U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 1997
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from___________to___________
Commission file number 333-16451
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SAC TECHNOLOGIES, INC.
(Exact name of small business Issuer as specified in its charter)
MINNESOTA 41-1741861
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4444 West 76th Street, Suite 600, Edina, MN 55435
(Address of principal executive offices)
(612) 835-7080
(Issuer's telephone number)
--------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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___
Shares of the Registrant's Common Stock, par value $.01 per share, outstanding
as of August 14, 1997: 7,437,500 (1).
(1) Reflects the Company's July 1997 two for one stock split effected in
the form of the issuance of a one for one stock dividend.
<PAGE>
SAC TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance sheets as of December 31, 1996 and June 30, 1997 3
Statements of operations for the three and six months ended June 30,
1996 and 1997, and January 7, 1993 (date of inception) through
June 30, 1997 4
Statements of cash flows for the three and six months ended June 30,
1996 and 1997, and January 7, 1993 (date of inception) through
June 30, 1997 5
Notes to interim financial statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1 - Legal proceedings 13
Item 2 - Changes in securities 13
Item 3 - Defaults upon senior securities 13
Item 4 - Submission of matters to a vote of security holders 13
Item 5 - Other events 13
Item 6 - Exhibits and reports on Form 8-K 13
</TABLE>
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1996 1997
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 89,133 $ 4,779,571
Accounts receivable, net - 86,940
Inventories 106,229 293,509
Prepaid expenses 10,487 95,168
--------- ----------
Total current assets 205,849 5,255,188
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST, less
accumulated depreciation 41,936 145,621
OTHER ASSETS 157,478 16,718
--------- ----------
$ 405,263 $ 5,417,527
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable $ 330,000 $ -
Accounts payable 219,254 202,307
Accrued liabilities 12,180 58,868
---------- ----------
Total current liabilities 561,434 261,175
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - authorized, 20,000,000 shares of $.01 par value;
issued and outstanding, 5,017,500 and 7,437,500 shares 50,175 74,376
Additional contributed capital 874,918 7,334,909
Deficit accumulated during the development stage (969,264) (1,943,033)
Unearned compensation (112,000) (309,900)
--------- ----------
(156,171) 5,156,352
--------- ----------
$ 405,263 $ 5,417,527
========= ==========
</TABLE>
See accompanying notes to interim financial statements.
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
January 7,
1993 (date
Three months Six months of inception)
ended June 30, ended June 30, through
-------------------------- ------------------------- June 30,
1996 1997 1996 1997 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues
Product sales $ -- $ 20,595 $ -- $ 44,310 $ 44,310
Reimbursed research and development -- 24,000 -- 36,000 274,306
Technical support and other services -- 39,352 -- 116,790 263,541
----------- ----------- ----------- ----------- -----------
-- 83,947 -- 197,100 582,157
Costs and other expenses
Cost of product sales -- 9,148 -- 81,153 81,153
Cost of technical support and other services -- 16,879 -- 48,252 125,080
Selling, general and administrative 54,909 539,422 88,411 901,908 1,398,395
Research and development 103,774 128,136 150,046 224,667 956,845
----------- ----------- ----------- ----------- -----------
158,683 693,585 238,457 1,255,980 2,561,473
----------- ----------- ----------- ----------- -----------
Operating loss (158,683) (609,638) (238,457) (1,058,880) (1,979,316)
Other income (expense)
Interest and other income 176 70,816 194 89,008 93,296
Interest expense (16,297) -- (17,055) (3,897) (39,504)
----------- ----------- ----------- ----------- -----------
(16,121) 70,816 (16,861) 85,111 53,792
----------- ----------- ----------- ----------- -----------
NET LOSS $ (174,804) $ (538,822) $ (255,318) $ (973,769) $(1,925,524)
=========== =========== =========== =========== ===========
Loss per common share $ (.03) $ (.07) $ (.05) $ (.14) $ (.36)
=========== =========== =========== =========== ===========
Weighted average number of shares outstanding 5,057,923 7,437,500 4,928,446 6,761,824 5,378,460
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
January 7,
1993 (date
Three months Six months of inception)
ended June 30, ended June 30, through
-------------------------- ------------------------- June 30,
1996 1997 1996 1997 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (174,804) $ (538,822) $ (255,318) $ (973,769) $(1,925,524)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,105 13,418 1,480 17,618 21,353
Amortization
Warrants 4,167 -- 4,167 -- 4,167
Unearned compensation -- 19,100 -- 27,500 40,500
Interest converted to common stock 1,841 -- 1,841 -- 1,841
Revenues realized due to offset of billings
against a stock repurchase -- -- -- -- (170,174)
Warrants issued for services -- -- -- 27,500 27,500
Contribution of services -- -- -- -- 11,250
Change in assets and liabilities:
Accounts receivable 6,700 (34,530) -- (86,940) (86,940)
Inventories (9,589) (160,479) (8,702) (187,280) (293,509)
Prepaid expenses (3,540) (70,144) 447 (84,681) (95,168)
Accounts payable 14,121 112,632 13,462 (16,947) 202,307
Accrued liabilities 4,298 (94,950) 6,826 57,649 69,829
----------- ----------- ----------- ----------- -----------
19,103 (214,953) 19,521 (245,581) (267,044)
----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities (155,701) (753,775) (235,797) (1,219,350) (2,192,568)
Cash flows from investing activities
Capital expenditures -- (117,860) (2,588) (121,303) (166,974)
Security deposits -- (1,082) -- (7,301) (12,184)
Patents and trademarks -- -- -- -- (4,534)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities -- (118,942) (2,588) (128,604) (183,692)
Cash flows from financing activities
Net borrows (payments) under short-term
borrowing agreements (25,000) -- 70,000 (330,000) --
Issuance of convertible bridge notes 175,000 -- 175,000 -- 175,000
Issuance of warrants 25,000 -- 25,000 -- 25,000
Sales of common stock 408,818 -- 408,818 6,368,392 7,093,831
Redemption of common stock -- -- -- -- (138,000)
Offering costs 3,451 -- (4,400) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities 587,269 -- 674,418 6,038,392 7,155,831
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 431,568 (872,717) 436,033 4,690,438 4,779,571
Cash and cash equivalents at beginning of period 9,686 5,652,288 5,221 89,133 --
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 441,254 $ 4,779,571 $ 441,254 $ 4,779,571 $ 4,779,571
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1996, and June 30, 1996 and 1997 (Unaudited)
1. Unaudited Statements
The accompanying unaudited interim financial statements have been
prepared by SAC Technologies, Inc. (the "Company") in accordance with
generally accepted accounting principles, pursuant to the rules and
regulations of the Securities and Exchange Commission. Pursuant to such
rules and regulations, certain financial information and footnote
disclosures normally included in the financial statements have been
condensed or omitted.
In the opinion of management, the accompanying unaudited interim
financial statements contain all necessary adjustments, consisting only
of those of a recurring nature, and disclosures to present fairly the
financial position and the results of its operations and cash flows for
the periods presented. It is suggested that these interim financial
statements be read in conjunction with the financial statements and the
related notes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996.
2. Loss Per Share
Loss per common share is determined by dividing the net loss by the
weighted average number of shares of common stock and common stock
equivalents outstanding.
Under Securities and Exchange Commission rules for initial public
offerings, common stock equivalents for all periods presented include
shares sold or options or warrants granted within twelve months prior
to the effective date of the Company's initial public offering
(February 14, 1997) at per share prices less than that of the initial
public offering (assumed to be $3.00 per share - $6.00 pre stock
dividend) even if the impact is antidilutive.
During February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings per Share." This pronouncement provides a
different method of calculating earnings per share than is currently
used in accordance with APB No. 15, "Earnings per Share." SFAS 128
provides for the calculation of basic and diluted earnings per share.
Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted
earnings per share.
SFAS 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997 and early adoption is not
permitted. When adopted, the statement will require restatement of
prior years' earnings per share. The Company will adopt this statement
for its fourth quarter and year ending December 31, 1997. Assuming that
SFAS 128 had been implemented, basic and dilutive loss per share would
have been the same as that reported for all periods presented pursuant
to the existing Securities and Exchange Commission rules discussed
above.
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1996, and June 30, 1996 and 1997 (Unaudited)
<TABLE>
<CAPTION>
3. Other Assets
December 31, June 30,
1996 1997
<S> <C> <C>
Deferred offering costs $ 148,061 $ -
Security deposits 4,883 12,184
Patents 4,534 4,534
--------------- --------------
$ 157,478 $ 16,718
=============== =============
Deferred offering costs consist of legal fees and related expenses in
connection with the Company's initial public offering of common stock.
Such amounts were reflected as an offset to the gross proceeds received
from this offering (see note 5).
4. Accrued Liabilities
December 31, June 30,
1996 1997
Compensation $ 1,000 $ 14,920
Employee moving allowance - 32,228
Interest and other 11,180 11,720
----------------- -------------
$ 12,180 $ 58,868
================= =============
</TABLE>
5. Stockholders' Equity
During July 1997, the Company effected a two for one stock split in the
form of the issuance of a one for one stock dividend. The financial
statements and accompanying notes for the periods presented have been
restated for the stock split.
During February 1997, the Company completed an initial public offering
of 2,420,000 (1,210,000 pre stock dividend) shares of its common stock
at $3.00 ($6.00 pre stock dividend) per share resulting in net proceeds
of $6,220,331 after deduction of offering expenses. The proceeds from
the offering were used to repay all outstanding notes payable of
$442,000, including $117,000 of notes payable to a
stockholder/director.
The following non-statutory options have been granted since December
31, 1996:
<TABLE>
<CAPTION>
Date of Exercise
Grant Number Price Vesting Expiration Issued to
----- ------ ----- ------- ---------- ---------
<S> <C> <C> <C> <C> <C>
March 1997 260,000 $3.21 Ratably through March 2002 March 2004 New Chief
Operating Officer
April 1997 40,000 $4.43 Ratably through April 2002 April 2004 New Vice President
of Finance
April 1997 60,000 $4.43 Ratably through April 2002 April 2004 New Director of
Product Marketing
</TABLE>
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1996, and June 30, 1996 and 1997 (Unaudited)
5. Stockholders' Equity (continued)
The difference between the option exercise prices and estimated fair
value of common stock at the date of grant for the above options is
$225,400 and has been reflected as unearned compensation in the
Company's financial statements to be recognized as expense over the
five year vesting term of the stock option agreements.
In connection with the Company's initial public offering, the Agent for
the offering received a five-year warrant to purchase 88,938 (44,469
pre stock dividend) shares of common stock at an exercise price of
$3.60 ($7.20 pre stock dividend) per share. The warrant is exercisable
from February 1998 through February 2002. Effective March 1997, the
Company issued warrants to a consultant to purchase 25,000 (12,500 pre
stock dividend) shares of common stock at $3.00 ($6.00 pre stock
dividend) per share. The warrants are exercisable for seven years.
6. Related Party Transactions
Included in accounts receivable are $59,962 of amounts due from
Inter-Con/PC, Inc. During the six months ended June 30, 1997, $113,872
of revenues were recognized from transactions with Inter-Con/PC, Inc.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further information regarding the Company's
relationship with Inter-Con/PC, Inc.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR THIS PURPOSE,
ANY STATEMENTS CONTAINED IN THIS FORM 10-QSB THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," ANTICIPATE," OR
"CONTINUE" OR THE NEGATIVE OR OTHER VARIATION THEREOF OR COMPARABLE TERMINOLOGY
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR
NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY
DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS INCLUDING, WITHOUT
LIMITATION, THE RISK FACTORS SET FORTH IN THE "RISK FACTORS" SECTION OF THE
COMPANY'S REGISTRATION STATEMENT ON FORM SB-2 (FILE NO. 333-16451) FILED
PURSUANT TO RULE 424(b) DATED FEBRUARY 14, 1997 AND ANY FUTURE SUPPLEMENTS OR
AMENDMENTS TO THIS FILING.
OVERVIEW
The Company was incorporated in 1993 to develop real-time, stand-alone systems
capable of identifying individuals through automated fingerprint analysis for
use in controlling access to resources, information and facilities. From
inception through most of 1996 the Company's development efforts, which by
agreement were to be funded by Jasper Consulting, Inc. ("Jasper"), were
principally focused on the development of its fingerprint identification and
analysis products. In the second half of 1996, the Company shifted its principal
focus from development to marketing and sales of its products.
During March 1997, the Company hired a Chief Operating Officer with a marketing
background. During April 1997, the Company hired a Director of Product Marketing
and a Vice President of Finance. The Company's focus in the near term is to
market its products through OEM and license agreements primarily in the
following application areas: controlled access to appliances, information
resources, computers, computer networks, as well as apartments, offices and
other facilities.
During the quarter ended March 31, 1997, the Company began shipping its SACMan
product to customers (see below). During July 1997 the Company previewed its
first release of SAC Remote at the Card Tech Secure Tech Trade Show. The Company
expects to ship SAC Remote systems for OEM applications during the third quarter
1997. The Company continues its development of; SAC_Encrypt which will provide
for the encryption/de-encryption of local applications programs by controlling
all access to data files and networks according to a user's unique finger print
key, thereby controlling all data movement and peripherals within a computer
system and; SAC LOGON which will replace the standard computer password log on
and allow for access by the use of a fingerprint. The Company anticipates
release of these products during late 1997.
The Company's more significant current product offerings incorporate the
technology developed by the Company for Jasper. The Company has a world-wide
license agreement with Jasper for use of such technology in all access control
markets. Jasper has the right to exploit such technologies in all other markets.
The Company is considered a development stage enterprise for accounting
purposes. Results achieved to date are not indicative of future results
primarily because the Company has shifted its focus from solely the development
of its products to continued development, and marketing and selling of its
products. Broad commercial acceptance of the Company's products by customers and
end users is critical to the Company's success and ability to generate revenues.
The Company has limited sales to date and has a limited operating history upon
which an evaluation of the Company and its prospects can be based. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stage of development. The
Company may continue to sustain operating losses for the foreseeable future.
<PAGE>
OVERVIEW (CONTINUED)
The Company had previously completed development of a Set Top Box, which
provides for basic personal computer functions and Internet access via a
wireless keyboard and a conventional television set. However, the Company did
not believe that the promotion and marketing of the Set Top Box was within its
primary focus and, accordingly, conveyed the technology to Inter-Con/PC, Inc.
("Inter-Con"), in exchange for an initial 50% ownership interest (48.6% as of
June 30, 1997) in Inter-Con, a development stage Company. The Company has a
technical support agreement with Inter-Con which provides for Inter-Con to pay
technical support fees to the Company of up to $20,000 per month. The agreement
expires in October 1999 and is subject to three successive one-year renewals at
the option of Inter-Con.
By agreement, Jasper is obligated to pay a royalty to the Company for sales of
certain products and the Company has the exclusive right to manufacture products
sold by Jasper, subject to a predetermined pricing structure. However, the
Company is not relying on these potential sources of revenue from Jasper or its
interest in Inter-Con to significantly impact its results of operation.
The Company anticipates adding approximately six additional employees through
1998. The Company believes that research and development is critical to
maintaining a strong technological position in the industry and, therefore
expects research and development expenses to continue to increase in absolute
dollars in future periods. The Company anticipates accounts receivable and
inventory levels, and selling, general and administrative expenses will increase
significantly in connection with its transition to marketing and selling its
products.
RESULTS OF OPERATIONS
Revenues from SACMan product sales were $20,595 for the three months ended June
30, 1997 and $44,310 for the six months ended June 30, 1997. For the three
months ended June 30, 1997, these revenues were principally from the sale of
SACMan units to Jasper Consulting, Inc. Revenues for the six months ended June
30, 1997 also included sales of evaluation systems to original equipment
manufacturers and others developing or investigating the development of
applications which may utilize the Company's products.
During July 1997, the Company shipped one hundred units to Jasper Consulting,
Inc. for potential use by the Bolivian government for national identification
and voter registration applications. During August 1997, the Company signed a
development agreement with Anonymous Data Corporation (AdC) calling for a
minimum purchase of five hundred SAC Remote units over a twenty-four month
period. The agreement requires the Company to provide certain defined product
development and support services in exchange for $7,000 a month for a period of
forty-eight months. The Company received $15,000 upon signing the agreement. The
agreement states that AdC is to pay an additional $35,000 upon AdC obtaining
financing, as defined and $100,000 upon delivery and acceptance of the products
being developed. The Company also received a warrant to purchase three percent
of AdC for $50,000.
Revenues from reimbursed research and development were $24,000 during the three
months ended June 30, 1997 and $36,000 for the six months ended June 30, 1997
and relate to collection of previously unrecognized research and development
billings to Jasper, as discussed below.
Revenues from technical support and other services were $39,352 for the three
months ended June 30, 1997 and $116,790 during the six months ended June 30,
1997. These revenues relate primarily to billings under the technical service
agreement with Inter-Con discussed above and $32,059 of revenues from
development activities for Inter-Con and Jasper during the first quarter ended
March 31, 1997.
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
As more fully discussed in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996, the Company has recognized revenue from
Jasper (primarily related to reimbursed research and development and technical
support services through April 1996) on the cash method, as collection of
amounts billed is not assured. As of June 30, 1997 there were approximately
$376,000 of billings outstanding from Jasper which have not yet been recognized
for financial reporting purposes. Jasper has agreed to allow the Company to
offset future product royalties due to Jasper, if any, against these
unrecognized receivables. In addition, the Company may also charge an additional
$800 for each product manufactured by the Company for Jasper in order to
accelerate payment of the outstanding balance. No assurance can be given that
future sales subject to payment of royalties to Jasper or orders to manufacture
products on behalf of Jasper will occur in amounts sufficient to offset the
uncollected billings above, if at all.
Gross profit on product sales for the three month period ended June 30, 1997 was
$11,447. Cost of product sales exceeded revenues from products for the six
months ended June 30, 1997 by $36,843. This principally resulted from first
quarter costs associated with establishing a prototype pre-production line,
hiring and training personnel on the operation of the prototype pre-production
equipment.
Selling, general and administrative expense increased $484,513 to $539,422
during the three months ended June 30, 1997 and increased $813,497 to $901,908
for the six month period ended June 30, 1997 as compared to the three and six
months ended June 30, 1996. The increase for the three and six months ended June
30,1997 was primarily due to $233,820 and $322,962, respectively of additional
salaries and wages and incentive compensation for marketing and administrative
personnel; $8,000 and $98,100, respectively of recruiting and relocation costs
for the new Chief Operating Officer and Vice President of Finance; $63,062 and
$130,843, respectively of increased professional fees and the remainder of the
increase was principally due to certain marketing and travel activities.
Research and development expense increased $24,362 to $128,136 during the three
months ended June 30, 1997 and increased $74,621 to $224,667 for the six months
ended June 30, 1997 as compared to the three and six months ended June 30, 1996.
The increase is attributable to increased development activity to commercialize
certain of the Company's products.
LIQUIDITY AND CAPITAL RESOURCES
Since January 7, 1993 (date of inception), the Company's capital needs have been
principally met by a February 1997 initial public offering of 2,420,000
(1,210,000 pre stock dividend) shares of common stock at $3.00 ($6.00 pre stock
dividend) per share which resulted in net proceeds of $6,220,331, after
deduction of offering expenses, a July 1996 $700,000 private placement of common
stock and a May 1996 sale of $200,000 of convertible bridge notes. The bridge
notes were converted to common stock during mid 1996 concurrent with the
completion of the aforementioned private placement.
Net cash used in operating activities during the six months ended June 30, 1997
was $1,219,350 and was principally due to operating losses. Net cash used for
investing activities during the six months ended June 30, 1997 was $128,604 and
was primarily from the purchase of $121,303 of equipment and furniture. Net cash
provided by financing activities during the six months ended June 30, 1997 was
$6,038,392 and was principally from the proceeds received from the initial
public offering discussed above.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company believes the funds raised from its recent initial public offering
will be adequate to last through mid 1998. No assurance can be given that events
and circumstances won't change and require additional capital at an earlier
date. No assurance can be given that any additional financing, when needed, will
be available on acceptable terms, if at all, and such financing may only be
available on terms dilutive to existing stockholders.
Working capital increased $5,349,598 during the six months ended June 30, 1997
to $4,994,013, as compared to a deficit of $355,585 as of December 31, 1996.
This increase is principally due to the proceeds received from the initial
public offering. Additionally, during the six months ended June 30, 1997, there
was a $187,280 increase in inventories and a $86,940 increase in accounts
receivable, a $16,947 decrease in accounts payable and a $46,688 increase in
accrued expenses, a $213,000 reduction in borrowings under a revolving note
payable to a bank and the Company repaid a $117,000 note payable to an
officer/director. The inventory and accounts receivable increases are
attributable to sales of the Company's products and purchasing component parts
for its SACMan and related products for future production.
During March 1997, the Company entered into a five year employment agreement
with its new Chief Operating Officer. The agreement provides for certain base
salary and incentive payments. In the event of constructive termination, as
defined, this individual is entitled to one year severance pay, as defined (two
years in case of merger or acquisition). Additionally, the Company awarded this
individual options to purchase 260,000 (130,000 pre stock dividend) shares of
common stock at $3.21 ($6.43 pre stock dividend) per share. The options vest
five percent on June 30, 1997 and five percent each quarter thereafter, such
that on March 31, 2002, one-hundred percent of such options will be vested. The
options expire during March 2004.
During April 1997, the Company hired a vice president of finance and a director
of sales and marketing. The Company issued these individuals options to purchase
a total of 100,000 (50,000 pre stock dividend) shares of common stock at $4.43
($8.87 pre stock dividend) per share. The options vest five percent on July 17,
1997 and five percent each quarter thereafter, such that on April 17, 2002,
one-hundred percent of such options will be vested. The options expire during
April 2004.
The difference between the option exercise prices and estimated fair value of
common stock at the date of grant for the above options is $225,400 and has been
reflected as unearned compensation in the Company's financial statements, to be
recognized as expense over the five year vesting term of the stock option
agreement. (See note 5 of the notes to interim financial statements).
RECENTLY ISSUED ACCOUNTING STANDARD
See note 2 of notes to interim financial statements for information regarding
SFAS 128 "Earnings per Share."
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on May 29,
1997. Proxies for such meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934 as
amended. At the meeting, sufficient favorable votes were cast to
approve each of the following management proposals:
* Ratified Divine, Scherzer & Brody, Ltd., independent certified
public accountants, as auditors of the Company for its
calender year ended December 31, 1997. Divine, Scherzer &
Brody, Ltd. received 3,319,432 shares voted for approval;
2,000 shares voted against; 10,400 shares abstaining.
* Ratified election of directors for the term expiring in 1998.
All nominees received 3,315,832 shares voted for approval;
16,000 shares abstaining
Item 5. Other Information
None.
<PAGE>
PART II - OTHER INFORMATION - CONTINUED
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(i) Those exhibits required to be furnished in response to
this item, other than parts of Exhibit 10 and all of
Exhibit 27, were furnished in connection with the
Company's:
(A) Registration Statement on Form SB-2, File No.
33-16451 as filed with the Securities Exchange
Commission on November 20, 1996, and as amended by
Amendment No. 1 thereto filed on January 10, 1997,
Amendment No. 2 thereto filed February 7, 1997 and
Amendment No. 3 thereto filed February 14, 1997
and as supplemented by supplement dated April 9,
1997, all of which are incorporated herein by
reference.
(B) The Company's annual report on Form 10-KSB for the
year ended December 31, 1996 as filed on March 31,
1997 and,
(C) The Company's quarterly report on Form 10-QSB for
the quarter ended March 31, 1997 as filed on May
15, 1997 and as amended on May 20, 1997.
(ii) Exhibit 10 - Material Contracts
Technical Support and Cooperative Development
Agreement dated August 8, 1997 with Anonymous
Data Corporation.
(iii) Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SAC Technologies, Inc.
(the "Registrant")
Date: August 14, 1997 /s/ Barry Wendt
------------------------------------
Barry Wendt, Chief Executive Officer
/s/ Gary Wendt
------------------------------------
Gary Wendt, Chief Financial Officer
Technical Support and Cooperative Development Agreement
Effective the 8th day of August, 1997, in consideration of the mutual covenants
hereinafter set forth, SAC Technologies, Inc. ("SAC") and Anonymous Data
Corporation ("AdC"), intending to be legally bound, hereby covenant and agree as
follows:
Section 1--Product Definition
1.1 SAC shall use its best efforts to provide technical support and
manufacturing of the following products ("the Products") for the
benefit of AdC.
1.1.1 AdC Remote Access Terminal--the remote access terminal units
will include a fingerprint reader, analysis logic, and
interfaces necessary to identify an individual from their
fingerprint and interface to an AdC Secure Central Database
Server via a telephone connection. The access terminal
includes: a keypad for user input, a LCD display for user
prompting and data output, a telephone interface for remote
communications, a serial communications port for interfacing
to a local computer, a parallel printer interface for local
printing, a speaker for audio output, and an option interface
for secure video/audio communications. (See specifications
attached as Exhibit B, the "Specifications")
1.1.2 AdC Secure Central Database Server Interface--this server
interface provides for the connection of up to 1024
simultaneous AdC Remote Access Terminal users. The base system
supports connection of 16-32 remote users and is ungradable in
16-32 user block increments. The interface connects to a PC
compatible computer to provide secure encrypted access to an
on-line database utilizing a remote terminal user's BIO-KEY to
control access (See specifications attached as Exhibit C, also
referred to as the "Specifications").
The combination of the AdC Remote Access Terminal and AdC
Secure Central Database Server Interface provides for the
access of and associations to an AdC proprietary database
consisting of user medical test data derived from biological
specimens donated by the user. Which can be subsequently
accessed utilizing a user's unique BIO-KEY extracted from a
live scan of the user's fingerprint.
<PAGE>
1.2 If either party proposes a change to the Specifications of the
Products, the other party will reasonably and in good faith consider
and discuss with the proposing party the proposed change. In the event
the parties mutually agree on a proposed change, the same, and the cost
of the same, shall be the subject of a subsequently negotiated
development agreement.
Section 2--Products to be Designed and Developed
2.1 SAC is hereby contracted to design, develop, manufacture, and deliver
to AdC the AdC Remote Access Terminal and AdC Secure Central Database
Server Interface Products as described in Paragraphs 1.1.1 and 1.1.2 in
accordance with the Specifications.
Section 3--Obligations of AdC in Technical Support of Products
3.1 AdC shall take the following actions in connection with the technical
support of the Products.
3.1.1 Advise and consult about the Products and their applications.
3.1.2 Make available adequate laboratory space and qualified
personnel to participate in the technical support of the
Products at AdC's location.
3.1.3 Advise and consult regarding competitive products and new
technical improvements and innovations to enable the Products
to remain competitive.
Section 4--Ownership of the Products
4.1 SAC shall own all right, title and interest (including patent rights,
copyrights, trade secrets rights, mask work rights, and other rights
throughout the world) in the Products developed by SAC except as
further specified in Sections 4.2, 4.3 and 4.4.
4.2 AdC shall own all right, title and interest (including patent rights,
copyrights, trade secrets, mask work rights, and other rights
throughout the world) in the AdC applications developed by AdC or by
SAC for AdC. However, the base biometric database software used by SAC
to develop AdC applications shall remain the exclusive property of SAC.
<PAGE>
4.3 SAC will use its best efforts to obtain appropriate patents from the
U.S. patent office unless, based on the advice of SAC's patent counsel,
SAC determines in good faith that it is not desirable to patent any
part or all of the Products.
4.4 SAC and AdC agree all rights and title to proprietary intellectual
property, owned respectively by each company, shall remain the sole
property of the respective parties.
Section 5--Marketing Rights
5.1 SAC grants to AdC the exclusive rights to market the AdC Remote Access
Terminal and the AdC Secure Central Database Server for anonymous
identification and association of data to an individual's BIO-KEY in
the areas of infections Disease, testing, Employee Drug testing and
Genetic testing (AdC's "market segment"). AdC may market SAC's Products
in other markets on a non-exclusive basis in SAC's "Field of Use"
including but not limited to all markets in the world where the
Products may be sold for use in industrial, commercial and consumer
"Access Control" applications such as, access to information,
computers, computer databases (including anonymous databases), computer
networks, buildings, apartments, offices, labs, other facilities,
resources and appliances. Also including all non-government, state and
federal applications of personnel identification. These marketing
rights, exclusive and non-exclusive, specifically exclude: the
application of credit card clearing, check clearing and other financial
applications, law enforcement, national identification systems,
immigration control, automobiles, medical patient identification
systems (for purpose of identifying a patient undergoing care in a
medical facility), and personnel identification systems for federal and
state government applications.
5.2 SAC has the right to market SAC's Biometric Systems and versions of the
AdC Remote Access Terminal and the AdC Secure Central Database Server
into any market areas except for those markets detailed in section 5.1.
SAC cannot guarantee that products sold by SAC to other customers will
not be used in AdC's market area, however, SAC will alert its customers
to AdC's market area rights, as SAC deems appropriate.
Section 6--Price Protection
6.1 SAC guarantees that charges to AdC, for AdC Remote Access Terminal and
AdC Secure Central Database Server Interface from SAC, will maintain a
ten percent (10%) lower price than SAC's lowest paying client for these
Products or substantially similar versions and improvements of these
Products.
<PAGE>
Section 7--SAC's Technical Support Obligations
7.1 As part of SAC's technical support of the Products, SAC will endeavor
to cause the Products to operate in substantially the same manner as
described in the Specifications. SAC, at its own expense, upon receipt
of written notice from AdC, will endeavor to make all adjustments and
modifications necessary to cause the Products to so operate and furnish
the documentation and other material to the modifications to AdC.
7.2 SAC shall further be obligated to provide the following:
7.2.1 Advise and consult about the Products and their applications.
7.2.2 Advise and consult regarding the manufacturing of the Products
including, but not limited to, the design of the Products for
manufacturing efficiency and cost reduction, as well as the
ease of conducting quality assurance and testing.
7.2.3 Advise and consult regarding competitive products and new
technical improvements and innovations to enable the Products
to remain competitive.
7.3 With the approval of AdC, which approval shall not be unreasonably
withheld, and as the second aspect of SAC's technical support of the
Products, SAC may suggest suitable and durable substitute components to
the extent any specific components of the Product are not suitable or
durable or are not available because of obsolescence, short supply or
other reasons. If any such suggested substitution requires redesign of
the Products, then such redesign shall be deemed to be a change to the
Specifications of the Products. SAC shall furnish appropriate
documentation as to substituted components.
7.4 SAC's technical support of the Products shall be to and for the benefit
of AdC only, and (except as otherwise agreed to by SAC and AdC) shall
not be to or for the benefit of any of AdC's customers.
7.5 In the event changes to the Specifications become necessary or
otherwise requested the same shall not be part of SAC's obligations of
technical support, but instead shall be the subject of a subsequent and
mutually agreed upon development agreement.
7.6 SAC will provide typical warranty and repair support for Products
provided to AdC by SAC at the prevailing industry standard rates and
terms.
<PAGE>
Section 8--AdC's Payments to SAC
8.1 AdC shall payt to SAC, payments and other considerations described on
Schedule A, including but not limited to:
8.1.1 Commencing on the first day of the month next, following the
month in which the AdC Remote Access Terminal and AdC Secure
Central Database Server Interface, described in Sections 1.1.1
and 1.1.2, have been fully developed in accordance with the
Specifications, the amount of $7,000 per month as a retainer
and fee for the ongoing technical support of the Products for
the next forty-eight (48) months.
8.1.2 A payment of $15,000 on signing this agreement to initiate the
development of AdC Products as defined in Exhibits B, C and D.
8.1.3 A payment of $35,000, thirty (30) days after AdC has obtained
debt or equity financing in the amount of $250,000 or more on
terms satisfactory to AdC.
8.1.4 A payment of $100,000 on acceptance of Product by AdC
according to Specifications of Exhibits B, C and D.
8.1.5 On signing this agreement, a Warrant with an exercise term of
five (5) years to purchase three percent (3%) of the
outstanding capital stock of AdC as measured at the time of
exercise, at a cost of $50,000.
8.2 AT such time as SAC is no longer providing technical support with
respect to the Products, the monthly technical support payment shall
terminate with respect to such Products.
Section 9--Term
9.1 The term of this Agreement shall continue until August 8th 2000, and at
AdC's option may be renewed for three (3) successive one-year periods.
To exercise this renewal option AdC must give written notice of such
exercise to SAC prior to the expiration of the original term and prior
to the expiration of each one-year renewal period.
<PAGE>
Section 10--Use and Protection of Proprietary Information
10.1 AdC and SAC acknowledge and agree that all code, inventions,
algorithms, knowledge, ideas, software, and all other business
technical and financial information relating to the Products
("Proprietary Information") embody proprietary information of
substantial value to SAC and AdC. However, AdC and SAC acknowledge and
agree that the code, inventions, algorithms, knowledge, ideas, and
software, included in the Proprietary Information, may be used by SAC
in the development of other non-competitive products. However, SAC
agrees that it will not use the Proprietary Information itself or for
the benefit of any other person, to develop products which would
compete directly or indirectly with any of the Products in AdC's market
segment, or any improvements of such Products. SAC and AdC further
agree they will not use Proprietary Information learned from each other
without the expressed written consent of the other party (AdC and SAC).
SAC shall maintain all AdC business and financial information in
confidence and shall neither use, copy, or disclose, nor permit any
personnel of SAC to use, copy, or disclose, such business and financial
information for any purpose not specifically authorized under this
Agreement or otherwise. In the event that AdC or any successor or
assign of AdC, for any reason, abandons either the business of
marketing or distributing the Products or similar products in AdC's
market segment for a period of twelve (12) consecutive months, then,
the foregoing non-competition covenant agreement of SAC contained
herein shall be null, void, and of no further force and effect.
10.2 SAC shall require that the Products' software and hardware design
documents, provided by SAC to AdC, be kept in separate, secure drawers,
cabinets, or storage rooms, subject to restricted access by only select
authorized persons.
10.3 SAC acknowledges that any use or disclosure of AdC's business and
financial information by SAC or its personnel in a manner not
authorized by this Agreement would likely cause AdC irreparable damage
that could not be fully remedied by monetary damages. The parties
therefore agree that AdC shall have the right to obtain such injunctive
or other equitable relief from a court of competent jurisdiction as may
be necessary or appropriate to prevent such unauthorized or unlawful
action.
10.4 Notwithstanding anything to the contrary, the provisions of this
Section 10 shall not apply to information which: (i) is or has become
readily available without restriction through no fault of the receiving
party or its employees or agents; (ii) is received without restriction
from a third party lawfully in possession of such information and
lawfully empowered to disclose such information; or (iii) was
rightfully in the possession of the receiving party without restriction
prior to its disclosure by the other party.
<PAGE>
10.5 The provisions of this Section 10 shall survive termination of this
Agreement.
Section 11--Force Majeure and Excusable Delays
11.1 Neither party shall be liable for any costs or damages attributable to
nonperformance (including delays on the part of SAC in making
deliveries hereunder) arising out any "Event of Force Majeure," which
shall consist of any cause not within its reasonable control and not
due to its fault or negligence.
11.2 Each party shall give the other party prompt notice of the occurrence
of any Event of Force Majeure that is expected to cause delay
hereunder, and the date of performance by any such party shall be
extended for a period not exceeding the period of delay caused by the
Event of Force Majeure identified in such notice.
Section 12--Termination
12.1 This Agreement may be terminated as follows:
12.1.1 If SAC fails to discharge any material obligation or remedy
any default under this Agreement for a period of more than
sixty (60) days after AdC has given SAC written notice of such
failure then AdC may terminate this Agreement by giving
written notice to SAC.
12.1.2 If AdC fails to discharge any material obligation or remedy
any default under this Agreement for a period of more than
sixty (60) days after SAC has given AdC written notice of such
failure then SAC may terminate this Agreement by giving
written notice to AdC.
12.2 If this Agreement is terminated by either party in accordance with this
Section 12:
12.2.1 AdC shall have no further obligations to pay any money to SAC
or any further obligation to cooperate in the continued
development of the Products by SAC, and SAC shall have no
further obligation to support the Products or cooperate in the
continued development of them.
12.3 In addition to any other rights and remedies contained in Sections 12.1
and 2.2, either party shall have all other rights and remedies under
applicable law, all of which rights and remedies shall be cumulative
and non-exclusive to the extent permitted by law. In addition, certain
obligations of each party under this Agreement are unique. If any party
should default in its
<PAGE>
obligation under this Agreement, the parties acknowledge that in
certain circumstances which are reasonably determined by a party, it
would be extremely impractical to measure the resulting damages, and
accordingly, the non-defaulting party, in addition to any other
available rights or remedies set forth in the preceding sentence may
sue in equity for specific performance and the parties each expressly
waive the defense that a remedy in damages will be adequate.
12.4 Should any litigation be commenced between AdC and SAC concerning this
Agreement, the prevailing party in such litigation will be entitled, in
addition to such other relief as may be granted, to a reasonable sum as
and for its attorneys fees and court costs in such litigation which
shall be determined by the court in such litigation in a separate
action brought for that purpose.
Section 13--Miscellaneous
13.1 This Agreement shall be binding upon the successors and assigns of the
parties hereto; provided, however, that no assignment shall be made by
either party without the prior written consent of the other party. Any
attempt by either party to assign this Agreement or any of the rights
or duties hereunder contrary to the foregoing provision shall be void.
13.2 Any notice permitted or required under this Agreement shall be deemed
given when mailed by certified mail, return receipt requested, postage
prepaid, or when dispatched by telegram or facsimile (and followed by a
written confirmation mailed by certified mail, return receipt
requested, postage prepaid, within 24 hours after such dispatch).
Mail shall be addressed as follows:
If to AdC: If to SAC:
4340 S. Valley View Blvd. 4444 W. 76th Street, Suite 600
Las Vegas, NV 89103 Edina, MN 55435
Attention to: President Attention to: CEO
Or to either party at such other address as shall have notified the
other pursuant to this Section 13.2.
13.3 This Agreement constitutes the entire agreement between SAC and AdC
with respect to SAC's development and support of the Products for AdC,
and supersedes all prior oral or written agreements and understandings
and may be modified or amended only in a writing signed by the parties.
No representation, promise, inducement, or statement of intention has
been made or relied upon by any party hereto that is not set forth in
this Agreement and the exhibits referred to herein.
<PAGE>
13.4 AdC shall pay directly to SAC's attorney's reasonable costs and fees in
connection with the negotiation, execution and delivery of this
Agreement up to a maximum of $2,500.
13.5 This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Minnesota in all respects. If
any term of this Agreement conflicts with the law, all other terms of
this Agreement shall remain in effect and enforceable. Any suit,
action, litigation or other proceeding in connection with this
Agreement, or the agreements and documents executed and delivered
hereunder, will be brought, prosecuted and resolved solely in the state
or federal courts located in Hennepin County, Minnesota, and each party
hereby waives any objections it may have to the personal jurisdiction
of such courts.
13.6 The provisions of this Agreement which on their face anticipate their
survival, including but not limited to the provisions of Section 10 of
this Agreement, shall survive the expiration or termination of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their duly authorized corporate officers as of the day and year
first above written.
Anonymous Data Corporation SAC Technologies, Inc.
By: /s/ James E. Beecham By: /s/ Barry Wendt
Its: CEO Its: CEO
<PAGE>
Schedule A
TERMS
Following completion of specifications and signing of the Development/Support
agreement.
AdC to provide:
1) 150K as follows;
15K down to initiate proposed project. (See Section 8.1.1)
35K payment 30 days after AdC has obtained financing.
(Section 8.1.2) 100K payment on acceptance by AdC. (Section
8.1.3)
2) Purchase order for a minimum of 500 units to be scheduled over a period
of 24 months according to credit terms outlined in agreement.
3) Support payments of 7K/Month for a period of 48 months to SAC for
ongoing product support from SAC. (Section 8.1)
4) Option to purchase three percent (3%) equity stake in AdC. (Section
8.1.4)
SAC to provide:
1) Quantity 5 working AdC Remote Access Terminals.
2) Quantity 5 working AdC Secure Central Database Servers (complete with
PC's, provided by AdC) with one modular back panel each supporting up
to 16 simultaneous users.
3) Units as specified within 5% of target prices.
4) Ongoing product support.
5) Required software to implement proposed applications for the AdC Remote
Access Terminal and AdC Central Database Server. (See Exhibit D).
<PAGE>
Exhibit B
AdC REMOTE ACCESS TERMINAL
General Specifications:
Based on the current SACMAN technology with the following modifications.
(See attached pages)
Add:
a) Local Processor Core for stand-alone operation.
b) Local telephone interface with modem (14,400 Baud or greater) for
remote-to-Secure Central Database Server communications.
c) LCD display for data display and user prompting.
d) QWERTY Keypad for user input.
e) RS-232 Comm. port for inter-system communications or printer output.
f) Video-teleconferencing interface for optional microphone and camera.
(Estimated end user option cost ($99 - $149)
g) Speaker for audio output.
h) Parallel printer interface capable of printing bar code onto specimen
labels wherein bar code corresponds to user print on one-to-one basis.
i) Embedded AdC application software.
Remove:
a) I/O interface logic.
Target price to AdC 4th quarter 1997 of $659 or less. (Estimated time + or - 2
Months)
Target price to AdC 2nd quarter 1998 of $595 or less. (Does not include
options)
<PAGE>
Exhibit C
AdC SECURE CENTRAL DATABASE SERVER INTERFACE
Preliminary specifications:
a) Support connection of up to 1024 simultaneous AdC Remote Access
Terminal users for data access.
b) Modular-design back panel which can be populated incrementally in 16-32
user blocks.
c) Local firmware/commware (each back panel) which provides for
intelligent data packet encryption/de-encryption tied to specific user
BIO-Keys for secure data communications.
Target wholesale price of $895 or less for 1st quarter 1998. (Estimated time
+ or - 2 months)
Target wholesale price of $795 or less for 3rd quarter 1998.
NOTE: Base system @ cost of $895 will support 16 or 32 (TBD) on line users.
<PAGE>
Exhibit D
Software definitions for:
1) AdC Remote Access Terminal
2) AdC Secure Central Database Server Interface
a) Including interface support for designated AdC laboratory
partner PC computer and lab test data review officers
3) AdC communicable disease proprietary database applications
4) AdC employer/employee proprietary drug testing database application
5) AdC genetic testing proprietary database applications
NOTE: AdC and SAC will negotiate in good faith to define these applications
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