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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER: 1-12727
_________________
SENTRY TECHNOLOGY CORPORATION
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 96-11-3349733
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
350 WIRELESS BOULEVARD, HAUPPAUGE, NEW YORK 11788
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 232-2100
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class:
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Common Stock, $.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
At March 27, 2002, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $4,000,000 million based upon
the closing price of such securities on the OTC Bulletin Board on that date. At
March 27, 2002, the Registrant had outstanding 61,542,872 shares of Common
Stock.
Documents Incorporated by Reference
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None.
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PART I
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Item 1. Business.
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FORMATION OF THE COMPANY; GENERAL
Sentry Technology Corporation ("Sentry") was formed in connection with the
February 1997 merger of Knogo North America Inc., a Delaware corporation, and
Video Sentry Corporation, a Minnesota corporation. As a result of the merger,
we became the parent corporation of two wholly-owned Delaware subsidiaries:
Knogo North America Inc. ("Knogo") and Video Sentry Corporation ("Video"). This
series of transactions is referred to herein collectively as the "Merger."
The Merger was accounted for under the purchase method of accounting.
Although former Video shareholders received a majority voting interest in Sentry
based upon their common stock ownership percentage, generally accepted
accounting principles requires consideration of a number of factors, in addition
to voting interest, in determining the acquiring entity for purposes of purchase
accounting treatment. As a result of these factors, and solely for accounting
and financial reporting purposes, the Merger was accounted for as a reverse
acquisition of Video by Knogo. Accordingly, the financial statements of Knogo
are the historical financial statements of Sentry and the results of Sentry's
operations include the results of operations of Video after the Effective Date.
Knogo is engaged in the design, manufacture, sale, installation and
servicing of a complete line of electronic article surveillance equipment.
Knogo was incorporated in Delaware in October 1996. Its corporate predecessors
had been in business for more than 30 years.
Video designs, manufactures, markets, installs and services a programmable
traveling closed circuit television surveillance system that delivers a high
quality video picture which is used in a wide variety of applications. Video
also acts as a system integrator for conventional CCTV products that it markets,
installs and services. Video's predecessor was founded in 1990 and made its
first sales in 1992. Video was merged into Knogo as of December 31, 2000.
RECENT DEVELOPMENTS
Our strategy following the Merger in 1997 was to use Knogo's engineering
staff and excess manufacturing capacity resulting from a 1994 restructuring for
the reengineering and production of its proprietary and patented SentryVision
programmable traveling closed circuit television surveillance ("CCTV") systems.
With the reengineering completed, management believed that sales of
SentryVision, which had fallen in the final year that Video was a separate
corporation, would rebound.
While the engineering staff was able to resolve substantially the design
and manufacturing problems associated with SentryVision , the sales of the
system did not achieve the levels anticipated by the Company.
Furthermore, while still profitable, sales of Knogo's Electronic Article
Surveillance ("EAS") systems have continued to erode due to the attention we
gave to the reengineering and marketing of SentryVision as well as competition
from lower-priced "off-the-shelf" systems and competition from larger,
better-financed competitors such as Sensomatic Electronics Corporation and
Checkpoint Systems Inc. In addition, due to a non-compete provision entered
into by Knogo in 1994, we were not permitted to market our EAS products outside
of the United States and Canada. The non-compete provision expired at the end
of 1999.
We recognized that, because of our continuing operating losses and the
depletion of our tangible assets to fund ongoing operations, our ability to
continue to market our existing SentryVision and EAS products and to develop
new products and product extensions to allow us to remain competitive would
require additional investment.
On January 8, 2001, Dutch A&A Holding B.V. ("Dutch A&A") acquired
23,050,452 shares of the Company's common stock for $3.0 million, $1.0 million
of which was paid in January 2001, and the remaining balance was paid in equal
$1.0 million installments on April 30, 2001 and August 31, 2001. Dutch A&A is a
Netherlands company which, through its subsidiaries, is in the business of
development, manufacture, sale and distribution of various kinds of RFID, access
control and anti-theft electronic article surveillance products and accessories.
Dutch A&A currently owns 37.5 percent of the outstanding common stock of
the Company. At any time prior to January 8, 2002, Dutch A&A had the right to
increase its ownership of the Company's common stock to a total of 51% of the
shares of common stock then outstanding. If the average market value of the
Company's common stock, measured over any ten-day trading period during the one
year period following January 8, 2001, was at least $15.0 million, the purchase
price for the additional shares was to be determined by multiplying the actual
number of shares to be purchased by $.001; otherwise, the purchase price would
be $1.5 million. At any time prior to January 8, 2003, Dutch A&A may increase
its ownership of the Company's common stock to a total of 60% of the shares of
common stock then outstanding. The purchase price for the additional shares
shall be determined as follows: If the average market value of the common
stock, measured over a ten-day period during the two years preceding January 8,
2003, is at least $25.0 million, the purchase price shall be determined by
multiplying the actual number of shares to be purchased by $.001. If Dutch A&A
previously exercised its right to acquire shares increasing its investment to
51% of the Company's common stock, but the average market value test was not met
at the time of the second purchase, then the purchase price shall be $3.5
million. In November 2001, the first average market value threshold of $15
million was achieved entitling Dutch A&A to 51% ownership. At the request of
Dutch A&A, Sentry agreed to extend the expiration of this purchase right to
January 8, 2003. In addition, Dutch A&A agreed to extend its distribution
agreement with Sentry for an additional year. As a condition to the investment
by Dutch A&A, the stockholders of the Company elected three nominees of Dutch
A&A to the Board of Directors at a Special Meeting of Stockholders on December
8, 2000. If Dutch A&A has not acquired 51% of the Company's common stock by
January 8, 2003, one of the three nominees of Dutch A&A will resign and be
replaced, with the consent of Dutch A&A, by a nominee of the directors of the
Company who are not nominated by Dutch A&A.
In addition to the election of three nominees of Dutch A&A to the Board of
Directors, other matters which were approved at the December 8, 2000 Special
Meeting of Stockholders, and became effective as of January 8, 2001, were
proposals to amend the Company's certificate of incorporation to: (i) permit
the payment of a dividend of additional shares of Class A Preferred Stock at the
rate of 0.075 shares of Class A Preferred Stock for each share of Class A
Preferred Stock held; (ii) to reclassify Class A Preferred Stock into shares of
common stock on a ratio of five shares of common stock for each share of Class A
Preferred Stock outstanding; and (iii) to increase the number of the Company's
authorized shares of common stock to 140,000,000.
In addition, on December 28, 2000, our Board of Directors increased the
number of Directors from five to seven effective upon the closing of the Dutch
A&A investment. Upon the resignation of one Board member in March 2001, the
Board presently has six members.
THE SENTRYVISION SYSTEM
SentryVision refers to our family of traveling CCTV surveillance systems.
Over the years, Video has developed various generations of traveling CCTV
surveillance systems including the H-System, OH-System, the original
SentryVision and currently the new and improved SmartTrack system.
All versions of the product consist of a camera carriage unit, a continuous
track enclosed with tinted or mirrored glass enclosure and electronic control
equipment. The carriage unit moves within the enclosure and carries one or two
PTZ CCTV cameras, electronic transmission components and motor drives. The
carriage track and enclosure are designed to custom lengths for more complete
viewing. The carriage unit transmits video and control signals from the
camera(s) through two copper conductors running inside the enclosure to a
receiver unit located at one end of the carriage track. The copper conductors
also carry power to the camera carriage, eliminating the need for power or
communication cables. From the receiver unit, the video signals are relayed to
a central monitoring location by wire or fiber optics, where a system operator
can position or move the camera carriage to obtain the best vantage point while
viewing and recording the continuous, live video pictures. The system design
supports conventional peripheral devices, such as analog and digital
videocassette recorders, alarm inputs, fixed cameras, PTZ dome cameras,
switches/multiplexers, voice intercom systems, panic buttons and remote viewing
capability using dedicated phone lines or internet technology.
Unlike our previous products, our recently developed SentryVision
SmartTrack system features one or two state-of-the-art pan, tilt and zoom
("PTZ") domes providing for 360 unobstructed views to eliminate most blind
spots. Additionally, SmartTrack utilizes sophisticated software that provides
six tours and up to 60 presets per camera carriage to allow programmable viewing
and recording with or without an operator. The improvements made to the carriage
make the new SmartTrack system the fastest and most reliable traveling CCTV
surveillance system in the history of SentryVision product offerings. SmartTrack
is our premier product, replacing all previous generations of SentryVision
products.
Video's proprietary CCTV system, called SentryVision , is designed to
provide enhanced loss prevention surveillance in retail stores and distribution
centers as well as to provide monitoring and deterrence of illegal and unsafe
activities in a variety of other locations such as parking garages, correctional
facilities, warehouses, transportation centers and public transit terminals.
SentryVision may also be employed in a broad range of operational and process
monitoring applications in commercial manufacturing and industrial settings. As
of December 31, 2001, 1,170 SentryVision systems had been installed in
approximately 500 customer locations in North America. Current customers
include Lowe's Home Centers, Target Stores, Mills Fleet Farm, Winn Dixie,
Federal Express, Symbol Technologies, Menards, UPS, J.C. Penney, Canadian Tire,
Reno Depot, Este Lauder, Kohl's Department Stores, Disney Direct Marketing and
Duke University. In addition, during 2001, the Company's international
distributors installed 19 SentryVision systems in 13 customer locations in
Western Europe, Latin America and Asia. Our international customers include
Carrefour, Auchon, Cora, Castorama, B & Q, and Coop. We believe that, by
providing expanded surveillance coverage and enhanced flexibility to select the
locations watched, SentryVision has enabled customers to significantly reduce
inventory shrinkage, increase theft apprehension rates and improve safety and
security. Based on the price of its system and the experience of Video's
customers to date, we believe SentryVision is a cost-effective solution which
can improve the operations of our customers.
Video sold its first systems in 1992 for installation in parking garage
security surveillance applications, but quickly moved its market focus into the
retail sector. In this sector, we have identified a number of specific market
segments for which SentryVision is well suited for loss prevention
surveillance, including home centers, mass merchandise chains, supermarkets,
hypermarkets and drug stores, as well as related distribution centers. The key
application is inventory loss prevention in the stores, stock rooms and
distribution centers.
SentryVision is typically installed in large retail stores which use a
checkout area at the front of the store and product display configurations and
high merchandise shelving which form rows and aisles. Video specializes in
designing system applications which are customized to fit a customer's specific
needs and which integrate the customer's existing surveillance equipment (PTZ
dome and fixed-mount cameras) with SentryVision . The flexibility of the system
allows the customer to specify target-coverage areas ranging from stock rooms to
total store coverage and focus on shoplifting, employee theft or performance
evaluation of client personnel. Typically, SentryVision has been installed
near the ceiling between the rows of cash registers and the ends of the
merchandise aisles. This allows the retailer to easily observe both the cash
handling activities of cashiers in the checkout area and customer activities
between the merchandise rows, despite the presence of hanging signs and other
obstructions. The entire sales floor can be monitored efficiently by focusing
up and down the aisles and by moving the carriage horizontally from aisle to
aisle, or from cash register to cash register. In addition, with the use of
camera pan, tilt and zoom lens features, activities in each area can be
monitored in greater detail. Results from Video's current installations
indicate significant improvements in detecting shoplifting and employee theft.
More recently, retailers have integrated SentryVision with "front end"
packages of conventional CCTV cameras, dedicated to monitoring the registers and
allowing users to locate the traveling camera track where the maximum coverage
of in-store traffic can be monitored. The SentryVision system is today
generally sold in conjunction with conventional CCTV applications. Customers
using the SentryVision system have reported significant reductions in
theft-related inventory shrinkage.
Retail Market Applications
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- - Home Centers. Video has installed 771 systems in more than 307 store
locations for 7 customers in the home center segment of the retail market.
Typical of our customers in this market are Lowe's Home Centers, with more than
750 stores in 42 states, and Mills Fleet Farm, a 29 store regional hardware,
home supply and discount retail chain. Both companies required systems for
total floor coverage. We applied different solutions to this common problem in
each case. Lowe's Home Centers chose to integrate track cameras with PTZ dome
and fixed-mount cameras, while Mills Fleet Farm chose to use only the track
camera system.
- - Mass Merchandise Chains. Video has installed 96 systems for customers in
this segment, including Sears, Navy Exchange and Target Stores. The targeted
coverage varies extensively in these installations from only stock rooms to
total store coverage. The equipment package provided in each case varies with
the application and location of the need.
- - Supermarkets. Video has installed 31 systems in 29 store locations for 7
supermarket customers. The targeted coverage in most of these installations has
been the entire retail space. Supermarket chains using SentryVision include
Kroger, Marsh, Cub Foods, Winn-Dixie and Fiesta Mart.
Industrial Market Applications
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- - Distribution Centers. Video also provides loss prevention surveillance
for distribution centers and warehouses, and has installed 85 systems in
distribution centers for 37 different retailers including Kohl's Department
Stores, Target Stores, Borders Group, Disney Direct Marketing, Barnes & Noble,
Robinsons-May, Ross, Saks, Guess, Tower Records, Big Dog and J.C. Penney.
Traveling through a facility from an overhead position, the SentryVision 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.
- - Manufacturing and Transportation Facilities. So far SentryVision use in
factories has been limited but the benefits of continuous tracking of industrial
operations and processes indicate future growth. Continued expansion of the
SentryVision dealer program is expected to generate increased installations in
factories manufacturing electronics, pharmaceuticals, computers and other high
value products and in various wholesale distribution and transportation
facilities. Express package and other high throughput distribution facilities
are also good prospects for a continuous tracking CCTV system for theft
prevention. Installations include Symbol Technologies, AT&T Wireless, Federal
Express, UPS, Wyeth-Ayerst Labs, USF Logistics and Thompson Electronics.
- - Internet Data Centers. Video markets SentryVision systems to internet
data centers (IDC's). Most IDC's are full service business internet providers
with state-of-the-art systems that host, monitor and maintain mission-critical
web-sites, e-commerce platforms and business applications for small to medium
sized businesses. SentryVision systems are used to heighten security through
remote video monitoring. Installations include FirstWorld Communications, Inc.,
Savvis and The Discovery Channel.
Institutional Market Applications
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- - Parking, Corrections, and Government Institutions. We have installed 108
systems in three parking garages at Duke University's Medical Center with major
benefits identified as savings in guard costs, vandalism, safety and theft.
SentryVision has been installed in correctional facilities in Texas, Michigan,
New Mexico and Illinois, with reported safety benefits of continuous coverage in
dormitory, recreation and visitation areas. SentryVision installations have
also been completed in various government agencies including the Federal Reserve
Bank, US Postal Service and US Immigration Service.
CONVENTIONAL CCTV SYSTEMS
Conventional CCTV is cost effective in many applications and is the most
widely used loss prevention system in North America. Conventional CCTV uses all
the basic components of the video surveillance industry including fixed and dome
cameras, VCR's, monitors, switchers, multiplexers and controllers. As all of
this equipment is manufactured for Video by outside vendors, we can provide our
customers with state-of-the-art equipment for specific applications at favorable
costs. We believe that, while less profitable than SentryVision and
traditional EAS products, the CCTV products complement our other surveillance
systems and provide retailers with further protection against internal theft and
external shoplifting activities. CCTV systems can also be electronically
connected to EAS systems, causing a video record to be generated when a theft
alarm is triggered.
While we believe that conventional CCTV and SentryVision are complementary
security solutions, many companies have traditionally viewed them as competing
solutions and have selected between conventional CCTV systems and SentryVision
systems for their security solutions. We have received indications that our
largest single SentryVision customer, Lowe's Home Centers, continues to project
that the bulk of its orders in 2002 will be for conventional CCTV systems.
Remote video transmission and digital recording are other potential growth
areas for Video. These systems allow customers to monitor remote sites using
existing communication lines and a PC-based system. Video camera images are
stored and manipulated digitally, substituting the PC for the VCR and
multiplexer, and eliminating the videotape. Video markets digital video
recording and a remote video transmission unit developed by third-party vendors
including Kalatel, Integral and Trakonic.
We now are the exclusive provider of Trakonic's proprietary solution for
remote control of traveling CCTV camera images and movement over wireless local
area networks, using a hand held Personal Digital Assistant (PDA). Under our
agreement, we now have the exclusive right to market the Trakonic solution with
traveling CCTV systems. Using a PDA, security personnel and operation managers
are free to tour their facilities while maintaining full view and control of the
video surveillance system both for security and operational purposes, using
local area wireless networks. All viewed images are simultaneously stored on a
digital video recorder, which is an added value component of the Trakonic
system.
We continue to expand conventional CCTV installations in industrial and
institutional facilities. Significant installations have been made for express
package companies, including Federal Express, United Parcel Service, Emery Air
Freight and Airborne Express. The use of CCTV surveillance also continues to
grow in both new and existing correctional facilities and Sentry now has CCTV
installations in both state and county facilities.
In 2001, we continued marketing CCTV to the school market. Successful
installations were completed with reported benefits including decreased
vandalism and improved safety. In schools, conventional CCTV is an extremely
cost effective security option with Digital Recording and Remote Video
Transmission becoming attractive options for large school districts.
Our largest single school CCTV installation was at the Norristown (PA) High
School with 111 cameras, using digital recording and fiber optic cabling. It is
an advanced cost effective system with video from all cameras instantly
accessible on their network. The contract value was approximately $0.3 million.
EAS SYSTEMS
EAS systems consist of detection devices which are triggered when articles
or persons tagged with reusable tags or disposable labels, (referred to as
tags), pass through the detection device. The EAS systems which Knogo
manufactures are based upon three distinct technologies. One, the Radio
Frequency ("Knoscape RF ") System, uses medium radio frequency transmissions in
the two to nine megahertz range. Second, the "Ranger " system uses ultra-high
frequency radio signals in the 902 megahertz and 928 megahertz bands. Third,
the Magnetic ("Knoscape MM ") system uses very low frequency electromagnetic
signals in the range of 218 hertz to nine kilohertz. Knogo also manufactures a
non-electronic dye-stain pin ("KnoGlo "). Since 1996, Knogo has been an
authorized distributor of the library security systems and related products of
Minnesota Mining and Manufacturing Company ("3M").
The principal application of Knogo's products is to detect and deter
shoplifting and employee theft in supermarket, department, discount, specialty
and various other types of retail stores including bookstores, video, liquor,
drug, shoe, sporting goods and other stores. The use of these products reduces
inventory shrinkage by deterring shoplifting, increases sales potential by
permitting the more open display of greater quantities of merchandise, reduces
surveillance responsibilities of sales and other store personnel and, as a
result, increases profitability for the retailer. In addition, Knogo's EAS
systems are used in non-retail establishments to detect and deter theft, in
office buildings to control the loss of office equipment and other assets, in
nursing homes and hospitals for both asset and patient protection, and in a
variety of other applications.
The U.S. market for retail EAS systems and tags is estimated by industry
sources at $570 million and is growing at an estimated rate of 8 percent per
year.
At December 31, 2001, the approximate number of EAS Systems sold or leased
by Knogo and its predecessors exceeded 25,000.
Radio Frequency and Ranger Detection Systems
Knogo manufactures and distributes the Knoscape RF system, the principal
application of which is to detect and deter shoplifting and employee theft of
clothing and hard goods in retail establishments. Knogo also manufactures and
distributes the Ranger system, which the Company believes is a particularly
useful and cost efficient EAS system for high fashion retail stores with wide
mall-type exit areas which ordinarily would require multiple Knoscape RF
systems for adequate protection. The Knoscape RF and Ranger systems consist of
radio signal transmission and monitoring equipment installed at exits of
protected areas, such as doorways, elevator entrances and escalator ramps. The
devices are generally located in panels or pedestals anchored to the floor for a
vertical arrangement or mounted in or suspended from the ceiling (Silver Cloud)
and mounted in or on the floor in a horizontal arrangement. The panels or
pedestals are designed to harmonize with the decor of the store. The monitoring
equipment is activated by tags, containing electronic circuitry, attached to
merchandise transported through the monitored zone. The circuitry in the tag
interferes with the radio signals transmitted through the monitoring system,
thereby triggering alarms, flashing lights or indicators at a central control
point, or triggering the transmission of an alarm directly to the security
authorities. By means of multiple installations of horizontal Knoscape RF
systems or installation of one or more Ranger systems, the Company's products
have the ability to protect any size entrance or exit.
Non-deactivatable reusable tags are manufactured in a variety of sizes and
types and are attached directly to the articles to be protected by means of
specially designed fastener assemblies. A reusable tag is removed from the
protected article, usually by a clerk at the checkout desk, by use of a
decoupling device specially designed to facilitate the removal of the fastener
assemblies with a minimum of effort. Removal of the tag without a decoupler is
very difficult and unauthorized removal will usually damage the protected
article and thereby reduce its value to a shoplifter. Optional reminder
stations automatically remind the store clerk, by means of audiovisual
indicators, to remove the tag when the article is placed on the cashier's desk.
Disposable labels can be applied to products either by placing them
directly on the outside packaging of the item or hidden within the product by
the manufacturer. These labels can be deactivated, at the checkout desk,
through the use of a deactivation device.
Knoscape RF and Ranger systems generally have an economic useful life of
six years (although many of Knogo's systems have been operating for longer
periods), have a negligible false alarm rate and are adaptable to meet the
diversified article surveillance needs of individual retailers.
Magnetic Detection Systems
The primary application of Knoscape MM systems is to detect and deter
theft in "hard goods" applications such as supermarkets, bookstores and in other
specialty stores such as video, drug, liquor, shoe, record and sporting goods.
Knoscape MM systems use detection monitors which are activated by
electromagnetically sensitized strips. The MM targets are typically attached to
the articles to be protected and are easily camouflaged on a wide array of
products. The detection monitors used by the Knoscape MM systems are installed
at three to five foot intervals at the exits of protected areas. The magnetic
targets can be supplied in many forms and are attractively priced, making them
suitable for a variety of retail applications. In addition, the MM targets can
be manufactured to be activated and deactivated repeatedly while attached to the
articles to be protected. Accurate deactivation is also very important when the
item to be protected is a personal accessory that will be carried by its owner
from place to place, such as pocket books, pens, lipstick, shoes, camera film
and cameras.
The Knoscape MM system offers retailers several features not available in
Knoscape RF and Ranger systems. Since the target is very small, relatively
inexpensive and may be inserted at the point of manufacture or packaging, it
provides retailers with a great deal of flexibility and is practical for
permanent attachment to a wide variety of hard goods, especially low
profit-margin products. The target can be automatically deactivated at
check-out, eliminating the risk of triggering alarms when merchandise leaves the
store and saving sales personnel valuable time. Since the targets can be
incorporated directly into a price tag or the article itself, they are
convenient to use.
KnoGlo
KnoGlo , a non-electronic, dye-stain pin, releases an indelible liquid when
tampered with. Used with passive locking mechanisms without electronics, KnoGlo
is often a retailer's first step in loss prevention. KnoGlo is also employed
in stores with EAS systems as an extra layer of protection. Such protection is
useful in problem areas (near mall door openings, for example) or where users
must maximize selling space.
BOOKINGS
Of Sentry's bookings for the year ended December 31, 2001, approximately 23
percent were attributable to SentryVision , 40 percent to CCTV, 31 percent to
EAS and 6 percent to 3M library security systems. Of Sentry's bookings for the
year ended December 31, 2000, approximately 17 percent were attributable to
SentryVision , 39 percent to CCTV, 39 percent to EAS and 5 percent to 3M library
security systems. For the year ended December 31, 1999, approximately 13
percent were attributable to SentryVision , 39 percent to CCTV, 42 percent to
EAS, and 6 percent to 3M library security systems
MAJOR CUSTOMERS
Although the composition of our largest customers has changed from year to
year, a significant portion of our revenues has been attributable to a limited
number of major customers. In 2001, 2000 and 1999, Lowe's Home Centers accounted
for 22%, 14% and 19%, respectively, of total revenues. In 2001, 2000 and 1999,
Goody's Family Clothing accounted for 11%, 15% and 14% respectively, of total
revenues. While we believe that one or more major customers could account for a
significant portion of our sales for at least the next two years, we anticipate
that our customer base will continue to expand and that in the future we will be
less dependent on major customers.
PRODUCTION
In October 1998, we ceased manufacturing at our Cidra, Puerto Rico facility
and consolidated all manufacturing and assembly at our Hauppauge, New York
facility. The Puerto Rico facility was sold in February 1999. The consolidation
was intended to reduce operating costs and increase manufacturing controls by
allowing management and engineering staffs to interface real time with the
manufacturing process. However, as a result of product design and reliability
issues identified throughout the year in 2000, redesign initiatives were
implemented addressing both quality and manufacturability. In addition, in
2001, an enhanced quality assurance department was staffed, test equipment
procured and measures implemented to address and resolve quality concerns.
Video
- -----
Video's manufacturing operations consist primarily of the assembly of its
camera carriages and control units using materials and manufactured components
purchased from third parties. Video is not dependent upon any particular
supplier for these materials or components. Some parts are stock,
"off-the-shelf" components, and other materials and system components are
designed by Video and manufactured to Video's specifications. Final assembly
operations are conducted at the Company's facilities in Hauppauge, New York.
System components and parts include cameras, circuit boards, electric motors and
a variety of machined parts. Each system component and finished assembly
undergoes a quality assurance check by Video prior to its shipment to an
installation site. All SmartTrack electronic circuit board enclosures are
tested and burned in for 72 hours. Upon completion, the finished product is
tested and run for an additional 24 hours resulting in approximately 3,000
travel and PTZ cycles prior to quality assurance sign off. Video is not subject
to any state or federal environmental laws, regulations or obligations to obtain
related licenses or permits in connection with its manufacturing and assembly
operations.
Knogo
- -----
Knogo produces at our facilities in Hauppauge, New York, or purchases
through suppliers, its Knoscape RF, Ranger, Knoscape MM and KnoGlo, or their
components. Production consists of final assembly operations of printed
circuitry, electronic and mechanical components that Knogo purchases from
various suppliers. Independent contractors using existing molds and tooling
produce plastic cases and antenna coils for the tags to Knogo's specifications.
Through product redesign efforts, final assembly machines were modified to
reduce production complexities. As a result, increased production run rates of
this product have been realized, simultaneously increasing production quality
and reducing manpower. Knogo is not dependent on any one supplier or group of
suppliers of components for its systems. Our policy is to maintain Knogo's
inventory at a level that is sufficient to meet projected demand for its
products. We do not anticipate any difficulties in continuing to obtain
suitable components for Knogo at competitive prices in sufficient quantities as
and when needed.
MARKETING
We market our products for Video and Knogo, jointly, through the direct
efforts of approximately 15 salespersons located in select metropolitan areas
across the United States and Canada, as well as through a network of
dealers/system integrators. Marketing efforts include participation in trade
shows, advertising in trade publications, targeted direct mailings and
telemarketing. In addition, the effort is augmented through our Website which
provides enhanced product and market oriented information. Internationally, we
market SentryVision through large system integrators and distributors including
Ultrak, Chubb, Cegelec and Intrepid.
Video
- -----
To date, most SentryVision and conventional CCTV Systems have been sold on
a direct sale basis. Typical billing arrangements for SentryVision systems
involve invoicing 50% of total sale upon shipment of the product and 50% on the
completion of the installation.
While most of the current SentryVision and conventional CCTV sales have
been made to home centers, retail chains and distribution centers, our marketing
plan for Video also emphasized a dealer program for institutional, industrial
and international prospects.
Beginning in mid-1998, we began a program to market SentryVision through
qualified security dealers and integrators. Much of the industrial and
institutional SentryVision /CCTV prospects are serviced by local security
companies who design and install integrated CCTV, access control and alarm
systems. By working with these companies, we are able to reach a far larger
number of SentryVision prospects and penetrate the market more rapidly. The
program has generated much interest through trade advertising, direct mail and
trade show participation. By the end of 2001, non-exclusive contractual
relationships with security dealers were established including Professional
Security Association (PSA), a group of 200 dealers with combined annual sales of
approximately $800 million. Since then PSA has promoted SentryVision through
its CCTV integrators. These and additional dealers are expected to generate
significant SentryVision installations in industrial and institutional
facilities in 2002. Recent sales were made through ADT, STG, Siemans, Mosler
and Security Link.
In addition, we market SentryVision internationally using independent
distributors. The distribution agreements generally appoint a distributor for a
specified term as the exclusive distributor for a specified territory. The
agreements require the distributor to purchase a minimum dollar amount of the
Company's product during the term of the agreement to retain exclusivity. We
sell our products to independent distributors at prices below those charged to
end-users because distributors typically make volume purchases and assume
marketing, customer training, installation, servicing and financing
responsibilities. As of December 31, 2001, we have distributors in Canada, UK,
France, Mexico, Belgium, Holland, Italy, Singapore, Brazil and Argentina.
During 2001, Video placed in service 97 SentryVision systems and 4,257
CCTV cameras, as compared to 84 SentryVision systems and 3,424 CCTV cameras in
2000 and 58 SentryVision systems and 5,066 CCTV cameras in 1999.
Knogo
- -----
Knogo EAS systems are marketed on both a direct sales and lease basis, with
direct sales representing the majority of the business. The terms of the
standard leases are generally from one to five years. The sales prices and
lease rates vary based upon the type of system purchased or leased, number and
types of targets included, the sophistication of the system employed and, in the
case of a lease, its term. In the case of the Knoscape MM systems, detection
targets which are permanently attached to the item to be protected are sold to
the customer even when the system is leased. Therefore, in the case of either a
sale or lease of a Knoscape MM system, as the customer replenishes its
inventory; additional targets will be required for those items to be protected.
We also market a more expensive, removable, reusable detection tag for use with
the Knoscape MM systems on certain products such as clothing and other soft
goods.
During each of the years ended December 31, 2001, 2000 and 1999 Knogo
placed in service 675, 347 and 439, respectively, Knoscape RF , Ranger , and
Knoscape MM systems.
RF and Ranger systems continue to be used by apparel and department stores
which have wide exit areas and a desire for deterrence based on reusable hard
tags. Both the Silver Cloud and Knoscape RF systems are universal in that they
can detect both 2 MHz hard tags and 8 MHz labels. In the latter part of 1999,
Knogo introduced a new 8MHz P-2000 RF system designed for both hard and soft
good customers. The P-2000 system is economical and self-installable by the
customer.
Supermarkets, bookstores, video stores and specialty stores remain good
prospects for MM systems due to the small size and low cost of Micro-Magnetic
strips. Since 2000, Knoscape MM Systems feature updated digital electronics.
Knoscape MM Systems detect virtually all manufacturers' magnetic strips and can
universally replace older magnetic strip systems manufactured by various EAS
vendors.
The library market continues to be a substantial market for magnetic
technology. In March 1996, 3M and Knogo entered into a strategic alliance to
provide universal asset protection to libraries across North America. The
agreement, effective through March 2002, permits Knogo to act as a distributor
of all of 3M's library products, including the 3M Tattle-Tape Security Strips,
detection systems, 3M SelfCheck System hardware and software and other 3M
library materials flow management products and accessories to public, academic
and government libraries. In 1998, we designed and developed for 3M a new
library specific magnetic EAS system which in turn was added to this product
listing. Under the agreement, 3M provides service and installation for all new
and existing Knogo library customers throughout North America. In exchange for
these agreements, we agreed not to compete against 3M for sales and service of
EAS Systems in the library market until March 2004.
DUTCH A&A SECURITY PRODUCTS
In February 2001, we introduced a new EAS system manufactured by Dutch A&A,
which is housed in slender self-contained Plexiglas panels. The new 9000 PL 8.2
MHz system provides retailers with clear lines of sight at the front end along
with the durability of solid Plexiglas. The panels can be custom printed with
the retailer's logo for enhanced image and trade name awareness. The system's
electronics which are built-in to the base of the Plexiglas antenna provide
detection of 8.2 MHz labels and hard tags in aisles up to six feet wide. The
9000 PL system is offered in both single and dual aisle configurations and is
compatible with all existing 8.2 MHz tags and checkout accessories. The
Plexiglas RF system is the first in a series of new products being brought to
market by the Company as a result of a distribution agreement with Dutch A&A. In
addition, Dutch A&A will introduce through Sentry, LaserFuse, a new RF label
technology, which is compatible with, and an alternative to the labels offered
by Checkpoint Systems, Inc. In the future, we will also sell Dutch A&A products
in the proximity access control and RFID markets.
BACKLOG
Our backlog of orders was approximately $6.0 million at December 31, 2001,
as compared with approximately $5.8 million at December 31, 2000 and $3.2
million at December 31, 1999. We anticipate that substantially all of the
backlog present at the end of 2001 will be delivered during 2002.
SEASONAL ASPECTS OF THE BUSINESS
Our current customers are primarily dependent on retail sales which are
seasonal and subject to significant fluctuations which are difficult to predict.
SERVICE
Installation services are performed by our personnel and by carefully
screened and supervised subcontractors as well as authorized dealers and
distributors. Repair and maintenance services for Video and Knogo are performed
primarily by the Company's personnel. All products sold or leased are covered
by a warranty period. Generally, Video's products provide for a one-year
warranty and Knogo's products for a 90-day warranty. After the warranty period,
we offer our customers the option of entering into a maintenance contract with
the Company or paying for service on a per call basis.
Installations of SentryVision systems typically take from three days to
several weeks and involve mounting the enclosures, installing the controller
unit, installing the carriage assembly, and connecting control and transmission
cables to the central monitoring location. Items such as high voltage power
termination wiring are typically the responsibility of the end user.
Throughout the first half of 1999, we focused on recruiting and training
entry level installers for SentryVision and CCTV. As the travel costs for
these employees rose unacceptably, in the second half of the year we expanded
our program of hiring local sub-contractors for installation work and refocused
our employee efforts on service and maintenance work.
A great deal of our efforts was directed at servicing the existing
SentryVision systems, as reliability problems were not completely resolved.
Our engineering efforts were directed at resolving electronic problems, which
resulted in numerous service calls and in the re-design of printed circuit
boards to upgrade them and increase their performance and reliability. These
issues were substantially resolved in the first half of 1999. Mechanical
reliability issues then became our focus in the latter half of 1999 as system
problems continued. These issues appear to have been largely resolved with the
development and introduction in 1999 of new drive and idler wheels, brush block
assemblies and wire harnesses.
The use of subcontractors supervised by Company employees proved cost
effective with no sacrifice in quality. A network of qualified contractors was
established. In the second half of 1999, we released 34 installation employees
and retained only our most technically skilled employees. We intend to continue
to focus on EAS, SentryVision and CCTV technical service and maintenance and
continue to expand our contractor network for installation work.
This strategy has resulted in significant cost savings. In addition, we
retain our reputation of technical expertise within the industry and management
efforts can be focused on increased electronics training for our employees,
distributors and sub-contractors.
Since 2000, we have added 19 Service Partners and installation contractors
in 20 key market areas. In total, we have more than 60 factory trained service
technicians in the field to augment service provided by Company employees. Many
of these partners are factory trained and have contractual commitments to
provide prompt, quality service at our direction. The field service management
structure was also modified so that two of our most experienced managers will
focus exclusively on quality control with our service partners.
In addition, our Call Center was reorganized and a new supervisor
appointed. Technical support functions were transferred to our Design Center
personnel and all service requests are now screened extensively via telephone.
Initial results have been highly successful in lowering the number of on-site
visits required to resolve service issues.
In 2001, we focused on improving the quality of our service delivery system
and we were successful. Telephone surveys were conducted after installations
were completed and we achieved a 96% approval rating. Our employees remained
focused on technical service and maintenance. Technician headcount was reduced
to 41 at the end of 2001 as we continued to develop expertise among our service
and installation partner companies.
Our Design Center personnel continued to screen all service requests and
were able to close almost 500 calls over the telephone, avoiding costly service
calls. In addition, careful screening allowed us to ship replacement parts in
advance of the technician's arrival increasing our ability to complete calls in
a single visit.
Customer service is a priority and we are focused on continued improvements
in 2002. Since the introduction of the new and more reliable SentryVision
SmartTrack System, we expect sales to increase. We anticipate that increased
installation and service work can be supported by the existing headcount and
infrastructure.
COMPETITION
We operate in a highly competitive market with many companies engaged in
the business of furnishing security services designed to protect against
shoplifting and theft. In addition to EAS systems using the concept of tagged
merchandise, such services use, among other things, conventional PTZ dome and
fixed mount CCTV systems, traveling CCTV systems, mirrors, guards, private
detectives and combinations of the foregoing. We compete principally on the
basis of the nature and quality of its products and services and the
adaptability of these products to meet specific customer needs and price
requirements.
To our knowledge, there are several other companies that market, directly
or through distributors, conventional closed circuit video systems and/or EAS
equipment to retail stores, of which Sensormatic (recently purchased by Tyco),
Checkpoint Systems, Inc., Philips, Inc., Pelco Manufacturing, Inc., Panasonic,
Inc., and Ultrak, Inc. are the Company's principal competitors. Sensormatic has
also begun marketing a traveling CCTV system in the US. Outside the US, we are
aware of other companies that market other types of traveling CCTV systems
including Lextar Technologies, Ltd. in Australia, T.E.B., Sensormatic and DETI
in France and Moving Cameras Ltd. in the UK. Some of our competitors have far
greater financial resources, more experienced marketing organizations and a
greater number of employees than the Company.
In connection with the merger of Knogo's international EAS business with
Sensormatic in December 1994, Knogo agreed with Sensormatic that Knogo would not
compete with Sensormatic in selling EAS and conventional CCTV products in areas
outside of the United States, Canada and Puerto Rico through the period ending
December 29, 1999. Since then, Sentry has promoted selected EAS systems and
tags through a distribution network outside of North America although Sentry is
not permitted to use the Knogo name outside of the United States and Canada.
PATENTS AND OTHER INTELLECTUAL PROPERTY
Although patent protection is advantageous to Sentry, we do not consider
any single patent or patent license we own or hold to be material to our
operations. We believe that our competitive position ultimately will depend
on our experience, know-how and proprietary data, engineering, marketing and
service capabilities and business reputation, all of which are outside the scope
of patent protection.
Video
- -----
Video has a United States patent covering the cable-free transmission of a
video signal to and from the carriage. This technology prevents degradation of
the video signal which can result from the movement of and prolonged friction
caused by the carriage. Two additional U.S. patents were received in 2000 for
improvements made to the original technology which has been incorporated into
the SmartTrack product. Video also has received a corresponding European patent
and eleven foreign country patents. We intend to seek patent protection on
specific aspects of the SentryVision system, as well as for certain aspects of
new systems which may be developed for Video. There can be no assurance that
any patents applied for will be issued, or that the patents currently held, or
new patents, if issued, will be valid if contested or will provide any
significant competitive advantage to Video.
We are not aware of any infringement of patents or intellectual property
held by third parties. However, if Video is determined to have infringed on the
rights of others, Video and/or the Company may be required to obtain licenses
from such other parties. There can be no assurance that the persons or
organizations holding desired technology would grant licenses at all or, if
licenses were available, that the terms of such licenses would be acceptable to
the Company. In addition, we could be required to expend significant resources
to develop non-infringing technology.
Video has also relied on the registration of trademarks and trade names, as
well as on trade secret laws and confidentiality agreements with its employees.
While we intend to continue to seek to protect Video's proprietary technology
and developments through patents, trademark registration, trade secret laws and
confidentiality agreements, we do not rely on such protection to establish and
maintain Video's position in the marketplace. Management believes that
improvement of Video's existing products, reliance upon trade secrets and on
unpatented proprietary know-how, and the development of new products will be as
important as patent protection in establishing and maintaining a competitive
advantage.
Knogo
- -----
Knogo has 28 United States and Canadian patents and one patent applications
relating to (i) the method and apparatus for the detection of movement of
articles and persons and accessory equipment employed by Knogo in its Knoscape
RF , Ranger and Knoscape MM systems, (ii) various specific improvements used
in the Knoscape RF , Ranger and Knoscape MM systems and (iii) various
electrical theft detection methods, apparatus and improvements not presently
used in any of Knogo's EAS systems.
Sensormatic and Knogo license certain patent rights and technology to each
other, for use in their respective territories, pursuant to the License
Agreement dated December 29, 1994, entered into in connection with the 1994
Sensormatic transaction.
RESEARCH AND DEVELOPMENT
At December 31, 2001, Sentry had 6 employees located in the United States
engaged full-time in research and engineering and product development. Under our
relationship with Dutch A&A, we receive benefit from R&D activities of Dutch A&A
subsidiaries, which is expected to leverage our research and development
expenditures particularly in the area of EAS and RFID products. In addition, we
may from time to time retain consultants for specific project assistance. For
the years ended December 31, 2001, 2000 and 1999, approximately $0.6 million,
$0.9 million and $1.3 million, respectively, was expended on Company-sponsored
research.
Responding to high numbers of service calls for systems in the field, the
majority of our research and development expenditures in 2000 was directed
towards improving the reliability and performance of the SentryVision product
line. Enhancements were made to the mechanical, electrical and optical portions
of the system. These changes were so significant that they led to the design of
a completely new product called SmartTrack. Extensive software enhancements
were built in to provide programmability, user friendliness and field service
diagnostics.
The mechanical aspects of the systems were designed around one or two 360
pan, tilt and zoom camera modules. Electronics were redesigned for easier
serviceability. Reliability and video quality were also improved.
SmartTrack was field tested in the fourth quarter of 2000 and full
production of this new system began in the third quarter of 2001. SmartTrack
will replace earlier generations in our line of Sentry Vision products.
In addition to the creation of SmartTrack, our engineers worked on
continued enhancements to our Magnetic EAS systems during 2001.
REGULATION
Because Knogo's EAS systems and Video's surveillance and CCTV systems use
radio transmission and electromagnetic wave principles, such systems are subject
to regulation by the Federal Communications Commission ("FCC") under the
Communications Act of 1934. In those instances where it has been required,
certification of such products by the FCC has been obtained. As new products
are developed by the Company, application will be made to the FCC for
certification or licensing when required. No assurance can be given that such
certification or licensing will be obtained or that current rules and
regulations of the FCC will not be changed in an adverse manner.
Sentry's business plan calls for the sale and use of Sentry's products in
domestic markets and, where consistent with contractual obligations, in
international markets. Sentry's products may be subject to regulation by
governmental authorities in various countries having jurisdiction over
electronic and communication use. Sentry intends to apply for certification of
its products to comply with the requirements under the regulations of the
countries in which it plans to market its products. No assurance can be given
that such certification will be obtained or that current rules and regulations
in such countries will not be changed in a manner adverse to Sentry.
We believe we are in material compliance with applicable United States,
state and local laws and regulations relating to the protection of the
environment.
Industry Canada, the department of the Canadian federal government that
regulates and licenses the radio frequency spectrum in Canada, has brought to
our attention that several hundred of the units of the earlier generation of
Ranger 1 and 2 EAS devices sold by our Knogo subsidiary to retailers in Canada
do not comply with the relevant Industry Canada technical standards, and may
cause interference to other users of the radio spectrum. Industry Canada has
written to the customers concerned to apprise them of the situation, and to
demand that the non-compliant devices be removed or replaced with compliant
ones. The Company has been working with Industry Canada officials and the
retailers concerned to put in place a replacement program and a schedule that
will satisfy both the retailers and Industry Canada. A majority of these
retailers have subsequently upgraded to compliant EAS devices, and discussions
are continuing with others. Under the Radiocommunication Act (Canada) (the
"Act") which it administers, Industry Canada has extensive powers to, among
other measures, confiscate radio equipment that is non-compliant, and to
initiate prosecutions for alleged violations of the regulatory provisions in the
Act. However, Industry Canada's normal practice is to use co-operative
approaches to problems of technical non-compliance or radio interference, and to
work with the parties concerned to resolve such problems within a reasonable
time frame. As a result of our continuing efforts in co-operating with Industry
Canada, we believe that the few remaining issues relating to the Ranger 1
and 2 problems will be resolved in 2002.
EMPLOYEES
At December 31, 2001, the Company and its subsidiaries employed 130
full-time employees, of whom 20 were employed in administrative and clerical
capacities, 6 in engineering, research and development, 32 in production, in 23
marketing and sales and 49 in customer service and support. None of our
employees are employed pursuant to collective bargaining agreements. We believe
that our relations with employees are good.
Item 2. Properties.
- ------- ----------
The Company's principal executive, sales and administrative offices, and
its production, research and development and distribution facilities are located
in Hauppauge, New York, in a 68,000 square foot facility leased by the Company.
At December 31, 1998, we owned a 55,000 square foot manufacturing facility in
Cidra, Puerto Rico and a one-story building consisting of approximately 6,000
square feet in Villa Park, Illinois. Both facilities were sold in February
1999.
Item 3. Legal Proceedings.
- ------- ------------------
Although we are involved in ordinary, routine litigation incidental to our
business, we are not presently a party to any other legal proceeding, the
adverse determination of which, either individually or in the aggregate, would
be expected to have a material adverse affect on the Company's business or
financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- -----------------------------------------------------------
During the fourth quarter of the fiscal year ended December 31, 2001, there
were no matters submitted to a vote of the Company's security holders, through
the solicitation of proxies or otherwise.
PART II
-------
Item 5. Market for the Company's Common Equity and Related Stockholder
- ------- -------------------------------------------------------------------
Matters.
- -------
(a) Price Range of Common Stock.
The following table sets forth, for the periods indicated, the high, low
and closing sales prices per share of common stock as reported on the American
Stock Exchange composite tape until March 31, 2000 and thereafter as reported on
the over-the-counter bulletin board.
Stock Prices
------------
High Low Close
---- --- -----
2000
First Quarter $ 0.688 $ 0.156 $ 0.250
Second Quarter 0.500 0.063 0.094
Third Quarter 0.250 0.063 0.141
Fourth Quarter 0.250 0.045 0.063
2001
First Quarter $ 0.093 $ 0.040 $ 0.045
Second Quarter 0.210 0.045 0.125
Third Quarter 0.200 0.080 0.110
Fourth Quarter 0.255 0.100 0.150
2002
First Quarter $ 0.220 $ 0.130 $ 0.130
(through March 27, 2002)
Effective March 31, 2000, the Company's Common and Class A Preferred Stocks
were delisted from trading on the American Stock Exchange (Amex), because the
Company did not satisfy the current Amex guidelines for continued listing. The
Company's Common Stock is now quoted on the OTC Bulletin Board ("OTCBB") using
the symbol SKVY. The Company's Class A Preferred Stock ("SKVYP") traded on the
OTCBB prior to its redemption effective January 8, 2001.
(b) Holders of Common Stock.
The Common Stock began trading on the American Stock Exchange on February
13, 1997 under the symbol "SKV." Prior to such date, no public market for the
Common Stock existed. As of March 27, 2002, the Company had 61,542,872 shares
of Common Stock issued and outstanding, which were held by 256 holders of record
and approximately 2,900 beneficial owners.
(c) Dividends.
The payment of future dividends will be a business decision to be made by
the Board of Directors of Sentry from time-to-time based upon the results of
operations and financial condition of Sentry and such other factors as the Board
of Directors considers relevant. Sentry has not paid, and does not presently
intend to pay or consider the payment of, any cash dividends on the Common
Stock. In addition, covenants in the Company's credit agreement prohibit the
Company from paying cash dividends without the consent of the lender.
(d) Redemption of Class A Preferred Stock.
At a special meeting of shareholders held on December 8, 2000, a proposal
was adopted to pay a one-time stock dividend of .075 of a share of preferred
stock to preferred stockholders on the effective date of the Dutch A&A
investment, and immediately thereafter each share of preferred stock was
reclassified into five shares of common stock. The Dutch A&A investment took
place on January 8, 2001, at which time the preferred shares were reclassified
into 28,666,660 shares of common stock.
For additional information with respect to the Class A Preferred Stock, see
Note 1 to the Consolidated Financial Statements.
Item 6. Selected Financial Data
- ------- -------------------------
The table below sets forth selected consolidated historical financial data
of the Company for the years ended December 31, 1997, 1998, 1999, 2000 and 2001.
This consolidated financial data includes certain assets and liabilities of
Knogo, on a historical basis, relating to Knogo's operations in the United
States, Canada and Puerto Rico prior to February 12, 1997 and includes the
results of operations of Video Sentry after that date. The selected
consolidated historical financial data should be read in conjunction with the
audited Consolidated Financial Statements of the Company included in Item 8 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7.
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Years Ended December 31, . . . . . . . . . . . . . . . . . . . . . 1997 1998 1999 2000 2001
--------- -------- --------- --------- --------
SELECTED STATEMENT OF OPERATIONS DATA:
Sales, service, rentals and other . . . . . . . . . . . . . . . . $ 21,996 $26,364 $ 20,198 $ 18,259 $17,212
Sales to Sensormatic. . . . . . . . . . . . . . . . . . . . . . . 2,570 1,792 2,083 1,606 87
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . 24,566 28,156 22,281 19,865 17,299
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 12,882 14,412 14,339 11,120 8,879
Customer service expenses . . . . . . . . . . . . . . . . . . . . 4,772 6,253 5,457 4,464 4,361
Selling, general and administrative
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 9,629 10,118 9,169 7,576 5,773
Purchased in-process research and
development . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,200 - - - -
Restructuring and impairment charges. . . . . . . . . . . . . . . - - 3,026 2,981 -
Gain on sale of assets. . . . . . . . . . . . . . . . . . . . . . - - 503 - -
Loss before income taxes . . . . . . . . . . . . . . . . . . . . (17,743) (4,483) (11,034) (7,821) (2,911)
Loss before cumulative effect
of change in accounting principal . . . . . . . . . . . . . (17,917) (4,504) (11,034) (7,821) (2,911)
Cumulative effect of change in accounting principal . . . . . - - - 301 -
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,917) (4,504) (11,034) (8,122) (2,911)
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . 1,067 1,263 1,326 1,337 25
Return to common shareholders from redemption of preferred stock. - - - - 27,198
Net income (loss) available to
common shareholders . . . . . . . . . . . . . . . . . . . . . . . (18,984) (5,767) (12,360) (9,459) 24,262
Net income (loss) per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.08) (0.59) (1.27) (0.97) 0.40
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.08) (0.59) (1.27) (0.97) 0.39
As of December 31, . . . . . . . . . . . . . . . . . . . . . . . . 1997 1998 1999 2000 2001
--------- -------- --------- --------- --------
SELECTED BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,415 $12,668 $ 6,290 $ 2,173 $ 2,235
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 35,937 33,496 22,007 13,845 11,561
Property, plant and equipment, net. . . . . . . . . . . . . . . . 6,948 4,348 3,934 3,324 2,962
Obligations under capital leases. . . . . . . . . . . . . . . . . 3,313 3,241 3,058 2,892 2,751
Redeemable cumulative preferred stock . . . . . . . . . . . . . . 25,254 26,517 27,843 29,180 -
Total common shareholders' equity (deficit) . . . . . . . . . . . 1,792 (3,975) (16,335) (25,794) 2,891
Item 7. Management's Discussion and Analysis of Financial
- ------- ------------------------------------------------------
Condition and Results of Operations.
---------------------------------------
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial position and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates. Management believes that the critical accounting policies
and areas that require the most significant judgments and estimates to be used
in the preparation of the consolidated financial statements are allowance for
doubtful accounts, inventory obsolescence and accrued warranty.
Allowance for Doubtful Accounts -- We maintain an allowance for doubtful
trade accounts receivable for estimated losses resulting from the inability of
our customers to make required payments. In determining collectibility, we
review available customer financial statement information, credit rating reports
as well as other external documents and public filings. When it is deemed
probable that a specific customer account is uncollectible, that balance is
included in the reserve calculation. Actual results could differ from these
estimates under different assumptions.
Inventory Obsolescence - We write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those we project, additional inventory write-downs may be
required.
Accrued Warranty - We provide for the estimated cost of product warranty at
the time revenue is recognized. We calculate the reserve utilizing historical
product failure rates and service repair costs by product family. These rates
are reviewed and adjusted periodically. We utilize judgment for estimating these
costs and adjust our estimates as actual results become available.
Related Party Transactions -- Details of related party transactions are
included in Item 13 of this Form 10-K.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Consolidated revenues were 13% lower in the year ended December 31, 2001
than in the year ended December 31, 2000. Our overall domestic revenues
continued to be impacted by the soft economic environment resulting in a
slowdown or delay in new retail store openings of some of our customers. As
part of our reorganization of our sales department, more than one-third of our
account executives were terminated by June 2001. Following the release to the
sales force in September of the new SmartTrack traveling camera system, we were
able to hire qualified replacements in the middle of the fourth quarter. In
addition, some large contracts expected earlier in the last quarter of the year
were not received until the latter part of December 2001, delaying revenue
recognition until the installations could be completed in 2002. The backlog of
orders, which we expect to deliver within twelve months, increased to $6.0
million at December 31, 2001 as compared to $5.8 million at December 31, 2000.
Also Sensormatic stopped ordering EAS OEM equipment resulting in a $1.5 million
reduction of revenues. Total revenues for the periods presented are broken out
as follows:
2001 2000 Change
----------------------- -------
(in thousands)
EAS . . . . . . . . . . . . . . . . . .$ 5,600 $ 7,545 (26%)
CCTV. . . . . . . . . . . . . . . . . . 4,833 5,340 (9%)
SentryVision. . . . . . . . . . . . . . 1,772 1,713 3%
3M library products . . . . . . . . . . 622 1,103 (44%)
----------------------- -------
Total sales . . . . . . . . . . . . . . 12,827 15,701 (18%)
Service, installation and other . . . . 4,472 4,164 7%
----------------------- -------
Total revenues. . . . . . . . . . . . .$ 17,299 $19,865 (13%)
======================= =======
The decline in EAS sales in 2001 is primarily a result of lower OEM sales
to Sensormatic and lower sales to one of our major customers. We do not
currently expect an increase in sales to Sensormatic in the future. The decline
in CCTV was primarily related to a decrease in sales to the same customer. We
are encouraged by the increase in SentryVision SmartTrack sales which gained
momentum since the product was released to production in September 2001. Part
of our sales strategy was to offer system trials to new and existing customers
under a "Test-A-Track" program. Under this program, we install a system on a
nominal cost trial basis. At the end of the trial, if satisfied, the customer
purchases the system. To date, we have received only positive feedback from our
customers on the features and reliability of SmartTrack resulting in new sales
opportunities. In addition, we have offered new SmartTrack carriage upgrades to
existing customers that result in lower revenue than new system sales. We have
been successful selling SmartTrack to several domestic and international
large-scale security dealer integrators with repeat order opportunities. We see
a growing trend for product acceptance and increased market opportunities for
traveling camera systems both domestically and internationally. Sales of 3M
library products declined as we focused our sales efforts on Sentry produced
products. Service revenues increased as a result of the higher installed
equipment base of systems no longer under warranty.
Cost of sales as a percentage of sales were 69% in 2001 as compared to 64%
in 2000, excluding special charges described below. Higher scrap and rework
costs and production inefficiencies due to reduced volume in our manufacturing
operations were the primary cause of the increase in the percentage in the
current year. In 2000, as part of our restructuring plan, we included in cost
of sales, special charges of $1.0 million primarily representing provisions for
obsolete or excess inventory. Those charges, in 2000, were a result of a
combination of the introduction of SmartTrack, which replaced earlier generation
SentryVision systems, and the substitution of certain Dutch A&A systems which
were expected to replace systems in our EAS product lines.
Customer service expenses decreased 2% in 2001 as compared to 2000 and the
department generated a small profit due primarily to the successful
implementation of a new service delivery model which included a reduction in the
number of our customer service representatives and increased use of trained and
qualified installation and service partners.
Selling, general and administrative expenses decreased 24% to $5.8 million
in 2001 from $7.6 million in 2000 primarily as a result of continuing cost
saving measures, reduced infrastructure, lower selling expenses due to reduced
sales and the elimination of the amortization of the goodwill, which was
written-off in 2000.
Research and development costs continued to decrease in 2001 when compared
to the previous year due to further consolidation of facilities. The primary
emphasis in the current year continued to be directed towards the completion of
the new SentryVision SmartTrack system, which was released to production at the
end of the third quarter. Additional savings were achieved through the shared
research and development activities with Dutch A&A as a result of their
investment.
Interest expense decreased by $0.1 million in 2001 over 2000 primarily due
to lower average borrowings under our revolving credit agreement and lower
interest rates.
In February 1997, we acquired the SentryVision product line through the
merger with Video Sentry Corporation and assigned a value of $4.4 million to its
patent and existing technology. At that time, we assigned a seven-year life to
the technology. After the merger, we encountered severe liquidity problems due
to declining sales of this premier product due to design faults, repeated
repairs and the customer's perception that SentryVision was a costly and
unreliable product. The cost of conventional CCTV products also declined during
that period and added features made these systems more competitive when compared
to SentryVision. In addition, several competitors, including the industry's
leader - Sensormatic, produced their own cable free traveling camera systems
that competed directly with us. We considered pursuing a claim for patent
infringement against Sensormatic, but have decided not to pursue the claim at
this time. We have made such significant changes from the original traveling
CCTV system acquired from Video Sentry that they have become the basis for a new
product, which we have named SmartTrack. With the development of the
SentryVision SmartTrack system completed in the fourth quarter of 2000, we
re-assessed the remaining carrying value of the intangible assets related to the
original SentryVision products. Based on our review of the technological
developments in the marketplace, we determined that the original traveling CCTV
surveillance system goodwill and related patents no longer provide us with a
competitive advantage, and as a result, we recorded an impairment charge in 2000
of approximately $3.0 million related to these assets. These impairment charges
were calculated by comparing future discounted net cash flows to the goodwill's
carrying value. Factors leading to the impairment were a combination of
historical losses and insufficient estimated future cash flows from the
SentryVision system.
Due to net losses, we have not provided for income taxes in either of the
periods presented. The book benefit for taxable losses generated in both periods
presented was offset by recording a full valuation allowance. Such valuation
allowance was recorded because management does not believe that the utilization
of the tax benefits from operating losses, and other temporary differences are
"more likely than not" to be realized, as required by accounting principles
generally accepted in the United States of America.
As a result of the foregoing, Sentry had a net loss of $2.9 million in the
year ended December 31, 2001 as compared to a net loss of $8.1 million in the
year ended December 31, 2000.
We recorded preferred stock dividends of $25,000 and $1.3 million in 2001
and 2000. In connection with the waiver of certain financial covenants under
the agreement with our commercial lender, we were not allowed to pay cash
dividends, including the cash dividend on our preferred stock which would
otherwise have been payable in August of 1999, February and August 2000. At a
special meeting of shareholders held on December 8, 2000, a proposal was adopted
to pay a one-time stock dividend of .075 of a share of Class A Preferred Stock
to preferred stockholders in lieu of accrued dividends on the effective date of
the Dutch A&A investment, and immediately thereafter to reclassify each share of
preferred stock into five shares of common stock. The Dutch A&A investment took
place on January 8, 2001. The reclassification of the Class A Preferred Stock
resulted in a return to the common shareholders of $27.2 million, which was
recorded in the first quarter of 2001. This amount represents the difference
between the fair market value of the common stock issued and the carrying amount
of the preferred stock redeemed.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Consolidated revenues were 11% lower in the year ended December 31, 2000
than in the year ended December 31, 1999. We anticipated some of the reductions
due to the downsizing of the sales and promotional budgets due to our fiscal
constraints. However, delays in the installation schedules of our major
customers also impacted reported revenues. The backlog of orders, which we
expect to deliver within twelve months, was $5.8 million at December 31, 2000
compared to $3.2 million at December 31, 1999. Revenues from third party
customers, other than Sensormatic, were 92% of total revenues in 2000 as
compared to 91% in 1999. Total revenues for the periods presented are broken
out as follows:
2000 1999 Change
------- ------- -------
(in thousands)
EAS . . . . . . . . . . . . $ 7,545 $ 8,982 (16%)
CCTV. . . . . . . . . . . . 5,340 6,035 (12%)
SentryVision. . . . . . . . 1,713 1,593 8%
3M library products . . . . 1,103 1,056 4%
------- ------- -------
Total sales . . . . . . . . 15,701 17,666 (11%)
Service revenues and other. 4,164 4,615 (10%)
------- ------- -------
Total revenues. . . . . . . $19,865 $22,281 (11%)
======= ======= =======
The decline in EAS sales in 2000 was a result of lower sales of our
magnetic products and lower OEM sales to Sensormatic. The decline in CCTV was
primarily related to a decrease in sales to one of our major customers. While
we had improved SentryVision's reliability and performance through technical
modifications, it was still plagued by ongoing customer perception issues which
resulted in no substantial sales increases.
Cost of sales as a percentage of sales were 64% in 2000 as compared to 69%
in 1999, excluding special charges described below. Lower scrap and rework
costs relating to the SentryVision product line and better production
efficiencies in our manufacturing operations were the primary cause of the
decrease in the percentage in the current year. In addition, as part of our
restructuring plan initiated in 1999, and in line with our future business
plans, Sentry included in cost of sales, special charges of $1.0 million in 2000
and $2.1 million in 1999. These amounts primarily represented provisions for
obsolete or excess inventory. In 2000, the charges were a result of a
combination of the introduction of SmartTrack which will replace earlier
generation SentryVision systems and the substitution of certain Dutch A&A
systems which will replace systems in our EAS product lines. In 1999, the
charges were required as a result of modifications and upgrades made to the
Company's various product lines.
Customer service expenses decreased 18% in 2000 as compared to 1999 due
primarily to a reduction in the number of customer service representatives as a
result of our restructuring of operations, which took place at the end of 1999.
Selling, general and administrative expenses decreased 17% to $7.6 million
in 2000 from $9.2 million in 1999 primarily as a result of the savings from a
reduced infrastructure, lower sales promotion expenses and lower amortization of
goodwill.
Research and development costs were 33% lower in 2000 when compared to the
previous year due to a 50% reduction in headcount and a more focused effort on
product support. The primary emphasis in the current year has been directed
towards the development of the new SentryVision SmartTrack system.
Interest expense increased by $0.1 million in 2000 over 1999 primarily due
to higher average borrowings under the Company's revolving credit agreement and
higher interest rates.
During the first quarter of 1999, the Company sold its Puerto Rico
manufacturing facility and Illinois design center for net cash proceeds of
approximately $2.2 million that resulted in a net gain on the sale of $0.5
million.
In 2000, we recorded an impairment charge of approximately $3.0 million
related to the carrying value of goodwill from the merger with Video Sentry more
fully referred to above. These impairment charges were calculated by comparing
future discounted net cash flows to the goodwill's carrying value. Factors
leading to the impairment were a combination of historical losses and
insufficient estimated future cash flows from the SentryVision system.
During the fourth quarter of 1999, faced with continued losses and sales of
the original SentryVision below projected levels, we undertook significant
downsizing and operational changes, which resulted in restructuring and special
charges of $3.0 million. These charges included involuntary termination costs
of $0.6 million and workforce reductions of approximately 23% across almost all
operating departments. In addition, we incurred non-cash charges of $2.4
million related to a write-down of goodwill based on revised estimates of future
sales of the original SentryVision product.
Due to net losses, we have not provided for income taxes in either of the
periods presented.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. In accordance with SAB 101, we have changed our accounting method
for recognizing revenue on the sale of equipment where post-shipment obligations
exist. Previously, we recognized revenue for equipment when title transferred,
generally upon shipment. Beginning with the first quarter of year 2000, we began
recognizing revenue when installation is complete or other post-shipment
obligations have been satisfied. The cumulative effect of the change in
accounting method is a non-cash reduction in net earnings of $0.3 million, or
$0.03 per share.
As a result of the foregoing, Sentry had a net loss of $8.1 million in the
year ended in December 31, 2000 as compared to a net loss of $11.0 million in
the year ended December 31, 1999.
We recorded preferred stock dividends of $1.3 million in both 2000 and
1999. Dividends accrued through February 12, 1999 were paid-in-kind as of that
date.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the continued reduced revenue levels, continuing losses and
potential cash flow deficiencies, we initiated actions in 1999 which included,
among others, (a) reducing the number of employees, (b) attempting to improve
our working capital, (c) closing and/or consolidating some of our facilities,
(d) consolidating some administrative functions, and (e) evaluating certain
business lines to ensure that our resources are deployed in the most profitable
operations. Our initial efforts to rationalize our operations commenced in the
fourth quarter of 1999. Through 2000, the results of these efforts were not
sufficient to prevent significant operating losses. During 2000, we primarily
funded our operations through borrowings under our revolving credit facility,
including an amendment to our borrowing base formula that provided for increased
availability by up to $0.5 million through 2000, with periodic reductions until
July 2001 when the excess facility expired. We were increasingly dependent upon
future transactions, including the timely release of backlog orders from
customers and subsequent cash collections, in order to generate sufficient cash
flows and return to profitability. We had sold all available assets to raise
cash to finance our operations. We were, therefore, increasingly dependent on
borrowings under our revolving credit facility to finance our cash requirements.
To strengthen our financial position, we continued to solicit other
businesses within the security industry to ascertain the level of interest in a
possible joint venture or equity investment. Since October of 1999, several
parties had indicated interest in investment or merger with our company. In
February 2000 we began discussions with Dutch A&A about a possible transaction.
After many discussions and the exchange of information, we announced on August
8, 2000 that we had entered into an agreement pursuant to which Dutch A&A would
invest $3 million in newly issued shares of our common stock. For this
investment, Dutch A&A would receive 37.5% of our common stock then outstanding
on a fully-diluted basis, after giving effect to the reclassification of our
preferred stock into common stock. In addition, Dutch A&A has the right to
acquire additional shares during the two year period following the closing, up
to an aggregate holding of 60% of the common stock then outstanding. Currently,
under the terms of the share purchase agreement, Dutch A&A has the right to
acquire 51% of the common stock. The transaction was conditioned upon our
shareholders' approval, including approval by our preferred and common
stockholders, each voting as a class, to amend our certificate of incorporation
to: (i) permit the payment of a dividend of additional shares of Class A
Preferred Stock at a rate of 0.075 shares of Class A Preferred Stock for each
share of Class A Preferred Stock held; and (ii) to reclassify the Class A
Preferred Stock into shares of common stock at a ratio of five shares of common
stock for each share of Class A Preferred Stock outstanding, and (iii) to
increase the number of the authorized shares of common stock to 140,000,000. At
the Special Meeting held on December 8, 2000, the shareholders approved these
amendments.
On January 8, 2001, Dutch A&A acquired 23,050,452 shares of our common
stock for $3.0 million, $1.0 million of which was paid in January 2001, and the
remaining balance paid in equal $1.0 million installments on April 30, 2001 and
August 31, 2001. Concurrent with the share purchase agreement, we entered into a
distribution agreement with Dutch A&A allowing us access to new products of
Dutch A&A and allowing Dutch A&A access to our products for a period of no less
than three years. The consummation of this transaction has substantially
enhanced our liquidity and financial condition.
To further address the continuing losses, our business plan for 2002
includes the following:
- - Addition of new products, including high-end EAS systems and disposable
tags and labels, proximity access control and RFID, through our distribution
agreement with Dutch A&A.
- - Increased promotion of SmartTrack, our new entry in the SentryVision
family of products.
- - Strengthening our international dealer network with new and more
financially stronger business partners.
- - Sharing of marketing resources, and research and development, with Dutch
A&A.
- - Joint participation with Dutch A&A in trade show activity and a refocus on
expanding business with existing customers.
- - Continuation and expansion of our Service Partner program to augment
service provided by our employees.
- - Further subletting of office space in our corporate offices.
- - Additional cost cutting measures.
We have a revolving credit facility with GE Capital Corporation that
permits us to borrow up to $8 million, subject to availability, under a
borrowing formula based on accounts receivable and inventories. The credit
agreement, which was due to expire on December 31, 2001, was extended through
March 31, 2002. The facility is secured by a lien on substantially all of our
assets. At December 31, 2001, we had borrowings of approximately $2.6 million,
the maximum amount available under the facility. On February 21, 2002, we
signed a commitment letter for a new revolving credit facility with CIT Business
Credit. The amount of the facility and the terms are substantially the same as
the expiring facility. We closed on the new facility on March 22, 2002. The
new facility is for a period of three years expiring on March 22, 2005.
We will require liquidity and working capital to finance increases in
receivables and inventory associated with sales growth and, to a lesser extent,
for capital expenditures. We had no material capital expenditure or purchase
commitments as of December 31, 2001.
We believe that current cash reserves and cash generated by operations,
together with borrowings under the new revolving credit facility, will be
sufficient to meet our working capital and future capital expenditure
requirements over the next twelve months.
We will require positive cash flow from operations to meet our working
capital needs over the next twelve months. In the event that positive cash flow
from operations is not generated, we may be required to seek additional
financing to meet working capital needs. We anticipate revenue growth in new
and existing markets. We are striving to improve our gross margin and control
our selling expenses and our general and administrative expenses. There can be
no assurance, however, that changes in our plans or other events affecting our
operations will not result in accelerated or unexpected cash requirements, or
that we will be successful in achieving positive cash flow from operations or
obtaining financing. Our future cash requirements are expected to depend on
numerous factors, including, but not limited to; (i) the ability to generate
positive cash flow from operations, and the extent thereof, (ii) the ability to
raise additional capital or obtain additional financing, and (iii) economic
conditions. In the event that sufficient positive cash flow from operations is
not generated, we may need to seek additional financing from Dutch A&A or to
others to satisfy potential operating cash flow deficiencies.
The table below summarizes aggregate maturities of future minimum lease
payments under noncancelable operating and capital leases as of December 31,
2001.
Contractual Less than 1-3 4-5 After 5
Obligations Total 1 Year Years Years Years
(In Thousands)
Operating Leases $ 2,328 $ 155 $ 465 $ 310 $ 1,398
Capital Leases 5,623 351 1,138 752 3,382
------ ----- ------ ------ --------
Total $ 7,951 $ 506 $1,603 $1,062 $ 4,780
======= ===== ====== ====== ========
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 is effective for
all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated in a fair value hedge, the
changes in the fair value of the derivative and the hedged item is recognized in
earnings. If the derivative is designated in a cash-flow hedge, changes in the
fair value of the derivative is recorded in other comprehensive income and is
recognized in the income statement when the hedged item affects earnings. SFAS
No. 133 defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that does not qualify as a hedge, changes in fair
value are recognized in earnings. We adopted SFAS No. 133 on January 1, 2001
and the implementation did not have a material impact on our consolidated
financial statements.
In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations." SFAS No.
141 applies prospectively to all business combinations initiated after June 30,
2001 and to all business combinations accounted using the purchase method for
which the date of acquisition is July 1, 2001, or later. This statement requires
all business combinations to be accounted for using one method, the purchase
method. Under previously existing accounting rules, business combinations were
accounted for using one of two methods, the pooling-of-interests method or the
purchase method. The adoption of SFAS No. 141 did not have a material impact on
our financial statements.
In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Under SFAS No. 142, goodwill and some
intangible assets will no longer be amortized, but rather reviewed for
impairment on a periodic basis. The provisions of this Statement are required to
be applied starting with fiscal years beginning after December 15, 2001. This
Statement is required to be applied at the beginning of the Company's fiscal
year and to be applied to all goodwill and other intangible assets recognized in
its financial statements at that date. Impairment losses for goodwill and
certain intangible assets that arise due to the initial application of this
Statement are to be reported as resulting from a change in accounting principle.
Goodwill and intangible assets acquired after June 30, 2001, will be subject
immediately to the provisions of this Statement. The adoption of SFAS No. 142 is
not expected to have a material impact on our financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The adoption of SFAS No. 143
is not expected to have a material impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The adoption of SFAS No. 144 is not expected to have a material impact on our
financial statements.
INFLATION
The Company does not consider inflation to have a material impact on the
results of operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other sections of this Annual Report on Form
10-K contain "forward-looking statements" (as defined in the Private
Securities Litigation Reform Act of 1995 or the "PSLRA") that are based on
current expectations, estimates and projections about the industry in which
the Company operates, as well as management's beliefs and assumptions.
Words such as "expects," "anticipates" and "believes" and variations of
such words and similar expressions generally indicate that a statement is
forward-looking. The Company wishes to take advantage of the "safe harbor"
provisions of the PSLRA by cautioning readers that many important factors
discussed herein, among others, may cause the Company's results of
operations to differ from those expressed in the forward-looking
statements. These factors include: (i) the risk that any delay or
cancellation of orders from one or more of Sentry's two major customers may
have a material adverse effect on the Company's financial condition; (ii)
the risk that anticipated growth in the demand for the Company's products
in the retail, commercial and industrial sectors will not develop as
expected, whether due to competitive pressures in these markets or to any
other failure to gain market acceptance of the Company's products; (iii)
the risk that anticipated revenue growth through the domestic and
international dealers programs does not develop as expected; (iv) the risk
that the Company may not find sufficient qualified Service Partners to
provide future installation services; (v) the risk that the Company will
not be able to retain key personnel due to its current financial condition
(vi) the risk that the borrowing availability under the new credit facility
will not be adequate to meet the Company's growth requirements and (vii)
the risk arising from the large market position and greater financial and
other resources of Sentry's principal competitors, as described under "Item
1. Business-Competition."
Item 8. Financial Statements and Supplementary Data.
- ------- -----------------------------------------------
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- -------------------
PAGE
INDEPENDENT AUDITORS' REPORT 30
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2001 and 2000 31
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999 32
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999 33
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 34
Notes to Consolidated Financial Statements 35-49
SCHEDULE II - Valuation and Qualifying Accounts 50
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Sentry Technology Corporation
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Sentry
Technology Corporation and subsidiaries (the "Company") as of December 31, 2001
and 2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. Our audits also included the financial statement schedule listed in
the Index at item 14(a)(2). These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sentry Technology Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Jericho, New York
March 22, 2002
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
2001 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 423 $ 927
Accounts receivable, less allowance for doubtful accounts
of $763 and $890, respectively. . . . . . . . . . . . . . . . 2,713 3,178
Net investment in sales-type leases - current portion . . . . . 61 84
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 4,740 5,274
Prepaid expenses and other current assets . . . . . . . . . . . 338 202
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . . 8,275 9,665
NET INVESTMENT IN SALES-TYPE LEASES - Noncurrent portion. . . . . 35 100
SECURITY DEVICES ON LEASE - Net . . . . . . . . . . . . . . . . . 11 36
PROPERTY, PLANT AND EQUIPMENT - Net . . . . . . . . . . . . . . . 2,962 3,324
INTANGIBLES, including patent costs,
less accumulated amortization of $296 and $298, respectively. . 234 247
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . 44 473
--------- ---------
$ 11,561 $ 13,845
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit. . . . . . . . . . . . . . . . . . . . $ 2,599 $ 2,920
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 1,153 1,463
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 1,864 2,633
Obligations under capital leases - current portion. . . . . . . 121 124
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . 303 352
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . 6,040 7,492
OBLIGATIONS UNDER CAPITAL LEASES - Noncurrent portion . . . . . . 2,630 2,768
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY. . . . . . . . . . . - 199
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 8,670 10,459
COMMITMENTS AND CONTINGENCIES (Notes 2, 10 and 15)
REDEEMABLE CUMULATIVE PREFERRED STOCK . . . . . . . . . . . . . . - 29,180
COMMON SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value; authorized 140,000 shares,
issued and outstanding 61,543 and 9,751 shares, respectively. 62 10
Additional paid-in capital. . . . . . . . . . . . . . . . . . . 44,403 12,859
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (41,574) (38,663)
--------- ---------
Total common shareholders' equity (deficit) . . . . . . . . 2,891 (25,794)
--------- ---------
$ 11,561 $ 13,845
========= =========
See notes to consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999
REVENUES:
Sales . . . . . . . . . . . . . . . . . . . . . . . $12,827 $15,701 $ 17,666
Service revenues and other. . . . . . . . . . . . . 4,472 4,164 4,615
-------- -------- ---------
17,299 19,865 22,281
-------- -------- ---------
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . . 8,879 11,120 14,339
Customer services expenses. . . . . . . . . . . . . 4,361 4,464 5,457
Selling, general and administrative expenses. . . . 5,773 7,576 9,169
Research and development. . . . . . . . . . . . . . 661 862 1,289
Restructuring and impairment charges (Note 20). . . - 2,981 3,026
Gain on sale of assets (Note 18). . . . . . . . . . - - (503)
-------- -------- ---------
19,674 27,003 32,777
-------- -------- ---------
OPERATING LOSS. . . . . . . . . . . . . . . . . . . . (2,375) (7,138) (10,496)
INTEREST EXPENSE. . . . . . . . . . . . . . . . . . . 536 683 538
-------- -------- ---------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT ON CHANGE IN ACCOUNTING PRINCIPLE. . . . . . (2,911) (7,821) (11,034)
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . - - -
-------- -------- ---------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE. . . . . . . . . . . (2,911) (7,821) (11,034)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE . . . . . . . . . . . . . . . . . . . . . - (301) -
-------- -------- ---------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . (2,911) (8,122) (11,034)
PREFERRED STOCK DIVIDENDS . . . . . . . . . . . . . . (25) (1,337) (1,326)
RETURN TO COMMON SHAREHOLDERS FROM
REDEMPTION OF PREFERRED STOCK . . . . . . . . . . . 27,198 - -
-------- -------- ---------
NET INCOME (LOSS) ATTRIBUTED TO
COMMON SHAREHOLDERS . . . . . . . . . . . . . . . . . $24,262 $(9,459) $(12,360)
======== ======== =========
NET INCOME (LOSS) PER COMMON SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
Basic . . . . . . . . . . . . . . . . . . . . . . $ 0.40 $ (0.94) $ (1.27)
======== ======== =========
Diluted . . . . . . . . . . . . . . . . . . . . . $ 0.39 $ (0.94) $ (1.27)
======== ======== =========
NET INCOME (LOSS) PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . . $ 0.40 $ (0.97) $ (1.27)
======== ======== =========
Diluted . . . . . . . . . . . . . . . . . . . . . $ 0.39 $ (0.97) $ (1.27)
======== ======== =========
WEIGHTED AVERAGE COMMON SHARES:
Basic . . . . . . . . . . . . . . . . . . . . . . 60,468 9,751 9,751
======== ======== =========
Diluted . . . . . . . . . . . . . . . . . . . . . 62,008 9,751 9,751
======== ======== =========
See notes to consolidated financial statements
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
RETAINED TOTAL REDEEMABLE
ADDITIONAL EARNINGS COMMON CUMULATIVE
COMMON STOCK PAID-IN (ACCUMULATED SHAREHOLDERS' PREFERRED
SHARES AMOUNT CAPITAL DEFICIT) EQUITY (DEFICIT) STOCK
BALANCE, JANUARY 1, 1999 . . . . . . . . . . . . 9,751 $10 $15,522 $(19,507) $ (3,975) $ 26,517
Net loss and comprehensive loss. . . . . . . . - - - (11,034) (11,034) -
Preferred stock di