10QSB 1 doc1.txt FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 1-12727 ---------- SENTRY TECHNOLOGY CORPORATION ----------------------------- (Exact name of small business issuer as specified in its charter) Delaware 96-11-3349733 ---------- ------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1881 Lakeland Avenue, Ronkonkoma, NY 11779 ---------------------------------------------- ----- (Address of principal executive offices) (Zip Code) 631-739-2000 ------------ (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No - As of November 15, 2004, there were 120,548,804 shares of Common Stock outstanding. SENTRY TECHNOLOGY CORPORATION ----------------------------- INDEX ----- Page No. --------- PART I. FINANCIAL INFORMATION --------------------------------- Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets -- September 30, 2004 and December 31, 2003 3 Condensed Consolidated Statements of Operations -- Three Months Ended September 30, 2004 and 2003 and Nine Months Ended September 30, 2004 and 2003 4 Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 2004 and 2003 5 Notes to Condensed Consolidated Financial Statements - September 30, 2004 6 - 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 17 Item 3. Controls and Procedures 17 PART II. OTHER INFORMATION ------------------------------ Item 6. Exhibits and Reports on Form 8-K 18 Signatures 18 PART I. FINANCIAL INFORMATION --------------------------------- Item 1. Financial Statements (Unaudited) SENTRY TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
September 30, December 31, 2004 2003 --------------- -------------- ASSETS -------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 1,446 $ 210 Accounts receivable, less allowance for doubtful accounts of $413 and $304, respectively . . . . . . . . . 3,469 1,482 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 3,384 1,855 Prepaid expenses and other current assets. . . . . . . . . . 410 126 --------------- -------------- Total current assets . . . . . . . . . . . . . . . . . . . 8,709 3,673 PROPERTY, PLANT AND EQUIPMENT, net . . . . . . . . . . . . . . 658 209 GOODWILL 1,697 --- OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 558 211 --------------- -------------- $ 11,622 $ 4,093 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------------------------------------------------- CURRENT LIABILITIES Revolving line of credit and term loan . . . . . . . . . . . $ 2,904 $ 1,515 Accounts payable . . . . . . . . . . . . . . . . . . . . . . 806 566 Accrued liabilities. . . . . . . . . . . . . . . . . . . . . 1,258 1,601 Obligations under capital leases - current portion . . . . . 5 5 Deferred income. . . . . . . . . . . . . . . . . . . . . . . 150 271 --------------- -------------- Total current liabilities. . . . . . . . . . . . . . . . . 5,123 3,958 NOTES PAYABLE. . . . . . . . . . . . . . . . . . . . . . . . . 218 247 OBLIGATIONS UNDER CAPITAL LEASES - non-current portion. . . . . . . . . . . . . . . . . . . . . 9 13 CONVERTIBLE DEBENTURES 1,852 --- MINORITY INTEREST 951 --- --------------- -------------- Total liabilities. . . . . . . . . . . . . . . . . . . . . 8,153 4,218 SHAREHOLDERS' EQUITY Common stock . . . . . . . . . . . . . . . . . . . . . . . . 116 86 Additional paid-in capital . . . . . . . . . . . . . . . . . 48,144 44,658 Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (44,890) (44,749) Note receivable from shareholder --- (120) Equity adjustment from foreign currency translation 99 --- --------------- -------------- Total shareholders' equity (deficit) . . . . . . . . . . . 3,469 (125) --------------- -------------- $ 11,622 $ 4,093 =============== ============== See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three Months Ended Nine Months Ended September 30 September 30 2004 2003 2004 2003 ---- ---- ---- ---- REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,577 $ 3,784 $ 11,764 $ 9,684 COSTS AND EXPENSES: Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 1,915 1,490 4,538 3,979 Customer service expenses. . . . . . . . . . . . . . . . . . 1,100 1,094 3,220 2,912 Selling, general and administrative expenses . . . . . . . . 1,064 976 3,115 2,726 Research and development . . . . . . . . . . . . . . . . . . 266 157 606 492 -------- -------- -------- ------- 4,345 3,717 11,479 10,109 -------- -------- -------- ------- OPERATING INCOME (LOSS). . . . . . . . . . . . . . . . . . . . 232 67 285 (425) INTEREST AND FINANCING EXPENSES. . . . . . . . . . . . . . . . 105 171 309 513 -------- -------- -------- ------- INCOME (LOSS) BEFORE INCOME TAXES. . . . . . . . . . . . . . . 127 (104) (24) (938) INCOME TAX EXPENSE (BENEFIT) . . . . . . . . . . . . . . . . . 62 (143) 77 (491) -------- -------- -------- ------- INCOME (LOSS) BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . 65 39 (101) (447) MINORITY INTEREST (25) --- (40) --- -------- -------- -------- ------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. . . . . . . . . . . . 40 39 (141) (447) EXTRAORDINARY ITEM - Gain on extinguishment of debt, net of $143 and $491 income taxes --- 215 --- 737 -------- -------- -------- ------- NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . $ 40 254 $ (141) $ 290 ======== ======== ======== ======= NET INCOME (LOSS) PER SHARE Income (loss) before extraordinary item. . . . . . . . . . . . $ 0.00 0.00 $ (0.00) $ (0.01) Extraordinary item . . . . . . . . . . . . . . . . . . . . . . 0.00 0.00 0.00 0.01 -------- -------- -------- ------- Basic and diluted. . . . . . . . . . . . . . . . . . . . . . $ 0.00 0.00 $ (0.00) $ 0.00 ======== ======== ======== ======= WEIGHTED AVERAGE SHARES Basic and diluted. . . . . . . . . . . . . . . . . . . . . . 115,753 85,656 102,457 83,619 ======== ======== ======== ======= See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended September 30, ------------------- 2004 2003 ---------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss). . . . . . . . . . . . . . . . . . . . . . . $ (141) $ 290 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . 167 244 Provision for bad debts . . . . . . . . . . . . . . . . . . 20 38 Non-cash consideration 85 --- Minority interest in net income of consolidated subsidiary 40 --- Extraordinary gain on extinguishment of debt --- (1,228) Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . (648) (510) Inventories . . . . . . . . . . . . . . . . . . . . . . . . (247) 948 Accounts payable and other current assets and liabilities . (51) 422 ---------- -------- Net cash (used in) provided by operating activities. . . . . (775) 204 ----------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment, net . . . . . . . . (70) (23) Intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . (328) (12) Net cash provided by the acquisition of ID Systems 31 --- ----------- -------- Net cash used in investing activities. . . . . . . . . . . . (367) (35) ----------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) under the revolving line of credit and term loan . . . . . . . . . . . . . . . . . . 382 (172) Proceeds from bridge loan 100 --- Repayment of bridge loan (100) --- Proceeds from convertible debentures and warrants 2,000 --- Repayment of obligations under capital leases. . . . . . . . . (4) (53) Proceeds from sale of stock, net --- 5 ----------- -------- Net cash provided by (used in) financing activities. . . . . 2,378 (220) ----------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . 1,236 (51) CASH AND CASH EQUIVALENTS, at beginning of period. . . . . . . . 210 266 ----------- -------- CASH AND CASH EQUIVALENTS, at end of period. . . . . . . . . . . $ 1,446 $ 215 =========== ======== See notes to the condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 NOTE A -- Basis of Presentation ------------------------------------ The consolidated financial statements include the accounts of Sentry and its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Sentry's Annual Report to Stockholders on Form 10-KSB for the fiscal year ended December 31, 2003, as filed with the Securities and Exchange Commission. Certain prior period amounts have been reclassified to conform to current period presentation. NOTE B -- Capital Transactions and ID Systems Acquisition ----------------------------------------------------------------- Over the last several years, our largest shareholder, Dialoc ID Holdings B.V. ("Dialoc") was not able to provide us with additional financial support. On April 19, 2004, Dialoc sold 39,066,927 Sentry common shares (representing approximately 46% of the total issued and outstanding shares of Sentry) to a group of investors. Of the group, Saburah Investments Inc. ("Saburah") acquired 22,758,155 shares, Mr. Robert Furst 14,554,386 shares and Dr. Morton Roseman 1,754,386 shares. Mr. Peter Murdoch, President, CEO and Director of Sentry, is the owner of Saburah. Mr. Furst is a long-standing member of Sentry's Board of Directors. As a result of this transaction, Messers Angel and de Nood, Principals of Dialoc, resigned from Sentry's Board of Directors. In addition to the purchase of Sentry's common shares, Saburah also acquired 100% of ID Security Systems Canada, Inc. and ID Systems USA Inc. ("ID Systems"). The price paid to Dialoc by Saburah and Murdoch for Sentry and ID Systems shares in cash, debt assumption and other consideration 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 receives from Checkpoint Systems Inc. ("Checkpoint") resulting from litigation brought by ID Canada against Checkpoint. On April 30, 2004, Sentry purchased from Saburah Investments, Inc., an Ontario corporation, all of the outstanding common shares and Series "A" preference shares of ID Security Systems Canada Inc., an Ontario corporation, and all of the outstanding capital stock of ID Systems USA, Inc., a Pennsylvania corporation (collectively, "ID Systems"). ID Systems is a Toronto based company engaged in anti-shoplifting technology, security labeling, radio frequency identification (RFID), access control and library security. Sentry acquired ID Systems from Saburah in exchange for 30,000,000 Sentry common shares. The price paid per Sentry share for the securities of ID Systems was valued at approximately $0.11. A special committee of Sentry's Board of Directors received an opinion from Corporate Valuation Services confirming that the price paid for the acquisition of ID Systems was fair from the point of view of Sentry shareholders. As part of the purchase agreement, the proceeds of the ID Systems litigation settlement will be distributed to the former ID Systems' shareholders. However Saburah and Sentry have agreed that Sentry may require Saburah to purchase additional Sentry common shares under certain circumstances. Sentry's Board of Directors and shareholders owning a majority of Sentry common stock approved the acquisition of ID Systems. Other benefits flowing to Sentry/ID Systems via the purchase of ID Systems are as follows: - ID Systems and Sentry continue as the exclusive distributor in North and South America for a period of five years for all Dialoc products including Laserfuse radio frequency security labels and all RFID products. - Dialoc becomes the exclusive distributor in Europe and Asia of labels manufactured by ID Systems' security label manufacturing subsidiary, Custom Security Industries Inc. ("CSI"). - CSI acquires the right to purchase Laserfuse raw material for processing into finished security labels in its Toronto plant in order to reduce the cost of production. - CSI acquires the option to purchase a non-exclusive license to manufacture complete Laserfuse security labels for a period of 10 years subject to the payment of $500,000 and a running royalty of $0.001 per label. - Dialoc will continue to be a dealer for Sentry products in Europe and Asia. The purchase price of the ID Systems acquisition was as follows: (in thousands) Value of Sentry Technology Corporation common stock $ 3,300 Transaction costs 88 ----------- Total purchase price $ 3,388 ----------- Under the purchase method of accounting, the total purchase price as detailed above was allocated to ID System's net tangible assets and intangible assets based on their preliminary fair values as of April 30, 2004, which are as follows: (in thousands) Cash $ 119 Accounts receivable 1,309 Inventories 1,232 Prepaid expenses and other current assets 794 Property and equipment 458 Deferred charges 69 Bank debt (998) Accounts payable and accrued liabilities (449) Other liabilities (843) ---------- Net tangible assets 1,691 Goodwill 1,697 ---------- Total purchase price $ 3,388 ========== The Company is still in the process of obtaining final support for the valuations of certain intangible assets; accordingly allocation of the purchase price is subject to modification in the future. Any such modification is not expected to be significant. On an ongoing basis, Sentry will evaluate the carrying value versus the discounted cash benefit expected to be realized from the performance of the underlying operations and adjust for any impairment in value. Our condensed consolidated statements of operations include the revenues and expenses of ID Systems from May 1, 2004. The following supplemental pro forma information is presented to illustrate the effects of the acquisition on the historical operating results for the three month and nine month periods ended September 30, 2004 and 2003 as if the acquisition had occurred at the beginning of each respective period: Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 ---- ---- ---- ---- (in thousands, except per share data) Revenues $ 4,577 $ 5,534 $13,347 $14,163 Income (loss) before extraordinary item $ 40 $ 235** $ (358)* $ (204)** Net income (loss) $ 40 $ 450** $ (358) $ 533** Net income (loss) per share $ 0.00 $ 0.00 $ (0.00) $ 0.00 * The income before extraordinary item in the nine months ended September 30, 2004 includes a preacquisition write down of $256,000 related to ID Systems' Brazilian subsidiary. ** The income (loss) before extraordinary item in the three and nine months ended September 30, 2003 includes an income tax benefit of $143 and $491, respectively, resulting from the utilization of net operating loss carryforwards. Net income in the 2003 periods includes both the income tax benefit and the extraordinary gains of $215 and $737, respectively, from the extinguishment of debt. NOTE C -- Convertible Debenture ----------------------------------- On April 30, 2004, Sentry entered into a $2,000,000 secured convertible debenture with Brascan Technology Fund ("Brascan"), an alternative investment fund established by Brascan Asset Management, to invest in early stage, technology-based companies with high growth potential. Key terms of the transaction are as follows: - Four-year term. - Interest rate of 8%. - Redeemable at Sentry's option after 18 months. - Conversion price equal to the market price, at time of conversion, less a discount of 30% with a maximum conversion price of $0.12 per share. - Conversion is at the option of Brascan when market share price is equal to or greater than $0.17 per share or with the approval of Sentry's Board of Directors when the market share price is less than $0.17 per share. - Sentry will provide most favored pricing to all Brascan affiliates and expects to be a supplier of security and identification products to the Brascan affiliates. - Brascan was issued warrants for 5,000,000 shares of Sentry common stock, priced at $0.15 per share, exercisable anytime within the next four years. - Brascan is entitled to one seat on Sentry's Board of Directors or will participate as an observer. The Debenture is secured by a general security interest over all the assets and properties of Sentry. The amount is subordinate to the existing CIT and Bank of Montreal credit facilities. The proceeds of the financing, to be used primarily for working capital, were allocated between the debenture ($1,835,000) and the warrants ($165,000) based on their respective fair values in accordance with EITF 00-27 (Application of Issue 98-5 to Certain Convertible Instruments). The difference between the face value of the debenture and the allocated value is being charged to interest and financing expenses over the term of the debenture. Certain other warrants to purchase 425,000 shares of Sentry common stock at exercise prices ranging from $0.18 to $0.20 per share were issued in conjunction with the convertible debenture. The warrants are exercisable over one to three years. The fair value of these warrants ($49,000) is being charged to operations over the life of the warrants. As a condition of the financing, Sentry also acquired ID Systems. Sentry's Board of Directors and shareholders owning a majority of Sentry common stock approved the transaction with Brascan. Sentry requires liquidity and working capital to finance increases in receivables and inventory associated with sales growth, payments to past due vendors and, to a lesser extent, for capital expenditures. We had no material capital expenditure or purchase commitments as of September 30, 2004. We anticipate that current cash reserves, cash generated by the operations of Sentry and its new ID Systems' subsidiaries and the financing provided by the Brascan transaction and sale of stock to Saburah will be adequate to finance the Company's anticipated working capital requirements as well as future capital expenditure requirements for at least the next twelve months. NOTE D -- Inventories ------------------------ Inventories consist of the following: September 30, 2004 December 31, 2003 -------------------- ------------------- (in thousands) Raw materials $ 1,159 $ 449 Work-in-process 298 283 Finished goods 1,927 1,123 ----- ----- $ 3,384 $ 1,855 = ===== = ===== Reserves for excess and obsolete inventory totaled $1,737,000 and $2,148,000 as of September 30, 2004 and December 31, 2003, respectively and have been included as a component of the above amounts. NOTE E -- Credit Facilities ------------------------------- On April 30, 2004, Sentry's subsidiary, ID Security Systems Canada Inc., entered into credit facilities with Bank of Montreal, replacing its former credit facility. Facility 1 is a Canadian $1.5 million (U.S. $1.2 million) Overdraft Lending Facility, which is subject to certain limitations based on a percentage of eligible accounts receivable and inventories as defined in the agreement. Interest on the overdraft facility is payable monthly at the Bank of Montreal commercial prime lending rate (3.75% at September 30, 2004), plus 1% per annum. Facility 2 is a Canadian $250,000 (U.S. $198,000) Non-Revolving Demand Credit facility incurred to refinance an existing term loan with a previous lender. Principal payments of Canadian $6,945 plus interest are payable monthly in arrears. Borrowings under these facilities are secured by the assets of ID Systems. At September 30, 2004, approximately U.S. $1,030,000 was outstanding under the Bank of Montreal facilities. NOTE F -- Related Party Transactions ----------------------------------------- On March 27, 2002, Peter Murdoch, our President and CEO, exercised a stock option for two million shares of Sentry common stock at an exercise price of $0.06 per share, which was paid for through the issuance of a promissory note in the amount of $120,000. The principal of the note was secured by the option shares and was repayable no later than January 8, 2006. The note bore interest at prime less .75%. Mr. Murdoch satisfied the note and accrued interest as of March 31, 2004. The note had been reflected as a reduction of shareholders' equity on the balance sheet as of December 31, 2003. NOTE G -- Earnings Per Share --------------------------------- The earnings per share calculations (basic and diluted) at September 30, 2004 and 2003 are based upon the weighted average number of common shares outstanding during each period. There are no reconciling items in the numerator or denominator of the earnings per share calculations in either of the periods presented. Options to purchase 1,499,948 and 1,598,424 shares of common stock with a weighted average exercise price of $0.59 and $0.57 were outstanding at September 30, 2004 and 2003, but were not included in the computation of diluted net loss per share because their effect would be antidilutive or immaterial. The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock options awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. No options were granted in 2004 or 2003. The weighted average fair value of the options granted for the year ended December 31, 2001 is estimated at $0.05, using the Black-Scholes option pricing model with the following weighted average assumptions: expected life of five years; stock volatility, 147% in 2001; risk free interest rates, 4.8% in 2001, and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the post 1995 awards had been amortized to expense over the vesting period of the awards, pro forma net income attributed to common shareholders would have been as follows:
Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 ------ ------- ------- ------ (in thousands, except per share data) Net income (loss): As reported. . . . . . . . . . . . . . . . . . . $ 40 $ 254 $ (141) $ 290 Pro forma. . . . . . . . . . . . . . . . . . . . $ 37 $ 233 $ (154) $ 254 Net income (loss) per share: As reported. . . . . . . . . . . . . . . . . . . $ 0.00 $ 0.00 $(0.00) $0.00 Pro forma. . . . . . . . . . . . . . . . . . . . $ 0.00 $ 0.00 $(0.00) $0.00
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. No options were granted in the three or nine-month periods ended September 30, 2004 or 2003. NOTE H -Litigation Settlement and Subsequent Event -------------------------------------------------------- On August 1, 2004, ID Systems and Checkpoint entered into a settlement agreement effective July 30, 2004, pursuant to which Checkpoint agreed to pay $19.95 million in full and final settlement of claims covered by antitrust litigation. Payment in full was received on August 5, 2004. As provided when Sentry purchased ID Systems, the proceeds of the settlement were distributed to former shareholders of ID Systems, after payment of litigation fees and expenses. The agreement includes mutual releases between the parties for complaints arising from activities prior to the date of the agreement, except for any contractual obligations and any future claims for patent, copyright or trademark infringement. The agreement is not an acknowledgement of any wrongdoing or liability by either party. A Stipulation of Dismissal has been filed with the Third Circuit Court of Appeals to finally conclude the legal proceedings. During the third quarter of 2004, Sentry and its subsidiaries received $753,000 through the repayment of debt incurred by Dialoc prior to the ID Systems acquisition and the reimbursement for litigation expenses. While Sentry did not obtain an interest in the litigation settlement, Saburah and Sentry agreed that Sentry might require Saburah to purchase additional Sentry common shares equal to approximately 4.5% of any amount received (net of legal fees and expenses) from Checkpoint. The price per share has been set at 80% of the previous 20 days trading average prior to the announcement of the settlement. Sentry's Board of Directors exercised this option and based on the settlement amount, Sentry sold to Saburah approximately 4.8 million shares for $641,000 on November 5, 2004. The transaction will be recorded in Sentry's fourth quarter financial statements. After the acquisition of ID Systems and sale of additional shares as a result of the litigation settlement, Sentry will have 120,548,804 shares of common stock outstanding. Mr. Murdoch, directly or indirectly through his ownership of Saburah, will own or control 49.5% of the outstanding common stock of Sentry. Item 2. Management's Discussion and Analysis of Financial Condition and Results -------------------------------------------------------------------------------- of Operations. --------------- Certain Factors That May Affect Future Results ---------------------------------------------------- Information contained or incorporated by reference in this periodic report on Form 10-QSB and in other SEC filings by Sentry contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or the negative thereof, other variations thereon or comparable terminology, or by discussions of strategy. These forward-looking statements involve certain significant risks and uncertainties, and actual results may differ materially from the forward-looking statements. For further details and discussion of these risks and uncertainties see Sentry Technology Corporation's SEC filings including, but not limited to, its annual report on Form 10-KSB. No assurance can be given that future results covered by the forward-looking statements will be achieved, and other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. We do not undertake to publicly update or revise any of our forward-looking statements even if experience or future changes show that the indicated results or events will not be realized. Results of Operations: ------------------------ On April 30, 2004, Sentry purchased from Saburah Investments, Inc. all of the outstanding common shares and Series "A" preference shares of ID Security Systems Canada Inc., and all of the outstanding capital stock of ID Systems USA, Inc. (collectively, "ID Systems"). ID Systems is a Toronto based company engaged in anti-shoplifting technology, security labeling, radio frequency identification (RFID), access control and library security. Our condensed consolidated statements of operations include the revenues and expenses of ID Systems from May 1, 2004. Consolidated revenues were 21% higher in the both the quarter and nine month periods ended September 30, 2004 than in the quarter and nine month periods ended September 30, 2003. ID Systems' revenues for the third quarter and five months ended September 30, 2004 were $1.5 and $2.4 million. Our backlog of orders, which we expect to deliver within the next twelve months, was $3.2 million at September 30, 2004 as compared to $4.4 million at September 30, 2003. Total revenues for the periods presented are broken out as follows:
Q-3 Q-3 % 9 Mos. 9 Mos. % 2004 2003 Change 2004 2003 Change --------------- ------- ------- -------- ------ ------- (in thousands) (in thousands) EAS . . . . . . . . . . . . . $ 1,783 $ 490 264 $ 3,390 $1,505 125 CCTV. . . . . . . . . . . . . 940 706 33 2,509 2,653 (5) SentryVision. . . . . . . . . 708 1,420 (50) 2,500 2,279 10 --------------- ------- ------- -------- ------ ------- Total sales . . . . . . . . . 3,431 2,616 31 8,399 6,437 30 Service revenues and other. . 1,146 1,168 (2) 3,365 3,247 4 --------------- ------- ------- -------- ------ ------- Total revenues. . . . . . . . $ 4,577 $ 3,784 21 $ 11,764 $9,684 21 =============== ======= ======= ======== ====== =======
All of the increase in sales of EAS products in the third quarter and first nine months of 2004 was attributable to ID Systems' sales, which totaled $1.5 and $2.3 million of the respective totals. Sentry's historical comparative sales of EAS products decreased in both 2004 periods presented. The increase in CCTV sales and decrease in SentryVision sales in the third quarter of 2004 as compared to the third quarter of 2003 was a result of the mix of products purchased by Lowe's Home Centers. Total revenues from Lowe's Home Centers decreased $0.9 and $0.2 million in the third quarter and first nine months of 2004 as compared to the same periods in 2003. Service revenues and other decreased in the third quarter of 2004 primarily as a result of lower SentryVision installations than in the third quarter of 2003. Cost of sales were 56% and 54% of total sales in the three and nine month periods ended September 30, 2004 compared to 57% and 62% in the same periods of the prior year. We continued to see margin improvements as a result of the outsourcing of all significant manufacturing operations, which began in the second quarter of 2003. The decrease in the cost of sales percentage in the first nine months of 2004 over the first nine months of 2003 is primarily the result of the elimination of the charge to cost of sales of under absorbed fixed overhead costs due to the termination of in-house manufacturing and the move to a smaller facility. The increase in customer service expenses in the third quarter and first nine months of 2004 is primarily a result of higher sales of systems we install. We have decreased the number of customer service employees and increased the use of outside service contractors in order to better manage our total net customer service costs during fluctuations in activity levels from quarter to quarter. However, our efforts were hampered somewhat by our inability to maintain a proper level of service parts due to inadequate trade credit and financial resources during the first six months of 2004, which resulted in inefficiencies. As a result of our recent financing, we have restocked our service parts inventory enabling us to deliver service in a more timely and efficient manner. Selling, general and administrative expenses were 9% and 14% higher in the three and nine month periods ended September 30, 2004 when compared to the same periods of the previous year. This was primarily as a result of the ID Systems merger, which represented $342,000 and $590,000 of the amounts reported, respectively. However, as a percentage of total revenues, total costs decreased in the 2004 periods. The increase in research and development in the third quarter and first nine months of 2004 when compared to the third quarter and first nine months of 2003 is also attributable to the ID Systems merger. As a result of the restructuring of operations, the increase in sales activity levels and the merger with ID Systems, we were able to show operating income of $232,000 and $285,000 in the three and nine month periods ended September 30, 2004 as compared to operating profit of $67,000 and an operating loss of $425,000 in the same periods of 2003. Total interest and financing costs decreased in the third quarter and first nine months of 2004 as a result of lower capital lease interest due to the cancellation of the sale and leaseback agreement on our former headquarters facility. In addition in the third quarter of 2004, as a result of the Brascan Technology investment, we were able to eliminate the costly financing costs associated with purchase order financing. On July 9, 2003, Sentry entered into a settlement agreement with its landlord regarding the termination of its long-term capital and operating leases for its current facility in Hauppauge, New York. The Company recognized an extraordinary gain of $212,000 (net of $141,000 income taxes) in the third quarter of 2003, representing the difference between the carrying amounts of outstanding obligations to the landlord less the net book value of the property on the date of the settlement. In the second and third quarters of 2003, the Company also entered into settlements with certain of its vendors for past due obligations which resulted in a gain of approximately $525,000 (net of $350,000 income taxes) which represents the difference between the amounts due before the settlement and the total amount payable, including the value of the common stock, as a result of the settlement. In 2004, the income tax provisions result from taxable income of our ID Systems' subsidiary, which cannot be offset by Sentry's net operating loss carryforwards. In 2003, the $143,000 and $348,000 income tax provision recognized on the extraordinary gain was offset by an equivalent income tax benefit generated from the each period's loss from operations and the utilization of net operating loss carryforwards. As a result of the foregoing, Sentry had net income of $40,000 and a net loss of $141,000 in the quarter and first nine months ended September 30, 2004 as compared to net income of $254,000 and $290,000 in the quarter and nine months ended September 30, 2003. Liquidity and Capital Resources as of September 30, 2004 As a result of certain transactions detailed below, our financial condition has substantially strengthened. Since December 31, 2003, our working capital has increased from $(0.3) million to $3.6 million, total assets increased from $4.1 million to $11.6 million and shareholders' equity increased from $(0.1) million to $3.5 million. We have eliminated the use of expensive purchase order financing to finance inventory purchases and we are beginning to reestablish credit with new and existing vendors. In the second quarter of 2003, to address our reduced revenue levels, decreased financial position and recurring operating losses, our Board of Directors approved a restructuring plan to strengthen the Company's operating efficiencies and to better align its operations with current economic and market conditions. We were successful in implementing many changes to our business plan during 2003 including the downsizing of operations and relocation to smaller facilities, the negotiations with past due trade creditors and former landlord, the outsourcing of manufacturing and the expansion of our Service Partner program to augment service and installations. The successful implementation of this restructuring has resulted in substantial gross margin improvements and reductions in operating expenses beginning after the first quarter of 2003. Over the last several years, our largest shareholder, Dialoc ID Holdings B.V. ("Dialoc") was not able to provide us with additional financial support. On April 19, 2004, Dialoc sold 39,066,927 Sentry common shares (representing approximately 46% of the total issued and outstanding shares of Sentry) to a group of investors. Of the group, Saburah Investments Inc. ("Saburah") acquired 22,758,155 shares, Mr. Robert Furst 14,554,386 shares and Dr. Morton Roseman 1,754,386 shares. Peter L. Murdoch, President, CEO and Director of Sentry, is the owner of Saburah. Mr. Furst is also a long-standing member of Sentry's Board of Directors. As a result of this transaction, Messers Angel and de Nood, Principals of Dialoc, resigned from Sentry's Board of Directors. In addition to the purchase of Sentry's common shares, Saburah also acquired 100% of ID Security Systems Canada, Inc. and ID Systems USA Inc. ("ID Systems"). ID Systems is a Toronto based company engaged in anti-shoplifting technology, security labeling, radio frequency identification (RFID), access control and library security. The price paid to Dialoc by Saburah and Murdoch for Sentry and ID Systems shares in cash, debt assumption and other consideration is approximately $3.6 million plus the surrender of Murdoch's 15% interest in Dialoc. Saburah has also agreed to make a payment to Dialoc in the future equal to approximately 6% of any payment it receives from Checkpoint Systems Inc. resulting from litigation brought by ID Canada against Checkpoint. On April 30, 2004, Sentry purchased from Saburah Investments, Inc., an Ontario corporation, all of the outstanding common shares and Series "A" preference shares of ID Security Systems Canada Inc., an Ontario corporation, and all of the outstanding capital stock of ID Systems USA, Inc., a Pennsylvania corporation (collectively, "ID Systems"). ID Systems is a Toronto based company engaged in anti-shoplifting technology, security labeling, radio frequency identification (RFID), access control and library security. Sentry acquired ID Systems from Saburah in exchange for 30,000,000 Sentry common shares. The price paid per Sentry share for the securities of ID Systems was valued at approximately $0.11. A special committee of Sentry's Board of Directors received an opinion from Corporate Valuation Services confirming that the price paid for the acquisition of ID Systems was fair from the point of view of Sentry shareholders. Sentry's Board of Directors and shareholders owning a majority of Sentry common stock approved the acquisition of ID Systems. The purchase price of the acquisition was approximately $3.4 million representing $3.3 million in the value of Sentry common stock issued and $0.1 in transaction expenses. Sentry acquired $1.7 million in net tangible assets and assigned the remaining $1.7 million to goodwill. (See Note B to the condensed consolidated financial statements). On an ongoing basis, Sentry will evaluate the carrying value of the goodwill versus the discounted cash benefit expected to be realized from the performance of the underlying operations and adjust for any impairment in value. Other benefits flowing to Sentry/ID Systems via the purchase of ID Systems are as follows: - ID Systems and Sentry continue as the exclusive distributor in North and South America for a period of five years for all Dialoc products including Laserfuse radio frequency security labels and all RFID products. - Dialoc becomes the exclusive distributor in Europe and Asia of labels manufactured by ID Systems' security label manufacturing subsidiary, Custom Security Industries Inc. ("CSI"). - CSI acquires the right to purchase Laserfuse raw material for processing into finished security labels in its Toronto plant in order to reduce the cost of production. - CSI acquires the option to purchase a non-exclusive license to manufacture complete Laserfuse security labels for a period of 10 years subject to the payment of $500,000 and a running royalty of $0.001 per label. - Dialoc will continue to be a dealer for Sentry products in Europe and Asia. On April 30, 2004, ID Systems entered into new credit facilities with maximum availability of Canadian $1.75 million (U.S. $1.4 million) with the Bank of Montreal. The facilities provide working capital for ID Systems and all borrowings are secured by the assets of ID Systems. We continued to pursue additional debt or equity financing through our financial advisors and on April 30, 2004, Sentry entered into a $2,000,000 secured convertible debenture with Brascan Technology Fund ("Brascan"), an alternative investment fund established by Brascan Asset Management, to invest in early stage, technology-based companies with high growth potential. The proceeds of the financing will be used primarily for working capital. Key terms of the transaction are as follows: - Four-year term. - Interest rate of 8%. - Redeemable at Sentry's option after 18 months. - Conversion price equal to the market price, at time of conversion, less a discount of 30% with a maximum conversion price of $0.12 per share. - Conversion is at the option of Brascan when market share price is equal to or greater than $0.17 per share or with the approval of Sentry's Board of Directors when the market share price is less than $0.17 per share. - Sentry will provide most favored pricing to all Brascan affiliates and expects to be a supplier of security and identification products to the Brascan affiliates. - Brascan was issued warrants for 5,000,000 shares of Sentry common stock, priced at $0.15 per share, exercisable anytime within the next four years. - Brascan is entitled to one seat on Sentry's Board of Directors or will participate as an observer. The Debenture is secured by a general security interest over all the assets and properties of Sentry. The amount is subordinate to the existing CIT and Bank of Montreal credit facilities. Sentry also acquired ID Systems as a condition of the financing. Sentry's Board of Directors and shareholders owning a majority of Sentry common stock approved the transaction with Brascan. As of September 30, 2004, we had borrowings of approximately $1.9 million with CIT, the maximum amount available under the revolving credit facility and $1.0 million with the Bank of Montreal. Through the first half of 2004, most of our trade vendors continued to require cash in advance or COD payments for our purchases. Prior to the Brascan financing, we had to supplement our borrowings under the CIT credit facility with expensive purchase order financing through EPK Financial Corporation ("EPK"). As a result of the Brascan financing, during the second quarter of 2004, we repaid all amounts owed to EPK and discontinued our use of this facility. On August 1, 2004, ID Systems and Checkpoint entered into a settlement agreement effective July 30, 2004, pursuant to which Checkpoint agreed to pay $19.95 million in full and final settlement of claims covered by the antitrust litigation. Payment in full was received on August 5, 2004. As provided when Sentry purchased ID Systems, the proceeds of the settlement will be distributed to former shareholders of ID Systems, after payment of litigation fees and expenses. The agreement includes mutual releases between the parties for complaints arising from activities prior to the date of the agreement, except for any contractual obligations and any future claims for patent, copyright or trademark infringement. The agreement is not an acknowledgement of any wrongdoing or liability by either party. A Stipulation of Dismissal has been filed with the Third Circuit Court of Appeals to finally conclude the legal proceedings. While Sentry did not obtain an interest in the litigation settlement, Saburah and Sentry agreed that Sentry might require Saburah to purchase additional Sentry common shares equal to approximately 4.5% of any amount received (net of legal fees and expenses) from Checkpoint. The price per share was set at 80% of the previous 20 days trading average prior to the announcement of the settlement. Our Board of Directors has exercised this option and based on the settlement amount, Sentry will sell to Saburah approximately 4.8 million shares for $641,000. We received the funds from Saburah in November 2004 and the stock sale will be recorded in the fourth quarter of 2004. Sentry also was reimbursed for legal costs advanced by ID Systems, as well as for loans and trade receivables of approximating $753,000, which was received in the third quarter of 2004. These transactions, totaling $1.4 million, represent the total cash flowing to Sentry directly and indirectly as a result of the Checkpoint lawsuit. After the acquisition of ID Systems and sale of additional shares as a result of the litigation settlement, Sentry will have 120,548,804 shares of common stock outstanding. Mr. Murdoch, directly or indirectly through his ownership of Saburah, will own or control 49.5% of the outstanding common stock of Sentry. We will require liquidity and working capital to finance increases in receivables and inventory associated with sales growth, payments to past due vendors and, to a lesser extent, for capital expenditures. We had no material capital expenditure or purchase commitments as of September 30, 2004. We anticipate that current cash reserves, cash generated by the operations of Sentry and its new ID Systems' subsidiaries, as well as the financing provided by the Brascan transaction and the sale of stock to Saburah will be adequate to finance the Company's anticipated working capital requirements as well as future capital expenditure requirements for at least the next twelve months. Related Party Transactions ---------------------------- Details of related party transactions are included in Note F of this Form 10-QSB. Item 3. Controls and Procedures As of the end of the period covered by this report, Sentry Technology Corporation carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information related to the Company that is required to be included in Sentry Technology Corporation's periodic SEC filings. There has been no change in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonable likely to materially affect, the Company's internal control over financial reporting. SENTRY TECHNOLOGY CORPORATION PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits: 31.1 - Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 - Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 - Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*** 32.2 - Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*** *** In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed "filed" for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. (b) Reports on Form 8-K - On July 14, 2004, we filed a Current Report on Form 8-K disclosing a) the acquisition from Saburah Investments, Inc. an Ontario corporation, of 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, and b) a $2,000,000 investment in the Company by Brascan Technology Fund. On August 10, 2004, we filed a Current Report on Form 8-K disclosing a) the settlement of the ID Systems and Checkpoint Systems antitrust litigation and b) the $1,400,000 cash infusion expected from the reimbursement of litigation expenses, the repayment of debt from former ID Systems' shareholders and the sale of Sentry stock to Saburah Investments Inc. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SENTRY TECHNOLOGY CORPORATION ------------------------------- Date: November 15, 2004 By: /s/ PETER J. MUNDY ------------------- ----------------------- Peter J. Mundy, Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) SECTION 302 CERTIFICATION: Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Certification of CEO I, Peter L. Murdoch, certify that 1. I have reviewed this quarterly report on Form 10-QSB of Sentry Technology Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. /s/ PETER L. MURDOCH ------------------------------------------------- Peter L. Murdoch President and Chief Executive Officer November 15, 2004 SECTION 302 CERTIFICATION: Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Certification of CFO I, Peter J. Mundy, certify that 1. I have reviewed this quarterly report on Form 10-QSB of Sentry Technology Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. /s/ PETER J. MUNDY ------------------------------------------------- Peter J. Mundy Vice President and Chief Financial Officer November 15, 2004 SECTION 906 CERTIFICATION: Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION OF CEO In connection with the Quarterly Report of Sentry Technology Corporation (the "Company") on Form 10-QSB for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the Report"), I, Peter L. Murdoch, Chief Executive Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ PETER L. MURDOCH ------------------------------------------------- Peter L. Murdoch President and Chief Executive Officer November 15, 2004 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies this Report on Form 10-QSB pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. SECTION 906 CERTIFICATION: Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION OF CFO In connection with the Quarterly Report of Sentry Technology Corporation (the "Company") on Form 10-QSB for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the Report"), I, Peter J. Mundy, Chief Financial Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ PETER J. MUNDY ------------------------------------------------- Peter J. Mundy Vice President and Chief Financial Officer November 15, 2004 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies this Report on Form 10-QSB pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.