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 March 31, 2004
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 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.)
1881 Lakeland Avenue, Ronkonkoma, NY 11779
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
631-739-2000
------------
(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 May 12, 2004, there were 115,750,363 shares of Common Stock outstanding.
SENTRY TECHNOLOGY CORPORATION
-----------------------------
INDEX
-----
Page No.
---------
PART I. FINANCIAL INFORMATION
- ---------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
March 31, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Operations --
Three Months Ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows --
Three Months Ended March 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial
Statements -- March 31, 2004 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 13
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION
- ------------------------------
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
- ------
PART I. FINANCIAL INFORMATION
- ---------------------------------
Item 1. Financial Statements (Unaudited)
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2004 2003
----------- --------------
ASSETS
- --------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 181 $ 210
Accounts receivable, less allowance for doubtful
accounts of $312 and $304, respectively . . . . . . . . . 1,763 1,482
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 1,976 1,855
Prepaid expenses and other current assets. . . . . . . . . . 121 126
----------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . 4,041 3,673
PROPERTY, PLANT AND EQUIPMENT, net . . . . . . . . . . . . . . 176 209
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 204 211
----------- --------------
$ 4,421 $ 4,093
=========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------
CURRENT LIABILITIES
Revolving line of credit and term loan . . . . . . . . . . . $ 1,934 $ 1,515
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 728 566
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . 1,525 1,601
Obligations under capital leases - current portion . . . . 5 5
Deferred income. . . . . . . . . . . . . . . . . . . . . . . 226 271
----------- --------------
Total current liabilities. . . . . . . . . . . . . . . . . 4,418 3,958
NOTES PAYABLE. . . . . . . . . . . . . . . . . . . . . . . . . 186 247
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion. . . . . . . . . . . . . . . . . . . . . 12 13
----------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 4,616 4,218
SHAREHOLDERS' EQUITY
Common stock . . . . . . . . . . . . . . . . . . . . . . . . 86 86
Additional paid-in capital . . . . . . . . . . . . . . . . . 44,660 44,658
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (44,941) (44,749)
Note receivable from shareholder --- (120)
----------- --------------
Total shareholders' equity (deficit) . . . . . . . . . . . (195) (125)
----------- --------------
$ 4,421 $ 4,093
=========== ==============
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
March 31,
------------------------------
2004 2003
-------------------- --------
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,946 $ 3,574
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 941 1,652
Customer service expenses . . . . . . . . . . . . . . . . . 1,015 1,121
Selling, general and administrative expenses. . . . . . . . 897 945
Research and development. . . . . . . . . . . . . . . . . . 160 160
-------------------- --------
3,013 3,878
-------------------- --------
OPERATING LOSS. . . . . . . . . . . . . . . . . . . . . . . . (67) (304)
INTEREST AND FINANCING EXPENSES . . . . . . . . . . . . . . . 125 190
-------------------- --------
LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . . (192) (494)
INCOME TAXES --- ---
-------------------- --------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (192) $ (494)
==================== ========
NET LOSS PER SHARE
Basic and diluted . . . . . . . . . . . . . . . . . $ (0.00) $ (0.01)
==================== ========
WEIGHTED AVERAGE SHARES
Basic and diluted . . . . . . . . . . . . . . . . . 85,756 82,259
==================== ========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
----------------------------
2004 2003
-------------------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $ (192) $(494)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 36 103
Provision for bad debts. . . . . . . . . . . . . . . . . 10 13
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . (291) 202
Inventories. . . . . . . . . . . . . . . . . . . . . . . (121) 688
Accounts payable and other liabilities . . . . . . . . . 14 (5)
-------------------- ------
Net cash (used in) provided by operating activities . . . (544) 507
-------------------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net --- (14)
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . (3) (1)
-------------------- ------
Net cash used in investing activities . . . . . . . . . . (3) (15)
-------------------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under the revolving line
of credit and term loan. . . . . . . . . . . . . . . . . 419 (531)
Proceeds of bridge loan 100 ---
Repayment of obligations under capital leases . . . . . . . (1) (31)
Proceeds from sale of stock, net --- 5
-------------------- ------
Net cash provided by (used in) financing activities . . . 518 (557)
-------------------- ------
DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . (29) (65)
CASH AND CASH EQUIVALENTS, at beginning of period . . . . . . 210 266
-------------------- ------
CASH AND CASH EQUIVALENTS, at end of period . . . . . . . . . $ 181 $ 201
==================== ======
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
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-KSB for the fiscal year ended December
31, 2003, 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
- -------------------------------------------------
To address our reduced revenue levels, decreased financial position and
recurring operating losses, our Board of Directors approved a 2003 restructuring
plan to strengthen the Company's operating efficiencies and to better align its
operations with current economic and market conditions. We were successful in
implementing many changes to our business plan during 2003 including the
following:
- - Significantly downsized our operations including the elimination of
approximately 55 of 117 positions as of March 7, 2003.
- - Negotiated a settlement with past due trade vendors.
- - Negotiated with the previous landlord to move out of its Hauppauge
corporate facility and relocated its corporate offices to a smaller
and less costly facility.
- - 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.
The successful implementation of this restructuring has resulted in substantial
gross margin improvements and reductions in operating expenses beginning after
the first quarter of 2003.
As of March 31, 2004, we had borrowings of approximately $1.9 million with CIT,
the maximum amount available under the revolving credit facility. Most of our
trade vendors continue to require cash in advance or COD payments for purchases.
Therefore, we continued to supplement our borrowings under the CIT credit
facility with purchase order financing through EPK Financial Corporation
("EPK"). At March 31, 2004, the amount owed to EPK was approximately $307,000.
NOTE C -- Subsequent Events and Capital Transactions
- -----------------------------------------------------------
Over the last several years, our largest shareholder, Dialoc ID Holdings B.V.
("Dialoc") has not been able to provide us with additional financial support. On
April 19, 2004, Dialoc sold 39,066,927 Sentry common shares (representing
approximately 46% of the total issued and outstanding shares of Sentry) to a
group of investors. Of the group, Saburah Investments Inc. ("Saburah") acquired
22,758,155 shares, Mr. Robert Furst 14,554,386 shares and Dr. Morton Roseman
1,754,386 shares. Mr. Peter Murdoch, President, CEO and Director of Sentry, is
the owner of Saburah. Mr. Furst is also a long-standing member of Sentry's Board
of Directors. As a result of this transaction, Messers Angel and de Nood,
Principals of Dialoc, have resigned from Sentry's Board of Directors.
In addition to the purchase of Sentry's common shares, Saburah also acquired
100% of ID Security Systems Canada, Inc. and ID Systems USA Inc. ("ID Systems").
ID Systems is a Toronto based company engaged in anti-shoplifting technology,
security labeling, radio frequency identification (RFID), access control and
library security. The price paid to Dialoc by Saburah and Murdoch for Sentry
and ID Systems shares in cash, debt assumption and other consideration is
approximately $3.6 million plus the surrender of Murdoch's 15% interest in
Dialoc. Saburah has also agreed to make a payment to Dialoc in the future equal
to approximately 6% of any payment it receives from Checkpoint Systems Inc.
resulting from litigation brought by ID Canada against Checkpoint. ID Canada
has appealed the reduction of the original jury award of $79.2 million and they
are awaiting the decision of the Court of Appeals.
On April 30, 2004, Sentry entered into a $2,000,000 secured convertible
debenture with Brascan Technology Fund ("Brascan"), an alternative investment
fund established by Brascan Asset Management, to invest in early stage,
technology-based companies with high growth potential. The proceeds of the
financing will be used primarily for working capital.
Key terms of the transaction are as follows:
- - Four year term.
- - Interest rate of 8%.
- - Redeemable at Sentry's option after 18 months.
- - Conversion price equal to the market price, at time of conversion, less a
discount of 30% with a maximum conversion price of $0.12 per
share.
- - Conversion is at the option of Brascan when market share price is equal to
or greater than $0.17 per share or with the approval of Sentry's
Board of Directors when the market share price is less than
$0.17 per share.
- - Sentry will provide most favored pricing to all Brascan affiliates and
expects to be a supplier of security and identification products to the
Brascan affiliates.
- - Brascan was issued warrants for 5,000,000 shares of Sentry common stock,
priced at $0.15 per share, exercisable anytime within the next four
years.
- - Brascan is entitled to one seat on Sentry's Board of Directors.
As a condition of the financing, Sentry also acquired ID Security Systems Canada
Inc. ("ID Canada") and ID Systems USA Inc., collectively referred to as "ID
Systems."
Sentry's Board of Directors and shareholders owning a majority of Sentry common
stock approved the transaction with Brascan and the acquisition of ID Systems.
Simultaneously with the Brascan financing, Sentry acquired ID Systems from
Saburah in exchange for 30,000,000 Sentry common shares. The price paid per
Sentry share has been valued at approximately $0.12. An opinion has been
provided to a special committee of Sentry's Board of Directors by Corporate
Valuation Services confirming that both the price paid for the acquisition of ID
Systems and the agreed conversion price of the Brascan debt were fair from the
point of view of Sentry shareholders. Although Sentry will not obtain an
interest in the Checkpoint Systems litigation, Saburah and Sentry have agreed
that Sentry may require Saburah to purchase additional Sentry shares equal to
approximately 4.5% of any amount received by Saburah from the Checkpoint
litigation, to a maximum of $1,000,000. The price per share has been set at 80%
of the previous 20 days trading average if and when the call is made. This
transaction represents the maximum future benefit that may flow to Sentry and ID
Systems as a result of the Checkpoint lawsuit.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
Other benefits flowing to Sentry/ID Systems via the purchase of ID Systems are
as follows:
- - ID Systems and Sentry continue as the exclusive distributor in North and
South America for a period of five years for all Dialoc products including
Laserfuse radio frequency security labels and all RFID products.
- - Dialoc becomes the exclusive distributor in Europe and Asia of labels
manufactured by ID Systems' security label manufacturing subsidiary, Custom
Security Industries Inc. ("CSI").
- - CSI acquires the right to purchase Laserfuse raw material for processing
into finished security labels in its Toronto plant in order to reduce the cost
of production.
- - CSI acquires the option to purchase a non-exclusive license to manufacture
complete Laserfuse security labels for a period of 10 years subject to the
payment of $500,000 and a running royalty of $0.001 per label.
- - Dialoc will continue to be a dealer for Sentry products in Europe and
Asia.
After the acquisition of ID Systems, Sentry has 115,750,363 shares of common
stock outstanding. Mr. Murdoch, directly or indirectly through his ownership of
Saburah, now owns or controls 47.4% of the outstanding common stock of Sentry.
We 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. We had no material
capital expenditure or purchase commitments as of March 31, 2004. We anticipate
that current cash reserves, cash generated by the operations of Sentry and its
new ID Systems subsidiaries and the financing provided by the Brascan
transaction will be adequate to finance the Company's anticipated working
capital requirements as well as future capital expenditure requirements for at
least the next twelve months.
NOTE D -- Inventories
- ------------------------
Inventories consist of the following:
March 31, 2004 December 31, 2003
---------------- -------------------
(in thousands)
Raw materials $ 486 $ 449
Work-in-process 356 283
Finished goods 1,134 1,123
----- -----
$ 1,976 $ 1,855
= ===== = =====
Reserves for excess and obsolete inventory totaled $2,046,000 and $2,148,000 as
of March 31, 2004 and December 31, 2003, 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. Purchases from Dialoc ID were $35,000 and $1,000 in the quarters
ended March 31, 2004 and March 31, 2003, respectively. Services and sales to
Dialoc ID were $16,000 and $4,000 in the quarters ended March 31, 2004 and 2003,
respectively. The net amount payable to Dialoc ID as of March 31, 2004 was
$12,000.
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 was
secured by the option shares and was repayable no later than January 8, 2006.
The note bore interest at prime less .75%. Mr. Murdoch satisfied the note
and accrued interest as of March 31, 2004. The note had been reflected as a
reduction of shareholders' equity on the balance sheet as of December 31, 2003.
On January 22, 2004, Robert Furst, a Sentry Director, made a bridge loan to the
Company in the amount of $100,000. The loan bears interest at a rate of 15% per
annum and was due on or before April 30, 2004. As additional consideration for
the loan, Mr. Furst received a warrant to purchase 300,000 shares of Sentry
common stock at a price of $0.17 per share, which was the market price on the
date of grant (valued at $3,000). The warrant expires January 21, 2009. The
note, which is included in accrued liabilities at March 31, 2004, was repaid in
full on April 30, 2004.
NOTE F -- Earnings Per Share
- ---------------------------------
The earnings per share calculations (basic and diluted) at March 31, 2004 and
2003 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 1,581,924 and 1,653,884 shares of common stock
with a weighted average exercise price of $0.57 were outstanding at March 31,
2004 and 2003, but were not included in the computation of diluted net loss per
share because their effect would be antidilutive.
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure
of pro forma net income and earnings per share had the Company adopted the fair
value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock options
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. No options were granted in 2004 or 2003. The weighted
average fair value of the options granted for the year ended December 31, 2001
is estimated at $0.05, using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life of five years; stock
volatility, 147% in 2001; risk free interest rates, 4.8% in 2001, and no
dividends during the expected term. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they occur.
If the computed fair values of the post 1995 awards had been amortized to
expense over the vesting period of the awards, pro forma net income attributed
to common shareholders would have been as follows:
2004 2003
---- ----
(In Thousands, Except Per Share Amounts)
Net loss:
As reported $ (192) $ (494)
Pro forma (198) (513)
Net loss per share:
As reported $ - $ (0.01)
Pro forma $ - $ (0.01)
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-KSB. 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 18% lower in the quarter ended March 31, 2004 than in
the quarter ended March 31, 2003. 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
backlog of orders, which we expect to deliver within the next twelve months,
decreased to $3 million at March 31, 2004 as compared to $3.6 million at March
31, 2003. Total revenues for the periods presented are broken out as follows:
Q-1 Q-1 % Change
2004 2003 Incr (Decr)
---- ---- -----------
(in thousands)
EAS $ 448 $ 425 5
CCTV 599 1,477 (59)
SentryVision 735 373 97
Access Control 36 - 100
3M library products - 45 (100)
------- ------- -------
Total sales 1,818 2,320 (22)
Service revenues and other 1,128 1,254 (10)
------- ------- -------
Total revenues $ 2,946 $ 3,574 (18)
======= ======= =======
Direct sales of EAS products were slightly higher in the first quarter of 2004
as compared to the same period in the prior year as a result higher sales of
reusable tags. The decrease in CCTV sales is a result of lower sales to two
customers. We had sales of $0.5 million to Home Depot in the first quarter of
2003, which did not repeat in 2004 and we lost $0.5 million in revenues in 2004
from a significant customer that decided to source directly their purchases from
the CCTV manufacturers this year. Direct sales of SentryVision increased in
2004, including sales to Target, Reno Depot and Lane Limited. Sales to our
largest customer, Lowe's Home Centers, for our SentryVision Smart Track systems
and CCTV equipment in the first quarter of 2004 was approximately the same as in
the in the first quarter of 2003. 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 the first quarter primarily as a result of lower installation revenue than in
the first quarter of 2004.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cost of sales were 52% of total sales in the three month period ended March 31,
2004 compared to 71% in the same period 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
first quarter of 2004 is primarily the 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.
Customer service expenses, as a percentage of service revenues, increased 1% in
the first quarter of 2004 as compared to the first quarter of 2003. Through a
combination of a decrease in the number of customer service employees and
increased use of outside service contractor costs, we continue to be able to
lower total net customer service costs to compensate for the lower revenue
levels in the first three months of 2004.
Selling, general and administrative expenses were 12% lower in the three month
period ended March 31, 2004 when compared to the same period of the previous
year primarily as a result of lower facility costs and payroll costs partly as a
result of the headcount reduction as of March 7, 2003.
In dollar terms, we dedicated the same amount to research and development in the
first quarter of 2004 when compared to the first quarter of 2003, however it
increased as a percentage of revenues.
Total interest and financing costs decreased in the first quarter of 2004,
principally as a result of lower capital lease interest due to the cancellation
of the sale and leaseback agreement on our former headquarters facility.
Due to net operating losses, we have not provided for income taxes in any of the
periods of presented.
As a result of the foregoing, Sentry had a net loss of $0.2 million in the
quarter ended March 31, 2004 as compared to a net loss of $0.5 million in the
quarter ended March 31, 2003.
Liquidity and Capital Resources as of March 31, 2004
- ------------------------------------------------------------
To address our reduced revenue levels, decreased financial position and
recurring operating losses, our Board of Directors approved a 2003 restructuring
plan to strengthen the Company's operating efficiencies and to better align its
operations with current economic and market conditions. We were successful in
implementing many changes to our business plan during 2003 including the
following:
- - Significantly downsized our operations including the elimination of
approximately 55 of 117 positions as of March 7, 2003.
- - Negotiated a settlement with past due trade vendors.
- - Negotiated with the previous landlord to move out of its Hauppauge
corporate facility and relocated its corporate offices to a smaller
and less costly facility.
- - 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.
The successful implementation of this restructuring has resulted in substantial
gross margin improvements and reductions in operating expenses beginning after
the first quarter of 2003.
As of March 31, 2004, we had borrowings of approximately $1.9 million with CIT,
the maximum amount available under the revolving credit facility. Most of our
trade vendors continue to require cash in advance or COD payments for purchases.
Therefore, we continued to supplement our borrowings under the CIT credit
facility with purchase order financing through EPK Financial Corporation
("EPK"). Funding entails EPK providing funds directly to vendors to allow the
Company to secure the inventory needed to fulfill customer orders. Our costs for
each financing transaction has ranged from to 2.75% to 2% of Sentry's selling
price, plus 1.85% on the maximum outstanding funded amount each ten calendar
days or portion thereof, until EPK is paid in full, plus expenses. In connection
with this facility, an Intercreditor Agreement was entered into between EPK, the
CIT Group/Business Credit, Inc. ("CIT"), with whom we have a revolving line of
credit, and Sentry. Under this agreement, CIT subordinated its rights and
interests in the collateral related to each transaction to EPK. Currently, under
the terms of the Intercreditors Agreement, the maximum amount subordinated to
EPK at any time is limited to $650,000. During the first quarter of 2004, we
funded $0.7 million in inventory purchases under this facility as compared to
$0.3 million in the first quarter of 2003. Sentry uses the funds provided by EPK
to fund vendor purchases to complete orders currently in backlog. At March 31,
2004, the amount owed to EPK was approximately $307,000.
Over the last several years, our largest shareholder, Dialoc ID Holdings B.V.
("Dialoc") has not been able to provide us with additional financial support.
On April 19, 2004, Dialoc sold 39,066,927 Sentry common shares (representing
approximately 46% of the total issued and outstanding shares of Sentry) to a
group of investors. Of the group, Saburah Investments Inc. ("Saburah") acquired
22,758,155 shares, Mr. Robert Furst 14,554,386 shares and Dr. Morton Roseman
1,754,386 shares. Peter L. Murdoch, President, CEO and Director of Sentry, is
the owner of Saburah. Mr. Furst is also a long-standing member of Sentry's
Board of Directors. As a result of this transaction, Messers Angel and de Nood,
Principals of Dialoc, have resigned from Sentry's Board of Directors.
In addition to the purchase of Sentry's common shares, Saburah also acquired
100% of ID Security Systems Canada, Inc. and ID Systems USA Inc. ("ID Systems").
ID Systems is a Toronto based company engaged in anti-shoplifting technology,
security labeling, radio frequency identification (RFID), access control and
library security. The price paid to Dialoc by Saburah and Murdoch for Sentry
and ID Systems shares in cash, debt assumption and other consideration is
approximately $3.6 million plus the surrender of Murdoch's 15% interest in
Dialoc. Saburah has also agreed to make a payment to Dialoc in the future equal
to approximately 6% of any payment it receives from Checkpoint Systems Inc.
resulting from litigation brought by ID Canada against Checkpoint. ID Canada
has appealed the reduction of the original jury award of $79.2 million and they
are awaiting the decision of the Court of Appeals.
We continued to pursue additional debt or equity financing through our financial
advisors and on April 30, 2004, Sentry entered into a $2,000,000 secured
convertible debenture with Brascan Technology Fund ("Brascan"), an alternative
investment fund established by Brascan Asset Management, to invest in early
stage, technology-based companies with high growth potential. The proceeds of
the financing will be used primarily for working capital.
Key terms of the transaction are as follows:
- - Four year term.
- - Interest rate of 8%.
- - Redeemable at Sentry's option after 18 months.
- - Conversion price equal to the market price, at time of conversion, less a
discount of 30% with a maximum conversion price of $0.12 per
share.
- - Conversion is at the option of Brascan when market share price is equal to
or greater than $0.17 per share or with the approval of Sentry's
Board of Directors when the market share price is less than
$0.17 per share.
- - Sentry will provide most favored pricing to all Brascan affiliates and
expects to be a supplier of security and identification products to the
Brascan affiliates.
- - Brascan was issued warrants for 5,000,000 shares of Sentry common stock,
priced at $0.15 per share, exercisable anytime within the next four
years.
- - Brascan is entitled to one seat on Sentry's Board of Directors.
As a condition of the financing, Sentry also acquired ID Security Systems Canada
Inc. ("ID Canada") and ID Systems USA Inc., collectively referred to as "ID
Systems."
Sentry's Board of Directors and shareholders owning a majority of Sentry common
stock approved the transaction with Brascan and the acquisition of ID Systems.
Simultaneously with the Brascan financing, Sentry acquired ID Systems from
Saburah in exchange for 30,000,000 Sentry common shares. The price paid per
Sentry share has been valued at approximately $0.12. An opinion has been
provided to a special committee of Sentry's Board of Directors by Corporate
Valuation Services confirming that both the price paid for the acquisition of ID
Systems and the agreed conversion price of the Brascan debt were fair from the
point of view of Sentry shareholders. Although Sentry will not obtain an
interest in the Checkpoint Systems litigation, Saburah and Sentry have agreed
that Sentry may require Saburah to purchase additional Sentry shares equal to
approximately 4.5% of any amount received by Saburah from the Checkpoint
litigation, to a maximum of $1,000,000.
Other benefits flowing to Sentry/ID Systems via the purchase of ID Systems are
as follows:
- - ID Systems and Sentry continue as the exclusive distributor in North and
South America for a period of five years for all Dialoc products
including Laserfuse radio frequency security labels and all RFID
products.
- - Dialoc becomes the exclusive distributor in Europe and Asia of labels
manufactured by ID Systems' security label manufacturing subsidiary,
Custom Security Industries Inc. ("CSI").
- - CSI acquires the right to purchase Laserfuse raw material for processing
into finished security labels in its Toronto plant in order to reduce
the cost of production.
- - CSI acquires the option to purchase a non-exclusive license to manufacture
complete Laserfuse security labels for a period of 10 years subject
to the payment of $500,000 and a running royalty of $0.001 per
label.
- - Dialoc will continue to be a dealer for Sentry products in Europe and
Asia.
ID Systems will add new products and growth opportunities with approximately
$6.5 million in revenues, $4.5 million in assets and $700,000 in EBITDA based
upon 2003 performance. ID Systems' management including Dr. Roseman, President
of CSI, and Mr. Murdoch invested $100,000 each to complete the proposed
transaction between Saburah and Dialoc. Mr. Furst invested $900,000 of equity
in the combined transaction. Mr. Robert Furst is a long-standing member of
Sentry's Board of Directors. On completion of these transactions and prior to
Brascan's conversion of the proposed $2,000,000 debt transaction, Mr. Murdoch,
directly or indirectly through his ownership of Saburah, will own or control
47.4% of the outstanding common stock of Sentry.
We delayed the first payment due on the notes due to the vendors that we
negotiated settlements with last year until we obtained the Brascan financing.
On May 7, 2004, we paid approximately $37,000 to the holders of these notes.
We 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. We had no material
capital expenditure or purchase commitments as of March 31, 2004. We anticipate
that current cash reserves, cash generated by the operations of Sentry and its
new ID Systems subsidiaries and the financing provided by the Brascan
transaction will be adequate to finance the Company's anticipated working
capital requirements as well as future capital expenditure requirements for at
least the next twelve months. As a result of the financing, Sentry will no
longer need to use the expensive purchase order financing provided by EPK in
order to finance inventory purchases. As well, by agreement with CIT, the
previous monthly costs for outside management consultants will also be
eliminated as of May 2004. During the past 12 months purchase order financing
costs were $414,000 and management consultant fees were $124,000.
Related Party Transactions
- ----------------------------
Details of related party transactions are included in Note E of this Form
10-QSB.
SENTRY TECHNOLOGY CORPORATION
Item 3. Controls and Procedures
As of the end of the period covered by this report, Sentry Technology
Corporation carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information related to the Company that is
required to be included in Sentry Technology Corporation's periodic SEC filings.
There has been no change in the Company's internal control over financial
reporting during the period covered by this report that has materially affected,
or is reasonable likely to materially affect, the Company's internal control
over financial reporting.
Item 5. Other Information.
See Note C to the condensed consolidated financial statements.
PART II - OTHER INFORMATION
- -------------------------------
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 - Certification by the Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 - Certification by the Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 - Certification by the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.***
32.2 - Certification by the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.***
*** In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit
shall not be deemed "filed" for the purposes of Section 18 of the Securities and
Exchange Act of 1934 or otherwise subject to the liability of that section, nor
shall it be deemed incorporated by reference in any filing under the Securities
Act of 1933 or the Securities Exchange Act of 1934.
(b) Reports on Form 8-K - On February 27, 2004, we filed a Current
Report on Form 8-K disclosing the financial results of the quarter and year
ending December 31, 2003.
On March 10, 2004, we filed a Current Report on Form 8-K disclosing
the signing of a term sheet with a major North American Venture fund to raise $2
million in secured convertible debt and to acquire ID Systems.
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: May 14, 2004 By: /S/ PETER J. MUNDY
-------------- ----------------------------------
Peter J. Mundy, Vice President
Finance and Chief Financial Officer
(Principal Financial and
Accounting Officer)
SECTION 302 CERTIFICATION:
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CEO
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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we 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 and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer 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
function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; 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
over financial reporting.
/s/ PETER L. MURDOCH
-------------------------------------------------
Peter L. Murdoch
President and Chief Executive Officer
May 14, 2004
SECTION 302 CERTIFICATION:
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CFO
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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we 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 and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer 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
function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; 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
over financial reporting.
/s/ PETER J. MUNDY
-------------------------------------------------
Peter J. Mundy
Vice President and Chief Financial Officer
May 14, 2004
SECTION 906 CERTIFICATION:
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certification of CEO
In connection with the Quarterly Report of Sentry Technology Corporation (the
"Company") on Form 10-QSB for the period ended March 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the Report"), I, Peter L.
Murdoch, Chief Executive Officer of the Company, certify, pursuant to Section 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) and
15(d) 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
May 14, 2004
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission
or its staff upon request.
This certification accompanies this Report on Form 10-QSB pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by such Act, be deemed filed by the Company for purposes of Section 18
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
certification will not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Exchange Act, except to the
extent that the Company specifically incorporates it by reference.
SECTION 906 CERTIFICATION:
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certification of CFO
In connection with the Quarterly Report of Sentry Technology Corporation (the
"Company") on Form 10-QSB for the period ended March 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the Report"), I, Peter J.
Mundy, Chief Financial Officer of the Company, certify, pursuant to Section 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) and
15(d) 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
May 14, 2004
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission
or its staff upon request.
This certification accompanies this Report on Form 10-QSB pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by such Act, be deemed filed by the Company for purposes of Section 18
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
certification will not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Exchange Act, except to the
extent that the Company specifically incorporates it by reference.