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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12727
SENTRY TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 96-11-3349733
-------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 WIRELESS BOULEVARD, HAUPPAUGE, NEW YORK 11788
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Address of principal executive offices) (Zip Code)
516-232-2100
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(Registrant's telephone number, including area code)
(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 3, 1997 was
9,750,759.
SENTRY TECHNOLOGY CORPORATION
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INDEX
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PAGE NO.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations --
Three Months Ended September 30, 1997 and 1996
and Nine Months Ended September 30, 1997 and 1996 4
Consolidated Statement of Shareholders' Equity
Nine Months Ended September 30, 1997 5
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial
Statements -- September 30, 1997 7 - 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 9 - 10
PART II. OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1997 1996
------------ ------------
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 1,776 $ 7,658
Accounts receivable, less allowance for doubtful
accounts of $744 and $719, respectively 6,124 6,229
Net investment in sales-type leases -
current portion 575 1,496
Inventories 8,395 6,926
Prepaid expenses and other current assets 508 389
------- ---------
Total current assets 17,378 22,698
NET INVESTMENT IN SALES-TYPE LEASES-
non-current portion 1,060 1,205
SECURITY DEVICES ON LEASE, net 178 281
PROPERTY, PLANT AND EQUIPMENT, net 6,882 7,288
GOODWILL AND OTHER INTANGIBLES, net 10,687 364
OTHER ASSETS 554 1,021
--------- ---------
$ 36,739 $ 32,857
========= =========
LIABILITIES AND SHAREHOLDERS EQUITY
- -----------------------------------
CURRENT LIABILITIES
Accounts payable $ 1,264 $ 1,101
Accrued liabilities 3,220 2,268
Obligations under capital leases-
current portion 195 392
Deferred lease rentals 564 231
--------- ---------
Total current liabilities 5,243 3,992
OBLIGATIONS UNDER CAPITAL LEASES-
non-current portion 3,044 3,154
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 463 463
REDEEMABLE CUMULATIVE PREFERRED STOCK 24,949 ---
COMMON SHAREHOLDERS' EQUITY
Common stock 10 5
Additional paid-in capital 17,050 22,329
Retained earnings (accumulated deficit) (14,020) 2,914
--------- ---------
3,040 25,248
--------- ---------
$ 36,739 $ 32,857
========= =========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
REVENUES $ 6,435 $ 5,741 $ 17,160 $ 18,180
COSTS AND EXPENSES:
Cost of sales 3,397 3,008 9,036 9,398
Customer service expenses 1,415 779 3,364 2,197
Selling, general and
administrative expenses 2,395 1,544 7,031 5,387
Research and development 405 338 1,254 1,069
Interest (income) expense, net 78 (23) 101 (64)
Purchased in-process
research and development --- --- 13,200 ---
------------ ----------- --------- --------
7,690 5,646 33,986 17,987
------------ ----------- --------- ---------
OPERATING PROFIT (LOSS) (1,255) 95 (16,826) 193
OTHER INCOME:
Gain on sale of assets --- --- --- 2,462
------------ ----------- --------- --------
INCOME (LOSS) BEFORE
INCOME TAXES (1,255) 95 (16,826) 2,655
INCOME TAXES 36 24 108 664
------------ ------------ ---------- ---------
NET INCOME (LOSS) (1,291) 71 (16,934) 1,991
PREFERRED STOCK DIVIDENDS 305 --- 762 ---
-------------- ------------ ----------- ---------
NET INCOME (LOSS) AVAILABLE
TO COMMON SHAREHOLDERS $(1,596) $ 71 $(17,696) $ 1,991
------------- ----------- ---------- ---------
NET INCOME (LOSS) PER SHARE $ (.16) $ .01 $ (1.99) $ .39
------------- ----------- --------- ---------
WEIGHTED AVERAGE
COMMON SHARES 9,706 5,108 8,903 5,075
------------ ---------- --------- ---------
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30, 1997
Additional Total
Common Stock Paid-In Retained Shareholders
Shares Amount Capital Earnings Equity
------ ------ ---------- -------- ------------
BALANCE, DECEMBER 31, 1996
(as previously reported) 5,773 $ 58 $ 22,276 $ 2,914 $ 25,248
Restatement of Knogo N.A.
shares due to the merger (971) (53) 53 --- ---
------ --------- --------- --------- --------
BALANCE, DECEMBER 31, 1996
(as restated) 4,802 5 22,329 2,914 25,248
Shares issued to Video Sentry
shareholders in connection with
the merger 4,842 5 19,449 --- 19,454
Preferred shares issued to former
Knogo N.A. shareholders in
connection with the merger --- --- (24,009) --- (24,009)
Shares issued to employee
benefit plan 28 --- 83 --- 83
Exercise of stock options and
warrants 57 --- (40) --- (40)
Net loss --- --- --- (16,934) (16,934)
Preferred stock dividends --- --- (762) --- (762)
--- ----- -------- -------- ---------
BALANCE, SEPTEMBER 30, 1997 9,729 $ 10 $ 17,050 $(14,020) $ 3,040
------ ------- --------- --------- ---------
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
1997 1996
---- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (16,934) $ 1,991
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Write-off of purchased in-process research
and development 13,200 ---
Depreciation and amortization of security
devices and property, plant and equipment 899 847
Amortization of goodwill and intangibles 1,075 44
Provision for bad debts 30 69
Changes in operating assets and liabilities,
net of effects of business acquired:
Accounts receivable 779 2,287
Net investment in sales-type leases 1,066 (704)
Inventories (583) (708)
Accounts payable (1,266) (1,195)
Accrued liabilities (2,342) (236)
Other, net 625 248
--------- ---------
Net cash (used in) provided by operating activities (3,451) 2,643
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (169) (438)
Security devices on lease 20 (85)
--------- ---------
Net cash used in investing activities (149) (523)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of acquired debt (2,166) ---
Repayment of obligations under capital leases (337) (113)
Exercise of stock options and warrants 138 66
Stock issued to employee benefit plan 83 ---
--------- ---------
Net cash used in financing activities (2,282) (47)
(DECREASE) INCREASE IN CASH (5,882) 2,073
CASH, at beginning of period 7,658 409
--------- ---------
CASH, at end of period $ 1,776 $ 2,482
--------- ---------
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE A -- BASIS OF PRESENTATION - KNOGO NORTH AMERICA INC. AND VIDEO SENTRY
CORPORATION MERGER Sentry Technology Corporation ("Sentry") a newly publicly
traded 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
term "Company" refers to Sentry as of and subsequent to February 12, 1997 and to
Knogo N.A. prior to such date.
Pursuant to the merger agreement, Sentry issued one share of Common Stock for
each one share of Video Sentry Common Stock outstanding at the effective time of
the merger. Sentry also issued one share of Common Stock and one share of Class
A Preferred Stock for each 1.2022 shares of Knogo N.A. Common Stock outstanding.
The Sentry Class A Preferred Stock has a face value of $5.00 per share and a
cumulative dividend rate of 5.0% (the first two years of which are
paid-in-kind). The preferred stock is non-voting and subject to a mandatory
redemption four years from the date of issuance and optional redemption by
Sentry at any time after one year from the date of issuance. The redemption
price will be equal to $5.00 per preferred share (plus accrued and unpaid
dividends as of the redemption date) plus the amount, if any, by which the
market price of Sentry's Common Stock at the time of redemption exceeds a hurdle
price based on the price of Sentry Common Stock one year after the Effective
Date. The minimum hurdle price is $5.00 per share and the maximum is $6.50. The
preferred stock is not convertible, but the redemption price may, in certain
circumstances, be paid in common stock at Sentry's option. Undeclared and unpaid
cumulative dividends totaled $762,000 as of September 30, 1997.
The merger was accounted for under the purchase method of accounting and
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values at the date of acquisition. Goodwill and
other intangibles in the amount of approximately $11,350,000 have been
capitalized and non-recurring charges of approximately $13,200,000 relating to
in-process research and development have been expensed. The goodwill and other
intangibles will be amortized over an estimated useful life of seven years.
Although Video Sentry shareholders have a majority voting interest in Sentry
based upon their common stock ownership percentage, generally accepted
accounting principles requires consideration of a number of factors, in addition
to voting interest, in determining the acquiring entity for purposes of purchase
accounting treatment. Such other factors to be considered include: (i) key
Sentry management positions are held by individuals previously holding similar
such positions in Knogo N.A.; (ii) the assets, revenues and net earnings of
Knogo N.A. significantly exceed those of Video Sentry; and (iii) the market
value of the securities received by the former holders of Knogo N.A. Common
Stock significantly exceeds the market value of the securities received by the
former holders of Video Sentry Common Stock. As a result of these other factors,
and solely for accounting and financial reporting purposes, 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 consolidated balance sheet reflects the merger as of February 12, 1997, when
Sentry acquired all of the outstanding Video Sentry Common Stock at its fair
value plus direct costs incurred which are approximately $2,383,000. The
consolidated statements of operations and cash flows include the historical
results of Knogo N.A. in all periods presented and include the results of Video
Sentry after the Effective 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 -- RESTATEMENT
Common stock, additional paid-in capital and the weighted average common shares
have been retroactively restated to the earliest year presented in order to
reflect the effect of the recapitalization that occurred during the reverse
acquisition.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE C -- NET INVESTMENT IN SALES-TYPE LEASES The Company is the lessor of
security devices under agreements expiring in various years through 2001. The
net investment in sales-type leases consists of:
September 30, 1997 December 31, 1996
(in thousands)
Minimum lease payments receivable $ 1,941 $ 3,152
Allowance for uncollectible minimum
lease payments (97) (157)
Unearned income (239) (324)
Unguaranteed residual value 30 30
--------- ---------
Net investment 1,635 2,701
Less current portion 575 1,496
--------- ---------
Non-current portion $ 1,060 $ 1,205
--------- ---------
NOTE D -- INVENTORIES Inventories consist of the following:
September 30, 1997 December 31, 1996
(in thousands)
Raw materials $ 3,095 $ 2,498
Work-in-process 3,677 2,547
Finished goods 1,623 1,881
--------- ---------
$ 8,395 $ 6,926
--------- ---------
Reserves for excess and obsolete inventory totaled $1,777,000 and $1,691,000 as
of September 30, 1997 and December 31, 1996, respectively and have been included
as a component of the above amounts.
NOTE E -- SUPPLY AGREEMENT
Knogo N.A. had a supply agreement under which Sensormatic Electronics
Corporation ("Sensormatic") was obligated to purchase $2 million of products
from Knogo N.A. per quarter 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 $518,000
and $593,000 in the quarters ended September 30, 1997 and 1996 and $1,821,000
and $3,990,000 in the nine month periods ended September 30, 1997 and 1996,
respectively. During certain periods presented, in which the supply agreement
was in place, Sensormatic did not meet its minimum order amounts and,
accordingly, the Company recorded in revenues the cumulative profits on the
shortfall payable to the Company pursuant to the agreement. While there were no
amounts recorded in the third quarter of 1997, amounts of $1,176,000 were
recorded in the nine months ended September 30, 1997 and $341,000 and $642,000
in the three and nine month periods ended September 30, 1996. Included in
accounts receivable as of September 30, 1997 and December 31, 1996 are amounts
due from Sensormatic of $417,000 and $1,212,000, respectively.
NOTE F -- GAIN ON SALE OF ASSETS
In March 1996, the Company completed the sale of certain assets (primarily
patents and technology) of its library security systems business to Minnesota
Mining and Manufacturing Company ("3M") for a purchase price of $3 million, paid
at closing. In connection with such sale, Knogo N.A. and 3M entered into an
agreement pursuant to which the Company has become a distributor of certain of
3M's library systems products for an initial term of three years and has agreed
not to compete with 3M in the sale of security systems products (other than
closed circuit video systems) in the library market except as otherwise
contemplated by the transaction documentation. The parties also settled certain
patent litigation between them.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS:
Consolidated revenues were 12% higher and 6% lower in the third quarter and nine
month period ended September 30, 1997 than in the quarter and nine month period
ended September 30, 1996. Revenues from third party customers, other than
Sensormatic, in the current periods were $5,917,000 and $14,163,000 or 92% and
83% of total revenues, as compared to $4,807,000 and $13,548,000 or 84% and 75%
of total revenues in the prior year periods. These amounts represent a 23% and
5% increase over the third quarter and first nine months in the previous year.
The increase is primarily due to higher sales in the CCTV product lines,
including the SentryVisionRM traveling CCTV surveillance system, which was
partially offset by lower retail and library EAS sales. Although the supply
agreement officially expired and minimum purchase obligations ended, Sensormatic
continued to purchase certain products at similar margins. Sales to Sensormatic
were $518,000 and $593,000 in the quarters ended September 30, 1997 and 1996 and
$1,821,000 and $3,990,000 in the nine month periods ended September 30, 1997 and
1996, respectively. During certain periods presented, in which the supply
agreement was in place, Sensormatic did not meet its minimum order amounts, and,
accordingly, the Company recorded in revenues the cumulative profits on the
shortfall payable to the Company pursuant to the agreement. While there were no
amounts recorded in the third quarter of 1997, amounts of $1,176,000 were
recorded in the nine months ended September 30, 1997 and $341,000 and $642,000
in the three and nine month periods ended September 30, 1996. Sensormatic has
indicated it will continue to purchase certain EAS products from the Company in
the future. In addition, during the quarter, Sentry signed a multi-year
agreement with Sensormatic to be its exclusive distributor of SentryVisionRM
systems in Latin America and the Caribbean. This agreement marks the Company's
first venture outside of North America since the merger between Knogo N.A. and
Video Sentry was consummated.
Cost of sales were 53% of total revenues in both the three and nine months ended
September 30, 1997 compared to 52% in the same periods in the previous year. The
cost of sales percentage is impacted by several factors including the mix of
products sold to its third party customers and the amount of total revenues from
Sensormatic under the supply agreement. The increase in cost of sales in the
third quarter and first nine months of 1997 was primarily related to the new
SentryVisionRM product line. While the Company continues to make cost reductions
through better vendor sourcing and engineering improvements to the product line,
SentryVisionRM systems still currently carry lower margins than the traditional
EAS products produced by the Company. In the first nine months of 1997 cost of
sales was also negatively impacted by the lower production levels at the
Company's Puerto Rico manufacturing facility due to the decline in sales to
Sensormatic and the ramping up for the production of SentryVisionRM products
which only commenced late in the third quarter.
Customer service expenses were higher in both the third quarter and the nine
months of 1997 as compared to both the third quarter and first nine months of
1996 due to the addition of the Video Sentry customer service staff as well as
new hires, technical updates made to the existing installed Video Sentry
customer base and cross training for existing staff on EAS and CCTV (including
SentryVisionRM) product lines.
The increase in selling, general and administrative expenses in 1997 as compared
to 1996 were primarily a result of higher sales and marketing costs associated
with the promotion of the new SentryVisionRM systems and the amortization of
goodwill and intangibles acquired in the merger of $386,000 and $1,031,000 in
the third quarter and first nine months of 1997, respectively.
The increase in research and development costs in the third quarter and nine
months ended September 30, 1997 as compared to the third quarter and nine months
ended September 30, 1996 is a result of the continuing efforts to improve the
SentryVisionRM system.
Due to the consummation of the merger in the first quarter of 1997, Sentry
recorded for that period a non-recurring charge of $13,200,000 relating to
purchased in-process research and development. The amount was based on the
purchase price allocation and a valuation of existing technology and technology
in-process. The charge for in-process research and development equaled its
estimated current fair value based on risk adjusted cash flows of specifically
identified technologies for which the technological feasibility has not been
established and alternative future uses did not exist.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Company had net interest expense in the current year periods as compared to
net interest income in the 1996 periods. Interest income was $15,000 and
$113,000 in the third quarter and first nine months of 1997 as compared to
$43,000 and $125,000 in the same periods of 1996. As a result of the merger, the
Company reduced the amount of its temporary investments. Interest expense was
$93,000 and $214,000 in the three and nine month periods ended September 30,
1997 as compared to $20,000 and $61,000 in the same periods of 1996. The
increase is primarily due to the capitalized lease on its corporate headquarters
entered into at the end of 1996.
In the first quarter of 1996, the Company sold certain assets to 3M, consisting
of patents and technology, for a purchase price of $3 million. The proceeds, net
of certain costs including patent costs, inventory write downs, new product
training costs, legal and other costs, resulted in a gain of approximately $2.5
million which is included in the results of that period. See Note F.
Sentry's lower income taxes in the current periods represent the normal
provisions on the earnings of the Puerto Rico manufacturing operations which
cannot be offset by operating losses of other subsidiaries.. The higher amount
in the 1996 period was primarily related to the tax on the gain on the sale of
assets to 3M which were taxed at the statutory federal tax rate.
As a result of the foregoing, Sentry had a net loss of $1,291,000 and
$16,934,000 in the quarter and nine months ended September 30, 1997 as compared
to net income of $71,000 and $1,991,000 in the quarter and nine months ended
September 30, 1996.
Preferred stock dividends of $305,000 and $762,000 have been accrued in the
third quarter and first nine months of 1997. These amounts will be paid-in-kind
as of February 12, 1998. See Note A.
FINANCIAL CONDITION AS OF SEPTEMBER 30, 1997
- --------------------------------------------
During the first nine months and primarily as a result of the merger, Sentry
used approximately $5.9 million in cash. The Company utilized existing funds of
$2.2 million to retire acquired Video Sentry debt, $2.5 million to satisfy long
term vendor payables and the remainder to finance its operating activities. As
of September 30, 1997 the Company had no bank debt.
During the quarter, Sentry terminated its discussions with Knogo N.A.'s prior
lender regarding a new credit arrangement. The Company currently is considering
proposals from several commercial finance companies for a new revolving credit
agreement. Based upon discussions between Sentry's management and senior lending
officers at these institutions, Sentry believes that a new facility will be made
available to it for at least the same amount, and on substantially the same
terms, as were previously made available to Knogo N.A. Such facility would be
secured by a lien on substantially all of the assets of Sentry and its
subsidiaries. The Company expects to close on such a facility before year end.
The Company anticipates that current cash reserves, cash generated by operations
and cash obtained under the credit facility expected to be entered into by
Sentry will be adequate to finance its anticipated working capital requirements
as well as future capital expenditure requirements for at least the next twelve
months.
SENTRY TECHNOLOGY CORPORATION
PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
27. Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for
the three months ended September 30, 1997.
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 4, 1997 By: /S/ PETER J. MUNDY
Peter J. Mundy, Vice President
- Finance and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
Financial Data Schedule
For Period Ended September 30, 1997
Sentry Technology Corporation
(Unaudited)
(Dollars in Thousands)