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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12727
SENTRY TECHNOLOGY CORPORATION
(Exact name of 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)
516-232-2100
(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 ______
Number of shares outstanding of issuer's common stock as of May 13, 1998 was
9,750,760.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations --
Three Months Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows --
Three Months Ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements -- March 31, 1998 6 - 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8 - 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 9
<PAGE>
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,435 $ 2,146
Accounts receivable, less allowance for doubtful
accounts of $737 and $752, respectively 6,249 6,323
Net investment in sales-type leases -
current portion 587 613
Inventories 8,465 8,297
Prepaid expenses and other current assets 513 387
--------- ---------
Total current assets 17,249 17,766
NET INVESTMENT IN SALES-TYPE LEASES -
non-current portion 718 848
SECURITY DEVICES ON LEASE, net 163 151
PROPERTY, PLANT AND EQUIPMENT, net 6,848 6,948
GOODWILL AND OTHER INTANGIBLES, net 9,403 9,796
OTHER ASSETS 427 428
--------- ---------
$ 34,808 $ 35,937
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 1,052 $ ---
Accounts payable 1,608 1,982
Accrued liabilities 2,740 2,730
Obligations under capital leases -
current portion 201 218
Deferred income 447 421
--------- -------
Total current liabilities 6,048 5,351
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion 3,222 3,095
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 439 445
-------- ---------
Total liabilities 9,709 8,891
REDEEMABLE CUMULATIVE PREFERRED STOCK 25,560 25,254
COMMON SHAREHOLDERS' EQUITY
Common stock 10 10
Additional paid-in capital 16,479 16,785
Accumulated deficit (16,950) (15,003)
--------- ---------
(461) 1,792
--------- ---------
$ 34,808 $ 35,937
========= =========
Seee notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
REVENUES $ 5,198 $ 5,103
COSTS AND EXPENSES:
Cost of sales 2,835 2,499
Customer service expenses 1,387 837
Selling, general and administrative expenses 2,468 2,435
Research and development 336 430
Interest expense (income), net 98 (54)
Purchased in-process research and development --- 13,200
-------- ---------
7,124 19,347
-------- ---------
OPERATING LOSS (1,926) (14,244)
INCOME TAXES 21 36
------- ---------
NET LOSS (1,947) (14,280)
PREFERRED STOCK DIVIDENDS 306 ---
-------- ---------
NET LOSS ATTRIBUTED TO COMMON SHAREHOLDERS $ (2,253) $ (14,280)
========== =========
NET LOSS PER SHARE
Basic $ (.23) $ (1.95)
----------- ----------
Diluted $ (.23) $ (1.95)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
Basic 9,751 7,330
----- -----
Diluted 9,751 7,330
----- -----
See notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,947) $(14,280)
Adjustments to reconcile net loss
to net cash used in operating activities:
Write-off of purchased in-process research
and development --- 13,200
Depreciation and amortization of security
devices and property, plant and equipment 301 292
Amortization of goodwill and intangibles 397 272
Provision for bad debts 5 91
Changes in operating assets and liabilities,
net of effects of business acquired:
Accounts receivable 69 1,245
Net investment in sales-type leases 156 92
Inventories (168) (523)
Accounts payable (374) (328)
Accrued liabilities 10 (803)
Other, net (105) 96
--------- ---------
Net cash used in operating activities (1,656) (646)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (25) ---
Security devices on lease (22) 39
Intangibles (4) ---
--------- ---------
Net cash (used in) provided by investing activities (51) 39
---- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings, net 1,052 ---
Repayment of acquired debt --- (2,166)
Repayment of obligations under capital leases (56) (167)
------ --------
Net cash provided by (used in) financing activities 996 (2,333)
------- --------
DECREASE IN CASH (711) (2,940)
CASH, at beginning of period 2,146 7,658
------- ---------
CASH, at end of period $ 1,435 $ 4,718
========= =========
See notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE A -- BASIS OF PRESENTATION - KNOGO NORTH AMERICA INC. AND VIDEO SENTRY
CORPORATION MERGER 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
merger has been accounted for as a reverse acquisition of Video Sentry by Knogo
N.A. Accordingly the financial statements of Knogo N.A. are the historical
financial statements of Sentry and the results of Sentry's operations include
the results of operations of Video Sentry after the Effective Date. The term
"Company" refers to Sentry as of and subsequent to February 12, 1997 and to
Knogo N.A. prior to such date.
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.
NOTE B -- NET INVESTMENT IN SALES-TYPE LEASES The Company is the lessor of
security devices under agreements expiring in various years through 2002. The
net investment in sales-type leases consists of:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(in thousands)
<S> <C> <C>
Minimum lease payments receivable $ 1,512 $ 1,713
Allowance for uncollectible minimum lease payments (76) (86)
Unearned income (160) (195)
Unguaranteed residual value 29 29
--------- ---------
Net investment 1,305 1,461
Less current portion 587 613
--------- ---------
Non-current portion $ 718 $ 848
========= =========
NOTE C -- INVENTORIES Inventories consist of the following:
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(in thousands)
Raw materials $ 3,281 $ 2,662
Work-in-process 3,180 3,765
Finished goods 2,004 1,870
--------- ---------
$ 8,465 $ 8,297
========= =========
</TABLE>
Reserves for excess and obsolete inventory totaled $1,295,000 and $1,246,000 as
of March 31, 1998 and December 31, 1997, respectively and have been included as
a component of the above amounts.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE D -- SUPPLY AGREEMENT
Knogo N.A. had a supply agreement under which Sensormatic Electronics
Corporation ("Sensormatic") was obligated to purchase $2 million of products
from Knogo N.A. per quarter through June 30, 1997. Such products were priced to
yield Knogo N.A. a 35% gross margin. Although the supply agreement officially
expired and minimum purchase obligations ended, Sensormatic continued to
purchase certain products at similar margins. Sales to Sensormatic were $767,000
and $774,000 in the quarters ended March 31, 1998 and 1997, respectively. In the
first quarter of 1997, Sensormatic did not meet its minimum order amounts in
accordance with the terms of the supply agreement and, accordingly, the Company
recorded in revenues an amount of $502,000 representing the cumulative profits
on the shortfall payable to the Company pursuant to the agreement. Included in
accounts receivable as of March 31, 1998 and December 31, 1997 are amounts due
from Sensormatic of $646,000 and $492,000, respectively.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS:
Consolidated revenues were 2% higher in the first quarter ended March 31, 1998
than in the quarter ended March 31, 1997. Revenues from third party customers,
other than Sensormatic, in the current periods were $4,431,000 or 85% of total
revenues, as compared to $3,827,000 or 75% of total revenues in the prior year
period. These amounts represent a 16% increase over the first quarter in the
previous year. The increase is primarily due to higher sales in the CCTV product
lines, including the SentryVision(R) traveling CCTV surveillance system, which
was partially offset by lower retail and library EAS sales. Although the supply
agreement officially expired and minimum purchase obligations ended, Sensormatic
continued to purchase certain products at similar margins (See Note D). Sales to
Sensormatic were $767,000 and $774,000 in the quarters ended March 31, 1998 and
1997, respectively. Revenues in the first quarter of 1997 also included $502,000
representing the cumulative profits on the shortfall of minimum orders payable
to the Company in accordance with the terms of the supply agreement.
Cost of sales were 55% of total revenues in the three months ended March 31,
1998 compared to 49% in the same period in the previous year. Approximately 5%
of this increase is attributable to the amount of cumulative profits on the
minimum order shortfall under the supply agreement included in revenues in the
first quarter of 1997, which has no corresponding cost of sales. The 1998 cost
of sales percentage was also negatively impacted by a greater mix of distributed
CCTV products sold. These products are not produced by the Company and therefore
carry lower margins than the traditional CCTV and SentryVision(R) systems the
Company currently manufactures. This was offset, in part, by higher fixed cost
absorption due to higher production levels during the quarter in the Company's
manufacturing facility.
Customer service expenses were 66% higher in the first quarter of 1998 than in
the first quarter of 1997, but was about the same level as in the fourth quarter
of 1997. The higher costs were associated with the number of customer service
technicians and installers retained in anticipation of releases from the
Company's substantial backlog of orders.
Selling, general and administrative expenses remained approximately the same in
both amount and percentage of total revenues. Current period increases in
amortization of goodwill and intangibles and warranty costs were offset
partially by lower sales promotional expenses and the result of ongoing cost
control measures.
The decrease in research and development costs in the first quarter ended March
31, 1998 compared to the quarter ended March 31, 1997 is a result of a reduction
in staff levels and prototype costs associated with the completion of certain
EAS related projects.
At the consummation of the merger in the first quarter of 1997, Sentry recorded
for that period a non-recurring charge of $13,200,000 relating to purchased
in-process research and development. The amount was based on the purchase price
allocation and a valuation of existing technology and technology in-process. The
charge for in-process research and development equaled its estimated current
fair value based on risk adjusted cash flows of specifically identified
technologies for which the technological feasibility has not been established
and alternative future uses did not exist.
The Company had net interest expense in the current year period as compared to
net interest income in the 1997 period. Interest income was $11,000 in the first
quarter of 1998 as compared to $75,000 in the same period of 1997 due to lower
amounts of temporary investments. Interest expense was $109,000 in the three
month period ended March 31, 1998 as compared to $21,000 in the same period of
1997. The increase is primarily due to borrowings under the Company's revolving
credit agreement which became effective during the first quarter of 1998.
Sentry's income taxes in both periods represent provisions on the cumulative
earnings of the Puerto Rico manufacturing operations which cannot be offset by
operating losses of other subsidiaries.
As a result of the foregoing, Sentry had a net loss of $1,947,000 in the quarter
ended March 31, 1998 as compared to a net loss of $14,280,000 in the quarter
ended March 31, 1997.
Preferred stock dividends of $306,000 have been accrued in the first quarter of
1998. This amount will be paid-in-kind as of February 12, 1999.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FINANCIAL CONDITION AS OF MARCH 31, 1998
During the quarter the Company funded its operations and capital expenditures
through borrowings under its revolving credit facility and use of existing cash.
The Company believes the liquidity provided by future operations, existing cash
and financing arrangements should be sufficient to meet the Company's capital
requirements for the next twelve months.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
27. Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K - There were no reports on Form 8-K filed
for the three months ended March 31, 1998.
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: May 14, 1998 By: /S/ PETER J. MUNDY
------------------
Peter J. Mundy, Vice President -
Finance and Chief Financial Officer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,435
<SECURITIES> 0
<RECEIVABLES> 6,986
<ALLOWANCES> 737
<INVENTORY> 8,465
<CURRENT-ASSETS> 17,249
<PP&E> 13,563
<DEPRECIATION> 6,715
<TOTAL-ASSETS> 34,808
<CURRENT-LIABILITIES> 6,048
<BONDS> 3,222
25,560
0
<COMMON> 10
<OTHER-SE> (471)
<TOTAL-LIABILITY-AND-EQUITY> 34,808
<SALES> 4,702
<TOTAL-REVENUES> 5,198
<CGS> 2,835
<TOTAL-COSTS> 4,186
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> (1,926)
<INCOME-TAX> 21
<INCOME-CONTINUING> (1,947)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,947)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
<FN>
Amounts inapplcable or not disclosed as a separate line on the Statement of
Financial Position or Results of Operations are reported as 0 herein.
</FN>
</TABLE>
