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 March 31, 2002
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
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(Exact name of registrant as specified in its charter)
Delaware 96-11-3349733
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(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)
631-232-2100
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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
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As of May 15, 2002, there were 78,042,842 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 --
March 31, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations --
Three Months Ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows --
Three Months Ended March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial
Statements -- March 31, 2002 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 11
PART II. OTHER INFORMATION
- ------------------------------
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2002 2001
----------- --------------
ASSETS
- -------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 150 $ 423
Accounts receivable, less allowance for doubtful
accounts of $773 and $763, respectively. . . . . . . . . 2,906 2,713
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 4,634 4,740
Prepaid expenses and other current assets . . . . . . . . . 468 399
----------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . 8,158 8,275
PROPERTY, PLANT AND EQUIPMENT, net. . . . . . . . . . . . . . 2,845 2,962
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . 414 324
----------- --------------
$ 11,417 $ 11,561
=========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------
CURRENT LIABILITIES
Revolving line of credit and term loan. . . . . . . . . . . $ 2,783 $ 2,599
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 1,733 1,153
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 1,449 1,864
Obligations under capital leases -
current portion. . . . . . . . . . . . . . . . . . . . . 138 121
Deferred income . . . . . . . . . . . . . . . . . . . . . . 194 303
----------- --------------
Total current liabilities . . . . . . . . . . . . . . . . 6,297 6,040
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion . . . . . . . . . . . . . . . . . . . . 2,579 2,630
----------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . 8,876 8,670
COMMON SHAREHOLDERS' EQUITY
Common stock. . . . . . . . . . . . . . . . . . . . . . . . 64 62
Additional paid-in capital. . . . . . . . . . . . . . . . . 44,521 44,403
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (41,924) (41,574)
Receivable from shareholder (120) ---
----------- --------------
Total common shareholders' equity . . . . . . . . . . . . 2,541 2,891
----------- --------------
$ 11,417 $ 11,561
=========== ==============
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
March 31,
-----------------------------
2002 2001
-------- --------
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,742 $ 4,670
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 2,148 2,391
Customer service expenses . . . . . . . . . . . . . . . . . 1,279 1,129
Selling, general and administrative expenses. . . . . . . . 1,382 1,522
Research and development. . . . . . . . . . . . . . . . . . 151 175
--------- --------
4,960 5,217
--------- --------
OPERATING LOSS. . . . . . . . . . . . . . . . . . . . . . . . (218) (547)
INTEREST EXPENSE. . . . . . . . . . . . . . . . . . . . . . . 132 147
--------- --------
LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . . (350) (694)
INCOME TAXES --- ---
--------- --------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . (350) (694)
PREFERRED STOCK DIVIDENDS --- (25)
RETURN TO COMMON SHAREHOLDERS FROM
REDEMPTION OF PREFERRED STOCK --- 27,198
--------- --------
NET INCOME (LOSS) ATTRIBUTED TO
COMMON SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . $ (350) $26,479
========= ========
NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted. . . . . . . . . . . . . . . . . . . $ (0.01) $ 0.46
========= ========
WEIGHTED AVERAGE COMMON SHARES
Basic and diluted. . . . . . . . . . . . . . . . . . . 61,654 57,445
========= ========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
----------------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -----------------------------------------------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (350) $ (694)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization of security
devices and property, plant and equipment . . . . . . . . 122 131
Amortization of intangibles and other assets . . . . . . . . 12 7
Provision for bad debts. . . . . . . . . . . . . . . . . . . 10 13
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . (203) (112)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 106 712
Accounts payable and accrued liabilities . . . . . . . . . . 165 (952)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (273) 312
--------- --------
Net cash used in operating activities . . . . . . . . . . . . (411) (583)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net. . . . . . . . . (3) (4)
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (3)
--------- --------
Net cash used in investing activities . . . . . . . . . . . . (12) (7)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under the revolving line of credit and term loan 184 (128)
Repayment of obligations under capital leases . . . . . . . . . (34) (29)
Proceeds from exercise of stock options 120 ---
Proceeds from sale of stock, net --- 2,370
Receivable from stock options and stock sale. . . . . . . . . . (120) (2,000)
--------- --------
Net cash provided by financing activities . . . . . . . . . . 150 213
--------- --------
DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . (273) (377)
CASH AND CASH EQUIVALENTS, at beginning of period . . . . . . . . 423 927
--------- --------
CASH AND CASH EQUIVALENTS, at end of period . . . . . . . . . . . $ 150 $ 550
========= ========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE A -- Basis of Presentation
- ------------------------------------
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, 2001, as filed with the Securities and Exchange
Commission.
Certain prior period amounts have been reclassified to conform to current period
presentation.
NOTE B -- Investment by Dialoc ID Holdings B.V.
- -------------------------------------------------------
On January 8, 2001, Dialoc ID Holdings B.V. ("Dialoc ID"), formerly known as
Dutch A&A Holding, B.V., 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 $1 million was paid on August 31, 2001. Dialoc
ID 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. Concurrent with the share purchase agreement, the
Company entered into a distribution agreement with Dialoc ID allowing the
Company access to new products of Dialoc ID and allowing Dialoc ID access to the
Company's products for an initial period of not less than two years.
As of January 8, 2001, Dialoc ID owned 37.5% of the Company's outstanding common
stock. Under the share purchase agreement, at any time prior to January 8,
2002, Dialoc ID had the right to 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, was 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.
In November 2001, this market capitalization threshold was met. At that time,
our Board of Directors agreed to extend Dialoc ID's purchase right until January
8, 2003 in exchange for an extension of the distribution agreement for one year.
On May 15, 2002, Dialoc ID exercised their right to purchase 14,500,000
additional common shares at a price of $.001 per share. Currently, Dialoc ID
owns 48.1% of the Company's common stock. Further, the share purchase agreement
provides that at any time prior to January 8, 2003, Dialoc ID 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 Dialoc ID 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. As
a condition to the investment by Dialoc ID, the Company's stockholders elected
three nominees of Dialoc ID to the Board of Directors at a Special Meeting of
Stockholders on December 8, 2000. If Dialoc ID has not acquired 51% of the
Company's common stock by January 8, 2003, one of the three nominees of Dialoc
ID will resign and be replaced, with the consent of Dialoc ID, by a nominee of
the Company's directors who are not nominated by Dialoc ID.
In addition to the election of three nominees of Dialoc ID 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.
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.
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:
- - Entering into a new three-year financing agreement.
- - Signing of a distribution agreement with Dialoc ID providing us with
access to new products and shared technologies.
- - Improvements in existing products and service capabilities.
- - Additions to direct sales staff and emphasis on growing international
dealer base.
- - Various cost cutting and cost saving initiatives.
We will require positive cash flow from operations to meet our working capital
needs over the next twelve months. We anticipated receiving significant
additional purchase orders from specific customers during the first four months
of 2002. While we continue to believe that these purchase orders will be
received later this year, the delays we have experienced have caused us to: (i)
operate in a cash flow deficit for the first four months of the year: (ii)
borrow the maximum amounts available under our credit facility; and (iii) pursue
potential sources of debt or equity financing
We anticipate revenue growth in new and existing markets. We are striving to
improve our gross margin and control our selling expenses and our general and
administrative expenses. There can be no assurance, however, that changes in
our plans or other events affecting our operations will not result in
accelerated or unexpected cash requirements, or that we will be successful in
achieving positive cash flow from operations or obtaining financing. Our future
cash requirements are expected to depend on numerous factors, including, but not
limited to; (i) the ability to generate positive cash flow from operations, and
the extent thereof, (ii) the ability to raise additional capital or obtain
additional financing, and (iii) economic conditions. In the event that
sufficient positive cash flow from operations is not generated, we will seek
additional financing to satisfy current operating cash flow deficiencies. There
can be no assurance, however, that additional financing will be available on
terms that are satisfactory to the Company, or that any such financing will be
sufficient to provide the full amount of funding necessary.
NOTE D -- Revolving Line of Credit and Term Loan
- ---------------------------------------------------------
On March 22, 2002, we entered into a new three year revolving line of credit and
term loan with the CIT Group/Business Credit, Inc. ("CIT") for maximum
borrowings of $8 million, which are subject to certain limitations based on a
percentage of eligible accounts receivable and inventories as defined in the
agreement. Interest on the revolving line of credit is payable monthly at the
JPMorgan Chase Bank prime rate (4.75% at March 31, 2002), plus 2% per annum. We
are required to pay a commitment fee of 0.375% per annum on any unused portion
of the credit facility. Borrowings under the line are secured by substantially
all of our assets. The terms of the agreement, among other matters, places
restrictions on capital expenditures and prohibits the payment of dividends. In
addition, we entered into a $100,000 term loan with CIT. The principal shall be
repaid to CIT in twelve equal monthly installments of $8,333 beginning May 31,
2002. Interest on the term note is at the JPMorgan Chase Bank prime plus 2.25%.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE E -- Inventories
- ------------------------
Inventories consist of the following:
March 31, 2002 December 31, 2001
---------------- -------------------
(in thousands)
Raw materials $ 1,275 $ 1,139
Work-in-process 937 1,238
Finished goods 2,422 2,363
----- -----
$ 4,634 $ 4,740
= ===== = =====
Reserves for excess and obsolete inventory totaled $3,387,000 and $3,497,000 as
of March 31, 2002 and December 31, 2001, respectively and have been included as
a component of the above amounts.
NOTE F -- Related Party Transactions
- -----------------------------------------
As a result of the Dialoc ID investment, Sentry entered into a distribution
agreement with Dialoc ID which contemplates a two-way distribution relationship
between the companies. Under the agreement, Sentry has the rights to sell
Dialoc ID's EAS, access control and RFID products and accessories and Sentry
gives Dialoc ID 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, in 2001 Dialoc ID received an annual management fee
for product marketing and product engineering management from Sentry in the
amount of $100,000. Also, Peter Murdoch, a shareholder of Dialoc ID, receives
an annual salary of $150,000 in the capacity of President of Sentry. Purchases
from Dialoc ID were $3,000 and $60,000 in the quarters ended March 31, 2002 and
March 31, 2001, respectively. Services and sales to Dialoc ID were $5,000 in
the quarter ended March 31, 2002. The net amount payable to Dialoc ID as of
March 31, 2002 is $60,000.
In addition, on March 27, 2002, Peter Murdoch, our President and CEO, exercised
a stock option for two million shares of Sentry common stock at an exercise
price of $0.06 per share which was paid for through the issuance of a
promissory note in the amount of $120,000. The principal of the note is secured
by the option shares and is repayable no later than January 8, 2006. Mr.
Murdoch will not have any personal liability for the principal of the note if
the value of the option shares is not sufficient to repay the note. The note
bears interest at prime (currently 4.75%) less .75%. The note has been
reflected as a reduction of shareholders' equity on the balance sheet.
NOTE G -- Recent Accounting Pronouncements
- -----------------------------------------------
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
did not have a material impact on our financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. We are required to adopt the provisions of
SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 is not
expected to have a material impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. We
adopted SFAS No. 144 in the first quarter of 2002. The adoption of this
statement did not have a material effect on our financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE H -- Earnings Per Share
- ---------------------------------
The earnings per share calculations (basic and diluted) at March 31, 2002 and
2001 are based upon the weighted average number of common shares outstanding
during each period. There are no reconciling items in the numerator or
denominator of the earnings per share calculations in either of the periods
presented. Options and warrants have been excluded from the net loss per share
calculation at March 31, 2002 because their effect would be antidilutive. For
the period ended March 31, 2001 options and warrants have been excluded from the
calculation because the exercise price was greater than the average market price
for the quarter.
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.
Results of Operations:
- ------------------------
Consolidated revenues were 2% higher in the quarter ended March 31, 2002 than in
the quarter ended March 31, 2001. Our overall domestic revenues continued to be
impacted by the soft economic environment, resulting in a slowdown or delay in
new retail store openings of some of our customers. This is reflected in the
reduction in our backlog of orders at March 31, 2002 to approximately $4.5
million from approximately $5.2 million at March 31, 2001. Total revenues for
the periods presented are broken out as follows:
Q-1 Q-1 % Change
2002 2001 Increase(Decrease)
(in thousands)
EAS . . . . . . . . . . . . . . . . . . . . . . .$ 691 $ 1,335 (48)
CCTV. . . . . . . . . . . . . . . . . . . . . . . 1,767 1,692 4
SentryVision. . . . . . . . . . . . . . . . . . . 639 327 95
3M library products . . . . . . . . . . . . . . . 114 126 (10)
------- ------- -----
Total sales . . . . . . . . . . . . . . . . . . . 3,211 3,480 (8)
Service revenues and other. . . . . . . . . . . . 1,531 1,190 29
------- ------- -----
Total revenues. . . . . . . . . . . . . . . . . .$ 4,742 $ 4,670 2
======= ======= =====
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Direct sales of EAS products were lower in the first quarter of 2002 as compared
to the same period in the prior year in part as a result of lower sales to our
largest EAS customer, which has indicated it will open fewer new stores in 2002.
Sales of EAS products to Sensormatic were not significant in either of the
periods presented. The increase in CCTV revenues is primarily a result of the
completion of the installations that were delayed at the end of 2001. The
increase in SentryVision sales revenues in the first quarter of 2002 is a result
of the continuing market acceptance of the new SmartTrack system. We continue to
see a growing trend for product acceptance and increased market opportunities
for traveling camera systems both domestically and internationally. Sales of 3M
library products declined as we focused our sales efforts on Sentry produced
products. Service revenues increased as a result of the higher base of systems
no longer under warranty.
Cost of sales were 67% of total sales in the three month period ended March 31,
2002 compared to 69% in the same period of the prior year. The reduction in
percentage of sales in the first quarter of 2001 was primarily due to greater
plant efficiencies resulting from higher production levels than in the previous
year, which offset competitive pricing pressures during the current quarter.
Customer service expenses were 13% higher in the first quarter of 2002 than in
the first quarter of 2001 primarily as a result of the increase in service
billings on a larger installed base of systems and the increased use of outside
contractors needed to meet various customers' installation deadlines.
Selling, general and administrative expenses were 9% lower in the three month
period ended March 31, 2002 when compared to the same period of the previous
year primarily as a result of lower warranty costs and a reduction in
facilities.
Research and development costs were lower in the first quarter of 2002 when
compared to the first quarter of 2001 due to lower facilities cost as a result
of a reduction in space.
Net interest expense for the first quarter of 2002 decreased when compared due
to lower interest rates under our revolving credit agreement.
Due to net operating losses, we have not provided for income taxes in any of the
periods presented.
As a result of the foregoing, Sentry had a net loss of $0.4 million in the
quarter ended March 31, 2002 as compared to a net loss of $0.7 million in the
quarter ended March 31, 2001.
We recorded preferred stock dividends of $25,000 in the first quarter of 2001
prior to the redemption of the preferred stock on January 8, 2001.
Effective January 8, 2001, and just prior to the Dialoc ID 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 March 31, 2002
- ------------------------------------------------------------
We have incurred reduced revenue levels, decreased financial position and
recurring operating losses over the past several years. To further address the
continuing losses, our business plan for 2002 includes the following:
- - Entering into a new three-year financing agreement.
- - Addition of new products, including high-end EAS systems and disposable
tags and labels, proximity access control and RFID, through our
distribution agreement with Dialoc ID.
- - Increased promotion of SmartTrack, our new entry in the SentryVision
family of products.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - Strengthening our international dealer network with new and more
financially stronger business partners.
- - Joint participation with Dialoc ID in trade show activity and a refocus on
expanding business with existing customers.
- - Continuation and expansion of our Service Partner program to augment
service provided by our employees.
- - Further subletting of office space in our corporate offices.
- - Additions to direct sales staff and emphasis on growing international
dealer base.
- - Various additional cost cutting and cost saving initiatives.
On March 22, 2002, we entered into a new three year revolving line of credit and
term loan with the CIT Group/Business Credit, Inc. ("CIT") for maximum
borrowings of $8 million, which are subject to certain limitations based on a
percentage of eligible accounts receivable and inventories as defined in the
agreement. Interest on the revolving line of credit is payable monthly at the
JPMorgan Chase Bank prime rate (4.75% at March 31, 2002), plus 2% per annum. We
are required to pay a commitment fee of 0.375% per annum on any unused portion
of the credit facility. Borrowings under the line are secured by substantially
all of our assets. The terms of the agreement, among other matters, places
restrictions on capital expenditures and prohibits the payment of dividends. In
addition, we entered into a $100,000 term loan with CIT. The principal shall be
repaid to CIT in twelve equal monthly installments of $8,333 beginning May 31,
2002. Interest on the term note is at prime plus 2.25%.
We will require positive cash flow from operations to meet our working capital
needs over the next twelve months. We anticipated receiving significant
additional purchase orders from specific customers during the first four months
of 2002. While we continue to believe that these purchase orders will be
received later this year, the delays we have experienced have caused us to: (i)
operate in a cash flow deficit for the first four months of the year: (ii)
borrow the maximum amounts available under our credit facility; and (iii) pursue
potential sources of debt or equity financing.
We anticipate revenue growth in new and existing markets. We are striving to
improve our gross margin and control our selling expenses and our general and
administrative expenses. There can be no assurance, however, that changes in
our plans or other events affecting our operations will not result in
accelerated or unexpected cash requirements, or that we will be successful in
achieving positive cash flow from operations or obtaining financing. Our future
cash requirements are expected to depend on numerous factors, including, but not
limited to; (i) the ability to generate positive cash flow from operations, and
the extent thereof, (ii) the ability to raise additional capital or obtain
additional financing, and (iii) economic conditions. In the event that
sufficient positive cash flow from operations is not generated, we will seek
additional financing to satisfy current operating cash flow deficiencies. There
can be no assurance, however, that additional financing will be available on
terms that are satisfactory to the Company, or that any such financing will be
sufficient to provide the full amount of funding necessary.
Currently, under the terms of the share purchase agreement, Dialoc ID has the
right to acquire 51% of the common stock. On May 15, 2002, Dialoc ID exercised
their purchase right for an additional 14,500,000 shares of newly issued common
stock at an exercise price of $0.001 per share. As a result of this
transaction, Dialoc ID owns 48.1% of our common stock outstanding. In addition,
under certain conditions more fully described in Note B, Dialoc ID has the right
to acquire additional shares during the two year period following the closing,
up to an aggregate holding of 60% of the common stock then outstanding.
Related Party Transactions
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Details of related party transactions are included in Notes B and F of this
Form 10-Q.
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SENTRY TECHNOLOGY CORPORATION
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PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits: None
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for the
three months ended March 31, 2002.
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
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Date: May 15, 2002 By: /S/ PETER J. MUNDY
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Peter J. Mundy, Vice President
Finance and Chief Financial Officer
(Principal Financial and
Accounting Officer)