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, 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 Identification
incorporation or organization) 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
-
As of August 14, 2002, there were 78,043,872 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
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
June 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations --
Three Months Ended June 30, 2002 and 2001
and Six Months Ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial
Statements - June 30, 2002 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
PART II. OTHER INFORMATION
- ------------------------------
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2002 2001
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ASSETS
- -------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 250 $ 423
Accounts receivable, less allowance for doubtful
accounts of $743 and $763, respectively. . . . . . . . . 2,097 2,713
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 4,501 4,740
Prepaid expenses and other current assets . . . . . . . . . 417 399
---------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . 7,265 8,275
PROPERTY, PLANT AND EQUIPMENT, net. . . . . . . . . . . . . . 2,782 2,962
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . 381 324
---------- --------------
$ 10,428 $ 11,561
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------
CURRENT LIABILITIES
Revolving line of credit and term loan. . . . . . . . . . . $ 2,272 $ 2,599
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 2,182 1,153
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 1,570 1,864
Obligations under capital leases -
current portion. . . . . . . . . . . . . . . . . . . . . 128 121
Deferred income . . . . . . . . . . . . . . . . . . . . . . 227 303
---------- --------------
Total current liabilities . . . . . . . . . . . . . . . . 6,379 6,040
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion . . . . . . . . . . . . . . . . . . . . 2,579 2,630
---------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . 8,958 8,670
SHAREHOLDERS' EQUITY
Common stock. . . . . . . . . . . . . . . . . . . . . . . . 78 62
Additional paid-in capital. . . . . . . . . . . . . . . . . 44,521 44,403
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (43,009) (41,574)
Note receivable from shareholder (120) ---
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Total shareholders' equity. . . . . . . . . . . . . . . . 1,470 2,891
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$ 10,428 $ 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 Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES $ 3,181 $ 4,005 $ 7,923 $ 8,675
COSTS AND EXPENSES:
Cost of sales 1,559 2,103 3,707 4,494
Customer service expenses 1,054 1,024 2,333 2,153
Selling, general and administrative expenses 1,368 1,395 2,750 2,917
Research and development 145 208 296 383
-------- -------- -------- --------
4,126 4,730 9,086 9,947
-------- -------- -------- --------
OPERATING LOSS (945) (725) (1,163) (1,272)
INTEREST EXPENSE 140 136 272 283
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (1,085) (861) (1,435) (1,555)
INCOME TAXES --- --- --- ---
-------- -------- -------- --------
NET LOSS (1,085) (861) (1,435) (1,555)
PREFERRED STOCK DIVIDENDS --- --- --- 25
RETURN TO COMMON SHAREHOLDERS FROM
REDEMPTION OF PREFERRED STOCK --- --- --- 27,198
-------- -------- -------- --------
NET INCOME (LOSS) ATTRIBUTED TO
COMMON SHAREHOLDERS $(1,085) $ (861) $(1,435) $25,618
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
Basic $ (0.02) $ (0.01) $ (0.02) $ 0.43
======== ======== ======== ========
Diluted $ (0.02) $ (0.01) $ (0.02) $ 0.42
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
Basic 71,032 61,468 66,343 59,457
======== ======== ======== ========
Diluted 71,032 61,468 66,343 60,291
======== ======== ======== ========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
- -----------------------------------------------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,435) $ (1,555)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 266 268
Provision for bad debts. . . . . . . . . . . . . . . . . . . 23 27
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . 593 (325)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 239 901
Accounts payable and accrued liabilities . . . . . . . . . . 735 (1,037)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (164) 234
---------- -----------
Net cash provided by (used in) operating activities . . . . . 257 (1,487)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net. . . . . . . . . (62) (41)
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . (11) (20)
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Net cash used in investing activities . . . . . . . . . . . . (73) (61)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under the revolving line of credit and term loan (327) (10)
Repayment of obligations under capital leases . . . . . . . . . (44) (77)
Proceeds from sale of stock, net. . . . . . . . . . . . . . . . 14 2,370
Receivable from stock sale --- (1,000)
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Net cash provided by (used in) financing activities . . . . . (357) 1,283
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DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . (173) (265)
CASH AND CASH EQUIVALENTS, at beginning of period . . . . . . . . 423 927
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CASH AND CASH EQUIVALENTS, at end of period . . . . . . . . . . . $ 250 $ 662
========== ========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 would 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 14, 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 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
- 6 -
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
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 six 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 seven 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 June 30, 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%.
- 7 -
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE E -- Inventories
- -----------------------------------------------------
Inventories consist of the following:
June 30, 2002 December 31, 2001
-------------- -----------------
(in thousands)
Raw materials . . . . . . . . . . . . . . . . . . . . $ 1,397 $ 1,139
Work-in-process . . . . . . . . . . . . . . . . . . . 928 1,238
Finished goods. . . . . . . . . . . . . . . . . . . . . 2,176 2,363
---------- ----------
$ 4,501 $ 4,740
========== ==========
Reserves for excess and obsolete inventory totaled $3,418,000 and $3,497,000
as of June 30, 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 $7,000 and $26,000 in the quarters ended June 30, 2002 and
2001 and $10,000 and $86,000 in the six month periods ending June 30, 2002 and
2001, respectively. Services and sales to Dialoc ID were $8,000 and $15,000 in
the quarters ended June 30, 2002 and 2001 and $13,000 and $36,000 in the six
month periods ended June 30, 2002 and 2001, respectively. The net amount
payable to Dialoc ID as of June 30, 2002 is $86,000.
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 consolidated
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.
- 8 -
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This
statement provides guidance on the classification of gains and losses from the
extinguishment of debt and on the accounting for certain specified lease
transactions. Certain provisions of this statement related to the classification
of gains and losses from extinguishment of debt are required to be adopted by
the Company beginning with the year ended December 31, 2003. All other
provisions are required to be adopted after May 15, 2002 and early application
is encouraged. It is not anticipated that the adoption of this statement will
have a material impact on the consolidated financial position, consolidated
results of operations or liquidity of the Company.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and is effective for the Company on January 1, 2003. It is not anticipated that
the adoption of this statement will have a material impact on the consolidated
financial position, consolidated results of operations or liquidity of the
Company.
NOTE H -- Earnings Per Share
- ---------------------------------
The earnings per share calculations (basic and diluted) for the periods ended
June 30, 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 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 for the second quarter and six month period ended June 30, 2002 and
for the second quarter ended June 30, 2001 because their effect would be
antidilutive. For the six month period ended June 30, 2001, 834,000 options and
warrants were included in the diluted earnings per share calculation.
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 21% and 9% lower in the quarter and six months ended
June 30, 2002 than in the quarter and six months ended June 30, 2001. Our
overall domestic revenues continued to be impacted by the post September 11 soft
economic environment, resulting in a slowdown or delay in new retail store
openings of some of our customers. The backlog of orders at June 30, 2002 was
approximately $5.2 million from approximately $5.1 million at June 30, 2001.
Total revenues for the periods presented are broken out as follows:
- 9 -
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Q-2 Q-2 % 6 Mos. 6 Mos. %
2002 2001 Change 2002 2001 Change
-------- -------- ------- ------- ------- -------
(in thousands) (in thousands)
EAS . . . . . . . . . . . . . $ 625 $ 1,632 (62) $ 1,316 $ 2,967 (56)
CCTV. . . . . . . . . . . . . 863 771 12 2,630 2,463 7
SentryVision. . . . . . . . . 497 433 15 1,136 760 49
3M library products . . . . . 77 167 (54) 191 293 (35)
------- ------- ------ ------- ------- -------
Total sales . . . . . . . . . 2,062 3,003 (31) 5,273 6,483 (19)
Service revenues and other. . 1,119 1,002 12 2,650 2,192 21
------- ------- ------ ------- ------ -------
Total revenues. . . . . . . . $ 3,181 $ 4,005 (21) $ 7,923 $ 8,675 (9)
======= ======= ====== ======= ======= =======
Direct sales of EAS products were lower in both the second quarter and first six
months of 2002 as compared to the same periods in the prior year primarily as a
result of lower sales to two of our largest EAS customers, which have indicated
they will open fewer new stores in 2002. The increase in CCTV revenues is
primarily a result of higher sales to existing customers and the completion of
the installations that were delayed at the end of 2001. The increase in
SentryVision sales revenues in 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 due to delays in customer's installations. Service revenues increased
as a result of the higher base of systems no longer under warranty.
Cost of sales were 76% and 70% of total sales in the three and six month periods
ended June 30, 2002 compared to 66% and 63% in the same periods of the prior
year. The increase costs as a percentage of sales in the 2002 periods was
primarily due to a higher mix of sales through third distributors, which provide
lower margins than direct sales, as well as the under absorption of factory
overhead resulting from lower production levels than in the previous year and
competitive pricing pressures during the current year.
Customer service expenses were 3% and 8% higher in the second quarter and first
six months of 2002 than in the second quarter and first six months 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 2% and 6% lower in the three
and six month periods ended June 30, 2002 when compared to the same period of
the previous year primarily as a result of lower warranty costs and reductions
in office space.
Research and development costs were lower in the second quarter and first six
months of 2002 when compared to the second quarter and first six months of 2001
due to lower engineering prototype costs associated with Smart Track development
in 2001.
Net interest expense increased due to higher average borrowings for the second
quarter of 2002 but was slightly lower during the first six months of 2002 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 $1.1 and $1.4 million in
the quarter and first six months ended June 30, 2002 as compared to a net loss
of $0.9 and $1.6 million in the quarter and six month periods ended June 30,
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.
- 10 -
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 June 30, 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.
- - 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 June 30, 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 six 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 seven 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.
- 11 -
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Currently, under the terms of the share purchase agreement, Dialoc ID has the
right to acquire 51% of the common stock. On May 13, 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 currently 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
- ----------------------------
Details of related party transactions are included in Notes B and F of this Form
10-Q.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
99.1 Certification by Chief Executive Officer
99.2 Certification by Chief Financial Officer
(b) Reports on Form 8-K - On June 25, 2002, we filed a current report on Form
8-K with respect to the resignation of William A. Perlmuth as a Director
of the Company.
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, 2002
By: /s/ Peter J. Mundy
-------------------------------------------
Peter J. Mundy, Vice President
Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
- 12 -
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C.SS.1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002 of Sentry Technology Corporation (the "Company") as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Peter
L. Murdoch, President and Chief Executive Officer, certify, pursuant to 18
U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002,
that, to the best of my knowledge: (1) the Report fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2)
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ PETER L. MURDOCH
-------------------------------------------------
Peter L. Murdoch
President and Chief Executive Officer
August 14, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO 18 U.S.C.SS.1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002 of Sentry Technology Corporation (the "Company") as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Peter
J. Mundy, Vice President and Chief Financial Officer, certify, pursuant to 18
U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002,
that, to the best of my knowledge: (1) the Report fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2)
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ PETER J. MUNDY
-------------------------------------------------
Peter J. Mundy
Vice President and Chief Financial Officer
August 14, 2002