-----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, PxrEBxbtBVqSvvgld2IBvU4EpT7Zl62zl3xDGy5oEInsUwScQj14QNm+PnwCY5LU KlUX3YQRVmNNV3geVjjb1g== 0001137403-07-000018.txt : 20070328 0001137403-07-000018.hdr.sgml : 20070328 20070328161056 ACCESSION NUMBER: 0001137403-07-000018 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070328 DATE AS OF CHANGE: 20070328 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: 07724422 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 skvy2006.txt SENTRY TECHNOLOGY 10-KSB 2006 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from -__________ to ___________ Commission file number: 1-12727 __________________________________ 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 Regula-tion 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 $12,135,000. At March 23, 2007, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $2,162,000 based upon the closing price of such securities on the OTC Bulletin Board on that date. At March 23, 2007, the Registrant had outstanding 120,743,804 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 30 years. Sentry was formed in connection with the February 1997 merger of Knogo North America Inc., a Delaware corporation, and Video Sentry Corporation, a Minnesota corporation. As a result of the merger, we became the parent corporation of two wholly-owned Delaware subsidiaries: Knogo North America Inc. ("Knogo") and Video Sentry Corporation ("Video"). This series of transactions is referred to herein collectively as the "Initial Merger." Knogo was engaged in the design, manufacture, sale, installation and servicing of a complete line of electronic article surveillance equipment. Knogo was incorporated in Delaware in October 1996. Its corporate predecessors had been in business for more than 30 years. Video designed, manufactured, marketed, installed and serviced a programmable traveling closed circuit television surveillance system that delivers a high quality video picture, which is used in a wide variety of applications. Video also acted as a system integrator for conventional 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. EQUITY TRANSACTIONS On April 19, 2004, Dialoc ID Holdings B.V. ("Dialoc") sold 39,066,927 Sentry common shares (representing approximately 46% of the total issued and outstanding shares of Sentry) to a group of investors. Of the group, Saburah Investments Inc. ("Saburah") acquired 22,758,155 shares, Mr. Robert Furst 14,554,386 shares and Dr. Morton Roseman 1,754,386 shares. Mr. Peter Murdoch, President, CEO and Director of Sentry, is the owner of Saburah. Mr. Furst is a long-standing member of Sentry's Board of Directors. In addition to the purchase of Sentry's common shares, Saburah also acquired 100% of ID Security Systems Canada, Inc. and ID Systems USA, Inc. The price paid to Dialoc by Saburah and Murdoch for Sentry and ID Systems shares in cash, debt assumption and other consideration was approximately $3.6 million plus the surrender of Murdoch's 15% interest in Dialoc. Saburah also agreed to make a payment to Dialoc in the future equal to approximately 6% of any payment it received from Checkpoint Systems Inc. ("Checkpoint") resulting from litigation brought by ID Canada against Checkpoint. On April 30, 2004, Sentry purchased from Saburah Investments, Inc., an Ontario corporation, all of the outstanding common shares and Series "A" preference shares of ID Security Systems Canada, Inc., an Ontario corporation, and all of the outstanding capital stock of ID Systems USA, Inc., a Pennsylvania corporation. ID Systems was a Toronto based company engaged in anti-shoplifting technology, security labeling, 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 a distributor in North and South America for 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 Brookfield Technology Fund ("Brookfield"), an alternative investment fund established by Brookfield Asset Management (formerly known as Brascan Technology Fund and Brascan Asset Management, respectively), to invest in early stage, technology-based companies with high growth potential. Key terms of the transaction are as follows: - - Four year term. - - Interest rate of 8%. - - 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, represented the total cash received by Sentry directly and indirectly as a result of the Checkpoint lawsuit. Mr. Murdoch, directly or indirectly through his ownership of Saburah, owns or controls 51.2% 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, 2006, 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 2006, 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 1,375 stores in 49 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 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, Navarre, 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. SmartTrack 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 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. At December 31, 2006, the approximate number of EAS Systems sold or leased by Sentry and its predecessors exceeded 26,800. 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 users access to circulation software, automatic security strip deactivation, automatic return ticket printing, user access to book renewals, multi-lingual software interface and on-screen user instructions. QuickCheck systems have been installed in Omaha Public Library, 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. 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 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. BOOKINGS Of Sentry's bookings for the year ended December 31, 2006, approximately 60 percent were attributable to EAS, 36 percent to SentryVision and 4 percent to CCTV. For the year ended December 31, 2005, approximately 55 percent were attributable to EAS, 31 percent to SentryVision and 14 percent to CCTV. For the year ended December 31, 2004, approximately 42 percent were attributable to EAS, 32 percent to SentryVision and 26 percent to CCTV. 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 2006, no single customer accounted for more than 10% of total revenues. In 2005, Goody's Family Clothing accounted for 10% of total revenues. In 2004, Lowe's Home Centers accounted for 30% 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. 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 2006, 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 - ---------------- We have 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, 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 2006, we increased the number of direct salespersons to 11, whose efforts were supplemented through three 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 system integrators and distributors including Honeywell, ADT, Chubb, Intrepid, BSC and Repromatic. 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 both 2006 and 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 2006. 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, 2006, 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 2006, Sentry placed in service 131 SentryVision systems and 480 CCTV cameras, as compared to 150 SentryVision systems and 1,180 CCTV cameras in 2005 and 229 SentryVision systems and 2,626 CCTV cameras in 2004. 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. Knoscape RF systems are universal in that they can detect both 2 MHz hard tags and 8 MHz labels. Sentry also markets an 8MHz P-2000 RF system designed for both hard and soft good customers. The P-2000 system is economical and self-installable by the customer. 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 the primary 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, 2006 and 2005, Sentry placed in service 432 and 450 EAS systems, respectively. In addition in 2006 and 2005, we sold 51 and 23 QuickCheck patron self check book borrowing systems to libraries. BACKLOG Our backlog of orders was approximately $1.4 million at December 31, 2006, as compared to approximately $1.2 million at December 31, 2005 and approximately $2.2 million at December 31, 2004. We anticipate that substantially all of the backlog present as of December 31, 2006 will be delivered within 12 months. SEASONAL ASPECTS OF THE BUSINESS Our current video product customers are primarily dependent on retail sales, which are seasonal and subject to significant fluctuations and are difficult to predict. SERVICE Installation services are performed by our personnel and by carefully screened and supervised subcontractors as well as authorized dealers and distributors. Repair and maintenance services are performed primarily by our personnel. All products sold are covered by a warranty period, generally, one year. After the warranty period, we offer our customers the option of entering into a maintenance contract with the Company or paying for service on a per call basis. Installations of SentryVision systems typically take from three days to several weeks and involve mounting the enclosures, installing the controller unit, installing the carriage assembly, and connecting control and transmission cables to the central monitoring location. Items such as high voltage power termination wiring are typically the responsibility of the end user. The use of subcontractors supervised by Company employees proved cost effective with no apparent sacrifice in quality. We have now established a network of qualified contractors that perform most of our SentryVision and CCTV installations. 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 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, 2006, Sentry Technology Corporation had 5 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, 2006, 2005 and 2004 approximately $0.8 million, $0.9 million and $0.8 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 2006 incorporated improvements in preset accuracy, operational improvements for better user control and additional on-board diagnostics. New camera control protocols for SmartTrack were also developed and implemented. Additional projects included revisions to EAS products. RF systems developments included prototypes for new customer installable systems. In addition, we focused our efforts on software updates on Ranger systems and the development of a new and more cost efficient alarm console. Developments to EM systems included the mechanical design of a second-generation "WAM2" Library system and a "WAM2" tuning board prototype. QuickCheck system developments included continuing cost reductions in system components and software upgrades to improve product capabilities and functions. In addition, we developed software to incorporate a new ultrasonic item counter and the introduced the new "ADR1" Deactivator/Reactivator for library materials. At our Custom Security label making subsidiary, we developed new processes for the manufacturing of EM labels and a new book label using amorphous wire material. In addition, we continued research on conversion methods for RFID labels and the design of new RFID portals. 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, 2006, the Company and its subsidiaries employed 71 full-time employees, of whom 13 were employed in administrative and clerical capacities, 5 in engineering, research and development, 23 in production and manufacturing support, 14 in sales and marketing and 16 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 ("Bi-County") brought an action against the Company in the Supreme Court of New York, County of Suffolk, for the recovery of a real estate brokerage commission in the amount of approximately $250,000 relating to the termination of Bi-County's lease on its former Hauppauge facility. We believe there is no merit to this claim and the Company is vigorously defending such action. As of the date of this letter, plaintiff Bi-County's motion for summary judgment, as well as the Company's cross-motion, has been denied and the Company is awaiting a date for trial. The Company is asserting that Bi-County is not entitled to such commission. 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, 2006, 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 ----- ----- 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 0.12 0.11 Third Quarter 0.10 0.04 Fourth Quarter 0.07 0.05 2007 First Quarter (through March 23, 2007) $0.07 $0.05
The Company's Common Stock is quoted on the OTC Bulletin Board ("OTCBB") under the symbol SKVY. (b) Holders of Common Stock. As of March 23, 2007, the Company had 120,743,804 shares of Common Stock issued and outstanding, which were held by approximately 355 holders of record. (c) Dividends. The payment of future dividends will be a business decision to be made by the Board of Directors of Sentry from time-to-time based upon the results of operations and financial condition of Sentry and such other factors as the Board of Directors considers relevant. Sentry has not paid, and does not presently intend to pay or consider the payment of, any cash dividends on the Common Stock. In addition, covenants in the Company's credit agreements prohibit the Company from paying cash dividends without the consent of the lenders. (d) Securities Authorized for Issuance Under Equity Compensation Plans. For a description of the Company's equity securities authorized for issuance as described in Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," see Notes to our Financial Statements, Note [3.p.] "Significant Accounting Policies, Stock-Based Compensation," and Note [14], "Stock Based Compensation." 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 Note [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, 2002, 2003, 2004, 2005 and 2006. 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, 2002 2003 2004 2005 2006 -------- -------- ------- -------- -------- Selected Statement of Operations Data: - ------------------------------------- Total revenues $14,704 $13,243 $16,863 $13,570 $12,135 Cost of sales 7,382 5,179 6,351 5,960 5,374 Customer service expenses 4,240 3,977 4,175 2,654 2,209 Selling, general and administrative expenses 5,287 3,809 4,840 5,348 5,296 Income (loss) before income taxes and minority interest (3,356) (1,049) 253 (1,581) (2,055) Extraordinary item - Gain on extinguishment of debt - 738 - - - Net income (loss) (3,356) 181 31 (1,690) (2,304) Net income (loss) per common share: Basic and diluted (0.05) 0.00 0.00 (0.01) (0.02) As of December 31, 2002 2003 2004 2005 2006 -------- -------- ------- -------- -------- Selected Balance Sheet Data: - --------------------------- Working capital. $ (768) $ (285) $ 4,545 $ 3,037 $ 1,276 Total assets. 7,992 4,093 12,247 9,395 8,834 Property, plant and equipment, net. 2,563 209 689 637 609 Obligations under capital leases. 2,652 18 13 7 11 Convertible debentures - - 1,862 1,904 1,945 Minority interest - - 1,045 1,140 1,237 Total common stockholders' equity (deficit) (451) (125) 4,345 2,698 648
Results of Operations Year Ended December 31, 2006 Compared with Year Ended December 31, 2005 Consolidated revenues were 11% lower in the year ended December 31, 2006 than in the year ended December 31, 2005. Our backlog of orders was approximately $1.4 million at December 31, 2006, as compared to approximately $1.2 million at December 31, 2005. We anticipate that substantially all of the backlog present as of December 31, 2006 will be delivered within 12 months. Total revenues for the periods presented are broken out as follows:
% 2006 2005 Change ------ ------ ------ (in thousands) Electronic Article Surveillance (EAS) $ 6,813 $ 6,490 5 Closed Circuit Television (CCTV) 590 1,670 (65) SentryVision 2,809 2,971 (5) ------- ------- ---- Total sales 10,212 11,131 (8) Service, maintenance and installation 1,923 2,439 (21) ------- ------- ---- Total revenues $12,135 $13,570 (11) ======= ======= ----
North American revenues represented $10.1 million or 83% of total revenues in 2006 compared to $11.6 million or 83% of total revenues in 2005. Total international sales were $2.0 million in 2006 compared to $1.9 million in 2005. Our sales to our international dealers and distributors are denominated in U.S. dollars, therefore the strengthening of the Euro and other foreign currencies against the U.S. dollar in 2006 had no significant impact on reported revenues. The most significant impact on total revenues on a comparative basis was a reduction in revenues from our two largest customers, Lowe's and Goody's, by approximately $1.8 million in 2006 compared to 2005. We had significant growth in EAS sales in the North American library sector principally due to higher sales of our QuickCheck patron self check book-borrowing systems. In addition, we increased EAS sales by $0.5 million to library dealers in South America and Mexico in 2006 compared to 2005. International EAS sales were $0.7 million and $0.6 million in 2006 and 2005, respectively. However, these gains were offset by decreases in EAS equipment and label sales to North American retail customers. The reduction in CCTV and sales in 2006 as compared to 2005 was principally a result of lower sales to Lowe's and Goody's. North American SentryVision(R) sales decreased by $0.2 million to $1.5 million in 2006 compared to $1.7 million in 2005. International sales of SentryVision(R) represented $1.3 million in both 2006 and 2005. Service and maintenance revenues were substantially lower in 2006 as compared to 2005 principally as a result of cancellation of the Lowe's maintenance contract. Installation revenues were lower in 2006 as compared to 2005 due to lower CCTV and SentryVision(R) sales. Cost of sales was 53% of sales in 2006 compared to 54% in 2005. The reduction in percentage is partially a result of the change in product mix, particularly from the reduction in sales of lower margined conventional CCTV products. We continued to see strong domestic margin improvements in 2006 on the SmartTrack and QuickCheck product lines as a result of our outsourcing of manufacturing. However, our comparative margins on international SmartTrack sales have been reduced in 2006, due to competitive pressures. We also experienced reduced selling prices on EAS equipment to international dealers, particularly in South America and Mexico, which was offset partially by increased margins at our 51% owned labeling subsidiary. The decrease in customer service expenses in 2006, as compared to 2005, 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 1% lower in 2006 as compared to 2005. The decreases in expenses in 2006 are principally a result of administrative cost reductions including reduced headcount, lower legal and insurance costs, as well as a reduction in the foreign exchange losses. These were partially offset by increases in sales personnel and increased funding of sales and marketing programs. Research and development costs remained approximately the same at 7% and 6% of total revenues in 2006 and 2005, respectively. Total interest and financing costs were higher in 2006 compared to 2005 by $140,000. The increase is partially result of higher interest rates on short term borrowings under the credit facilities, as well as additional financing costs related to the loan guarantees provided by the Company's directors. The income tax provision was $145,000 in 2006 and $49,000 in 2005. The income tax expense in both periods principally results from the taxable income of our Canadian subsidiaries, which cannot be offset by Sentry's net operating loss carryforwards. As a result of the foregoing, we had net loss of $2,304,000 in the year ended December 31, 2006, as compared to net loss of $1,690,000 in the year ended December 31, 2005. Liquidity and Capital Resources At December 31, 2006, we had cash and short term investments of $0.6 million, working capital of $1.3 million, total assets of $8.8 million and stockholders' equity of $0.6 million. Our net cash used in operating activities was $1.1 million. Cash was principally used to finance increases in inventory levels purchased in anticipation of higher sales activity levels. This was offset by cash generated from reductions in accounts receivable resulting from the decline in revenues as well as an increase in accounts payable and accrued liabilities. Our investing activities in 2006 provided short term investments of $138,000 offset by $112,000 for the purchase of manufacturing equipment at our 51% owned labeling plant. There are no significant projected capital expenditure requirements anticipated in the near term, however, the level of spending will be dependent upon various factors, including growth of the business and general economic conditions. We generated $992,000 in net cash from financing activities in 2006 through an increase in borrowings under our credit facilities, which are described more fully below. Borrowing availability under the Royal Bank of Canada ("RBC") credit facility had previously been based upon the level of receivables and inventory, which declined in 2006. The increased availability under the credit facility was principally related to the loan guarantees provided by our directors. In November 2006, the Company and certain of its subsidiaries amended its secured credit facility with RBC by converting the facility to a demand loan, increasing the interest rate and eliminating financial covenants. In addition, during the year, the maximum borrowings under the facility were reduced to Canadian $3.6 million (U.S. $3.1 million). However, RBC increased the borrowing base formula by Canadian $1.0 million (U.S. $858,000) in exchange for additional security provided by two of the Company's directors in the second quarter of 2006. Borrowings under the facility are subject to certain limitations based on a percentage of eligible accounts receivable and inventories as defined in the agreement. Interest is payable at a rate of Royal Bank of Canada prime rate (6.0% at December 31, 2006), plus 2.75% per annum. Borrowings under this facility are secured by substantially all of the Company's assets. As of December 31, 2006, the Company had borrowings of $2.6 million, which was the maximum available under the facility. The outstanding balance of the loan from the RBC as of March 16, 2007 exceeds the maximum amount of funds available to the Company based on the formula included in the Royal Bank loan agreement, and accordingly, the Company is in violation of the terms of that agreement. RBC has been made aware of the violation and has agreed to waive the violation until April 30, 2007. At the end of the second quarter of 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. $858,000) in exchange for the bank providing increased availability under its credit facility to the Company by the same amount. In consideration of these guarantees, Mr. Murdoch and Mr. Furst will receive a fee of $43,000, to be shared between them, paid in 12 equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 2.9 million shares of the Company's common stock, at an exercise price of $0.10 per share. The fair value of these warrants of $120,000 was determined in accordance with SFAS No. 123R "Share-Based Payment" and beginning in June 2006 is being written off over the period of the guarantee, which is one year. During the year ended December 31, 2006, $70,000 has been recorded in interest and financing expense related to these warrants and $50,000 will be expensed in 2007. In addition, in December 2006, the Company entered into a secured revolving credit agreement with Tradition Capital Bank. From December 15, 2006 through the expiration of the facility on June 15, 2007, the Company may draw up to a maximum of $550,000 under the facility. Interest is payable at a rate of Tradition Capital Bank prime rate (8.25% at December 31, 2006), plus 1% per annum. Borrowings under this facility are secured by substantially all of the Company's assets in a second position to RBC. In addition, the loan is fully secured by the personal guarantees of Mr. Murdoch and Mr. Furst. In consideration of these guarantees, Mr. Murdoch and Mr. Furst will receive a fee of $14,000, to be shared between them, paid in 6 equal monthly installments beginning in December 2006. As additional consideration, they received fully vested, two year warrants to purchase approximately 5.2 million shares of the Company's common stock, at an exercise price of $0.053 per share. The fair value of these warrants of $91,000 was determined in accordance with SFAS No. 123R "Share-Based Payment" and beginning in December 2006 is being written off over the period of the guarantee, which is six months. During the year ended December 31, 2006, $8,000 has been recorded in interest and financing expense related to these warrants and $83,000 will be expensed in 2007. We will require positive cash flows from operations to meet our working capital needs over the next twelve months. Sentry's revenues declined and we incurred operating losses in 2006 and 2005. Borrowing availability under the Company's principal credit facility at RBC has traditionally been based upon the level of receivables and inventory, which declined in 2006. This limited our ability to secure additional bank financing without the personal guarantees of Sentry's directors, which expire in the second quarter of 2007. In addition, the outstanding balance of the loan from the RBC as of March 16, 2007 exceeds the maximum amount of funds available to the Company based on the formula included in the Royal Bank loan agreement, and accordingly, the Company is in violation of the terms of that agreement. RBC has been made aware of the violation and has agreed to waive the violation until April 30, 2007. Further, a majority of the Company's cash is held at the 51% owned subsidiary. The Company has instituted certain plans to increase its revenue base as well as preserve its cash, including significant cost cutting measures in 2007 and inventory reduction initiatives. We made a substantial investment in the sales and marketing infrastructure during the 2006 and anticipated a substantial increase in sales particularly in the SentryVision(R) SmartTrack product line which has not yet occurred. While we believe that we have developed solid sales leads with some of the world's largest retailers, we continued to see delays in receipt of current orders, which caused us to operate in a cash flow deficit for the year, and there can be no assurance that such leads will result in orders, or that any such orders will provide revenues sufficient to meet our working capital needs. We anticipate revenue growth in new and existing markets. We are striving to continue to improve our gross margins and control our selling expenses and our general and administrative expenses. There can be no assurance, however, that changes in our plans or other events affecting our operations will not result in accelerated or unexpected cash requirements, or that we will be successful in achieving positive cash flow from operations or obtaining adequate financing through our credit facility. Our future cash requirements are expected to depend on numerous factors, including, but not limited to: (i) the ability to generate positive cash flow from operations; (ii) the ability to raise additional capital or obtain additional financing; and (iii) economic conditions. In the event that sufficient positive cash flow from operations is not generated, we will seek additional financing to satisfy current operating cash flow deficiencies. There can be no assurance, however, that additional financing will be available on terms that are satisfactory to the Company, or that any such financing will be sufficient to provide the full amount of funding necessary. The table below summarizes aggregate maturities contractual obligations as of December 31, 2006.
Contractual Less than 1-3 4-5 After 5 Obligations Total 1 Year Years Years Years - ---------------------- --------------- ---------- ------ ------ -------- (In Thousands) Operating leases $ 747 $ 308 $ 428 $ 11 $ - Capital leases 13 4 5 4 - Notes payable 36 36 - - - Convertible debentures 2,000 - 2,000 - - --------------- ---------- ------ ------ -------- Total $ 2,796 $ 348 $2,433 $ 15 $ - =============== ========== ====== ====== ========
Recent Accounting Pronouncements In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year's financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary "correcting" adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings only if material under the dual method. SAB 108 is effective for fiscal years ending on or after November 15, 2006. The Company has assessed the effect of adopting this guidance and has determined that there will be no impact on the Company's consolidated financial statements. In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements," which is effective for calendar year companies on January 1, 2008. The Statement defines fair value, establishes a framework for measuring fair value in accordance with Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. The Statement codifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The Company is currently assessing the potential impacts of implementing this standard. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132 (R)" ("SFAS 158"). SFAS 158 requires an employer to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit plan is defined as the difference between the fair value of the plan assets and the plans benefit obligation. For a pension plan the benefit obligation is the projected benefit obligation and for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. SFAS 158 requires an employer to recognize as a component of other comprehensive income, net of tax, the gains and losses and prior service costs or credits that arise during the period but that are not recognized as components of net periodic benefit costs pursuant to SFAS 87 "Employers' Accounting for Pensions." SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year-end. Additional footnote disclosure is also required about certain effects on net periodic benefit cost for the next year that arise from the delayed recognition of gains or losses, prior service costs or credits, and transition asset or obligation. Except for the year-end measurement requirement, SFAS 158 is effective for the year ending December 31, 2006. The adoption of this Statement in 2006 did not have a material impact on the financial condition or results of operations of the Company. In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB No. 109" ("FIN 48"), effective for fiscal years beginning after December 15, 2006. FIN 48 requires a two-step approach to determine how to recognize tax benefits in the financial statements where recognition and measurement of a tax benefit must be evaluated separately. A tax benefit will be recognized only if it meets a "more-likely-than-not" recognition threshold. For tax positions that meet this threshold, the tax benefit recognized is based on the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. The Company is currently evaluating the impact of adopting FIN 48, and has not yet determined the significance of this new rule to our overall results of operations, cash flows or financial position. In March 2006, the FASB issued Statement 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140," ("SFAS 156") which amends SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In a significant change to current guidance, SFAS No. 156 permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities: (1) Amortization Method or (2) Fair Value Measurement Method. SFAS No. 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company is currently reviewing the effect, if any, the proposed guidance will have on its financial statements. In February 2006, the FASB issued Statement No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS 155"). This Statement permits fair value of remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amended SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company is currently reviewing the effect, if any, the proposed guidance will have on its financial statements. 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 ---------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ YEARS ENDED DECEMBER 31, 2006 AND 2005 -------------------------------------- CONTENTS -------- Page ---- Report of Independent Registered Public Accounting Firm 25 Consolidated Balance Sheets 26 Consolidated Statements of Operations 27 Consolidated Statements of Stockholders' Equity 28 Consolidated Statements of Cash Flows 29 Notes to Consolidated Financial Statements 30 - 43 Report of Independent Registered Public Accounting Firm ------------------------------------------------------- To the Board of Directors and Stockholders of Sentry Technology Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of Sentry Technology Corporation and Subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the two year period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sentry Technology Corporation and Subsidiaries as of December 31, 2006 and 2005 and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, reduced levels of revenue and decreased consolidated financial position as a result of not meeting its business plan, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ SF Partnership, LLP CHARTERED ACCOUNTANTS Toronto, Canada March 16, 2007 SENTRY TECHNOLOGY CORPORATION ----------------------------- AND SUBSIDIARIES ---------------- CONSOLIDATED BALANCE SHEETS --------------------------- (In Thousands, Except Par Value Amounts)
December 31, 2006 2005 ---- ---- ASSETS ------ Current Assets: Cash and cash equivalents $ 360 $ 445 Short-term investments 259 397 Accounts receivable, net of allowance for doubtful accounts of $160 and $141, respectively 2,251 2,762 Inventory 3,005 2,709 Prepaid expenses and other assets 306 318 -------------- --------- Total current assets 6,181 6,631 PROPERTY AND EQUIPMENT, net 609 637 GOODWILL 1,564 1,564 OTHER ASSETS 480 563 -------------- --------- TOTAL ASSETS $ 8,834 $ 9,395 ============== ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Bank indebtedness, demand loan and revolving line of credit $ 3,030 $ 2,039 Accounts payable 609 489 Accrued liabilities 1,078 925 Obligations under capital leases - current portion 3 6 Deferred income 185 135 -------------- --------- Total current liabilities 4,905 3,594 OBLIGATIONS UNDER CAPITAL LEASES, less current portion 8 1 DEFERRED TAX LIABILITY 91 58 CONVERTIBLE DEBENTURE 1,945 1,904 -------------- --------- Total liabilities 6,949 5,557 MINORITY INTEREST 1,237 1,140 COMMITMENTS AND CONTINGENCIES (Note 11) STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value; authorized 10,000 (2005 - 10,000) shares, none issued and outstanding Common stock, $0.001 par value; authorized 160,000 (2005 - 160,000) shares; issued and outstanding 120,744 and 120,629 shares, respectively 121 121 Additional paid-in capital 49,037 48,783 Accumulated deficit (48,712) (46,408) Accumulated other comprehensive income 202 202 -------------- --------- Total stockholders' equity 648 2,698 -------------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,834 $ 9,395 ============== =========
The accompanying notes are an integral part of these consolidated financial statements SENTRY TECHNOLOGY CORPORATION ----------------------------- AND SUBSIDIARIES ---------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- (In Thousands, Except Per Share Amounts)
Years Ended December 31, ------------------------ 2006 2005 ------ ------ REVENUES: Sales $ 10,212 $ 11,131 Service, installation and other revenues 1,923 2,439 ---------- --------- 12,135 13,570 ---------- --------- COST OF SALES AND EXPENSES: Cost of sales 5,374 5,960 Customer service expenses 2,209 2,654 Selling, general and administrative expenses 5,296 5,348 Research and development 838 856 ---------- --------- 13,717 14,818 ---------- --------- OPERATING LOSS (1,582) (1,248) INTEREST AND FINANCING EXPENSE, net 473 333 ---------- --------- LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (2,055) (1,581) INCOME TAX EXPENSE 145 49 ---------- --------- LOSS BEFORE MINORITY INTEREST (2,200) (1,630) MINORITY INTEREST (104) (60) ---------- --------- NET LOSS $ (2,304) $ (1,690) ========== ========= LOSS PER SHARE Basic and diluted $ (0.02) $ (0.01) ========== ========= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic and diluted 120,716 120,594 ========== =========
The accompanying notes are an integral part of these consolidated financial statements. SENTRY TECHNOLOGY CORPORATION ----------------------------- AND SUBSIDIARIES ---------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ----------------------------------------------- (In Thousands) YEARS ENDED DECEMBER 31, 2006 AND 2005 --------------------------------------
Accumulated Additional Other Common Stock Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Income ------------ -------- ------------ --------------- ------------ BALANCE, January 1, 2005 120,549 $ 121 $ 48,779 $ (44,718) $ 163 Net loss for the period - - - (1,690) - Exercise of stock options for cash 80 - 4 - - Equity adjustment from foreign currency translation - - - - 39 ------------ -------- ------------ --------------- ------------ BALANCE, December 31, 2005 120,629 $ 121 $ 48,783 $ (46,408) $ 202 ============ ======== ============ =============== ============ BALANCE, January 1, 2006 120,629 $ 121 $ 48,783 $ (46,408) $ 202 Net loss for the period - - - (2,304) - Exercise of stock options for cash 115 - 7 - - Stock-based compensation - - 35 - - Warrants issued - - 212 - - Equity adjustment from foreign currency translation - - - - - ------------ -------- ------------ --------------- ------------ BALANCE, December 31, 2006 120,744 $ 121 $ 49,037 $ (48,712) $ 202 ============ ======== ============ =============== ============ Total Stockholders' Comprehensive Equity Income (Deficit) (Loss) --------------- --------------- BALANCE, January 1, 2005 $ 4,345 Net loss for the period (1,690) $ (1,690) Exercise of stock options for cash 4 Equity adjustment from foreign currency translation 39 39 --------------- --------------- BALANCE, December 31, 2005 $ 2,698 $ (1,651) =============== =============== BALANCE, January 1, 2006 $ 2,698 Net loss for the period (2,304) $ (2,304) Exercise of stock options for cash 7 Stock-based compensation 35 - Warrants issued 212 - Equity adjustment from foreign currency translation - - --------------- --------------- BALANCE, December 31, 2006 $ 648 $ (2,304) =============== ===============
The accompanying notes are an integral part of these consolidated financial statements. SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES ---------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (In Thousands)
Years Ended December 31, ------------------------ 2006 2005 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,304) $ (1,690) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation 150 154 Amortization of intangibles and other assets 188 135 Deferred income taxes 33 19 Non-cash consideration 168 59 Minority interest in net income of consolidated subsidiary 97 95 Changes in operating assets and liabilities: Accounts receivable 511 777 Inventory (296) 605 Prepaid expenses and other assets 12 207 Accounts payable 120 (310) Accrued liabilities 153 (220) Deferred income 50 (34) -------- --------- Net cash used in operating activities (1,118) (203) -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Changes in short-term investments 138 (69) Purchases of property and equipment (112) (102) Intangibles 15 (25) -------- --------- Net cash provided by (used in) investing activities 41 (196) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowing on the demand loan and revolving line of credit 991 220 Repayment of notes payable --- (189) Repayment of term loan --- (821) Repayment of obligations under capital leases (6) (7) Proceeds of sale of stock, net 7 4 -------- --------- Net cash provided by (used in) financing activities 992 (793) -------- --------- DECREASE IN CASH AND CASH EQUIVALENTS (85) (1,192) CASH AND CASH EQUIVALENTS, beginning of year 445 1,637 -------- --------- CASH AND CASH EQUIVALENTS, end of year $ 360 $ 445 ======== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 348 $ 302 ======== ========= Income taxes $ 8 $ 99 ======== ========= In the year, the Company issued warrants valued at $211,000 to officers and directors to purchase common shares of the Company (Note 7).
The accompanying notes are an integral part of these consolidated financial statements SENTRY TECHNOLOGY CORPORATION ----------------------------- AND SUBSIDIARIES ---------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ YEARS ENDED DECEMBER 31, 2006 AND 2005 -------------------------------------- 1. Operations and Organization: ----------------------------- 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 40 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. 2. Going Concern: -------------- The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company has incurred operating losses, reduced levels of revenues and decreased financial position as a result of not meeting its business plan. The Company had losses of $2.3 million for the year ended December 31, 2006 and as at December 31, 2006, the Company had an accumulated deficit of $48.7 million. The Company's continuation as a going concern is uncertain. Management's plan is to continue raising additional funds through future equity or debt financing until it achieves profitable operations. Although the Company plans to pursue additional financing, there can be no assurance that the Company will be able to secure financing when needed or obtain such on terms satisfactory to the Company, if at all. The Company's continuation as a going concern depends upon its ability to raise funds and achieve and sustain profitable operations. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern. 3. Significant Accounting Policies: --------------------------------- a. Principles of consolidation ----------------------------- The consolidated financial statements include the accounts of the Company and its wholly owned (Sentry Technology Canada Inc. and Knogo Caribe Inc.) and majority owned (Custom Security Industries Inc.) subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation. b. Revenue recognition -------------------- The Company recognizes revenue on the sale of security devices when installation is complete or other post-shipment obligations have been satisfied. For those products not requiring installation or if installation costs are not material, the Company recognizes revenues upon shipment. Service revenues are recognized when services are performed and maintenance revenues are recognized ratably over the service contract period. Included in accounts receivable at December 31, 2006 and 2005 are unbilled accounts receivable of $97,000 and $36,000, respectively. c. Deferred income ---------------- Deferred income consists of rentals related to operating leases and maintenance contracts billed or paid in advance. d. Cash and cash equivalents ---------------------------- The Company considers all highly liquid temporary investments with original maturities of less than ninety days to be cash equivalents. Temporary cash investments are placed with high credit quality financial institutions. At times, the Company's cash deposits with any one financial institution may exceed federally insured limits. e. Short-term investments ----------------------- Short-term investments include highly liquid investments with initial maturity of between three and twelve months. Included in short-term investments in 2006 and 2005 is $85,000 and $84,000, respectively, of restricted funds used as collateral on Banker Acceptances. f. Allowance for doubtful accounts ---------------------------------- Losses from uncollectible accounts are provided for by utilizing the allowance for doubtful accounts method based upon management's estimate of uncollectible amounts. Management specifically 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. g. Inventory --------- Inventory is stated at the lower of cost (first-in, first-out method) or market. h. Product warranty ----------------- Provisions for estimated expenses related to product warranties are made at the time products are sold and are included in accrued liabilities. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims. i. Depreciation ------------ Depreciation of property and equipment is provided for using the straight-line method over their related estimated useful lives. j. Other assets ------------- Other assets consist of deferred charges relating to credit facilities, patents and other intangibles (including trade secrets and customer relationships). Costs relating to credit facilities are deferred over the term of the related debt. Amortization of debt issuance cost is included in selling, general and administrative expenses and interest expense in the consolidated statement of operations. Cost and expenses incurred in obtaining patents and other intangibles are amortized over the remaining life of the patents and other intangibles, not exceeding 17 years, on a straight-line basis. k. Goodwill -------- Goodwill represents the excess of acquisition cost over the fair value of net assets acquired in business combinations. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", goodwill is not amortized but reviewed annually for impairment. l. Comprehensive Income (Loss) --------------------------- The Company accounts for comprehensive income (loss) in accordance with SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of financial statements. Comprehensive income (loss) is presented in the statements of stockholders' equity, and consists of net earnings (loss) and unrealized gains (losses) on available for sale marketable securities; foreign currency translation adjustments and changes in market value of future contracts that qualify as a hedge; and negative equity adjustments recognized in accordance with SFAS No. 87 "Employers' Accounting for Pensions". SFAS No. 130 requires only additional disclosures in the financial statements and does not affect the Company's financial position or results of operations. m. Impairment of long-lived assets ---------------------------------- The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. Impairment is measured at fair value. The Company completed its annual review of impairment and determined that long-lived assets were not impaired. n. Financial instruments ---------------------- Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from the financial instruments. The fair value of the financial instruments approximates their carrying values, unless otherwise noted. o. 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. p. Stock-based compensation ------------------------- Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), "Share-Based Payment", and related interpretations, or "SFAS No. 123(R)", to account for stock-based compensation using the modified prospective transition method and therefore will not restate our prior period results. SFAS No. 123(R) supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", or APB No. 25, and revises guidance in SFAS No. 123, "Accounting for Stock-Based Compensation", or SFAS No. 123. Among other things, SFAS No. 123(R) requires that compensation expense be recognized in the financial statements for share-based awards based on the grant date fair value of those awards. The modified prospective transition method applies to (a) unvested stock options under the 1997 Stock Incentive Plan based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123, and (b) any new share-based awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Additionally, stock-based compensation expense includes an estimate for pre-vesting forfeitures and is recognized over the requisite service periods of the awards on a straight-line basis, which is generally commensurate with the vesting term. SFAS No. 123(R) requires the benefits associated with tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow as previously required. In 2006, the Company did not record any excess tax benefit generated from option exercises. Prior to January 1, 2006, the Company accounted for stock-based compensation plans in accordance with APB No. 25 and related interpretations. Accordingly, compensation expense for a stock option grant was recognized only if the exercise price was less than the market value of the common stock on the grant date. Prior to the adoption of SFAS No. 123(R), as required under the disclosure provisions of SFAS No. 123, as amended, the Company provided pro forma net income (loss) and earnings (loss) per common share for each period as if the Company had applied the fair value method to measure stock-based compensation expense. The following table illustrates the effect on net loss and earnings per common share as if the Company applied the fair value method to measure stock based compensation, which is more fully described in Note 14, as required under the disclosure provisions of SFAS No. 123(R):
2005 ------------------ (In thousands, except per share data) Net loss: As reported $ (1,690) Add stock-based compensation expensed in determination of net loss as reported, net of related tax effect --- Less stock-based compensation expense determined under the fair value method for all awards, net of related tax effects (27) ------------- Pro forma $ (1,717) ============= Net loss per share: As reported $ (0.01) ============= Pro forma $ (0.01) =============
q. 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 Stockholders' Equity and are excluded from net income. Foreign exchange transaction gains (losses) are included in selling, general and administrative expenses and amounted to approximately $42,000 and $(133,000) for the years ended December 31, 2006 and 2005, respectively. r. Shipping and handling costs ------------------------------ Shipping and handling costs are included in selling, general and administrative expenses and approximated $322,000 and $233,000 in 2006 and 2005, respectively. s. Use of estimates ------------------ The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. t. Asset retirement obligations ------------------------------ The Company accounts for asset retirement obligations in accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations", which requires that the fair value of an asset retirement obligation be recorded as a liability in the period in which a company incurs the obligation. u. Reclassifications ----------------- Certain prior year balances have been reclassified to conform to current year classifications. v. Recent accounting pronouncements ---------------------------------- In February 2007, the FASB issued SFAS No. 159, "The Fair Value of Option for Financial Assets and Liabilities" ("SFAS No. 159"), which permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The decision about whether to elect the fair value option is applied instrument by instrument, with a few exceptions; the decision is irrevocable; and it is applied only to entire instruments and not to portions of instruments. The statement requires disclosures that facilitate comparisons (a) between entities that choose different measurement attributes for similar assets and liabilities and (b) between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157, "Fair Value Measurement". Upon implementation, an entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. Since the provisions of SFAS No. 159 are applied prospectively, any potential impact will depend on the instruments selected for fair value measurement at the time of implementation. In September 2006, the Securities Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year's financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary "correcting" adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings only if material under the dual method. SAB 108 is effective for fiscal years ending on or after November 15, 2006. The Company has assessed the effect of adopting this guidance and has determined that there will be no impact on the Company's consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which is effective for calendar year companies on January 1, 2008. The Statement defines fair value, establishes a framework for measuring fair value in accordance with Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. The Statement codifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The Company is currently assessing the potential impacts of implementing this standard. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132 (R)" ("SFAS 158"). SFAS 158 requires an employer to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit plan is defined as the difference between the fair value of the plan assets and the plans benefit obligation. For a pension plan the benefit obligation is the projected benefit obligation and for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. SFAS 158 requires an employer to recognize as a component of other comprehensive income, net of tax, the gains and losses and prior service costs or credits that arise during the period but that are not recognized as components of net periodic benefit costs pursuant to SFAS 87 "Employers' Accounting for Pensions." SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year-end. Additional footnote disclosure is also required about certain effects on net periodic benefit cost for the next year that arise from the delayed recognition of gains or losses, prior service costs or credits, and transition asset or obligation. Except for the year-end measurement requirement, SFAS 158 is effective for the year ending December 31, 2006. The adoption of this Statement in 2006 did not have a material impact on the financial condition or results of operations of the Company. In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB No. 109" ("FIN 48"), effective for fiscal years beginning after December 15, 2006. FIN 48 requires a two-step approach to determine how to recognize tax benefits in the financial statements where recognition and measurement of a tax benefit must be evaluated separately. A tax benefit will be recognized only if it meets a "more-likely-than-not" recognition threshold. For tax positions that meet this threshold, the tax benefit recognized is based on the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. The Company is currently evaluating the impact of adopting FIN 48, and has not yet determined the significance of this new rule to our overall results of operations, cash flows or financial position. In March 2006, the FASB issued Statement 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140," ("SFAS 156") which amends SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In a significant change to current guidance, SFAS No. 156 permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities: (1) Amortization Method or (2) Fair Value Measurement Method. SFAS No. 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company is currently reviewing the effect, if any, the proposed guidance will have on its financial statements. In February 2006, the FASB issued Statement No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS 155"). This Statement permits fair value of remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amended SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company is currently reviewing the effect, if any, the proposed guidance will have on its financial statements. 4. Inventory: ---------
Inventory consists of the following: December 31, -------------------- 2006 2005 -------------------- (In thousands) -------------------- Raw materials $ 938 $ 1,101 Work-in-process 233 279 Finished goods 1,834 1,329 $ 3,005 $ 2,709 ======== ========
The components of inventory shown are net of reserves for excess and obsolete inventory totaling $1,285,000 and $1,304,000 as of December 31, 2006 and 2005, respectively. 5. Property and Equipment: ------------------------ Property and equipment are stated at cost and are summarized as follows:
Estimated Useful Lives December 31, Years 2006 2005 --------- --------- (In thousands) ---------------------- Machinery and equipment 3 - 10 $ 2,451 $ 2,362 Furniture, fixtures and office equipment 3 - 10 2,376 2,360 Leasehold improvements 3 - 5 92 92 4,919 4,814 ---------- --------- Less accumulated depreciation 4,310 4,177 $ 609 $ 637 ========== =========
Net property and equipment located in Canada approximated $553,000 and $578,000 in 2006 and 2005. Depreciation expense on property and equipment in 2006 and 2005 totaled $150,000 and $154,000, respectively. 6. Other Assets: -------------
Other assets consist of the following: December 31, 2006 2005 -------- -------- (In thousands) ------------------------- Deferred charges $ 156 $ 118 Intangibles, net 311 432 Other 13 13 $ 480 $ 563 ========= ========
Amortization expense on intangibles in 2006 and 2005 totaled $144,000 and $81,000, respectively. 7. Bank Indebtedness, Demand Loan, Revolving Line of Credit: ---------------------------------------------------------------
Balances under credit facilities consist of the following: December 31, ============ 2006 2005 ---- ---- (In thousands) -------------- Royal Bank of Canada - Bank indebtedness $ 36 $ --- Royal Bank of Canada - Demand loan 2,519 2,039 Tradition Capital Bank - Revolving line of credit 475 --- -------- ------- $ 3,030 $ 2,039 ======== =======
a) Royal Bank of Canada ----------------------- In November 2006, the Company and certain of its subsidiaries amended its secured credit facility with Royal Bank of Canada ("RBC") by converting the facility to a demand loan, increasing the interest rate and eliminating financial covenants. In addition, during the year, the maximum borrowings under the demand loan were reduced to Canadian $3.6 million (U.S. $3.1 million). However, RBC increased the borrowing base formula by Canadian $1.0 million (U.S. $858,000) in exchange for additional security provided by two of the Company's directors in the second quarter of 2006. Borrowings under the demand loan are subject to certain limitations based on a percentage of eligible accounts receivable and inventory as defined in the agreement. Interest is payable at a rate of RBC's prime rate (6.0% at December 31, 2006), plus 2.75% per annum. Borrowings under this demand loan are secured by substantially all of the Company's assets. As of December 31, 2006, the Company had borrowings of $2.6 million, which was the maximum available under the demand loan. The outstanding balance of the loan from the RBC as of March 16, 2007 exceeds the maximum amount of funds available to the Company based on the formula included in the Royal Bank loan agreement, and accordingly, the Company is in violation of the terms of that agreement. RBC has been made aware of the violation and has agreed to waive the violation until April 30, 2007. At the end of the second quarter of 2006, Mr. Murdoch, Sentry's Chief Executive Officer 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. $858,000) in exchange for RBC providing increased availability under its credit facility to the Company by the same amount. In consideration of these guarantees, Mr. Murdoch and Mr. Furst will receive a fee of $43,000, to be shared between them, paid in 12 equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 2.9 million common shares of the Company at an exercise price of $0.10 per share. The fair value of these warrants of $120,000 was determined in accordance with SFAS No. 123R "Share-Based Payment" and beginning in June 2006 is being taken into income over the period of the guarantee, which is one year. During the year ended December 31, 2006, $70,000 has been recorded in interest and financing expense related to these warrants and $50,000 will be expensed in 2007. b) Tradition Capital Bank ------------------------ In December 2006, the Company entered into a secured revolving credit agreement with Tradition Capital Bank. From December 15, 2006 through the expiration of the facility on June 15, 2007, the Company may draw up to a maximum of $550,000 under the facility. Interest is payable at the Tradition Capital Bank's prime rate (8.25% at December 31, 2006), plus 1% per annum. Borrowings under this facility are secured by substantially all of the Company's assets in a second position to RBC. In addition, the facility is fully secured by the personal guarantees of Mr. Murdoch and Mr. Furst. In consideration of these guarantees, Mr. Murdoch and Mr. Furst will receive a fee of $14,000, to be shared between them, paid in 6 equal monthly installments beginning in December 2006. As additional consideration, they received fully vested, two year warrants to purchase approximately 5.2 million shares of the Company's common stock, at an exercise price of $0.053 per share. The fair value of these warrants of $91,000 was determined in accordance with SFAS No. 123R "Share-Based Payment" and beginning in December 2006 is being taken into income over the period of the guarantee, which is six months. During the year ended December 31, 2006, $8,000 has been recorded in interest and financing expense related to these warrants and $83,000 will be expensed in 2007. 8. Accrued Liabilities:
Accrued liabilities consist of the following: December 31, ======================= 2006 2005 ------ ------ (In thousands) ----------------------- Accrued salaries, employee benefits and payroll taxes $ 297 $ 260 Other accrued liabilities 781 665 --------- ------- $ 1,078 $ 925 ========= =======
9. Income Taxes: -------------- The reconciliation between total tax expense and the expected U.S. Federal income tax is as follows:
2006 2005 (In thousands) --------------------- Expected tax benefit at 40% $ (838) $ (537) Add: Non-deductible expenses 52 13 U.S. losses producing no tax benefit 786 524 Foreign tax provisions 145 49 -------- -------- $ 145 $ 49 ======== ========
As of December 31, 2006, the Company had net operating loss carryforwards of approximately $36 million, which expire through the year 2027. The utilization of these net operating loss carryforwards will likely be subject to substantial annual limitations imposed by the Internal Revenue Code Section 382. The following is a list by year of the expiring net operating loss carryforwards:
December 31, =============== 2006 (In thousands) --------------- 2007 $ 286 2008 861 2009 776 2010 1,714 2011 4,963 Thereafter 27,400 $ 36,000 ---------------
Significant components of deferred tax assets (liabilities) at December 31, 2006 and 2005 are comprised of:
Deferred Tax Assets (Liabilities) 2006 2005 ------------ ------------- (In thousands) --------------------------------- Assets: Accounts receivable $ 44 $ 52 Inventory 513 514 Stock-based compensation 14 --- Accrued liabilities 91 100 Property and equipment 431 425 Net operating loss carryforwards 14,768 13,876 --------- -------- Gross deferred tax assets 15,861 14,967 Less: valuation allowance 15,754 14,923 --------- -------- Deferred tax assets 107 44 Liabilities: Property and equipment (87) (83) Intangible assets (83) --- Other (28) (19) --------- -------- Gross deferred tax liabilities (198) (102) --------- -------- Deferred tax liability $ (91) $ (58) ========= ========
The increase in the valuation allowance for the year ended December 31, 2006 was primarily attributable to the increase in net operating loss carryforwards. A valuation allowance has been recorded against the net deferred tax assets, because it is more likely than not that the asset will not be realized in the foreseeable future. The $145,000 and $49,000 income tax provisions for 2006 and 2005, respectively, are principally attributable to foreign taxes on Canadian operations. 10. Convertible Debenture: ----------------------- On April 30, 2004, Sentry entered into a $2,000,000 secured convertible debenture with Brookfield Technology Fund ("Brookfield"), an alternative investment fund established by Brookfield Asset Management (formerly known as Brascan Technology Fund and Brascan Asset Management, respectively), to invest in early stage, technology-based companies with high growth potential. Key terms of the transaction are as follows: - - Four-year term. - - Interest rate of 8%. - - Redeemable at Sentry's option after 18 months. - - Conversion price equal to the market price, at time of conversion, less a discount of 30% with a maximum conversion price of $0.12 per share. - - Conversion is at the option of Brookfield when market share price is equal to or greater than $0.17 per share or with the approval of Sentry's Board of Directors when the market share price is less than $0.17 per share. - - Sentry will provide most favored pricing to all Brookfield affiliates and expects to be a supplier of security and identification products to the Brookfield affiliates. - - Brookfield was issued warrants for 5,000,000 common shares of Sentry, priced at $0.15 per share, exercisable anytime up to April 30, 2008. - - Brookfield is entitled to one seat on Sentry's Board of Directors or will participate as an observer. The convertible debenture is secured by a general security interest over all the assets and properties of Sentry. The amount is subordinate to the existing RBC demand loan. The proceeds of the financing, to be used primarily for working capital, were initially allocated between the convertible debenture ($1,835,000) and the warrants ($165,000) based on their respective fair values in accordance with Emerging Issues Task Force (EITF) 00-27 "Application of Issue 98-5 to Certain Convertible Instruments". The difference between the face value of the debenture and the allocated value is being charged to interest and financing expenses over the term of the convertible debenture. No beneficial conversion feature has been recognized under the term of the convertible debenture. Certain other warrants to purchase 425,000 common shares of Sentry at exercise prices ranging from $0.18 to $0.20 per share were issued in conjunction with the convertible debenture. The warrants 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 acquired 100% of ID Security Systems Canada, Inc. and ID Systems USA Inc. ("ID Systems"). Effective January 1, 2005, the name of the acquired subsidiaries were changed to Sentry Technology Canada Inc. and Sentry Technology USA Inc. On August 9, 2006, the Company executed a plan of merger between the Company and Sentry Technology USA Inc. Effective December 31, 2005, the Company remained the surviving corporation. Sentry's Board of Directors and shareholders owning a majority of Sentry common stock approved the transaction with Brookfield. 11. Commitments and Contingencies: ------------------------------- a. Operating leases ----------------- The Company leases certain administrative and manufacturing facilities and equipment under non-cancelable operating leases that expire at various dates through 2009. Rent expense related to operating leases for 2006 and 2005 was $316,000 and $283,000 per year, respectively. Minimum annual rental commitments are $307,000 in 2007, $260,000 in 2008, $168,000 in 2009, $8,000 in 2010 and $4,000 in 2011. b. 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 2006 or 2005. c. 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 $249,000. Also, the president of the Company's 51% owned subsidiary, Custom Security Industries Inc., is entitled to receive 10% of its pretax profits. d. 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 the Company's 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. 12. Related Party Transactions: ----------------------------- Related parties include directors and officers and companies controlled by the directors and officers of the Company. Transactions between related parties are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Included in accounts payable is $0 for 2006 (2005 - $26,000) and included in accrued liabilities for 2006 is $31,000 (2005 - $23,000) due to related parties. 13. Earnings Per Share: --------------------- The earnings per share calculations (basic and diluted) at December 31, 2006 and 2005 are based upon the weighted average number of common shares outstanding during each period. There were no reconciling items in the numerator or denominator of the earnings per share calculations in either of the periods presented. Options to purchase 2,145,500 and 2,431,524 shares of common stock with a weighted average exercise price of $0.16 and $0.35 were outstanding at December 31, 2006 and 2005, respectively, but were not included in the computation of diluted net loss per share because their effect would be antidilutive. Convertible debentures and warrants were also not included in the weighted average number of shares outstanding because their effect would be antidilutive. 14. Stock-Based Compensation: -------------------------- a) Stock Options -------------- The Company's 1997 Stock Incentive Plan of Sentry Technology Corporation (the "1997 Plan"), which is shareholder approved, permits the granting of common share options and shares to its employees for up to 6,369,365 shares of common stock as stock-based compensation and 3,512,238 common shares were available for grant as of December 31, 2006. The stock option committee may grant awards to eligible employees in the form of stock options, restricted stock awards, phantom stock awards or stock appreciation rights. Stock options may be granted as incentive stock options or non-qualified stock options. Such options normally become exercisable at a rate of 20% per year over a five-year period and expire ten years from the date of grant. 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, 2006, 2,145,500 common shares were reserved for issuance in connection with the exercise of stock options. No incentive awards shall be granted under the 1997 Plan after January 14, 2007. Cash received from exercise of options during the periods were $7,000 in 2006 and $4,000 in 2005. The assumptions used for the specified reporting periods and resulting estimates of weighted average fair value per share of options granted during those periods were as follows:
Years Ended December 31, 2006 2005 -------------------------- Risk-free interest rate 4.46% 4.0% Expected dividend yield 0% 0% Expected lives 2 - 3 years 2 - 5 years Expected volatility 100% 123%
The following table represents the Company's stock options granted, forfeited or expired and exercised during the year ended December 31, 2006 and 2005:
Weighted Number of Weighted Average Aggregate Shares Average Remaining Intrinsic Subject to Exercise Contractual Value Issuance Price Term ($000) ----------- --------- ----------- --------- Outstanding at January 1, 2005 1,275,316 $ 0.63 Granted 1,525,000 0.10 Exercised (80,000) 0.05 Forfeited or expired (288,792) 0.34 ----------- --------- Outstanding at December 31, 2005 2,431,524 $ 0.35 Granted 650,000 0.10 Exercised (115,000) 0.06 6 Forfeited or expired (821,024) 0.69 ----------- --------- Outstanding at December 31, 2006 2,145,500 $ 0.16 7.9 years 0 =========== ========= =========== ====== Exercisable at December 31, 2006 845,000 $ 0.26 6.5 years 0 =========== ========= =========== ======
The aggregate intrinsic value of options has been shown as $0 because the weighted average exercise price of the price of the outstanding and exercisable option shares exceeded the year end market price of the Company's common stock. The compensation cost recognized in income for stock-based compensation was $35,000 for 2006 and none for 2005. As of December 31, 2006, there was $81,000 of total unrecognized compensation cost, net of estimated forfeitures, related to all unvested stock options, which is expected to be recognized over a weighted average period of approximately 3.2 years. The weighted average grant date fair value of options granted during the year was $0.06 in 2006 and $0.08 in 2005. The following is a summary of stock options as of December 31, 2006:
Options Outstanding Options Exercisable ----------------------------------------------- ------------------------------- Weighted- Weighted- Weighted-average average Number of average Exercise Number of Exercise Range of Exercise Prices Options Remaining Life Price Options Price - ------------------------- ---------- -------------- ----------------- ------------ ------------- $0.05 to $0.15 2,047,500 8.2 $ 0.09 747,500 $ 0.09 $0.31 to $0.62 53,000 2.1 0.60 53,000 0.60 $2.00 to $3.00 45,000 0.5 2.55 45,000 2.55 --------- ---- ------- -------- ------- $0.05 to $3.00 2,145,500 7.9 $ 0.16 845,500 $ 0.26 ========= ==== ======= ======== =======
At December 31, 2006, options for 3,512,238 common shares were available for future grants. b) Warrants -------- Sentry currently has outstanding warrants for 13,788,680 (2005 - 5,725,000) common shares issued in connection with various financing arrangements. The warrants have exercise prices ranging from $0.05 to $0.20 (2005 - $0.15 to $0.20) and expire from April 29, 2007 through January 21, 2009. 15. Major Customers and Credit Concentrations: --------------------------------------------- The Company grants credit to customers who are principally in the retail industry and libraries. During 2005, revenues from one customer represented approximately 10% of total revenues. No other customer accounted for more than 10% of total revenues in 2006 and 2005. Canadian revenues approximated $3,050,000 and $2,756,000 in 2006 and 2005, respectively. 16. Revenues by Product Line: ---------------------------
Revenues by product line are as follows: December 31, ------------------------- 2006 2005 ---- ---- (In thousands) ------------------------- Electronic Article Surveillance (EAS) $ 6,813 $ 6,490 Closed Circuit Television (CCTV) 590 1,670 SentryVision (R) 2,809 2,971 Service, installation and other revenues 1,923 2,439 ----------- ---------- Total revenues $ 12,135 $ 13,570 =========== ==========
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. 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 53, 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 54, 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 56, 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 53 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. Peter J. Mundy 50 Our former Vice President-Finance and Chief Financial Officer. Mr. Mundy also served 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. The employment contract of Peter J. Mundy, Vice President and Chief Financial Officer, terminated on December 31, 2006. In furtherance of the Company's ongoing cost reduction efforts, Mr. Mundy's contract was not renewed. Commencing January 1, 2007, Mr. Mundy will perform certain services for the Company under a six month consulting arrangement pursuant to which he has agreed to provide up to seven hours of services per week. Joseph Ryan 57 Our former Vice President - Sales and Marketing from January 2006. Mr. Ryan was President of Ionic Fusion, a nanotechnology startup from 2003 until 2006. Prior thereto, Mr. Ryan was Executive Administrator of the Non Profit Faith Based, Christ Fellowship and Place of Hope from 1999 until 2003. From 1978 until 1999 Mr. Ryan was with Sensormatic Electronics in various capacities as Vice President of Marketing, Vice President of Business Development, Executive in Charge of the Olympic Games, Sr. Vice President Global Source Tagging and Chairman of Sensor ID, Sensormatic's RFID division. Mr. Ryan's employment terminated as of January 31, 2007. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's officers, Directors and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, Directors and greater than ten-percent Stockholders are required by Securities and Exchange Commission regulations to furnish the Company with copies of all such reports they file. Based solely on a review of the copies of reports furnished to the Company, or written representations, the Company believes that during the fiscal year ended December 31, 2006, 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 5 on January 15, 2007 with the SEC, for the granting of warrants for 1,150,000 shares of the Company's common stock at an exercise price of $0.10 per share, which was granted on April 28, 2006 and for the grant of warrants for 2,594,340 shares of the Company's common stock at an exercise price of $0.053 per share, which was granted on December 15, 2006; and Peter L. Murdoch, the Company's President, CEO and member of the Board, filed a late report on Form 5 on January 13, 2007 with the SEC, for the granting of warrants for 1,725,000 shares of the Company's common stock at an exercise price of $0.10 per share, which was granted on April 28, 2006 and for the grant of warrants for 2,594,340 shares of the Company's common stock at an exercise price of $0.053 per share, which was granted on December 15, 2006. AUDIT COMMITTEE FINANCIAL EXPERT We do not have a separate audit committee and therefore the Board of Directors in its entirety functions as the audit committee. We have at least one audit committee financial expert serving on our Board of Directors, Mr. Robert Furst. CODE OF ETHICS We have adopted a written Code of Ethics that applies to all of our directors, officers and employees. A copy of our Code of Ethics is available on our website at www.sentrytechnology.com and print copies are available to any shareholder that requests a copy. Any amendment to the Code of Ethics or any waiver of the Code of Ethics will be disclosed on our website at www.sentrytechnology.com promptly following the date of such amendment or waiver. Item 10. EXECUTIVE COMPENSATION. - ----------------------------------
Non-Qualified Non-Equity Deferred All Stock Option Incentive Plan Compensation Other Salary Bonus Awards Awards Compensation Earnings Compensation Total Name & Principal Position Year ($) ($) ($) ($) ($) ($) ($) ($) Peter L. Murdoch, President & 2005 178,275 - - - - - - 178,275 CEO(1) 2006 181,145 - - - - - - 181,145 Peter J. Mundy, 2005 136,013 - - - - - - 136,013 VP - CFO (2) 2006 140,664 - - - - - 21,370 (3) 162,032 Joseph Ryan, Jr., 2006 137,500 - - 32,881(4) - - - 170,381 VP - Sales & Marketing (4)
1) Mr. Murdoch received no salary increase in 2006. A portion of his pay is designated in Canadian dollars, which translated into higher US dollars in 2006 when compared to 2005. (2) The employment contract of Peter J. Mundy, Vice President and Chief Financial Officer, terminated on December 31, 2006. In furtherance of the Company's ongoing cost reduction efforts, Mr. Mundy's contract was not renewed. Commencing January 1, 2007, Mr. Mundy will perform certain services for the Company under a six month consulting arrangement pursuant to which he has agreed to provide up to seven hours of services per week. (3) Represents accrued vacation paid upon contract termination. (4) Mr. Ryan was hired January 31, 2006. Effective January 31, 2007, Mr. Ryan's employment was terminated. (5) SFAS 123R expense equaled $32,881. 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 On January 31, 2006, we granted an option to purchase 500,000 shares to Joseph Ryan at an exercise price of $0.10 per share, which was the market price on the date of grant. The shares vest ratably over a three year period. Outstanding Equity Awards at 2006 Fiscal Year End The following table sets forth for each of the persons named in the Summary Compensation Table the number of options exercised during 2006 and the amount realized by each such officer. In addition, the table shows the number of options that the named executive officer held as of December 31, 2006, both exercisable and unexercisable, and the value of such options as of that date.
Option Awards Stock Awards ------------------------------------------------------------------- ---------------------------------------------- Equity Incentive Equity Plan Incentive Awards: Plan Market or Awards: Payout Equity Number of Value of Incentive Market Unearned Unearned Number Plan Awards: Number Value of Shares, Shares, Number of Number of of Shares Shares or Units or Units or of Securities Securities or Units Units of Other Other Securities Underlying Underlying of Stock Stock Rights Rights Underlying Unexercised Unexercised Option Option that have that have that have that have Options (#) Options (#) Unearned Exercise Expiration not not not vested not vested Name Exercisable Unexercisable Options (#) Price (#) Date vested vested (#) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) Peter L. Murdoch - - - - - - - - - Peter J. Mundy - - - - - - - - - Joseph Ryan - 500,000 - $ 0.10 1/31/2009 - - - -
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 $181,000, in 2006 and $178,000 in 2005. Our Board of Directors approves the compensation paid to our other executive officers, approving or disapproving the recommendation of the Chief Executive Officer. The Board of Directors also determines the amount of shares and exercise prices for any stock option grants under our 1997 Stock Incentive Plan, and the amount of our matching contribution percentage under our Retirement Savings 401(k) Plan, respectively. Mr. Mundy was compensated pursuant to a written employment agreement providing for his base salary. The employment agreement was not renewed as of December 31, 2006. Accordingly, Mr. Mundy will receive severance pay an amount equal to 50% of his base pay in effect immediately prior to his expiration of the term of employment, payable monthly, for a period of one year after such expiration. Compensation of Directors
Non-Equity Nonqualified Incentive Deferred Fees Earned Plan Compensation Name or Paid Stock Option Compensation Earnings All Other in Cash ($) Awards ($) Awards ($) ($) ($) Compensation ($) Total ($) (a) (b) (c) (d) (e) (f) (g) (h) All Non-employee $5,000 annual plus 50,000 annually Board Members meeting fees - at Fair Market - - - - Value on Date of Grant, Immediately Vested
Mr. Murdoch, who is also our full-time employee receives no additional compensation for his service as a Director. Each Director and Brookfield Technology Fund, in its capacity as an Observer, received an annual retainer of $5,000 for 2006. In addition, each non-employee Director is eligible to participate in our 1997 Stock Incentive Plan. In May 2006, Mr. Furst, Mr. Granoff and the Brookfield Technology Fund each received options to purchase 50,000 shares of our common stock at exercise prices of $0.10 per share, which was the market price on the date of grant. The options were exercisable immediately and expire after 10 years. [GRAPHIC OMITED]
PERFORMANCE CHART ----------------- 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 ------------------------------------------------------------- Sentry Technology Corporation $ 100 $ 675 $ 925 $ 455 $ 290 S&P 600 Small Cap Index $ 100 $ 138 $ 167 $ 178 $ 203 S&P Elec. Equip. Index $ 100 $ 169 $ 155 $ 157 $ 156
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The following table sets forth the beneficial ownership of our common stock at March 23, 2007, as to each (i) beneficial owner of five percent or more of the common stock, (ii) Sentry Director, (iii) executive officer of Sentry, and (iv) all Directors and executive officers as a group. On March 23, 2007, 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) c/o Saburah Investments Inc. 37 Voyager Court North Toronto, Ontario M9W 4Y2 64,034,436 (2) 51.2% Robert D. Furst, Jr. 20,955,054 (3) 16.8% c/o Alternative Strategies Advisors LLC 601 Carlson Parkway, Suite 610 Minnetonka, MN 55305 Joan E. Miller 219,500 (4) * Jonathan G. Granoff 190,000 (5) * All Sentry Directors and executive officers as a group (4 persons) 85,398,990 (6) 65.9%
* Less than one percent 1) Based on 120,743,804 shares of common stock outstanding as of March 23, 2007. Each figure showing the percentage of outstanding shares beneficially owned has been calculated by treating as outstanding and owned the shares of common stock that could be purchased by the indicated person within 60 days upon the exercise of stock options. 2) Includes 57,553,596 shares of common stock held by Saburah Investments Inc. of which Mr. Murdoch is the 100% owner and 4,319,340 shares of common stock issuable upon the exercise of stock warrants exercisable within 60 days of the date hereof. 3) Includes 4,198,340 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 147,000 shares of common stock issuable upon the exercise of stock options exercisable within 60 days from the date hereof. 5) Includes 130,000 shares of common stock exercisable upon the exercise of stock options exercisable within 60 days from the date hereof. 6) Includes 8,794,680 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 - ----------------------------------------------------------- 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. In consideration of these guarantees, Mr. Murdoch and Mr. Furst are receiving a fee of $43,000, to be shared between them, paid in 12 equal monthly installments. As additional consideration, they received fully vested, two year warrants to purchase approximately 2.9 million shares of the Company's common stock, at an exercise price of $0.10 per share. The fair value of these warrants of $120,000 was determined in accordance with SFAS No. 123R "Share-Based Payment" and beginning in June 2006 is being written off over the period of the guarantee, which is one year. During the year ended December 31, 2006, $70,000 has been recorded in interest and financing expense related to these warrants and $50,000 will be expensed in 2007. In addition, in December 2006, Mr. Murdoch and Mr. Furst agreed to provide personal guarantees to Tradition Capital Bank in the amount of U.S. $550,000 in exchange for the bank providing a new revolving credit facility to the Company in the same amount. In consideration of these guarantees, Mr. Murdoch and Mr. Furst are receiving a fee of $14,000, to be shared between them, paid in 6 equal monthly installments beginning in December 2006. As additional consideration, they received fully vested, two year warrants to purchase approximately 5.2 million shares of the Company's common stock, at an exercise price of $0.053 per share. The fair value of these warrants of $91,000 was determined in accordance with SFAS No. 123R "Share-Based Payment" and beginning in December 2006 is being written off over the period of the guarantee, which is six months. During the year ended December 31, 2006, $8,000 has been recorded in interest and financing expense related to these warrants and $83,000 will be expensed in 2007. Item 13. EXHIBITS - ------------------- 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. Incorporated by reference to Exhibit 2.2 to the Company's annual report on Form 10-KSB for fiscal 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. Incorporated by reference to Exhibit 2.3 to the Company's annual report on Form 10-KSB for fiscal 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. Incorporated by reference to Exhibit 3.1 to the Company's annual report on Form 10-KSB for fiscal 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. Incorporated by reference to Exhibit 3.2 to the Company's annual report on Form 10-KSB for fiscal 2005. 3.3 Amended and Restated Bylaws of the Company. Incorporated by reference to Exhibit 3.3 to the Company's annual report on Form 10-KSB for fiscal 2005. 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 4.2 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 4.3 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 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. 10.4 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. 10.5 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. 10.6 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. 10.7 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. 10.8 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. 10.9 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. 10.10 Amendment to Credit Facility Letter Agreement between Sentry Technology Canada Inc. and Royal Bank of Canada dated January 23, 2006. Incorporated by reference to Exhibit 10.14 to the Company's annual report on Form 10-KSB for fiscal 2005. 10.11 Credit Facility Letter Agreement between Sentry Technology Canada Inc. and Royal Bank of Canada dated May 15, 2006. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated May 31, 2006. 10.12 Amendment to Credit Facility Letter Agreement between Sentry Technology Canada Inc. and Royal Bank of Canada dated November 27, 2006. 10.13 Revolving Credit Agreement between Tradition Capital Bank and Sentry Technology Corporation, dated December 15, 2006. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated December 19, 2006. 14 Code of Ethics. Incorporated by reference to Exhibit 14 to the Company's annual report on Form 10-KSB for fiscal 2005. 21 Subsidiaries of the Company. Incorporated by reference to Exhibit 21 to the Company's annual report on Form 10-KSB for fiscal 2005. 23.1 Consent of SF Partnership, LLP 31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*** 32.2 Certification by the Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*** *** In accordance with Item 601(b)(32)(ii) of Regulation S-B, this exhibit shall not be deemed "filed" for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. 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 2006 and 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 by SF Partnership, LLP in 2006 and 2005 were $78,000 and $65,000, respectively, net of expenses. In 2004, the amount paid to Holtz Rubenstein, LLP, our predecessor auditors, was $104,000, net of expenses. Audit-Related Fees There were no other fees for 2006 and $2,000 for 2005 billed by SF Partnership, LLP for assurance and related services that were reasonably related to the performance of the audit or review of the Company's financial statements and not reported under "Audit Fees" above. Tax Fees There were no other fees billed by our independent auditors during the last two fiscal years for tax compliance. All Other Fees There were no other fees billed by our independent accountants during the last two fiscal years for products and services provided. 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/ Joan E. Miller --------------------- Joan E. Miller Vice President-Finance, Principal Financial Officer and Treasurer Dated: March 23, 2007 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/ Joan E. Miller Vice President-Finance, - --------------------- Principal Financial and Accounting Officer Joan E. Miller and Treasurer /s/ Robert D. Furst, Jr. Director - ---------------------------- Robert D. Furst, Jr. /s/ Jonathan G. Granoff Director - -------------------------- Jonathan G. Granoff Dated: March 23, 2007 EXHIBIT INDEX - -------------- 10.12 Amendment to Credit Facility Letter Agreement between Sentry Technology Canada Inc. and Royal Bank of Canada dated November 27, 2006. 23.1 Consent of SF Partnership, LLP. 31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *** 32.2 Certification by the Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *** EX-10.12 2 creditfacilityletteramend.txt ROYAL BANK OF CANADA-AMENDMENT TO CREDIT FACILITY LETTER AGMT. Exhibit 10.12 ------------- Royal Bank of Canada Information Technology-GTA 260 East Beaver Creek Road - 2nd Floor Richmond Hill, ON, L4B 3M3 Tel.: 416-955-2139 Fax: 416-955-2562 RBC [GRAPHIC OMITED] November 27, 2006 Private and Confidential SENTRY TECHNOLOGY CANADA INC. 37 Voyager Court North Toronto, ON M9W 4Y2 We refer to the agreement dated May 15, 2006 between SENTRY TECHNOLOGY CANADA INC., as the Borrower, and Royal Bank of Canada, as the Bank, (the "Agreement") and in particular to the Credit Facility and Financial Covenants sections of 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 Credit Facilities section, Facility # 1, the first line is amended by deleting the "term facility" and by substituting the "demand facility". 2. Under the Credit Facilities section, Facility # 1(a) is amended and restated as follows: 1(a) Interest rate (per annum): RBP + 2.75% 3. Delete in its entirety the section entitled Financial Covenants. CONDITIONS PRECEDENT The effectiveness of this amendment is conditional upon receipt of a duly executed copy 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. This amending agreement is open for acceptance until December 4, 2006, after which date it will be null and void, unless extended in writing by the Bank. ROYAL BANK OF CANADA Per: /S/ Colin Cochrane -------------------- Name: Colin Cochrane Title: Manager, Special Asset Management /js Agreed to and accepted this 28 day of November, 2006. ---- --------- SENTRY TECHNOLOGY CANADA INC. Per: /S/ Peter L. Murdoch ------------------------- Name: Peter L. Murdoch Title: President Per: /S/ Peter J. Mundy --------------------- Name: Peter J. Mundy Title: VP - CFO I/We have the authority to bind the Borrower EX-23.1 3 consentofsfpartnership.txt SF PARTNERSHIP CONSENT 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, 2007 appearing in this Annual Report on Form 10-KSB of Sentry Technology Corporation for the year ended December 31, 2006. /s/ SF Partnership, LLP Chartered Accountants Toronto, Canada March 16, 2007 EX-31.1 4 ceocertification-pmurdoch.txt EXHIBIT 31.1-CERTIFICATION OF P MURDOCH 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 March 23, 2007 EX-31.2 5 pfocertification-jmiller.txt EXHIBIT 31.2 - CERTIFICATION OF PFO - JOAN E. MILLER SECTION 302 CERTIFICATION: Exhibit 31.2 ------------- CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Certification of Principal Financial Officer I, Joan E. Miller, 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/ JOAN E. MILLER ------------------------------------------------- Joan E. Miller Vice President and Principal Financial Officer March 23, 2007 EX-32.1 6 section906cert-pmurdoch.txt EXHIBIT 32.1-SECTION 906 CERTIFICATION OF P. MURDOCH 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, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report"), I, Peter L. Murdoch, Chief Executive Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ PETER L. MURDOCH ------------------------------------------------- Peter L. Murdoch President and Chief Executive Officer March 23, 2007 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 7 section906cert-jemiller.txt EXHIBIT 32.2-SECTION 906 CERTIFICATION-JOAN E. MILLER 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 Principal Financial Officer In connection with the Annual Report of Sentry Technology Corporation (the "Company") on Form 10-KSB for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report"), I, Joan E. Miller, Principal 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/ JOAN E. MILLER ------------------------------------------------- Joan E. Miller Vice President and Principal Financial Officer March 23, 2007 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-----