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 September 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 Identification
incorporation or organization) No.)
1881 Lakeland Avenue, Ronkonkoma, NY 11779
--------------------------------------------- -----
(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 November 11, 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 --
September 30, 2005 and December 31, 2004 3
Consolidated Statements of Operations --
Three Months Ended September 30, 2005 and 2004
And Nine Months Ended September 30, 2005 and 2004 4
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 2005 and 2004 5
Notes to Consolidated Financial
Statements - September 30, 2005 6 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
Item 3. Controls and Procedures 13 - 14
PART II. OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements (Unaudited)
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2005 2004
------------- ------------
(Unaudited) (Audited)
ASSETS
- --------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 978 $ 1,965
Accounts receivable, less allowance for doubtful
accounts of $137 and $338, respectively 2,954 3,500
Inventories 2,953 3,314
Prepaid expenses and other current assets 451 525
---------- ---------
Total current assets 7,336 9,304
PROPERTY, PLANT AND EQUIPMENT, net. . . . . . . . . 641 689
GOODWILL 1,564 1,564
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . 601 690
---------- ---------
$10,142 $12,247
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------
CURRENT LIABILITIES
Revolving line of credit and term loan $ 1,876 $ 2,640
Accounts payable 815 799
Accrued liabilities 974 1,146
Obligations under capital leases - current portion 6 5
Deferred income 103 169
---------- ---------
Total current liabilities 3,774 4,759
NOTES PAYABLE --- 189
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion 3 8
DEFFERED TAX LIABILITY. . . . . . . . . . . . . . . 34 39
CONVERTIBLE DEBENTURES. . . . . . . . . . . . . . . 1,894 1,862
MINORITY INTEREST . . . . . . . . . . . . . . . . . 1,129 1,045
---------- -------
Total liabilities 6,834 7,902
SHAREHOLDERS' EQUITY
Common stock, $0.001 par value; authorized
160,000 shares, issued and outstanding
120,629 and 120,549 shares 121 121
Additional paid-in capital 48,783 48,779
Accumulated deficit (45,804) (44,718)
Other accumulated comprehensive income 208 163
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Total shareholders' equity 3,308 4,345
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$10,142 $12,247
======= =======
See notes to the consolidated financial statements
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------
2005 2004 2005 2004
(Unaudited) (Unaudited)
REVENUES
Sales $ 3,343 $ 3,498 $ 8,718 $ 8,532
Service, installation and other 518 1,146 1,903 3,365
--------- -------- --------- ---------
3,861 4,644 10,621 11,897
COSTS AND EXPENSES:
Cost of sales 1,793 1,915 4,688 4,538
Customer service expenses 587 1,100 2,038 3,220
Selling, general and administrative expenses 1,479 1,131 4,017 3,248
Research and development 191 266 638 606
--------- -------- --------- ---------
4,050 4,412 11,381 11,612
--------- -------- --------- ---------
OPERATING INCOME (LOSS) (189) 232 (760) 285
INTEREST AND FINANCING EXPENSES 80 105 249 309
--------- -------- -------- ------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (269) 127 (1,009) (24)
INCOME TAX EXPENSE 9 62 29 77
--------- -------- -------- ------
INCOME (LOSS) BEFORE MINORITY INTEREST (278) 65 (1,038) (101)
MINORITY INTEREST (18) (25) (48) (40)
--------- -------- -------- ------
NET INCOME (LOSS) $ (296) $ 40 $(1,086) $(141)
========= ======== ======== ======
NET INCOME (LOSS) PER SHARE
Basic and diluted $ (0.00) $ 0.00 $ (0.01) $ (0.00)
========= ======== ======== =========
WEIGHTED AVERAGE SHARES
Basic and diluted 120,629 115,753 120,582 102,457
========= ======== ========= =========
See notes to the consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
---------------------------------
2005 2004
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
- ---------------------------------------------------
Net Loss $(1,086) $ (141)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 242 167
Provision for bad debts (12) 20
Non-cash consideration 45 85
Minority interest in net income of consolidated subsidiary 84 40
Changes in operating assets and liabilities:
Accounts receivable 558 (648)
Inventories 361 (247)
Accounts payable and other current assets and liabilities (344) (51)
----- ------
Net cash used in operating activities (152) (775)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (90) (70)
Intangibles (26) (328)
Net cash provided by the acquisition of ID Systems --- 31
----- ------
Net cash used in investing activities (116) (367)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under the revolving line (764) 382
Proceeds from bridge loan --- 100
Repayment of bridge loan --- (100)
Proceeds from convertible debentures and warrants --- 2,000
Repayment of obligations under capital leases (4) (4)
Proceeds from sale of stock, net 4 ---
----- ------
Net cash (used in) provided by financing activities (764) 2,378
-------- -------
EFFECTS OF EXCHANGE RATES ON CASH 45 ---
------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (987) 1,236
CASH AND CASH EQUIVALENTS, at beginning of period 1,965 210
------- --------
CASH AND CASH EQUIVALENTS, at end of period $ 978 $ 1,446
======= ========
See notes to the consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 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 November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs,
an amendment of ARB No. 43, Chapter 4". This statement amends the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). SFAS No. 151 requires that those items be recognized as
current period charges. In addition, this statement requires that allocation of
fixed production overheads to costs of conversion be based upon the normal
capacity of the production facilities. The provisions of SFAS No. 151 are
effective for inventory costs incurred in fiscal years beginning after June 15,
2005. The Company is currently evaluating the impact of SFAS No. 151 on its
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29". SFAS No. 153 replaces the exception
from fair value measurement in APB Opinion No. 29 for non-monetary exchanges of
similar productive assets with a general exception from fair value measurement
for exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is to be applied prospectively, and is effective for non-monetary asset
exchanges occurring in fiscal periods after the December 2004 issuance of SFAS
No. 153. The Company does not believe the adoption of SFAS No. 153 will be
significant to the overall results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). SFAS No. 123R requires the Company to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The cost of the
employee services is recognized as compensation cost over the period that an
employee provides service in exchange for the award. SFAS No. 123R will be
effective January 1, 2006 for the Company and may be adopted using a modified
prospective method or a modified retrospective method. Although the Company has
not yet completed an analysis to quantify the exact impact the new standard will
have on its future financial performance, the disclosures in Note 8 provide
detail as to the Company's financial performance
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2005
as if the Company had applied the fair value-based method and recognition
provisions of SFAS No. 123R to stock-based employee compensation to the current
reporting periods.
In March 2005, the FASB issued FASB Staff Position ("FSP") No. 46(R)-5,
"Implicit Variable Interests under FASB Interpretation No. ("FIN") 46 (revised
December 2003), Consolidation of Variable Interest Entities" ("FSP FIN 46R-5").
FSP FIN 46R-5 provides guidance for a reporting enterprise on whether it holds
an implicit variable interest in Variable Interest Entities ("VIEs") or
potential VIEs when specific conditions exist. This FSP is effective in the
first period beginning after March 3, 2005 in accordance with the transition
provisions of FIN 46 (revised December 2003), "Consolidation of Variable
Interest Entities - an Interpretation of Accounting Research Bulletin No. 51"
("FIN 46R"). The Company has determined that the adoption of FSP FIN 46R-5 will
not have an impact on its results of operations and financial position.
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.
The following supplemental pro forma information is presented to illustrate the
effects of the acquisition on the historical operating results for the three and
nine month periods ended September 30, 2004 as if the acquisition had occurred
as of January 1, 2004:
Three Months Ended Nine Months Ended
September 30, 2004 September 30, 2004
-------------------- --------------------
(in thousands, except per share data)
Revenues $ 4,644 $ 13,480
Income (loss) before extraordinary item $ 40 $ (358)
Net income (loss) $ 40 $ (358)
Net income (loss) per share $ 0.00 $ (0.00)
NOTE 4 -- Inventories
- ---------------------
Inventories consist of the following:
September 30, 2005 December 31, 2004
------------------ -----------------
(in thousands)
Raw materials $ 1,082 $ 1,206
Work-in-process 212 292
Finished goods 1,659 1,816
----- -----
$ 2,953 $ 3,314
= ===== = =====
Reserves for excess and obsolete inventory totaled $1,339,000 and $1,528,000 as
of September 30, 2005 and December 31, 2004, respectively and have been included
as a component of the above amounts.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2005
NOTE 5 -- Credit Facilities
- ---------------------------
Balances under credit facilities consist of the following:
September 30, 2005 December 31, 2004
----------------- -----------------
(in thousands)
Royal Bank of Canada $ 1,876 $ ---
The CIT Group/Business Credit Inc.
revolving credit --- 1,769
Bank of Montreal overdraft lending --- 734
Bank of Montreal non-revolving demand --- 137
--- ---
$ 1,876 $ 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. $3.9 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 September 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. At September 30, 2005, the Company had excess borrowing capacity of
$342,000.
As of September 30, 2005, the Company failed to meet one of its financial
covenants under the Royal Bank agreement. It is presently in negotiations with
the bank to obtain a waiver of the covenant as of that date and on a continuing
basis.
NOTE 6 - Comprehensive Income (Loss)
- ------------------------------------
Comprehensive income (loss) is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
(in thousands)
Net income (loss): $ (296) $ 40 $ (1,086) $(141)
Other comprehensive income (loss):
Foreign currency translation
adjustments 95 61 45 99
------ ----- ------- -----
Comprehensive income (loss) $ (201) $ 101 $ (1,041) $ (42)
= ==== = === = ======= =====
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.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2005
NOTE 8 -- Earnings Per Share
The earnings per share calculations (basic and diluted) at September 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 2,604,512 and 1,499,948 shares of common stock
with a weighted average exercise price of $0.34 and $0.59 were outstanding at
September 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, 1,525,000 options were granted at market price
on of the dates of the grants. 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 4.7
years; stock volatility, 123%; risk free interest rates, 4.0%, 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 nine month period ended September 30, 2004.
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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
(in thousands, except per share data)
Net income (loss):
As reported $ (296) $ 40 $(1,086) $ (141)
Less stock based
compensation expense
determined under the fair
value method of all awards,
net of related tax effects (7) (3) (18) (13)
----- ----- ------ ------
Pro forma $ (303) $ 37 $(1,104) $ (154)
= ==== = == ======= = ====
Net loss per share:
As reported $ (0.00) $ 0.00 $ (0.01) $(0.00)
======== ======== ========= =======
Pro forma $ (0.00) $ 0.00 $ (0.01) $(0.00)
======== ======== ========= =======
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On August 12, 2005, the Board of Directors and shareholders representing a
majority of the outstanding shares approved an increase in the number of shares
available for grant under the 1997 Stock Incentive Plan of Sentry Technology
Corporation by 4,000,000 shares.
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 17% lower in the quarter ended September 30, 2005 as
compared to the quarter ended September 30, 2004. For the nine month period
ended September 30, 2005 consolidated revenues were 11% lower than in the same
period of last year. Our backlog of orders, which we expect to deliver within
the next twelve months, was $1.6 million at September 30, 2005 as compared to
$2.2 million at December 31, 2004. The backlog was $3.2 million at September
30, 2004. Total revenues for the periods presented are broken out as follows:
Q-3 Q-3 % 9 Mos. 9 Mos. %
2005 2004 Change 2005 2004 Change
---- ---- ------ ---- ---- ------
(in thousands) (in thousands)
EAS $ 1,961 $ 1,808 8 $5,153 $3,434 50
CCTV 523 959 (45) 1,291 2,550 (49)
SentryVision 859 731 18 2,274 2,548 (11)
---- ----- -- ----- ----- ---
Total sales 3,343 3,498 (4) 8,718 8,532 2
Service,
installation
and other 518 1,146 (55) 1,903 3,365 (43)
----- ----- ---- ----- ----- ---
Total revenues $ 3,861 $ 4,644 (17) $10,621 $11,897 (11)
======= ======= ==== ======= ======= ===
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The increase in EAS sales is primarily attributable to Sentry Canada's sales,
which represented $1.7 million of EAS sales in the third quarter and $4.3
million in the first nine months of 2005 compared to $1.5 million in the third
quarter $2.3 million in the first nine 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 $1.5
million in the third quarter of 2004 to $0.2 million in the third quarter of
2005 and from $4.0 million in the first nine months of 2004 to $1.0 million in
the first nine months of 2005. As Lowe's purchased both CCTV and SentryVision
products this reduction affected the reported sales in both categories. We
anticipate that this decision will continue to result in a substantial decrease
in future revenues from Lowe's on a comparative basis. We have added new sales
representatives and new customers that have substantially offset the loss of
Lowe's sales. As a result, our business is more balanced and is less reliant on
a single large customer for future success.
International sales of our SentryVision Smart Track system were approximately
the same in the third quarter and first nine 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 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 also
lower primarily as a result of cancellation of the Lowe's maintenance contract.
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. We have recently teamed with Civitas Group to develop Homeland
Security sales. In addition, 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 54% of total sales in both the three and nine month periods
ended September 30, 2005 compared to 55% and 53% in the three and nine month
periods ended September 30, 2004. We continue to see strong domestic margin
improvements in 2005 on the SmartTrack product lines as a result of our
outsourcing of manufacturing. However, our comparative margins on international
SmartTrack sales have been reduced in 2005 due to competitive pressures. Sentry
Canada's sales increased as a percentage of total sales in both the third
quarter and first nine months of 2005. As a percentage of sales, Sentry
Canada's cost of sales are higher than Sentry's historical costs as a portion of
its sales are made through dealers and distributors that carry lower margins
than sales made direct to end users. In addition, lower production volume at
our 51% owned labeling subsidiary resulted in higher overhead and a higher cost
of sales percentage in both the three and the nine month periods of 2005.
The decrease in customer service expenses in the third quarter and first nine
months of 2005 as compared to the third quarter and first nine 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.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Selling, general and administrative expenses were 31% and 24% higher in the
three and nine month periods ended September 30, 2005 when compared to the same
periods of the previous year. The increase in expenses in the comparative third
quarter amounts are principally a result of higher sales and marketing expenses,
higher foreign exchange losses and lower vendor settlements. The increase in
expenses in the nine month period is principally a result of nine full months of
Sentry Canada expenses in 2005 compared to five months in the 2004 period. We
have made certain administrative expense reductions to help compensate for the
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. Four new sales persons were hired
recently with substantial industry experience. Many new sales opportunities are
being developed that we anticipate will have a positive impact on future
revenues. 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. Included in selling, general and administrative
expenses were foreign exchange losses (gains) of $116,000 and $123,000 in the
three and nine month periods ended September 30, 2005 compared to $(1,000) and
$10,000 in the three and nine month periods ended September 30, 2004. The
change in the foreign currency exposure is a result of the recent global credit
facility denominated in Canadian dollars. We are currently working with our
lender to investigate strategies to mitigate this exposure.
The reduction in research and development in the third quarter of 2005 when
compared to the third quarter of 2004 is a result of lower prototype costs and a
reduction in the number of engineers. The increase in the first nine months of
2005 compared to the first nine months of 2004 was a result of increased
prototype costs associated with the development of our WAM EAS antenna that was
successfully introduced to the market at the end of the second quarter. In
addition, only five months of the research efforts of Sentry Canada were
included in the 2004 period.
Total interest and financing costs were lower in the third quarter of 2005
compared to 2004 was a result of lower average bank debt and lower interest
rates under the new credit agreement. In addition, the reduction in total
interest and financing costs in the first nine 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.
As a result of the foregoing, Sentry had losses of $296,000 and $1,086,000 in
the quarter and nine months ended September 30, 2005 as compared to a net income
of $40,000 and a net loss of $141,000 in the quarter and nine months ended
September 30, 2004.
Liquidity and Capital Resources as of September 30, 2005
At September 30, 2005, we had cash of $1.0 million, working capital of $3.6
million, total assets of $10.1 million and shareholders' equity of $3.3 million.
While we had a loss of $1.1 million in the first nine months of 2005, our net
cash used in operating activities was only $152,000. This was a result of lower
amounts of accounts receivable partially as a result of better collections
efforts as well as lower sales volume. 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.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We utilized $0.8 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 nine months 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. $3.9 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 September 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 September 30, 2005, we had borrowings of approximately $1.9
million with RBC and had excess borrowing capacity of $0.3 million. As of
September 30, 2005, the Company failed to meet one of its financial covenants
under the Royal Bank agreement. It is presently in negotiations with the bank
to obtain a waiver of the covenant as of that date and on a continuing basis.
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 September 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.
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.
SENTRY TECHNOLOGY CORPORATION
CONTROLS AND PROCEDURES
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: November 11, 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
November 11, 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
November 11, 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 September 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
November 11, 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 September 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
November 11, 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.