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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
( X ) QUARTERLY REPORT ( ) TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999 Commission File No. 33-20015-NY
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SENTECH EAS CORPORATION
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0734041
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
484 SOUTHWEST 12TH AVENUE
DEERFIELD BEACH, FLORIDA 33442-3108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 954-426-2965
Former name, former address and former fiscal year,
if changed since last report: SAME
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of April 30, 1999, there were 1,677,219 shares of the common stock
outstanding.
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<PAGE>
SENTECH EAS CORPORATION
INDEX
FORM 10-QSB
THREE MONTHS ENDED MARCH 31, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statement of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
1
<PAGE>
SENTECH EAS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------- -------------
ASSETS
- ----------------------------------------------------------
Current assets
<S> <C> <C>
Cash and cash equivalents $ 240,787 $ 305,307
Accounts receivable, net of allowances of $5,000 149,266 110,576
Inventories 467,436 478,886
Other current assets 65,639 54,847
----------- -----------
Total current assets 923,128 949,616
Property and equipment, net 29,716 33,450
Other assets 160,857 161,570
----------- -----------
$ 1,113,701 $ 1,144,636
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------
Current liabilities
Accounts payable $ 137,905 $ 110,090
Accrued liabilities 47,692 55,814
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Total current liabilities 185,597 165,904
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Long-term debt 203,000 203,000
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Shareholders' equity
Common stock; $0.00024 par value; 20,833,333
authorized; 1,677,219 issued and outstanding 403 403
Additional capital 2,463,182 2,463,182
Accumulated deficit (1,738,481) (1,687,853)
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Total shareholders' equity 725,104 775,732
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$ 1,113,701 $ 1,144,636
=========== ===========
</TABLE>
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
SENTECH EAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
--------- ---------
- ----------------------------------------------------------
<S> <C> <C>
Revenues $ 288,692 $ 685,862
Cost of revenues (180,198) (464,742)
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Gross profit 108,494 221,120
Selling, general, and administrative expenses (158,076) (245,160)
--------- ---------
Operating loss (49,582) (24,040)
Interest expense (1,046) (1,263)
Interest income _ 2,290
--------- ---------
Net loss $ (50,628) $ (23,013)
========= =========
Net loss per share $ (0.03) $ (0.01)
========= =========
</TABLE>
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
SENTECH EAS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 1,677,219 $ 403 $ 2,463,182 $(1,687,853) $ 775,732
Net loss (50,628) (50,628)
BALANCE AT MARCH 31, 1999
(UNAUDITED) 1,677,219 $ 403 $ 2,463,182 $(1,738,481) $ 725,104
=========== =========== =========== =========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
SENTECH EAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
- ---------------------------------------------------------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (50,628) $ (23,013)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,447 5,184
Net changes in operating assets and liabilities:
Accounts receivable (38,690) 1,136
Inventories 11,450 (111,313)
Other current assets (10,792) 13,582
Other assets _ 350
Accounts payable 27,815 (53,324)
Accrued liabilities (8,122) (2,502)
--------- ---------
Net cash used in operating activities (64,520) (169,900)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures _ (1,383)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable to bank _ (16,657)
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Net cash used in financing activities _ (16,657)
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Net decrease in cash and cash equivalents (64,520) (187,940)
Cash and cash equivalents at beginning of year 305,307 475,263
--------- ---------
Cash and cash equivalents at end of year $ 240,787 $ 287,323
========= =========
</TABLE>
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
SENTECH EAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the financial statements of
SenTech EAS Corporation and its wholly owned subsidiary, SenTech EAS
International, Inc., (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
The interim consolidated financial statements presented have been prepared
by the Company without audit and, in the opinion of the management, reflect
all adjustments of a normal recurring nature necessary for a fair statement
of (a) the results of operations for the three months ended March 31, 1999
and March 31, 1998, (b) the financial position at March 31, 1999, and (c)
the cash flows for the three month periods ended March 31, 1999 and March
31, 1998. Interim results are not necessarily indicative of results for a
full year.
The consolidated balance sheet presented as of December 31, 1998 has been
derived from the consolidated financial statements that have been audited
by the Company's independent public accountants. The consolidated financial
statements and notes are condensed as permitted by Form 10-QSB and do not
contain certain information included in the annual financial statements and
notes of the Company. The consolidated financial statements and notes
included herein should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-KSB.
2. INVENTORIES
INVENTORIES CONSISTED OF THE FOLLOWING:
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
---------------------- --------------------
RAW MATERIALS $ 205,289 $ 249,129
FINISHED GOODS 262,147 229,757
---------------------- --------------------
$ 467,436 $ 478,886
====================== ====================
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
3. NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of
common shares and dilutive potential common stock outstanding during the
year. The number of shares used in the per share computations were
1,677,219 and 1,640,427 at March 31, 1999 and 1998, respectively. Potential
common stock, when included in the computation of dilutive earnings per
share, was anti-dilutive at March 31, 1999 and 1998.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" and
Statement of Financial Accounting Standards No. 129 "Disclosure of
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Information about Capital Structure" which are both effective for fiscal
years beginning after December 15, 1997. SFAS No. 128 simplifies the
current required calculation of earnings per share ("EPS") under APB No.
15, "Earnings per Share", by replacing the existing calculation of primary
EPS with a basic EPS calculation. It requires a dual presentation for
complex capital structures of basic and diluted EPS on the face of the
income statement and requires a reconciliation of basic EPS factors to
diluted EPS factors. SFAS No. 129 requires disclosure of the Company's
capital structure. There was no material impact to the Company's EPS
calculation or financial statement presentation and disclosure due to the
adoption of SFAS No. 128 and SFAS No. 129.
4. RECENT PRONOUNCEMENTS IN ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. SFAS
No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements which requires the Company to (i) classify items of
other comprehensive income by their nature in a financial statement and
(ii) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the
equity section of the balance sheet. There was no material impact to the
Company's financial reporting or presentation due to the adoption of SFAS
No. 130.
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise",
and amends SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries".
SFAS No. 131 requires annual financial statements to disclose information
about products and services, geographic areas, and major customers based on
a management approach, along with interim reports. The management approach
requires disclosing financial and descriptive information about an
enterprise's reportable operating segments based on reporting information
the way management organizes the segments for making business decisions and
assessing performance. It also eliminates the requirement to disclose
additional information about subsidiaries that were not consolidated. This
new management approach may result in more information being disclosed than
presently practiced and require new interim information not previously
presented. There was no material impact to the Company's financial
reporting or presentation due to the adoption of SFAS No. 131.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 "Employers" Disclosures About
Pensions and Other Postretirement Benefits-an amendment of FASB Statements
No. 87, 88, and 106" which is effective for fiscal years beginning after
December 15, 1997. SFAS No. 132 revises only the employers' disclosures
about pension and other postretirement benefit plans; it does not change
the measurement or recognition of such plans. Since the Compan does not
have such plans, there is no impact to the Company's financial reporting or
presentation due to the adoption of SFAS No. 132.
5. COMMITMENTS AND CONTINGENCIES
AGREEMENT AND PLAN OF MERGER
On October 28, 1998, the Company entered into an Agreement and Plan of
Merger with Ensec International, Inc. ("Ensec") which, upon completion of
the merger, will result in the Company and Ensec becoming wholly owned
subsidiaries of a newly formed holding company, Sensec International, Inc.
("Sensec"). Under the terms of the agreement, the Company's stockholders
will receive approximately 40% of the outstanding common shares of Sensec,
and the Ensec stockholders will receive approximately 60% of the
outstanding common shares of Sensec. Completion of the merger is subject to
the approval of the boards of directors and stockholders of both the
Company and Ensec. Ensec is a systems integrator and services provider in
7
<PAGE>
commercial and industrial integrated security systems, video remote
surveillance, and data information security systems and is listed on the
OTC Bulletin Board under the symbol "ENSC".
PURCHASE AND MANUFACTURING AGREEMENT
In June 1997, the Company entered into a three year purchase and
manufacturing agreement (the "Agreement") with a company whose President
and Chief Executive Officer is a director of the Company. The Agreement, as
amended, provides for the development and manufacture of the Company's
third generation EAS system. The Agreement requires the Company to pay
$187,000 of non-recurring engineering costs in exchange for an assignment
of fifty percent of the joint technology as defined by the Agreement.
Payments made for non-recurring engineering are recorded at cost and are
amortized as a component of cost of revenues using the units-of-production
method. As of March 31, 1999, $183,000 of non-recurring engineering costs
were capitalized, net of $4,000 of accumulated amortization, of which
$31,000 and $152,000 are included in other current assets and other assets,
respectively. For the three months ended March 31, 1999 and 1998, there was
approximately $700 and $0 of amortized non-recurring engineering costs
included in cost of revenues. The Agreement also requires the Company to
purchase minimum quantities of the system each year representing an
aggregate purchase commitment of $2,250,000 with annual obligations of
$375,000 by February 1999; $750,000 by January 2000; and $1,125,000 by
January 2001.
YEAR 2000 ISSUE
Computer programs used by businesses worldwide were written using two
digits rather than four digits to define the applicable year. Accordingly,
these programs recognize the dates "00" and "01" as the years 1900 and 1901
rather than the years 2000 and 2001. The Company recognizes the need to
ensure its operations will not be adversely impacted by year 2000 computer
program failures arising from program processes and calculations
misinterpreting the year 2000 date. The Company is currently evaluating its
financial and operational systems to determine the impact the year 2000
issue will have on its operations. The Company also plans to communicate
with its significant suppliers, dealers, financial institutions, and others
with which it conducts business to determine the extent the Company may be
impacted by third parties' failure to address the year 2000 issue. Although
the Company plans to be year 2000 compliant prior to December 31, 1999 and
expects no material impact to the Company operations, there can be no
assurance that the failure of the Company or such third parties to
successfully address their respective year 2000 issues will not have a
material adverse effect on the Company's business, financial condition,
cash flows, and result of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. The Company's actual results
could differ materially from those set forth in the forward-looking
statements.
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto and with the Company's
audited financial statements and notes thereto for the fiscal year ended
December 31, 1998.
8
<PAGE>
FIRST QUARTER 1999 AS COMPARED TO THE FIRST QUARTER 1998
REVENUES
Revenues were approximately $289,000 for the first quarter 1999, a decrease
of $397,000 or 58% from revenues of $686,000 for the first quarter 1998.
The decrease in revenues for the first quarter 1999 was primarily
attributed to sales from a new customer which generated 53% of the
Company's total revenues for the first quarter 1998. At March 31, 1999, the
Company ended the quarter with nearly $94,000 in backlog compared to
$159,000 in backlog at March 31, 1998.
GROSS PROFIT
Gross profit was approximately $108,000 for the first quarter 1999, a
decrease of $113,000 or 51% from gross profit of $221,000 for the first
quarter 1998 primarily as a result of the decrease in revenues. Gross
profit margin was 37.6% for the first quarter 1999, an increase from 32.2%
for the first quarter 1998. The Company realizes substantially higher gross
profit margins on its manufactured products than it realizes on its
purchased products due to the proprietary nature of purchased products,
however, the current sales mix is expected to remain constant as the
Company's customer base expands.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative expenses were approximately $158,000
for the first quarter 1999, a decrease of $87,000 or 36% from selling,
general, and administrative expenses of $245,000 for the first quarter
1998. Operating expenses decreased significantly during the first quarter
1999 resulting from the cost restructure and downsizing during the third
quarter of 1998. Overall, compensation expense decreased over $23,000 and
professional fees decreased over $25,000.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense was approximately $1,100 for the first quarter 1999, a
decrease of $200 or 15% from interest expense of $1,300 for the first
quarter 1998 primarily due to the payment in full of the Company's 7.5%
note payable to bank in March 1998. Interest income for the first quarter
1998 primarily represents interest earned on cash balances in excess of
operating requirements.
NET LOSS AND NET LOSS PER SHARE
Net loss was approximately $(51,000) for the first quarter 1999, an
increase of $(28,000) or 122% from the net loss of $(23,000) for the first
quarter 1998 primarily as a result of a decrease of approximately $113,000
in gross profit offset by a decrease in operating costs of nearly $85,000.
Net loss per share was $(0.03) at March 31, 1999, an increase of $(0.02)
per share or 200% from the net loss per share of $(0.01) at March 31, 1998
resulting from the $28,000 decrease in net loss and an increase of 36,792
weighted average number of common shares from 1,640,427 during the first
quarter 1998 to 1,677,219 during the first quarter 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's accumulated deficit was approximately $(1,738,000) and
$(1,725,000) at March 31, 1999 and 1998, respectively. Working capital
decreased approximately $41,000 from $779,000 at March 31, 1998 to $738,000
at March 31, 1999.
Net cash used in operating activities was approximately $(65,000) during
the first quarter 1999, a decrease of $105,000 from $(170,000) during the
first quarter 1998.
9
<PAGE>
The Company believes the expected results of operations in 1999 will be
sufficient to fund current business operations and anticipated growth.
However, the Company believes it may need to raise additional capital
through debt or equity financing to fund its anticipated growth beyond
1999. There is no assurance that such additional financing will be
available when needed or available with terms acceptable to the Company.
SEASONALITY
The Company's revenues are substantially dependent on its customers'
seasonal retail sales. Historically, the Company has experienced higher
sales volume in the third and fourth quarters of each year.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1996, the Company was named as a defendant in a lawsuit filed in
New Jersey Superior Court whereby the plaintiff is seeking damages with
respect to certain alleged invoices totaling approximately $20,000. A
motion to amend the pleadings was filed and granted to assert counterclaims
and third party claims against the plaintiff and its officers for, among
other things, false designation of origin under the federal Lanham Act,
violations of statutory and common law unfair competition, trademark and
trade dress infringement, and breach of contract all of which may result in
damages exceeding $1,000,000. The Company's counterclaim and third party
claims arose from an alleged intentional breach of a requirements type
contract in which the plaintiff was authorized to manufacture for the
Company certain equipment for sale to third parties. Although the Company
has recorded in accrued liabilities a provision of approximately $20,000
for any liability which may result from the plaintif s claims, the Company
plans to continue to vigorously defend against the plaintiff's alleged
claims and to pursue its counterclaims and third party claims against the
plaintiff. While there is no assurance as to the outcome of this legal
action, management and legal counsel for the Company believe the ultimate
resolution of this matter will not have a material adverse effect on its
consolidated financial position or results of operations.
ITEM 5. OTHER INFORMATION
MARKET FOR REGISTRANT'S COMMON STOCK
The Company's common stock has not commenced trading but is listed on the
National Association of Securities Dealers, Inc. ("NASD") OTC Electronic
Bulletin Board ("Bulletin Board") under the symbol "SETE". There have been
no quotes on the Company's common stock since its listing on the Bulletin
Board.
No assurance can be given that a public trading market for the Company's
common stock will develop or if developed will be sustained.
In April 1997, in connection with a private placement of the Company's
common stock under Regulation D Rule 506 of the Securities Act of 1933, as
amended, the Company consummated the sale of 343,894 units, each unit
consisting of one share of common stock and one common stock purchase
warrant. Each warrant expires after five years of issuance and entitles the
registered holder to purchase one share of common stock at a purchase price
equal to the lesser of $5.50 or ten percent above the offering price of a
share of common stock in a proposed public offering. The net proceeds
received by the Company from this offering were approximately $707,000 of
which approximately $198,000 from the sale of 88,173 units was received
during the year ended December 31, 1997.
10
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no exhibits or reports on Form 8-K filed during the three month
period ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, hereunto duly authorized, on April
30, 1999.
SENTECH EAS CORPORATION
By: /s/ RONALD L. MEGGISON, JR.
---------------------------
Ronald L. Meggison, Jr.
President and Chief Executive Officer
(Principal Executive and Financial
Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 240,787
<SECURITIES> 0
<RECEIVABLES> 149,266
<ALLOWANCES> 5,000
<INVENTORY> 467,436
<CURRENT-ASSETS> 923,128
<PP&E> 29,716
<DEPRECIATION> 3,734
<TOTAL-ASSETS> 1,113,701
<CURRENT-LIABILITIES> 185,597
<BONDS> 203,000
<COMMON> 403
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,113,701
<SALES> 288,692
<TOTAL-REVENUES> 288,692
<CGS> 180,198
<TOTAL-COSTS> 180,198
<OTHER-EXPENSES> 158,076
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,046
<INCOME-PRETAX> (50,628)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50,628)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
