-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QGRJhsRzFSiZvLvTbScEj1yL/0geEgRWRAQ2sm7WdqJI3N7kXQvX/oC1g5V8ESv4 78e+Q1SM8+dLxhKkDXHO7w== 0001137403-01-500011.txt : 20020425 0001137403-01-500011.hdr.sgml : 20020425 ACCESSION NUMBER: 0001137403-01-500011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 DATE AS OF CHANGE: 20011227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENTRY TECHNOLOGY CORP CENTRAL INDEX KEY: 0001030708 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 113349733 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12727 FILM NUMBER: 1713101 BUSINESS ADDRESS: STREET 1: 350 WIRELESS BLVD CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5142322100 MAIL ADDRESS: STREET 1: 350 WIRELESS BLVD CITY: HAUPPAUGE STATE: NY ZIP: 11788 10QSB 1 doc1.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 1-12727 ---------- SENTRY TECHNOLOGY CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) Delaware 96-11-3349733 ---------- ------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 350 Wireless Boulevard, Hauppauge, New York - - --------------------------------------------------------------------- 11788 (Address of principal executive offices) (Zip Code) 631-232-2100 ------------ (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No - As of August 14, 2001, there were 61,467,872 shares of Common Stock outstanding. SENTRY TECHNOLOGY CORPORATION ----------------------------- INDEX ----- Page No. --------- PART I. FINANCIAL INFORMATION - - --------------------------------- Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets -- June 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations -- Three Months Ended June 30, 2001 and 2000 and Six Months Ended June 30, 2001 and 2000 4 Condensed Consolidated Statement of Shareholders' Equity Six Months Ended June 30, 2001 5 Condensed Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2001 and 2000 6 Notes to Condensed Consolidated Financial Statements -- June 30, 2001 7 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 13 PART II. OTHER INFORMATION - - ------------------------------ Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14
SENTRY TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) June 30, December 31, 2001 2000 ---------- -------------- ASSETS - - -------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 662 $ 927 Accounts receivable, less allowance for doubtful accounts of $870 and $890, respectively 3,476 3,178 Net investment in sales-type leases - current portion 77 84 Inventories 4,373 5,274 Prepaid expenses and other current assets 413 202 ---------- -------------- Total current assets 9,001 9,665 NET INVESTMENT IN SALES-TYPE LEASES - non-current portion 64 100 SECURITY DEVICES ON LEASE, net 28 36 PROPERTY, PLANT AND EQUIPMENT, net 3,119 3,324 OTHER ASSETS 274 720 ---------- -------------- $ 12,486 $ 13,845 ========== ============== LIABILITIES AND SHAREHOLDERS' EQUITY - - -------------------------------------------------------------- CURRENT LIABILITIES Revolving line of credit $ 2,910 $ 2,920 Accounts payable 1,217 1,463 Accrued liabilities 1,842 2,633 Obligations under capital leases - current portion 131 124 Deferred income 326 352 ---------- -------------- Total current liabilities 6,426 7,492 OBLIGATIONS UNDER CAPITAL LEASES - non-current portion 2,684 2,768 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 175 199 ---------- -------------- Total liabilities 9,285 10,459 REDEEMABLE CUMULATIVE PREFERRED STOCK --- 29,180 COMMON SHAREHOLDERS' EQUITY (DEFICIT) Common stock 61 10 Additional paid-in capital 44,358 12,859 Accumulated deficit (40,218) (38,663) Receivable from stock sale (1,000) --- ---------- -------------- Total common shareholders' equity 3,201 (25,794) ---------- -------------- $ 12,486 $ 13,845 ========== ============== See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, -------------------- ------------------ 2001 2000 2001 2000 --------- --------- -------- -------- REVENUES $ 4,005 $ 5,169 $ 8,675 $10,041 COSTS AND EXPENSES: Cost of sales 2,103 2,615 4,494 5,274 Customer service expenses 1,024 1,140 2,153 2,297 Selling, general and administrative expenses 1,395 2,039 2,917 3,812 Research and development 208 225 383 451 ----------- --------- -------- -------- 4,730 6,019 9,947 11,834 ----------- --------- -------- -------- OPERATING LOSS (725) (850) (1,272) (1,793) INTEREST EXPENSE 136 166 283 324 ----------- --------- -------- -------- LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (861) (1,016) (1,555) (2,117) INCOME TAXES --- --- --- --- ----------- --------- -------- -------- NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (861) (1,016) (1,555) (2,117) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE --- --- --- 301 ----------- --------- -------- -------- NET LOSS (861) (1,016) (1,555) (2,418) PREFERRED STOCK DIVIDENDS --- 333 25 665 RETURN TO COMMON SHAREHOLDERS FROM REDEMPTION OF PREFERRED STOCK --- --- 27,198 --- ----------- -------- -------- -------- NET INCOME (LOSS) ATTRIBUTED TO COMMON SHAREHOLDERS $ (861) $ (1,349) $25,618 $(3,083) ============ ======== ======== ======== NET INCOME (LOSS) PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: Basic $ (0.01) $ (0.14) $ 0.43 $ (0.29) ============ ========= ======= ======== Diluted $ (0.01) $ (0.14) $ 0.42 $ (0.29) ============ ========= ======= ======== NET INCOME (LOSS) PER COMMON SHARE Basic $ (0.01) $ (0.14) $ 0.43 $ (0.32) ============ ========= ======= ======== Diluted $ (0.01) $ (0.14) $ 0.42 $ (0.32) ============ ========= ======= ======== WEIGHTED AVERAGE COMMON SHARES Basic 61,468 9,751 59,457 9,751 ============ ========= ======== ======= Diluted 61,468 9,751 60,291 9,751 ============ ========= ======== ======= See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) Total Retained Common Redeemable Common Additional Earnings Receivable Shareholders' Cumulative Stock Paid-In (Accumulated From Equity Preferred Shares Amount Capital Deficit) Stock Sale (Deficit) Stock ------ ------- --------- --------- ------------ ---------- --------- BALANCE, DECEMBER 31, 2000 9,751 $ 10 $ 12,859 $(38,663) $ --- $ (25,794) $ 29,180 Net loss and comprehensive loss --- --- --- (1,555) --- (1,555) Preferred stock dividends --- --- (25) --- --- (25) 25 Common shares issued in connection with redemption of Class A Preferred Stock 28,667 28 29,177 --- --- 29,205 (29,205) Common Stock issued to Dutch A&A net of Expenses 23,050 23 2,347 --- (1,000) 1,370 --- ------ ------- --------- --------- ------------ ---------- --------- BALANCE, JUNE 30, 2001 61,468 $ 61 $ 44,358 $(40,218) $ (1,000) $ 3,201 $ --- ====== ======= ========= ========= ============ ========== =========
See notes to the condensed consolidated financial statements
SENTRY TECHNOLOGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six Months Ended June 30, ------------------ 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: - - --------------------------------------------------- Net loss $(1,555) $(2,418) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of security devices and property, plant and equipment 255 314 Amortization of intangibles and other assets 13 498 Provision for bad debts 27 25 Changes in operating assets and liabilities: Accounts receivable (325) 2,070 Net investment in sales-type leases 43 279 Inventories 901 (540) Accounts payable and accrued liabilities (1,037) (226) Other, net 192 (309) -------- -------- Net cash used in operating activities (1,486) (307) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment, net (41) (11) Security devices on lease (1) (16) Intangibles (20) (5) -------- -------- Net cash used in investing activities (62) (32) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) under the revolving line of credit (10) 657 Repayment of obligations under capital leases (77) (97) Proceeds from sale of stock, net 2,370 --- Receivable from stock sale (1,000) --- -------- -------- Net cash provided by financing activities 1,283 560 -------- -------- INCREASE (DECREASE) IN CASH (265) 221 CASH, at beginning of period 927 951 -------- -------- CASH, at end of period $ 662 $ 1,172 ======== ========
See notes to the condensed condolidated financial statements. SENTRY TECHNOLOGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 NOTE A -- Basis of Presentation - Knogo North America Inc. and Video Sentry - - -------------------------------------------------------------------------------- Corporation Merger - - ------------------- Sentry Technology Corporation ("Sentry"), a Delaware Corporation, was established to effect the merger of Knogo North America Inc. ("Knogo N.A.") and Video Sentry Corporation ("Video Sentry") which was consummated on February 12, 1997 (the "Effective Date"). The merger resulted in Knogo N.A. and Video Sentry becoming wholly owned subsidiaries of Sentry. The consolidated financial statements include the accounts of Sentry and its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements are unaudited. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the financial information for the periods indicated, have been included. Interim results are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Sentry's Annual Report to Stockholders on Form 10-K for the fiscal year ended December 31, 2000, as filed with the Securities and Exchange Commission. NOTE B -- Investment by Dutch A&A - - --------------------------------------- On January 8, 2001, Dutch A&A Holding, B.V. ("Dutch A&A) acquired 23,050,452 shares of our common stock for $3 million, of which $1 million was paid in January 2001, $1 million was paid on April 30, 2001 and the remaining balance of $1 million was due on July 31, 2001, which has been extended by the Board of Directors to August 31, 2001. Dutch A&A is a Netherlands company which, through its subsidiaries, is in the business of development, manufacture, sale and distribution of various kinds of identification, access control and anti-theft electronic article surveillance systems and accessories. As of January 8, 2001, Dutch A&A owns 37.5% of our outstanding common stock. At any time prior to January 8, 2002, Dutch A&A may increase its ownership of our common stock to a total of 51% of the shares of common stock then outstanding. If the average market value of our common stock, measured over any 10-day trading period during the one year period following January 8, 2001, is at least $15.0 million, the purchase price for the additional shares shall be determined by multiplying the actual number of shares to be purchased by $.001; otherwise, the purchase price will be $1.5 million. At any time prior to January 8, 2003, Dutch A&A may increase its ownership of our common stock to a total of 60% of the shares of common stock then outstanding. The purchase price for the additional shares shall be determined as follows: If the average market value of the common stock, measured over a 10-day period during the two years preceding January 8, 2003, is at least $25 million, the purchase price shall be determined by multiplying the actual number of shares to be purchased by $.001. If Dutch A&A previously exercised its right to acquire shares increasing its investment to 51% of our common stock, but the average market value test was not met at the time of the second purchase, then the purchase price shall be $3.5 million; otherwise the purchase price shall be $5.0 million. As a condition to the investment by Dutch A&A, our stockholders elected three nominees of Dutch A&A to the Board of Directors at a Special Meeting of Stockholders on December 8, 2000. If Dutch A&A has not acquired 51% of our common stock by January 8, 2003, one of the three nominees of Dutch A&A will resign and be replaced, with the consent of Dutch A&A, by a nominee of our directors who are not nominated by Dutch A&A. In addition to the election of three nominees of Dutch A&A to the Board of Directors, other matters which were approved at the December 8, 2000 Special Meeting of Stockholders and became effective on January 8, 2001 were amendments to the Company's certificate of incorporation to: (i) permit the payment of a dividend of additional shares of Class A Preferred Stock at the rate of 0.075 shares of Class A Preferred Stock for each share of Class A Preferred Stock held; (ii) to reclassify Class A Preferred Stock into shares of common stock on a ratio of five shares of common stock for each share of Class A Preferred Stock outstanding; and (iii) to increase the number of the Company's authorized shares of common stock to 140,000,000. As a result of the dividend and reclassification, 28,666,660 common shares were issued to former Class A Preferred shareholders. Also, on December 28, 2000, the Board of Directors increased the number of directors from five to seven effective upon the closing of the Dutch A&A investment. The reclassification of the Class A Preferred Shares resulted in a return to the common shareholders of $27.2 million, which was recorded in the first quarter of 2001. This amount represents the difference between the fair market value of the common stock issued and the carrying amount of the preferred stock redeemed. SENTRY TECHNOLOGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 NOTE C -- Financial Condition and Liquidity - - ------------------------------------------------- We have incurred reduced revenue levels, decreased financial position and recurring operating losses over the past several years. To strengthen our financial position, a number of activities have been initiated including: - - - Investment of $3 million in newly issued shares of the Company's common stock by Dutch A&A. The transaction with Dutch A&A will allow us to introduce new products, share resources and simplify our capital structure. - - - Improvements in existing products and service capabilities. - - - Various cost cutting and cost saving initiatives. As a result of these activities, we anticipate that current cash reserves, cash obtained pursuant to the Dutch A&A transaction, existing lines of credit and cash generated by operations should be sufficient to meet our working capital requirements, as well as future capital expenditure requirements, over the next twelve months. NOTE D -- Net Investment in Sales-Type Leases - - ---------------------------------------------------- We are the lessor of security devices under agreements expiring in various years through 2003. The net investment in sales-type leases consists of:
June 30, 2001 December 31, 2000 --------------- ------------------- (in thousands) Minimum lease payments receivable $ 162 $ 215 Allowance for uncollectible minimum lease payments (8) (10) Unearned income (13) (21) --------------- ------------------- Net investment 141 184 Less current portion 77 84 --------------- ------------------- Non-current portion $ 64 $ 100 =============== ===================
NOTE E -- Inventories - - ------------------------ Inventories consist of the following: June 30, 2001 December 31, 2000 --------------- ------------------- (in thousands) Raw materials $ 1,226 $ 1,479 Work-in-process 2,053 2,259 Finished goods 1,094 1,536 -------------- ------------------ $ 4,373 $ 5,274 ============== ==================
Reserves for excess and obsolete inventory totaled $3,160,000 and $3,354,000 as of June 30, 2001 and December 31, 2000, respectively and have been included as a component of the above amounts. NOTE F -- Related Party Transactions - - ----------------------------------------- As a result of the Dutch A&A investment, Sentry entered into a distribution agreement with Dutch A&A which contemplates a two-way distribution relationship between the companies. Under the agreement, Sentry has the rights to sell Dutch A&A's EAS, access control and RFID products and accessories and Sentry gives Dutch A&A the rights to sell its EAS and CCTV products and accessories. Pricing for products under the agreements are at the lowest prices charged to affiliates. In addition, Dutch A&A receives annual management fees for product marketing and product engineering management from Sentry in the amount of $100,000. Also, Peter Murdoch, a shareholder of Dutch A&A, receives an annual salary of $150,000 in the capacity of President of Sentry. Purchases from Dutch A&A were $26,000 and $86,000 in the quarter and six month periods ended June 30, 2001. Fees, services and sales to Dutch A&A were $15,000 and $36,000 in the quarter and six months ended June 30, 2001. The net amount receivable from Dutch A&A as of June 30, 2001 is $23,000. SENTRY TECHNOLOGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 NOTE G -- Recent Accounting Pronouncements - - ----------------------------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal years Beginning after June 15, 2000. SFAS No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, will be required to be recorded on the balance sheet at fair value. If the derivative is designated in a fair value hedge, the changes in the fair value of the derivative and the hedged item will be recognized in earnings. If the derivative is designated in a cash-flow hedge, changes in the fair value of the derivative will be recorded in other comprehensive income and will be recognized in the income statement when the hedged item affects earnings. SFAS No. 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value will be recognized in earnings. We adopted SFAS No. 133 on January 31, 2001 and the implementation did not have a material impact on our consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations." SFAS No. 141 applies prospectively to all business combinations initiated after June 30, 2001 and to all business combinations accounted using the purchase method for which the date of acquisition is July 1, 2001, or later. This statement requires all business combinations to be accounted for using one method, the purchase method. Under previously existing accounting rules, business combinations were accounted for using one of two methods, the pooling-of-interests method or the purchase method. The adoption of SFAS No. 141 is not expected to have a material impact on the Company's financial statements. In June 2001, the Financial Accounting Standards Board issued Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and some intangible assets will no longer be amortized, but rather reviewed for impairment on a periodic basis. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. This Statement is required to be applied at the beginning of the Company's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Impairment losses for goodwill and certain intangible assets that arise due to the initial application of this Statement are to be reported as resulting from a change in accounting principle. Goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the provisions of this Statement. The adoption of SFAS No. 142 is not expected to have a material impact on the Company's financial statements. NOTE H -- Change in Accounting Principle - - ---------------------------------------------- In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. The SAB summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in the financial statements. In accordance with SAB 101, we have changed our accounting method for recognizing revenue on the sale of equipment where post-shipment obligations exist. Previously, we recognized revenue for equipment when title transferred, generally upon shipment. Beginning with the first quarter of year 2000, we began recognizing revenue when installation is complete or other post-shipment obligations have been satisfied. The cumulative effect of the change in accounting method is a non-cash reduction in net earnings of $301,000, or $0.03 per share. SENTRY TECHNOLOGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 NOTE I -- Earnings Per Share - - --------------------------------- Basic earnings per share is determined by using the weighted average number of common shares outstanding during each period. Diluted earnings per share further assumes the issuance of common shares for all dilutive potential common shares outstanding. The calculations for earnings per share are as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- (in thousands, except per share amounts) Net Income (Loss): Income (loss) before cumulative effect of accounting change $ (861) $(1,016) $25,643 $(2,117) Effect of preferred stock dividends --- (333) (25) (665) -------- -------- -------- -------- (861) (1,349) 25,618 (2,782) Cumulative effect of accounting change --- --- --- (301) -------- -------- -------- -------- Net income (loss) attributed to common shareholders $ (861) $(1,349) $25,618 $(3,083) ======== ======== ======== ======== Weighted Average Common Shares: Weighted average common shares for basic earnings per share 61,467 9,751 59,457 9,751 Stock option plans --- --- 834 --- -------- -------- -------- -------- Weighted average common shares for diluted earnings per share 61,467 9,751 60,291 9,751 ======== ======== ======== ======== Basic and Diluted Earnings per Common Share: Before cumulative effect of accounting change $ (0.01) $ (0.14) $ 0.43 $ (0.29) Cumulative effect of accounting change --- --- --- (0.03) -------- -------- -------- -------- Basic earnings per common share $ (0.01) $ (0.14) $ 0.43 $ (0.32) ======== ======== ======== ======== Diluted earnings per common share $ (0.01) $ (0.14) $ 0.42 $ (0.32) ======== ======== ======== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain Factors That May Affect Future Results - - ---------------------------------------------------- Information contained or incorporated by reference in this periodic report on Form 10-Q and in other SEC filings by Sentry contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or the negative thereof, other variations thereon or comparable terminology, or by discussions of strategy. These forward-looking statements involve certain significant risks and uncertainties, and actual results may differ materially from the forward-looking statements. For further details and discussion of these risks and uncertainties see Sentry Technology Corporation's SEC filings including, but not limited to, its annual report on Form 10-K. No assurance can be given that future results covered by the forward-looking statements will be achieved, and other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. We do not undertake to publicly update or revise any of our forward-looking statements even if experience or future changes show that the indicated results or events will not be realized. SENTRY TECHNOLOGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: - - ------------------------ Consolidated revenues were 23% and 14% lower in the quarter and six months ended June 30, 2001 than in the quarter and six month periods ended June 30, 2000. Our overall domestic revenues were impacted by the soft economic environment, resulting in a slowdown or delay in new retail store openings of some of our customers. Our backlog of orders at June 30, 2001 was approximately $5.1 million as compared to approximately $5.8 million at June 30, 2000. Revenues from third party customers, other than Sensormatic, in the current periods were 99% of total revenues in both the second quarter and first six months of 2001, as compared to 86% and 87% of total revenues in the prior year period. Total revenues for the periods presented are broken out as follows:
Q-2 Q-2 % 6 Mos. 6 Mos. % 2001 2000 Change 2001 2000 Change ------ ------ ------- ------ ------- ------- (in thousands) (in thousands) EAS $1,632 $1,895 (14) $2,967 $ 4,060 (27) CCTV 919 1,809 (49) 3,031 3,236 (6) SentryVision(R) 464 408 14 849 695 22 3M library products 167 282 (41) 293 655 (55) ------ ------ ------- ------ ------- ------- Total sales 3,182 4,394 (28) 7,140 8,646 (17) Service revenues and other 823 775 6 1,535 1,395 10 ------ ------ ------- ------ ------- ------- Total revenues $4,005 $5,169 (23) $8,675 $10,041 (14) ====== ====== ======= ====== ======= =======
Direct sales of EAS products in the 2001 periods were similar to the prior year periods, however total EAS revenues were negatively impacted by a reduction in OEM sales to Sensormatic of $0.6 and $1.2 million in the second quarter and first six months of 2001, respectively. Presently, we do not anticipate an increase the level of sales to Sensormatic through the rest of the year. The decrease in CCTV revenues is primarily related to a lesser marketing emphasis placed on non-retail CCTV sales as part of our strategy to attract dealers in the commercial and industrial markets for SentryVision . We are currently in the process of negotiating with several domestic and international large-scale security dealer integrators. SentryVision sales increased due to the initial sales of the new SmartTrack system, which is scheduled for full release in the third quarter. To date, we have received positive feedback from our customers on the features and reliability of SmartTrack, resulting in new sales opportunities. We see a growing trend for product acceptance and increased market opportunities for traveling camera systems. Sales of 3M library products were lower primarily as a result of reduced marketing emphasis of lower margin products we do not manufacture. Service revenues increased as a result of the increase in the installed base of systems. Cost of sales were 53% and 52% of total revenues in the three and six month periods ended June 30, 2001 compared to 51% and 53% in the same periods in the previous year. The differences in percentages were primarily due to changes in product mix. Customer service expenses were 10% and 6% lower in the second quarter and first six months of 2001 than in the second quarter and first six months of 2000. The expense reduction is due to a combination of our ability to reduce the number of customer service representatives and lower Service Partner costs. We are encouraged by the improvements made in our service delivery system, which has resulted in fewer service calls and a quicker service response time to our customers. Our remedial warranty costs associated with prior generation SentryVision installations have continued to decrease. Selling, general and administrative expenses were 32% and 23% lower in the three and six month periods ended June 30, 2001 when compared to the same periods of the previous year primarily as a result of lower amortization of patents and goodwill and lower sales commissions. We continued to augment our sales and marketing efforts through the hiring of a new sales director and the hiring of new sales account executives. SENTRY TECHNOLOGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Research and development costs were lower when compared to the previous year periods due to a reduction in headcount and our continued concentration on development of the SmartTrack system. Net interest expense for the second quarter and first six months of 2001 decreased due to lower average borrowings under our revolving credit agreement and lower interest rates. Due to net operating losses, we have not provided for income taxes in any of the periods presented. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. The SAB summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in the financial statements. In accordance with SAB 101, we have changed our accounting method for recognizing revenue on the sale of equipment where post-shipment obligations exist. Previously, we recognized revenue for equipment when title transferred, generally upon shipment. Beginning with the first quarter of year 2000, we began recognizing revenue when installation is complete or other post-shipment obligations have been satisfied. The cumulative effect of the change in accounting method is a non-cash reduction in net earnings of $0.3 million, or $0.03 per share. As a result of the foregoing, Sentry had a net loss of $0.9 and $1.6 million in the quarter and six month periods ended June 30, 2001 as compared to a net loss of $1.1 and $2.4 million in the quarter and six month periods ended June 30, 2000. We recorded preferred stock dividends of $25,000 through January 8, 2001 prior to the preferred stock redemption, as compared to $0.3 and $0.7 million in the second quarter and first six months of 2000. Effective January 8, 2001, and just prior to the Dutch A&A investment, there was a payment of a dividend of additional shares of Class A Preferred Stock at the rate of 0.075 shares of Class A Preferred Stock for each share of Class A Preferred Stock held and immediately thereafter a reclassification of the Class A Preferred Stock into common stock at a ratio of five shares of common stock for each share of Class A Preferred Stock outstanding. The reclassification of the Class A Preferred Shares resulted in a return to the common shareholders of $27.2 million, which was recorded in the first quarter of 2001. This amount represents the difference between the fair market value of the common stock issued and the carrying amount of the preferred stock redeemed. Liquidity and Capital Resources as of June 30, 2001 - - ----------------------------------------------------------- The Company has incurred reduced revenue levels, decreased financial position and recurring operating losses over the past several years. To strengthen the Company's financial position, a number of activities have been initiated including: - - - Investment of $3 million in newly issued shares of the Company's common stock by Dutch A&A. The transaction with Dutch A&A will allow the Company to introduce new products, share resources and simplify the Company's capital structure. - - - Improvements in existing products and service capabilities. - - - Various cost cutting and cost saving initiatives. As a result of these activities, the Company anticipates that current cash reserves, cash obtained pursuant to the Dutch A&A transaction, existing lines of credit and cash generated by operations should be sufficient to meet the Company's working capital requirements, as well as future capital expenditure requirements, over the next twelve months. SENTRY TECHNOLOGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On January 8, 2001, Dutch A&A Holding, B.V. ("Dutch A&A) acquired 23,050,452 shares of the Company's common stock for $3 million, of which $1 million was paid in January 2001, $1 million was paid on April 30, 2001 and the remaining balance of $1 million was due on July 31, 2001, which was extended by the Board of Directors to August 31, 2001. Dutch A&A is a Netherlands company which, through its subsidiaries, is in the business of development, manufacture, sale and distribution of various kinds of identification, access control and anti-theft electronic article surveillance systems and accessories. As of January 8, 2001, Dutch A&A owns 37.5% of the outstanding common stock of the Company. At any time prior to January 8, 2002, Dutch A&A may increase its ownership of the Company's common stock to a total of 51% of the shares of common stock then outstanding. If the average market value of the Company's common stock, measured over any 10-day trading period during the one year period following January 8, 2001, is at least $15.0 million, the purchase price for the additional shares shall be determined by multiplying the actual number of shares to be purchased by $.001; otherwise, the purchase price will be $1.5 million. At any time prior to January 8, 2003, Dutch A&A may increase its ownership of the Company's common stock to a total of 60% of the shares of common stock then outstanding. The purchase price for the additional shares shall be determined as follows: If the average market value of the common stock, measured over a 10-day period during the two years preceding January 8, 2003, is at least $25 million, the purchase price shall be determined by multiplying the actual number of shares to be purchased by $.001. If Dutch A&A previously exercised its right to acquire shares increasing its investment to 51% of the Company's common stock, but the average market value test was not met at the time of the second purchase, then the purchase price shall be $3.5 million; otherwise the purchase price shall be $5.0 million. As a condition to the investment by Dutch A&A, the stockholders of the Company elected three nominees of Dutch A&A to the Board of Directors at a Special Meeting of Stockholders on December 8, 2000. If Dutch A&A has not acquired 51% of the Company's common stock by January 8, 2003, one of the three nominees of Dutch A&A will resign and be replaced, with the consent of Dutch A&A, by a nominee of the directors of the Company who are not nominated by Dutch A&A. In addition to the election of three nominees of Dutch A&A to the Board of Directors, other matters which were approved at the December 8, 2000 Special Meeting of Stockholders and became effective on January 8, 2001 were amendments to the Company's certificate of incorporation to: (i) permit the payment of a dividend of additional shares of Class A Preferred Stock at the rate of 0.075 shares of Class A Preferred Stock for each share of Class A Preferred Stock held; (ii) to reclassify Class A Preferred Stock into shares of common stock on a ratio of five shares of common stock for each share of Class A Preferred Stock outstanding; and (iii) to increase the number of the Company's authorized shares of common stock to 140,000,000. Also, on December 28, 2000, the Board of Directors increased the number of directors from five to seven effective upon the closing of the Dutch A&A investment. PART II - OTHER INFORMATION - - ------------------------------- Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits: 10.28 Waiver and Eighth Amendment to the Loan and Security Agreement, dated August 10, 2001, between General Electric Capital Corporation and Knogo North America Inc. (b) Reports on Form 8-K - There were no reports on Form 8-K filed for the three months ended June 30, 2001. SENTRY TECHNOLOGY CORPORATION PART II - SIGNATURES SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SENTRY TECHNOLOGY CORPORATION ------------------------------- Date: August 14, 2001 By: /S/ PETER J. MUNDY ----------------- ---------------------- Peter J. Mundy, Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) EX-10.28 3 doc2.txt WAIVER AND EIGHTH AMENDMENT TO THE LOAN AND SECURITY AGREEMENT -------------------------------------------------------------- Waiver and Eighth Amendment dated as of August 10, 2001 (this "AMENDMENT") to the Loan and Security Agreement, dated as of December 31, 1997 (as amended and modified, the "LOAN AGREEMENT"), among GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation ("LENDER") and KNOGO NORTH AMERICA INC., a Delaware corporation ("BORROWER"), and the other Credit Parties executing this Amendment. WITNESSETH : ---------- WHEREAS, Borrower has requested that Lender waive the defaults arising from the breach of the "Minimum Net Worth" financial covenant for certain dates of determination and amend the terms of certain financial covenants; WHEREAS, Lender is willing to waive such financial covenant defaults and amend the Loan Agreement only on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises, the covenants and agreements contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties do hereby agree that all capitalized terms used herein shall have the meanings ascribed thereto in the Loan Agreement and do hereby further agree as follows: STATEMENT OF TERMS ------------------ 1. WAIVERS. Lender hereby waives the Event of Default arising solely as a -------- result of the breach of the Minimum Net Worth covenant solely for the periods ending December 31, 2000, January 31, 2001, February 28, 2001, March 31, 2001, April 30, 2001 and May 31, 2001. 2. AMENDMENT. Paragraph 2 of Schedule G of the Loan Agreement is amended in --------- its entirety to provide as follows: "Minimum Net Worth. Sentry and its Subsidiaries on a consolidated basis ------------------- shall have a Net Worth of not less than the amounts set forth below as of the dates set forth below:
Fiscal Month Ending Net Worth - - ------------------------------------ ---------- June 30, 2001 $3,200,000 July 31, 2001 $2,700,000 August 31, 2001 $2,700,000 September 30, 2001 and the last $3,200,000 day of each Fiscal Month thereafter"
3. REPRESENTATIONS AND WARRANTIES. To induce Lender to enter into this --------------------------------- Amendment, each Credit Party hereto hereby warrants, represents and covenants to Lender that: (a) each representation and warranty of the Credit Parties set forth in the Loan Agreement is hereby restated and reaffirmed as true and correct on and as of the date hereof after giving affect to this Amendment as if such representation or warranty were made on and as of the date hereof (except to the extent that any such representation or warranty expressly relates to a prior specific date or period in which case it is true and correct as of such prior date or period), and no Default or Event of Default has occurred and is continuing as of this date under the Loan Agreement after giving effect to this Amendment; and (b) each Credit Party hereto has the power and is duly authorized to enter into, deliver and perform this Amendment, and this Amendment is the legal, valid and binding obligation of such Credit Party enforceable against it in accordance with its terms. 4. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT. The ------------------------------------------------------------- effectiveness of this Amendment is subject to the fulfillment of the following conditions precedent: (a) Lender shall have received one or more counterparts of this Amendment duly executed and delivered by the Credit Parties hereto; (b) Any and all guarantors of the Obligations shall have consented to the execution, delivery and performance of this Amendment and all of the transactions contemplated hereby by signing one or more counterparts of this Amendment in the appropriate space indicated below and returning same to Lender; and (c) Borrower shall have paid to Lender an amendment fee in the amount of $5,000 which shall be charged to Borrower's loan account on the date of this Amendment together with all of Lenders legal fees, costs and expenses incurred in connection with the preparation, negotiation, execution and delivery of this Amendment. 5. CONTINUING EFFECT OF LOAN AGREEMENT. Except as expressly set forth --------------------------------------- herein, the provisions of the Loan Agreement, and the Liens granted thereunder, are and shall remain in full force and effect and the waiver set forth herein shall be limited precisely as drafted and shall not constitute a waiver of any other provisions of the Loan Agreement. 6. COUNTERPARTS. This Amendment may be executed in multiple counterparts ------------ each of which shall be deemed to be an original and all of which when taken together shall constitute one and the same instrument. 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN --------------- ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICTS OF LAWS. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year specified at the beginning hereof. KNOGO NORTH AMERICA INC., AS BORROWER By: /s/ Peter J. Mundy --------------------- Name: Peter J. Mundy Title: V.P. - CFO SENTRY TECHNOLOGY CORPORATION, AS CREDIT PARTY By: /s/ Peter J. Mundy --------------------- Name: Peter J. Mundy Title: V.P. - CFO VIDEO SENTRY CORPORATION, AS CREDIT PARTY By: /s/ Peter J. Mundy --------------------- Name: Peter J. Mundy Title: V.P. - CFO KNOGO CARIBE, INC., AS CREDIT PARTY By: /s/ Peter J. Mundy --------------------- Name: Peter J. Mundy Title: V.P. - CFO GENERAL ELECTRIC CAPITAL CORPORATION, AS LENDER By: /s/ Philip F. Carfora ------------------------ Name: Philip F. Carfora Title: Duly Authorized Signatory CONSENT OF GUARANTORS Each of the undersigned guarantors does hereby consent to the execution, delivery and performance of the within and foregoing Amendment and confirms the continuing effect of such guarantor's guarantee of the Obligations after giving effect to the foregoing Amendment. IN WITNESS WHEREOF, each of the undersigned guarantors has executed this Consent to Guarantors as of the day and year first above set forth. GUARANTORS: SENTRY TECHNOLOGY CORPORATION By: /s/ Peter J. Mundy --------------------- Name: Peter J. Mundy Title: V.P. - CFO VIDEO SENTRY CORPORATION By: /s/ Peter J. Mundy --------------------- Name: Peter J. Mundy Title: V.P. - CFO KNOGO CARIBE, INC. By: /s/ Peter J. Mundy --------------------- Name: Peter J. Mundy Title: Treasurer -----END PRIVACY-ENHANCED MESSAGE-----