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, 2006
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
-----------------------------
(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
- ------------------------------------------------------- -----
(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)
Check 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
---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
---
As of August 14, 2006, there were 120,743,804 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
---
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, 2006 and December 31, 2005 3
Consolidated Statements of Operations --
Three Months Ended June 30, 2006 and 2005
And Six Months Ended June 30, 2006 and 2005 4
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2006 and 2005 5
Notes to Consolidated Financial
Statements - June 30, 2006 6 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 14
Item 3. Controls and Procedures 14 - 15
PART II. OTHER INFORMATION
- ----------------------------
Item 6. Exhibits 15
Signatures 15
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements (Unaudited)
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2006 2005
---- ----
(Unaudited) (Audited)
ASSETS
- ------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 672 $ 842
Accounts receivable, less allowance for doubtful
accounts of $86 and $141, respectively 1,813 2,762
Inventories 3,053 2,709
Prepaid expenses and other current assets 543 318
--------- ---------
Total current assets 6,081 6,631
PROPERTY, PLANT AND EQUIPMENT, net 646 637
GOODWILL 1,564 1,564
OTHER ASSETS 458 563
--------- ---------
$ 8,749 $ 9,395
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Revolving line of credit and term loan $ 2,020 $ 2,039
Accounts payable 593 489
Accrued liabilities 1,320 925
Obligations under capital leases - current portion 4 6
Deferred income 98 99
--------- ---------
Total current liabilities 4,035 3,558
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion -- 1
DEFFERED TAX LIABILITY 60 58
CONVERTIBLE DEBENTURES 1,924 1,904
MINORITY INTEREST 1,228 1,140
OTHER LIABILITIES 55 36
--------- ---------
7,302 6,697
SHAREHOLDERS' EQUITY
Common stock, $0.001 par value; authorized 160,000
shares, issued and outstanding 120,744 and
120,629 shares 121 121
Additional paid-in capital 48,811 48,783
Accumulated deficit (47,736) (46,408)
Other accumulated comprehensive income 251 202
--------- ---------
Total shareholders' equity 1,447 2,698
--------- ---------
$ 8,749 $ 9,395
========= =========
See notes to the consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2006 2005 2006 2005
(Unaudited) (Unaudited)
REVENUES
Sales $ 2,526 $ 3,462 $ 4,811 $ 5,375
Service, installation and other 406 805 829 1,385
------- -------- ------- --------
2,932 4,267 5,640 6,760
COSTS AND EXPENSES:
Cost of sales 1,302 1,915 2,558 2,895
Customer service expenses 558 747 1,081 1,496
Selling, general and administrative expenses 1,324 1,272 2,677 2,493
Research and development 204 214 404 447
------- -------- ------- --------
3,388 4,148 6,720 7,331
------- -------- ------- --------
OPERATING INCOME (LOSS) (456) 119 (1,080) (571)
INTEREST AND FINANCING EXPENSES 86 78 168 169
------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (542) 41 (1,248) (740)
INCOME TAX EXPENSE 30 37 40 20
------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST (572) 4 (1,288) (760)
MINORITY INTEREST (26) (34) (40) (30)
-------- -------- -------- --------
NET LOSS $ (598) $ (30) $(1,328) $ (790)
======== ======== ======== ========
NET LOSS PER SHARE
Basic and diluted $ (0.00) $ (0.00) $ (0.01) $ (0.01)
======= ======== ======== ========
WEIGHTED AVERAGE SHARES
Basic and diluted 120,729 120,566 120,689 120,559
======= ======= ======= =======
See notes to the consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
---------------------------
2006 2005
------ ------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,328) $ (790)
Adjustments to reconcile net loss
to net cash (used in) provided by operating activities:
Depreciation and amortization 139 163
Provision for bad debts 4 (20)
Deferred income taxes 2 (44)
Non cash consideration 89 17
Minority interest in net loss of consolidated subsidiary 88 (5)
Changes in operating assets and liabilities:
Accounts receivable 945 566
Inventories (344) 158
Prepaid expenses and other assets (225) 64
Accounts payable and accrued liabilities 497 204
Deferred income (1) (103)
Other liabilities 19 ---
-------- -------
Net cash (used in) provided by operating activities (115) 210
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (87) (26)
Intangibles (19) (16)
-------- -------
Net cash used in investing activities (106) (42)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under the revolving line of credit (19) (1,148)
Repayment of term loan --- ---
Repayment of notes payable --- (165)
Repayment of obligations under capital leases (1) (3)
Proceeds from exercise of stock options 22 4
-------- --------
Net cash provided by (used in) financing activities 2 (1,312)
-------- --------
EFFECTS OF EXCHANGE RATES ON CASH 49 (50)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (170) (1,194)
CASH AND CASH EQUIVALENTS, at beginning of period 842 1,965
-------- --------
CASH AND CASH EQUIVALENTS, at end of period $ 672 $ 771
======== ========
See notes to the consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2006
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 and their basis of application is consistent with that of the previous
year. 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, 2005, 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 July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" (FIN 48), effective for fiscal years beginning after December
15, 2006. FIN 48 requires a two-step approach to determine how to recognize tax
benefits in the financial statements where recognition and measurement of a tax
benefit must be evaluated separately. A tax benefit will be recognized only if
it meets a "more-likely-than-not" recognition threshold. For tax positions that
meet this threshold, the tax benefit recognized is based on the largest amount
of tax benefit that is greater than 50 percent likely of being realized upon
ultimate settlement with the taxing authority. The Company is currently
evaluating the impact of adopting FIN 48, and has not yet determined the
significance of this new rule to our overall results of operations, cash flows
or financial position.
In March 2006, the FASB issued Statement 156, "Accounting for Servicing of
Financial Assets," which amends SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." In a
significant change to current guidance, SFAS No. 156 permits an entity to choose
either of the following subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities: (1)
Amortization Method or (2) Fair Value Measurement Method. SFAS No. 156 is
effective as of the beginning of an entity's first fiscal year that begins after
September 15, 2006. The Company is currently reviewing the effect, if any, the
proposed guidance will have on its financial statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140." This
Statement permits fair value of remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation; clarifies which interest-only strips and principal-only strips are
not subject to the requirements of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"; establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2006
embedded derivative requiring bifurcation; clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives; and
amended SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. SFAS No. 155 is effective for all financial instruments acquired,
issued, or subject to a remeasurement (new basis) event occurring after the
beginning of an entity's first fiscal year that begins after September 15, 2006.
The Company is currently reviewing the effect, if any, the proposed guidance
will have on its financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 is effective
January 1, 2006 for the Company and was adopted using a modified prospective
method during the quarter ended March 31, 2006. Note 8 provides disclosure on
the effect of the adoption of SFAS No. 123R on net income and earnings per
share.
NOTE 3 -- Inventories
- ---------------------
Inventories consist of the following:
June 30, 2006 December 31, 2005
------------- -----------------
(in thousands)
Raw materials $ 1,043 $ 1,101
Work-in-process 225 279
Finished goods 1,785 1,329
----------- -----------
$ 3,053 $ 2,709
=========== ===========
Reserves for excess and obsolete inventory totaled $1,098,000 and $1,261,000 as
of June 30, 2006 and December 31, 2005, respectively and have been included as a
component of the above amounts.
NOTE 4 -- Credit Facilities
- ---------------------------
In May 2006, the Company and certain of its subsidiaries amended its secured
credit facility with Royal Bank of Canada ("RBC") by extending the term of the
agreement through May 2007 and modifying certain financial covenants. In
addition, the maximum borrowings under the facility were reduced to Canadian
$3.6 million (U.S. $3.2 million). However, RBC increased the borrowing base
formula Company by Canadian $1.0 million (U.S. $896,000) in exchange for
additional security provided by two of the Company's directors. Borrowings
under the facility 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 (6.0% at June
30, 2006), plus 1.75% per annum. Borrowings under this facility are secured by
substantially all of the Company's assets. As of June 30, 2006, the Company had
borrowings of $2.0 million under this facility and had excess borrowing capacity
of approximately $0.5 million.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2006
NOTE 5 - Comprehensive Income (Loss)
- ------------------------------------
Comprehensive income (loss) is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
(in thousands)
Net loss: $ (598) $ (30) $ (1,328) $ (790)
Other comprehensive income (loss):
Foreign currency translation
adjustments 51 (36) 49 (50)
------- ------ --------- -------
Comprehensive loss $ (547) $ (66) $ (1,279) $ (840)
======= ====== ========= =======
NOTE 6 -- Related Party Transactions
- ------------------------------------
At the end of the second quarter of 2006, Mr. Murdoch, Sentry's CEO and Director
and Mr. Furst, a Sentry Director, provided personal guarantees to RBC, the
Company's lender, in the amount of Canadian $1 million (U.S. $896,000) in
exchange for the bank providing increased availability under its credit facility
to the Company by the same amount. In consideration of these guarantees, Mr.
Murdoch and Mr. Furst will receive a fee of $43,000, to be shared between them,
paid in 12 equal monthly installments. As additional consideration, they
received fully vested, two year warrants to purchase approximately 2.9 million
shares of the Company's common stock, at an exercise price of $0.10 per share.
The fair value of these warrants of $120,000 was determined in accordance with
SFAS No. 123R "Share-Based Payment" and beginning in June 2006 is being written
off over the period of the guarantee, which is one year.
NOTE 7 -- Earnings Per Share
- ----------------------------
The earnings per share calculations (basic and diluted) at June 30, 2006 and
2005 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 2,555,000 and 1,229,512 shares of common stock
with a weighted average exercise price of $0.21 and $0.61 were outstanding at
June 30, 2006 and 2005, respectively, but were not included in the computation
of diluted net loss per share because their effect would be antidilutive.
NOTE 8 -- Stock Based Compensation
- ----------------------------------
The Company's 1997 Plan, which is shareholder approved, permits the grant of
share options and shares to its employees for up to 6,369,365 shares of common
stock as stock compensation and 3,102,738 shares were available for grant as of
June 30, 2006. All stock options under the 1997 Plan are granted at the fair
market value of the common stock at the grant date. Employee stock options vest
ratably usually over a three or five-year period and generally expire 10 years
from the grant date. Stock options granted to non-employee directors usually
vest immediately.
Accounting for Employee Awards:
- ----------------------------------
Effective January 1, 2006, the Company's Plan is accounted for in accordance
with the recognition and measurement provisions of SFAS No. 123R, which replaces
SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees, and related interpretations. SFAS 123R requires compensation costs
related to share-based payment transactions, including employee stock options,
to be recognized in the financial
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2006
statements. In addition, the Company adheres to the guidance set forth within
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No.
107, which provides the Staff's views regarding the interaction between SFAS No.
123R and certain SEC rules and regulations and provides interpretations with
respect to the valuation of share-based payments for public companies.
Prior to January 1, 2006, the Company accounted for similar transactions in
accordance with APB No. 25 which employed the intrinsic value method of
measuring compensation cost. Accordingly, compensation expense was not
recognized for fixed stock options if the exercise price of the option equaled
or exceeded the fair value of the underlying stock at the grant date.
While SFAS No. 123R encouraged recognition of the fair value of all stock-based
awards on the date of grant as expense over the vesting period, companies were
permitted to continue to apply the intrinsic value-based method of accounting
prescribed by APB No. 25 and disclose certain pro-forma amounts as if the fair
value approach of SFAS No. 123R had been applied. In December 2002, SFAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure, an
amendment of SFAS No. 123, was issued, which, in addition to providing
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation, required more
prominent pro-forma disclosures in both the annual and interim financial
statements. The Company complied with these disclosure requirements for all
applicable periods prior to January 1, 2006.
In adopting SFAS 123R, the Company applied the modified prospective approach to
transition. Under the modified prospective approach, the provisions of SFAS 123R
are to be applied to new awards and to awards modified, repurchased, or
cancelled after the required effective date. Additionally, compensation cost for
the portion of awards for which the requisite service has not been rendered that
are outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of awards shall be based on the grant-date
fair value of those awards as calculated for either recognition or pro-forma
disclosures under SFAS 123R.
As a result of the adoption of SFAS 123R, the Company's results for the three
and six months ended June 30, 2006 include share-based compensation expense
totaling approximately $11,000 and $17,000, respectively. Such amounts have
been included in the Consolidated Statements of Operations within selling,
general and administrative expenses. No income tax benefit has been recognized
in the income statement for share-based compensation arrangements as the Company
has provided for 100% valuation allowance on net deferred tax assets. No stock
option compensation expense was recorded under APB No. 25 in the Statements of
Operations in the six months ended June 30, 2005.
Employee stock option compensation expense in 2006 is the estimated fair value
of options granted amortized on a straight-line basis over the requisite service
period for entire portion of the award. The Company has not adjusted the expense
by estimated forfeitures, as required by SFAS 123R for employee options, since
the forfeiture rate based upon historical data was determined to be immaterial.
Accounting for Non-employee Awards:
- --------------------------------------
The Company previously accounted for options granted to its non-employee
consultants and non-employee registered representatives using the fair value
cost in accordance with SFAS 123 and EITF No.
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2006
96-18. The adoption of SFAS 123R and SAB 107 as of January 1, 2006, had no
material impact on the accounting for non-employee awards. The Company
continues to consider the additional guidance set forth in EITF Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees"
("EITF 96-18"). There was $4,000 of stock compensation expense related to
non-employee options in both the three and six month period ended June 30, 2006.
No stock compensation expense was recorded in the three and six month periods
ended June 30, 2005.
The weighted average estimated fair value of stock options was $0.05 and $0.07
for options granted during the three and six months ended June 30, 2006,
respectively, and $0.08 and $0.08 for options granted during the three and six
months ended June 30, 2005, respectively. The fair value of options at the date
of grant was estimated using the Black-Scholes option pricing model. During
2006, the Company took into consideration guidance under SFAS 123R and SAB 107
when reviewing and updating assumptions.
The expected volatility is based upon historical volatility of our stock and
other contributing factors. The expected term is based upon observation of
actual time elapsed between date of grant and exercise of options for all
employees. Previously such assumptions were determined based on historical
data.
The assumptions used for the specified reporting periods and resulting estimates
of weighted average fair value per share of options granted during those periods
were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
Risk-free interest rate 4.75% -- 4.46% 4.0%
Expected dividend yield 0% -- 0% 0%
Expected lives 2 years -- 2 - 3 years 2 years
Expected volatility 87% -- 100% 94%
No options were granted in the second quarter ended June 30, 2005.
The following table illustrates the pro forma effect on net loss and loss per
share as if the fair value recognition provisions of SFAS No. 123R had been
applied to all outstanding and unvested awards in the prior year comparable
period:
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
------------- -------------
Net loss, as reported $ (30) $ (790)
Add: Stock based compensation
expense included in reported net loss --- ---
Deduct: Employee stock option
compensation expense determined under
fair value based method for all employee
awards (no tax effect) (6) (11)
------- --------
Pro forma net loss $ (36) $ (801)
======= ========
Net loss per common share:
As reported-basic and diluted $(0.00) $ (0.01)
======= ========
Pro forma-basic and diluted $(0.00) $ (0.01)
======== ========
SENTRY TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2006
The following table represents the Company's stock options granted, exercised
and forfeited during the six months ended June 30, 2006:
Weighted
Number of Weighted Average Aggregate
Shares Average Remaining Intrinsic
Subject to Exercise Contractual Value
Issuance Price Term ($000)
-------- ----- ---------- ------
Outstanding at Dec. 31, 2005 2,431,524 0.35
Granted 650,000 0.10
Cancelled (411,524) 0.87
Exercised (115,000) 0.06 6
--------- ----
Outstanding at June 30, 2006 2,555,000 0.21 7.84 years 0
========= ==== ========== ====
Exercisable at June 30, 2006 930,000 0.42 5.36 years 0
========= ==== ========== ====
The aggregate intrinsic value of options has been shown as $0 because the
weighted average exercise price of the price of the outstanding and exercisable
option shares exceeded the quarter end market price of the Company's common
stock.
As of June 30, 2006, there was $113,000 of total unrecognized compensation cost,
net of estimated forfeitures, related to all unvested stock options, which is
expected to be recognized over a weighted average period of approximately 3.6
years.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
Certain Factors That May Affect Future Results
- ----------------------------------------------
Information contained or incorporated by reference in this periodic report on
Form 10-QSB and in other SEC filings by Sentry contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof, other variations thereon or comparable terminology, or by
discussions of strategy. These forward-looking statements involve certain
significant risks and uncertainties, and actual results may differ materially
from the forward-looking statements. For further details and discussion of these
risks and uncertainties see Sentry Technology Corporation's SEC filings
including, but not limited to, its annual report on Form 10-KSB. No assurance
can be given that future results covered by the forward-looking statements will
be achieved, and other factors could also cause actual results to vary
materially from the future results covered in such forward-looking statements.
We do not undertake to publicly update or revise any of our forward-looking
statements even if experience or future changes show that the indicated results
or events will not be realized.
Results of Operations:
- ------------------------
Consolidated revenues were 31% lower in the quarter ended June 30, 2006 as
compared to the quarter ended June 30, 2005. For the six month period ended
June 30, 2006 consolidated revenues were 17% lower than in the same period of
last year. Our backlog of orders, which we expect to deliver within the next
twelve months, was $2.0 million at June 30, 2006 as compared to $2.2 million at
December 31, 2005.
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Total revenues for the periods presented are broken out as follows:
Q-2 Q-2 % 6 Mos. 6 Mos. %
2006 2005 Change 2006 2005 Change
---- ---- ------ ---- ---- ------
(in thousands) (in thousands)
EAS $ 1,865 $ 2,142 (13) $ 3,376 $ 3,192 6
CCTV 168 455 (63) 375 768 (51)
SentryVision 493 865 (43) 1,060 1,415 (25)
----- ------- ---- ------- ------- ----
Total sales 2,526 3,462 (27) 4,811 5,375 (10)
Service,
installation
and other 406 805 (50) 829 1,385 (40)
----- ------- ---- ------- ------- ----
Total revenues $ 2,932 $ 4,267 (31) $ 5,640 $ 6,760 (17)
======= ======= ==== ======= ======= ====
Sales in the second quarter of 2006 continued to be soft across all product
lines. Approximately $.7 million of the overall decrease in comparative total
revenues of $1.1 million in the first six months of 2006 was attributed to
Lowe's Home Centers.
We had growth in EAS sales in the North American library sector principally due
to higher sales of our QuickCheck patron self check book-borrowing systems. In
addition, we increased EAS sales to dealers in South and Central America in both
the second quarter and first six months of 2006. However, these gains were more
than offset by decreases in EAS sales to retail customers particularly in the
second quarter of 2006. The reduction in CCTV sales in the second quarter and
first six months of 2006 as compared to the same periods in 2005 was principally
a result of lower sales to Lowe's and Goody's. Domestic sales of our
SentryVision SmartTrack system were lower in the second quarter and first six
months of 2006 when compared to the same periods of 2005 principally as a result
of an unexpected delay in several installations with a major retailer.
International dealer sales of SentryVision were lower in both periods of 2006
primarily due to lower sales in the UK market. 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. Service and
maintenance revenues were substantially lower as a result of cancellation of the
Lowe's maintenance contract. Installation revenues were lower in the 2006 as
compared to 2005 due to lower CCTV and SentryVision sales.
Cost of sales were 52% and 53% of total sales in the three and six month periods
ended June 30, 2006 compared to 55% and 54% in the three and six month periods
ended June 30, 2005. We continue to see strong domestic margins in 2006 on EAS
and SmartTrack product lines as a result of our outsourcing of manufacturing.
Cost of sales at our 51% owned labeling subsidiary improved as a result of
higher production volume, which resulted in lower overhead in both the three and
the six month periods of 2006.
The decrease in customer service expenses in the second quarter and first six
months of 2006 as compared to the second quarter and first six months of 2005 is
primarily a result of a decrease in the number of customer service employees and
lower outside service contractor costs.
Selling, general and administrative expenses were 4% and 7% higher in the three
and six month periods ended June 30, 2006 when compared to the same periods in
the previous year. The increases in expenses are principally a result of higher
sales and marketing expenses, higher product warranty costs and $35,000
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
resulting from the settlement of audit fees with our predecessor auditors.
Also, in the first half of 2006, we hired additional sales personnel and a new
VP of Sales and Marketing, with prior experience with our industry's largest
competitor. We have increased funding of sales and marketing programs, which
have allowed the sales team to develop opportunities with new and existing
customers, which we anticipate will result in increased revenue later in the
year.
The reduction in research and development in the second quarter and first six
moths of 2006 when compared to the same periods in 2005 is principally a result
of a reduction in the number of engineering support staff offset partially by
the increased use of engineering consulting firms.
While there was lower average bank debt during the first half of 2006 when
compared to 2005, interest and financing costs increased in the second quarter
of 2006 compared to 2005 as a result of an increase in interest rates.
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 net losses of $598,000 and $1,328,000
in the quarter and six months ended June 30, 2006 as compared to net losses of
$30,000 and $790,000 in the quarter and six months ended June 30, 2005.
Liquidity and Capital Resources as of June 30, 2006
At June 30, 2006, we had cash of $0.7 million, working capital of $2.0 million,
total assets of $8.7 million and shareholders' equity of $1.3 million. While we
had a loss of $1.4 million in the first six months of 2006, our net cash used in
operating activities was only $115,000. Cash was generated from reductions in
accounts receivable principally due to improved collection efforts as well as an
increase in accounts payable and accrued liabilities. This was offset by
increases in inventory levels purchased in anticipation of higher sales activity
levels.
Our investing activities used net cash of $106,000 during the first six months
of 2006 principally for the purchase of manufacturing equipment at our 51% owned
labeling plant. There are no significant projected capital expenditure
requirements anticipated through the remainder of the year, however, the level
of spending will be dependent upon various factors, including growth of the
business and general economic conditions.
We generated $2,000 in net cash from financing in the first six months of 2006
activities through an increase during the second quarter of 2006 in borrowings
under our credit facility and the exercise of stock options. Availability under
the credit facilities is principally based on the level of our receivables and
inventory, which declined in the first six months of 2006.
In May 2006, the Company and certain of its subsidiaries amended its secured
credit facility with Royal Bank of Canada ("RBC") by extending the term of the
agreement through May 2007 and modifying certain financial covenants. In
addition, the maximum borrowings under the facility were reduced to Canadian
$3.6 million (U.S. $3.2 million). However, RBC increased the borrowing base
formula Company by Canadian $1.0 million (U.S. $896,000) in exchange for
additional security provided by two
SENTRY TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
of the Company's directors. Borrowings under the facility 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 (6.0% at June 30, 2006), plus 1.75% per annum.
Borrowings under this facility are secured by substantially all of the Company's
assets. As of June 30, 2006, the Company had borrowings of $2.0 million under
this facility and had excess borrowing capacity of approximately $0.5 million
principally as a result of the guarantees indicated above.
We will require positive cash flows from operations to meet our working capital
needs over the next twelve months. Sentry's revenues declined and we incurred
an operating loss in 2005. This trend continued through the first half of 2006
and substantially reduced the Company's available cash reserves and limited our
ability to secure additional bank financing. A majority of the Company's cash
is held at the 51% owned subsidiary. The Company has instituted certain plans
to increase its revenue base as well as preserve its cash, including cost
cutting measures and inventory reduction initiatives. We made a substantial
investment in the sales and marketing infrastructure during the first six months
of 2006 and anticipated a substantial increase in sales particularly in the
SentryVision SmartTrack product line which has not yet occurred. While we
continue to believe that we have developed solid sales leads with some of the
world's largest retailers, the delays in receipt of current orders have caused
us to operate in a cash flow deficit for the first six months of the year.
We anticipate revenue growth in new and existing markets. We are striving to
continue to improve our gross margins and control our selling expenses and our
general and administrative expenses. There can be no assurance, however, that
changes in our plans or other events affecting our operations will not result in
accelerated or unexpected cash requirements, or that we will be successful in
achieving positive cash flow from operations or obtaining adequate financing
through our credit facility. Our future cash requirements are expected to
depend on numerous factors, including, but not limited to: (i) the ability to
generate positive cash flow from operations; (ii) the ability to raise
additional capital or obtain additional financing; and (iii) economic
conditions. In the event that sufficient positive cash flow from operations is
not generated, we will seek additional financing to satisfy current operating
cash flow deficiencies. There can be no assurance, however, that additional
financing will be available on terms that are satisfactory to the Company, or
that any such financing will be sufficient to provide the full amount of funding
necessary.
Related Party Transactions
- ----------------------------
Details of related party transactions are included in Note 6 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 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 14, 2006 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 RULE 13(A) OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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-14 and 15d-14) for the Registrant and we have:
A. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure the 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. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principals;
C. 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
D. 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 materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting.
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 control over
financial reporting.
DATED: August 14, 2006
BY: /S/ PETER L. MURDOCH
-------------------------------------
NAME: Peter L. Murdoch
TITLE: President and Chief Executive Officer
SECTION 302 CERTIFICATION:
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13(A) OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 202
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-14 and 15d-14) for the Registrant and we have:
A. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure the 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. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principals;
C. 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
D. 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 materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting.
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 control over
financial reporting.
Dated: August 14, 2006
By: /s/ Peter J. Mundy
------------------------------------------
Name: Peter J. Mundy
Title: Vice President and Chief Financial Officer
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, 2006 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 14, 2006
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, 2006 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 14, 2006
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.