SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
COMMISSION FILE NUMBER: 1-12727
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SENTRY TECHNOLOGY CORPORATION
(Exact name of the Registrant as specified in its charter)
DELAWARE 96-11-3231714
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1881 LAKELAND AVENUE, RONKONKOMA, NY 11779
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 739-2000
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class:
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Common Stock, $.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes ____ No X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes ____ No X
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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 ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer _____ Accelerated filer _____
Non-accelerated filer _____ Smaller reporting company X
(Do not check if a smaller reporting company) -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
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The issuer's revenues for the latest fiscal year were $12,708,000.
At March 13, 2009, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $824,000 based upon the
closing price of such securities on the OTC Bulletin Board on that date.
At March 13, 2009, the registrant had outstanding 120,743,804 shares of Common
Stock.
Documents Incorporated by Reference
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None.
Transitional Small Business Disclosure Format (check one) Yes ___ No X
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
Sentry designs, manufactures, sells and installs a complete line of Video
Surveillance Systems (VSS), Electro-Magnetic (EM) and Radio Frequency
Identification (RFID) based Library Management systems as well as Radio
Frequency (RF) and Electro-Magnetic (EM) Electronic Article Surveillance (EAS)
systems. The VSS product line features SentryVision, SmartTrack, a proprietary,
patented traveling Surveillance System, and includes conventional pan, tilt and
zoom ("PTZ") and fixed camera video systems. The Company's products are used by
libraries to secure inventory and improve operating efficiency, by retailers to
deter shoplifting and internal theft and by industrial and institutional
customers to protect assets and people.
Sentry was incorporated in Delaware in 1996. Its corporate predecessors had
been in business for more than 30 years. Sentry was formed in connection with
the February 1997 merger of Knogo North America Inc., a Delaware corporation,
and Video Sentry Corporation, a Minnesota corporation. As a result of the
merger, we became the parent corporation of two wholly-owned Delaware
subsidiaries: Knogo North America Inc. ("Knogo") and Video Sentry Corporation
("Video"). This series of transactions is referred to herein collectively as the
"Initial Merger."
Knogo was engaged in the design, manufacture, sale, installation and servicing
of a complete line of electronic article surveillance equipment. Knogo was
incorporated in Delaware in October 1996. Its corporate predecessors had been in
business for more than 30 years.
Video designed, manufactured, marketed, installed and serviced a programmable
traveling closed circuit television surveillance system that delivers a high
quality video picture, which is used in a wide variety of applications. Video
also acted as a system integrator for conventional VSS products that it
marketed, installed and serviced. Video's predecessor was founded in 1990 and
made its first sales in 1992. Video was merged into Knogo as of December 31,
2000.
On April 30, 2004, Sentry acquired all the outstanding common stock and Series
"A" preference shares of ID Security Systems Canada, Inc., an Ontario
corporation, and all the outstanding capital stock of ID Systems USA, Inc., a
Pennsylvania corporation, (collectively "ID Systems"). The acquisition expanded
our product offering to include library security and process management systems
including electromagnetic and RFID based patron self-service systems. 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").
On March 22, 2005, Sentry was merged into its subsidiary Knogo pursuant to a
plan of merger in which Knogo was the surviving corporation. The merger was
effective for accounting purposes on January 1, 2005. Pursuant to the Plan of
Merger, Knogo changed its name to Sentry Technology Corporation.
EQUITY TRANSACTIONS
On April 19, 2004, Dialoc ID Holdings B.V. ("Dialoc") sold 39,066,927 Sentry
common shares (representing approximately 46% of the total issued and
outstanding shares of Sentry) to a group of investors. Of the group, Saburah
Investments Inc. ("Saburah") acquired 22,758,155 shares, Mr. Robert Furst
14,554,386 shares and Dr. Morton Roseman 1,754,386 shares. Mr. Peter Murdoch,
President, CEO and Director of Sentry, is the owner of Saburah. Mr. Furst is a
long-standing member of Sentry's Board of Directors.
In addition to the purchase of Sentry's common shares, Saburah also acquired
100% of ID Security Systems Canada, Inc. and ID Systems USA, Inc. The price
paid to Dialoc by Saburah and Murdoch for Sentry and ID Systems shares in cash,
debt assumption and other consideration was approximately $3.6 million plus the
surrender of Murdoch's 15% interest in Dialoc. Saburah also agreed to make a
payment to Dialoc in the future equal to approximately 6% of any payment it
received from Checkpoint Systems Inc. ("Checkpoint") resulting from litigation
brought by ID Canada against Checkpoint.
On April 30, 2004, Sentry purchased from Saburah Investments, Inc., an Ontario
corporation, all of the outstanding common shares and Series "A" preference
shares of ID Security Systems Canada, Inc., an Ontario corporation, and all of
the outstanding capital stock of ID Systems USA, Inc., a Pennsylvania
corporation. ID Systems was a Toronto based company engaged in anti-shoplifting
technology, security labeling, RFID, access control and library security.
Sentry acquired ID Systems from Saburah in exchange for 30,000,000 Sentry common
shares. The price paid per Sentry share for the securities of ID Systems was
valued at approximately $0.11. A special committee of Sentry's Board of
Directors received an opinion from Corporate Valuation Services confirming that
the price paid for the acquisition of ID Systems was fair from the point of view
of Sentry shareholders. As part of the purchase agreement, the proceeds of the
ID Systems litigation settlement were distributed to the former ID Systems'
shareholders. Sentry's Board of Directors and shareholders owning a majority of
Sentry common stock approved the acquisition of ID Systems.
Other benefits flowing to Sentry/ID Systems via the purchase of ID Systems are
as follows:
- - ID Systems and Sentry continue as a distributor in North and South America
for Dialoc products.
- - Dialoc became a distributor in Europe and Asia of labels manufactured by
ID Systems' security label manufacturing subsidiary, Custom Security
Industries Inc. ("CSI").
- - Dialoc will continue to be a dealer for Sentry products in Europe and
Asia.
On April 30, 2004, Sentry entered into a $2,000,000 secured convertible
debenture with Brookfield Technology Fund ("Brookfield"), an alternative
investment fund established by Brookfield Asset Management (formerly known as
Brascan Technology Fund and Brascan Asset Management, respectively), to invest
in early stage, technology-based companies with high growth potential.
Key terms of the transaction are as follows:
- - Four-year term.
- - Interest rate of 8% per annum.
- - Redeemable at Sentry's option after 18 months.
- - Conversion price equal to the market price, at time of conversion, less a
discount of 30% with a maximum conversion price of $0.12 per share.
- - Conversion is at the option of Brookfield when market share price is equal
to or greater than $0.17 per share or with the approval of Sentry's Board
of Directors when the market share price is less than $0.17 per share.
- - Sentry will provide most favored pricing to all Brookfield affiliates and
expects to be a supplier of security and identification products to the
Brookfield affiliates.
- - Brookfield was issued warrants for 5,000,000 shares of Sentry common
stock, priced at $0.15 per share, exercisable anytime until April 30,
2008.
- - Brookfield is entitled to one seat on Sentry's Board of Directors or will
participate as an observer.
The Debenture is secured by a general security interest over all the assets and
properties of Sentry. The amount is subordinate to the existing credit
facilities. Sentry acquired ID Systems as a condition of the financing.
The proceeds of the financing, to be used primarily for working capital, were
initially allocated between the convertible debenture ($1,835,000) and the
warrants ($165,000) based on their respective fair values in accordance with
Emerging Issues Task Force (EITF) 00-27 "Application of Issue 98-5 to Certain
Convertible Instruments". The difference between the face value of the
debenture and the allocated value was being charged to interest and financing
expenses over the term of the convertible debenture. No beneficial conversion
feature has been recognized under the term of the convertible debenture.
Certain other warrants to purchase 425,000 common shares of Sentry at exercise
prices ranging from $0.18 to $0.20 per share were issued in conjunction with the
convertible debenture. The warrants were exercisable over one to three years.
The fair value of these warrants ($49,000) was charged to operations over the
life of the warrants. During the year ended December 31, 2008, nil (2007 -
$5,000) was recorded in interest and financing expenses related to these
warrants. These options expired during 2007.
Sentry's Board of Directors and shareholders owning a majority of Sentry common
stock approved the transaction with Brookfield.
On April 11, 2008, Brookfield extended its maturity of the debenture to December
31, 2008. The 5,000,000 warrants that were originally issued expired. In
consideration of this renewal, Brookfield received fully- vested, two-year
warrants to purchase 5 million common shares of the Company at an exercise price
of $0.10 per share. The fair value of these warrants of $150,000 was determined
in accordance with SFAS No. 123R and beginning in May 2008 was taken into income
over the period of the guarantee, which was eight months. This extension
expired on December 31, 2008. On November 24, 2008 Brookfield further extended
its maturity of the debenture to July 30, 2009. There is no assurance that
further extensions will be obtained.
Mr. Murdoch, directly or indirectly through his ownership of Saburah Investments
Inc., owns or controls 49.5% of the outstanding common stock of Sentry, which
does not include the amount of shares to which Mr. Murdoch would be entitled to
upon exercise of warrants.
THE SENTRYVISION SYSTEM
SentryVision refers to our product line of proprietary traveling video
surveillance systems. Over the years, Sentry has continually improved the
product starting with the H-System, followed by the OH-System, the original
SentryVision and currently the latest SmartTrack system.
All versions of the product consist of a camera carriage unit, a continuous
track enclosed with tinted or mirrored glass enclosure and electronic control
equipment. The carriage unit moves within the enclosure and carries one or two
PTZ video cameras, electronic transmission components and motor drives. The
track, consisting of 12 foot or 4 meter sections, is suspended from the ceiling.
The carriage is hidden using a tinted enclosure. The carriage unit transmits
video and control signals from the camera(s) through two copper conductors
running inside the enclosure to a receiver unit located at one end of the
carriage track. The copper conductors also carry power to the camera carriage,
eliminating the need for power or communication cables. From the receiver unit,
the video signals are relayed to a central monitoring location by wire or fiber
optics, where a system operator can position or move the camera carriage to
obtain the best vantage point while viewing and recording the continuous, live
video pictures. The system design supports conventional peripheral devices, such
as digital videocassette recorders, alarm inputs, fixed cameras, PTZ dome
cameras, switches/multiplexers, voice intercom systems, panic buttons and remote
viewing capability via the internet.
Unlike our previous products, the SentryVision SmartTrack system features one
or two state-of-the-art pan, tilt and zoom ("PTZ") domes providing 360
unobstructed views to eliminate most blind spots. Additionally, SmartTrack
utilizes sophisticated software that provides six tours and up to 60 presets per
camera carriage to allow programmable viewing and recording with or without an
operator. The improvements made to the carriage make the new SmartTrack system
the fastest and most reliable traveling VSS surveillance system in the history
of SentryVision product offerings. SmartTrack is our premier product,
replacing all previous generations of SentryVision .
SentryVision is designed to provide enhanced loss prevention surveillance in
retail stores and distribution centers as well as to provide monitoring and
deterrence of illegal and unsafe activities in a variety of other locations such
as parking garages, correctional facilities, transportation centers and public
transit terminals. SentryVision may also be employed in a broad range of
operational and process monitoring applications in commercial manufacturing and
industrial settings. SentryVision is now installed in four of the top five and
six of the top ten Global Retailers. As of December 31, 2008, SentryVision
systems had been installed at the following customer locations in North America:
Kmart, Navy Exchange, Lowe's Home Centers, Target Stores, Mills Fleet Farm, Winn
Dixie, Federal Express, Cabellas, Fred Meyer, Motorola, UPS, J.C. Penney,
Canadian Tire, Reno Depot, Estee Lauder, Kohl's Department Stores and Disney
Direct Marketing. In addition, during 2008, the Company's international
distributors installed SentryVision systems in customer locations throughout
Western and Eastern Europe, Latin America and Asia. Our international customers
include ASDA Wal-Mart, Boot Drug Stores, Carrefour, Auchan, Cora, Castorama, B &
Q, Tesco and Coop. We believe that, by providing expanded surveillance coverage
and enhanced flexibility to select the locations watched, SentryVision has
enabled customers to significantly reduce inventory shrinkage, increase theft
apprehension rates and improve safety and security. Based on the price of its
system and the experience of Sentry's customers to date, we believe SentryVision
is a cost-effective solution, which can improve the operations of our customers.
Sentry sold its first systems in 1992 for installation in parking garage
security surveillance applications, but quickly moved its market focus into the
retail sector. In this sector, we have identified a number of specific market
segments for which SentryVision is well suited for loss prevention
surveillance, including home centers, mass merchandise chains, supermarkets,
hypermarkets and drug stores, as well as related distribution centers. The key
application is inventory loss prevention in the stores, stock rooms and
distribution centers as well as a tool to improve business operations via our
OperationalVideo system.
SentryVision is typically installed in large retail stores which use a checkout
area at the front of the store and product display configurations and high
merchandise shelving which form rows and aisles. Sentry specializes in designing
system applications which are customized to fit a customer's specific needs and
which integrate the customer's existing surveillance equipment (PTZ dome and
fixed-mount cameras) with SentryVision . The flexibility of the system allows
the customer to specify target-coverage areas ranging from stock rooms to total
store coverage and focus on shoplifting, employee theft or performance
evaluation of client personnel. Typically, SentryVision has been installed near
the ceiling between the rows of cash registers and the ends of the merchandise
aisles. This allows the retailer to easily observe both the cash handling
activities of cashiers in the checkout area and customer activities between the
merchandise rows, despite the presence of hanging signs and other obstructions.
The entire sales floor can be monitored efficiently by focusing up and down the
aisles and by moving the carriage horizontally from aisle to aisle, or from cash
register to cash register. In addition, with the use of camera pan, tilt and
zoom lens features, activities in each area can be monitored in greater detail.
Results from Sentry's current installations indicate significant improvements in
detecting shoplifting, employee theft and improving business operations.
In 2007 we installed the first OperationalVideo applications in Kmart.
OperationalVideo delivers real-time images over the internet using Sentry's
SmartTrack traveling camera system and digital video server to help control
safety and security as well as remote viewing of store operations,
merchandising, signage, displays, pricing and employee procedure compliance.
Managers have access to all store operations from the home office, regional
offices and any fixed or mobile location equipped with an internet connection.
As well, security personnel are able to walk the floor interacting with staff
and customers while maintaining control of the SmartTrack system using a
wireless PDA. Video is managed via the SentryVision Server, a network device
that provides real-time remote viewing and user passwords to manage hierarchal
control of the system.
Retailers have also integrated SentryVision with "front end" packages of
conventional video cameras, dedicated to monitoring the registers and allowing
users to locate the traveling camera track where the maximum coverage of
in-store traffic can be monitored. The SentryVision system is today generally
sold in conjunction with conventional video applications. Customers using the
SentryVision system have reported significant reductions in theft-related
inventory shrinkage.
SentryVision HipTV allows the user to view and control video images from the
SmartTrack traveling video system using a mobile hand held computer and wireless
communication network. Customers are no longer required to sit in front of a
video console to manage the SmartTrack system. The SentryVision Mobile
solution is being used to manage operations and security in large store and
distribution centers in the United States.
SentryVision Server is an IP addressable digital video server, which gives
users the ability to capture, stream, view and store video images using a web
browser. The SentryVision Server (SVS) comes with software that allows
multiple users to simultaneously connect to a variety of SentryVision DVMS
(Digital Video Management System) via LAN - across TCIP/IP networks. The system
uses a Windows-based application for configuration and a browser-based client
for remote viewing of live and recorded video for quick and easy investigation
of security issues, as well as policies and procedure compliance. The SVS
server also runs our OperationalVideo business management solutions for
retailers.
RETAIL MARKET APPLICATIONS
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Home Centers: Sentry has installed systems in the home center segment of the
retail market. Typical of our customers in this market is Mills Fleet Farm, a 32
store regional hardware, home supply and discount retail chain. The company
requires systems for total floor coverage.
- - Mass Merchandise and Specialty Chains. Sentry has installed systems for
customers including Navy Exchange, Kmart and Walgreens. The targeted coverage
varies extensively in these installations from only stock rooms to total store
coverage. The equipment package provided in each case varies with the
application and location of the need.
- - Supermarkets. Sentry has installed systems in supermarket customers
including ASDA Wal-Mart, Kroger, Marsh, Auchan, Cub Foods, Winn-Dixie and Fiesta
Mart. The targeted coverage in most of these installations has been the entire
retail space.
INDUSTRIAL MARKET APPLICATIONS
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- - Distribution Centers. Sentry also provides loss prevention surveillance
for distribution centers and warehouses, and has installed systems for retailers
including TJ Maxx, Big Lots, Home Depot, Kohl's Department Stores, Target
Stores, Boots Drug Stores, Ingram Micro, Navarre, Mastronardi Produce, Borders
Group, Disney Direct Marketing, Saks, Guess, Big Dog, Food Lion, Roundy's, the
Gap, Bealls and J.C. Penney. Traveling through a facility from an overhead
position, the SentryVision system can monitor activities occurring between the
stacked rows of cartons or lines of hanging garments. The system can also move a
surveillance camera into position to monitor shipping and receiving docks and
parked delivery trucks. To achieve surveillance capabilities equivalent to those
of the SentryVision system, a conventional PTZ dome system or fixed-mount video
surveillance camera would have to be installed at every desired vantage point,
requiring numerous cameras, additional equipment and wiring and increased
installation and operating costs.
- - Manufacturing and Transportation Facilities. SentryVision use in
factories has been limited, but the benefits of continuous tracking of
industrial operations and processes indicate future growth potential. Continued
expansion of the SentryVision dealer program is expected to generate increased
installations in factories manufacturing electronics, pharmaceuticals, computers
and other high value products and in various wholesale distribution and
transportation facilities. Express package and other high throughput
distribution facilities are also good prospects for a continuous tracking VSS
system for theft prevention. Installations include FedEx Freight, Motorola,
Federal Express Air & Ground and UPS. In Cape Town, South Africa, The Metro
Rail Network has installed 10 tracks at several terminal stations to monitor
passengers at the junction of bus, railway and taxi services. SmartTrack is an
integral part of an overall crime prevention and deterrence program including
central management of all video devices over a network. In addition, the Mexico
City Metro purchased more than 100 SmartTrack systems to manage safety and
security for one of the world's largest subway systems.
CONVENTIONAL VIDEO SURVEILLANCE SYSTEMS
Conventional video surveillance systems are cost effective in many applications
and are the most widely used loss prevention system in North America.
Conventional video uses all the basic components of the video surveillance
industry including fixed and dome cameras, digital cameras, digital video
recorders, monitors, switchers, multiplexers and controllers. This equipment is
manufactured for Sentry by outside vendors. We believe that, while less
profitable than SentryVision and traditional EAS products, conventional video
products complement our other surveillance systems and provide customers with
further protection against internal theft and external shoplifting activities.
While we believe that conventional video and SentryVision are complementary
security solutions, many companies have traditionally viewed them as competing
solutions and have selected between conventional video systems and SentryVision
systems for their security solutions.
Remote video transmission and digital recording are continuing growth areas for
Sentry. These systems allow customers to monitor remote sites using existing
communication lines and a PC-based system. Video camera images are stored and
manipulated digitally, substituting the PC for the VCR and multiplexer, and
eliminating the videotape. Sentry markets digital video recording and a remote
video transmission unit developed by third-party vendors including GE Security,
VCT and TeleWatch.
We continue to expand conventional video installations in industrial and
institutional facilities. Significant installations have been made for express
package companies, including Federal Express.
EAS SYSTEMS
EAS (electronic article surveillance) systems consist of detection devices that
are triggered when articles or persons tagged with reusable tags or disposable
labels, (referred to as tags), pass through the detection device. The EAS
systems that Sentry manufactures are based upon three distinct technologies.
One, the Radio Frequency ("Knoscape RF") System, uses medium radio frequency
transmissions in the two to nine megahertz range. Second, the "Ranger" system
uses ultra-high frequency radio signals in the 902 megahertz and 928 megahertz
bands. Third, the Electromagnetic ("Knoscape MM ") system uses very low
frequency electromagnetic signals in the range of 218 hertz to nine kilohertz.
The principal application of Sentry's products is to detect and deter
shoplifting and employee theft in supermarket, department, discount, specialty
and various other types of retail stores including bookstores, video, liquor,
drug, shoe, sporting goods and other stores. The use of these products reduces
inventory shrinkage by deterring shoplifting, increases sales potential by
permitting the more open display of greater quantities of merchandise, reduces
surveillance responsibilities of sales and other store personnel and, as a
result, increases profitability for the retailer. In addition, Sentry's EAS
systems are used in non-retail establishments to detect and deter theft, in
office buildings to control the loss of office equipment and other assets, in
nursing homes and hospitals for both asset and patient protection, and in a
variety of other applications. We are placing less emphasis on EAS markets as
the Company continues to focus more on the library and bookstore market
segments.
RADIO FREQUENCY AND RANGER DETECTION SYSTEMS
Sentry manufactures and distributes the Knoscape RF system, the principal
application of which is to detect and deter shoplifting and employee theft of
clothing and hard goods in retail establishments. Sentry also manufactures and
distributes the Ranger system, which the Company believes is a particularly
useful and cost efficient EAS system for high fashion retail stores with wide
mall-type exit areas that ordinarily would require multiple Knoscape RF systems
for adequate protection. The Knoscape RF and Ranger systems consist of radio
signal transmission and monitoring equipment installed at exits of protected
areas, such as doorways, elevator entrances and escalator ramps. The devices are
generally located in panels or pedestals anchored to the floor for a vertical
arrangement or mounted in or suspended from the ceiling (Ranger) and mounted in
or on the floor in a horizontal arrangement. The panels or pedestals are
designed to harmonize with the decor of the store. The monitoring equipment is
activated by tags containing electronic circuitry, attached to merchandise
transported through the monitored zone. The circuitry in the tag interferes with
the radio signals transmitted through the monitoring system, thereby triggering
alarms, flashing lights or indicators at a central control point, or triggering
the transmission of an alarm directly to the security authorities. By means of
multiple installation of one or more Ranger systems, the Company's products have
the ability to protect any size entrance or exit.
Non-deactivatable reusable tags are manufactured in a variety of sizes and types
and are attached directly to the articles to be protected by means of specially
designed fastener assemblies. A clerk at the checkout desk removes a reusable
tag from the protected article by use of a decoupling device specially designed
to facilitate the removal of the fastener assemblies with a minimum of effort.
Removal of the tag without a decoupler is very difficult and unauthorized
removal will usually damage the protected article and thereby reduce its value
to a shoplifter. Optional reminder stations automatically remind the store
clerk, by means of audiovisual indicators, to remove the tag when the article is
placed on the cashier's desk.
Disposable labels can be applied to products either by placing them directly on
the outside packaging of the item or hidden within the product by the
manufacturer. These labels can be deactivated, at the checkout desk, through the
use of a deactivation device.
Knoscape RF and Ranger systems generally have an economic useful life of six
years (although many of Sentry's systems have been operating for longer
periods), have a negligible false alarm rate and are adaptable to meet the
diversified article surveillance needs of individual retailers.
ELECTROMAGNETIC (EM) DETECTION SYSTEMS
The primary application for both our MM1 and WAM electromagnetic theft detection
systems is to detect and deter theft in libraries and bookstores.
The EM systems use detection monitors that are activated by electromagnetically
sensitized strips. The EM targets are typically attached to the articles to be
protected and are easily camouflaged on a wide array of products. The detection
monitors used by the systems are installed at three to five foot intervals at
the exits of protected areas. The magnetic targets can be supplied in many forms
and are attractively priced. In addition, the EM targets can be manufactured to
be activated and deactivated repeatedly while attached to the articles to be
protected.
PATRON SELF CHECK BOOK BORROWING SYSTEMS
Libraries worldwide are struggling to reduce operating costs by applying cost
effective technology solutions. The Sentry QuickCheck patron self check book
borrowing system offers an ideal solution to gain an increasing share of the
growing market for library security market in North America. The QuickCheck
system is RFID ready and provides users access to circulation software,
automatic security strip deactivation, automatic return ticket printing, user
access to book renewals, multi-lingual software interface and on-screen user
instructions. QuickCheck systems have been installed in Omaha Public Library,
Palm Beach Public Library, Supreme Court of Canada, Harris County Public
Library, Burlington Public Library, Vancouver Public Library, Ottawa Public
Library, McGill University Library and Calgary Public Library.
RADIO FREQUENCY IDENTIFICATION (RFID)
RFID is a wireless electronic data collection system that uses radio frequency
signals to identify and track objects using readers and tiny integrated circuits
in label format. Applications include library management, warehousing, parcel
tracking, inventory control, asset protection and supply chain management. We
are in the initial stages of introducing ISO standard, RFID labels, tags and
readers for library management.
DIALOC ID SECURITY PRODUCTS
We also distribute EAS systems manufactured by Dialoc ID. The 9000-P 8.2 MHz
system, which is housed in slender, self-contained Plexiglas panels, provides
retailers with clear lines of sight at the front end along with the durability
of solid Plexiglas. The panels can be custom printed with the retailer's logo
for enhanced image and trade name awareness. The system's electronics, which are
built-in to the base of the Plexiglas antenna, provide detection of 8.2 MHz
labels and hard tags in aisles up to six feet wide. The 9000 PL system is
offered in both single and dual aisle configurations and is compatible with all
existing 8.2 MHz tags and checkout accessories.
MAJOR CUSTOMERS
Although the composition of our largest customers has changed from year to year,
a significant portion of our revenues has been attributable to a limited number
of major customers. In 2008, a sale to a dealer serving the Mexico City Metro
accounted for 11% of total revenues and sales to FedEx accounted for 10% of
total revenues. In 2007, Steve and Barry's accounted for approximately 18% of
total revenues.
PRODUCTION
SENTRYVISION AND VIDEO SURVEILLANCE SYSTEMS
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By the end of 2006, Sentry had outsourced substantially all of its SmartTrack
manufacturing operations. Although we are not dependent upon any particular
supplier, Sentry has made an investment in material and training with selected
sub-contractors to supply major portions of our SmartTrack system. Most system
parts are "off-the-shelf" components, and other materials and system components
are designed by Sentry and manufactured to Sentry's specifications. Some
minimal final assembly operations are conducted at the Company's facilities in
Ronkonkoma, New York. System components and parts include cameras, circuit
boards, electric motors and a variety of machined parts. Each finished assembly
undergoes a quality assurance check by Sentry prior to its shipment to an
installation site. All SentryVision carriage assemblies are tested and burned
in for 24 hours, resulting in approximately 3,000 travel and PTZ cycles prior to
quality assurance sign off. Sentry is not required under any state or federal
environmental law or regulations to obtain related licenses or permits in
connection with its manufacturing and assembly operations.
EAS PRODUCTS
- -------------
Sentry produces at our facilities in Ronkonkoma, New York, or purchases through
suppliers, its RF, Ranger, and EM systems, or their components. Production
consists of final assembly operations of electronic and mechanical components
that Sentry purchases from various suppliers. Independent contractors using
existing molds and tooling produce plastic cases and antenna coils for the tags
to Sentry's specifications. Sentry is not dependent on any one supplier or group
of suppliers of components for its systems.
Our policy is to maintain our inventory at a level that is sufficient to meet
projected demand for its products. We do not anticipate any difficulties in
continuing to obtain suitable components for our products at competitive prices
in sufficient quantities as and when needed.
SECURITY LABELS
- ----------------
We have a 51% interest in Custom Securities Industries Inc. ("CSI"), an Ontario
company. Since its founding in 1988, CSI has established a worldwide reputation
for innovation and excellence in the Electronic Article Surveillance (EAS)
Industry. Extensive experience and know-how in the leading EAS technologies,
combined with expertise in materials converting, in-house development of
proprietary products and the use of specially designed converting equipment,
enables CSI to offer custom tailored solutions with a rapid turn around time.
Over the years, CSI has acquired a wide range of knowledge and developed its own
trade secrets and manufacturing procedures to ensure competitive pricing, a
broad range of high quality products, and the ability to supply products in both
small and large volumes. CSI offers EAS products compatible with Radio Frequency
(RF), Electromagnetic (EM), and Acousto-Magnetic (AM) technologies. Whatever the
particular application, from standard EM pressure sensitive labels to
sequentially printed barcode labels, products are available.
CSI products are sold through distributors around the world in over 25 countries
and every continent.
CSI also manufactures a broad range of Source Tagging Solutions for the Radio
Frequency and Acousto-Magnetic technologies. These products are successfully
meeting the needs of retailers in the hardware, auto aftermarket, food and
general merchandise categories. CSI has recently added a sales person to work
with packagers and brand owners in the North American market to promote the sale
of Source Tagging Solutions.
CSI specializes in custom solutions for hard to tag items. Long term
associations with leading suppliers of EAS sensor materials, films and papers,
pressure sensitive materials and adhesives enables CSI to handle the most
demanding of label product needs with either standard or custom solutions. CSI
offers a wide selection of labels and fashion tags. Their EM products are made
with high performance materials, such as extremely low coercivity amorphous
alloys and ultra stable deactivation ribbon.
CSI's manufacturing equipment incorporates computer and control technology,
including PLC's, Motion Controllers, Servo Motors, many different types of
position and movement sensors, along with a very large inventory of specialized
tooling and dies. Besides providing security labels to Sentry, CSI's customers
include Tyco, Checkpoint, Dialoc, Gateway/Gunnebo and Retailers
Advantage.
MARKETING
We market our SentryVision and conventional video systems through the direct
efforts of salespersons located in select metropolitan areas across the United
States and Canada, as well as through dealers/system integrators. In 2008, we
employed 8 direct sales representatives, whose efforts were supplemented through
three in-house sales support staff and independent sales representatives. We
also market our EAS products to smaller local and regional retailers through
selected dealers and distributors. Sales are made into the library market on
both a direct basis as well as through catalogs and dealers.
We market our products primarily through participation in trade shows, placement
of ads in trade publications, direct mailings and through telemarketing. In
addition, these efforts are augmented through our Website, which provides
enhanced product and market oriented information. Internationally, we market
SentryVision through system integrators and distributors including Honeywell,
ADT, Chubb, Intrepid, BSC and Repromatic.
SENTRYVISION AND VIDEO SURVEILLANCE SYSTEMS
- -----------------------------------------------
To date, most SentryVision and conventional video systems have been sold on a
direct sale basis. Typical billing arrangements for SentryVision systems
involve invoicing 50% of total sale upon shipment of the product and 50% on the
completion of the installation. The successful introduction of our
OperationalVideo program in the fourth quarter of 2007 has created important
large reference sites that will help in growing the business.
While most of the current SentryVision and conventional video sales have been
made to home centers, retail chains and distribution centers, our marketing plan
for Sentry also emphasized a dealer program for institutional, industrial and
international prospects.
We also market SentryVision through qualified security dealers and integrators.
Much of the industrial and institutional SentryVision / VSS prospects are
serviced by local security companies who design and install integrated video,
access control and alarm systems. By working with these companies, we expected
to be able to reach a far larger number of SentryVision prospects and penetrate
the market more rapidly. The program has generated interest through trade
advertising, direct mail and trade show participation. Domestic dealers did not
generate significant SentryVision installations in industrial and institutional
facilities in 2008.
In addition, we market SentryVision internationally using independent
distributors on both an exclusive and nonexclusive basis. We sell our products
to independent distributors at prices below those charged to end-users because
distributors typically make volume purchases and assume marketing, customer
training, installation, servicing and financing responsibilities. As of
December 31, 2008, we have distributors in the UK, France, Mexico, Belgium,
Holland, Italy, Poland, Singapore, Russia, Spain, Brazil, Argentina, Hungary,
Romania, Taiwan, Lebanon, Australia, Japan, South Africa, South Korea, Israel
and the United Arab Emirates.
EAS PRODUCTS
- -------------
Sentry EAS systems are principally marketed on a direct sales basis. In the case
of the electromagnetic (EM) systems, detection targets, which are sold to the
customer, are permanently attached to the item to be protected. Therefore, as
the customer replenishes its inventory, additional targets will be required for
those items to be protected. We also market a more expensive, removable,
reusable detection tag for use with the Knoscape MM systems on certain products
such as clothing and other soft goods.
RF and Ranger systems continue to be used by apparel and department stores that
have wide exit areas and a desire for deterrence based on reusable hard tags.
Knoscape RF systems detect both 2 MHz hard tags and 8 MHz labels. Sentry also
markets an 8MHz P-2000 RF system designed for both hard and soft good customers.
Bookstores remain good prospects for EM systems due to the small size and low
cost of EM strips. EM systems feature updated digital electronics that detect
virtually all manufacturers' magnetic strips and can universally replace older
magnetic strip systems manufactured by various EAS vendors. Sentry is the
official supplier of the National Association of College Stores (NACS).
The library market continues to be the primary market for magnetic technology.
BACKLOG
Our backlog of orders was approximately $2.6 million at December 31, 2008, as
compared to approximately $2.8 million at December 31, 2007. We anticipate that
substantially all of the backlog present as of December 31, 2008 will be
delivered within 12 months.
SEASONAL ASPECTS OF THE BUSINESS
Our current video product customers are primarily dependent on retail sales,
which are seasonal and subject to significant fluctuations and are difficult to
predict.
SERVICE
Installation services are performed by our personnel and by carefully screened
and supervised subcontractors as well as authorized dealers and distributors.
Repair and maintenance services are performed primarily by our personnel. All
products sold are covered by a warranty period, generally, one year. After the
warranty period, we offer our customers the option of entering into a
maintenance contract with the Company or paying for service on a per call basis.
Installations of SentryVision systems typically take from three days to several
weeks and involve mounting the enclosures, installing the controller unit,
installing the carriage assembly, and connecting control and transmission cables
to the central monitoring location. Items such as high voltage power termination
wiring are typically the responsibility of the end user.
The use of subcontractors supervised by Company employees proved cost effective
with no apparent sacrifice in quality. We have now established a network of
qualified contractors that perform most of our SentryVision and conventional
video surveillance system installations. Our technical staff now focuses on
EAS, SentryVision and VSS service and maintenance and we rely on our
well-established partner network for installation work. The model remains
cost-effective and allows us to scale our efforts up or down as business
requires without the risk of a fixed cost structure. This strategy has resulted
in significant cost savings. In addition, we retain our reputation for
technical expertise within the industry. We anticipate that this level of
coverage will be adequate, coupled with our Service Partner Network, to service
our customer base.
Our Design Center personnel continued to screen all service requests over the
telephone, avoiding costly service calls. In addition, careful screening
allowed us to ship replacement parts in advance of the technician's arrival
increasing our ability to complete calls in a single visit.
COMPETITION
We operate in a highly competitive market with many companies engaged in the
business of furnishing security services designed to protect against shoplifting
and theft. In addition to EAS systems using the concept of tagged merchandise,
such security services use, among other things, conventional PTZ dome and fixed
mount VSS systems, traveling video systems, mirrors, guards, private detectives
and combinations of the foregoing. We compete principally on the basis of the
nature and quality of our products and services and the adaptability of these
products to meet specific customer needs and price requirements.
To our knowledge, there are several other companies that market, directly or
through distributors, conventional closed circuit video systems and/or EAS
equipment to retail stores, of which Sensormatic (acquired by Tyco/ADT),
Checkpoint Systems, Inc., GE Security, Pelco Manufacturing, Inc., Panasonic,
Inc. and Honeywell are the Company's principal competitors. Outside the U.S., we
are aware of other companies that market other types of traveling video systems
including Lextar Technologies, Ltd. in Australia, T.E.B. in France and
Sensormatic Europe. Some of our competitors have far greater financial
resources, more experienced marketing organizations and a greater number of
employees than the Company.
PATENTS AND OTHER INTELLECTUAL PROPERTY
Although patent protection is advantageous to Sentry, we do not consider any
single patent or patent license we own or hold to be material to our operations.
We believe that our competitive position ultimately will depend on our
experience, know-how and proprietary data, engineering, marketing and service
capabilities and business reputation, all of which are outside the scope of
patent protection.
SENTRYVISION
- ------------
Sentry has a United States patent covering the cable-free transmission of a
video signal to and from the carriage. This technology prevents degradation of
the video signal, which can result from the movement of and prolonged friction
caused by the carriage. Two additional U.S. patents were received for
improvements made to the original technology, which has been incorporated into
the SmartTrack product. Sentry also has six corresponding European patents and
three foreign country patents. We intend to seek patent protection on specific
aspects of the SentryVision system, as well as for certain aspects of new
systems which may be developed for Sentry. There can be no assurance that any
patents applied for will be issued, or that the patents currently held, or new
patents, if issued, will be valid if contested or will provide any significant
competitive advantage to Sentry.
We are not aware of any infringement of patents or intellectual property held by
third parties. However, if Sentry is determined to have infringed on the rights
of others, Sentry may be required to obtain licenses from such other parties.
There can be no assurance that the persons or organizations holding desired
technology would grant licenses at all or, if licenses were available, that the
terms of such licenses would be acceptable to the Company. In addition, we could
be required to expend significant resources to develop non-infringing
technology.
Sentry has also relied on the registration of trademarks and trade names, as
well as on trade secret laws and confidentiality agreements with its employees.
While we intend to continue to seek to protect Sentry's proprietary technology
and developments through patents, trademark registration and confidentiality
agreements, we do not rely on such protection to establish and maintain Sentry's
position in the marketplace. Management believes that improvement of Sentry's
existing products, reliance upon trade secrets and on unpatented proprietary
know-how, and the development of new products will be as important as patent
protection in establishing and maintaining a competitive advantage.
EAS PRODUCTS
- -------------
Sentry has 9 United States and Canadian patents relating to (i) the method and
apparatus for the detection of movement of articles and accessory equipment
employed by Sentry in its RF, Ranger and EM systems, (ii) various specific
improvements used in the RF, Ranger and EM systems and (iii) various electrical
theft detection methods, apparatus and improvements not presently used in any of
Sentry's EAS systems.
PRODUCT AUTHENTICATION
- -----------------------
Sentry's Custom Security Industry subsidiary has two United States patents
related to a product authentication. One patent is for a system that measures
certain magnetic properties of a marker with an electronic reader utilizing an
electromagnetic search field and the second patent is for a unique reader
suitable for this system.
RESEARCH AND DEVELOPMENT
As of December 31, 2008, Sentry Technology Corporation had 4 full time employees
engaged in research, engineering, product development and design. In addition,
the Company may retain consultants to assist in specific areas related to
research, engineering and product development. For the years ended December 31,
2008 and 2007, approximately $0.6 million and $0.7 million, respectively, was
expended on Company-sponsored research.
The SmartTrack System continued to benefit from product improvement efforts
focused on adding software features and reducing the cost of manufactured
products. Other developments during 2008 incorporated improvements in business
applications for retail operational management.
Additional projects included revisions to EAS products.
Developments to EM systems included the mechanical design of a second-generation
"WAM2" Library system and a "WAM2" tuning board prototype. The system is
expected to be released in the second quarter of 2009.
QuickCheck system developments included continuing cost reductions in system
components and software upgrades to improve product capabilities and functions.
In addition, we made improvements in software to incorporate a new height
measurement sensor to prevent theft at the self-check station. A patent has
been filed to protect important intellectual property. Management believes that
this feature will offer a unique competitive position in the library self-serve
market.
CSI is supporting a long term research effort at cole Polytechnique, University
of Montreal, in conjunction with the National Science and Research Council of
Canada, to develop improved magnetic sensors for antishoplifting and
authentication.
REGULATION
Because Sentry's EAS and VSS systems use radio transmission and electromagnetic
wave principles, such systems are subject to regulation by the Federal
Communications Commission ("FCC") under the Communications Act of 1934. In those
instances where it has been required, certification of such products by the FCC
has been obtained. As we develop new products, application will be made to the
FCC for certification or licensing when required. No assurance can be given that
such certification or licensing will be obtained or that current rules and
regulations of the FCC will not be changed in an adverse manner.
Our business plan calls for the sale and use of Sentry's products in domestic
markets and, where consistent with contractual obligations, in international
markets. Sentry's products may be subject to regulation by governmental
authorities in various countries having jurisdiction over electronic and
communication use. We intend to apply for certification of our products to
comply with the requirements under the regulations of the countries in which we
plan to market our products. No assurance can be given that such certification
will be obtained or that current rules and regulations in such countries will
not be changed in a manner adverse to Sentry.
We believe we are in material compliance with applicable United States, state
and local laws and regulations relating to the protection of the environment.
EMPLOYEES
At December 31, 2008, the Company and its subsidiaries employed 65 full-time
employees, of whom 13 were employed in administrative and clerical capacities, 4
in engineering, research and development, 21 in production and manufacturing
support, 12 in sales and marketing and 15 in customer service and support. None
of our employees are employed pursuant to collective bargaining agreements.
ITEM 2. DESCRIPTION OF PROPERTIES
- -------------------------------------
Our principal executive, administrative offices, research and development and
distribution facilities are located in Ronkonkoma, New York, in a 20,000 square
foot facility leased by the Company. In addition, we maintain a sales,
administrative and distribution office in a leased 3,250 square foot facility in
Toronto, Ontario. Our CSI subsidiary leases facilities for manufacturing and
distribution totaling 7,000 square feet located in Thornhill, Ontario.
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
In August 2004, Bi-County Park Associates, Inc. d/b/a Ashlind Properties
("Bi-County") brought an action against the Company in the Supreme Court of New
York, County of Suffolk, for the recovery of a real estate brokerage commission
in the amount of approximately $250,000 relating to the termination of
Bi-County's lease on its former Hauppauge facility. On December 10, 2007 a
jury ruled in favor of the Company and no money was paid to Bi-County.
Although the Company is involved in ordinary, routine litigation incidental to
our business, it is not presently a party to any other legal proceeding, the
adverse determination of which, either individually or in the aggregate, would
be expected to have a material adverse affect on the Company's business or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
During the fourth quarter of fiscal year ended December 31, 2008, there were no
matters submitted to a vote of the Company's security holders through the
solicitation of proxies or otherwise.
-------
PART II
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ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
- -------------------------------------------------------------------------
MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
- -------------------------------------------------------------------------
(a) Price Range of Common Stock.
The following table sets forth, for the periods indicated, the high and low
sales prices per share of common stock:
High Low
---- ---
2007
First Quarter $ 0.07 $ 0.04
Second Quarter 0.08 0.04
Third Quarter 0.11 0.06
Fourth Quarter 0.17 0.09
2008
First Quarter $ 0.12 $ 0.06
Second Quarter 0.10 0.05
Third Quarter 0.09 0.01
Fourth Quarter 0.06 0.01
2009
First Quarter $ 0.03 $ 0.01
(through March 13, 2009)
The Company's Common Stock is quoted on the OTC Bulletin Board ("OTCBB") under
the symbol SKVY.
(b) Holders of Common Stock.
As of March 13, 2009, the Company had 120,743,804 shares of Common Stock issued
and outstanding, which were held by approximately 346 holders of record.
(c) Dividends.
The payment of future dividends will be a business decision to be made by the
Board of Directors of Sentry from time-to-time based upon the results of
operations and financial condition of Sentry and such other factors as the Board
of Directors considers relevant. Sentry has not paid, and does not presently
intend to pay or consider the payment of, any cash dividends on the Common
Stock. In addition, covenants in the Company's credit agreements prohibit the
Company from paying cash dividends without the consent of the lenders.
(d) Securities Authorized for Issuance Under Equity Compensation Plans.
For a description of the Company's equity securities authorized for issuance as
described in Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," see Notes to our Financial Statements, Note [3.o.] "Significant
Accounting Policies, Stock-Based Compensation," and Note [15], "Stock Based
Compensation."
The Company did not repurchase any of its equity securities during the fourth
quarter of the fiscal year ended December 31, 2008.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The table below sets forth selected consolidated historical financial data of
the Company for the years ended December 31, 2004, 2005, 2006, 2007 and 2008.
The selected consolidated historical financial data should be read in
conjunction with the Consolidated Financial Statements of the Company included
in Item 8.
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Years Ended December 31, 2004 2005 2006 2007 2008
------- -------- -------- -------- --------
SELECTED STATEMENT OF OPERATIONS DATA:
Total revenues $16,863 $13,570 $12,135 $13,498 $12,708
Cost of sales 6,351 5,960 5,374 6,215 6,261
Customer service expenses 4,175 2,654 2,209 2,474 2,115
Selling, general and administrative expenses 4,840 5,348 5,296 4,787 4,339
Goodwill impairment - - - 1,564 -
Income (loss) before income taxes and minority interest 253 (1,581) (2,055) (3,755) (933)
Net income (loss) 31 (1,690) (2,304) (3,678) (1,138)
Net income (loss) per common share:
Basic and diluted 0.00 (0.01) (0.02) (0.03) (0.01)
As of December 31, 2004 2005 2006 2007 2008
------- -------- -------- -------- --------
SELECTED BALANCE SHEET DATA:
Working capital. $ 4,545 $ 3,037 $ 1,276 $(1,817) $(2,337)
Total assets. 12,247 9,395 8,834 8,532 5,970
Property, plant and equipment, net. 689 637 609 634 439
Bank indebtedness, demand loan and revolving line of credit. 2,604 2,039 3,030 4,551 3,418
Convertible debentures 1,862 1,904 1,945 1,986 2,000
Minority interest 1,045 1,140 1,237 1,200 1,311
Total common stockholders' equity (deficit) 4,345 2,698 648 (2,238) (3,071)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- -------- ----------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. Actual results could differ from those
estimates. Management believes that the critical accounting policies and areas
that require the most significant judgments and estimates to be used in the
preparation of the consolidated financial statements are allowance for doubtful
accounts, inventory obsolescence and accrued warranty.
Allowance for Doubtful Accounts -- We maintain an allowance for doubtful trade
accounts receivable for estimated losses resulting from the inability of our
customers to make required payments. In determining collectibility, we review
available customer financial statement information, credit rating reports as
well as other external documents and public filings. When it is deemed probable
that a specific customer account is uncollectible, that balance is included in
the reserve calculation. Actual results could differ from these estimates under
different assumptions. If the financial condition of our customers
deteriorated, impairing their ability to make payments, additional allowances
may be required.
Inventory Obsolescence --We write down our inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual future demand or market conditions are less
favorable than those we project, additional inventory write-downs may be
required.
Impairment of long-lived assets -- We review our long-lived assets, property and
equipment, intangible assets, goodwill and other assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of these
assets may not be fully recoverable. Impairment is measured at fair value. If
impairment indicators exist, we determine whether the projected undiscounted
cash flows will be sufficient to cover the carrying value of such assets. This
requires us to make significant judgments about the expected future cash flows
of the asset group. The future cash flows are dependent on general and economic
conditions and are subject to change. The Company was unable to justify the
carrying value of the goodwill at December 31, 2007 as a result of inadequate
cash flows; therefore, a charge to income in 2007 of $1,564,000 was recognized,
representing the entire balance of goodwill.
Accrued Warranty -- We provide for the estimated cost of product warranty at the
time revenue is recognized. We calculate the reserve utilizing historical
product failure rates and service repair costs by product family. These rates
are reviewed and adjusted periodically. We utilize judgment for estimating these
costs and adjust our estimates as actual results become available.
Revenue Recognition -- We recognize revenue when installation is complete or
other post-shipment obligations have been satisfied. For those products not
requiring installation, or if installation costs are not material, the Company
recognizes revenues upon shipment. Service revenues are recognized when earned
and maintenance revenues are recognized ratably over the maintenance contract
period.
Related Party Transactions -- Details of related party transactions are included
in Item 13 and in Note [13] of the Financial Statements of this Form 10-K.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2008 COMPARED WITH YEAR ENDED DECEMBER 31, 2007
Consolidated revenues were 6% lower in the year ended December 31, 2008 than in
the year ended December 31, 2007. Our backlog of orders was approximately $2.6
million at December 31, 2008, a decrease of 7%, as compared to approximately
$2.8 million at December 31, 2007. We anticipate that substantially all of the
backlog present as of December 31, 2008 will be delivered within 12 months.
Total revenues for the periods presented are broken out as follows:
%
2008 2007 Change
---- ---- ------
(In Thousands)
Electronic Article Surveillance (EAS) $ 5,484 $ 6,656 (18)
Video Surveillance Systems (VSS) 510 501 2
SentryVision 4,865 3,894 25
------- ------- ----
Total sales 10,859 11,051 (2)
Service, maintenance and installation 1,849 2,447 (24)
------- ------- ----
Total revenues $12,708 $13,498 (6)
======= ======= ====
North American revenues represented $8.8 million or 69% of total revenues in
2008 compared to $11.2 million or 83% of total revenues in 2007. Total
international sales were $3.9 million in 2008 compared to $2.3 million in 2007.
Our sales to international dealers and distributors are denominated in U.S.
dollars, therefore fluctuations of the Euro and other foreign currencies against
the U.S. dollar in 2008 had no impact on reported revenues. The most
significant impact on total revenues on a comparative basis was the loss of one
major domestic customer of $2.4 million which was offset partially by the
increase in one new international customer for $1.3 million.
EAS sales decreased by 18% or $1,172,000 in 2008 compared to 2007. Domestic EAS
sales were $4.7 million in 2008 compared to $5.9 million in 2007 and
international EAS sales were $.8 million in both periods. This decrease is due
to a de-emphasis on legacy EAS sales to retailers, as well as a decrease in
label sales from our 51% owned subsidiary. VSS sales were up by 2% or $9,000 in
2008 compared to 2007. SentryVision sales were up by 25% or $971,000 in 2008
as compared to 2007. Domestic SentryVision sales were $1.7 million in 2008
compared to $2.5 million in 2007. This decrease is due to a loss of one major
customer (Steve & Barry's), offset slightly by increases in sales to other
customers including FedEx. International SentryVision sales were $3.2 million
in 2008 compared to $1.4 million in 2007. This increase is primarily the result
of a sale to a dealer serving the Mexico City Metro.
Service, maintenance and installation revenues were 24% lower in 2008 as
compared to 2007 due to lower domestic sales revenue including the non-recurring
installation revenue we received from Steve & Barry's during the prior year.
Cost of sales was 58% in 2008 compared to 56% in 2007. The increase in
percentage is primarily due to an increase in the percentage of total sales to
foreign dealers where we obtain lower margins.
The 15% decrease in customer service expenses in 2008 over 2007 is primarily due
to lower subcontractor labor, installation material and travel costs due to
lower domestic revenues from installed products. Outside service contractors
are used in order to better manage our total customer service requirements
during fluctuations in activity levels.
Selling, general and administrative expenses were 9% lower in 2008 as compared
to 2007. This decrease is principally due to a reduction in domestic warranty
expenses, sales salaries and travel and freight expenses, offset somewhat by
higher professional fees.
Research and development costs were 18% lower in 2008 as compared to 2007. The
decrease in expenses in 2008 is primarily a result of decreased headcount and
prototype costs.
The Company recognized a foreign exchange gain of $0.8 million during 2008
compared to a loss of $0.6 million in 2007 due to the strengthening of the U.S.
dollar compared to the Canadian dollar during 2008. The gain is principally a
result of short-term designated payables denominated in Canadian dollars and the
impact of receivables denominated in U.S. dollars.
The Company was unable to justify the carrying value of goodwill related to the
purchase of Sentry Canada as a result of inadequate cash flows; therefore, a
goodwill impairment charge of $1,564,000 was recognized in 2007, representing
the entire balance of goodwill.
Net interest expense remained approximately the same in 2008 of $545,000 versus
$546,000 in 2007. This is primarily due to lower interest rates during 2008 vs.
2007, which was offset by a higher average outstanding debt in 2008.
Non-cash amortization costs related to financing increased in 2008 by $264,000
as compared to 2007. This increase is primarily a result of an increase in
amortization expense resulting from the issuance of additional warrants to
Brookfield granted in connection with the extension of their debenture, as well
as additional warrants issued to two of the Company's directors for loan
guarantee extensions.
The income tax expense of $94,000 in 2008 is principally a result of the taxable
income of Custom Security Industries (CSI), our 51% owned Canadian subsidiary,
which cannot be offset by Sentry's net operating loss carryforwards. The income
tax benefit of $40,000 in 2007 is a result of a reduction in the year-end 2007
estimated taxes of CSI.
As a result of the foregoing, we had net loss of $1,138,000 in the year ended
December 31, 2008, as compared to net loss of $3,678,000 in the year ended
December 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
During 2008, the Company continued to finance its operations principally through
the loan guarantee extensions given from two of the Company's directors, Mr.
Murdoch and Mr. Furst, to the Company's principal lenders.
At December 31, 2008, we had cash and short term investments of $0.9 million,
working capital of ($2.3) million and total assets of $6.0 million. Cash
provided by operating activities was $1.6 million. Cash was principally
provided by the collection of accounts receivable and reduction in inventory
levels. This was partially offset by cash used to pay down vendors.
Cash used in investing activities was $168,000 substantially due to the increase
in short-term investments, changes in other assets and the purchase of
manufacturing equipment at our 51% owned labeling plant. There are no
significant projected capital expenditure requirements anticipated in the near
term.
Cash used by financing activities was $550,000 during 2008. Borrowing
availability under the credit facilities has been based upon the combined levels
of receivables and inventory, which were lower during 2008. Due to the
continued decline in the Company's financial position, RBC further reduced the
maximum borrowing availability under its credit facility requiring the Company
to pay down the loan during 2008 by $550,000.
Royal Bank of Canada
- -----------------------
The maximum borrowing under the demand loan facility was Canadian $3.6 million
(U.S. $2.9 million). RBC increased the borrowing base formula by Canadian $1.0
million (U.S. $817,000) 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 inventory
as defined in the agreement. Interest is payable at a rate of RBC's prime rate
(3.5% at December 31, 2008), plus 2.75% per annum. Borrowings under this
facility are secured by substantially all of the Company's assets. As of
December 31, 2008, the Company exceeded its facilities under the lending formula
by approximately Canadian $670,000 (U.S. $547,000) (subject to the above
limitations) under the demand loan. RBC agreed to forbear from the exercise of
its rights and remedies under the security in respect of the indebtedness until
October 31, 2008 or earlier in the event of the occurrence of default in
accordance with the Forbearance Agreement, which was finalized on May 29, 2008.
In accordance with the Forbearance Agreement the maximum borrowings were reduced
to Canadian $3,175,000 (U.S. $2,593,000) and the interest rate was increased
from RBC's prime rate plus 2.75% per annum to RBC's prime rate plus 3.25% per
annum.
As of October 31, 2008, the Forbearance Agreement with RBC expired. On November
12, 2008, the Company and RBC extended the Forbearance Agreement to May 15,
2009. In accordance with the Forbearance Agreement extension, the maximum
borrowings were reduced to Canadian $3,000,000 (U.S. $2,449,800) and the
interest rate was further increased from RBC's prime rate plus 3.25% per annum
to RBC's prime rate plus 3.75% per annum. At December 31, 2008 borrowings were
at Canadian $2,900,000 (U.S. $2,368,000). There is no assurance that further
extensions will be obtained.
In consideration for the guarantees provided by Mr. Murdoch and Mr. Furst to
RBC, the Company paid a fee of $43,000, shared between them, paid in twelve
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 and beginning in June 2006 was taken into income over the period of the
guarantee, which was one year. These guarantees expired in June 2007 and were
subsequently renewed in July 2007 until April 30, 2008. In consideration of
these guarantee renewals, Mr. Murdoch and Mr. Furst received a fee of $40,000,
shared between them, paid in ten equal monthly installments. As additional
consideration, they received fully-vested, two- year warrants to purchase
approximately 7.4 million common shares of the Company at an exercise price of
$0.065 per share. The fair value of these warrants of $164,000 was determined
in accordance with SFAS No. 123R and beginning in July 2007 was taken into
income over the period of the guarantee, which was ten months. These guarantees
expired in April 2008 and were subsequently renewed in May 2008 until December
31, 2008. In consideration of these guarantee renewals, Mr. Murdoch and Mr.
Furst received a fee of $33,000, shared between them, paid in eight equal
monthly installments. As additional consideration, they received fully-vested,
two-year warrants to purchase approximately 5 million common shares of the
Company at an exercise price of $0.10 per share. The fair value of these
warrants of $150,000 was determined in accordance with SFAS No. 123R and
beginning in May 2008 was taken into income over the period of the guarantee,
which was eight months. These guarantees expired in December 2008 and were
renewed until July 30, 2009. In consideration of these guarantees renewals, Mr.
Murdoch and Mr. Furst will receive a fee of $24,000, shared between them, paid
in seven equal monthly installments. As additional consideration, they received
fully-vested, two-year warrants to purchase approximately 13.2 million common
shares of the Company at an exercise price of $.018 per share. The fair value
of these warrants of $124,000 was determined in accordance with SFAS No. 123R
and beginning in January 2009 is being taken into income over the period of the
guarantee.
During the year ended December 31, 2008, $49,000 (2007 - $43,000) has been
recorded in interest expense related to the above warrants. During the year
ended December 31, 2008, $216,000 (2007 - $148,000) has been recorded in
non-cash amortization costs related to the above warrants.
Tradition Capital Bank
- ------------------------
In December 2006, the Company entered into a secured revolving credit agreement
with Tradition Capital Bank. From December 15, 2006, through the expiration of
the facility on June 15, 2007, the Company drew up to a maximum of $550,000
under the facility. Borrowings under this facility were secured by
substantially all of the Company's assets in a second position to RBC. In
addition, the loan was fully secured by personal guarantees of Mr. Murdoch and
Mr. Furst. In consideration of these guarantees, Mr. Murdoch and Mr. Furst
received a fee of $14,000, shared between them, paid in six equal monthly
installments beginning in December 2006. As additional consideration, they
received fully- vested, two-year warrants to purchase approximately 5.2 million
shares of the Company's common stock, at an exercise price of $0.053 per share.
The fair value of these warrants of $91,000 was determined in accordance with
SFAS No. 123R and beginning in December 2006 was taken into income over the
period of the guarantee, which was six months. The credit facility and related
guarantees expired in June 2007 and were subsequently renewed in July 2007 until
April 30, 2008. In consideration of the guarantee renewals, Mr. Murdoch and Mr.
Furst received a fee of $23,000, shared between them, paid in ten equal monthly
installments. As additional consideration, they received fully-vested, two-year
warrants to purchase approximately 4.2 million common shares of the Company at
an exercise price of $0.065 per share. The fair value of these warrants of
$94,000 was determined in accordance with SFAS No. 123R and beginning in July
2007 was taken into income over the period of the guarantee, which was ten
months.
On September 25, 2007, Mr. Murdoch and Mr. Furst agreed to provide Tradition
Capital Bank additional personal guarantees totaling $500,000, which increased
the maximum the Company could draw to $1,050,000, until April 30, 2008, under
the same terms and conditions as listed above. In consideration of the
guarantees, Mr. Murdoch and Mr. Furst received a fee of $15,000, shared
between them, paid in seven equal monthly installments. As additional
consideration, they received fully-vested, two-year warrants to purchase
approximately 2.5 million common shares of the Company at an exercise price of
$0.10 per share. The fair value of these warrants of $89,000 was determined in
accordance with SFAS No. 123R and beginning in October 2007 was taken into
income over the period of the guarantee, which was seven months. On April 30,
2008 the above loan facility and related guarantees expired and were renewed
until December 31, 2008. Interest is payable at the reference rate (Wall Street
Journal prime, with an interest rate floor of 5.5%, currently 3.25%), plus 1.0%
per annum. In consideration of these guarantee renewals, Mr. Murdoch and Mr.
Furst received a fee of $35,000, shared between them, paid in eight equal
monthly installments. As additional consideration, they received fully-vested,
two-year warrants to purchase approximately 5.3 million common shares of the
Company at an exercise price of $0.10 per share. The fair value of these
warrants of $157,000 was determined in accordance with SFAS No. 123R and
beginning in May 2008 was taken into income over the period of the guarantee,
which was eight months. On December 31, 2008 the above loan facility and related
guarantees expired and were renewed until July 31, 2009 under similar terms and
conditions. At December 31, 2008 borrowings were at the maximum amount
available. In consideration of these guarantee renewals, Mr. Murdoch and Mr.
Furst will receive a fee of $31,000, shared between them, paid in seven equal
monthly installments. As additional consideration, they received fully-vested,
two-year warrants to purchase approximately 17.0 million common shares of the
Company at an exercise price of $.018 per share. The fair value of these
warrants of $160,000 was determined in accordance with SFAS No. 123R and
beginning in January 2009 is being taken into income over the period of the
guarantee, which is seven months. There is no assurance that further extensions
will be obtained.
During the year ended December 31, 2008, $53,000 (2007 - $31,000) has been
recorded in interest expense related to the above warrants. During the year
ended December 31, 2008, $245,000 (2007 - $178,000) has been recorded in
non-cash amortization costs related to the above warrants.
In August 2007, Mr. Murdoch agreed to provide a personal guarantee for a Letter
of Credit of $49,350 for a period of one year in favor of Palm Beach Public
Library that the Company was unable to obtain on its own in order to complete a
sale of the Company's self-service library systems. In consideration of this
guarantee Mr. Murdoch received a fee of $2,000 paid in twelve equal monthly
installments. As additional consideration, he received fully-vested, two-year
warrants to purchase approximately 0.2 million common shares of the Company at
an exercise price of $0.10 per share. The fair value of these warrants of
$10,000 was determined in accordance with SFAS No. 123R "Share-Based Payment,"
and beginning in August 2007 was taken into income over the period of the
guarantee, which was twelve months. This letter of credit and related guarantee
expired in August 2008 and was subsequently renewed in August 2008 until August
2009. In consideration of this guarantee renewal, Mr. Murdoch will receive a fee
of $2,000 paid over the next twelve months. As additional consideration, he
received fully-vested, two-year warrants to purchase approximately 1.4 million
common shares of the Company at an exercise price of $0.018 per share. The fair
value of these warrants of $13,000 is determined in accordance with SFAS No.
123R "Share-Based Payment," and beginning in August 2008 is being taken into
income over the period of the guarantee, which is twelve months. During the
year ended December 31, 2008, $1,000 (2007 - $1,000) has been recorded in
interest expense related to the above warrants and $1,000 will be expensed in
2009. During the year ended December 31, 2008, $11,000 (2007 - $4,000) has been
recorded in non-cash amortization costs related to the above warrants and
$8,000 will be expensed in 2009.
In December 2007, Mr. Murdoch, Sentry's CEO and director, and Mr. Furst, a
Sentry director, agreed to lend the Company $141,000 ($81,000 and $60,000,
respectively) to secure a bid that the Company was unable to obtain on its own
to sell products to an airport facility. In consideration of the loans, Mr.
Murdoch and Mr. Furst received interest for the period of the loan at the Bank
of America's prime rate (7.25%) plus 1% per annum. During the year ended
December 31, 2008, $1,000 (2007 - $1,000) has been recorded in interest expense
related to the loans. The loans were repaid in January 2008. Included in
accrued liabilities for 2007 for this transaction is $142,000.
On May 17, 2007, our Board of Directors and a majority of the outstanding
shareholders approved an increase in the authorized number of Sentry's common
shares from 160,000,000 to 190,000,000, principally in order to meet the
requirements of the Brookfield Technology Fund investment.
On April 11, 2008, Brookfield extended its maturity of the debenture to December
31, 2008. The 5,000,000 warrants that were originally issued expired. In
consideration of this renewal, Brookfield received fully- vested, two-year
warrants to purchase 5 million common shares of the Company at an exercise price
of $0.10 per share. The fair value of these warrants of $150,000 was determined
in accordance with SFAS No. 123R and beginning in May 2008 was taken into income
over the period of the guarantee, which was eight months. This extension
expired on December 31, 2008. On November 24, 2008 Brookfield further extended
its maturity of the debenture to July 30, 2009. There is no assurance that
further extensions will be obtained.
We will require positive cash flows from operations to meet our working capital
needs over the next twelve months. While the Company has shown decreased levels
of revenues, it achieved a small operating profit of $248,000, which was
achieved in part as a result of a $817,000 foreign exchange gain. This has
substantially reduced the Company's available cash reserves and limited our
ability to secure additional bank financing.
We are striving to improve our gross margins and continue to control selling,
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.
The table below summarizes aggregate maturities contractual obligations as of
December 31, 2008.
Contractual Less than 1-3 4-5 After 5
Obligations Total 1 Year Years Years Years
- ----------- ------ ----- ----- ----- -------
(In Thousands)
Operating leases $ 236 $ 176 $ 60 $ - $ -
Capital leases 6 2 4 - -
Notes payable 36 36 - - -
Convertible debentures 2,000 2,000 - - -
------ ------ ------- ---- ------
Total $2,278 $2,214 $ 64 $ - $ -
====== ====== ======= ==== ======
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2008, FASB issued FASB Staff Position ("FSP") SFAS 140-4 and FIN 46
(R)-8, "Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities" ("FSP SFAS 140-4
and FIN 46 (R)"). FSP SFAS 140-4 and FIN 46 (R) amends FASB SFAS 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", to require public entities to provide additional disclosures about
transfers of financial assets. It also amends FASB SFAS 46 (revised December
2003), "Consolidation of Variable Interest Entities", to require public
enterprises, including sponsors that have a variable interest in a variable
interest entity, to provide additional disclosures about their involvement with
variable interest entities. Additionally, this FSP requires certain disclosures
to be provided by a public enterprise that is (a) a sponsor of a qualifying
special purpose entity ("SPE") that holds a variable interest in the qualifying
SPE but was not the transferor (nontransferor) of financial assets to the
qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant
variable interest in the qualifying SPE but was not the transferor
(nontransferor) of financial assets to the qualifying SPE. The disclosures
required by FSP SFAS 140-4 and FIN 46 (R)" are intended to provide greater
transparency to financial statement users about a transferor's continuing
involvement with transferred financial assets and an enterprise's involvement
with variable interest entities and qualifying SPEs. FSP SFAS 140-4 and FIN 46
(R) is effective for reporting periods (annual or interim) ending after December
15, 2008. The Company is currently reviewing the effect, if any; the proposed
guidance will have on its consolidated financial statements.
In September 2008, FASB issued FSP No. 133-1 and FIN 45-4, "Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161" ("FSP SFAS 133-1 and FIN 45-4"). FSP 133-1 and FIN 45-4
to require disclosures by sellers of credit derivatives, including credit
derivatives embedded in a hybrid instrument. FSP SFAS 133-1 and FIN 45-4 also
amend FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," to require an additional disclosure about the current status of the
payment/performance risk of a guarantee. Further, FSP SFAS 133-1 and FIN 45-4
clarifies the Board's intent about the effective date of FASB Statement No. 161,
"Disclosures about Derivative Instruments and Hedging Activities." FSP SFAS
133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending
after November 15, 2008. The adoption of FSP SFAS 133-1 and FIN 45-4 will have
no impact on the Company's consolidated financial statements.
In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles ("GAAP")
in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." The Company is currently reviewing
the effect, if any; the proposed guidance will have on its consolidated
financial statements.
In May 2008, FASB issued FSP Accounting Principles Board ("APB") 14-1,
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1
clarifies that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of
such instruments should separately account for the liability and equity
components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
adoption is not permitted. The Company is currently reviewing the effect, if
any; the proposed guidance will have on its consolidated financial statements.
In April 2008, FASB issued FASB Staff Position ("FSP") Statement of Financial
Accounting Standards ("SFAS") No. 142-3, "Determination of the Useful Life of
Intangible Assets" ("FSP SFAS 142-3"). FSP SFAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). The intent of this FSP is
to improve the consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows used to measure the
fair value of the asset under FASB Statement No. 141 (revised 2007), "Business
Combinations," and other U.S. generally accepted accounting principles ("GAAP").
FSP SFAS 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The requirement for determining useful lives must be applied
prospectively to intangible assets acquired after the effective date and the
disclosure requirements must be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. Early adoption is
prohibited. The Company is currently reviewing the effect, if any; the proposed
guidance will have on its consolidated financial statements.
INFLATION
The Company does not consider inflation to have a material impact on the results
of operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The "Management's Discussion and Analysis or Plan of Operation" and other
sections of this Annual Report on Form 10-K contain "forward-looking statements"
(as defined in the Private Securities Litigation Reform Act of 1995 or the
"PSLRA") that are based on current expectations, estimates and projections about
the industry in which the Company operates, as well as management's beliefs and
assumptions. Words such as "expects," "anticipates" and "believes" and
variations of such words and similar expressions generally indicate that a
statement is forward-looking. The Company wishes to take advantage of the "safe
harbor" provisions of the PSLRA by cautioning readers that many important
factors discussed herein, among others, may cause the Company's results of
operations to differ from those expressed in the forward-looking statements.
These factors include: (i) the risk that any delay or cancellation of orders
from one or more of Sentry's major customers may have a material adverse effect
on the Company's financial condition; (ii) the risk that anticipated growth in
the demand for the Company's products in the retail, commercial and industrial
sectors will not develop as expected, whether due to competitive pressures in
these markets or to any other failure to gain market acceptance of the Company's
products; (iii) the risk that anticipated revenue growth through the domestic
and international dealers programs does not develop as expected; (iv) the risk
that the Company may not find sufficient qualified Service Partners to provide
future installation services; (v) the risk that the Company will not be able to
retain key personnel; (vi) the risk that the borrowing availability under our
credit facilities will not be adequate to meet the Company's growth
requirements; and (vii) the risk arising from the large market position and
greater financial and other resources of Sentry's principal competitors, as
described under "Item 1. Business-Competition."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
We are exposed to a variety of market risks, including the effects of changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from adverse changes in market rates and prices. The Company is
exposed to currency risk as some of the Company's sales and purchases are
incurred in Canadian dollars resulting in Canadian denominated accounts
receivable and accounts payable. A portion of its expenses is incurred in
Canadian dollars and Euros, which would result in foreign denominated accounts
payable. In addition, certain of the Company's cash is denominated in Canadian
dollars. These balances are therefore subject to gains and losses due to
fluctuations in those currencies.
We are exposed to interest rate risk primarily through our debt facilities since
some of those instruments bear interest at variable rates. At December 31, 2008,
we had outstanding borrowings under variable interest rate debt agreements that
totaled approximately $3,418,000.
ITEM 8. FINANCIAL STATEMENTS
- -------- ---------------------
SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 2008 AND 2007
--------------------------------------
CONTENTS
--------
Page
----
Report of Independent Registered Public Accounting Firm 27
Consolidated Balance Sheets 28
Consolidated Statements of Operations 29
Consolidated Statements of Stockholders' Deficit 30
Consolidated Statements of Cash Flows 31
Notes to Consolidated Financial Statements 32 - 46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Sentry Technology Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sentry
Technology Corporation and Subsidiaries as of December 31, 2008 and 2007 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the years in the two year period ended December 31, 2008.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sentry
Technology Corporation and Subsidiaries as of December 31, 2008 and 2007 and the
results of its operations and its cash flows for each of the years in the two
year period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has suffered
recurring losses from operations, lack of profitability and negative working
capital and decreased consolidated financial position as a result of not meeting
its business plan, which raises substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ SF Partnership, LLP
CHARTERED ACCOUNTANTS
TORONTO, CANADA
February 27, 2009
SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
December 31,
2008 2007
------------ -----------
ASSETS
- ----------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 643 $ 256
Short-term investments 264 202
Accounts receivable, net of allowance for doubtful accounts
of $179 in 2008 and $209 in 2007 971 3,014
Inventory, net 2,739 3,299
Prepaid expenses and other current assets 682 858
-------------- ---------
Total current assets 5,299 7,629
PROPERTY AND EQUIPMENT, net 439 634
OTHER ASSETS 232 269
-------------- ---------
TOTAL ASSETS $ 5,970 $ 8,532
============== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ----------------------------------------------------------------------------
Current Liabilities:
Bank indebtedness, demand loan and revolving line of credit $ 3,418 $ 4,551
Accounts payable 830 1,223
Accrued liabilities 1,211 1,539
Obligations under capital leases - current portion 2 2
Deferred income 175 145
Convertible debenture 2,000 1,986
-------------- ---------
Total current liabilities 7,636 9,446
Long-term debt -- less current portion:
Obligations under capital leases 4 7
Deferred tax liabilities 90 117
-------------- ---------
Total long-term liabilities 94 124
-------------- ---------
Total liabilities 7,730 9,570
-------------- ---------
MINORITY INTEREST 1,311 1,200
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.001 par value; authorized 10,000 (2007 - 10,000)
shares, none issued and outstanding
Common stock, $0.001 par value; authorized 190,000 (2007 - 190,000)
shares; issued and outstanding 120,744 (2007 - 120,744) shares 121 121
Additional paid-in capital 50,196 49,420
Accumulated deficit (53,528) (52,390)
Accumulated other comprehensive income 140 611
-------------- ---------
Total stockholders' deficit (3,071) (2,238)
-------------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,970 $ 8,532
============== =========
The accompanying notes are an integral part of these consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended December 31,
------------------------
2008 2007
-------- ---------
REVENUES:
Sales $ 10,859 $ 11,051
Service, installation and maintenance revenues 1,849 2,447
----------- ---------
12,708 13,498
----------- ---------
COST OF SALES AND EXPENSES:
Cost of sales 6,261 6,215
Customer service expenses 2,115 2,474
Selling, general and administrative expenses 4,339 4,787
Research and development 562 688
Foreign exchange (gain) loss (817) 607
----------- ---------
12,460 14,771
----------- ---------
INCOME (LOSS) FROM OPERATIONS 248 (1,273)
GOODWILL IMPAIRMENT - 1,564
INTEREST EXPENSE, net 545 546
NON-CASH AMORTIZATION COSTS RELATED TO FINANCING 636 372
----------- ---------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (933) (3,755)
INCOME TAX EXPENSE (RECOVERY) 94 (40)
----------- ---------
LOSS BEFORE MINORITY INTEREST (1,027) (3,715)
MINORITY INTEREST EXPENSE (INCOME) 111 (37)
----------- ---------
NET LOSS $ (1,138) $ (3,678)
=========== =========
LOSS PER SHARE
Basic and diluted $ (0.01) $ (0.03)
=========== =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic and diluted 120,744 120,744
=========== =========
The accompanying notes are an integral part of these consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
------------------------------------------------
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2008 AND 2007
--------------------------------------
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Deficit
--------- -------- ---------- ------------ ------------- ------------
BALANCE, January 1, 2007 120,744 $ 121 $ 49,037 $ (48,712) $ 202 $ 648
Net loss for the year - - - (3,678) - (3,678)
Stock-based compensation - - 26 - - 26
Warrants issued - - 357 - - 357
Equity adjustment from foreign currency translation - - - - 409 409
----------- -------- --------- ----------- ------------ ---------
BALANCE, December 31, 2007 120,744 $ 121 $ 49,420 $ (52,390) $ 611 $ (2,238)
============ ======== ========= =========== ============ ========
BALANCE, January 1, 2008 120,744 $ 121 $ 49,420 $ (52,390) $ 611 $ (2,238)
Net loss for the year - - - (1,138) - (1,138)
Stock-based compensation - - 22 - - 22
Warrants issued - - 754 - - 754
Equity adjustment from foreign currency translation - - - - (471) (471)
------------ -------- ---------- ---------- ------------ --------
BALANCE, DECEMBER 31, 2008 120,744 $ 121 $ 50,196 $ (53,528) $ 140 $ (3,071)
============ ======== ========= ========== ============ ========
The accompanying notes are an integral part of these consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(IN THOUSANDS)
Years Ended December 31,
------------------------
2008 2007
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,138) $ (3,678)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 108 125
Amortization of intangibles and other assets 66 133
Deferred income taxes (6) 9
Non-cash consideration
Stock-based compensation 22 26
Warrant amortization 622 336
Amortization of convertible debenture 14 41
Goodwill impairment - 1,564
Minority interest expense (income) of consolidated subsidiary 111 (37)
Changes in operating assets and liabilities:
Accounts receivable 1,603 (431)
Inventory 459 (218)
Prepaid expenses and other current assets 272 (497)
Accounts payable (353) 583
Accrued liabilities (247) 411
Deferred income 38 (17)
---------- ----------
Net cash provided by (used in) operating activities 1,571 (1,650)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in short-term investments (117) 105
Purchases of property and equipment (19) (53)
Changes in other assets (32) (30)
---------- ----------
Net cash (used in) provided by investing activities (168) 22
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (repayment) on the bank indebtedness,
demand loan and revolving line of credit (548) 1,047
Repayment of obligations under capital leases (2) (2)
----------- ----------
Net cash (used in) provided by financing activities (550) 1,045
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES (466) 479
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 387 (104)
CASH AND CASH EQUIVALENTS, beginning of year 256 360
---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 643 $ 256
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 609 $ 547
========== ==========
Income taxes $ - $ 89
========== ==========
Non-cash financial activities:
Issuance of warrants relating to bank guarantees (Note 7) $ 754 $ 357
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION
-----------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 2008 AND 2007
--------------------------------------
1. OPERATIONS AND ORGANIZATION:
-----------------------------
a. Business
--------
Sentry Technology Corporation, a publicly traded Delaware Corporation, was
established on February 12, 1997. Its corporate predecessors had been in
business for more than 40 years. Sentry Technology Corporation and its
subsidiaries ("Sentry" or the "Company"), design, manufacture, sell and install
a complete line of Video Surveillance Systems (VSS), Electro-Magnetic (EM) and
RFID based Library Management systems as well as Radio Frequency (RF) and
Electro-Magnetic (EM) EAS systems. The VSS product line features SentryVision,
SmartTrack, a proprietary, patented traveling Surveillance System, and includes
conventional pan, tilt and zoom ("PTZ") and fixed camera video systems. The
Company's products are used by libraries to secure inventory and improve
operating efficiency, by retailers to deter shoplifting and internal theft and
by industrial and institutional customers to protect assets and people.
2. GOING CONCERN:
--------------
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America with the assumption that the Company will be able to realize its assets
and discharge its liabilities in the normal course of business.
The Company has incurred losses and decreased financial position as a
result of not meeting its business plan. The Company had losses of approximately
$1.1 million for the year ended December 31, 2008 (2007 - $3.7 million) and as
of December 31, 2008, the Company had an accumulated deficit of approximately
$53.5 million (2007 - deficit of $52.4 million). The Company's continuation as a
going concern is uncertain. The Company entered into a Forbearance Agreement on
May 29, 2008, with its primary lender, Royal Bank of Canada ("RBC"), who agreed
to forbear from the exercise of their rights and remedies in respect of the
indebtedness until October 31, 2008 or earlier in the event of the occurrence of
a default in the agreement. As of October 31, 2008, the Forbearance Agreement
expired. On November 12, 2008, the Company and RBC extended the Forbearance
Agreement to May 15, 2009 with revised terms and conditions. The Company's
convertible debenture holders and Tradition Capital Bank initially agreed to
extend maturity to December 31, 2008, and subsequently agreed to extend to July
30, 2009. There is no assurance that further extensions will be obtained.
Management plans to pursue raising additional funds through future equity or
debt financing to satisfy commitments to its primary lenders and convertible
debenture holders until it achieves profitable operations. Although the Company
plans to pursue additional financing, there can be no assurance that the Company
will be able to secure financing when needed or obtain such financing on terms
satisfactory to the Company, if at all. The Company's continuation as a going
concern depends upon its ability to raise funds and achieve and sustain
profitable operations.
The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the inability of the Company to continue as a going concern.
3. SIGNIFICANT ACCOUNTING POLICIES:
---------------------------------
a. Principles of consolidation
-----------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned (Sentry Technology Canada Inc. and Knogo Caribe
Inc.) and majority-owned (Custom Security Industries Inc.) subsidiaries. All
intercompany balances and transactions have been eliminated on consolidation.
b. Revenue recognition
--------------------
The Company recognizes revenue on the sale of security devices when
installation is complete or other post-shipment obligations have been satisfied.
For those products not requiring installation or if installation costs are not
material, the Company recognizes revenue upon shipment.
Service revenues are recognized when services are performed and
maintenance revenues are recognized ratably over the maintenance contract
period.
Included in accounts receivable at December 31, 2008 and 2007 are
unbilled accounts receivable of $3,000 and $18,000, respectively.
c. Deferred income
----------------
Deferred income consists of maintenance contracts billed or paid in
advance.
d. Cash and cash equivalents
----------------------------
The Company considers all highly liquid temporary investments with
original maturities of less than ninety days to be cash equivalents. Temporary
cash investments are placed with high credit quality financial institutions. At
times, the Company's cash deposits with any one financial institution may exceed
federally insured limits.
e. Short-term investments
-----------------------
Short-term investments include highly liquid investments with initial
maturity of between three and twelve months. Included in short-term investments
in 2008 and 2007 is $82,000 and $100,000, respectively, of restricted funds used
as collateral on Banker's Acceptances.
f. Allowance for doubtful accounts
----------------------------------
Losses from uncollectible accounts are provided for by utilizing the
allowance for doubtful accounts method based upon management's estimate of
uncollectible amounts. Management specifically analyzes accounts receivable and
analyzes potential bad debts, customer concentrations, credit worthiness,
current economic trends and changes in customer payment terms when evaluating
the allowance for doubtful accounts.
g. Inventory
---------
Inventory is stated at the lower of cost (first-in, first-out method)
or market.
h. Product warranty
-----------------
Provisions for estimated expenses related to product warranties are
made at the time products are sold and are included in accrued liabilities.
These estimates are established using historical information on the nature,
frequency, and average cost of warranty claims.
i. Property and equipment
------------------------
Property and equipment are stated at cost. Depreciation of property
and equipment is provided for using the straight-line method over their related
estimated useful lives.
j. Other assets
-------------
Other assets consist of security deposits receivable, patents and
other intangibles (including trade secrets and customer relationships). Cost and
expenses incurred in obtaining patents and other intangibles are amortized over
the remaining life of the patents and other intangibles, not exceeding 17 years,
on a straight-line basis.
k. Goodwill
--------
Goodwill represents the excess of acquisition cost over the fair value of
net assets acquired in business combinations. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets", goodwill is not amortized but reviewed annually for impairment. The
Company was unable to justify the carrying value of the goodwill at December 31,
2007 as a result of inadequate cash flows; therefore, a charge to income in 2007
of $1,564,000 was recognized, representing the entire balance of goodwill.
l. Comprehensive income (loss)
---------------------------
The Company accounts for comprehensive income (loss) in accordance with
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and presentation of comprehensive income
(loss) and its components in a full set of financial statements. Comprehensive
income (loss) is presented in the statements of stockholders' equity, and
consists of net earnings (loss) and unrealized gains (losses) on available for
sale marketable securities; foreign currency translation adjustments; changes in
market value of future contracts that qualify as a hedge; and negative equity
adjustments recognized in accordance with SFAS No. 87 "Employers' Accounting for
Pensions".
m. Impairment of long-lived assets
----------------------------------
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of these
assets may not be fully recoverable in accordance with SFAS No. 144, "Accounting
for Impairment or Disposal of Long-Lived Assets." To determine recoverability
of its long-lived assets, the Company evaluates the probability that future
undiscounted net cash flows, without interest charges, will be less than the
carrying amount of the assets. Impairment is measured at fair value. The
Company completed its annual review of impairment and determined that long-lived
assets were not impaired.
n. Income taxes
-------------
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Management
provides a valuation allowance against deferred tax assets for amounts which are
not considered "more likely than not" to be realized.
The Company adopted the provisions of the Financial Accounting Standards
Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes" ("Interpretation 48"), on January 1, 2007. There was no effect on the
Company's financial statements at January 1, 2007 resulting from the
implementation of Interpretation No. 48 since there were no unrecognized tax
benefits at January 1, 2007.
There were no additions or reductions in unrecognized tax benefits during
the year ended December 31, 2008.
o. Stock-based compensation
-------------------------
The Company accounts for stock-based compensation in accordance with the
provisions of SFAS No. 123(R), "Share-Based Payment", and related
interpretations, or "SFAS No. 123(R)", using the modified prospective transition
method and therefore will not restate prior period results. SFAS No. 123(R)
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", ("APB No. 25"), and revises guidance in SFAS No.
123, "Accounting for Stock-Based Compensation", ("SFAS No. 123"). Among other
things, SFAS No. 123(R) requires that compensation expense be recognized in the
financial statements for share-based awards based on the grant date fair value
of those awards. The modified prospective transition method applies to (a)
unvested stock options under the 1997 and 2007 Stock Incentive Plans based on
the grant date fair value estimated in accordance with the pro forma provisions
of SFAS No. 123, and (b) any new share-based awards granted, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123(R). Additionally, stock-based compensation expense includes an estimate for
pre-vesting forfeitures and is recognized over the requisite service periods of
the awards on a straight-line basis, which is generally commensurate with the
vesting term.
SFAS No. 123(R) requires the benefits associated with tax deductions
in excess of recognized compensation cost to be reported as a financing cash
flow rather than as an operating cash flow as previously required. In 2008 and
in 2007, the Company did not record any excess tax benefit generated from option
exercises.
p. Convertible debenture with stock purchase warrants
-------------------------------------------------------
The Company has issued convertible debt with non-detachable conversion
features and detachable warrants. The values assigned to the warrants and
embedded conversion feature of the debt are based on the guidance of Emerging
Issue Task Force ("EITF") No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios"
("EITF No. 98-5"), EITF No. 00-19, "Accounting for Derivative Financial
Instruments to, and Potentially Settled in, a Company's Own Stock" ("EITF No.
00-19"), SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS No. 150") and EITF No.
00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments of the
FASB's Emerging Issues Task Force" ("EITF No. 00-27"). The non-detachable
conversion feature and detachable warrants are recorded as a discount to the
related debt either as additional paid-in capital or a derivative liability,
depending on the guidance, using the intrinsic value method or relative fair
value method, respectively. The debt discount associated with the warrants and
embedded conversion feature, if any, is amortized to interest expense over the
life of the debenture or upon earlier conversion of the debenture using either
the effective yield method or the straight-line method, as appropriate.
q. Foreign currency translation
------------------------------
The functional currency of the Company's foreign entities is the local
currency, which is Canadian dollars. The translation of foreign currencies into
U.S. dollars is performed for balance sheet accounts using the exchange rates in
effect at the balance sheet dates and for revenue and expense accounts using a
weighted average exchange rate during the year. The gains or losses resulting
from the translation are included in Accumulated Other Comprehensive Income in
the Consolidated Statement of Stockholders' Deficit and are excluded from net
income (loss). Gains or losses resulting from foreign currency transactions are
included in earnings.
r. Shipping and handling costs
------------------------------
Shipping and handling costs are included in selling, general and
administrative expenses and approximated $284,000 and $303,000 in 2008 and 2007,
respectively.
s. Use of estimates
------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
t. Reclassifications
-----------------
Certain prior year balances have been reclassified to conform to
current year classifications.
u. Recent accounting pronouncements
----------------------------------
In December 2008, FASB issued FASB Staff Position ("FSP") SFAS 140-4 and
FIN 46 (R)-8, "Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities" ("FSP SFAS 140-4
and FIN 46 (R)"). FSP SFAS 140-4 and FIN 46 (R) amends FASB SFAS 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", to require public entities to provide additional disclosures about
transfers of financial assets. It also amends FASB SFAS 46 (revised December
2003), "Consolidation of Variable Interest Entities", to require public
enterprises, including sponsors that have a variable interest in a variable
interest entity, to provide additional disclosures about their involvement with
variable interest entities. Additionally, this FSP requires certain disclosures
to be provided by a public enterprise that is (a) a sponsor of a qualifying
special purpose entity ("SPE") that holds a variable interest in the qualifying
SPE but was not the transferor (nontransferor) of financial assets to the
qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant
variable interest in the qualifying SPE but was not the transferor
(nontransferor) of financial assets to the qualifying SPE. The disclosures
required by FSP SFAS 140-4 and FIN 46 (R)" are intended to provide greater
transparency to financial statement users about a transferor's continuing
involvement with transferred financial assets and an enterprise's involvement
with variable interest entities and qualifying SPEs. FSP SFAS 140-4 and FIN 46
(R) is effective for reporting periods (annual or interim) ending after December
15, 2008. The Company is currently reviewing the effect, if any; the proposed
guidance will have on its consolidated financial statements.
In September 2008, FASB issued FSP No. 133-1 and FIN 45-4, "Disclosures
about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement
No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date
of FASB Statement No. 161" ("FSP SFAS 133-1 and FIN 45-4"). FSP 133-1 and FIN
45-4 to require disclosures by sellers of credit derivatives, including credit
derivatives embedded in a hybrid instrument. FSP SFAS 133-1 and FIN 45-4 also
amend FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," to require an additional disclosure about the current status of the
payment/performance risk of a guarantee. Further, FSP SFAS 133-1 and FIN 45-4
clarifies the Board's intent about the effective date of FASB Statement No. 161,
"Disclosures about Derivative Instruments and Hedging Activities." FSP SFAS
133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending
after November 15, 2008. The adoption of FSP SFAS 133-1 and FIN 45-4 will have
no impact on the Company's consolidated financial statements.
In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles ("GAAP")
in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." The Company is currently reviewing
the effect, if any; the proposed guidance will have on its consolidated
financial statements.
In May 2008, FASB issued FSP Accounting Principles Board ("APB") 14-1,
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1
clarifies that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of
such instruments should separately account for the liability and equity
components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
adoption is not permitted. The Company is currently reviewing the effect, if
any; the proposed guidance will have on its consolidated financial statements.
In April 2008, FASB issued FASB Staff Position ("FSP") Statement of
Financial Accounting Standards ("SFAS") No. 142-3, "Determination of the Useful
Life of Intangible Assets" ("FSP SFAS 142-3"). FSP SFAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). The intent of this FSP is
to improve the consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows used to measure the
fair value of the asset under FASB Statement No. 141 (revised 2007), "Business
Combinations," and other U.S. generally accepted accounting principles ("GAAP").
FSP SFAS 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The requirement for determining useful lives must be applied
prospectively to intangible assets acquired after the effective date and the
disclosure requirements must be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. Early adoption is
prohibited. The Company is currently reviewing the effect, if any; the proposed
guidance will have on its consolidated financial statements.
4. INVENTORY:
---------
Inventory consisted of the following:
December 31,
==================
2008 2007
---- ----
(In Thousands)
--------------
Raw materials $ 1,039 $ 1,288
Work-in-process 178 193
Finished goods 1,522 1,818
-------- --------
$ 2,739 $ 3,299
======== ========
The components of inventory shown are net of reserves for excess and
obsolete inventory totaling $1,403,000 and $1,350,000 as of December 31, 2008
and 2007, respectively.
5. PROPERTY AND EQUIPMENT, NET:
------------------------------
Property and equipment are stated at cost and are summarized as follows:
Estimated
Useful Lives December 31,
Years 2008 2007
------------- ---- ----
(In Thousands)
Mahinery and equipment 3 - 10 $ 1,978 $ 2,789
Furniture, fixtures and office equipment 3 - 10 1,820 2,415
Leasehold improvements 3 - 5 90 96
-------- --------
3,888 5,300
Less accumulated depreciation and amortization 3,449 4,666
-------- --------
$ 439 $ 634
======== ========
Net property and equipment located in Canada approximated $430,000 and
$619,000 in 2008 and 2007, respectively. Depreciation expense on property and
equipment in 2008 and 2007 totaled $108,000 and $125,000, respectively.
6. OTHER ASSETS:
-------------
Other assets consist of the following:
December 31,
====================
2008 2007
---- ----
(In Thousands)
Intangibles, net $ 218 $ 256
Other 14 13
------- -------
$ 232 $ 269
======= =======
Amortization expense on other assets in 2008 and 2007 totaled $66,000 and
$133,000, respectively.
7. BANK INDEBTEDNESS, DEMAND LOAN, REVOLVING LINE OF CREDIT:
---------------------------------------------------------------
Balances under credit facilities consist of the following:
December 31,
=====================
2008 2007
------ ------
(In Thousands)
Royal Bank of Canada ("RBC") - Bank indebtedness $ - $ 13
Royal Bank of Canada - Demand loan 2,368 3,488
Tradition Capital Bank - Revolving line of credit 1,050 1,050
-------- --------
$ 3,418 $ 4,551
======== ========
a) Royal Bank of Canada
-----------------------
The maximum borrowing under the demand loan facility was Canadian $3.6
million (U.S. $2.9 million). RBC increased the borrowing base formula by
Canadian $1.0 million (U.S. $817,000) 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 inventory as defined in the agreement. Interest is payable at a
rate of RBC's prime rate (3.5% at December 31, 2008), plus 2.75% per annum.
Borrowings under this facility are secured by substantially all of the Company's
assets. As of December 31, 2008, the Company exceeded its facilities under the
lending formula by approximately Canadian $670,000 (U.S. $547,000)(subject to
the above limitations) under the demand loan. RBC agreed to forbear from the
exercise of its rights and remedies under the security in respect of the
indebtedness until October 31, 2008 or earlier in the event of the occurrence of
default in accordance with the Forbearance Agreement, which was finalized on May
29, 2008. In accordance with the Forbearance Agreement the maximum borrowings
were reduced to Canadian $3,175,000 (U.S. $2,593,000) and the interest rate was
increased from RBC's prime rate plus 2.75% per annum to RBC's prime rate plus
3.25% per annum.
As of October 31, 2008, the Forbearance Agreement with RBC expired. On
November 12, 2008, the Company and RBC extended the Forbearance Agreement to May
15, 2009. In accordance with the Forbearance Agreement extension, the maximum
borrowings were reduced to Canadian $3,000,000 (U.S. $2,449,800) and the
interest rate was further increased from RBC's prime rate plus 3.25% per annum
to RBC's prime rate plus 3.75% per annum. At December 31, 2008 borrowings were
at Canadian $2,900,000 (U.S. $2,368,000). There is no assurance that further
extensions will be obtained.
In consideration for the guarantees provided by Mr. Murdoch and Mr. Furst
to RBC, the Company paid a fee of $43,000, shared between them, paid in twelve
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 and beginning in June 2006 was taken into income over the period of the
guarantee, which was one year. These guarantees expired in June 2007 and were
subsequently renewed in July 2007 until April 30, 2008. In consideration of
these guarantee renewals, Mr. Murdoch and Mr. Furst received a fee of $40,000,
shared between them, paid in ten equal monthly installments. As additional
consideration, they received fully-vested, two- year warrants to purchase
approximately 7.4 million common shares of the Company at an exercise price of
$0.065 per share. The fair value of these warrants of $164,000 was determined
in accordance with SFAS No. 123R and beginning in July 2007 was taken into
income over the period of the guarantee, which was ten months. These guarantees
expired in April 2008 and were subsequently renewed in May 2008 until December
31, 2008. In consideration of these guarantee renewals, Mr. Murdoch and Mr.
Furst received a fee of $33,000, shared between them, paid in eight equal
monthly installments. As additional consideration, they received fully-vested,
two-year warrants to purchase approximately 5 million common shares of the
Company at an exercise price of $0.10 per share. The fair value of these
warrants of $150,000 was determined in accordance with SFAS No. 123R and
beginning in May 2008 was taken into income over the period of the guarantee,
which was eight months. These guarantees expired in December 2008 and were
renewed until July 30, 2009. In consideration of these guarantees renewals, Mr.
Murdoch and Mr. Furst will receive a fee of $24,000, shared between them, paid
in seven equal monthly installments. As additional consideration, they received
fully-vested, two-year warrants to purchase approximately 13.2 million common
shares of the Company at an exercise price of $.018 per share. The fair value
of these warrants of $124,000 was determined in accordance with SFAS No. 123R
and beginning in January 2009 is being taken into income over the period of the
guarantee.
During the year ended December 31, 2008, $49,000 (2007 - $43,000) has been
recorded in interest expense related to the above warrants. During the year
ended December 31, 2008, $216,000 (2007 - $148,000) has been recorded in
non-cash amortization costs related to the above warrants.
b) Tradition Capital Bank
------------------------
In December 2006, the Company entered into a secured revolving credit
agreement with Tradition Capital Bank. From December 15, 2006, through the
expiration of the facility on June 15, 2007, the Company drew up to a maximum of
$550,000 under the facility. Borrowings under this facility were secured by
substantially all of the Company's assets in a second position to RBC. In
addition, the loan was fully secured by personal guarantees of Mr. Murdoch and
Mr. Furst. In consideration of these guarantees, Mr. Murdoch and Mr. Furst
received a fee of $14,000, shared between them, paid in six equal monthly
installments beginning in December 2006. As additional consideration, they
received fully- vested, two-year warrants to purchase approximately 5.2 million
shares of the Company's common stock, at an exercise price of $0.053 per share.
The fair value of these warrants of $91,000 was determined in accordance with
SFAS No. 123R and beginning in December 2006 was taken into income over the
period of the guarantee, which was six months. The credit facility and related
guarantees expired in June 2007 and were subsequently renewed in July 2007 until
April 30, 2008. In consideration of the guarantee renewals, Mr. Murdoch and Mr.
Furst received a fee of $23,000, shared between them, paid in ten equal monthly
installments. As additional consideration, they received fully-vested, two-year
warrants to purchase approximately 4.2 million common shares of the Company at
an exercise price of $0.065 per share. The fair value of these warrants of
$94,000 was determined in accordance with SFAS No. 123R and beginning in July
2007 was taken into income over the period of the guarantee, which was ten
months.
On September 25, 2007, Mr. Murdoch and Mr. Furst agreed to provide
Tradition Capital Bank additional personal guarantees totaling $500,000, which
increased the maximum the Company could draw to $1,050,000, until April 30,
2008, under the same terms and conditions as listed above. In consideration of
the guarantees, Mr. Murdoch and Mr. Furst received a fee of $15,000, shared
between them, paid in seven equal monthly installments. As additional
consideration, they received fully-vested, two-year warrants to purchase
approximately 2.5 million common shares of the Company at an exercise price of
$0.10 per share. The fair value of these warrants of $89,000 was determined in
accordance with SFAS No. 123R and beginning in October 2007 was taken into
income over the period of the guarantee, which was seven months. On April 30,
2008 the above loan facility and related guarantees expired and were renewed
until December 31, 2008. Interest is payable at the reference rate (Wall Street
Journal prime, with an interest rate floor of 5.5%, currently 3.25%), plus 1.0%
per annum. In consideration of these guarantee renewals, Mr. Murdoch and Mr.
Furst received a fee of $35,000, shared between them, paid in eight equal
monthly installments. As additional consideration, they received fully-vested,
two-year warrants to purchase approximately 5.3 million common shares of the
Company at an exercise price of $0.10 per share. The fair value of these
warrants of $157,000 was determined in accordance with SFAS No. 123R and
beginning in May 2008 was taken into income over the period of the guarantee,
which was eight months. On December 31, 2008 the above loan facility and related
guarantees expired and were renewed until July 31, 2009 under similar terms and
conditions. At December 31, 2008 borrowings were at the maximum amount
available. In consideration of these guarantee renewals, Mr. Murdoch and Mr.
Furst will receive a fee of $31,000, shared between them, paid in seven equal
monthly installments. As additional consideration, they received fully-vested,
two-year warrants to purchase approximately 17.0 million common shares of the
Company at an exercise price of $.018 per share. The fair value of these
warrants of $160,000 was determined in accordance with SFAS No. 123R and
beginning in January 2009 is being taken into income over the period of the
guarantee, which is seven months. There is no assurance that further extensions
will be obtained.
During the year ended December 31, 2008, $53,000 (2007 - $31,000) has been
recorded in interest expense related to the above warrants. During the year
ended December 31, 2008, $245,000 (2007 - $178,000) has been recorded in
non-cash amortization costs related to the above warrants.
8. ACCRUED LIABILITIES:
---------------------
Accrued liabilities consist of the following:
December 31,
===================
2008 2007
---- ----
(In Thousands)
Accrued salaries, employee benefits and payroll taxes $ 256 $ 280
Customer deposits payable 210 305
Other accrued liabilities 745 954
------- --------
$ 1,211 $ 1,539
======= ========
9. INCOME TAXES:
--------------
The reconciliation between total tax expense (recovery) and the expected
U.S. Federal income tax is as follows:
December 31,
=====================
2008 2007
---- ----
(In Thousands)
Expected tax benefit at 40% $ (347) $ (1,419)
Add:
Goodwill impairment - 625
Non-deductible expenses 11 13
U.S. losses producing no tax benefit 336 781
Foreign tax provision (recovery) 94 (40)
-------- ----------
$ 94 $ (40)
======== ==========
Foreign tax provision (recovery) is principally attributable to foreign
taxes on Canadian operations.
As of December 31, 2008, the Company had net operating loss carryforwards
of approximately $38 million, which expire through the year 2028. The
utilization of these net operating loss carryforwards will likely be subject to
substantial annual limitations imposed by the Internal Revenue Code Section 382.
The following is a list by year of the expiring net operating loss
carryforwards:
(In Thousands)
--------------
2009 $ 776
2010 1,714
2011 4,963
2012 3,003
2013 -
Thereafter 27,454
---------
$ 37,910
=========
Significant components of deferred tax assets (liabilities) at December 31,
2008 and 2007 are comprised of:
December 31,
====================
2008 2007
(In Thousands)
Assets:
Accounts receivable $ 56 $ 40
Inventory 564 529
Stock-based compensation 33 24
Accrued liabilities 110 115
Property and equipment 399 410
Net operating loss carryforwards 15,472 15,448
------- --------
Gross deferred tax assets 16,634 16,566
Less: valuation allowance 16,555 16,488
------- --------
Deferred tax assets 79 78
Liabilities:
Property and equipment (87) (107)
Intangible assets (58) (71)
Other (24) (17)
------- --------
Gross deferred tax liabilities (169) (195)
------- --------
Deferred tax liabilities $ (90) $ (117)
======== =========
The increase in the valuation allowance for the year ended December 31,
2008 was primarily attributable to the increase in net operating loss
carryforwards. A valuation allowance has been recorded against the net deferred
tax assets, because it is more likely than not that the assets will not be
realized in the foreseeable future.
10. CONVERTIBLE DEBENTURE:
-----------------------
On April 30, 2004, Sentry entered into a $2,000,000 secured convertible
debenture with Brookfield Technology Fund ("Brookfield"), an alternative
investment fund established by Brookfield Asset Management (formerly known as
Brascan Technology Fund and Brascan Asset Management, respectively), to invest
in early stage, technology-based companies with high growth potential.
Key terms of the transaction are as follows:
- - Four-year term.
- - Interest rate of 8% per annum.
- - Redeemable at Sentry's option after 18 months.
- - Conversion price equal to the market price, at time of conversion, less a
discount of 30% with a maximum conversion price of $0.12 per share.
- - Conversion is at the option of Brookfield when market share price is equal
to or greater than $0.17 per share or with the approval of Sentry's Board
of Directors when the market share price is less than $0.17 per share.
- - Sentry will provide most favored pricing to all Brookfield affiliates and
expects to be a supplier of security and identification products to the
Brookfield affiliates.
- - Brookfield was issued warrants for 5,000,000 common shares of Sentry,
priced at $0.15 per share, exercisable anytime up to April 30, 2008.
- - Brookfield is entitled to one seat on Sentry's Board of Directors or will
participate as an observer.
The convertible debenture is secured by a general security interest over
all the assets and properties of Sentry. The amount is subordinate to the
existing credit facilities.
The proceeds of the financing, to be used primarily for working capital,
were initially allocated between the convertible debenture ($1,835,000) and the
warrants ($165,000) based on their respective fair values in accordance with
Emerging Issues Task Force (EITF) 00-27 "Application of Issue 98-5 to Certain
Convertible Instruments". The difference between the face value of the debenture
and the allocated value was being charged to interest and financing expenses
over the term of the convertible debenture. No beneficial conversion feature has
been recognized under the term of the convertible debenture.
Certain other warrants to purchase 425,000 common shares of Sentry at
exercise prices ranging from $0.18 to $0.20 per share were issued in conjunction
with the convertible debenture. The warrants were exercisable over one to three
years. The fair value of these warrants ($49,000) was charged to operations over
the life of the warrants. During the year ended December 31, 2008, nil (2007 -
$5,000) was recorded in interest and financing expenses related to these
warrants. These options expired during 2007.
Sentry's Board of Directors and shareholders owning a majority of Sentry
common stock approved the transaction with Brookfield.
On April 11, 2008, Brookfield extended its maturity of the debenture to
December 31, 2008. The 5,000,000 warrants that were originally issued expired.
In consideration of this renewal, Brookfield received fully- vested, two-year
warrants to purchase 5 million common shares of the Company at an exercise price
of $0.10 per share. The fair value of these warrants of $150,000 was determined
in accordance with SFAS No. 123R and beginning in May 2008 was taken into income
over the period of the guarantee, which was eight months. This extension
expired on December 31, 2008. On November 24, 2008 Brookfield further extended
its maturity of the debenture to July 30, 2009. There is no assurance that
further extensions will be obtained.
11. COMPREHENSIVE LOSS:
-------------------
December 31,
====================
2008 2007
--------------------
(In Thousands)
--------------------
Net loss: $(1,138) $(3,678)
-------- --------
Other comprehensive loss:
Foreign currency translation adjustments (471) 409
-------- --------
Comprehensive loss $(1,609) $(3,269)
======== ========
12. COMMITMENTS AND CONTINGENCIES:
-------------------------------
a. Operating leases
-----------------
The Company leases certain administrative and manufacturing facilities
and equipment under non-cancelable operating leases that expire at various dates
to 2011. Rent expense related to operating leases for 2008 and 2007 was
$305,000 and $323,000 per year, respectively. Minimum annual rental commitments
are $176,000 in 2009, $41,000 in 2010 and $19,000 in 2011.
b. Capital leases
---------------
The Company leases certain administrative equipment under non-cancelable
capital leases that expire at various dates to 2011. Minimum annual rental
commitments are $2,000 in 2009, $3,000 in 2010 and $1,000 in 2011.
c. 401(k) Plan
------------
In January 1997, the Company adopted the Sentry Technology Corporation
Retirement Savings 401(k) Plan (the "Plan"). The Plan permits eligible
employees to make voluntary contributions to a trust, up to a maximum of 35% of
compensation, subject to certain limitations. The Company may elect to
contribute a matching contribution equal to a designated percentage of the
eligible employee's deferral election. The Company may also make discretionary
contributions, subject to certain conditions, as defined in the Plan. No
Company contributions were made in 2008 or 2007.
d. Employment agreements
----------------------
The Company and several key executives entered into employment
agreements with remaining terms of up to two years for which the Company will
have a commitment of $264,000. Also, the president of the Company's 51% owned
subsidiary, Custom Security Industries Inc., is entitled to receive 10% of its
pretax profits.
e. Litigation
----------
In August 2004, Bi-County Park Associates, Inc. d/b/a Ashlind Properties
("Bi-County") brought an action against the Company in the Supreme Court of New
York, County of Suffolk, for the recovery of a real estate brokerage commission
in the amount of approximately $250,000 relating to the termination of
Bi-County's lease on its former Hauppauge facility. On December 10, 2007 a
jury ruled in favor of the Company and no money was paid to Bi-County.
Although the Company is involved in ordinary, routine litigation incidental
to our business, it is not presently a party to any other legal proceeding, the
adverse determination of which, either individually or in the aggregate, would
be expected to have a material adverse affect on the Company's business or
financial condition.
13. RELATED PARTY TRANSACTIONS:
-----------------------------
Transactions between related parties are in the normal course of operations
and are measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
Mr. Murdoch, Sentry's CEO and director, and Mr. Furst, a Sentry director,
provided personal guarantees to existing loans from Tradition Bank and RBC.
Please refer to Note 7 for details.
In August 2007, Mr. Murdoch agreed to provide a personal guarantee for a
Letter of Credit of $49,350 for a period of one year in favor of Palm Beach
Public Library that the Company was unable to obtain on its own in order to
complete a sale of the Company's self-service library systems. In consideration
of this guarantee Mr. Murdoch received a fee of $2,000 paid in twelve equal
monthly installments. As additional consideration, he received fully-vested,
two-year warrants to purchase approximately 0.2 million common shares of the
Company at an exercise price of $0.10 per share. The fair value of these
warrants of $10,000 was determined in accordance with SFAS No. 123R "Share-Based
Payment," and beginning in August 2007 was taken into income over the period of
the guarantee, which was twelve months. This letter of credit and related
guarantee expired in August 2008 and was subsequently renewed in August 2008
until August 2009. In consideration of this guarantee renewal, Mr. Murdoch will
receive a fee of $2,000 paid over the next twelve months. As additional
consideration, he received fully-vested, two-year warrants to purchase
approximately 1.4 million common shares of the Company at an exercise price of
$0.018 per share. The fair value of these warrants of $13,000 is determined in
accordance with SFAS No. 123R "Share-Based Payment," and beginning in August
2008 is being taken into income over the period of the guarantee, which is
twelve months. During the year ended December 31, 2008, $1,000 (2007 - $1,000)
has been recorded in interest expense related to the above warrants and $1,000
will be expensed in 2009. During the year ended December 31, 2008, $11,000
(2007 - $4,000) has been recorded in non-cash amortization costs related to the
above warrants and $8,000 will be expensed in 2009.
In December 2007, Mr. Murdoch, Sentry's CEO and director, and Mr. Furst, a
Sentry director, agreed to lend the Company $141,000 ($81,000 and $60,000,
respectively) to secure a bid that the Company was unable to obtain on its own
to sell products to an airport facility. In consideration of the loans, Mr.
Murdoch and Mr. Furst received interest for the period of the loan at the Bank
of America's prime rate (7.25%) plus 1% per annum. During the year ended
December 31, 2008, $1,000 (2007 - $1,000) has been recorded in interest expense
related to the loans. The loans were repaid in January 2008. Included in
accrued liabilities for 2007 for this transaction is $142,000.
14. EARNINGS (LOSS) PER SHARE:
-----------------------------
The (loss) earnings per share calculations (basic and diluted) for the
years ended December 31, 2008 and 2007 are based upon the weighted average
number of common shares outstanding during each period. There were no
reconciling items in the numerator or denominator of the loss per share
calculations in either of the periods presented. Options to purchase 2,150,000
and 2,057,000 shares of common stock with a weighted average exercise price of
$0.09 and $0.10 were outstanding at December 31, 2008 and 2007, respectively,
but were not included in the computation of diluted net loss per share because
their effect would be anti-dilutive. Convertible debentures and warrants were
also not included in the weighted average number of shares outstanding because
their effect would be anti-dilutive.
15. STOCK-BASED COMPENSATION:
--------------------------
The Company's 1997 Stock Incentive Plan of Sentry (the "1997 Plan"), which
is shareholder approved, permits the granting of common share options and shares
to its employees for up to 6,369,365 shares of common stock as stock-based
compensation. This plan expired as of January 14, 2007 and as such, there were
no remaining shares available for grant under this plan at December 31, 2008.
The plan was renewed on May 18, 2007 (the "2007 Plan"), is shareholder approved
and permits the granting of common share options and shares to its employees for
up to 5,000,000 shares of common stock as stock-based compensation. As of
December 31, 2008, there were 4,283,500 common shares available for grants under
this Plan. The stock option committee may grant awards to eligible employees in
the form of stock options, restricted stock awards, phantom stock awards or
stock appreciation rights. Stock options may be granted as incentive stock
options or non-qualified stock options. Such options normally become
exercisable at a rate of 20% per year over a five-year period and expire ten
years from the date of grant.
There was no cash received from exercise of options during either 2008 or
2007.
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:
Years Ended December 31,
========================
2008 2007
------ ------
Risk-free interest rate 2.5% 4.82%
Expected dividend yield 0% 0%
Expected lives 2 years 2 - 5 years
Expected volatility 77% 80%
The following table represents the Company's stock options granted, forfeited or
expired and exercised during the years ended December 31, 2008 and 2007:
Weighted
Number of Weighted Average Aggregate
Shares Average Remaining Intrinsic
Subject to Exercise Contractual Value
Issuance Price Term ($000)
---------- -------- ----------- ----------
Outstanding at January 1, 2007 2,145,500 $ 0.16 7.9 years $ 0
Granted 511,500 0.06
Exercised - - $ -
Forfeited (535,000) 0.10
Expired (65,000) 1.84
---------- -------
Outstanding at December 31, 2007 2,057,000 $ 0.10 7.5 years $ 71
Granted 225,000 0.06
Exercised - - $ -
Forfeited (129,000) 0.16
Expired (3,000) 2.37
---------- -------
Outstanding at December 31, 2008 2,150,000 $ 0.09 6.8 years $ -
=========== ======= ========== ========
EXERCISABLE AT DECEMBER 31, 2008 1,606,000 $ 0.09 6.7 YEARS $ -
=========== ======= ========== ========
The aggregate intrinsic value of options represents the excess of market
price of the Company's stock over the weighted average exercise price of the
price of the outstanding and exercisable option shares. At December 31, 2008,
the aggregate intrinsic value of options has been shown as $0 because the
exercise price of outstanding and exercisable option shares exceeded the
period-end market price of the Company's common stock.
The compensation cost recognized in income for stock-based compensation was
$22,000 for 2008 and $26,000 for 2007.
As of December 31, 2008, there was $31,000 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 2.1 years.
The weighted average grant date fair value of options per share granted
during the year was $0.03 in 2008 and $0.04 in 2007.
The following is a summary of stock options as of December 31, 2008:
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted-
Weighted- Weighted-average average
Number of average Exercise Number of Exercise
Range of Exercise Prices Options Remaining Life Price Options Price
- ------------------------- --------- -------------- ---------------- ------------ -----------
$0.05 to $0.07 934,000 7.2 years $ 0.06 750,000 $ 0.06
$0.09 to $015 1,200,000 6.7 years 0.10 840,000 0.10
$0.31 to $0.62 16,000 0.3 years 0.56 16,000 0.56
--------- ---------- --------- ---------- --------
$0.05 to $0.62 2,150,000 6.8 years $ 0.09 1,606,000 $ 0.09
--------- ---------- --------- ---------- --------
The following is a summary of stock options as of December 31, 2007:
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted-
Weighted- Weighted-average average
Number of average Exercise Number of Exercise
Range of Exercise Prices Options Remaining Life Price Options Price
- ------------------------- --------- -------------- ---------------- ------------ -----------
$0.05 to $0.07 749,000 7.4 years $ 0.06 499,000 $ 0.06
$0.09 to $015 1,275,000 7.7 years 0.10 690,000 0.11
$0.31 to $0.62 28,000 1.1 years 0.59 28,000 0.59
$2.00 to $2.37 5,000 0.1 years 2.22 5,000 2.22
--------- ---------- --------- --------- --------
$0.05 to $2.37 2,057,000 7.5 years $ 0.10 1,222,000 $ 0.11
--------- ---------- --------- --------- --------
a) Warrants
--------
As of December 31, 2008, Sentry had outstanding warrants for 61,519,488 (2007 -
27,718,123) common shares issued in connection with various financing
arrangements. The warrants have exercise prices ranging from $0.018 to $0.17
(2007 - $0.05 to $0.17) and expire from January 22, 2009 through November 14,
2010.
16. REVENUES BY PRODUCT LINE:
---------------------------
December 31,
=========================
2008 2007
------ ------
(In thousands)
Electronic Article Surveillance (EAS) $ 5,484 $ 6,656
Video Surveillance Systems (VSS) 510 501
SentryVision 4,865 3,894
Service, installation and other revenues 1,849 2,447
---------- ---------
Total revenues $ 12,708 $ 13,498
========== =========
17. FINANCIAL INSTRUMENTS:
----------------------
Unless otherwise noted, it is management's opinion that the Company is not
exposed to significant interest, currency or credit risks arising from the
financial instruments. The fair value of the financial instruments approximates
their carrying values, unless otherwise noted.
Currency Risk
--------------
The Company is exposed to currency risk as some of the Company's sales and
purchases are incurred in Canadian dollars resulting in Canadian denominated
accounts receivable and accounts payable. A portion of its expenses is incurred
in Canadian dollars and Euros, which would result in foreign denominated
accounts payable. In addition, certain of the Company's cash is denominated in
Canadian dollars. These balances are therefore subject to gains and losses due
to fluctuations in those currencies.
Credit Risk
------------
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of accounts receivable.
Concentrations of credit risk with respect to these receivables are limited as
the Company conducts regular assessments of credit issues. The Company grants
credit to customers who are principally in the retail industry and libraries.
During 2008, revenues from one customer totaled 11% of total revenues and
revenues from another customer totaled 10% of total revenues; no other
customer accounted for more than 10% of total revenues. During 2007, revenues
from one customer represented approximately 18% of total revenues; no other
customer accounted for more than 10% of total revenues. The Company believes
that there is no unusual exposure associated with the collection of these
receivables.
Interest Risk
--------------
The Company is exposed to interest risk on its bank indebtedness, demand
loan and revolving line of credit.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------- -------------------------------------------------------------------
FINANCIAL DISCLOSURE
- ---------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES
- ---------------------------------
Internal Controls
We maintain disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) that are designed (i) to collect the information we are
required to disclose in the reports we file with the SEC; (ii) to record,
process, summarize and disclose this information within the time periods
specified in the rules of the SEC; and (iii) to ensure that information is
accumulated and communicated to our management, including our Chief Executive
Officer and Principal Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in the Company's internal control over financial reporting
that occurred during our most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Annual Report of Management on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 15d-15(f) under the
Exchange Act) for the Company. Management, with the participation of our Chief
Executive Officer and our Principal Financial Officer, evaluated the
effectiveness of our internal control over financial reporting as of December
31, 2008 (the end of our fiscal year), based on the framework and criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, management concluded that our internal control over financial
reporting was effective as of December 31, 2008.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
--------
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------------
DIRECTORS
The following sets forth information regarding the persons serving as Directors
of Sentry:
PETER L. MURDOCH, age 55, has been the President and Chief Executive Officer,
Director and Chairman of the Board since January 8, 2001. Mr. Murdoch has
extensive experience in the retail security industry as well as in the sales of
technology-based products. He was Managing Director and President of ID
Security Systems Canada, Inc. since its inception in 1987 until its acquisition
by Sentry. From 1997 through 2004, he served as member of the management
committee of Dialoc ID. Prior to joining ID Security Systems Canada, Inc., Mr.
Murdoch was Vice President of Sales for Catalyst International Business Systems.
He is an economics graduate from the University of Western Ontario. Mr.
Murdoch's term as a Director expires at the next Annual Meeting.
ROBERT D. FURST, JR., age 56, has been a Director of Sentry Technology since its
inception. Prior thereto he was a Director of Video Sentry Corporation, our
predecessor, from January 1993 until February 1997. He was Chairman of the
Board of Video Sentry from July 1996 and Chief Executive Officer from August
1996 until February 1997. Mr. Furst was one of the original shareholders of
Video Sentry. He is also a founder and managing principal of Alternative
Strategy Advisers LLC, an alternative investment management firm. Mr. Furst is
a member of the Chicago Board of Trade and has been a securities and commodities
trader since 1980. Mr. Furst is a continuing director on the Board of Directors
after the completion of the Dialoc ID Investment. Mr. Furst's term as a
Director expires at the next Annual Meeting.
JONATHAN G. GRANOFF, age 58, has been a Director of Sentry Technology since
January 8, 2001. Mr. Granoff is the President of the Global Security Institute
and United Nations representative for Lawyers Alliance for World Security. He is
also Chairman of the American Bar Association Committee on Arms Control and
Disarmament. Mr. Granoff has been in the practice of law since 1979. Formerly
Mr. Granoff served at Nutri Systems Inc. as an attorney and Director of
Franchising. Mr. Granoff's term as a Director expires at the next Annual
Meeting.
NAME AGE OFFICE
- -------------------- --- ------
Peter L. Murdoch 55 Our President and Chief Executive Officer
since January 8, 2001. Mr. Murdoch has
extensive experience in the retail security
industry as well as in the sales of
technology-based products. He was Managing
Director of ID Security Systems Canada,
Inc. since its inception in 1987. Beginning
in 1997 he has served as member of the
management committee of Dialoc ID. Prior to
joining ID Security Systems Canada, Inc.,
Mr. Murdoch was Vice President of Sales for
Catalyst International Business Systems.
He is an economics graduate from the
University of Western Ontario.
Joan E. Miller 54 Joan Miller has been the Vice President -
Finance since January 1, 2007. In this
capacity Ms. Miller is responsible for all
accounting functions and financial reporting.
Prior to that, Ms. Miller was the Vice
President - Controller of Sentry since July
2000, the Controller of Knogo North America
Inc. since December 1986 and Assistant
Controller for Knogo Corporation since
November 1980. Prior to joining Sentry, Ms.
Miller worked for Harman Kardon Inc. as
Assistant Controller from June 1976 to
November 1980 and as Cost Accounting Manager
from December 1975 to June 1976. Ms. Miller
is a graduate from Hofstra University and
is a Certified Public Accountant.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers, Directors and persons who own more than 10% of
a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, Directors and greater than ten-percent Stockholders are required by
Securities and Exchange Commission regulations to furnish the Company with
copies of all such reports they file.
Based solely on a review of the copies of reports furnished to the Company, or
written representations, the Company believes that during the fiscal year ended
December 31, 2008, all Section 16(a) filing requirements applicable to its
officers, Directors and greater than ten-percent beneficial owners were complied
with, except the following: (i) Robert D. Furst, Jr., a member of the Board,
filed a late report on Form 5 on March 10, 2009 with the SEC, for the granting
of warrants for 4,625,000 shares of the Company's common stock at an exercise
price of $0.10 per share, which was granted on May 1, 2008 and for the granting
of stock options to purchase 75,000 shares of the Company's common stock at an
exercise price of $0.06 per share, which was granted on August 13, 2008; (ii)
Peter L. Murdoch, the Company's President, CEO and member of the Board, filed a
late report on Form 5 on March 11, 2009 with the SEC, for the granting of
warrants for 5,625,000 shares of the Company's common stock at an exercise price
of $0.10 per share, which was granted on May 1, 2008; and for the grant of
warrants for 1,370,833 shares of the Company's common stock at an exercise price
of $0.018 per share, which was granted on November 14, 2008; and (iii) Jonathan
G. Granoff, a member of the Board, filed a late report on Form 5 on March 16,
2009 with the SEC, for the granting of stock options to purchase 75,000 shares
of the Company's common stock at an exercise price of $0.06 per share, which was
granted on August 13, 2008.
Please note that both Mr. Furst and Mr. Murdoch had warrants and stock options
expire during 2008. Mr. Furst had 3,000 stock options expire on February 12,
2008; 1,150,000 warrants expired on April 28, 2008 and 2,594,340 warrants
expired on December 15, 2008. Mr. Murdoch had 1,725,000 warrants expire on
April 28, 2008 and 2,594,340 warrants expired on December 15, 2008.
AUDIT COMMITTEE FINANCIAL EXPERT
We do not have a separate audit committee and therefore the Board of Directors
in its entirety functions as the audit committee. We have at least one audit
committee financial expert serving on our Board of Directors, Mr. Robert Furst.
CODE OF ETHICS
We have adopted a written Code of Ethics that applies to all of our directors,
officers and employees. A copy of our Code of Ethics is available on our website
at www.sentrytechnology.com and print copies are available to any shareholder
that requests a copy. Any amendment to the Code of Ethics or any waiver of the
Code of Ethics will be disclosed on our website at www.sentrytechnology.com
promptly following the date of such amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
- ----------------------------------
SUMMARY COMPENSATION TABLE
NON-EQUITY
INCENTIVE NONQUALIFIED
STOCK OPTION PLAN DEFERRED ALL OTHER
SALARY BONUS AWARDS AWARDS COMPENSATION COMPENSATION COMPENSATION TOTAL
NAME & PRINCIPAL YEAR ($) ($) ($) ($) ($) EARNINGS ($) ($) ($)
POSITION
Peter L. Murdoch,
President & CEO (1) 2007 183,760 - - - - - 41,894 (2) 225,654
2008 184,240 - - - - - 59,109 (2) 243,349
Joan E. Miller, 2007 124,663 - - 2,369 (3) - - - 127,032
VP Finance 2008 138,327 - - - - - - 138,327
(1) Mr. Murdoch received no salary increase in 2008. A portion of his pay
is designated in Canadian dollars, which translated into higher US dollars
in 2008 when compared to 2007.
(2) Represents interest paid in relation to personal loan guarantees issued.
(3) Represents the compensation costs recognized for financial statement
reporting purposes in 2007 for the fair value of stock options in
accordance with Statement of Financial Accounting Standards No. 123R.
(See Note 15 under the caption "Stock-Based Compensation" to the
accompanying financial statements.)
As to various items of personal benefits, we have concluded that the aggregate
amount of such benefits with respect to each individual does not exceed $10,000.
OPTIONS GRANTED IN LAST FISCAL YEAR
There were no options granted to executives during 2008.
OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR END
The following table sets forth for each of the persons named in the Summary
Compensation Table the number of options exercised during 2008 and the amount
realized by each such officer. In addition, the table shows the number of
options that the named executive officer held as of December 31, 2008, both
exercisable and unexercisable, and the value of such options as of that date.
Option Awards Stock Awards
---------------------------------------------------------------- -----------------------------------------------------
Equity
Incentive Plan
Equity Incentive Market Awards: Equity Incentive
Plan Awards: Number Value of Number of Plan Awards
Number Number of Number of of Shares Shares or Unearned Market or Payout
of Securities Securities or Units Units of Shares, Units Value of
Securities Underlying Underlying of Stock Stock or Other Unearned Shares,
Underlying Unexercised Unexercised Option Option That Have That Have Rights That Units or Other
Options(#) Options (#) Unearned Exercise Expiration Not Not Have Not Rights that Have
Name Exercisable Unexercisable Options (#) Price ($) Date Vested(#) Vested ($) Vested (#) Not Vested ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
Peter L. Murdoch - - - - - - - - -
Joan E. Miller 100,000 - - 0.07 7/17/2010 - - - -
60,000 40,000 - 0.09 8/12/2015 - - - $ 400
31,600 18,400 - 0.07 5/29/2017 - - - $ 200
EMPLOYMENT AGREEMENTS AND COMPENSATION OF EXECUTIVE OFFICERS;
CHANGE OF CONTROL ARRANGEMENTS
The Board set Peter L. Murdoch's compensation, in the capacity of President, at
an annual salary of approximately $184,000, in 2008 and $184,000 in 2007.
The Chief Executive Officer approves the compensation paid to our other
executive officers. The Board of Directors determines the amount of shares and
exercise prices for any stock option grants under our 2007 Stock Incentive Plan,
and the amount of our matching contribution percentage under our Retirement
Savings 401(k) Plan, respectively.
Currently, Ms. Joan Miller is compensated pursuant to a written employment
agreement. This agreement renews automatically on April 1st for one-year terms.
Additionally, Ms. Miller will receive three months salary if the contract is not
renewed. Her annual salary for 2009 is presently $140,000.
COMPENSATION OF DIRECTORS
Nonqualified
Fees Deferred
Earned or Option Non-Equity Compensation All
Paid in Cash Stock Awards Incentive Plan Earnings Other
Name ($) (1) Awards ($) ($) (2) (3) Compensation ($) ($) Compensation ($) Total ($)
(a) (b) (c) (d) (e) (f) (g) (h)
Robert D. Furst, 5,000 - 1,933 (2) - - - 6,933
Director
Jonathan G. Granoff, 5,000 - 1,933 (2) - - - 6,933
Director
Brookfield Technology
Fund, Observer 5,000 - 1,933 (2) - - - 6,933
(1) Each Director and Brookfield Technology Fund, in its capacity as an
Observer, accrued an annual retainer of $5,000 each for 2008, which has not
yet been paid. Mr. Murdoch, who is also our full-time employee, receives no
additional compensation for his service as a Director.
(2) Represents the compensation costs recognized for financial statement
reporting purposes in 2008 for the fair value of stock options in
accordance with Statement of Financial Accounting Standards No. 123R. (See
Note 15 under the caption "Stock-Based Compensation" to the accompanying
financial statements.)
(3) Each non-employee Director is eligible to participate in our 2007 Stock
Incentive Plan. In August 2008, Mr. Furst, Mr. Granoff and the Brookfield
Technology Fund each received options to purchase 75,000 shares of our
common stock at exercise prices of $0.06 per share, which was the market
price on the date of grant. The options were exercisable immediately and
expire after 10 years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- ----------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
- ---------------------------
The following table sets forth the beneficial ownership of our common stock at
March 13, 2009, as to each (i) beneficial owner of five percent or more of the
common stock, (ii) Sentry Director, (iii) executive officer of Sentry, and (iv)
all Directors and executive officers as a group. On March 13, 2009, 120,743,804
shares of common stock were outstanding.
NAME AND ADDRESS OF BENEFICIAL OWNERS
- -------------------------------------
SHARES OF PERCENT
DIRECTORS AND EXECUTIVE OFFICERS COMMON STOCK OF CLASS (1)
- -------------------------------- ------------ ------------
Peter L. Murdoch (5) 91,194,356 (2) 59.9%
c/o Saburah Investments Inc.
28 Voyager Court South
Toronto, Ontario M9W 5M7
Robert D. Furst, Jr. 42,947,802 (3) 29.5%
c/o Alternative Strategies Advisors LLC
601 Carlson Parkway, Suite 610
Minnetonka, MN 55305
Joan E. Miller 264,100 (4) *
Jonathan G. Granoff 340,000 (5) *
All Sentry Directors and executive officers
as a group (4 persons) 134,746,258 (6) 75.8%
- ---------------------------------
* Less than one percent
1) Based on 120,743,804 shares of common stock outstanding as of March 13,
2009. Each figure showing the percentage of outstanding shares beneficially
owned has been calculated by treating as outstanding and owned the shares
of common stock that could be purchased by the indicated person within 60
days upon the exercise of stock options.
2) Includes 57,553,596 shares of common stock held by Saburah Investments Inc.
of which Mr. Murdoch is the 100% owner and 31,479,260 shares of common
stock issuable upon the exercise of stock warrants exercisable within 60
days of the date hereof.
3) Includes 25,023,228 shares of common stock issuable upon the exercise of
stock options or warrants exercisable within 60 days of the date hereof.
Mr. Furst also holds a warrant to purchase 2,500,000 common shares from
Saburah investments Inc., which are excluded from the shares owned. Shares
subject to this warrant will be issued from shares currently owned by
Saburah.
4) Includes 191,600 shares of common stock issuable upon the exercise of stock
options exercisable within 60 days from the date hereof.
5) Includes 280,000 shares of common stock exercisable upon the exercise of
stock options exercisable within 60 days from the date hereof.
6) Includes 56,974,088 shares of common stock issuable upon the exercise of
stock options and warrants exercisable within 60 days from the date hereof.
- ------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
-----------------------------------------------------------
a) Royal Bank of Canada
-----------------------
The maximum borrowing under the demand loan facility was Canadian $3.6 million
(U.S. $2.9 million). RBC increased the borrowing base formula by Canadian $1.0
million (U.S. $817,000) 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 inventory
as defined in the agreement. Interest is payable at a rate of RBC's prime rate
(3.5% at December 31, 2008), plus 2.75% per annum. Borrowings under this
facility are secured by substantially all of the Company's assets. As of
December 31, 2008, the Company exceeded its facilities under the lending formula
by approximately Canadian $670,000 (U.S. $547,000)(subject to the above
limitations) under the demand loan. RBC agreed to forbear from the exercise of
its rights and remedies under the security in respect of the indebtedness until
October 31, 2008 or earlier in the event of the occurrence of default in
accordance with the Forbearance Agreement, which was finalized on May 29, 2008.
In accordance with the Forbearance Agreement the maximum borrowings were reduced
to Canadian $3,175,000 (U.S. $2,593,000) and the interest rate was increased
from RBC's prime rate plus 2.75% per annum to RBC's prime rate plus 3.25% per
annum.
As of October 31, 2008, the Forbearance Agreement with RBC expired. On November
12, 2008, the Company and RBC extended the Forbearance Agreement to May 15,
2009. In accordance with the Forbearance Agreement extension, the maximum
borrowings were reduced to Canadian $3,000,000 (U.S. $2,449,800) and the
interest rate was further increased from RBC's prime rate plus 3.25% per annum
to RBC's prime rate plus 3.75% per annum. At December 31, 2008 borrowings were
at Canadian $2,900,000 (U.S. $2,368,000). There is no assurance that further
extensions will be obtained.
In consideration for the guarantees provided by Mr. Murdoch and Mr. Furst to
RBC, the Company paid a fee of $43,000, shared between them, paid in twelve
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 and beginning in June 2006 was taken into income over the period of the
guarantee, which was one year. These guarantees expired in June 2007 and were
subsequently renewed in July 2007 until April 30, 2008. In consideration of
these guarantee renewals, Mr. Murdoch and Mr. Furst received a fee of $40,000,
shared between them, paid in ten equal monthly installments. As additional
consideration, they received fully-vested, two- year warrants to purchase
approximately 7.4 million common shares of the Company at an exercise price of
$0.065 per share. The fair value of these warrants of $164,000 was determined
in accordance with SFAS No. 123R and beginning in July 2007 was taken into
income over the period of the guarantee, which was ten months. These guarantees
expired in April 2008 and were subsequently renewed in May 2008 until December
31, 2008. In consideration of these guarantee renewals, Mr. Murdoch and Mr.
Furst received a fee of $33,000, shared between them, paid in eight equal
monthly installments. As additional consideration, they received fully-vested,
two-year warrants to purchase approximately 5 million common shares of the
Company at an exercise price of $0.10 per share. The fair value of these
warrants of $150,000 was determined in accordance with SFAS No. 123R and
beginning in May 2008 was taken into income over the period of the guarantee,
which was eight months. These guarantees expired in December 2008 and were
renewed until July 30, 2009. In consideration of these guarantees renewals, Mr.
Murdoch and Mr. Furst will receive a fee of $24,000, shared between them, paid
in seven equal monthly installments. As additional consideration, they received
fully-vested, two-year warrants to purchase approximately 13.2 million common
shares of the Company at an exercise price of $.018 per share. The fair value
of these warrants of $124,000 was determined in accordance with SFAS No. 123R
and beginning in January 2009 is being taken into income over the period of the
guarantee.
During the year ended December 31, 2008, $49,000 (2007 - $43,000) has been
recorded in interest expense related to the above warrants. During the year
ended December 31, 2008, $216,000 (2007 - $148,000) has been recorded in
non-cash amortization costs related to the above warrants.
b) Tradition Capital Bank
------------------------
In December 2006, the Company entered into a secured revolving credit agreement
with Tradition Capital Bank. From December 15, 2006, through the expiration of
the facility on June 15, 2007, the Company drew up to a maximum of $550,000
under the facility. Borrowings under this facility were secured by
substantially all of the Company's assets in a second position to RBC. In
addition, the loan was fully secured by personal guarantees of Mr. Murdoch and
Mr. Furst. In consideration of these guarantees, Mr. Murdoch and Mr. Furst
received a fee of $14,000, shared between them, paid in six equal monthly
installments beginning in December 2006. As additional consideration, they
received fully- vested, two-year warrants to purchase approximately 5.2 million
shares of the Company's common stock, at an exercise price of $0.053 per share.
The fair value of these warrants of $91,000 was determined in accordance with
SFAS No. 123R and beginning in December 2006 was taken into income over the
period of the guarantee, which was six months. The credit facility and related
guarantees expired in June 2007 and were subsequently renewed in July 2007 until
April 30, 2008. In consideration of the guarantee renewals, Mr. Murdoch and Mr.
Furst received a fee of $23,000, shared between them, paid in ten equal monthly
installments. As additional consideration, they received fully-vested, two-year
warrants to purchase approximately 4.2 million common shares of the Company at
an exercise price of $0.065 per share. The fair value of these warrants of
$94,000 was determined in accordance with SFAS No. 123R and beginning in July
2007 was taken into income over the period of the guarantee, which was ten
months.
On September 25, 2007, Mr. Murdoch and Mr. Furst agreed to provide Tradition
Capital Bank additional personal guarantees totaling $500,000, which increased
the maximum the Company could draw to $1,050,000, until April 30, 2008, under
the same terms and conditions as listed above. In consideration of the
guarantees, Mr. Murdoch and Mr. Furst received a fee of $15,000, shared between
them, paid in seven equal monthly installments. As additional consideration,
they received fully-vested, two-year warrants to purchase approximately 2.5
million common shares of the Company at an exercise price of $0.10 per share.
The fair value of these warrants of $89,000 was determined in accordance with
SFAS No. 123R and beginning in October 2007 was taken into income over the
period of the guarantee, which was seven months. On April 30, 2008 the above
loan facility and related guarantees expired and were renewed until December 31,
2008. Interest is payable at the reference rate (Wall Street Journal prime, with
an interest rate floor of 5.5%, currently 3.25%), plus 1.0% per annum. In
consideration of these guarantee renewals, Mr. Murdoch and Mr. Furst received a
fee of $35,000, shared between them, paid in eight equal monthly installments.
As additional consideration, they received fully-vested, two-year warrants to
purchase approximately 5.3 million common shares of the Company at an exercise
price of $0.10 per share. The fair value of these warrants of $157,000 was
determined in accordance with SFAS No. 123R and beginning in May 2008 was taken
into income over the period of the guarantee, which was eight months. On
December 31, 2008 the above loan facility and related guarantees expired and
were renewed until July 31, 2009 under similar terms and conditions. At December
31, 2008 borrowings were at the maximum amount available. In consideration of
these guarantee renewals, Mr. Murdoch and Mr. Furst will receive a fee of
$31,000, shared between them, paid in seven equal monthly installments. As
additional consideration, they received fully-vested, two-year warrants to
purchase approximately 17.0 million common shares of the Company at an exercise
price of $.018 per share. The fair value of these warrants of $160,000 was
determined in accordance with SFAS No. 123R and beginning in January 2009 is
being taken into income over the period of the guarantee, which is seven months.
There is no assurance that further extensions will be obtained.
During the year ended December 31, 2008, $53,000 (2007 - $31,000) has been
recorded in interest expense related to the above warrants. During the year
ended December 31, 2008, $245,000 (2007 - $178,000) has been recorded in
non-cash amortization costs related to the above warrants.
c) Palm Beach Public Library - Letter of Credit
---------------------------------------------------
In August 2007, Mr. Murdoch agreed to provide a personal guarantee for a Letter
of Credit of $49,350 for a period of one year in favor of Palm Beach Public
Library that the Company was unable to obtain on its own in order to complete a
sale of the Company's self-service library systems. In consideration of this
guarantee Mr. Murdoch received a fee of $2,000 paid in twelve equal monthly
installments. As additional consideration, he received fully-vested, two-year
warrants to purchase approximately 0.2 million common shares of the Company at
an exercise price of $0.10 per share. The fair value of these warrants of
$10,000 was determined in accordance with SFAS No. 123R "Share-Based Payment,"
and beginning in August 2007 was taken into income over the period of the
guarantee, which was twelve months. This letter of credit and related guarantee
expired in August 2008 and was subsequently renewed in August 2008 until August
2009. In consideration of this guarantee renewal, Mr. Murdoch will receive a fee
of $2,000 paid over the next twelve months. As additional consideration, he
received fully-vested, two-year warrants to purchase approximately 1.4 million
common shares of the Company at an exercise price of $0.018 per share. The fair
value of these warrants of $13,000 is determined in accordance with SFAS No.
123R "Share-Based Payment," and beginning in August 2008 is being taken into
income over the period of the guarantee, which is twelve months. During the
year ended December 31, 2008, $1,000 (2007 - $1,000) has been recorded in
interest expense related to the above warrants and $1,000 will be expensed in
2009. During the year ended December 31, 2008, $11,000 (2007 - $4,000) has been
recorded in non-cash amortization costs related to the above warrants and
$8,000 will be expensed in 2009.
d) Airport - Bid Bond
---------------------
In December 2007, Mr. Murdoch, Sentry's CEO and director, and Mr. Furst, a
Sentry director, agreed to lend the Company $141,000 ($81,000 and $60,000,
respectively) to secure a bid that the Company was unable to obtain on its own
to sell products to an airport facility. In consideration of the loans, Mr.
Murdoch and Mr. Furst received interest for the period of the loan at the Bank
of America's prime rate (7.25%) plus 1% per annum. During the year ended
December 31, 2008, $1,000 (2007 - $1,000) has been recorded in interest expense
related to the loans. The loans were repaid in January 2008. Included in
accrued liabilities for 2007 for this transaction is $142,000.
e) Director Independence
----------------------
Jonathan G. Granoff is the sole independent director as determined in
accordance with Rule 4200 of the NASD.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
- ------------------------------------------------------
The Company's board of directors reviews and approves audit and permissible
non-audit services performed by its independent accountants, as well as the fees
charged for such services. In its review of non-audit service fees and its
appointment of SF Partnership, LLP as the Company's independent accountants, the
board of directors considered whether the provision of such services is
compatible with maintaining independence. The board of directors approved all of
the services provided and fees charged by SF Partnership, LLP in 2008 and 2007.
AUDIT FEES
The aggregate fees billed by for professional services for the audit of the
annual financial statements of the Company and the reviews of the financial
statements included in the Company's quarterly reports on Form 10-Q by SF
Partnership, LLP in 2008 and Form 10-QSB in 2007 were $89,000 and $84,000,
respectively, net of expenses.
AUDIT-RELATED FEES
There were no other fees for 2008 and 2007 billed by SF Partnership, LLP for
assurance and related services that were reasonably related to the performance
of the audit or review of the Company's financial statements and not reported
under "Audit Fees" above.
TAX FEES
There were no other fees billed by our independent auditors during the last two
fiscal years for tax compliance.
ALL OTHER FEES
There were no other fees billed by our independent accountants during the last
two fiscal years for products and services provided.
ITEM 15. EXHIBITS
- -------------------
2.1 Stock Purchase Agreement, dated April 29, 2004, by and between Sentry
Technology Corporation and Saburah Investments, Inc. Incorporated by
reference to Exhibit 2.1 to Company's Form 8-K as filed with the Securities
and Exchange Commission on July 14, 2004.
3.1 Amended and Restated Certificate of Incorporation of Sentry Technology
Corporation, as filed with the Delaware Secretary of State on April 26,
2005. Incorporated by reference to Exhibit 3.1 to the Company's Form 10-KSB
as filed with the Securities and Exchange Commission on April 17, 2006.
3.2 Certificate of Amendment of Certificate of Incorporation of Sentry
Technology Corporation, as filed with the Delaware Secretary of State on
May 27, 2005. Incorporated by reference to Exhibit 3.2 to the Company's
Form 10-KSB as filed with the Securities and Exchange Commission on April
17, 2006.
3.3 Certificate of Amendment of Certificate of Incorporation of Sentry
Technology Corporation, as filed with the Delaware Secretary of State on
May 17, 2007. Incorporated by reference to Exhibit 3.1 to Company's Form
8-K as filed with the Securities and Exchange Commission on May 29, 2007.
3.4 Amended and Restated Bylaws of the Company. Incorporated by reference to
Exhibit 3.3 to the Company's Form 10-KSB as filed with the Securities and
Exchange Commission on April 17, 2006.
4.1 Convertible Debenture, dated April 30, 2004, issued by Sentry Technology
Corporation to Brascan Technology Fund, Inc. Incorporated by reference to
Exhibit 4.1 to Company's Form 8-K as filed with the Securities and Exchange
Commission on July 14, 2004.
4.2 Warrant Certificate, dated April 30, 2004, issued by Sentry Technology
Corporation to Brascan Technology Fund, Inc. Incorporated by reference to
Exhibit 4.2 to Company's Form 8-K as filed with the Securities and Exchange
Commission on July 14, 2004.
4.3 Stakeholders Rights Agreement, dated April 30, 2004, by and among Sentry
Technology Corporation, Peter Murdoch, Robert Furst, Saburah Investments
Inc., and Brascan Technology Fund Inc. Incorporated by reference to Exhibit
4.3 to Company's Form 8-K as filed with the Securities and Exchange
Commission on July 14, 2004.
10.1 2007 Company Stock Incentive Plan. Incorporated by reference to Exhibit
10.1 to the Company's Form 10-KSB as filed with the Securities and Exchange
Commission on April 14, 2008.
10.2 Retirement Savings 401(k) Plan. Incorporated by reference to Exhibit 10.6
to the Company's Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission on January 21, 1997 (No. 333-20135).
10.3 Lease Agreement dated September 16, 2003 between Sentry Technology
Corporation and G & J Lakeland Realty Corp. Incorporated by reference to
Exhibit 10.35 to the Company's Form 10-QSB as filed with the Securities and
Exchange Commission on November 6, 2003.
10.4 Credit Facility Letter Agreement between Sentry Technology Canada Inc. and
Royal Bank of Canada dated April 19, 2005. Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K as filed with the Securities and
Exchange Commission on May 18, 2005.
10.5 Amendment to Credit Facility Letter Agreement between Sentry Technology
Canada Inc. and Royal Bank of Canada dated May 12, 2005. Incorporated by
reference to Exhibit 10.2 to the Company's Form 8-K as filed with the
Securities and Exchange Commission on May 18, 2005.
10.6 Postponement and Subordination Agreement between Brascan Technology Fund,
Royal Bank of Canada and Sentry Technology Canada Inc. dated May 12, 2005.
Incorporated by reference to Exhibit 10.3 to the Company's Form 8-K as
filed with the Securities and Exchange Commission on May 18, 2005.
10.7 Amendment to Credit Facility Letter Agreement between Sentry Technology
Canada Inc. and Royal Bank of Canada dated January 23, 2006. Incorporated
by reference to Exhibit 10.14 to the Company's Form 10-KSB as filed with
the Securities and Exchange Commission on April 17, 2006.
10.8 Credit Facility Letter Agreement between Sentry Technology Canada Inc. and
Royal Bank of Canada dated May 15, 2006. Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K as filed with the Securities and
Exchange Commission on May 31, 2006.
10.9 Amendment to Credit Facility Letter Agreement between Sentry Technology
Canada Inc. and Royal Bank of Canada dated November 27, 2006. Incorporated
by reference to Exhibit 10.12 to the Company's Form 10-KSB as filed with
the Securities and Exchange Commission on March 28, 2007.
10.10 Revolving Credit Agreement between Tradition Capital Bank and Sentry
Technology Corporation, dated September 26, 2007. Incorporated by reference
to Exhibit 10.10 to the Company's Form 10-KSB as filed with the Securities
and Exchange Commission on April 14, 2008.
10.11 Forbearance Agreement dated May 29, 2008 among Royal Bank of Canada,
Sentry Technology Canada, Inc., Sentry Technology Corporation and Custom
Security Industries, Inc. Incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q as filed with the Securities and Exchange Commission on
August 12, 2008.
10.12 Forbearance Agreement - Extension dated as of November 12, 2008 among
Royal Bank of Canada, Sentry Technology Canada, Inc., Sentry Technology
Corporation and Custom Security Industries, Inc. Incorporated by reference
to Exhibit 10.1 to the Company's Form 10-Q as filed with the Securities and
Exchange Commission on November 14, 2008.
14 2007 Code of Ethics. Incorporated by reference to Exhibit 14 to the
Company's Form 10-KSB as filed with the Securities and Exchange Commission
on April 14, 2008.
21 Subsidiaries of the Company. Incorporated by reference to Exhibit 21 to the
Company's Form 10-KSB as filed with the Securities and Exchange Commission
on April 17, 2006.
23.1 Consent of SF Partnership, LLP.
31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Principal 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 Principal 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-B, 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
- ----------
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SENTRY TECHNOLOGY CORPORATION
By: /s/ Joan E. Miller
------------------------------------
Joan E. Miller
Vice President-Finance and Treasurer
(Principal Financial and Accounting Officer)
Dated: March 16, 2009
In accordance with the Exchange Act, this Annual Report on Form 10-K has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the date indicated.
Signature Title Date
- --------- ------------------------------------ ----
/s/ Peter L. Murdoch Chief Executive Officer and Director March 16, 2009
- ----------------------
Peter L. Murdoch
/s/ Joan E. Miller Vice President-Finance and Treasurer March 16, 2009
- ---------------------- (Principal Financial and Accounting
Joan E. Miller Officer)
/s/ Robert D. Furst, Jr. Director March 16, 2009
- ------------------------
Robert D. Furst, Jr.
Director March 16, 2009
- ------------------------
Jonathan G. Granoff
EXHIBIT INDEX
- --------------
23.1 Consent of SF Partnership, LLP.
31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Principal 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 Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. ***