U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Fiscal Year Ended December 31, 1998
Commission File Number 1-13463
SAC TECHNOLOGIES, INC.
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(Name of small business issuer in its charter)
MINNESOTA 41-1741861
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4444 WEST 76TH STREET, SUITE 600, EDINA, MINNESOTA 55435
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (612)-835-7080
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on which Registered
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Common Stock, Boston Stock Exchange
$0.01 par value per share
Securities registered under Section 12(g) of the Exchange Act
None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrants 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. _X_
State issuer's revenues for its most recent fiscal year: $384,580
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State the aggregate market value of the voting stock (Common Stock)
held by non-affiliates of the registrant based on the closing sale price as
reported by NASDAQ on March 16, 1999: $9,618,679.
As of March 16 1999, 7,536,867 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Information required by Part III of this Form 10-KSB shall be
incorporated by reference to the Registrant's Definitive Proxy Statement for the
Company's 1999 Annual Meeting of Shareholders which shall be filed with the
Securities and Exchange Commission by no later than April 30,1999.
Transitional Small Business Disclosure Formats (check one):
Yes___ No_X_
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* Shares of Common Stock held beneficially by directors, executive officers and
persons known to own beneficially in excess of 5 percent of the Common Stock
have been excluded in calculating this value.
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PART I
PRIVATE SECURITIES LITIGATION REFORM ACT
The information contained in this Annual Report on Form 10-KSB and in
other public statements by the Company and Company officers include or may
contain certain forward-looking statements. When used in this Report or in such
statements, the words "estimate," "project," "intends," "expects," "believes"
and similar expressions are intended to identify forward-looking statements
regarding events and financial trends which may affect the Company's future
operating results and financial position. Such statements are not guarantees of
future performance and are subject to risks and uncertainties that could cause
the Company's actual results and financial position to differ materially from
those included within the forward-looking statements. Such factors are described
in detail below under the caption "RISK FACTORS." Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date made. The Company undertakes no obligation to publicly release the
results of any revision to these forward-looking statements to reflect events or
circumstances after the date made or to reflect the occurrence of unanticipated
events.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
SAC Technologies, Inc., a Minnesota corporation (the "Company"), was
incorporated in 1993 for the purpose of developing an automated fingerprint
identification system in accordance with the terms of a development agreement
("Development Agreement") with Jasper Consulting, Inc. ("Jasper"). The
Development Agreement provided for Jasper to fund the Company's development of
certain fingerprint identification ("FIDS Technology") in consideration of the
Company assigning to Jasper any right to patent the FIDS Technology. During the
fall of 1993, the Company completed the initial development of the FIDS
Technology and Jasper filed patent applications with the United States Patent
and Trademark Office covering the technology. Thereafter, the Company purchased
certain optic technology (the "Optic Technology") from Richard T. Fiskum, a
director, executive officer and principal stockholder of the Company.
Thereafter, the Company entered into a world-wide license agreement
with Jasper for use of the FIDS Technology and Optic Technology in all access
control markets, with Jasper obtaining the right to use the FIDS Technology and
Optic Technology in all other markets including, specifically, the financial
services, law enforcement and government markets. The license agreement
provides for each company to pay royalties to the other for products
sold in their respective markets and a percentage of licensing fees associated
with licensing of the technology in their respective markets.
Since the initial development of the FIDS Technology, the Company has
continued to develop and aquire improved technology and currently employs its
own proprietary fingerprint identification technology in its product offerings.
Since the Company is no longer dependent upon the FIDS Technology, it is
currently evaluating whether it has the right to market and sell its finger
print identification products and license its technology in any market without
obligation to pay royalties to Jasper. During the past year the Company has also
been in discussions with Jasper regarding the scope of the licensing agreement
and their continuing relationship, if any. As of
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the date hereof, no definitive conclusions or agreements have been made and
therefore, no assurance can be given that additional markets will open up to the
Company or that future royalty payments would not be due to Jasper.
GENERAL DESCRIPTION OF BUSINESS OF ISSUER
The Company develops and markets fingerprint identification technology
for use in general commercial markets. These products utilize biometric
technology- the science of analyzing specific human characteristics which are
unique to each individual in order to identify a specific person from a broader
population. Examples of the unique biological characteristics that can be used
to identify an individual include fingerprints, iris patterns of the eye, hand
geometry and voice and facial structure. Fingerprint analysis is an accurate and
reliable method to distinguish one individual from another and is viewed as less
intrusive than other biometric identification methods. As a result, fingerprint
analysis has gained the most widespread use for biometric identification.
Biometric technology represents a novel approach to identity verification which
has only been used in limited applications and has not gained widespread
acceptance in any commercial or consumer markets.
The Company's technology scans a person's fingerprint and identifies a
person within three seconds without the use of a pass, key card, personal
identification (PIN) number, or other identifying data. The Company's goal is to
develop automated fingerprint identification products which are portable, easily
integrated with existing applications and affordable for mass commercialization
for use by OEMs, distributors and to a lesser degree, system integrators in the
computer network, general access control and other markets.
CURRENT AND POTENTIAL MARKETS
The Company believes that its fingerprint identification technology
will have a broad range of possible applications relating to technology
security. The potential applications for secure access control include the
following:
(i) General access control - Every doorway presently utilizing any
form of controlled access represents a possible sale
opportunity for the Company. Secure access control was
estimated by S.P. Freeman & Company to be a $2.2 billion
market in the United States during 1998.
(ii) Information resource and network access control - Every
existing computer network and stand-alone computer system
represents an opportunity for use of the Company's technology.
Products utilizing the Company's fingerprint identification technology
are currently being utilized in access control doorways to replace PIN numbers,
access cards and keys, in time clocks to replace time cards and in computer
peripherals designed to control access to a network or a specific application.
The Company believes that biometric technology can be utilized in a multitude of
additional applications including, but not limited to, replacement of keys for
entry into personal residences, offices or hotel rooms, restricting access to
undesirable internet sites,
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providing confidentiality for e-mails and other information transmitted over the
internet, replacing PINs at automated teller machines and restricting use of
dangerous products such as gas stoves, ovens, heavy equipment or automobiles to
certain qualified persons. To date, the Company has engaged in limited marketing
of its products and technologies and generated minimal sales principally to the
general access control and computer network security markets.
TECHNOLOGY
The Company's underlying technology consists of (i) the Optic
Technology, which captures the image of a fingerprint; (ii) hardware and
software which translates and standardizes the image of the fingerprint for
computer analysis ("Biometric Solution"); (iii) Vector Segment Technology which
creates a mathematical representation (Bio-Key(TM)) based on the particular
characteristic of the fingerprint; and (iv) SAC_App, an application generator
and database management development package which facilitates integration of the
Company's products for vertical market applications. Utilizing these
technologies, the Company has continued the development of its identification
products which are designed to assure that only individuals comprising an
approved fingerprint in an online or embedded database are allowed access to a
computer network, application or restricted area.
Optic Technology. The Company's Optics Technology uses a camera and red
light to take a visual image of an approximately one-half inch by one-half inch
area of a fingerprint. The image is produced at an effective resolution of
approximately 1,000 dots per inch (DPI). The products then make several passes
on the image to optimize and clarify it. Subsequently the technology identifies
distinguishing characteristics of a fingerprint. These distinguishing
characteristics are mapped by the Company's technology in order to verify
whether the characteristics match those of a previously mapped fingerprint.
VLTA Vertor Segment Technology. The Company's Vector Segment Technology
processes features of a live fingerprint. These features are reduced to a
computer model code (Bio-Key(TM)) unique to the individual. When a person
seeking access to a computer network or restricted area places his or her finger
on the reader, a new Bio-Key(TM) is generated which is compared to an on-line
database to determine whether it matches any Bio-Key(TM) on file. If there is a
match, the person is identified and given access to the computer network or
restricted area. This is accomplished without the use of a key, password, card
or token. The actual finger print is not typically stored in the database.
The Company has replaced FIDS with Vector Segment Technology.
Management believes that the Vector Segment Technology is superior to both the
FIDS Technology previously utilized by the Company and similar technologies
utilized by its competitors.
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Identification Verses Verification Technology. Unlike many of the
biometric products currently available, the Company's technology identifies the
fingerprint of an unknown person by searching a database to determine whether
the current scanned Bio-Key(TM) matches any previously stored mathematical
representation (Bio-Key(TM)). By contrast, most of the Company's fingerprint
competitors simply verify that the fingerprint image of a known person matches a
previously stored copy of that person's fingerprint. By their very nature, such
verification systems typically require an additional item of data such as a PIN
number or access card to initially identify the user. Verification systems don't
eliminate the need for cumbersome access cards, keys or PIN numbers and the
administrative costs associated with the distribution and replacement of such
cards. By contrast, the Company's identification technology does not require
identifying data other than a person's fingerprint and eliminates the need for
such additional identifying data. Based on the foregoing, the Company believes
that its identification technology provides it with a meaningful competitive
advantage in the marketplace. On April 27, 1998, the Company's SACcat(TM)
product earned the International Computer Association's first biometric
identification certification.
Layered Technologies. As more fully described below in the section
captioned "BUSINESS STRATEGY STRATEGIC ALLIANCE," the Company has entered into
various agreements intended to allow the Company to incorporate additional forms
of biometric technology, namely voice and facial recognition, into the Company's
products and technologies.
PRODUCTS AND MARKETS
The Company's current plan is to develop and market products which
address industry-specific security applications focusing on two principal
markets; computer network security and general access control. The Company has
developed some product assembly capability and is exploring outside-contract
manufacturing and assembly of its products, as needed. See "BUSINESS OF THE
COMPANY- SOURCES OF RAW MATERIALS AND SUPPLIERS." Although the Company has
completed the development of a product line, it has only generated minimal sales
of its products and biometric technology has not gained any meaningful
commercial acceptance.
SACMan(TM). The Company's SACMan(TM) is a developer toolkit (DTK) for a
biometrics database application generator. The DTK has been developed for
Original Equipment Manufacturers ("OEMs") and system integrators and includes
all required hardware and software
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components to develop custom or standard applications of biometric technology
into new or existing products.
SACcat(TM). The Company's SACcat(TM) product is a biometrics
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information access control solution that provides for workstation log-on, screen
saver, and security at one single location or across several networked
workstations. SACcat(TM) creates a computer model code (Bio-Key(TM)) of a
fingerprint to identify a live scan of a fingerprint without the use of a key,
password card or token. The SACcat(TM) product is intended for the information
security marketplace and currently supports a Windows 95/98, Windows NT and
Novel operating environments, in addition to supporting a Sun System Unix based
search engine for remote database matching.
SACRemote(TM). The Company's SAC_Remote(TM) product is a personal
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computer ("PC") programmable fingerprint identification product in a stand-alone
package with a local compact with central processing unit and is intended to
provide OEMs and systems integrators a biometric identification access control
solution. SAC_Remote(TM) can be integrated into a wide range of other OEM
product applications such as: point of sale, visitor control, facility access,
and ATM/credit card transactions. The Company is working on a new version of the
SAC_Remote(TM) to provide for more utility, at a lower cost and smaller size.
See "BUSINESS STRATEGY - TECHNOLOGICAL AND PRODUCT DEVELOPMENT."
BUSINESS STRATEGY
The Company's current business plan consists of a threefold strategy of
(i) continuous technology development; (ii) maintaining and developing its
strategic alliances with existing and new biometric and technology companies to
offer products with a wider range of function; and (iii) entering into licensing
arrangements with OEMs, distributors and system integrators.
Technological and Product Development. Management believes that the
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Company's identification technology is the most advanced and discriminating
fingerprint technology widely available on the market today. Through its own
research and development and strategic alliances, the Company intends to
continue to refine and improve its product offering. During 1999, the Company
will be focused on enhancing the technology included in two of its biometric
identification products: SACcat(TM), the Company's computer peripheral for work
station and network security and convenience, and SAC_Remote(TM), the Company's
stand alone unit for access control applications.
The Company intends to focus on the next generation SACcat(TM)
fingerprint scanner incorporating the Company's core technology with an improved
optical system designed for better scanning capability for poor quality
fingerprints. An added interface component is intended to allow for the use of
layered biometrics consisting of voice and facial recognition. Cosmetic
improvements are intended to include improved finger placement features,
futuristic design and reduced size. Based on its research, management believes
that the next generation SACcat(TM) will represent an improvement over the
existing product. The Company is in the process of producing
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a prototype to determine whether it can be successfully mass-produced on a
cost-effective basis. Accordingly, there can be no assurance that such new
product can be produced at an acceptable price on a large scale. Once ready for
mass-production the Company will need a three to four month lead time before the
new version will be available for delivery to customers. There can be no
assurance as to when, if ever, this will occur.
The Company also intends to complete the development of an upgraded
version of SAC_Remote(TM) which will be a stand alone embedded controller
designed to support layered biometrics consisting of fingerprint, voice and
facial recognition that would fit into a double duplex box for OEM integration,
distributors and system integrators. Although originally developed for the
access control market, SAC_Remote(TM) can also be embedded into new or existing
systems for applications such as time and attendance, door entry, kiosk/vending
or point-of-sale.
The Company has recently completed the development of SACSecure(TM)
(Level 1 and 2), a software application which selectively encrypts files and
programs. The biometric version (Level 3) of SACSecure(TM) is intended to be
bundled with other software applications including desktop security and screen
saver lockout as a biometric suite and add-on software package. Through various
strategic alliances, the Company expects that additional software applications
such as layered biometrics consisting of voice and facial recognition and video
teleconferencing will be available to be used with the Company's products during
1999, however there can be no assurance that such technology will be
successfully integrated with the Company's existing technology, developed
timely, or be accepted in the marketplace. See "Strategic Alliances" below.
The Company intends to enter into a definitive agreement with ImEdge
Technologies, Inc., a White Plains, New York based technology company
("ImEdge"). Pursuant to a letter of intent, the Company has provided funding to
ImEdge to develop its proprietary holographic technology. If the Company
executes a definitive agreement with ImEdge the nature of the optic component of
the Company's technology may change as the Company would attempt to integrate
holographic technology into its technology and products. The Company believes
that the holographic technology will allow for cost and size reductions to the
existing products. No assurance can be given that the Company will execute such
an agreement with ImEdge or that the Company will be able to successfully
integrate ImEdge's holographic technology into the Company's technology and
products.
Strategic Alliances. Commencing during the fourth quarter of 1997, the
Company has entered into various agreements which have been designed to allow
the Company to incorporate voice and facial recognition, encryption, desktop
configuration, security and video conferencing capabilities for utilization with
its products. These technologies are designed to provide for a full range of
applications. The actual timing of the integration of these technologies will be
subject to a variety of factors including without limitation, technology and
development issues as well as planning and implementing an effective marketing
approach. Certain of these technologies are already integrated. No assurance can
be given that the remaining technologies will be incorporated in a manner
acceptable to potential customers, that any will be timely implemented or that
the end products cost will be acceptable to any potential customers.
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The Company and Keyware Technologies, Inc. ("Keyware") have entered
into a strategic alliance to integrate Keyware's Voice Guardian verification
technology into SACMan(TM) products. Keyware's Layered Biometric Verification
(LBV(TM) is designed to enable users to mix and match those biometric
technologies that work best for their application and meet their unique security
requirements. The integrated VoiceGuardian(TM) technology is anticipated to be
available on the Company's products in mid to late 1999.
The Company and Miros, Inc., ("Miros"), located in Wellesly, MA,
developer of face recognition software for security and time and attendance,
have signed a non-exclusive agreement regarding the integration of Miros'
TrueFace software into the Company's fingerprint identification products. Miros'
TrueFace software is based on neural network technology and is designed to
overcome the variability of peoples' faces in determining whether a face is the
same as the image that was previously stored on a database. TrueFace PC is
stated to be compatible with PC client/server standards and also to be used
alone or in conjunction with other computer security methods. The TrueFace PC
client runs on Microsoft Windows 95 and NT. The server software runs on Windows
NT, Netware 4.x, and Unix.
The Company and Pinnacle Technology, Inc. ("Pinnacle") have entered
into an exclusive agreement to integrate Pinnacle's "Trusted Desktop Commander"
security software with the Company's own biometric technology to provide
convenient point and click configuration and control of Windows 95,98 Windows NT
and Novell network environments tied to a user's actual identity. The combined
technologies are designed to allow management information system managers and
system administrators to biometrically identify and control who can logon to a
workstation or network. The system is also intended to give administrators the
ability to centrally configure the desktop of every user on the network for
subsequent profile download to the workstation during logon, restrict access to
applications and data, restrict access to workstation or network resources
including printers and disk drives, audit and monitor all user activities and
allow for user mobility via desktop profile download. Users can also be
restricted from altering their desktops, which may reduce maintenance costs and
training and improve productivity. The Company has successfully integrated
Pinnacle's technology for its Windows 95,98 products.
The Company and Certicom Corp. ("Certicom") of Toronto, Canada and San
Mateo, California have entered into a licensing agreement. Certicom is a
provider of cryptographic technologies for computing and communications
companies. Vendors of electronic commerce and digital communications products
are integrating and deploying Certicom's core technology, the Certicom Elliptic
Curve Engine (CE)2, across a wide range of operating environments and devices to
build security into software, smart card and wireless applications. Based on
Elliptic Curve Cryptography, (CE)2 provides higher levels of security at smaller
key sizes than any other established public-key cryptographic system.
The Company has entered into an exclusive agreement with Baraka
IntraCom, Inc. ("Baraka") of Torrance, California and London, U.K. Under the
agreement, the Company is expected to integrate Baraka IntraComs's video
conferencing and video e-mail technology with its
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own biometrics technology and cryptographic software licensed from Certicom
Corp. to provide users the ability to biometrically identify, control, encrypt
and secure live video node to node communications over unsecured channels
utilizing an individual's unique Bio-Key(TM). Baraka's VidCall 32, a
software-only video conferencing system for Windows 95, 98 enables live video
conferencing worldwide with dial-up connections over ordinary phone lines.
CineMail, an audio/video e-mail package, allows anyone with a PC, video camera
and standard modem to capture and send full-motion video over normal telephone
lines, the Internet or any of the world's standard e-mail services. Although
this integration was anticipated to be complete by late 1998, it together with
the Company's new layered biometric compatible reader (next generation SACcat),
is still in development.
Licensing Agreements. During the fourth quarter of 1998, the Company
commenced a licensing program pursuant to which it has entered into licensing
agreements with various OEMs pursuant to which the Company's technologies are
incorporated into the offerings of these OEMs. As of the date of this Report,
the Company has entered into three such agreements. There can be no assurance
that the Company will have the marketing or financial resources to enter into
any additional licensing agreements or that any such agreements will generate
any meaningful revenue or earnings for the Company.
During February 1999, the Company signed a one year, renewable
non-exclusive OEM Licensing agreement with Sense Technologies, Inc. primarily
for time clock applications. The agreement provides for a one-time licensing fee
of $100,000 with a minimum annual pre-purchase (non-refundable) royalty of
$50,000 payable through November 1999. The Company is obligated to deliver
physical product specification under the agreement.
During March 1999, the Company signed a one year, renewable
non-exclusive OEM licensing agreement with OPUS Biometric Technologies, Inc. to
allow them the ability to represent, distribute, reproduce and upgrade certain
biometric technologies engineered and owned by SAC Technologies, Inc. in the
Canadian Market. The Agreement calls for a one time licensing fee of $100,000
with a minimum pre-purchase (non-refundable) product inventory of $45,000. In
order to maintain the license, OPUS will be required to purchase a minimum of
$250,000 annually from the Company in product, licensing fees, maintenance
agreements and other services provided by the Company.
During March 1999, the Company signed a two year, renewable
non-exclusive distribution agreement with Biometrics 2000.com to conduct a 60
day pilot test of the Company's SAC-Remote(TM) OEM Fingerprint Identification
System for embedded facility access control applications. Upon acceptance of the
Company's technology, which requires a successful pilot study, Biometrics
2000.com is to pay a one time licensing fee of $100,000 with a minimum annual
pre-purchase royalty (non-refundable) of $50,000 per year, or $100,000 over the
two years. The terms call for $50,000 upon completion of the pilot study with
six quarterly payments of $25,000. The two year, renewable, technology
manufacturing licensing agreement allows Biometrics 2000.com the ability to
reproduce, distribute, export sublicense and upgrade certain biometric
technologies engineered and owned by the Company for use in Biometrics 2000.com
manufactured and purchased equipment, primarily for the facility access control
market.
The Company does not expect to derive any significant short-term or
long-term revenue from the markets serviced by Jasper.
MARKETING AND DISTRIBUTION METHODS OF THE PRODUCTS AND TECHNOLOGIES
The Company's marketing and distribution efforts consist of (i) general
promotion of biometric technology and the Company's products; and (ii) direct
selling efforts to, among others,
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OEMs and master distributors. As described in this Report, the Company has only
generated limited sales and the market for its products and technologies is
evolving.
With respect to promotion, the Company has developed and is continually
updating marketing literature describing biometric technology and the Company's
products and technologies. In addition, the Company attends and actively
participates in various product conferences and conventions in the technology
and security industries and advertises in trade publications and catalogues. The
purpose of these activities are to generate market awareness of biometric
technology generally and the Company's offerings specifically.
With respect to direct selling efforts, current marketing plans consist
of direct sales efforts to OEMs. In this regard, the Company seeks to enter into
licensing arrangements with OEMs to incorporate the Company's technologies into
their products as well as making direct sales of its SAC_Remote(TM) product. The
Company is primarily dependent upon such licensees to develop end user
applications for its technologies. The Company also targets system integrators
to incorporate the Company's proprietary technologies and products into a
computer network. With respect to distributors, the Company has distributed its
products through distributors and master distributors. The Company is currently
focusing on master distributors which typically provide technical support and
service to their customers. Given the size of the Company and its limited
resources, the Company is unable to provide such services to end users and seeks
to conserve such resources for the continued development of its products and
technologies.
The Company's marketing efforts are conducted primarily out of its Las
Vegas office by its Marketing and Sales Manager and three sales
people/assistants. In order to compete effectively the Company needs to enhance
its sales and marketing efforts. This will require the hiring of additional
qualified individuals and technical support staff. There can be no assurance
that the Company will have the financial resources to attract or retain such
personnel.
COMPETITION
The markets for the Company's products and technologies are developing
and are characterized by intense competition and rapid technological change. No
assurance can be given that the Company's competitors will not develop new or
enhanced technologies that will offer superior price, performance or function
features or render the Company's products or technologies obsolete. As of the
date of this Report, the Company has yet to manufacture, market, or sell any of
its products on a wide-scale commercial basis.
In addition to existing commonplace methods of restricting access to
facilities such as pass cards, PIN numbers, passwords, locks and keys, there are
numerous companies involved in the development, manufacture and marketing of
fingerprint biometric products to government, law enforcement, prison and
consumer markets. These companies include Digital Biometrics, Inc., PRINTRAK
International, Indenticator, INDENTIX, Mytec Technologies, Inc., The National
Registry, Sandia Labs, Biometrics Identification, Inc., Ultrascan, Inc., I/O
Software, Hi-Key Technologies, and WhoVision?. In addition, the integration of
the Company's products with those of its strategic partners previously described
will most
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likely subject the integrated products to competition from a variety of other
industries and competitors. Many of these competitors have substantially greater
financial resources and experience in marketing biometric products.
Most current automated fingerprint identification product sales have
been for government and law enforcement applications and are priced higher than
the Company's Product. This may be attributable, in part, to the fact that
several of the Company's competitors are integrating other manufacturers'
hardware and/or software and, as a result, may be forced to bear higher
component costs and technology licensing fees' as well as greater selling
expenses. Although most of the companies specifically targeting consumer
application markets have successfully developed their products, biometric
products and technologies have not been widely accepted in the commercial
markets.
With current non-biometric technologies the user must typically possess
a key, card, or bit of information such as a PIN number or password. These
systems are easily defeated by obtaining possession of the key, card, or
password, or by counterfeiting the key or card. The Company's biometric
technology and products are intended to replace such systems and substantially
reduce the related security breaches. Although biometric based "verification"
systems can identify a person and prevent unauthorized persons from entering
into a restricted area, such systems do not eliminate the need for PIN numbers,
cards, keys or tokens. By contrast, the Company's identification technology does
not require the use of any such additional identifier other than the person's
fingerprint and "identifies" rather than "verifies" the subject. The Company
believes that such end-user convenience creates a meaningful competitive
advantage for the Company. There can be no assurance, however, that the
Company's competitors will not develop similar or superior "identification"
technology which could have a material adverse effect on the Company's financial
condition and results of operation. The Company's products will also be
competing for market share with other biometric technologies including hand
geometry, iris scanning, retinal scanning, and signature verification, as well
as existing lock/security/card technology. This is especially true if and when
the Company is able to successfully integrate its technology with those of its
strategic partners.
SOURCES OF RAW MATERIALS AND PRINCIPAL SUPPLIERS
Assembly of the Company's products utilizes components, equipment and
processes generally available from outside electronics firms. To date, the
Company has purchased all electronic parts, optics parts, circuit boards, and
cases from outside vendors and has performed the final assembly, calibration,
testing and serialization of its product. Two outside vendors located in
Minnesota have also assembled products. In addition, the Company has identified
several manufacturers which it believes have the ability to perform assembly of
its products, as appropriate, to meet production and assembly requirements
beyond this pre-production stage. The Company is currently exploring
opportunities to have its products manufactured overseas in order to reduce
costs. Although management of the Company has commenced discussions with certain
manufacturers who have expressed an interest in manufacturing the Company's
products, no firm offers have been received and there can be no assurance that
the Company will be able to obtain such a manufacturing contract on terms
acceptable to the Company if at all.
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PRESENCE OF MAJOR CUSTOMER
During fiscal year ended December 31, 1998, $244,979, or 64% of the
Company's total revenue, was derived from sales to Aultimate Technology
Marketing, Inc. (ATM). Although the Company and ATM are parties to a three-year
distributorship agreement which provides for ATM to purchase $282,000 of
SACcat(TM) Units per year, the Company does not believe that its success as an
operating company is dependent on ATM or any of the Company's other current
customers.
INTELLECTUAL PROPERTY RIGHTS
The Company's technology consists of knowledge and information relating
to computer hardware and software which is used to create an automated process
of imaging a fingerprint, formatting the fingerprint for computer analysis, and
identifying and verifying the print relative to an existing database of
fingerprint information. The Optic Technology and the Company's Biometric
Solution are owned by the Company, subject to an exclusive worldwide license
which has been granted to Jasper to use and sell products in all markets other
than access control. The Vector Segment Technology is owned by the Company. The
FIDS Technology is owned by Jasper subject to an exclusive worldwide license in
favor of the Company to use and sell products in all access control markets. The
Company is currently evaluating its rights with respect to Jasper and is in
discussion with Jasper regarding the scope of their relationship.
Either Jasper or the Company may transfer or license its rights to FIDS
Technology, with the consent of the other party. Any consideration received with
respect to a transfer of FIDS Technology within Jasper's field of use is divided
as follows: (i) 10% to Jasper for purposes of funding any legal fees and costs
incurred with respect to the transfer or claims; (ii) 10% to the Company for
purposes of funding ongoing research and development expenses with respect to
the FIDS Technology, Optic Technology, or Biometric Solution; (iii) 48% to
Jasper without restrictions; and (iv) 32% to the Company without restriction.
Any consideration received with respect to a transfer or license of FIDS
Technology within the Company's field of use, will be divided as follows: (i)
10% to Jasper for purposes of funding any legal fees and costs incurred with
respect to the transfer or claims; (ii) 10% to the Company for purposes of
funding ongoing research and development expenses with respect to the FIDS
Technology, Optic Technology, or Biometric Solution; (iii) 48% to the Company
without restrictions; and (iv) 32% to Jasper without restriction.
While the Company has filed a patent application relating to both the
Optic Technology and Biometric Solution components of its technology, no patents
have yet been issued or indicated as allowable. The Company has not yet filed a
patent with respect to the Vector Segment Technology. Part of the Company's
technology consists of software or hardware implementations of software
("firmware"). The Company intends to take measures to ensure copyright
protection for its software and firmware releases prior to distribution. The
firmware/software is, however, serialized in an attempt to ensure that only
matched sets will function together. This provides both a mechanism to combat
cloning of the Company's products and a method for standardizing products. The
Company believes it has developed common law
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trademark rights in the term SACMan(TM), SACcat(TM), SAC_Remote(TM),
Bio-Key(TM), SACSecure(TM), SACcipher(TM) and SACbook(TM) and has filed federal
trademark applications. The Company does not claim any additional trademarks.
RESEARCH AND DEVELOPMENT
During fiscal years ended December 31, 1997 and 1998, the Company spent
approximately $560,000 and $1,570,000, respectively on research and development.
The Company's limited customer base did not directly bear the cost for such
research and development during 1997 or 1998, which was principally funded
through outside sources of equity and debt financing by the Company.
GOVERNMENT REGULATION
The Company currently is not subject to direct regulation by any
government agency, other than regulations generally applicable to businesses.
However, in the event of any international sales of the Company's products or
manufacture of the Company's products overseas, the Company would likely be
subject to various domestic and foreign laws regulating such exports and export
activities.
ENVIRONMENTAL REGULATION
As of the date of this Report, the Company has not incurred any
material expenses relating to the compliance with federal, state or local
environmental laws and does not expect to incur any material expenses in the
foreseeable future.
EMPLOYEES
The Company currently employs 15 individuals on a full-time basis: five
are primarily involved in research, development, and technical support; one is
principally involved in technical support and quality control; two are
principally involved in research, development, and administrative matters; three
are principally involved in administrative and finance matters; and four are
principally involved in sales and marketing efforts.
RISK FACTORS
The following material risk factors, among others, may affect the
Company's financial condition and results of operations.
DEVELOPMENT STAGE COMPANY; LIMITED OPERATING HISTORY; OPERATING LOSSES.
The Company is a development stage enterprise, formed in 1993, which has yet to
generate any significant revenue and, since inception through December 31, 1998,
has had accumulated losses of $9,496,871 and negative cashflow from operations
of $8,066,545. As of December 31, 1998, the Company reported negative working
capital of $1,075,778. In addition, the Company has never successfully marketed
a product and its officers have limited experience in the operation and
development of a business like the Company's. Until the Company is able to
generate significant revenues from the sale of its technologies, the Company
anticipates net losses will continue. There
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can be no assurance that the Company will ever be able to generate significant
revenues or operate successfully.
GOING CONCERN EXPLANATORY PARAGRAPH. The Company has historically met
its working capital requirements through financing transactions involving the
public or private placement of its debt or equity securities. Management does
not expect the current working capital to support the Company's operations
beyond the short-term. Accordingly, as of the date of this Report, the Company
is in need of immediate and substantial additional capital to fund operations
beyond the short-term. The Company's independent auditors have included an
explanatory paragraph in their opinion for the year ended December 31, 1998 as
to the substantial doubt about the Company's ability to continue as a going
concern. The Company's long-term viability and growth will depend upon the
successful commercialization of its technologies by others and its ability to
obtain immediate financing, among other matters, as to which there can be no
assurances.
LIMITED OWNERSHIP AND USE RIGHTS OF FINGERPRINT TECHNOLOGY. The success
of the Company, among many other factors, will depend upon the success of the
Company's technology which has been utilized to complete the development of its
initial automated fingerprint identification products including SACMan(TM) (a
developer toolkit), SACcat(TM) and SAC_Remote(TM). The Biometric Solution and
Optic Technologies are owned by the Company and are subject to an exclusive
worldwide license which has been granted by the Company to Jasper Consulting,
Inc. ("Jasper") which permits Jasper to use and sell products incorporating
these technologies in certain markets. The Fingerprint Identification Technology
("FIDS") is owned by Jasper subject to an exclusive worldwide license which has
been granted to the Company which permits the Company to use and sell products
incorporating the FIDS technology in all access control markets. The Company has
developed and owns its Vector Segment Technology algorythm with print
classification code and is presently utilizing this technology exclusively in
place of the FIDS Technology. Given that the Company no longer utilizes the FIDS
Technology, the Company is currently evaluating whether it can license and sell
products incorporating the Vector Segment Technology in markets other than
general access control and information security and is in discussions with
Jasper regarding the scope of their continued relationship, if any. Accordingly,
although the Company owns certain of its technologies, it is a licensee with
respect to certain other technologies and in any event, at this time, the
Company may not have the right to sell products incorporating its or other
technologies or license its or other technologies outside of the access control
markets.
INTELLECTUAL PROPERTY PROTECTION. There are currently two patents
pending relating to technologies utilized by the Company; one for both the Optic
Technology and Biometric Solution which was filed by the Company, and one for
FIDS Technology which was filed by Jasper. The Company has not yet filed a
patent relating to its Vector Segment Technology. There can be no assurances
given that any patents will ever be issued, or that, if issued, the Company
would have the resources to protect any such issued patent from infringement.
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Although the Company believes that its technology does not infringe upon patents
held by others, no assurance can be given that such infringements do not exist.
PRODUCT DEFECTS. In the event the Company develops new products or
enhancements to existing products, when first released by the Company, such
products may contain undetected design faults and software errors, or "bugs"
that, despite testing of such products by the Company, are discovered only after
a product has been installed and used by customers. There can be no assurance
that faults or errors in the Company's existing products or in new products
introduced by the Company will not be discovered in the future, causing delays
in product introductions and shipments or requiring design modifications that
could adversely affect the Company's competitive position and results of
operations. In addition, there can be no assurance that new products or product
enhancements developed by the Company will achieve market acceptance or, if
successful, will not adversely impact sales of the Company's existing products.
On occasion, the Company has discovered minor design defects in its products
that have caused delays in the introduction of products. To date, however, the
Company has not experienced any significant problems in this regard and has not
recalled products as a result of a product defect.
LIMITED SALES AND MARKETING; LIMITED MARKET ACCEPTANCE. The Company has
recently commenced marketing its products, including SACMan(TM) (a developer's
toolkit), SACcat(TM) and SAC_Remote(TM), principally through licensing
agreements with OEMs, distributors and system integrators whereby others are
responsible for sales or development of applications which can then be sold to
end users. The Company has yet to generate any significant sales of any of its
products, the Company's employees have limited experience in marketing such
products and no effective distribution channels have been developed. While the
Company has plans for developing a significant marketing and sales effort, along
with accessing various distribution channels, there is no significant internal
sales force within the Company and there can be no assurance that the Company
will be successful in attracting and retaining such necessary qualified
marketing and sales expertise or have the financial resources to attract and
retain such persons. The Company's future success will depend, among other
factors, upon the extent to which customers in the new markets acquire, adopt,
and continue to use the Company's products as well as the extent to which OEMs
distributors and system integrators are able to effectively market products on
behalf of the Company.
In addition to the foregoing, biometric technology has only received a
limited market acceptance particularly in the private sector. There can be no
assurance that the Company's products or technologies will gain any meaningful
acceptance in the commercial markets served by its OEMs, distributors and
application developers or that any of the Company's current sales and marketing
activities and strategies will prove effective. In summary, the Company competes
in an undeveloped evolving market and is substantially dependent upon others to
develop applications and to sell the Company's products.
CHANGES IN TECHNOLOGY. The access control and information security
markets are subject to rapid technological change and intense competition. There
can be no assurance that the Company will be able to keep pace with this change.
In this regard, the Company's competitors, most of which have substantially
greater financial and marketing resources than the Company, may independently
develop technologies similar or superior to those utilized by the Company
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which may result in the Company's technologies or products becoming less
competitive or obsolete. Accordingly, if the Company is unable for technological
or other reasons to develop products on a timely basis in response to
technological changes, or if the Company's products or product enhancements do
not achieve market acceptance, the Company's business would be materially and
adversely affected.
DEPENDENCE ON SUCCESS OF STRATEGIC ALLIANCES, OEMS AND SYSTEM
INTEGRATORS. Commencing during the fourth quarter of 1997 the Company entered
into various strategic alliances which are designed to allow the Company to
integrate voice and facial recognition, encryption, desktop configuration,
security and video conferencing capabilities for utilization with its
technology. While the Company anticipates that integrated products would be more
marketable and accepted in the marketplace, the Company does not believe that
its inability to successfully integrate its technology with the technology of
the Company's strategic partners would have a material adverse effect on the
Company's ability to successfully market its products.
The success in integrating these technologies and the integrated
products and applications will not only depend on the Company's efforts and
technologies but also the efforts and technologies of others. No assurance can
be given that the companies providing these technologies will remain in business
and continue to provide technological support to the Company, that these
technologies will be incorporated in a manner acceptable to potential customers,
that the integration will be timely implemented, that the cost of the end
products will be acceptable to the marketplace, that the end products will be
priced such that they will be profitable to the Company or that the Company will
have the resources to complete these efforts. In addition, no assurance can be
given that the technologies will effectively compete with new or existing
technologies in all of these markets or that superior technologies will not be
developed which would obsolete an integrated component or components of the
Company's anticipated layered biometric solution. By integrating other
companies' technologies into the Company's products, the Company may also expose
itself to intellectual property infringement claims because the Company is not
in control of all of the technology in its products. The actual timing of the
integration of these technologies will be subject to a variety of factors
including without limitation, technology and development issues as well as
developing an effective marketing approach.
The Company intends to enter into a definitive agreement with ImEdge
Technologies, Inc. regarding its proprietary holographic optic technology. If
the Company executes an agreement with ImEdge Technologies, Inc., the nature of
the optic component of the Company's technology may change as the Company would
attempt to integrate holographic technology into its technology and products.
The Company anticipates that the integration of holographic technology would
reduce the size and cost of production of its products. No assurance can be
given that ImEdge will successfully complete development of its technology, the
Company will execute an agreement with ImEdge Technologies, Inc. or that the
Company will be able to successfully integrate ImEdge Technologies, Inc.'s
holographic technology into the Company's technology and products, or that the
Company will be able to reduce the size and cost of the product.
The Company is also dependent upon its OEM licensees, distributors and
system integrators who generate sales of products which incorporate the
Company's technologies. The
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Company is, therefore, dependent upon the efforts of others in order to develop
any meaningful revenues for the Company in the near term and beyond. There can
be no assurance that such licensees will have the financial, marketing or
technical resources in order to successfully distribute its products to create
market awareness of biometric technology or generate any meaningful revenues for
the Company.
IMMEDIATE NEED FOR ADDITIONAL FUNDS. The Company is in immediate need
of substantial additional capital to fund the ongoing development and expansion
of its business, including its research, development, marketing and sales
efforts, and pursuit of strategic partnerships. The Company's current working
capital will not be sufficient to fund the Company beyond the short-term. In
addition, as of the date of this Report, the Company is not in compliance with
the standards required to maintain its listing on the Nasdaq SmallCap Market due
to, among other things, not meeting the $2,000,000 net tangible asset
requirement. SEE "POSSIBLE DELISTING FROM THE NASDAQ SMALLCAP MARKET;
ACCELERATION OF OUTSTANDING INDEBTEDNESS; POSSIBLE APPLICABILITY OF "PENNY STOCK
RULES" AND IMPACT ON LIQUIDITY OF COMMON STOCK." Accordingly, the Company is
currently evaluating and considering the viability of obtaining additional
financing through the issuance of additional debt or equity securities on a
negotiated private placement basis to institutional and accredited investors. As
of the date hereof, although the Company has had initial discussions with
potential investors, it has not reached any definitive agreement with any such
investor regarding the specific terms of an investment in the Company. There can
be no assurance that any such financing will be available, if at all, on terms
acceptable to the Company. To the extent such financing results in the issuance
of additional equity securities, the Company's existing stockholders will be
subject to additional dilution which may be substantial.
POSSIBLE DELISTING FROM THE NASDAQ SMALLCAP MARKET; ACCELERATION OF
OUTSTANDING INDEBTEDNESS; POSSIBLE APPLICABILITY OF "PENNY STOCK RULES" AND
IMPACT ON LIQUIDITY OF COMMON STOCK. The Company's Common Stock is currently
listed for trading on the Nasdaq SmallCap Market and the Boston Stock Exchange.
There can be no assurance that such listings will be maintained. As described in
the Company's filings with the Securities and Exchange Commission and press
releases, the Company is not currently in compliance with the minimum
maintenance standards in order to maintain its listing on the Nasdaq SmallCap
Market. Specifically, the Company does not currently have (i) net tangible
assets in excess of $2,000,000; (ii) market capitalization in excess of
$35,000,000; or (iii) earnings from continuing operations of at least $500,000.
The Company has received notice from Nasdaq of its intent to delist the
Company's shares. The Company has requested and received an oral hearing
objecting to the proposed delisting and seeking a temporary exemption from such
minimum maintenance requirements which is scheduled to be held on April 15,
1999. In order to achieve compliance with the minimum maintenance standards
required by the Nasdaq SmallCap Market, the Company must increase its net
tangible assets, either through the issuance of securities or otherwise, by
approximately $3,500,000. If the Company is not in compliance with the listing
requirements applicable to the Nasdaq SmallCap Market by the date of the hearing
or its plan to achieve compliance is not accepted by Nasdaq, its shares will
likely be delisted from the Nasdaq SmallCap Market.
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There can be no assurance, that the Company will be able to meet such
applicable maintenance standards by the hearing date, if ever or that meeting
such standards will insure the Company's continued listing on the Nasdaq
SmallCap Market.
In the event of a delisting of the Company's Common Stock, the Company
would be in default under the terms of an outstanding Convertible Debenture
resulting in the acceleration of the Company's obligation to repay the entire
principal amount ($2,500,000) and all accrued interest due thereunder and an
increase of the applicable interest rate from 5% to 9%. As of the date of this
Report, the Company does not have the financial resources to repay such amount.
In addition, the public trading market for the Common Stock would be
adversely affected and the Common Stock will likely be quoted on the OTC
Bulletin Board which provides for limited liquidity. In addition, in the event
the Company's Common Stock continues to trade below $5.00, it will be subject to
SEC Rules and Regulations which impose limitations upon the manner in which
certain low priced securities (referred to as a "penny stock") are publicly
traded. Under these regulations, a penny stock is defined as any equity security
having a market price of less than $5.00 per share, subject to certain
exceptions. Such exceptions include any equity security listed on the Nasdaq
National Market or SmallCap Market and any equity security issued by an issuer
that has (i) net tangible assets of at least $2,000,000, if such issuer has been
in continuous operation for three years, (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years, or (iii) average annual revenue of at least $6,000,000 if such issuer has
been in continuous operation for less than three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith. Under these regulations, certain
broker/dealers who recommend such securities to persons other than established
customers and certain accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale.
In addition to the foregoing, during the fourth quarter of 1998, Nasdaq
requested supplemental information from the Company with respect to certain of
the Company's disclosures appearing in its annual and quarterly reports filed
with the SEC. Although, the Company has responded to each of these inquires, as
of the date of this report, it has received no indication that Nasdaq is
satisfied with the Company's responses or that additional inquiries will not be
made in the future. The Company has not been advised by Nasdaq that these
inquiries are likely to lead to a notification of delisting, however, there can
be no assurance that Nasdaq will not seek to delist the Company's shares from
the Nasdaq SmallCap Market in the event they are not satisfied with the
Company's responses.
POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND
CONVERTIBLE DEBENTURE; REGISTRATION RIGHTS. As of December 31, 1998, there were
1,612,050 shares of Common Stock reserved for issuance upon exercise of
outstanding stock options and warrants. Additional shares of the Company's
Common Stock are reserved for issuance upon the exercise of options available
for future grant under the Company's 1996 Stock Option Plan. The Company has
filed a registration statement to register the public resale of 18,000 shares of
the Company's Common Stock underlying vested options, 538,502 shares of the
Company's Common Stock underlying warrants and approximately 1,000,000 or more
shares issuable upon conversion
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of an outstanding convertible debenture. Upon exercise of the stock options or
warrants or upon conversion of the convertible debenture, a significant number
of shares of Common Stock would be eligible for sale into the public
marketplace. The issuance of the freely tradeable shares underlying the stock
options, warrants and convertible debentures would have a dilutive effect on the
Company's shareholders and may have a negative impact on the trading price of
the Company's Common Stock.
COMPETITION. The Company is engaged in a rapidly evolving field. The
markets for the Company's products and technologies are developing and are
characterized by intense competition. In addition to existing commonplace
methods of restricting access to facilities and information, such as pass cards,
PIN numbers, password access and locks and keys, there are numerous companies
involved in the development, manufacture, and marketing of fingerprint biometric
products to government, law enforcement, prison, and consumer markets.
Competition from other companies is intense and expected to increase. Most of
the Company's competitors have substantially greater financial resources,
research and development staffs, sales and marketing staffs, and facilities than
does the Company. In addition, the integration of the Company's products with
those of its strategic partners will likely subject the integrated products to
competition with a variety of other competitors in varying industries. Many of
these competitors have substantially greater resources and experience in
marketing biometric products. Other recently developed technologies are, or may
in the future be, the basis of competitive products. There can be no assurance
that the Company's competitors will not develop technologies and products that
are more effective than those being developed by the Company or that would
render the Company's technology and products obsolete or noncompetitive.
DEPENDENCE UPON NEW AND UNCERTAIN MARKETS; UNCERTAINTY OF MARKET
ACCEPTANCE. Substantially all of the Company's revenues to date have been and
for the foreseeable future are anticipated to be, derived from biometric
products and technologies. Biometric products and technologies represent a new
approach to determining a person's identity which have only been used in limited
applications and have not gained widespread commercial acceptance. The expansion
of the market for the Company's technologies and products depends on a number of
factors including the cost and reliability of the Company's products and
technologies and the products and technologies of its competitors, customer
perception of the perceived benefits of these products, public perception of the
intrusiveness of these products, public confidence as to the confidentiality of
private information and customer satisfaction with the Company's products and
technologies and publicity regarding same. Public objections have been raised
regarding the use of biometric products and technology on privacy grounds. The
Company's future success is substantially dependent upon the development and
expansion of markets for biometric products. Even assuming these markets
develop, there can be no assurance that the Company's products and technologies
will be competitive or gain any meaningful market acceptance. Accordingly, if
the markets for the Company's products or technologies fail to develop or
develop more slowly than anticipated, or if such products fail to gain any
meaningful market acceptance, the Company's business, financial condition and
results of operations would be materially and adversely affected.
PRODUCT LIABILITY; INSURANCE. The Company faces an inherent business
risk of exposure to product liability claims in the event that the use of its
products are alleged to have resulted in
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injuries or losses related to their manufacture and use. Although the Company
seeks to employ provisions limiting liability in contractual relationships with
customers, there can be no assurance that the Company will be able to
effectively avoid significant liability exposure. The Company does not own any
product liability insurance. The Company may attempt to obtain insurance to
minimize the impact of any potential product liability; however, there can be no
assurance that the Company will be able to obtain such insurance on acceptable
terms, or at all. Consequently, a product liability claim or recall or other
claims with respect to any uninsured liabilities could have a material adverse
effect on the business or financial condition of the Company.
ABSENCE OF DIVIDENDS. The Company has never declared or paid a cash
dividend on its common stock. The Company intends to retain earnings, if any,
for use in the operation and expansion of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
DEPENDENCE ON KEY PERSONNEL. The Company's operations are materially
dependent upon the services of Barry M. Wendt, the Chief Executive Officer of
the Company and the co-inventor of SACMan(TM) and its underlying components. The
loss of the services of Mr. Wendt would materially and adversely affect the
Company's business. The Company has an agreement with Mr. Wendt prohibiting
competition with the Company for a period of three years if the Company
terminates Mr. Wendt's employment for "cause" (as defined in the agreements),
and a period of two years if he voluntarily terminates employment. There can be
no assurance that the Company will retain Mr. Wendt, or that it will
successfully attract and retain additional or replacement personnel with the
requisite experience and capabilities to enable the Company to profitably and
effectively evaluate, develop, and market the Company's product line. The
Company holds key man insurance policies in the amount of $250,000 on Barry M.
Wendt. No assurance can be given that the amount of the key man insurance policy
is adequate.
MANAGEMENT OF EXPECTED GROWTH. The Company hopes to significantly
expand its business. Such anticipated expansion will likely place further
demands on the Company's existing management and operations. The Company's
future growth and profitability will depend, in part, on management's ability to
successfully manage a growing sales force and implement management and operating
systems which react efficiently and timely to short and long-term trends or
changes in its business. There can be no assurance that the Company will be able
to effectively manage the anticipated expansion of its business.
CONTROL BY EXISTING MANAGEMENT. The Company's directors and officers
own approximately 55% the Company's outstanding capital stock. Accordingly, they
are currently and for the foreseeable future will be to control the Company's
business and affairs, including electing directors, appointing officers and
determining officers' compensation.
VOLATILITY OF STOCK PRICE. The trading price of the Common Stock has
from time to time fluctuated widely and in the future may be subject to similar
fluctuations in response to quarter to quarter variations in the Company's
operating results, announcements of innovations or new products by the Company
or its competitors, general conditions in the biometric and access control
industries, and other events or factors. Although approximately fourteen (14)
registered broker dealers currently make a market in the Company's common stock,
no assurance can be
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given that any or all of these firms will continue to serve as market makers or
have the financial capability to stabilize or support the Company's common
stock. If any or all of these firms do not have such financial capability, the
Company's common stock would likely decrease, possibly dramatically. The Company
is currently subject to delisting from the Nasdaq SmallCap Market. In the event
of such delisting, the Company's common stock would likely be traded on the less
liquid OTC Electronic Bulletin Board and if it continues to trade below $5.00,
be considered a "penny stock" subjecting the Company's common stock to
substantial additional regulations relating to the trading of such shares. See
"POSSIBLE DELISTING FROM THE NASDAQ SMALLCAP MARKET, POSSIBLE APPLICABILITY OF
PENNY STOCK RULES AND IMPACT ON LIQUIDITY OF COMMON STOCK" above. In addition,
in recent years broad stock market indices, in general, and the securities of
technology companies, in particular, have experienced substantial price
fluctuations. Such broad market fluctuations may adversely affect the future
trading price of the Common Stock.
MANUFACTURE OF PRODUCTS. The Company intends to have other companies
manufacture its products in the future rather than producing its own products.
The Company has not entered into any agreement to have another company
manufacture the Company's products. The Company is also exploring having its
products manufactured by overseas manufacturers in order to attempt to lower
production costs. Possible overseas manufacturing, if attempted, could lead to
risks associated therewith, including, without limitation, foreign currency and
economic fluctuations and import/export related restrictions, minimum
quantities, increased lead times and decrease in working capital. No assurance
can be given that the Company will be able to enter into a manufacturing
agreement on terms favorable to the Company, or that having another company
manufacture the Company's products would reduce the Company's cost of
manufacturing. In addition, no assurance can be given that the company
manufacturing the Company's products will do so in a timely manner or in a
manner consistent with quality standards of the Company and its customers.
LIMITATIONS OF LIABILITY. The Company's Articles of Incorporation
provide, as permitted by Minnesota law, that a director of the Company shall not
be personally liable to its shareholders for monetary damages for breach of his
or her fiduciary duty of care as a director, with certain exceptions. In
addition, the Company's bylaws provide for mandatory indemnification of
directors and officers to the fullest extent permitted by Minnesota law.
MINNESOTA ANTI-TAKEOVER LAW. The Company is governed by the provisions
of Section 302A.673 of the Minnesota Business Corporation Act ("MBCA"). In
general, the law prohibits a public Minnesota corporation from engaging in a
"business combination" (with an "interested shareholder") for a period of four
years after the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
"Business Combination" includes mergers, share exchanges, asset sales, plan or
proposal of liquidation or dissolution, recapitalization, issuance and transfers
of shares in excess of 5% or more of the Company's shares. "Interested
Shareholder" means any person who owns directly or indirectly 10% or more of a
public corporation's outstanding voting stock or an affiliate or associate of a
public corporation which owns, or within four years did own, 10% or more of the
public corporation's outstanding voting stock. These provisions regarding
certain business combinations under the MBCA could have the effect of delaying,
deferring, or preventing a
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change in control of the Company or the removal of existing management. A
takeover transaction frequently affords stockholders the opportunity to sell
their shares at a premium over current market prices.
YEAR 2000. The Company is currently working to minimize the potential
impact of the Year 2000 on the processing of date-sensitive information by the
Company's computerized information systems. The Year 2000 problem is the result
of computer programs being written using two digits (rather than four) to define
the applicable year, which could result in miscalculation or system failures.
The Company has tested each of its products and believes that all are Year 2000
compliant. The Company is currently evaluating all software used by the Company
for internal operations and expects to complete this process by mid 1999. To
date, no material problems have been identified. Any such software that
management determines not to be Year 2000 compliant, will be exchanged for Year
2000 compliant software as soon as practicable after such determination. The
costs of addressing potential problems have not, and are not expected to have a
material adverse impact on the Company's financial position, results of
operations or cash flows in future periods. The Company is, however, at risk
that its customers, strategic partners or vendors are unable to resolve any Year
2000 processing issues in a timely manner. If such entities are required to
expend funds to remedy such problems, it could delay the integration of the
Company's technology into the technologies of such entities, or reduce or
eliminate potential sales of products incorporating the Company's technology.
This could result in a material adverse affect on the Company's financial
condition and results of operation. In this regard, the Company has contacted
its customers, strategic partners and suppliers to identify any Year 2000
problems which might impact the Company. The Company has only received responses
from three of five of its strategic partners, which stated that they believe
that their products are Year 2000 compliant. The Company has yet to develop a
comprehensive contingency plan to address the situations that may result if it
or any of its strategic partners OEM's or distributors are unable to achieve
Year 2000 compliance.
ITEM 2. DESCRIPTION OF PROPERTY
The Company does not own any real estate and conducts its operations
from two leased premises. The Company leases approximately 4,555 square feet of
space at 4444 West 76th Street, Suite 600, Edina, Minnesota 55435 under a five
year lease which terminates on May 31, 2002 and currently provides for monthly
rent of $4,697 which increases ratably over the term of the lease
to $5,124. This property is currently and will continue to be used primarily for
ongoing research and development. The Company also leases approximately 3,840
square feet of space at 4620 South Valley View Road, Suite Al, Las Vegas, Nevada
89103 under a three-year lease which terminates on February 14, 2000 and
provides for monthly rent of $3,009. The Company's corporate finance and
marketing activities are conducted out of this office which also serves as a
showroom facility and to a lesser extent, a product support facility. The
Company also leases an apartment in Minneapolis, Minnesota, which provides for
monthly rent of $1,075 and is used by Company employees based in Las Vegas when
working out of the Edina office. The Company is in the process of seeking a
tenant to sub-lease part of its Minnesota facilities. Its Nevada facilities are
adequate for the Company's current and reasonably foreseeable future operations.
23
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Other than as set forth below, the Company is not a party to any
material litigation and is not aware of any threatened litigation that would
have a material adverse effect on its business.
1. On or about August 11, 1998, a lawsuit was filed in
Hennepin County, Minnesota District Court against the Company by
Donald Johnson and Myron Norenberg. Johnson and Norenberg claim that
they were wrongfully terminated or constructively discharged from their
employment with the Company. Each plaintiff is seeking relief in excess
of $50,000. The Company adamantly denies the validity of each
plaintiff's claims and the extent of each plaintiff's alleged damages.
Written discovery is currently being exchanged by the parties. The
Company intends to continue to vigorously defend this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq SmallCap Market under
the symbol "SACM", and on The Boston Stock Exchange under the symbol "SAC". The
Nasdaq SmallCap Market is the principal market on which the company's Common
Stock trades.
The Company is not currently in compliance with the minimum maintenance
standards required to remain eligible for continue listing on the Nasdaq
SmallCap Market. Specifically, the Company does not have (i) net tangible assets
in excess of $2,000,000; (ii) market capitalization in excess of $35,000,000; or
(iii) earnings from continuing operations of at least $500,000. The Company has
been granted a hearing before the NASD for the purpose of seeking a temporary
exemption from such continued listing standards. The hearing is currently
scheduled for April 15, 1999. If the Company's request is not granted, it will
be subject to immediate delisitng.
In the event that the Company's Common Stock is delisted from the
Nasdaq SmallCap Market it will likely be traded on the less liquid OTC
Electronic Bulletin Board. Thereafter, if the Company's common stock continues
to trade below $5.00 per share, it will be considered a penny stock and be
subject to additional SEC rules and regulations which impose limitations upon
the manner in which such securities are traded. SEE "RISK FACTORS-POSSIBLE
DE-LISTING FROM NASDAQ SMALLCAP MARKET; ACCELERATION OF OUTSTANDING
INDEBTEDNESS; POSSIBLE APPLICATION OF PENNY STOCK RULES AND IMPACT ON LIQUIDITY
OF COMMON STOCK."
The following table sets forth the range of high and low bid prices per
share of Common Stock for each quarterly period during the fiscal years ended
December 31, 1997 and 1998 as reported by Nasdaq. Such quotations represent
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
24
<PAGE>
1998: HIGH LOW
---- ---
Quarter ended March 31, 1998 10 1/4 5 3/4
Quarter ended June 30, 1998 10 3/4 6 1/4
Quarter ended September 30, 1998 7 2
Quarter ended December 31, 1998 4 3/8 1 1/2
1997: HIGH LOW
---- ---
Quarter ended March 31, 1997 8 1/2 6 1/2
Quarter ended June 30, 1997 12 1/4 4 3/4
Quarter ended September 30, 1997 20 3/4 9
Quarter ended December 31, 1997 13 7/8 8 9/16
As of March 19, 1999 the number of stockholders of record of the
Company's Common Stock was 86. Based on broker inquiry conducted in connection
with the Company's Annual Meeting of Stockholders in 1998, management believes
that there are approximately 1,500 beneficial owners of its Common Stock. The
Company has not declared or paid any cash dividends on its Common Stock since
inception and does not intend to pay any dividends for the foreseeable future.
25
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
JANUARY 7, 1993
(DATE OF INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH DECEMBER 31,
-------------------------------------------------- ------------
1996 1997 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA
Revenues ................................. $ 32,000 $ 464,168 $ 384,580 $ 1,233,805
Costs and other expenses
Cost of sales, support and other
services ........................ 14,875 390,243 1,054,548 1,521,619
Selling, general and administrative .. 422,681 2,297,148 3,314,701 6,108,336
Research and development ............. 386,613 563,045 1,570,033 2,865,256
------------ ------------ ------------ ------------
824,169 3,250,436 5,939,282 10,495,211
------------ ------------ ------------ ------------
Operating loss .................. (792,169) (2,786,268) (5,554,702) (9,261,406)
Other income (expense), net .............. (31,319) 192,454 (396,600) (235,465)
------------ ------------ ------------ ------------
NET LOSS ................................. $ (823,488) $ (2,593,814) $ (5,951,302) $ (9,496,871)
============ ============ ============ ============
Basic and dilutive loss per share ........ $ (.18) $ (.37) $ (.79) $ (1.75)
============ ============ ============ ============
Weighted average number of shares
outstanding (basic and dilutive) .... 4,565,206 7,047,190 7,494,647 5,434,803
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATE
Working capital (deficit) .......... $ (355,585) $ 3,460,199 $(1,075,778)
Total assets ....................... 405,263 4,165,694 2,159,644
Stockholders' equity (deficit) ..... (156,171) 3,641,694 (556,614)
</TABLE>
SEE PART 1 OF THIS FORM-KSB REGARDING A DISCUSSION OF FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN AND CERTAIN RISK FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN SUCH FORWARD LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE AUDITED
FINANCIAL STATEMENTS INCLUDED ELSEWHERE HEREIN.
26
<PAGE>
OVERVIEW
The Company is a technology company involved in developing biometric
technology and applications. Specifically, the Company develops and markets
fingerprint identification technology for use in general commercial markets. The
Company has focused on the general access control and information resource and
network access control markets. The Company's current product offerings, and
related technology, have been developed as security solutions for original
equipment manufacturers (OEM), distributors and system integrators. Even
though the Company intends to continue to enhance these current offerings, and
develop others, the Company does not intend to create "off the shelf" products
for mass commercialization.
The Company markets its products and technology through license
agreements with OEMs, distributors and system integrators. The Company also
intends to and has sold master distribution rights agreements for development of
certain OEM and application development potential in selected territories. For
OEM licenses, the Company generally supplies the technology and "serialized
chips" to the OEM. For system integrator applications, the Company supplies a
completed unit. While it has internally assembled completed units in the past,
the Company does not intend to do so in the future. It is exploring subcontract
manufacturing arrangements.
As discussed above, the Company is primarily dependent upon others to
develop end-user applications for its technology and products. There can be no
assurance that such applications will be developed by others in a manner
acceptable to potential end users or that it will occur during a period of time
for which the Company has access to adequate capital to fund its business.
The Company's success is dependent upon, among other things, reducing
the cost of its products to an acceptable level to earn gross margin on sales.
In connection with this objective, the Company is exploring the purchase of
certain technology it believes will reduce the cost and size of it's products,
and it is exploring subcontract manufacturing arrangements. In addition, the
Company will continue to be dependent upon others to incorporate certain
licensed technologies with the Company's offerings. No assurance can be given
that the Company will be able to reduce it's costs to generate adequate gross
margin dollars; that the technologies to be incorporated into it's products will
be incorporated and performed in a manner acceptable to potential OEM's, system
integrators, distributors or their end users; that it will be timely implemented
or that the end product's cost will be acceptable to the marketplace.
Additionally, without considering any potential demand for repayment by
the holder of the Company's $2,500,000 convertible debenture, the Company
believes its existing cash will only last until the second quarter of 1999. Due
to these uncertainties the Company's independent auditors will include an
explanatory paragraph in their opinion for the year ended December 31, 1998 as
to the substantial doubt about the Company ability to continue as a going
concern. The Company's long-term viability and growth will depend upon the
successful commercialization of its technologies and its ability to obtain
adequate financing, among other matters, as to which there can be no assurances.
27
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO YEAR ENDED DECEMBER 31, 1997:
Revenues
Total revenues decreased $79,588 during 1998 to $384,580 as compared to
$464,168 for 1997. The Company believes revenues for the first quarter ending
March 31, 1999 will be greater than those of the first quarter of the prior year
due to OEM license and distribution agreements signed during the first quarter
of 1999.
Revenues from product sales increased by $213,846 to $366,630 during
the year ended December 1,1998 as compared to $152,784 for 1997. The increase in
product sales was due to $244,979, sales to ATM, a distributor of the Company,
and to a lessor extent the sale of SACMan(TM) Developer Tool Kit Systems to
entities developing or investigating the development of applications which may
utilize the Company's product. This was offset by a decline in sales of product
to Jasper during the year.
Revenues from reimbursed research and development decreased by $25,800
to $10,200 during the year ended December 31, 1998 as compared to $36,000 in
1997. These revenues related to collections of previously unrecognized research
and development billings to Jasper, recognized on the cash basis of accounting.
No assurances can be given that any additional amounts will be collected in the
future.
Revenues from technical support and other services, which were
primarily from Jasper and Inter-Con, decreased by $267,634 to $7,750 during the
year ended December 31, 1998 as compared to $275,384 in 1997. During 1997 the
technical support agreement with Inter-Con PC was mutually terminated. No
assurances can be given that any additional technical support or other revenues
will be realized from Jasper or any other entity, nor is this the primary focus
of the Company.
Effective April 13, 1998, the Company signed a Distribution Agreement
with ATM. Terms of the agreement include preferential pricing, and commitments
by ATM as a distributor to purchase certain minimum quantities. Certain brokers
of Tuscher Company, Inc. company's primary market makers are princial
stockholders and members of the management of ATM
In connection with the above, ATM granted the Company an option to
acquire up to 400,000 shares of its' common stock at $.25 per share, exercisable
for seven years; and the Company granted ATM an option to purchase 100,000
shares of its common stock at $8.46 per share.
During December 1998, the Company entered into a letter of intent with
ATM whereby the Company agreed to license the rights to certain technology
developed by ATM to interface with the Company's product. The Company is to pay
a 10%, and in certain circumstances a 1% royalty to ATM. There were no royalty
payments made during 1998. The Company currently recognizes revenues from sales
to ATM on the cash basis. As of December 31, 1998 there was $27,665 of deferred
revenue related to sales made to ATM.
28
<PAGE>
Costs and Other Expenses
Costs of product sales exceeded revenues from product sales by $685,833
as of December 31,1998 as compared to $79,055 in 1997. This was principally due
to a $600,000 write-down of inventory to estimated net realizable value. The
write-downs resulted from a process, over time, of the Company evaluating
current sales of the Company's products and competitive pricing. The remaining
variances were primarily from costs associated with the production of a limited
amount of units. The Company is exploring means to reduce its current product
cost including purchasing certain imaging technology to replace some of its
current optics componetries. Additionally, the Company intends to explore
offshore manufacturing opportunities. No assurance may be given that the above
objectives will be achieved or if achieved, whether it will result in a
reduction of product costs that will lead to the Company generating positive
gross margins or becoming profitable.
Selling, general and administrative expenses increased $1,017,553 to
$3,314,701 during the year ended December 31, 1998 as compared to $2,297,148 in
1997. Of the increase, $153,982 related to additional salaries for selling and
administrative personnel, $166,266 related to professional fees, $44,856 related
to the completion on the Company's internal computer network, $56,264 related to
promotional products to potential customers; and $556,150 related to non-cash
charges for the estimated fair market value of a warrant granted to ATM as part
of a sales distribution agreement (see above), a warrant granted to TCI in order
to terminate its rights of first refusal to participate in future public
offerings, a non-cash charge related to the estimated fair market value of an
option granted to a consultant to help develop a strategic growth plan and to
enhance shareholder value and amortization of unearned compensation associated
with the issuance of below market stock options to employees and consultants of
the Company. In December, 1998 the Company recorded a one time charge of $88,900
for costs associated with the severance agreement for the Vice President of
Business Development. The above was offset by a decrease of $357,230 for cost
associated with employee recruiting and moving in 1997 and a one time charge for
costs associated with the severance package for the Company's former Chief
Operating Officer who was terminated in October, 1997 and $68,875 in bad debt
expense.
Research and development expenses increased $1,006,988 to $1,570,033
during the year ended December 31, 1998 as compared to $563,045. Of the increase
$719,018 was related to licensing and integration costs associated with
technologies the Company plans to incorporate into its SACCat(TM) product and a
$200,000 non-cash charge for the estimated fair market value of an option
granted to an entity with which the Company entered into a licensing agreement.
The above costs were expensed because the realizability of cash flows from the
licenses has not been demonstrated. The remaining increase is attributable to
increased development activity to enhance certain of its products and
applications.
Interest income decreased $96,475 to $99,876 during the year ended
December 31, 1998 compared to $196,351 in 1997 due to the decrease in the
balances of certificates of deposits.
Interest expense increased $492,579 to $496,476 during the year ended
December 31, 1998 as compared to $3,897 in 1997 due to non-cash charges of
$400,752 for the intrinsic value
29
<PAGE>
of the beneficial conversion feature of the Convertible Debentures. The Company
expects that interest expense will decrease in 1999.
Net Operating Loss Carryforwards
As of December 31, 1998, the Company has net operating loss
carryforwards of approximately $8,800,000. The carryforwards expire annually
beginning in 2008. Such net operating carryforwards may be limited in the future
in the event of a change in ownership of the Company as defined in the Internal
Revenue Code.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996:
Revenues
Total revenues increased $432,168 during 1997 to $464,168 as compared
to $32,000 for 1996. Revenues from product sales were $152,784 for 1997. These
sales were principally from the sale of SACMan(TM) units to Jasper for a
specific application, and, to a lesser extent, include sales of SACMan(TM)
Developer Tool Kit systems to entities developing or investigating the
development of applications which may utilize the Company's product.
Revenues from reimbursed research and development were $36,000 during
1997. These revenues relate to collections of previously unrecognized research
and development billings to Jasper, recognized on the cash basis of accounting.
Revenues from technical support and other services, which are primarily
from Jasper and Inter-Con, increased $243,384 during 1997 to $275,384 as
compared to $32,000 in 1996. Of the $243,384 increase in 1997, $111,065 relates
to billings under a technical support agreement with Inter-Con and $34,429
relates to other development activities for Inter-Con. There was also $82,890 of
technical support provided to Jasper. Effective December 31, 1997 the technical
support agreement with Inter-Con was terminated.
During August 1997, the Company signed an agreement with Anonymous Data
Corporation (AdC). The agreement calls for the of purchase of five hundred
SAC_Remote(TM) units, modified to fit AdC's application, over a twenty-four
month period commencing in late 1998. The agreement requires the Company to
provide certain defined product development and support services in exchange for
$7,000 a month over forty-eight months. The Company received $15,000 upon the
signing of this 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. Delivery of the products under
development are expected to occur in late 1999. However, no assurance can be
given that these products will be completed, will be accepted by AdC, or that
payment from AdC will be forthcoming under the agreement.
30
<PAGE>
Costs and Other Expenses
Costs of product sales exceeded revenues from products sales by $79,055
in 1997. This was partially due to costs associated with establishing a
prototype pre-production line and the hiring and training of personnel to
operate the equipment. In addition, molds with an undepreciated net book value
of $31,413 were written-off.
Selling, general and administrative expenses increased by $1,874,467 to
$2,297,148 during the year ended December 31, 1997 as compared to $422,681 for
1996. The increase included approximately $650,000 in salaries for new personnel
and increases of salaries of existing personnel, $250,000 of costs associated
with a severance agreement for the Chief Operating Officer, $142,000 in bad debt
expense related to Jasper and Inter-Con, PC; $264,000 for increased legal and
other consulting fees; $173,000 for travel, trade shows and collateral; $71,000
for amortization of unearned compensation associated with the issuance of below
market stock options to employees and consultants of the Company and a cashless
stock option exercise; and $11,373 of costs for recruiting and relocation. The
remainder of the difference is primarily due to overall increased operating
expenses.
Research and development expense increased $176,432 to $563,045 as
compared to $386,613 in 1996. The increase was attributed principally to the
development of the SACcat(TM) unit and, to a lesser extent, the continued
development of the SAC_Remote(TM) product line.
Interest income increased by $192,063 to $196,351 during the year ended
December 31, 1997 as compared to $4,288 in 1996. The increase was due to
interest earned on certificates of deposit from money received from the initial
public offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during 1998 was $4,557,026 and
was principally due to operating losses. The operating losses were primarily
funded by cash on hand at December 31, 1997 and proceeds received from a
$2,500,000 private offering of a convertible debenture and detachable warrants.
Net cash used for investing activities during 1998 was $31,404 and was
due to the purchase of equipment and furniture. Net cash provided by financing
activities during 1998 was $2,300,293 and was principally from proceeds received
from the issuance of the Convertible Debenture and detachable warrants.
Working capital decreased $4,535,977 during the year ended December 31,
1998 to a deficit of $(1,075,778), as compared to $3,460,199 as of December 31,
1997. This decrease is principally due to a $5,951,302 of operating loss offset
by a net increase of $2,208,976 in a convertible debenture.
Since January 7, 1993 (date of inception), the Company's capital needs
have been principally met as follows: (i) a May 1996 sale of $200,000 of
convertible bridge notes and
31
<PAGE>
warrants to purchase 50,000 shares of common stock which were converted to
Common Stock during mid-1996; (ii) a July 1996 $700,000 private placement of
Common Stock; (iii) a February 1997 initial public offering of 2,420,000 shares
of Common Stock at $3.00 per share which resulted in net proceeds of $6,220,331,
after deduction of offering expenses; and (iv) a June 1998 $2,500,000 private
offering of a convertible debenture and detachable warrants.
The Company does not currently maintain a line of credit or term loan
with any commercial bank or other financial institution.
On June 30, 1998, the Company sold to Shaar Fund, Ltd., an
international investment fund, $2,500,000 of 5% Convertible Debenture due June
30, 2001 (the "Convertible Debenture"). At the Company's option, an additional
$1,000,000 principal amount Convertible Debenture may be sold to Shaar Fund,
Ltd. if certain targets are met, including certain minimum share price and
trading volume levels regarding the Company's Common Stock. As of the date of
this Report, none of these targets have been met. No assurances can be given
that the Company will meet these targets in order to be able to exercise such
option.
The Convertible Debenture is convertible into shares of the Company's
Common Stock at a conversion price equal to the lesser of (i) $7.15; or (ii) the
average closing bid price of the Company's Common Stock for a five-day period
ending the day prior to the notice of conversion multiplied by a discount
factor, which increases over time from 15% to 22% (20% at December 31, 1998; 22%
as of the date of this Report). The Convertible Debenture is redeemable at the
option of the Company under certain circumstances. Interest on the Convertible
Debenture is not convertible.
The Company was obligated to file, and has filed a registration
statement (not yet effective) covering the resale of the shares of Common Stock
issuable upon conversion or exercise, as applicable, of the Convertible
Debenture and the detachable warrants. Since the registration statement is not
yet effective, the Company is subject to late filing penalty of $25,000 which
increases daily at a rate of $50,000 per month ($153,333 as of March 14, 1999).
The Company intends to negotiate for the release of such penalties, however, no
assurances may be given that such efforts will be successful.
The Convertible Debenture agreement contains certain dilution and
conversion price adjustment provisions if certain events occur. In the event of
repayment, the Company is subject to certain repayment costs of up to 24% of the
principal amount repaid. In addition, the Company is required to meet certain
covenants, including the maintenance of its listing in the NASDAQ Small Cap
Market.
In late January 1999, the Company received a notice of delisting from
Nasdaq due to the Company's failure tangible meet the minimum capitalization and
net asset levels to remain listed. The Company has been granted an oral hearing
to seek a temporary exemption from such maintenance standards which is scheduled
to be held on April 15, 1999. If the Company is not in compliance with the
continued listing requirements applicable to the Nasdaq SmallCap Market by such
date or its plan to achieve compliance is not accepted by Nasdaq, its shares
will likely be delisted from the Nasdaq SmallCap Market.
32
<PAGE>
compliance with such standards as of the hearing date. A delisting of the
Company's securities could significantly impair the Company's ability to obtain
additional financing. The Company estimates it needs to increase it's net
tangible assets as defined by NASDAQ by at least $3,500,000 to meet the minimum
net asset requirement. There can be no assurance that the Company will be able
to meet such requirements or if met, that its shares will not be delisted from
Nasdaq SmallCap Market.
If the Company is delisted from the Nasdaq SmallCap Market, it would be
an event of default under the terms of the Convertible Debenture resulting in
the immediate acceleration of the repayment thereof. The Company does not have
the necessary funds to repay the $2,500,000 Convertible Debenture. Should demand
for repayment not be made, the Company estimates its existing cash will only
last until second quarter 1999 based on the Company's current cash burn rate.
In order to address these liquidity issues, the Company has had
discussions with the Shaar Fund regarding the conversion of the Convertible
Debenture into convertible preferred stock. This will require an amendment to
the Company's Articles of Incorporation. This would increase the Company's net
worth by approximately $2.5 million.
Management is also evaluating the viability of obtaining additional
financing through the issuance of additional debt or equity securities of the
Company on a negotiated private placement basis to institutional and accredited
investors. In this regard, the Company has been engaged in discussions with
certain investors, however, as of the date of this Report, the Company has not
reached any definitive agreement with any such investor regarding the specific
terms of an investment in the Company. Management believes the successful
completion of the above initiatives may bring the Company back into compliance
with Nasdaq Smallcap Market maintenance standards. No assurance can be given
that any form of additional financing will be available on terms acceptable to
the Company, that adequate financing will be obtained to meet its needs, or that
such financing would not be dilutive to existing stockholders. Also, no
assurance may be given that the debenture holder will convert its indebtedness
to convertible preferred stock, or do so without a significant cost to the
Company. Management believes it will need $3,000,000 to $5,000,000 to support
its operations through 1999.
The Company has entered into various technology license agreements.
The Company has committed to pay approximately $140,000 to certain of the
licensors of the technology during 1999 and $25,000 in 2000, for the per unit
cost of imbedding such technologies into the Company's products at agreed upon
minimum levels, and for the purchase of inventory from such companies. In order
to maintain exclusivity as it relates to the biometrics industry for two
technology licenses through 2000, the Company is required to purchase an
additional $325,000 and $375,000 of products during 1999 and 2000, respectively.
Jasper has a cross license agreement with the Company for FIDS
technology, and has purchased products and services from the Company over the
years. FIDS technology was previously a significant component of the Company's
product offerings. During 1998, the Company replaced the FIDS technology with
internally developed Vector Segment Technology. The Company is evaluating the
impact of the above on potential required royalty payments to Jasper and each of
the respective parties' defined markets.
33
<PAGE>
In February 1999 the Company enhanced its liquidity through the sale of
600,000 shares of common stock of Inter-Con to a shareholder of Inter-Con for
gross proceeds of $90,000.
YEAR 2000.
The Company is currently working to minimize the potential impact of
the Year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year, which could result in miscalculation or system failures.
The Company has tested each of its products and believes that all are Year 2000
compliant. The Company is currently evaluating all software used by the Company
for internal operations and expects to complete this process by mid 1999. To
date, no material problems have been identified. Any such software that
management determines not to be Year 2000 compliant, will be exchanged for Year
2000 compliant software as soon as practicable after such determination. The
costs of addressing potential problems have not and are not expected to have a
material adverse impact on the Company's financial position, results of
operations or cash flows in future periods.
The Company is, however, at risk that its customers, strategic partners
or vendors are unable to resolve any Year 2000 processing issues in a timely
manner. If such entities are required to expend funds to remedy such problems,
it could delay the integration of the Company's technology into the technologies
of such other entities, or reduce or eliminate potential sales of products
incorporating the Company's technology. This could result in a material adverse
effect on the Company's financial condition and results of operation. In this
regard, the Company has contacted its customers, strategic partners and
suppliers to identify any Year 2000 problems which might impact the Company. The
Company has only received responses from three of six such strategic partners,
which stated that they believe that their products are Year 2000 compliant.
The Company has not yet developed a comprehensive contingency plan to
address the situations that may result if it or any of its strategic partners,
OEMs or distributors are unable to achieve Year 2000 readiness. The Company
intends to devise contingency plans by mid 1999 to mitigate any adverse effects
on the conduct of the Company's business. There can be no assurance that any
contingency plans developed by the Company will prevent any negative impact to
the Company's financial condition or results of operation.
IMPACT OF INFLATION
The effects of inflation on the Company's operations were not
significant during the periods presented.
34
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (FAS) 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
companies to recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting under FAS 133. Adopting the provisions of SFAS 133 are not expected
to have a material effect on the Company's financial statements. The standard is
effective for fiscal 2000.
As the Company begins to license the rights to its technology, it will
be subject to recognition of revenues from software licensing will be recognized
in accordance with Statement of Position 97-2 and Software Revenue Statement of
Position 98-4. Accordingly, revenues will be recognized when delivery of the
software has occurred, a signed non-cancelable license agreement has been
received from the customer and any remaining obligations under the license
agreement are insignificant. Revenue associated with agreements to provide
product support services is expected to be recognized as related services are
provided. Revenue from annual or other renewals of maintenance contracts is
expected to be deferred and recognized on a straight-line basis over the term of
the contracts.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company set forth are herein
beginning on page number F-1:
35
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by Item 9 is incorporated by reference to the
Company's Definitive Proxy Statement for its 1999 Annual Meeting of Shareholders
which shall be filed with the Securities and Exchange Commission by no later
than April 30, 1999.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference to the
Company's Definitive Proxy Statement for its 1999 Annual Meeting of Shareholders
which shall be filed with the Securities and Exchange Commission by no later
than April 30, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated by reference to the
Company's Definitive Proxy Statement for its 1999 Annual Meeting of Shareholders
which shall be filed with the Securities and Exchange Commission by no later
than April 30, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference to the
Company's Definitive Proxy Statement for its 1999 Annual Meeting of Shareholders
which shall be filed with the Securities and Exchange Commission no later than
April 30, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report.
Portions of Item 13 are submitted as separate sections of this report:
(1) Financial statements filed as part of this Report:
Report of Independent Certified Public Accountants
Balance Sheets as of - December 31, 1997 and 1998
Statement of Operations - For the Years ended
December 31, 1996, 1997 and 1998 and January 7, 1993
(date of inception) through December 31, 1998
Statement of Shareholders' Equity (Deficit) - For the
Years ended December 31, 1996, 1997 and 1998 and
January 7, 1993 (date of inception) through December
31, 1998
36
<PAGE>
Statement of Cash Flows - For the Years ended
December 31, 1996, 1997 and 1998 and January 7, 1993
(date of inception) through December 31, 1998
Notes to Financial Statements - December 31, 1996,
1997 and 1998
(2) The following exhibits are filed as part of this
Report:
<TABLE>
<CAPTION>
Exhibit No. Exhibit Method of Filing
- ----------- ------- ----------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation Incorporated by reference to
Exhibit 3.1 to the Registrant's
Registration Statement on SB-2,
File No. 333-16451 filed February
14, 1997 (the "Registration
Statement")
3.2 Amended and Restated Bylaws Incorporated by reference to
Exhibit 3.2 to the Registration
Statement
4.1 Specimen of Common Stock Certificate Incorporated by reference to
Exhibit 4.1 to the Registration
Statement
10.1 SAC Technologies, Inc. 1996 Stock Option Plan Incorporated by reference to
Exhibit 10.1 to the Registration
Statement
10.2 License and Marketing Agreement by and among Harinder S. Incorporated by reference to
Takhar, Barry M. Wendt, Benedict A. Wittig and Richard T. Exhibit 10.2 to the Registration
Fiskum, Jasper Consulting, Inc. and the Company dated April Statement
26, 1996 (with OEM Agreement by and between Jasper
Consulting, Inc. and the Company dated April 26, 1996
attached as Exhibit A)
10.3 Employment Agreement by and between Barry M. Wendt and the Incorporated by reference to
Company dated as of May 10, 1996 (with Non-Competition Letter Exhibit 10.3 to the Registration
effective May 10, 1996 attached as Exhibit A) Statement
10.4 Employment Agreement by and between Richard T. Fiskum and the Incorporated by reference to
Company dated as of May 10, 1996 Exhibit 10.4 to the
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C>
(with Non-Competition Letter effective May 10, 1996 attached Registration Statement
as Exhibit A)
10.5 Employment Agreement by and between Gary E. Wendt and the Incorporated by reference to
Company dated as of May 10, 1996 (with Non-Competition Letter Exhibit 10.5 to the Registration
effective May 10, 1996 attached as Exhibit A) Statement
10.6 Employment Agreement by and between Benedict A. Wittig and Incorporated by reference to
the Company dated as of May 10, 1996 (with Non-Competition Exhibit 10.6 to the Registration
Letter effective May 10, 1996 attached as Exhibit A) Statement
10.7 Employment Agreement by and between Timothy N. Tracey and the Incorporated by reference to
Company dated as of March 24, 1997 (with Non-Competition Exhibit 10.7 to the Registrant's
Letter effective March 27, 1997 attached as Exhibit A) quarterly report on Form 10-QSB
for the quarter ended March 30,
1997
10.8 Technical Support and Cooperative Development Agreement by Incorporated by reference to
and between the Company and Inter-Con/PC, Inc. effective Exhibit 10.7 to the Registration
November 1, 1996 (with Exhibits A-C) Statement
10.9 Technical Support and Cooperative Development Agreement with Incorporated by reference to
Anonymous Data Control Exhibit 10.9 to the Registrant's
quarterly report on Form 10-QSB
for the quarter ended September
30, 1997
10.10 Strategic Alliance, Bundling and Authorization to Replicate Incorporated by reference to
Agreement with Miros, Incorporated Exhibit 10.10 to the Registrant's
Annual Report on Form 10-KSB for
fiscal year ended December 31, 1997,
filed March 31, 1998 (the "1998
10-KSB")
10.11 Strategic Alliance Agreement with Keyware Technologies. Incorporated by reference to
Exhibit 10.11 to the 1998 10-KSB
10.12 Certicom OEM Licensing Agreement Incorporated by reference to
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C>
Exhibit 10.12 to the 1998 10-KSB
10.13 Strategic Alliance Agreement with Pinnacle Technology, Inc. Incorporated by reference to
Exhibit 10.13 to the 1998 10-KSB
10.14 Strategic Alliance Agreement with Baraka Intercom, Inc. Incorporated by reference to
Exhibit 10.14 to the 1998 10-KSB
10.15# Aultimate Technology Marketing, Inc. Purchase, Supply and Incorporated by reference to
Distributor Agreement Exhibit 10.15 to the Registrant's
Quarterly Report on Form 10-QSB
for quarter ended March 31, 1998
10.16# Warrant Agreement dated June 30 by and between the Company Incorporated by reference to
and the Shaar Fund, Ltd. Exhibit 10.16 to the Registrant's
Quarterly Report on Form 10-QSB
for quarter ended June 30, 1998
(the "June 30, 1998 10-QSB")
10.17# Securities Purchase Agreement dated June 30 by and between Incorporated by reference to
the Company and Shaar Fund, Ltd. Exhibit 10.17 to the June 30,
1998, 10-QSB
10.18# 5% Convertible Debenture issued to Shaar Fund, Ltd. Incorporated by reference to
Exhibit 10.18 to the June 30,
1998, 10-QSB
10.19# Registration Rights Agreement by and between the Company and Incorporated by reference to
Shaar Fund, Ltd. Exhibit 10.19 to the June 30,
1998, 10-QSB
23.1 Consent of Divine, Scherzer & Brody, Ltd. Filed herewith
25.1 Power of Attorney (included in the signature page to the Filed herewith
Registration Statement)
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C>
27.1 Financial Data Schedule Filed herewith
</TABLE>
# Confidential treatment requested pursuant to the Securities Exchange Act of
1934 as amended, Rule 24B(ii); Confidential portions of the Exhibits have been
deleted and filed separately with the Securities and Exchange Commission.
(b) Reports on Form 8-K
None.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registration has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SAC TECHNOLOGIES, INC.
Date: March 31, 1999 /s/ Barry M. Wendt
------------------------------------
Barry M. Wendt,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated. Each person whose
signature appears below constitutes and appoints Barry M. Wendt as their true
and lawful attorney-in-fact and agent, with full power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-KSB and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Signature Date
- --------- ----
/s/ Barry M. Wendt March 31, 1999
- ---------------------------------
Barry M. Wendt
/s/ Gary E. Wendt March 31, 1999
- ---------------------------------
Gary E. Wendt
Chief Financial Officer and Director (Principal
Financial and Accounting Officer)
/s/ Benedict A. Wittig March 31, 1999
- ---------------------------------
Benedict A. Wittig
Secretary and Director
/s/ Lonnie L. Hammargen March 31, 1999
- ---------------------------------
Lonnie L. Hammargen
Director
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
Item 13(a)(1) List
FOR THE THREE YEARS ENDED
DECEMBER 31, 1998
SAC TECHNOLOGIES, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
DECEMBER 31, 1997 AND 1998
The following financial statements of SAC Technologies, Inc. are included herein
at the indicated page numbers:
<TABLE>
<CAPTION>
Page No.
------------
<S> <C>
Report of Independent Certified Public Accountants F-1
Balance Sheets at December 31, 1997 and 1998 F-2
Statements of Operations - Years ended December 31, 1996, 1997 and 1998, and January 7, 1993 (date of
inception) through December 31, 1998 F-3
Statement of Stockholders' Equity (Deficit) - Years ended December 31, 1996,
1997 and 1998, and January 7, 1993 (date of inception) through December 31,
1998 F-4
Statements of Cash Flows - Years ended December 31, 1996, 1997 and 1998, and January 7, 1993 (date of
inception) through December 31, 1998 F-5
Notes to the Financial Statements - December 31, 1996, 1997 and 1998 F-6
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
SAC Technologies, Inc.
We have audited the accompanying balance sheets of SAC Technologies, Inc. (a
Minnesota corporation in the development stage) as of December 31, 1997 and 1998
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1998,
and the period January 7, 1993 (date of inception) through December 31, 1998.
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 generally accepted auditing
standards. 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 statements presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SAC Technologies, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, and the
period January 7, 1993 (date of inception) through December 31, 1998 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, as discussed in Note A to the financial
statements, the Company is in the development stage and has not generated
significant revenues since inception, and the Company has suffered recurring
losses from operations and has a deficit in working capital that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note A. The financial
statements do not include any adjustments that might result from this
uncertainty.
/s/ Divine, Scherzer & Brody, Ltd.
Minneapolis, Minnesota
March 14, 1999
F-1
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS (Note A)
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (notes A2 and B) $ 3,351,753 $ 1,063,616
Accounts receivable, less allowance for doubtful receivables
of $99,000 and $158,000, (notes B and K) 56,770 44,702
Inventories (note A3) 464,927 410,287
Prepaid expenses 110,760 121,875
----------- -----------
Total current assets 3,984,210 1,640,480
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST, less accumulated
depreciation (notes A4 and C) 163,966 135,469
OTHER ASSETS (notes A4, A5 and D) 17,518 383,695
----------- -----------
$ 4,165,694 $ 2,159,644
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Convertible debentures, less discount of $291,024
(note F) $ - $ 2,208,976
Accounts payable (note K) 288,688 280,879
Accrued liabilities (note E) 235,323 226,403
----------- -----------
Total current liabilities 524,011 2,716,258
COMMITMENTS AND CONTINGENCIES (notes G and K) - -
STOCKHOLDERS' EQUITY (DEFICIT) (notes H and K)
Common stock - authorized, 20,000,000 shares of $.01 par value;
issued and outstanding, 7,461,367 and 7,510,867 shares 74,614 75,109
Additional contributed capital 7,241,690 8,960,135
Deficit accumulated during the development stage (3,583,666) (9,534,968)
Unearned compensation (note A4) (90,955) (56,890)
----------- -----------
3,641,693 (556,614)
----------- -----------
$ 4,165,694 $ 2,159,644
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF OPERATIONS (Note A)
<TABLE>
<CAPTION>
January 7,
1993 (date
of
inception)
Years ended December 31, through
------------------------------------------------ December
1996 1997 1998 31, 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues (notes A1, B, D and K)
Product sales $ - $ 152,784 $ 366,630 $ 519,414
Reimbursed research and
development - 36,000 10,200 284,506
Technical support and other
services 32,000 275,384 7,750 429,885
----------- ----------- ------------ ------------
32,000 464,168 384,580 1,233,805
Costs and other expenses (note K)
Cost of product sales (note
A11) - 231,839 1,052,463 1,284,302
Cost of technical support and
other services 14,875 158,404 2,085 237,317
Selling, general and
administrative 422,681 2,297,148 3,314,701 6,108,336
Research and development (note
A7) 386,613 563,045 1,570,033 2,865,256
----------- ----------- ------------ ------------
824,169 3,250,436 5,939,282 10,495,211
----------- ----------- ------------ ------------
Operating loss (792,169) (2,786,268) (5,554,702) (9,261,406)
Other income (expense)
Interest income 4,288 196,351 99,876 300,515
Interest expense (35,607) (3,897) (496,476) (535,980)
----------- ----------- ------------ ------------
(31,319) 192,454 (396,600) (235,465)
----------- ----------- ------------ ------------
NET LOSS (note J) $ (823,488) $(2,593,814) $ (5,951,302) $ (9,496,871)
=========== =========== ============ ============
Net loss per common share (notes A8 and H)
Basic $ (.18) $ (.37) $ (.79) $ (1.75)
Diluted (.18) (.37) (.79) (1.75)
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (Notes A and H)
<TABLE>
<CAPTION>
Common Stock
---------------------------
Class A
---------------------------
Shares Amount
------------ -----------
<S> <C> <C>
Sales of common stock January 7, 1993 1,575,000 $ 15,750
Sale of common stock January 7, 1993 at $.02 per share 675,000 6,750
Contribution of services - -
Redemption of director and officers common stock August 4, 1995 at $0 per share (135,000) (1,350)
Sale of common stock August 4, 1995 at $.24 per share 472,500 4,725
Redemption of common stock August 4, 1995 at $.24 per share (337,500) (3,375)
Sale of common stock December 22, 1995 at $.17 per share 146,250 1,463
Redemption of common stock December 22, 1995 at $.22 per share (337,500) (3,375)
Net loss for the period from January 7, 1993 (date of inception) through December 31, 1995 - -
---------- --------
Balance as of December 31, 1995 2,058,750 20,588
Conversion of Class A and B common stock into common stock (2,058,750) (20,588)
Issuance of detachable warrants on May 17, 1996, in connection with bridge financing
arrangements, valued at $25,000, to purchase 100,000 shares of common stock at $1.00 per share - -
Sales of common stock during June and July, 1996 at $1.00 per share, less offering costs of
$124,663 - -
Conversion of bridge notes plus accrued interest of $1,841 to common stock on June 28, 1996 at
$1.00 per share - -
Compensation - -
Unearned compensation amortized (note A4) - -
Net loss for the year ended December 31, 1996 - -
---------- --------
Balance as of December 31, 1996 - -
Accrued interest contributed to capital by officer - -
Unearned compensation grant - -
Unearned compensation amortization - -
Unearned compensation reversal related to employee terminations - -
Exercise of stock options - -
Sales of common stock in February and March 1997 at $3.00 per share, less offering costs of
$1,039,668 - -
Issuance of warrants on March 24, 1997, valued at $27,500 to purchase 25,000 shares of common
stock at $3.00 per share - -
Net loss for the year ended December 31, 1997 - -
---------- --------
Balance as of December 31, 1997 - -
Unearned compensation grant - -
Unearned compensation amortization - -
Exercise of stock options and warrants - -
Issuance of stock options on April 13, 1998, valued at $352,650 to purchase 100,000 shares of
common stock at $8.46 per share - -
Fair market value of conversion feature on debenture issued June 30, 1998 (note F) - -
Issuance of warrants on June 30, 1998, valued at $432,000 to purchase 350,000 shares of common
stock at $7.29 and $7.50 per share (note F) - -
Issuance of stock options on April 1, 1998 and September 15, 1998 valued at $237,500 to
purchase 423,000 shares of common stock at $3.00 to $6.42 per share - -
Net loss for the year ended December 31, 1998 - -
---------- --------
Balance as of December 31, 1998 - $ -
========== ========
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Common Stock
--------------------------
Class B
--------------------------
Shares Amount
------------ -----------
<S> <C> <C>
Sales of common stock January 7, 1993 1,575,000 $ 15,750
Sale of common stock January 7, 1993 at $.02 per share 675,000 6,750
Contribution of services - -
Redemption of director and officers common stock August 4, 1995 at $0 per share (135,000) (1,350)
Sale of common stock August 4, 1995 at $.24 per share 472,500 4,725
Redemption of common stock August 4, 1995 at $.24 per share (337,500) (3,375)
Sale of common stock December 22, 1995 at $.17 per share 146,250 1,463
Redemption of common stock December 22, 1995 at $.22 per share (337,500) (3,375)
Net loss for the period from January 7, 1993 (date of inception) through December 31, 1995 - -
---------- --------
Balance as of December 31, 1995 2,058,750 20,588
Conversion of Class A and B common stock into common stock (2,058,750) (20,588)
Issuance of detachable warrants on May 17, 1996, in connection with bridge financing
arrangements, valued at $25,000, to purchase 100,000 shares of common stock at $1.00 per share - -
Sales of common stock during June and July, 1996 at $1.00 per share, less offering costs of
$124,663 - -
Conversion of bridge notes plus accrued interest of $1,841 to common stock on June 28, 1996 at
$1.00 per share - -
Compensation - -
Unearned compensation amortized (note A4) - -
Net loss for the year ended December 31, 1996 - -
---------- --------
Balance as of December 31, 1996 - -
Accrued interest contributed to capital by officer - -
Unearned compensation grant - -
Unearned compensation amortization - -
Unearned compensation reversal related to employee terminations - -
Exercise of stock options - -
Sales of common stock in February and March 1997 at $3.00 per share, less offering costs of
$1,039,668 - -
Issuance of warrants on March 24, 1997, valued at $27,500 to purchase 25,000 shares of common
stock at $3.00 per share - -
Net loss for the year ended December 31, 1997 - -
---------- --------
Balance as of December 31, 1997 - -
Unearned compensation grant - -
Unearned compensation amortization - -
Exercise of stock options and warrants - -
Issuance of stock options on April 13, 1998, valued at $352,650 to purchase 100,000 shares of
common stock at $8.46 per share - -
Fair market value of conversion feature on debenture issued June 30, 1998 (note F) - -
Issuance of warrants on June 30, 1998, valued at $432,000 to purchase 350,000 shares of common
stock at $7.29 and $7.50 per share (note F) - -
Issuance of stock options on April 1, 1998 and September 15, 1998 valued at $237,500 to
purchase 423,000 shares of common stock at $3.00 to $6.42 per share - -
Net loss for the year ended December 31, 1998 - -
---------- --------
Balance as of December 31, 1998 - $ -
========== ========
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Common Stock
------------------------
Shares Amount
---------- ---------
<S> <C> <C>
Sales of common stock January 7, 1993 - $ -
Sale of common stock January 7, 1993 at $.02 per share - -
Contribution of services - -
Redemption of director and officers common stock August 4, 1995 at $0 per share - -
Sale of common stock August 4, 1995 at $.24 per share - -
Redemption of common stock August 4, 1995 at $.24 per share - -
Sale of common stock December 22, 1995 at $.17 per share - -
Redemption of common stock December 22, 1995 at $.22 per share - -
Net loss for the period from January 7, 1993 (date of inception) through December 31, 1995 - -
--------- -------
Balance as of December 31, 1995 - -
Conversion of Class A and B common stock into common stock 4,117,500 41,176
Issuance of detachable warrants on May 17, 1996, in connection with bridge financing
arrangements, valued at $25,000, to purchase 100,000 shares of common stock at $1.00 per share - -
Sales of common stock during June and July, 1996 at $1.00 per share, less offering costs of
$ 124,663 698,160 6,982
Conversion of bridge notes plus accrued interest of $1,841 to common stock on June 28, 1996 at
$1.00 per share 201,840 2,018
Compensation - -
Unearned compensation amortized (note A4) - -
Net loss for the year ended December 31, 1996 - -
--------- -------
Balance as of December 31, 1996 5,017,500 50,176
Accrued interest contributed to capital by officer
Unearned compensation grant - -
Unearned compensation amortization - -
Unearned compensation reversal related to employee terminations - -
Exercise of stock options 23,867 238
Sales of common stock in February and March 1997 at $3.00 per share, less offering costs of
$1,039,668 2,420,000 24,200
Issuance of warrants on March 24, 1997, valued at $27,500 to purchase 25,000 shares of common
stock at $3.00 per share - -
Net loss for the year ended December 31, 1997 - -
--------- -------
Balance as of December 31, 1997 7,461,367 74,614
Unearned compensation grant - -
Unearned compensation amortization - -
Exercise of stock options and warrants 49,500 495
Issuance of stock options on April 13, 1998, valued at $352,650 to purchase 100,000 shares of
common stock at $8.46 per share - -
Fair market value of conversion feature on debenture issued June 30, 1998 (note F) - -
Issuance of warrants on June 30, 1998, valued at $432,000 to purchase 350,000 shares of common
stock at $7.29 and $7.50 per share (note F) - -
Issuance of stock options on April 1, 1998 and September 15, 1998 valued at $237,500 to
purchase 423,000 shares of common stock at $3.00 to $6.42 per share - -
Net loss for the year ended December 31, 1998 - -
--------- -------
Balance as of December 31, 1998 7,510,867 $75,109
========= =======
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Deficit
accumulated
Additional during the
contributed development
capital stage
------------ ------------
<S> <C> <C>
Sales of common stock January 7, 1993 $ (22,750) $ (8,747)
Sale of common stock January 7, 1993 at $.02 per share 11,500 -
Contribution of services 11,250 -
Redemption of director and officers common stock August 4, 1995 at $0 per share 2,700 -
Sale of common stock August 4, 1995 at $.24 per share 215,550 -
Redemption of common stock August 4, 1995 at $.24 per share (151,424) -
Sale of common stock December 22, 1995 at $.17 per share 47,074 -
Redemption of common stock December 22, 1995 at $.22 per share (113,900) (29,350)
Net loss for the period from January 7, 1993 (date of inception) through December 31, 1995 - (128,267)
------------ -------------
Balance as of December 31, 1995 - (166,364)
Conversion of Class A and B common stock into common stock - -
Issuance of detachable warrants on May 17, 1996, in connection with bridge financing
arrangements, valued at $25,000, to purchase 100,000 shares of common stock at $1.00 per share 25,000 -
Sales of common stock during June and July, 1996 at $1.00 per share, less offering costs of
$124,663 566,515 -
Conversion of bridge notes plus accrued interest of $1,841 to common stock on June 28, 1996 at
$1.00 per share 178,990 -
Compensation 125,000 -
Unearned compensation amortized (note A4) - -
Net loss for the year ended December 31, 1996 - (823,488)
------------ -------------
Balance as of December 31, 1996 895,505 (989,852)
Accrued interest contributed to capital by officer 10,960 -
Unearned compensation grant 225,400 -
Unearned compensation amortization - -
Unearned compensation reversal related to employee terminations (184,191) -
Exercise of stock options 70,384 -
Sales of common stock in February and March 1997 at $3.00 per share, less offering costs of
$1,039,668 6,196,132 -
Issuance of warrants on March 24, 1997, valued at $27,500 to purchase 25,000 shares of common
stock at $3.00 per share 27,500 -
Net loss for the year ended December 31, 1997 - (2,593,814)
------------ -------------
Balance as of December 31, 1997 7,241,690 (3,583,666)
Unearned compensation grant 58,520 -
Unearned compensation amortization - -
Exercise of stock options and warrants 112,775 -
Issuance of stock options on April 13, 1998, valued at $352,650 to purchase 100,000 shares of
common stock at $8.46 per share 352,650 -
Fair market value of conversion feature on debenture issued June 30, 1998 (note F) 525,000 -
Issuance of warrants on June 30, 1998, valued at $432,000 to purchase 350,000 shares of common
stock at $7.29 and $7.50 per share (note F) 432,000 -
Issuance of stock options on April 1, 1998 and September 15, 1998 valued at $237,500 to
purchase 423,000 shares of common stock at $3.00 to $6.42 per share 237,500 -
Net loss for the year ended December 31, 1998 - (5,951,302)
---------- -------------
Balance as of December 31, 1998 $8,960,135 $ (9,534,968)
========== =============
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Unearned
compensation Total
------------ ------------
<S> <C> <C>
Sales of common stock January 7, 1993 $ - $ 3
Sale of common stock January 7, 1993 at $.02 per share - 25,000
Contribution of services - 11,250
Redemption of director and officers common stock August 4, 1995 at $0 per share - -
Sale of common stock August 4, 1995 at $.24 per share - 225,000
Redemption of common stock August 4, 1995 at $.24 per share - (158,174)
Sale of common stock December 22, 1995 at $.17 per share - 50,000
Redemption of common stock December 22, 1995 at $.22 per share - (150,000)
Net loss for the period from January 7, 1993 (date of inception) through December 31, 1995 - (128,267)
--------- -----------
Balance as of December 31, 1995 - (125,188)
Conversion of Class A and B common stock into common stock - -
Issuance of detachable warrants on May 17, 1996, in connection with bridge financing
arrangements, valued at $25,000, to purchase 100,000 shares of common stock at $1.00 per share - 25,000
Sales of common stock during June and July, 1996 at $1.00 per share, less offering costs of
$124,663 - 573,497
Conversion of bridge notes plus accrued interest of $1,841 to common stock on June 28, 1996 at
$1.00 per share - 181,008
Compensation (125,000) -
Unearned compensation amortized (note A4) 13,000 13,000
Net loss for the year ended December 31, 1996 - (823,488)
--------- -----------
Balance as of December 31, 1996 (112,000) (156,171)
Accrued interest contributed to capital by officer - 10,960
Unearned compensation grant - -
Unearned compensation amortization (225,400) 62,254
Unearned compensation reversal related to employee terminations 62,254 -
Exercise of stock options 184,191 70,622
Sales of common stock in February and March 1997 at $3.00 per share, less offering costs of
$1,039,668 - 6,220,332
Issuance of warrants on March 24, 1997, valued at $27,500 to purchase 25,000 shares of common
stock at $3.00 per share - 27,500
Net loss for the year ended December 31, 1997 - (2,593,814)
--------- -----------
Balance as of December 31, 1997 (90,955) 3,641,683
Unearned compensation grant (58,520) -
Unearned compensation amortization 92,585 92,585
Exercise of stock options and warrants - 113,270
Issuance of stock options on April 13, 1998, valued at $352,650 to purchase 100,000 shares of
common stock at $8.46 per share - 352,650
Fair market value of conversion feature on debenture issued June 30, 1998 (note F) - 525,000
Issuance of warrants on June 30, 1998, valued at $432,000 to purchase 350,000 shares of common
stock at $7.29 and $7.50 per share (note F) - 432,000
Issuance of stock options on April 1, 1998 and September 15, 1998 valued at $237,500 to
purchase 423,000 shares of common stock at $3.00 to $6.42 per share - 237,500
Net loss for the year ended December 31, 1998 - (5,951,302)
--------- -----------
Balance as of December 31, 1998 $ (56,890) $ (556,614)
========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS (Notes A and L)
<TABLE>
<CAPTION>
January 7,
1993 (date of
inception)
Years ended December 31, through
----------------------------------------- December 31,
1996 1997 1998 1998
------------------------------------------ -------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $(823,488) $(2,593,814) $(5,951,302) $(9,496,871)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation (note A4) 3,226 41,370 59,901 105,006
Amortization (note A4)
Unearned compensation 13,000 62,254 92,585 167,839
Deferred financing costs (note F) 4,167 - 80,400 84,567
Interest expense amortization for the intrinsic
value of the beneficial conversion feature of
the convertible debenture (note F) - - 400,376 400,376
Allowance for doubtful receivables - 99,000 59,000 158,000
Write-down of inventory (note A11) - - 600,000 600,000
Revenues realized due to offset of billings against a
stock repurchase - - - (170,174)
Options issued for license rights - - 200,000 200,000
Options issued in connection with distribution agreement - - 352,650 352,650
Acquired research and development (note K) - - - 117,000
Warrants issued for services and other - 27,500 169,500 197,000
Contribution of services - - - 11,250
Other 1,841 21,593 - 23,434
Change in assets and liabilities:
Accounts receivable - (155,770) (46,932) (202,702)
Inventories (100,616) (358,698) (545,360) (1,010,287)
Prepaid expenses (5,830) (100,273) (11,115) (121,875)
Accounts payable 212,950 69,434 (7,809) 280,879
Accrued liabilities 11,157 234,103 (8,920) 237,363
--------- ----------- ----------- -----------
139,895 (59,487) 1,394,276 1,430,326
--------- ----------- ----------- -----------
Net cash used in operating activities (683,593) (2,653,301) (4,557,026) (8,066,545)
Cash flows from investing activities
Capital expenditures (38,747) (163,400) (31,404) (240,475)
Security deposits (2,650) (8,101) - (12,984)
Patents and trademarks (4,534) - - (4,534)
--------- ----------- ----------- -----------
Net cash used for investing activities (45,931) (171,501) (31,404) (257,993)
Cash flows from financing activities
Net borrowings under short-term borrowing agreements 188,000 (330,000) - (117,000)
Issuance of convertible bridge notes 175,000 - - 175,000
Issuance of convertible debentures - - 1,775,000 1,775,000
Issuance of warrants and convertible debentures discount 25,000 - 725,000 750,000
Deferred financing costs - - (312,977) (312,977)
Exercise of stock options and warrants - 49,029 113,270 162,299
Sales of common stock 573,497 6,368,393 - 7,093,832
Redemption of common stock - - - (138,000)
Deferred offering costs (148,061) - - -
--------- ----------- ----------- -----------
Net cash provided by financing activities 813,436 6,087,422 2,300,293 9,388,154
--------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 83,912 3,262,620 (2,288,137) 1,063,616
Cash and cash equivalents, beginning of period 5,221 89,133 3,351,753 -
--------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 89,133 $ 3,351,753 $ 1,063,616 $ 1,063,616
========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
SAC Technologies, Inc. was incorporated in Minnesota in January 1993.
The Company develops and markets fingerprint identification
technologies and products. The Company's technologies and products are
marketed to original equipment manufacturers (OEM), system integrators,
value-added resellers (VAR's), and distributors in the information
management and access control markets. To date, the Company has focused
on developing products for use by others in biometric applications for
access control and information security applications. The Company is a
development stage enterprise that conducts its operations from
Minneapolis, Minnesota and Las Vegas, Nevada.
Basis of Presentation
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, principally to
affiliates of the Company (see notes B and K), and has accumulated
losses since inception of $9,496,871, of which $5,951,302 were incurred
during 1998. The Company believes operating losses will continue. As of
December 31, 1998 there was a $1,075,778 deficit in working capital.
The Company believes its existing cash will not be adequate to fund
expansion and distribution of its product offerings.
During January 1999, the Company received a notice of delisting from
NASDAQ due to not meeting minimum capitalization and net asset
provisions. The Company has been granted an oral hearing to be held on
April 15, 1999. If the Company is not in compliance with the continued
listing requirements applicable to the NASDAQ by such date, or if its
plan to acheive compliance is not accepted by NASDAQ, its shares
will likely be delisted from the NASDAQ SmallCap Market. A delisting of
the Company's securities could significantly impair the Company's
ability to obtain additional financing. The Company estimates it needs
to increase its net assets as defined by NASDAQ by $6,000,000 to
maintain the minimum net asset requirement through December 31, 1999.
If the Company was delisted from NASDAQ, it would put the Company in
default under the terms of the Company's $2,500,000 convertible
debenture and could cause an acceleration of the repayment thereof.
The Company does not currently have the necessary funds to repay the
$2,500,000 convertible debenture. Should demand for repayment not be
made, the Company estimates its exististing cash will only last until
second quarter 1999 based on the Company's current cash burn rate.
Management is in discussions with certain institutional and accredited
investors with respect to an investment in the company of at least
$3,000,000 to $5,000,000 of additional funds to support its operations.
The Company is also in discussions with the convertible debenture
holder to request a conversion of some on all of their debenture into
convertible preferred stock. The Company believes the combination of
the above initiatives may bring it back into compliance with NASDAQ. No
assurance can be given that any form of additional financing will be
available on terms acceptable to the Company, that adequate financing
will be obtained to meet its needs, or that such financing would not be
dilutive to existing stockholders. Also, no assurance may be given that
the debenture holder will convert any of their indebtedness to
convertible preferred stock, or do so without a significant cost to the
Company.
F-6
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. The matters described
in the preceding paragraphs raise substantial doubt about the Company's
ability to continue as a going concern. Recoverability of a major
portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon the Company advancing beyond the development
stage, which in turn is dependent upon the Company's ability to obtain
additional financing, meet its financing requirements on a continuing
basis, and succeed in its future operations. The accompanying financial
statements do not include any adjustments that might be necessary
should the Company be unable to continue in existence
Summary of Significant Accounting Policies
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
1. Revenue Recognition
Revenue is recognized from product sales and services when a product is
shipped or the services are provided, the sales price is fixed, and
when collection is considered probable. Where collectibility is
considered doubtful, revenue is recognized on the basis of cash
received (see note K).
2. Cash and Cash Equivalents
The Company includes as cash equivalents certificates of deposit and
all other liquid investments with a maturity of three months or less,
when purchased.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. The Company's
inventories consist principally of component parts ready for final
assembly.
F-7
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
4. Depreciation and Amortization
Depreciation is provided for in amounts sufficient to relate the cost
of depreciable assets to operations over their estimated services lives
of three and five years using the straight-line method for financial
reporting purposes and accelerated methods for tax reporting purposes.
Deferred income taxes are provided for these differences.
Costs associated with patents and trademarks are capitalized, and upon
issuance or approval, are amortized over sixty months or the remaining
life of the patent or trademark, whichever is shorter. If the patent or
trademark issuance approval is denied, the costs will be expensed at
that time.
Unearned compensation related to stock options is amortized to expense
over the vesting period of the stock options. Forfeitures of nonvested
options are recognized as a reduction of additional contributed capital
during the period the forfeitures occur.
5. Other Assets
The Company's investment in the common stock of Inter-Con/PC, Inc. is
accounted for at cost plus equity in undistributed earnings (loss)
since the date of acquisition.
6. Advertising Expense
The Company expenses the costs of advertising as incurred. Advertising
expenses for the years ended December 31, 1996, 1997 and 1998, and the
period January 7, 1993 (date of inception) through December 31, 1998
were $115, $362 and $144,672 and $145,149, respectively.
7. Research and Development Expenditures
All costs related to development of new products are charged to expense
as incurred. Such costs are required to be expensed until technological
feasibility and proven marketability of the product are established.
There have been no costs capitalized post technological feasibility.
F-8
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
8. Loss per Common Share
Loss per common share is computed pursuant to Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). Basic loss per
share is calculated by dividing the net loss attributable to common
stockholders by the number of weighted average common shares
outstanding (4,565,206, 7,047,190, 7,494,647 and 5,434,803 shares for
the years ended December 31, 1996, 1997 and 1998, and the period from
January 7, 1993 (date of inception) to December 31, 1998,
respectively). Diluted loss per share is calculated by dividing the net
loss attributable to common stockholders by the weighted average common
shares, and when dilutive, the dilutive effect of options and warrants
outstanding are included using the treasury stock method. There was no
difference between basic and dilutive loss per share for all periods
presented as the impact would have been antidilutive.
9. Income Taxes
The Company provides for income taxes based on income reported for
financial reporting purposes. Certain charges to earnings differ as to
timing from those deducted for tax purposes; these relate primarily to
revenue recognition and net operating loss carryforwards. The tax
effect of these differences are recorded as deferred income taxes.
10. Accounting for Stock Based Compensation
As permitted under Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company accounts for stock-based compensation under the intrinsic value
method prescribed by Accounting Principles Board Opinion 25,
AAccounting for Stock Issued to Employees@ (APB 25). The Company
provides pro forma disclosures of net loss and loss per share as if the
fair value basis method prescribed in SFAS 123 had been applied in
measuring compensation expense (see note H).
Pursuant to APB 25, no accounting recognition is given to employee
stock options issued at fair market value or greater until they are
exercised, at which time the proceeds are credited to the capital
accounts. With respect to non-statutory compensatory options, the
Company may recognize a tax benefit upon exercise of these options in
an amount equal to the tax effect of the excess of the fair market
value of the common stock over the option price on the day of the
exercise. With respect to incentive stock options, tax benefits arising
from disqualifying dispositions may be recognized at the time of such
disposition. Tax benefits recognized related to stock options are
credited to additional contributed capital.
F-9
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
11. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities as of the date of the financial
statements, as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The Company's financial statements are based on a number of estimates,
including a $600,000 write-down of inventories to estimated net
realizable value during 1998. It is reasonably possible that such
estimate could materially change in the forthcoming year and such
revisions could be material.
Significant estimates were also recorded for the estimated fair values
of the conversion feature of a convertible debenture issued during 1998
(see note F), capitalized deferred offering costs (see note D)
recoverability of future royalty committments (see Note G) and the
estimated fair values of various stock options and warrants granted
during 1997 and 1998 (see notes F and H).
NOTE B - CONCENTRATIONS
The Company sells its products principally to entities operating in the
security industry. Significant concentrations follow:
<TABLE>
<CAPTION>
January 7,
1993 (date of
inception)
through
December 31, December
----------------------------------------- 31, 1998
1996 1997 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Percentage of total revenues during the year
ATM (an affiliate) - % - % 64 % 20 %
Jasper (an affiliate) - 26 14 50
Inter-Con/PC (an affiliate) 100 38 - 17
Outstanding accounts receivable, before
allowances
ATM $ - $ - $ 37,665 N/A
Jasper - 155,770 135,958 N/A
Inter-Con/PC - - - N/A
</TABLE>
During the years ended December 31, 1997 and 1998, the Company recorded
provisions for uncollectible accounts of $99,000 and $73,125.
The Company maintains its cash balances in two financial institutions
in Minnesota and Nevada. These balances are insured by the Federal
Deposit Insurance Corporation up to $100,000.
See note K for additional related party transactions.
F-10
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE C - EQUIPMENT AND FURNITURE AND FIXTURES
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Equipment $176,600 $205,118
Furniture and fixtures 32,471 35,357
-------- --------
209,071 240,475
Less accumulated depreciation 45,105 105,006
-------- --------
$163,966 $135,469
======== ========
</TABLE>
NOTE D - OTHER ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Security deposits $ 12,984 $ 12,984
Patents pending 4,534 4,534
Deferred finance costs, less accumulated amortization of
$46,800 as of December 31, 1998 (see notes A4 and F) - 233,200
Deferred offering costs (see note A11) - 132,977
Investment in affiliate (see note A5 and see below) - -
-------- --------
$ 17,518 $383,695
======== ========
</TABLE>
Deferred offering costs were incurred in connection with a December
1998, amended February 12, 1999, private placement of the Company's
securities which did not materialize. The Company has had ongoing
discussions with the placement agent for the transaction. If the
Company is unable to secure financing in connection with the work
performed related to this offering, the deferred financing costs will
be written-off.
During October 1996, the Company contributed its "Set Top Box"
technology to Inter-Con/PC for an initial 50% (approximately 35% as of
December 31, 1998) ownership interest in Inter-Con/PC. Inter-Con/PC is
a development stage enterprise founded in June 1996 to market and
distribute the "Set Top Box" and related products.
Costs associated with the development of the "Set Top Box" technology
prior to contribution have been expensed as research and development
costs since the technology had not reached technological feasibility
and proven marketability as of the date of transfer. Accordingly, the
Company's capitalized cost basis in the technology as of the date of
contribution was $0. Inter-Con/PC had no earnings through December 31,
1998.
The Company entered into a technical support agreement with
Inter-Con/PC for a fee of up to $20,000 per month. During March 1998,
the Company and Inter-Con/PC reached an agreement in principle to
terminate the technical support agreement. The Company has not recorded
revenue from the technical support agreement since November 1997.
During the fourth quarter of 1997, the Company wrote-off $42,621 of
receivables from Inter-Con/PC. See notes B and K for disclosures of
revenue from Inter-Con/PC.
Subsequent to year-end, the Company sold 50% of its investment in
Inter-Con/PC for $90,000. The $90,000 gain on sale will be included in
earnings for 1999.
F-11
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE E - ACCRUED LIABILITIES
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
--------- --------
<S> <C> <C>
Compensation $232,105 $106,241
Interest - 62,500
Deferred revenues - 27,665
Other 3,218 29,997
-------- --------
$235,323 $226,403
======== ========
</TABLE>
Included in accrued compensation as of December 31, 1997 and 1998 are
$218,438, and $92,574 relating to severance agreements payable through
July 31, 1999.
NOTE F - CONVERTIBLE DEBENTURES
On June 30, 1998, the Company sold to Shaar Fund, Ltd., an
international investment fund, $2,500,000 of 5% (effective rate of 16%)
convertible debentures due June 30, 2001, and detachable warrants. At
the Company's option, an additional $1,000,000 of 5% convertible
debentures may be sold to Shaar Fund, Ltd. if certain targets are met,
including certain minimum share price and trading volume levels for the
Company's common stock. As of the date of this report, none of the
targets have been met. No assurances can be given that the Company will
meet targets to be able to exercise the option on the $1,000,000 of
additional convertible debentures discussed above.
The debentures are convertible into shares of the Company's common
stock in increments beginning 120 days from October 28, 1998 and are
fully convertible after 181 days. The conversion price equals the
lesser of (a) $7.15 (110% of the closing bid price of the common stock
on June 29, 1998), or (b) the average closing bid price for a five-day
period ending the day prior to the notice of conversion multiplied by a
discount factor, which increases over time from 15% to 22% (20% at
December 31, 1998). The convertible debentures are redeemable at the
option of the Company under certain circumstances. Interest on the
convertible debentures is not convertible.
The Company was obligated to file, and has filed, a registration
statement (not yet effective) covering the resale of the shares of
common stock underlying the debentures and the detachable warrants,
among other securities. However, since the registration statement is
not yet effective the Company is subject to late filing penalties
commencing December 27, 1998 of $25,000 and $50,000 per month
thereafter ($153,333 as of March 14, 1999).
The convertible debenture agreement contains certain dilution and
conversion price adjustment provisions if certain events occur, as
defined. In the event of repayment, the Company is subject to certain
repayment costs of up to 24% of the principal amount repaid. In
addition, the Company is required to meet certain covenants, including
the maintenance of its listing in the NASDAQ Small Cap Market. As
discussed at note A, the Company is not in compliance with the NASDAQ
Small Cap Market listing requirements. Accordingly, the convertible
debentures have been classified as a current liability in the
accompanying financial statements. Additionally, in the event of a
delisting of the Company's common stock, the interest rate for the
debentures will increase from 5% to 9%.
F-12
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE F - CONVERTIBLE DEBENTURES - CONTINUED
The $525,000 estimated fair value of the debenture conversion feature
has been reflected as a discount to the 5% convertible debentures
issued and will be amortized as additional interest expense principally
through February 26, 1999, the date the debenture holder is able to
convert their debenture at the maximum 22% discount discussed above.
The estimated fair market value of the debenture conversion feature was
calculated by applying the maximum 22% discount rate over the maximum
discount period of 240 days. A 7% discount rate was then applied to
calculate the net present value of the conversion feature of $525,000.
The estimated fair market value of the above warrants were calculated
by using three different valuation models (the Black-Scholes and
Shelton models, and a comparative market approach), each of which
assumes the warrants are freely traded in the marketplace. Since the
warrants issued are not freely tradable in the marketplace, a 33%
discount was applied to the freely traded value.
In connection with the convertible debentures, the Company also granted
a warrant to purchase 100,000 shares of common stock to Shaar Fund,
Ltd. The $200,000 estimated fair market value of the warrant has been
reflected as a discount to the 5% convertible debentures issued and
will be amortized as additional interest expense over the term of the
debentures. In connection with this transaction, a warrant to purchase
200,000 shares of common stock was also issued to Tuschner & Company,
Inc. (TCI), underwriter for the Company's initial public offering, as
part of an agreement in which TCI agreed to waive all future rights of
first refusal to sell the Company's securities; the right to 66,000 of
such shares vests immediately and the right to 134,000 of such shares
vests upon the occurrence of certain events discussed at note G. The
$132,000 estimated fair market value of the portion of the warrant
which vested immediately has been reflected as a component of selling,
general and administrative expenses for the year ended December 31,
1998. The $268,000 estimated fair market value of the remaining portion
of the warrant which did not vest immediately may be offset against
proceeds from a future public offering, if one occurs. For accounting
purposes, the Company has not reflected this amount as a deferred
finance cost with a corresponding increase to stockholders' equity as
it believes it is more appropriate to offset such amounts against
proceeds of a public offering, since such an offering is not assured.
See note G for an additional commitment made to TCI.
NOTE G - COMMITMENTS AND CONTINGENCIES
Lease Agreements
The Company operates from leased facilities under noncancelable
operating leases that expire during May 2002 for its Minnesota location
and February 2000 for its Nevada location. The Company pays for
property taxes, maintenance, insurance, and other occupancy expense
applicable to the leased premises.
F-13
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE G- COMMITMENTS AND CONTINGENCIES - CONTINUED
Minimum rental commitments of non-cancelable operating leases are
approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
------------------------
1999 $ 76,000
2000 48,000
2001 44,000
2002 19,000
--------
$187,000
========
Rental expense was as follows:
Year ended December 31,
------------------------
1996 $ 24,571
1997 84,631
1998 80,276
January 7, 1993 (date of inception) through December 31,1998 206,572
</TABLE>
Inventory Purchase Commitments and License Fees
The Company has entered into various technology license agreements. The
Company has committed to pay approximately $140,000 to certain of the
licensors of the technology during 1999 and $25,000 in 2000, for the
per unit cost of imbedding such technologies into the Company's
products at agreed upon minimum levels, and for the purchase of
inventory from such companies. In order to maintain exclusivity as it
relates to the biometric industry for two technology licenses through
2000, the Company is required to purchase an additional $325,000 and
$375,000 of products during 1999 and 2000, respectively.
See note K for information regarding the licensing/royalty agreement
with Jasper.
Employment Agreements
The Company has employment agreements with four individuals. The
employment agreements contain non-compete clauses that prohibit the
employees from being employed by a competitor of the Company. The
non-compete clause is in effect for two years for voluntary
terminations and three years for terminations with cause. In the event
of "constructive termination," as defined, the agreements provide each
employee with up to three years salary (as of December 31, 1998)
reduced by one month for each month thereafter until December 31, 1999,
at which time the amount of severance is two years. As of December 31,
1998, the aggregate commitment approximates $1,656,000.
F-14
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
Future Public Offering Costs
On June 30, 1998, the Company entered into an agreement with TCI, the
Company's primary market maker and original underwriter, whereby TCI
agreed to waive all future rights of first refusal to sell the
Company's securities. In exchange for this, the Company agreed to pay
TCI $100,000, of which $34,000 was paid after closing on the sale of
convertible debentures and $66,000 will be due if the Company closes a
future public offering. Payment of the $100,000 would be reduced by any
amount TCI might receive as a non-accountable expense allowance if a
future public offering occurs.
Other
On September 30, 1998, the Company entered into a one year agreement
with a firm to help the Company develop a strategic growth plan and to
enhance shareholder value. The Company will pay the firm $10,000 a
month for their services and, the Company granted the firm an option to
purchase 375,000 shares of its common stock at $3.00 per share.
The Company is subject to certain lawsuits and other claims arising out
of the conduct of its business. In the opinion of management, such
matters are without merit or are of such a kind or involve such amounts
that they would not have a material effect on the financial position or
results of operations of the Company.
NOTE H - STOCKHOLDERS' EQUITY
Initial Public Offering
During the quarter ended March 31, 1997, the Company completed an
initial public offering of 2,420,000 shares of its common stock at
$3.00 per share resulting in gross proceeds of $7,260,000 before
deduction of offering expenses.
1996 Stock Option Plan
During May 1996, the Board of Directors and stockholders of the Company
adopted the 1996 Stock Option Plan (the Plan). Under the Plan, 750,000
(375,000 pre-stock dividend) shares of common stock may be issued to
employees, officers, directors, and consultants of the Company at
exercise prices which may not be below 100% of fair market value for
incentive stock options and 85% for all others. Pursuant to the Plan,
the term of incentive stock options and nonstatutory stock options
granted may not exceed ten years. Options issued under the Plan vest
pursuant to the terms of stock option agreements with the recipients.
In the event of a change in control, as defined, all options
outstanding vest immediately and are exercisable for their remaining
terms. The Plan terminates in May 2006.
F-15
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
1996 Stock Option Plan - Continued
Pursuant to the Plan, each non-employee director may receive options to
purchase 50,000 shares of common stock which will vest 20% annually for
five years. Five years after the initial grant of an option to a
non-employee director, and every fifth year thereafter, non-employee
directors who remain on the Board shall automatically be granted
additional options to purchase 50,000 shares of Common Stock which
shall vest 20% on May 1 of each year over a period of five years. All
options granted to non-employee directors shall have an exercise price
equal to 100% of the fair market value of the Company's common stock.
Non-Plan Stock Options
From time to time the Company grants options outside of the 1996 Plan.
As of December 31, 1998 there were non-plan options outstanding to
acquire 498,000 shares.
Summary Option Information
The following table summarizes option activity:
<TABLE>
<CAPTION>
Weighted
Number of shares Range of average
-------------------------------- exercise exercise
1996 plan Non-plan Total prices price
----------- -------- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1995 - - - $ - $ -
Granted 346,000 - 346,000 1.00 - 1.13 1.12
-------- ------- --------
Balance, December 31,
1996 346,000 - 346,000 1.00 - 1.13 1.12
Granted 458,166 - 458,166 3.21 -10.75 5.09
Exercised (25,000) - (25,000) 1.00 - 4.43 2.49
Expired or canceled (328,000) - (328,000) 1.12 - 4.43 3.12
-------- ------- --------
Balance, December 31,
1997 451,166 - 451,166 1.00 -10.75 3.63
Granted 150,500 523,000 673,500 3.00 -10.75 4.62
Exercised (42,000) - (42,000) 1.13 - 3.22 2.52
Expired or canceled (85,332) (25,000) (110,332) 1.13 -10.75 9.18
-------- ------- --------
Balance, December 31,
1998 474,334 498,000 972,334 1.00 -10.75 3.74
======== ======= ========
Available for grant,
December 31, 1998 208,666 - 208,666
======= ======= ========
</TABLE>
F-16
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
Summary Option Information - Continued
The weighted average fair values of all options granted during the
years ended December 31, 1996, 1997 and 1998 were $.83, $6.37 and $4.99
per share, respectively.
Additional information regarding options outstanding as of December 31,
1998 follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
average average average
Range of Number of exercise remaining Number exercise
exercise prices options price life exercisable price
---------------- ------------ ------------ -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$1.00-1.13 258,000 $ 1.12 4.58 258,000 $1.12
3.00-4.44 506,000 3.24 5.75 113,150 3.19
6.42-8.56 181,000 7.80 5.90 98,600 8.17
10.75 27,334 10.75 247 20,134 10.75
</TABLE>
During 1997 and 1998, options for 360,000 and 40,000 shares,
respectively were granted to employees at per share exercise prices
less than the fair market value of the common stock at the date of
issuance. The difference between the option exercise price and
estimated fair value of common stock at the date of grant for these
options was $225,400 and $58,520, respectively and has been reflected
as unearned compensation in the Company's financial statements, to be
recognized as expense over the vesting terms of the related stock
option agreements. In connection with certain employee terminations,
$184,191 of unearned compensation was reversed during 1997, with no
resulting impact to the statement of operations.
During 1996, 1997 and 1998, options for 268,000, 0 and 523,000 shares,
respectively were granted to consultants and strategic partners. The
estimated fair value of these options were $125,000, $0 and $590,150,
respectively.
Option Proforma Information
Pursuant to SFAS 123 (see note A10), the Company has elected to
continue to follow APB 25 for accounting for its employee stock
options. Under APB 25, no compensation expense is recognized for
employee stock option grants where the stock option exercise price
equals the market price of the underlying stock on the date of grant.
SFAS 123 requires the use of an option valuation model to determine the
value of options granted. The Company utilizes the Black-Scholes option
valuation model. The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
F-17
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
If the Company would have accounted for its employee and director stock
option grants pursuant to the fair value method prescribed by SFAS 123,
the Company's net loss and net loss per share for the periods ended
December 31, would have been as follows:
<TABLE>
<CAPTION>
January 7,
1993 (date of
inception)
Years ended December 31, through
------------------------------------------------------- December
1996 1997 1998 31, 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss
As reported $ (823,488) $(2,593,814) $ (5,951,302) $ (9,496,871)
Proforma (842,488) (2,625,814) (6,120,302) (9,716,871)
Net loss per common
share
As reported
Basic (.18) (.37) (.79) (1.75)
Diluted (.18) (.37) (.79) (1.75)
Proforma
Basic (.18) (.37) (.82) (1.79)
Diluted (.18) (.37) (.82) (1.79)
</TABLE>
The assumptions utilized to determine the fair value of each option
grant is estimated on the date of grant using the following weighted
average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Risk free interest rate 6.00 % 6.25 % 4.70 %
Expected life of options (in years) 4.00 4.00 4.00
Expected dividends - - -
Volatility of stock price - % 93 % 133 %
</TABLE>
The effects of applying SFAS 123 for pro forma disclosures for 1996,
1997 and 1998 are not likely to be representative of the effects on
reported net loss and net loss per share for future years, because
options vest over several years and additional awards generally are
made each year.
F-18
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
Warrants
Warrant activity is summarized as follows:
<TABLE>
<CAPTION>
Exercisable at
Price per Expiration December 31,
Outstanding share date 1998
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance December 31, 1995 - $ - - -
Granted to bridge
noteholders 92,500 1.00-3.00 1999 92,500
Granted to TCI 83,278 3.00 2001 83,278
--------------
Balance December 31, 1996 183,278
Granted to consultants 25,000 3.00 2004 25,000
Granted to TCI 88,938 3.60 2002 88,938
--------------
Balance, December 31, 1997 297,216
Granted in connection 150,000 7.29 2003 150,000
with financing (see
note F)
Granted to TCI (see notes
F and G) 200,000 7.50 2005 66,000
Exercised (7,500) 1.00 - -
-------------- --------------
Balance, December 31, 1998 639,716 505,716
============== ==============
Exercised through December
31, 1998 7,500
==============
</TABLE>
The estimated fair value of the warrants granted was $125,000, $27,500
and $432,000, respectively.
F-19
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE I - PROFIT SHARING PLAN AND TRUST
During the year ended December 31, 1997, the Company implemented the
SAC Technologies, Inc. 401(k) Profit Sharing Plan and Trust which
covers substantially all of its employees. Participants may elect to
enter into salary reduction agreements with the Company for a portion
of their compensation. The plan authorizes the Board of Directors of
the Company to annually authorize contributions, out of earnings and
profits. For the years ended December 31, 1997 and 1998, contributions
to the plan totaled $52,396 and $53,054, respectively. There were no
contributions made by the Company during 1997 or 1998.
NOTE J - INCOME TAXES
Deferred taxes consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Short-term asset
Allowances for doubtful receivables $ - $ 40,000 $ 62,000
Accrued Compensation - 76,000 35,000
------------ ------------ -------------
- 116,000 97,000
Less valuation allowance - 116,000 97,000
------------ ------------ -------------
$ - $ - $ -
============ ============ =============
Long-term asset
Depreciation and other $ - $ - $ (4,000)
Revenue recognition 157,000 150,000 141,000
Income tax credits - 20,000 38,000
Net operating loss carryforwards 209,000 1,158,000 3,390,000
------------ ------------ -------------
366,000 1,328,000 3,565,000
Less valuation allowance 366,000 1,328,000 3,565,000
------------ ------------ -------------
$ - $ - $ -
============ ============ =============
</TABLE>
A valuation allowance has been recorded due to uncertainty of
realization of deferred tax assets principally due to the development
stage nature and operating loss history of the Company; however, the
valuation allowances could be reduced or eliminated based on future
earnings and future estimates of taxable income. Also, income tax
benefits related to stock option exercises have not been recognized in
the financial statements for the same reasons.
As of December 31, 1998, the Company has federal net operating loss
carryforwards of approximately $8,800,000 and Minnesota net operating
loss carryforwards of approximately $8,200,000. These operating losses
expire between 2008 and 2018. Net operating loss carryforwards
available to offset future taxable income may be subject to the
limitations under Section 382 of the Internal Revenue Code due to
changes in the equity ownership of the Company.
F-20
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE K- RELATED PARTY TRANSACTIONS
Jasper
BACKGROUND
Jasper Consulting, Inc. ("Jasper") was a stockholder of the Company
from inception through December 1995. Jasper has a cross license
agreement with the Company for FIDS technology (see below), and has
purchased products and services from the Company over the years. FIDS
technology was previously a significant component of the Company's
product offerings. The Company has replaced the FIDS technology with
internally developed Vector Segment technology. The Company is
evaluating the impact of the above on potential required royalty
payments to Jasper in each of the respective party's defined markets.
Jasper agreed to fund research and development for the Company's
products from inception through April 1996 principally in consideration
of an assignment of the patent rights to the FIDS technology. However,
most of this funding was provided by the Company. Research and
development funding after this date was the responsibility of the
Company. The Company maintains the patent and the intellectual property
rights if any to the non - FIDS technologies.
Through 1996, the Company had billed various amounts for reimbursement
under a development arrangement with Jasper. Jasper had not paid the
majority of these billings. At such time, the Company believed Jasper
did not have the financial wherewithal to pay for such amounts.
Therefore, realizability of the outstanding billings to Jasper was not
assured and was not recognized as revenue.
Should such outstanding billings to Jasper be collected in the future,
they will be reflected in income upon receipt. As of December 31, 1997
and 1998, there were approximately $407,000 and $404,000, respectively
of outstanding billings (not yet recognized as revenues for financial
statement purposes) to Jasper.
F-21
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE K- RELATED PARTY TRANSACTIONS - CONTINUED
Total costs incurred pursuant to the development arrangement with
Jasper were $72,471, $0, $0 and $404,118 for the years ended December
31, 1996, 1997 and 1998, and for the period January 7, 1993 (date of
inception) through December 31, 1998.
Accounts receivable from Jasper as of December 31, 1997 and 1998,
excluding the $407,000 and $404,000 of uncollected billings (discussed
above), respectively, were $156,895 and $135,958, respectively.
FIDS LICENSE AGREEMENT WITH JASPER
The following are the more significant terms and conditions of the FIDS
license arrangement with Jasper:
* The Company and Jasper have the exclusive worldwide license rights
to each other's technologies, as defined.
* The Company is to pay a $30.50 per unit royalty to Jasper for all
sales made by the Company of products utilizing the FIDS
technology.
* The Company is to receive a $30.00 per unit royalty from Jasper
for sales made by Jasper of products utilizing the FIDS
technology.
* Jasper receives all rights to future modifications made by the
Company to the FIDS technology.
* The Company may not sell, assign, or transfer its FIDS technology
or grant sublicenses without consent of Jasper. In the event of
sale, assignment, transfer, or sublicense of FIDS technology by
the Company, 42% of any sales proceeds are required to be remitted
to Jasper and 10% to be retained to fund ongoing development.
Additionally, in the event of sale, assignment, transfer, or
sublicense of FIDS technology by Jasper, 42% of any sales proceeds
are required to be remitted to the Company, with 10% of such
amount to be utilized to fund ongoing development.
* The term of the agreement expires the later of April 2016 or the
date of the last patent to expire (as of December 31, 1998 no
patents were issued, and none can be assured of being issued).
F-22
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE K- RELATED PARTY TRANSACTIONS - CONTINUED
ATM
---
Certain brokers of TCI, the Company's primary market maker, are
principal stockholders and members of management of Aultimate
Technology Marketing (ATM). Effective April 13, 1998, the Company
signed a Distribution Agreement with ATM. Terms of the agreement
include preferential pricing, and commitments by ATM as a distributor
to purchase certain minimum quantities.
In connection with the above, ATM granted the Company an option to
acquire up to 400,000 shares of its common stock at $.25 per share,
exercisable for seven years; and the Company granted ATM an option to
purchase 100,000 shares of its common stock at $8.46 per share.
During December 1998, the Company entered into a letter of intent with
ATM whereby the Company agreed to license from ATM the rights to
certain technology developed by ATM to interface with the Company's
product. The Company is to pay 10%, and in certain circumstances 1%, as
a royalty to ATM under this license agreement. There were no royalties
under this agreement during 1998.
Other
-----
<TABLE>
<CAPTION>
January 7,
1993 (date of
inception)
Years ended December 31, through
----------------------------------------------- December 31,
1996 1997 1998 1998
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues recognized from (note B):
Jasper $ - $ 211,918 $ 54,350 $ 619,325
Inter-Con/PC (note D) 32,000 177,494 - 209,494
ATM
- - 244,979 244,979
Purchase of optics technology - - - 117,000
Purchase of component parts from a
Company previously owned by a
stockholder 21,434 35,355 252,077 308,866
Rent, assembly, and computer
aided design services acquired
from an affiliate - - - 77,049
Equipment purchased from a stockholder
- - - 5,000
</TABLE>
F-23
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE K - RELATED PARTY TRANSACTIONS - CONTINUED
Included in accounts receivable as of December 31, 1997 and 1998 are
$156,895 and 139,420, respectively of amounts due from Jasper. Included
in accounts receivable as of December 31, 1998 is $37,665 due from ATM,
of which $27,665 has been reflected as deferred revenues.
In addition, the Company had transactions with IR & D (a principal
stockholder and director of the Company was previously an owner and a
director of IR & D through August 12, 1998). Accounts receivable from
IR & D as of December 31, 1998 was $12,271. Accounts payable to IR & D
as of December 31, 1997 and 1998 were $6,018 and $12,060, respectively.
See notes F and G for transactions with TCI.
NOTE L - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
January 7,
1993 (date of
inception)
Years ended December 31, through
--------------------------------------------- December 31,
1996 1997 1998 1998
------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Cash paid for:
Interest $ 24,564 $ 3,980 $ - $ 28,544
Income taxes - - - -
Noncash Financing Activities:
Offset deferred offering
costs against the
proceeds of the
initial public
offering - 148,061 - 148,061
Accrued interest
contributed to
capital by officer - 10,960 - 10,960
Conversion of bridge notes into
common stock 179,167 - - 179,167
Common stock
repurchases offset
by a reduction in
amounts billed to
Jasper for research
and development - - - 170,174
</TABLE>
F-24
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE M - FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value
information as of December 31, 1997 and 1998 as required by
Financial Accounting Standards Board No.107 (ASFAS 107"). Such
information, which pertains to the Company's financial instruments,
is based on the requirements set forth in SFAS 107 and does not
purport to represent the aggregate net fair value of the Company.
All material financial instruments as of December 31, 1997 and 1998
for which it is practicable to estimate the value, approximated
fair value because of the short maturity of those instruments.
F-25
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report on Form
10-KSB for the year ended December 31, 1998 of our report dated March 14, 1999,
appearing in the registration statement on Form S-8 (file no. 333-37351) of SAC
Technologies, Inc. filed with the Securities and Exchange Commission pursuant to
the Securities Act of 1933 which became effective October 7, 1997.
/s/ Divine, Scherzer & Brody, Ltd.
Minneapolis, Minnesota
March 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,063,616
<SECURITIES> 0
<RECEIVABLES> 202,702
<ALLOWANCES> 158,000
<INVENTORY> 410,287
<CURRENT-ASSETS> 1,640,480
<PP&E> 240,475
<DEPRECIATION> 105,006
<TOTAL-ASSETS> 2,159,644
<CURRENT-LIABILITIES> 2,716,258
<BONDS> 0
0
0
<COMMON> 75,109
<OTHER-SE> (631,723)
<TOTAL-LIABILITY-AND-EQUITY> 2,159,644
<SALES> 366,630
<TOTAL-REVENUES> 384,580
<CGS> 1,052,463
<TOTAL-COSTS> 1,054,548
<OTHER-EXPENSES> 4,811,609
<LOSS-PROVISION> 73,125
<INTEREST-EXPENSE> 496,476
<INCOME-PRETAX> (5,951,302)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,951,302)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,951,302)
<EPS-PRIMARY> (.79)
<EPS-DILUTED> (.79)
</TABLE>
