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, 1998
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 August 7, 1998 was
9,750,760.
SENTRY TECHNOLOGY CORPORATION
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations --
Three Months Ended June 30, 1998 and 1997
and Six Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows --
Six Months Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements -- June 30, 1998 6 - 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8 - 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 9
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
1998 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,451 $ 2,146
Accounts receivable, less allowance for doubtful
accounts of $725 and $752, respectively 7,184 6,323
Net investment in sales-type leases -
current portion 561 613
Inventories 8,185 8,297
Prepaid expenses and other current assets 504 387
------------ ------------
Total current assets 17,885 17,766
NET INVESTMENT IN SALES-TYPE LEASES -
non-current portion 601 848
SECURITY DEVICES ON LEASE, net 144 151
PROPERTY, PLANT AND EQUIPMENT, net 6,548 6,948
GOODWILL AND OTHER INTANGIBLES, net 9,010 9,796
OTHER ASSETS 344 428
--------- --------
$ 34,532 $ 35,937
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 1,901 $ ---
Accounts payable 1,072 1,982
Accrued liabilities 2,734 2,730
Obligations under capital leases -
current portion 178 218
Deferred income 447 421
--------- ---------
Total current liabilities 6,332 5,351
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion 3,180 3,095
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 412 445
---------- ---------
Total liabilities 9,924 8,891
REDEEMABLE CUMULATIVE PREFERRED STOCK 25,877 25,254
COMMON SHAREHOLDERS' EQUITY
Common stock 10 10
Additional paid-in capital 16,162 16,785
Accumulated deficit (17,441) (15,003)
--------- ---------
(1,269) 1,792
--------- ---------
$ 34,532 $ 35,937
========= =========
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,
1998 1997 1998 1997
REVENUES $ 7,199 $ 5,622 $ 12,397 $ 10,725
COSTS AND EXPENSES:
Cost of sales 3,155 3,140 5,990 5,639
Customer service expenses 1,649 1,112 3,036 1,949
Selling, general and
administrative expenses 2,443 2,201 4,911 4,636
Research and development 330 419 666 849
Interest (income) expense, net 113 77 211 23
Purchased in-process
research and development --- --- --- 13,200
--------- --------- --------- ---------
7,690 6,949 14,814 26,296
--------- --------- --------- ---------
OPERATING LOSS (491) (1,327) (2,417) (15,571)
INCOME TAXES --- 36 21 72
--------- --------- --------- ---------
NET LOSS (491) (1,363) (2,438) (15,643)
PREFERRED STOCK DIVIDENDS 317 457 623 457
--------- --------- --------- ---------
NET LOSS ATTRIBUTED
TO COMMON SHAREHOLDERS $ (808) $ (1,820) $ (3,061) $ (16,100)
============== ========= ========= =========
NET LOSS PER SHARE
Basic $ (.08) $ (.19) $ (.31) $ (1.89)
============== ========= ========= =========
Diluted $ (.08) $ (.19) $ (.31) $ (1.89)
============== ========= ========= =========
WEIGHTED AVERAGE
COMMON SHARES
Basic 9,751 9,672 9,751 8,501
========= ========= ========= =========
Diluted 9,751 9,672 9,751 8,501
========= ========= ========= =========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
JUNE 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,438) $(15,643)
Adjustments to reconcile net loss
to net cash used in operating activities:
Write-off of purchased in-process research
and development --- 13,200
Depreciation and amortization of security
devices and property, plant and equipment 590 631
Amortization of goodwill and intangibles 793 674
Provision for bad debts 7 43
Changes in operating assets and liabilities,
net of effects of business acquired:
Accounts receivable (868) 1,357
Net investment in sales-type leases 299 903
Inventories 112 (452)
Accounts payable (910) (1,391)
Accrued liabilities 4 (2,391)
Other, net (40) 218
--------- ---------
Net cash used in operating activities (2,451) (2,851)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (16) (122)
Security devices on lease (29) 26
Intangibles (7) ---
--------- ---------
Net cash used in investing activities (52) (96)
--- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings, net 1,901 ---
Repayment of acquired debt --- (2,166)
Repayment of obligations under capital leases (93) (253)
Exercise of stock options and warrants --- 138
--------- ---------
Net cash provided by (used in) financing activities 1,808 (2,281)
----- ------
DECREASE IN CASH (695) (5,228)
CASH, at beginning of period 2,146 7,658
--------- ---------
CASH, at end of period $ 1,451 $ 2,430
========= =========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
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 2002. The
net investment in sales-type leases consists of:
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(in thousands)
Minimum lease payments receivable $ 1,337 $ 1,713
Allowance for uncollectible minimum lease payments (67) (86)
Unearned income (135) (195)
Unguaranteed residual value 27 29
--------- ---------
Net investment 1,162 1,461
Less current portion 561 613
--------- ---------
Non-current portion $ 601 $ 848
========= =========
NOTE C -- INVENTORIES Inventories consist of the following:
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(in thousands)
Raw materials $ 3,483 $ 2,662
Work-in-process 2,675 3,765
Finished goods 2,027 1,870
--------- ---------
$ 8,185 $ 8,297
========= =========
Reserves for excess and obsolete inventory totaled $1,351,000 and $1,246,000 as
of June 30, 1998 and December 31, 1997, respectively and have been included as a
component of the above amounts.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE D -- 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 $531,000
and $529,000 in the quarters ended June 30, 1998 and 1997 and $1,298,000 and
$1,303,000 in the six month periods ended June 30, 1998 and 1997, respectively.
In the first quarter and first six months of 1997, Sensormatic did not meet its
minimum order amounts in accordance with the terms of the supply agreement and,
accordingly, the Company recorded in revenues amounts of $674,000 and $1,176,000
representing the cumulative profits on the shortfall payable to the Company
pursuant to the agreement. Included in accounts receivable as of June 30, 1998
and December 31, 1997 are amounts due from Sensormatic of $312,000 and $492,000,
respectively.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS:
Consolidated revenues were 28% and 16% higher in the second quarter and six
month period ended June 30, 1998 than in the quarter and six month period ended
June 30, 1997. Revenues from third party customers, other than Sensormatic, in
the current periods were $6,668,000 and $11,099,000 or 93% and 90% of total
revenues as compared to $4,419,000 and $8,246,000 or 79% and 77% of total
revenues in the prior year periods. The backlog of unfilled orders expected to
be delivered within the next twelve months was $8.5 million at June 30, 1998 as
compared to $3.5 million at June 30, 1997.
The increase in revenues in both the quarter and six months ended June 30, 1998
is attributable to higher sales in the CCTV product lines, including
SentryVision(R) traveling CCTV surveillance system, which grew at rates of 150%
and 165% over the sales in the prior year periods, respectively. A
SentryVision(R) sale to a multi-level parking garage accounted for $1,170,000 in
June 1998. Electronic Article Surveillance (EAS) system sales remained
relatively unchanged from the second quarter, but were 17% lower in the first
six months of 1998 over the comparable period in the prior year. Sales of 3M
library systems were 42% and 33% lower in the second quarter and first six
months of 1998 as compared to the prior year periods.
Although the supply agreement expired and minimum purchase obligations ended,
Sensormatic continued to purchase certain products at similar margins (See Note
D). Sales to Sensormatic in the quarter and six month period ended June 30, 1998
were $531,000 and $1,298,000 as compared to $529,000 and $1,303,000 in the prior
year periods. Revenues in the second quarter and first half of 1997 also
included $674,000 and $1,176,000, respectively, representing the cumulative
profits on the shortfall of minimum orders payable to the Company in accordance
with the supply agreement.
Service and other revenues increased by $209,000 and $183,000 second quarter and
first six months of 1998 over the same periods in the prior year primarily as a
result of increased SentryVision(R) maintenance contracts.
Cost of sales were 44% and 48% of total revenue in the three and six months
ended June 30, 1998 compared to 56% and 53% in the same periods in the previous
year. The reduction in percentages in the current periods is primarily
attributable to better product sourcing and engineering improvements in the CCTV
and SentryVision(R) product lines and higher fixed cost absorption due to higher
production levels in the Company's manufacturing facility.
Customer service expenses were higher in both the second quarter and first six
months of 1998 as compared to both the second quarter and first six months of
1997 due to a higher number of customer service representatives required to
install and maintain the increasing CCTV and SentryVision(R) customer base.
Selling, general and administrative expenses decreased to 34% and 40% of
revenues in the second quarter and first six months of 1998 as compared to 39%
and 43% in the same periods in 1997. The increase in the amounts in the current
periods related to higher warranty costs and amortization of patents and
goodwill and were partially offset by lower sales promotional expenses.
The 21% decrease in research and development costs in the second quarter and 22%
decrease in the first six months ended June 30, 1998 compared to the same
periods ended June 30, 1997 is a result of a reduction in staff levels and
prototype costs associated with the completion of certain EAS related projects.
At 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 do not exist.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Net interest expenses for the second quarter and first six months of 1998
increased by $36,000 and $188,000, respectively, over the same periods of 1997.
This increase is due to borrowings under the Company's revolving credit
agreement which became effective during the first quarter of 1998.
Sentry has not provided for income taxes in the second quarter of 1998 due to
the net loss. Income taxes in the first quarter of 1998 and both periods
presented in 1997 represent provisions on the cumulative earnings of the Puerto
Rico manufacturing operations which cannot be offset by operating losses of
other subsidiaries.
As a result of the foregoing, Sentry had a net loss of $491,000 and $2,438,000
in the quarter and six months ended June 30, 1998 as compared to a net loss of
$1,363,000 and 15,643,000 in the quarter and six months ended June 30, 1997.
Preferred stock dividends of $317,000 and $623,000 have been accrued in the
second quarter and first six months of 1998 as compared to $457,000 in the
second quarter and first six months of 1997. These amounts will be paid-in-kind
as of February 12, 1999.
FINANCIAL CONDITION AS OF JUNE 30, 1998
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 believes the liquidity provided by future operations, existing cash
and financing arrangements will be sufficient to meet the Company's capital
requirements for the next twelve months.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
10.12 First Amendment and Waiver to the Loan and
Security Agreement Between the Company and General
Electric Capital Corporation Dated June 30, 1998
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 June 30, 1998.
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: AUGUST 7, 1998 By: /S/ PETER J. MUNDY
Peter J. Mundy, Vice President -
Finance and Chief Financial Officer
(Principal Financial and
Accounting Officer)