting Stock, voting
together as a single class, will be required to amend or repeal, or adopt any
provision inconsistent with, this Article Sixth.
SEVENTH. Section 1. Number, Election, and Terms of Directors. Subject
to the rights, if any, of the holders of any series of Preferred Stock to elect
additional Directors under circumstances specified in a Preferred Stock
Designation, the number of the Directors of the Company will not be less than
three nor more than 12 and will be fixed from time to time in the manner
described in the By-Laws of the Company. The Directors, other than those who may
be elected by the holders of any series of Preferred Stock, will be classified
with respect to the time for which they severally hold office into three
classes, as nearly equal in number as possible, designated Class I, Class II,
and Class III. The Directors first appointed to Class I will hold office for a
term expiring at the first annual meeting of stockholders to be held following
the filing of this Certificate; the Directors first appointed to Class II will
hold office for a term expiring at the second annual meeting of stockholders to
be held following the filing of this Certificate; and the Directors first
appointed to Class III will hold office for a term expiring at the third annual
meeting of stockholders to be held following the filing of this Certificate,
with the members of each class to hold office until their successors are elected
and qualified. At each succeeding annual meeting of the stockholders of the
Company, the successors of the class of Directors whose terms expire at that
meeting will be elected by plurality vote of all votes cast at such meeting to
hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election. Election of Directors of
the Company need not be by written ballot unless requested by the Chairman or by
the holders of a majority of the Voting Stock present in person or represented
by proxy at a meeting of the stockholders at which Directors are to be elected.
Section 2. Nomination of Director Candidates. Advance notice of
stockholder nominations for the election of Directors must be given in the
manner provided in the By-Laws of the Company.
Section 3. Newly Created Directorships and Vacancies. Subject to the
rights, if any, of the holders of any series of Preferred Stock to elect
additional Directors under circumstances specified in a Preferred Stock
Designation, newly created directorships resulting from any increase in the
number of Directors and any vacancies on the Board resulting from death,
resignation, disqualification, removal, or other cause will be filled solely by
the affirmative vote of a majority of the remaining Directors then in office,
even though less than a quorum of the Board, or by a sole remaining Director.
Any Director elected in accordance with the preceding sentence will hold office
for the remainder of the full term of the class of Directors in which the new
directorship was created or the vacancy occurred and until such Director's
successor has been elected and qualified. No decrease in the number of Directors
constituting the Board may shorten the term of any incumbent Director.
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Section 4. Removal. Subject to the rights, if any, of the holders of
any series of Preferred Stock to elect additional Directors under circumstances
specified in a Preferred Stock Designation, any Director may be removed from
office by the stockholders only for cause and only in the manner provided in
this Section 4. At any annual meeting or special meeting of the stockholders,
the notice of which states that the removal of a Director or Directors is among
the purposes of the meeting, the affirmative vote of the holders of at least 80%
of the Voting Stock, voting together as a single class, may remove such Director
or Directors for cause. Except as may be provided by applicable law, cause for
removal will be deemed to exist only if the Director whose removal is proposed
has been adjudged by a court of competent jurisdiction to be liable to the
Company or its stockholders for misconduct as a result of (a) a breach of such
Director's duty of loyalty to the Company, (b) any act or omission by such
Director not in good faith or which involves a knowing violation of law, or (c)
any transaction from which such Director derived an improper personal benefit,
and such adjudication is no longer subject to direct appeal.
Section 5. Amendment, Repeal, Etc. Notwithstanding anything contained
in this Amended and Restated Certificate of Incorporation to the contrary, the
affirmative vote of at least 80% of the Voting Stock, voting together as a
single class, is required to amend or repeal, or adopt any provision
inconsistent with, this Article Seventh.
EIGHTH. Section 1. Notwithstanding any other provision of this Amended
and Restated Certificate of Incorporation and except as set forth in Section 2
of this Article EIGHTH, the affirmative vote of at least 80% of the Voting
Stock, voting together as a single class, shall be required:
I. For the adoption of any agreement for the merger or
consolidation of the Company or any Subsidiary (as defined in Section 5
of this Article EIGHTH) with or into any other person (as defined in
Section 5 of this Article EIGHTH).
II. To authorize any sale, lease, transfer or exchange of, or
any mortgage or pledge of or the granting of any other security
interest in, or any other disposition of, all or any substantial part
of the assets of the Company or any Subsidiary to or with any other
person (in a single transaction or in a series of related
transactions).
III. To authorize the issuance or transfer by the Company or
any Subsidiary of any securities of the Company or any Subsidiary
(except securities issued pursuant to a stock option, purchase, bonus
or other plan or arrangement, for natural persons who are directors,
employees, consultants and/or agents of the Company or a Subsidiary, or
securities issued upon exercise of any conversion rights, warrants,
options or rights which shall have been outstanding at the time of
adoption of this Article EIGHTH or which shall have been issued in a
transaction not in contravention of the provisions of this Article
EIGHTH) to any other person in exchange for cash, securities or other
assets or a combination thereof, if, in the case of any of the
foregoing transactions (as of the date of any action taken by the Board
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with respect to any such proposed transaction, or as of the record date
for the determination of stockholders entitled to notice of and to vote
on any such proposed transaction or immediately prior to the
consummation of any such proposed transaction), such other person is,
or at any time within the preceding 12 months has been, the beneficial
owner, directly or indirectly, of 20 percent or more of the outstanding
shares of Voting Stock of the Company.
Section 2. The provisions of Section 1 of this Article EIGHTH shall not
apply to (1) any transaction described in such Section 1 if the Board shall by
resolution have approved a memorandum of agreement with such person setting
forth the principal terms of such transaction and such transaction is
substantially consistent therewith, provided that a majority of those directors
voting in favor of such resolution are Continuing Directors (as defined in
Section 5 of this Article EIGHTH), (2) any transaction described in such Section
1 if the other party to such transaction is a Major Subsidiary (as defined in
Section 5 of this Article EIGHTH) or (3) any transaction described in such
Section 1 (other than a merger or consolidation to which the Company would be a
party) if the fair value of the securities, assets or other consideration
proposed to be issued or transferred, in any way disposed of, or received, by
the Company or any Subsidiary in connection with any such transaction or any
series of such transactions which are related is less than $5,000,000.
Section 3. Notwithstanding any other provisions of this Amended and
Restated Certificate of Incorporation and except as set forth in Section 4 of
this Article EIGHTH, the affirmative vote of the holders of at least 80 % of the
Voting Stock, voting together as a single class, shall be required:
I. To authorize a liquidation or dissolution of the Company,
II. To authorize any offer by the Company to purchase shares
of its outstanding Voting Stock (except pursuant to redemption
provisions of any preferred stock of the Company),
III. To authorize any reclassification of securities of the
Company, any recapitalization or any other transaction in each case
designed to decrease the number of holders of Voting Stock of the
Company,
if (as of the date of any action taken by the Board with respect to any such
proposed transaction, or as of the record date for the determination of
stockholders entitled to notice of and to vote on any such proposed transaction
or immediately prior to the consummation of any such proposed transaction) any
other person is the beneficial owner, directly or indirectly, of 5 percent or
more of the outstanding shares of Voting Stock of the Company.
Section 4. The provisions of Section 3 of this Article EIGHTH shall not
apply to any transaction described in such Section 3 if the Board shall by
resolution have approved a memorandum setting forth the principal terms of such
transaction and such transaction is
6
substantially consistent therewith, provided that a majority of those directors
voting in favor of such resolution are Continuing Directors (as defined in
Section 5 of this Article EIGHTH).
Section 5. For the purpose of this Article EIGHTH:
I. Any person shall be deemed to be the "beneficial owner" of
any shares of stock of the Company (i) which it owns, directly or
indirectly, whether of record or not, or which it has the right to
acquire pursuant to any agreement, or upon exercise of conversion
rights, warrants or options, or otherwise, or (ii) which are
beneficially owned, directly or indirectly (including shares deemed
owned through application of clause (i) above), by any other person
which is its affiliate or associate (as defined in this Section 5) or
with which it or any of its affiliates or associates has any agreement,
arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of stock of the Company. The outstanding shares of
any class of stock of the Company shall be deemed to include shares
deemed owned, through application of clauses (i) and (ii) above, but
shall not include any other shares which may be issuable pursuant to
any agreement, or upon exercise of conversion rights, warrants or
options, or otherwise.
II. An "affiliate" of a specified person is any person that,
directly or indirectly, controls or is controlled by, or is under
common control with, the person specified. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with"), as used with respect
to any person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management and
policies of the specified person, whether through the ownership of
voting securities or by contract or otherwise.
III. The term "associates" used to indicate a relationship
with any specified person means (i) any person in which such specified
person has a significant financial interest or as to which such
specified person's relationship is such that such specified person
substantially influences its management and policies or any person
having a significant financial interest in such specified person or
which substantially influences the management and policies of such
specified person, and without limitation to the foregoing, (ii) any
person of which such specified person is an officer, director or
partner or is, directly or indirectly, the beneficial owner of 5
percent or more of any class of equity securities, (iii) any trust or
other estate in which such specified person has a substantial
beneficial interest or as to which such person serves as trustee or in
a similar fiduciary capacity, and (iv) any relative or spouse of such
specified person, or any relative of such spouse, who has the same home
as such specified person or who is a director or officer of such
specified person or any corporation which controls or is controlled by
such specified person.
IV. A "person" is any individual, corporation or other entity.
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V. The term "securities" shall include, without limitation,
any stocks, bonds, debentures, notes and evidences of indebtedness, and
any warrants, options and other rights to subscribe to or purchase any
of the foregoing.
VI. A "Subsidiary" is any corporation of which at least a
majority of the outstanding shares of equity stock is owned of record
or beneficially by the Company and/or its Subsidiaries. A "Major
Subsidiary" is any corporation of which at least 80 percent of the
outstanding shares of equity stock is owned of record and beneficially
by the Company and/or its Major Subsidiaries.
VII. The term "Continuing Director" shall mean a person who
was a duly elected and acting director of the Company at the time of
the adoption of this Article EIGHTH or became a duly elected and acting
director of the Company prior to the time that, for the purposes of
Section 2 or Section 4, as the case may be, of this Article EIGHTH,
such other person became a beneficial owner, directly or indirectly, of
5 percent or more of the Voting Stock of the Company, or a person
designated (whether before or after election as a director) to be a
Continuing Director by a majority of the Continuing Directors.
Section 6. A majority of the Continuing Directors shall have the power
and duty to determine for the purposes of this Article EIGHTH, on the basis of
information known to them, whether a proposed transaction is subject to the
provisions of Section 1 or Section 3 of this Article EIGHTH, and in particular
and without limitation, whether (1) any person beneficially owns 5 percent or
more of the outstanding shares of Voting Stock of the Company, (2) any person is
an "affiliate" or "associate" of any other person, (3) any person has an
agreement, arrangement or understanding with any other person, (4) any proposed
transaction involves a substantial part of the assets of the Company or any
Subsidiary, (5) the fair value of securities, assets or other consideration
referred to in Section 2 of this Article EIGHTH is less than $5,000,000, (6) any
series of transactions are related, and (7) the memorandum referred to in
Section 2 or Section 4 of this Article EIGHTH is substantially consistent with
the transaction to which it relates. Any such determination shall be conclusive
and binding for all purposes of this Article EIGHTH.
Section 7. The affirmative vote of stockholders required by this
Article EIGHTH shall be in lieu of any lesser vote or consent of the holders of
the stock of the Company otherwise required by law or in any agreement to which
the Company is a party, and shall be in addition to any voting requirements
imposed by law or any other provisions of the Amended and Restated Certificate
of Incorporation of the Company, including resolutions providing for the
issuance of a class or series of stock adopted by the Board pursuant to
authority vested in it by the provisions of the Amended and Restated Certificate
of Incorporation, in favor of certain classes of stock.
Section 8. No amendment to this Amended and Restated Certificate of
Incorporation, directly or indirectly by merger, consolidation or otherwise,
shall amend, alter, change or
8
repeal any of the provisions of this Article EIGHTH, unless the amendment
effecting such amendment, alteration, change or repeal shall receive the
affirmative vote of the holders of at least 80 percent of the outstanding shares
of stock of the Company entitled to vote in elections of directors; provided
that this Section 8 shall not apply to any such amendment if such amendment is
submitted to the stockholders for adoption with the unanimous recommendation of
the entire Board.
NINTH. To the full extent permitted by the Delaware General Corporation
Law or any other applicable law currently or hereafter in effect, no Director of
the Company will be personally liable to the Company or its stockholders for or
with respect to any acts or omissions in the performance of his or her duties as
a Director of the Company. Any repeal or modification of this Article Ninth will
not adversely affect any right or protection of a Director of the Company
existing prior to such repeal or modification.
TENTH. Each person who is or was or had agreed to become a Director or
officer of the Company, and each such person who is or was serving or who had
agreed to serve at the request of the Board or an officer of the Company as an
employee or agent of the Company or as a director, officer, employee, or agent
of another corporation, partnership, joint venture, trust, or other entity,
whether for profit or not for profit (including the heirs, executors,
administrators, or estate of such person), will be indemnified by the Company to
the full extent permitted by the Delaware General Corporation Law or any other
applicable law as currently or hereafter in effect. The right of indemnification
provided in this Article Tenth (a) will not be exclusive of any other rights to
which any person seeking indemnification may otherwise be entitled, including
without limitation pursuant to any contract approved by a majority of the Whole
Board (whether or not the Directors approving such contract are or are to be
parties to such contract or similar contracts), and (b) will be applicable to
matters otherwise within its scope whether or not such matters arose or arise
before or after the adoption of this Article Tenth. Without limiting the
generality or the effect of the foregoing, the Company may adopt By-Laws, or
enter into one or more agreements with any person, which provide for
indemnification greater or different than that provided in this Article Tenth or
the DGCL. Notwithstanding anything contained in this Amended and Restated
Certificate of Incorporation to the contrary, the amendment or repeal of, or
adoption of any provision inconsistent with, this Article Tenth will require the
affirmative vote of the holders of at least 80% of the Voting Stock, voting
together as a single class. Any amendment or repeal of, or adoption of any
provision inconsistent with, this Article Tenth will not adversely affect any
right or protection existing hereunder prior to such amendment, repeal, or
adoption.
ELEVENTH: Whenever a compromise or arrangement is proposed between the
Company and its creditors or any class of them and/or between the Company and
its stockholders or any class of them, any court of equitable jurisdiction
within the State of Delaware may, on the application in a summary way of the
Company or any creditor or stockholder thereof or on the application of any
receiver or receivers appointed for the
9
Company under the provisions of Section 291 of Title 8 of the Delaware Code or
on the application of trustees in dissolution or of any receiver or receivers
appointed for the Company under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders, of the Company, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders, of the Company, as the case
may be, agree to any compromise or arrangement and to any reorganization of the
Company as a consequence of such compromise or arrangement, the said compromise
or arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders, of
the Company, as the case may be, and also on the Company.
3. This Amended and Restated Certificate of Incorporation was duly
adopted in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware by written consent of the sole
stockholder in lieu of a meeting of stockholders in accordance with the
provisions of Section 228 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said Sentry Technology Corporation has caused this
certificate to be signed by Thomas A. Nicolette, its President and Chief
Executive Officer, and attested by Peter J. Mundy, its Secretary, this ____ day
of __________, 1997.
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Signed and attested to this __ day of _________, 1997.
SENTRY TECHNOLOGY
CORPORATION
-----------------------------
Name: Thomas A. Nicolette
Title: President and Chief Executive
Officer
Attest:
- -------------------------------
Name: Peter J. Mundy
Title: Secretary
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CERTIFICATE OF DESIGNATIONS
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES,
RIGHTS, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF THE
SERIES A PREFERRED STOCK OF
SENTRY TECHNOLOGY CORPORATION
-------------------------------------------
Pursuant to Section 151 of the
General Corporation Law of
the State of Delaware
-------------------------------------------
SENTRY TECHNOLOGY CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
in accordance with the provisions of Section 151 of the General Corporation law
of the State of Delaware, does hereby certify that the following resolution was
duly adopted by the Board of Directors of the Corporation on January 14, 1997;
RESOLVED, that pursuant to the authority expressly vested in the Board
of Directors of the Corporation by Article Fourth of the Amended and Restated
Certificate of Incorporation of the Corporation, the Board of Directors hereby
fixes and determines the voting rights, designations, preferences,
qualifications, privileges, limitations, options and other rights of the
6,000,000 shares of Class A Preferred Stock, par value $0.001 per share (the
"Class A Preferred Stock") of the Corporation as follows:
1. Rank. The Class A Preferred Stock shall, with respect to
dividend rights and rights on liquidation, winding up or dissolution, rank (i)
on parity with, or junior to, as the case may be, any other class or series of
Preferred Stock established by the Board, the terms of which shall specifically
provide that such class or series shall rank on parity with, or senior to, the
Class A Preferred Stock with respect to dividend rights and rights on
liquidation, winding up or dissolution, and (ii) except as set forth below,
prior to any other equity securities of the Corporation with respect to dividend
rights and rights on liquidation, winding up or dissolution (all of such equity
securities of the Corporation to which the Class A Preferred Stock ranks prior,
including the Corporation's common stock, par value $0.001 per share (the
"Common Stock") are at times collectively referred to herein as the "Junior
Stock").
2. Dividend.
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(a) The annual dividend rate on each share of the
Class A Preferred Stock shall be fixed at five percent (5%) of the Face Value,
payable in accordance with this paragraph 2 (the "Dividend"). The holders of
shares of the Class A Preferred Stock shall be entitled to receive Dividends on
the following dates (each, a "dividend payment date"): February 6, 1998 and
1999, August 6, 1999 and 2000, and February 6, 2000 and 2001; the 12 month
period ending on each of the first two dividend payment dates is an "annual
dividend period," the six month period ending on each of the next four dividend
payment dates is a "semi-annual dividend period" and each such annual dividend
period or semi-annual dividend period is a "dividend period." Dividends (whether
or not declared) shall be payable in additional shares of the Class A Preferred
Stock during the two annual dividend periods ending on the first two dividend
payment dates subsequent to issuance of the Class A Preferred Stock, such that
holders shall receive a Dividend of 1/20th of a share of Class A Preferred Stock
for each share of Class A Preferred Stock held. Thereafter, the holders of
shares of the Class A Preferred Stock shall be entitled to receive, in
preference to dividends on the Junior Stock, and whether or not declared the
Dividend (including any Dividend accrued and unpaid) payable in cash, out of
funds legally available for the payment of dividends, such that holders shall
receive a Dividend of $0.25 for each share of Class A Preferred Stock held,
which Dividend shall accrue semi-annually and be due in equal installments on
each of the last four dividend payment dates. Dividends shall be paid on the
applicable dividend payment date to the holders of record at the close of
business on the date (the "record date") specified by the Board at the time such
Dividend is declared; provided, however, that such record date shall not be more
than 60 days nor less than 10 days prior to the applicable dividend payment
date. For the purposes of this paragraph, each additional share of the Class A
Preferred Stock issued as a Dividend shall be valued at the Face Value.
Dividends (whether payable in cash or in stock) shall be fully cumulative and
shall accrue, with additional payments thereon, from the first day of the
dividend period in which such Dividend may be payable as herein provided on all
shares of the Class A Preferred Stock issued and outstanding on the first day of
such dividend period, except that with respect to the initial dividend period,
such Dividend shall accrue from the date of issue. If the dividend payment date
is not a business day, the dividend payment date shall be the next succeeding
business day.
(b) All Dividends paid with respect to shares of the
Class A Preferred Stock pursuant to paragraph 2(a) shall be paid pro rata to the
holders entitled thereto.
(c) If at any time the Corporation shall have failed
to pay all dividends which have accrued on any outstanding shares of any other
class or series of the Preferred Stock having cumulative dividend rights ranking
on parity with the shares of the Class A Preferred Stock at the times such
dividends are payable or the Corporation shall fail to redeem any of such stock
on the date set for the redemption thereof, no cash Dividend shall be declared
by the Board or paid or set apart for payment by the Corporation on shares of
the Class A Preferred Stock unless prior to or concurrently with such
declaration, payment or setting apart for payment, all accrued and unpaid
dividends on all outstanding shares of such other series of the Preferred Stock
shall have been or be declared, paid or set apart for payment, with additional
payments thereon, if any; provided, however, that in the event such failure to
pay accrued dividends is with respect only to the
13
outstanding shares of the Class A Preferred Stock and any outstanding shares of
any other class or series of the Preferred Stock having cumulative dividend
rights on parity with the shares of the Class A Preferred Stock, cash dividends
may be declared, paid or set apart for payment, with additional payment thereon,
pro rata on shares of the Class A Preferred Stock and shares of such other class
or series of the Preferred Stock so that the amounts of any cash dividends
declared, paid or set apart for payment on shares of the Class A Preferred Stock
and shares of such other series of the Preferred Stock shall in all cases bear
to each other the same ratio that, at the time of such declaration, payment or
setting apart for payment, all accrued but unpaid cash dividends on shares of
the Class A Preferred Stock and shares of such other series of the Preferred
Stock bear to each other. Any Dividend not paid pursuant to paragraph 2(a) or
this paragraph 2(c) shall be fully cumulative and shall accrue with additional
payments thereon, as set forth in paragraph 2(a).
(d) (i) Holders of shares of the Class A Preferred
Stock shall be entitled to receive the Dividends provided for in
paragraph 2(a) in preference to and in priority over any dividends
other than dividends paid in Junior Stock upon any of the Junior Stock.
(ii) So long as any shares of the Class A Preferred
Stock are outstanding, the Corporation shall not declare, pay or set
apart for payment any dividend on any of the Junior Stock (other than
dividends paid in such Junior Stock) or make any payment on account of,
or set apart for payment money for a sinking or other similar fund for,
the purchase, redemption or other retirement of, any of the Junior
Stock or any warrants, rights, calls or options exercisable for any of
the Junior Stock, or make any distribution in respect thereof, either
directly or indirectly, and whether in cash, obligations or shares of
the capital stock of the Corporation or other property (other than
distributions or dividends in stock to the holders of such stock), and
shall not permit any corporation or other entity directly or indirectly
controlled by the Corporation to purchase or redeem any of the Junior
Stock or any warrants, rights, calls or options exercisable for any of
the Junior Stock, unless prior to or concurrently with such
declaration, payment, setting apart for payment, purchase or
distribution, as the case may be, all accrued and unpaid cash
Dividends, including additional payments thereon, on shares of the
Class A Preferred Stock not paid in accordance with the provisions of
paragraph 2(a) shall have been or be paid and the Corporation shall
have redeemed those shares of the Class A Preferred Stock required to
be redeemed theretofore by the terms hereof.
(e) Subject to the foregoing provisions of this
paragraph 2, the Board may declare and the Corporation may pay or set apart for
payment dividends and other distributions on any of the Junior Stock, and may
purchase or otherwise redeem any of the Junior Stock or any warrants, rights or
options exercisable for any of the Junior Stock; provided, however, that a
decision by the Board to declare a dividend on any of the Junior Stock shall
require approval by that number of directors representing at least 66b% of the
Board, less any vacancies on the Board. In such event, the holders of the Class
A Preferred Stock and the holders of such Junior Stock shall share equally,
share and share alike, in the distribution of any and all dividends declared on
such
14
Junior Stock, provided that for this purpose each share of Class A Preferred
Stock shall be treated as one share of such Junior Stock.
(f) The Corporation shall not be required to issue
fractional shares of Class A Preferred Stock as a result of the payment of
Dividends. If any fraction of a share of Class A Preferred Stock would be
issuable upon the payment of a Dividend, the Corporation may, in lieu of issuing
such fractional share, pay to such holder for any such fraction of a share an
amount in cash equal to the product obtained by multiplying (i) such fraction by
(ii) the Face Value.
(g) Whenever, at any time or times, any Dividend
payable shall be, and continue, in arrears, the holders of the outstanding
shares of Class A Preferred Stock shall have the right, voting separately as a
class, to elect two directors of the Corporation. Upon the vesting of such right
of the holders of Class A Preferred Stock, the maximum authorized number of
members of the Board shall automatically be increased by two and the two
vacancies so created shall be filled by vote of the holders of the outstanding
shares of Class A Preferred Stock. The right of the holders of Class A Preferred
Stock to elect members of the Board as aforesaid shall continue until such time
as all Dividends in arrears shall have been paid in full, at which time such
right shall terminate, except as herein or by law expressly provided, subject to
revesting in the event of each and every subsequent default of the character
above described. Upon termination of such special voting rights attributable to
holders of the Class A Preferred Stock pursuant to this paragraph, the term of
office of any directors elected by the holders of shares of Class A Preferred
Stock (any such director, a "Class A Preferred Stock Director") pursuant to such
special voting rights shall immediately terminate and the number of directors
constituting the entire Board shall be reduced by two. Any Class A Preferred
Stock Director may be removed by, and shall not be removed otherwise than by, a
majority vote of the outstanding shares of Class A Preferred Stock. If the
office of any Class A Preferred Stock Director becomes vacant by reason of
death, resignation, retirement, disqualification, removal from office, or
otherwise, a successor who shall hold office for the unexpired term in respect
of which such vacancy occurred shall be elected by the holders of the
outstanding shares of Class A preferred Stock, voting separately as a class.
3. Adjustment of Hurdle Price.
(a) To preserve the actual or potential economic
value of the Class A Preferred Stock, if at any time after the date of this
Amended and Restated Certificate of Incorporation (the "Certificate"), there
shall be any change in the Common Stock, whether by reason of stock dividends,
stock splits, recapitalizations, mergers, consolidations, combinations or
exchanges of securities, split-ups, split-offs, spin-offs, liquidations, other
similar changes in capitalization, any distribution or issuance of cash, assets,
evidences of indebtedness or subscription rights, options or warrants to holders
of Common Stock (other than regular cash dividends) or otherwise, then, in each
such event the Board shall make such appropriate adjustments in the Hurdle Price
(as defined below) such that following such adjustments, such event shall not
have had the effect of increasing, reducing or limiting the benefits the holders
of shares of Class A Preferred Stock would have had absent such event.
15
(b) The "Deemed Value" as used herein shall equal the
Face Value plus the amount by which the Closing Price exceeds the Hurdle Price
on the date of the relevant event. The "Hurdle Price" as used herein shall mean
the amount that is the average of the closing prices for a share of Common Stock
on the twenty (20) consecutive trading days ending on the trading date last
preceding the first anniversary of the first issuance of the Class A Preferred
Stock; provided, however, that in no event shall the Hurdle Price be less than
$5.00 or more than $6.50, such that (x) if such average amount is less than
$5.00, the Hurdle Price shall equal $5.00 and (y) if such average amount is more
than $6.50, the Hurdle Price shall equal $6.50; and provided, further, that the
Hurdle Price shall be subject to adjustment as set forth in paragraph 3(a). The
"Closing Price" as used herein shall mean the average of the closing prices for
a share of Common Stock on the twenty (20) consecutive trading days ending on
the trading date last preceding an optional redemption date, the Mandatory
Redemption Date (as defined below), the date of an event described in paragraph
4(a) above or the closing date of an Acquisition (as defined below), as the case
may be, as reported on the National Association of Securities Dealers, Inc.'s
Automated Quotations System ("NASDAQ") or if such closing prices shall not be
reported on NASDAQ, the average of the closing prices, regular way, for a share
of such security on the principal national securities exchange on which such
security is listed on such twenty (20) consecutive trading days, or if such
security is not listed on any national securities exchange, the average of the
mean between the closing bid and asked prices of a share of such security on
such twenty (20) consecutive trading days as reported, or if such prices shall
not be so reported, as the same shall be reported by the National Quotation
Bureau, Incorporated or, in all other cases, the value set in good faith by the
Board.
4. Liquidation Preference.
(a) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, the
holders of shares of the Class A Preferred Stock then outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders an amount in cash for each share outstanding
equal to (i) the Deemed Value on the date of such an event plus (ii) an amount
in cash equal to all accrued but unpaid Dividends thereon, plus additional
dividends on unpaid Dividends accrued prior to the commencement of the
then-current dividend period, to the date fixed for liquidation, before any
payment shall be made or any assets distributed to the holders of any of the
Junior Stock. If the assets of the Corporation are not sufficient to pay in full
the liquidation payments payable to the holders of outstanding shares of the
Class A Preferred Stock and any other class or series of the Preferred Stock
having liquidation rights on parity with the shares of the Class A Preferred
Stock, then the holders of all such shares shall share ratably in such
distribution of assets in accordance with the amount which would be payable on
such distribution if the amounts to which the holders of outstanding shares of
the Class A Preferred Stock and the holders of outstanding shares of such other
series of the Preferred Stock are entitled were paid in full.
16
(b) The liquidation payment with respect to each
fractional share of the Class A Preferred Stock outstanding, if any, shall be
equal to a ratably proportionate amount of the liquidation payment with respect
to each outstanding share of the Class A Preferred Stock.
(c) For purposes of this paragraph 4, neither the
voluntary sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all the property or
assets of the Corporation nor the consolidation or merger of the Corporation
with one or more other corporations shall be deemed to be a liquidation,
dissolution or winding up, voluntary or involuntary, unless such voluntary sale,
conveyance, exchange or transfer shall be in connection with a dissolution or
winding up of the business of the Corporation.
(d) Any sale, lease or conveyance of all or
substantially all of the Corporation's assets or merger or consolidation of the
Corporation which results in the holders of the Common Stock receiving in
exchange for such Common Stock either cash or notes, debentures or other
evidences of indebtedness or obligations to pay cash or preferred stock of the
surviving entity which ranks on parity with the Class A Preferred Stock in
liquidation or dividends shall be deemed to be a liquidation, dissolution or
winding up of the affairs of the Corporation within the meaning of this
paragraph 4. In the cases of merger or consolidation of the Corporation where
holders of the Common Stock receive, in exchange for such Common Stock, common
stock or preferred stock which is junior in liquidation and dividends to the
Class A Preferred Stock in the surviving entity (whether or not such surviving
entity is the Corporation) of such merger or consolidation or preferred stock of
another entity, the Class A Preferred Stock shall be deemed to be preferred
stock of such surviving entity or other entity, as the case may be, with the
same annual dividend rate and equivalent rights to the rights set forth herein
and the merger or consolidation agreement shall expressly so provide. In the
event of a merger or consolidation of the Corporation where the consideration
received by the holders of the Common Stock consists of two or more of the types
of consideration set forth above, the holders of the Class A Preferred Stock
shall be entitled to receive either cash or securities based upon the foregoing
in the same proportion as the holders of the Common Stock of the Corporation are
receiving cash or debt securities, or equity securities in the surviving entity
or another entity.
(e) Notwithstanding paragraph 4(a), in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, the holders of Class A Preferred Stock shall receive
the greater of (i) the amount payable under paragraph 4(a) above or (ii) the
amount which would be the liquidation payment per share of Common Stock if the
Class A Preferred Stock were effectively redeemed for Common Stock prior to such
liquidation, for which purpose the Class A Preferred Stock shall be treated as
representing an equal number of shares of Common Stock.
5. Redemption.
(a) Optional Redemption. Prior to the first
anniversary of the date of issuance of the Class A Preferred
17
Stock, the Corporation shall not redeem the Class A Preferred Stock. Subject to
the preceding sentence and the requirements of paragraph 5(b), the Corporation
may, at its option, redeem the Class A Preferred Stock, at any time in whole at
the Deemed Value, together with accrued and unpaid Dividends, if any, thereon.
If the Corporation has completed a Public Offering (as defined below) or an
Acquisition more than 35 days prior to the Mandatory Redemption Date, then the
Corporation may, at its option, redeem the Class A Preferred Stock, in whole at
the Deemed Value, together with accrued and unpaid Dividends, if any, thereon,
subject to the following conditions: (i) the redemption shall be declared on the
closing date of such Public Offering or Acquisition, (ii) the redemption date
shall be fixed no later than 35 days after such closing date, (iii) for purposes
of determining the Deemed Value in the case of a Public Offering, the Closing
Price shall equal the price per share at which Common Stock is issued in such
Public Offering and (iv) for purposes of determining the Deemed Value in the
case of an Acquisition, the Closing Price shall be determined as of the closing
date of such Acquisition. "Public Offering" as used herein shall mean an
underwritten public offering of Common Stock with net proceeds resulting
therefrom in excess of $12,000,000. "Acquisition" as used herein shall mean an
acquisition by the Corporation of property of or securities issued by a third
party in which the consideration paid by the Corporation (i) consists, in whole
or in part, of shares of Common Stock and (ii) the aggregate value of such
shares of Common Stock exceeds $12,000,000; provided that such aggregate value
shall equal the number of such shares of Common Stock multiplied by the Closing
Price as of the closing date of such Acquisition.
(b) Mandatory Redemption. On the fourth anniversary
of the date of issuance of the Class A Preferred Stock (the "Mandatory
Redemption Date"), so long as any shares of the Class A Preferred Stock shall be
outstanding, the Corporation shall redeem any issued and outstanding Class A
Preferred Stock at the Deemed Value, together with accrued and unpaid Dividends,
if any, thereon, payable in cash (to the extent the Corporation shall have funds
legally available for such payment) or Common Stock. The price of such Common
Stock shall be its Closing Price. To the extent that funds are not legally
available on the Mandatory Redemption Date for the payment in cash for the
mandatory redemption of the Class A Preferred Stock and the Corporation does not
issue Common Stock as payment for such mandatory redemption, the provisions of
paragraph 7 shall apply.
(c) Acquired Shares. Shares of the Class A Preferred
Stock which have been issued and reacquired in any manner, including shares
purchased or redeemed, shall (upon compliance with any applicable provisions of
the laws of the State of Delaware) have the status of authorized and unissued
shares of Preferred Stock undesignated as to class or series and may be
redesignated and reissued as part of any class or series of the Preferred Stock;
provided, however, that no such issued and reacquired shares of the Class A
Preferred Stock shall be reissued or sold as Class A Preferred Stock.
6. Procedure for Redemption.
(a) Manner of Notice. In the event the Corporation
shall redeem shares of the Class A Preferred Stock, notice of such redemption
shall be given by first class mail, postage
18
prepaid, mailed not less than 30 days nor more than 60 days prior to the
redemption date, to each holder of record of the shares to be redeemed at such
holder's address as the same appears on the stock register of the Corporation.
Each such notice shall state (i) the redemption date; (ii) the aggregate number
of shares of the Class A Preferred Stock to be redeemed; (iii) the redemption
payment and to what extent such redemption payment will be paid in cash and/or
Common Stock; (iv) the place or places where certificates for such shares are to
be surrendered for the redemption payment; and (v) that Dividends on the shares
to be redeemed will cease to accrue on such redemption date.
(b) Effect of Notice; Redemption. Notice having been
mailed as aforesaid, from and after the redemption date (unless default shall be
made by the Corporation in providing money for the payment of the redemption of
the shares so called for redemption), Dividends on the shares of the Class A
Preferred Stock so called for redemption shall cease to accrue, and said shares
shall no longer be deemed to be outstanding, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from the
Corporation the redemption payment) shall cease. Upon surrender in accordance
with said notice of the certificates for any shares so redeemed (properly
endorsed or assigned for transfer, if the Board shall so require and the notice
shall so state), such shares shall be redeemed by the Corporation at the Deemed
Value plus accrued and unpaid Dividends.
7. Conversion to Notes.
(a) To the extent that funds are not legally
available on the Mandatory Redemption Date for the payment in cash for the
mandatory redemption of the Class A Preferred Stock, and the Corporation does
not issue Common Stock as payment for such mandatory redemption, as required
herein, each outstanding share of Class A Preferred Stock shall automatically
convert (the "Conversion") into a subordinated note (the "Subordinated Note")
given by the Corporation for the benefit of the holder thereof. Each
Subordinated Note shall be in a principal amount equal to the Deemed Value plus
accrued and unpaid Dividends. The Subordinated Notes (i) shall bear interest at
a rate of six percent (6%) per annum, (ii) shall mature at the end of one year
from the date of Conversion, and (iii) upon maturity, shall become due and
payable as to any outstanding principal and interest.
(b) At the time of the Conversion, the holders of the
Subordinated Notes shall have the right, voting separately as a class, to elect
one director of the Corporation. Upon the vesting of such right of the holders
of the Subordinated Notes, the maximum authorized number of members of the Board
shall automatically be increased by one and the one vacancy so created shall be
filled by vote of the holders of the Subordinated Notes. The right of the
holders of the Subordinated Notes to elect a member of the Board as aforesaid
shall continue until such time as the Subordinated Notes have been paid in full,
at which time such right shall terminate, except as herein or by law expressly
provided. Upon termination of such special voting rights attributable to holders
of the Subordinated Notes pursuant to this paragraph, the term of office of any
director elected by the holders of Subordinated Notes (any such director, a
"Subordinated Notes Director")
19
pursuant to such special voting rights shall immediately terminate and the
number of directors constituting the entire Board shall be reduced by one. Any
Subordinated Notes Director may be removed by, and shall not be removed
otherwise than by, a majority vote of the outstanding Subordinated Notes. If the
office of any Subordinated Notes Director becomes vacant by reason of death,
resignation, retirement, disqualification, removal from office, or otherwise, a
successor who shall hold office for the unexpired term in respect of which such
vacancy occurred shall be elected by a majority of the outstanding Subordinated
Notes, voting separately as a class.
(b) The indebtedness represented by the Subordinated
Notes and the payment of the principal of and any interest on each and all of
the Subordinated Notes shall be subordinate and subject in right of payment to
the prior payment in full of all Senior Indebtedness (as defined below). "Senior
Indebtedness" as used herein shall mean the principal of and premium, if any,
and interest on (a) all indebtedness of the Corporation for money borrowed,
other than Preferred Stock, whether outstanding as of the date hereof or
thereafter created, incurred or assumed, except indebtedness that by the terms
of the instrument or instruments by which such indebtedness was created or
incurred expressly provides that it (i) is junior in right of payment to the
Subordinated Notes or (ii) ranks pari passu with the Subordinated Notes, (b)
amendments, renewals, extensions, modifications, refinancings and refundings of
any such indebtedness and (c) all of the Corporation's trade payables. For
purposes of the preceding sentence, "indebtedness for money borrowed" when used
with respect to the Corporation means: (a) all indebtedness of the Corporation
for money borrowed (including any indebtedness secured by a mortgage,
conditional sales contract or other lien which is (i) given to secure all or
part of the purchase price of property subject thereto, whether given to the
vendor of such property or to another or (ii) existing on property at the time
of acquisition thereof); (b) all indebtedness of the Corporation evidenced by
notes, debentures, bonds or other securities; (c) all lease obligations of the
Corporation which are capitalized on the books of the Corporation in accordance
with generally accepted accounting principles; (d) all indebtedness of others of
the kinds described in the preceding clause (c) assumed by or guaranteed in any
manner by the Corporation or in effect guaranteed by the Corporation through an
agreement to purchase, contingent or otherwise; and (e) all renewals, extensions
or refundings of indebtedness of the kinds described in any of the preceding
clauses (a), (b) or (d) and all renewals or extensions of lease obligations of
the kinds described in either of the preceding clauses (c) or (d).
8. Voting Rights. The holders of record of shares of the Class
A Preferred Stock shall not be entitled to any voting rights except as provided
by law or otherwise specifically provided herein.
9. Consent. No consent of holders of the Class A Preferred
Stock shall be required for (a) the creation of any indebtedness of any kind of
the Corporation, (b) the creation of any class of stock of the Corporation
ranking junior as to dividends and upon liquidation to the Class A Preferred
Stock, or (c) any increase or decrease in the amount of authorized Common Stock.
The holders of record of shares of the Class A Preferred Stock shall have the
right, voting as a class, to vote on (i) any change in the rights, privileges or
preferenes of the Class A Preferred Stock, provided that a favorable vote of at
least two-thirds of the number of outstanding shares of the Class A Preferred
Stock is required to authorize such change, (ii) the creation of any additional
class of preferred stock senior to the Class A Preferred Stock, provided that an
affirmative vote of at least two-thirds of the outstanding shares of the Class A
Preferred Stock is required for the creation of such senior class, and (iii) the
creation of any additional class of preferred stock equal in preference to the
Class A Preferred Stock, provided that an affirmative vote of at least a
majority of the outstanding shares of the Class A Preferred Stock is required
for the creation of such equal class.
20
10. Amendments. The Board reserves the right by subsequent
amendment of this Certificate from time to time to decrease the number of shares
which constitute the Class A Preferred Stock (but not below the number of shares
thereof then outstanding and required for the payment of Dividends pursuant to
paragraph 2).
21
IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed by Thomas Nicolette, its President and attested by Peter J. Mundy, its
Secretary, this ___ day of ___________, 1997.
SENTRY TECHNOLOGY CORPORATION
By: __________________________________
Thomas A. Nicolette
Attest:
____________________________
Peter J. Mundy
22
APPENDIX G
SENTRY TECHNOLOGY CORPORATION
BY-LAWS
(As of January 14, 1997)
STOCKHOLDERS' MEETINGS
1. Time and Place of Meetings. All meetings of the stockholders for the
election of Directors or for any other purpose will be held at such time and
place, within or without the State of Delaware, as may be designated by the
Board or, in the absence of a designation by the Board, the Chairman, the
President, or the Secretary, and stated in the notice of meeting. The Board may
postpone and reschedule any previously scheduled annual or special meeting of
the stockholders.
2. Annual Meeting. An annual meeting of the stockholders will be held
at such date and time as may be designated from time to time by the Board, at
which meeting the stockholders will elect by a plurality vote the Directors to
succeed those whose terms expire at such meeting and will transact such other
business as may properly be brought before the meeting in accordance with By-Law
8.
3. Special Meetings. Special meetings of the stockholders may be called
only by (a) the Chairman or (b) the Secretary within 10 calendar days after
receipt of the written request of a majority of the Whole Board. Any such
request by a majority of the Whole Board must be sent to the Chairman and the
Secretary and must state the purpose or purposes of the proposed meeting.
Special meetings of holders of the outstanding Preferred Stock, if any, may be
called in the manner and for the purposes provided in the applicable Preferred
Stock Designation. At a special meeting of stockholders, only such business may
be conducted or considered as (i) has been specified in the notice of the
meeting (or any supplement thereto) given by or at the direction of the Chairman
or a majority of the Whole Board or (ii) otherwise is properly brought before
the meeting by the presiding officer of the meeting (as described in By-Law 8)
or by or at the direction of a majority of the Whole Board.
4. Notice of Meetings. Written notice of every meeting of the
stockholders, stating the place, date, and hour of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
will be given not less than 10 nor more than 60 calendar days before the date of
the meeting to each stockholder of record entitled to vote at such meeting,
except as otherwise provided herein or by law. When a meeting is adjourned to
another place, date, or time, written notice need not be given of the adjourned
meeting if the place, date, and time thereof are announced at the meeting at
which the adjournment is taken; provided, however, that if the adjournment is
for more than 30 calendar days, or if after the adjournment
1
a new record date is fixed for the adjourned meeting, written notice of the
place, date, and time of the adjourned meeting must be given in conformity
herewith. At any adjourned meeting, any business may be transacted which
properly could have been transacted at the original meeting.
5. Inspectors. The Board may appoint one or more inspectors of election
to act as judges of the voting and to determine those entitled to vote at any
meeting of the stockholders, or any adjournment thereof, in advance of such
meeting. The Board may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is able to
act at a meeting of stockholders, the presiding officer of the meeting may
appoint one or more substitute inspectors.
6. Quorum. Except as otherwise provided by law or in a Preferred Stock
Designation, the holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, will
constitute a quorum at all meetings of the stockholders for the transaction of
business thereat. If, however, such quorum is not present or represented at any
meeting of the stockholders, the stockholders entitled to vote thereat, present
in person or represented by proxy, will have the power to adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum is present or represented.
7. Voting. Except as otherwise provided by law, by the Certificate of
Incorporation, or in a Preferred Stock Designation, each stockholder will be
entitled at every meeting of the stockholders to one vote for each share of
stock having voting power standing in the name of such stockholder on the books
of the Company on the record date for the meeting and such votes may be cast
either in person or by written proxy. Every proxy must be duly executed and
filed with the Secretary. A stockholder may revoke any proxy that is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary. The vote upon any question brought before a
meeting of the stockholders may be by voice vote, unless otherwise required by
the Certificate of Incorporation or these By-Laws or unless the Chairman or the
holders of a majority of the outstanding shares of all classes of stock entitled
to vote thereon present in person or by proxy at such meeting otherwise
determine. Every vote taken by written ballot will be counted by the inspectors
of election. When a quorum is present at any meeting, the affirmative vote of
the holders of a majority of the stock present in person or represented by proxy
at the meeting and entitled to vote on the subject matter and which has actually
been voted will be the act of the stockholders, except in the election of
Directors or as otherwise provided in these By-Laws, the Certificate of
Incorporation, a Preferred Stock Designation, or by law.
2
8. Order of Business. (a) The Chairman, or any officer of the Company
designated by a majority of the Whole Board, will call meetings of the
stockholders to order and will act as presiding officer thereof. Unless
otherwise determined by the Board prior to the meeting, the presiding officer of
the meeting of the stockholders will also determine the order of business and
have the authority in his or her sole discretion to regulate the conduct of any
such meeting, including without limitation by imposing restrictions on the
persons (other than stockholders of the Company or their duly appointed proxies)
who may attend any such stockholders' meeting, by ascertaining whether any
stockholder or his proxy may be excluded from any meeting of the stockholders
based upon any determination by the presiding officer, in his or her sole
discretion, that any such person has unduly disrupted or is likely to disrupt
the proceedings thereat, and by determining the circumstances in which any
person may make a statement or ask questions at any meeting of the stockholders.
(b) At an annual meeting of the stockholders, only such business will
be conducted or considered as is properly brought before the meeting. To be
properly brought before an annual meeting, business must be (i) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board, (ii) otherwise properly brought before the meeting by the presiding
officer or by or at the direction of a majority of the Whole Board, or (iii)
otherwise properly requested to be brought before the meeting by a stockholder
of the Company in accordance with paragraph (c) of this By-Law 8.
(c) For business to be properly requested to be brought before an
annual meeting by a stockholder, the stockholder must (i) be a stockholder of
the Company of record at the time of the giving of the notice for such annual
meeting provided for in these By-Laws, (ii) be entitled to vote at such meeting,
and (iii) have given timely notice thereof in writing to the Secretary. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Company not less than 60 calendar days
prior to the annual meeting; provided, however, that in the event public
announcement of the date of the annual meeting is not made at least 75 calendar
days prior to the date of the annual meeting, notice by the stockholder to be
timely must be so received not later than the close of business on the 10th
calendar day following the day on which public announcement is first made of the
date of the annual meeting. A stockholder's notice to the Secretary must set
forth as to each matter the stockholder proposes to bring before the annual
meeting (A) a description in reasonable detail of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (B) the name and address, as they appear on the Company's
books, of the stockholder proposing such business and the beneficial owner, if
any, on whose behalf the proposal is made, (C) the class and number of shares of
the Company that are owned beneficially and of record by the stockholder
proposing such business and by the beneficial owner, if any, on whose behalf the
proposal is made, and (D) any material interest of such stockholder proposing
such business and the beneficial owner, if any, on whose behalf the proposal is
made in such business. Notwithstanding anything in these By-Laws to the
contrary, no business will be conducted at an annual meeting except in
accordance with the procedures set
3
forth in this By-Law 8. The presiding officer of the annual meeting will, if the
facts warrant, determine that business was not properly brought before the
meeting in accordance with the procedures prescribed in this By-Law 8 and, if he
or she should so determine, he or she will so declare to the meeting and any
such business not properly brought before the meeting will not be transacted.
Notwithstanding the foregoing provisions of this By-Law 8, a stockholder must
also comply with all applicable requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder with respect to the
matters set forth in this By-Law 8. For purposes of this By-Law and By-Law 13,
"public announcement" means disclosure in a press release reported by the Dow
Jones News Service, Associated Press, or comparable national news service or in
a document publicly filed by the Company with the Securities and Exchange
Commission pursuant to Sections 13, 14, or 15(d) of the Securities Exchange Act
of 1934, as amended. Nothing in this By-Law 8 will be deemed to affect any
rights of stockholders to request inclusion of proposals in the Company's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended.
DIRECTORS
9. Function. The business and affairs of the Company will be managed
under the direction of its Board.
10. Number, Election, and Terms. Subject to the rights, if any, of any
series of Preferred Stock to elect additional Directors under circumstances
specified in a Preferred Stock Designation, the authorized number of Directors
may be determined from time to time only by a vote of a majority of the Whole
Board or by the affirmative vote of the holders of at least 80% of the Voting
Stock, voting together as a single class, but in no case will the number of
Directors be other than as provided in the Certificate of Incorporation. The
Directors, other than those who may be elected by the holders of any series of
the Preferred Stock, will be classified with respect to the time for which they
severally hold office in accordance with the Certificate of Incorporation. The
Chairman shall be selected by a majority vote of the Board. The Chairman shall
preside over meetings of the Board and have the other powers and
responsibilities in relation to the activities of the Board as are specified in
these Bylaws. The Chairman will not be an officer of the Company.
11. Vacancies and Newly Created Directorships. Subject to the rights,
if any, of the holders of any series of Preferred Stock to elect additional
Directors under circumstances
4
specified in a Preferred Stock Designation, newly created directorships
resulting from any increase in the number of Directors and any vacancies on the
Board resulting from death, resignation, disqualification, removal, or other
cause will be filled solely by the affirmative vote of a majority of the
remaining Directors then in office, even though less than a quorum of the Board,
or by a sole remaining Director. Any Director elected in accordance with the
preceding sentence will hold office for the remainder of the full term of the
class of Directors in which the new directorship was created or the vacancy
occurred and until such Director's successor is elected and qualified. No
decrease in the number of Directors constituting the Board will shorten the term
of an incumbent Director.
12. Removal. Subject to the rights, if any, of the holders of any
series of Preferred Stock to elect additional Directors under circumstances
specified in a Preferred Stock Designation, any Director may be removed from
office by the stockholders only for cause and only in the manner provided in the
Certificate of Incorporation and, if applicable, any amendment to these By-Laws.
13. Nominations of Directors; Election. (a) Subject to the rights, if
any, of the holders of any series of Preferred Stock to elect additional
Directors under circumstances specified in a Preferred Stock Designation, only
persons who are nominated in accordance with the following procedures will be
eligible for election as Directors of the Company.
(b) Nominations of persons for election as Directors of the Company may
be made at a meeting of stockholders (i) by or at the direction of the Board or
(ii) by any stockholder who is a stockholder of record at the time of giving of
notice provided for in this By-Law 13 who is entitled to vote for the election
of Directors at the meeting and who complies with the procedures set forth in
this By-Law 13. All nominations by stockholders must be made pursuant to timely
notice in proper written form to the Secretary.
(c) To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the Company not less than 60
calendar days prior to the meeting; provided, however, that in the event that
public announcement of the date of the meeting is not made at least 75 calendar
days prior to the date of the meeting, notice by the stockholder to be timely
must be so received not later than the close of business on the 10th calendar
day following the day on which public announcement is first made of the date of
the meeting. To be in proper written form, such stockholder's notice must set
forth or include (i) the name and address, as they appear on the Company's
books, of the stockholder giving the notice and of the beneficial owner, if any,
on whose behalf the nomination is made; (ii) a representation that the
stockholder giving the notice is a holder of record of stock of the
5
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(iii) the class and number of shares of stock of the Company owned beneficially
and of record by the stockholder giving the notice and by the beneficial owner,
if any, on whose behalf the nomination is made; (iv) a description of all
arrangements or understandings between or among any of (A) the stockholder
giving the notice, (B) the beneficial owner on whose behalf the notice is given,
(C) each nominee, and (D) any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to be made by the
stockholder giving the notice; (v) such other information regarding each nominee
proposed by the stockholder giving the notice as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended
to be nominated, by the Board; and (vi) the signed consent of each nominee to
serve as a director of the Company if so elected. At the request of the Board,
any person nominated by the Board for election as a Director must furnish to the
Secretary that information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee. The presiding officer of the meeting
for election of Directors will, if the facts warrant, determine that a
nomination was not made in accordance with the procedures prescribed by this
By-Law 13, and if he or she should so determine, he or she will so declare to
the meeting and the defective nomination will be disregarded. Notwithstanding
the foregoing provisions of this By-Law 13, a stockholder must also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder with respect to the matters set forth
in this By-Law 13.
14. Resignation. Any Director may resign at any time by giving written
notice of his resignation to the Chairman or the Secretary. Any resignation will
be effective upon actual receipt by any such person or, if later, as of the date
and time specified in such written notice.
15. Regular Meetings. Regular meetings of the Board may be held
immediately after the annual meeting of the stockholders and at such other time
and place either within or without the State of Delaware as may from time to
time be determined by the Board. Notice of regular meetings of the Board need
not be given.
16. Special Meetings. Special meetings of the Board may be called by
the Chairman or the President on one day's notice to each Director by whom such
notice is not waived, given either personally or by mail, telephone, telegram,
telex, facsimile, or similar medium of communication, and will be called by the
Chairman or the President in like manner and on like notice on the written
request of five or more Directors. Special meetings of the Board may be held at
such time and place either within or without the State of Delaware as is
determined by the Board or specified in the notice of any such meeting.
6
17. Quorum. At all meetings of the Board, a majority of the total
number of Directors then in office will constitute a quorum for the transaction
of business. Except for the designation of committees as hereinafter provided
and except for actions required by these By-Laws or the Certificate of
Incorporation to be taken by a majority of the Whole Board, the act of a
majority of the Directors present at any meeting at which there is a quorum will
be the act of the Board. If a quorum is not present at any meeting of the Board,
the Directors present thereat may adjourn the meeting from time to time to
another place, time, or date, without notice other than announcement at the
meeting, until a quorum is present.
18. Participation in Meetings by Telephone Conference. Members of the
Board or any committee designated by the Board may participate in a meeting of
the Board or any such committee, as the case may be, by means of telephone
conference or similar means by which all persons participating in the meeting
can hear each other, and such participation in a meeting will constitute
presence in person at the meeting.
19. Committees. (a) The Board, by resolution passed by a majority of
the Whole Board, may designate an executive committee (the "Executive
Committee"). The Executive Committee, if one is so designated, will have and may
exercise the powers of the Board, except the power to declare dividends, to
amend these By-Laws, to elect officers, or to rescind or modify any prior action
of the Board and except as otherwise provided by law.
(b) The Board, by resolution passed by a majority of the Whole Board,
may designate one or more additional committees, each such committee to consist
of one or more Directors and each to have such lawfully delegable powers and
duties as the Board may confer.
(c) The Executive Committee and each other committee of the Board will
serve at the pleasure of the Board or as may be specified in any resolution from
time to time adopted by the Board. The Board may designate one or more Directors
as alternate members of any such committee, who may replace any absent or
disqualified member at any meeting of such committee. In lieu of such action by
the Board, in the absence or upon the disqualification of any member of a
committee of the Board, the members thereof present at any such meeting of such
committee and not disqualified from voting, whether or not they constitute a
quorum, may unanimously appoint another member of the Board to act at the
meeting in the place of any such absent or disqualified member.
7
(d) Except as otherwise provided in these By-Laws or by law, any
committee of the Board, to the extent provided in Paragraph (a) of this By-Law
or, if applicable, in the resolution of the Board, will have and may exercise
all the powers and authority of the Board in the direction of the management of
the business and affairs of the Company. Any such committee designated by the
Board will have such name as may be determined from time to time by resolution
adopted by the Board. Unless otherwise prescribed by the Board, a majority of
the members of any committee of the Board will constitute a quorum for the
transaction of business, and the act of a majority of the members present at a
meeting at which there is a quorum will be the act of such committee. Each
committee of the Board may prescribe its own rules for calling and holding
meetings and its method of procedure, subject to any rules prescribed by the
Board, and will keep a written record of all actions taken by it.
20. Compensation. The Board may establish the compensation for, and
reimbursement of the expenses of, Directors for membership on the Board and on
committees of the Board, attendance at meetings of the Board or committees of
the Board, and for other services by Directors to the Company or any of its
majority-owned subsidiaries.
21. Rules. The Board may adopt rules and regulations for the conduct of
their meetings and the management of the affairs of the Company.
NOTICES
22. Generally. Except as otherwise provided by law, these By-Laws, or
the Certificate of Incorporation, whenever by law or under the provisions of the
Certificate of Incorporation or these By-Laws notice is required to be given to
any Director or stockholder, it will not be construed to require personal
notice, but such notice may be given in writing, by mail, addressed to such
Director or stockholder, at the address of such Director or stockholder as it
appears on the records of the Company, with postage thereon prepaid, and such
notice will be deemed to be given at the time when the same is deposited in the
United States mail. Notice to Directors may also be given by telephone,
telegram, telex, facsimile, or similar medium of communication or as otherwise
may be permitted by these By-Laws.
23. Waivers. Whenever any notice is required to be given by law or
under the provisions
8
of the Certificate of Incorporation or these By-Laws, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time of the event for which notice is to be given, will be deemed
equivalent to such notice. Attendance of a person at a meeting will constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
OFFICERS
24. Generally. The officers of the Company will be elected by the Board
and will consist of a President, a Secretary, and a Treasurer. The Board of
Directors may also choose any or all of the following: one or more Vice
Presidents (who may be given particular designations with respect to authority,
function, or seniority), and such other officers as the Board may from time to
time determine. Notwithstanding the foregoing, by specific action the Board may
authorize the Chairman to appoint any person to any office other than President,
Secretary, or Treasurer. Any number of offices may be held by the same person.
Any of the offices may be left vacant from time to time as the Board may
determine. In the case of the absence or disability of any officer of the
Company or for any other reason deemed sufficient by a majority of the Board,
the Board may delegate the absent or disabled officer's powers or duties to any
other officer or to any Director.
25. Compensation. The compensation of all officers and agents of the
Company who are also Directors of the Company will be fixed by the Board or by a
committee of the Board. The Board may fix, or delegate the power to fix, the
compensation of other officers and agents of the Company to an officer of the
Company.
26. Succession. The officers of the Company will hold office at the
pleasure of the Board of Directors. Any officer may be removed at any time by
the affirmative vote of a majority of the Whole Board. Any vacancy occurring in
any office of the Company may be filled by the Board.
27. Authority and Duties. Each of the officers of the Company will have
such authority and will perform such duties as are customarily incident to their
respective offices or as may be
9
specified from time to time by the Board.
STOCK
28. Certificates. Certificates representing shares of stock of the
Company will be in such form as is determined by the Board, subject to
applicable legal requirements. Each such certificate will be numbered and its
issuance recorded in the books of the Company, and such certificate will exhibit
the holder's name and the number of shares and will be signed by, or in the name
of, the Company by the President and the Secretary or an Assistant Secretary, or
the Treasurer or an Assistant Treasurer, and will also be signed by, or bear the
facsimile signature of, a duly authorized officer or agent of any properly
designated transfer agent of the Company. Any or all of the signatures and the
seal of the Company, if any, upon such certificates may be facsimiles, engraved,
or printed. Such certificates may be issued and delivered notwithstanding that
the person whose facsimile signature appears thereon may have ceased to be such
officer at the time the certificates are issued and delivered.
29. Classes of Stock. The designations, preferences, and relative
participating, optional, or other special rights of the various classes of stock
or series thereof, and the qualifications, limitations, or restrictions thereof,
will be set forth in full or summarized on the face or back of the certificates
which the Company issues to represent its stock, or in lieu thereof, such
certificates will set forth the office of the Company from which the holders of
certificates may obtain a copy of such information.
30. Transfers. Upon surrender to the Company or the transfer agent of
the Company of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment, or authority to transfer, it will be the
duty of the Company to issue, or to cause its transfer agent to issue, a new
certificate to the person entitled thereto, cancel the old certificate, and
record the transaction upon its books.
31. Lost, Stolen, or Destroyed Certificates. The Secretary may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Company alleged to have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact, satisfactory
to the Secretary, by the person claiming the certificate of stock to be lost,
stolen,
10
or destroyed. As a condition precedent to the issuance of a new certificate or
certificates, the Secretary may require the owners of such lost, stolen, or
destroyed certificate or certificates to give the Company a bond in such sum and
with such surety or sureties as the Secretary may direct as indemnity against
any claims that may be made against the Company with respect to the certificate
alleged to have been lost, stolen, or destroyed or the issuance of the new
certificate.
32. Record Dates. (a) In order that the Company may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board may fix a record date, which will not be more
than 60 nor less than 10 calendar days before the date of such meeting. If no
record date is fixed by the Board, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders will be at the
close of business on the calendar day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the calendar day
next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of the
stockholders will apply to any adjournment of the meeting; provided, however,
that the Board may fix a new record date for the adjourned meeting.
(b) In order that the Company may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion, or exchange of stock, or for the purpose of any other lawful
action, the Board may fix a record date, which record date will not be more than
60 calendar days prior to such action. If no record date is fixed, the record
date for determining stockholders for any such purpose will be at the close of
business on the calendar day on which the Board adopts the resolution relating
thereto.
(c) The Company will be entitled to treat the person in whose name any
share of its stock is registered as the owner thereof for all purposes, and will
not be bound to recognize any equitable or other claim to, or interest in, such
share on the part of any other person, whether or not the Company has notice
thereof, except as expressly provided by applicable law.
11
INDEMNIFICATION
33. Damages and Expenses. (a) Without limiting the generality or effect
of Article Ninth of the Certificate of Incorporation, the Company shall to the
fullest extent permitted by applicable law as then in effect indemnify any
person (an "Indemnitee") who is or was involved in any manner (including without
limitation as a party or a witness) or is threatened to be made so involved in
any threatened, pending, or completed investigation, claim, action, suit, or
proceeding, whether civil, criminal, administrative, or investigative (including
without limitation any action, suit, or proceeding by or in the right of the
Company to procure a judgment in its favor) (a "Proceeding") by reason of the
fact that such person is or was or had agreed to become a Director, officer,
employee, or agent of the Company, or is or was serving at the request of the
Board or an officer of the Company as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other entity, whether
for profit or not for profit (including the heirs, executors, administrators, or
estate of such person), or anything done or not by such person in any such
capacity, against all expenses (including attorneys' fees), judgments, fines,
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such Proceeding. Such indemnification will be a contract
right and will include the right to receive payment in advance of any expenses
incurred by an Indemnitee in connection with such Proceeding, consistent with
the provisions of applicable law as then in effect.
(b) The right of indemnification provided in this By-Law 33 will not be
exclusive of any other rights to which any person seeking indemnification may
otherwise be entitled, and will be applicable to Proceedings commenced or
continuing after the adoption of this By-Law 33, whether arising from acts or
omissions occurring before or after such adoption.
(c) In furtherance, but not in limitation of the foregoing provisions,
the following procedures, presumptions, and remedies will apply with respect to
advancement of expenses and the right to indemnification under this By-Law 33:
(i) All reasonable expenses incurred by or on behalf of an
Indemnitee in connection with any Proceeding will be advanced to the
Indemnitee by the Company within 30 calendar days after the receipt by
the Company of a statement or statements from the Indemnitee requesting
such advance or advances from time to time, whether prior to or after
final disposition of such Proceeding. Such statement or statements will
reasonably evidence the expenses incurred by the Indemnitee and, if and
to the extent required by law at the time of such advance, will include
or be accompanied by an undertaking by or on behalf of the Indemnitee
to repay such amounts advanced as to
12
which it may ultimately be determined that the Indemnitee is not
entitled. If such an undertaking is required by law at the time of an
advance, no security will be required for such undertaking and such
undertaking will be accepted without reference to the recipient's
financial ability to make repayment.
(ii) To obtain indemnification under this By-Law 33, the
Indemnitee will submit to the Secretary a written request, including
such documentation supporting the claim as is reasonably available to
the Indemnitee and is reasonably necessary to determine whether and to
what extent the Indemnitee is entitled to indemnification (the
"Supporting Documentation"). The determination of the Indemnitee's
entitlement to indemnification will be made not less than 60 calendar
days after receipt by the Company of the written request for
indemnification together with the Supporting Documentation. The
Secretary will promptly upon receipt of such a request for
indemnification advise the Board in writing that the Indemnitee has
requested indemnification. The Indemnitee's entitlement to
indemnification under this By-Law 33 will be determined in one of the
following ways: (A) by a majority vote of the Disinterested Directors
(as hereinafter defined), if they constitute a quorum of the Board, or,
in the case of an Indemnitee that is not a present or former officer of
the Company, by any committee of the Board or committee of officers or
agents of the Company designated for such purpose by a majority of the
Whole Board; (B) by a written opinion of Independent Counsel if (1) a
Change of Control has occurred and the Indemnitee so requests or (2) in
the case of an Indemnitee that is a present or former officer of the
Company, a quorum of the Board consisting of Disinterested Directors is
not obtainable or, even if obtainable, a majority of such Disinterested
Directors so directs; (C) by the stockholders (but only if a majority
of the Disinterested Directors, if they constitute a quorum of the
Board, presents the issue of entitlement to indemnification to the
stockholders for their determination); or (D) as provided in
subparagraph (iii) below. In the event the determination of entitlement
to indemnification is to be made by Independent Counsel pursuant to
clause (B) above, a majority of the Disinterested Directors will select
the Independent Counsel, but only an Independent Counsel to which the
Indemnitee does not reasonably object; provided, however, that if a
Change of Control has occurred, the Indemnitee will select such
Independent Counsel, but only an Independent Counsel to which the Board
does not reasonably object.
(iii) Except as otherwise expressly provided in this By-Law
33, the Indemnitee will be presumed to be entitled to indemnification
under this By-Law 33 upon submission of a request for indemnification
together with the Supporting Documentation in accordance with
subparagraph (c) (ii) above, and thereafter the Company will have the
burden of proof to overcome that presumption in reaching a contrary
determination. In any event, if the person or persons empowered under
subparagraph (c) (ii) to determine entitlement to indemnification has
not been appointed or has not made a determination within 60 calendar
days after receipt by the Company of the request therefor together with
13
the Supporting Documentation, the Indemnitee will be deemed to be
entitled to indemnification and the Indemnitee will be entitled to such
indemnification unless (A) the Indemnitee misrepresented or failed to
disclose a material fact in making the request for indemnification or
in the Supporting Documentation or (B) such indemnification is
prohibited by law. The termination of any Proceeding described in
paragraph (a) of this By-Law 33, or of any claim, issue, or matter
therein, by judgment, order, settlement, or conviction, or upon a plea
of nolo contendere or its equivalent, will not, of itself, adversely
affect the right of the Indemnitee to indemnification or create a
presumption that the Indemnitee did not act in good faith and in a
manner which the Indemnitee reasonably believed to be in or not opposed
to the best interests of the Company or, with respect to any criminal
Proceeding, that the Indemnitee had reasonable cause to believe that
his conduct was not unlawful.
(iv) (A) In the event that a determination is made pursuant to
subparagraph (c) (ii) that the Indemnitee is not entitled to
indemnification under this By-Law 33, (1) the Indemnitee will be
entitled to seek an adjudication of his or her entitlement to such
indemnification either, at the Indemnitee's sole option, in (x) an
appropriate court of the State of Delaware or any other court of
competent jurisdiction or (y) an arbitration to be conducted by a
single arbitrator pursuant to the rules of the American Arbitration
Association; (2) any such judicial proceeding or arbitration will be de
novo and the Indemnitee will not be prejudiced by reason of such
adverse determination; and (3) in any such judicial proceeding or
arbitration the Company will have the burden of proving that the
Indemnitee is not entitled to indemnification under this By-Law 33.
(B) If a determination is made or deemed to have been made,
pursuant to subparagraph (c)(ii) or (iii) of this By-Law 33 that the
Indemnitee is entitled to indemnification, the Company will be
obligated to pay the amounts constituting such indemnification within
five business days after such determination has been made or deemed to
have been made and will be conclusively bound by such determination
unless (1) the Indemnitee misrepresented or failed to disclose a
material fact in making the request for indemnification or in the
Supporting Documentation or (2) such indemnification is prohibited by
law. In the event that advancement of expenses is not timely made
pursuant to subparagraph (c)(i) of this By-Law 33 or payment of
indemnification is not made within five business days after a
determination of entitlement to indemnification has been made or deemed
to have been made pursuant to subparagraph (c)(ii) or (iii) of this
By-Law 33, the Indemnitee will be entitled to seek judicial enforcement
of the Company's obligation to pay to the Indemnitee such advancement
of expenses or indemnification. Notwithstanding the foregoing, the
Company may bring an action, in an appropriate court in the State of
Delaware or any other court of competent jurisdiction, contesting the
right of the Indemnitee to receive indemnification hereunder due to the
occurrence of any event described in subclause (1) or (2) of this
clause (B) (a "Disqualifying Event"); provided, however, that in any
such action the Company will have
14
the burden of proving the occurrence of such Disqualifying Event.
(C) The Company will be precluded from asserting in any
judicial proceeding or arbitration commenced pursuant to the provisions
of this subparagraph (c)(iv) that the procedures and presumptions of
this By-Law 33 are not valid, binding, and enforceable and will
stipulate in any such court or before any such arbitrator that the
Company is bound by all the provisions of this By-Law 33.
(D) In the event that the Indemnitee, pursuant to the
provisions of this subparagraph (c)(iv), seeks a judicial adjudication
of, or an award in arbitration to enforce, his rights under, or to
recover damages for breach of, this By-Law 33, the Indemnitee will be
entitled to recover from the Company, and will be indemnified by the
Company against, any expenses actually and reasonably incurred by the
Indemnitee if the Indemnitee prevails in such judicial adjudication or
arbitration. If it is determined in such judicial adjudication or
arbitration that the Indemnitee is entitled to receive part but not all
of the indemnification or advancement of expenses sought, the expenses
incurred by the Indemnitee in connection with such judicial
adjudication or arbitration will be prorated accordingly.
(v) For purposes of this paragraph (c):
(A) "Change in Control" means the occurrence of any of the
following events:
(1) The Company is merged, consolidated, or
reorganized into or with another corporation or other legal
entity, and as a result of such merger, consolidation, or
reorganization less than a majority of the combined voting
power of the then outstanding securities of such corporation
or entity immediately after such transaction are held in the
aggregate by the holders of the Voting Stock immediately prior
to such transaction;
(2) The Company sells or otherwise transfers all or
substantially all of its assets to another corporation or
other legal entity and, as a result of such sale or transfer,
less than a majority of the combined voting power of the
15
then-outstanding securities of such other corporation or
entity immediately after such sale or transfer is held in the
aggregate by the holders of Voting Stock immediately prior to
such sale or transfer;
(3) There is a report filed on Schedule 13D or
Schedule 14D-1 (or any successor schedule, form, or report or
item therein), each as promulgated pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"),
disclosing that any person (as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial owner" is
defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act) of securities representing
20% or more of the combined voting power of the Voting Stock;
(4) The Company files a report or proxy statement
with the Securities and Exchange Commission pursuant to the
Exchange Act disclosing in response to Form 8-K or Schedule
14A (or any successor schedule, form, or report or item
therein) that a change in control of the Company has occurred
or will occur in the future pursuant to any then-existing
contract or transaction; or
(5) If, during any period of two consecutive years,
individuals who at the beginning of any such period constitute
the Directors cease for any reason to constitute at least a
majority thereof; provided, however, that for purposes of this
clause (5) each Director who is first elected, or first
nominated for election by the Company's stockholders, by a
vote of at least two-thirds of the Directors (or a committee
of the Board) then still in office who were Directors at the
beginning of any such period will be deemed to have been a
Director at the beginning of such period.
Notwithstanding the foregoing provisions of clauses (3) or (4) of this paragraph
(c)(v)(A), unless otherwise determined in a specific case by majority vote of
the Board, a "Change in Control" will not be deemed to have occurred for
purposes of such clauses (3) or (4) solely because (x) the Company, (y) an
entity in which the Company, directly or indirectly, beneficially owns 50% or
more of the voting securities (a "Subsidiary"), or (z) any employee stock
ownership plan or any other employee benefit plan of the Company or any
Subsidiary either files or becomes obligated to file a report or a proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K, or
Schedule 14A (or any successor schedule, form, or report or item therein) under
the Exchange Act disclosing beneficial ownership by it of shares of Voting
Stock, whether in
16
excess of 20% or otherwise, or because the Company reports that a change in
control of the Company has occurred or will occur in the future by reason of
such beneficial ownership.
(B) "Disinterested Director" means a Director of the Company
who is not or was not a party to the Proceeding in respect of which
indemnification is sought by the Indemnitee.
(C) "Independent Counsel" means a law firm or a member of a
law firm that neither presently is, nor in the past five years has
been, retained to represent (1) the Company or the Indemnitee in any
matter material to either such party or (2) any other party to the
Proceeding giving rise to a claim for indemnification under this By-Law
33. Notwithstanding the foregoing, the term "Independent Counsel" will
not include any person who, under the applicable standards of
professional conduct then prevailing under the law of the State of
Delaware, would be precluded from representing either the Company or
the Indemnitee in an action to determine the Indemnitee's rights under
this By-Law 33.
(d) If any provision or provisions of this By-Law 33 are held to be
invalid, illegal, or unenforceable for any reason whatsoever: (i) the validity,
legality, and enforceability of the remaining provisions of this By-Law 33
(including without limitation all portions of any paragraph of this By-Law 33
containing any such provision held to be invalid, illegal, or unenforceable,
that are not themselves invalid, illegal, or unenforceable) will not in any way
be affected or impaired thereby and (ii) to the fullest extent possible, the
provisions of this By-Law 33 (including without limitation all portions of any
paragraph of this By-Law 33 containing any such provision held to be invalid,
illegal, or unenforceable, that are not themselves invalid, illegal, or
unenforceable) will be construed so as to give effect to the intent manifested
by the provision held invalid, illegal, or unenforceable.
34. Insurance, Contracts, and Funding. The Company may purchase and
maintain insurance to protect itself and any Indemnitee against any expenses,
judgments, fines, and amounts paid in settlement or incurred by any Indemnitee
in connection with any Proceeding referred to in By-Law 33 or otherwise, to the
fullest extent permitted by applicable law as then in effect. The Company may
enter into contracts with any person entitled to indemnification under By-Law 33
or otherwise, and may create a trust fund, grant a security interest, or use
other means (including without limitation a letter of credit) to ensure the
payment of such amounts as may be necessary to effect indemnification as
provided in By-Law 33.
17
GENERAL
35. Fiscal Year. The fiscal year of the Company will end on December 31
or such date as may be fixed from time to time by the Board.
36. Seal. The Board may adopt a corporate seal and use the same by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
37. Reliance upon Books, Reports, and Records. Each Director, each
member of a committee designated by the Board, and each officer of the Company
will, in the performance of his or her duties, be fully protected in relying in
good faith upon the records of the Company and upon such information, opinions,
reports, or statements presented to the Company by any of the Company's officers
or employees, or committees of the Board, or by any other person or entity as to
matters the Director, committee member, or officer believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Company.
38. Time Periods. In applying any provision of these By-Laws that
requires that an act be done or not be done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days will be used unless otherwise specified, the
day of the doing of the act will be excluded and the day of the event will be
included.
39. Amendments. Except as otherwise provided by law or by the
Certificate of Incorporation, these By-Laws or any of them may be amended in any
respect or repealed at any time, either (i) at any meeting of stockholders,
provided that any amendment or supplement proposed to be acted upon at any such
meeting has been described or referred to in the notice of such meeting, or (ii)
at any meeting of the Board, provided that no amendment adopted by the Board may
vary or conflict with any amendment adopted by the stockholders.
18
40. Certain Defined Terms. Terms used herein with initial capital
letters that are defined in the Certificate of Incorporation are used herein as
so defined.
APPENDIX H
Dear Stockholder:
A Special Meeting of Shareholders of Video Sentry Corporation will be held at
the offices of Winthrop & Weinstine, 3000 Dain Bosworth Plaza, 60 South Sixth
Street, Minneapolis, Minnesota, on February 6, 1997 at 10:00 a.m., local time.
At the special meeting, Shareholders will act to consider and vote upon a
proposal regarding the merger of Video Sentry Corporation and Knogo North
America Inc.
Your vote is important. Whether or not you plan to attend the meeting, please
review the enclosed proxy statement, complete the proxy form below and return it
promptly in the envelope provided.
Sincerely,
Ronald V. McClurg
Corporate Secretary
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Special Meeting of Stockholders -- To be held February 6, 1997
THE BOARD OF DIRECTORS SOLICITS THIS PROXY
The undersigned hereby (1) acknowledges receipt of the Notice of Special Meeting
of Shareholders (the "Special Meeting") of Video Sentry Corporation, a Minnesota
corporation ("Video"), and the Joint Proxy Statement/Prospectus in connection
therewith and (2) appoints Robert D. Furst, Jr. and Andrew L. Benson, and each
of them, his proxies with full power of substitution for and in the name, place
and stead of the undersigned, to vote upon and act with respect to all of the
shares of Common Stock, par value $0.01 per share (the "Common Stock"), of Video
standing in the name of the undersigned, or with respect to which the
undersigned is entitled to vote and act, at the Special Meeting and at any
adjournment or postponement thereof. The proxies of the undersigned may vote
according to their discretion on any other matter that may properly come before
the Special Meeting or any adjournments or postponements thereof.
THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE. IF NO SPECIFICATION
IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1
Please date this proxy and sign your name exactly as it appears hereon and mail
this proxy in the enclosed envelope. No postage is required. Where there is more
than one owner, each should sign. When signing as an attorney, administrator,
executor, guardian or trustee, please add your title as such. If executed by a
corporation, the proxy should be signed by a duly authorized officer.
Continued and to be voted and signed on reverse
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
The Board of Directors recommends a vote FOR item (1) listed below.
(1) To approve and adopt the Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of November 27, 1996, as amended, by
and between Video, Knogo North America Inc., Sentry Technology
Corporation, Viking Merger Corp. and Strip Merger Corp.
FOR AGAINST ABSTAIN
|_| |_| |_|
PLEASE MARK ALL CHOICES LIKE THIS [X]
Signature____________________________ Date __________________
Signature____________________________ Date __________________
APPENDIX I
KNOGO NORTH AMERICA INC.
SPECIAL MEETING OF STOCKHOLDERS, FEBRUARY 6, 1997
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Thomas A. Nicolette, William A. Perlmuth
and Peter J. Mundy, or a majority of those present and acting, or if only one is
present, then that one, proxies, with full power of substitution, to vote all
shares of KNOGO NORTH AMERICA INC. (the "Company") which the undersigned is
entitled to vote at the Company's Special Meeting to be held at Knogo's
corporate headquarters, 350 Wireless Boulevard, Hauppauge, New York, on February
6, 1997, at 11:00 A.M., New York time, and at any adjournment thereof, hereby
ratifying all that said proxies or their substitutes may do by virtue hereof,
and the undersigned authorizes and instructs said proxies to vote as follows:
(Please sign on reverse side and return promptly)
[ X ] Please mark your
vote as in this example
1. MERGER PROPOSAL: Check the appropriate box to indicate the manner in
which you direct the proxies to vote your shares in connection with the Proposal
to adopt the Amended and Restated Agreement and Plan of Reorganization and
Merger among Video Sentry Corporation, the Company, Sentry Technology
Corporation, Viking Merger Corp. and Strip Merger Corp., all as described more
fully in the accompanying Joint Proxy Statement/Prospectus:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, upon any other matters which may properly come
before the meeting or any adjournments thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
---
Receipt of the Notice of Special Meeting and Joint Proxy Statement/
Prospectus is hereby acknowledged.
PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
___________________________________ ___________________________________
(Signature of Stockholder) (Signature of Stockholder)
Dated _______________________, 1997
Your signature should appear the
same as your name appears hereon.
If signing as attorney, executor,
administrator, trustee or guardian,
please indicate the capacity in
which signing. When signing as
joint tenants, all parties to the
joint tenancy must sign. When the
proxy is given by a corporation it
should be signed by an authorized
officer.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL")
empowers a Delaware corporation to indemnify its directors, officer, employees
and agents under certain circumstances. Sentry's Amended and Restated
Certificate of Incorporation (the "Certificate") and Bylaws (the "Bylaws")
provide that Sentry shall indemnify, to the full extent authorized or permitted
by law (as now or hereafter in effect), any person involved, or threatened to be
involved, including, without limitation as a party or witness, in any action,
suit or proceeding (whether civil or criminal or otherwise) by reason of the
fact that he, his testator or intestate, is or was a director, officer, employee
or agent of Sentry or by reason of the fact that such director or officer, at
the request of Sentry is or was serving at any other corporation, partnership,
joint venture, trust or other entity, in any capacity. The Certificate and
Bylaws further provide that Sentry may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of Sentry or
is serving at the request of Sentry as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other entity against
any liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, to the fullest extent permitted under
applicable law as then in effect. In addition, the Certificate and the Bylaws
provide that Sentry may create a trust fund, grant a security interest and/or
use other means (including, without limitation, letters of credit), as well as
enter into contracts providing for indemnification to the full extent authorized
or permitted by law to ensure the payment of such amounts as may become
necessary to effect indemnification as provided therein, or elsewhere.
Moreover, the Certificate further provides that no director of Sentry
shall be personally liable to Sentry or its stockholders for or with respect to
any acts or omissions in the performance of his or her duties as a Director of
Sentry, except a director shall be liable to the extent provided by applicable
law (i) for any breach of the director's duty of loyalty to Sentry or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) for liability under
Section 174 of the DGCL (involving certain unlawful dividends or stock
repurchases); or (iv) any transaction from which the director derived an
improper personal benefit. This provision does not limit or eliminate the rights
of the Company or any stockholder to seek non-monetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
Sentry maintains an officer's and director's liability insurance policy
insuring its officers and directors against certain liabilities and expenses
incurred by them in their capacities as such, and insuring Sentry under certain
circumstances, in the event that indemnification payments are made by Sentry to
such officers and directors.
II-1
Item 21. Exhibits
Exhibit
Number Description
- ------ -----------
2.1 Amended and Restated Agreement and Plan of Reorganization and Merger, dated as of November
27, 1996, among Video Sentry Corporation, Knogo North America Inc., Sentry Technology
Corporation, Viking Merger Corp. and Strip Merger Corp., as amended by Amendment No. 1
to Amended and Restated Agreement and Plan of Reorganization and Merger, dated as of January
10, 1997 (set forth in Appendix A to the Joint Proxy Statement/Prospectus included in the Registration
Statement).
3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant (set forth in Appendix F
to the Joint Proxy Statement/Prospectus included in the Registration Statement).
3.2 Form of Bylaws of the Registrant (set forth in Appendix G to the Joint Proxy Statement/Prospectus included
in the Registration Statement).
5.1 Opinion of Dewey Ballantine as to the legality of the securities.
8.1 Tax Opinion of Dewey Ballantine, regarding certain Federal income tax matters.
8.2 Tax Opinion of Stroock & Stroock & Lavan regarding certain Federal income tax matters.
10.1 Form of Employment Agreement between Thomas A. Nicolette and Sentry Technology
Corporation.
10.2 Form of Employment Agreement between Peter J. Mundy and Sentry Technology Corporation.
10.3 Form of Employment Agreement between Peter Zhou and Sentry Technology Corporation.
10.4 Form of Employment Agreement between Andrew L. Benson and Sentry Technology Corporation.
10.5 1997 Stock Incentive Plan of Sentry Technology Corporation.
10.6 Form of Sentry Technology Corporation 401(k) Plan.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Alex. Brown & Sons Incorporated.
23.4 Consent of Donald & Co. Securities.
23.5 Consent of Dewey Ballantine (included in its opinions filed as Exhibits 5.1 and 8.1).
23.6 Consent of Stroock & Stroock & Lavan (included in its opinion filed as Exhibit 8.2).
23.7 Consent of Robert L. Barbanell.
24.1 Powers of Attorney (included on the signature page of this Registration Statement).
99.1 Form of Proxy for holders of Video Sentry Corporation Common Stock (set forth in Appendix H
to the Joint Proxy Statement/Prospectus included in the Registration Statement).
99.2 Form of Proxy for holders of Knogo North America Inc. Common Stock (set forth in Appendix I
to the Joint Proxy Statement/Prospectus included in the Registration Statement).
99.3 Form of Letter to Shareholders of Video Sentry Corporation.
II-2
99.4 Form of Notice of Special Meeting of Shareholders to the holders of Video Sentry Corporation
Common Stock.
99.5 Form of Letter to Stockholders of Knogo North America Inc.
99.6 Form of Notice of Special Meeting of Stockholders to the holders of Knogo North America Inc.
Common Stock.
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to re-offerings by persons who may be deemed underwriters, in addition
to the information called for by the other Items of the applicable form.
(5) That, every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415 thereunder, will be filed as a part
of an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event
II-3
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-4
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Thomas A. Nicolette and William A. Perlmuth his true and lawful attorney-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Hauppauge, State of
New York, on the 21st day of January, 1997.
SENTRY TECHNOLOGY CORPORATION
By /s/ Thomas A. Nicolette
--------------------------------------
Thomas A. Nicolette
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas A. Nicolette
- -------------------------- President, Chief Executive Officer January 21, 1997
Thomas A. Nicolette and Director (Principal Executive
Officer)
/s/ Peter J. Mundy
- -------------------------- Chief Financial Officer (Principal January 21, 1997
Peter J. Mundy Financial Officer)
/s/ Andrew L. Benson
- -------------------------- Vice President and Director January 21, 1997
Andrew L. Benson
/s/ William A. Perlmuth
- -------------------------- Chairman of the Board of January 21, 1997
William A. Perlmuth Directors
/s/ Robert D. Furst, Jr.
- -------------------------- Director January 21, 1997
Robert D. Furst, Jr.
II-5
Index to Exhibits
Exhibit
Number Description
- ------ -----------
2.1 Amended and Restated Agreement and Plan of Reorganization and Merger, dated as of November
27, 1996, among Video Sentry Corporation, Knogo North America Inc., Sentry Technology
Corporation, Viking Merger Corp. and Strip Merger Corp., as amended by Amendment No. 1
to Amended and Restated Agreement and Plan of Reorganization and Merger, dated as of January
10, 1997 (set forth in Appendix A to the Joint Proxy Statement/Prospectus included in the Registration
Statement).
3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant (set forth in Appendix F
to the Joint Proxy Statement/Prospectus included in the Registration Statement).
3.2 Form of Bylaws of the Registrant (set forth in Appendix G to the Joint Proxy Statement/Prospectus included
in the Registration Statement).
5.1 Opinion of Dewey Ballantine as to the legality of the securities.
8.1 Tax Opinion of Dewey Ballantine, regarding certain Federal income tax matters.
8.2 Tax Opinion of Stroock & Stroock & Lavan regarding certain Federal income tax matters.
10.1 Form of Employment Agreement between Thomas A. Nicolette and Sentry Technology
Corporation.
10.2 Form of Employment Agreement between Peter J. Mundy and Sentry Technology Corporation.
10.3 Form of Employment Agreement between Peter Zhou and Sentry Technology Corporation.
10.4 Form of Employment Agreement between Andrew L. Benson and Sentry Technology Corporation.
10.5 1997 Stock Incentive Plan of Sentry Technology Corporation.
10.6 Form of Sentry Technology Corporation 401(k) Plan.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Alex. Brown & Sons Incorporated.
23.4 Consent of Donald & Co. Securities.
23.5 Consent of Dewey Ballantine (included in its opinions filed as Exhibits 5.1 and 8.1).
23.6 Consent of Stroock & Stroock & Lavan (included in its opinion filed as Exhibit 8.2).
23.7 Consent of Robert L. Barbanell.
24.1 Powers of Attorney (included on the signature page of this Registration Statement).
99.1 Form of Proxy for holders of Video Sentry Corporation Common Stock (set forth in Appendix H
to the Joint Proxy Statement/Prospectus included in the Registration Statement).
99.2 Form of Proxy for holders of Knogo North America Inc. Common Stock (set forth in Appendix I
to the Joint Proxy Statement/Prospectus included in the Registration Statement).
99.3 Form of Letter to Shareholders of Video Sentry Corporation.
99.4 Form of Notice of Special Meeting of Shareholders to the holders of Video Sentry Corporation
Common Stock.
99.5 Form of Letter to Stockholders of Knogo North America Inc.
99.6 Form of Notice of Special Meeting of Stockholders to the holders of Knogo North America Inc.
Common Stock.