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Previous: MORGAN STANLEY ABS CAPITAL I INC, 8-K, EX-8.1, 2000-08-18 |
Next: SENTRY TECHNOLOGY CORP, 10-Q, EX-27, 2000-08-18 |
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, 2000
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)
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Delaware |
96-11-3349733 |
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350 Wireless Boulevard, Hauppauge, New York |
11788 |
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 NoAs of August 18 , 2000, there were 9,750,760 shares of Common Stock and 5,333,334 shares of Class A Preferred Stock outstanding.
SENTRY TECHNOLOGY CORPORATION
INDEX
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Page No. |
PART I. FINANCIAL INFORMATION
Item 1. |
Financial Statements (Unaudited) |
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Consolidated Balance Sheets -- |
3 |
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Condensed Consolidated Statements of Operations -- |
4 |
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Condensed Consolidated Statements of Cash Flows -- |
5 |
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Notes to Condensed Consolidated Financial |
6 - 8 |
Item 2. |
Management's Discussion and Analysis of |
8 - 10 |
PART II. OTHER INFORMATION
Item 6. |
Exhibits and Reports on Form 8-K |
10 |
Signatures |
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11 |
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2000 1999
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,172 $ 951
Accounts receivable, less allowance for
doubtful accounts of $734 and $683,
respectively 4,743 6,838
Net investment in sales-type leases -
current portion 156 393
Inventories 5,798 5,258
Prepaid expenses and other current assets 441 166
--- ---
Total current assets 12,310 13,606
NET INVESTMENT IN SALES-TYPE LEASES -
non-current portion 66 108
SECURITY DEVICES ON LEASE, net 73 66
PROPERTY, PLANT AND EQUIPMENT, net 3,640 3,934
GOODWILL AND OTHER INTANGIBLES, net 3,734 4,227
OTHER ASSETS 33 66
-- --
$ 19,856 $ 22,007
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 3,732 $ 3,075
Accounts payable 1,257 1,088
Accrued liabilities 2,374 2,769
Obligations under capital leases -
current portion 144 165
Deferred income 185 219
--- ---
Total current liabilities 7,692 7,316
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion 2,817 2,893
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 257 290
--- ---
Total liabilities 10,766 10,499
REDEEMABLE CUMULATIVE PREFERRED STOCK 28,508 27,843
COMMON SHAREHOLDERS' EQUITY (DEFICIT)
Common stock 10 10
Additional paid-in capital 14,196 14,196
Accumulated deficit (33,624) (30,541)
------- -------
(19,418) (16,335)
------- -------
$ 19,856 $ 22,007
======== ========
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 Six Months Ended
June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES $ 5,169 $ 7,269 $ 10,041 $ 12,659
COSTS AND EXPENSES:
Cost of sales 2,615 4,146 5,274 6,919
Customer service expenses 1,140 1,289 2,297 2,989
Selling, general and
administrative expenses 2,039 2,379 3,812 4,668
Research and development 225 322 451 635
Interest expense, net 166 121 324 258
--- --- --- ---
6,185 8,257 12,158 15,469
----- ----- ------ ------
OPERATING LOSS (1,016) (988) (2,117) (2,810)
OTHER INCOME - Gain on sale
of assets (Note E) -- -- -- 503
--- --- --- ---
LOSS BEFORE INCOME TAXES (1,016) (988) (2,117) (2,307)
INCOME TAXES -- -- -- --
--- --- --- ---
NET LOSS BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (1,016) (988) (2,117) (2,307)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE -- -- 301 --
--- --- --- ---
NET LOSS (1,016) (988) (2,418) (2,307)
PREFERRED STOCK DIVIDENDS 333 333 665 654
--- --- --- ---
NET LOSS ATTRIBUTED
TO COMMON SHAREHOLDERS $ (1,349) $ (1,321) $ (3,083) $ (2,961)
======== ======== ======== ========
NET LOSS PER COMMON SHARE
BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE:
Basic $ (.14) $ (.14) $ (.29) $ (.30)
======== ======== ======== =======
Diluted $ (.14) $ (.14) $ (.29) $ (.30)
======== ======== ======== =======
NET LOSS PER COMMON SHARE
Basic $ (.14) $ (.14) $ (.32) $ (.30)
======== ======== ======== =======
Diluted $ (.14) $ (.14) $ (.32) $ (.30)
======== ======== ======== =======
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
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
---------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,418) $(2,307)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization of security
devices and property, plant and equipment 314 416
Amortization of goodwill and intangibles 498 797
Provision for bad debts 25 14
Gain on sale of assets -- (503)
Changes in operating assets and liabilities:
Accounts receivable 2,070 944
Net investment in sales-type leases 279 312
Inventories (540) 485
Accounts payable 169 219
Accrued liabilities (395) (180)
Other, net (309) 85
---- --
Net cash provided by (used in) operating activities (307) 282
---- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of facilities -- 2,194
Purchase of property, plant and equipment, net (11) (106)
Security devices on lease (16) 2
Intangibles (5) (16)
-- ---
Net cash provided by (used in) investing activities (32) 2,074
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in borrowings under the revolving
line of credit 657 (2,131)
Repayment of obligations under capital leases (97) (96)
--- ---
Net cash provided by (used in) financing activities 560 (2,227)
--- ------
INCREASE (DECREASE) IN CASH 221 129
CASH, at beginning of period 951 873
--- ---
CASH, at end of period $ 1,172 $ 1,002
======= =======
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
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 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.
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:
June 30, 2000 December 31, 1999
------------- -----------------
(in thousands)
Minimum lease payments receivable $ 254 $ 570
Allowance for uncollectible minimum lease
payments (13) (29)
Unearned income (19) (40)
Unguaranteed residual value -- --
----- -----
Net investment 222 501
Less current portion 156 393
----- -----
Non-current portion $ 66 $ 108
===== =====
NOTE C -- Inventories
Inventories consist of the following:
June 30, 2000 December 31, 1999
------------ ------------------
(in thousands)
Raw materials $2,573 $2,333
Work-in-process 1,638 1,482
Finished goods 1,587 1,443
$5,798 $5,258
Reserves for excess and obsolete inventory totaled $2,855,000 and $3,404,000 as of June 30, 2000 and December 31, 1999, 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 $702,000
and $1,371,000 in the quarters ended June 30, 2000 and 1999 and $1,299,000 and
$1,680,000 in the six month periods ended June 30, 2000 and 1999, respectively.
Included in accounts receivable as of June 30, 2000 and December 31, 1999 are
amounts due from Sensormatic of $615,000 and $269,000, respectively.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE E -- Other Income – Gain on Sale of Assets
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. 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.
NOTE F -- Change in Accounting Principle
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. The SAB
summarizes certain of the staff’s views in applying generally accepted
accounting principles to revenue recognition in the financial statements.
In accordance with SAB 101, the Company has changed its accounting method for recognizing revenue on the sale of equipment where post-shipment obligations exist. Previously, the Company recognized revenue for equipment when title transferred, generally upon shipment. Beginning with the first quarter of year 2000, the Company began recognizing revenue when installation is complete or other post-shipment obligations have been satisfied. The cumulative effect of the change in accounting method is a non-cash reduction in net earnings of $301,000, or $0.03 per share.
NOTE G -- Earnings Per Share
Basic earnings per share is determined by using the weighted average number of
common shares outstanding during each period. Diluted earnings per share further
assumes the issuance of common shares for all dilutive potential common shares
outstanding. The calculation for earnings per share are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except
per share amounts)
Net Loss per Share:
Net loss before cumulative effect of accounting change $(1,016) $ (988) $(2,117) $(2,307)
Effect of preferred stock dividends (333) (333) (665) (654)
---- ---- ---- ----
(1,349) (1,321) (2,782) (2,961)
Cumulative effect of accounting change -- -- (301) --
---- ---- ---- ----
Net loss attributable to common shareholders $(1,349) $(1,321) $(3,083) $(2,961)
Weighted Average Common Shares 9,751 9,751 9,751 9,751
===== ===== ===== =====
Basic and Diluted Earnings per Common Share:
Before cumulative effect of accounting change $ (.14) $ (.14) $ (.29) $ (.30)
Cumulative effect of accounting change -- -- (.03) --
---- ---- ---- ----
Basic and Diluted earnings per Common Share $ (.14) $ (.14) $ (.32) $ (.30)
======= ====== ======= =======
Since the Company has a net loss for all periods presented, the effect of common stock options and warrants would be antidilutive.
NOTE H -- Subsequent Event
The Company announced on August 8, 2000 that it had entered into
an agreement pursuant to which Dutch A&A Holding, B.V. (the
“Purchaser”) will invest $3 million in newly issued Common Stock of
Sentry. For this investment the Purchaser will receive 37.5% of the outstanding
Common Stock of Sentry on a fully-diluted basis, after giving effect to
the exchange of Sentry’s Preferred Stock into Common Stock.
In addition, the Purchaser will have 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. The transaction is conditioned upon
Sentry shareholder approval, including approval by the Preferred and Common
Stockholders, each voting as a class, of a reclassification of the Preferred
Stock into Common Stock on the basis of five shares of Common for every
Preferred share, as well as a number of other conditions.
At any time prior to the first anniversary of the closing, the Purchaser may purchase additional shares of Common Stock bringing its acquisitions under the Agreement to 51% of the Common Stock to be then outstanding. The purchase price for such additional shares will be $1.5 million, but if the average market value of all of the outstanding Common Stock (measured over any ten-day trading period) is at least $15.0 million, the purchase price will be the par value of the shares purchased (at $0.001 per share).
At any time on or prior to the second anniversary of the first closing, the Purchaser may purchase additional shares of Common Stock bringing its acquisition under the Agreement to 60% of the Common Stock to be then outstanding. The purchase price for such additional shares will be $3.5 million, but if the average market value of all of the outstanding Common Stock (measured over any ten-day trading period) is at least $25.0 million, the purchase price will be the par value of the shares purchased (at $0.001 per share).
The Purchaser also has the right at any time after the first closing to purchase additional shares to bring its acquisitions under the Agreement to 60%, for an additional purchase price of $5.0 million.
The obligations of the parties are subject to various conditions set forth in the Agreement.
SENTRY TECHNOLOGY CORPORATION
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 29% and 21% lower in the quarter and six month periods ended June 30, 2000 than in the quarter and six month periods ended June 30, 1999. Some of the reductions were anticipated due to the downsizing of the sales and sales promotional budgets due to the fiscal constraints of the Company. However, reported revenues were also impacted by a delay in the installation schedules of the Company’s major customers. The backlog of orders at June 30, 2000 was approximately $5.8 million as compared to approximately $3.1 million at June 30, 1999. Revenues from third party customers, other than Sensormatic, in the current periods were 86% and 87% of total revenues, as compared to 81% and 87% of total revenues in the prior year period. Total revenues for the periods presented are broken out as follows:
Q-2 Q-2 % 6 Mos. 6 Mos. %
2000 1999 Change 2000 1999 Change
---- ---- ------ ---- ---- ------
(in thousands) (in thousands)
EAS $ 1,895 $ 3,051 (38) $ 4,060 $ 4,978 (18)
CCTV 1,809 2,143 (16) 3,236 4,538 (29)
SentryVision(R) 408 810 (50) 695 1,105 (37)
3M library products 282 596 (53) 655 833 (21)
4,394 6,600 (33) 8,646 11,454 (25)
Service revenues and other 775 669 16 1,395 1,205 16
Total revenues $ 5,169 $ 7,269 (29) $ 10,041 $ 12,659 (21)
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The decline in revenues affected all product lines in 2000 when compared to 1999. EAS revenues were impacted by a lower amount of OEM sales to Sensormatic and other distributors. The decrease in CCTV revenues is primarily related to a decrease in sales to one of the Company’s major customers. While the Company has improved SentryVision®‘s reliability and performance through technical modifications, it was still plagued by ongoing customer perception issues resulting in lower sales. Sales of 3M library products were lower primarily as a result of fewer sales account executives than in 1999.
Cost of sales were 51% and 53% of total revenues in the three and six month periods ended June 30, 2000 compared to 57% and 55% in the same periods in the previous year. The decrease in the percentage in the current year periods is primarily due to lower scrap and rework costs relating to the SentryVision® product line and better production efficiencies in the Company’s manufacturing operations.
Customer service expenses were 12% and 23% lower in the second quarter and first six months of 2000 than in the second quarter and first six months of 1999 due to a reduction in the number of customer service representatives as a result of the Company’s restructuring of operations which took place in the fourth quarter of 1999.
Selling, general and administrative expenses were 14% and 18% lower in the three and six month periods ended June 30, 2000 when compared to the same periods of the previous year primarily as a result of the savings from a reduced infrastructure, lower sales promotion expenses and lower amortization of goodwill.
Research and development costs were 30% and 29% lower when compared to the previous year periods due to a 50% reduction in headcount and a more focused effort on product support.
Net interest expense for the second quarter and first six months of 2000 increased due to higher average borrowings under the Company’s revolving credit agreement and higher interest rates.
During the quarter ended March 31, 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.
Due to net losses, Sentry has not provided for income taxes in any of the periods presented.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. The SAB summarizes certain of the staff’s views in applying generally accepted accounting principles to revenue recognition in the financial statements. In accordance with SAB 101, the Company has changed its accounting method for recognizing revenue on the sale of equipment where post-shipment obligations exist. Previously, the Company recognized revenue for equipment when title transferred, generally upon shipment. Beginning with the first quarter of year 2000, the Company began recognizing revenue when installation is complete or other post-shipment obligations have been satisfied. The cumulative effect of the change in accounting method is a non-cash reduction in net earnings of $301,000, or $0.03 per share.
As a result of the foregoing, Sentry had a net loss of $1,016,000 and $2,418,000 in the quarter and six month period ended June 30, 2000 as compared to a net loss of $988,000 and $2,307,000 in the quarter and six month period ended June 30, 1999.
Preferred stock dividends of $333,000 and $665,000 have been recorded in the second quarter and first six months of 2000 as compared to $333,000 and $654,000 in the second quarter and first six months of 1999. Dividends accrued through February 12, 1999 were paid-in-kind as of that date. In connection with 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 1999 and February 2000. Under the terms of the Class A Preferred Stock, the dividend will cumulate and Class A Preferred Stockholders, voting as a class, are entitled to elect two additional directors to the Company’s Board.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources as of June 30, 2000
As a result of the continued reduced revenue levels and the Company’s financial position, the Company’s management initiated actions in 1999 which included among others, (a) downsizing personnel, (b) attempting to improve its working capital, (c) closing and/or consolidating certain of its facilities, (d) consolidating certain administrative functions, and (e) evaluating certain business lines to ensure that the Company’s resources are deployed in the more profitable operations. The Company’s initial efforts to rationalize its operations commenced in the fourth quarter of 1999. Through 2000, the results of these efforts were not sufficient to prevent significant operating losses. During the first six months of 2000 the Company has primarily funded its operations through borrowings under its revolving credit facility, including an amendment to its borrowing base formula which provides for increased availability by up to $500,000 through September 1, 2000. The Company is increasingly dependent upon certain future transactions, including the timely release of backlog orders from customers and subsequent cash collections, in order to generate sufficient cash flows and return the Company to profitability.
To strengthen its financial position, the Company’s management and its Directors continued to solicit other businesses within the security industry to ascertain the level of interest in a possible joint venture or equity investment in the Company. After many discussions and the exchange of information, the Company announced on August 8, 2000 that it had entered into an agreement pursuant to which Dutch A&A Holding, B.V. (the “Purchaser”) will invest $3 million in newly issued Common Stock of Sentry. For this investment the Purchaser will receive 37.5% of the outstanding Common Stock of Sentry on a fully-diluted basis, after giving effect to the exchange of Sentry’s Preferred Stock into Common Stock. In addition, the Purchaser will have 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. The transaction is conditioned upon Sentry shareholder approval, including approval by the Preferred and Common Stockholders, each voting as a class, of a reclassification of the Preferred Stock into Common Stock on the basis of five shares of Common for every Preferred share, as well as a number of other conditions. Consummation of this transaction will substantially enhance the liquidity and financial condition of the Company. There can be no assurances, however, that the transaction will be successfully consummated.
PART II - OTHER INFORMATION
Item 6. |
Exhibits and Reports on Form 8-K |
(a) |
List of Exhibits: |
(b) |
Reports on Form 8-K – The Company reported on Form 8-K filed on August 10, 2000, that it had entered into an agreement on August 8, 2000 pursuant to which Dutch A&A Holding, B.V. (the “Purchaser”) will invest $3 million in newly issued Common Stock of the Company. For this investment, the Purchaser will receive 37.5% of the outstanding Common Stock of the Company on a fully diluted basis, after giving effect to the exchange of the Company’s Preferred Stock into Common Stock. The transaction is conditional upon the approval of both the Preferred and Common shareholders. |
SENTRY TECHNOLOGY CORPORATION
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.
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SENTRY TECHNOLOGY CORPORATION |
Date: August 18, 2000
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