FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 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
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SENTRY TECHNOLOGY CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 96-11-3349733
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
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 August 16, 2004, there were 115,753,362 shares of Common Stock
outstanding.
SENTRY TECHNOLOGY CORPORATION
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INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
June 30, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Operations --
Three Months Ended June 30, 2004 and 2003
And Six Months Ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial
Statements - June 30, 2004 6 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 15
Item 3. Controls and Procedures 15
PART II. OTHER INFORMATION
- ------------------------------
Item 1. Legal Proceedings 15 - 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
PART I. FINANCIAL INFORMATION
- ---------------------------------
Item 1. Financial Statements (Unaudited)
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2004 2003
---------- --------------
ASSETS
- ------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . $ 1,339 $ 210
Accounts receivable, less allowance for doubtful
accounts of $407 and $304, respectively . . . . . 3,519 1,482
Inventories. . . . . . . . . . . . . . . . . . . . . 3,170 1,855
Prepaid expenses and other current assets. . . . . . 1,039 126
---------- --------------
Total current assets . . . . . . . . . . . . . . . 9,067 3,673
PROPERTY, PLANT AND EQUIPMENT, net . . . . . . . . . . 613 209
GOODWILL 1,588 ---
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . 413 211
---------- --------------
$ 11,681 $ 4,093
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------
CURRENT LIABILITIES
Revolving line of credit and term loan . . . . . . . $ 2,831 $ 1,515
Accounts payable . . . . . . . . . . . . . . . . . . 988 566
Accrued liabilities. . . . . . . . . . . . . . . . . 1,285 1,601
Obligations under capital leases - current portion . 5 5
Deferred income. . . . . . . . . . . . . . . . . . . 185 271
---------- --------------
Total current liabilities. . . . . . . . . . . . . 5,294 3,958
NOTES PAYABLE. . . . . . . . . . . . . . . . . . . . . 276 247
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion. . . . . . . . . . . . . . . . . 10 13
CONVERTIBLE DEBENTURES 1,842 ---
MINORITY INTEREST 890 ---
---------- --------------
Total liabilities. . . . . . . . . . . . . . . . . 8,312 4,218
SHAREHOLDERS' EQUITY
Common stock . . . . . . . . . . . . . . . . . . . . 116 86
Additional paid-in capital . . . . . . . . . . . . . 48,144 44,658
Accumulated deficit. . . . . . . . . . . . . . . . . (44,929) (44,749)
Note receivable from shareholder --- (120)
Equity adjustment from foreign currency translation 38 ---
---------- --------------
Total shareholders' equity (deficit) . . . . . . . 3,369 (125)
---------- --------------
$ 11,681 $ 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 Six Months Ended
June 30, June 30,
----------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,241 2,326 $ 7,187 $ 5,900
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 1,682 837 2,623 2,489
Customer service expenses. . . . . . . . . . . . . . . . . . 1,105 697 2,120 1,818
Selling, general and administrative expenses . . . . . . . . 1,154 805 2,051 1,750
Research and development . . . . . . . . . . . . . . . . . . 180 175 340 335
-------- -------- -------- --------
4,121 2,514 7,134 6,392
--------- -------- -------- --------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . . . . . . . 120 (188) 53 (492)
INTEREST AND FINANCING EXPENSES. . . . . . . . . . . . . . . . 79 152 204 342
--------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES. . . . . . . . . . . . . . . 41 (340) (151) (834)
INCOME TAX EXPENSE (BENEFIT) . . . . . . . . . . . . . . . . . 15 (348) 15 (348)
--------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . 26 8 (166) (486)
MINORITY INTEREST (14) --- (14) ---
--------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. . . . . . . . . . . . 12 8 (180) (486)
EXTRAORDINARY ITEM - Gain on extinguishment
of debt, net of $348 income taxes --- 522 --- 522
--------- -------- -------- --------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . $ 12 530 $ (180) $ 36
========= ======== ======== ========
NET INCOME (LOSS) PER SHARE
Income (loss) before extraordinary item. . . . . . . . . . . . $ 0.00 0.00 $ (0.00) $ (0.01)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . 0.00 0.01 0.00 0.01
--------- -------- -------- --------
Basic and diluted. . . . . . . . . . . . . . . . . . . . . . $ 0.00 0.01 $ (0.00) $ 0.00
========= ======== ======== ========
WEIGHTED AVERAGE SHARES
Basic and diluted. . . . . . . . . . . . . . . . . . . . . . 105,862 82,943 95,809 82,601
========= ======== ======== ========
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
------------------
2004 2003
----------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
- ----------------------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . $ (180) $ 36
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 89 200
Provision for bad debts . . . . . . . . . . . . . . . . . . 20 25
Non-cash consideration 53 ---
Minority interest in net income of consolidated subsidiary 14 ---
Extraordinary gain on extinguishment of debt --- (870)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . (524) 513
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (31) 940
Accounts payable and other current assets and liabilities . (515) (162)
---------- ------
Net cash (used in) provided by operating activities. . . . . (1,074) 682
----------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net . . . . . . . . (9) (12)
Intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . (185) (12)
Net cash provided by the acquisition of ID Systems 82 ---
----------- ------
Net cash used in investing activities. . . . . . . . . . . . (112) (24)
----------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under the revolving line
of credit and term loan . . . . . . . . . . . . . . . . . . 318 (770)
Proceeds from bridge loan 100 ---
Repayment of bridge loan (100) ---
Proceeds from convertible debentures and warrants 2,000 ---
Repayment of obligations under capital leases. . . . . . . . . (3) (52)
Proceeds from sale of stock, net --- 5
----------- ------
Net cash provided by (used in) financing activities. . . . . 2,315 (817)
----------- ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . 1,129 (159)
CASH AND CASH EQUIVALENTS, at beginning of period. . . . . . . . 210 266
----------- ------
CASH AND CASH EQUIVALENTS, at end of period. . . . . . . . . . . $ 1,339 $ 107
=========== ======
See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE A -- Basis of Presentation
- ------------------------------------
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 -- Capital Transactions and ID Systems Acquisition
- -----------------------------------------------------------------
Over the last several years, our largest shareholder, Dialoc ID Holdings B.V.
("Dialoc") was not 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, 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").
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. ("Checkpoint") resulting from
litigation brought by ID Canada against Checkpoint.
On April 30, 2004, Sentry purchased from Saburah Investments, Inc., an Ontario
corporation, all of the outstanding common shares and Series "A" preference
shares of ID Security Systems Canada Inc., an Ontario corporation, and all of
the outstanding capital stock of ID Systems USA, Inc., a Pennsylvania
corporation (collectively, "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. Sentry acquired ID
Systems from Saburah in exchange for 30,000,000 Sentry common shares. The price
paid per Sentry share for the securities of ID Systems was valued at
approximately $0.11. A special committee of Sentry's Board of Directors received
an opinion from Corporate Valuation Services confirming that the price paid for
the acquisition of ID Systems was fair from the point of view of Sentry
shareholders. As part of the purchase agreement, the proceeds of the ID Systems
litigation settlement will be distributed to the former ID Systems shareholders.
However Saburah and Sentry have agreed that Sentry may require Saburah to
purchase additional Sentry common shares under certain circumstances. Sentry's
Board of Directors and shareholders owning a majority of Sentry common stock
approved the acquisition of ID Systems.
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.
The purchase price of the ID Systems acquisition was as follows:
(in thousands)
Value of Sentry Technology Corporation common stock $ 3,300
Transaction costs 68
-----------
Total purchase price $ 3,368
===========
Under the purchase method of accounting, the total purchase price as detailed
above was allocated to ID System's net tangible assets and intangible assets
based on their preliminary fair values as of April 30, 2004, which are as
follows:
(in thousands)
Cash $ 150
Accounts receivable 1,511
Inventories 1,264
Prepaid expenses and other current assets 831
Property and equipment 470
Deferred charges 15
Bank debt (998)
Accounts payable and accrued liabilities (540)
Other liabilities (923)
---------
Net tangible assets 1,780
Goodwill 1,588
---------
Total purchase price $ 3,368
=========
The Company is still in the process of obtaining final support for the
valuations of certain intangible assets; accordingly allocation of the purchase
price is subject to modification in the future. Any such modification is not
expected to be significant. On an ongoing basis, Sentry will evaluate the
carrying value versus the discounted cash benefit expected to be realized from
the performance of the underlying operations and adjust for any impairment in
value.
The Company is still in the process of obtaining final support for the
valuations of certain intangible assets; accordingly allocation of the purchase
price is subject to modification in the future. Any such modification is not
expected to be significant. On an ongoing basis, Sentry will evaluate the
carrying value versus the discounted cash benefit expected to be realized from
the performance of the underlying operations and adjust for any impairment in
value.
Our condensed consolidated statements of operations include the revenues and
expenses of ID Systems from May 1, 2004.
The following supplemental pro forma information is presented to illustrate the
effects of the acquisition on the historical operating results for the three
month and six month periods ended June 30, 2004 and 2003 as if the acquisition
had occurred at the beginning of each respective period:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------- --------- ------- -------
(in thousands, except per share data)
Revenues. . . . . . . . . . . . . . . . . . . . . . . $ 4,880 $ 3,784 $ 9,066 $ 8,629
Income (loss) before extraordinary item . . . . . . . $ 14 $ 25* $ (103) $ (439)*
Net income (loss) . . . . . . . . . . . . . . . . . . $ 14 $ 547* $ (103) $ 83*
Net income (loss) per share . . . . . . . . . . . . . $ (0.00) $ 0.00 $ (0.00) $ 0.00
*The income (loss) before extraordinary item in the three and six months ended
June 30, 2004 includes an income tax benefit of $348 resulting from the
utilization of net operating loss carryforwards. Net income in the 2003 periods
includes both the $348 tax benefit and the $522 extraordinary gain from the
extinguishment of debt.
NOTE C -- Convertible Debenture
- -----------------------------------
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.
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 or will
participate as an observer.
The Debenture is secured by a general security interest over all the assets and
properties of Sentry. The amount is subordinate to the existing CIT and Bank of
Montreal credit facilities.
The proceeds of the financing, to be used primarily for working capital, were
allocated between the debenture ($1,835,000) and the warrants ($165,000) based
on their respective fair values in accordance with EITF 00-27 (Application of
Issue 98-5 to Certain Convertible Instruments). The difference between the face
value of the debenture and the allocated value will be charged to interest and
financing expenses over the term of the debenture.
Certain other warrants to purchase 425,000 shares of Sentry common stock at
exercise prices ranging from $0.18 to $0.20 per share were issued in conjunction
with the convertible debenture. The warrants are exercisable over one to three
years. The fair value of these warrants ($49,000) will be charged to operations
over the life of the warrants.
As a condition of the financing, Sentry also acquired ID Systems.
Sentry's Board of Directors and shareholders owning a majority of Sentry common
stock approved the transaction with Brascan.
Sentry requires 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 June 30, 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 and sale of stock to Saburah 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:
June 30, 2004 December 31, 2003
--------------- -------------------
(in thousands)
Raw materials $ 831 $ 449
Work-in-process 392 283
Finished goods 2,052 1,123
----- -----
$ 3,275 $ 1,855
========= =========
Reserves for excess and obsolete inventory totaled $2,111,000 and $2,148,000 as
of June 30, 2004 and December 31, 2003, respectively and have been included as a
component of the above amounts.
NOTE E -- Credit Facilities
- -------------------------------
On April 30, 2004, Sentry's subsidiary, ID Security Systems Canada Inc., entered
into credit facilities with Bank of Montreal, replacing its former credit
facility. Facility 1 is a Canadian $1.5 million (U.S. $1.1 million) Overdraft
Lending Facility, which is subject to certain limitations based on a percentage
of eligible accounts receivable and inventories as defined in the agreement.
Interest on the overdraft facility is payable monthly at the Bank of Montreal
commercial prime lending rate (3.75% at June 30, 2004), plus 1% per annum.
Facility 2 is a Canadian $250,000 (U.S. $187,000) Non-Revolving Demand Credit
facility incurred to refinance an existing term loan with a previous lender.
Principal payments of Canadian $6,945 plus interest are payable monthly in
arrears. Borrowings under these facilities are secured by the assets of ID
Systems. At June 30, 2004, approximately U.S. $974,000 was outstanding under
the Bank of Montreal facilities.
NOTE F -- Related Party Transactions
- -----------------------------------------
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 interest rate on the loan was 15% per
annum and the loan 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 was repaid in full on April 30, 2004.
NOTE G -- Earnings Per Share
- ---------------------------------
The earnings per share calculations (basic and diluted) at June 30, 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 1,499,948 and 1,615,912 shares of common stock
with a weighted average exercise price of $0.59 and $0.57 were outstanding at
June 30, 2004 and 2003, but were not included in the computation of diluted net
loss per share because their effect would be antidilutive or immaterial.
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:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------- -------- ------- -------
(in thousands, except per share data)
Net income (loss):
As reported. . . . . . . . . . . . . . . . . . . $ 12 $ 530 $ (180) $ 36
Pro forma. . . . . . . . . . . . . . . . . . . . $ 9 $ 512 $ (189) $ -
Net income (loss) per share:
As reported. . . . . . . . . . . . . . . . . . . $ 0.00 $ 0.01 $(0.00) $0.00
Pro forma. . . . . . . . . . . . . . . . . . . . $ 0.00 $ 0.01 $(0.00) $0.00
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model. No options were granted in the three or
six-month periods ended June 30, 2004 or 2003.
NOTE H -- Subsequent Event
- ------------------------------
On August 1, 2004, ID Systems and Checkpoint entered into a settlement agreement
effective July 30, 2004, pursuant to which Checkpoint agreed to pay $19.95
million, in full and final settlement of claims covered by antitrust litigation.
Payment in full was received on August 5, 2004. As provided when Sentry
purchased ID Systems, the proceeds of the settlement will be distributed to
former shareholders of ID Systems, after payment of litigation fees and
expenses. The agreement includes mutual releases between the parties for
complaints arising from activities prior to the date of the agreement, except
for any contractual obligations and any future claims for patent, copyright or
trademark infringement. The agreement is not an acknowledgement of any
wrongdoing or liability by either party. A Stipulation of Dismissal has been
filed with the Third Circuit Court of Appeals to finally conclude the legal
proceedings.
While Sentry did not obtain an interest in the litigation settlement, Saburah
and Sentry have agreed that Sentry may require Saburah to purchase additional
Sentry common shares equal to approximately 4.5% of any amount received (net of
legal fees and expenses) from Checkpoint. The price per share has been set at
80% of the previous 20 days trading average prior to the announcement of the
settlement. Sentry's Board of Directors has exercised this option and based on
the settlement amount, will sell to Saburah approximately 4.8 million shares for
approximately $640,000. Sentry and its subsidiaries also expects to receive an
additional $760,000 through the repayment of debt incurred by Dialoc prior to
the ID Systems acquisition and the reimbursement for litigation expenses, which
are recorded as assets on the balance sheet as of June 30, 2004. These
transactions, totaling $1.4 million, represent the total cash flowing to Sentry
directly and indirectly as a result of the Checkpoint lawsuit.
After the acquisition of ID Systems and sale of additional shares as a result of
the litigation settlement, Sentry will have 120,559,724 shares of common stock
outstanding. Mr. Murdoch, directly or indirectly through his ownership of
Saburah, will own or control 49.5% of the outstanding common stock of Sentry.
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:
- ------------------------
On April 30, 2004, Sentry purchased from Saburah Investments, Inc. all of the
outstanding common shares and Series "A" preference shares of ID Security
Systems Canada Inc., and all of the outstanding capital stock of ID Systems USA,
Inc. (collectively, "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. Our condensed
consolidated statements of operations include the revenues and expenses of ID
Systems from May 1, 2004.
Consolidated revenues were 82% and 22% higher in the quarter and six month
period ended June 30, 2004 than in the quarter and six month period ended June
30, 2003. ID Systems revenues for the two months ended June 30, 2004 were $0.9
million. Our backlog of orders, which we expect to deliver within the next
twelve months, increased to $4.1 million at June 30, 2004 as compared to $3.4
million at June 30, 2003. Total revenues for the periods presented are broken
out as follows:
Q-2 Q-2 % 6 Mos. 6 Mos. %
2004 2003 Change 2004 2003 Change
------- ------ ------ ------- ------ -------
(in thousands) (in thousands)
EAS . . . . . . . . . . . . . $ 1,136 $ 546 108 $ 1,607 $1,015 58
CCTV. . . . . . . . . . . . . 970 470 106 1,569 1,947 (19)
SentryVision. . . . . . . . . 1,044 485 115 1,792 859 109
------- ------- ------ ------- ------ -------
Total sales . . . . . . . . . 3,150 1,501 110 4,968 3,821 30
Service revenues and other. . 1,091 825 32 2,219 2,079 7
------- ------- ------ ------- ------ -------
Total revenues. . . . . . . . $ 4,241 $ 2,326 82 $ 7,187 $5,900 22
======= ======= ====== ======= ====== =======
All of the increase in sales of EAS products in the second quarter and first six
months of 2004 was attributable to ID Systems sales which totaled $0.9 million
of the respective totals as compared to the same periods in the prior year.
Sentry's historical comparative sales of EAS products decreased in both 2004
periods presented. While there was an increase in CCTV sales in the second
quarter of 2004 as a result of higher sales to Lowe's Home Centers, there was a
decrease in the six months of 2004 is a result of lower sales to two customers.
In the first half of 2003, we had sales of $0.6 million to Home Depot, which did
not repeat in 2004 and we lost $0.6 million in revenues in 2004 from a
significant customer that decided to source their CCTV purchases directly.
Direct sales of SentryVision increased in 2004, including sales to Wal-Mart UK,
Target, Reno Depot and Lane Limited. Service revenues and other increased in
the second quarter primarily as a result of higher revenue from CCTV and
SentryVision installations than in the second quarter and first six months of
2003.
Cost of sales were 53% of total sales in both the three and six month periods
ended June 30, 2004 compared to 56% and 65% in the same periods of the prior
year. We have outsourced all significant manufacturing operations beginning in
the second quarter of 2003, resulting in lower product costs. The decrease in
the cost of sales percentage in the first six months 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 and the move to
a smaller facility.
The increase in customer service expenses in the second quarter and first six
months of 2004 is a primarily a result of higher sales of systems we install.
We have decreased the number of customer service employees and increased the use
of outside service contractors in order to better manage our total net customer
service costs during fluctuations in activity levels from quarter to quarter.
However, our efforts were hampered somewhat by our inability to maintain a
proper level of service parts due to inadequate trade credit and financial
resources during the first six months of 2004, which resulted in inefficiencies.
As a result of our recent financing, we have recently restocked our service
parts inventory enabling us to deliver service in a more timely and efficient
manner.
Selling, general and administrative expenses were 43% and 17% higher in the
three and six month periods ended June 30, 2004 when compared to the same
periods of the previous year primarily as a result of the ID Systems merger.
However, as a percent of total revenues, total costs decreased.
We dedicated the same amount to research and development in the second quarter
and first six months of 2004 when compared to the second quarter and first six
months of 2003.
As a result of the restructuring of operations, the increase in sales activity
levels and the merger with ID Systems, we were able to show operating income of
$120,000 and $53,000 in the three and six month periods ended June 30, 2004 as
compared to operating losses of $188,000 and $492,000 in the same periods of
2003.
Total interest and financing costs decreased in the second quarter and first six
months 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.
In the second quarter of 2003, the Company entered into a settlement with
certain of its vendors for past due obligations which resulted in a gain of
approximately $522,000 (net of $348,000 income taxes) which represents the
difference between the amounts due before the settlement and the total amount
payable, including the value of the common stock, as a result of the settlement.
In 2004, the income tax provision results from taxable income of our ID Systems
subsidiary, which cannot be offset by Sentry's net operating loss carryforwards.
In 2003, the $348,000 income tax provision recognized on the extraordinary gain
was offset by an equivalent income tax benefit generated from the current
period's loss from operations and the utilization of net operating loss
carryforwards.
As a result of the foregoing, Sentry had net income of $12,000 and a net loss of
$180,000 in the quarter and first six months ended June 30, 2004 as compared to
net profits of $530,000 and $36,000 in the quarter and six months ended June 30,
2003.
Liquidity and Capital Resources as of June 30, 2004
In the second quarter of 2003, 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 downsizing of operations and relocation to
smaller facilities, the negotiations with past due trade creditors and former
landlord, the outsourcing of manufacturing and the expansion of our Service
Partner program to augment service and installations. 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.
Over the last several years, our largest shareholder, Dialoc ID Holdings B.V.
("Dialoc") was not 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.
On April 30, 2004, Sentry purchased from Saburah Investments, Inc., an Ontario
corporation, all of the outstanding common shares and Series "A" preference
shares of ID Security Systems Canada Inc., an Ontario corporation, and all of
the outstanding capital stock of ID Systems USA, Inc., a Pennsylvania
corporation (collectively, "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. Sentry
acquired ID Systems from Saburah in exchange for 30,000,000 Sentry common
shares. The price paid per Sentry share for the securities of ID Systems was
valued at approximately $0.11. A special committee of Sentry's Board of
Directors received an opinion from Corporate Valuation Services confirming that
the price paid for the acquisition of ID Systems was fair from the point of view
of Sentry shareholders. Sentry's Board of Directors and shareholders owning a
majority of Sentry common stock approved the acquisition of ID Systems.
The purchase price of the acquisition was approximately $3.4 million
representing $3.3 million in the value of Sentry common stock issued and $0.1 in
transaction expenses. Sentry will acquire $1.8 million in net tangible assets
and assign the remaining $1.6 million to goodwill. (See Note B to the condensed
consolidated financial statements). On an ongoing basis, Sentry will evaluate
the carrying value of the goodwill versus the discounted cash benefit expected
to be realized from the performance of the underlying operations and adjust for
any impairment in value.
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.
On April 30, 2004, ID Systems entered into new credit facilities with maximum
availability of Canadian $1.75 million (U.S. $1.3 million) with the Bank of
Montreal. The facilities provide working capital for ID Systems and all
borrowings are secured by the assets of ID Systems.
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 or will
participate as an observer.
The Debenture is secured by a general security interest over all the assets and
properties of Sentry. The amount is subordinate to the existing CIT and Bank of
Montreal credit facilities.
Sentry also acquired ID Systems as a condition of the financing.
Sentry's Board of Directors and shareholders owning a majority of Sentry common
stock approved the transaction with Brascan.
As of June 30, 2004, we had borrowings of approximately $1.9 million with CIT,
the maximum amount available under the revolving credit facility and $1.0
million with the Bank of Montreal. Through the first half of 2004, most of our
trade vendors continued to require cash in advance or COD payments for our
purchases. Prior to the Brascan financing, we had to supplement our borrowings
under the CIT credit facility with expensive purchase order financing through
EPK Financial Corporation ("EPK"). As a result of the Brascan financing, during
the second quarter of 2004, we repaid all amounts owed to EPK and discontinued
our use of this facility.
On August 1, 2004, ID Systems and Checkpoint entered into a settlement agreement
effective July 30, 2004, pursuant to which Checkpoint agreed to pay $19.95
million, in full and final settlement of claims covered by the antitrust
litigation. Payment in full was received on August 5, 2004. As provided when
Sentry purchased ID Systems, the proceeds of the settlement will be distributed
to former shareholders of ID Systems, after payment of litigation fees and
expenses. The agreement includes mutual releases between the parties for
complaints arising from activities prior to the date of the agreement, except
for any contractual obligations and any future claims for patent, copyright or
trademark infringement. The agreement is not an acknowledgement of any
wrongdoing or liability by either party. A Stipulation of Dismissal has been
filed with the Third Circuit Court of Appeals to finally conclude the legal
proceedings.
While Sentry did not obtain an interest in the litigation settlement, Saburah
and Sentry agreed that Sentry may require Saburah to purchase additional Sentry
common shares equal to approximately 4.5% of any amount received (net of legal
fees and expenses) from Checkpoint. The price per share was set at 80% of the
previous 20 days trading average prior to the announcement of the settlement.
Sentry's Board of Directors has exercised this option and based on the
settlement amount, will sell to Saburah approximately 4.8 million shares for
$640,000. Sentry also expects to be reimbursed for legal costs advanced by ID
Systems, as well as for loans and trade receivables of approximating $760,000,
which are recorded as assets on the balance sheet as of June 30, 2004. These
transactions, totaling $1.4 million, represent the cash flowing to Sentry
directly and indirectly as a result of the Checkpoint lawsuit.
After the acquisition of ID Systems and sale of additional shares as a result of
the litigation settlement, Sentry will have 120,559,724 shares of common stock
outstanding. Mr. Murdoch, directly or indirectly through his ownership of
Saburah, will own or control 49.5% 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 June 30, 2004. We anticipate
that current cash reserves, cash generated by the operations of Sentry and its
new ID Systems subsidiaries, as well as the financing provided by the Brascan
transaction and the sale of stock to Saburah 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 were also eliminated as of May 2004.
Related Party Transactions
- ----------------------------
Details of related party transactions are included in Note F of this Form
10-QSB.
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.
PART II - OTHER INFORMATION
- -------------------------------
Item 1. Legal Proceedings
ID Security Systems Canada Inc. versus Checkpoint Systems, Inc.
On May 24, 2002, the jury in the Civil Action No. 99-CV-577 in the United States
District Court for the Eastern District of Pennsylvania, filed by plaintiff ID
Security Systems Canada Inc. ("ID Systems") against Checkpoint Systems, Inc.
("Checkpoint"), held against ID Systems on the plaintiff's claim for
Monopolization of Commerce, but in favor of the ID Systems on claims of
Attempted Monopolization and Conspiracy to Monopolize. In addition, the jury
held in favor of the ID Systems on two tort claims related to tortious
interference and unfair competition. Judgment was entered on the verdict in
favor of the plaintiff, after trebling, in the amount of $79.2 million plus
attorneys' fees and costs to be determined by the Court.
On March 28, 2003, the Court issued an order that vacated the jury verdict on
the antitrust claims and reduced the damages award related to tortious
interference and unfair competition from $19 million to $13 million. Checkpoint
subsequently filed an additional motion to further reduce the $13 million by
$2.1 million based on a prior agreement between the parties and a previous Order
by the Court. The Court granted the Checkpoint's motion, and on May 20,
2003 further reduced the judgment from $13 million to $10.9 million. On the
same date, the Court stayed execution of the judgment upon the posting of a bond
in the amount of $11.3 million by Checkpoint.
Both ID Systems and Checkpoint filed appeals to the Third Circuit Court of
Appeals related to the various decisions of the Court. Oral arguments for these
appeals were heard on March 30, 2004.
On August 1, 2004, ID Systems and Checkpoint entered into a settlement agreement
effective July 30, 2004, pursuant to which Checkpoint agreed to pay $19.95
million, in full and final settlement of claims covered by the litigation.
Payment in full was received on August 5, 2004. As provided when Sentry
purchased ID Systems, the proceeds of the settlement will be distributed to
former shareholders of ID Systems, after payment of litigation fees and
expenses. The agreement includes mutual releases between the parties for
complaints arising from activities prior to the date of the agreement, except
for any contractual obligations and any future claims for patent, copyright or
trademark infringement. The agreement is not an acknowledgement of any
wrongdoing or liability by either party. A Stipulation of Dismissal has been
filed with the Third Circuit Court of Appeals to finally conclude the legal
proceedings.
Item 5 - Other Information
==============================
See Note B to the condensed consolidated financial statements.
======================================================================
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 - Loan Agreement between ID Security Systems Canada Inc. and Bank of
Montreal dated April 30, 2004.
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 - There were no Reports on Form 8-K filed in
the three months ended June 30, 2004.
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 16, 2004 By: /S/ PETER J. MUNDY
----------------- ----------------------
Peter J. Mundy, Vice President
-- Finance and Chief Financial Officer
(Principal Financial and
Accounting Officer)
EXHIBIT 10.1
[GRAPHIC OMITTED]
Branch of Account: First Canadian Place, Toronto, Ontario Transit No. 0002
- ----------------------------------------------------------- ----------------
OPERATING LOAN AGREEMENT
BANK OF MONTREAL WITH AVAILMENT IN CDN. DOLLARS
(for use in all Provinces except
Quebec)
To: Bank of Montreal Date: April 30, 2004
The undersigned hereby requests the Bank of Montreal (the "Bank") to
provide a credit facility to the undersigned, subject to the following terms and
conditions:
1. DEFINED TERMS
In this Agreement, unless the subject matter or context otherwise require:
1.01 "Account" shall mean the Canadian Dollar Account or the U.S. Dollar
--------
Account, whichever is applicable.
1.02 "Canadian Dollar Account"/ "U.S. Dollar Account" shall mean Account No.
----------------------- -------------------
__________________ at the branch designated above.
1.03 "Facility Fee" shall mean a fixed monthly fee of $ 350.00.
-------------
1.04 "Loan" shall mean at any time the aggregate of all amounts debited to
----
the Account (including without limitation cheques, transfers,
withdrawals, interest, costs, charges and fees) in excess of the
aggregate of all amounts credited to the Account for which the Bank
has given value. Amounts debited or credited to the Canadian Dollar
Account shall be denominated in Canadian dollars while amounts debited
or credited to the U.S. Dollar Account shall be denominated in U.S.
dollars.
1.05 "Loan Limit" shall mean One Million Five Hundred
-----------
Thousand--------------------00/100 Canadian ($ 1,500,000.00 ) or such
lesser amount as may be calculated by the Bank from time to time under
the Lending Margin Calculation, if any, set out in the Addendum
hereto.
1.06 "Loan Rate" shall mean in respect of a Canadian Dollar Loan, a rate
----------
equal to the Bank's Prime Rate plus one per cent (1.00%) per annum.
1.07 "Prime Rate" shall mean the floating annual rate of interest
-----------
established from time to time by the Bank as the reference rate it
will use to determine the rate of interest payable to the Bank by
borrowers from the Bank in Canadian dollars in Canada and designated
by the Bank as its Prime Rate. The Prime Rate on the date hereof is
___________________ per cent ( ______%) per annum.
1.09 "Overdraft Rate" shall mean the annual rate of interest established
---------------
from time to time by the Bank as the interest rate it will use to
calculate the interest payable on overdrawn accounts and designated by
the Bank as the "Overdraft Rate". The Overdraft Rate on the date
hereof is twenty one per cent ( 21.00%) per annum.
2. ACCOUNT
2.01 The undersigned may from time to time draw cheques on the Account,
subject to the terms hereof. Cheques drawn on the Canadian Dollar
Account shall be drawn in Canadian dollars; cheques drawn on the U.S.
Dollar Account shall be drawn in U.S. dollars.
2.02 The undersigned shall not at any time permit the Loan to exceed the
Loan Limit and shall use the Account for business purposes only.
2.03 The Bank is authorized to debit the Canadian Dollar Account and the
U.S. Dollar Account for all fees and interest required hereunder and
for all costs, charges and expenses referred to in paragraph 8.01 and
in any other agreement(s) the undersigned has entered into with the
Bank.
3. FACILITY FEE
3.01 The undersigned shall pay the Facility Fee to the Bank, in the currency
of the applicable Account, on the last day of each month in addition
to all other fees applicable to the Account. Notwithstanding paragraph
1.03, the amount of the Facility Fee shall be determined by the Bank
from time to time. The Facility Fee shall be payable for the credit
facility provided hereunder and for other standard reporting services
provided by the Bank in connection with the Account.
4. INTEREST
4.01 The undersigned shall, both before and after demand or judgment, pay
interest at the Loan Rate on the daily closing balance of the Loan up
to the Loan Limit, such interest to be calculated and payable monthly
on the last day of each month.
4.02 The undersigned shall, both before and after demand or judgment, pay
interest at the Overdraft Rate on the amount of any daily closing
balance of the Loan in excess of the Loan Limit, such interest to be
calculated and payable monthly on the last day of each month, but
nothing herein shall oblige the Bank to permit the Loan to exceed the
Loan Limit.
5. OTHER PAYMENTS
5.01 If any change occurring after the date of this Agreement in any law or
in any interpretation or application thereof by any governmental
authority charged with the administration thereof or compliance with
any guideline, request or requirement from any fiscal, monetary or
other authority (whether or not having the force of law) shall either
(i) impose, modify, assess or deem applicable any reserve, special
deposit, assessment or similar requirement on account of or with
respect to the credit facility provided by the Bank under this
Agreement or (ii) impose on the Bank any other condition, restriction,
limitation or (iii) make the Bank liable for any payment or tax of any
kind whatsoever or change the basis of taxation of payments to the
Bank of principal, interest, fees or any other amount payable under
this Agreement(except for changes in the rate of tax on the overall
net income, profit or gains of the Bank) and the result of any of the
foregoing is to increase the cost to the Bank of providing the credit
facility under this Agreement or to reduce any amount otherwise
receivable by the Bank under this Agreement on account of or with
respect to the credit facility provided by the Bank hereunder, then
the undersigned agrees, within ten days after any demand by the Bank,
to commence paying to the Bank amounts sufficient to reimburse the
Bank against such increased cost or such liability.
6. DEMAND AND TERMINATION
6.01 The undersigned shall pay the Loan to the Bank ON DEMAND. The Bank may
at any time terminate the credit facility provided hereunder and
demand payment of the Loan by notice as herein provided.
6.02 THE BANK MAY REFUSE TO HONOR ANY CHEQUE OR PERMIT ANY TRANSFER OR
WITHDRAWAL FROM THE ACCOUNT UPON (A) ANY FAILURE OF THE UNDERSIGNED TO
PERFORM OR SATISFY ANY TERM OR CONDITION HEREOF, (B) ANY DEFAULT BY
THE UNDERSIGNED IN THE PERFORMANCE OF ANY OBLIGATION OF THE
UNDERSIGNED TO THE BANK WHETHER CONTAINED HEREIN OR OTHERWISE, (C) THE
DEATH OF ANY GUARANTOR OF ANY INDEBTEDNESS OF THE UNDERSIGNED OR
RECEIPT BY THE BANK OF NOTICE OF TERMINATION OF ANY GUARANTEE OF ANY
INDEBTEDNESS OF THE UNDERSIGNED OR (D) ANY DEMAND FOR PAYMENT OF THE
LOAN, WHETHER OR NOT ANY TIME PERIOD HAS LAPSED AFTER THE TIME OF THE
DEMAND.
7. DOCUMENTATION
7.01 The undersigned shall deliver to the Bank from time to time, promptly
on request, in form and substance satisfactory to the Bank:
(a) any security required by the Bank; and
(b) all other documents and information required by the Bank
including, if applicable, all documentation and information
listed in the Addendum.
7.02 Any security document delivered hereunder shall be held as additional
security for the indebtedness of the undersigned for the Loan, and not
in substitution or in satisfaction thereof.
7.03 The Bank's statements of the Account at any time shall constitute prima
facie evidence of the Loan.
7.04 The undersigned will immediately notify the Bank if any guarantor of
the indebtedness of the undersigned to the Bank dies.
8. COSTS
8.01 The undersigned shall pay all reasonable costs, charges and expenses
incurred by the Bank in the preparation or enforcement of this
Agreement or any security required hereunder.
9. NOTICES
9.01 The Bank shall not be required to notify the undersigned of changes to
either the Prime Rate or the U.S. Base Rate, and shall not be required
to notify the undersigned of changes to the Overdraft Rate or in the
Bank's calculations of the Lending Margin Calculation, if any.
9.02 Any request for any document or information, notice of termination,
demand for payment or other notice to be sent by the Bank to the
undersigned in connection with this Agreement or the Account may be
delivered to the undersigned (or any one of them, if more than one),
or mailed by prepaid ordinary mail to the undersigned (or any one of
them, if more than one) at the last known address for the undersigned
(or any one of them, if more than one) in the Bank's records, and the
undersigned shall be deemed to have received such request or notice on
the date of delivery, if delivered, and four (4) days after mailing,
if mailed.
10. GENERAL
10.01 The provisions of the Addendum, if any, shall be incorporated into
this Agreement and form part hereof.
10.02 This Agreement shall be binding upon the undersigned and the
respective executors, administrators, successors and assigns of the
undersigned, but the undersigned shall not assign any of the rights or
obligations of the undersigned hereunder without the prior written
consent of the Bank.
10.03 The failure of either the undersigned or the Bank to require
performance by the other of any provision hereof shall in no way
affect the right thereafter to enforce such provision; nor shall the
waiver by either party of any breach of any covenant, condition or
proviso of this Agreement or any other agreement between the Bank and
the undersigned be taken or held to be a waiver of any further breach
of the same covenant, condition or proviso.
10.04 This Agreement shall be in addition to and not in substitution for any
other agreement between the undersigned and the Bank.
10.05 The undersigned will execute, and agrees to be bound by the terms and
conditions contained in, the Bank's standard form of Operation of
Account Agreement or appropriate form of current account authority.
Without limiting the generality of the foregoing, the undersigned
agrees that any statement of the Account provided to the undersigned
shall be deemed to be a correct and accurate statement of the Loan as
at the date of the statement, unless the undersigned has notified the
Bank of errors, irregularities or omissions within the thirty day
period specified in the Operation of Account Agreement or current
account authority.
10.06 All payments relating to the Loan made by the undersigned pursuant to
this Agreement shall be paid in the currency in which the Loan is
outstanding. All other amounts owing hereunder shall be paid in
Canadian dollars except as otherwise herein agreed.
In the event the Bank is required to recover any amount owing hereunder by
way of judicial proceeding, all amounts owing hereunder shall be payable in
Canadian dollars. Notwithstanding the foregoing, the obligation of the
undersigned under this Agreement to make payments in U.S. dollars shall not be
discharged or satisfied by any tender or recovery pursuant to any judgment
expressed in or converted into Canadian dollars except to the extent that such
tender or recovery shall result in the effective receipt by the Bank of the full
amount of U.S. dollars so payable hereunder. Accordingly, the obligation of the
undersigned shall be enforceable as an alternative or additional cause of action
for the purpose of recovery in Canadian dollars of the amount (if any) by which
such effective receipt shall fall short of the full amount of U.S. dollars so
payable hereunder and shall not be affected by any judgment being obtained for
any other sums due hereunder.
For purposes of recovery by the Bank of amounts debited to the U.S. Dollar
Account, the Canadian Dollar Equivalent Amount shall apply. "Canadian Dollar
---------------
Equivalent Amount" shall mean, on any date, the amount of Canadian dollars into
- ------------------
which U.S. dollars may be converted at the Bank's applicable noon spot buying
rate on the date such conversion is made.
10.07 Time shall be of the essence of this Agreement.
10.08 If more than one person signs this Agreement, the obligations of the
undersigned are joint and several and the Bank is authorized to honour
any cheque drawn on the Account or pay any withdrawal from the Account
to create or increase the Loan if any such cheque or withdrawal
request is signed by one of the undersigned.
10.09 It is the express wish of the parties that this Agreement and any
related documents be drawn up and executed in English. Les parties
conviennent que la pr sente convention et tous les documents s'y
rattachant soient r dig s et sign s en anglais.
As at April 30, 2004.
Customer: ID Security Systems Canada Inc.
----------------------------------------------
By: /s/ Peter L. Murdoch
President
(To be signed by Account Holder(s), or by authorized signing officer(s) in the
case of corporations, societies, lodges, etc. In the case of corporations affix
seal where applicable.)
ADDENDUM TO
OPERATING LOAN AGREEMENT
LENDING MARGIN CALCULATION
The following Lending Margin Calculation is applicable to the attached
Operating Loan Agreement. The calculation and the amount of the Lending Margin
Calculation is in the sole and complete discretion of the Bank, and in cases of
dispute, the Lending Margin Calculation calculated by the Bank shall prevail.
The Lending Margin Calculation shall be an amount equal to:
If not applicable, insert N/A
Operating Advances are at all times to be contained within 75% of the Bank's
estimated worth of good quality assigned Canadian domiciled accounts receivable,
plus, 60% of the Bank's estimated worth of good quality assigned U.S. domiciled
accounts receivable after deducting accounts past due 60 days and over, foreign
accounts, inter-company accounts, deemed trusts arising from unpaid taxes and
government remittances, contra accounts, accounts in dispute, and any other
unacceptable accounts.
Plus 50% of the Account Manager's valuation of assigned raw material and
finished goods inventory located in Ontario which is free of encumbrances, after
deducting work-in-process, on consignment and prior claims. The margin value of
inventory is not to exceed one third (1/3) of the margin value assigned to
accounts receivable.
IF NOT APPLICABLE, INSERT N/A
Documentation:
The Borrower shall deliver to the Bank the following:
1. Certified aged accounts receivable and accounts payable listing for the
Borrower, and guarantors as appropriate, illustrating rebates,
discounts, allowance for returns, allowance for doubtful accounts, contra
accounts, set-off amounts due from related parties to be submitted
within 25 days of month end;
2. Certified listing of inventory to be submitted within 25 days of month
end;
3. Quarterly in-house combined financial statements for the ID Security
Systems Group to be provided within 45 days of each fiscal quarter
end;
4. Annual audited combined year end financial statements for the ID Security
Systems Group within 120 days of fiscal year end;
5. Annual un-combined audited year end financial statements for ID Security
Systems Canada Inc., ID Systems USA Inc., Custom Security Industries
Inc., and ID Systems Do Brazil within 120 days of fiscal year end;
6. Annual combined financial projections for the ID Security Systems Group
including balance sheet, income statement, and cash flow statements
to be submitted within 120 days of fiscal year end.
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
August 16, 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
August 16, 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 June 30, 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
August 16, 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 June 30, 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
August 16, 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.