-----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, DqJ3rmzEkMUpMP+GUPRke8OjvdTJyxvxVNkKEX80zFb9UMDULI74CJLmHY3V98+Z z4iUp1Luk45dR54OY0TNNw== 0001137403-06-000019.txt : 20060417 0001137403-06-000019.hdr.sgml : 20060417 20060417152230 ACCESSION NUMBER: 0001137403-06-000019 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060417 DATE AS OF CHANGE: 20060417 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-12727 FILM NUMBER: 06762224 BUSINESS ADDRESS: STREET 1: 1881 LAKELAND AVENUE CITY: RONKONKOMA STATE: NY ZIP: 11779 BUSINESS PHONE: 6317392000 MAIL ADDRESS: STREET 1: 1881 LAKELAND AVENUE CITY: RONKONKOMA STATE: NY ZIP: 11779 10KSB 1 skvy10ksb2005.txt SENTRY 10KSB 2005 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ FORM 10-KSB X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the fiscal year ended December 31, 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 the Registrant 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) Registrant's telephone number, including area code: (631) 739-2000 --------------- (Former address, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Title of each class: -------------------- Common Stock, $.001 par value 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ____ The issuer's revenues for the latest fiscal year were $13,570,000. At April 12, 2006, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $5,375,000 based upon the closing price of such securities on the OTC Bulletin Board on that date. At April 12, 2006, the Registrant had outstanding 120,728,804 shares of Common Stock. Documents Incorporated by Reference - -------------------------------------- None. ------ PART I ------ Item 1. BUSINESS - ------------------- GENERAL Sentry Technology Corporation ("Sentry") is engaged in the design, sale, installation and servicing of a complete line of Radio Frequency (RF) and Electro-Magnetic (EM) electronic article surveillance (EAS) systems and Closed Circuit Television (CCTV) solutions. The CCTV product line features the proprietary SentryVision SmartTrack patented traveling surveillance system. The Company's products are used by retailers to deter shoplifting and internal theft and by industrial and institutional customers to protect assets and people. Sentry was incorporated in Delaware in 1996. Its corporate predecessors had been in business for more than 38 years. Sentry was formed in connection with the February 1997 merger of Knogo North America Inc., a Delaware corporation, and Video Sentry Corporation, a Minnesota corporation. As a result of the merger, we became the parent corporation of two wholly-owned Delaware subsidiaries: Knogo North America Inc. ("Knogo") and Video Sentry Corporation ("Video"). This series of transactions is referred to herein collectively as the "Initial Merger." Knogo was engaged in the design, manufacture, sale, installation and servicing of a complete line of electronic article surveillance equipment. Knogo was incorporated in Delaware in October 1996. Its corporate predecessors had been in business for more than 30 years. Video designed, manufactured, marketed, installed and serviced a programmable traveling closed circuit television surveillance system that delivers a high quality video picture which is used in a wide variety of applications. Video also acted as a system integrator for conventional CCTV products that it marketed, installed and serviced. Video's predecessor was founded in 1990 and made its first sales in 1992. Video was merged into Knogo as of December 31, 2000. On April 30, 2004, Sentry acquired all the outstanding common stock and Series "A" preference shares of ID Security Systems Canada, Inc., an Ontario corporation, and all the outstanding capital stock of ID Systems USA, Inc., a Pennsylvania corporation, (collectively "ID Systems"). The acquisition expanded our product offering to include proximity Access Control and Radio Frequency Identification (RFID) solutions. Effective January 1, 2005, ID Systems changed the name of ID Security Systems Canada Inc. and ID Systems USA Inc. to Sentry Technology Canada Inc. and Sentry Technology USA Inc., (collectively "Sentry Canada"). On March 22, 2005, Sentry was merged into its subsidiary Knogo pursuant to a plan of merger in which Knogo was the surviving corporation. The merger was effective for accounting purposes on January 1, 2005. Pursuant to the Plan of Merger, Knogo changed its name to Sentry Technology Corporation. RECENT DEVELOPMENTS 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. The price paid to Dialoc by Saburah and Murdoch for Sentry and ID Systems shares in cash, debt assumption and other consideration was approximately $3.6 million plus the surrender of Murdoch's 15% interest in Dialoc. Saburah also agreed to make a payment to Dialoc in the future equal to approximately 6% of any payment it received from Checkpoint Systems Inc. ("Checkpoint") resulting from litigation brought by ID Canada against Checkpoint. On April 30, 2004, Sentry purchased from Saburah Investments, Inc., an Ontario corporation, all of the outstanding common shares and Series "A" preference shares of ID Security Systems Canada, Inc., an Ontario corporation, and all of the outstanding capital stock of ID Systems USA, Inc., a Pennsylvania corporation. ID Systems 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 were distributed to the former ID Systems' shareholders. Sentry's Board of Directors and shareholders owning a majority of Sentry common stock approved the acquisition of ID Systems. Other benefits flowing to Sentry/ID Systems via the purchase of ID Systems are as follows: - - ID Systems and Sentry continue as 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 became a distributor in Europe and Asia of labels manufactured by ID Systems' security label manufacturing subsidiary, Custom Security Industries Inc. ("CSI"). - - CSI acquired 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 acquired 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, 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. Effective November 2005, the entities changed their respective names to Brookfield Technology Fund and Brookfield Asset Management, (collectively referred to as, "Brookfield"). 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 Brookfield when market share price is equal to or greater than $0.17 per share or with the approval of Sentry's Board of Directors when the market share price is less than $0.17 per share. - - Sentry will provide most favored pricing to all Brookfield affiliates and expects to be a supplier of security and identification products to the Brookfield affiliates. - - Brookfield was issued warrants for 5,000,000 shares of Sentry common stock, priced at $0.15 per share, exercisable anytime until April 30, 2008. - - Brookfield is entitled to one seat on Sentry's Board of Directors or will participate as an observer. The Debenture is secured by a general security interest over all the assets and properties of Sentry. The amount is subordinate to the existing credit facilities. Sentry acquired ID Systems as a condition of the financing. 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 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 reimbursement of 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 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 sold to Saburah approximately 4.8 million shares for $641,000 on November 5, 2004. These transactions, totaling $1.4 million, represent the total cash flowing to Sentry directly and indirectly as a result of the Checkpoint lawsuit. Mr. Murdoch, directly or indirectly through his ownership of Saburah, owns or controls 49.5% of the outstanding common stock of Sentry. THE SENTRYVISION SYSTEM SentryVision refers to our family of proprietary traveling CCTV surveillance systems. Over the years, Sentry has developed various generations of traveling CCTV surveillance systems including the H-System, OH-System, the original SentryVision and currently the improved SmartTrack system. All versions of the product consist of a camera carriage unit, a continuous track enclosed with tinted or mirrored glass enclosure and electronic control equipment. The carriage unit moves within the enclosure and carries one or two PTZ CCTV cameras, electronic transmission components and motor drives. The carriage track and enclosure are designed to custom lengths for more complete viewing. The carriage unit transmits video and control signals from the camera(s) through two copper conductors running inside the enclosure to a receiver unit located at one end of the carriage track. The copper conductors also carry power to the camera carriage, eliminating the need for power or communication cables. From the receiver unit, the video signals are relayed to a central monitoring location by wire or fiber optics, where a system operator can position or move the camera carriage to obtain the best vantage point while viewing and recording the continuous, live video pictures. The system design supports conventional peripheral devices, such as analog and digital videocassette recorders, alarm inputs, fixed cameras, PTZ dome cameras, switches/multiplexers, voice intercom systems, panic buttons and remote viewing capability using dedicated phone lines or internet technology. Unlike our previous products, our SentryVision SmartTrack system features one or two state-of-the-art pan, tilt and zoom ("PTZ") domes providing for 360 unobstructed views to eliminate most blind spots. Additionally, SmartTrack utilizes sophisticated software that provides six tours and up to 60 presets per camera carriage to allow programmable viewing and recording with or without an operator. The improvements made to the carriage make the new SmartTrack system the fastest and most reliable traveling CCTV surveillance system in the history of SentryVision product offerings. SmartTrack is our premier product, replacing all previous generations of SentryVision products. SentryVision is designed to provide enhanced loss prevention surveillance in retail stores and distribution centers as well as to provide monitoring and deterrence of illegal and unsafe activities in a variety of other locations such as parking garages, correctional facilities, warehouses, transportation centers and public transit terminals. SentryVision may also be employed in a broad range of operational and process monitoring applications in commercial manufacturing and industrial settings. SentryVision is now installed in four of the top five and six of the top ten Global Retailers. As of December 31, 2005, SentryVision systems had been installed at the following customer locations in North America: Lowe's Home Centers, Target Stores, Mills Fleet Farm, Winn Dixie, Federal Express, Cabellas, Fred Meyer, Symbol Technologies, Menards, UPS, J.C. Penney, Canadian Tire, Reno Depot, Estee Lauder, Kohl's Department Stores and Disney Direct Marketing. In addition, during 2005, the Company's international distributors installed SentryVision systems in customer locations throughout Western and Eastern Europe, Latin America and Asia. Our international customers include ASDA Wal-Mart, Carrefour, Auchan, Cora, Castorama, B & Q, Tesco and Coop. We believe that, by providing expanded surveillance coverage and enhanced flexibility to select the locations watched, SentryVision has enabled customers to significantly reduce inventory shrinkage, increase theft apprehension rates and improve safety and security. Based on the price of its system and the experience of Sentry's customers to date, we believe SentryVision is a cost-effective solution, which can improve the operations of our customers. Sentry sold its first systems in 1992 for installation in parking garage security surveillance applications, but quickly moved its market focus into the retail sector. In this sector, we have identified a number of specific market segments for which SentryVision is well suited for loss prevention surveillance, including home centers, mass merchandise chains, supermarkets, hypermarkets and drug stores, as well as related distribution centers. The key application is inventory loss prevention in the stores, stock rooms and distribution centers. SentryVision is typically installed in large retail stores which use a checkout area at the front of the store and product display configurations and high merchandise shelving which form rows and aisles. Sentry specializes in designing system applications which are customized to fit a customer's specific needs and which integrate the customer's existing surveillance equipment (PTZ dome and fixed-mount cameras) with SentryVision . The flexibility of the system allows the customer to specify target-coverage areas ranging from stock rooms to total store coverage and focus on shoplifting, employee theft or performance evaluation of client personnel. Typically, SentryVision has been installed near the ceiling between the rows of cash registers and the ends of the merchandise aisles. This allows the retailer to easily observe both the cash handling activities of cashiers in the checkout area and customer activities between the merchandise rows, despite the presence of hanging signs and other obstructions. The entire sales floor can be monitored efficiently by focusing up and down the aisles and by moving the carriage horizontally from aisle to aisle, or from cash register to cash register. In addition, with the use of camera pan, tilt and zoom lens features, activities in each area can be monitored in greater detail. Results from Sentry's current installations indicate significant improvements in detecting shoplifting and employee theft. Retailers have also integrated SentryVision with "front end" packages of conventional CCTV cameras, dedicated to monitoring the registers and allowing users to locate the traveling camera track where the maximum coverage of in-store traffic can be monitored. The SentryVision system is today generally sold in conjunction with conventional CCTV applications. Customers using the SentryVision system have reported significant reductions in theft-related inventory shrinkage. Our SentryVision Mobile allows the user to view and control video images from the SmartTrack traveling CCTV system using a mobile hand held computer and wireless communication network. The earlier generation SentryVision Mobile product operated on a wireless Personal Digital Assist (PDA) using Windows CE. The new version now runs on the latest, tablet style wireless computer under Windows XP and is significantly faster than the earlier PDA version. The increased speed and computing power offered by the tablet gives the user real time video viewing. Customers are no longer required to sit in front of a video console to manage the SmartTrack system. The SentryVision Mobile solution is being used to manage operations and security in large distribution centers in the United States. SentryVision Server is an IP addressable digital video server, which gives users the ability to capture, stream, view and store video images using a web browser with the reliability of the Linux OS. The SentryVision Server comes with software that allows multiple users to simultaneously connect to a variety of SentryVision DVMS (Digital Video Management System) via LAN - across TCIP/IP networks. The system uses a Windows-based application for configuration and a browser-based client for remote viewing of live and recorded video for quick and easy investigation of security issues, as well as policies and procedure compliance. Retail Market Applications - ---------------------------- - - Home Centers. Sentry has installed systems in the home center segment of the retail market. This market has by far been the greatest market for the SmartTrack systems. Typical of our customers in this market are Lowe's Home Centers, with more than 1,234 stores in 46 states, and Mills Fleet Farm, a 30 store regional hardware, home supply and discount retail chain. Both companies required systems for total floor coverage. We applied different solutions to this common problem in each case. Lowe's Home Centers chose to integrate track cameras with PTZ dome and fixed-mount cameras, while Mills Fleet Farm chose to use only the track camera system. - - Mass Merchandise Chains. Sentry has installed systems for customers including Sears, Navy Exchange, Walgreens and Target Stores. The targeted coverage varies extensively in these installations from only stock rooms to total store coverage. The equipment package provided in each case varies with the application and location of the need. - - Supermarkets. Sentry has installed systems in supermarket customers including Kroger, Marsh, Cub Foods, Winn-Dixie and Fiesta Mart. The targeted coverage in most of these installations has been the entire retail space. Industrial Market Applications - -------------------------------- - - Distribution Centers. Sentry also provides loss prevention surveillance for distribution centers and warehouses, and has installed systems for retailers including TJ Maxx, Big Lots, Home Depot, Kohl's Department Stores, Target Stores, Ingram Micro, Navarro, Wendy's, Mastronardi Produce, Borders Group, Disney Direct Marketing, Barnes & Noble, Robinsons-May, Ross, Saks, Guess, Tower Records, Big Dog, Food Lion, Roundy's, the Gap, Bealls and J.C. Penney. Traveling through a facility from an overhead position, the SentryVision system can monitor activities occurring between the stacked rows of cartons or lines of hanging garments. The system can also move a surveillance camera into position to monitor shipping and receiving docks and parked delivery trucks. To achieve surveillance capabilities equivalent to those of the SentryVision system, a conventional PTZ dome system or fixed-mount CCTV camera would have to be installed at every desired vantage point, requiring numerous cameras, additional equipment and wiring and increased installation and operating costs. - - Manufacturing and Transportation Facilities. So far SentryVision use in factories has been limited, but the benefits of continuous tracking of industrial operations and processes indicate future growth potential. Continued expansion of the SentryVision dealer program is expected to generate increased installations in factories manufacturing electronics, pharmaceuticals, computers and other high value products and in various wholesale distribution and transportation facilities. Express package and other high throughput distribution facilities are also good prospects for a continuous tracking CCTV system for theft prevention. Installations include Watkins Motor Lines, Symbol Technologies, AT&T Wireless, Federal Express, UPS, Wyeth-Ayerst Labs, USF Logistics and Thompson Electronics. In Cape Town, South Africa, The Metro Rail Network has installed 10 tracks at several terminal stations to monitor passengers at the junction of bus, railway and taxi services. Smart Track is an integral part of an overall crime prevention and deterrence program including central management of all video devices over a network. - - Internet Data Centers. Sentry markets SentryVision systems to Internet data centers (IDC's). Most IDC's are full service business internet providers with state-of-the-art systems that host, monitor and maintain mission-critical web-sites, e-commerce platforms and business applications for small to medium sized businesses. SentryVision systems are used to heighten security through remote video monitoring. Installations include Dallas Exchange, TIAA-CREF, Savvis and The Discovery Channel. Institutional Market Applications - ----------------------------------- - - Corrections and Government Institutions. SentryVision has been installed in correctional facilities in Michigan, New Mexico and Illinois, with reported safety benefits of continuous coverage in dormitory, recreation and visitation areas. SentryVision installations have also been completed in various government agencies including the Federal Reserve Bank, U.S. Postal Service, Central Intelligence Agency and U.S. Immigration Service. CONVENTIONAL CCTV SYSTEMS Conventional CCTV is cost effective in many applications and is the most widely used loss prevention system in North America. Conventional CCTV uses all the basic components of the video surveillance industry including fixed and dome cameras, digital video recorders, VCR's, monitors, switchers, multiplexers and controllers. As all of this equipment is manufactured for Sentry by outside vendors, we can provide our customers with state-of-the-art equipment for specific applications at favorable costs. We believe that, while less profitable than SentryVision and traditional EAS products, the CCTV products complement our other surveillance systems and provide retailers with further protection against internal theft and external shoplifting activities. CCTV systems can also be electronically connected to EAS systems, causing a video record to be generated when a theft alarm is triggered. While we believe that conventional CCTV and SentryVision are complementary security solutions, many companies have traditionally viewed them as competing solutions and have selected between conventional CCTV systems and SentryVision systems for their security solutions. Remote video transmission and digital recording are continuing growth areas for Sentry. These systems allow customers to monitor remote sites using existing communication lines and a PC-based system. Video camera images are stored and manipulated digitally, substituting the PC for the VCR and multiplexer, and eliminating the videotape. Sentry markets digital video recording and a remote video transmission unit developed by third-party vendors including GE Security and TeleWatch. We continue to expand conventional CCTV installations in industrial and institutional facilities. Significant installations have been made for express package companies, including Federal Express, United Parcel Service, Emery Air Freight and Airborne Express. The use of CCTV surveillance also continues to grow in both new and existing correctional facilities and Sentry now has CCTV installations in both state and county facilities. The school market is another CCTV segment. Successful installations were completed with reported benefits including decreased vandalism and improved safety. In schools, conventional CCTV is an extremely cost effective security option with Digital Recording and Remote Video Transmission becoming attractive options for large school districts. Our largest single school CCTV installation was at the Norristown (PA) High School with 111 cameras, using digital recording and fiber optic cabling. It is an advanced, cost effective system with video from all cameras instantly accessible on their network. EAS SYSTEMS EAS systems consist of detection devices that are triggered when articles or persons tagged with reusable tags or disposable labels, (referred to as tags), pass through the detection device. The EAS systems that Sentry manufactures are based upon three distinct technologies. One, the Radio Frequency ("Knoscape RF") System, uses medium radio frequency transmissions in the two to nine megahertz range. Second, the "Ranger " system uses ultra-high frequency radio signals in the 902 megahertz and 928 megahertz bands. Third, the Electromagnetic ("Knoscape MM ") system uses very low frequency electromagnetic signals in the range of 218 hertz to nine kilohertz. The principal application of Sentry's products is to detect and deter shoplifting and employee theft in supermarket, department, discount, specialty and various other types of retail stores including bookstores, video, liquor, drug, shoe, sporting goods and other stores. The use of these products reduces inventory shrinkage by deterring shoplifting, increases sales potential by permitting the more open display of greater quantities of merchandise, reduces surveillance responsibilities of sales and other store personnel and, as a result, increases profitability for the retailer. In addition, Sentry's EAS systems are used in non-retail establishments to detect and deter theft, in office buildings to control the loss of office equipment and other assets, in nursing homes and hospitals for both asset and patient protection, and in a variety of other applications. The North and South American market for retail EAS systems and tags is estimated by industry sources in excess of $500 million and is growing at an estimated rate of 8 percent per year. At December 31, 2005, the approximate number of EAS Systems sold or leased by Sentry and its predecessors exceeded 26,400. Radio Frequency and Ranger Detection Systems Sentry manufactures and distributes the Knoscape RF system, the principal application of which is to detect and deter shoplifting and employee theft of clothing and hard goods in retail establishments. Sentry also manufactures and distributes the Ranger system, which the Company believes is a particularly useful and cost efficient EAS system for high fashion retail stores with wide mall-type exit areas that ordinarily would require multiple Knoscape RF systems for adequate protection. The Knoscape RF and Ranger systems consist of radio signal transmission and monitoring equipment installed at exits of protected areas, such as doorways, elevator entrances and escalator ramps. The devices are generally located in panels or pedestals anchored to the floor for a vertical arrangement or mounted in or suspended from the ceiling (Silver Cloud) and mounted in or on the floor in a horizontal arrangement. The panels or pedestals are designed to harmonize with the decor of the store. The monitoring equipment is activated by tags containing electronic circuitry, attached to merchandise transported through the monitored zone. The circuitry in the tag interferes with the radio signals transmitted through the monitoring system, thereby triggering alarms, flashing lights or indicators at a central control point, or triggering the transmission of an alarm directly to the security authorities. By means of multiple installations of horizontal Knoscape RF systems or installation of one or more Ranger systems, the Company's products have the ability to protect any size entrance or exit. Non-deactivatable reusable tags are manufactured in a variety of sizes and types and are attached directly to the articles to be protected by means of specially designed fastener assemblies. A clerk at the checkout desk removes a reusable tag from the protected article by use of a decoupling device specially designed to facilitate the removal of the fastener assemblies with a minimum of effort. Removal of the tag without a decoupler is very difficult and unauthorized removal will usually damage the protected article and thereby reduce its value to a shoplifter. Optional reminder stations automatically remind the store clerk, by means of audiovisual indicators, to remove the tag when the article is placed on the cashier's desk. Disposable labels can be applied to products either by placing them directly on the outside packaging of the item or hidden within the product by the manufacturer. These labels can be deactivated, at the checkout desk, through the use of a deactivation device. Knoscape RF and Ranger systems generally have an economic useful life of six years (although many of Sentry's systems have been operating for longer periods), have a negligible false alarm rate and are adaptable to meet the diversified article surveillance needs of individual retailers. Electromagnetic Detection Systems The primary application of Knoscape MM systems is to detect and deter theft in "hard goods" applications such as supermarkets, bookstores and in other specialty stores such as video, drug, liquor, shoe, record and sporting goods. Knoscape MM systems use detection monitors that are activated by electromagnetically sensitized strips. The MM targets are typically attached to the articles to be protected and are easily camouflaged on a wide array of products. The detection monitors used by the Knoscape MM systems are installed at three to five foot intervals at the exits of protected areas. The magnetic targets can be supplied in many forms and are attractively priced, making them suitable for a variety of retail applications. In addition, the MM targets can be manufactured to be activated and deactivated repeatedly while attached to the articles to be protected. Accurate deactivation is also very important when the item to be protected is a personal accessory that will be carried by its owner from place to place, such as pocket books, pens, lipstick, shoes, camera film and cameras. The Knoscape MM system offers retailers several features not available in Knoscape RF and Ranger systems. Since the target is very small, relatively inexpensive and may be inserted at the point of manufacture or packaging, it provides retailers with a great deal of flexibility and is practical for permanent attachment to a wide variety of hard goods, especially low profit-margin products. The target can be automatically deactivated at check-out, eliminating the risk of triggering alarms when merchandise leaves the store and saving sales personnel valuable time. Since the targets can be incorporated directly into a price tag or the article itself, they are convenient to use. PATRON SELF CHECK BOOK BORROWING SYSTEMS Libraries worldwide are struggling to reduce operating costs by applying cost effective technology solutions. The Sentry QuickCheck patron self check book borrowing system offers an ideal solution to gain an increasing share of the estimated $100 million library security market in North America. The QuickCheck system is RFID ready and provides for user access to circulation software, automatic security strip deactivation, automatic return ticket printing, user access to book renewals, multi-lingual software interface and on-screen user instructions. QuickCheck systems have been installed in Omaha Public Library, Supreme Court of Canada, Harris County Public Library, Burlington Public Library, Vancouver Public Library, Ottawa Public Library, McGill University Library and Calgary Public Library. RADIO FREQUENCY IDENTIFICATION (RFID) RFID is a wireless electronic data collection system that uses radio frequency signals to identify and track objects using readers and tiny integrated circuits in label format. Applications include library management, warehousing, parcel tracking, inventory control, asset protection and supply chain management. We are in the initial stages of introducing ISO standard, RFID labels, tags and readers for library management and upgrades to its access control systems. PRODUCT AUTHENTICATION Product Authentication is a specific use technology, identifying fraudulent documentation and/or "knock-off" products. With our patented, application specific electromagnetic label imbedded in an object, an EM reader will quickly determine the authenticity of the item. We anticipate introducing products to address this need. DIALOC ID SECURITY PRODUCTS Under a five-year license agreement, ending in March 2009, we also distribute EAS systems manufactured by Dialoc ID. The 9000-P 8.2 MHz system, which is housed in slender, self-contained Plexiglas panels, provides retailers with clear lines of sight at the front end along with the durability of solid Plexiglas. The panels can be custom printed with the retailer's logo for enhanced image and trade name awareness. The system's electronics, which are built-in to the base of the Plexiglas antenna, provide detection of 8.2 MHz labels and hard tags in aisles up to six feet wide. The 9000 PL system is offered in both single and dual aisle configurations and is compatible with all existing 8.2 MHz tags and checkout accessories. In addition, through Sentry, Dialoc ID anticipates it may introduce LaserFuse, a new RF label technology, which will be compatible with, and an alternative to, the labels offered by Checkpoint Systems, Inc. BOOKINGS Of Sentry's bookings for the year ended December 31, 2005, approximately 31 percent were attributable to SentryVision , 14 percent to CCTV and 55 percent to EAS. Of Sentry's bookings for the year ended December 31, 2004, approximately 32 percent were attributable to SentryVision , 26 percent to CCTV and 42 percent to EAS. For the year ended December 31, 2003, approximately 52 percent were attributable to SentryVision, 30 percent to CCTV, 18 percent to EAS. MAJOR CUSTOMERS Although the composition of our largest customers has changed from year to year, a significant portion of our revenues has been attributable to a limited number of major customers. In 2005, Goody's Family Clothing accounted for 10% of total revenues. In 2004 and 2003, Lowe's Home Centers accounted for 30% and 44%, respectively, of total revenues. In January 2005, Lowe's Home Centers notified us that they would not be renewing their annual maintenance contract, which represented $0.9 million of our revenues in 2004. The maintenance contract also contributed towards the selection of vendors for replacement and add-on CCTV business in new and existing Lowe's locations. As a result of this decision, Revenues from Lowe's Home Centers decreased from $5.0 million in 2004 to $1.0 million in 2005. We anticipate that future revenues from Lowe's will continue to decline on a comparable basis. While we believe that one or more major customers could account for a significant portion of our sales for at least the next two years, we anticipate that our customer base will continue to expand and that in the future we will be less dependent on major customers. PRODUCTION SentryVision and CCTV Products - --------------------------------- By the end of 2005, Sentry had outsourced substantially all of its manufacturing operations. Although we are not dependent upon any particular supplier, Sentry has made an investment in material and training with selected sub-contractors to supply major portions of our SmartTrack system. Most system parts are "off-the-shelf" components, and other materials and system components are designed by Sentry and manufactured to Sentry's specifications. Some minimal final assembly operations are conducted at the Company's facilities in Ronkonkoma, New York. System components and parts include cameras, circuit boards, electric motors and a variety of machined parts. Each finished assembly undergoes a quality assurance check by Sentry prior to its shipment to an installation site. All SentryVision carriage assemblies are tested and burned in for 24 hours, resulting in approximately 3,000 travel and PTZ cycles prior to quality assurance sign off. Sentry is not required under any state or federal environmental law or regulations to obtain related licenses or permits in connection with its manufacturing and assembly operations. EAS Products - ------------- Sentry produces at our facilities in Ronkonkoma, New York, or purchases through suppliers, its RF, Ranger, and MM systems, or their components. Production consists of final assembly operations of electronic and mechanical components that Sentry purchases from various suppliers. Independent contractors using existing molds and tooling produce plastic cases and antenna coils for the tags to Sentry's specifications. Sentry is not dependent on any one supplier or group of suppliers of components for its systems. Our policy is to maintain our inventory at a level that is sufficient to meet projected demand for its products. We do not anticipate any difficulties in continuing to obtain suitable components for our products at competitive prices in sufficient quantities as and when needed. Security Labels - ---------------- As a result of the acquisition of ID Systems in 2004, we obtained a 51% interest in Custom Securities Industries Inc. ("CSI"), an Ontario company. Since it's founding in 1988, CSI has established a worldwide reputation for innovation and excellence in the Electronic Article Surveillance (EAS) Industry. Extensive experience and know how in the leading EAS technologies, combined with expertise in converting, in house development of proprietary products and the use of specially designed converting equipment, enables CSI to offer custom tailored solutions with a rapid turn around time. Over the years, CSI has acquired a wide range of knowledge and developed its own trade secrets and manufacturing procedures to ensure competitive pricing, a broad range of high quality products, and the ability to supply products in both small and large volumes. CSI offers EAS products compatible with Radio Frequency (RF), Electromagnetic (EM), and Accousto-Magnetic (AM) technologies. Whatever the particular application, from standard EM pressure sensitive labels to sequentially printed barcode labels, products are available. Recently CSI has also introduced Source Tagging Solutions for the Radio Frequency and Accousto-Magnetic technologies. These products are successfully meeting the needs of retailers in the hardware, auto aftermarket, food and general merchandise categories. CSI specializes in custom solutions for hard to tag items. Long term associations with leading suppliers of EAS sensor materials, films and papers, pressure sensitive materials and adhesives enables CSI to handle the most demanding of label product needs with either standard or custom solutions. CSI offers a wide selection of labels and fashion tags. Our products are made with high performance materials, such as extremely low coercivity amorphous alloys and ultra stable deactivation ribbon. CSI's manufacturing equipment incorporates computer and control technology, including PLC's, Motion Controllers, Servo Motors, many different types of position and movement sensors, along with a very large inventory of specialized tooling and dies. Besides providing security labels to Sentry and ID Systems, CSI's customers include Tyco, Checkpoint, Dialoc ID, KMA and Retailers Advantage. MARKETING We market our SentryVision and conventional CCTV Systems through the direct efforts of salespersons located in select metropolitan areas across the United States and Canada, as well as through dealers/system integrators. In 2005, we increased the number of direct salespersons from four to 11, whose efforts were supplemented through six in-house sales support staff and independent sales representatives. We have centralized our sales management in our Toronto office. We also market our EAS products to smaller local and regional retailers through selected dealers and distributors. Sales are made into the library market on both a direct basis as well as through catalogs and dealers. We market our products primarily through participation in trade shows, placement of ads in trade publications, direct mailings and through telemarketing. In addition, these efforts are augmented through our Website, which provides enhanced product and market oriented information. Internationally, we market SentryVision through large system integrators and distributors including Honeywell, ADT, Chubb, Intrepid and BSC. SentryVision and CCTV Products - --------------------------------- To date, most SentryVision and conventional CCTV Systems have been sold on a direct sale basis. Typical billing arrangements for SentryVision systems involve invoicing 50% of total sale upon shipment of the product and 50% on the completion of the installation. While most of the current SentryVision and conventional CCTV sales have been made to home centers, retail chains and distribution centers, our marketing plan for Sentry also emphasized a dealer program for institutional, industrial and international prospects. We also market SentryVision through qualified security dealers and integrators. Much of the industrial and institutional SentryVision / CCTV prospects are serviced by local security companies who design and install integrated CCTV, access control and alarm systems. By working with these companies, we expected to be able to reach a far larger number of SentryVision prospects and penetrate the market more rapidly. The program has generated interest through trade advertising, direct mail and trade show participation. In 2005, our largest domestic dealer was Tyco's ADT Security division. Domestic dealers did not generate significant SentryVision installations in industrial and institutional facilities in 2004. Prior sales were made through ADT, STG, Siemans, Mosler and Security Link. In addition, we market SentryVision internationally using independent distributors on both an exclusive and nonexclusive basis. We sell our products to independent distributors at prices below those charged to end-users because distributors typically make volume purchases and assume marketing, customer training, installation, servicing and financing responsibilities. As of December 31, 2005, we have distributors in Canada, UK, France, Mexico, Belgium, Holland, Italy, Poland, Singapore, Russia, Spain, Brazil, Argentina, Hungary, Romania, Taiwan, Lebanon, Australia, Japan, South Africa, South Korea, Israel and the United Arab Emirates. During 2005, Sentry placed in service 150 SentryVision systems and 1,180 CCTV cameras, as compared to 229 SentryVision systems and 2,626 CCTV cameras in 2004, and 197 SentryVision systems and 2,996 CCTV cameras in 2003. EAS Products - ------------- Sentry EAS systems are principally marketed on a direct sales basis. In the case of the Knoscape MM systems, detection targets, which are sold to the customer, are permanently attached to the item to be protected. Therefore, as the customer replenishes its inventory, additional targets will be required for those items to be protected. We also market a more expensive, removable, reusable detection tag for use with the Knoscape MM systems on certain products such as clothing and other soft goods. RF and Ranger systems continue to be used by apparel and department stores that have wide exit areas and a desire for deterrence based on reusable hard tags. Both the Silver Cloud and Knoscape RF systems are universal in that they can detect both 2 MHz hard tags and 8 MHz labels. Knogo also markets an 8MHz P-2000 RF system designed for both hard and soft good customers. The P-2000 system is economical and self-installable by the customer. Supermarkets, bookstores, video stores and specialty stores remain good prospects for MM systems due to the small size and low cost of Micro-Magnetic strips. Knoscape MM Systems feature updated digital electronics. Knoscape MM Systems detect virtually all manufacturers' magnetic strips and can universally replace older magnetic strip systems manufactured by various EAS vendors. The library market continues to be a substantial market for magnetic technology. We were subject to an agreement not to compete against 3M for sales and service of EAS Systems in the library market, which expired in March 2004. During the years ended December 31, 2005 and 2004, Sentry placed in service 450 and 202 EAS systems, respectively. In addition in 2005, we sold 23 QuickCheck patron self check systems to libraries. BACKLOG Our backlog of orders was approximately $1.2 million at December 31, 2005, as compared to approximately $2.2 million at December 31, 2004 and approximately $3.2 million at December 31, 2003. We have experienced a trend, particularly with our major customers, of receiving fewer long-term blanket orders than in the past. We anticipate that substantially all of the backlog present as of December 31, 2005 will be delivered within 12 months. SEASONAL ASPECTS OF THE BUSINESS Our current customers are primarily dependent on retail sales, which are seasonal and subject to significant fluctuations and are difficult to predict. SERVICE Installation services are performed by our personnel and by carefully screened and supervised subcontractors as well as authorized dealers and distributors. Repair and maintenance services are performed primarily by our personnel. All products sold are covered by a warranty period, generally, one year. After the warranty period, we offer our customers the option of entering into a maintenance contract with the Company or paying for service on a per call basis. Installations of SentryVision systems typically take from three days to several weeks and involve mounting the enclosures, installing the controller unit, installing the carriage assembly, and connecting control and transmission cables to the central monitoring location. Items such as high voltage power termination wiring are typically the responsibility of the end user. The use of subcontractors supervised by Company employees proved cost effective with no apparent sacrifice in quality. A network of qualified contractors was established. The loss of the Lowe's maintenance contract in the beginning of 2005, lead to a reduction of technician headcount to 14. In 2005, we released 9 employees and retained only our most technically skilled employees. Our technical staff now focuses on EAS, SentryVision and CCTV service and maintenance and we rely on our well-established partner network for installation work. The model remains cost-effective and allows us to scale our efforts up or down as business requires without the risk of a fixed cost structure. This strategy has resulted in significant cost savings. In addition, we retain our reputation for technical expertise within the industry. We anticipate that this level of coverage will be adequate, coupled with our maturing Service Partner Network, to service our customer base. Our Design Center personnel continued to screen all service requests over the telephone, avoiding costly service calls. In addition, careful screening allowed us to ship replacement parts in advance of the technician's arrival increasing our ability to complete calls in a single visit. COMPETITION We operate in a highly competitive market with many companies engaged in the business of furnishing security services designed to protect against shoplifting and theft. In addition to EAS systems using the concept of tagged merchandise, such security services use, among other things, conventional PTZ dome and fixed mount CCTV systems, traveling CCTV systems, mirrors, guards, private detectives and combinations of the foregoing. We compete principally on the basis of the nature and quality of its products and services and the adaptability of these products to meet specific customer needs and price requirements. To our knowledge, there are several other companies that market, directly or through distributors, conventional closed circuit video systems and/or EAS equipment to retail stores, of which Sensormatic (acquired by Tyco/ADT), Checkpoint Systems, Inc., GE Security, Pelco Manufacturing, Inc., Panasonic, Inc. and Honeywell are the Company's principal competitors. Outside the U.S., we are aware of other companies that market other types of traveling CCTV systems including Lextar Technologies, Ltd. in Australia, T.E.B., Sensormatic and DETI in France and Moving Cameras Ltd. in the UK. Some of our competitors have far greater financial resources, more experienced marketing organizations and a greater number of employees than the Company. PATENTS AND OTHER INTELLECTUAL PROPERTY Although patent protection is advantageous to Sentry, we do not consider any single patent or patent license we own or hold to be material to our operations. We believe that our competitive position ultimately will depend on our experience, know-how and proprietary data, engineering, marketing and service capabilities and business reputation, all of which are outside the scope of patent protection. SentryVision - ------------ Sentry has a United States patent covering the cable-free transmission of a video signal to and from the carriage. This technology prevents degradation of the video signal, which can result from the movement of and prolonged friction caused by the carriage. Three additional U.S. patents were received for improvements made to the original technology, which has been incorporated into the SmartTrack product. Sentry also has received a corresponding European patent and eleven foreign country patents. We intend to seek patent protection on specific aspects of the SentryVision system, as well as for certain aspects of new systems which may be developed for Sentry. There can be no assurance that any patents applied for will be issued, or that the patents currently held, or new patents, if issued, will be valid if contested or will provide any significant competitive advantage to Sentry. We are not aware of any infringement of patents or intellectual property held by third parties. However, if Sentry is determined to have infringed on the rights of others, Sentry may be required to obtain licenses from such other parties. There can be no assurance that the persons or organizations holding desired technology would grant licenses at all or, if licenses were available, that the terms of such licenses would be acceptable to the Company. In addition, we could be required to expend significant resources to develop non-infringing technology. Sentry has also relied on the registration of trademarks and trade names, as well as on trade secret laws and confidentiality agreements with its employees. While we intend to continue to seek to protect Sentry's proprietary technology and developments through patents, trademark registration and confidentiality agreements, we do not rely on such protection to establish and maintain Sentry's position in the marketplace. Management believes that improvement of Sentry's existing products, reliance upon trade secrets and on unpatented proprietary know-how, and the development of new products will be as important as patent protection in establishing and maintaining a competitive advantage. EAS Products - ------------- Sentry has 21 United States and Canadian patents and one patent application relating to (i) the method and apparatus for the detection of movement of articles and persons and accessory equipment employed by Sentry in its Knoscape RF, Ranger and Knoscape MM systems, (ii) various specific improvements used in the Knoscape RF, Ranger and Knoscape MM systems and (iii) various electrical theft detection methods, apparatus and improvements not presently used in any of Sentry's EAS systems. Product Authentication - ----------------------- Sentry's Custom Security Industry subsidiary has two United States patents related to a product authentication. One patent is for a system that measures certain magnetic properties of a marker with an electronic reader utilizing an electromagnetic search field and the second patent is for a unique reader suitable for this system. RESEARCH AND DEVELOPMENT As of December 31, 2005, Sentry Technology Corporation had 8 full time employees engaged in research, engineering, product development and design. In addition, the Company may retain consultants to assist in specific areas related to research, engineering and product development. For the years ended December 31, 2005, 2004 and 2003, approximately $0.9 million, $0.8 million and $0.7 million, respectively, was expended on Company-sponsored research. The SmartTrack System continued to benefit from product improvement efforts focused on adding features and reducing the cost of manufactured products. Continued software developments during 2005 resulted in improved user interfaces, additional support for industry protocols, and allowed the use of a wider range of camera options. Also in 2005, we commenced work with a design firm for the development of the next generation SmartTrack system. Additional projects included revisions to EAS products. EM product offerings were enhanced through development of a new antenna panel called WAM, which was released in 2005. The design incorporates a contemporary furniture style that compliments a wide variety of environments. Technological advances in the design simplify the installation process and result in a more reliable system. In addition, internal development in RF Systems focused on cost reductions in the swept RF wrap desk and improvements to our customer installable systems. REGULATION Because Sentry's EAS and CCTV systems use radio transmission and electromagnetic wave principles, such systems are subject to regulation by the Federal Communications Commission ("FCC") under the Communications Act of 1934. In those instances where it has been required, certification of such products by the FCC has been obtained. As we develop new products, application will be made to the FCC for certification or licensing when required. No assurance can be given that such certification or licensing will be obtained or that current rules and regulations of the FCC will not be changed in an adverse manner. Our business plan calls for the sale and use of Sentry's products in domestic markets and, where consistent with contractual obligations, in international markets. Sentry's products may be subject to regulation by governmental authorities in various countries having jurisdiction over electronic and communication use. We intend to apply for certification of our products to comply with the requirements under the regulations of the countries in which we plan to market our products. No assurance can be given that such certification will be obtained or that current rules and regulations in such countries will not be changed in a manner adverse to Sentry. We believe we are in material compliance with applicable United States, state and local laws and regulations relating to the protection of the environment. EMPLOYEES At December 31, 2005, the Company and its subsidiaries employed 83 full-time employees, of whom 17 were employed in administrative and clerical capacities, 8 in engineering, research and development, 25 in production and manufacturing support, 16 in sales and marketing and 17 in customer service and support. None of our employees are employed pursuant to collective bargaining agreements. Item 2. PROPERTIES - -------------------- Our principal executive, administrative offices, research and development and distribution facilities are located in Ronkonkoma, New York, in a 20,000 square foot facility leased by the Company. In addition, we maintain a sales, administrative and distribution office in a leased 7,400 square foot facility in Toronto, Ontario. Our CSI subsidiary leases facilities for manufacturing and distribution totaling 7,000 square feet located in Thornhill, Ontario. Item 3. LEGAL PROCEEDINGS - ---------------------------- In August 2004, Bi-County Park Associates, Inc. d/b/a Ashlind Properties brought an action against us in the Supreme Court of New York, County of Suffolk, for the recovery of a real estate brokerage commission in the amount of $250,000 relating to the termination of its lease on its former Hauppauge facility. We are still in the discovery stages related to this action. We believe there is no merit to this claim and we are actively defending such action. Although we are involved in ordinary, routine litigation incidental to our business, we are not presently a party to any other legal proceeding, the adverse determination of which, either individually or in the aggregate, would be expected to have a material adverse affect on the Company's business or financial condition. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - --------------------------------------------------------------------- During the fourth quarter of fiscal year ended December 31, 2005, there were no matters submitted to a vote of the Company's security holders through the solicitation of proxies or otherwise. PART II ------- Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER - ------------------------------------------------------------------------------ MATTERS - ------- (a) Price Range of Common Stock. The following table sets forth, for the periods indicated, the high and low sales prices per share of common stock: High Low ---- --- 2004 First Quarter $ 0.25 $ 0.12 Second Quarter 0.29 0.14 Third Quarter 0.18 0.10 Fourth Quarter 0.19 0.09 2005 First Quarter $ 0.24 $ 0.15 Second Quarter 0.16 0.10 Third Quarter 0.13 0.09 Fourth Quarter 0.15 0.09 2006 First Quarter $ 0.15 $ 0.08 Second Quarter (through April 12, 2006) $ 0.12 $ 0.11 The Company's Common Stock is quoted on the OTC Bulletin Board ("OTCBB") under the symbol SKVY. (b) Holders of Common Stock. As of April 12, 2006, the Company had 120,728,804 shares of Common Stock issued and outstanding, which were held by approximately 359 holders of record. (c) Dividends. The payment of future dividends will be a business decision to be made by the Board of Directors of Sentry from time-to-time based upon the results of operations and financial condition of Sentry and such other factors as the Board of Directors considers relevant. Sentry has not paid, and does not presently intend to pay or consider the payment of, any cash dividends on the Common Stock. In addition, covenants in the Company's credit agreements prohibit the Company from paying cash dividends without the consent of the lenders. (d) Securities Authorized for Issuance Under Equity Compensation Plans. For a description of the Company's equity securities authorized for issuance as described in Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," see Notes to our Financial Statements, Note 1.o. "Significant Accounting Policies, Stock-Based Compensation," and Note 9, "Common Shareholders' Equity." Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - -------- ----------------------------------------------------------------- AND RESULTS OF OPERATIONS ---------------------------- Critical Accounting Policies Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Management believes that the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of the consolidated financial statements are allowance for doubtful accounts, inventory obsolescence and accrued warranty. Allowance for Doubtful Accounts -- We maintain an allowance for doubtful trade accounts receivable for estimated losses resulting from the inability of our customers to make required payments. In determining collectibility, we review available customer financial statement information, credit rating reports as well as other external documents and public filings. When it is deemed probable that a specific customer account is uncollectible, that balance is included in the reserve calculation. Actual results could differ from these estimates under different assumptions. Inventory Obsolescence --We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those we project, additional inventory write-downs may be required. Impairment of long-lived assets -- We review our long-lived assets, property and equipment, intangible assets, goodwill and other assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. Impairment is measured at fair value. If impairment indicators exist, we determine whether the projected undiscounted cash flows will be sufficient to cover the carrying value of such assets. This requires us to make significant judgments about the expected future cash flows of the asset group. The future cash flows are dependent on general and economic conditions and are subject to change. Accrued Warranty -- We provide for the estimated cost of product warranty at the time revenue is recognized. We calculate the reserve utilizing historical product failure rates and service repair costs by product family. These rates are reviewed and adjusted periodically. We utilize judgment for estimating these costs and adjust our estimates as actual results become available. Revenue Recognition -- We offer our security devices for sale or lease. We recognize revenue when installation is complete or other post-shipment obligations have been satisfied. For those products not requiring installation, or if installation costs are not material, the Company recognizes revenues upon shipment. Service revenues are recognized when earned and maintenance revenues are recognized ratably over the service contract period. Related Party Transactions -- Details of related party transactions are included in Item 12 and in Notes 2 and 12 of the Financial Statements of this Form 10-KSB. Selected Financial Data - ------------------------- The table below sets forth selected consolidated historical financial data of the Company for the years ended December 31, 2001, 2002, 2003, 2004 and 2005. The selected consolidated historical financial data should be read in conjunction with the Consolidated Financial Statements of the Company included in Item 7.
(Amounts in thousands except for per share data) Years Ended December 31, 2001 2002 2003 2004 2005 -------- -------- -------- ------- -------- Selected Statement of Operations Data: - ------------------------------------- Total revenues $17,299 $14,704 $13,243 $16,863 $13,570 Cost of sales 8,879 7,382 5,179 6,351 5,960 Customer service expenses 4,361 4,240 3,977 4,175 2,654 Selling, general and administrative expenses 5,773 5,287 3,809 4,840 5,348 Restructuring and impairment charges - - - - - Income (loss) before income taxes (2,911) (3,356) (1,049) 253 (1,581) Extraordinary item - Gain on extinguishment of debt - - 738 - - Cumulative effect of change in accounting principal - - - - - Net income (loss) (2,911) (3,356) 181 31 (1,690) Preferred stock dividends 25 - - - - Return to common shareholders from redemption of preferred stock . 27,198 - - - - Net income (loss) available to common shareholders 24,262 (3,356) 181 31 (1,690) Net income (loss) per common share: Basic 0.40 (0.05) 0.00 0.00 (0.01) Diluted 0.39 (0.05) 0.00 0.00 (0.01) As of December 31, Selected Balance Sheet Data: 2001 2002 2003 2004 2005 -------- -------- -------- ------- -------- Working capital . $ 2,235 $ (768) $ (285) $ 4,545 $ 3,037 Total assets . 11,561 7,992 4,093 12,247 9,395 Property, plant and equipment, net . 2,962 2,563 209 689 637 Obligations under capital leases . 2,751 2,652 18 13 7 Convertible debentures - - - 1,862 1,904 Minority interest - - - 1,045 1,140 Total common shareholders' equity (deficit) 2,891 (451) (125) 4,345 2,698
Results of Operations Year Ended December 31, 2005 Compared with Year Ended December 31, 2004 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 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 20% lower in the year ended December 31, 2005 than in the year ended December 31, 2004. Sentry Canada's revenues for the twelve months ended December 31, 2005 represented $5.6 million of total revenues compared with $4.1 million of total revenues for the eight month period included in the year ended December 31, 2004. Our backlog of orders was approximately $1.2 million at December 31, 2005, as compared to approximately $2.2 million at December 31, 2004. We have experienced a trend, particularly with our major customers, of receiving fewer long-term blanket orders than in the past. We anticipate that substantially all of the backlog present as of December 31, 2005 will be delivered within 12 months. Total revenues for the periods presented are broken out as follows: % 2005 2004 Change ---- ---- ------ (in thousands) EAS $ 6,490 $ 5,358 21 CCTV 1,670 3,272 (49) SentryVision 2,971 3,852 (23) ----- ----- ---- Total sales 11,131 12,482 (11) Service, installation and other 2,439 4,381 (44) ----- ----- ---- Total revenues $ 13,570 $ 16,863 (20) = ====== = ====== ==== The increase in EAS sales is primarily attributable to Sentry Canada's sales, which represented $5.3 million of EAS sales in 2005 compared to $3.8 million in 2004. In January 2005, we were notified by Lowe's Home Center, historically 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 $5.0 million in 2004 to $1.0 million in 2005. As Lowe's purchased both CCTV and SentryVision products this reduction affected the reported sales in both categories. We anticipate that this decision will continue to result in a decrease in future revenues from Lowe's on a comparative basis. We have added new sales representatives and new customers that have somewhat offset the loss of Lowe's sales in 2005. As a result, we anticipate that our business will be more balanced and will be less reliant on a single large customer for future success. Sales to our international dealers and distributors represented $1.3 million of total SentryVision sales in 2005 as compared to $1.6 million in 2004. Our sales of SentryVision products to our international dealers and distributors are denominated in U.S. dollars, therefore the strengthening of the U.S. dollar against the Euro in 2005 had no significant impact on reported revenues. Both service and 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, the installation revenues associated with EAS systems are lower than for CCTV and SentryVision sales. Maintenance revenues were also lower primarily as a result of cancellation of the Lowe's maintenance contract. Sales reps and international distributors have been added to the sales group plus new print ads and trade show attendance will assist in improving our sales results. In addition, our flagship SmartTrack traveling camera system and proprietary library security and information systems require little maintenance, 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. In January 2006, we received orders from J.C. Penney and Target for installation of SentryVision SmartTrack traveling camera systems in five distribution centers. Both customers are among the 10 largest retailers in America and are repeat users of our flagship products with budgets allocated for the acquisition of additional SmartTrack systems in 2006. Cost of sales was 54% of sales in 2005 compared to 51% in 2004. We continue to see strong domestic margin improvements in 2005 on the SmartTrack product lines as a result of our outsourcing of manufacturing. However, our comparative margins on international SmartTrack sales have been reduced in 2005, due to competitive pressures. Sentry Canada's sales increased as a percentage of total sales in 2005, compared to 2004. As a percentage of sales, Sentry Canada's cost of sales are higher than Sentry's historical costs as a portion of its sales are made through dealers and distributors that carry lower margins than sales made direct to end users. In addition, lower production volume at our 51% owned labeling subsidiary resulted in higher overhead and a higher cost of sales percentage in first half of 2005. The decrease in customer service expenses in 2005, as compared 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 between periods. Selling, general and administrative expenses were 10% higher in 2005 as compared to 2004. The increase in such expenses, on a comparable basis, is principally a result of higher sales and marketing expenses and higher foreign exchange losses. The increase in such expenses 2005 is principally a result of twelve full months of Sentry Canada expenses in 2005, compared to eight months in the 2004 period. Included in selling, general and administrative expenses were foreign exchange losses (gains) of $133,000 in 2005, compared to $79,000 in 2004. The change in the foreign currency exposure is a result of the global credit facility entered into in the second quarter of 2005, which is denominated in Canadian dollars. We are currently working with our lender to develop the most efficient hedging strategies to mitigate this exposure. We have made certain administrative expense reductions to help compensate for the reduction in Lowe's business. In October 2005, we consolidated our accounting and distribution functions from our Toronto, Ontario facility to Ronkonkoma, NY resulting in the elimination of duplicate functions while further streamlining operations. At the same time, we have increased funding of sales and marketing programs, which we expect will continue to increase our business with new and existing customers. Four new sales persons were hired in 2005 with substantial industry experience. In addition, we recently hired a new VP of Sales and Marketing, with prior experience with our industry's largest competitor, to lead the growing team of sales professionals and to focus on establishing the Sentry brand name as a market leader. Many new sales opportunities are being developed that we anticipate will have a positive impact on future revenues. New programs include a marketing campaign to promote SentryVision to Homeland Security 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. Research and development costs increased 3% in 2005, compared to 2004, principally as a result of the inclusion of twelve months of research efforts of Sentry Canada in 2005, compared to eight months in 2004. Total interest and financing costs were lower in 2005, compared to 2004, as a result of lower average bank debt and lower interest rates under the new credit agreement as well as a result of the elimination of costly financing associated with purchase order financing included in the first half of 2004. The income tax provision of $ 49,000 in 2005, and $140,000 in 2004, principally results from taxable income of our ID Systems subsidiaries, which cannot be offset by Sentry's net operating loss carryforwards. As a result of the foregoing, we had net loss of $1,690,000 in the year ended December 31, 2005, as compared to net income of $31,000 in the year ended December 31, 2004. Year Ended December 31, 2004 Compared with Year Ended December 31, 2003 Our consolidated statements of operations include the revenues and expenses of Sentry Canada from May 1, 2004. Consolidated revenues were 27% higher in the year ended December 31, 2004 than in the year ended December 31, 2003 Sentry Canada's revenues for the eight months period ended December 31, 2004 represented $4.1 million of total revenues. The backlog of orders, which we expect to deliver within twelve months, decreased to $2.2 million at December 31, 2004 as compared to $3.2 million at December 31, 2003. We believe this is due in part to a trend, particularly from our major customers, of awarding fewer long-term blanket orders than in the past. Total revenues for the periods presented are broken out as follows: % 2004 2003 Change ---- ---- ------ (in thousands) EAS $ 5,358 $ 1,914 180 CCTV 3,272 3,699 (12) SentryVision 3,852 3,133 23 ----- ----- -- Total sales 12,482 8,746 43 Service, installation and other 4,381 4,497 (3) ----- ----- -- Total revenues $ 16,863 $ 13,243 27 = ====== = ====== == The increase in sales of EAS products in 2004 was attributable to Sentry Canada's sales, which represented $3.8 million of the total. Sentry's historical comparative sales of EAS systems and tags decreased in 2004. The decrease in CCTV revenues is primarily a result of lower sales to two customers. We had sales of $0.6 million in 2003 to Home Depot, which did not repeat in 2004 and we lost $0.5 million in revenues in 2004 from a significant customer that decided to source their purchases from the CCTV manufacturer. SentryVision sales increased both domestically and internationally. Sales to our international dealers and distributors represented $1.6 million of total SentryVision sales in 2004 as compared to $1.2 million in 2003. Our sales of SentryVision products to our international dealers and distributors are denominated in U.S. dollars, therefore the strengthening of the Euro against the U.S. dollar had no significant impact on revenues. Service, installation and other revenues decreased 2004 primarily as a result of lower CCTV installations than in 2003. Even though EAS sales increased substantially, the installation revenues associated with EAS systems are significantly lower than those for CCTV and SentryVision sales. In addition, Lowe's negotiated a lower rate per store for the maintenance contract in 2004 than in 2003. Total revenues from Lowe's Home Centers represented $5.0 million in 2004 as compared to $5.8 million in 2003. Of the $0.8 million decrease, $0.6 million was a reduction in SentryVision sales and $0.2 million was a reduction in service and installation income. Cost of sales was 52% of sales in 2004, compared to 60% in 2003. We continue to see margin improvements as a result of the outsourcing of all significant manufacturing operations, which we began in the second quarter of 2003. The decrease in the cost of sales percentage in 2004 as compared to 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. As a percentage of sales, the costs associated with Sentry Canada's sales were slightly higher than Sentry's historical costs as a higher portion of their sales are made through dealer and distributors which carry lower margins than sales made direct to end users. Our customer service expenses increased by 5% in 2004, as compared to 2003. Of the increase 4% was due to the Sentry Canada acquisition. In 2004, we decreased the number of customer service employees and increased the use of outside service contractors in order to manage our total net customer service costs during fluctuations in activity levels between periods. However, our efforts were hampered somewhat by our inability to maintain a proper level of service parts during the first six months of 2004, due to inadequate trade credit and financial resources, which resulted in inefficiencies. Selling, general and administrative expenses were 26% higher in 2004 when compared to 2003. While our historical costs decreased as a result of our restructuring in 2003, our acquisition of Sentry Canada added $1.1 million in selling, general and administrative expenses during the eight months they were included in the 2004 results. The increase in research and development costs in 2004, when compared to 2003, is also primarily a result of the Sentry Canada acquisition. As a result of the restructuring of operations, the increase in sales activity levels and the acquisition of Sentry Canada, we were able to show operating income of $0.7 million in 2004 as compared to an operating loss of $0.4 million in 2003. Total interest and financing costs decreased by $259,000 in 2004, as compared to 2003. Bank interest expense increased by $39,000 in 2004, due to higher average borrowings and slightly higher interest rates under our revolving credit and term loan facility with CIT and the Sentry Canada credit facility with Bank of Montreal. Interest under capital leases decreased by $156,000, as a result of the cancellation of the sale and leaseback agreement on our former headquarters facility. While interest and financing costs related to the Brookfield Technology financing added $151,000 in 2004, we were able to eliminate, in the second half of 2004, the costly financing costs associated with purchase order financing, resulting in a savings of $293,000 for the entire year. During 2003, we entered into settlements with certain vendors for past due obligations which resulted in a gain of approximately $526,000 (net of $351,000 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 addition, on July 9, 2003, we entered into a settlement agreement with our former landlord regarding the termination of its long-term capital and operating leases for our facility in Hauppauge, New York. We recognized an extraordinary gain of $212,000 (net of $141,000 income taxes) in 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. The income tax provision of $140,000 in 2004 principally results from taxable income of our Sentry Canada subsidiaries, which cannot be offset by Sentry's net operating loss carryforwards. The $492,000 income tax provision recognized on the extraordinary gains in 2003 was offset by equivalent income tax benefits generated from the 2003 loss from operations and the utilization of net operating loss carryforwards. As a result of the foregoing, we had net income of $31,000 in the year ended December 31, 2004 as compared to $181,000 in the year ended December 31, 2003. Liquidity and Capital Resources At December 31, 2005, we had cash of $0.8 million, working capital of $3.0 million, total assets of $9.4 million and shareholders' equity of $2.7 million. While we had a loss of $1.7 million in 2005, our net cash used in operating activities was only $242,000. This was a result of lower amounts of accounts receivable partially as a result of better collections efforts as well as lower sales volume. We have also eliminated the use of expensive purchase order financing to fund inventory purchases and we are continuing to reestablish credit with new and existing vendors. We utilized $0.8 million in financing activities through a pay down of balances under our previous credit facilities. Availability under the credit facilities is principally based on the level of our receivables and inventory, which declined in 2005. Net reductions in our credit facilities were funded through the use of existing cash. On May 13, 2005, the Company and certain of its subsidiaries entered into a new secured credit facility with Royal Bank of Canada ("RBC") for maximum borrowings of up to Canadian $4.5 million (U.S. $3.9 million), which are subject to certain limitations based on a percentage of eligible accounts receivable and inventories as defined in the agreement. Interest is payable at a rate of RBC prime rate (5.0% at December 31, 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 December 31, 2005, we had borrowings of approximately $2.0 million with RBC and had excess borrowing capacity of $0.5 million. As of the end of the third and fourth quarters of 2005, the Company failed to meet one of its financial covenants under the Royal Bank agreement. Subsequent to year end, the Company received from RBC a tolerance of default and waiver of the covenant as of those dates. In addition, on January 23, 2006, the agreement was amended with regard to certain financial and reporting covenants and the interest rate increased to RBC prime rate plus 1.75%. 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, other than the Dialoc distribution agreement, as of December 31, 2005. Sentry's revenues declined and we incurred an operating loss in 2005. This trend continued through the first quarter of 2006 and substantially reduced the Company's available cash reserves and limited our ability to secure additional bank financing. The Company has instituted certain plans to increase its revenue base as well as preserve its cash, including cost cutting measures and inventory reduction initiatives. We are presently in the final stages of negotiations with RBC, our lender, to amend our credit agreement by further modifying certain financial covenants and by extending the term of the agreement through April 2007. Mr. Murdoch, Sentry's CEO and Director and Mr. Furst, a Sentry Director, have agreed to provide a personal guarantee to RBC in the amount of Canadian $1 million (U.S. $860,000) in exchange for the bank providing increased availability under its credit facility to the Company by the same amount. In consideration of these guarantees, Mr. Murdoch and Mr. Furst will receive a fee of $43,000, to be shared between them, paid in 12 equal monthly installments. As additional consideration, they will receive fully vested, two year warrants to purchase between 2.9 million and 3.8 million shares of the Company's common stock, at an exercise price ranging between $0.075 and $0.10 per share, dependent upon certain stock market conditions. The fair value of these warrants will be recorded in accordance with SFAS No. 123R "Share-Based Payment" in the second quarter of 2006 and will be written off over the period of the guarantee. After conversations with RBC, management believes that these amendments will be approved in the near future. Based upon the achievement of its plans, as well as the additional borrowing availability as a result of the Directors guaranties, the Company believes that it will have sufficient cash to meet its anticipated operating costs, capital expenditures and debt service requirements for at least the next twelve months. 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 Brookfield Technology Fund investment. The table below summarizes aggregate maturities contractual obligations as of December 31, 2005. Less Contractual than 1-3 4-5 After 5 Obligations Total 1 Year Years Years Years - ----------- ----- ------ ----- ----- ------- (In Thousands) Operating leases $ 1,009 $ 285 $ 533 $ 191 $ - Capital leases 8 7 1 - - Notes payable & term loans 91 91 - - - Convertible debentures 2,000 - 2,000 - - ------- ----- ------ ----- -------- Total $ 3,108 $ 383 $2,534 $ 191 $ - ======= ===== ====== ===== ======== Recent Accounting Pronouncements In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4". This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current period charges. In addition, this statement requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred in fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact of SFAS No. 151 on its consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29". SFAS No. 153 replaces the exception from fair value measurement in APB Opinion No. 29 for non-monetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is to be applied prospectively, and is effective for non-monetary asset exchanges occurring in fiscal periods after the December 2004 issuance of SFAS No. 153. The Company does not believe the adoption of SFAS No. 153 will be significant to the overall results of operations or financial position. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of the employee services is recognized as compensation cost over the period that an employee provides service in exchange for the award. Beginning with the Company's first quarter of fiscal year 2006, it will be required to adopt SFAS 123(R), and will recognize share-based compensation costs in its results of operations. The Company currently provides pro forma disclosures under SFAS 123 reflecting the effects of share-based compensation costs on its results of operations in Note 8 to consolidated financial statements. Although such pro forma effects of applying SFAS 123 may be indicative of the effects of adopting SFAS 123(R), the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123(R) will be dependent on numerous factors including, but not limited to, levels of share-based payments granted in the future and the timing thereof; the valuation model chosen by the Company to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the service period; and the transition method chosen for adopting SFAS 123(R), which permits public companies to adopt its requirements using various methods, including the "modified prospective application method" and the "modified retrospective application method." The Company plans to adopt SFAS 123(R) using the modified prospective application method. The Company expects that the adoption of SFAS 123(R) may have a material impact on its results of operations subsequent to adoption. SFAS No. 123R will be effective January 1, 2006 for the Company and may be adopted using a modified prospective method or a modified retrospective method. Although the Company has not yet completed an analysis to quantify the exact impact the new standard will have on its future financial performance, the disclosures in Note 8 provide detail as to the Company's financial performance as if the Company had applied the fair value-based method and recognition provisions of SFAS No. 123R to stock-based employee compensation to the current reporting periods. In March 2005, the FASB issued FASB Staff Position ("FSP") No. 46(R)-5, "Implicit Variable Interests under FASB Interpretation No. ("FIN") 46 (revised December 2003), Consolidation of Variable Interest Entities" ("FSP FIN 46R-5"). FSP FIN 46R-5 provides guidance for a reporting enterprise on whether it holds an implicit variable interest in Variable Interest Entities ("VIEs") or potential VIEs when specific conditions exist. This FSP is effective in the first period beginning after March 3, 2005 in accordance with the transition provisions of FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities - an Interpretation of Accounting Research Bulletin No. 51" ("FIN 46R"). The Company has determined that the adoption of FSP FIN 46R-5 will not have an impact on its results of operations and financial position. In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"), which will result in (1) more consistent recognition of liabilities relating to asset retirement obligations, (2) more information about expected future cash outflows associated with those obligations, and (3) more information about investments in long-lived assets because additional asset retirement costs will be recognized as part of the carrying amounts of the assets. FIN 47 clarifies that the term "conditional asset retirement obligation" as used in SFAS No. 143, "Accounting for Asset Retirement Obligations", refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 in 2005 did not have a material impact on the financial position or results of operations of the Company. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections", which replaces APB Opinion No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion No. 28". SFAS No. 154 provides guidance on the accounting for and reporting of changes in accounting principles and error corrections. SFAS No. 154 requires retrospective application to prior period financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS No. 154 also requires certain disclosures for restatements due to correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, and is required to be adopted by the Company as of January 1, 2006. The impact that the adoption of SFAS No. 154 will have on the Company's results of operations and financial condition will depend on the nature of future accounting changes adopted by the Company and the nature of transitional guidance provided in future accounting pronouncements. Inflation The Company does not consider inflation to have a material impact on the results of operations. Cautionary Statement Regarding Forward-Looking Statements The "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Annual Report on Form 10-KSB contain "forward-looking statements" (as defined in the Private Securities Litigation Reform Act of 1995 or the "PSLRA") that are based on current expectations, estimates and projections about the industry in which the Company operates, as well as management's beliefs and assumptions. Words such as "expects," "anticipates" and "believes" and variations of such words and similar expressions generally indicate that a statement is forward-looking. The Company wishes to take advantage of the "safe harbor" provisions of the PSLRA by cautioning readers that many important factors discussed herein, among others, may cause the Company's results of operations to differ from those expressed in the forward-looking statements. These factors include: (i) the risk that any delay or cancellation of orders from one or more of Sentry's major customers may have a material adverse effect on the Company's financial condition; (ii) the risk that anticipated growth in the demand for the Company's products in the retail, commercial and industrial sectors will not develop as expected, whether due to competitive pressures in these markets or to any other failure to gain market acceptance of the Company's products; (iii) the risk that anticipated revenue growth through the domestic and international dealers programs does not develop as expected; (iv) the risk that the Company may not find sufficient qualified Service Partners to provide future installation services; (v) the risk that the Company will not be able to retain key personnel; (vi) the risk that the borrowing availability under our credit facilities will not be adequate to meet the Company's growth requirements; and (vii) the risk arising from the large market position and greater financial and other resources of Sentry's principal competitors, as described under "Item 1. Business-Competition." Item 7. FINANCIAL STATEMENTS - -------- --------------------- SENTRY TECHNOLOGY CORPORATION ----------------------------- AND SUBSIDIARIES ---------------- CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 -------------------------------------------- CONTENTS -------- Page ---- Explanatory Note 28 Report of Independent Registered Public Accounting Firm 29 CONSOLIDATED FINANCIAL STATEMENTS: Balance sheets 30 Statements of operations 31 Statements of shareholders' equity 32 Statements of cash flows 33 Notes to financial statements 34 - 48 ------ Explanatory Note In August 2005, we dismissed our auditors, Holtz Rubenstein Reminick LLP ("Holtz"). Subsequent to the completion of the 2004 audit, Holtz submitted an invoice for excess charges related to our 2004 audit. We rejected the invoice for excess charges since we believed we were operating under a fixed fee contract with Holtz. As a result of what Holtz deems to be a fee dispute, Holtz has refused to consent to the use of their audit opinion for the consolidated balance sheet for the year ended December 31, 2004 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2004. We have attempted to settle this dispute but our offers have been rejected. We are investigating the available remedies. We have included the statements referred to above in the consolidated financial statements contained in this document. While these statements are the same as the prior year audited financial statements on which Holtz issued an unqualified opinion as of March 25, 2005, we have labeled them as "Unaudited" for purposes of this report. Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Sentry Technology Corporation We have audited the accompanying consolidated balance sheet of Sentry Technology Corporation as at December 31, 2005 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sentry Technology Corporation as at December 31, 2005 and the results of its consolidated operations, shareholders' equity and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements of Sentry Technology Corporation as of December 31, 2004 and 2003, were audited by other auditors whose report dated March 29, 2005, expressed an unqualified opinion on those statements. /s/ SF Partnership, LLP CHARTERED ACCOUNTANTS TORONTO, CANADA March 16, 2006 SENTRY TECHNOLOGY CORPORATION ----------------------------- AND SUBSIDIARIES ---------------- CONSOLIDATED BALANCE SHEETS --------------------------- (In Thousands, Except Par Value Amounts)
December 31, ---------------------------- 2005 2004 -------------- ------------ ASSETS (Audited) (Unaudited) - ------------------------------------------------------------------ -------------- ------------ Current Assets: Cash and cash equivalents $ 842 $ 1,965 Accounts receivable, less allowance for doubtful accounts of $141 and $338, respectively 2,762 3,500 Inventories 2,709 3,314 Prepaid expenses and other current assets 318 525 -------------- ------------ Total current assets 6,631 9,304 PROPERTY AND EQUIPMENT, net 637 689 GOODWILL 1,564 1,564 OTHER ASSETS 563 690 -------------- ------------ $ 9,395 $ 12,247 ============== ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------ Current Liabilities: Revolving line of credit and term loan $ 2,039 $ 2,640 Accounts payable 489 799 Accrued liabilities 925 1,146 Obligations under capital leases - current portion 6 5 Deferred income 135 169 -------------- ------------ Total current liabilities 3,594 4,759 NOTES PAYABLE --- 189 OBLIGATIONS UNDER CAPITAL LEASES, less current portion 1 8 DEFERRED TAX LIABILITY 58 39 CONVERTIBLE DEBENTURES 1,904 1,862 MINORITY INTEREST 1,140 1,045 -------------- ------------ Total liabilities 6,697 7,902 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $0.001 par value; authorized 160,000 and 140,000 shares, respectively; issued and outstanding 120,629 and 120,549 shares, respectively 121 121 Additional paid-in capital 48,783 48,779 Accumulated deficit (46,408) (44,718) Equity adjustment from foreign currency conversion 202 163 -------------- ------------ Total shareholders' equity 2,698 4,345 -------------- ------------ $ 9,395 $ 12,247 ============== ============
See notes to consolidated financial statements SENTRY TECHNOLOGY CORPORATION ----------------------------- AND SUBSIDIARIES ---------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- (In Thousands, Except Per Share Amounts)
Years Ended December 31, ------------------------------------------------------ 2005 2004 2003 ------------------------------------------------------ (Audited) (Unaudited) (Unaudited) REVENUES: Sales $ 11,131 $ 12,482 $ 8,746 Service, installation and other revenues 2,439 4,381 4,497 -------------------------- ------------ ------------ 13,570 16,863 13,243 -------------------------- ------------ ------------ COST AND EXPENSES: Cost of sales 5,960 6,351 5,179 Customer service expenses 2,654 4,175 3,977 Selling, general and administrative expenses 5,348 4,840 3,809 Research and development 856 832 656 -------------------------- ------------ ------------ 14,818 16,198 13,621 -------------------------- ------------ ------------ OPERATING INCOME (LOSS) (1,248) 665 (378) INTEREST AND FINANCING EXPENSE, net 333 412 671 -------------------------- ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEM (1,581) 253 (1,049) INCOME TAX EXPENSE (BENEFIT) 49 140 (492) -------------------------- ------------ ------------ INCOME (LOSS) BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM (1,630) 113 (557) MINORITY INTEREST (60) (82) --- -------------------------- ------------ ------------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,690) 31 (557) EXTRAORDINARY ITEM - Gain on extinguishment of debt, net of $492 income taxes --- --- 738 -------------------------- ------------ ------------ NET INCOME (LOSS) $ (1,690) $ 31 $ 181 ========================== ============ ============ BASIC INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item $ (0.01) $ 0.00 $ (0.01) Extraordinary item 0.00 0.00 0.01 -------------------------- ------------ ------------ Net income (loss) $ (0.01) $ 0.00 $ 0.00 ========================== ============ ============ WEIGHTED AVERAGE BASIC COMMON SHARES 120,594 106,532 84,153 ========================== ============ ============
See notes to consolidated financial statements SENTRY TECHNOLOGY CORPORATION ----------------------------- AND SUBSIDIARIES ---------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ----------------------------------------------- (In Thousands) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 --------------------------------------------
Note Additional Receivable Common Stock Paid-in Accumulated from Shares Amount Capital Deficit Shareholder ------------- -------- ------------ --------- --------------- (Unaudited) BALANCE, January 1, 2003 78,044 $ 78 $ 44,521 $(44,930) $ (120) Net income - - - 181 - Settlement of debt and lease obligations 3,193 3 137 - - Net proceeds from common stock issued to Dialoc 4,517 5 - - - Exercise of stock options 2 - - - - ------------- -------- ------------ --------- --------------- BALANCE, December 31, 2003 85,756 86 44,658 (44,749) (120) (Unaudited) Net income - - - 31 - Repayment of note receivable from shareholder - - - - 120 Issuance of warrants - - 215 - - Acquisition of ID Systems 30,000 30 3,270 - - Net proceeds from common stock sold to Saburah 4,795 5 636 - - Retired stock (5) - - - - Exercise of stock options 3 - - - - Equity adjustment from foreign currency translation - - - - - Comprehensive income - - - - - ------------- -------- ------------ --------- --------------- BALANCE, December 31, 2004 120,549 121 48,779 (44,718) - (Audited) Net loss - - - (1,690) - Exercise of stock options 80 - 4 - - Equity adjustment from foreign currency translation - - - - - Comprehensive loss - - - - - ------------- -------- ------------ --------- --------------- BALANCE, December 31, 2005 120,629 $ 121 $ 48,783 $(46,408) $ - ============= ======== ============ ========= =============== Accumulated Total Other Shareholders' Comprehensive Comprehensive Equity Income Income (Deficit) (Loss) ------------- --------------- --------------- (Unaudited) BALANCE, January 1, 2003 $ - $ (451) Net income - 181 $ 181 =============== Settlement of debt and lease obligations - 140 Net proceeds from common stock issued to Dialoc - 5 Exercise of stock options - - ------------- --------------- BALANCE, December 31, 2003 - (125) (Unaudited) Net income - 31 $ 31 Repayment of note receivable from shareholder - 120 Issuance of warrants - 215 Acquisition of ID Systems - 3,300 Net proceeds from common stock sold to Saburah - 641 Retired stock - - Exercise of stock options - - Equity adjustment from foreign currency translation 163 163 163 --------------- Comprehensive income - - $ 194 ------------- --------------- =============== BALANCE, December 31, 2004 163 4,345 (Audited) Net loss - (1,690) $ (1,690) Exercise of stock options - 4 Equity adjustment from foreign currency translation 39 39 39 --------------- Comprehensive loss - - $ (1,651) ------------- --------------- =============== BALANCE, December 31, 2005 $ 202 $ 2,698 ============= ===============
See notes to consolidated financial statements SENTRY TECHNOLOGY CORPORATION ----------------------------- AND SUBSIDIARIES ---------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (In Thousands)
Years Ended December 31, ------------------------ 2005 2004 2003 ---------- ------------ ------------ (Audited) (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (1,690) $ 31 $ 181 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation 154 183 262 Amortization of intangibles and other assets 135 179 90 Provision for bad debts 1 (14) (16) Deferred income taxes 19 39 --- Non-cash consideration 59 63 --- Minority interest in net income of consolidated subsidiary 95 208 --- Extraordinary gain on extinguishments of debt --- --- (1,230) Changes in operating assets and liabilities: Accounts receivable 737 (823) 6 Inventories 605 (196) 1,290 Prepaid expenses and other assets 207 143 (129) Accounts payable and accrued liabilities (530) (557) 65 Deferred income (34) (102) (123) ---------- ------------ ------------ Net cash (used in) provided by operating activities (242) (846) 396 ---------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (102) (205) (81) Intangibles (25) (92) (16) Net cash provided by the acquisition of ID Systems --- 31 --- ---------- ------------ ------------ Net cash used in investing activities (127) (266) (97) ---------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowing (payments) on the revolving line of credit 220 329 (1,372) Proceeds of notes payable --- --- 247 Repayment of notes payable (189) (58) --- Proceeds of term loan --- --- 845 Repayment of term loan (821) (203) (25) Proceeds of bridge loan --- 100 --- Repayment of bridge loan --- (100) --- Proceeds of convertible debenture and warrants --- 2,000 --- Repayment of obligations under capital leases (7) (5) (55) Proceeds of sale of stock, net 4 641 5 ---------- ------------ ------------ Net cash provided by (used in) financing activities (793) 2,704 (355) ---------- ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES 39 163 --- ---------- ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,123) 1,755 (56) CASH AND CASH EQUIVALENTS, beginning of year 1,965 210 266 ---------- ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 842 $ 1,965 $ 210 ========== ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 302 $ 341 $ 676 ========== ============ ============ Income taxes $ 83 $ 72 $ --- ========== ============ ============
See notes to consolidated statements SENTRY TECHNOLOGY CORPORATION ----------------------------- AND SUBSIDIARIES ---------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ YEARS ENDED DECEMBER 31, 2005 (Audited), 2004 (Unaudited) AND 2003 (Unaudited) ------------------------------------------------------------------------------ 1. SIGNIFICANT ACCOUNTING POLICIES: --------------------------------- a. Business -------- Sentry Technology Corporation ("Sentry" or the "Company"), a publicly traded Delaware Corporation, was established on February 12, 1997. Its corporate predecessors had been in business for more than 39 years. The Company is engaged in the design, manufacture, distribution, installation and service of systems designed to be used by retailers to deter shoplifting and internal theft and by industrial and institutional customers to protect assets and people. b. Principles of consolidation ----------------------------- The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. c. Revenue recognition -------------------- The Company offers its security devices for sale or lease. For the years ended December 31, 2005, 2004 and 2003, leases of security devices were not material. The Company recognizes revenue when installation is complete or other post-shipment obligations have been satisfied. For those products not requiring installation or if installation costs are not material, the Company recognizes revenues upon shipment. Service revenues are recognized when earned and maintenance revenues are recognized ratably over the service contract period. Included in accounts receivable at December 31, 2005 and 2004 are unbilled accounts receivable of $36,000 and $129,000, respectively. d. Cash and cash equivalents ---------------------------- The Company considers all highly liquid temporary investments with original maturities of less than ninety days to be cash equivalents. Temporary cash investments are placed with high credit quality financial institutions. At times, the Company's cash deposits with any one financial institution may exceed federally insured limits. e. Allowance for doubtful accounts ---------------------------------- Losses from uncollectible accounts are provided for by utilizing the allowance for doubtful accounts method based upon management's estimate of uncollectible amounts. Management specifically analyzed accounts receivable and analyzes potential bad debts, customer concentrations, credit worthiness, current economic trends and changes in customer payment terms when evaluating the allowance for doubtful accounts. f. Inventories ----------- Inventories are stated at the lower of cost (first-in, first-out method) or market. g. Product warranty ----------------- Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims. h. Depreciation and amortization ------------------------------- Depreciation of security devices on lease and property and equipment is provided for using the straight-line method over their related estimated useful lives. Security devices on lease generally have estimated useful lives of six years, except the cost of security devices related to operating leases with purchase options are depreciated over the life of the lease. i. Patents and other intangibles -------------------------------- Cost and expenses incurred in obtaining patents are amortized over the remaining life of the patents, not exceeding 17 years, on a straight-line basis. Costs assigned to other intangibles, including trade secrets, distribution agreements and customer relationships, are being amortized on a straight line basis over their estimated useful lives of 5 to 15 years. Estimated annual amortization expense for the next five succeeding fiscal years will range from $76,000 in 2006 to $9,000 in 2010. j. Goodwill -------- Goodwill represents the excess of acquisition cost over the fair value of net assets acquired in business combinations. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, goodwill is not amortized but reviewed annually for impairment. k. Impairment of long-lived assets ---------------------------------- The Company reviews its long-lived assets, property and equipment, intangible assets, goodwill and other assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. Impairment is measured at fair value. The Company completed its annual review of impairment and determined that long-lived assets were not impaired. l. Fair value of financial instruments --------------------------------------- It is management's belief that the carrying amounts of the Company's financial instruments (cash and cash equivalents, accounts receivable, revolving line of credit, accounts payable and obligations under capital leases) approximate their fair value at December 31, 2005 and 2004 due to the short maturity of these instruments or due to the terms of such instruments approximating instruments with similar terms currently available to the Company. m. Deferred income ---------------- Deferred income consists of rentals related to operating leases and maintenance contracts billed or paid in advance. n. Income taxes ------------- The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. o. Stock-based compensation ------------------------- 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 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, 2005 is estimated at $0.08, using the Black-Scholes option pricing model with the following weighted average assumptions: expected life of 4.7 years; stock volatility, 123%; risk free interest rates, 4.0%, and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values 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: 2005 2004 2003 ------- ------ ------ (Audited) (Unaudited) (Unaudited) (In thousands, except per share data) Net income (loss): As reported $ (1,690) $ 31 $ 181 Less stock based compensation expense determined under the fair value method for all awards, net of related tax effects (27) (12) (74) ----------- --------- ---------- Pro forma $ (1,717) $ 19 $ 107 Net income (loss) per share: As reported $ (0.01) $ 0.00 $ 0.00 Pro forma (0.01) 0.00 0.00 p. Foreign currency translation ------------------------------ The functional currency of the Company's foreign entities is the local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using the exchange rates in effect at the balance sheet dates and for revenue and expense accounts using a weighted average exchange rate during the year. The gains or losses resulting from the translation are included in Accumulated Other Comprehensive Income in the Consolidated Statement of Shareholders' Equity and are excluded from net income. Foreign exchange transaction gains (losses) are included in selling, general and administrative expenses and amounted to approximately $(133,000), $(79,000) and $12,000 for the years ended December 31, 2005, 2004 and 2003, respectively. q. Shipping and handling costs ------------------------------ Shipping and handling costs are included in selling, general and administrative expenses and approximated $233,000, $251,000 and $215,000 in 2005, 2004 and 2003, respectively. r. Use of estimates ------------------ The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. s. Reclassifications ----------------- Certain prior year balances have been reclassified to conform to current year classifications. t. Recent accounting pronouncements ---------------------------------- In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4". This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current period charges. In addition, this statement requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred in fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact of SFAS No. 151 on its consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29". SFAS No. 153 replaces the exception from fair value measurement in APB Opinion No. 29 for non-monetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is to be applied prospectively, and is effective for non-monetary asset exchanges occurring in fiscal periods after the December 2004 issuance of SFAS No. 153. The Company does not believe the adoption of SFAS No. 153 will be significant to the overall results of operations or financial position. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of the employee services is recognized as compensation cost over the period that an employee provides service in exchange for the award. Beginning with the Company's first quarter of fiscal year 2006, it will be required to adopt SFAS 123(R), and will recognize share-based compensation costs in its results of operations. The Company currently provides pro forma disclosures under SFAS 123 reflecting the effects of share-based compensation costs on its results of operations in Note 8 to consolidated financial statements. Although such pro forma effects of applying SFAS 123 may be indicative of the effects of adopting SFAS 123(R), the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123(R) will be dependent on numerous factors including, but not limited to, levels of share-based payments granted in the future and the timing thereof; the valuation model chosen by the Company to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the service period; and the transition method chosen for adopting SFAS 123(R), which permits public companies to adopt its requirements using various methods, including the "modified prospective application method" and the "modified retrospective application method." The Company plans to adopt SFAS 123(R) using the modified prospective application method. The Company expects that the adoption of SFAS 123(R) may have a material impact on its results of operations subsequent to adoption. In March 2005, the FASB issued FASB Staff Position ("FSP") No. 46(R)-5, "Implicit Variable Interests under FASB Interpretation No. ("FIN") 46 (revised December 2003), Consolidation of Variable Interest Entities" ("FSP FIN 46R-5"). FSP FIN 46R-5 provides guidance for a reporting enterprise on whether it holds an implicit variable interest in Variable Interest Entities ("VIEs") or potential VIEs when specific conditions exist. This FSP is effective in the first period beginning after March 3, 2005 in accordance with the transition provisions of FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities - an Interpretation of Accounting Research Bulletin No. 51" ("FIN 46R"). The Company has determined that the adoption of FSP FIN 46R-5 will not have an impact on its results of operations and financial position. In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"), which will result in (1) more consistent recognition of liabilities relating to asset retirement obligations, (2) more information about expected future cash outflows associated with those obligations, and (3) more information about investments in long-lived assets because additional asset retirement costs will be recognized as part of the carrying amounts of the assets. FIN 47 clarifies that the term "conditional asset retirement obligation" as used in SFAS No. 143, "Accounting for Asset Retirement Obligations", refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 in 2005 did not have a material impact on the financial position or results of operations of the Company. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections", which replaces APB Opinion No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion No. 28". SFAS No. 154 provides guidance on the accounting for and reporting of changes in accounting principles and error corrections. SFAS No. 154 requires retrospective application to prior period financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS No. 154 also requires certain disclosures for restatements due to correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, and is required to be adopted by the Company as of January 1, 2006. The impact that the adoption of SFAS No. 154 will have on the Company's results of operations and financial condition will depend on the nature of future accounting changes adopted by the Company and the nature of transitional guidance provided in future accounting pronouncements. 2. CAPITAL TRANSACTIONS AND ID SYSTEMS ACQUISITION: ----------------------------------------------------- Our largest shareholder had been Dialoc ID Holdings B.V. ("Dialoc"). On April 19, 2004, Dialoc sold 39,066,927 Sentry common shares (representing approximately 46% of the total issued and outstanding common 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"). Effective January 1, 2005, the names of the acquired subsidiaries were changed to Sentry Technology Canada Inc. and Sentry Technology USA Inc. 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 became a distributor in Europe and Asia of labels manufactured by ID Systems' security label manufacturing subsidiary, Custom Security Industries Inc. ("CSI"). - - CSI acquired 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 acquired 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 fair values as of April 30, 2004, which were as follows: (in thousands) Cash $ 119 Accounts receivable 1,181 Inventories 1,263 Prepaid expenses and other current assets 754 Property and equipment 458 Deferred charges 69 Bank debt (998) Accounts payable and accrued liabilities (449) Other liabilities (843) ---------- Net tangible assets 1,554 Goodwill and other intangibles 1,834 ---------- Total purchase price $ 3,388 ========== Other intangible assets acquired ($270,000) included trade secrets ($150,000 - 10 year life), patents ($60,000 - 15 year life) and customer relationships ($60,000 - 5 year life). 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. Based on the Company's annual review, there was no impairment as of December 31, 2005. The accompanying consolidated statements of operations include the revenues and expenses of ID Systems from May 1, 2004. The following supplemental pro forma information illustrates the effects of the acquisition on the historical operating results for the years ended December 31, 2004 and 2003, as if the acquisition had occurred at the beginning of each respective period: 2004 2003 ---- ---- (Unaudited) (Unaudited) (In thousands, except per share data) ------------------------------------- Revenues $ 18,128 $ 19,566 Income (loss) before extraordinary item $ (92) $ (130) * Net income (loss) $ (92) $ 608 * Net income (loss) per share $ (0.00) $ 0.01 * The income (loss) before extraordinary item in the year ended December 31, 2003 includes an income tax benefit of $492,000 resulting from the utilization of net operating loss carryforwards. Net income in 2003 includes both the income tax benefit and the extraordinary gains of $738,000 from the extinguishment of debt. 3. 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. Effective November 2005, the entities changed their respective names to Brookfield Technology Fund and Brookfield Asset Management, (collectively referred to as, "Brookfield"). 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 Brookfield when market share price is equal to or greater than $0.17 per share or with the approval of Sentry's Board of Directors when the market share price is less than $0.17 per share. - - Sentry will provide most favored pricing to all Brookfield affiliates and expects to be a supplier of security and identification products to the Brookfield affiliates. - - Brookfield was issued warrants for 5,000,000 shares of Sentry common stock, priced at $0.15 per share, exercisable anytime within the next four years. - - Brookfield is entitled to one seat on Sentry's Board of Directors or will participate as an observer. The Debenture is secured by a general security interest over all the assets and properties of Sentry. The amount is subordinate to the existing Royal Bank of Canada credit facilities. The proceeds of the financing, to be used primarily for working capital, were initially 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 Brookfield. 4. INVENTORY: ---------
Inventories consist of the following: December 31, 2005 2004 (Audited) (Unaudited) ---------------------------- (In thousands) ---------------------------- Raw materials $ 1,101 $ 1,206 Work-in-process 279 292 Finished goods 1,329 1,816 --------------- ------ $ 2,709 $3,314 =============== ======
The components of inventory shown are net of reserves for excess and obsolete inventory totaling $1,261,000 and $1,528,000 as of December 31, 2004 and 2003, respectively. 5. PROPERTY AND EQUIPMENT: ------------------------ Property and equipment are stated at cost and are summarized as follows:
Estimated Useful Lives December 31, Years 2005 2004 (Audited) (Unaudited) ----------------------- (In thousands) ----------------------- Machinery and equipment 3 - 10 $ 2,362 $ 2,270 Furniture, fixtures and office equipment 3 - 10 2,360 2,349 Leasehold improvements 3 - 10 92 89 4,814 4,708 ----------- ---------- Less accumulated depreciation 4,177 4,019 ----------- ---------- $ 637 $ 689 =========== ==========
Net property and equipment located in Canada approximated $578,000 and $585,000 in 2005 and 2004. Depreciation expense on property and equipment in 2005, 2004 and 2003 totaled $154,000, $139,000 and $261,000, respectively. 6. ACCRUED LIABILITIES: --------------------
December 31, Accrued liabilities consist of the following: 2005 2004 (Audited) (Unaudited) ------------------------ (In thousands) ------------------------ Accrued salaries, employee benefits and payroll taxes $ 260 $ 333 Other accrued liabilities 665 813 ----------- --------- $ 925 $ 1,146 =========== =========
7. CREDIT FACILITIES: ------------------
Balances under credit facilities December 31, consist of the following: ======================= 2005 2004 (Audited) (Unaudited) ----------------------- (In thousands) ----------------------- Royal Bank of Canada $ 2,039 $ --- The CIT Group/Business Credit Inc. revolving credit --- 1,769 Bank of Montreal overdraft lending --- 734 Bank of Montreal non-revolving demand --- 137 --------- ------- $ 2,039 $ 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 ("RBC") for maximum borrowings of up to Canadian $4.5 million (U.S. $3.9 million), which are subject to certain limitations based on a percentage of eligible accounts receivable and inventories as defined in the agreement. Interest is payable at a rate of Royal Bank of Canada prime rate (5.0% at December 31, 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. As of December 31, 2005, the Company had excess borrowing capacity of approximately $0.5 million. As of the end of the third and fourth quarters of 2005, the Company failed to meet one of its financial covenants under the RBC agreement. Subsequent to year end, the Company received from RBC a tolerance of default and waiver of the covenant as of those dates. In addition, on January 23, 2006, the agreement was amended with regard to certain financial and reporting covenants and the interest rate increased to RBC prime rate plus 1.75%. The Company is presently in the final stages of negotiations with RBC to amend the credit agreement by further modifying certain financial covenants and by extending the term of the agreement through April 2007. In addition, while the maximum borrowing under the facility would remain the same, the Company has requested that RBC increase the borrowing availability to the Company by Canadian $1.0 million (U.S. $860,000) in exchange for additional security provided by two of the Company's directors. After conversations with RBC, management believes that these amendments will be approved in the near future. 8. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES: ---------------------------------------------- a. Capital leases --------------- The Company currently leases office equipment under non-cancelable capital leases with minimum annual rental commitments of $7,000 in 2006 and $1,000 in 2007. b. Operating leases ----------------- The Company leases certain administrative and manufacturing facilities and equipment under non-cancelable operating leases that expire at various dates through 2009. Rent expense related to operating leases for 2005, 2004 and 2003 was $283,000, $234,000 and 103,000 per year, respectively. Minimum annual rental commitments are $285,000 in 2006, $283,000 in 2007, $250,000 in 2008 and $190,000 in 2009. 9. COMMON SHAREHOLDERS' EQUITY: ----------------------------- a. Earnings Per Share ("EPS") ----------------------------- Basic EPS is determined by using the weighted average number of common shares outstanding during each period. Diluted EPS further assumes the issuance of common shares for all dilutive potential common shares outstanding. Options to purchase 2,431,524, 1,275,316 and 1,581,924 shares of common stock were outstanding at the end of 2005, 2004 and 2003, respectively, but were not included in the computation of diluted net loss per share because their effect would be antidilutive or immaterial. b. Stock options -------------- In February 1997, the Company adopted the 1997 Stock Incentive Plan of Sentry Technology Corporation (the "1997 Plan"). The 1997 Plan initially provided for grants up to 2,250,000 options to purchase the Company's common stock. Under the antidilution provisions of the 1997 Plan, as a result of the preferred stock redemption in January 2001, the shares available for grant were increased by 1,719,365 shares. In March 2001, the Board of Directors approved an additional increase of 3,600,000. In April 2004, in order to meet certain criteria for the Brookfield financing, the Board of Directors reduced the number of shares available for grant by 5,200,000. In August 2005, as a result of the increase in total authorized shares, the Board of Directors increased the number of shares available for grant by 4,000,000. The stock option committee may grant awards to eligible employees in the form of stock options, restricted stock awards, phantom stock awards or stock appreciation rights. Stock options may be granted as incentive stock options or nonqualified stock options. Such options normally become exercisable at a rate of 20% per year over a five-year period and expire ten years from the date of grant. However, the Saburah investment constituted a change in control under the 1997 Plan, resulting in the immediate vesting of all shares issued prior to May 1, 2004. All outstanding stock options are issued at not less than the fair value of the related common stock at the date of grant. At December 31, 2005, 2,431,524 common shares were reserved for issuance in connection with the exercise of stock options. Stock option transactions for the years ended December 31, 2005, 2004 and 2003 are as follows:
Weighted Average Number Exercise of Shares Price Balance, January 1, 2003 3,341,292 $ 0.69 Granted - - Exercised (2,000) 0.05 Canceled (1,757,368) 0.79 Balance, December 31, 2003 (Unaudited) 1,581,924 0.57 ----------- --------- Granted - - Exercised (3,000) 0.05 Canceled (303,608) 0.35 Balance, December 31, 2004 (Unaudited) 1,275,316 0.63 ----------- --------- Granted 1,525,000 0.10 Exercised (80,000) 0.05 Canceled (288,792) 0.34 ----------- --------- Balance, December 31, 2005 (Audited) 2,431,524 $ 0.35 ----------- ---------
Significant option groups outstanding at December 31, 2005 and related option price and life information were as follows:
Weighted Average Remaining Range of Number Contractual Number Exercise Price Outstanding Life Exercisable - --------------- ------------ ----------- ----------- 0.05 - 0.15 1,907,500 8.24 682,500 0.31 - 0.62 127,500 3.06 127,500 1.05 - 3.00 396,524 0.61 396,524 ---------- ------ ---------- 2,431,524 6.73 1,206,524
At December 31, 2005, options to purchase an aggregate of 1,206,524 common shares were vested and currently exercisable at a weighted average exercise price of $0.61 expiring through 2015. At December 31, 2005, options for 3,341,214 common shares were available for future grants. As discussed in Note 1, the Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, ("Accounting for Stock Issued to Employees and its related interpretations"). Accordingly, as all options have been granted at exercise prices equal to fair market value on the date of grant, no compensation expense has been recognized in the financial statements for employee stock arrangements. c. Warrants -------- Sentry currently has outstanding warrants for 6,725,000 common shares issued in connection with various financing arrangements. The warrants have exercise prices ranging from $0.15 to $0.20 and expire from April 29, 2007 through January 21, 2009. 10. INCOME TAXES: ------------- The reconciliation between total tax expense and the expected U.S. Federal income tax is as follows:
2005 2004 2003 --------------------------------- (Audited) (Unaudited) (Unaudited) (In thousands) --------------------------------- Expected tax provision (benefit) at 34% $ (537) $ 86 $ (357) Add: Nondeductible expenses 13 16 16 U.S. losses producing no tax benefit 524 6 - Use of net operating loss carry forwards to offset tax on extraordinary item - - (151) ------- ------ ------- $ 49 $ 140 $ (492)
As of December 31, 2005, the Company had net operating loss carryforwards of approximately $34 million, which expire through the year 2025. The utilization of these net operating loss carryforwards will likely be subject to substantial annual limitations imposed by the Internal Revenue Code Section 382. Significant components of deferred tax assets (liabilities) at December 31, 2005 and 2004 are comprised of:
Deferred Tax Assets (Liabilities) 2005 2004 ------------- --------------- (Audited) (Unaudited) (In thousands) --------------------------------- Assets: Accounts receivable $ 52 $ 112 Inventories 514 639 Accrued liabilities 100 98 Property and equipment 425 353 Net operating loss carryforwards 13,876 13,078 Gross deferred tax assets 14,967 14,280 Less valuation allowance 14,936 14,268 Deferred tax assets 31 12 ----------- -------- Liabilities: Property and equipment (83) (51) Other (19) -- Gross deferred tax liabilities (102) (51) ----------- -------- Less valuation allowance 13 -- Deferred tax liabilities (89) (51) ----------- -------- Net deferred tax liability $ (58) $ (39) ----------- --------
The increase in the valuation allowance for the years ended December 31, 2005, and 2004, was primarily attributable to the increase in net operating loss carryforwards. A valuation allowance has been recorded against the net deferred tax assets, because it is more likely than not that such asset will not be realized in the foreseeable future. The $49,000 and $142,000 income tax provisions for 2005, and 2004, respectively, is principally attributable to foreign taxes on Canadian operations. The $492,000 income tax benefit for 2003 represents the utilization of that period's loss from operations against the tax provision on the extraordinary gain from debt extinguishment. 11. EXTRAORDINARY ITEM - GAIN ON THE EXTINGUISHMENT OF DEBT: --------------------------------------------------------------- During 2003, the Company entered into a settlement with certain of its vendors for past due obligations. Under the terms of the settlement, each participating vendor received a note for approximately 10% of their balance due and two shares of Sentry common stock for each dollar owed in full satisfaction of their outstanding balances, which approximated $1,092,000. The notes, approximating $112,000, are non-interest bearing and are payable in three equal installments on January 15, 2004, 2005, and 2006. The 2,193,263 shares issued in connection with this settlement were valued at approximately $105,000, based on the market value of the stock at the time of the settlement. As a result of this transaction, the Company realized an extraordinary gain of $877,000 in 2003, representing 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. The Company made the first and second annual note payments. The third payment due January 2006 is currently on hold. 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 facility in Hauppauge, New York. Under terms of the settlement, Sentry was released from its current and future liabilities under the leases in exchange for a $250,000, 8% note, payable in 36 equal monthly installments of $7,834, including interest, commencing November 1, 2003. In addition, Sentry issued the landlord 1,000,000 shares of common stock, for which the fair value of the stock ($33,000) was determined using the closing price as of July 9, 2003. Sentry was also obligated to pay rent of $16,000 per month until it vacated the premises on September 30, 2003. The Company recognized a gain of $353,000 in 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. As a result of the Brookfield financing, Sentry was obligated to prepay an amount of $50,000 against the note in May 2004, which resulted in a reduction in the remaining monthly payments to $5,932. As of October 1, 2003, Sentry moved its corporate offices and distribution center to a 20,000 square foot facility in Ronkonkoma, New York. The Company entered into a three-year lease with an option to renew for an additional three year period. The current annual rent is $148,600. Sentry presently expects to exercise the renewal option as of October 1, 2006, at which time the annual rent for the next three years will increase to $160,000, 165,000 and $170,000, respectively. The $492,000 income tax provision recognized in 2003 on the extraordinary gains was offset by an equivalent income tax benefit generated from that periods' loss from operations and the utilization of net operating loss carryforwards. 12. 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 grant (valued at $3,000 and charged to interest and financing expenses). The warrant expires January 21, 2009. The note was repaid in full on April 30, 2004. On August 1, 2004, ID Systems and Checkpoint Systems Inc. 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 an 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 was 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 reimbursement of 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 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 sold to Saburah approximately 4.8 million shares for $641,000 on November 5, 2004. These transactions, totaling $1.4 million, represent the total cash flowing to Sentry directly and indirectly as a result of the Checkpoint lawsuit. In April 2006, Mr. Murdoch, Sentry's CEO and Director and Mr. Furst, a Sentry Director, agreed to provide a personal guarantee to RBC, the Company's lender, in the amount of Canadian $1 million (U.S. $860,000) in exchange for the bank providing increased availability under its credit facility to the Company by the same amount. In consideration of these guarantees, Mr. Murdoch and Mr. Furst will receive a fee of $43,000, to be shared between them, paid in 12 equal monthly installments. As additional consideration, they will receive fully vested, two year warrants to purchase between 2.9 million and 3.8 million shares of the Company's common stock, at an exercise price ranging between $0.075 and $0.10 per share, dependent upon certain stock market conditions. The fair value of these warrants will be recorded in accordance with SFAS No. 123R "Share-Based Payment" in the second quarter of 2006 and will be written off over the period of the guarantee. 13. COMMITMENTS AND CONTINGENCIES: ------------------------------- a. 401(k) Plan ------------ In January 1997, the Company adopted the Sentry Technology Corporation Retirement Savings 401(k) Plan (the "Plan"). The Plan permits eligible employees to make voluntary contributions to a trust, up to a maximum of 35% of compensation, subject to certain limitations. The Company may elect to contribute a matching contribution equal to a designated percentage of the eligible employee's deferral election. The Company may also make discretionary contributions, subject to certain conditions, as defined in the Plan. No Company contributions were made in 2005, 2004 or 2003. b. Employment agreements ---------------------- The Company and several key executives entered into employment agreements with remaining terms of one year for which the Company will have a minimum commitment of $423,000. Also, the president of the Company's 51% owned subsidiary, Custom Security Industries Inc., is entitled to receive 10% of its pretax profits. c. Litigation ---------- In August 2004, Bi-County Park Associates, Inc. d/b/a Ashlind Properties brought an action against the Company for the recovery of a real estate brokerage commission in the amount of $250,000 relating to the termination of its lease on its former Hauppauge facility. Management believes there is no merit to this claim and is actively defending such action. The Company is a party to litigation matters and claims, which are normal in the course of its operations. While the results of such litigation and claims cannot be predicted with certainty, management believes that the final outcome of such matters will not have a materially adverse effect on the Company's consolidated financial position, results of operations and cash flows. d. Distribution Agreements ------------------------ On March 31, 2004, the Company entered into a five-year distribution agreement with Dialoc under which the Company must purchase a minimum of $1.1 million of Dialoc's products each year. 14. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS: --------------------------------------------- The Company grants credit to customers who are principally in the retail industry and libraries. During 2005, revenues from Goody's represented approximately 10% of total revenues. During 2004 and 2003, revenues from Lowe's Home Center represented approximately 30% and 44% of total revenues, respectively. No other customer accounted for more than 10% of total revenues in 2005, 2004 and 2003. In January 2005, Lowe's Home Centers notified the Company that they would not be renewing their annual maintenance contract, which represented $850,000 of revenues in 2004. The annual maintenance contract had an impact on the selection of vendors for replacement and add-on CCTV business in existing Lowe's locations. The Company anticipates that this decision will result in a substantial decrease in future revenues from Lowe's on a comparative basis. Canadian revenues approximated $2,756,000, $2,322,000 and $247,000 in 2005, 2004 and 2003, respectively. 15. REVENUE BY PRODUCT LINE: --------------------------
Revenues by product line are as follows: 2005 2004 2003 ---------- --------- ---------- (Audited) (Unaudited) (Unaudited) (In thousands) ------------------------------------ EAS $ 6,490 $ 5,358 $ 1,914 CCTV 1,670 3,272 3,699 Sentry Vision 2,971 3,852 3,133 Service, installation and other revenues 2,439 4,381 4,497 --------- -------- -------- Total revenues $ 13,570 $16,863 $13,243
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - -------- ------------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------- None. ITEM 8A. CONTROLS AND PROCEDURES - --------------------------------- As of the end of the period covered by this report, our Company conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal controls, which are included within disclosure controls and procedures, during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls. ITEM 8B. OTHER INFORMATION - --------------------------- In August 2005, we dismissed our auditors, Holtz Rubenstein Reminick LLP ("Holtz"). Subsequent to the completion of the 2004 audit, Holtz submitted an invoice for excess charges related to our 2004 audit. We rejected the invoice for excess charges since we believed we were operating under a fixed fee contract with Holtz. As a result of what Holtz deems to be a fee dispute, Holtz has refused to consent to the use of their audit opinion for the consolidated balance sheet for the year ended December 31, 2004 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2004. We have attempted to settle this dispute but our offers have been rejected. We are investigating the available remedies. We have included the statements referred to above in the consolidated financial statements contained in this document. While these statements are the same as the prior year audited financial statements on which Holtz issued an unqualified opinion as of March 25, 2005, we have labeled them as "Unaudited" for purposes of this report. PART III -------- ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- --------------------------------------------------------- DIRECTORS The following sets forth information regarding the persons serving as Directors of Sentry: PETER L. MURDOCH, age 52, has been the President and Chief Executive Officer, Director and Chairman of the Board since January 8, 2001. Mr. Murdoch has extensive experience in the retail security industry as well as in the sales of technology-based products. He was Managing Director and President of ID Security Systems Canada, Inc. since its inception in 1987 until its acquisition by Sentry. From 1997 through 2004, he served as member of the management committee of Dialoc ID. Prior to joining ID Security Systems Canada, Inc., Mr. Murdoch was Vice President of Sales for Catalyst International Business Systems. He is an economics graduate from the University of Western Ontario. Mr. Murdoch's term as a Director expires at the next Annual Meeting. ROBERT D. FURST, JR., age 53, has been a Director of Sentry Technology since its inception. Prior thereto he was a Director of Video Sentry Corporation, our predecessor, from January 1993 until February 1997. He was Chairman of the Board of Video Sentry from July 1996 and Chief Executive Officer from August 1996 until February 1997. Mr. Furst was one of the original shareholders of Video Sentry. He is also a founder and managing principal of Alternative Strategy Advisers LLC, an alternative investment management firm. Mr. Furst is a member of the Chicago Board of Trade and has been a securities and commodities trader since 1980. Mr. Furst is a continuing director on the Board of Directors after the completion of the Dialoc ID Investment. Mr. Furst's term as a Director expires at the next Annual Meeting. JONATHAN G. GRANOFF, age 55, has been a Director of Sentry Technology since January 8, 2001. Mr. Granoff was appointed to the Board of Directors when it was expanded from five to seven members. Mr. Granoff is the President of the Global Security Institute and United Nations representative for Lawyers Alliance for World Security. He is also Chairman of the American Bar Association Committee on Arms Control and Disarmament. Mr. Granoff has been in the practice of law since 1979. Formerly Mr. Granoff served at Nutri Systems Inc. as an attorney and Director of Franchising. Mr. Granoff's term as a Director expires at the next Annual Meeting. EXECUTIVE OFFICERS The following sets forth information regarding the persons serving as executive officers of the Company: NAME AGE OFFICE - ---- --- ------ Peter L. Murdoch 52 President and Chief Executive Officer Our President and Chief Executive Officer since January 8, 2001. Mr. Murdoch has extensive experience in the retail security industry as well as in the sales of technology-based products. He was Managing Director of ID Security Systems Canada, Inc. since its inception in 1987. Beginning in 1997 he has served as member of the management committee of Dialoc ID. Prior to joining ID Security Systems Canada, Inc., Mr. Murdoch was Vice President of Sales for Catalyst International Business Systems. He is an economics graduate from the University of Western Ontario. NAME AGE OFFICE - ---- --- ------ Peter J. Mundy 49 Vice President-Finance and Chief Financial Officer Our Vice President-Finance and Chief Financial Officer. Mr. Mundy also serves as our Secretary and Treasurer. Mr. Mundy was Vice President - Finance, Chief Financial Officer, Secretary and Treasurer of Knogo North America Inc. from December 1994. Prior thereto, Mr. Mundy served as an officer of Knogo Corporation where he was Vice President - Corporate Controller from May 1994 and, prior to such time, Corporate Controller and Controller since 1982. Mr. Mundy is a Certified Public Accountant. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's officers, Directors and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, Directors and greater than ten-percent Stockholders are required by Securities and Exchange Commission regulations to furnish the Company with copies of all such reports they file. Based solely on a review of the copies of reports furnished to the Company, or written representations that no Forms 5 were required, the Company believes that during the fiscal year ended December 31, 2005, all Section 16(a) filing requirements applicable to its officers, Directors and greater than ten-percent beneficial owners were complied with, except the following. Robert D. Furst, Jr., a member of the Board, filed a late report on Form 4 on January 28, 2005 with the SEC, for the sale of 400,000 shares of the Company's common stock at prices ranging from $0.225 per share to $0.26 per share, which sales occurred on January 25, 2005. AUDIT COMMITTEE FINANCIAL EXPERT We do not have a separate audit committee and therefore the Board of Directors in its entirety functions as the audit committee. We have at least one audit committee financial expert serving on our Board of Directors, Mr. Robert Furst. CODE OF ETHICS We have adopted a written Code of Ethics that applies to all of our directors, officers and employees. A copy of our Code of Ethics is available on our website at www.sentrytechnology.com and print copies are available to any shareholder that requests a copy. Any amendment to the Code of Ethics or any waiver of the Code of Ethics will be disclosed on our website at www.sentrytechnology.com promptly following the date of such amendment or waiver. ITEM 10. EXECUTIVE COMPENSATION. - ---------------------------------- SUMMARY COMPENSATION TABLE The following table summarizes the compensation for our fiscal years ended December 31, 2005 of our Chief Executive Officer and Chief Financial Officer:
LONG-TERM ALL OTHER ANNUAL COMPENSATION COMPENSATION COMPENSATION -------------------- ------------- ------------------- NAME AND SECURITIES UNDERLYING PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) - ----------------------- ---- -------------------- --------------------- ------------------- Peter L. Murdoch 2005 $178,275 - - - President and CEO 2004 237,500 (1) - - - 2003 50,000 - - - Peter J. Mundy 2005 136,013 - - - Vice President - CFO, 2004 131,160 - - - Secretary and Treasurer 2003 131,160 - - -
(1) Includes amounts paid by ID Systems in 2004 and $62,500 of Sentry salary deferred from 2002. As to various items of personal benefits, we have concluded that the aggregate amount of such benefits with respect to each individual does not exceed the lesser of $50,000 or 10% of the annual salary and bonus reported in the table for such individual. OPTIONS GRANTED IN LAST FISCAL YEAR No options were granted to executive officers in 2005. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table sets forth for each of the persons named in the Summary Compensation Table the number of options exercised during 2005 and the amount realized by each such officer. In addition, the table shows the number of options that the named executive officer held as of December 31, 2004, both exercisable (E) and unexercisable (U), and the value of such options as of that date.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN OPTIONS AT YEAR-END THE MONEY OPTIONS AT (#) YEAR END ($) SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE - ---------------- ------------ ------------ ---------------------- ----------------------- Peter L. Murdoch - - E - E - U - U - Peter J. Mundy - - E 444,632 E $3,900 U - U -
COMPENSATION OF DIRECTORS Directors who are also our full-time employees receive no additional compensation for their services as Directors. Each Director and Brookfield Technology Fund, in its capacity as an Observer, received an annual retainer of $5,000 for 2005. In addition, each non-employee Director is eligible to participate in our 1997 Stock Incentive Plan. In March 2005, Mr. Furst, Mr. Granoff and the Brookfield Technology Fund each received options to purchase 50,000 shares of our common stock at an exercise price of $0.15 per share, which was the market price on the date of grant. The options were exercisable immediately and expire after 10 years. No options were awarded to Directors during 2004 and 2003. EMPLOYMENT AGREEMENTS AND COMPENSATION OF EXECUTIVE OFFICERS; CHANGE OF CONTROL ARRANGEMENTS The Board set Peter L. Murdoch's compensation, in the capacity of President, at an annual salary of approximately $178,000, in 2005, $175,000 in 2004 and $50,000 in 2003. Our Board of Directors approves the compensation paid to our other executive officers, approving or disapproving the recommendation of the Chief Executive Officer. The Board of Directors also determines the amount of shares and exercise prices for any stock option grants under our 1997 Stock Incentive Plan, and the amount of our matching contribution percentage under our Retirement Savings 401(k) Plan, respectively. Currently, Mr. Mundy is compensated pursuant to a written employment agreement providing for his base salary. This agreement provides for annual salary increases intended to maintain his base salary against increases in the cost of living as measured by the United States Department of Labor. Mr. Mundy waived these increases for the years 2003 and 2004. The employment agreement for Mr. Mundy renews automatically on May 1 for one-year terms. His annual salary for 2006 is presently $140,664. The employment agreement for Mr. Mundy also provides that in the event of a change in control, the term of his employment will be automatically extended for a period of one year, following the date of such change in control. Following such change in control, Mr. Mundy will have the right to terminate his employment for good reason, as defined, while continuing to receive the salary and bonus otherwise payable thereunder for the remainder of the employment term. Additionally, the employment agreement provides that in the event of a change in control all options held by Mr. Mundy, whether or not then vested, would fully vest. If the change in control was not approved by a majority of the Existing Directors (as defined in our Certificate of Incorporation), he would be entitled to receive, for each option for which the exercise price is less than the market price of our common stock, cash in cancellation of such options in an amount equal to such difference. [GRAPHIC OMITED]
PERFORMANCE CHART ----------------- 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 ------------------------------------------------------------- Sentry Technology Corporation $ 100 $ 13 $ 90 $ 123 $ 61 S&P 600 Small Cap Index $ 100 $ 85 $ 116 $ 142 $ 151 S&P Elec. Equip. Index $ 100 $ 48 $ 81 $ 75 $ 75
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ---------------------------------------------------------------------- The following table sets forth the beneficial ownership of our common stock at April 12, 2006, as to each (i) beneficial owner of five percent or more of the common stock, (ii) Sentry Director, (iii) executive officer of Sentry, and (iv) all Directors and executive officers as a group. On April 12, 2006, 120,728,804 shares of common stock were outstanding .
NAME AND ADDRESS OF BENEFICIAL OWNERS - -------------------------------------------------- SHARES OF PERCENT DIRECTORS AND EXECUTIVE OFFICERS COMMON STOCK OF CLASS (1) - -------------------------------------------------- ------------ ------------ Peter L. Murdoch (5) 59,715,096 (2) 49.5% c/o Saburah Investments Inc. 37 Voyager Court North Toronto, Ontario M9W 4Y2 Robert D. Furst, Jr. 16,368,714 (3) 13.5% c/o Alternative Strategies Advisors LLC 601 Carlson Parkway, Suite 610 Minnetonka, MN 55305 Peter J. Mundy 449,069 (4) * Jonathan G. Granoff 140,000 (5) * All Sentry Directors and executive officers as a group (4 persons) 76,664,776 (6) 63.1%
___________________ * Less than one percent 1) Based on 120,728,804 shares of common stock outstanding as of April 12, 2006. Each figure showing the percentage of outstanding shares beneficially owned has been calculated by treating as outstanding and owned the shares of common stock that could be purchased by the indicated person within 60 days upon the exercise of stock options. 2) Includes 57,553,596 shares of common stock held by Saburah Investments Inc. of which Mr. Murdoch is the 100% owner. 3) Includes 404,000 shares of common stock issuable upon the exercise of stock options or warrants exercisable within 60 days of the date hereof. Mr. Furst also holds a warrant to purchase 2,500,000 common shares from Saburah investments Inc., which are excluded from the shares owned. Shares subject to this warrant will be issued from shares currently owned by Saburah. 4) Includes 245,000 shares of common stock issuable upon the exercise of stock options exercisable within 60 days from the date hereof. 5) Includes 80,000 shares of common stock exercisable upon the exercise of stock options exercisable within 60 days from the date hereof. 6) Includes 729,000 shares of common stock issuable upon the exercise of stock options and warrants exercisable within 60 days from the date hereof. - ------ ITEM 12.CERTAIN RELATIONSHIPS AND RELATED 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 grant (valued at $3,000 and charged to interest and financing expenses). The warrant expires January 21, 2009. The note was repaid in full on April 30, 2004. On August 1, 2004, ID Systems and Checkpoint Systems Inc. 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 an 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 was 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 reimbursement of 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 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 sold to Saburah approximately 4.8 million shares for $641,000 on November 5, 2004. These transactions, totaling $1.4 million, represent the total cash flowing to Sentry directly and indirectly as a result of the Checkpoint lawsuit. In April 2006, Mr. Murdoch, Sentry's CEO and Director and Mr. Furst, a Sentry Director, agreed to provide personal guarantees to RBC, the Company's lender, in the amount of Canadian $1 million (U.S. $860,000) in exchange for the bank providing increased availability under its credit facility to the Company by the same amount. For these guarantees, Mr. Murdoch and Mr. Furst will receive a fee of $43,000 to be paid in 12 equal monthly installments, and fully vested, two year warrants for between 2.9 million and 3.8 million common shares, dependent upon certain stock market conditions. The fair value of these warrants will be recorded in accordance with SFAS No. 123R "Share-Based Payment" in the second quarter of 2006 and will be written off over the period of the guarantee. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K - ------------------------------------------------ 2.1 Amended and Restated Agreement and Plan of Reorganization and Merger, dated as of November 27, 1996 among Video Sentry Corporation, Knogo North America Inc., Sentry Technology Corporation, Viking Merger Corp. and Strip Merger Corp., as amended by Amendment No. 1 to Amended and Restated Agreement and Plan of Reorganization and Merger, dated as of January 10, 1997. Incorporated by reference to Exhibit 2.1 to Company's Registration Statement on Form S-4 (No. 333-20135). 2.2 Plan of Merger, merging Sentry Technology Corporation, a Delaware corporation into Knogo North America, Inc., a Delaware corporation, to be effective as of January 1, 2005. 2.3 Certificate of Merger, merging Sentry Technology Corporation, a Delaware corporation into Knogo North America, Inc., a Delaware corporation, effective date January 1, 2005, as filed with the Delaware Secretary of State on April 26, 2005. 2.4 Stock Purchase Agreement, dated April 29, 2004, by and between Sentry Technology Corporation and Saburah Investments, Inc. Incorporated by reference to Exhibit 2.1 to Company's Current Report on Form 8-K dated July 14, 2004. 3.1 Amended and Restated Certificate of Incorporation of Sentry Technology Corporation, as filed with the Delaware Secretary of State on April 26, 2005. 3.2 Certificate of Amendment of Certificate of Incorporation of Sentry Technology Corporation, as filed with the Delaware Secretary of State on May 27, 2005. 3.3 Amended and Restated Bylaws of the Company. 4.1 Convertible Debenture, dated April 30, 2004, issued by Sentry Technology Corporation to Brascan Technology Fund, Inc. Incorporated by reference to Exhibit 2.1 to Company's Current Report on Form 8-K dated July 14, 2004. 4.2 Warrant Certificate, dated April 30, 2004, issued by Sentry Technology Corporation to Brascan Technology Fund, Inc. Incorporated by reference to Exhibit 2.1 to Company's Current Report on Form 8-K dated July 14, 2004. 4.3 Stakeholders Rights Agreement, dated April 30, 2004, by and among Sentry Technology Corporation, Peter Murdoch, Robert Furst, Saburah Investments Inc., and Brascan Technology Fund Inc. Incorporated by reference to Exhibit 2.1 to Company's Current Report on Form 8-K dated July 14, 2004. 10.1 1997 Stock Incentive Plan. Incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-4 (No. 333-20135). 10.2 Retirement Savings 401(k) Plan. Incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-4 (No. 333-20135). 10.3 Employment Agreement, dated as of February 12, 1997, between the Company and Peter J. Mundy. Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-4 (No. 333-20135). 10.4 Contribution and Divestiture Agreement dated December 29, 1994 between Knogo Corporation and Knogo North America Inc. Incorporated by reference to Exhibit 10.8 to the Company's annual report on Form 10-K for fiscal 1997. 10.5 License Agreement dated December 29, 1994 between Knogo Corporation and Knogo North America Inc. Incorporated by reference to Exhibit 10.9 to the Company's annual report on Form 10-K for fiscal 1997. 10.6 Stipulation of Settlement and Lease Termination dated July 29, 2003 between Knogo North America Inc. and NOG (NY) QRS 12-23, Inc. Incorporated by reference to Exhibit 10.34 to the Company's Quarterly Report on Form 10-Q dated November 4, 2003. 10.7 Distribution Agreement, dated January 8, 2001, between Sentry and Dialoc ID, incorporated by reference to Exhibit B of Exhibit 10.1 to the Company's Current Report on Form 8-K, dated August 10, 2000. 10.8 Lease Agreement dated September 16, 2003 between Sentry Technology Corporation and G & J Lakeland Realty Corp. Incorporated by reference to Exhibit 10.34 to the Company's Quarterly Report on Form 10-QSB dated November 4, 2003. 10.9 Forbearance Agreement between The CIT Group/Business Credit, Inc. and Knogo North America Inc., dated December 8, 2003. Incorporated by reference to Exhibit 10.36 to the Company's annual report on Form 10-KSB for fiscal 2003. 10.10 Amendment to Forbearance Agreement and Financing Agreement between The CIT Group/Business Credit, Inc. and Knogo North America Inc., dated December 30, 2004. Incorporated by reference to Exhibit 10.37 to the Company's annual report on Form 10-KSB for fiscal 2004. 10.11 Credit Facility Letter Agreement between Sentry Technology Canada Inc. and Royal Bank of Canada dated April 19, 2005. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated May 18, 2005. 10.12 Amendment to Credit Facility Letter Agreement between Sentry Technology Canada Inc. and Royal Bank of Canada dated May 12, 2005. Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated May 18, 2005. 10.13 Postponement and Subordination Agreement between Brascan Technology Fund, Royal Bank of Canada and Sentry Technology Canada Inc. dated May 12, 2005. Incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, dated May 18, 2005. 10.14 Amendment to Credit Facility Letter Agreement between Sentry Technology Canada Inc. and Royal Bank of Canada dated January 23, 2006. 14 Code of Ethics. 21 Subsidiaries of the Company. 23.1 Consent of SF Partnership, LLP. 31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by the 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-B, this exhibit shall not be deemed "filed" for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. (b) Reports on Form 8-K. There were no Forms 8-K filed by the registrant during the fourth quarter of 2005. - ------ ITEM 14.PRINCIPAL ACCOUNTANTS FEES AND SERVICES - ---------------------------------------------------- The Company's board of directors reviews and approves audit and permissible non-audit services performed by its independent accountants, as well as the fees charged for such services. In its review of non-audit service fees and its appointment of SF Partnership, LLP as the Company's independent accountants, the board of directors considered whether the provision of such services is compatible with maintaining independence. The board of directors approved all of the services provided and fees charged by SF Partnership, LLP in 2005. AUDIT FEES The aggregate fees billed by for professional services for the audit of the annual financial statements of the Company and the reviews of the financial statements included in the Company's quarterly reports on Form 10-QSB in 2005 were $65,000 by SF Partnership, LLP. In 2005, 2004 and 2003 the amounts paid to Holtz Rubenstein Reminick LLP, our predecessor auditors, were $15,000, $104,000 and $58,000, respectively, net of expenses. AUDIT-RELATED FEES There were $2,000 of other fees billed by SF Partnership, LLP in 2005 and $33,000 and $9,000 of other fees billed by Holtz Rubenstein Reminick during 2004 and 2003, respectively, for assurance and related services that were reasonably related to the performance of the audit or review of the Company's financial statements and not reported under "Audit Fees" above. TAX FEES There were no other fees billed by our independent auditors during the last two fiscal years for tax compliance. ALL OTHER FEES There were no other fees billed by our independent auditors during the last two fiscal years for products and services provided. Holtz Rubenstein Reminick LLP had served as the Company's independent public accountants since December 30, 2002. Holtz Rubenstein Reminick LLP 's report on the Company's consolidated financial statements for the fiscal years ended December 31, 2004 and 2003 did not contain an adverse opinion or disclaimer of opinion, nor was such report qualified or modified as to uncertainty, audit scope or accounting principles. During the year ended December 31, 2004, and the interim period ended August 1, 2005, there were no disagreements between the Company and Holtz Rubenstein Reminick LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Holtz Rubenstein Reminick LLP 's satisfaction, would have caused it to make reference to the subject matter in connection with its report on the Company's consolidated financial statements for such year; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-B. During the year ended December 31, 2004, and the interim period ended August 1, 2005, the Company did not consult SF Partnership LLP with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or (ii) any matter that was either the subject of a disagreement, within the meaning of Item 304(a)(1)(iv) of Regulation S-B, or any "reportable event," as that term is defined in Item 304(a)(1)(v) of Regulation S-B. SIGNATURES: - ----------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SENTRY TECHNOLOGY CORPORATION By: /s/ Peter J. Mundy --------------------- Peter J. Mundy Vice President-Finance, Chief Financial Officer, Secretary and Treasurer Dated: April 13, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-KSB has been signed below by the following persons in the capacities and on the date indicated. Signature Title - --------- ----- /s/ Peter L. Murdoch Chief Executive Officer and Director - ----------------------- Peter L. Murdoch /s/ Peter J. Mundy Vice President-Finance, - --------------------- Chief Financial and Accounting Officer Peter J. Mundy Secretary and Treasurer /s/ Robert D. Furst, Jr. Director - ---------------------------- Robert D. Furst, Jr. /s/ Jonathan G. Granoff Director - -------------------------- Jonathan G. Granoff Dated: April 13, 2006 EXHIBIT INDEX 2.2 Plan of Merger, merging Sentry Technology Corporation, a Delaware corporation into Knogo North America, Inc., a Delaware corporation, to be effective as of January 1, 2005. 2.3 Certificate of Merger, merging Sentry Technology Corporation, a Delaware corporation into Knogo North America, Inc., a Delaware corporation, effective date January 1, 2005, as filed with the Delaware Secretary of State on April 26, 2005. 3.1 Amended and Restated Certificate of Incorporation of Sentry Technology Corporation, as filed with the Delaware Secretary of State on April 26, 2005. 3.2 Certificate of Amendment of Certificate of Incorporation of Sentry Technology Corporation, as filed with the Delaware Secretary of State on May 27, 2005. 3.3 Amended and Restated Bylaws of the Company. 10.14 Amendment to Credit Facility Letter Agreement between Sentry Technology Canada Inc. and Royal Bank of Canada dated January 23, 2006. 14 Code of Ethics. 21 Subsidiaries of the Company 23.1 Consent of SF Partnership, LLP. 31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by the 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. *** EX-2.2 2 planofmergerskvyintoknogo.txt PLAN OF MERGER - SENTRY TECHNOLOGY CORP. INTO KNOGO NORTH AMERICA EXHIBIT 2.2 PLAN OF MERGER OF SENTRY TECHNOLOGY CORPORATION, a Delaware corporation WITH AND INTO KNOGO NORTH AMERICA INC., a Delaware Corporation Background ---------- WHEREAS, Knogo North America Inc. (the "Knogo") was originally incorporated as a business corporation under the laws of the State of Delaware on October 8, 1996, with the registered address of c/o The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801; and WHEREAS, Sentry Technology Corporation ("Sentry") was originally incorporated as a business corporation under the laws of the State of Delaware on October 8, 1996 with the registered address of c/o The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801; and WHEREAS, it has been proposed that Sentry be merged with and into Knogo pursuant to the Delaware General Corporation Law, Title 8, Section 253, and this Plan of Merger, subject to the approval of this Plan of Merger by the board of directors and stockholders of Knogo and the board of directors and stockholders of Sentry. Terms ----- 1. Merger and Change of Name. Upon the Effective Date (as defined in ------------------------- Section 6.2 below) of the merger, Sentry shall be merged with and into Knogo and, thereafter, the separate existence of Sentry shall cease and Knogo shall continue in existence under and subject to the laws of the State of Delaware (the "Merger"). Effective upon the Merger, pursuant to Delaware General Corporation Law, Title 8, Section 253(b), Knogo's corporate name shall be changed to Sentry Technology Corporation (the "Name Change"). The surviving corporate entity, upon completion of the Merger and Name Change, shall hereinafter be referred to as the "Surviving Corporation". 2. Certificate of Incorporation and By-laws of Surviving Corporation. ----------------------------------------------------------------- 2.1 On the Effective Date, the Certificate of Incorporation of Knogo as in effect on the date hereof shall be amended and restated as provided in Exhibit A attached hereto, and once amended and restated, shall remain in effect as the Certificate of Incorporation of the Surviving Corporation following the Merger, until thereafter altered, amended or repealed as therein provided or as permitted by law. 2.2 On the Effective Date, the By-laws of Knogo, as in effect on the date hereof, shall be amended and restated as provided in Exhibit B attached hereto, and once amended and restated, shall remain in effect as the By-laws of the Surviving Corporation following the Merger, until thereafter altered, amended or repealed as provided therein. 3. Manner of Conversion of Sentry Shares into Surviving Corporation ----------------------------------------------------------------- Shares. - ------ 3.1 On the Effective Date, all shares of common stock in Knogo and Sentry shall be deemed shares of the common stock of the Surviving Corporation. 4. Effect of Merger. ---------------- 4.1 Upon the Effective Date: 4.1.1 Sentry and Knogo shall become a single entity which shall be the Surviving Corporation, and shall do business under the name of Sentry Technology Corporation, and the separate existence of Knogo and Sentry shall cease; 4.1.2 All and singular, the rights, privileges, powers and franchises of Sentry and Knogo, and all property, real, personal and mixed, and all debts due to either of Sentry or Knogo on whatever account, as well as for all things in action or belonging to each of said entities shall be vested in the Surviving Corporation without further act or deed; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of Sentry and Knogo, respectively, and the title to any real estate vested by deed or otherwise in either of said entities shall not revert or be in any way impaired; 4.1.3 All rights of creditors and all liens upon any property of any of Sentry or Knogo shall be preserved unimpaired, and all fees, debts, liabilities, taxes, obligations and duties of either of Sentry or Knogo shall thenceforth attach to the Surviving Corporation, and may be enforced against it to the same extent as if said debts, liabilities, taxes and duties had been incurred or contracted by it; and 4.2 From and after the Effective Date, the officers and directors of the Surviving Corporation shall execute or cause to be executed such further assignments, assurances or other documents as the Surviving Corporation or its successors and assigns may reasonably determine to be necessary or desirable to confirm the transfer of title and ownership of Sentry's and Knogo's properties and rights to the Surviving Corporation or to otherwise carry out the purposes of this Plan. 5. Directors and Officers of Surviving Corporation. ----------------------------------------------- 5.1 The Directors of Sentry on the Effective Date shall continue as the Directors of the Surviving Corporation and shall hold office until their respective successors are duly elected and qualified. 5.2 The officers of Sentry on the Effective Date shall be and continue as the officers of the Surviving Corporation and shall hold office until their respective successors are duly elected and qualified. 6. Adoption of Plan of Merger. -------------------------- 6.1 This Plan of Merger shall be submitted for approval to the board of directors of Knogo and the board of directors of Sentry and shall be effective as of the Effective Date, subject to such approval and subsequent adoption by the stockholders of Knogo and the stockholders of Sentry and the filing of a certificate of merger as hereinafter provided. Upon such approval and adoption, a certificate of merger shall be prepared, executed and filed in the Office of the Secretary of State of Delaware in accordance with the applicable provisions of the Delaware General Corporation Law. 6.2 The Merger provided for by this Agreement shall become effective on January 1, 2005 (the "Effective Date"). 7. Binding Agreement. This Plan of Merger may be terminated by the ----------------- board of directors of Knogo or the board of directors of Sentry at any time prior to the filing of the certificate of merger as set forth above. Upon the filing of the certificate of merger, this Plan of Merger shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. EX-2.3 3 certofmergerskvyintoknogo.txt CERTIFICATE OF MERGER SENTRY TECHNOLOGY INTO KNOGO NORTH AMERICA EXHIBIT 2.3 CERTIFICATE OF MERGER MERGING SENTRY TECHNOLOGY CORPORATION, a Delaware corporation INTO KNOGO NORTH AMERICA INC., a Delaware Corporation * * * * * * * The undersigned entities, pursuant to the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware Act") hereby execute the following Certificate of Merger: FIRST: That Sentry Technology Corporation, a corporation organized and existing under the laws of the State of Delaware ("Sentry"), was incorporated on the 8th day of October, 1996, pursuant to the Delaware Act and under the general laws of the State of Delaware. That Knogo North America Inc., a corporation organized and existing under the laws of the State of Delaware ("Knogo"), was incorporated on the 8th day of October, 1996, pursuant to the Delaware Act and under the general laws of the State of Delaware. SECOND: That a Plan of Merger has been approved, adopted, certified, executed and acknowledged by Sentry and Knogo in accordance with Section 251 of the Delaware Act. THIRD: That Knogo North America Inc., the surviving entity, shall hereby change its name to Sentry Technology Corporation. FOURTH: That the Certificate of Incorporation of the surviving entity is hereby amended and restated in full, and shall be the Certificate of Incorporation of the surviving corporation. FIFTH: That the executed Plan of Merger is on file at the principal place of business of Knogo, at 1881 Lakeland Avenue, Ronkonkoma, New York 11779. SIXTH: That a copy of the Plan of Merger shall be furnished on request and without cost to any stockholder of either Knogo or Sentry. SEVENTH: That all of the issued and outstanding shares of Knogo voted for the Plan of Merger; and a majority of the issued and outstanding shares of Sentry voted for the Plan of Merger. EIGHTH: That the merger shall be effective as of January 1, 2005, for accounting purposes only (the "Effective Date"); provided, however, that this Certificate of Merger may be amended and/or the merger terminated and abandoned by the Board of Directors of Knogo at any time prior to the date of filing of this certificate of merger with the Secretary of State of Delaware. IN WITNESS WHEREOF, Knogo and Sentry have caused this Certificate of Merger to be signed this 22nd day of March, 2005. ATTEST: KNOGO NORTH AMERICA INC. a Delaware corporation By: /s/ Lorie Leliever By: /s/ Peter L. Murdoch ------------------- ----------------------- Name: Peter L. Murdoch Title: President and CEO ATTEST: SENTRY TECHNOLOGY CORPORATION a Delaware corporation By: /s/ Lorie Leliever By: /s/ Peter L. Murdoch -------------------- ----------------------- Name: Peter L. Murdoch Title: President and CEO EX-3.1 4 amendedcertofinc.txt AMENDED AND RESTATED CERTIFICATE OF INCORPORATION FOR SENTRY TECHNOLOGY CORP. EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SENTRY TECHNOLOGY CORPORATION It is hereby certified that: 1. The present name of the corporation (hereinafter called the "Company") is Sentry Technology Corporation, the Company was originally incorporated under the name Strip Merger Corp., Inc.; and the date of filing the original certificate of incorporation of the Company with the Secretary of State of the State of Delaware is October 8, 1996. 2. The provisions of the certificate of incorporation of the Company as heretofore amended and/or supplemented, and as herein amended, are hereby restated and integrated into the single instrument which is hereinafter set forth, and which is entitled Restated Certificate of Incorporation of Sentry Technology Corporation without any further amendment other than the amendment herein certified and without any discrepancy between the provisions of the certificate of incorporation as heretofore amended and supplemented and the provisions of the said single instrument hereinafter set forth. 3. The amendment and the restatement of the restated certificate of incorporation herein certified have been duly adopted by the stockholders in accordance with the provisions of Section 242 and of Section 245 of the General Corporation Law of the State of Delaware. 4. Effective as of January 1, 2005, for accounting purposes only, the certificate of incorporation of the Company, as amended and restated herein, shall read as follows: AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SENTRY TECHNOLOGY CORPORATION FIRST. The name of the corporation is SENTRY TECHNOLOGY CORPORATION (the "Company"). SECOND. The address of the Company's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of the Company's registered agent at such address is The Corporation Trust Company. THIRD. The purpose of the Company is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. Section 1. Authorized Capital Stock. The Company is authorized to ------------------------ issue two classes of capital stock, designated Common Stock and Preferred Stock. The total number of shares of capital stock that the Company is authorized to issue is 150,000,000 shares, consisting of 140,000,000 shares of Common Stock, par value $0.001 per share, and 10,000,000 shares of Preferred Stock, par value $0.001 per share, the designations, rights and preferences of which are set forth in Section 2, below. Section 2. Preferred Stock. The Preferred Stock may be issued --------------- in one or more series. The Board of Directors of the Company (the "Board") is hereby authorized to issue the shares of Preferred Stock in such series and to fix from time to time before issuance the number of shares to be included in any such series and the designation, relative powers, preferences, and rights and qualifications, limitations, or restrictions of all shares of such series. The authority of the Board with respect to each such series will include, without limiting the generality of the foregoing, the determination of any or all of the following: (a) the number of shares of any series and the designation to distinguish the shares of such series from the shares of all other series; (b) the voting powers, if any, and whether such voting powers are full or limited in such series; (c) the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid; (d) whether dividends, if any, will be cumulative or noncumulative, the dividend rate of such series, and the dates and preferences of dividends on such series; (e) the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Company; (f) the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock, or any other security, of the Company or any other corporation or other entity, and the price or prices or the rates of exchange applicable thereto; (g) the right, if any, to subscribe for or to purchase any securities of the Company or any other corporation or other entity; (h) the provisions, if any, of a sinking fund applicable to such series; and (i) any other relative, participating, optional, or other special powers, preferences, rights, qualifications, limitations, or restrictions thereof; all as may be determined from time to time by the Board and stated in the resolution or resolutions providing for the issuance of such Preferred Stock (collectively, a "Preferred Stock Designation"). Section 3. Common Stock. Except as may otherwise be provided in a ------------- Preferred Stock Designation, the holders of Common Stock will be entitled to one vote on each matter submitted to a vote at a meeting of stockholders for each share of Common Stock held of record by such holder as of the record date for such meeting. FIFTH. The Board may make, amend, and repeal the By-Laws of the Company. Any By-Law made by the Board under the powers conferred hereby may be amended or repealed by the Board or by the stockholders in the manner provided in the By-Laws of the Company. Notwithstanding the foregoing and anything contained in this Amended and Restated Certificate of Incorporation to the contrary, By-Laws 3, 8, 10, 11, 12, 13, and 39 may not be amended or repealed by the stockholders, and no provision inconsistent therewith may be adopted by the stockholders, without the affirmative vote of the holders of at least 80% of the Voting Stock, voting together as a single class. The Company may in its By-Laws confer powers upon the Board in addition to the foregoing and in addition to the powers and authorities expressly conferred upon the Board by applicable law. For the purposes of this Amended and Restated Certificate of Incorporation, "Voting Stock" means stock of the Company of any class or series entitled to vote generally in the election of Directors. Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the Voting Stock, voting together as a single class, is required to amend or repeal, or to adopt any provisions inconsistent with, this Article Fifth. SIXTH. Subject to the rights of the holders of any series of Preferred Stock: (a) any action required or permitted to be taken by the stockholders of the Company must be effected at a duly called annual or special meeting of stockholders of the Company and may not be effected by any consent in writing of such stockholders; and (b) special meetings of stockholders of the Company may be called only by (i) the Chairman of the Board (the "Chairman") or (ii) the Secretary of the Company (the "Secretary") within 10 calendar days after receipt of the written request of a majority of the total number of Directors which the Company would have if there were no vacancies (the "Whole Board"). At any annual meeting or special meeting of stockholders of the Company, only such business will be conducted or considered as has been brought before such meeting in the manner provided in the By-Laws of the Company. Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of at least 80% of the Voting Stock, voting together as a single class, will be required to amend or repeal, or adopt any provision inconsistent with, this Article Sixth. SEVENTH. Section 1. Number, Election, and Terms of Directors. Subject to ----------------------------------------- the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, the number of the Directors of the Company will not be less than three nor more than 12 and will be fixed from time to time in the manner described in the By-Laws of the Company. The Directors, other than those who may be elected by the holders of any series of Preferred Stock, will be classified with respect to the time for which they severally hold office into three classes, as nearly equal in number as possible, designated Class I, Class II, and Class III. The Directors first appointed to Class I will hold office for a term expiring at the first annual meeting of stockholders to be held following the filing of this Certificate; the Directors first appointed to Class II will hold office for a term expiring at the second annual meeting of stockholders to be held following the filing of this Certificate; and the Directors first appointed to Class III will hold office for a term expiring at the third annual meeting of stockholders to be held following the filing of this Certificate, with the members of each class to hold office until their successors are elected and qualified. At each succeeding annual meeting of the stockholders of the Company, the successors of the class of Directors whose terms expire at that meeting will be elected by plurality vote of all votes cast at such meeting to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. Election of Directors of the Company need not be by written ballot unless requested by the Chairman or by the holders of a majority of the Voting Stock present in person or represented by proxy at a meeting of the stockholders at which Directors are to be elected. Section 2. Nomination of Director Candidates. Advance notice of stockholder --------------------------------- nominations for the election of Directors must be given in the manner provided in the By-Laws of the Company. Section 3. Newly Created Directorships and Vacancies. Subject to the ----------------------------------------- rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, newly created directorships resulting from any increase in the number of Directors and any vacancies on the Board resulting from death, resignation, disqualification, removal, or other cause will be filled solely by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board, or by a sole remaining Director. Any Director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director's successor has been elected and qualified. No decrease in the number of Directors constituting the Board may shorten the term of any incumbent Director. Section 4. Removal. Subject to the rights, if any, of the holders of any ------- series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, any Director may be removed from office by the stockholders only for cause and only in the manner provided in this Section 4. At any annual meeting or special meeting of the stockholders, the notice of which states that the removal of a Director or Directors is among the purposes of the meeting, the affirmative vote of the holders of at least 80% of the Voting Stock, voting together as a single class, may remove such Director or Directors for cause. Except as may be provided by applicable law, cause for removal will be deemed to exist only if the Director whose removal is proposed has been adjudged by a court of competent jurisdiction to be liable to the Company or its stockholders for misconduct as a result of (a) a breach of such Director's duty of loyalty to the Company, (b) any act or omission by such Director not in good faith or which involves a knowing violation of law, or (c) any transaction from which such Director derived an improper personal benefit, and such adjudication is no longer subject to direct appeal. Section 5. Amendment, Repeal, Etc. Notwithstanding anything contained in ----------------------- this Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of at least 80% of the Voting Stock, voting together as a single class, is required to amend or repeal, or adopt any provision inconsistent with, this Article Seventh. EIGHTH. Section 1. Notwithstanding any other provision of this Amended and Restated Certificate of Incorporation and except as set forth in Section 2 of this Article EIGHTH, the affirmative vote of at least 80% of the Voting Stock, voting together as a single class, shall be required: I. For the adoption of any agreement for the merger or consolidation of the Company or any Subsidiary (as defined in Section 5 of this Article EIGHTH) with or into any other person (as defined in Section 5 of this Article EIGHTH). II. To authorize any sale, lease, transfer or exchange of, or any mortgage or pledge of or the granting of any other security interest in, or any other disposition of, all or any substantial part of the assets of the Company or any Subsidiary to or with any other person (in a single transaction or in a series of related transactions). III. To authorize the issuance or transfer by the Company or any Subsidiary of any securities of the Company or any Subsidiary (except securities issued pursuant to a stock option, purchase, bonus or other plan or arrangement, for natural persons who are directors, employees, consultants and/or agents of the Company or a Subsidiary, or securities issued upon exercise of any conversion rights, warrants, options or rights which shall have been outstanding at the time of adoption of this Article EIGHTH or which shall have been issued in a transaction not in contravention of the provisions of this Article EIGHTH) to any other person in exchange for cash, securities or other assets or a combination thereof, if, in the case of any of the foregoing transactions (as of the date of any action taken by the Board with respect to any such proposed transaction, or as of the record date for the determination of stockholders entitled to notice of and to vote on any such proposed transaction or immediately prior to the consummation of any such proposed transaction), such other person is, or at any time within the preceding 12 months has been, the beneficial owner, directly or indirectly, of 20 percent or more of the outstanding shares of Voting Stock of the Company. Section 2. The provisions of Section 1 of this Article EIGHTH shall not apply to (1) any transaction described in such Section 1 if the Board shall by resolution have approved a memorandum of agreement with such person setting forth the principal terms of such transaction and such transaction is substantially consistent therewith, provided that a majority of those directors voting in favor of such resolution are Continuing Directors (as defined in Section 5 of this Article EIGHTH), (2) any transaction described in such Section 1 if the other party to such transaction is a Major Subsidiary (as defined in Section 5 of this Article EIGHTH) or (3) any transaction described in such Section 1 (other than a merger or consolidation to which the Company would be a party) if the fair value of the securities, assets or other consideration proposed to be issued or transferred, in any way disposed of, or received, by the Company or any Subsidiary in connection with any such transaction or any series of such transactions which are related is less than $5,000,000. Section 3. Notwithstanding any other provisions of this Amended and Restated Certificate of Incorporation and except as set forth in Section 4 of this Article EIGHTH, the affirmative vote of the holders of at least 80 % of the Voting Stock, voting together as a single class, shall be required: I. To authorize a liquidation or dissolution of the Company, II. To authorize any offer by the Company to purchase shares of its outstanding Voting Stock (except pursuant to redemption provisions of any preferred stock Company), III. To authorize any reclassification of securities of the Company, any recapitalization or any other transaction in each case designed to decrease the number of holders of Voting Stock of the Company, if (as of the date of any action taken by the Board with respect to any such proposed transaction, or as of the record date for the determination of stockholders entitled to notice of and to vote on any such proposed transaction or immediately prior to the consummation of any such proposed transaction) any other person is the beneficial owner, directly or indirectly, of 5 percent or more of the outstanding shares of Voting Stock of the Company. Section 4. The provisions of Section 3 of this Article EIGHTH shall not apply to any transaction described in such Section 3 if the Board shall by resolution have approved a memorandum setting forth the principal terms of such transaction and such transaction is substantially consistent therewith, provided that a majority of those directors voting in favor of such resolution are Continuing Directors (as defined in Section 5 of this Article EIGHTH). Section 5. For the purpose of this Article EIGHTH: IV. Any person shall be deemed to be the "beneficial owner" of any shares of stock of the Company (i) which it owns, directly or indirectly, whether of record or not, or which it has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, or (ii) which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (i) above), by any other person which is its affiliate or associate (as defined in this Section 5) or with which it or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of stock of the Company. The outstanding shares of any class of stock of the Company shall be deemed to include shares deemed owned, through application of clauses (i) and (ii) above, but shall not include any other shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. V. An "affiliate" of a specified person is any person that, directly or indirectly, controls or is controlled by, or is under common control with, the person specified. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the specified person, whether through the ownership of voting securities or by contract or otherwise. VI. The term "associates" used to indicate a relationship with any specified person means (i) any person in which such specified person has a significant financial interest or as to which such specified person's relationship is such that such specified person substantially influences its management and policies or any person having a significant financial interest in such specified person or which substantially influences the management and policies of such specified person, and without limitation to the foregoing, (ii) any person of which such specified person is an officer, director or partner or is, directly or indirectly, the beneficial owner of 5 percent or more of any class of equity securities, (iii) any trust or other estate in which such specified person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, and (iv) any relative or spouse of such specified person, or any relative of such spouse, who has the same home as such specified person or who is a director or officer of such specified person or any corporation which controls or is controlled by such specified person. VII. A "person" is any individual, corporation or other entity. VIII. The term "securities" shall include, without limitation, any stocks, bonds, debentures, notes and evidences of indebtedness, and any warrants, options and other rights to subscribe to or purchase any of the foregoing. IX. A "Subsidiary" is any corporation of which at least a majority of the outstanding shares of equity stock is owned of record or beneficially by the Company and/or its Subsidiaries. A "Major Subsidiary" is any corporation of which at least 80 percent of the outstanding shares of equity stock is owned of record and beneficially by the Company and/or its Major Subsidiaries. X. The term "Continuing Director" shall mean a person who was a duly elected and acting director of the Company at the time of the adoption of this Article EIGHTH or became a duly elected and acting director of the Company prior to the time that, for the purposes of Section 2 or Section 4, as the case may be, of this Article EIGHTH, such other person became a beneficial owner, directly or indirectly, of 5 percent or more of the Voting Stock of the Company, or a person designated (whether before or after election as a director) to be a Continuing Director by a majority of the Continuing Directors. Section 6. A majority of the Continuing Directors shall have the power and duty to determine for the purposes of this Article EIGHTH, on the basis of information known to them, whether a proposed transaction is subject to the provisions of Section 1 or Section 3 of this Article EIGHTH, and in particular and without limitation, whether (1) any person beneficially owns 5 percent or more of the outstanding shares of Voting Stock of the Company, (2) any person is an "affiliate" or "associate" of any other person, (3) any person has an agreement, arrangement or understanding with any other person, (4) any proposed transaction involves a substantial part of the assets of the Company or any Subsidiary, (5) the fair value of securities, assets or other consideration referred to in Section 2 of this Article EIGHTH is less than $5,000,000, (6) any series of transactions are related, and (7) the memorandum referred to in Section 2 or Section 4 of this Article EIGHTH is substantially consistent with the transaction to which it relates. Any such determination shall be conclusive and binding for all purposes of this Article EIGHTH. Section 7. The affirmative vote of stockholders required by this Article EIGHTH shall be in lieu of any lesser vote or consent of the holders of the stock of the Company otherwise required by law or in any agreement to which the Company is a party, and shall be in addition to any voting requirements imposed by law or any other provisions of the Amended and Restated Certificate of Incorporation of the Company, including resolutions providing for the issuance of a class or series of stock adopted by the Board pursuant to authority vested in it by the provisions of the Amended and Restated Certificate of Incorporation, in favor of certain classes of stock. Section 8. No amendment to this Amended and Restated Certificate of Incorporation, directly or indirectly by merger, consolidation or otherwise, shall amend, alter, change or repeal any of the provisions of this Article EIGHTH, unless the amendment effecting such amendment, alteration, change or repeal shall receive the affirmative vote of the holders of at least 80 percent of the outstanding shares of stock of the Company entitled to vote in elections of directors; provided that this Section 8 shall not apply to any such amendment if such amendment is submitted to the stockholders for adoption with the unanimous recommendation of the entire Board. NINTH. To the full extent permitted by the Delaware General Corporation Law or any other applicable law currently or hereafter in effect, no Director of the Company will be personally liable to the Company or its stockholders for or with respect to any acts or omissions in the performance of his or her duties as a Director of the Company. Any repeal or modification of this Article Ninth will not adversely affect any right or protection of a Director of the Company existing prior to such repeal or modification. TENTH. Each person who is or was or had agreed to become a Director or officer of the Company, and each such person who is or was serving or who had agreed to serve at the request of the Board or an officer of the Company as an employee or agent of the Company or as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other entity, whether for profit or not for profit (including the heirs, executors, administrators, or estate of such person), will be indemnified by the Company to the full extent permitted by the Delaware General Corporation Law or any other applicable law as currently or hereafter in effect. The right of indemnification provided in this Article Tenth (a) will not be exclusive of any other rights to which any person seeking indemnification may otherwise be entitled, including without limitation pursuant to any contract approved by a majority of the Whole Board (whether or not the Directors approving such contract are or are to be parties to such contract or similar contracts), and (b) will be applicable to matters otherwise within its scope whether or not such matters arose or arise before or after the adoption of this Article Tenth. Without limiting the generality or the effect of the foregoing, the Company may adopt By-Laws, or enter into one or more agreements with any person, which provide for indemnification greater or different than that provided in this Article Tenth or the DGCL. Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation to the contrary, the amendment or repeal of, or adoption of any provision inconsistent with, this Article Tenth will require the affirmative vote of the holders of at least 80% of the Voting Stock, voting together as a single class. Any amendment or repeal of, or adoption of any provision inconsistent with, this Article Tenth will not adversely affect any right or protection existing hereunder prior to such amendment, repeal, or adoption. ELEVENTH. Whenever a compromise or arrangement is proposed between the Company and its creditors or any class of them and/or between the Company and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Company or any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Company under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Company under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders, of the Company, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders, of the Company, as the case may be, agree to any compromise or arrangement and to any reorganization of the Company as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Company, as the case may be, and also on the Company. TWELFTH. Whenever any provision of this Amended and Restated Certificate of Incorporation requires the affirmative vote of at least 80% of the Voting Stock, voting together as a single class, such provision shall not apply to the amendment or repeal of such provision if such amendment is submitted to the stockholders for adoption with the approval of the Board of Directors. Signed on March 28th, 2005 /s/ Peter L. Murdoch -------------------- Name: Peter L. Murdoch Title: President and CEO EX-3.2 5 certofamendment.txt CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION EXHIBIT 3.2 STATE OF DELAWARE CERTIFICATE of AMENDMENT of CERTIFICATE of INCORPORATION of SENTRY TECHNOLOGY CORPORATION _____________________________________________________________________________ First: That at a meeting of the Board of Directors of Sentry Technology Corporation, and in accordance with Section 242 of the Delaware General Corporation Law, resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the shareholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: Resolved, that the Certificate of Incorporation of this corporation be amended by changing Article Four, Section 1, so that, as amended, said Article and Section shall be and read as follows: "FOURTH, Section 1. Authorized Capital Stock. The Company is authorized to issue ------------------------ two classes of capital stock, designated Common Stock and Preferred Stock. The total number of shares of capital stock that the Company is authorized to issue is 170,000,000 shares, consisting of 160,000,000 shares of Common Stock, par value $0.001 per share, and 10,000,000 shares of Preferred Stock, par value $0.001 per share, the designations, rights and preferences of which are set forth in Section 2, below." Second: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the majority stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, and at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. Third: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. Fourth: That the capital of said corporation shall not be reduced under or by reason of said amendment. SENTRY TECHNOLOGY CORPORATION Dated: May 24, 2005 By: /s/ Peter J. Mundy ----------------------- Name: Peter J. Mundy Title: Secretary EX-3.3 6 amendedbylaws.txt AMENDED AND RESTATED BYLAWS OF THE CORPORATION EXHIBIT 3.3 AMENDED AND RESTATED BYLAWS OF SENTRY TECHNOLOGY CORPORATION f/k/a Knogo North America, Inc. effective as of April 26, 2005 These Amended and Restated Bylaws of Sentry Technology Corporation hereby fully amend, replace and restate any previous bylaws: STOCKHOLDERS' MEETINGS 1. Time and Place of Meetings. All meetings of the stockholders for the election of Directors or for any other purpose will be held at such time and place, within or without the State of Delaware, as may be designated by the Board or, in the absence of a designation by the Board, the Chairman, the President, or the Secretary, and stated in the notice of meeting. The Board may postpone and reschedule any previously scheduled annual or special meeting of the stockholders. 2. Annual Meeting. An annual meeting of the stockholders will be held at such date and time as may be designated from time to time by the Board, at which meeting the stockholders will elect by a plurality vote the Directors to succeed those whose terms expire at such meeting and will transact such other business as may properly be brought before the meeting in accordance with By-Law 8. 3. Special Meetings. Special meetings of the stockholders may be called only by (a) the Chairman or (b) the Secretary within 10 calendar days after receipt of the written request of a majority of the Whole Board. Any such request by a majority of the Whole Board must be sent to the Chairman and the Secretary and must state the purpose or purposes of the proposed meeting. Special meetings of holders of the outstanding Preferred Stock, if any, may be called in the manner and for the purposes provided in the applicable Preferred Stock Designation. At a special meeting of stockholders, only such business may be conducted or considered as (i) has been specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Chairman or a majority of the Whole Board or (ii) otherwise is properly brought before the meeting by the presiding officer of the meeting (as described in By-Law 8) or by or at the direction of a majority of the Whole Board. 4. Notice of Meetings. Written notice of every meeting of the stockholders, stating the place, date, and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, will be given not less than 10 nor more than 60 calendar days before the date of the meeting to each stockholder of record entitled to vote at such meeting, except as otherwise provided herein or by law. When a meeting is adjourned to another place, date, or time, written notice need not be given of the adjourned meeting if the place, date, and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than 30 calendar days, or if after the adjournment a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting must be given in conformity herewith. At any adjourned meeting, any business may be transacted which properly could have been transacted at the original meeting. 5. Inspectors. The Board may appoint one or more inspectors of election to act as judges of the voting and to determine those entitled to vote at any meeting of the stockholders, or any adjournment thereof, in advance of such meeting. The Board may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the presiding officer of the meeting may appoint one or more substitute inspectors. 6. Quorum. Except as otherwise provided by law or in a Preferred Stock Designation, the holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, will constitute a quorum at all meetings of the stockholders for the transaction of business thereat. If, however, such quorum is not present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, will have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. 7. Voting. Except as otherwise provided by law, by the Certificate of Incorporation, or in a Preferred Stock Designation, each stockholder will be entitled at every meeting of the stockholders to one vote for each share of stock having voting power standing in the name of such stockholder on the books of the Company on the record date for the meeting and such votes may be cast either in person or by written proxy. Every proxy must be duly executed and filed with the Secretary. A stockholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary. The vote upon any question brought before a meeting of the stockholders may be by voice vote, unless otherwise required by the Certificate of Incorporation or these By-Laws or unless the Chairman or the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or by proxy at such meeting otherwise determine. Every vote taken by written ballot will be counted by the inspectors of election. When a quorum is present at any meeting, the affirmative vote of the holders of a majority of the stock present in person or represented by proxy at the meeting and entitled to vote on the subject matter and which has actually been voted will be the act of the stockholders, except in the election of Directors or as otherwise provided in these By-Laws, the Certificate of Incorporation, a Preferred Stock Designation, or by law. 8. Order of Business. (a) The Chairman, or any officer of the Company designated by a majority of the Whole Board, will call meetings of the stockholders to order and will act as residing officer thereof. Unless otherwise determined by the Board prior to the meeting, the presiding officer of the meeting of the stockholders will also determine the order of business and have the authority in his or her sole discretion to regulate the conduct of any such meeting, including without limitation by imposing restrictions on the persons (other than stockholders of the Company or their duly appointed proxies) who may attend any such stockholders' meeting, by ascertaining whether any stockholder or his proxy may be excluded from any meeting of the stockholders based upon any determination by the presiding officer, in his or her sole discretion, that any such person has unduly disrupted or is likely to disrupt the proceedings thereat, and by determining the circumstances in which any person may make a statement or ask questions at any meeting of the stockholders. (b) At an annual meeting of the stockholders, only such business will be conducted or considered as is properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (ii) otherwise properly brought before the meeting by the presiding officer or by or at the direction of a majority of the Whole Board, or (iii) otherwise properly requested to be brought before the meeting by a stockholder of the Company in accordance with paragraph (c) of this By-Law 8. (c) For business to be properly requested to be brought before an annual meeting by a stockholder, the stockholder must (i) be a stockholder of the Company of record at the time of the giving of the notice for such annual meeting provided for in these By-Laws, (ii) be entitled to vote at such meeting, and (iii) have given timely notice thereof in writing to the Secretary. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 60 calendar days prior to the annual meeting; provided, however, that in the event public announcement of the date of the annual meeting is not made at least 75 calendar days prior to the date of the annual meeting, notice by the stockholder to be timely must be so received not later than the close of business on the 10th calendar day following the day on which public announcement is first made of the date of the annual meeting. A stockholder's notice to the Secretary must set forth as to each matter the stockholder proposes to bring before the annual meeting (A) a description in reasonable detail of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (B) the name and address, as they appear on the Company's books, of the stockholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made, (C) the class and number of shares of the Company that are owned beneficially and of record by the stockholder proposing such business and by the beneficial owner, if any, on whose behalf the proposal is made, and (D) any material interest of such stockholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made in such business. Notwithstanding anything in these By-Laws to the contrary, no business will be conducted at an annual meeting except in accordance with the procedures set forth in this By-Law 8. The presiding officer of the annual meeting will, if the facts warrant, determine that business was not properly brought before the meeting in accordance with the procedures prescribed in this By-Law 8 and, if he or she should so determine, he or she will so declare to the meeting and any such business not properly brought before the meeting will not be transacted. Notwithstanding the foregoing provisions of this By-Law 8, a stockholder must also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this By-Law 8. For purposes of this By-Law and By-Law 13, "public announcement" means disclosure in a press release reported by the Dow Jones News Service, Associated Press, or comparable national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Sections 13, 14, or 15(d) of the Securities Exchange Act of 1934, as amended. Nothing in this By-Law 8 will be deemed to affect any rights of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended. DIRECTORS 9. Function. The business and affairs of the Company will be managed under the direction of its Board. 10. Number, Election, and Terms. Subject to the rights, if any, of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, the authorized number of Directors may be determined from time to time only by a vote of a majority of the Whole Board or by the affirmative vote of the holders of at least 80% of the Voting Stock, voting together as a single class, but in no case will the number of Directors be other than as provided in the Certificate of Incorporation. The Directors, other than those who may be elected by the holders of any series of the Preferred Stock, will be classified with respect to the time for which they severally hold office in accordance with the Certificate of Incorporation. The Chairman shall be selected by a majority vote of the Board. The Chairman shall preside over meetings of the Board and have the other powers and responsibilities in relation to the activities of the Board as are specified in these Bylaws. The Chairman will not be an officer of the Company. 11. Vacancies and Newly Created Directorships. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, newly created directorships resulting from any increase in the number of Directors and any vacancies on the Board resulting from death, resignation, disqualification, removal, or other cause will be filled solely by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board, or by a sole remaining Director. Any Director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director's successor is elected and qualified. No decrease in the number of Directors constituting the Board will shorten the term of an incumbent Director. 12. Removal. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, any Director may be removed from office by the stockholders only for cause and only in the manner provided in the Certificate of Incorporation and, if applicable, any amendment to these By-Laws. 13. Nominations of Directors; Election. (a) Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, only persons who are nominated in accordance with the following procedures will be eligible for election as Directors of the Company. (b) Nominations of persons for election as Directors of the Company may be made at a meeting of stockholders (i) by or at the direction of the Board or (ii) by any stockholder who is a stockholder of record at the time of giving of notice provided for in this By-Law 13 who is entitled to vote for the election of Directors at the meeting and who complies with the procedures set forth in this By-Law 13. All nominations by stockholders must be made pursuant to timely notice in proper written form to the Secretary. (c) To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 60 calendar days prior to the meeting; provided, however, that in the event that public announcement of the date of the meeting is not made at least 75 calendar days prior to the date of the meeting, notice by the stockholder to be timely must be so received not later than the close of business on the 10th calendar day following the day on which public announcement is first made of the date of the meeting. To be in proper written form, such stockholder's notice must set forth or include (i) the name and address, as they appear on the Company's books, of the stockholder giving the notice and of the beneficial owner, if any, on whose behalf the nomination is made; (ii) a representation that the stockholder giving the notice is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) the class and number of shares of stock of the Company owned beneficially and of record by the stockholder giving the notice and by the beneficial owner, if any, on whose behalf the nomination is made; (iv) a description of all arrangements or understandings between or among any of (A) the stockholder giving the notice, (B) the beneficial owner on whose behalf the notice is given, (C) each nominee, and (D) any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder giving the notice; (v) such other information regarding each nominee proposed by the stockholder giving the notice as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board; and (vi) the signed consent of each nominee to serve as a director of the Company if so elected. At the request of the Board, any person nominated by the Board for election as a Director must furnish to the Secretary that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. The presiding officer of the meeting for election of Directors will, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed by this By-Law 13, and if he or she should so determine, he or she will so declare to the meeting and the defective nomination will be disregarded. Notwithstanding the foregoing provisions of this By-Law 13, a stockholder must also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this By-Law 13. 14. Resignation. Any Director may resign at any time by giving written notice of his resignation to the Chairman or the Secretary. Any resignation will be effective upon actual receipt by any such person or, if later, as of the date and time specified in such written notice. 15. Regular Meetings. Regular meetings of the Board may be held immediately after the annual meeting of the stockholders and at such other time and place either within or without the State of Delaware as may from time to time be determined by the Board. Notice of regular meetings of the Board need not be given. 16. Special Meetings. Special meetings of the Board may be called by the Chairman or the President on one day's notice to each Director by whom such notice is not waived, given either personally or by mail, telephone, telegram, telex, facsimile, or similar medium of communication, and will be called by the Chairman or the President in like manner and on like notice on the written request of five or more Directors. Special meetings of the Board may be held at such time and place either within or without the State of Delaware as is determined by the Board or specified in the notice of any such meeting. 17. Quorum. At all meetings of the Board, a majority of the total number of Directors then in office will constitute a quorum for the transaction of business. Except for the designation of committees as hereinafter provided and except for actions required by these By-Laws or the Certificate of Incorporation to be taken by a majority of the Whole Board, the act of a majority of the Directors present at any meeting at which there is a quorum will be the act of the Board. If a quorum is not present at any meeting of the Board, the Directors present thereat may adjourn the meeting from time to time to another place, time, or date, without notice other than announcement at the meeting, until a quorum is present. 18. Participation in Meetings by Telephone Conference. Members of the Board or any committee designated by the Board may participate in a meeting of the Board or any such committee, as the case may be, by means of telephone conference or similar means by which all persons participating in the meeting can hear each other, and such participation in a meeting will constitute presence in person at the meeting. 19. Committees. (a) The Board, by resolution passed by a majority of the Whole Board, may designate an executive committee (the "Executive Committee"). The Executive Committee, if one is so designated, will have and may exercise the powers of the Board, except the power to declare dividends, to amend these By-Laws, to elect officers, or to rescind or modify any prior action of the Board and except as otherwise provided by law. (b) The Board, by resolution passed by a majority of the Whole Board, may designate one or more additional committees, each such committee to consist of one or more Directors and each to have such lawfully delegable powers and duties as the Board may confer. (c) The Executive Committee and each other committee of the Board will serve at the pleasure of the Board or as may be specified in any resolution from time to time adopted by the Board. The Board may designate one or more Directors as alternate members of any such committee, who may replace any absent or disqualified member at any meeting of such committee. In lieu of such action by the Board, in the absence or upon the disqualification of any member of a committee of the Board, the members thereof present at any such meeting of such committee and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. (d) Except as otherwise provided in these By-Laws or by law, any committee of the Board, to the extent provided in Paragraph (a) of this By-Law or, if applicable, in the resolution of the Board, will have and may exercise all the powers and authority of the Board in the direction of the management of the business and affairs of the Company. Any such committee designated by the Board will have such name as may be determined from time to time by resolution adopted by the Board. Unless otherwise prescribed by the Board, a majority of the members of any committee of the Board will constitute a quorum for the transaction of business, and the act of a majority of the members present at a meeting at which there is a quorum will be the act of such committee. Each committee of the Board may prescribe its own rules for calling and holding meetings and its method of procedure, subject to any rules prescribed by the Board, and will keep a written record of all actions taken by it. 20. Compensation. The Board may establish the compensation for, and reimbursement of the expenses of, Directors for membership on the Board and on committees of the Board, attendance at meetings of the Board or committees of the Board, and for other services by Directors to the Company or any of its majority-owned subsidiaries. 21. Rules. The Board may adopt rules and regulations for the conduct of their meetings and the management of the affairs of the Company. NOTICES 22. Generally. Except as otherwise provided by law, these By-Laws, or the Certificate of Incorporation, whenever by law or under the provisions of the Certificate of Incorporation or these By-Laws notice is required to be given to any Director or stockholder, it will not be construed to require personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at the address of such Director or stockholder as it appears on the records of the Company, with postage thereon prepaid, and such notice will be deemed to be given at the time when the same is deposited in the United States mail. Notice to Directors may also be given by telephone, telegram, telex, facsimile, or similar medium of communication or as otherwise may be permitted by these By-Laws. 23. Waivers. Whenever any notice is required to be given by law or under the provisions of the Certificate of Incorporation or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time of the event for which notice is to be given, will be deemed equivalent to such notice. Attendance of a person at a meeting will constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. OFFICERS 24. Generally. The officers of the Company will be elected by the Board and will consist of a President, a Secretary, and a Treasurer. The Board of Directors may also choose any or all of the following: one or more Vice Presidents (who may be given particular designations with respect to authority, function, or seniority), and such other officers as the Board may from time to time determine. Notwithstanding the foregoing, by specific action the Board may authorize the Chairman to appoint any person to any office other than President, Secretary, or Treasurer. Any number of offices may be held by the same person. Any of the offices may be left vacant from time to time as the Board may determine. In the case of the absence or disability of any officer of the Company or for any other reason deemed sufficient by a majority of the Board, the Board may delegate the absent or disabled officer's powers or duties to any other officer or to any Director. 25. Compensation. The compensation of all officers and agents of the Company who are also Directors of the Company will be fixed by the Board or by a committee of the Board. The Board may fix, or delegate the power to fix, the compensation of other officers and agents of the Company to an officer of the Company. 26. Succession. The officers of the Company will hold office at the pleasure of the Board of Directors. Any officer may be removed at any time by the affirmative vote of a majority of the Whole Board. Any vacancy occurring in any office of the Company may be filled by the Board. 27. Authority and Duties. Each of the officers of the Company will have such authority and will perform such duties as are customarily incident to their respective offices or as may be specified from time to time by the Board. STOCK 28. Certificates. Certificates representing shares of stock of the Company will be in such form as is determined by the Board, subject to applicable legal requirements. Each such certificate will be numbered and its issuance recorded in the books of the Company, and such certificate will exhibit the holder's name and the number of shares and will be signed by, or in the name of, the Company by the President and the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, and will also be signed by, or bear the facsimile signature of, a duly authorized officer or agent of any properly designated transfer agent of the Company. Any or all of the signatures and the seal of the Company, if any, upon such certificates may be facsimiles, engraved, or printed. Such certificates may be issued and delivered notwithstanding that the person whose facsimile signature appears thereon may have ceased to be such officer at the time the certificates are issued and delivered. 29. Classes of Stock. The designations, preferences, and relative participating, optional, or other special rights of the various classes of stock or series thereof, and the qualifications, limitations, or restrictions thereof, will be set forth in full or summarized on the face or back of the certificates which the Company issues to represent its stock, or in lieu thereof, such certificates will set forth the office of the Company from which the holders of certificates may obtain a copy of such information. 30. Transfers. Upon surrender to the Company or the transfer agent of the Company of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, it will be the duty of the Company to issue, or to cause its transfer agent to issue, a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. 31. Lost, Stolen, or Destroyed Certificates. The Secretary may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact, satisfactory to the Secretary, by the person claiming the certificate of stock to be lost, stolen, or destroyed. As a condition precedent to the issuance of a new certificate or certificates, the Secretary may require the owners of such lost, stolen, or destroyed certificate or certificates to give the Company a bond in such sum and with such surety or sureties as the Secretary may direct as indemnity against any claims that may be made against the Company with respect to the certificate alleged to have been lost, stolen, or destroyed or the issuance of the new certificate. 32. Record Dates. (a) In order that the Company may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board may fix a record date, which will not be more than 60 nor less than 10 calendar days before the date of such meeting. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders will be at the close of business on the calendar day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the calendar day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of the stockholders will apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. (b) In order that the Company may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board may fix a record date, which record date will not be more than 60 calendar days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose will be at the close of business on the calendar day on which the Board adopts the resolution relating thereto. (c) The Company will be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes, and will not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Company has notice thereof, except as expressly provided by applicable law. INDEMNIFICATION 33. Damages and Expenses. (a) Without limiting the generality or effect of Article Ninth of the Certificate of Incorporation, the Company shall to the fullest extent permitted by applicable law as then in effect indemnify any person (an "Indemnitee") who is or was involved in any manner (including without limitation as a party or a witness) or is threatened to be made so involved in any threatened, pending, or completed investigation, claim, action, suit, or proceeding, whether civil, criminal, administrative, or investigative (including without limitation any action, suit, or proceeding by or in the right of the Company to procure a judgment in its favor) (a "Proceeding") by reason of the fact that such person is or was or had agreed to become a Director, officer, employee, or agent of the Company, or is or was serving at the request of the Board or an officer of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other entity, whether for profit or not for profit (including the heirs, executors, administrators, or estate of such person), or anything done or not by such person in any such capacity, against all expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding. Such indemnification will be a contract right and will include the right to receive payment in advance of any expenses incurred by an Indemnitee in connection with such Proceeding, consistent with the provisions of applicable law as then in effect. (b) The right of indemnification provided in this By-Law 33 will not be exclusive of any other rights to which any person seeking indemnification may otherwise be entitled, and will be applicable to Proceedings commenced or continuing after the adoption of this By-Law 33, whether arising from acts or omissions occurring before or after such adoption. (c) In furtherance, but not in limitation of the foregoing provisions, the following procedures, presumptions, and remedies will apply with respect to advancement of expenses and the right to indemnification under this By-Law 33: (i) All reasonable expenses incurred by or on behalf of an Indemnitee in connection with any Proceeding will be advanced to the Indemnitee by the Company within 30 calendar days after the receipt by the Company of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements will reasonably evidence the expenses incurred by the Indemnitee and, if and to the extent required by law at the time of such advance, will include or be accompanied by an undertaking by or on behalf of the Indemnitee to repay such amounts advanced as to which it may ultimately be determined that the Indemnitee is not entitled. If such an undertaking is required by law at the time of an advance, no security will be required for such undertaking and such undertaking will be accepted without reference to the recipient's financial ability to make repayment. (ii) To obtain indemnification under this By-Law 33, the Indemnitee will submit to the Secretary a written request, including such documentation supporting the claim as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification (the "Supporting Documentation"). The determination of the Indemnitee's entitlement to indemnification will be made not more than 60 calendar days after receipt by the Company of the written request for indemnification together with the Supporting Documentation. The Secretary will promptly upon receipt of such a request for indemnification advise the Board in writing that the Indemnitee has requested indemnification. The Indemnitee's entitlement to indemnification under this By-Law 33 will be determined in one of the following ways: (A) by a majority vote of the Disinterested Directors (as hereinafter defined), if they constitute a quorum of the Board, or, in the case of an Indemnitee that is not a present or former officer of the Company, by any committee of the Board or committee of officers or agents of the Company designated for such purpose by a majority of the Whole Board; (B) by a written opinion of Independent Counsel if (1) a Change of Control has occurred and the Indemnitee so requests or (2) in the case of an Indemnitee that is a present or former officer of the Company, a quorum of the Board consisting of Disinterested Directors is not obtainable or, even if obtainable, a majority of such Disinterested Directors so directs; (C) by the stockholders (but only if a majority of the Disinterested Directors, if they constitute a quorum of the Board, presents the issue of entitlement to indemnification to the stockholders for their determination); or (D) as provided in subparagraph (iii) below. In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to clause (B) above, a majority of the Disinterested Directors will select the Independent Counsel, but only an Independent Counsel to which the Indemnitee does not reasonably object; provided, however, that if a Change of Control has occurred, the Indemnitee will select such Independent Counsel, but only an Independent Counsel to which the Board does not reasonably object. (iii) Except as otherwise expressly provided in this By-Law 33, the Indemnitee will be presumed to be entitled to indemnification under this By-Law 33 upon submission of a request for indemnification together with the Supporting Documentation in accordance with subparagraph (c) (ii) above, and thereafter the Company will have the burden of proof to overcome that presumption in reaching a contrary determination. In any event, if the person or persons empowered under subparagraph (c) (ii) to determine entitlement to indemnification has not been appointed or has not made a determination within 60 calendar days after receipt by the Company of the request therefor together with the Supporting Documentation, the Indemnitee will be deemed to be entitled to indemnification and the Indemnitee will be entitled to such indemnification unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. The termination of any Proceeding described in paragraph (a) of this By-Law 33, or of any claim, issue, or matter therein, by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, will not, of itself, adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that his conduct was not unlawful. (iv) (A) In the event that a determination is made pursuant to subparagraph (c) (ii) that the Indemnitee is not entitled to indemnification under this By-Law 33, (1) the Indemnitee will be entitled to seek an adjudication of his or her entitlement to such indemnification either, at the Indemnitee's sole option, in (x) an appropriate court of the State of Delaware or any other court of competent jurisdiction or (y) an arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association; (2) any such judicial proceeding or arbitration will be de novo and the Indemnitee will not be prejudiced by reason of such adverse determination; and (3) in any such judicial proceeding or arbitration the Company will have the burden of proving that the Indemnitee is not entitled to indemnification under this By-Law 33. (B) If a determination is made or deemed to have been made, pursuant to subparagraph (c)(ii) or (iii) of this By-Law 33 that the Indemnitee is entitled to indemnification, the Company will be obligated to pay the amounts constituting such indemnification within five business days after such determination has been made or deemed to have been made and will be conclusively bound by such determination unless (1) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (2) such indemnification is prohibited by law. In the event that advancement of expenses is not timely made pursuant to subparagraph (c)(i) of this By-Law 33 or payment of indemnification is not made within five business days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to subparagraph (c)(ii) or (iii) of this By-Law 33, the Indemnitee will be entitled to seek judicial enforcement of the Company's obligation to pay to the Indemnitee such advancement of expenses or indemnification. Notwithstanding the foregoing, the Company may bring an action, in an appropriate court in the State of Delaware or any other court of competent jurisdiction, contesting the right of the Indemnitee to receive indemnification hereunder due to the occurrence of any event described in subclause (1) or (2) of this clause (B) (a "Disqualifying Event"); provided, however, that in any such action the Company will have the burden of proving the occurrence of such Disqualifying Event. (C) The Company will be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to the provisions of this subparagraph (c)(iv) that the procedures and presumptions of this By-Law 33 are not valid, binding, and enforceable and will stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this By-Law 33. (D) In the event that the Indemnitee, pursuant to the provisions of this subparagraph (c)(iv), seeks a judicial adjudication of, or an award in arbitration to enforce, his rights under, or to recover damages for breach of, this By-Law 33, the Indemnitee will be entitled to recover from the Company, and will be indemnified by the Company against, any expenses actually and reasonably incurred by the Indemnitee if the Indemnitee prevails in such judicial adjudication or arbitration. If it is determined in such judicial adjudication or arbitration that the Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by the Indemnitee in connection with such judicial adjudication or arbitration will be prorated accordingly. (v) For purposes of this paragraph (c): (A) "Change in Control" means the occurrence of any of the following events: (1) The Company is merged, consolidated, or reorganized into or with another corporation or other legal entity, and as a result of such merger, consolidation, or reorganization less than a majority of the combined voting power of the then outstanding securities of such corporation or entity immediately after such transaction are held in the aggregate by the holders of the Voting Stock immediately prior to such transaction; (2) The Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal entity and, as a result of such sale or transfer, less than a majority of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock immediately prior to such sale or transfer; (3) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report or item therein), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 20% or more of the combined voting power of the Voting Stock; (4) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form, or report or item therein) that a change in control of the Company has occurred or will occur in the future pursuant to any then-existing contract or transaction; or (5) If, during any period of two consecutive years, individuals who at the beginning of any such period constitute the Directors cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this clause (5) each Director who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least two-thirds of the Directors (or a committee of the Board) then still in office who were Directors at the beginning of any such period will be deemed to have been a Director at the beginning of such period. Notwithstanding the foregoing provisions of clauses (3) or (4) of this paragraph (c)(v)(A), unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" will not be deemed to have occurred for purposes of such clauses (3) or (4) solely because (x) the Company, (y) an entity in which the Company, directly or indirectly, beneficially owns 50% or more of the voting securities (a "Subsidiary"), or (z) any employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K, or Schedule 14A (or any successor schedule, form, or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 20% or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. (B) "Disinterested Director" means a Director of the Company who is not or was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee. (C) "Independent Counsel" means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent (1) the Company or the Indemnitee in any matter material to either such party or (2) any other party to the Proceeding giving rise to a claim for indemnification under this By-Law 33. Notwithstanding the foregoing, the term "Independent Counsel" will not include any person who, under the applicable standards of professional conduct then prevailing under the law of the State of Delaware, would be precluded from representing either the Company or the Indemnitee in an action to determine the Indemnitee's rights under this By-Law 33. (d) If any provision or provisions of this By-Law 33 are held to be invalid, illegal, or unenforceable for any reason whatsoever: (i) the validity, legality, and enforceability of the remaining provisions of this By-Law 33 (including without limitation all portions of any paragraph of this By-Law 33 containing any such provision held to be invalid, illegal, or unenforceable, that are not themselves invalid, illegal, or unenforceable) will not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of this By-Law 33 (including without limitation all portions of any paragraph of this By-Law 33 containing any such provision held to be invalid, illegal, or unenforceable, that are not themselves invalid, illegal, or unenforceable) will be construed so as to give effect to the intent manifested by the provision held invalid, illegal, or unenforceable. 34. Insurance, Contracts, and Funding. The Company may purchase and maintain insurance to protect itself and any Indemnitee against any expenses, judgments, fines, and amounts paid in settlement or incurred by any Indemnitee in connection with any Proceeding referred to in By-Law 33 or otherwise, to the fullest extent permitted by applicable law as then in effect. The Company may enter into contracts with any person entitled to indemnification under By-Law 33 or otherwise, and may create a trust fund, grant a security interest, or use other means (including without limitation a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in By-Law 33. GENERAL 35. Fiscal Year. The fiscal year of the Company will end on December 31 or such date as may be fixed from time to time by the Board. 36. Seal. The Board may adopt a corporate seal and use the same by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 37. Reliance upon Books, Reports, and Records. Each Director, each member of a committee designated by the Board, and each officer of the Company will, in the performance of his or her duties, be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports, or statements presented to the Company by any of the Company's officers or employees, or committees of the Board, or by any other person or entity as to matters the Director, committee member, or officer believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company. 38. Time Periods. In applying any provision of these By-Laws that requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days will be used unless otherwise specified, the day of the doing of the act will be excluded and the day of the event will be included. 39. Amendments. Except as otherwise provided by law or by the Certificate of Incorporation, these By-Laws or any of them may be amended in any respect or repealed at any time, either (i) at any meeting of stockholders, provided that any amendment or supplement proposed to be acted upon at any such meeting has been described or referred to in the notice of such meeting, or (ii) at any meeting of the Board, provided that no amendment adopted by the Board may vary or conflict with any amendment adopted by the stockholders. 40. Certain Defined Terms. Terms used herein with initial capital letters that are defined in the Certificate of Incorporation are used herein as so defined. EX-10.14 7 ltramendcreditfacilityrbc.txt LETTER AMENDMENT TO CREDIT FACILITY WITH RBC EXHIBIT 10.14 [GRAPHIC OMITED] Royal Bank of Canada Information Technology - GTA 260 East Beaver Creek Road, Suite 201 Richmond Hill, Ontario L4B 3M3 TeL: (905) 764-4755 Fax: (905) 764-4361 January 23, 2006 Private and Confidential SENTRY TECHNOLOGY CANADA INC. c/o Sentry Technology Corporation 37 Voyager Court North Toronto, Ontario M9W 4Y2 We refer to the agreement dated April 19, 2005 between Sentry Technology Canada Inc., as the Borrower, and Royal Bank of Canada, as the Bank, (the "Agreement"). All capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement. The Agreement is amended as follows: 1. Under the Repayment section, Facility (1) is amended and restated as follows: REPAYMENT - --------- Facility (1) - ------------ Borrowings under this facility are expected to revolve with operating requirements. Borrowings under this facility shall be repayable on April 30, 2006. 2. Under the Interest Rates and Fees section, Facility (1) is amended and restated as follows: INTEREST RATES AND FEES - ----------------------- Facility (1) - ------------ RBP Loans: RBP plus 1.75% per annum. RBUSBR Loans: RBUSBR plus 1.75% per annum. LCs: fee to be quoted by the Bank at the time of issue of each LC. LGs: fee to be quoted by the Bank at the time of issue of each LG, subject to a minimum fee of $100 in the currency of issue. Sentry Technology Canada Inc. - 2 - January 23,2006 3. Under the Security section, paragraph (e) is deleted and replaced with the following: (e) Postponement and subordination agreement between the Brascan Technology Fund ("Brascan"), the Bank, the Borrower, Sentry Technology Corporation, Sentry Technology USA Inc. and Custom Security Industries Inc., whereby the parties agree, inter alia, that: (i) the Brascan Security (as defined therein) shall rank subsequent and be subordinate to the Lender Security (as defined therein) held by the Bank, to a maximum of $5,350,000; (ii) with the exception of subparagraph (e)(i) above, the Lender Security (as defined therein) shall rank subsequent and be subordinate to the Brascan Security to the extent of the Brascan Indebtedness (as defined therein), and; (iii) upon receipt by Brascan of written notice by the Bank that the Bank is issuing a demand pursuant to any of the obligations owing by any of the Borrower, Sentry Technology Corporation, Sentry Technology USA Inc. or Custom Security Industries Inc. to the Bank, Brascan will cease to receive and will postpone receipt of all payment of any Brascan Indebtedness for a period of time provided for therein. 4. Under the Reporting Covenants section, (i) paragraph (b) under the reporting covenants for the Borrower, is amended and restated as follows: (b) monthly company prepared financial statements for the Borrower, within 30 days of each month end; and (ii) paragraph (a) under the reporting covenants for Sentry Technology Corporation, is amended and restated as follows: (a) monthly company prepared consolidated financial statements for Sentry Technology Corporation, within 30 days of each month end; 5. The Financial Covenants section is amended and restated as follows: FINANCIAL COVENANTS - ------------------- Sentry Technology Corporation covenants and agrees with the Bank, while any availability exists or any Borrowings remain outstanding under any Credit Facility, which is a term facility: a) maintain on a consolidated basis, to be measured as at the end of each fiscal quarter: i. a ratio of Current Assets to Current Liabilities of not less than 1.5:1; ii. a ratio of Funded Debt to EBITDA, calculated on a rolling 4 quarters basis for the fiscal quarter then ended and the immediately preceding 3 fiscal quarters, of not greater than 2.5:1; iii. a ratio of Total Liabilities to Tangible Net Worth of not greater than 2.5:1; iv. EBITDA of at least the amounts listed in the table below for the corresponding fiscal quarter, commencing with the fiscal quarter ending June 30, 2006: Sentry Technology Canada Inc. -3- January 23,2006 Fiscal Quarter Ending: Method of Calculation US Currency EBITDA - ---------------------------------------------------------------------------- June 30,2006 N/A $500 - ---------------------------------------------------------------------------- September 30, 2006 Year-To-Date $1,280,000 - ---------------------------------------------------------------------------- December 31, 2006 calculated on a rolling $1,940,000 4 quarters basis for the fiscal quarter then ended and the immediately preceding 3 fiscal quarters - ---------------------------------------------------------------------------- Each fiscal quarter calculated on a rolling $1,940,000 thereafter 4 quarters basis for the fiscal quarter then ended and the immediately preceding 3 fiscal quarters - ----------------------------------------------------------------------------- v. Tangible Net Worth of at least the amounts listed in the table below for the corresponding fiscal quarter commencing with fiscal quarter ending March 31, 2006: Fiscal Quarter Ending: US Currency TNW - ----------------------------------------------------- March 31,2006 $2,900,000 - ----------------------------------------------------- June 30,2006 $3,300,000 - ----------------------------------------------------- September 30,2006 $4,000,000 - ----------------------------------------------------- December 31,2006 $4,500,000 - ----------------------------------------------------- Each fiscal quarter thereafter $4,500,000 - ----------------------------------------------------- 6. Schedule "E" is replaced as attached. CONDITIONS PRECEDENT - -------------------- The effectiveness of this amendment is conditional upon receipt of: a) a duly executed copy of this amending agreement; and b) such financial and other information or documents relating to the Borrower or any Guarantor if applicable as the Bank may reasonably require. AMENDMENT FEE - ------------- A non-refundable amendment fee of $3,000 is payable by the Borrower upon acceptance of this amending agreement. COUNTERPART EXECUTION - --------------------- This amending agreement may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together constitute one and the same instrument. All other terms and conditions outlined in the Agreement remain unchanged and in full force and effect. Sentry Technology Canada Inc. - 4 - January 23,2006 This amending agreement is open for acceptance until February 22, 2006, after which date it will be null and void, unless extended in writing by the Bank. ROYAL BANK OF CANADA Per: /s/ Marc J. Drouin Name: Marc J. Drouin Title: Senior Account Manager Agreed to and accepted this 2nd day of February, 2006. SENTRY TECHNOLOGY CANADA INC. Per: /s/Peter L. Murcoch Name: Peter L. Murdoch Title: President Per: Name: Title: I/We have the authority to bind the Borrower Agreed to and accepted this 2nd day of February, 2006. SENTRY TECHNOLOGY CORPORATION Per: /s/ Peter L. Murdoch Name: Peter L. Murdoch Title: President Per: Name: Title: I/We have the authority to bind the Guarantor Sentry Technology Canada Inc. - 5 - January 23,2006 We acknowledge and confirm our agreement with the foregoing terms and conditions, as Guarantor, as of February 2, 2006. SENTRY TECHNOLOGY USA INC. Per: /s/ Peter L. Murdoch Name: Peter L. Murdoch Title: President Per: Name: Title: I/We have the authority to bind the Guarantor We acknowledge and confirm our agreement with the foregoing terms and conditions, as Guarantor, as of February 2, 2006. CUSTOM SECURITY INDUSTRIES INC. Per: /s/ Morton F. Roseman Name: Morton F. Roseman Title: President Per: Name: Title: I/We have the authority to bind the Guarantor Schedule E Schedule "E" to the agreement dated April 19, 2005, between Sentry Technology Canada Inc., as Borrower, and Royal Bank of Canada, as the Bank. Compliance Certificate I, , the of Sentry Technology Corporation (the "Guarantor") hereby certify as of fiscal quarter ending __________________: 1. I am familiar with and have examined the provisions of the letter agreement (the "Agreement") dated April 19, 2005, and any amendments thereto, between Sentry Technology Canada Inc., as Borrower, and Royal Bank of Canada (the "Bank"), as the Bank, and have made reasonable investigations of corporate records and inquiries of other officers and senior personnel of the Borrower and Guarantor. Terms defined in the Agreement have the same meanings when used in this certificate. 2. The representations and warranties contained in the Agreement are true and correct. 3. No event or circumstance has occurred which constitutes or which, with the giving of notice, lapse of time, or both, would constitute an Event of Default under the Agreement and there is no reason to believe that during the next fiscal quarter of the Guarantor, any such event or circumstance will occur. 4. The ratio of Current Assets to Current Liabilities is : 1, being not less than the minimum required ratio of 1.5:1. 5. The ratio of Total Liabilities to Tangible Net Worth is : 1, being not greater than the maximum ratio of 2.5:1. 6. The ratio of Net Funded Debt to EBITDA is : 1, being not greater than the required maximum ratio of 2.5:1. 7. EBITDA is US$_____________, being no less than the required US$500 for the fiscal quarter ending June 30, 2006, improving to US$1,280,000 for fiscal quarter ending September 30,2006, and US$ 1,940,000 for the fiscal quarter ending December 31,2006 and for each fiscal quarter thereafter. 8. Tangible Net Worth is US$___________, being not less the required US$2,900,000 for the fiscal quarter ending March 31,2006, improving to US $3,300,000 for the fiscal quarter ending June 30, 2006, US$4,000,000 for the fiscal quarter ending September 30,2006 and US$4,500,000 for the fiscal quarter ending December 31,2006 and for each fiscal quarter thereafter. 9. The detailed calculations of the foregoing ratios and covenants is set forth in the addendum annexed hereto and are true and correct in all respects. Dated this day of , 20 . Per: Name:__________________________________ Title: ______________________________ EX-14 8 codeofethics.txt CODE OF ETHICS EXHIBIT 14 SENTRY TECHNOLOGY CORPORATION & SUBSIDIARIES CODE OF ETHICS Adopted as of March 15, 2004 GENERAL PHILOSOPHY This Code of Ethics sets forth the principles by which we operate our company and conduct our daily business with our shareholders, customers, vendors and with each other. Sentry Technology Corporation is committed to conducting business in an ethical and legal manner. Our directors, employees, agents and representatives are expected to act in accordance with the highest ethical and legal standards in all aspects of their business activities. The principles described in this Code apply to all directors, officers and employees of Sentry Technology and its subsidiaries (hereinafter referred to as the "Company"). These principles are not intended to be a complete list of ethical and legal issues a director, officer or employee might face in the course of his/her business activities. Therefore, it is intended that these principles are to be applied using common sense and reasonable business judgment. These principles and standards of conduct apply in all countries where the Company conducts business. It is the Company's policy to conduct its business with the highest standards of integrity and in accordance with all applicable laws and regulations. Employees are expected to deal fairly and honestly with each other as well as with our vendors, customers and other third parties. This Code neither constitutes nor should be construed to constitute a contract of employment for a definite term or a guarantee of continued employment. PRINCIPLES Conflicts of Interest All directors, officers and employees of the Company should avoid any action or interest that conflicts or gives the appearance of a conflict with the Company's interests. A "conflict of interest" exists whenever an individual's personal interests interfere or appear to interfere with the interests of the Company. A conflict situation can arise when a director, officer or employee takes actions or has interests that may make it difficult to perform his or her work for the Company objectively and effectively. Conflicts of interest may also arise when a director, officer or employee or a member of his or her family receives improper personal benefits as a result of his or her position with the Company, whether from a third party or from the Company. Directors, officers and employees are expected to avoid all situations that might lead to an actual or apparent conflict of interest. Conflicts of interest may not always be identifiable, so if a question arises, an officer or employee should consult with higher levels of management. Any director, officer or employee who becomes aware of an actual or apparent conflict involving an officer or employee is required to bring it to the attention of a supervisor, manager or other appropriate personnel. Any director who becomes aware of an actual or apparent conflict involving themselves or another director should disclose the conflict to the Board of Directors. Protection and Proper Use of Company Assets All directors, officers and employees should protect the Company's assets and ensure their efficient and proper use. Permitting the Company's property, including electronically transmitted and stored data and computer resources, to be damaged, lost or used in an unauthorized manner is strictly prohibited. Corporate Opportunity Directors, officers and employees are prohibited from (a) taking for themselves personal opportunities that properly belong to the Company or are discovered through the use of corporate property, information or position; (b) using corporate property, information or position for personal gain; and (c) competing with the Company. Confidentiality Directors, officers and employees must maintain the confidentiality of non-public information entrusted to them by the Company or its customers or vendors, except when disclosure is specifically authorized by applicable law, rule or regulation. Confidential information includes all non-public information that might be of use to competitors of the Company or harmful to the Company, its customers, vendors or employees if disclosed. Fair Dealing We seek to outperform our competition fairly and honestly. We seek competitive advantages through superior performance, never through unethical or illegal business practices. Stealing proprietary information, possessing or utilizing trade secret information that was obtained without the owner's consent or inducing such disclosures by past or present employees of other companies is prohibited. Each director, officer and employee is expected to deal fairly with the Company's customers, vendors, competitors, officers and employees. No one should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair dealing. PUBLIC COMPANY REPORTING As a public company, it is of critical importance that the Company's filings with the Securities and Exchange Commission, governmental and other regulatory agencies and other public communications be accurate and timely. Depending on their position with the Company, a director, officer or employee may be required to provide necessary information to assure that the Company's public reports are complete, accurate and understandable. The Company expects directors, officers and employees to take this responsibility very seriously and to provide prompt and accurate information related to the Company's public disclosure requirements. Financial Statements and Other Records All of the Company's books, records, accounts and financial statements must appropriately reflect the Company's transactions in accordance with generally accepted accounting principles and conform to applicable legal requirements and to the Company's system of internal controls as well as its disclosure controls and procedures. Records should always be retained or destroyed according to the Company's record retention policies. Complying with Laws, Rules, Regulations, Policies and Procedures All directors, officers and employees of the Company are expected to understand, respect and comply with all of the laws, rules and regulations of federal, state and local governments and other appropriate regulatory agencies and the policies and procedures of the Company that apply to them in their position with the Company. Employees are responsible for talking to their supervisor to determine which laws, rules, regulations, policies and procedures apply to their position and what training is necessary to understand and comply with them. Securities Law Compliance It is unethical and illegal for a director, officer or employee to place a purchase or sell order or recommend that another person place a purchase or sale order in the stock of Sentry Technology Corporation when they have knowledge of material information concerning the Company that has not been disclosed to the public. In addition, it is unethical and illegal for a director, officer or employee to place a purchase or sell order or recommend that another person place a purchase or sell order in the securities of another corporation, if they learn in the course of their employment or position as director of the Company, confidential information about the corporation that is likely to affect the value of those securities. Any questions concerning the propriety of participating in a Sentry Technology Corporation or another corporation stock or other security transaction should be directed to the Company's Chief Financial Officer. REPORTING ILLEGAL OR UNETHICAL BEHAVIOR, ACCOUNTING, AUDITING AND FINANCIAL REPORTING COMPLAINTS Complaints of Illegal or Unethical Behavior Directors, officers and employees who suspect or know of violations of the Code of Ethics or illegal or unethical business or workplace conduct, including actions or failures to act, by directors, officers or employees are required to promptly report (anonymously or otherwise) the violation or conduct to their supervisor, superiors or other representative of the Company in light of the circumstances. If the individual to whom such information is conveyed is not responsive, or if there is reason to believe that reporting to such individuals is inappropriate in particular cases, then the employee may contact the Company's Chief Executive Officer or Chief Financial Officer. Such communications will be kept confidential to the extent feasible. If the employee is still not satisfied with the response, the employee may contact any member of the Board of Directors of the Company. Such submissions may be directed to the attention of the Board of Directors at the principal executive offices of the Company or the principal place of business of the individual director. If concerns or complaints require confidentiality, then this confidentiality will be protected to the extent feasible, subject to applicable law. Accounting, Auditing and Financial Reporting Complaints The Company's policy is to comply with all applicable controls, financial reporting regulations and generally accepted accounting principles. Directors, officers or employees of the Company having unresolved concerns or complaints regarding questionable accounting, auditing or financial reporting matters of the Company may submit (anonymously or otherwise) those concerns or complaints to the Company's Chief Financial Officer. Subject to its legal duties, the Company will treat such submissions confidentially. Such submissions may be directed to the attention of the Board of Directors and/or the Chief Financial Officer at the principal executive offices of the Company or the principal place of business of the individual director. Non-Retaliation All concerns or complaints of violations under this Code of Ethics or other known or suspected illegal or unethical conduct will be promptly investigated and appropriate action taken. No director, officer or employee expressing concerns or complaints will be subject to any disciplinary or other adverse action by the Company absent making a knowingly false report. AMENDMENT, MODIFICATION AND WAIVER This Code of Ethics may only be amended or modified by the Board of Directors of Sentry Technology Corporation. Waivers of the Code of Ethics may only be granted by the Board of Directors of Sentry Technology Corporation Waivers of the Code of Ethics and reasons for the waiver will be promptly disclosed as required by the Securities Exchange Act of 1934 and the rules thereof, and the applicable rules of any exchange upon which any of the Company's securities are listed. In addition, amendments and modifications to the Code of Ethics will be promptly disclosed to the Company's shareholders. CODE OF ETHICS ADHERENCE All directors, officers and employees are required to adhere to the Code of Ethics. Any failure to adhere to the Code of Ethics may result in disciplinary action, up to and including termination of employment or the director's position with the Company. Violations of the Code of Ethics may also constitute violations of law and may result in civil and criminal penalties for the director, officer or employee and /or the Company. Adherence to the Code of Ethics will be closely monitored by the Company. The Company will retain a record of all concerns and complaints and the results of its investigations for a period of four years. EX-21 9 subsidiaries.txt SUBSIDIARIES EXHIBIT 21 Subsidiaries Set forth below are the names of the direct and indirect subsidiaries of Sentry Technology Corporation, together with the percentage ownership interest of each such corporation held by its parent. - -Sentry Technology Canada Inc. (100%) - -Custom Security Industries Inc. (51%) - -Sentry Technology USA Inc. (100%) merged into Sentry Technology Corporation as of December 31, 2005 - -Knogo Caribe Inc. (inactive) (100%) EX-23.1 10 consentofaccountants.txt CONSENT OF REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 333-34929 and 333-34867 of Sentry Technology Corporation on Form S-8 of our report dated March 16, 2006 appearing in this Annual Report on Form 10-KSB of Sentry Technology Corporation for the year ended December 31, 2005. /s/ SF Partnership, LLP Chartered Accountants Toronto, Canada March 16, 2006 EX-31.1 11 section302certbyceo.txt SECTION 302 CERTIFICATION BY CEO 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 annual report on Form 10-KSB of Sentry Technology Corporation; 2. Based on my knowledge, this annual 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 annual 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 April 13, 2006 EX-31.2 12 section302cert-cfo.txt SECTION 302 CERTIFICATION BY CFO 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 annual report on Form 10-KSB of Sentry Technology Corporation; 2. Based on my knowledge, this annual 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 annual 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 April 13, 2006 EX-32.1 13 section906cert-ceo.txt SECTION 906 CERTIFICATION BY CEO 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 Annual Report of Sentry Technology Corporation (the "Company") on Form 10-KSB for the period ended December 31, 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 April 13, 2006 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies this Report on Form 10-KSB 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. EX-32.2 14 section906cert-cfo.txt SECTION 906 CERTIFICATION BY CFO 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 Annual Report of Sentry Technology Corporation (the "Company") on Form 10-KSB for the period ended December 31, 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 April 13, 2006 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies this Report on Form 10-KSB 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-----