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 June 30, 1999
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
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(Address of principal executive offices) (Zip Code)
516-232-2100
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(Registrant's telephone number, including area code)
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(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 August 4, 1999 was
9,750,761.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations --
Three Months Ended June 30, 1999 and 1998
and Six Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows --
Six Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements -- June 30, 1999 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
<PAGE>
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
-------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,002 $ 873
Accounts receivable, less allowance for doubtful
accounts of $605 and $651, respectively 8,350 9,308
Net investment in sales-type leases -
current portion 525 574
Inventories 6,897 7,382
Assets held for sale --- 1,691
Prepaid expenses and other current assets 447 371
--------- ---------
Total current assets 17,221 20,199
NET INVESTMENT IN SALES-TYPE LEASES -
non-current portion 203 466
SECURITY DEVICES ON LEASE, net 55 65
PROPERTY, PLANT AND EQUIPMENT, net 4,046 4,348
GOODWILL AND OTHER INTANGIBLES, net 7,441 8,222
OTHER ASSETS 155 196
--------- ---------
$ 29,121 $ 33,496
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 634 $ 2,765
Accounts payable 1,476 1,257
Accrued liabilities 2,900 3,080
Obligations under capital leases -
current portion 169 180
Deferred income 396 249
--------- ---------
Total current liabilities 5,575 7,531
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion 2,976 3,061
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 335 362
--------- ---------
Total liabilities 8,886 10,954
REDEEMABLE CUMULATIVE PREFERRED STOCK 27,171 26,517
COMMON SHAREHOLDERS' EQUITY (DEFICIT)
Common stock 10 10
Additional paid-in capital 14,868 15,522
Accumulated deficit (21,814) (19,507)
--------- ---------
(6,936) (3,975)
--------- ---------
$ 29,121 $ 33,496
========= =========
See notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 7,269 $ 7,199 $ 12,659 $ 12,397
COSTS AND EXPENSES:
Cost of sales 4,146 3,155 6,919 5,990
Customer service expenses 1,289 1,649 2,989 3,036
Selling, general and
administrative expenses 2,379 2,443 4,668 4,911
Research and development 322 330 635 666
Interest expense, net 121 113 258 211
--- --- --- ---
8,257 7,690 15,469 14,814
----- ----- ------ ------
OPERATING LOSS (988) (491) (2,810) (2,417)
OTHER INCOME - Gain on sale
of facilities (Note E) -- -- 503 --
-------- -------- -------- ---------
(988) (491) (2,307) (2,417)
INCOME TAXES -- -- -- 21
-------- -------- -------- ---------
NET LOSS (988) (491) (2,307) (2,438)
PREFERRED STOCK DIVIDENDS 333 317 654 623
-------- -------- -------- ---------
NET LOSS ATTRIBUTED
TO COMMON SHAREHOLDERS $ 1,321) $ (808) $ (2,961) $ (3,061)
======== ======= ======== ========
NET LOSS PER COMMON SHARE
Basic $ (.14) $ (.08) $ (.30) $ ( .31)
========= ========= ========= =========
Diluted $ (.14) $ .08) $ (.30) $ ( .31)
========= ========= ========= =========
WEIGHTED AVERAGE
COMMON SHARES
Basic 9,751 9,751 9,751 9,751
===== ===== ===== =====
Diluted 9,751 9,751 9,751 9,751
===== ===== ===== =====
See notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(2,307) $(2,438)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization of security
devices and property, plant and equipment 416 590
Amortization of goodwill and intangibles 797 793
Provision for bad debts 14 7
Gain on sale of facilities (503) --
Changes in operating assets and liabilities,
net of effects of business acquired:
Accounts receivable 944 (868)
Net investment in sales-type leases 312 299
Inventories 485 112
Accounts payable 219 (910)
Accrued liabilities (180) 4
Other, net 85 (40)
------- -------
Net cash provided by (used in) operating activities 282 (2,451)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of facilities 2,194 --
Purchase of property, plant and equipment, net (106) (16)
Security devices on lease 2 (29)
Intangibles (16) (7)
------- -------
Net cash provided by (used in) investing activities 2,074 (52)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under the revolving line of credit (2,131) 1,901
Repayment of obligations under capital leases (96) (93)
------- -------
Net cash provided by (used in) financing activities (2,227) 1,808
------- -------
INCREASE (DECREASE) IN CASH 129 (695)
CASH, at beginning of period 873 2,146
------- -------
CASH, at end of period $ 1,002 $ 1,451
======= =======
See notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(in thousands)
<S> <C> <C>
Minimum lease payments receivable $ 837 $ 1,204
Allowance for uncollectible minimum lease payments (41) (60)
Unearned income (68) (120)
Unguaranteed residual value --- 16
--------- ---------
Net investment 728 1,040
Less current portion 525 574
--------- ---------
Non-current portion $ 203 $ 466
========= =========
</TABLE>
NOTE C -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------ -----------------
(in thousands)
<S> <C> <C>
Raw materials $ 2,508 $ 2,497
Work-in-process 2,711 3,058
Finished goods 1,678 1,827
--------- ---------
$ 6,897 $ 7,382
========= =========
Reserves for excess and obsolete inventory totaled $1,311,000 and $1,318,000 as
of June 30, 1999 and December 31, 1998, respectively and have been included as a
component of the above amounts.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE D -- SUPPLY AGREEMENT
Knogo N.A. had a supply agreement under which Sensormatic Electronics
Corporation ("Sensormatic") was obligated to purchase products from Knogo N.A.
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 $1,371,000 and $531,000 in the quarters ended
June 30, 1999 and 1998 and $1,680,000 and $1,298,000 in the six month periods
ended June 30, 1999 and 1998, respectively. Included in accounts receivable as
of June 30, 1999 and December 31, 1998 are amounts due from Sensormatic of
$1,079,000 and $162,000, respectively.
NOTE E -- OTHER INCOME - GAIN ON SALE OF FACILITIES
In February 1999, the Company sold its Puerto Rico manufacturing facility and
Illinois CCTV design center and related land for net proceeds of approximately
$2.2 million. At December 31, 1998, included in assets held for sale was
approximately $1.7 million representing the net carrying amount of these
properties. A gain representing the excess of the net proceeds over the carrying
value of these properties of $503,000 was recognized in the first quarter of
1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD LOOKING STATEMENTS
This report may include information that could constitute forward-looking
statements made pursuant to the safe harbor provision of the Private Securities
Litigation Reform Act of 1995. Any such forward-looking statements may involve
risk and uncertainties that could cause actual results to differ materially from
any future results encompassed within forward-looking statements.
RESULTS OF OPERATIONS:
Consolidated revenues were 1% and 2% higher in the quarter and six month period
ended June 30, 1999 than in the quarter and six month period ended June 30,
1998. Revenues from third party customers, other than Sensormatic, in the
current periods were 81% and 87% of total revenues, as compared to 93% and 90%
of total revenues in the prior year periods. Total revenues for the periods
presented are broken out as follows:
<TABLE>
<CAPTION>
Q-2 Q-2 6 Mos. 6 Mos.
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
EAS systems $ 1,680 $ 1,477 14% $ 3,298 $ 2,969 11%
CCTV 2,143 1,958 9% 4,538 3,232 40%
SentryVision(R) 810 1,946 (58%) 1,105 2,738 (60%)
3M library products 596 511 17% 833 888 (6%)
- - --- --- -- --- --- --
5,229 5,892 (11%) 9,774 9,827 (1%)
Service revenues and other 669 776 (14%) 1,205 1,272 (5%)
--- --- --- ----- ----- --
Third party customer revenues 5,898 6,668 (12%) 10,979 11,099 (1%)
Sales to Sensormatic 1,371 531 158% 1,680 1,298 29%
----- --- --- ----- ----- --
Total revenues $ 7,269 $ 7,199 1% $ 12,659 $ 12,397 2%
========== ========= ======== ========= ========= =====
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The increase in CCTV revenues and decline in SentryVision(R) during the current
year periods is primarily related to the decision by one of the Company's major
customers to purchase conventional CCTV for the bulk of its security product
orders for 1999. Also, the second quarter of 1998 included a SentryVision(R)
sale to a multi-level parking garage which accounted for $1.2 million.
Cost of sales were 57% and 55% of total revenues in the three and six month
periods ended June 30, 1999 compared to 44% and 48% in the same periods in the
previous year. The increase in the percentage in the current year periods as
compared to the previous year periods is a result of a combination of factors
including: (i) a higher percentage of revenues resulting from sales to the
Company's distributors and to Sensormatic, both of which carry lower margins
than direct customer sales; (ii) increased sales of CCTV products which result
in higher product costs than the SentryVision(R) product line; and (iii) higher
EAS product costs due to continued training costs and lower machine output
levels on equipment damaged in transit from the Puerto Rico plant.
Customer service expenses were 22% and 2% lower in the second quarter and first
six months of 1999 as compared to the second quarter and first six months of
1998 due primarily to a lower number of SentryVision(R) installations in the
current periods which require more labor than installations of the Company's
other products.
Selling, general and administrative expenses were lower in both the three month
and six month periods ended June 30, 1999 as compared to the same periods of the
previous year primarily as a result of the savings through the consolidation of
facilities.
Research and development costs remained fairly constant in all periods
presented. The primarily emphasis in the current year has been directed towards
manufacturing improvements related to the move from Puerto Rico to New York and
improvements to the SentryVision(R)system.
Net interest expense for the second quarter and first six months of 1999
increased by $8,000 and $47,000, repectively, over the same periods of 1998. The
increase is due to higher net borrowings under the Company's revolving credit
agreement.
During the first quarter of 1999, the Company sold its Puerto Rico manufacturing
facility and Illinois design center for net cash proceeds of approximately $2.2
million which resulted in a net gain on the sale of $503,000.
Sentry's income taxes in the first half of 1998 represent a provision on the
cumulative earning of the Puerto Rico manufacturing operations which were closed
at the end of 1998. Due to net losses, Sentry has not provided for income taxes
in any other periods presented.
As a result of the foregoing, Sentry had a net loss of $988,000 and $2,307,000
in the quarter and six month period ended June 30, 1999 as compared to a net
loss of $491,000 and $2,438,000 in the quarter and six months ended June 30,
1998.
Preferred stock dividends of $333,000 and $654,000 have been recorded in the
second quarter and first six months of 1999 as compared to $317,000 and $623,000
in the second quarter and first six months of 1998. Dividends accrued through
February 12, 1999 were paid-in-kind as of that date. In connection with the
waiver of certain financial covenants under the Company's agreement with its
commercial lender, the Company is restricted from paying cash dividends,
including the cash dividend on its Class A Preferred Stock which would otherwise
be payable in August of 1999. Under the terms of the Class A Preferred Stock,
the dividends will cumulate and Class A Preferred Stockholders, voting as a
class, will be entitled to elect two additional directors to the Company's
Board.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES AS OF JUNE 30, 1999
The Company has funded its operations and capital expenditures through
borrowings under its revolving credit facility and use of existing cash. The
cash proceeds of $2.2 million from the sale of certain facilities, noted above,
were used to reduce borrowings under the revolving credit facility during the
first quarter.
The Company anticipates that current cash reserves, cash generated by operations
and financing arrangements should be sufficient to meet the Company's working
capital requirements as well as future capital expenditure requirements for the
next twelve months.
YEAR 2000 UPDATE
Many existing computer programs were designed and developed without considering
the upcoming change in the century, which could lead to the failure of computer
applications or create erroneous results by or at the Year 2000. On January 1,
2000, any computer system or other equipment using date sensitive software which
uses only two digits to represent the year may recognize "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar activities.
Recognizing the potential impact, the Company began actively resolving its Year
2000 compliance issues in early 1997. Using internal and external resources, the
Company analyzed and assessed its business systems, including computer systems,
PC's and network hardware, telephone systems, production process controllers,
access control, office equipment and the product it sells.
Upgrades to both mid-range and network computer hardware, operating systems and
related infrastructures have been completed and are now Year 2000 compliant. All
critical application software has been reviewed and Year 2000 compliant versions
have been obtained. The Company has completed the process of retrofitting custom
modifications to the upgraded versions. All applications with forward scheduling
impact are now considered to be Year 2000 compliant. The Company believes its
manufactured products are Year 2000 compliant.
The cost of becoming compliant is not expected to exceed $300,000 and
approximately one half has been incurred to date. The remaining costs relate
primarily to hardware upgrades to the Company's PC's and telephone systems which
will be completed by the third quarter of 1999. There can be no assurance that
the Company will not incur unanticipated costs or that it will be able to
successfully address all Year 2000 issues.
The impact of the Year 2000 issue on the Company will also be affected by the
Year 2000 readiness of its business partners, customers, suppliers and vendors
and providers of facilities, equipment and services. Failure by these third
parties to be Year 2000 compliant may adversely affect, among other things, the
Company's production, revenue and the timing of cash receipts. The Company has
begun to make inquiries of such third parties in this regard and based on the
responses to these inquiries, the Company will decide to what extent, if any, a
contingency plan should be developed. To date, however, the Company has received
only preliminary feedback from such third parties and has not independently
confirmed any information received from such third parties with respect to Year
2000 issues. As such, there can be no assurance that such third parties will
address the Year 2000 issue and complete their Year 2000 conversion in a timely
fashion or will not suffer a Year 2000 business disruption that may adversely
affect the Company's business.
<PAGE>
JUNE 30, 1999
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 June 30, 1999.
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: AUGUST 5, 1999 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 JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,002
<SECURITIES> 0
<RECEIVABLES> 8,955
<ALLOWANCES> 605
<INVENTORY> 6,897
<CURRENT-ASSETS> 17,221
<PP&E> 9,628
<DEPRECIATION> 5,582
<TOTAL-ASSETS> 29,121
<CURRENT-LIABILITIES> 5,575
<BONDS> 2,976
27,171
0
<COMMON> 10
<OTHER-SE> (6,946)
<TOTAL-LIABILITY-AND-EQUITY> 29,121
<SALES> 11,455
<TOTAL-REVENUES> 12,659
<CGS> 6,919
<TOTAL-COSTS> 8,278
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 258
<INCOME-PRETAX> (2,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,307)
<EPS-BASIC> (.30)
<EPS-DILUTED> (.30)
</TABLE>
