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, 2005
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 96-11-3231714
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1881 Lakeland Avenue, Ronkonkoma, NY 11779
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(Address of principal executive offices) (Zip Code)
631-739-2000
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-
As of August 12, 2005, there were 120,628,804 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, 2005 and December 31, 2004 3
Consolidated Statements of Operations --
Three Months Ended June 30, 2005 and 2004
And Six Months Ended June 30, 2005 and 2004 4
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2005 and 2004 5
Notes to Consolidated Financial
Statements - June 30, 2005 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements (Unaudited)
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2005 2004
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(Unaudited) (Audited)
ASSETS
- -------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 771 $ 1,965
Accounts receivable, less allowance for doubtful
accounts of $151 and $338, respectively 2,954 3,500
Inventories 3,156 3,314
Prepaid expenses and other current assets 474 525
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Total current assets 7,355 9,304
PROPERTY, PLANT AND EQUIPMENT, net 625 689
GOODWILL 1,564 1,564
OTHER ASSETS 624 690
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$ 10,168 $ 12,247
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------
CURRENT LIABILITIES
Revolving line of credit and term loan $ 1,492 $ 2,640
Accounts payable 908 799
Accrued liabilities 1,194 1,146
Obligations under capital leases - current portion 6 5
Deferred income 66 169
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Total current liabilities 3,666 4,759
NOTES PAYABLE 24 189
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion 4 8
DEFFERED TAX LIABILITY 42 39
CONVERTIBLE DEBENTURES 1,883 1,862
MINORITY INTEREST 1,040 1,045
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Total liabilities 6,659 7,902
SHAREHOLDERS' EQUITY
Common stock, $0.001 par value; authorized 160,000 shares, 121 121
issued and outstanding 120,628 and 120,549 shares
Additional paid-in capital 48,783 48,779
Accumulated deficit (45,508) (44,718)
Other accumulated comprehensive income 113 163
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Total shareholders' equity 3,509 4,345
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$ 10,168 $ 12,247
========== ==============
See notes to the consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------
2005 2004 2005 2004
(Unaudited) (Unaudited)
REVENUES
Sales $ 3,462 $ 3,188 $ 5,375 $ 5,034
Service, installation and other 805 1,091 1,385 2,219
------- -------- -------- --------
4,267 4,279 6,760 7,253
COSTS AND EXPENSES:
Cost of sales 1,915 1,682 2,895 2,623
Customer service expenses 747 1,105 1,496 2,120
Selling, general and administrative expenses 1,272 1,192 2,493 2,117
Research and development 214 180 447 340
------- -------- -------- -------
4,148 4,159 7,331 7,200
------- -------- -------- -------
OPERATING INCOME (LOSS) 119 120 (571) 53
INTEREST AND FINANCING EXPENSES 78 79 169 204
------- -------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 41 41 (740) (151)
INCOME TAX EXPENSE 37 15 20 15
------- -------- -------- -------
INCOME (LOSS) BEFORE MINORITY INTEREST 4 26 (760) (166)
MINORITY INTEREST (34) (14) (30) (14)
------- -------- -------- -------
NET INCOME (LOSS) $ (30) $ 12 $ (790) $ (180)
======= ======== ======== =======
NET INCOME (LOSS) PER SHARE
Basic and diluted $ (0.00) $ 0.00 $ (0.01) $(0.00)
======= ======== ======== =======
WEIGHTED AVERAGE SHARES
Basic and diluted 120,566 105,862 120,559 95,809
======= ======== ======== =======
See notes to the consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
------------------
2005 2004
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(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
- -----------------------------------------------------------
Net loss $ (790) $ (180)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 163 89
Provision for bad debts (20) 20
Non-cash consideration 17 53
Minority interest in net income of consolidated subsidiary (5) 14
Changes in operating assets and liabilities:
Accounts receivable 566 (524)
Inventories 158 (31)
Accounts payable and other current assets and liabilities (44) (515)
------------------ --------
Net cash provided by (used in) operating activities 45 (1,074)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (26) (9)
Intangibles (16) (185)
Net cash provided by the acquisition of ID Systems --- 82
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Net cash used in investing activities (42) (112)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under the revolving line
of credit and term loan (1,148) 318
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) (3)
Proceeds from sale of stock, net 4 ---
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Net cash (used in) provided by financing activities (1,147) 2,315
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EFFECTS OF EXCHANGE RATES ON CASH (50) ---
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,194) 1,129
CASH AND CASH EQUIVALENTS, at beginning of period 1,965 210
------------------ --------
CASH AND CASH EQUIVALENTS, at end of period $ 771 $ 1,339
================== ========
See notes to the consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005
NOTE 1 -- Basis of Presentation
- -------------------------------
The consolidated financial statements include the accounts of Sentry Technology
Corporation ("the Company") and its majority-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited 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, 2004, as filed with the
Securities and Exchange Commission.
Certain prior period amounts have been reclassified to conform to current period
presentation.
Note 2 -- Recent Accounting Pronouncements
- ------------------------------------------
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS No.
123R revises SFAS No. 123 and supersedes Accounting Principles Based Opinion No.
25, "Accounting for Stock Issued to Employees." In April 2005, the SEC announced
SFAS 123R would be effective no later than the beginning of the first fiscal
year beginning after June 15, 2005. We will adopt the provisions of SFAS No.
123R effective January 1, 2006. SFAS No. 123R requires all share-based payments
to employees to be recognized in the financial statements based on fair value.
We currently account for share-based payments to employees using APB No. 25's
intrinsic value method. Under SFAS No. 123R we will be required to follow a fair
value approach, such as the Black-Scholes or lattice option valuation models, at
the date of a stock-based award grant. SFAS No. 123R permits one of two methods
of adoption: (1) modified prospective method or (2) modified retrospective
method. We plan to adopt SFAS No. 123R using the modified prospective method.
This method requires that we recognize compensation expense for all share-based
payments granted on or after January 1, 2006 and for all awards granted to
employees prior to January 1, 2006 that remain unvested on January 1, 2006. The
adoption of SFAS No. 123R is not expected to have a material impact on the
Company's financial position or results of operations.
NOTE 3 -- ID Systems Acquisition
- --------------------------------
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"). Mr. Peter Murdoch, President, CEO
and Director of Sentry, is the owner of Saburah. Effective January 1, 2005, the
names of the acquired subsidiaries were changed to Sentry Technology Canada Inc.
and Sentry Technology USA Inc.
The Company's consolidated statements of operations include the revenues and
expenses of ID Systems from May 1, 2004.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005
The following supplemental pro forma information is presented to illustrate the
effects of the acquisition on the historical operating results for the three and
six month periods ended June 30, 2004 as if the acquisition had occurred as of
January 1, 2004:
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2004
--------------------------------------------
(in thousands, except per share data)
Revenues $ 4,918 $9,132
Income (loss) before extraordinary item $ 14 $ (103)
Net income (loss) $ 14 $ (103)
Net income (loss) per share $ (0.00) $(0.00)
NOTE 4 -- Inventories
- ---------------------
Inventories consist of the following June 30, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------
(in thousands)
Raw materials $1,040 $1,206
Work-in-process 298 292
Finished goods 1,818 1,816
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$3,156 $3,314
====== ======
Reserves for excess and obsolete inventory totaled $1,471,000 and $1,528,000 as
of June 30, 2005 and December 31, 2004, respectively and have been included as a
component of the above amounts.
NOTE 5 -- Credit Facilities
- -----------------------------------------------------------
Balances under credit facilities consist of the following:
- -----------------------------------------------------------
June 30, 2005 December 31, 2004
------------------------------------------
(in thousands)
Royal Bank of Canada $ 1,492 $ ---
The CIT Group/Business Credit Inc. revolving credit --- 1,769
Bank of Montreal overdraft lending --- 734
Bank of Montreal non-revolving demand --- 137
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$ 1,492 $2,640
========== ======
On May 13, 2005, the Company and certain of its subsidiaries entered into a new
secured credit facility with Royal Bank of Canada for maximum borrowings of up
to Canadian $4.5 million (U.S. $3.6 million), which are subject to certain
limitations based on a percentage of eligible accounts receivable and
inventories as defined in the agreement. Interest is payable at a rate of Royal
Bank of Canada prime rate (4.25% at June 30, 2005), plus 1.25% per annum.
Borrowings under this facility are secured by substantially all of the Company's
assets. This new facility replaced the Company's former revolving credit
agreement in the United States and its overdraft lending and term loan agreement
in Canada.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005
NOTE 6 - Comprehensive Income (Loss)
- -------------------------------------------
Comprehensive income (loss) is as follows:
- -------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
(in thousands)
Net income (loss): $(30) $ 12 $(790) $(180)
Other comprehensive income (loss):
Foreign currency translation adjustments (36) 38 (50) 38
---- ---- ----- -----
Comprehensive income (loss) $(66) $ 50 $(840) $(142)
==== ==== ===== =====
NOTE 7 -- Related Party Transactions
- ------------------------------------
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 the grant (valued at $3,000 and charged to interest
and financing expenses). The warrant expires on January 21, 2009. The note was
repaid in full on April 30, 2004.
NOTE 8 -- Earnings Per Share
- ----------------------------
The earnings per share calculations (basic and diluted) at June 30, 2005 and
2004 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 1,229,512 and 1,499,948 shares of common stock
with a weighted average exercise price of $0.61 and $0.59 were outstanding at
June 30, 2005 and 2004, respectively, 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. The fair value of
each option granted is estimated on the date of grant using the Black-Scholes
option-pricing model. In 2005, 150,000 options were granted at market price on
of the date of the grant. The weighted average fair value of the options
granted in 2005 is estimated at $0.08, using the Black-Scholes option pricing
model with the following weighted average assumptions: expected life of two
years; stock volatility, 94% in 2005; risk free interest rates, 4.0% in 2005,
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. No options were granted in the six month period ended June 30, 2004.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005
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,
2005 2004 2005 2004
---- ---- ---- ----
(in thousands, except per share data)
Net loss:
As reported $ (30) $ 12 $ (790) $ (180)
Less stock based compensation expense
determined under the fair value method
of all awards, net of related tax effects (6) (3) (11) (9)
----- ---- ------ ------
Pro forma $ (36) $ 9 $ (801) $ (189)
===== ==== ====== ======
Net loss per share:
As reported $(0.00) $0.00 $(0.01) $(0.00)
====== ===== ====== ======
Pro forma $(0.00) $0.00 $(0.01) $(0.00)
====== ===== ====== ======
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. Effective January 1, 2005, ID
Systems changed the name of ID Security Systems Canada Inc. and ID Systems
USA Inc. to Sentry Technology Canada Inc. and Sentry Technology USA Inc.,
(collectively "Sentry Canada").
Consolidated revenues were substantially the same in the quarter ended June 30,
2005 as compared to the quarter ended June 30, 2004. For the six month period
ended June 30, 2005 consolidated revenues were 7% lower than in the same period
of last year. Sentry Canada's revenues represented $1.7 million of the total
revenues in the second quarter and $2.6 million in the first six months ended
June 30, 2005 as compared to $0.9 million in the second quarter and first six
months of 2004. Our backlog of orders, which we expect to deliver within the
next twelve months, was $2.8 million at June 30, 2005 as compared to $2.2
million at December 31, 2004. The backlog was $3.6 million at June 30, 2004.
Total revenues for the periods presented are broken out as follows:
Q-2 Q-2 % 6 Mos. 6 Mos. %
2005 2004 Change 2005 2004 Change
-------- ------- ------- ------- ------ -------
(in thousands) (in thousands)
EAS $ 2,142 $ 1,132 89 $ 3,192 $1,626 96
CCTV 455 984 (54) 768 1,591 (52)
SentryVision 865 1,072 (19) 1,415 1,817 (22)
-------- ------- ------- ------- ------ -------
Total sales 3,462 3,188 9 5,375 5,034 7
Service, installation and other 805 1,091 (26) 1,385 2,219 (38)
-------- ------- ------- ------- ------ -------
Total revenues $ 4,267 $ 4,279 (0) $ 6,760 $7,253 (7)
======== ======= ======= ======= ====== =======
The increase in EAS sales is primarily attributable to Sentry Canada's sales,
which represented $1.7 million of EAS sales in the second quarter and $2.6
million in the first six months of 2005 compared to $0.9 million in both the
second quarter and first six months of 2004. In January 2005, we were notified
by Lowe's Home Center, our largest customer, that they would not be renewing
their maintenance contract for 2005. While the annual value of the maintenance
contract was approximately $0.9 million, it contributed towards the selection of
vendors for replacement and add-on CCTV business in new and existing Lowe's
locations. As a result, revenues from Lowe's decreased from $1.4 million in the
second quarter of 2004 to $0.1 million in the second quarter of 2005 and from
$2.5 million in the first six months of 2004 to $0.8 million in the first six
months of 2005. This reduction had an impact on our reported sales of CCTV and
SentryVision products. We anticipate that this decision will continue to result
in a substantial decrease in future revenues from Lowe's on a comparative basis
for the remainder of the year. We have added new sales representatives and new
customers that offset the loss of Lowe's revenue in the second quarter. As a
result, our business is more balanced and no longer relies on a single large
customer for success.
Both domestic and international sales of our SentryVision Smart Track system
weakened in the second quarter and first six months of 2005 when compared to the
same periods of 2004. Our sales of SentryVision products to our international
dealers and distributors are denominated in U.S. dollars, therefore the
strengthening of the Euro and other foreign currencies against the U.S. dollar
had no significant impact on revenues. While service revenues were
approximately the same in both periods in 2005 and 2004, installation revenues
were significantly lower in the 2005 periods as compared to the same periods of
2004, due to lower domestic sales of CCTV and SentryVision systems. Even though
EAS sales increased substantially, the installation revenues associated with EAS
systems are lower than for CCTV and SentryVision sales. Maintenance revenues
were lower primarily as a result of cancellation of the Lowe's maintenance
contract.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We are encouraged by the recent order rates as well as a backlog of $2.8 million
at the end of June 2005. Sales reps and international distributors have been
added to the sales group plus new print ads and trade show attendance will
assist in improving our sales results. In particular, our flagship SmartTrack
traveling camera system and proprietary library security and information systems
are operating trouble free, which has helped both to reduce service costs and
allow our sales reps to develop new business as a result of strong references
from many satisfied national and international customers.
Cost of sales were 55% and 54% of total sales in the three and six month periods
ended June 30, 2005 compared to 53% and 52% in the three and six month periods
ended June, 30, 2004. We continue to see margin improvements in 2005 on
Sentry's historical costs as a result of the outsourcing of all significant
manufacturing operations. However, as a percentage of sales, Sentry Canada's
cost of sales were higher than Sentry's historical costs as a higher portion of
its sales are made through dealers and distributors that carry lower margins
than sales made direct to end users. In addition, lower sales volume at our 51%
owned labeling subsidiary resulted in underabsorbed overhead resulting in a
higher than normal cost of sales percentage.
The decrease in customer service expenses in the second quarter and first six
months of 2005 as compared to the second quarter and first six months of 2004 is
primarily a result of a decrease in the number of customer service employees and
increased 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. As a result, our service department has remained profitable despite
the loss of the Lowe's maintenance agreement.
Selling, general and administrative expenses were 7% and 18% higher in the three
and six month periods ended June 30, 2005 when compared to the same periods of
the previous year. Sentry Canada's expenses represent $0.4 and $0.8 million of
the total expenses in the second quarter and first six months of 2005 as
compared to $0.3 million in the second quarter and first six months of 2004. We
have made certain administrative expense reductions to help compensate for the
expected reduction in Lowe's business. At the same time, we have increased
funding of sales and marketing programs, which we expect will continue to
increase our business with new and existing customers. New programs include a
marketing campaign to promote SentryVision to Homeland Security consultants and
the appointment of a new distributor for the Brazilian market to sell EAS
products to the library market and SentryVision systems to all customers.
The increase in research and development in the second quarter and first six
months of 2005 when compared to the second quarter and first six months of 2004
includes the research efforts of Sentry Canada and increased prototype costs
associated with the development of our new WAM EAS antenna. The WAM system has
been successfully introduced to the market.
Total interest and financing costs were approximately the same in the second
quarter of 2005 and 2004. Interest in the second quarter of 2005 included three
months interest related to the Brascan convertible debenture compared to only
two months in the second quarter of 2004. This was offset by lower interest on
bank debt as a result of lower average borrowings. The reduction in total
interest and financing costs in the first six months of 2005 was a result of the
elimination of costly financing associated with purchase order financing
included in the first half of 2004.
The income tax expense in all the periods presented principally results from
taxable income of our Sentry Canada subsidiaries, which cannot be offset by
Sentry's net operating loss carryforwards.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As a result of the foregoing, Sentry had losses of $30,000 and $790,000 in the
quarter and six months ended June 30, 2005 as compared to a net income of
$12,000 and a net loss of $180,000 in the quarter and six months ended June 30,
2004.
Liquidity and Capital Resources as of June 30, 2005
At June 30, 2005, we had cash of $0.8 million, working capital of $3.7 million,
total assets of $10.2 million and shareholders' equity of $3.5 million. While
we had a loss of $0.8 million in the first six months of 2005, we generated cash
from operating activities of $45,000. This was a result of lower amounts of
accounts receivable partially as a result of better collections efforts as well
as lower sales. We have also eliminated the use of expensive purchase order
financing to fund inventory purchases and we are continuing to reestablish
credit with new and existing vendors.
We utilized $1.1 million in financing activities through a pay down of balances
under our previous credit facilities. Availability under the credit facilities
is principally based on the level of our receivables and inventory, which
declined in the first half of 2005. Net reductions in our credit facilities
were funded through the use of existing cash.
On May 13, 2005, the Company and certain of its subsidiaries entered into a new
secured credit facility with Royal Bank of Canada ("RBC") for maximum borrowings
of up to Canadian $4.5 million (U.S. $3.6 million), which are subject to certain
limitations based on a percentage of eligible accounts receivable and
inventories as defined in the agreement. Interest is payable at a rate of RBC
prime rate (4.25% at June 30, 2005), plus 1.25% per annum. Borrowings under
this facility are secured by substantially all of the Company's assets. This
new facility replaced the Company's former revolving credit agreement in the
United States and its overdraft lending and term loan agreement in Canada. The
consolidation of our credit facilities is another step in our efforts to improve
operating efficiencies and to further reduce our costs of financing. The new
facility also provides for limited financing of certain foreign receivables,
which may provide additional future availability over the previous facilities.
As of June 30, 2005, we had borrowings of approximately $1.5 million with RBC.
We will require liquidity and working capital to finance increases in
receivables and inventory associated with sales growth and, to a lesser extent,
for capital expenditures. We had no material capital expenditure or purchase
commitments as of June 30, 2005. We believe that our anticipated cash needs for
the foreseeable future can be funded from cash and cash equivalents on hand,
availability under our credit facilities and cash generated from future
operations.
On March 28, 2005, our Board of Directors and a majority of the outstanding
shareholders approved an increase in the authorized number of Sentry's common
shares from 140,000,000 to 160,000,000, principally in order to meet the
requirements of the Brascan Technology Fund investment.
Related Party Transactions
- ----------------------------
Details of related party transactions are included in Note 7 of this Form
10-QSB.
SENTRY TECHNOLOGY CORPORATION
CONTROLS AND PROCEDURES
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 6 - Exhibits
(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.
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 12, 2005 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
August 12, 2005
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 12, 2005
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, 2005 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 12, 2005
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, 2005 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 12, 2005
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.