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, 1999
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 November 12, 1999
was 9,750,760.
SENTRY TECHNOLOGY CORPORATION
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations --
Three Months Ended September 30, 1999 and 1998
and Nine Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements -- September 30, 1999 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 9
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1999 1998
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,180 $ 873
Accounts receivable, less allowance for doubtful
accounts of $604 and $651, respectively 8,071 9,308
Net investment in sales-type leases -
current portion 472 574
Inventories 7,042 7,382
Assets held for sale --- 1,691
Prepaid expenses and other current assets 340 371
--------- ---------
Total current assets 17,105 20,199
NET INVESTMENT IN SALES-TYPE LEASES -
non-current portion 127 466
SECURITY DEVICES ON LEASE, net 76 65
PROPERTY, PLANT AND EQUIPMENT, net 4,057 4,348
GOODWILL AND OTHER INTANGIBLES, net 7,045 8,222
OTHER ASSETS 22 196
--------- ----------
$ 28,432 $ 33,496
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 1,660 $ 2,765
Accounts payable 1,252 1,257
Accrued liabilities 2,918 3,080
Obligations under capital leases -
current portion 163 180
Deferred income 334 249
--------- ---------
Total current liabilities 6,327 7,531
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion 2,934 3,061
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 313 362
--------- ---------
Total liabilities 9,574 10,954
REDEEMABLE CUMULATIVE PREFERRED STOCK 27,507 26,517
COMMON SHAREHOLDERS' EQUITY (DEFICIT)
Common stock 10 10
Additional paid-in capital 14,532 15,522
Accumulated deficit (23,191) (19,507)
---------- ---------
(8,649) (3,975)
---------- ----------
$ 28,432 $ 33,496
========== ==========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES $ 5,523 $ 8,100 $ 18,182 $ 20,497
COSTS AND EXPENSES:
Cost of sales 2,872 4,001 9,791 9,991
Customer service expenses 1,245 1,637 4,234 4,673
Selling, general and
administrative expenses 2,257 2,461 6,925 7,372
Research and development 397 343 1,032 1,009
Interest expense, net 129 141 387 352
--------- --------- --------- ---------
6,900 8,583 22,369 23,397
--------- --------- --------- ---------
OPERATING LOSS (1,377) (483) (4,187) (2,900)
OTHER INCOME - Gain on sale
of facilities (Note E) --- --- 503 ---
--------- --------- --------- ---------
(1,377) (483) (3,684) (2,900)
INCOME TAXES --- --- --- 21
--------- --------- --------- ---------
NET LOSS (1,377) (483) (3,684) (2,921)
PREFERRED STOCK DIVIDENDS 336 320 990 943
--------- --------- --------- ---------
NET LOSS ATTRIBUTED
TO COMMON SHAREHOLDERS $ (1,713) $ (803) $ (4,674) $ (3,864)
========= ========= ========= =========
NET LOSS PER COMMON SHARE
Basic $ (.18) $ (.08) $ (.48) $ (.40)
=========== =========== ========= ==========
Diluted $ (.18) $ (.08) $ (.48) $ (.40)
============ =========== ========= ==========
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
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES: ----- ----
Net loss $ (3,684) $ (2,921)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization of security
devices and property, plant and equipment 584 867
Amortization of goodwill and intangibles 1,194 1,190
Provision for bad debts 20 15
Gain on sale of facilities (503) ---
Changes in operating assets and liabilities,
net of effects of business acquired:
Accounts receivable 1,217 (2,744)
Net investment in sales-type leases 441 406
Inventories 340 (1)
Accounts payable (5) (159)
Accrued liabilities (162) 427
Other, net 241 (38)
--------- ---------
Net cash used in operating activities (317) (2,958)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of facilities 2,194 ---
Purchase of property, plant and equipment, net (274) (175)
Security devices on lease (30) (14)
Intangibles (17) (17)
--------- ---------
Net cash provided by (used in) investing activities 1,873 (206)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under the revolving line of credit (1,105) 2,459
Repayment of obligations under capital leases (144) (141)
--------- ---------
Net cash provided by (used in) financing activities (1,249) 2,318
--------- ---------
INCREASE (DECREASE) IN CASH 307 (846)
CASH, at beginning of period 873 2,146
--------- ---------
CASH, at end of period $ 1,180 $ 1,300
========= =========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 2003. The net investment in sales-type leases consists of:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(in thousands)
Minimum lease payments receivable $ 685 $ 1,204
Allowance for uncollectible minimum lease payments (34) (60)
Unearned income (52) (120)
Unguaranteed residual value --- 16
--------- ---------
Net investment 599 1,040
Less current portion 472 574
--------- ---------
Non-current portion $ 127 $ 466
========= =========
NOTE C -- INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(in thousands)
Raw materials $ 2,574 $ 2,497
Work-in-process 2,731 3,058
Finished goods 1,737 1,827
--------- ---------
$ 7,042 $ 7,382
========= =========
Reserves for excess and obsolete inventory totaled $1,299,000 and $1,318,000 as
of September 30, 1999 and December 31, 1998, 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 $125,000 and $116,000 in the quarters ended
September 30, 1999 and 1998 and $1,805,000 and $1,414,000 in the nine month
periods ended September 30, 1999 and 1998, respectively.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE E -- OTHER INCOME - GAIN ON SALE OF FACILITIES
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. At December 31, 1998, included in assets held for sale was
approximately $1.7 million representing the net carrying amount of these
properties. 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.
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 32% and 11% lower in the quarter and nine month
period ended September 30, 1999 than in the quarter and nine month period ended
September 30, 1998. Total revenues for the periods presented are broken out as
follows:
Q-3 Q-3 9 Mos. 9 Mos.
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
EAS systems $ 2,349 $ 2,610 (10%) $ 5,647 $ 5,579 1%
CCTV 1,496 2,431 (38%) 6,034 5,663 7%
SentryVision(R) 580 1,948 (70%) 1,685 4,686 (64%)
3M library products 83 316 (74%) 916 1,204 (24%)
--------- -------- --------- --------- --------- --------
4,508 7,305 (38%) 14,282 17,132 (17%)
Service revenues and other 890 679 31% 2,095 1,951 7%
--------- -------- ---------- --------- --------- --------
Third party customer revenues 5,398 7,984 (32%) 16,377 19,083 (14%)
Sales to Sensormatic 125 116 8% 1,805 1,414 28%
--------- -------- --------- --------- --------- --------
Total revenues $ 5,523 $ 8,100 (32%) $ 18,182 $ 20,497 (11%)
========= ======== ========== ========= ========= =========
In the third quarter of 1999, revenues decreased in all product lines. The
decrease is attributed to a slow-down in the number of orders placed by both the
Company's existing customer base as well as new prospective customers, resulting
in a significant decline in sales during the period. Management believes that
revenues were also negatively impacted by the Company's announcement in the
third quarter that it retained an investment banking firm for a possible
corporate transaction, which raised uncertainties about the Company's future
with its customers. For the nine month period ended September 30, 1999, the
decline in SentryVision(R) is primarily related to the decision by one of the
Company's major SentryVision(R) customers to purchase conventional CCTV for the
bulk of its security product orders for 1999.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cost of sales were 52% and 54% of total revenues in the three and nine month
periods ended September 30, 1999 compared to 49% in both the same periods in the
previous year. The increase in the percentage in the current year periods as
compared to the previous year periods is a result of a combination of factors
including: (i) increased scrap and rework costs associated with quality related
issues in the SentryVision(R) product line; (ii) increased sales of CCTV
products in the nine month period which result in higher product costs than the
SentryVision(R) product line; and (iii) higher EAS product costs due to
continued lower machine output levels on equipment damaged in transit from the
Puerto Rico plant.
Customer service expenses were 24% and 9% lower in the third quarter and first
nine months of 1999 as compared to the third quarter and first nine months of
1998 due primarily to a lower number of SentryVision(R) installations in the
current periods which require more labor than installations of the Company's
other products.
Selling, general and administrative expenses were lower in both the three month
and nine month periods ended September 30, 1999 as compared to the same periods
of the previous year primarily as a result of the savings through the
consolidation of facilities.
Research and development costs were slightly higher in the third quarter of 1999
as compared to 1998. The primary emphasis in the current year has been directed
towards manufacturing improvements related to the move from Puerto Rico to New
York and improvements to the SentryVision(R) system.
Net interest expense for the third quarter of 1999 decreased by $12,000 over the
same period of 1998 due to lower net borrowings under the Company's revolving
credit agreement.
During the first quarter of 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's income taxes in the first nine months of 1998 represent a provision on
the cumulative earning of the Puerto Rico manufacturing operations which were
closed at the end of 1998. Due to net losses, Sentry has not provided for income
taxes in any other periods presented.
As a result of the foregoing, Sentry had a net loss of $1,377,000 and $3,684,000
in the quarter and nine month period ended September 30, 1999 as compared to a
net loss of $483,000 and $2,921,000 in the quarter and nine months ended
September 30, 1998.
Preferred stock dividends of $336,000 and $990,000 have been recorded in the
third quarter and first nine months of 1999 as compared to $320,000 and $943,000
in the third quarter and first nine months of 1998. Dividends accrued through
February 12, 1999 were paid-in-kind as of that date. In connection with the
waiver of 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 of 1999. Under the terms of the Class A Preferred
Stock, the dividends will cumulate and Class A Preferred Stockholders, voting as
a class, will be entitled to elect two additional directors to the Company's
Board.
LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 30, 1999
The Company has funded its operations and capital expenditures through
borrowings under its revolving credit facility and use of existing cash. The
cash proceeds of $2.2 million from the sale of certain facilities, noted above,
were used to reduce borrowings under the revolving credit facility during the
first quarter. The Company has no material capital expenditure or purchase
commitments as of September 30, 1999.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's existing credit agreement with G.E. Capital Corporation is due to
expire as of December 31, 1999. The Company's ability to renew the credit
agreement will depend, in large part, on its ability to reduce losses and
improve operating results. Presently, the Company is completing its revised
business plan for the year 2000 and beyond which, upon completion, will be
presented to the existing lender and others. Although there are no assurances
that their efforts will be successful, it is management's belief that it will be
able to renew or replace the existing line. The existing credit agreement does
not permit the Company to pay cash dividends on the Class A Preferred Stock.
Accordingly, the August 1999 dividend was not paid but instead was cumulated.
Management believes that any replacement facility would similarly prohibit the
Company from paying cash dividends.
The Company anticipates that current cash reserves, cash generated by operations
and cash obtained under financing arrangements, if consummated, should be
sufficient to meet the Company's working capital requirements as well as future
capital expenditure requirements for the next twelve months.
YEAR 2000 UPDATE
Many existing computer programs were designed and developed without considering
the upcoming change in the century, which could lead to the failure of computer
applications or create erroneous results by or at the Year 2000. On January 1,
2000, any computer system or other equipment using date sensitive software which
uses only two digits to represent the year may recognize "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar activities.
Recognizing the potential impact, the Company began actively resolving its Year
2000 compliance issues in early 1997. Using internal and external resources, the
Company analyzed and assessed its business systems, including computer systems,
PC's and network hardware, telephone systems, production process controllers,
access control, office equipment and the product it sells.
Upgrades to both mid-range and network computer hardware, operating systems and
related infrastructures have been completed and are now Year 2000 compliant. All
critical application software has been reviewed and Year 2000 compliant versions
have been obtained. The Company has completed the process of retrofitting custom
modifications to the upgraded versions. All applications with forward scheduling
impact are now considered to be Year 2000 compliant. The Company believes its
manufactured products are Year 2000 compliant.
The Company has incurred approximately $300,000 of costs to date related to the
Year 2000 program. Approximately $196,000 was incurred in the first nine months
of 1999. The remaining costs, estimated to be $55,000, relate primarily to
hardware upgrades on the Company's PC's and telephone systems, which will be
completed before the end of 1999. There can be no assurance that the Company
will not incur unanticipated costs or that it will be able to address all Year
2000 issues.
The impact of the Year 2000 issue on the Company will also be affected by the
Year 2000 readiness of its business partners, customers, suppliers and vendors
and providers of facilities, equipment and services. 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 has
contacted many of its critical suppliers, financial institutions, public
utilities and other entities to determine the Year 2000 readiness of its
material business relationships. While the Company has not been informed of any
material risks associated with these entities, there is no guarantee of the Year
2000 readiness of those entities or the potential material adverse effect on the
Company.
SENTRY TECHNOLOGY CORPORATION
SEPTEMBER 30, 1999
PART II - OTHER INFORMATION
RECENT DEVELOPMENTS
As a result of the Company's current operating results and low stock price, the
Company has scheduled meetings with the American Stock Exchange (the "Exchange")
on the future listing status of the Company's stock on the Exchange. Should the
Exchange determine to discontinue the Company's listing, the Company's stock
would continue to trade on an over-the-counter basis. This, however, could have
a negative impact on the Company's stock price.
On October 13, 1999, the Company gave notice to Legg Mason Wood Walker ("Legg
Mason") of the Company's determination to terminate its engagement with Legg
Mason. The termination was effective November 3, 1999. The Company retained Legg
Mason in May 1999 to locate a potential strategic partner for a corporate
transaction with the Company. As of October 13, 1999, Legg Mason had been
unsuccessful in developing a potential transaction, and the Company resolved to
end its search. Management believes that the Company's low stock price (relative
to its competitors') and unsuccessful search for a strategic transaction partner
may raise uncertainties with the Company's present customers and impede
development of new customers.
On October 15, 1999, the Company appointed Anthony H.N. Schnelling as the
interim President & Chief Executive Officer of the Company, replacing Thomas A.
Nicolette. Mr. Schnelling, who is a principal of Restoration Management Company,
LLC, will focus the management team's efforts on revising the Company's business
plan with a view to reduce losses and improve the Company's operating results
over the next year. However, based on the Company's present condition, there can
be no assurance that management will be successful in these efforts.
Item 3. Defaults Upon Senior Securities
(b) As described more fully in Management's Discussion and Analysis of
Financial Condition above, the agreement governing the Company's
existing credit facility presently will not permit the Company to pay
the dividend. Accordingly, on August 12, 1999 the Company did not pay
the $.125 cash dividend per share on its Class A Preferred Stock.
Since any replacement credit facility is likely to also prohibit the
payment of cash dividends, the Company believes that it will not pay
the February 2000 dividend on the Class A Preferred Stock. Unpaid
dividends cumulate as provided in the Certificate of Designations
governing the Class A Preferred Stock. See "Liquidity and Capital
Resources."
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
10.15 Consulting Agreement between the Company and Restoration
Management Company, LLC
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, 1999.
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 12, 1999 By: /S/ PETER J. MUNDY
----------------- -------------------
Peter J. Mundy, Vice President
- Finance and Chief Financial
Officer (Principal Financial
and Accounting Officer)