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, 2001
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
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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)
631-232-2100
------------
(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
-
As of August 14, 2001, there were 61,467,872 shares of Common Stock outstanding.
SENTRY TECHNOLOGY CORPORATION
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INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
- - ---------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
June 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Operations --
Three Months Ended June 30, 2001 and 2000
and Six Months Ended June 30, 2001 and 2000 4
Condensed Consolidated Statement of Shareholders' Equity
Six Months Ended June 30, 2001 5
Condensed Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2001 and 2000 6
Notes to Condensed Consolidated Financial
Statements -- June 30, 2001 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
PART II. OTHER INFORMATION
- - ------------------------------
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2001 2000
---------- --------------
ASSETS
- - --------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 662 $ 927
Accounts receivable, less allowance for doubtful
accounts of $870 and $890, respectively 3,476 3,178
Net investment in sales-type leases -
current portion 77 84
Inventories 4,373 5,274
Prepaid expenses and other current assets 413 202
---------- --------------
Total current assets 9,001 9,665
NET INVESTMENT IN SALES-TYPE LEASES -
non-current portion 64 100
SECURITY DEVICES ON LEASE, net 28 36
PROPERTY, PLANT AND EQUIPMENT, net 3,119 3,324
OTHER ASSETS 274 720
---------- --------------
$ 12,486 $ 13,845
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- - --------------------------------------------------------------
CURRENT LIABILITIES
Revolving line of credit $ 2,910 $ 2,920
Accounts payable 1,217 1,463
Accrued liabilities 1,842 2,633
Obligations under capital leases -
current portion 131 124
Deferred income 326 352
---------- --------------
Total current liabilities 6,426 7,492
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion 2,684 2,768
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 175 199
---------- --------------
Total liabilities 9,285 10,459
REDEEMABLE CUMULATIVE PREFERRED STOCK --- 29,180
COMMON SHAREHOLDERS' EQUITY (DEFICIT)
Common stock 61 10
Additional paid-in capital 44,358 12,859
Accumulated deficit (40,218) (38,663)
Receivable from stock sale (1,000) ---
---------- --------------
Total common shareholders' equity 3,201 (25,794)
---------- --------------
$ 12,486 $ 13,845
========== ==============
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,
-------------------- ------------------
2001 2000 2001 2000
--------- --------- -------- --------
REVENUES $ 4,005 $ 5,169 $ 8,675 $10,041
COSTS AND EXPENSES:
Cost of sales 2,103 2,615 4,494 5,274
Customer service expenses 1,024 1,140 2,153 2,297
Selling, general and
administrative expenses 1,395 2,039 2,917 3,812
Research and development 208 225 383 451
----------- --------- -------- --------
4,730 6,019 9,947 11,834
----------- --------- -------- --------
OPERATING LOSS (725) (850) (1,272) (1,793)
INTEREST EXPENSE 136 166 283 324
----------- --------- -------- --------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (861) (1,016) (1,555) (2,117)
INCOME TAXES --- --- --- ---
----------- --------- -------- --------
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (861) (1,016) (1,555) (2,117)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE --- --- --- 301
----------- --------- -------- --------
NET LOSS (861) (1,016) (1,555) (2,418)
PREFERRED STOCK DIVIDENDS --- 333 25 665
RETURN TO COMMON SHAREHOLDERS FROM
REDEMPTION OF PREFERRED STOCK --- --- 27,198 ---
----------- -------- -------- --------
NET INCOME (LOSS) ATTRIBUTED TO
COMMON SHAREHOLDERS $ (861) $ (1,349) $25,618 $(3,083)
============ ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE:
Basic $ (0.01) $ (0.14) $ 0.43 $ (0.29)
============ ========= ======= ========
Diluted $ (0.01) $ (0.14) $ 0.42 $ (0.29)
============ ========= ======= ========
NET INCOME (LOSS) PER COMMON SHARE
Basic $ (0.01) $ (0.14) $ 0.43 $ (0.32)
============ ========= ======= ========
Diluted $ (0.01) $ (0.14) $ 0.42 $ (0.32)
============ ========= ======= ========
WEIGHTED AVERAGE COMMON SHARES
Basic 61,468 9,751 59,457 9,751
============ ========= ======== =======
Diluted 61,468 9,751 60,291 9,751
============ ========= ======== =======
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Total
Retained Common Redeemable
Common Additional Earnings Receivable Shareholders' Cumulative
Stock Paid-In (Accumulated From Equity Preferred
Shares Amount Capital Deficit) Stock Sale (Deficit) Stock
------ ------- --------- --------- ------------ ---------- ---------
BALANCE, DECEMBER 31, 2000 9,751 $ 10 $ 12,859 $(38,663) $ --- $ (25,794) $ 29,180
Net loss and comprehensive loss --- --- --- (1,555) --- (1,555)
Preferred stock dividends --- --- (25) --- --- (25) 25
Common shares issued in connection
with redemption of Class A
Preferred Stock 28,667 28 29,177 --- --- 29,205 (29,205)
Common Stock issued to
Dutch A&A net of
Expenses 23,050 23 2,347 --- (1,000) 1,370 ---
------ ------- --------- --------- ------------ ---------- ---------
BALANCE, JUNE 30, 2001 61,468 $ 61 $ 44,358 $(40,218) $ (1,000) $ 3,201 $ ---
====== ======= ========= ========= ============ ========== =========
See notes to the condensed consolidated financial statements
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
- - ---------------------------------------------------
Net loss $(1,555) $(2,418)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization of security
devices and property, plant and equipment 255 314
Amortization of intangibles and other assets 13 498
Provision for bad debts 27 25
Changes in operating assets and liabilities:
Accounts receivable (325) 2,070
Net investment in sales-type leases 43 279
Inventories 901 (540)
Accounts payable and accrued liabilities (1,037) (226)
Other, net 192 (309)
-------- --------
Net cash used in operating activities (1,486) (307)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (41) (11)
Security devices on lease (1) (16)
Intangibles (20) (5)
-------- --------
Net cash used in investing activities (62) (32)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under the revolving line of credit (10) 657
Repayment of obligations under capital leases (77) (97)
Proceeds from sale of stock, net 2,370 ---
Receivable from stock sale (1,000) ---
-------- --------
Net cash provided by financing activities 1,283 560
-------- --------
INCREASE (DECREASE) IN CASH (265) 221
CASH, at beginning of period 927 951
-------- --------
CASH, at end of period $ 662 $ 1,172
======== ========
See notes to the condensed condolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
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 consolidated financial
statements include the accounts of Sentry and its majority-owned subsidiaries.
All intercompany accounts and transactions have been eliminated in
consolidation.
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. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in Sentry's Annual Report to Stockholders on Form 10-K for the fiscal
year ended December 31, 2000, as filed with the Securities and Exchange
Commission.
NOTE B -- Investment by Dutch A&A
- - ---------------------------------------
On January 8, 2001, Dutch A&A Holding, B.V. ("Dutch A&A) acquired 23,050,452
shares of our common stock for $3 million, of which $1 million was paid in
January 2001, $1 million was paid on April 30, 2001 and the remaining balance of
$1 million was due on July 31, 2001, which has been extended by the Board of
Directors to August 31, 2001. Dutch A&A is a Netherlands company which, through
its subsidiaries, is in the business of development, manufacture, sale and
distribution of various kinds of identification, access control and anti-theft
electronic article surveillance systems and accessories.
As of January 8, 2001, Dutch A&A owns 37.5% of our outstanding common stock. At
any time prior to January 8, 2002, Dutch A&A may increase its ownership of our
common stock to a total of 51% of the shares of common stock then outstanding.
If the average market value of our common stock, measured over any 10-day
trading period during the one year period following January 8, 2001, is at least
$15.0 million, the purchase price for the additional shares shall be determined
by multiplying the actual number of shares to be purchased by $.001; otherwise,
the purchase price will be $1.5 million. At any time prior to January 8, 2003,
Dutch A&A may increase its ownership of our common stock to a total of 60% of
the shares of common stock then outstanding. The purchase price for the
additional shares shall be determined as follows: If the average market value of
the common stock, measured over a 10-day period during the two years preceding
January 8, 2003, is at least $25 million, the purchase price shall be determined
by multiplying the actual number of shares to be purchased by $.001. If Dutch
A&A previously exercised its right to acquire shares increasing its investment
to 51% of our common stock, but the average market value test was not met at the
time of the second purchase, then the purchase price shall be $3.5 million;
otherwise the purchase price shall be $5.0 million. As a condition to the
investment by Dutch A&A, our stockholders elected three nominees of Dutch A&A to
the Board of Directors at a Special Meeting of Stockholders on December 8, 2000.
If Dutch A&A has not acquired 51% of our common stock by January 8, 2003, one of
the three nominees of Dutch A&A will resign and be replaced, with the consent of
Dutch A&A, by a nominee of our directors who are not nominated by Dutch A&A.
In addition to the election of three nominees of Dutch A&A to the Board of
Directors, other matters which were approved at the December 8, 2000 Special
Meeting of Stockholders and became effective on January 8, 2001 were amendments
to the Company's certificate of incorporation to: (i) permit the payment of a
dividend of additional shares of Class A Preferred Stock at the rate of 0.075
shares of Class A Preferred Stock for each share of Class A Preferred Stock
held; (ii) to reclassify Class A Preferred Stock into shares of common stock on
a ratio of five shares of common stock for each share of Class A Preferred Stock
outstanding; and (iii) to increase the number of the Company's authorized shares
of common stock to 140,000,000. As a result of the dividend and
reclassification, 28,666,660 common shares were issued to former Class A
Preferred shareholders.
Also, on December 28, 2000, the Board of Directors increased the number of
directors from five to seven effective upon the closing of the Dutch A&A
investment.
The reclassification of the Class A Preferred Shares resulted in a return to the
common shareholders of $27.2 million, which was recorded in the first quarter of
2001. This amount represents the difference between the fair market value of
the common stock issued and the carrying amount of the preferred stock redeemed.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE C -- Financial Condition and Liquidity
- - -------------------------------------------------
We have incurred reduced revenue levels, decreased financial position and
recurring operating losses over the past several years. To strengthen our
financial position, a number of activities have been initiated including:
- - - Investment of $3 million in newly issued shares of the Company's common
stock by Dutch A&A. The transaction with Dutch A&A will allow us to
introduce new products, share resources and simplify our capital
structure.
- - - Improvements in existing products and service capabilities.
- - - Various cost cutting and cost saving initiatives.
As a result of these activities, we anticipate that current cash reserves, cash
obtained pursuant to the Dutch A&A transaction, existing lines of credit and
cash generated by operations should be sufficient to meet our working capital
requirements, as well as future capital expenditure requirements, over the next
twelve months.
NOTE D -- Net Investment in Sales-Type Leases
- - ----------------------------------------------------
We are the lessor of security devices under agreements expiring in various years
through 2003. The net investment in sales-type leases consists of:
June 30, 2001 December 31, 2000
--------------- -------------------
(in thousands)
Minimum lease payments receivable $ 162 $ 215
Allowance for uncollectible minimum lease payments (8) (10)
Unearned income (13) (21)
--------------- -------------------
Net investment 141 184
Less current portion 77 84
--------------- -------------------
Non-current portion $ 64 $ 100
=============== ===================
NOTE E -- Inventories
- - ------------------------
Inventories consist of the following:
June 30, 2001 December 31, 2000
--------------- -------------------
(in thousands)
Raw materials $ 1,226 $ 1,479
Work-in-process 2,053 2,259
Finished goods 1,094 1,536
-------------- ------------------
$ 4,373 $ 5,274
============== ==================
Reserves for excess and obsolete inventory totaled $3,160,000 and $3,354,000 as
of June 30, 2001 and December 31, 2000, respectively and have been included as a
component of the above amounts.
NOTE F -- Related Party Transactions
- - -----------------------------------------
As a result of the Dutch A&A investment, Sentry entered into a distribution
agreement with Dutch A&A which contemplates a two-way distribution relationship
between the companies. Under the agreement, Sentry has the rights to sell Dutch
A&A's EAS, access control and RFID products and accessories and Sentry gives
Dutch A&A the rights to sell its EAS and CCTV products and accessories.
Pricing for products under the agreements are at the lowest prices charged to
affiliates. In addition, Dutch A&A receives annual management fees for product
marketing and product engineering management from Sentry in the amount of
$100,000. Also, Peter Murdoch, a shareholder of Dutch A&A, receives an annual
salary of $150,000 in the capacity of President of Sentry. Purchases from Dutch
A&A were $26,000 and $86,000 in the quarter and six month periods ended June 30,
2001. Fees, services and sales to Dutch A&A were $15,000 and $36,000 in the
quarter and six months ended June 30, 2001. The net amount receivable from
Dutch A&A as of June 30, 2001 is $23,000.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE G -- Recent Accounting Pronouncements
- - -----------------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
years Beginning after June 15, 2000. SFAS No. 133, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging relationships
or not, will be required to be recorded on the balance sheet at fair value. If
the derivative is designated in a fair value hedge, the changes in the fair
value of the derivative and the hedged item will be recognized in earnings. If
the derivative is designated in a cash-flow hedge, changes in the fair value of
the derivative will be recorded in other comprehensive income and will be
recognized in the income statement when the hedged item affects earnings. SFAS
No. 133 defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that does not qualify as a hedge, changes in fair
value will be recognized in earnings. We adopted SFAS No. 133 on January 31,
2001 and the implementation did not have a material impact on our consolidated
financial statements.
In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations." SFAS
No. 141 applies prospectively to all business combinations initiated after June
30, 2001 and to all business combinations accounted using the purchase method
for which the date of acquisition is July 1, 2001, or later. This statement
requires all business combinations to be accounted for using one method, the
purchase method. Under previously existing accounting rules, business
combinations were accounted for using one of two methods, the
pooling-of-interests method or the purchase method. The adoption of SFAS No.
141 is not expected to have a material impact on the Company's financial
statements.
In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Under SFAS No. 142, goodwill and some
intangible assets will no longer be amortized, but rather reviewed for
impairment on a periodic basis. The provisions of this Statement are required to
be applied starting with fiscal years beginning after December 15, 2001. This
Statement is required to be applied at the beginning of the Company's fiscal
year and to be applied to all goodwill and other intangible assets recognized in
its financial statements at that date. Impairment losses for goodwill and
certain intangible assets that arise due to the initial application of this
Statement are to be reported as resulting from a change in accounting principle.
Goodwill and intangible assets acquired after June 30, 2001, will be subject
immediately to the provisions of this Statement. The adoption of SFAS No. 142
is not expected to have a material impact on the Company's financial statements.
NOTE H -- Change in Accounting Principle
- - ----------------------------------------------
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, we have changed our accounting method for
recognizing revenue on the sale of equipment where post-shipment obligations
exist. Previously, we recognized revenue for equipment when title transferred,
generally upon shipment. Beginning with the first quarter of year 2000, we
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.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE I -- Earnings Per Share
- - ---------------------------------
Basic earnings per share is determined by using the weighted average number of
common shares outstanding during each period. Diluted earnings per share
further assumes the issuance of common shares for all dilutive potential common
shares outstanding. The calculations for earnings per share are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
(in thousands, except
per share amounts)
Net Income (Loss):
Income (loss) before cumulative effect
of accounting change $ (861) $(1,016) $25,643 $(2,117)
Effect of preferred stock dividends --- (333) (25) (665)
-------- -------- -------- --------
(861) (1,349) 25,618 (2,782)
Cumulative effect of accounting change --- --- --- (301)
-------- -------- -------- --------
Net income (loss) attributed to common shareholders $ (861) $(1,349) $25,618 $(3,083)
======== ======== ======== ========
Weighted Average Common Shares:
Weighted average common shares for basic earnings
per share 61,467 9,751 59,457 9,751
Stock option plans --- --- 834 ---
-------- -------- -------- --------
Weighted average common shares for diluted earnings
per share 61,467 9,751 60,291 9,751
======== ======== ======== ========
Basic and Diluted Earnings per Common Share:
Before cumulative effect of accounting change $ (0.01) $ (0.14) $ 0.43 $ (0.29)
Cumulative effect of accounting change --- --- --- (0.03)
-------- -------- -------- --------
Basic earnings per common share $ (0.01) $ (0.14) $ 0.43 $ (0.32)
======== ======== ======== ========
Diluted earnings per common share $ (0.01) $ (0.14) $ 0.42 $ (0.32)
======== ======== ======== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain Factors That May Affect Future Results
- - ----------------------------------------------------
Information contained or incorporated by reference in this periodic report on
Form 10-Q and in other SEC filings by Sentry contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof, other variations thereon or comparable terminology, or by
discussions of strategy. These forward-looking statements involve certain
significant risks and uncertainties, and actual results may differ materially
from the forward-looking statements. For further details and discussion of these
risks and uncertainties see Sentry Technology Corporation's SEC filings
including, but not limited to, its annual report on Form 10-K. No assurance can
be given that future results covered by the forward-looking statements will be
achieved, and other factors could also cause actual results to vary materially
from the future results covered in such forward-looking statements. We do not
undertake to publicly update or revise any of our forward-looking statements
even if experience or future changes show that the indicated results or events
will not be realized.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations:
- - ------------------------
Consolidated revenues were 23% and 14% lower in the quarter and six months ended
June 30, 2001 than in the quarter and six month periods ended June 30, 2000.
Our overall domestic revenues were impacted by the soft economic environment,
resulting in a slowdown or delay in new retail store openings of some of our
customers. Our backlog of orders at June 30, 2001 was approximately $5.1
million as compared to approximately $5.8 million at June 30, 2000. Revenues
from third party customers, other than Sensormatic, in the current periods were
99% of total revenues in both the second quarter and first six months of 2001,
as compared to 86% and 87% of total revenues in the prior year period. Total
revenues for the periods presented are broken out as follows:
Q-2 Q-2 % 6 Mos. 6 Mos. %
2001 2000 Change 2001 2000 Change
------ ------ ------- ------ ------- -------
(in thousands) (in thousands)
EAS $1,632 $1,895 (14) $2,967 $ 4,060 (27)
CCTV 919 1,809 (49) 3,031 3,236 (6)
SentryVision(R) 464 408 14 849 695 22
3M library products 167 282 (41) 293 655 (55)
------ ------ ------- ------ ------- -------
Total sales 3,182 4,394 (28) 7,140 8,646 (17)
Service revenues and other 823 775 6 1,535 1,395 10
------ ------ ------- ------ ------- -------
Total revenues $4,005 $5,169 (23) $8,675 $10,041 (14)
====== ====== ======= ====== ======= =======
Direct sales of EAS products in the 2001 periods were similar to the prior year
periods, however total EAS revenues were negatively impacted by a reduction in
OEM sales to Sensormatic of $0.6 and $1.2 million in the second quarter and
first six months of 2001, respectively. Presently, we do not anticipate an
increase the level of sales to Sensormatic through the rest of the year. The
decrease in CCTV revenues is primarily related to a lesser marketing emphasis
placed on non-retail CCTV sales as part of our strategy to attract dealers in
the commercial and industrial markets for SentryVision . We are currently in the
process of negotiating with several domestic and international large-scale
security dealer integrators. SentryVision sales increased due to the initial
sales of the new SmartTrack system, which is scheduled for full release in the
third quarter. To date, we have received positive feedback from our customers
on the features and reliability of SmartTrack, resulting in new sales
opportunities. We see a growing trend for product acceptance and increased
market opportunities for traveling camera systems. Sales of 3M library products
were lower primarily as a result of reduced marketing emphasis of lower margin
products we do not manufacture. Service revenues increased as a result of the
increase in the installed base of systems.
Cost of sales were 53% and 52% of total revenues in the three and six month
periods ended June 30, 2001 compared to 51% and 53% in the same periods in the
previous year. The differences in percentages were primarily due to changes in
product mix.
Customer service expenses were 10% and 6% lower in the second quarter and first
six months of 2001 than in the second quarter and first six months of 2000. The
expense reduction is due to a combination of our ability to reduce the number of
customer service representatives and lower Service Partner costs. We are
encouraged by the improvements made in our service delivery system, which has
resulted in fewer service calls and a quicker service response time to our
customers. Our remedial warranty costs associated with prior generation
SentryVision installations have continued to decrease.
Selling, general and administrative expenses were 32% and 23% lower in the three
and six month periods ended June 30, 2001 when compared to the same periods of
the previous year primarily as a result of lower amortization of patents and
goodwill and lower sales commissions. We continued to augment our sales and
marketing efforts through the hiring of a new sales director and the hiring of
new sales account executives.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Research and development costs were lower when compared to the previous year
periods due to a reduction in headcount and our continued concentration on
development of the SmartTrack system.
Net interest expense for the second quarter and first six months of 2001
decreased due to lower average borrowings under our revolving credit agreement
and lower interest rates.
Due to net operating losses, we have not provided for income taxes in any of the
periods 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, we have changed our accounting method for recognizing
revenue on the sale of equipment where post-shipment obligations exist.
Previously, we recognized revenue for equipment when title transferred,
generally upon shipment. Beginning with the first quarter of year 2000, we
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 $0.3 million, or
$0.03 per share.
As a result of the foregoing, Sentry had a net loss of $0.9 and $1.6 million in
the quarter and six month periods ended June 30, 2001 as compared to a net loss
of $1.1 and $2.4 million in the quarter and six month periods ended June 30,
2000.
We recorded preferred stock dividends of $25,000 through January 8, 2001 prior
to the preferred stock redemption, as compared to $0.3 and $0.7 million in the
second quarter and first six months of 2000.
Effective January 8, 2001, and just prior to the Dutch A&A investment, there was
a payment of a dividend of additional shares of Class A Preferred Stock at the
rate of 0.075 shares of Class A Preferred Stock for each share of Class A
Preferred Stock held and immediately thereafter a reclassification of the Class
A Preferred Stock into common stock at a ratio of five shares of common stock
for each share of Class A Preferred Stock outstanding. The reclassification of
the Class A Preferred Shares resulted in a return to the common shareholders of
$27.2 million, which was recorded in the first quarter of 2001. This amount
represents the difference between the fair market value of the common stock
issued and the carrying amount of the preferred stock redeemed.
Liquidity and Capital Resources as of June 30, 2001
- - -----------------------------------------------------------
The Company has incurred reduced revenue levels, decreased financial position
and recurring operating losses over the past several years. To strengthen the
Company's financial position, a number of activities have been initiated
including:
- - - Investment of $3 million in newly issued shares of the Company's common
stock by Dutch A&A. The transaction with Dutch A&A will allow the Company to
introduce new products, share resources and simplify the Company's capital
structure.
- - - Improvements in existing products and service capabilities.
- - - Various cost cutting and cost saving initiatives.
As a result of these activities, the Company anticipates that current cash
reserves, cash obtained pursuant to the Dutch A&A transaction, existing lines of
credit and cash generated by operations should be sufficient to meet the
Company's working capital requirements, as well as future capital expenditure
requirements, over the next twelve months.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On January 8, 2001, Dutch A&A Holding, B.V. ("Dutch A&A) acquired 23,050,452
shares of the Company's common stock for $3 million, of which $1 million was
paid in January 2001, $1 million was paid on April 30, 2001 and the remaining
balance of $1 million was due on July 31, 2001, which was extended by the Board
of Directors to August 31, 2001. Dutch A&A is a Netherlands company which,
through its subsidiaries, is in the business of development, manufacture, sale
and distribution of various kinds of identification, access control and
anti-theft electronic article surveillance systems and accessories.
As of January 8, 2001, Dutch A&A owns 37.5% of the outstanding common stock of
the Company. At any time prior to January 8, 2002, Dutch A&A may increase its
ownership of the Company's common stock to a total of 51% of the shares of
common stock then outstanding. If the average market value of the Company's
common stock, measured over any 10-day trading period during the one year period
following January 8, 2001, is at least $15.0 million, the purchase price for the
additional shares shall be determined by multiplying the actual number of shares
to be purchased by $.001; otherwise, the purchase price will be $1.5 million.
At any time prior to January 8, 2003, Dutch A&A may increase its ownership of
the Company's common stock to a total of 60% of the shares of common stock then
outstanding. The purchase price for the additional shares shall be determined
as follows: If the average market value of the common stock, measured over a
10-day period during the two years preceding January 8, 2003, is at least $25
million, the purchase price shall be determined by multiplying the actual number
of shares to be purchased by $.001. If Dutch A&A previously exercised its right
to acquire shares increasing its investment to 51% of the Company's common
stock, but the average market value test was not met at the time of the second
purchase, then the purchase price shall be $3.5 million; otherwise the purchase
price shall be $5.0 million. As a condition to the investment by Dutch A&A, the
stockholders of the Company elected three nominees of Dutch A&A to the Board of
Directors at a Special Meeting of Stockholders on December 8, 2000. If Dutch
A&A has not acquired 51% of the Company's common stock by January 8, 2003, one
of the three nominees of Dutch A&A will resign and be replaced, with the consent
of Dutch A&A, by a nominee of the directors of the Company who are not nominated
by Dutch A&A.
In addition to the election of three nominees of Dutch A&A to the Board of
Directors, other matters which were approved at the December 8, 2000 Special
Meeting of Stockholders and became effective on January 8, 2001 were amendments
to the Company's certificate of incorporation to: (i) permit the payment of a
dividend of additional shares of Class A Preferred Stock at the rate of 0.075
shares of Class A Preferred Stock for each share of Class A Preferred Stock
held; (ii) to reclassify Class A Preferred Stock into shares of common stock on
a ratio of five shares of common stock for each share of Class A Preferred Stock
outstanding; and (iii) to increase the number of the Company's authorized shares
of common stock to 140,000,000.
Also, on December 28, 2000, the Board of Directors increased the number of
directors from five to seven effective upon the closing of the Dutch A&A
investment.
PART II - OTHER INFORMATION
- - -------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
10.28 Waiver and Eighth Amendment to the Loan and Security Agreement,
dated August 10, 2001, between General Electric Capital Corporation
and Knogo North America Inc.
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for
the three months ended June 30, 2001.
SENTRY TECHNOLOGY CORPORATION
PART II - SIGNATURES
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 14, 2001 By: /S/ PETER J. MUNDY
----------------- ----------------------
Peter J. Mundy,
Vice President
Finance and
Chief Financial Officer
(Principal Financial
and Accounting Officer)