-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JHSFWItAPCr+dIpEBeAKxXS652DcRMwn2FgY62iHtPIcpOiwh8OAA1OhtUWOJi2K oNWAThkXiMbg3Y51TmSIHg== 0001137403-05-000034.txt : 20050812 0001137403-05-000034.hdr.sgml : 20050812 20050812151256 ACCESSION NUMBER: 0001137403-05-000034 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050812 DATE AS OF CHANGE: 20050812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENTRY TECHNOLOGY CORP CENTRAL INDEX KEY: 0001030708 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 113349733 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-12727 FILM NUMBER: 051021219 BUSINESS ADDRESS: STREET 1: 350 WIRELESS BLVD CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5142322100 MAIL ADDRESS: STREET 1: 350 WIRELESS BLVD CITY: HAUPPAUGE STATE: NY ZIP: 11788 10QSB 1 sentrytest10q.txt SENTRY TECHNOLOGY TEST 10-QSB JUNE 2005 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 1-12727 ---------- SENTRY TECHNOLOGY CORPORATION ----------------------------- (Exact name of small business issuer as specified in its charter) Delaware 96-11-3231714 -------- ------------- (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 August 12, 2005, there were 120,628,804 shares of Common Stock outstanding. SENTRY TECHNOLOGY CORPORATION ----------------------------- INDEX ----- Page No. -------- PART I. FINANCIAL INFORMATION - ------------------------------- Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets -- June 30, 2005 and December 31, 2004 3 Consolidated Statements of Operations -- Three Months Ended June 30, 2005 and 2004 And Six Months Ended June 30, 2005 and 2004 4 Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2005 and 2004 5 Notes to Consolidated Financial Statements - June 30, 2005 6 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 12 Item 3. Controls and Procedures 13 PART II. OTHER INFORMATION - ---------------------------- Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 PART I. FINANCIAL INFORMATION - ------------------------------- Item 1. Financial Statements (Unaudited)
SENTRY TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) June 30, December 31, 2005 2004 ---------- -------------- (Unaudited) (Audited) ASSETS - ------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 771 $ 1,965 Accounts receivable, less allowance for doubtful accounts of $151 and $338, respectively 2,954 3,500 Inventories 3,156 3,314 Prepaid expenses and other current assets 474 525 ---------- -------------- Total current assets 7,355 9,304 PROPERTY, PLANT AND EQUIPMENT, net 625 689 GOODWILL 1,564 1,564 OTHER ASSETS 624 690 ---------- -------------- $ 10,168 $ 12,247 ========== ============== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------- CURRENT LIABILITIES Revolving line of credit and term loan $ 1,492 $ 2,640 Accounts payable 908 799 Accrued liabilities 1,194 1,146 Obligations under capital leases - current portion 6 5 Deferred income 66 169 ---------- -------------- Total current liabilities 3,666 4,759 NOTES PAYABLE 24 189 OBLIGATIONS UNDER CAPITAL LEASES - non-current portion 4 8 DEFFERED TAX LIABILITY 42 39 CONVERTIBLE DEBENTURES 1,883 1,862 MINORITY INTEREST 1,040 1,045 ---------- -------------- Total liabilities 6,659 7,902 SHAREHOLDERS' EQUITY Common stock, $0.001 par value; authorized 160,000 shares, 121 121 issued and outstanding 120,628 and 120,549 shares Additional paid-in capital 48,783 48,779 Accumulated deficit (45,508) (44,718) Other accumulated comprehensive income 113 163 ---------- -------------- Total shareholders' equity 3,509 4,345 ---------- -------------- $ 10,168 $ 12,247 ========== ============== See notes to the consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ---------------------------------------------- 2005 2004 2005 2004 (Unaudited) (Unaudited) REVENUES Sales $ 3,462 $ 3,188 $ 5,375 $ 5,034 Service, installation and other 805 1,091 1,385 2,219 ------- -------- -------- -------- 4,267 4,279 6,760 7,253 COSTS AND EXPENSES: Cost of sales 1,915 1,682 2,895 2,623 Customer service expenses 747 1,105 1,496 2,120 Selling, general and administrative expenses 1,272 1,192 2,493 2,117 Research and development 214 180 447 340 ------- -------- -------- ------- 4,148 4,159 7,331 7,200 ------- -------- -------- ------- OPERATING INCOME (LOSS) 119 120 (571) 53 INTEREST AND FINANCING EXPENSES 78 79 169 204 ------- -------- -------- ------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 41 41 (740) (151) INCOME TAX EXPENSE 37 15 20 15 ------- -------- -------- ------- INCOME (LOSS) BEFORE MINORITY INTEREST 4 26 (760) (166) MINORITY INTEREST (34) (14) (30) (14) ------- -------- -------- ------- NET INCOME (LOSS) $ (30) $ 12 $ (790) $ (180) ======= ======== ======== ======= NET INCOME (LOSS) PER SHARE Basic and diluted $ (0.00) $ 0.00 $ (0.01) $(0.00) ======= ======== ======== ======= WEIGHTED AVERAGE SHARES Basic and diluted 120,566 105,862 120,559 95,809 ======= ======== ======== ======= See notes to the consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six Months Ended June 30, ------------------ 2005 2004 ----------- ---------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: - ----------------------------------------------------------- Net loss $ (790) $ (180) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 163 89 Provision for bad debts (20) 20 Non-cash consideration 17 53 Minority interest in net income of consolidated subsidiary (5) 14 Changes in operating assets and liabilities: Accounts receivable 566 (524) Inventories 158 (31) Accounts payable and other current assets and liabilities (44) (515) ------------------ -------- Net cash provided by (used in) operating activities 45 (1,074) ------------------ -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (26) (9) Intangibles (16) (185) Net cash provided by the acquisition of ID Systems --- 82 ------------------ -------- Net cash used in investing activities (42) (112) ------------------ -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) under the revolving line of credit and term loan (1,148) 318 Proceeds from bridge loan --- 100 Repayment of bridge loan --- (100) Proceeds from convertible debentures and warrants --- 2,000 Repayment of obligations under capital leases (3) (3) Proceeds from sale of stock, net 4 --- ------------------ -------- Net cash (used in) provided by financing activities (1,147) 2,315 ------------------ -------- EFFECTS OF EXCHANGE RATES ON CASH (50) --- ------------------ -------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,194) 1,129 CASH AND CASH EQUIVALENTS, at beginning of period 1,965 210 ------------------ -------- CASH AND CASH EQUIVALENTS, at end of period $ 771 $ 1,339 ================== ======== See notes to the consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2005 NOTE 1 -- Basis of Presentation - ------------------------------- The consolidated financial statements include the accounts of Sentry Technology Corporation ("the Company") and its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Sentry's Annual Report to Stockholders on Form 10-KSB for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission. Certain prior period amounts have been reclassified to conform to current period presentation. Note 2 -- Recent Accounting Pronouncements - ------------------------------------------ In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS No. 123R revises SFAS No. 123 and supersedes Accounting Principles Based Opinion No. 25, "Accounting for Stock Issued to Employees." In April 2005, the SEC announced SFAS 123R would be effective no later than the beginning of the first fiscal year beginning after June 15, 2005. We will adopt the provisions of SFAS No. 123R effective January 1, 2006. SFAS No. 123R requires all share-based payments to employees to be recognized in the financial statements based on fair value. We currently account for share-based payments to employees using APB No. 25's intrinsic value method. Under SFAS No. 123R we will be required to follow a fair value approach, such as the Black-Scholes or lattice option valuation models, at the date of a stock-based award grant. SFAS No. 123R permits one of two methods of adoption: (1) modified prospective method or (2) modified retrospective method. We plan to adopt SFAS No. 123R using the modified prospective method. This method requires that we recognize compensation expense for all share-based payments granted on or after January 1, 2006 and for all awards granted to employees prior to January 1, 2006 that remain unvested on January 1, 2006. The adoption of SFAS No. 123R is not expected to have a material impact on the Company's financial position or results of operations. NOTE 3 -- ID Systems Acquisition - -------------------------------- On April 30, 2004, Sentry purchased from Saburah Investments, Inc., an Ontario corporation, all of the outstanding common shares and Series "A" preference shares of ID Security Systems Canada Inc., an Ontario corporation, and all of the outstanding capital stock of ID Systems USA, Inc., a Pennsylvania corporation (collectively, "ID Systems"). Mr. Peter Murdoch, President, CEO and Director of Sentry, is the owner of Saburah. Effective January 1, 2005, the names of the acquired subsidiaries were changed to Sentry Technology Canada Inc. and Sentry Technology USA Inc. The Company's consolidated statements of operations include the revenues and expenses of ID Systems from May 1, 2004. SENTRY TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2005 The following supplemental pro forma information is presented to illustrate the effects of the acquisition on the historical operating results for the three and six month periods ended June 30, 2004 as if the acquisition had occurred as of January 1, 2004:
Three Months Ended Six Months Ended June 30, 2004 June 30, 2004 -------------------------------------------- (in thousands, except per share data) Revenues $ 4,918 $9,132 Income (loss) before extraordinary item $ 14 $ (103) Net income (loss) $ 14 $ (103) Net income (loss) per share $ (0.00) $(0.00)
NOTE 4 -- Inventories - --------------------- Inventories consist of the following June 30, 2005 December 31, 2004 - ----------------------------------------------------------------------------------------- (in thousands) Raw materials $1,040 $1,206 Work-in-process 298 292 Finished goods 1,818 1,816 ------ ------ $3,156 $3,314 ====== ======
Reserves for excess and obsolete inventory totaled $1,471,000 and $1,528,000 as of June 30, 2005 and December 31, 2004, respectively and have been included as a component of the above amounts.
NOTE 5 -- Credit Facilities - ----------------------------------------------------------- Balances under credit facilities consist of the following: - ----------------------------------------------------------- June 30, 2005 December 31, 2004 ------------------------------------------ (in thousands) Royal Bank of Canada $ 1,492 $ --- The CIT Group/Business Credit Inc. revolving credit --- 1,769 Bank of Montreal overdraft lending --- 734 Bank of Montreal non-revolving demand --- 137 ---------- ------ $ 1,492 $2,640 ========== ======
On May 13, 2005, the Company and certain of its subsidiaries entered into a new secured credit facility with Royal Bank of Canada for maximum borrowings of up to Canadian $4.5 million (U.S. $3.6 million), which are subject to certain limitations based on a percentage of eligible accounts receivable and inventories as defined in the agreement. Interest is payable at a rate of Royal Bank of Canada prime rate (4.25% at June 30, 2005), plus 1.25% per annum. Borrowings under this facility are secured by substantially all of the Company's assets. This new facility replaced the Company's former revolving credit agreement in the United States and its overdraft lending and term loan agreement in Canada. SENTRY TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2005
NOTE 6 - Comprehensive Income (Loss) - ------------------------------------------- Comprehensive income (loss) is as follows: - ------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- (in thousands) Net income (loss): $(30) $ 12 $(790) $(180) Other comprehensive income (loss): Foreign currency translation adjustments (36) 38 (50) 38 ---- ---- ----- ----- Comprehensive income (loss) $(66) $ 50 $(840) $(142) ==== ==== ===== =====
NOTE 7 -- Related Party Transactions - ------------------------------------ On January 22, 2004, Robert Furst, a Sentry Director, made a bridge loan to the Company in the amount of $100,000. The interest rate on the loan was 15% per annum and the loan was due on or before April 30, 2004. As additional consideration for the loan, Mr. Furst received a warrant to purchase 300,000 shares of Sentry common stock at a price of $0.17 per share, which was the market price on the date of the grant (valued at $3,000 and charged to interest and financing expenses). The warrant expires on January 21, 2009. The note was repaid in full on April 30, 2004. NOTE 8 -- Earnings Per Share - ---------------------------- The earnings per share calculations (basic and diluted) at June 30, 2005 and 2004 are based upon the weighted average number of common shares outstanding during each period. There are no reconciling items in the numerator or denominator of the earnings per share calculations in either of the periods presented. Options to purchase 1,229,512 and 1,499,948 shares of common stock with a weighted average exercise price of $0.61 and $0.59 were outstanding at June 30, 2005 and 2004, respectively, but were not included in the computation of diluted net loss per share because their effect would be antidilutive or immaterial. The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock options awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. In 2005, 150,000 options were granted at market price on of the date of the grant. The weighted average fair value of the options granted in 2005 is estimated at $0.08, using the Black-Scholes option pricing model with the following weighted average assumptions: expected life of two years; stock volatility, 94% in 2005; risk free interest rates, 4.0% in 2005, and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. No options were granted in the six month period ended June 30, 2004. SENTRY TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2005 If the computed fair values of the post 1995 awards had been amortized to expense over the vesting period of the awards, pro forma net income attributed to common shareholders would have been as follows:
Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- (in thousands, except per share data) Net loss: As reported $ (30) $ 12 $ (790) $ (180) Less stock based compensation expense determined under the fair value method of all awards, net of related tax effects (6) (3) (11) (9) ----- ---- ------ ------ Pro forma $ (36) $ 9 $ (801) $ (189) ===== ==== ====== ====== Net loss per share: As reported $(0.00) $0.00 $(0.01) $(0.00) ====== ===== ====== ====== Pro forma $(0.00) $0.00 $(0.01) $(0.00) ====== ===== ====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations. - -------------- Certain Factors That May Affect Future Results - ---------------------------------------------- Information contained or incorporated by reference in this periodic report on Form 10-QSB and in other SEC filings by Sentry contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or the negative thereof, other variations thereon or comparable terminology, or by discussions of strategy. These forward-looking statements involve certain significant risks and uncertainties, and actual results may differ materially from the forward-looking statements. For further details and discussion of these risks and uncertainties see Sentry Technology Corporation's SEC filings including, but not limited to, its annual report on Form 10-KSB. No assurance can be given that future results covered by the forward-looking statements will be achieved, and other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. We do not undertake to publicly update or revise any of our forward-looking statements even if experience or future changes show that the indicated results or events will not be realized. Results of Operations: - ---------------------- On April 30, 2004, Sentry purchased from Saburah Investments, Inc. all of the outstanding common shares and Series "A" preference shares of ID Security Systems Canada Inc., and all of the outstanding capital stock of ID Systems USA, Inc. (collectively, "ID Systems"). ID Systems is a Toronto based company engaged in anti-shoplifting technology, security labeling, radio frequency identification (RFID), access control and library security. Our condensed consolidated statements of operations include the revenues and expenses of ID Systems from May 1, 2004. Effective January 1, 2005, ID Systems changed the name of ID Security Systems Canada Inc. and ID Systems USA Inc. to Sentry Technology Canada Inc. and Sentry Technology USA Inc., (collectively "Sentry Canada"). Consolidated revenues were substantially the same in the quarter ended June 30, 2005 as compared to the quarter ended June 30, 2004. For the six month period ended June 30, 2005 consolidated revenues were 7% lower than in the same period of last year. Sentry Canada's revenues represented $1.7 million of the total revenues in the second quarter and $2.6 million in the first six months ended June 30, 2005 as compared to $0.9 million in the second quarter and first six months of 2004. Our backlog of orders, which we expect to deliver within the next twelve months, was $2.8 million at June 30, 2005 as compared to $2.2 million at December 31, 2004. The backlog was $3.6 million at June 30, 2004. Total revenues for the periods presented are broken out as follows:
Q-2 Q-2 % 6 Mos. 6 Mos. % 2005 2004 Change 2005 2004 Change -------- ------- ------- ------- ------ ------- (in thousands) (in thousands) EAS $ 2,142 $ 1,132 89 $ 3,192 $1,626 96 CCTV 455 984 (54) 768 1,591 (52) SentryVision 865 1,072 (19) 1,415 1,817 (22) -------- ------- ------- ------- ------ ------- Total sales 3,462 3,188 9 5,375 5,034 7 Service, installation and other 805 1,091 (26) 1,385 2,219 (38) -------- ------- ------- ------- ------ ------- Total revenues $ 4,267 $ 4,279 (0) $ 6,760 $7,253 (7) ======== ======= ======= ======= ====== =======
The increase in EAS sales is primarily attributable to Sentry Canada's sales, which represented $1.7 million of EAS sales in the second quarter and $2.6 million in the first six months of 2005 compared to $0.9 million in both the second quarter and first six months of 2004. In January 2005, we were notified by Lowe's Home Center, our largest customer, that they would not be renewing their maintenance contract for 2005. While the annual value of the maintenance contract was approximately $0.9 million, it contributed towards the selection of vendors for replacement and add-on CCTV business in new and existing Lowe's locations. As a result, revenues from Lowe's decreased from $1.4 million in the second quarter of 2004 to $0.1 million in the second quarter of 2005 and from $2.5 million in the first six months of 2004 to $0.8 million in the first six months of 2005. This reduction had an impact on our reported sales of CCTV and SentryVision products. We anticipate that this decision will continue to result in a substantial decrease in future revenues from Lowe's on a comparative basis for the remainder of the year. We have added new sales representatives and new customers that offset the loss of Lowe's revenue in the second quarter. As a result, our business is more balanced and no longer relies on a single large customer for success. Both domestic and international sales of our SentryVision Smart Track system weakened in the second quarter and first six months of 2005 when compared to the same periods of 2004. Our sales of SentryVision products to our international dealers and distributors are denominated in U.S. dollars, therefore the strengthening of the Euro and other foreign currencies against the U.S. dollar had no significant impact on revenues. While service revenues were approximately the same in both periods in 2005 and 2004, installation revenues were significantly lower in the 2005 periods as compared to the same periods of 2004, due to lower domestic sales of CCTV and SentryVision systems. Even though EAS sales increased substantially, the installation revenues associated with EAS systems are lower than for CCTV and SentryVision sales. Maintenance revenues were lower primarily as a result of cancellation of the Lowe's maintenance contract. SENTRY TECHNOLOGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We are encouraged by the recent order rates as well as a backlog of $2.8 million at the end of June 2005. Sales reps and international distributors have been added to the sales group plus new print ads and trade show attendance will assist in improving our sales results. In particular, our flagship SmartTrack traveling camera system and proprietary library security and information systems are operating trouble free, which has helped both to reduce service costs and allow our sales reps to develop new business as a result of strong references from many satisfied national and international customers. Cost of sales were 55% and 54% of total sales in the three and six month periods ended June 30, 2005 compared to 53% and 52% in the three and six month periods ended June, 30, 2004. We continue to see margin improvements in 2005 on Sentry's historical costs as a result of the outsourcing of all significant manufacturing operations. However, as a percentage of sales, Sentry Canada's cost of sales were higher than Sentry's historical costs as a higher portion of its sales are made through dealers and distributors that carry lower margins than sales made direct to end users. In addition, lower sales volume at our 51% owned labeling subsidiary resulted in underabsorbed overhead resulting in a higher than normal cost of sales percentage. The decrease in customer service expenses in the second quarter and first six months of 2005 as compared to the second quarter and first six months of 2004 is primarily a result of a decrease in the number of customer service employees and increased use of outside service contractors in order to better manage our total net customer service costs during fluctuations in activity levels from quarter to quarter. As a result, our service department has remained profitable despite the loss of the Lowe's maintenance agreement. Selling, general and administrative expenses were 7% and 18% higher in the three and six month periods ended June 30, 2005 when compared to the same periods of the previous year. Sentry Canada's expenses represent $0.4 and $0.8 million of the total expenses in the second quarter and first six months of 2005 as compared to $0.3 million in the second quarter and first six months of 2004. We have made certain administrative expense reductions to help compensate for the expected reduction in Lowe's business. At the same time, we have increased funding of sales and marketing programs, which we expect will continue to increase our business with new and existing customers. New programs include a marketing campaign to promote SentryVision to Homeland Security consultants and the appointment of a new distributor for the Brazilian market to sell EAS products to the library market and SentryVision systems to all customers. The increase in research and development in the second quarter and first six months of 2005 when compared to the second quarter and first six months of 2004 includes the research efforts of Sentry Canada and increased prototype costs associated with the development of our new WAM EAS antenna. The WAM system has been successfully introduced to the market. Total interest and financing costs were approximately the same in the second quarter of 2005 and 2004. Interest in the second quarter of 2005 included three months interest related to the Brascan convertible debenture compared to only two months in the second quarter of 2004. This was offset by lower interest on bank debt as a result of lower average borrowings. The reduction in total interest and financing costs in the first six months of 2005 was a result of the elimination of costly financing associated with purchase order financing included in the first half of 2004. The income tax expense in all the periods presented principally results from taxable income of our Sentry Canada subsidiaries, which cannot be offset by Sentry's net operating loss carryforwards. SENTRY TECHNOLOGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As a result of the foregoing, Sentry had losses of $30,000 and $790,000 in the quarter and six months ended June 30, 2005 as compared to a net income of $12,000 and a net loss of $180,000 in the quarter and six months ended June 30, 2004. Liquidity and Capital Resources as of June 30, 2005 At June 30, 2005, we had cash of $0.8 million, working capital of $3.7 million, total assets of $10.2 million and shareholders' equity of $3.5 million. While we had a loss of $0.8 million in the first six months of 2005, we generated cash from operating activities of $45,000. This was a result of lower amounts of accounts receivable partially as a result of better collections efforts as well as lower sales. We have also eliminated the use of expensive purchase order financing to fund inventory purchases and we are continuing to reestablish credit with new and existing vendors. We utilized $1.1 million in financing activities through a pay down of balances under our previous credit facilities. Availability under the credit facilities is principally based on the level of our receivables and inventory, which declined in the first half of 2005. Net reductions in our credit facilities were funded through the use of existing cash. On May 13, 2005, the Company and certain of its subsidiaries entered into a new secured credit facility with Royal Bank of Canada ("RBC") for maximum borrowings of up to Canadian $4.5 million (U.S. $3.6 million), which are subject to certain limitations based on a percentage of eligible accounts receivable and inventories as defined in the agreement. Interest is payable at a rate of RBC prime rate (4.25% at June 30, 2005), plus 1.25% per annum. Borrowings under this facility are secured by substantially all of the Company's assets. This new facility replaced the Company's former revolving credit agreement in the United States and its overdraft lending and term loan agreement in Canada. The consolidation of our credit facilities is another step in our efforts to improve operating efficiencies and to further reduce our costs of financing. The new facility also provides for limited financing of certain foreign receivables, which may provide additional future availability over the previous facilities. As of June 30, 2005, we had borrowings of approximately $1.5 million with RBC. We will require liquidity and working capital to finance increases in receivables and inventory associated with sales growth and, to a lesser extent, for capital expenditures. We had no material capital expenditure or purchase commitments as of June 30, 2005. We believe that our anticipated cash needs for the foreseeable future can be funded from cash and cash equivalents on hand, availability under our credit facilities and cash generated from future operations. On March 28, 2005, our Board of Directors and a majority of the outstanding shareholders approved an increase in the authorized number of Sentry's common shares from 140,000,000 to 160,000,000, principally in order to meet the requirements of the Brascan Technology Fund investment. Related Party Transactions - ---------------------------- Details of related party transactions are included in Note 7 of this Form 10-QSB. SENTRY TECHNOLOGY CORPORATION CONTROLS AND PROCEDURES Item 3. Controls and Procedures As of the end of the period covered by this report, Sentry Technology Corporation carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information related to the Company that is required to be included in Sentry Technology Corporation's periodic SEC filings. There has been no change in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonable likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 6 - Exhibits (a) Exhibits: 31.1 - Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 - Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 - Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*** 32.2 - Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*** *** In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed "filed" for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SENTRY TECHNOLOGY CORPORATION ----------------------------- Date: August 12, 2005 By: /s/PETER J. MUNDY --------------- ------------------------- Peter J. Mundy, Vice President- Finance and Chief Financial Officer (Principal Financial and Accounting Officer) SECTION 302 CERTIFICATION: Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Certification of CEO I, Peter L. Murdoch, certify that 1. I have reviewed this quarterly report on Form 10-QSB of Sentry Technology Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. /s/ PETER L. MURDOCH ------------------------------------------------- Peter L. Murdoch President and Chief Executive Officer August 12, 2005 SECTION 302 CERTIFICATION: Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Certification of CFO I, Peter J. Mundy, certify that 1. I have reviewed this quarterly report on Form 10-QSB of Sentry Technology Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. /s/ PETER J. MUNDY ---------------------------------------------- Peter J. Mundy Vice President and Chief Financial Officer August 12, 2005 SECTION 906 CERTIFICATION: Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Certification of CEO In connection with the Quarterly Report of Sentry Technology Corporation (the "Company") on Form 10-QSB for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report"), I, Peter L. Murdoch, Chief Executive Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ PETER L. MURDOCH ------------------------------------------------- Peter L. Murdoch President and Chief Executive Officer August 12, 2005 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies this Report on Form 10-QSB pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. SECTION 906 CERTIFICATION: Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Certification of CFO In connection with the Quarterly Report of Sentry Technology Corporation (the "Company") on Form 10-QSB for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report"), I, Peter J. Mundy, Chief Financial Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ PETER J. MUNDY ----------------------------------------- Peter J. Mundy Vice President and Chief Financial Officer August 12, 2005 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies this Report on Form 10-QSB pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. -----END PRIVACY-ENHANCED MESSAGE-----