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, 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
(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 November 12, 1999
was 9,750,760.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations --
Three Months Ended September 30, 1999 and 1998
and Nine Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements -- September 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 3. Defaults Upon Senior Securities 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
<PAGE>
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,180 $ 873
Accounts receivable, less allowance for doubtful
accounts of $604 and $651, respectively 8,071 9,308
Net investment in sales-type leases -
current portion 472 574
Inventories 7,042 7,382
Assets held for sale --- 1,691
Prepaid expenses and other current assets 340 371
--------- ---------
Total current assets 17,105 20,199
NET INVESTMENT IN SALES-TYPE LEASES -
non-current portion 127 466
SECURITY DEVICES ON LEASE, net 76 65
PROPERTY, PLANT AND EQUIPMENT, net 4,057 4,348
GOODWILL AND OTHER INTANGIBLES, net 7,045 8,222
OTHER ASSETS 22 196
--------- ----------
$ 28,432 $ 33,496
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 1,660 $ 2,765
Accounts payable 1,252 1,257
Accrued liabilities 2,918 3,080
Obligations under capital leases -
current portion 163 180
Deferred income 334 249
--------- ---------
Total current liabilities 6,327 7,531
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion 2,934 3,061
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 313 362
--------- ---------
Total liabilities 9,574 10,954
REDEEMABLE CUMULATIVE PREFERRED STOCK 27,507 26,517
COMMON SHAREHOLDERS' EQUITY (DEFICIT)
Common stock 10 10
Additional paid-in capital 14,532 15,522
Accumulated deficit (23,191) (19,507)
---------- ---------
(8,649) (3,975)
---------- ----------
$ 28,432 $ 33,496
========== ==========
</TABLE>
See notes to the condensed consolidated financial statements.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 5,523 $ 8,100 $ 18,182 $ 20,497
COSTS AND EXPENSES:
Cost of sales 2,872 4,001 9,791 9,991
Customer service expenses 1,245 1,637 4,234 4,673
Selling, general and
administrative expenses 2,257 2,461 6,925 7,372
Research and development 397 343 1,032 1,009
Interest expense, net 129 141 387 352
--------- --------- --------- ---------
6,900 8,583 22,369 23,397
--------- --------- --------- ---------
OPERATING LOSS (1,377) (483) (4,187) (2,900)
OTHER INCOME - Gain on sale
of facilities (Note E) --- --- 503 ---
--------- --------- --------- ---------
(1,377) (483) (3,684) (2,900)
INCOME TAXES --- --- --- 21
--------- --------- --------- ---------
NET LOSS (1,377) (483) (3,684) (2,921)
PREFERRED STOCK DIVIDENDS 336 320 990 943
--------- --------- --------- ---------
NET LOSS ATTRIBUTED
TO COMMON SHAREHOLDERS $ (1,713) $ (803) $ (4,674) $ (3,864)
========= ========= ========= =========
NET LOSS PER COMMON SHARE
Basic $ (.18) $ (.08) $ (.48) $ (.40)
=========== =========== ========= ==========
Diluted $ (.18) $ (.08) $ (.48) $ (.40)
============ =========== ========= ==========
WEIGHTED AVERAGE
COMMON SHARES
Basic 9,751 9,751 9,751 9,751
========= ========= ========= =========
Diluted 9,751 9,751 9,751 9,751
========= ========= ========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES: ----- ----
<S> <C> <C>
Net loss $ (3,684) $ (2,921)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization of security
devices and property, plant and equipment 584 867
Amortization of goodwill and intangibles 1,194 1,190
Provision for bad debts 20 15
Gain on sale of facilities (503) ---
Changes in operating assets and liabilities,
net of effects of business acquired:
Accounts receivable 1,217 (2,744)
Net investment in sales-type leases 441 406
Inventories 340 (1)
Accounts payable (5) (159)
Accrued liabilities (162) 427
Other, net 241 (38)
--------- ---------
Net cash used in operating activities (317) (2,958)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of facilities 2,194 ---
Purchase of property, plant and equipment, net (274) (175)
Security devices on lease (30) (14)
Intangibles (17) (17)
--------- ---------
Net cash provided by (used in) investing activities 1,873 (206)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under the revolving line of credit (1,105) 2,459
Repayment of obligations under capital leases (144) (141)
--------- ---------
Net cash provided by (used in) financing activities (1,249) 2,318
--------- ---------
INCREASE (DECREASE) IN CASH 307 (846)
CASH, at beginning of period 873 2,146
--------- ---------
CASH, at end of period $ 1,180 $ 1,300
========= =========
See notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 2003. The net investment in sales-type leases consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(in thousands)
<S> <C> <C>
Minimum lease payments receivable $ 685 $ 1,204
Allowance for uncollectible minimum lease payments (34) (60)
Unearned income (52) (120)
Unguaranteed residual value --- 16
--------- ---------
Net investment 599 1,040
Less current portion 472 574
--------- ---------
Non-current portion $ 127 $ 466
========= =========
NOTE C -- INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(in thousands)
Raw materials $ 2,574 $ 2,497
Work-in-process 2,731 3,058
Finished goods 1,737 1,827
--------- ---------
$ 7,042 $ 7,382
========= =========
</TABLE>
Reserves for excess and obsolete inventory totaled $1,299,000 and $1,318,000 as
of September 30, 1999 and December 31, 1998, respectively and have been included
as a component of the above amounts.
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 $125,000 and $116,000 in the quarters ended
September 30, 1999 and 1998 and $1,805,000 and $1,414,000 in the nine month
periods ended September 30, 1999 and 1998, respectively.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 32% and 11% lower in the quarter and nine month
period ended September 30, 1999 than in the quarter and nine month period ended
September 30, 1998. Total revenues for the periods presented are broken out as
follows:
<TABLE>
<CAPTION>
Q-3 Q-3 9 Mos. 9 Mos.
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
EAS systems $ 2,349 $ 2,610 (10%) $ 5,647 $ 5,579 1%
CCTV 1,496 2,431 (38%) 6,034 5,663 7%
SentryVision(R) 580 1,948 (70%) 1,685 4,686 (64%)
3M library products 83 316 (74%) 916 1,204 (24%)
--------- -------- --------- --------- --------- --------
4,508 7,305 (38%) 14,282 17,132 (17%)
Service revenues and other 890 679 31% 2,095 1,951 7%
--------- -------- ---------- --------- --------- --------
Third party customer revenues 5,398 7,984 (32%) 16,377 19,083 (14%)
Sales to Sensormatic 125 116 8% 1,805 1,414 28%
--------- -------- --------- --------- --------- --------
Total revenues $ 5,523 $ 8,100 (32%) $ 18,182 $ 20,497 (11%)
========= ======== ========== ========= ========= =========
</TABLE>
In the third quarter of 1999, revenues decreased in all product lines. The
decrease is attributed to a slow-down in the number of orders placed by both the
Company's existing customer base as well as new prospective customers, resulting
in a significant decline in sales during the period. Management believes that
revenues were also negatively impacted by the Company's announcement in the
third quarter that it retained an investment banking firm for a possible
corporate transaction, which raised uncertainties about the Company's future
with its customers. For the nine month period ended September 30, 1999, the
decline in SentryVision(R) is primarily related to the decision by one of the
Company's major SentryVision(R) customers to purchase conventional CCTV for the
bulk of its security product orders for 1999.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cost of sales were 52% and 54% of total revenues in the three and nine month
periods ended September 30, 1999 compared to 49% in both 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) increased scrap and rework costs associated with quality related
issues in the SentryVision(R) product line; (ii) increased sales of CCTV
products in the nine month period which result in higher product costs than the
SentryVision(R) product line; and (iii) higher EAS product costs due to
continued lower machine output levels on equipment damaged in transit from the
Puerto Rico plant.
Customer service expenses were 24% and 9% lower in the third quarter and first
nine months of 1999 as compared to the third quarter and first nine 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 nine month periods ended September 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 were slightly higher in the third quarter of 1999
as compared to 1998. The primary 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 third quarter of 1999 decreased by $12,000 over the
same period of 1998 due to lower 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 nine months 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 $1,377,000 and $3,684,000
in the quarter and nine month period ended September 30, 1999 as compared to a
net loss of $483,000 and $2,921,000 in the quarter and nine months ended
September 30, 1998.
Preferred stock dividends of $336,000 and $990,000 have been recorded in the
third quarter and first nine months of 1999 as compared to $320,000 and $943,000
in the third quarter and first nine 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
have been 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.
LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 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 has no material capital expenditure or purchase
commitments as of September 30, 1999.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's existing credit agreement with G.E. Capital Corporation is due to
expire as of December 31, 1999. The Company's ability to renew the credit
agreement will depend, in large part, on its ability to reduce losses and
improve operating results. Presently, the Company is completing its revised
business plan for the year 2000 and beyond which, upon completion, will be
presented to the existing lender and others. Although there are no assurances
that their efforts will be successful, it is management's belief that it will be
able to renew or replace the existing line. The existing credit agreement does
not permit the Company to pay cash dividends on the Class A Preferred Stock.
Accordingly, the August 1999 dividend was not paid but instead was cumulated.
Management believes that any replacement facility would similarly prohibit the
Company from paying cash dividends.
The Company anticipates that current cash reserves, cash generated by operations
and cash obtained under financing arrangements, if consummated, 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 Company has incurred approximately $300,000 of costs to date related to the
Year 2000 program. Approximately $196,000 was incurred in the first nine months
of 1999. The remaining costs, estimated to be $55,000, relate primarily to
hardware upgrades on the Company's PC's and telephone systems, which will be
completed before the end of 1999. There can be no assurance that the Company
will not incur unanticipated costs or that it will be able to 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
contacted many of its critical suppliers, financial institutions, public
utilities and other entities to determine the Year 2000 readiness of its
material business relationships. While the Company has not been informed of any
material risks associated with these entities, there is no guarantee of the Year
2000 readiness of those entities or the potential material adverse effect on the
Company.
<PAGE>
SENTRY TECHNOLOGY CORPORATION
SEPTEMBER 30, 1999
PART II - OTHER INFORMATION
RECENT DEVELOPMENTS
As a result of the Company's current operating results and low stock price, the
Company has scheduled meetings with the American Stock Exchange (the "Exchange")
on the future listing status of the Company's stock on the Exchange. Should the
Exchange determine to discontinue the Company's listing, the Company's stock
would continue to trade on an over-the-counter basis. This, however, could have
a negative impact on the Company's stock price.
On October 13, 1999, the Company gave notice to Legg Mason Wood Walker ("Legg
Mason") of the Company's determination to terminate its engagement with Legg
Mason. The termination was effective November 3, 1999. The Company retained Legg
Mason in May 1999 to locate a potential strategic partner for a corporate
transaction with the Company. As of October 13, 1999, Legg Mason had been
unsuccessful in developing a potential transaction, and the Company resolved to
end its search. Management believes that the Company's low stock price (relative
to its competitors') and unsuccessful search for a strategic transaction partner
may raise uncertainties with the Company's present customers and impede
development of new customers.
On October 15, 1999, the Company appointed Anthony H.N. Schnelling as the
interim President & Chief Executive Officer of the Company, replacing Thomas A.
Nicolette. Mr. Schnelling, who is a principal of Restoration Management Company,
LLC, will focus the management team's efforts on revising the Company's business
plan with a view to reduce losses and improve the Company's operating results
over the next year. However, based on the Company's present condition, there can
be no assurance that management will be successful in these efforts.
Item 3. Defaults Upon Senior Securities
(b) As described more fully in Management's Discussion and Analysis of
Financial Condition above, the agreement governing the Company's
existing credit facility presently will not permit the Company to pay
the dividend. Accordingly, on August 12, 1999 the Company did not pay
the $.125 cash dividend per share on its Class A Preferred Stock.
Since any replacement credit facility is likely to also prohibit the
payment of cash dividends, the Company believes that it will not pay
the February 2000 dividend on the Class A Preferred Stock. Unpaid
dividends cumulate as provided in the Certificate of Designations
governing the Class A Preferred Stock. See "Liquidity and Capital
Resources."
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
10.15 Consulting Agreement between the Company and Restoration
Management Company, LLC
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 September 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: NOVEMBER 12, 1999 By: /S/ PETER J. MUNDY
----------------- -------------------
Peter J. Mundy, Vice President
- Finance and Chief Financial
Officer (Principal Financial
and Accounting Officer)
<PAGE>
Restoration Management Company, LLC
35 Sutton Place Suite 9G
New York, NY 10022
November 11, 1999
Gentlemen:
Pursuant to Section 5(ii) of the Agreement between Restoration Management
Company, LLC ("Restoration") and Sentry Technology Corporation (the "Company")
dated October 15, 1999 (the "Agreement"), this letter confirms the parties'
understanding as to the compensation to be paid to Restoration for the services
of Anthony A. Gerbino ("Gerbino") to the Company.
0 As of November 1, 1999, Restoration shall be compensated for the
services of Gerbino to the Company at the rate of $50 per hour for the
first 200 hours billed each month but shall not receive compensation
for hours billed in excess of 200 hours per month.
0 The Company shall pay Restoration on the 15th day of each month
beginning November 15, 1999 for hours billed during the previous
month.
0 The Company shall pay directly or reimburse Restoration, upon receipt
of periodic billings, for all reasonable out-of-pocket and incidental
expenses such as travel, lodging, entertainment, postage, telephone
and facsimile charges incurred by Gerbino in connection with his
services to the Company.
As contemplated by the Agreement, Restoration shall receive no additional
compensation for services rendered by Gerbino prior to November 1, 1999.
Very truly yours,
Sentry Technology Corporation
By: /s/Peter J. Mundy
Peter J. Mundy
Vice President-Finance and CFO
Accepted and agreed as of November 11, 1999
Restoration Management Company, LLC
By: /s/Anthony H.N. Schnelling
Anthony H.N. Schnelling
Managing Director
<PAGE>
AMENDMENT
Whereas, Restoration Management Company, LLC ("Restoration") entered
into an agreement with Sentry Technology Corporation (the "Company") as of
October 15, 1999 pursuant to which Restoration agreed to provide certain
operational and financial consulting services to the Company (the "Agreement");
and
WHEREAS, certain options issuable to Restoration at the time that the
Agreement was entered into were referred to in the Agreement as "incentive stock
options"; and
WHEREAS, the Company and Restoration wish to amend the Agreement in
accordance with the terms hereof;
NOW, THEREFORE, the undersigned hereby amend the Agreement as follows:
1. The words "incentive stock options" in the first sentence of
Section 5(v) of the Agreement are hereby deleted and in their place is
substituted the words "non-qualified stock options".
2. The word "Restoration" in the first sentence of Section 5(v) of the
Agreement is hereby deleted and in its place is substituted the word "Anthony
H.N. Schnelling".
3. The following sentence shall be inserted immediately following the
first sentence of Section 5(v) of the Agreement:
Such options may be assigned or transferred only to an
employee or consultant of the Company or such employee or
consultant's family members as defined in Section A(1)(a)(5)
of the General Instructions to Form S-8 of the Securities
Act of 1933.
4. Section 5 of the Agreement shall be amended to add a subsection
(viii) which shall state as follows:
The Company shall prepare and file with the Securities and
Exchange Commission, within 20 days following the filing of
its annual report on Form 10K for the year ended December
31, 1999, a registration statement on Form S-8 including a
reoffer prospectus with respect to the shares of common
stock issuable upon exercise of the options issued pursuant
to the Agreement and shall use its best efforts to cause
such registration statement to become effective and remain
effective during the term of such options plus, if such
options are exercised in whole or in part, for one year
after such exercise.
<PAGE>
IN WITNESS WHEREOF, the undersigned have signed this Amendment as of
the 9th day of November, 1999.
SENTRY TECHNOLOGY CORPORATION
By: /S/ WILLIAM A. PERLMUTH
----------------------------
William A. Perlmuth
Chairman of the Board
RESTORATION MANAGEMENT
COMPANY, LLC
By: /S/ ANTHONY H. N. SCHNELLING
-------------------------------
Anthony H.N. Schnelling
Managing Director
<PAGE>
RESTORATION MANAGEMENT COMPANY, LLC
35 Sutton Place Suite 9G
New York, NY 10022
October 15, 1999
William A. Perlmuth, Esq.
Chairman of the Board
Sentry Technology Corporation
350 Wireless Boulevard
Hauppauge, New York 11788
Dear Mr. Perlmuth:
This will confirm the understanding and agreement (the "Agreement") between
Sentry Technology Corporation (the "Company") and Restoration Management
Company, LLC ("Restoration") regarding the objectives, tasks, work product, fees
and expenses for the engagement of Restoration to provide operational and
financial consulting services to the Company.
1. ENGAGEMENT. To serve as the Chief Executive Officer of the
Company, reporting to the Board of Directors and to direct
the Company in its restructuring efforts (the "Engagement").
2. TASKS.
0 Perform the functions and duties of Chief
Executive Officer and such other senior executive
positions at the Company as may be appropriate and
agreed to by the Board of Directors.
0 Manage the Company's daily operations and
restructuring efforts, including negotiating with
parties in interest.
0 Assist in such other matters as may be mutually
agreed upon.
3. WORK PRODUCT. Our work product will consist of:
0 Information to be discussed with you and others,
as you may direct.
0 Written reports and analysis worksheets to support
our actions as we deem necessary or as you may
request.
4. STAFFING. Anthony H.H. Schnelling will be the principal
responsible for the overall engagement and will serve as
Chief Executive Officer of the Company. He will be assisted
by Anthony A. Gerbino, who may also, with the agreement of
the Board of Directors, be appointed to an executive
position with the Company. In addition, we have
relationships with, and periodically retain, independent
contractors with specialized skills and abilities to assist
us. If retained, any such independent contractors are
considered to be Restoration staff for the purposes of the
Engagement.
5. COMPENSATION. As compensation for the services rendered by
Restoration hereunder, the Company shall pay Restoration as
follows:
(i) A retainer of $40,000 (the "Initial Amount"),
payable upon the signing of this Agreement (the
"Retainer"). This retainer shall remain
outstanding during the term of the Engagement,
provided, however, that $20,000 of the retainer
shall be applied to pay fees due Restoration on
January 15, 2000 for the month then beginning
2000. In the event that the Company terminates the
Engagement prior to the last day of the third
month following the commencement of the
Engagement, Restoration shall be entitled to
retain the remaining Retainer in full.
(ii) Restoration shall receive $20,000 per month in
fees as compensation for time devoted to the
Engagement by Anthony Schnelling. Time devoted to
the Engagement by Anthony Gerbino to assist
Anthony Schnelling during the two weeks following
the commencement of the Engagement shall be
provided by Restoration to the Company at no
additional charge. Thereafter, Restoration shall
be additionally compensated for all time devoted
to the Engagement by Anthony Gerbino, in excess of
occasional support time, at (i) an hourly rate to
be agreed with the Board of Directors, or (ii) in
the event Restoration recommends that Anthony
Gerbino assume an executive position with the
Company, a monthly fee commensurate with the
duties being performed, but in no event to be less
than the monthly salary currently being paid to
senior executives of the Company performing
similar tasks.
(iii) A success fee equal to 1% of the value to be
received by the Company and/or its equity holders
as a result of any sale, merger, joint venture or
combination of the Company with any party
whatsoever, including, but not limited to any
transaction entered into with current or former
officers, directors or shareholders of the
Company; provided, however, that any such success
fee shall be capped at $100,000 and a success fee
equal to 1% of the value of any financing entered
into by the Company, whether for debt, equity or
any combination thereof; provided, however that
the size of any such financing exceeds $5 million,
provided further, that any such success fee shall
also be capped at $100,000.
(iv) If the Company enters into any agreement or
arrangement with respect to the Engagement, with
anyone contacted during the Engagement, at any
time during a period from the date hereof through
the close of business on the last day of the 6th
month following the Termination, which agreement
or arrangement would have caused the Company to
owe Restoration a payment pursuant to subsection
(iii) of this paragraph 3 had such agreement or
arrangement been entered into prior to the
Termination, than the Company shall make such
payment as if the Termination had not occurred.
(v) The Company shall, effective with the commencement
of the Engagement, issue to Restoration incentive
stock options to purchase 200,000 shares of the
common stock of the Company at an exercise price
of $0.188 per share. Such option will be
immediately exercisable and shall expire on the
second anniversary of the Termination; provided,
however, that such options may not be exercised
(A) following the Termination of the Engagement by
Restoration prior to the last day of the sixth
month following the commencement of the
Engagement, unless Restoration has terminated the
Engagement because the Company has acted in bad
faith, or has not remained current with its
payment obligations to Restoration, as set forth
herein, or has not or is unable to pay its trust
fund tax obligations (including but not limited to
withholding taxes, sales taxes), or (B) upon the
Termination of the Engagement by the Company for
cause. "Cause" as used in this sub-section shall
mean the willful or grossly negligent failure of
Restoration to perform its obligations hereunder
or of Schnelling to carry out the duties of Chief
Executive Officer.
(vi) The Company shall pay directly or reimburse
Restoration, upon receipt of periodic billings,
for all reasonable out-of-pocket and incidental
expenses incurred in connection with the
Engagement such as travel, lodging, entertainment,
postage, telephone and facsimile charges.
(vii) The fees described above shall be due and shall be
paid by wire transfer on the dates set forth in
the schedule on Exhibit 1 hereto. The expenses
described above shall be payable by the Company by
wire transfer immediately upon receipt by the
Company of Restoration's invoices, which shall be
presented monthly.
6. TIMING. We will commence this engagement immediately upon
receipt of a signed engagement letter and the Retainer.
7. INDEMNIFICATION. The Company hereby agrees to indemnify and
hold harmless Restoration and its officers, members,
principals, affiliates, subcontractors, their respective
directors, officers, agents and employees (collectively the
"Indemnified Persons") from and against any and all claims,
liabilities, losses, damages, and expenses incurred by any
Indemnified Person (including but not limited to any
Indemnified Person's counsel fees and disbursements and the
costs of such Indemnified Person's professional time (such
professional time will be reimbursed at our rates in effect
when such future time is required), as they are incurred,
arising in connection with investigating, preparing for, or
defending any action, formal or informal claim,
investigation, inquiry or other proceeding, whether or not
in connection with pending or threatened litigation) which
are related to or arise in any manner out of the engagement
contemplated hereby, including any legal proceeding in which
any Indemnified Person may be required or agree to
participate in, but in which such Indemnified Person is not
a party; PROVIDED, HOWEVER, that the Company shall not be
responsible for any claims, liabilities, losses, damages, or
expenses pursuant to this paragraph which are finally
determined to have resulted from the gross negligence or
willful misconduct of any Indemnified Person. The Company
further agrees that the Company shall not, without the prior
written consent of the Indemnified Parties, settle,
compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder
unless such settlement, compromise or consent includes an
unconditional release of Restoration and each other
Indemnified Person hereunder from all liability arising out
of such claim, action, suit or proceeding.
8. INDEMNIFICATION OF OFFICERS. In addition to the foregoing
indemnification, any Restoration personnel who may serve as
officers of the Company shall be individually covered by the
same indemnification and directors' and officers' liability
insurance as is applicable to other officers of the Company,
which insurance shall provide for no less than $7.5 million
of coverage for each such officer or director.
9. CONFIDENTIALITY. Restoration agrees to keep confidential all
non-public information obtained from the Company.
Restoration agrees that neither it nor its officers,
members, principals, affiliates, subcontractors, their
respective directors, officers, agents and employees or
attorneys (the "Confidential Parties") will disclose to any
other person or entity, or use for any purpose other than
specified herein, any information pertaining to the Company
or any affiliate thereof which is either non-public,
confidential or proprietary in nature ("Information") which
it obtains or is given access to during the performance of
the services provided for hereunder. Restoration may,
however, make reasonable disclosure of Information to third
parties in connection with their performance of their
obligations and assignments hereunder. In addition, for
purposes of this Agreement, the Information does not include
information which (a) is now or in the future becomes
generally to the public other than as a result of a
disclosure by the Confidential Parties, (b) was available to
the Confidential Parties on a non-confidential basis prior
to its disclosure to the Confidential Parties pursuant to
this Agreement, (c) becomes available to the Confidential
Parties on a non-confidential basis from a source other than
the Company, provided that the source is not bound by a
confidentiality agreement with the Company.
Should the Confidential Parties be requested or
required, by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative
demand, court order or other process issued by a court of
competent jurisdiction or any federal or state agency or
administrative review board to which the Confidential
Parties are or may be subject, to disclose any or all of the
Information, the Confidential Parties will promptly provide
written notice of same to the Company so that the Company
may seek a protective order or other appropriate remedy. In
no event will Confidential Parties disclose more than that
portion of the Information that is legally required and the
Confidential Parties shall cooperate with the Company in its
effort to obtain a protective order or other assurance that
the Information will not be disclosed, or, if it is
disclosed, will be disclosed in such a manner as to limit to
the greatest extent possible the number of persons who are
granted access to the Information.
10. FRAMEWORK OF THE ENGAGEMENT. The Company acknowledges that
it is hiring Restoration to provide consulting service to
assist and advise the Company in its reorganization.
Restoration's engagement shall not constitute an audit,
review or compilation, or any other type of financial
reporting engagement that is subject to the rules of the
AICPA or other such state and national professional bodies.
11. TERMINATION. Either Party may terminate the Engagement at
any time by giving the other party written notice of such
termination (the "Termination"); provided that,
notwithstanding such Termination, Restoration will be
entitled to any fees and expenses earned pursuant to the
provisions of this Agreement. Such payment obligation shall
inure to the benefit of any successor or assignee of
Restoration. It is further understood that unless the
Company acts in bad faith, or has not remained current with
its payment obligations to Restoration, as set forth herein,
or has not or is unable to pay its trust fund tax
obligations (including but not limited to withholding taxes,
sales taxes), Restoration will not terminate the Engagement
prior to the last business day of the sixth month following
the commencement of the Engagement. It is further understood
that unless Restoration acts in bad faith, the Company will
not terminate the Engagement prior to the last business day
of the third month following the commencement of the
Engagement.
12. SURVIVAL. The obligations of the parties pursuant to
paragraphs 5, 6, 7, 8, 9 and 10 shall survive the
Termination of this Agreement along with any other section
that expressly provides that it shall survive the
Termination.
13. RELATIONSHIP OF THE PARTIES. The parties hereto intend that
an independent contractor relationship will be created by
this Agreement. Restoration and its officers, members,
principals, affiliates, subcontractors, their respective
directors, officers, agents and employees are not to be
considered an employee or agent of the Company and are not
entitled to any of the benefits that the Company provides
for the Company's employees, except as may otherwise be
expressly provided for in this Agreement.
14. ASSIGNABILITY. The benefits of this Agreement shall inure to
the benefit of the parties hereto, their respective
successors and assigns and of the Indemnified Persons
hereunder and their successors, assigns and representatives
and the obligations and liabilities assumed in this
Agreement by the parties hereto shall be binding upon their
respective successors and assigns. This Agreement may not be
assigned by any party hereto, without the prior written
consent of all the parties hereto.
15. ENTIRE AGREEMENT. This Agreement incorporates the entire
understanding between the parties with respect to its
subject matter and supersedes all previous agreements or
understandings that might exist or have existed. This
Agreement may not be amended or modified, except in writing,
executed by the parties hereto.
16. GOVERNING LAW. This agreement shall be governed by and
construed in accordance with the laws of the State of New
York, without giving effect to principles of conflicts of
laws.
17. ALTERNATIVE DISPUTE RESOLUTION. If there is any dispute
between the parties as to the terms of this Agreement and
they are unable to agree on a mutually satisfactory
resolution within 30 days, either party may require the
matter to be settled by binding arbitration. Such
arbitration shall take place in New York City. Following a
request for arbitration by either party, the parties shall
attempt to agree upon a single arbitrator. If the parties
are unable to agree upon a single arbitrator, each party
shall appoint one arbitrator. These two arbitrators shall
jointly appoint a third arbitrator. In the event the two
arbitrators cannot agree on a third arbitrator, the American
Arbitration Association in New York City shall appoint the
third arbitrator. The arbitration shall be held according to
the rules and procedures of the American Arbitration
Association. The decision of the arbitrator(s) shall be
final, binding and non-appealable.
18. DISCLOSURE OF CONFLICTS. Except as may be expressly set
forth in an attachment to this Agreement, Restoration knows
of no fact or situation that would represent a conflict of
interest for it in connection with this Assignment and with
regard to the Company. However, it is possible that there
may be relationships, either past or currently existing,
that need to be brought to your attention as Restoration
becomes familiar with the universe of parties who are
involved in this assignment. Any such disclosure will be
promptly made by Restoration upon its becoming aware of a
need to make such disclosure.
19. SEVERABILITY. Any provision of this Agreement that shall be
determined to be invalid or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision
in any other jurisdiction.
20. NOTICES. All Notices required or permitted to be delivered
under this Agreement shall be sent, if to restoration, to
the address set forth at the head of this Agreement, to
Anthony H.N. Schnelling and, if to the Company, to the
address set forth above, to the attention of the Chairman of
the Board with a copy to William A. Perlmuth, c/o Stroock &
Stroock & Lavan, 180 Maiden Land, New York, New York 10038
or to such other name or address as you may give Restoration
in writing. All notices under this Agreement shall be deemed
delivered if sent by facsimile or by overnight mail or
courier. All notices shall be deemed to have been delivered
only upon receipt by the receiving party.
If the Company becomes involved in a proceeding under the U.S. Bankruptcy Code,
it agrees to petition the Court to affirm this agreement as part of its first
day motions.
<PAGE>
Please confirm that the foregoing is in accordance with our understanding by
signing and returning to Restoration the enclosed duplicate of this letter,
whereupon it shall constitute an agreement binding upon yourselves and
ourselves.
Very Truly Yours,
/S/ ANTHONY SCHNELLING
Restoration Management Company LLC
By: ANTHONY SCHNELLING
Its: Managing Director
Accepted and agreed as of
October 15, 1999
SENTRY TECHNOLOGY CORPORATION
By: /S/ WILLIAM A. PERLMUTH
----------------------------
Its: Chairman of the Board
<PAGE>
Exhibit 1
Fee Payments Due
October 15, 1999 $40,000 Retainer
November 15, 1999 $20,000 Nov. Fees
December 15, 1999 $20,000 Dec. Fees
January 15, 2000 $0 Retainer Reduction
February 15, 2000 $20,000 February Fees
March 15, 2000 $20,000 March Fees1
- --------
1 Unless the Engagement is extended or modified prior to April 1, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS INAPPLICABLE OR NOT
DISCLOSED AS A SEPARATE LINE ON THE STATEMENT OF FINANCIAL POSITION OR RESULTS
OF OPERATIONS ARE REPORTED AS 0 HEREIN.
</LEGEND>
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<PERIOD-END> SEP-30-1999
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<INVENTORY> 7,042
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<TOTAL-ASSETS> 28,432
<CURRENT-LIABILITIES> 6,327
<BONDS> 2,934
27,507
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<COMMON> 10
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<TOTAL-LIABILITY-AND-EQUITY> 28,432
<SALES> 16,087
<TOTAL-REVENUES> 18,182
<CGS> 9,791
<TOTAL-COSTS> 12,171
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 20
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