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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12727
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SENTRY TECHNOLOGY CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 96-11-3349733
---------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 Wireless Boulevard, Hauppauge, New York 11788
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
631-232-2100
------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
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
-
As of November 14, 2002, there were 78,043,872 shares of Common Stock
outstanding.
SENTRY TECHNOLOGY CORPORATION
-----------------------------
INDEX
-----
Page No.
---------
PART I. FINANCIAL INFORMATION
- ---------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
September 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations --
Three Months Ended September 30, 2002 and 2001
and Nine Months Ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial
Statements - September 30, 2002 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
PART II. OTHER INFORMATION
- ------------------------------
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
- 2 -
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The Company's independent public accounting firm did not complete its review of
the condensed consolidated financial statements included herein prior to the
deadline for filing this Form 10-Q, as required by Rule 10-01(d) of Regulation
s-x promulgated under the Securities Exchange Act of 1934, as amended.
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2002 2001
--------------- --------------
ASSETS
- -------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 529 $ 423
Accounts receivable, less allowance for doubtful
accounts of $639 and $763, respectively. . . . . . . . . 1,899 2,713
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 3,721 4,740
Prepaid expenses and other current assets . . . . . . . . . 301 399
--------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . 6,450 8,275
PROPERTY, PLANT AND EQUIPMENT, net. . . . . . . . . . . . . . 2,674 2,962
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . 355 324
--------------- --------------
$ 9,479 $ 11,561
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------
CURRENT LIABILITIES
Revolving line of credit and term loan. . . . . . . . . . . $ 2,248 $ 2,599
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 2,191 1,153
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 1,510 1,864
Obligations under capital leases -
current portion. . . . . . . . . . . . . . . . . . . . . 112 121
Deferred income . . . . . . . . . . . . . . . . . . . . . . 421 303
--------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . 6,482 6,040
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion . . . . . . . . . . . . . . . . . . . . 2,578 2,630
--------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . 9,060 8,670
SHAREHOLDERS' EQUITY
Common stock. . . . . . . . . . . . . . . . . . . . . . . . 78 62
Additional paid-in capital. . . . . . . . . . . . . . . . . 44,521 44,403
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (44,057) (41,574)
Note receivable from shareholder (123) ---
--------------- --------------
Total shareholders' equity. . . . . . . . . . . . . . . . 419 2,891
--------------- --------------
$ 9,479 $ 11,561
=============== ==============
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,425 $ 4,329 $11,348 $13,004
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 1,884 2,219 5,591 6,713
Customer service expenses . . . . . . . . . . . . . . . . . 977 1,174 3,310 3,327
Selling, general and administrative expenses. . . . . . . . 1,389 1,417 4,139 4,334
Research and development. . . . . . . . . . . . . . . . . . 119 107 415 490
------ ------- -------- --------
4,369 4,917 13,455 14,864
------ ------- -------- --------
OPERATING LOSS. . . . . . . . . . . . . . . . . . . . . . . . (944) (588) (2,107) (1,860)
INTEREST EXPENSE. . . . . . . . . . . . . . . . . . . . . . . 104 129 376 412
------ ------- -------- --------
LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . . (1,048) (717) (2,483) (2,272)
INCOME TAXES --- --- --- ---
------ ------- -------- --------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,048) (717) (2,483) (2,272)
PREFERRED STOCK DIVIDENDS --- --- --- 25
RETURN TO COMMON SHAREHOLDERS FROM
REDEMPTION OF PREFERRED STOCK --- --- --- 27,198
------ ------- -------- --------
NET INCOME (LOSS) ATTRIBUTED TO
COMMON SHAREHOLDERS. . . . . . . . . . . . . . . . . . . $(1,048) $ (717) $(2,483) $24,901
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.01) $ (0.04) $ 0.41
======== ======== ======== ========
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.01) $ (0.04) $ 0.41
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,044 61,468 70,243 60,127
======== ======== ======== ========
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . 78,044 61,468 70,243 61,298
======== ======== ======== ========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
-----------------------------
2002 2001
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -----------------------------------------------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,483) $ (2,272)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 359 401
Provision for bad debts. . . . . . . . . . . . . . . . . . . (39) 41
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . 853 (310)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 1,019 902
Accounts payable and accrued liabilities . . . . . . . . . . 684 (1,177)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 190 80
-------------- -----------
Net cash provided by (used in) operating activities . . . . . 583 (2,335)
-------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net. . . . . . . . . (64) (67)
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . (12) (21)
-------------- -----------
Net cash used in investing activities . . . . . . . . . . . . (76) (88)
-------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under the revolving line of credit and term loan (351) (434)
Repayment of obligations under capital leases . . . . . . . . . (61) (109)
Proceeds from sale of stock, net. . . . . . . . . . . . . . . . 14 2,370
Receivable from stock sale (3) ---
-------------- -----------
Net cash provided by (used in) financing activities . . . . . (401) 1,827
-------------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . . . 106 (596)
CASH AND CASH EQUIVALENTS, at beginning of period . . . . . . . . 423 927
-------------- -----------
CASH AND CASH EQUIVALENTS, at end of period . . . . . . . . . . . $ 529 $ 331
============== ===========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
NOTE A -- Basis of Presentation
- ------------------------------------
Sentry Technology Corporation ("Sentry"), a Delaware Corporation, was
established to effect the merger of Knogo North America Inc. ("Knogo N.A.") and
Video Sentry Corporation ("Video Sentry") which was consummated on February 12,
1997 (the "Effective Date"). The merger resulted in Knogo N.A. and Video Sentry
becoming wholly- owned subsidiaries of Sentry. The consolidated financial
statements include the accounts of Sentry and its majority-owned subsidiaries.
All intercompany accounts and transactions have been eliminated in
consolidation.
The consolidated financial statements are unaudited. In the opinion of
management, all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of the financial information for the periods
indicated, have been included. Interim results are not necessarily indicative
of results for a full year. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in Sentry's Annual Report to Stockholders on Form 10-K for the fiscal
year ended December 31, 2001, as filed with the Securities and Exchange
Commission.
Certain prior period amounts have been reclassified to conform to current period
presentation.
NOTE B -- Investment by Dialoc ID Holdings B.V.
- -------------------------------------------------------
On January 8, 2001, Dialoc ID Holdings B.V. ("Dialoc ID"), formerly known as
Dutch A&A Holding, B.V., acquired 23,050,452 shares of our common stock for $3
million, of which $1 million was paid in January 2001, $1 million was paid on
April 30, 2001 and the remaining $1 million was paid on August 31, 2001. Dialoc
ID is a Netherlands company which, through its subsidiaries, is in the business
of development, manufacture, sale and distribution of various kinds of
identification, access control and anti-theft electronic article surveillance
systems and accessories. Concurrent with the share purchase agreement, the
Company entered into a distribution agreement with Dialoc ID allowing the
Company access to new products of Dialoc ID and allowing Dialoc ID access to the
Company's products for an initial period of not less than two years.
As of January 8, 2001, Dialoc ID owned 37.5% of the Company's outstanding common
stock. Under the share purchase agreement, at any time prior to January 8,
2002, Dialoc ID 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 10-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 would be
determined by multiplying the actual number of shares to be purchased by $.001.
In November 2001, this market capitalization threshold was met. At that time,
our Board of Directors agreed to extend Dialoc ID's purchase right until January
8, 2003 in exchange for an extension of the distribution agreement for one year.
On May 14, 2002, Dialoc ID exercised their right to purchase 14,500,000
additional common shares at a price of $.001 per share. Currently, Dialoc ID
owns 48.1% of the Company's common stock. Further, the share purchase agreement
provides that at any time prior to January 8, 2003, Dialoc ID may increase its
ownership of the Company's common stock to a total of 60% of the shares of
common stock then outstanding. The purchase price for the additional shares
shall be determined as follows: If the average market value of the common stock,
measured over a 10-day period during the two years preceding January 8, 2003, is
at least $25 million, the purchase price shall be determined by multiplying the
actual number of shares to be purchased by $.001. If the average market value
test is not met at the time of the second purchase, then the purchase price
shall be $3.5 million. As a condition to the investment by Dialoc ID, the
Company's stockholders elected three nominees of Dialoc ID to the Board of
Directors at a Special Meeting of Stockholders on December 8, 2000. If Dialoc
ID has not acquired 51% of the Company's common stock by January 8, 2003, one of
the three nominees of Dialoc ID will resign and be replaced, with the consent of
Dialoc ID, by a nominee of the Company's directors who is not nominated by
Dialoc ID.
In addition to the election of three nominees of Dialoc ID to the Board of
Directors, other matters which were approved at the December 8, 2000 Special
Meeting of Stockholders and became effective on January 8, 2001 were amendments
to the Company's certificate of incorporation to: (i) permit the payment of a
dividend of additional shares of Class A Preferred Stock at the rate of 0.075
shares of Class A Preferred Stock for each share of Class A Preferred Stock
held; (ii) to reclassify Class A Preferred Stock into shares of common stock on
a ratio of five shares of common stock for each share of Class A Preferred Stock
outstanding; and (iii) to increase the number of the Company's authorized shares
of common stock to 140,000,000. As a result of the dividend and
reclassification, 28,666,660 common shares were issued to former Class A
Preferred shareholders.
The reclassification of the Class A Preferred Shares 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.
NOTE C -- Financial Condition and Liquidity
- -------------------------------------------------
We have incurred reduced revenue levels, decreased financial position and
recurring operating losses over the past several years. To strengthen our
financial position, a number of activities have been initiated including:
- - Entering into a new three-year financing agreement.
- - Signing of a distribution agreement with Dialoc ID providing us with
access to new products and shared technologies.
- - Improvements in existing products and service capabilities.
- - Additions to direct sales staff and emphasis on growing international
dealer base.
- - Various cost cutting and cost saving initiatives.
We will require positive cash flow from operations to meet our working capital
needs over the next twelve months. We anticipated receiving significant
additional purchase orders from specific customers during the first nine months
of 2002. While we continue to believe that these purchase orders will
eventually be received, the delays we have experienced have caused us to: (i)
operate in a cash flow deficit for the first ten months of the year; (ii) borrow
the maximum amounts available under our credit facility; and (iii) pursue
potential sources of debt or equity financing.
On October 10, 2002, we entered into a purchase order financing facility with
EPK Financial Corporation ("EPK"). Funding entails EPK providing funds directly
to vendors to allow us to secure the inventory we need to fulfill customer
orders. Sentry's costs for each financing transaction will be equal to 3.5% of
Sentry's selling price, plus 1.85% on the maximum outstanding funded amount each
ten calendar days or portion thereof, until EPK is paid in full, plus expenses.
In connection with this facility, an Intercreditor Agreement was entered into
between EPK, CIT and Sentry. Under this agreement, CIT subordinated its rights
and interests in the collateral related to each transaction to EPK. Currently,
under the terms of the Intercreditors Agreement, the maximum amount subordinated
to EPK at any time is limited to $350,000. Sentry will use the funds provided
by EPK to fund vendor purchases to complete orders currently in backlog.
Through the first nine months of 2002, we were not successful in achieving
positive cash flow from operations and as a result, our payables to vendors are
substantially in excess of terms. Therefore, in October 2002, we retained the
New York investment banking firm of Balfour Capital Advisors, LLC to assist the
Company in conducting an organized search and evaluation regarding a possible
corporate transaction to gain access to greater resources and to exploit the
Company's products and technological advances. There can be no assurance,
however, that additional financing will be available on terms that are
satisfactory to the Company, or that any such financing will be sufficient to
provide the full amount of funding necessary.
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.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
NOTE D -- Revolving Line of Credit and Term Loan
- ---------------------------------------------------------
On March 22, 2002, we entered into a new three year revolving line of credit and
term loan with the CIT Group/Business Credit, Inc. ("CIT") for maximum
borrowings of $8 million, which are subject to certain limitations based on a
percentage of eligible accounts receivable and inventories as defined in the
agreement. Interest on the revolving line of credit is payable monthly at the
JPMorgan Chase Bank prime rate (4.75% at September 30, 2002), plus 2% per annum.
We are required to pay a commitment fee of 0.375% per annum on any unused
portion of the credit facility. Borrowings under the line are secured by
substantially all of our assets. The terms of the agreement, among other
matters, places restrictions on capital expenditures and prohibits the payment
of dividends. In addition, we entered into a $100,000 term loan with CIT. The
principal is currently being repaid to CIT in twelve equal monthly installments
of $8,333 beginning May 31, 2002. Interest on the term note is at the JPMorgan
Chase Bank prime plus 2.25%.
NOTE E -- Inventories
- ------------------------
Inventories consist of the following:
September 30, 2002 December 31, 2001
-------------------- -------------------
(in thousands)
Raw materials $ 850 $ 1,139
Work-in-process 496 520
Finished goods 2,375 3,081
--------- -----------
$ 3,721 $ 4,740
= ===== = =====
Reserves for excess and obsolete inventory totaled $3,138,000 and $3,497,000 as
of September 30, 2002 and December 31, 2001, respectively and have been included
as a component of the above amounts.
NOTE F -- Related Party Transactions
- -----------------------------------------
As a result of the Dialoc ID investment, Sentry entered into a distribution
agreement with Dialoc ID which contemplates a two-way distribution relationship
between the companies. Under the agreement, Sentry has the rights to sell
Dialoc ID's EAS, access control and RFID products and accessories and Sentry
gives Dialoc ID the rights to sell its EAS and CCTV products and accessories.
Pricing for products under the agreements are at the lowest prices charged to
affiliates. In addition, in 2001 Dialoc ID received an annual management fee
for product marketing and product engineering management from Sentry in the
amount of $100,000. Also, Peter Murdoch, a shareholder of Dialoc ID, receives
an annual salary of $150,000 in the capacity of President of Sentry. Purchases
from Dialoc ID were $3,000 and $50,000 in the quarters ended September 30, 2002
and 2001 and $13,000 and $136,000 in the nine month periods ending September 30,
2002 and 2001, respectively. Services and sales to Dialoc ID were $24,000 and
$3,000 in the quarters ended September 30, 2002 and 2001 and $37,000 and $39,000
in the nine month periods ended September 30, 2002 and 2001, respectively. The
net amount payable to Dialoc ID as of September 30, 2002 is $83,000.
In addition, on March 27, 2002, Peter Murdoch, our President and CEO, exercised
a stock option for two million shares of Sentry common stock at an exercise
price of $0.06 per share which was paid for through the issuance of a
promissory note in the amount of $120,000. The principal of the note is secured
by the option shares and is repayable no later than January 8, 2006. Mr.
Murdoch will not have any personal liability for the principal of the note if
the value of the option shares is not sufficient to repay the note. The note
bears interest at prime (currently 4.75%) less .75%. The note and accrued
interest has been reflected as a reduction of shareholders' equity on the
consolidated balance sheet.
NOTE G -- Recent Accounting Pronouncements
- -----------------------------------------------
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
did not 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. We are required to adopt the provisions of
SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 is not
expected to have a material impact on our financial statements.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This
statement provides guidance on the classification of gains and losses from the
extinguishment of debt and on the accounting for certain specified lease
transactions. Certain provisions of this statement related to the classification
of gains and losses from extinguishment of debt are required to be adopted by
the Company beginning with the year ended December 31, 2003. All other
provisions are required to be adopted after May 15, 2002 and early application
is encouraged. It is not anticipated that the adoption of this statement will
have a material impact on the consolidated financial position, consolidated
results of operations or liquidity of the Company.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and is effective for the Company on January 1, 2003. It is not anticipated that
the adoption of this statement will have a material impact on the consolidated
financial position, consolidated results of operations or liquidity of the
Company.
NOTE H -- Earnings Per Share
- ---------------------------------
The earnings per share calculations (basic and diluted) for the periods ended
September 30, 2002 and 2001 are based upon the weighted average number of common
shares outstanding during each period. There are no reconciling items in the
numerator of the earnings per share calculations in either of the periods
presented. Options and warrants have been excluded from the net loss per share
calculation for the third quarter and nine month period ended September 30, 2002
and for the third quarter ended September 30, 2001 because their effect would be
antidilutive. For the nine month period ended September 30, 2001, 1,171,000
options and warrants were included in the diluted earnings per share
calculation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain Factors That May Affect Future Results
- ----------------------------------------------------
Information contained or incorporated by reference in this periodic report on
Form 10-Q and in other SEC filings by Sentry contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof, other variations thereon or comparable terminology, or by
discussions of strategy. These forward-looking statements involve certain
significant risks and uncertainties, and actual results may differ materially
from the forward-looking statements. For further details and discussion of these
risks and uncertainties see Sentry Technology Corporation's SEC filings
including, but not limited to, its annual report on Form 10-K. No assurance can
be given that future results covered by the forward-looking statements will be
achieved, and other factors could also cause actual results to vary materially
from the future results covered in such forward-looking statements. We do not
undertake to publicly update or revise any of our forward-looking statements
even if experience or future changes show that the indicated results or events
will not be realized.
Results of Operations:
- ------------------------
Consolidated revenues were 21% and 13% lower in the quarter and nine months
ended September 30, 2002 than in the quarter and nine months ended September 30,
2001. Our overall domestic revenues continued to be impacted by the post
September 11 soft economic environment, resulting in a slowdown or delay in new
retail store openings of some of our customers. The backlog of orders at
September 30, 2002 was approximately $5.4 million as compared to approximately
$5.3 million at September 30, 2001. Total revenues for the periods presented
are broken out as follows:
Q-3 Q-3 % 9 Mos. 9 Mos. %
2002 2001 Change 2002 2001 Change
------- ------- ------- ------- ------- -------
(in thousands) (in thousands)
EAS. . . . . . . . . . . . . . . $ 676 $ 1,360 (50) $ 1,992 $ 4,327 (54)
CCTV . . . . . . . . . . . . . . 621 1,120 (45) 3,251 3,584 (9)
SentryVision . . . . . . . . . . 1,037 523 98 2,173 1,283 69
3M library products. . . . . . . 24 212 (89) 215 505 (57)
------- ------- ------ -------- ------- -------
Total sales. . . . . . . . . . . 2,358 3,215 (27) 7,631 9,699 (21)
Service, installation and other. 1,067 1,114 (4) 3,717 3,305 12
------- ------- ------ -------- ------- -------
Total revenues . . . . . . . . . $ 3,425 $ 4,329 (21) $ 11,348 $13,004 (13)
======= ======= ====== ======== ======= =======
Direct sales of EAS products were lower in both the third quarter and first nine
months of 2002 as compared to the same periods in the prior year primarily as a
result of lower sales to two of our largest EAS customers, which have opened
fewer new stores in 2002, and lower sales to our Mexican distributor. The
decrease in CCTV revenues and increase in SentryVision revenues is primarily a
result of a decision by our largest customer to resume purchasing our traveling
camera products in 16 existing store locations in the third quarter of 2002. We
continue to 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 due to delays in
customer's installations. Service revenues increased as a result of the higher
base of systems no longer under warranty but were offset by lower installation
revenues resulting from lower EAS and CCTV sales.
Cost of sales were 80% and 73% of total sales in the three and nine month
periods ended September 30, 2002 compared to 69% and 69% in the same periods of
the prior year. The increase costs as a percentage of sales in the 2002 periods
was primarily due to higher scrap and rework costs, the under absorption of
factory overhead resulting from lower production levels than in the previous
year, higher provisions for slow moving inventories.
Customer service expenses were 17% and 1% lower in the third quarter and first
nine months of 2002 than in the third quarter and first nine months of 2001
primarily due to lower installation costs resulting from lower revenue levels.
Selling, general and administrative expenses were 2% and 4% lower in the three
and nine month periods ended September 30, 2002 when compared to the same period
of the previous year primarily as a result of lower warranty costs and
reductions in office space.
Research and development costs were slightly higher in the third quarter of 2002
when compared to the third quarter of 2001 due to the development of SmartTrack
Remote. In the first nine months of 2002, costs were 15% less than the first
nine months of 2001 due to lower engineering prototype costs associated with
SmartTrack system development in 2001.
Net interest expense decreased due to lower average borrowings and lower
interest rates under our revolving credit agreement for the third quarter and
first nine months of 2002.
Due to net operating losses, we have not provided for income taxes in any of the
periods presented.
As a result of the foregoing, Sentry had a net loss of $1.0 and $2.5 million in
the quarter and first nine months ended September 30, 2002 as compared to a net
loss of $0.7 and $2.3 million in the quarter and nine month periods ended
September 30, 2001.
We recorded preferred stock dividends of $25,000 in the first quarter of 2001
prior to the redemption of the preferred stock on January 8, 2001.
Effective January 8, 2001, and just prior to the Dialoc ID investment, there was
a 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 and immediately thereafter a reclassification of the Class
A Preferred Stock into common stock at a ratio of five shares of common stock
for each share of Class A Preferred Stock outstanding. The reclassification of
the Class A Preferred Shares 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.
Liquidity and Capital Resources as of September 30, 2002
- ----------------------------------------------------------------
We have incurred reduced revenue levels, decreased financial position and
recurring operating losses over the past several years. To further address the
continuing losses, our business plan for 2002 includes the following:
- - Entering into a new three-year financing agreement.
- - Addition of new products, including high-end EAS systems and disposable
tags and labels, proximity access control and RFID, through our
distribution agreement with Dialoc ID.
- - Increased promotion of SmartTrack, our new entry in the SentryVision
family of products.
- - Partnering with Trakonic to create Smart Track Mobile, our wireless
handheld video viewing solution and Smart Track Remote, our web-based
video product.
- - Strengthening our international dealer network with new and more
financially stronger business partners.
- - Joint participation with Dialoc ID 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.
- - Additions to direct sales staff and emphasis on growing international
dealer base.
- - Various additional cost cutting and cost saving initiatives.
On March 22, 2002, we entered into a new three-year revolving line of credit and
term loan with the CIT Group/Business Credit, Inc. ("CIT") for maximum
borrowings of $8 million, which are subject to certain limitations based on a
percentage of eligible accounts receivable and inventories as defined in the
agreement. Interest on the revolving line of credit is payable monthly at the
JPMorgan Chase Bank prime rate (4.75% at September 30, 2002), plus 2% per annum.
We are required to pay a commitment fee of 0.375% per annum on any unused
portion of the credit facility. Borrowings under the line are secured by
substantially all of our assets. The terms of the agreement, among other
matters, places restrictions on capital expenditures and prohibits the payment
of dividends. In addition, we entered into a $100,000 term loan with CIT. The
principal shall be repaid to CIT in twelve equal monthly installments of $8,333
beginning May 31, 2002. Interest on the term note is at prime plus 2.25%. As
of September 30, 2002, we had borrowings of approximately $2.2 million, the
maximum amount available under the facility. Approximately $0.5 million of the
cash on the balance sheet at September 30, 2002 was paid to CIT to reduce the
loan balance within a few days of quarter end.
We will require positive cash flow from operations to meet our working capital
needs over the next twelve months. We anticipated receiving significant
additional purchase orders from specific customers during the first nine months
of 2002. While we continue to believe that these purchase orders will
eventually be received, the delays we have experienced have caused us to: (i)
operate in a cash flow deficit for the first ten months of the year; (ii) borrow
the maximum amounts available under our credit facility; and (iii) pursue
potential sources of debt or equity financing.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On October 10, 2002, we entered into a purchase order financing facility with
EPK Financial Corporation ("EPK"). Purchase order financing is short term
funding used to finance the purchase or manufacture of specific goods that we
have pre-sold to credit worthy end customers. Funding entails EPK providing
funds directly to vendors to allow us to secure the inventory we need to fulfill
customers orders. Sentry's costs for each financing transaction will be equal
to 3.5% of Sentry's selling price, plus 1.85% on the maximum outstanding funded
amount each ten calendar days or portion thereof, until EPK is paid in full,
plus expenses. In connection with this facility, an Intercreditor Agreement was
entered into between EPK, CIT and Sentry. Under this agreement, CIT
subordinated its rights and interests in the collateral related to each
transaction to EPK. Currently, under the terms of the Intercreditors Agreement,
the maximum amount subordinated to EPK at any time is limited to $350,000.
Sentry will use the funds provided by EPK to fund vendor purchases to complete
orders currently in backlog. The first transaction for approximately $300,000
was funded on October 16, 2002.
Through the first nine months of 2002, we were not successful in achieving
positive cash flow from operations and as a result, our payables to vendors are
substantially in excess of terms. Therefore, in October 2002, we retained the
New York investment banking firm of Balfour Capital Advisors, LLC to assist the
Company in conducting an organized search and evaluation regarding a possible
corporate transaction to gain access to greater resources and to exploit the
Company's products and technological advances. Balfour will take the lead in
attempting to raise up to $5 million in financing to assist the Company in
bringing existing vendor payables current and to achieve its longer-term goals.
There can be no assurance, however, that additional financing will be available
on terms that are satisfactory to the Company, or that any such financing will
be sufficient to provide the full amount of funding necessary.
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.
Currently, under the terms of the share purchase agreement, Dialoc ID has the
right to acquire 51% of the common stock. On May 13, 2002, Dialoc ID exercised
their purchase right for an additional 14,500,000 shares of newly issued common
stock at an exercise price of $0.001 per share. As a result of this
transaction, Dialoc ID currently owns 48.1% of our common stock outstanding. In
addition, under certain conditions more fully described in Note B, Dialoc ID 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.
Related Party Transactions
- ----------------------------
Details of related party transactions are included in Notes B and F of this Form
10-Q.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
10.30 Master Agreement between Sentry Technology Corporation
and EPK Financial Corporation, dated October 10, 2002.
10.31 Master Agreement between Knogo North America Inc. and EPK
Financial Corporation, dated October 10, 2002.
10.32 Intercreditor Agreement between Knogo North America Inc.,
EPK Financial Corporation and The CIT Group/Business Credit,
Inc., dated October 16, 2002.
99.1 Certification by Chief Executive Officer
99.2 Certification by Chief Financial Officer
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for the
three months ended September 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SENTRY TECHNOLOGY CORPORATION
-------------------------------
Date: November 14, 2002 By: /s/ PETER J. MUNDY
------------------- ---------------------
Peter J. Mundy,
Vice President
Finance and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Exhibit Index
- -------------
10.30 Master Agreement between Sentry Technology Corporation
and EPK Financial Corporation, dated October 10, 2002.
10.31 Master Agreement between Knogo North America Inc. and EPK
Financial Corporation, dated October 10, 2002.
10.32 Intercreditor Agreement between Knogo North America Inc.,
EPK Financial Corporation and The CIT Group/Business Credit,
Inc., dated October 16, 2002.
99.1 Certification by Chief Executive Officer
99.2 Certification by Chief Financial Officer
EXHIBIT 10.30
MASTER AGREEMENT
This Master Agreement dated as of October 10, 2002 is by and between Sentry
Technology Corporation, a Delaware corporation (the "Manager"), and EPK
Financial Corporation, a Texas corporation ("EPK").
PRELIMINARY MATTERS
A. The Manager may, from time to time, identify trading
opportunities involving the purchase and resale of goods.
B. The Parties wish to set forth their agreement regarding the
terms upon which EPK may agree to purchase and resell such goods and the
provision of management services by, and compensation of, the Manager in
connection therewith.
AGREEMENT
In consideration of the premises, and of the representations, warranties,
covenants, agreements, and conditions contained herein, and for other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Manager and EPK hereby agree as follows:
ARTICLE I
INTERPRETATION
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
have the meanings specified:
"Affiliate" when used with respect to a Person, means any other Person
---------
whom directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such Person. The term "control"
(including the correlative term "controlled") means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting stock, by contract
or otherwise.
"Agreement" has the meaning specified in Section 1.4.
---------
"Business Day" means any day which is not a Saturday, a Sunday or a
-------------
day on which national banks in the State of Texas are authorized or required by
law to be closed.
"Confirmation" means a confirmation in the form of Exhibit A or such
------------
other form of written instrument as to which the Parties may agree.
"Credit Enhancement," with respect to a Transaction and if applicable,
------------------
means the letter of credit, guaranty, bond or other form of credit support with
respect to the obligations of the Purchaser under such Transaction, provided by
the Credit Enhancer for such Transaction.
"Credit Enhancer," with respect to a Transaction, means the Person, if
---------------
any, identified as such in the Confirmation with respect to such Transaction.
"EPK" has the meaning specified in the preamble to this Agreement.
---
"EPK Minimum Proceeds," with respect to a Transaction, has the meaning
--------------------
specified in the Confirmation for such Transaction.
"EPK Purchase Price," with respect to a Transaction, means the
--------------------
aggregate purchase price payable and/or paid to the Vendor for the Goods under
such Transaction as set forth in the Vendor Pro Forma Invoice for such
Transaction and the Confirmation with respect to such Transaction.
"Event of Default" has the meaning specified in Section 4.1.
------------------
"FCPA" means the U.S. Foreign Corrupt Practices Act, 15 U.S.C. 78a, et
----
seq., as amended, supplemented and replaced from time to time.
"Governmental Authority" means any government or any political
-----------------------
subdivision or agency, department or instrumentality thereof, including, without
limitation any court or administrative body.
"Goods," with respect to a Transaction, means the goods identified as
-----
such in the Confirmation with respect to such Transaction.
"Guarantor" means Knogo North America, Inc and Video Sentry
---------
Corporation, a division of Knogo North America, Inc. The Guarantor constitutes
a Credit Enhancer with respect to all Transactions hereunder.
"Guaranty" means the guaranty of the Guarantor, in form acceptable to
--------
EPK, delivered pursuant to Section 5.14. The Guaranty shall constitute Credit
Enhancement with respect to all Transactions hereunder.
"Manager's Compensation," with respect to a Transaction and subject to
----------------------
Section 2.5, the compensation of the Manager for performing his obligations in
respect of such Transaction under the Agreement, as specified in the
Confirmation with respect to such Transaction.
"Party" means EPK or the Manager.
-----
"Person" means collectively, any individual, partnership, corporation,
------
limited liability company, business trust, joint stock company, trust,
unincorporated organization, joint venture, firm or other entity, or
Governmental Authority.
"Purchase Order," with respect to a Transaction, means the agreement
---------------
referring to purchase orders from the Purchaser for the Goods with respect to
such Transaction, including any and all additions, substitutions, replacements,
and/or changes thereto.
"Purchaser," with respect to a Transaction, means the Person
---------
identified as such in the Confirmation with respect to such Transaction,
including any and all additions, substitutions, replacements, and/or changes
thereto.
"Purchaser Purchase Price," with respect to a Transaction, means the
--------------------------
aggregate purchase price payable by the Purchaser for the Goods under such
transaction as set forth in the Purchase Order for such Transaction and the
Confirmation with respect to such Transaction, including any and all additions,
substitutions, replacements, and/or changes thereto.
"Solvent," as to any Person, such Person (a) owns property whose fair
-------
salable value is greater than the amount required to pay all of such Person's
indebtedness (including contingent debts), (b) is able to pay all of the
indebtedness as such indebtedness matures and (c) has capital sufficient to
carry on its business and transactions and all business and transactions in
which it is about to engage.
"Taxes" means all taxes, tariffs, duties, stamp taxes or fees of any
-----
description due any Governmental Authority arising out of or in connection with
any Transaction, excepting only United States federal income taxation of EPK and
any State of Texas tax based on the net income of EPK.
"Transaction" means a particular transaction governed by the terms of
-----------
this Agreement, including the terms set forth in the Confirmation with respect
to such transaction.
"Vendor," with respect to a Transaction, means the Person identified
------
as such in the Confirmation with respect to such Transaction, including any and
all additions, substitutions, replacements, and/or changes thereto.
"Vendor Pro Forma Invoice" with respect to a Transaction, means the
---------------------------
contract from the Vendor for the Goods with respect to such Transaction,
including any and all additions, substitutions, replacements, and/or changes
thereto.
1.2 Other Definitional Provisions.
-------------------------------
a. Unless otherwise specified therein, all terms defined in this
Agreement have the above-defined meanings when used in any Confirmation,
certificate, amendment, report or other document made or delivered pursuant
hereto.
b. Each term defined in the singular form in Section 1.1 shall
mean the plural thereof when the plural form of such term is used in this
Agreement or any Confirmation, certificate, amendment, report or other document
made or delivered pursuant hereto, and each term defined in the plural form in
Section 1.1 shall mean the singular thereof when the singular form of such term
is used herein or therein.
c. The words "hereof," "herein," "hereunder" and similar terms
when used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement, and section, schedule and exhibit
references herein are references to sections, schedules and exhibits to this
Agreement unless otherwise specified.
d. The word "including" when used herein shall mean "including
without limitation. "
e. Unless otherwise specified herein, all times set forth herein
are Dallas, Texas time.
1.3 Inconsistency. In the event of any inconsistency between the
-------------
provisions of any Confirmation and this Agreement, such Confirmation will
prevail for the purpose of (but only for the purpose of) the relevant
Transaction.
1.4 Single Agreement. All Transactions are entered into in reliance on
-----------------
the fact that this Master Agreement and all Confirmations form a single
agreement between the Parties (collectively referred to as this "Agreement"),
and the parties would not otherwise enter into any Transactions.
ARTICLE II
TRANSACTIONS
2.1 Offer. The Manager may, from time to time propose a Transaction by
-----
submitting to EPK a proposed Confirmation setting forth for such Transaction the
Goods, the EPK Minimum Proceeds, the Manager's Compensation, the EPK Purchase
Price, the Vendor, the Purchaser Purchase Price, the Purchaser, information
sufficient to enable to EPK to determine the relative credit worthiness of the
Purchaser, the Purchaser's terms and method of payment in the transaction, and,
if applicable, the Credit Enhancer, and attaching copies of the Vendor Pro Forma
Invoice, the Purchase Order and, if applicable, the Credit Enhancement (other
than the Guaranty) with respect to the proposed Transaction, and any other items
which EPK may request from time to time to properly review the Transaction.
2.2 Acceptance. EPK shall have no obligation to enter into any
----------
proposed Transaction. In the event that EPK and the Manager agree upon a
proposed Transaction, such agreement shall be evidenced by the execution and
delivery (which may be by telecopy) of a Confirmation setting forth the terms of
such Transaction. The Confirmation with respect to a Transaction shall become
effective upon all of the following having occurred (i) execution and delivery
thereof by both of the Parties; (ii) assignment (or other means of transfer) to
EPK acceptable to EPK of any Credit Enhancement with respect to the Transaction;
(iii) if requested by EPK, deliver to EPK a letter from each and every creditor
of Manager that now or hereafter holds a security interest in or lien on any and
all of Manager's Inventory and Accounts and all personal property whereunder
each of them shall have consented to the Transactions contemplated by this
Agreement and shall have acknowledged EPK's sole and exclusive ownership in the
Goods and all proceeds thereof; and (iv) if requested by EPK, the establishment
of a lock box account over which EPK shall have sole access, dominion and
control at a state or national bank acceptable to EPK (the "Lock Box") at the
sole cost and expense of Manager.
2.3 Services of the Manager. Unless otherwise specified in the
--------------------------
Confirmation relevant to a Transaction, the Manager and/or it agents and
representatives shall: (a) cause the Goods to be shipped to the Purchaser in
accordance with the Purchase Order relevant to such Transaction and bear all
costs, including any shipping costs and messenger expenses and legal costs,
incidental to such Transaction; (b) indemnify and hold EPK and its assigns
harmless from and against any loss caused by the failure of (i) the Vendor or
any shipper to timely deliver Goods which conform to the requirements of the
Vendor Invoice, the Purchase Order and applicable law, or (ii) the Manager to
truthfully represent the Purchaser's credit information or the terms and method
of payments in the transaction as contemplated in Section 3.1; (c) indemnify and
hold EPK and its assigns harmless from and against any claim of or liability to
any Person arising out of the Transaction, including without limitation any
claim of or liability to the Purchaser or any other Person in respect of the
Goods; (d) pay, and indemnify and hold EPK and its assigns harmless from and
against, any Taxes due in connection with such Transaction; (e) be responsible
for performing all administrative and ministerial tasks relating to the
collection of such invoices to the Purchaser; provided, however, that the
foregoing shall in no way limit EPK's right at any time and from time to time to
collect amounts owing under such invoices directly; and provided, further, that
the foregoing shall not constitute a guaranty by Manager of the payment or
collection of such invoices; (f) to pay for and do all things necessary to
maintain all warranty, service and/or other post delivery obligations with
Purchaser; and (f) not perform any action which could result in reduced or
non-payment by Purchaser.
2.4 Maximum EPK Purchase Price. Unless otherwise specified in the
-----------------------------
Confirmation relevant to a Transaction, the maximum EPK Purchase Price shall be
$300,000.00.
2.5 Compensation of the Manager. The compensation of the Manager in
------------------------------
respect of its services in connection with a particular Transaction shall be the
Manager's Compensation set forth in the Confirmation with respect to such
Transaction; provided, that unless otherwise specified in the Confirmation with
respect to such Transaction, the compensation of the Manager in respect of a
particular Transaction shall be payable solely from the proceeds received by EPK
from the Purchaser and, if applicable, the Credit Enhancer with respect to such
Transaction and only to the extent that such proceeds exceed the EPK Minimum
Proceeds for such Transaction. Prior to the payment of Manager's Compensation,
EPK has the right, in its sole discretion, to require the Manager to execute a
general release duly notarized in form acceptable to EPK. In the event EPK
receives communication of any kind as to any conflicting claims or legal
proceedings made by any Party in connection with a particular Transaction
including, but not limited to, the Manager, Vendor and/or Purchaser, EPK
maintains the right, and is authorized by the Manager, and at Manager's sole
risk to (1) retain an amount acceptable to EPK in trust to reserve against such
claims and legal proceedings, (2) file suit in interpleader or for declaratory
relief and deposit such funds into court and/or (3) deposit same with an
attorney acceptable to EPK in trust for EPK, Manager and/or such claimants.
2.6 Further Assurances. The Manager hereby agrees that at any time and
------------------
from time to time after the execution of this Agreement, Manager shall, upon
request of EPK, execute and deliver such further acts and things as EPK may
request in order to fully effect the purposes of this Agreement and to protect
EPK's interests in the Goods and/or Credit Enhancements, including, but not
limited to, furnishing any and all documents necessary to enable EPK or its
insurer to defend itself in any litigation arising in connection herewith.
Manager shall give EPK written notice of any action known by Manager to have
been taken by a third party which may jeopardize EPK's rights in the Goods
and/or Credit Enhancement promptly after Manager becomes aware of the same.
Manager hereby agrees to reimburse EPK for all out-of-pocket costs and expenses
(including but not limited to reasonable attorneys fees) incurred by EPK in
connection with (i) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by EPK, the Vendor, the Purchaser, Manager or any other
person) in any way relating to the Goods, the transactions or this Agreement,
(ii) any attempt to enforce any of EPK's rights in the Goods or Credit
Enhancements in the transactions or under this Agreement against Manager, the
Vendor, the Purchaser or any other person, and/or (iii) any attempt to verify,
protect, sell, liquidate or otherwise dispose of the Goods and/or Credit
Enhancements.
2.7 Title. All Goods shall at all times be and remain the sole and
-----
exclusive property of EPK and titled in the name of EPK or such tradestyle as
may be acceptable to EPK.
2.8 Insurance on Goods. Manager shall obtain insurance on behalf of
--------------------
EPK which insures the Goods against all risks or physical loss or damage with
warehouse to warehouse coverage. All such policies of insurance shall name EPK
as the additional insured party and as first loss-payee thereunder. EPK shall
have the right to file all insurance claims in EPK's or Manager's name, as well
as the right to acquire insurance, at the sole cost of Manager, if Manager's
insurance is terminated or deemed insufficient by EPK.
2.9. Collection of Purchaser Purchase Price. Subject to the Credit
------------------------------------------
Enhancement identified as such in the Confirmation, all invoices shall instruct
the Purchaser to remit their payments directly to the Lock Box. Without
limiting the foregoing, in the event that Manager shall receive any remittances
from any Purchaser from time-to-time on account of Transactions, such
remittances shall be and remain EPK's property and Manager shall hold such
remittances as trustee of an express trust for EPK's benefit and immediately
deliver over to EPK for deposit or cause to be deposited the same in the Lock
Box or to EPK or to such other account designated by EPK. Manager acknowledges
that such remittances are the sole and exclusive property of EPK. All payments
of the Purchaser's Purchase Price which are made through presentment of a letter
of credit shall instruct the collecting or paying bank of said letter of credit
to make payment by wire transfer of immediately available funds to the Lock Box,
to EPK or to such other account designated by EPK. All funds deposited in said
special account are the sole and exclusive property of EPK. EPK and its
directors, officers and agents shall have the right to sign and endorse on
behalf of Manager all checks, drafts and other forms of payment received by EPK
in connection with the payment of any account. Manager appoints EPK or any other
person EPK may from time to time designate, as Manager's attorney-in-fact with
power to:
(a) endorse Manager's name on any checks, drafts or other forms of payment
or security that may come into possession;
(b) sign Manager's name on notices of assignment, verifications of accounts,
verifications of Purchase Orders and notices to current and/or potential future
Purchasers;
(c) receive, open and dispose of all mail addressed to Manager and received
by EPK;
(d) send notices of assignment, requests for verification of Purchase Orders
or requests for verification of accounts to current and/or potential future
Purchasers;
(e) to sign Manager's name and file any federal and state Financing
Statement(s) / recordations / registrations / continuation statements /
assignments / subordinations / terminations, etc. and/or amendments (UCC-1,
UCC-2, UCC-3, etc.);
(f) to use the name of Manager and, in EPK's sole discretion, to litigate,
file in court and/or serve documents in respect to, and, for an amount less than
face value or cost; etc. in prosecuting and/or defending any action/claim
brought by/against/involving Manager / EPK / Purchaser and/or any third parties;
(g) to settle, compromise, surrender Goods and/or security or modify any
such Purchase Order and otherwise deal with Purchaser, those with whom Manager
and/or Purchaser has contracted, for the account and risk of Manager,
notwithstanding any effect on any Purchase Order; and
(h) do all things necessary to carry out the terms of this Agreement.
2.10 Access to Information and Control Over Goods. Manager shall
--------------------------------------------------
provide EPK with any and all information which EPK may reasonably request
concerning the Goods, the Purchaser, the Vendors, Manager, and/or any other
parties involved with the Goods, including, but not limited to, the inspection
of the books and records of Manager by EPK and its representatives. Manager
shall provide EPK with immediate access to any and all Goods in Manager's
possession, actual or constructive, upon request by EPK. In the event that EPK
determines in good faith that it is necessary for EPK to assert or enforce its
rights as owner of the Goods in order to adequately protect its interests, EPK
shall be permitted to take, and Manager shall assist EPK in taking any and all
action as EPK deems necessary, including, but not limited to, (i) notifying
freight forwarders, the Purchasers, the Vendors and other third parties of EPK's
interest in the Goods, and (ii) taking immediate and complete physical control
over the Goods and the proceeds and products thereof.
2.11. NO WARRANTIES ON GOODS. ALL GOODS COVERED BY THE AGREEMENT ARE
------------------------
RESOLD BY EPK "AS IS" AND "WITH ALL FAULTS," AND MANAGER ACKNOWLEDGES THAT NO
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE ARE TO BE
IMPLIED IN THE AGREEMENT. EPK GIVES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE
DESCRIPTION, QUALITY, MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE,
PRODUCTIVENESS, OR ANY OTHER MATTER OF ANY OF THE GOODS. EPK SHALL BE IN NO WAY
RESPONSIBLE FOR THE PROPER USE OR SERVICE OF THE GOODS.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 The Manager. The Manager hereby represents and warrants, and the
------------
delivery by the Manager of each Confirmation shall constitute the further
representation and warranty of the Manager, that:
(a) The Manager is a corporation duly organized and validly
existing and in good standing under the laws of Delaware.
(b) the Manager has all requisite authority to enter into this
Agreement and to perform all the obligations required to be performed by it
hereunder;
(c) neither the execution and delivery by the Manager of this
Agreement, nor the consummation of any of the Transactions herein contemplated,
nor compliance with the terms and provisions hereof, will (i) materially
contravene or conflict with the articles of incorporation or bylaws of the
Manager, any requirement of law to which the Manager is subject, or any
indenture, mortgage, deed of trust, or other agreement or instrument to which
the Manager is a party or by which the Manager may be bound, or to which the
property of the Manager may be subject, or (ii) result in the creation or
imposition of any lien on the property of the Manager by any party other than
EPK;
(d) this Agreement is the legal, valid and binding obligation of
the Manager, enforceable against the Manager in accordance with its terms;
(e) there is no material fact relevant to the transactions
contemplated by this Agreement (and in the case of each Confirmation, there is
no material fact relevant to the Transaction set forth in such Confirmation)
known to the Manager that the Manager has not disclosed to EPK;
(f) the Manager is not (and in the case of each Confirmation, to
the knowledge of the Manager after due inquiry, neither the Purchaser nor the
Vendor thereunder is) in default under any loan agreement, mortgage, security
agreement or other material agreement or obligation to which it is a party or by
which any of its property is bound;
(g) there are no material actions, suits or legal, equitable,
arbitration or administrative proceedings pending, or to the knowledge of the
Manager threatened, against the Manager (and in the case of each Confirmation,
to the knowledge of the Manager after due inquiry, there are no material
actions, suits or legal, equitable, arbitration or administrative proceedings
pending, or threatened, against the Purchaser or the Vendor thereunder);
(h) all tax returns required to be filed by the Manager in any
jurisdiction have been filed and all taxes, assessments, fees and other
governmental charges upon the Manager or upon any of its properties, income or
franchises have been paid prior to the time that such taxes could give rise to a
lien thereon;
(i) neither the execution and delivery of this Agreement nor the
consummation of any of the transactions contemplated hereby requires the consent
or approval of, the giving of notice to, or the registration, recording or
filing by the Manager or any other Person of any document with, or the taking of
any other action in respect of, any Governmental Authority which has
jurisdiction over the Manager (or, in the case of each Confirmation, the
Purchaser or the Vendor thereunder) or any of its property;
(j) the Manager has delivered to EPK a list of creditors of the
Manager; Annual Reports pursuant to Section 13 or 15d of the Securities Exchange
Act of 1934 for the fiscal years ending December 31, 2000 and December 31, 2001;
Quarterly Report pursuant to Section 13 or 15d of the Securities Exchange Act of
1934; and Corporate Tax Returns for the period ending 12/31/00 and 12/31/01.
Such lists, Annual and Quarterly Reports, and Corporate Tax Returns are accurate
in all material respects;
(k) the Manager (and, in the case of each Confirmation, to the
best knowledge of the Manager, the Purchaser and the Vendor thereunder) is
Solvent;
(l) none of the Purchaser, the Vendor or the Credit Enhancer with
respect to any Transaction is an Affiliate of the Manager;
(m) all information furnished by the Manager in each Confirmation
is true, correct, and complete;
(n) the Manager has paid and will continue to pay and maintain
in current standing all taxes, insurances, licenses, etc. required for
conduct of its business or profession; and
(o) the Manager will not merge, consolidate or otherwise alter or
modify its corporate name, structure, or existence, re-incorporate or
re-organize, or enter into or engage in any operation or activity materially
different from that presently being conducted by the Manger.
All representations and warranties by the Manager herein shall survive until all
obligations of the Manager under this Agreement have been irrevocably paid in
full, and any investigation at any time made by or on behalf of EPK shall not
diminish the right of EPK to rely thereon.
ARTICLE IV
DEFAULT; REMEDIES
4.1 Event of Default. An Event of Default shall exist if any one or
------------------
more of the following occurs and remains uncured after five (5) Business Days
written notice thereof:
(a) The Manager fails to make any payment due hereunder on the
date that such payment is due;
(b) the Manager fails to observe or perform any other term,
covenant or agreement set forth in this Agreement on its part to be performed or
observed and such failure continues unremedied for five (5) Business Days past
the date when such observance or performance is due;
(c) any material statement, warranty or representation by or on
behalf of the Manager contained in this Agreement, (including any Confirmation
or other writing furnished in connection with this Agreement) proves to have
been incorrect or misleading in any material respect when made or deemed made;
(d) any provision of this Agreement shall for any reason cease to
be in full force and effect, or be declared null and void or unenforceable in
whole or in part, or the validity or enforceability of any such document shall
be challenged or denied; or
(e) (i) the commencement by the Manager or any Credit Enhancer as
debtor of any case or proceeding under any bankruptcy, insolvency,
reorganization, liquidation, dissolution or similar law, or the seeking by the
Manager or any Credit Enhancer of the appointment of a receiver, trustee,
custodian or similar official for such Person or any substantial part of its
property, (ii) the commencement of any such case or proceeding against the
Manager, (iii) the making by the Manager or any Credit Enhancer of a general
assignment for the benefit of its creditors, or (iv) the admission in writing by
the Manager or any Credit Enhancer that it is unable to pay its debts as they
become due.
4.2 Remedies. Upon the occurrence of an Event of Default, all
--------
obligations of EPK hereunder shall be suspended and EPK may exercise all rights
and remedies granted in this Agreement, in any Credit Enhancement and/or under
applicable law, and may offset all Manager's compensation then due against any
sums due EPK.
ARTICLE V
MISCELLANEOUS
5.1 Term. This Agreement may be terminated by EPK immediately upon
----
written notice to the Manager or by the Manager upon 30 days after Manager
delivers written notice to EPK and shall terminate without notice by either
Party on October 3, 2005; provided, that notwithstanding the termination of this
Agreement, this Agreement shall continue in full force and effect with respect
to any Transactions with respect to which Manager has not fully performed its
obligations hereunder until such time as such performance is completed.
5.2 Entire Agreement. Amendments. etc. This Agreement constitutes the
-----------------
entire agreement and understanding of the Manager with respect to its subject
matter and supersedes all oral communications and prior writings with respect
thereto. No amendment or waiver of any provision of this Agreement nor any
consent to any departure by either Party herefrom shall in any event be
effective unless the same shall be in writing and signed by the Party against
whom enforcement of such amendment, waiver or consent is sought, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
5.3 No Waiver, Remedies. No failure on the part of EPK to exercise, and
-------------------
no delay on the part of EPK in exercising, any right hereunder shall operate as
a waiver of such right; nor shall any single or partial exercise of any right by
EPK preclude any further or subsequent exercise of the same or any other right.
The remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
5.4 Notices. etc. Any notice or other communication in respect of this
-------------
Agreement may be given in any form set forth below to the address or number or
in accordance with the electronic messaging system details provided on Schedule
I and will be deemed effective as indicated:
(i) If in writing and delivered in person or by courier, on the
date it is delivered;
(ii) if sent by facsimile transmission, on the date that
transmission is received by a responsible employee of the recipient in legible
form (it being agreed that the burden of proving receipt will be on the sender
and will not be met by a transmission report generated by the sender's facsimile
machine); or
(iii) if sent by certified or registered mail or the equivalent
(return receipt requested) on the date it is delivered.
Either Party may by written notice to the other change the address or facsimile
number or electronic messaging system details at which notices are to be given
to it.
5.5 Captions. The captions in this Agreement are for convenience of
--------
reference only and are not to be given any substantive meaning or significance
whatever in construing the terms and provisions of this Agreement.
5.6 Transfer. Neither this Agreement nor any interest or obligation in
--------
or under this Agreement may be transferred (whether by way of security or
otherwise) by the Manager without the prior written consent of EPK. EPK may,
with written notice to the Manager, assign or transfer all or any part of its
interests and obligations herein to any other Person, and such other Person
shall thereupon become vested with all rights and obligations in respect thereof
granted to and assumed by EPK herein or otherwise.
5.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
--------------
AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF TEXAS.
5.8 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN
-------------- ------------------
NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN
DALLAS COUNTY, TEXAS. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND
REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR OTHER PRINCIPAL PLACE OF
BUSINESS OF MANAGER OR EPK, MANAGER HEREBY CONSENTS AND AGREES THAT THE DISTRICT
COURT OF DALLAS COUNTY, TEXAS, OR, AT EPK'S OPTION, THE UNITED STATES DISTRICT
COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN MANAGER AND
EPK PERTAINING TO THIS AGREEMENT OR TO ANY OTHER MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT. MANAGER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO
SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND MANAGER
HEREBY WAIVES ANY OBJECTION WHICH MANAGER MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE
----- --- ----------
GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH
COURT. MANAGER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND
OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO MANAGER AT THE ADDRESS LAST KNOWN TO EPK AND THAT SERVICE SO MADE
SHALL BE DEEMED COMPLETED UPON THE EARLIER OF MANAGER'S ACTUAL RECEIPT THEREOF
OR 3 DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN
THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF EPK TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE
ENFORCEMENT BY MANAGER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE
TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER
APPROPRIATE FORUM OR JURISDICTION.
5.9 JURY TRIAL; DAMAGES. THE MANAGER HEREBY (A) IRREVOCABLY AND
---------------------
UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN
ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY
COUNTERCLAIM THEREIN; (B) IRREVOCABLY WAIVES, TO THE EXTENT NOT PROHIBITED BY
LAW, ANY RIGHT THEY MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY
SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR
IN ADDITION TO, ACTUAL DAMAGES; (C) CERTIFIES THAT NO PARTY HERETO NOR ANY
REPRESENTATIVE OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR
OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION,
SEEK TO ENFORCE THE FOREGOING WAIVERS; AND (D) ACKNOWLEDGES THAT THEY ENTERED
INTO THE AGREEMENT, AND THE TRANSACTIONS CONTEMPLATED HEREBY, BASED UPON, AMONG
OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION.
5.10 Attorneys' Fees. Manager shall pay all EPK's legal fees and
----------------
expenses in connection with the enforcement of this Agreement.
5.11 No Rights Conferred Upon Third Parties. This Agreement is for the
---------------------------------------
benefit of the Parties hereto and nothing contained herein shall be construed to
give any third party any benefits or rights hereunder.
5.12 Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be an original but all of which together shall constitute one and
the same instrument.
5.13 COMPLIANCE WITH LAWS. MANAGER SHALL STRICTLY OBSERVE AND COMPLY
----------------------
WITH ALL FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS WHICH GOVERN THE
MANUFACTURE, SALE, HANDLING AND DISPOSAL OF ANY PRODUCTS HEREIN SPECIFIED.
MANAGER ALSO AGREES TO COMPLY WITH THE PROVISIONS RELATING TO THE FCCA SET FORTH
IN EXHIBIT B. IF MANAGER VIOLATES ANY OF SUCH LAWS OR REGULATIONS OR IS
OFFICIALLY CHARGED WITH SUCH VIOLATIONS, EPK IN ITS SOLE DISCRETION MAY TREAT
THIS CONDUCT AS A BREACH OF THIS WHOLE AGREEMENT AND IN ADDITION TO ANY OTHER
REMEDIES, MAY IMMEDIATELY TERMINATE THIS AGREEMENT.
5.14 Guaranty. The Manager shall cause the Guarantor to execute and
--------
deliver the Guaranty and take all actions reasonably requested by EPK to cause
the Guarantor to perform its obligations under the Guaranty.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth above.
MANAGER:
SENTRY TECHNOLOGY CORPORATION
By: /s/ PETER J. MUNDY
-----------------------
Title: Vice President & CFO
-----------------------
Date: October 10, 2002
------------------
EPK:
EPK FINANCIAL CORPORATION
By: /s/ EDWARD P. KING
-----------------------
Edward P. King
Title: President
Date: October 25, 2002
------------------
SCHEDULE I
TO
MASTER AGREEMENT
EXECUTED AND DELIVERED AS OF OCTOBER 10, 2002 BETWEEN
SENTRY TECHNOLOGY CORPORATION (the "Manager")
AND
EPK FINANCIAL CORPORATION ("EPK")
ADDRESSES FOR NOTICES
-----------------------
Address for notices to the Manager:
Address: 350 Wireless Blvd. Hauppauge, NY 11788
Attention: Peter J. Mundy
Facsimile: 631-232-0954 Phone: 631-881-2005
With a courtesy copy of any material notice to the Company's counsel at:
Mark Haltzman, Esq.
Mark S. Haltzman & Associates
One Belmont Avenue, Suite 300
Bala Cynwyd, PA 19004
Tel : 610-668-0865
Fax : 610-668-1915
Address for notices to EPK:
Address: 2711 Cedar Springs Dallas, TX 75201
Attention: Edward P. King
Facsimile: 214/871-0082 Phone: 214/871-0055
EXHIBIT 10.31
MASTER AGREEMENT
This Master Agreement dated as of October 10, 2002 is by and between Knogo
North America Inc., a Delaware corporation and Video Sentry Corporation, a
division of Knogo North America Inc. (collectively, the "Manager"), and EPK
Financial Corporation, a Texas corporation ("EPK").
PRELIMINARY MATTERS
A. The Manager may, from time to time, identify trading
opportunities involving the purchase and resale of goods.
B. The Parties wish to set forth their agreement regarding the
terms upon which EPK may agree to purchase and resell such goods and the
provision of management services by, and compensation of, the Manager in
connection therewith.
AGREEMENT
In consideration of the premises, and of the representations, warranties,
covenants, agreements, and conditions contained herein, and for other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Manager and EPK hereby agree as follows:
ARTICLE I
INTERPRETATION
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
have the meanings specified:
"Affiliate" when used with respect to a Person, means any other Person
---------
whom directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such Person. The term "control"
(including the correlative term "controlled") means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting stock, by contract
or otherwise.
"Agreement" has the meaning specified in Section 1.4.
---------
"Business Day" means any day which is not a Saturday, a Sunday or a
-------------
day on which national banks in the State of Texas are authorized or required by
law to be closed.
"Confirmation" means a confirmation in the form of Exhibit A or such
------------
other form of written instrument as to which the Parties may agree.
"Credit Enhancement," with respect to a Transaction and if applicable,
------------------
means the letter of credit, guaranty, bond or other form of credit support with
respect to the obligations of the Purchaser under such Transaction, provided by
the Credit Enhancer for such Transaction.
"Credit Enhancer," with respect to a Transaction, means the Person, if
---------------
any, identified as such in the Confirmation with respect to such Transaction.
"EPK" has the meaning specified in the preamble to this Agreement.
---
"EPK Minimum Proceeds," with respect to a Transaction, has the meaning
--------------------
specified in the Confirmation for such Transaction.
"EPK Purchase Price," with respect to a Transaction, means the
--------------------
aggregate purchase price payable and/or paid to the Vendor for the Goods under
such Transaction as set forth in the Vendor Pro Forma Invoice for such
Transaction and the Confirmation with respect to such Transaction.
"Event of Default" has the meaning specified in Section 4.1.
------------------
"FCPA" means the U.S. Foreign Corrupt Practices Act, 15 U.S.C. 78a, et
----
seq., as amended, supplemented and replaced from time to time.
"Governmental Authority" means any government or any political
-----------------------
subdivision or agency, department or instrumentality thereof, including, without
limitation any court or administrative body.
"Goods," with respect to a Transaction, means the goods identified as
-----
such in the Confirmation with respect to such Transaction.
"Guarantor" means Sentry Technology Corporation. The Guarantor
---------
constitutes a Credit Enhancer with respect to all Transactions hereunder.
"Guaranty" means the guaranty of the Guarantor, in form acceptable to
--------
EPK, delivered pursuant to Section 5.14. The Guaranty shall constitute Credit
Enhancement with respect to all Transactions hereunder.
"Manager's Compensation," with respect to a Transaction and subject to
----------------------
Section 2.5, the compensation of the Manager for performing his obligations in
respect of such Transaction under the Agreement, as specified in the
Confirmation with respect to such Transaction.
"Party" means EPK or the Manager.
-----
"Person" means collectively, any individual, partnership, corporation,
------
limited liability company, business trust, joint stock company, trust,
unincorporated organization, joint venture, firm or other entity, or
Governmental Authority.
"Purchase Order," with respect to a Transaction, means the agreement
---------------
referring to purchase orders from the Purchaser for the Goods with respect to
such Transaction, including any and all additions, substitutions, replacements,
and/or changes thereto.
"Purchaser," with respect to a Transaction, means the Person
---------
identified as such in the Confirmation with respect to such Transaction,
including any and all additions, substitutions, replacements, and/or changes
thereto.
"Purchaser Purchase Price," with respect to a Transaction, means the
--------------------------
aggregate purchase price payable by the Purchaser for the Goods under such
transaction as set forth in the Purchase Order for such Transaction and the
Confirmation with respect to such Transaction, including any and all additions,
substitutions, replacements, and/or changes thereto.
"Solvent," as to any Person, such Person (a) owns property whose fair
-------
salable value is greater than the amount required to pay all of such Person's
indebtedness (including contingent debts), (b) is able to pay all of the
indebtedness as such indebtedness matures and (c) has capital sufficient to
carry on its business and transactions and all business and transactions in
which it is about to engage.
"Taxes" means all taxes, tariffs, duties, stamp taxes or fees of any
-----
description due any Governmental Authority arising out of or in connection with
any Transaction, excepting only United States federal income taxation of EPK and
any State of Texas tax based on the net income of EPK.
"Transaction" means a particular transaction governed by the terms of
-----------
this Agreement, including the terms set forth in the Confirmation with respect
to such transaction.
"Vendor," with respect to a Transaction, means the Person identified
------
as such in the Confirmation with respect to such Transaction, including any and
all additions, substitutions, replacements, and/or changes thereto.
"Vendor Pro Forma Invoice" with respect to a Transaction, means the
---------------------------
contract from the Vendor for the Goods with respect to such Transaction,
including any and all additions, substitutions, replacements, and/or changes
thereto.
1.2 Other Definitional Provisions.
-------------------------------
a. Unless otherwise specified therein, all terms defined in this
Agreement have the above-defined meanings when used in any Confirmation,
certificate, amendment, report or other document made or delivered pursuant
hereto.
b. Each term defined in the singular form in Section 1.1 shall
mean the plural thereof when the plural form of such term is used in this
Agreement or any Confirmation, certificate, amendment, report or other document
made or delivered pursuant hereto, and each term defined in the plural form in
Section 1.1 shall mean the singular thereof when the singular form of such term
is used herein or therein.
c. The words "hereof," "herein," "hereunder" and similar terms
when used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement, and section, schedule and exhibit
references herein are references to sections, schedules and exhibits to this
Agreement unless otherwise specified.
d. The word "including" when used herein shall mean "including
without limitation."
e. Unless otherwise specified herein, all times set forth herein
are Dallas, Texas time.
1.3 Inconsistency. In the event of any inconsistency between the
-------------
provisions of any Confirmation and this Agreement, such Confirmation will
prevail for the purpose of (but only for the purpose of) the relevant
Transaction.
1.4 Single Agreement. All Transactions are entered into in reliance on
-----------------
the fact that this Master Agreement and all Confirmations form a single
agreement between the Parties (collectively referred to as this "Agreement"),
and the parties would not otherwise enter into any Transactions.
ARTICLE II
TRANSACTIONS
2.1 Offer. The Manager may, from time to time propose a Transaction by
-----
submitting to EPK a proposed Confirmation setting forth for such Transaction the
Goods, the EPK Minimum Proceeds, the Manager's Compensation, the EPK Purchase
Price, the Vendor, the Purchaser Purchase Price, the Purchaser, information
sufficient to enable to EPK to determine the relative credit worthiness of the
Purchaser, the Purchaser's terms and method of payment in the transaction, and,
if applicable, the Credit Enhancer, and attaching copies of the Vendor Pro Forma
Invoice, the Purchase Order and, if applicable, the Credit Enhancement (other
than the Guaranty) with respect to the proposed Transaction, and any other items
which EPK may request from time to time to properly review the Transaction.
2.2 Acceptance. EPK shall have no obligation to enter into any
----------
proposed Transaction. In the event that EPK and the Manager agree upon a
proposed Transaction, such agreement shall be evidenced by the execution and
delivery (which may be by telecopy) of a Confirmation setting forth the terms of
such Transaction. The Confirmation with respect to a Transaction shall become
effective upon all of the following having occurred (i) execution and delivery
thereof by both of the Parties; (ii) assignment (or other means of transfer) to
EPK acceptable to EPK of any Credit Enhancement with respect to the Transaction;
(iii) if requested by EPK, deliver to EPK a letter from each and every creditor
of Manager that now or hereafter holds a security interest in or lien on any and
all of Manager's Inventory and Accounts and all personal property whereunder
each of them shall have consented to the Transactions contemplated by this
Agreement and shall have acknowledged EPK's sole and exclusive ownership in the
Goods and all proceeds thereof; and (iv) if requested by EPK, the establishment
of a lock box account over which EPK shall have sole access, dominion and
control at a state or national bank acceptable to EPK (the "Lock Box") at the
sole cost and expense of Manager.
2.3 Services of the Manager. Unless otherwise specified in the
--------------------------
Confirmation relevant to a Transaction, the Manager and/or it agents and
representatives shall: (a) cause the Goods to be shipped to the Purchaser in
accordance with the Purchase Order relevant to such Transaction and bear all
costs, including any shipping costs and messenger expenses and legal costs,
incidental to such Transaction; (b) indemnify and hold EPK and its assigns
harmless from and against any loss caused by the failure of (i) the Vendor or
any shipper to timely deliver Goods which conform to the requirements of the
Vendor Invoice, the Purchase Order and applicable law, or (ii) the Manager to
truthfully represent the Purchaser's credit information or the terms and method
of payments in the transaction as contemplated in Section 3.1; (c) indemnify and
hold EPK and its assigns harmless from and against any claim of or liability to
any Person arising out of the Transaction, including without limitation any
claim of or liability to the Purchaser or any other Person in respect of the
Goods; (d) pay, and indemnify and hold EPK and its assigns harmless from and
against, any Taxes due in connection with such Transaction; (e) be responsible
for performing all administrative and ministerial tasks relating to the
collection of such invoices to the Purchaser; provided, however, that the
foregoing shall in no way limit EPK's right at any time and from time to time to
collect amounts owing under such invoices directly; and provided, further, that
the foregoing shall not constitute a guaranty by Manager of the payment or
collection of such invoices; (f) to pay for and do all things necessary to
maintain all warranty, service and/or other post delivery obligations with
Purchaser; and (f) not perform any action which could result in reduced or
non-payment by Purchaser.
2.4 Maximum EPK Purchase Price. Unless otherwise specified in the
-----------------------------
Confirmation relevant to a Transaction, the maximum EPK Purchase Price shall be
$300,000.00.
2.5 Compensation of the Manager. The compensation of the Manager in
------------------------------
respect of its services in connection with a particular Transaction shall be the
Manager's Compensation set forth in the Confirmation with respect to such
Transaction; provided, that unless otherwise specified in the Confirmation with
respect to such Transaction, the compensation of the Manager in respect of a
particular Transaction shall be payable solely from the proceeds received by EPK
from the Purchaser and, if applicable, the Credit Enhancer with respect to such
Transaction and only to the extent that such proceeds exceed the EPK Minimum
Proceeds for such Transaction. Prior to the payment of Manager's Compensation,
EPK has the right, in its sole discretion, to require the Manager to execute a
general release duly notarized in form acceptable to EPK. In the event EPK
receives communication of any kind as to any conflicting claims or legal
proceedings made by any Party in connection with a particular Transaction
including, but not limited to, the Manager, Vendor and/or Purchaser, EPK
maintains the right, and is authorized by the Manager, and at Manager's sole
risk to (1) retain an amount acceptable to EPK in trust to reserve against such
claims and legal proceedings, (2) file suit in interpleader or for declaratory
relief and deposit such funds into court and/or (3) deposit same with an
attorney acceptable to EPK in trust for EPK, Manager and/or such claimants.
2.6 Further Assurances. The Manager hereby agrees that at any time and
------------------
from time to time after the execution of this Agreement, Manager shall, upon
request of EPK, execute and deliver such further acts and things as EPK may
request in order to fully effect the purposes of this Agreement and to protect
EPK's interests in the Goods and/or Credit Enhancements, including, but not
limited to, furnishing any and all documents necessary to enable EPK or its
insurer to defend itself in any litigation arising in connection herewith.
Manager shall give EPK written notice of any action known by Manager to have
been taken by a third party which may jeopardize EPK's rights in the Goods
and/or Credit Enhancement promptly after Manager becomes aware of the same.
Manager hereby agrees to reimburse EPK for all out-of-pocket costs and expenses
(including but not limited to reasonable attorneys fees) incurred by EPK in
connection with (i) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by EPK, the Vendor, the Purchaser, Manager or any other
person) in any way relating to the Goods, the transactions or this Agreement,
(ii) any attempt to enforce any of EPK's rights in the Goods or Credit
Enhancements in the transactions or under this Agreement against Manager, the
Vendor, the Purchaser or any other person, and/or (iii) any attempt to verify,
protect, sell, liquidate or otherwise dispose of the Goods and/or Credit
Enhancements.
2.7 Title. All Goods shall at all times be and remain the sole and
-----
exclusive property of EPK and titled in the name of EPK or such tradestyle as
may be acceptable to EPK.
2.8 Insurance on Goods. Manager shall obtain insurance on behalf of
--------------------
EPK which insures the Goods against all risks or physical loss or damage with
warehouse to warehouse coverage. All such policies of insurance shall name EPK
as the additional insured party and as first loss-payee thereunder. EPK shall
have the right to file all insurance claims in EPK's or Manager's name, as well
as the right to acquire insurance, at the sole cost of Manager, if Manager's
insurance is terminated or deemed insufficient by EPK.
2.9. Collection of Purchaser Purchase Price. Subject to the Credit
------------------------------------------
Enhancement identified as such in the Confirmation, all invoices shall instruct
the Purchaser to remit their payments directly to the Lock Box. Without
limiting the foregoing, in the event that Manager shall receive any remittances
from any Purchaser from time-to-time on account of Transactions, such
remittances shall be and remain EPK's property and Manager shall hold such
remittances as trustee of an express trust for EPK's benefit and immediately
deliver over to EPK for deposit or cause to be deposited the same in the Lock
Box or to EPK or to such other account designated by EPK. Manager acknowledges
that such remittances are the sole and exclusive property of EPK. All payments
of the Purchaser's Purchase Price which are made through presentment of a letter
of credit shall instruct the collecting or paying bank of said letter of credit
to make payment by wire transfer of immediately available funds to the Lock Box,
to EPK or to such other account designated by EPK. All funds deposited in said
special account are the sole and exclusive property of EPK. EPK and its
directors, officers and agents shall have the right to sign and endorse on
behalf of Manager all checks, drafts and other forms of payment received by EPK
in connection with the payment of any account. Manager appoints EPK or any other
person EPK may from time to time designate, as Manager's attorney-in-fact with
power to:
(a) endorse Manager's name on any checks, drafts or other forms of payment
or security that may come into possession;
(b) sign Manager's name on notices of assignment, verifications of accounts,
verifications of Purchase Orders and notices to current and/or potential future
Purchasers;
(c) receive, open and dispose of all mail addressed to Manager and received
by EPK;
(d) send notices of assignment, requests for verification of Purchase Orders
or requests for verification of accounts to current and/or potential future
Purchasers;
(e) to sign Manager's name and file any federal and state Financing
Statement(s) / recordations / registrations / continuation statements /
assignments / subordinations / terminations, etc. and/or amendments (UCC-1,
UCC-2, UCC-3, etc.);
(f) to use the name of Manager and, in EPK's sole discretion, to litigate,
file in court and/or serve documents in respect to, and, for an amount less than
face value or cost; etc. in prosecuting and/or defending any action/claim
brought by/against/involving Manager / EPK / Purchaser and/or any third parties;
(g) to settle, compromise, surrender Goods and/or security or modify any
such Purchase Order and otherwise deal with Purchaser, those with whom Manager
and/or Purchaser has contracted, for the account and risk of Manager,
notwithstanding any effect on any Purchase Order; and
(h) do all things necessary to carry out the terms of this Agreement.
2.10 Access to Information and Control Over Goods. Manager shall
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provide EPK with any and all information which EPK may reasonably request
concerning the Goods, the Purchaser, the Vendors, Manager, and/or any other
parties involved with the Goods, including, but not limited to, the inspection
of the books and records of Manager by EPK and its representatives. Manager
shall provide EPK with immediate access to any and all Goods in Manager's
possession, actual or constructive, upon request by EPK. In the event that EPK
determines in good faith that it is necessary for EPK to assert or enforce its
rights as owner of the Goods in order to adequately protect its interests, EPK
shall be permitted to take, and Manager shall assist EPK in taking any and all
action as EPK deems necessary, including, but not limited to, (i) notifying
freight forwarders, the Purchasers, the Vendors and other third parties of EPK's
interest in the Goods, and (ii) taking immediate and complete physical control
over the Goods and the proceeds and products thereof.
2.11. NO WARRANTIES ON GOODS. ALL GOODS COVERED BY THE AGREEMENT ARE
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RESOLD BY EPK "AS IS" AND "WITH ALL FAULTS," AND MANAGER ACKNOWLEDGES THAT NO
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE ARE TO BE
IMPLIED IN THE AGREEMENT. EPK GIVES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE
DESCRIPTION, QUALITY, MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE,
PRODUCTIVENESS, OR ANY OTHER MATTER OF ANY OF THE GOODS. EPK SHALL BE IN NO WAY
RESPONSIBLE FOR THE PROPER USE OR SERVICE OF THE GOODS.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 The Manager. The Manager hereby represents and warrants, and the
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delivery by the Manager of each Confirmation shall constitute the further
representation and warranty of the Manager, that:
(a) The Manager is a corporation duly organized and validly
existing and in good standing under the laws of Delaware.
(b) the Manager has all requisite authority to enter into this
Agreement and to perform all the obligations required to be performed by it
hereunder;
(c) neither the execution and delivery by the Manager of this
Agreement, nor the consummation of any of the Transactions herein contemplated,
nor compliance with the terms and provisions hereof, will (i) materially
contravene or conflict with the articles of incorporation or bylaws of the
Manager, any requirement of law to which the Manager is subject, or any
indenture, mortgage, deed of trust, or other agreement or instrument to which
the Manager is a party or by which the Manager may be bound, or to which the
property of the Manager may be subject, or (ii) result in the creation or
imposition of any lien on the property of the Manager by any party other than
EPK;
(d) this Agreement is the legal, valid and binding obligation of
the Manager, enforceable against the Manager in accordance with its terms;
(e) there is no material fact relevant to the transactions
contemplated by this Agreement (and in the case of each Confirmation, there is
no material fact relevant to the Transaction set forth in such Confirmation)
known to the Manager that the Manager has not disclosed to EPK;
(f) the Manager is not (and in the case of each Confirmation, to
the knowledge of the Manager after due inquiry, neither the Purchaser nor the
Vendor thereunder is) in default under any loan agreement, mortgage, security
agreement or other material agreement or obligation to which it is a party or by
which any of its property is bound;
(g) there are no material actions, suits or legal, equitable,
arbitration or administrative proceedings pending, or to the knowledge of the
Manager threatened, against the Manager (and in the case of each Confirmation,
to the knowledge of the Manager after due inquiry, there are no material
actions, suits or legal, equitable, arbitration or administrative proceedings
pending, or threatened, against the Purchaser or the Vendor thereunder);
(h) all tax returns required to be filed by the Manager in any
jurisdiction have been filed and all taxes, assessments, fees and other
governmental charges upon the Manager or upon any of its properties, income or
franchises have been paid prior to the time that such taxes could give rise to a
lien thereon;
(i) neither the execution and delivery of this Agreement nor the
consummation of any of the transactions contemplated hereby requires the consent
or approval of, the giving of notice to, or the registration, recording or
filing by the Manager or any other Person of any document with, or the taking of
any other action in respect of, any Governmental Authority which has
jurisdiction over the Manager (or, in the case of each Confirmation, the
Purchaser or the Vendor thereunder) or any of its property;
(j) the Manager has delivered to EPK a list of creditors of the
Manager; Annual Reports for Sentry Technology Corporation pursuant to Section 13
or 15d of the Securities Exchange Act of 1934 for the fiscal years ending
December 31, 2000 and December 31, 2001; Quarterly Report for Sentry Techn