FORM 10-QSB
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, 2003
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 small business issuer 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
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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 13, 2003, there were 85,746,886 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, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Operations --
Three Months Ended June 30, 2003 and 2002
And Six Months Ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial
Statements - June 30, 2003 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION
- ------------------------------
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
PART I. FINANCIAL INFORMATION
- ---------------------------------
Item 1. Financial Statements (Unaudited)
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2003 2002
---------- --------------
ASSETS
- --------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 107 $ 266
Accounts receivable, less allowance for doubtful
accounts of $342 and $303, respectively . . . . . . . . . 934 1,472
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 2,205 3,145
Prepaid expenses and other current assets. . . . . . . . . . 172 237
---------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . 3,418 5,120
PROPERTY, PLANT AND EQUIPMENT, net . . . . . . . . . . . . . . 2,390 2,563
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 287 309
---------- --------------
$ 6,095 $ 7,992
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------
CURRENT LIABILITIES
Revolving line of credit and term loan . . . . . . . . . . . $ 1,297 $ 2,067
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 498 1,807
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . 1,707 1,523
Obligations under capital leases -
current portion . . . . . . . . . . . . . . . . . . . . . 91 97
Deferred income. . . . . . . . . . . . . . . . . . . . . . . 225 394
---------- --------------
Total current liabilities. . . . . . . . . . . . . . . . . 3,818 5,888
NOTES PAYABLE 74 ---
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion. . . . . . . . . . . . . . . . . . . . . 2,509 2,555
---------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 6,401 8,443
SHAREHOLDERS' EQUITY
Common stock . . . . . . . . . . . . . . . . . . . . . . . . 85 78
Additional paid-in capital . . . . . . . . . . . . . . . . . 44,623 44,521
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (44,894) (44,930)
Note receivable from shareholder . . . . . . . . . . . . . . (120) (120)
---------- --------------
Total shareholders' equity (deficit) . . . . . . . . . . . (306) (451)
---------- --------------
$ 6,095 $ 7,992
========== ==============
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,
------------------- -----------------
2003 2002 2003 2002
------------------- -----------------
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,326 3,181 $ 5,900 $ 7,923
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 837 1,559 2,489 3,707
Customer service expenses. . . . . . . . . . . . . . . . . . 697 1,054 1,818 2,333
Selling, general and administrative expenses . . . . . . . . 857 1,368 1,881 2,750
Research and development . . . . . . . . . . . . . . . . . . 175 145 335 296
-------- -------- -------- -------
2,566 4,126 6,523 9,086
-------- -------- -------- -------
OPERATING LOSS . . . . . . . . . . . . . . . . . . . . . . . . (240) (945) (623) (1,163)
INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . 100 140 211 272
-------- -------- -------- -------
LOSS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . (340) (1,085) (834) (1,435)
INCOME TAXES (BENEFIT) (348) --- (348) ---
-------- -------- -------- -------
PROFIT (LOSS) BEFORE EXTRAORDINARY ITEM. . . . . . . . . . . . 8 (1,085) (486) (1,435)
EXTRAORDINARY ITEM - Gain on extinguishment
of debt, net of $348 income taxes 522 --- 522 ---
-------- -------- -------- -------
NET PROFIT (LOSS). . . . . . . . . . . . . . . . . . . . . . . $ 530 (1,085) $ 36 $(1,435)
======== ======== ======== ========
NET PROFIT (LOSS) PER SHARE
Profit (loss) before extraordinary item. . . . . . . . . . . $ 0.00 (0.02) $ (0.01) $ (0.02)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . 0.01 0.00 0.01 0.00
-------- -------- -------- --------
Basic and diluted. . . . . . . . . . . . . . . . . . . . . . $ 0.01 (0.02) $ 0.00 $ (0.02)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES
Basic and diluted. . . . . . . . . . . . . . . . . . . . . . 82,943 71,032 82,601 66,343
======== ======== ======== ========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
----------------------------
2003 2002
------------------ --------
CASH FLOWS FROM OPERATING ACTIVITIES:
- ----------------------------------------------------------------
Net profit (loss). . . . . . . . . . . . . . . . . . . . . . . $ 36 $(1,435)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 200 266
Provision for bad debts . . . . . . . . . . . . . . . . . . 25 23
Gain on extinguishment of debt. . . . . . . . . . . . . . . (870) --
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . 513 593
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 940 239
Accounts payable and accrued liabilities. . . . . . . . . . (77) 735
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . (85) (164)
------------------ --------
Net cash provided by operating activities. . . . . . . . . . 682 257
------------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net . . . . . . . . (12) (62)
Intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . (12) (11)
------------------ --------
Net cash used in investing activities. . . . . . . . . . . . (24) (73)
------------------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under the revolving line of credit and term loan. (770) (327)
Repayment of obligations under capital leases. . . . . . . . . (52) (44)
Proceeds from sale of stock, net . . . . . . . . . . . . . . . 5 14
------------------ --------
Net cash used in by financing activities . . . . . . . . . . (817) (357)
------------------ --------
DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . (159) (173)
CASH AND CASH EQUIVALENTS, at beginning of period. . . . . . . . 266 423
------------------ --------
CASH AND CASH EQUIVALENTS, at end of period. . . . . . . . . . . $ 107 $ 250
================== ========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
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 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 accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Interim
results are not necessarily indicative of the results that may be expected 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, 2002, as filed with the Securities and Exchange Commission.
Certain prior period amounts have been reclassified to conform to current period
presentation.
NOTE B -- Financial Condition and Liquidity
- -------------------------------------------------
We have incurred reduced revenue levels, decreased financial position and
recurring operating losses over the past several years. As a result, the Board
of Directors approved a restructuring plan for 2003 to strengthen the Company's
operating efficiencies and to better align its operations with current economic
and market conditions. To date our progress under the revised business plan is
as follows:
- - Significantly downsized our operations including the elimination of
approximately 60 of 117 positions as of March 7, 2003.
- - Negotiated a settlement with past due trade vendors which has resulted in
an $870,000 gain.
- - Negotiated with the current landlord to move out of its present
corporate facility. The lease termination will result in a gain of
approximately $350,000 in the third quarter of 2003. In addition,
the Company is finalizing its negotiations to relocate to a smaller
and less costly facility by October 1, 2003.
- - Dedicated a substantial portion of our remaining resources towards
maintaining and improving our relationships with our 30 largest
customers.
- - Outsourced of all non-essential manufacturing and assembly operations to
qualified subcontractors.
- - Further expanded our Service Partner program to augment service and
installations performed by our employees.
On January 7, 2003, Sentry initiated its restructuring plan. Due to the size of
the layoff, Sentry was required to give the terminated employees a 60-day notice
period. The costs associated with these restructuring activities are being
expensed as they are incurred. The successful implementation of this
restructuring to date has resulted in substantial gross margin improvements and
reductions in operating expenses beginning in the second quarter of 2003.
There can be no assurance, however, that changes in Sentry's plans or other
events affecting its operations will not result in accelerated or unexpected
cash requirements, or that the Company will be successful in achieving positive
cash flow from operations or that additional debt or equity financing will be
available on terms that are satisfactory to Sentry, or that any such debt or
equity financing will be sufficient to provide the full amount of funding
necessary. Sentry's 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.
Sentry will require liquidity and working capital to finance increases in
receivables and inventory associated with sales growth, payments to past due
vendors and, to a lesser extent, for capital expenditures. The Company had no
material capital expenditure or purchase commitments as of June 30, 2003.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
Currently, Sentry's major shareholder, Dialoc ID, is not able to provide
additional financial support for Sentry. If the Company is not able to raise
additional debt or equity financing, it could be forced into a bankruptcy or be
required to liquidate its assets. In this scenario, most likely, Sentry's
secured lender would receive the bulk of any proceeds.
NOTE C -- Extraordinary Item - Gain on Extinguishment of Debt
- -----------------------------------------------------------------------
In June 2003, the Company entered into a settlement with certain of its vendors
for past due obligations. Under the terms of the settlement, each participating
vendor received a note for approximately 10% of their balance due and two shares
of Sentry common stock for each dollar owed in full satisfaction of their
outstanding balances, which approximated $1,085,000. The notes, approximating
$110,000, are non-interest bearing and are payable in three equal installments
on January 15, 2004, 2005, and 2006. The 2,172,360 shares issued in connection
with this settlement were valued at approximately $105,000, based on the market
value of the stock at the time of the settlement. As a result of this
transaction, the Company realized an extraordinary gain of $870,000,
representing the difference between the amounts due before the settlement and
the total amount payable, including the value of the common stock, as a result
of the settlement. The $348,000 income tax provision recognized on the
extraordinary gain was offset by an equivalent income tax benefit generated from
the current period's loss from operations and the utilization of net operating
loss carryforwards.
NOTE D -- Inventories
- ------------------------
Inventories consist of the following:
June 30, 2003 December 31, 2002
--------------- -------------------
(in thousands)
Raw materials $ 537 $ 513
Work-in-process 510 618
Finished goods 1,158 2,014
----- -----
$ 2,205 $ 3,145
========= =========
Reserves for excess and obsolete inventory totaled $2,425,000 and $3,610,000 as
of June 30, 2003 and December 31, 2002, respectively and have been included as a
component of the above amounts.
NOTE E -- 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. Also, Peter Murdoch, a shareholder of Dialoc ID, receives an annual
salary of $50,000 in 2003 in the capacity of President of Sentry. Purchases
from Dialoc ID were $11,000 and $7,000 in the quarters ended June 30, 2003 and
June 30, 2002 and $12,000 and $10,000 in the six month periods ended June 30,
2003 and 2002, respectively. Services and sales to Dialoc ID were $35,000 and
$8,000 in the quarters ended June 30, 2003 and 2002 and $39,000 and $13,000 in
the six month periods ended June 30, 2003 and 2003, respectively. The net
amount payable to Dialoc ID as of June 30, 2003 was $118,000.
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 %) less .75%. The note has been reflected
as a reduction of shareholders' equity on the balance sheet.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE F -- Earnings Per Share
- ---------------------------------
The earnings per share calculations (basic and diluted) at June 30, 2003 and
2002 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 to purchase 1,615,912 and 3,673,508 shares of common stock
with a weighted average exercise price of $0.57 and $0.71 were outstanding at
June 30, 2003 and 2002, but were not included in the computation of diluted net
loss per share because their effect would be antidilutive.
Stock options issued to employees are accounted for under the intrinsic value
method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." No stock-based employee compensation cost is reflected in net income
(loss), as all options granted had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net loss and net loss per share if we had applied the
fair value method of accounting for stock options under the provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation".
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
--------- -------- -------- ---------
(in thousands, except per share data)
Net income (loss), as reported . . . . . . $ 530 $(1,085) $ 36 $(1,435)
Deduct: Total stock-based employee
compensation expense determined
under the fair value method for all
awards, net of related tax effects . . . . 20 29 36 139
----- -------- ----- --------
Pro-forma net income (loss). . . . . . . . $ 510 $(1,114) $ - $(1,574)
===== ======== ===== ========
Net income (loss) per share:
Basic and Diluted - as reported. . . . . . $0.01 $ (0.02) $0.00 $ (0.02)
===== ======== ===== ========
Basic and Diluted - pro forma. . . . . . . $0.01 $ (0.02) $0.00 $ (0.02)
===== ======== ===== ========
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model. No options were granted in the three or
six month periods ended June 30, 2003 or 2002.
NOTE G -- Subsequent Event
- ------------------------------
On July 9, 2003, Sentry entered into a settlement agreement with its landlord
regarding the termination of its long-term capital and operating leases for its
current facility in Hauppauge, New York. Under terms of the settlement, Sentry
is released from its current and future liabilities under the leases in exchange
for a $250,000 8% note, payable in 36 equal monthly installments of $7,834,
including interest, commencing November 1, 2003. The note also obligates Sentry
to prepay an amount of $100,000 against the note in the event of an equity
financing, as defined. In addition, Sentry agreed to issue the landlord
1,000,000 shares of common stock, for which the fair value of the stock
($33,000) was determined using the closing price as of July 9, 2003. Sentry is
also obligated to pay rent of $16,000 per month until it vacates the premises on
or before September 30, 2003. The Company anticipates that it will recognize a
gain of approximately $350,000 in the third quarter of 2003, representing the
difference between the carrying amount of outstanding obligations to the
landlord less the net book value of the property on the date of the settlement.
The Company is currently finalizing its negotiations for a new operating
facility.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 2. 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-QSB 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:
- ------------------------
We sell our products predominantly into the retail market. We recognize that
our domestic revenues will continue to be influenced by the soft economic
environment. As part of our restructuring plan and due to the limitations of
our financial resources, we reduced the number of direct salespersons from
thirteen to four, whose efforts are supplemented by six in-house sales support
staff and two independent sales representatives. Our sales efforts were
primarily focused towards our top 30 customers. The transition to this strategy
may result in large swings in our order flow, based on the timing of new store
openings and the receipt of orders from these customers. This is reflected in
the reduction in our backlog of orders from approximately $5.2 million at June
30, 2002 to approximately $3.4 million at June 30, 2003. Just after the end of
Q-2, we received approximately $1.5 million in additional Lowe's Home Centers
orders. Consolidated revenues were 27% and 26% lower in the quarter and six
months ended June 30, 2003 than in the quarter and six months ended June 30,
2002. Total revenues for the periods presented are broken out as follows:
Q-2 Q-2 % 6 Mos. 6 Mos. %
2003 2002 Change 2003 2002 Change
------- ------- ------- ------- ------ -------
(in thousands) (in thousands)
EAS . . . . . . . . . . . . . $ 546 $ 625 (13) $ 970 $ 1,316 (26)
CCTV. . . . . . . . . . . . . 470 863 (46) 1,947 2,630 (26)
SentryVision. . . . . . . . . 485 497 (2) 859 1,136 (24)
3M library products . . . . . - 77 (100) 45 191 (76)
------- ------- ------- ------- ------ -------
Total sales . . . . . . . . . 1,501 2,062 (27) 3,821 5,273 (28)
Service revenues and other. . 825 1,119 (26) 2,079 2,650 (22)
------- ------- ------- ------- ------ -------
Total revenues. . . . . . . . $2,326 $3,181 (27) $ 5,900 $7,923 (26)
======= ======= ======= ======= ====== =======
Direct sales of EAS products were lower in both the second quarter and first six
months of 2003 as compared to the same period in the prior year as a result of
lower sales to our Mexican Distributor and to smaller boutique customers. There
was a decrease in CCTV and SentryVision revenues from Lowe's Home Centers of
approximately $1.0 million in the first six months of 2003 as compared to the
first six months of 2002 as result of the timing of the contracts received,
which was partially offset by approximately $0.5 million in new CCTV orders from
Home Depot. We terminated our distribution agreement with 3M for library
products as of the end of 2002, however, the final installations were completed
in first quarter of 2003. Service revenues and other decreased in both the
second quarter and first six months primarily as a result of lower installation
revenue than in the prior year.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cost of sales were 56% and 65% of total sales in the three and six month periods
ended June 30, 2003 compared to 76% and 70% in the same periods of the prior
year. Part of our restructuring plan for 2003 included the outsourcing of all
significant manufacturing operations. The decrease in the cost of sales
percentage in the second quarter of 2003 is a result of the elimination of the
charge to cost of sales of under absorbed fixed overhead costs due to the
termination of in-house manufacturing as of the end of the first quarter of
2003.
We were successful in reducing customer service expenses by 34% and 22% in the
second quarter and first six months of 2003 as compared to the second quarter
and first six months of 2002 primarily as a result of a decrease in the number
of customer service employees and lower outside contractor costs resulting from
lower revenue levels.
Selling, general and administrative expenses were 37% and 32% lower in the three
and six month periods ended June 30, 2003 when compared to the same period of
the previous year. primarily as a result of lower payroll costs and commissions
partly as a result of the headcount reduction as of March 7, 2003. We
anticipate that selling, general and administrative costs will continue to
decline on a comparative basis during the remainder of 2003, particularly after
we relocate to a smaller, less costly facility by October 1, 2003.
Research and development costs were higher in the second quarter and first six
months of 2003 when compared to the second quarter and first six months of 2002
due to a reorganization and transfer of employees into the engineering group as
part of our restructuring.
Net interest expense for the second quarter and first six months of 2003
decreased due to lower average borrowings and lower interest rates under our
revolving credit agreement.
In the second quarter of 2003, the Company entered into a settlement with
certain of its vendors for past due obligations which resulted in a gain of
approximately $522,000 (net of $348,000 income taxes) which represents the
difference between the amounts due before the settlement and the total amount
payable, including the value of the common stock, as a result of the settlement
..
The $348,000 income tax provision recognized on the extraordinary gain was
offset by an equivalent income tax benefit generated from the current period's
loss from operations and the utilization of net operating loss carryforwards.
Due to net operating losses, we have not provided for income taxes in any of the
periods of 2002.
As a result of the foregoing, Sentry had net profits of $530,000 and $36,000 in
the quarter and first six months ended June 30, 2003 as compared to net losses
of $1.1 and $1.4 million in the quarter and six months ended June 30, 2002.
Liquidity and Capital Resources as of June 30, 2003
- -----------------------------------------------------------
We have incurred reduced revenue levels, decreased financial position and
recurring operating losses over the past several years. As a result, the Board
of Directors approved a restructuring plan for 2003 to strengthen the Company's
operating efficiencies and to better align its operations with current economic
and market conditions. To date, we have made significant progress under our
revised business plan including the following:
- - Significantly downsized our operations including the elimination of
approximately 60 of 117 positions as of March 7, 2003.
- - Negotiated a settlement with past due trade vendors which has resulted in
an $870,000 gain.
- - Negotiated with the current landlord to move out of its present corporate
facility. The lease termination will result in a gain of approximately
$350,000 in the third quarter of 2003. In addition, the Company is
finalizing its negotiations to relocate to a smaller and less costly
facility by October 1, 2003.
- - Dedicated a substantial portion of our remaining resources towards
maintaining and improving our relationships with our 30 largest
customers.
- - Outsourced all non-essential manufacturing and assembly operations to
qualified subcontractors.
- - Further expanded our Service Partner program to augment service and
installations performed by our employees.
On January 7, 2003, Sentry initiated its restructuring plan. Due to the size of
the layoff, Sentry was required to give the terminated employees a 60-day notice
period. The costs associated with these restructuring activities are being
expensed as they are incurred. The successful implementation of this
restructuring to date has resulted in substantial gross margin improvements and
reductions in operating expenses beginning after the first quarter of 2003.
As of June 30, 2003, we had borrowings of approximately $1.3 million with CIT,
the maximum amount available under the revolving credit facility. We continue
to supplement our borrowings under this credit facility with purchase order
financing through EPK Financial Corporation. During the second quarter and
first six months of 2003, we funded $247,000 and $686,000 in inventory purchases
under this facility. As of June 30, 2003, we owed approximately $150,000 under
this facility.
In June 2003, the Company entered into a settlement with certain of its vendors
for past due obligations. Under the terms of the settlement, each participating
vendor received a note for approximately 10% of their balance due and two shares
of Sentry common stock for each dollar owed in full satisfaction of their
outstanding balances, which approximated $1,1 million. The notes, approximating
$110,000, are non-interest bearing and are payable in three equal installments
on January 15, 2004, 2005, and 2006. The 2,172,360 shares issued in connection
with this settlement were valued at approximately $105,000, based on the market
value of the stock at the time of the settlement. As a result of this
transaction, the Company realized an extraordinary gain of $870,000,
representing the difference between the amounts due before the settlement and
the total amount payable, including the value of the common stock, as a result
of the settlement. To date, approximately 81% of past due trade debts have been
settled.
On July 9, 2003, Sentry entered into a settlement agreement with its landlord
regarding the termination of its long-term capital and operating leases for its
current facility in Hauppauge, New York. Under terms of the settlement, Sentry
is released from its current and future liabilities under the leases in exchange
for a $250,000 8% note, payable in 36 equal monthly installments of $7,834,
including interest, commencing November 1, 2003. The note also obligates Sentry
to prepay an amount of $100,000 against the note in the event of an equity
financing, as defined. In addition, Sentry agreed to issue the landlord
1,000,000 shares of common stock, for which the fair value of the stock
($33,000) was determined using the closing price as of July 9, 2003. Sentry is
also obligated to pay rent of $16,000 per month until it vacates the premises on
or before September 30, 2003. The Company anticipates that it will recognize a
gain of approximately $350,000 in the third quarter of 2003, representing the
difference between the carrying amount of outstanding obligations to the
landlord less the net book value of the property on the date of the settlement.
The Company is currently finalizing its negotiations for a new operating
facility. It is anticipated that the move will result in excess of $250,000 in
savings on an annualized basis.
We continue to pursue additional debt or equity financing through our financial
advisors.
There can be no assurance, however, that changes in Sentry's plans or other
events affecting its operations will not result in accelerated or unexpected
cash requirements, or that the Company will be successful in achieving positive
cash flow from operations or that additional debt or equity financing will be
available on terms that are satisfactory to Sentry, or that any such debt or
equity financing will be sufficient to provide the full amount of funding
necessary. Sentry's 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.
Sentry will require liquidity and working capital to finance increases in
receivables and inventory associated with sales growth, payments to past due
vendors and, to a lesser extent, for capital expenditures. The Company had no
material capital expenditure or purchase commitments as of June 30, 2003.
Currently, Sentry's major shareholder, Dialoc ID, is not able to provide
additional financial support for Sentry. If the Company is not able to raise
additional debt or equity financing, we could be forced into a bankruptcy or be
required to liquidate our assets. In this scenario, most likely, Sentry's
secured lender would receive the bulk of any proceeds.
Related Party Transactions
- ----------------------------
Details of related party transactions are included in Note E of this Form
10-QSB.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on an evaluation conducted within 90 days prior to the filing
date of this Quarterly Report on Form 10-QSB, that the Company's disclosure
controls and procedures have functioned effectively so as to provide those
officers the information necessary whether:
99.1 this Quarterly Report on Form 10-QSB contains any untrue statement
of a material fact or omits to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report on Form 10-QSB, and
(ii) the financial statements, and other financial information included in
this Quarterly Report on Form 10-QSB, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this Quarterly Report
on Form 10-QSB.
There have been no significant changes in the Company's internal controls or in
other factors since the date of the Chief Executive Officer's and Chief
Financial Officer's evaluation that could significantly affect these internal
controls, including any corrective actions with regards to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
- -------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
99.2 Certification by Chief Executive Officer
99.3 Certification by Chief Financial Officer
(b) Reports on Form 8-K - On June 24, 2003, the Company filed a Report on
Form 8-K announcing the postponement and restructuring of approximately $1.1
million of its supplier debt as part of its comprehensive plan to restructure
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, 2003 By: /S/ PETER J. MUNDY
----------------- ----------------------
Peter J. Mundy,
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
CERTIFICATIONS
I, Peter L. Murdoch, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Sentry Technology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ PETER L. MURDOCH
-------------------------------------------------
Peter L. Murdoch
President and Chief Executive Officer
August 14, 2003
CERTIFICATIONS
I, Peter J. Mundy, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Sentry Technology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ PETER J. MUNDY
-------------------------------------------------
Peter J. Mundy
Vice President and Chief Financial Officer
August 14, 2003
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-QSB for the quarter
ended June 30, 2003 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, 2003
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-QSB for the quarter
ended June 30, 2003 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, 2003