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 10% lower in the quarter ended March
31, 2000 than in the quarter ended March 31, 1999. Revenues from third party
customers, other than Sensormatic, in the current periods were $4,269,000 or 88%
of total revenues, as compared to $5,081,000 or 94% of total revenues in the
prior year period. Total revenues for the periods presented are broken out as
follows:
Q-1 Q-1 % Change
2000 1999 Incr (Decr)
---- ---- -----------
(in thousands)
EAS $ 2,165 $ 1,927 12
CCTV 1,427 2,395 (40)
SentryVision(R) 287 295 (3)
3M library products 373 237 57
-------- --------- ---------
4,252 4,854 (12)
Service revenues and other 620 536 16
-------- --------- ---------
Total revenues $ 4,872 $ 5,390 (10)
======== ========= =========
The decrease in CCTV revenues during the current period is
primarily related to a decrease in sales to one of the Company’s major
customers.
Cost of sales were 55% of total revenues in the three months
ended March 31, 2000 compared to 51% in the same period in the previous year.
The increase in the percentage in the current year is primarily due to lower
margins on sales of EAS products due to competitive pressures and higher sales
to Sensormatic on an OEM basis which carry lower margins than normal sales to
customers.
Customer service expenses were 32% lower in the first quarter of
2000 than in the first quarter 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 23% lower when
compared to last year’s first quarter primarily as a result of the savings
from a reduced infrastructure, lower sales promotion expenses and lower
amortization of goodwill. As a percentage of revenues, these expenses decreased
by 6% from 42% to 36%.
Research and development costs were 28% lower when compared to
the previous year’s period due to a 50% reduction in headcount.
Net interest expense for the first quarter of 2000 increased by
$21,000 over the first quarter of 1999 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.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Due to net losses, Sentry has not provided for income taxes in
either period 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
$1,402,000 in the quarter ended March 31, 2000 as compared to a net loss of
$1,319,000 in the quarter ended March 31, 1999.
Preferred stock dividends of $332,000 and $321,000 were recorded
in the first quarters of 2000 and 1999, respectively. 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.
Liquidity and Capital Resources as of March 31, 2000
During the quarter the Company funded its operations and capital
expenditures through borrowings under its revolving credit facility and use of
existing cash.
The Company anticipates that current cash reserves, cash
generated by operations and financing arrangements should be sufficient to meet
the Company’s working capital requirements as well as future capital
expenditure requirements for the next twelve months. In addition, on May 11,
2000, G.E. Capital Corporation amended the borrowing base formula providing for
increased availability under the revolving credit facility by up to $500,000
through September 1, 2000.
Year 2000 Update
As of the date of this filing, the Company has not experienced
any Year 2000 issues arising from its systems or those of its material vendors
or suppliers. 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 continues to maintain contact with its
critical suppliers, financial institutions and other entities to determine the
Year 2000 readiness of its material business relationships. If there are ongoing
Year 2000 issues that arise at a later date, the Company has contingency plans
in place to address these issues.
In light of the Company’s efforts, the Year 2000 issue has
had no material adverse effect to date on the business or results of operations
and is not expected to have a material impact on the Company’s financial
condition. There are no unbudgeted expenditures expected to occur in the future.
However, there can be no assurances that the Company or any third parties will
not have ongoing Year 2000 issues that may arise in the future which could
affect the financial statement results.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
| Item 6. |
|
Exhibits and Reports on Form 8-K |
| |
|
10.19 |
Fourth Amendment to the Loan and Security Agreement between the Company and
General Electric Capital Corporation dated May 11, 2000. |
| |
|
27. |
Financial Data Schedule (For SEC use only) |
| (b) |
|
Reports on Form 8-K - There were no reports on Form 8-K filed for the three months ended
March 31, 2000. |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant had duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
| |
SENTRY TECHNOLOGY CORPORATION |
| Date: May 12, 2000 |
By: /s/ PETER J. MUNDY
Peter J. Mundy, Vice President - Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer) |
