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, 1999
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 (IRS Employer Identification Number)
of Incorporation or organization)
1285 CORPORATE CENTER DRIVE, SUITE #175, EAGAN, MN 55121
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (651)-687-0414
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, None
$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_
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State issuer's revenues for its most recent fiscal year: $157,970
State the aggregate market value of the voting common equity (Common
Stock) held by non-affiliates of the registrant based on the closing sale price
as reported on the OTC Bulletin Board on April 5, 2000 was $ 4,755,091. *
As of April 5, 2000, 9,551,890 shares of the registrant's Common Stock
were outstanding.
Transitional Small Business Disclosure Formats (check one):
Yes ___ No _X_
DOCUMENTS INCORPORATED BY REFERENCE
None.
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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 or directors
includes 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 technology ("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 former director and executive officer and currently a
principal stockholder of the Company.
Thereafter, the Company entered into a worldwide 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.
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Since the initial development of the FIDS Technology, the Company has
developed its' own proprietary fingerprint identification technology known as
Vector Segment Technology. In this regard, on March 8, 2000 the Company and
Jasper entered into a letter of intent to execute a definitive agreement with
respect to the ownership, use, commercialization and exploitation of each
party's respective technologies. The agreement is intended to supercede and
replace all existing agreements between the parties, eliminate the current
market segmentation, and the payments due in connection with sales of their
respective technologies. The agreement is intended to be closed on by April 21,
2000 and the terms provide for, among other things, (i) the Company to deliver
the FIDS source code to Jasper and conduct a test of the code; (ii) both parties
acknowledging that Vector Segment Technology is the sole property of the Company
and that FIDS is the sole property of Jasper; (iii) each party offering its
technology to the other party at a per node cost; and (iv) the forgiveness of
all outstanding indebtedness between the parties. As of the date of this Report
the definitive agreement has not been executed and no assurance can be given
that it will be completed on terms acceptable to the Company, if at all.
GENERAL DESCRIPTION OF BUSINESS
The Company is in the business of developing and marketing proprietary
biometric technology products and software solutions. 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, is an emerging technology. Examples of the unique biological
characteristics that can be used to identify an individual include fingerprints,
iris patterns, 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 many 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 proprietary biometric technology scans a person's
fingerprint and identifies a person typically within three seconds without the
use of a password, key card, personal identification (PIN) number or other
identifying data. The Company believes that its fingerprint identification
technology will have a broad range of possible applications relating to
information security and access control, including:
* Securing Internet sites and Web pages
* Information resource and network access control
* General access control, i.e., facility access control
The Company believes that biometric technology can be utilized in a
multitude of applications including, but not limited to, replacement of keys for
entry into personal residences, offices or hotel rooms, restricting access to
undesirable internet sites, replacing Pins at automated teller machines and
restricting use of dangerous products such as gas stoves, ovens,
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heavy equipment or automobiles to certain qualified persons. Products utilizing
the Company's fingerprint identification technology are currently being utilized
in access control applications 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. 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)) of a fingerprint based on
its particular characteristics; and (iv) SACMan DTK (Developers Tool Kit), a
Biometric application development tool which facilitates integration of the
Company's technology for vertical market applications. Utilizing these
technologies, the Company is continuing to develop identification products and
software solutions which are designed to assure that only individuals comprising
an approved fingerprint in an online or embedded database are allowed access to
an application through real time authentication with an emphasis on Web based
applications.
Optic Technology. The Company's Optic Technology uses a camera and red
spectrum light to take a visual image of an approximately one-half inch by
one-half inch area of a fingerprint. The image is captured at an effective
resolution of approximately 1,000 dots per inch (DPI). Several processing passes
are then made on the image to optimize it for extraction of distinguishing
characteristics of the fingerprint. These distinguishing characteristics are
then mapped by the Company's technology in order to verify whether the
characteristics match those of a previously mapped fingerprint.
VSTA Vector Segment Technology Analysis. 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 a 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 application, i.e., a
computer network, Web Site or restricted area. This can be accomplished without
the use of a key, password, user-Id, card, PIN number or token. The actual
fingerprint is not typically stored in the database.
As more fully explained below, the Company intends to license its
core technology for securing Web-Based applications. In order to effectuate this
plan, the Company has recently modified its core Vector Segment Technology to
make it easily adaptable to scanners other than its proprietary 5th
generation SACMan or 6th generation IDME readers. In the past, the Company's
identification algorithm had required the use of its own high resolution reader
technology to provide for reliable one to many identification applications. The
evolution of the Vector Segment Technology has allowed for the de-coupling of
the core identification algorithm from the reader technology, which allows the
algorithm to be utilized with lower resolution and lower quality readers
available from other manufacturers.
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Identification Verses Verification Technology. Management believes that
the Company's Vector Segment Technology is superior to similar technologies
utilized by its competitors. Unlike many of the biometric technologies currently
available, the Company's technology can identify 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)). Most of the Company's fingerprint competitors simply verify that
the fingerprint image of a known person matches a previously stored copy or
model of that individual's fingerprint. By their very nature, such verification
systems 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 typically 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 and only fingerprint biometric
identification certification.
PRODUCTS
The following is a description of the status of each of the Company's
current product offerings. Although the Company will continue to pursue direct
sales of its products, its primary focus will be to license its core technology
to Original Equipment Manufacturers ("OEMs") for integration into their products
and to electronic commerce and other Web based companies to secure Web-based
applications.
SACMan(TM). The Company's SACMan(TM) is a developer toolkit (DTK) for
generating biometrics identification applications. The DTK has been developed
for OEMs and system integrators and includes required hardware and software
components to develop a custom application, which utilizes the Company's
biometric technology.
SACcat(TM). The Company's SACcat(TM) product is a biometric information
access control solution that provided for workstation log-on and screen saver
lockout. 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 was developed for the information security
marketplace and supported Windows 95/98, Windows NT and Novel operating
environments, in addition to supporting a Sun System Unix based search engine
for remote database matching. The Company has developed the next generation
SACcat(TM) fingerprint scanner (IDME) incorporating the Company's core
technology with an improved optical system designed for better scanning
capability for poor quality fingerprints and integrated anti-spoofing security.
An added interface component was designed to allow for the future use of layered
biometrics consisting of voice and facial recognition. Cosmetic improvements
include improved finger placement features, futuristic design and reduced size.
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Based on its research, management believes that the next generation (IDME)
reader represents a significant improvement over the existing product.
The Company has a limited number of 5th generation readers in inventory
and does not intend to manufacture any additional readers except on a special
order basis. In this regard, the Company has received formal volume quotations
for the "IDME" readers from third party manufacturers which provide a
substantial cost reduction over the 5th generation product. Once ready for
mass-production the Company will need a three to four month lead-time before the
new version would be available for delivery to customers. There can be no
assurance as to when, if ever, third party manufacturing will occur.
SACRemote(TM). The SACRemote is an OEM developer platform for embedded
access control applications, which is available for OEM licensing applications.
The Company does not intend to pursue further internal development of this
product at this time.
SACSecure(TM). The Company's SACSecure(TM) product, (Level 1 and 2) is
a software application that selectively encrypts files and programs. As of the
date of this Report, the Company has not Completed its Level 3 biometric version
which is intended to provide for Biometric locking of encrypted file sets. There
can be no assurance as to when, if ever, this will occur.
BUSINESS STRATEGY
The Company believes it has developed one of the most advanced and
discriminating fingerprint identification technologies available for general
commercial use today. Having completed such development, the Company's current
objective is to market its proprietary technology in order to generate
meaningful revenue for the Company during 2000.
Overview. The Company's initial goal was to develop automated
fingerprint identification products which were portable, easily integrated with
existing applications and affordable for mass commercialization and distribution
through OEMs, distributors and to a lesser degree, system integrators in the
computer network, general access control and other markets. This included the
development of the SACcat and sixth generation IDME readers. During the last
two fiscal years the Company has pursued an OEM licensing program and most
recently is developing an integrated Web based biometric authentication system.
The Company's current business plan, which continues to evolve,
consists of a threefold strategy of (i) continued product and technological
development; (ii) marketing its products and technologies both directly and
through licensing agreements with OEMs and private labelers which address
industry-specific applications; and (iii) the development and licensure of a
Web-based biometric authentication software solution to e-commerce and Web based
transaction companies.
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Technological and Product Development. Although management believes
that the Company's identification technology is one of the most advanced and
discriminating fingerprint technologies available on the market today, the
markets in which the Company competes are characterized by rapid technological
change and evolving standards. In order to maintain its position in the market,
the Company will continue to upgrade and refine its existing products and
technologies. During 2000, the Company will primarily focus on enhancing its
identification technology for large database, Web based server authentication
applications, including porting to multiple platforms and peer group reader
technology. Successful development of this solution will require additional
financing to which there can be no assurance.
Product Sales and Licensing Agreements. The Company will continue to
market and manufacture its stand-alone products on a special order basis. As of
the date of this Report, the Company does not have any orders for any material
amount of product.
During the last fiscal year the evolution of the Company's technology
has allowed it to shift its focus from product development to the licensing of
its core technology to OEMs for integration into their product offerings. As of
the date of this Report, the Company has one license agreement. 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, of which
$37,000 has been paid to date, with a minimum annual pre-purchase
(non-refundable) royalty of $50,000 payable through November 1999. The Company
is obligated to deliver physical product specifications under the agreement.
The Company will focus on general access control and computer network
security applications. 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.
Web Based Biometric Authentication Solution. In recent months,
recognizing the exponential growth in electronic commerce and related security
concerns, the Company has been actively positioning its technology development
for the licensing of a Web based biometric authentication software solution to
e-commerce and other companies which rely on Web Based transactions. This
initiative has involved transitioning the Company's technology to focus on
identification applications for large databases and Web based server
authentication applications, including porting to multiple platforms and peer
group reader technology. These efforts have resulted in the de-coupling of the
core identification algorithm from the reader technology providing for the
algorithm to be utilized with other readers available from other manufacturers.
This development has allowed the Company to explore the licensing of the IDME
reader to third party manufacturers. The Company believes
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that the versatility provided by the de-coupling of the identification algorithm
and reader technology will facilitate the pursuit of licensing Web based server
authentication applications.
The Web based server authentication application is an integrated
solution involving the sale of readers and the licensure of client and server
based software to provide for reliable and cost effective user authentication in
connection with the processing of e-commerce transactions. This solution is also
intended to secure other general purpose Web site applications such as
restricting access to specific Web pages or specific information contained on a
Web-site. Successful execution of this initiative will require the development
of enhanced software to provide an effective interface between client and
server-based software. The Company is continuing to develop this software and is
in discussion with potential users of such a solution. There can be no assurance
that the Company will have the financial or human resources necessary to
complete the development of the software necessary to effectuate such plan in a
timely manner, if at all.
Although the Company has completed the development of its core
technology and readers, neither has gained any meaningful commercial acceptance,
and the Company has only generated minimal revenue since inception and it has
not entered into any significant licensing arrangements. In addition, the
Company's business model, particularly the Web authentication initiative,
represents a novel approach to Internet security, has not been adopted by any
Internet company and there can be no assurance that there will be a demand for
such a solution or that the Company will have the financial, marketing and human
resources necessary to successfully develop and market such a software solution.
Termination of Certain Strategic Alliance and Distributor Agreements.
Commencing during the fourth quarter of 1997, the Company entered into various
agreements which were intended to allow the Company to incorporate synergistic
technologies consisting of voice and facial recognition, encryption, desktop
configuration, security and video conferencing capabilities for utilization with
its products. These alliances were typically with development stage technology
companies. At this time, the Company is not pursuing the joint marketing and
development of technologies from Keyware Technologies, Inc. (voice recognition),
Miros, Inc. (face recognition) and Pinnacle Technology, Inc. (desktop
configuration). In addition, the Company has terminated distributor, and license
agreements with Baraka Intercon, CompuMark (LLC), and OPUS Technologies, Inc.
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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, OEMs and private labelers. 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 has attended and has
actively participated in various product conferences and conventions in the
technology and security industries. The purpose of these activities were to
generate market awareness of biometric technology generally and the Company's
offerings specifically.
During 1999, the Company reduced its workforce including its sales and
marketing departments. The Company's current marketing efforts are conducted
primarily out of its Eagan office by a marketing consultant, a management
consultant and its executive officers primarily through direct selling efforts
to OEMs and private labelers. The Company is dependent upon these licensees to
develop end user applications for its technologies.
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 license its technology or
manufacture, market, or sell 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 biometrics products to government, law enforcement, prison and
consumer markets. These companies include Digital Biometrics, Inc., PRINTRAK
International, INDENTIX, Mytec Technologies, Inc., Safelink, Biometrics
Identification, Inc., and I/O Software,. 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, which are typically priced
higher than the Company's products and licensing arrangements. Although most of
the companies specifically targeting consumer application markets have completed
the development of their products, biometric products and technologies have not
been widely accepted in the commercial markets.
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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 is 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 typically
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 biometrics technologies including hand
geometry, iris scanning, retinal scanning, and signature verification, as well
as existing lock/security/card technology.
SOURCES OF RAW MATERIALS AND PRINCIPAL SUPPLIERS
Assembly of the Company's reader products utilizes components,
equipment and processes generally available from outside electronics firms. Two
outside vendors located in Minnesota have assembled products in the past. The
Company has firm quotations from several manufacturers which it believes have
the ability to perform assembly of its reader products, as appropriate, to meet
pre-production and assembly requirements for the OEM licensees. The Company will
provide these quotations and product specifications to its OEM licensees but
does not intend to produce or assemble hardware reader product in the future.
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
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Biometrics 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 Company owns the Vector Segment
Technology. None of the Company's technologies are subject to any patent,
however, the Company has filed a patent application relating to both the Optic
Technology and Biometrics Solution components of its technology, no patents have
yet been issued or indicated as allowable. The Company is also filing a patent
with respect to the Vector Segment Technology. There can be no assurances given
that any patents will ever be issued, or that, if issued, the Company will have
the resources to protect any such issued patent infringement. 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.
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. Under the current agreement, 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 Biometrics 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 Biometrics
Solution; (iii) 48% to the Company without restrictions; and (iv) 32% to Jasper
without restriction. The letter of intent between the parties contemplates the
elimination of the forgoing, for each company to utilize its own technology and
for the licensure by each party of its technology to the other party.
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
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, 1998 and 1999, the Company spent
approximately $1,570,000 and $227,000, respectively on research and development.
The Company's limited customer base did not directly bear these costs,
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which were principally funded through, outside sources of equity and debt
financing. During 2000, the Company's research and development effort will be
focused on the continued evolution of its Web based authentication solution.
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any
government agency, other than regulations generally applicable to businesses.
However, in the event of any international sales or overseas manufacturing, 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 AND CONSULTANTS.
The Company currently employs six individuals on a full-time basis;
four are primarily involved in engineering, research and development and two are
involved in administrative and finance matters. The Company also utilizes three
consultants who provide marketing, engineering and executive management services
to the Company.
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. From inception through December 31, 1999, the
Company has had accumulated losses of $12,925,228 and negative cash flow from
operations of $10,266,575. As of December 31, 1999, the Company reported
negative working capital of ($742,729) and a negative net worth of ($1,683,862.)
In order to generate any meaningful revenue, the Company must complete its
evolution from a development to a marketing company. This will require the
retention of additional executive management and other personnel as well as
additional investment in its marketing efforts. Since there can be no assurance
the Company will be able to secure these necessary human and capital resources,
there can be no assurance that it will be able to generate any significant
revenues from the OEM licensing of its technologies, and the Company anticipates
net losses will continue.
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 its current working capital to support the Company's operations
beyond the short-term and
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is in need of substantial additional capital to fund operations beyond the
short-term. As a result, the Company's independent auditors have included an
explanatory paragraph in their opinion for the year ended December 31, 1999 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 OEM licensing of its technologies and its ability to obtain
additional financing, among other matters, as to which there can be no
assurances.
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. The Company's current cash resources will not be sufficient to fund the
Company beyond the short-term. Accordingly, the Company is currently seeking to
obtain additional financing through the issuance of additional debt or equity
securities on a negotiated private placement basis to institutional and
accredited investors. 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 on terms acceptable to
the Company if at all. 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. Given the number of
shares of Common Stock reserved for issuance upon the conversion or exercise of
outstanding options, warrants, debentures and convertible preferred stock, the
Company will likely need to increase the number of shares of Common Stock it is
authorized to issue in order to raise the financing necessary to sustain
operations beyond the short term. This will require stockholder approval which
in turn requires the calling of a meeting and solicitation of proxies. This may
result in a delay in obtaining such financing.
PRODUCT DEFECTS. In the event the Company develops new products or
software, 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
markets its products principally through licensing agreements with OEMs and
private labelers, 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 its products and no effective distribution
channels have been developed. While the Company has plans for developing a
significant marketing effort consistent with the state and ability of its
technology, there can be no assurance that the Company will have the resources
to successfully achieve any meaningful sales of its products or technologies.
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 and private labelers are
able to effectively integrate and market reliable and affordable 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 and private labelers
that any of the Company's current development sales and marketing activities and
strategies will prove effective or that there will ever be sufficient demand for
the Company's products or technology to create a market large enough to produce
any meaningful revenue or earnings for the Company. 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 technology.
CHANGES IN TECHNOLOGY. The Internet, 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
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Company, may independently develop technologies similar or superior to those
utilized by the Company 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.
NEED TO RETAIN ADDITIONAL EXECUTIVE MANAGEMENT AND ENGINEERING
PERSONNEL. The Company intends to increase its sales and marketing efforts and
complete the technological development of its Web based authentication
initiative during 2000 which will require the retention of additional executive
management and engineering personnel. The Company's future success will depend
upon its ability to attract, retain and motivate such persons. The market for
such persons is highly competitive and there can be no assurance that the
Company will be able to recruit the qualified persons necessary to accomplish
the forgoing objectives.
DEPENDENCE UPON NEW AND UNCERTAIN MARKETS; UNCERTAINTY OF BUSINESS
PLAN. The Company's business model, particularly the Web authentication
initiative, represents a novel approach to Internet security, and as of the date
of this Report has not been adopted by any Internet company. There can be no
assurance that there will be a demand for such a solution, that the Company will
have the financial, marketing or human resources required to successfully
develop and market such a software solution or that any potential market will be
large enough to provide any meaningful revenue or earnings for the Company.
DEPENDENCE ON SUCCESS OF OEMS AND PRIVATE LABELERS. The Company will be
dependent upon its OEM licensees and private labelers who generate sales of
products which incorporate the Company's technologies. The 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 biometrics technology or generate any meaningful revenues for the
Company.
IMPACT OF "PENNY STOCK RULES" ON LIQUIDITY OF COMMON STOCK. The
Company's Common Stock currently trades on the OTC Bulletin Board which
provides for limited liquidity. Since the Company's Common Stock continues to
trade below $5.00, it continues to 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, none of which are applicable to
the Company. These 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. The presence of these regulations has
the effect of limiting the
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trading activity of the Company's Common Stock and reducing the liquidity of an
investment in the Company's Common Stock.
POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS, WARRANTS, CONVERTIBLE
DEBENTURE AND PREFERRED STOCK; REGISTRATION RIGHTS. As of the date of this
Report, there are currently 2,393,873 shares of Common Stock reserved for
issuance upon exercise of outstanding stock options and warrants, an additional
1,301,127 shares are reserved for issuance upon the exercise of options
available for future grant under the Company's 1996 and 1999 Stock Option Plans,
approximately 2,300,000 shares reserved for issuance upon conversion of an
outstanding convertible debenture and approximately 4,100,000 shares reserved
for issuance upon the conversion of outstanding shares of Series A Convertible
Preferred Stock. The Company has filed a registration statement to register the
public resale of 538,502 shares of Common Stock underlying vested options and
warrants and the shares issuable upon conversion of an outstanding convertible
debenture. The Company has agreed to register the resale of the shares of Common
Stock upon conversion or exercise of additional shares of Series A Preferred
Stock and warrants issued in connection therewith. The exercise or conversion of
the foregoing securities will result in a significant increase in the number of
outstanding shares and have a dilutive effect on the Company's shareholders. The
registration rights described above will result in a significant increase in the
number of shares available for sale into the public marketplace which may have a
negative impact on the trading price of the Company's Common Stock.
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 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.
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CONTROL BY EXISTING MANAGEMENT. The Company's directors and officers
own approximately 30% of the Company's outstanding Common Stock. Accordingly,
they are currently and for the foreseeable future will be able 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, financial condition, announcements of innovations or new
products by the Company or its competitors, general conditions in the biometrics
and access control industries, and other events or factors. Although
approximately 13 registered broker dealers currently make a market in the
Company's Common Stock, no assurance can be 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. 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.
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 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.
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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 6,822 square feet of
space at 1285 Corporate Center Drive, Suite No. 175, Eagan, Minnesota 55121
under a five-year lease, which terminates on August 31, 2004 and currently
provides for monthly rent of $4,553 which increases ratably over the term of the
lease to $5,349. The Company's engineering, research and development are
conducted out of this office. The Company also leases approximately 750 square
feet of space at 8250 W. Charleston Boulevard, Suite #120, Las Vegas, Nevada
89117 under a one-year lease, which terminates on March 31, 2001 and provides
for monthly rent of $1,122. The Company's corporate finance and marketing
technical support activities are conducted out of this office which also serves
as a showroom facility. The Company believes that its current facilities are
adequate for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Other than as set forth below, the Company is not a party to any
material litigation.
On or about November 3, 1999, Keyware Technologies, Inc. filed a breach
of contract lawsuit against the Company in the Middlesex County, Massachusetts
Superior Court arising out of a November 26, 1997 strategic alliance agreement.
Keyware is seeking damages of $100,000. The Company has answered the complaint
and asserted a cross-claim against Keyware for breach of contract seeking
damages in excess of $50,000. Discovery is proceeding and the Company continues
to aggressively defend this matter and prosecute its counter-claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is eligible for quotation on the OTC
Bulletin Board under the symbol "SACM".
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, 1998 and 1999 as reported (i) by the NASDAQ SmallCap Market with
respect to 1998, the quarter ended March 31, 1999; (ii) by the OTC Bulletin
Board with respect to the quarters ended September 30 and December 31, 1999; and
(iii) with respect to the quarter ended June 30, 1999, as reported by the NASDAQ
SmallCap Market through May 24, 1999 and the OTC Bulletin Board for the balance
of the quarter. Such quotations represent inter-dealer prices, without retail
mark-up, markdown or commission, and may not represent actual transactions.
1999: HIGH LOW
---- ---
Quarter ended March 31, 1999 3 1/8 1 1/4
Quarter ended June 30, 1999 2 11/16 1 1/8
Quarter ended September 30, 1999 1 21/64 38/64
Quarter ended December 31, 1999 1 9/16 1/2
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
As of April 5, 2000 the number of stockholders of record of the
Company's Common Stock was 118. Based on broker inquiry conducted in connection
with the Company's distribution of proxy solicitation materials in connection
with Company's scheduled Annual Meeting of Stockholders in 1999, management
believes that there are approximately 1,675 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.
RECENT SALE OF UNREGISTERED SECURITIES.
1. On March 17, 2000, the Company issued 6,750 shares of its Series A
9% Convertible Preferred Stock and a warrant to purchase 67,500 shares of Common
Stock to the Shaar Fund, Ltd., raising gross proceeds of $450,000. These
securities were issued to one (1) accredited investor in a private placement
transaction exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof directly by the Company
without payment of underwriting discounts or commissions to any person.
The Preferred shares are immediately convertible into shares of common
stock at a conversion price equal to the lesser of (a) 110% of the closing bid
price of the Company's common stock on July 8, 1999 or (b) a 22% discount to the
average closing bid prices of the
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Company's common stock during the five trading days period prior to conversion.
The warrants have a five-year term, and are immediately exercisable at
an exercise price equal to 110% of the average closing bid prices of the
Company's Common Stock during the five trading days prior to the issuance of the
Warrant.
2. On each of December, January, February and March 15 the Company
issued options to purchase 40,000 shares of Common Stock at exercise prices of
$.50, $.6875, $.8125 and $1.0625, respectively to Bruce Nordin, an executive
management consultant to the Company. The options were issued in a private
placement transaction exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder without
payment of underwriting discounts or commissions to any person.
In connection with this financing, the Company granted the Shaar Fund a
right of first refusal to participate in all or any part of future sales of
common stock for a one (1) year period.
The Company also agreed to file a registration statement with the SEC
covering the resale of the shares of common stock issuable upon conversion of
the preferred shares or the exercise of the warrants by no later than on or
about June 1, 2000, and to cause such registration statement to be declared
effective by no later than on or about August 14, 2000. If the Company files the
registration statement and causes it to be declared effective within the time
frame above, any penalties relating to the July 9, 1999 private placement of
preferred shares and warrants to the Shaar Fund accrued as a result of the
Company's failure to file a registration statement will be waived.
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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,
----------------------- --------------------
1997 1998 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA
Revenues .................................. $ 464,168 $ 384,580 $ 157,970 $ 1,391,775
Costs and other expenses
Cost of sales, support and other
services ......................... 390,243 1,054,548 452,593 1,974,212
Selling, general and administrative ... 2,297,148 3,314,701 2,151,466 8,259,802
Research, development and engineering . 563,045 1,570,033 856,692 3,721,948
------------ ------------ ------------ ------------
3,250,436 5,939,282 3,460,751 13,955,962
------------ ------------ ------------ ------------
Operating loss ................... (2,786,268) (5,554,702) (3,302,781) (12,564,187)
Other income (expense), net ............... 192,454 (396,600) (125,576) (361,041)
------------ ------------ ------------ ------------
NET LOSS .................................. $ (2,593,814) $ (5,951,302) $ (3,428,357) $(12,925,228)
------------ ------------ ------------ ------------
NET LOSS .................................. $ (2,593,814) $ (5,951,302) $ (3,428,357) $(12,925,228)
============ ============ ============ ============
Series A 9% convertible preferred
Stock dividend and accretion ........ -- -- (341,600) (341,600)
------------ ------------ ------------ ------------
Loss applicable to common shareholders $ (2,593,814) $ (5,951,302) $ (3,769,957) $(13,266,828)
============ ============ ============ ============
Basic and diluted net loss per share
Net loss .............................. $ (.37) $ (.79) $ (.41) $ (2.21)
Series A 9% convertible preferred
Stock dividend and accretion ........ -- -- (.04) (.06)
------------ ------------ ------------ ------------
Net loss applicable to common
Stockholders ............................ $ (.37) $ (.79) $ (.45) $ (2.27)
============ ============ ============ ============
Weighted average number of shares
outstanding (basic and dilutive) ...... 7,047,190 7,494,647 8,308,093 5,846,078
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATE
Working capital (deficit).......... $3,460,199 $(1,075,778) $ (742,729)
Total assets....................... 4,165,694 2,159,644 360,724
Stockholders' equity (deficit)..... 3,641,694 (556,614) (1,683,862)
</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.
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<PAGE>
OVERVIEW
Historically, the Company's goal was to develop automated fingerprint
identification products which were portable, easily integrated with existing
applications and affordable for mass commercialization and distribution through
OEMs, distributors and to a lesser degree, system integrators in the computer
network, general access control and other markets. This included the development
of the SACcat and sixth generation IDME readers. During the last two fiscal
years, the evolution of the Company's technology has allowed it to shift its
focus from product development to the licensing of its core technology to OEMs
for integration into their product offerings. In recent months, recognizing the
exponential growth in electronic commerce and related security concerns, the
Company has been actively positioning its technology for the licensing of a Web
based biometric authentication software solution to e-commerce and Web Based
transaction companies. This integrated solution will involve the sale of readers
and the licensure of client and server based software to provide for reliable
and cost effective user authentication in connection with the processing of
e-commerce transactions. This solution is also intended to be available to
secure e-commerce and other general purpose Web site applications. Successful
execution of this model will require the development of enhanced software to
provide an effective interface between client and server-based software. The
Company's business model going forward is intended to, and will likely utilize a
combination of the foregoing.
Although the Company has completed the development of its technology
and readers, neither has gained any meaningful commercial acceptance and the
Company has only generated minimal revenue since inception. The Company's
business model, particularly the Web authentication initiative, represents a
novel approach to Internet security and as of the date of this Report has not
been adopted by any Internet company and there can be no assurance that there
will be a demand for such a solution or that the Company will have the
financial, marketing or human resources necessary to successfully develop and
market such a software solution.
The Company believes its existing cash will only last until the end of
the second quarter of 2000. Due to these and other uncertainties the Company's
independent auditors have included an explanatory paragraph in their opinion for
the year ended December 31, 1999 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998:
Revenues
Total revenues decreased $226,619 during 1999 to $157,970 as compared
to $384,589 for 1998. The Company believes revenues for the first quarter ending
March 31, 2000 will be less
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<PAGE>
than those of the first quarter of the prior year. The decrease was primarily
due to a sale in 1998 or a $244,979 sale of SACcat units to ATM, a distributor
of the Company, without a comparable transaction in 1999, and to a lessor extent
the sale of SACcat units sold in 1999 consisted primarily of sales under
licensing agreements that were signed during the first quarter of 1999.
Costs and Other Expenses
Costs of product sales exceeded revenues from product sales by $294,623
during the year ended December 31,1999 as compared to $685,833 in 1998. This was
principally due to a $283,515 write-down of inventory to estimated net
realizable value in 1999 as compared to 600,000 in 1998. 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 continues to explore means to reduce its current product
cost. 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.
Selling, general and administrative expenses decreased $1,163,235 to
$2,151,466 during the ended December 31, 1999 as compared to $3,314,701 in 1998.
Of the year decreases, $88,900 related to a one time charge in 1998 for cost
associated with the severance agreement for the Vice President of Business
development, $397,634 related to a decrease in salaries for selling and
administrative personnel; $556,150 related to non-cash charges incurred in 1998
related to estimated fair market value of warrants granted to ATM as part of a
sales distribution agreement, 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 for the Company without a
comparable transaction in 1999; $72,599 related to the reduction in investor and
public relations expenses; and $56,264 related to promotional products given
away to potential customers in 1998 without a comparable transaction in 1999.
These amounts were off set by a $66,000 payment in settlement of a wrongful
termination lawsuit; $132,500 was penalty that was accrued for the late filing
of the registration statement on the Convertible Preferred Stock transaction if
the Company files a Registration Statement and it is effective within the time
frame stated in the documents, then these penalties will be abated. $48,600 was
non-cash charges associated with the fair market value of warrants issued to two
consultants of the Company; $122,369 in professional fees which were primarily
due to additional costs associated with the filing of the registration statement
and increasing in financing activities.
Research, development and engineering expenses decreased $713,341 to
$856,692 during the year ended December 31, 1999 as compared to $1,570,033 in
1998. Of the decrease, $200,000 was a non-cash charge for the estimated fair
market value of an option granted to an entity in 1998 with which the Company
entered into a licensing agreement; $719,018 related to licensing and
integration costs associated with technologies the Company planned to
incorporate into its SACCat(TM) product. The Company has decided not to pursue
any further integration of these technologies. These amounts were offset by
increases of $73,428 relating to the expensing of previously capitalized copies
of software and $133,487 primarily due to rent and depreciation cost allocated
in 1999.
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<PAGE>
Interest and other income increased $108,745 to $208,621 during the
year ended December 31, 1999 compared to $99,876 in 1998. Of the increase
$190,000 was proceeds from the sale of common shares of Inter-con P/C offset by
a decrease in interest income in 1999.
Interest expense decreased $162,279 to $334,197 during the year ended
December 31, 1999 as compared to $496,476 in 1998. Of the decrease $276,128 was
due to the amortization of the non-cash charge for the intrinsic value of the
beneficial conversion feature of the convertible debentures. Of the increase,
$86,554 related to amortization of the fair market value of the warrants that
were issued to the Fund; and $26,430 was interest accrued on the convertible
debenture.
Net Operating Loss Carryforwards
As of December 31, 1999, the Company has net operating loss
carryforwards of approximately $12,450,000. 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, 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.
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
22
<PAGE>
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 Tuschner Company, Inc. company's primary market maker are principal
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.
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 components. 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 of 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
23
<PAGE>
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 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during 1999 was $2,200,030 and
was principally due to operating losses. The operating losses were primarily
funded by cash on hand at December 31, 1998 and proceeds received from a
$1,325,000 private offering of a convertible debenture and detachable warrants.
Net cash provided by investing activities during 1999 was $178,527 and
was principle due to the sale of the Company's interest in Inter-con P/C. Net
cash provided by financing activities during 1999 was $1,059,039 and was
principally from proceeds received from the issuance of Preferred Stock and
detachable warrants and a note payable from the Shaar Fund.
Working capital increased $333,049 during the year ended December 31,
1999 to a deficit of ($742,729), as compared to ($1,075,778) as of December 31,
1998. This increase is principally due to the reclassification of the
Convertible Debenture to long term and the conversion of $1,342,000 of the
Convertible Debenture and a sale of Preferred Stock.
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 warrants to purchase 50,000 shares of common stock
which were converted to Common Stock
24
<PAGE>
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; (iv) a June 1998 $2,500,000 private offering of
a convertible debenture and detachable warrants; (v) a July 1999 $875,000
private offering of shares of the Series A convertible Preferred Stock and
detachable warrants; and (vi) a March 2000 $450,000 private offering of shares
of the Series A convertible Preferred Stock 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"). 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 of 22%. The Convertible Debenture is
redeemable at the option of the Company under certain circumstances. Interest is
payable quarterly in arrears, and at the option of the Company, is payable
in-kind through the issuance of additional shares of the Company's Common Stock
at the conversion price. As of the date of this Report, $1,642,000 principal
amount of Convertible Debentures have been converted into an aggregate of
2,015,023 shares of Common Stock. 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.
On July 9, 1999 the Company completed a private placement of $13,125
shares of its Series A Convertible Preferred Stock and 5-year warrants to
purchase 131,250 shares of Common Stock exercisable at $1.196 per share to The
Shaar Fund Ltd. The Company realized net proceeds of $200,539 from the sale of
these securities. On March 17, 2000 the Company completed a private placement of
6,750 of its Series A Convertible Preferred Stock and 5-year warrants to
purchase 67,500 shares of common stock with the Shaar Fund, Ltd. The Company
realized net proceeds of $150,000 after giving effect to the repayment of
$250,000 of notes payable to the Shaar Fund.
The preferred shares provide for a 9% dividend payable semi-annually in
arrears. At the option of the Company, the dividends are payable in kind through
the issuance of additional shares of Company common stock. The preferred shares
are immediately convertible into shares of common stock at a conversion price
equal to the lesser of (a) 110% of the closing bid of the Company's common stock
on July 8, 1999 or (b) a 22% discount to the average closing bid prices of the
Company's common stock during the five trading day period prior to conversion.
The preferred shares are redeemable, in whole or in part, at the option of the
Company at 100% of face value ($100 per share). The Company is obligated to file
a registration statement with the Securities and Exchange Commission covering
the resale of the shares of common stock issuable upon conversion of the
preferred shares or exercise of the warrants.
On March 31, 2000, the Company obtained a bridge loan from the Fund in
the amount of $300,000. The loan bears interest at a rate of 10% per annum and
is due on the earlier of June 30, 2000 or the Company completing a private
equity financing resulting in gross proceeds to the Company of at least
$1,250,000.
As of the date of this Report the Company has minimal cash resources
and is in need of substantial additional capital to maintain operations beyond
the mid second quarter of 2000. Management is seeking to obtain 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.
25
<PAGE>
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. Management believes it will need $1,000,000 to $2,000,000
to support its operations through 2000.
IMPACT OF INFLATION
The effects of inflation on the Company's operations were not
significant during the periods presented.
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 is 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 that 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:
26
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS
The following financial statements of SAC Technologies, Inc. are included herein
at the indicated page numbers:
Page No.
--------
Report of Independent Certified Public Accountants F-1
Balance Sheets at December 31, 1998 and 1999 F-2
Statements of Operations - Years ended December 31, 1997, 1998 and 1999,
and January 7, 1993 (date of inception) through December 31, 1999 F-3
Statement of Stockholders' Equity (Deficit) - Years ended December 31,
1997, 1998 and 1999, and January 7, 1993 (date of inception)
through December 31, 1999 F-4
Statements of Cash Flows - Years ended December 31, 1997, 1998 and 1999,
and January 7, 1993 (date of inception) through December 31, 1999 F-5
Notes to the Financial Statements - December 31, 1997, 1998 and 1999 F-6
27
<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, 1998 and 1999
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1999,
and the period January 7, 1993 (date of inception) through December 31, 1999.
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 statement 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, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, and the
period January 7, 1993 (date of inception) through December 31, 1999 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, the Company has suffered recurring losses
from operations, and the Company has deficits in working capital and
stockholders' equity (deficit). These aforementioned issues, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
this uncertainty. Management's plans in regard to these matters are also
discussed in Note A.
/s/ Divine, Scherzer & Brody, Ltd.
Minneapolis, Minnesota
March 21, 2000 (except for notes K and N, as to which
the dates are April 6 and April 9, 2000, respectively)
F-1
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS (Note A)
<TABLE>
<CAPTION>
ASSETS
December 31,
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (notes A2 and B) $ 1,063,616 $ 101,152
Accounts receivable, less allowance for doubtful receivables of
$158,000 and $62,500, respectively (notes B and K) 44,702 13,331
Inventories (note A3) 410,287 32,500
Prepaid expenses 121,875 43,120
------------ ------------
Total current assets 1,640,480 190,103
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST, less
accumulated depreciation (notes A4 and C) 135,469 79,257
OTHER ASSETS (notes A4, A5 and D) 383,695 91,364
------------ ------------
$ 2,159,644 $ 360,724
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
10% note payable (note N) $ -- $ 150,000
Convertible debentures, less discount of $291,024 and $0,
respectively (note F) 2,208,976 --
Accounts payable (note K) 280,879 341,035
Accrued liabilities (note E) 226,403 441,797
------------ ------------
Total current liabilities 2,716,258 932,832
CONVERTIBLE DEBENTURES, less discount of $0 and $46,246
respectively (note F) -- 1,111,754
COMMITMENTS AND CONTINGENCIES (notes G, H and K) -- --
STOCKHOLDERS' EQUITY (DEFICIT) (notes H, K and N)
Preferred stock - authorized, 5,000,000 shares of $.01 par value;
50,000 designated as Series A 9% Convertible (liquidation
preference of $100 per share); issued and outstanding, 0 and
13,125 shares, respectively -- 131
Common stock - authorized, 20,000,000 shares of $.01 par value;
issued and outstanding, 7,510,867 and 9,106,257 shares,
respectively 75,109 91,063
Additional contributed capital 8,960,135 11,473,269
Deficit accumulated during the development stage (9,534,968) (13,248,325)
Unearned compensation (note A4) (56,890) --
------------ ------------
(556,614) (1,683,862)
------------ ------------
$ 2,159,644 $ 360,724
============ ============
</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 31,
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues (notes A1, B, D and K)
Product sales $ 152,784 $ 366,630 $ 57,970 $ 577,384
License fees -- -- 100,000 100,000
Reimbursed research and development 36,000 10,200 -- 284,506
Technical support and other services 275,384 7,750 -- 429,885
------------ ------------ ------------ ------------
464,168 384,580 157,970 1,391,775
Costs and other expenses (note K)
Cost of product sales (note A11) 231,839 1,052,463 452,593 1,736,895
Cost of technical support and other
services 158,404 2,085 -- 237,317
Selling, general and administrative 2,297,148 3,314,701 2,151,466 8,259,802
Research, development and engineering
(notes A7 and D) 563,045 1,570,033 856,692 3,721,948
------------ ------------ ------------ ------------
3,250,436 5,939,282 3,460,751 13,955,962
------------ ------------ ------------ ------------
Operating loss (2,786,268) (5,554,702) (3,302,781) (12,564,187)
Other income (expense)
Interest and other income (note D) 196,351 99,876 208,621 509,136
Interest expense (3,897) (496,476) (334,197) (870,177)
------------ ------------ ------------ ------------
192,454 (396,600) (125,576) (361,041)
------------ ------------ ------------ ------------
NET LOSS (note J) $ (2,593,814) $ (5,951,302) $ (3,428,357) $(12,925,228)
============ ============ ============ ============
Net loss $ (2,593,814) $ (5,951,302) $ (3,428,357) $(12,925,228)
Series A 9% convertible preferred stock
dividend and accretion (note H) -- -- (341,600) (341,600)
------------ ------------ ------------ ------------
Loss applicable to common stockholders $ (2,593,814) $ (5,951,302) $ (3,769,957) $(13,266,828)
============ ============ ============ ============
Basic and diluted net loss per share
Net loss $ (.37) $ (.79) $ (.41) $ (2.21)
Series A 9% convertible preferred
stock dividend and accretion -- -- (.04) (.06)
------------ ------------ ------------ ------------
Net loss applicable to common
stockholders $ (.37) $ (.79) $ (.45) $ (2.27)
============ ============ ============ ============
Weighted average number of shares used
(note A8) 7,047,190 7,494,647 8,308,093 5,846,078
============ ============ ============ ============
</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>
Series A 9% Convertible
Preferred Stock Common Stock
------------------------- ---------------------------
Shares Amount Shares Amount
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales of common stock January 7, 1993 -- $ -- 3,150,000 $ 31,500
Sale of common stock January 7, 1993 at $.02 per share -- -- 1,350,000 13,500
Contribution of services -- -- -- --
Redemption of director and officers common stock August 4, 1995
at $0 per share -- -- (270,000) (2,700)
Sale of common stock August 4, 1995 through December 22, 1995 at
$.17 through $.24 per share -- -- 1,237,500 12,376
Redemption of common stock August 4, 1995 through December 22,
1995 at $.22 through $.24 per share -- -- (1,350,000) (13,500)
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 period from January 7, 1993 (date of inception)
through 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 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 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 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 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
Sale of stock warrants during September 1999 to purchase 320,000
shares of common stock at $.84 - $1.00 per share -- -- -- --
Unearned compensation amortization -- -- -- --
Unearned compensation reversal related to employee termination -- -- -- --
Exercise of stock options -- -- 26,000 260
Compensation element of stock option vesting to consultants -- -- -- --
Issuance of preferred stock during July 1999 13,125 131 -- --
Accretion of preferred stock beneficial conversion feature -- -- -- --
Conversion of debentures (note F) -- -- 15,869,390 15,694
Net loss for the year ended December 31, 1999 -- -- -- --
----------- ------------ ------------ ------------
Balance as of December 31, 1999 13,125 $ 131 9,106,257 $ 91,063
=========== ============ ============ ============
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Deficit
accumulated
Additional during the
contributed development Unearned
capital stage compensation Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales of common stock January 7, 1993 $ (22,750) $ (8,747) $ -- $ 3
Sale of common stock January 7, 1993 at $.02 per share 11,500 -- -- 25,000
Contribution of services 11,250 -- -- 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 through December 22, 1995 at
$.17 through $.24 per share 262,624 -- -- 275,000
Redemption of common stock August 4, 1995 through December 22,
1995 at $.22 through $.24 per share (265,324) (29,350) -- (308,174)
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 -- -- 25,000
Sales of common stock during June and July, 1996 at $1.00 per
share, less offering costs of $124,663 566,515 -- -- 573,497
Conversion of bridge notes plus accrued interest of $1,841 to
common stock on June 28, 1996 at $1.00 per share 178,990 -- -- 181,008
Compensation 125,000 -- (125,000) --
Unearned compensation amortized (note A4) -- -- 13,000 13,000
Net loss for the period from January 7, 1993 (date of inception)
through December 31, 1996 -- (951,755) -- (951,755)
------------ ------------ ------------ ------------
Balance as of December 31, 1996 895,505 (989,852) (112,000) (156,171)
Accrued interest contributed to capital by officer 10,960 -- -- 10,960
Unearned compensation grant 225,400 -- (225,400) --
Unearned compensation amortization -- -- 62,254 62,254
Unearned compensation reversal related to employee terminations (184,191) -- 184,191 --
Exercise of stock options 70,384 -- -- 70,622
Sales of common stock in February and March 1997 at $3.00 per
share, less offering costs of $1,039,668 6,196,132 -- -- 6,220,332
Issuance of warrants on March 24, 1997 to purchase 25,000 shares
of common stock at $3.00 per share 27,500 -- -- 27,500
Net loss for the year ended December 31, 1997 -- (2,593,814) -- (2,593,814)
------------ ------------ ------------ ------------
Balance as of December 31, 1997 7,241,690 (3,583,666) (90,955) 3,641,683
Unearned compensation grant 58,520 -- (58,520) --
Unearned compensation amortization -- -- 92,585 92,585
Exercise of stock options and warrants 112,775 -- -- 113,270
Issuance of stock options on April 13, 1998 to purchase 100,000
shares of common stock at $8.46 per share 352,650 -- -- 352,650
Fair market value of conversion feature on debenture issued
June 30, 1998 (note F) 525,000 -- -- 525,000
Issuance of warrants on June 30, 1998 to purchase 350,000 shares
of common stock at $7.29 and $7.50 per share (note F) 432,000 -- -- 432,000
Issuance of stock options on April 1, 1998 and September 15,
1998 to purchase 423,000 shares of common stock at $3.00 to
$6.42 per share 237,500 -- -- 237,500
Net loss for the year ended December 31, 1998 -- (5,951,302) -- (5,951,302)
------------ ------------ ------------ ------------
Balance as of December 31, 1998 8,960,135 (9,534,968) (56,890) (556,614)
Sale of stock warrants during September 1999 to purchase 320,000
shares of common stock at $.84 - $1.00 per share 80,000 -- -- 80,000
Unearned compensation amortization -- -- 13,970 13,970
Unearned compensation reversal related to employee termination (42,920) -- 42,920 --
Exercise of stock options 28,240 28,500
Compensation element of stock option vesting to consultants 36,100 -- -- 36,100
Issuance of preferred stock during July 1999 800,408 -- -- 800,539
Accretion of preferred stock beneficial conversion feature 285,000 (285,000) -- --
Conversion of debentures (note F) 1,326,306 -- -- 1,342,000
Net loss for the year ended December 31, 1999 -- (3,428,357) -- (3,428,357)
------------ ------------ ------------ ------------
Balance as of December 31, 1999 $ 11,473,269 $(13,248,325) $ -- $ (1,683,862)
============ ============ ============ ============
</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,
1997 1998 1999 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (2,593,814) $ (5,951,302) $ (3,428,357) $(12,925,228)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation (note A4) 41,370 59,901 58,650 163,656
Amortization (note A4)
Unearned compensation 62,254 92,585 13,970 181,809
Deferred financing costs (note F) -- 80,400 288,543 373,110
The intrinsic value of the beneficial conversion
feature of the convertible debenture (note F) -- 400,376 124,624 525,000
Allowance for doubtful receivables 99,000 59,000 (158,000) --
Write-down of inventory (note A11) -- 600,000 283,515 883,515
Write-down of deferred financing costs -- -- 132,977 132,977
Gain on sale of Inter-Con/PC, Inc. stock (notes A5 and D) -- -- (190,000) (190,000)
Revenues realized due to offset of billings against a
stock repurchase -- -- -- (170,174)
Acquired research and development (note K) -- -- -- 117,000
Options and warrants issued for services and other 27,500 722,150 36,100 785,750
Other 21,593 -- -- 34,684
Change in assets and liabilities:
Accounts receivable (155,770) (46,932) 189,371 (13,331)
Inventories (358,698) (545,360) 94,272 (916,015)
Prepaid expenses (100,273) (11,115) 78,755 (43,120)
Accounts payable 69,434 (7,809) 60,156 341,035
Accrued liabilities 234,103 (8,920) 215,394 452,757
------------ ------------ ------------ ------------
(59,487) 1,394,276 1,228,327 2,658,653
------------ ------------ ------------ ------------
Net cash used in operating activities (2,653,301) (4,557,026) (2,200,030) (10,266,575)
Cash flows from investing activities
Capital expenditures (163,400) (31,404) (2,438) (242,913)
Security deposits (8,101) -- (9,035) (22,019)
Proceeds from sale of Inter-Con/PC, Inc. stock -- -- 190,000 190,000
Patents and trademarks -- -- -- (4,534)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (171,501) (31,404) 178,527 (79,466)
Cash flows from financing activities
Net borrowings under short-term borrowing agreements (330,000) -- 150,000 33,000
Issuance of convertible bridge notes -- -- -- 175,000
Issuance of convertible debentures -- 1,775,000 -- 1,775,000
Issuance of warrants and convertible debentures discount -- 725,000 134,000 884,000
Deferred financing costs -- (312,977) -- (312,977)
Exercise of stock options and warrants 49,029 113,270 28,500 190,799
Sales of common and preferred stock 6,368,393 -- 746,539 7,840,371
Redemption of common stock -- -- -- (138,000)
------------ ------------ ------------ ------------
Net cash provided by financing activities 6,087,422 2,300,293 1,059,039 10,447,193
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 3,262,620 (2,288,137) (962,464) 101,152
Cash and cash equivalents, beginning of period 89,133 3,351,753 1,063,616 --
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 3,351,753 $ 1,063,616 $ 101,152 $ 101,152
============ ============ ============ ============
</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, 1997, 1998 and 1999
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Background
SAC Technologies, Inc. was incorporated in Minnesota in January 1993.
The Company is a development stage enterprise that conducts its
operations from Minneapolis, Minnesota and Las Vegas, Nevada.
Historically, the Company's goal was to develop automated fingerprint
identification products which were portable, easily integrated with
existing applications and affordable for mass commercialization and
distribution through original equipment manufacturers (OEMs),
distributors and to a lesser degree, system integrators in the computer
network, general access control and other markets.
The Company is evaluating various strategies including a restructuring
which, if completed, would result in material changes to the current
Board of Directors and executive management. The above could result in
a material change in strategic direction and could result in certain
termination costs. It also could have a material effect on the future
financing needs of the Company. No assurance can be given that the
above business plan or restructuring will be completed, or if
completed, successful and not dilutive to stockholders.
Basis of Presentation
Broad commercial acceptance of the Company's technology is critical to
the Company's success and ability to generate revenues. The Company has
had limited revenues to date, principally to affiliates of the Company
(see notes B and K), and has accumulated losses since inception of
$12,925,228, of which $3,428,357 were incurred during 1999. The Company
believes operating losses will continue. As of December 31, 1999 there
was a $742,729 deficit in working capital and a deficit in
stockholders' equity (deficit) of $1,683,862; the Company was past due
in repayment of most accounts payable; it has had to significantly
reduce its workforce; and it was subject to late filing penalties for
not timely filing a registration statement for their July 1999 private
placement of preferred stock (note H). The Company believes its
existing cash will only last through the mid-second quarter of 2000 and
will not be adequate to fund expansion and distribution of any
marketing strategy. The Company has also been delisted from NASDAQ.
Since December 31, 1999, the Company has raised an additional $675,000
from The Shaar Fund, Ltd. (Shaar Fund) the Company's principle
institutional investor, in the form of Series A 9% Convertible
Preferred Stock. After a 33% discount ($225,000), repayment of a
$150,000 note from the Shaar Fund that was outstanding as of December
31, 1999, repayment of an additional $100,000 note from the Shaar Fund
issued subsequent to year-end, and after payment of certain other
costs, the net proceeds received were $150,000 (see note N). The
Company is also in discussions to raise an additional $1.25 million of
equity financing.
F-6
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Basic of Presentation - continued
The Company is in need of substantial additional capital. 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.
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 from software licensing is recognized in accordance with
Statement of Position 97-2, Software Revenue Recognition. Revenue from
software licensing is 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 and collection is considered probable.
Revenue from product sales and services is recognized when a product is
shipped or the services are provided, the sales price is fixed, and
when collection is considered probable.
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.
F-7
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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.
Deferred finance costs are amortized using the straight-line method
over the three year life of the convertible debentures. Any unamortized
amounts at conversion of the convertible debentures are amortized in
proportion to the extent of the convertible debentures converted.
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 forfeiture occurs.
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 as of December 31, 1997 and 1998. This
investment was sold in 1999. See note D for further information.
6. Advertising Expense
The Company expenses the costs of advertising as incurred. Advertising
expenses for the years ended December 31, 1997, 1998, 1999, and the
period January 7, 1993 (date of inception) through December 31, 1999
were $362, $144,672, $63,063 and $208,212, respectively.
F-8
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
Research and development expenditures for the years ended December 31,
1997, 1998, 1999, and the period January 7, 1993 (date of inception)
through December 31, 1999 were approximately $563,000, $1,570,000,
$227,000 and $3,092,000, respectively.
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. 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, warrants and
other convertible instruments 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,
"Accounting 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, 1997, 1998 and 1999
NOTE A - THE COMPANY 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 and $283,515 write-down of inventories to
estimated net realizable value during 1998 and 1999, respectively. It
is reasonably possible that such estimates could materially change in
forthcoming years. Significant estimates were also recorded for the
estimated fair values of the conversion features of a convertible
debenture and preferred stock instrument issued during 1998 and 1999
(see notes F and H), and the estimated fair values of various stock
options and warrants granted (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)
December 31, through
--------------------------------------- December 31,
1997 1998 1999 1999
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Percentage of total revenues during the year
ATM (an affiliate) --% 64% --% 19%
Jasper (an affiliate) 26 14 6 45
Inter-Con/PC (an affiliate) 38 -- -- 16
Company A -- -- 63 7
Outstanding accounts receivable, before
allowances
ATM $ -- $ 37,665 $ -- N/A
Jasper 155,770 135,958 -- N/A
Inter-Con/PC -- -- -- N/A
Company A -- -- 62,500 N/A
</TABLE>
During the years ended December 31, 1997, 1998 and 1999, the Company
recorded provisions for uncollectible accounts of $99,000, $73,125 and
62,500, respectively, related to the above.
The Company maintains its cash balances in a financial institution in
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, 1997, 1998 and 1999
NOTE C - EQUIPMENT AND FURNITURE AND FIXTURES
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Equipment $ 205,118 $ 207,556
Furniture and fixtures 35,357 35,357
---------- ----------
240,475 242,913
Less accumulated depreciation 105,006 163,656
---------- ----------
$ 135,469 $ 79,257
========== ==========
</TABLE>
NOTE D - OTHER ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Security deposits $ 12,984 $ 22,019
Patents pending (note A4) 4,534 4,534
Deferred finance costs, less accumulated amortization of
$46,800 and $215,189, respectively (notes A4 and F) 233,200 64,811
Deferred offering costs 132,977 --
Investment in affiliate (note A5 and see below) -- --
---------- ----------
$ 383,695 $ 91,364
========== ==========
</TABLE>
As previously reported, during October 1996, the Company contributed
certain technology (Technology) to Inter-Con P/C, Inc. (Inter-Con) in
exchange for an initial fifty-percent equity ownership in Inter-Con.
The costs associated with the development of the Technology were
expensed as research and development costs as 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. Therefore, the
investment in Inter-Con was carried at $0. Since October 1996,
Inter-Con has not reported a profit. The Company has continued to carry
the investment in Inter-Con at $0.
During 1999 the Company sold its investment in Inter-Con for $190,000
to a former director of the Company. The resulting $190,000 gain has
been reflected in other income in the statement of operations during
the year ended December 31, 1999 and the period January 7, 1993 (date
of inception) through December 31, 1999.
F-11
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE E - ACCRUED LIABILITIES
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Compensation $ 106,241 $ 136,044
Interest 62,500 151,430
Accrued late filing fees (note H) -- 132,500
Deferred revenues 27,665 --
Other 29,997 21,823
---------- ----------
$ 226,403 $ 441,797
========== ==========
</TABLE>
Included in accrued compensation as of December 31, 1998 and 1999 is
$92,574 and $56,000 relating to severance agreements and termination
costs payable through July 31, 2000.
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. The
debentures are convertible into shares of the Company's common stock at
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
subject to a 22% discount factor (Conversion Price). The convertible
debentures are redeemable at the option of the Company under certain
circumstances. Interest is payable quarterly in arrears, and at the
option of the Company, is payable in kind through the issuance of
additional shares of the Company's common stock at the Conversion
Price.
F-12
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE F - CONVERTIBLE DEBENTURES - CONTINUED
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.
The $525,000 estimated fair value of the debenture conversion feature
has been reflected as a discount to the 5% convertible debentures
issued and was amortized as additional interest expense principally
through February 26, 1999, the date the debenture holder was 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 traded in the marketplace, a 33%
discount was applied to the freely traded value. The Company utilized
an outside independent appraiser to determine the valuation.
In connection with the convertible debentures, the Company also granted
the Shaar Fund, Ltd. a warrant to purchase 100,000 shares of common
stock. 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 vested immediately and the right to 134,000 of such shares
will vest upon the successful completion of a public offering. The
$132,000 estimated fair market value of the portion of the warrant
which vested immediately was 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.
During 1999, the holder of the Debenture converted $1,342,000 of
principal amount into an aggregate of 1,569,390 shares of common stock.
Additionally, during February 2000, $300,000 of principal was converted
into 445,633 shares of common stock.
F-13
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE G - COMMITMENTS AND CONTINGENCIES
Lease Agreements
The Company operates from leased facilities under non-cancelable
operating leases that expire during August 2004 for its Minnesota
location and March 2001 for its Nevada location. The Company pays for
property taxes, maintenance, insurance, and other occupancy expense
applicable to the leased premises.
Minimum rental commitments of non-cancelable operating leases are
approximately as follows:
<TABLE>
<S> <C>
Year ending December 31,
------------------------
2000 $ 54,000
2001 41,000
2002 40,000
2003 42,000
2004 29,000
----------
$ 206,000
==========
Rental expense was as follows:
Year ended December 31,
-----------------------
1997 $ 84,631
1998 80,276
1999 123,810
January 7, 1993 (date of inception) through December 31, 1999 330,382
</TABLE>
License Fees
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 two years of salary. During 1999, one of the
individuals resigned. As of December 31, 1999, the aggregate commitment
for the three remaining individuals approximates $591,000.
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.
F-14
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
Lawsuit
During 1999, a former licensor of technology to the Company filed a
lawsuit in which it seeks $100,000 in damages for breech of contract.
The Company has filed a counter-suit seeking damages in excess of
$50,000. Management intends to vigorously defend itself in this matter
and believes the resolution of this matter will no result in any
significant expense to the Company. The Company is subject to certain
other threatened lawsuits or 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.
Other
During September 1999 the Company entered into a consulting agreement
with a firm for investor relations through September 2001. The
agreement may be terminated with 60 days notice. The agreement provides
for cash compensation of $3,000 per month. In connection with the
agreement, an option for 400,000 shares of common stock, exercisable at
$1.00 per share, was granted. The option vests at 16,670 shares for
each month the contract remains in effect, and it expires August 31,
2002.
Effective November 15, 1999, the Company entered into a consulting
agreement with an individual to provide certain senior management
services. The agreement provides for cash compensation of $15,000 per
month and options to purchase 40,000 shares of common stock per month,
for each month the agreement is in effect. The options are exercisable
at the fair value of common stock at the date of grant for five years.
The option agreement requires the Company to register such options at
the Company's next registration filing, if any.
The consulting contract expired February 14, 2000 and the Company has
been renewing it on a bi-weekly basis. The current contract expires
March 31, 2000. Through December 31, 1999, options to purchase 40,000
shares of common stock have been issued and are exercisable at $.50 per
share, and since year-end, options for 120,000 shares have been issued.
During January 2000, the Company granted an option to purchase 100,000
shares of common stock to a consultant expiring in five years, to
complete a business plan for the Company. The option fully vests and is
exercisable at the stock price on the date of the successful completion
and acceptance of the business plan.
Pursuant to Emerging Issues Task Force (EITF) 96-18, the Company will
record the estimated fair value of the above options as they vest, as
additional compensation to the consultants. During 1999, the Company
reflected $36,100 of compensation expense related to the above options,
due to 89,010 shares of common stock vesting under the options.
F-15
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE H - STOCKHOLDERS' EQUITY
Series A 9% Convertible Preferred Stock
On July 9, 1999, the Company completed a private placement of
$1,312,500 of its Series A 9% Convertible Preferred Stock (Preferred
Stock) and a 5-year warrant to purchase 131,250 shares of Common Stock
exercisable at $1.196 per share with the Shaar Fund, Ltd. The warrants
have piggyback registration rights. The Company received net proceeds
of $700,539 after giving effect to a 33% discount ($437,500) to the
face amount of the preferred stock, and offering costs of $74,461 and
repayment of a $100,000 note to the Shaar Fund, Ltd.
The preferred shares are immediately convertible into shares of common
stock at a conversion price equal to the lesser of (a) $1.196 (110% of
the closing bid price of the Company's common stock on July 8, 1999) or
(b) a 22% discount to the average closing bid prices of the Company's
common stock during the five trading days prior to conversion (the
Conversion Price). The Conversion Price is subject to adjustment in the
event that the Company issues any additional common stock options,
warrants or other convertible securities (including securities in a
stock merger transaction) without consideration, or for consideration
per share less than the effective conversion price in effect on the
date of issuance, as defined.
The preferred shares provide for a 9% cumulative dividend payable
semi-annually on June 15 and December 15. At the option of the Company,
the dividends are payable in cash if an election is made by the Board
of Directors within ten days of the semi-annual dividend dates, else
they are payable in kind through the issuance of additional shares of
the Company's common stock at the Conversion Price. All declared but
unpaid dividends bear interest at 9%. As of December 31, 1999,
cumulative undeclared dividends were $56,600.
The preferred shares are redeemable, in whole or in part, at the option
of the Company at 100% of face value ($100 per share) assuming the
Company has met certain conditions. The holders of the Preferred Stock
have no voting rights. The Company is required to reserve shares of
common stock sufficient to yield two-hundred percent of the number of
shares of common stock issuable upon conversion of the preferred stock
to also cover related dividends and outstanding warrants to the Shaar
Fund, Ltd. (see below). Also, the Company granted the Shaar Fund, Ltd.
a right of first refusal to participate in all or any part of future
sales of common stock on the same terms as offered in such sale.
Additionally, the Company is required to maintain it's eligibility for
quotation and trading on the OTC Electronic Bulletin Board, a national
securities exchange, or the NASDAQ Stock Market, and to file all
required reports with the Securities and Exchange Commission.
The Company was obligated to file a registration statement with the SEC
covering the resale of the shares of common stock issuable upon
conversion of the preferred shares or the exercise of the warrant no
later than September 7, 1999 and have such registration statement
declared effective by December 6, 1999. As of the date of this report
the Company has not filed the registration statement and is subject to
late filing penalties of approximately $132,500 as of December 31,
1999. Such penalties increase by 3% of the outstanding face amount of
the Preferred Stock (approximately $39,000) per month thereafter.
However, the Shaar Fund, Ltd. has waived this event of non-compliance
so long as the Company files a registration statement covering the
above securities and $675,000 of Series A 9% Convertible Preferred
Stock ($675,000 Series A) issued subsequent to year-end (see note N)
within seventy-five days of issuance of the $675,000 Series A with an
effective date no later than one hundred and fifty days after issuance
of the $675,000 Series A. The $132,500 of penalties as of December 31,
1999 have been reflected in selling, general and administrative
expenses for the year ended December 31, 1999. If the Company files a
registration statement and it is effective within the time frame above,
any accrued penalties will be reversed into income upon effective
registration of the above described securities.
F-16
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
Series A 9% Convertible Preferred Stock - Continued
In accordance with ETIF 98-5, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable
Conversions, the Company has determined the embedded beneficial
conversion feature associated with the convertible preferred stock
instrument and the fair market value of the detachable warrant are
$285,000 and $54,000, respectively. The estimated fair market value of
the warrant was calculated by using the Black-Scholes model, which
assumes the warrants are freely traded in the marketplace. Since the
warrants are not freely tradable in the marketplace, a 40% discount was
applied to the freely traded value.
Accordingly, the embedded beneficial conversation feature and the
detachable warrants reduced the assigned value of the preferred stock
to $461,539. However, the $285,000 beneficial conversion feature is
analogous to a dividend to the preferred stockholders and was
recognized as a return to preferred stockholders since the preferred
stock is immediately convertible into common stock. The offset to the
dividend was an increase in the value assigned to the preferred stock
bringing the total value assigned to $746,539.
1996 Stock Option Plan
During May 1996, the Board of Directors and stockholders of the Company
adopted the 1996 Stock Option Plan (the 1996 Plan). Under the Plan,
750,000 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. The Plan terminates in May
2006.
1999 Stock Option Plan
During August 1999, the Board of Directors of the Company adopted the
1999 Stock Option Plan (the 1999 Plan). The plan was not presented to
stockholders for approval and thus incentive stock options are not
available under the plan. Under the Plan, 2,000,000 shares of common
stock may be issued to employees, officers, directors, and consultants
of the Company at exercise prices which may not be below 85% of fair
market value. Pursuant to the Plan, the term of 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 August 2009.
F-17
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
Other 1996 and 1999 Plan Information
Pursuant to the 1996 and 1999 Plans, 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% 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.
Additionally, in the event of a change in control, as defined
(including if incumbent directors, as defined, cease to constitute a
majority of the Board of Directors), all options outstanding vest
immediately and are exercisable for their remaining terms.
Non-Plan Stock Options
From time to time the Company grants options outside of the Plans. As
of December 31, 1999 there were non-plan options outstanding to acquire
1,038,000 shares.
Summary Option Information
The following table summarizes option activity:
<TABLE>
<CAPTION>
Number of shares Weighted
------------------------------------------------------ Range of average
1996 1999 Non- exercise exercise
plan plan Plan Total prices price
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
Granted 300,000 885,548 540,000 1,725,548 .88- 1.00 .92
Exercised (26,000) -- -- (26,000) 1.00- 1.13 1.10
Expired or canceled (278,009) -- -- (278,009) 1.13-10.75 3.74
---------- ---------- ---------- ----------
Balance, December 31, 1999 470,325 885,548 1,038,000 2,393,873 1.73
========== ========== ========== ==========
Available for grant,
December 31, 1999 186,675 1,114,452 -- 1,301,127
========== ========== ========== ==========
</TABLE>
F-18
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
Summary Option Information - Continued
The weighted average fair values of options granted to employees and
directors during the years ended December 31, 1997, 1998 and 1999 were
$6.37, $4.99 and $.84 per share, respectively.
Additional information regarding all options outstanding as of December
31, 1999 follows:
<TABLE>
<CAPTION>
Weighted
Weighted average Weighted
average remaining average
Range of Number of exercise life Number exercise
exercise prices options price (in years) exercisable price
--------------- --------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ .50- 1.13 1,801,548 $ .92 4.83 544,565 $ .91
3.00- 4.44 461,000 3.19 4.28 413,840 3.11
6.42- 8.56 130,200 7.66 5.61 115,200 7.83
10.75 1,125 10.75 .25 1,125 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 and $42,920 of unearned compensation was reversed during 1997
and 1999, respectively, with no resulting impact to the statement of
operations.
During 1997, 1998 and 1999, options for 0, 523,000 and 540,000 shares,
respectively were granted to consultants and strategic partners. The
estimated fair value of the options which vested during each year were
$0, $428,025 and $147,875, 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-19
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
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 31,
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss
As reported $ (2,593,814) $ (5,951,302) $ (3,428,357) $(12,925,228)
Proforma (2,625,814) (6,120,302) (3,760,357) (13,477,228)
Net loss applicable to
common stockholders
As reported (2,593,814) (5,951,302) (3,769,957) (13,266,828)
Proforma (2,625,814) (6,120,302) (4,101,957) (13,818,828)
Basic and diluted net loss per
common share applicable to
common stockholders
As reported (.37) (.79) (.45) (2.27)
Proforma (.37) (.82) (.49) (2.36)
</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>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk free interest rate 6.25% 4.70% 6.30%
Expected life of options (in years) 4.00 4.00 4.00
Expected dividends -- -- --
Volatility of stock price 93% 133% 187%
</TABLE>
The effects of applying SFAS 123 for proforma disclosures for 1997,
1998 and 1999 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-20
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
Warrants
Warrant activity is summarized as follows:
<TABLE>
<CAPTION>
Exercisable at
Price per Expiration December 31,
Outstanding share date 1999
----------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 183,278 $ 1.00-3.00 2001 83,278
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
with financing (see
note F) 150,000 7.29 2003 150,000
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
Granted in connection with
financing (see note H) 131,250 1.20 2004 131,250
Sold to outside investors
(see below) 320,000 .84-1.00 2002 320,000
Expired (92,500) 1.00-3.00 -- --
---------- ----------
Balance, December 31, 1999 998,466 864,466
========== ==========
Exercised through December 31,
1999 7,500
==========
</TABLE>
The Company sold warrants to purchase 320,000 shares of common stock at
$.84 - $1.00 per share for $80,000 to three outside investors. The
warrants contain certain anti-dilution provisions, have piggyback
registration rights and expire the earlier of:
* August 31, 2002, or
* At the Company's option, it may accelerate the expiration date
for all or a portion of the warrants, upon notification to the
holder, once the Company's common stock reaches between $3.00 -
$3.20 per share, as defined.
The estimated fair value of the warrants granted during 1997, 1998 and
1999 (excluding the sales of warrants in 1999) was $27,500, $432,000
and $54,000, respectively.
F-21
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE I - PROFIT SHARING PLAN AND TRUST
During the year ended December 31, 1999, the Company terminated the SAC
Technologies, Inc. 401(k) Profit Sharing Plan and Trust which covered
substantially all of its employees. Participants had entered into
salary reduction agreements with the Company for a portion of their
compensation. The plan authorized the Board of Directors of the Company
to annually authorize contributions, out of earnings and profits. There
were no contributions made by the Company during 1997, 1998 or 1999.
NOTE J - INCOME TAXES
Deferred taxes consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Short-term asset
Allowances for doubtful receivables $ 40,000 $ 62,000 $ 24,000
Accrued compensation 76,000 35,000 51,000
Accrued late filing fees -- -- 51,000
----------- ----------- -----------
116,000 97,000 126,000
Less valuation allowance 116,000 97,000 126,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
Long-term asset
Depreciation and other $ -- $ (4,000) $ 11,000
Accrued interest -- -- 58,000
Revenue recognition 150,000 141,000 --
Income tax credits 20,000 38,000 83,000
Net operating loss carryforwards 1,158,000 3,390,000 4,660,000
----------- ----------- -----------
1,328,000 3,565,000 4,812,000
Less valuation allowance 1,328,000 3,565,000 4,812,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-22
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE J - INCOME TAXES - CONTINUED
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, 1999, the Company has federal net operating loss
carryforwards of approximately $12,447,000 and Minnesota net operating
loss carryforwards of approximately $9,194,000. These operating losses
expire between 2008 and 2019. 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.
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. During March 2000, the
Company and Jasper signed a letter of intent regarding their continued
relationship and clarification of each of the respective party's
technology ownership and access to markets (see below).
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 non-FIDS technologies.
F-23
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE K - RELATED PARTY TRANSACTIONS - CONTINUED
There were no costs incurred pursuant to the development arrangement
with Jasper for the years ended December 31, 1997, 1998 and 1999, and
such costs were $404,118 for the period January 7, 1993 (date of
inception) through December 31, 1999.
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, 1999
no patents were issued, and none can be assured of being
issued).
F-24
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE K - RELATED PARTY TRANSACTIONS - CONTINUED
SUBSEQUENT LETTER OF INTENT
Effective March 9, 2000, the Company and Jasper signed a letter of
intent (LOI). The LOI is subject to the parties entering into a
definitive agreement. The LOI expires April 21, 2000. The more
significant terms of the LOI include:
* The Company and Jasper will cancel all indebtedness between
the two organizations. As of December 31, 1999, there were no
amounts reflected as outstanding in the Company's financial
statements.
* The Company is required to make certain corrections to the
FIDS code and provide assistance to Jasper for up to 100 hours
at no charge. The Company is to deliver the FIDS source code
and related documentation, amongst other documentation.
* The Company maintains its rights to the VST and Jasper
maintains it rights to FIDS and both companies gain access to
all markets. The Company intends to offer Jasper the right to
use VST on a per-node-use royalty basis. Jasper intends to
offer the Company the same regarding FIDS.
* The Company intends to grant Jasper the right to manufacture
SACcat and ID.ME Readers. Additionally, the Company is
required to provide Jasper with all documentation in and to
the manufacture of the SACcat and ID.ME Readers.
* Jasper receives a first right of refusal to purchase SACcat
Readers at $125 per unit for the remainder of 2000.
No assurance can be given that a definitive agreement will ever be
entered into; that the terms as outlined above will not change, that
the Company will outright own VST; that VST will prove to be
significant value added component the Company's technology and product
offerings; or that the ultimate cost to the Company to execute a
definitive agreement will not be prohibitive or dilutive.
ATM
Certain brokers of TCI, the Company's former primary market maker, are
or were 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
included preferential pricing, and commitments by ATM as a distributor
to purchase certain minimum quantities.
F-25
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE K - RELATED PARTY TRANSACTIONS - CONTINUED
ATM - Continued
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 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.
On January 24, 2000, the Company signed a letter of intent to acquire
Aultimate Technology Marketing, Inc. (ATM). The terms of the merger
provided for issuance of 410,428 shares of restricted common stock and
the issuance of up to an additional 389,572 shares of restricted common
stock subject to a one-year earn-out provision. Additionally, if the
merger is completed, the option for 100,000 shares of the Company's
common stock held by ATM, will be cancelled. Closing of the transaction
is subject to several conditions. The target date of completion of the
merger is on or before April 27, 2000. No assurances can be given that
the merger will be completed as outlined in the original letter of
intent or that it will result in significant value to the Company.
Other
<TABLE>
<CAPTION>
January 7,
1993 (date of
inception)
Years ended December 31, through
-------------------------------------- December 31,
1997 1998 1999 1999
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues recognized from (note B):
Jasper $ 211,918 $ 54,350 $ 10,000 $ 629,325
Inter-Con/PC (note D) 177,494 -- -- 209,494
ATM -- 244,979 -- 244,979
Purchase of optics technology from
a stockholder -- -- -- 117,000
Purchase of component parts from IR&D 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
Payment for development services and
other from ATM -- -- 138,653 138,653
</TABLE>
F-26
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE K - RELATED PARTY TRANSACTIONS - CONTINUED
Included in accounts receivable as of December 31, 1998 is $139,420 due
from Jasper. Included in accounts receivable as of December 31, 1998 is
$37,665 due from ATM, of which $27,665 was reflected as deferred
revenues.
In addition, the Company had transactions with IR & D (a principal
stockholder and former director of the Company who 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, which was
written off in 1999. Accounts payable to IR & D as of December 31, 1998
was $12,060.
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,
1997 1998 1999 1999
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Cash paid for:
Interest $ 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
Convertible debentures
into common stock -- -- 1,342,000 1,342,000
Common stock repurchases
offset by a reduction in
amounts billed to Jasper
for research and
development -- -- -- 170,174
Accretion of preferred stock
beneficial conversion
feature -- -- 285,000 285,000
Unearned compensation
reversal related to
Employee terminations 184,191 -- 42,920 227,111
</TABLE>
F-27
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE M - FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value
information as of December 31, 1998 and 1999 as required by Financial
Accounting Standards Board No.107 ("SFAS 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, 1998 and 1999 for which it is
practicable to estimate the value, approximated fair value because of
the short maturity of those instruments.
NOTE N - SUBSEQUENT EVENTS
Preferred Stock Offering
On March 17, 2000, the Company completed a private placement of
$675,000 of its Preferred Stock and a 5-year warrant to purchase 67,500
shares of Common Stock exercisable at $1.196 per share with the Shaar
Fund, Ltd. The warrants have piggyback registration rights. The Company
received net proceeds of $150,000 after giving effect to a 33% discount
($225,000) to the face amount of the preferred stock, offering costs of
$150,000, repayment of the $150,000 note outstanding to Shaar Fund,
Ltd. as of December 31, 1999, and repayment of an additional $100,000
note to the Shaar Fund, Ltd. issued subsequent to year-end.
The preferred shares are immediately convertible into shares of common
stock at a conversion price equal to the lesser of (a) $1.196 (110% of
the closing bid price of the Company's common stock on July 8, 1999) or
(b) a 22% discount to the average closing bid prices of the Company's
common stock during the five trading days period prior to conversion
(the Conversion Price). See note H for other terms and conditions of
the Company's Preferred Stock, including penalties associated with not
registering the Preferred Stock.
In accordance with ETIF 98-5 Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversions
the fair market value assigned to the embedded beneficial conversation
feature and the detachable warrants will reduce the assigned fair
market value of the preferred stock. The beneficial conversion feature
is analogous to a dividend to the preferred stockholders and will be
recognized during the quarter ended March 31, 2000 as a return to
preferred stockholders since the preferred stock can be converted
immediately into common stock. The offset to the dividend will be an
increase in the value assigned to the preferred stock. The Company has
not yet determined the value of the above described beneficial
conversion feature or warrants.
$300,000 Promissory Note
The Company raised an additional $300,000 in the form of a 10%
promissory note due the earlier of June 30, 2000 or completion of a
private offering of equity securities resulting in gross proceeds of at
least $1,250,000.
Director Options
During April 2000 two directors agreed to cancel an aggregate of
407,610 options to purchase shares of common stock which were granted
to them during 1999.
F-28
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
NOTE O - QUARTERLY INFORMATION
During the fourth quarter ended December 31, 1999, the Company recorded
$135,000 related to a write-down of inventory to estimated net
realizable value. This was reflected in cost of sales. Additionally,
$120,000 of previously recognized consulting fees expense was reversed
and offset by $91,000 of various additional expenses, the largest being
accrued compensation matters of approximately $50,000. The net impact
of these two items has been reflected within selling, general and
administrative expenses.
F-29
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following sets forth certain information about each director and
executive officer of the Company. The Common Stock ownership of each nominee for
director is provided under "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITIONS HELD SINCE
- ---- --- -------------- -----
<S> <C> <C>
Barry M. Wendt 52 Chief Executive Officer, 1993
Chairman of the Board of Directors
Gary E. Wendt 58 Chief Financial Officer, Director 1993
Benedict A. Wittig 57 Secretary, Director of Systems 1993
Software, Director
Dr. Lonnie L. Hammargren 61 Director 1998
Jeffry R. Brown 50 Director 1999
</TABLE>
BARRY M. WENDT has served as Chief Executive Officer and Chairman of
the Board of Directors of the Company since its inception in 1993. From 1993 to
1994, Mr. Wendt also acted as the part-time and temporary Chief Executive
Officer of Esprit Technologies, Inc., a computer manufacturer which produced
high speed PCs marketed primarily to government and industry in the Midwestern
United States. From 1988 to 1995, Mr. Wendt worked for, and from 1992 to 1995,
was the CEO of, The Technology Congress, Ltd., a service bureau which supported
primarily Fortune 500 companies in CAD/CAM/CAE laser plotting, scanning, and
electrical testing, with an emphasis on photo-tooling for the fabrication
industry. The Technology Congress, Ltd. filed for protection under Chapter 11 of
the United States Bankruptcy Code in August, 1994 and was ultimately liquidated
under Chapter 7 of the Bankruptcy Code in July, 1995. Mr. Wendt received a
Bachelor of Science degree in Electronic Engineering from Florida International
University, a diploma in RF and Consumer electronic systems from the De Vry
Institute of Technology, and an Associate of Science in Electronic Engineering
from Gulf Coast
28
<PAGE>
Community College. Mr. Wendt is the brother of Gary E. Wendt, Chief Financial
Officer and a Director of the Company.
GARY E. WENDT has served as the Chief Financial Officer and a Director
of the Company since its inception in 1993. Mr. Wendt has primary responsibility
for the Company's financial reports and administers accounting operations. From
1993 to 1994, Mr. Wendt was Treasurer and Chief Financial Officer of Esprit
Technologies, Inc., a computer manufacturer which produced high speed PCs
marketed primarily to government and industry in the Midwestern United States.
From 1988 to 1995, he was Secretary-Treasurer and Chief Financial Officer of The
Technology Congress, Ltd. which filed for protection under Chapter 11 of the
United States Bankruptcy Code in August, 1994 and was ultimately liquidated
under Chapter 7 of the Bankruptcy Code in July, 1995. Mr. Wendt attended
Metropolitan State University, North Hennepin Community College, and the Academy
of Accountancy where he was certified in public accounting. Mr. Wendt is not a
Certified Public Accountant. Mr. Wendt is the brother of Barry M. Wendt, Chief
Executive Officer and Chairman of the Board of the Company.
BENEDICT A. WITTIG has served as Director of Systems Software,
Secretary and a Director of the Company since its inception in 1993. Mr. Wittig
manages all software projects and software development undertaken by the
Company. From 1993 to 1994, Mr. Wittig was a Systems Software Manager for Esprit
Technologies, Inc., a computer manufacturer which produced high speed PCs and
marketed primarily to government and industry in the Midwestern United States.
Mr. Wittig received both a Master of Science in Electronic Engineering and a
Bachelor of Science in Electronic Engineering from the University of Missouri.
LONNIE L. HAMMARGREN, M.D. has served as a director of the Company
since November 12, 1998. Dr. Hammargren served as the Lieutenant Governor of the
State of Nevada from 1994 through 1998 and is currently a physician/surgeon
specializing in neurosurgery. His elected offices include the Nevada State Board
of Education and the University Board of Regents. Dr. Hammargren is a board
certified diplomat of the American Board of Neurological Surgery and is the only
neurosurgeon in Nevada to be elected to the Pediatric Section of the American
Association of Neurological Surgery. He graduated from the University of
Minnesota and holds a Bachelor of Science Degree, Master of Arts, Medical
Doctor, Master of Science, Neurosurgery, internship, State University of New
York, and neurosurgery residency, Mayo Clinic. Dr. Hammargren has also served in
the Vietnam War and was a flight surgeon for astronauts at the NASA Manned Space
Craft Center.
JEFFRY R. BROWN has served as director of the Company since September
1999. Mr. Brown currently serves as managing director for Chancellor Media
Group, a division of AmFm Media. From 1995 to 1999, Mr. Brown served as a
marketing, promotion and sponsorship consultant for such clients as Signature
Sports, Born Information Services and the JC Penney Company. As Senior Vice
President Business Development for Gage Marketing Group, LLC between 1992 and
1995, Mr. Brown represented clients such as Proctor and Gamble, Paramount, RJ
Reynolds, and Frito Lay.
29
<PAGE>
DIRECTORS' TERMS OF OFFICE
Each of Messrs. Barry Wendt, Gary Wendt and Benedict Wittig were
elected as directors at the Company's 1998 Annual Meeting of Shareholders to
hold office for a term of one (1) year until their successors are duly elected
and qualified. Each of Dr. Hammargren and Jeffry Brown was appointed by the
Board of Directors to fill board vacancies created or to increase the size of
the Board to and serve until the next annual meeting of shareholders or until
their respective successors are duly elected and qualified.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), requires the Company's officers and directors and persons
who own more than ten percent (10%) of the Company's Common Stock to file with
the Securities and Exchange Commission ("SEC") initial reports of ownership and
reports of changes in ownership of the Company's Common Stock. Such officers,
directors and ten percent (10%) stockholders are also required by applicable SEC
rules to furnish the Company with copies of all forms filed with the SEC
pursuant to Section 16(a) of the Exchange Act. Based solely on its review of the
copies of such forms received by it, or written representations from such
persons that no other reports were required for such persons, the Company
believes that during the fiscal year ended December 31, 1999, all Section 16(a)
filing requirements applicable to the Company's officers, directors and ten
percent (10%) stockholders were satisfied in a timely fashion.
30
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years ended December 31, 19998, 19987 and 1997 concerning executive compensation
paid or accrued by the Company to or for the benefit of the Company's executive
officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
----------------------
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- --------------------------- ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Barry M. Wendt 1999 $128,440 -- $4,873
Chief Executive Officer 1998 173,442 -- 5,530
1997 161,642 $20,000 4,742
Benedict A. Wittig 1999 $107,147 -- $5,299
Secretary, Director of 1998 143,646 -- 5,098
Systems Software 1997 130,599 $15,000 4,345
Gary E. Wendt 1999 $100,274 -- $5,299
Chief Financial Officer 1998 113,554 -- 5,470
1997 99,753 $15,000 4,688
</TABLE>
(1) Consists of group health insurance premiums and a vehicle allowance.
The following table sets forth for the named executive officer information
regarding stock options granted to such such officer during the 1999 fiscal
year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
31
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Number of Percent Of
Shares Total Options/
Underlying SARs Granted To Exercise Or
Options/SARs Employees In Base Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barry M. Wendt 96,920 9% $.903 September, 2006
121,000 11% $.875 September, 2006
- --------------------------------------------------------------------------------------------
Gary E. Wendt 76,380 8% $.903 September, 2006
97,000 9% $.875 September, 2006
- --------------------------------------------------------------------------------------------
Benedict A. Wittig 87,690 8% $.903 September, 2006
101,000 9% $.875 Septmeber, 2006
- --------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth for the named executive officer
information regarding stock options exercised by such officer during the 1999
fiscal year, together with the number and value of stock options held at 1999
fiscal year-end, each on an aggregated basis.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Aggregated Option Exercises in the 1999 Fiscal Year
and Fiscal Year-End Option Value
- -----------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Number of Options at Options at
Shares Fiscal Year-End Fiscal Year-End
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barry M. Wendt -- -- 110,020/108,900(2) $0/$0
- -----------------------------------------------------------------------------------------------
Gary E. Wendt -- -- 86,080/87,300 $0/$0
- -----------------------------------------------------------------------------------------------
Benedict A. Wittig -- -- 97,790/90,900(2) $0/$0
- -----------------------------------------------------------------------------------------------
</TABLE>
- ----------------
(1) As of December 31, 1999, the last sales price of the Company's Common Stock
as reported on the OTC Bulletin Board was $.65.
(2) Mr. Barry Wendt and Mr. Benedict Wittig have surrendered these options to
the Company for cancellation.
Employment Agreements
On May 10, 1996, the Company entered into five-year employment
agreements with Barry M. Wendt, Chief Executive Officer; Benedict A Wittig,
Director of Systems Software; and Gary E. Wendt, Chief Financial Officer. The
terms of the employment agreements for each of the above individuals are
substantially identical, with differences only as to base salary. The agreements
provide for a base salary subject to an annual increase by the Board of
Directors and a bonus payable at the discretion of the Board of Directors.
Each officer may be terminated only for "cause" as that term is defined
in the employment agreements. The employment agreements also contain
confidentiality obligations and incorporate a Non-Competition Letter. The
Non-Competition Letter prohibits each officer from competing with the Company
for a period of three (3) years if the Company terminates the employment for
cause and a period of two (2) years if such officer voluntarily terminates
employment. In the event of a termination without cause, or a "constructive
termination", which is defined to include an adverse change in the officer's
status or position in the Company, a reduction of the officer's base salary
other than for austerity purposes or breach by the Company
32
<PAGE>
of any of its other contractual obligations for other than austerity reasons,
the officer's non-competition obligations lapse and the officer will receive
severance in an amount equal to his base salary for the greater of (i) the
number of years or portions thereof remaining between the date of termination
and December 31, 2001 and (ii) two (2) years. Except as may be prohibited by
law, during the term of the employment agreements, each of the officers are
obligated to disclose and assign to the Company all ideas, inventions and
business plans developed by each of them in the course of their employment which
relate directly or indirectly to the Company's business.
Consulting Agreement
In November of 1999, the Company entered into an agreement with Bruce
W. Nordin to provide executive management consulting services to the Company, on
an interim basis in consideration of monthly payments in the amount of $15,000.
The agreement also provides for the Company to issue options to Mr. Nordin on a
monthly basis to purchase 40,000 shares of common stock at an exercise price
equal to the closing market price of the Company's common stock on the date of
grant. As of the date of this report, the Company has issued Mr. Nordin options
to purchase 160,000 shares of common stock at exercise prices ranging from $.50
to $1.06 per share. The agreement may be terminated by either party upon written
notice.
1996 and 1999 Stock Option Plan Change in Control Provisions
The Company's 1996 Stock Option Plan (as amended to date, the "1996
Plan") and 1999 Stock Option Plan (the "1999 Plan" and together with the 1996
Plan, the "Plans")) provide for the acceleration of the vesting of unvested
options upon a "Change in Control" of the Company. A Change in Control is
defined in the Plans to include (i) a sale or transfer of substantially all of
the Company's assets; (ii) the dissolution or liquidation of the Company; (iii)
a merger or consolidation to which the Company is a party and after which the
prior shareholders of the Company hold less than 50% of the combined voting
power of the surviving corporation's outstanding securities; (iv) the incumbent
directors cease to constitute at least a majority of the Board of Directors; or
(v) a change in control of the Company which would otherwise be reportable under
Section 13 or 15(d) of the Exchange Act.
In the event of a "Change In Control" both Plans provide for the
immediate vesting of all options issued thereunder. The 1999 Plan provides for
the Company to deliver written notice to each optionee under the 1999 Plan
fifteen (15) days prior to the occurrence of a Change In Control during which
all options issued under the 1999 Plan may be exercised. Thereafter, all options
issued under the 1999 Plan automatically expire. The 1996 Plan provides for all
options to remain exercisable for the remainder of their respective terms and
permits the Company to make a cash payment to the any or all optionees in
respect of any or all options equal to the difference between the exercise price
of such option and the fair market value of the Company's Common Stock
immediately prior to the Change In Control.
Director Compensation
Members of the Board of Directors receive no cash compensation for
serving on the Board of Directors. Pursuant to the 1999 Plan, upon appointment,
each non-employee director is
33
<PAGE>
entitled to receive options to purchase up to 50,000 shares of Common Stock
which vest 20% annually over 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 of Directors are automatically
granted additional options to purchase 50,000 shares of Common Stock which vest
20% annually over five years. All options granted to non-employee directors have
an exercise price equal to 100% of the fair market value of a share of the
Company's Common Stock on the date of grant.
34
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 7, 2000 information with
respect to the beneficial ownership of the Company's Common Stock of all persons
which the Company, pursuant to filings with the SEC, has reason to believe may
be deemed the beneficial owners of more than five percent (5%) of the Company's
outstanding Common Stock. Also set forth in the table is the beneficial
ownership of all shares of the Company's Common Stock, as of such date, of all
officers and directors of the Company, individually and as a group.
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- ---------------- ------------ --------
Barry M. Wendt
1285 Corporate Center Drive, Suite No. 175
Eagan, MN 55121 1,237,800 12.8%
Gary E. Wendt
4620 S. Valley View Blvd., Suite A
Las Vegas, NV 89103 UPDATE ADDRESS 491,080(2) 5.1%
Benedict A. Wittig
1285 Corporate Center Drive, Suite No. 175
Eagan, MN 55121 UPDATE ADDRESS 1,237,500 12.8%
Dr. Lonnie L. Hammargren
4318 Ridgecrest Drive
Las Vegas, NV 89121 9,000(3) *
Jeffry R. Brown
5710 Northwood Ridge
Bloomington, MN 55437 --(4) --
Richard T. Fiskum
28690 660th Avenue
Lithfield, MN 55355 1,237,500 12.8%
The Shaar Fund, Ltd.
C/o Citco Fund Services (Curacao) N.V.
Kaya Flamboyan 9
Curacao
Netherlands Antilles 266,744(5) 9.99%(5)
All Directors and Officers
As a group (5 persons) 2,975,380 30.8%
35
<PAGE>
*Less than 1%.
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in
the regulations promulgated under the Securities Exchange Act of 1934
and, accordingly, may include securities owned by or for, among others,
the spouse and/or minor children of an individual and any other
relative who has the same home as such individual, as well as, other
securities as to which the individual has or shares voting or
investment power or which each person has the right to acquire within
60 days through the exercise of options or otherwise. Beneficial
ownership may be disclaimed as to certain of the securities. This table
has been prepared based on 9,551,890 shares of Common Stock outstanding
as of April 5, 2000.
(2) Includes 86,080 shares issuable upon exercise of options. Does not
include 87,300 shares issuable upon exercise of options subject to
vesting. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - OPTIONS
GRANTED TO OFFICERS AND DIRECTORS."
(3) Consists of shares issuable upon exercise of options. Does not include
86,000 shares issuable upon exercise of options which are subject to
vesting. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - OPTIONS
GRANTED TO OFFICERS AND DIRECTORS."
(4) Does not include 50,000 shares issuable upon exercise of options which
are subject to vesting. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - OPTIONS GRANTED TO OFFICERS AND DIRECTORS."
(5) In addition to these shares, the Shaar Fund, Ltd. (the "Fund") owns an
aggregate of 198,750 shares of common stock issuable upon exercise of
warrants, $ 858,000 principal amount of debentures convertible into
shares of Common Stock and 19,875 shares of the Company's Series A 9%
Convertible Preferred Stock. The debenture and preferred stock are
convertible into common stock at a floating conversion price based on
the trading price of the Company's Common Stock. The terms of the
debenture prohibits the Fund from converting the debenture into in
excess of 5% of the Company's outstanding shares. The Series A
Preferred Stock and certain of the warrants contain provisions which
prohibit the conversion or exercise, as applicable, of such securities
which results in the Fund owning in excess of 9.99% of the Company's
outstanding shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT ARRANGEMENTS
The Company has employment agreements with each of Barry Wendt,
Benedict Wittig, and Gary Wendt. See "EXECUTIVE COMPENSATION - EMPLOYMENT
AGREEMENTS."
OPTIONS GRANTED TO OFFICERS AND DIRECTORS
During 1999, the Company issued options under the 1996 and 1999 Plans
to its executive officers as described in ITEM 10 above.
36
<PAGE>
The Company granted nonqualified stock options under the 1999 Plan to
purchase 50,000 shares of Common Stock to Mr. Brown upon his appointment as a
non-employee director of the Company. In connection therewith, the Company
granted nonqualified stock options to purchase 50,000 shares of Common Stock to
Dr. Hammargren. These options were issued at an exercise price of $.969 per
share, the last sales price of the Company's Common Stock as reported on the OTC
Electronic Bulletin Board on the date of grant. These options vest in five (5)
equal annual installments commencing one year after the date of grant.
SURRENDER OF OPTIONS
On April 7, 2000 Barry M. Wendt surrendered options to purchase 218,920
shares of Common Stock and Benedict A. Wittig surrendered options to purchase
188,690 shares of Common Stock. Upon surrender, these options were cancelled by
the Company. As a result, the Company may issue options to purchase an
additional 407,610 shares of Common Stock under the 1996 and 1999 Plans to its
current and future directors, employees and consultants.
SEVERANCE AGREEMENT WITH MR. FISKUM
Effective April 21, 1999, Mr. Fiskum resigned his positions as a
director and executive officer of the Company. In connection with his
resignation, the Company and Mr. Fiskum entered into a two year consulting
agreement pursuant to which Mr. Fiskum provides certain consulting services to
the Company in consideration of monthly compensation of $1,000 and continuation
of medical benefits. The agreement includes a mutual release, confidentiality
agreement and restrictive covenant prohibiting Mr. Fiskum from competing
directly or indirectly with the Company, soliciting any current or proposed
customer of the Company or hiring or soliciting any employee of the Company for
a period of two years.
TRANSACTIONS WITH INDUSTRIAL RESEARCH DEVELOPMENT, INC.
During the fiscal year ended December 31, 1998, the Company purchased
certain optic components from Industrial Research Development, Inc. ("IRD")
totaling $252,077. Prior to January 1997, Mr. Fiskum was the sole shareholder of
IRD. Although he divested himself of his ownership interest in IRD prior to the
Company's initial public offering in February 1997, the agreement of sale
provided for a deferred payment contingent upon IRD generating a certain level
of revenues during 1998 and Mr. Fiskum remaining a director of IRD until on or
about August 12, 1998. The Company understands that the revenues of IRD during
1998 (excluding revenues from the sale of products to the Company) exceeded the
minimum requirement.
TRANSACTIONS WITH THE SHAAR FUND, LTD.
On December 16, 1999 and January 31, 2000 the Shaar Fund Ltd., a
principal stockholder of the Company (the "Fund"), advanced the Company $150,000
and $100,000, respectively, pursuant to short term promissory notes at an
interest rate of 10% per annum. On March 17, 2000 the Fund purchased shares of
Series A Preferred Stock and Common Stock Purchase Warrants at purchase price of
$450,000. In connection with this financing, the Fund cancelled the notes in
partial payment for such securities. On March 31, 2000, the Fund provided the
Company with a bridge loan in the amount of $300,000 at an interest rate of 10%.
The loan is due on the earlier of June 30, 2000 or the upon the Company
completing a private offering of equity securities resulting in a gross proceeds
of $1,250,000.
37
<PAGE>
DISCUSSIONS REGARDING EXECUTIVE MANAGEMENT CHANGES.
The Company is in the process of recruiting additional executive
management to effectuate the transition of the Company from a technology
development company to a marketing company. This will likely involve the
resignation or reassignment of certain of the Company's current officers.
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, 1998 and 1999
Statement of Operations - For the Years ended
December 31, 1997, 1998 and 1999 and January 7, 1993
(Date of inception) through December 31, 1999
Statement of Shareholders' Equity (Deficit) - For the
Years ended December 31, 1997, 1998 and 1999 and
January 7, 1993 (date of inception) through December
31, 1999
Statement of Cash Flows - For the Years ended
December 31, 1997, 1998 and 1999 and January 7, 1993
(Date of inception) through December 31, 1999
Notes to Financial Statements - December 31, 1997,
1998 and 1999
(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")
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C>
3.2 Amended and Restated Bylaws Incorporated by reference to Exhibit
3.2 to the Registration Statement
3.3 Certificate of Amendment to Amended and Restated Incorporated by reference to Exhibit
Articles of Incorporation 3.3 to the Registrant's Report on
Form 10-QSB for the quarter ended
March 31, 1999
3.4 Certificate of Designation of Series A 9% Convertible Incorporated by reference to Exhibit
Preferred Stock 3.4 to the Registrant's Current
Report on Form 8-K dated July 8, 1999
3.5 Amended and Restated Certificate of Designation of Filed herewith
Series A 9% Convertible Preferred Stock
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 Incorporated by reference to Exhibit
S. Takhar, Barry M. Wendt, Benedict A. Wittig and 10.2 to the Registration Statement
Richard T Fiskum, Jasper Consulting, Inc. and the
Company dated April 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 Incorporated by reference to Exhibit
and the Company dated as of May 10, 1996 (with 10.3 to the Registration Statement
Non-Competition Letter effective May 10, 1996
attached as Exhibit A)
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C>
10.4 Employment Agreement by and between Richard T. Fiskum Incorporated by reference as Exhibit
and the Company dated as of May 10, 1996 (with 10.4 to the Registration Statement
Non-Competition Letter effective May 10, 1996
attached as Exhibit A)
10.5 Employment Agreement by and between Gary E. Wendt and Incorporated by reference to
the Company dated as of May 10, 1996 (with Exhibit 10.5 to the Registration
Non-Competition Letter effective May 10, 1996 Statement
attached as Exhibit A)
10.6 Employment Agreement by and between Benedict A. Incorporated by reference to Exhibit
Wittig and the Company dated as of May 10, 1996 (with 10.6 to the Registration Statement
Non-Competition Letter effective May 10, 1996
attached as Exhibit A)
10.7 Employment Agreement by and between Timothy N. Tracey Incorporated by reference to Exhibit
and the Company dated as of March 24, 1997 (with 10.7 to the Registrant's quarterly
Non-Competition Letter effective March 27, 1997 report on Form 10-QSB for the
attached as Exhibit A) quarter ended March 30, 1997
10.8 Technical Support and Cooperative Development Incorporated by reference to Exhibit
Agreement by and between the Company and 10.7 to the Registration Statement
Inter-Con/PC, Inc. effective November 1, 1996 (with
Exhibits A-C)
10.9 Technical Support and Cooperative Development Incorporated by reference to Exhibit
Agreement with Anonymous Data Control 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 Incorporated by reference to Exhibit
Replicate Agreement with Miros, Incorporated 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 Incorporated by reference to Exhibit
Technologies 10.11 to the 1998 10-KSB
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C>
10.12 Certicom OEM Licensing Agreement Incorporated by reference to Exhibit
10.12 to the 1998 10-KSB
10.13 Strategic Alliance Agreement with Pinnacle Incorporated by reference to Exhibit
Technology, Inc. 10.13 to the 1998 10-KSB
10.14 Strategic Alliance Agreement with Baraka Intercom, Incorporated by reference to Exhibit
Inc. 10.14 to the 1998 10-KSB
10.15# Aultimate Technology Marketing, Inc. Purchase, Supply Incorporated by reference to Exhibit
and Distributor Agreement 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 Incorporated by reference to Exhibit
Company and The Shaar Fund, Ltd. 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 Incorporated by reference to Exhibit
between the Company and The Shaar Fund Ltd. 10.17 to the June 30, 1998 10-QSB
10.18# 5% Convertible Debenture issued to The Shaar Fund, Incorporated by reference to Exhibit
Ltd. 10.18 to the June 30, 1998 10-QSB
10.19# Registration Rights Agreement by and between the Incorporated by reference to Exhibit
Company and The Shaar Fund, Ltd. 10.19 to the June 30, 1998 10-QSB
10.20 Registration Rights Agreement by and between the Incorporated by reference to Exhibit
Registrant and The Shaar Fund, Ltd. dated July 8, 1999 10.20 to the July 8, 1999 8-K
10.21 Securities Purchase Agreement by and between the Incorporated by reference to Exhibit
Registrant and The Shaar Fund Ltd. dated July 9, 1999 10.21 to the July 8, 1999 8-K
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
10.22 Form of Warrant granted to The Shaar Fund Ltd. Incorporated by reference to Exhibit
10.22 to the July 8, 1999 8-K
10.23 Amendment No. 1 to the SAC Technologies, Inc. 1996 Filed herewith
Stock Option Plan
10.24 SAC Technologies, Inc. 1999 Stock Option Plan Filed herewith
23.1 Consent of Divine, Scherzer & Brody, Ltd. Filed herewith
25.1 Power of Attorney (included in the signature page to Filed herewith
the Registration Statement
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
42
<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: April 14, 2000 /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 April 14, 2000
- ------------------
Barry M. Wendt
Chairman of the Board of Directors and
Chief Executive Officer
/s/ Gary E. Wendt April 14, 2000
- -----------------
Gary E. Wendt
Chief Financial Officer and Director (Principal
Financial and Accounting Officer)
/s/ Benedict A. Wittig April 14, 2000
- ----------------------
Benedict A. Wittig
Secretary and Director
/s/ Lonnie L. Hammargen April 14, 2000
- -----------------------
Lonnie L. Hammargen
Director
/s/ Jeffry R. Brown April 14, 2000
- -------------------
Jeffry R. Brown
Director
43
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
3.5 Amended and Restated Certificate of Designation of Series A 9%
Convertible Preferred Stock
10.23 Amendment No. 1 to the SAC Technologies, Inc. 1996 Stock Option
Plan
10.24 SAC Technologies, Inc. 1999 Stock Option Plan
23.1 Consent of Divine, Scherzer & Brody, Ltd.
25.1 Power of Attorney (included in the signature page to the
Registration Statement
27.1 Financial Data Schedule
44
EXHIBIT NO. 3.5
AMENDED AND RESTATED
CERTIFICATE OF DESIGNATION
The undersigned officer of SAC Technologies, Inc., a Minnesota
corporation (the "Corporation" or "Company") does hereby certify that the
following resolution was adopted by the Board of Directors of the Corporation in
accordance with Minnesota Statutes Chapter 302A.239 on February __,2000:
WHEREAS, the Articles of Incorporation of the Company presently
authorize the issuance of 5,000,000 shares of Preferred Stock, $.01 par value
per share, in one or more series upon terms and conditions that are to be
designated by the Board of Directors;
WHEREAS, by resolution dated June 30,1999, the Board of Directors
provided for the designation of 13,125 shares of the Company's Preferred Stock
as "Series A 9% Convertible Preferred Stock" as set forth in that certain
Certificate of Designation filed with the Secretary of State of Minnesota on or
about July 2, 1999;
WHEREAS, all of the authorized shares of Series A 9% Convertible
Preferred Stock have been issued and remain outstanding on and as of the date
hereof;
WHEREAS, in order to accommodate a business purpose deemed proper by
the Board of Directors, the Board of Directors does hereby seek to provide for
amendment and restatement of the Certificate of Designation of the Company's
Series A 9% Convertible Preferred Stock to increase the number of shares of the
Company's Preferred Stock designated as "Series A 9% Convertible Preferred
Stock"; and
WHEREAS, the terms, conditions, voting rights, preferences, limitations
and special rights of the Series A 9% Convertible Preferred Stock in their
entirety are as provided herein.
NOW, THEREFORE, be it:
RESOLVED, that a series of the class of authorized Preferred Stock,
$.01 par value per share, of the Company hereinafter designated "Series A 9%
Convertible Preferred Stock," be hereby created, and that the designation and
amount thereof and the voting powers, preferences and relative, participating
and other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
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Section 1. Designation and Amount.
The shares of such series shall be designated as the "Series A 9%
Convertible Preferred Stock " (the "Series A Shares") and the number of shares
initially constituting such series shall be 50,000 which may be issued in whole
or fractional shares.
Section 2. Dividends and Distributions.
(a) The holders of Series A Shares shall be entitled to receive
dividends at a rate of nine percent (9%) per annum of the liquidation preference
of $100 per share (the "Liquidation Preference"), which shall be fully
cumulative, prior and in preference to any declaration or payment of any
dividend payable other than in shares of common stock, $.01 par value per share,
of the Company (the "Common Stock") or other distribution on the Common Stock of
the Company. If the dividends on the Series A Shares cannot legally be paid in
full, dividends shall be paid, to the maximum permissible extent, to the holders
of the Series A Shares, PARRI PASSU. The dividends on the Series A Shares shall
accrue from the date of issuance of each share and shall be payable
semi-annually on June 15 and December 15 of each year (each a "Dividend Date")
commencing on December 15, 1999, except that if any such date is a Saturday,
Sunday or legal holiday (a "Non-Business Day") then such dividend shall be
payable on the next day that is not a Saturday, Sunday or legal holiday on which
banks in the State of Minnesota are permitted to be closed (a "Business Day") to
holders of record as they appear on the stock books of the Company on the
applicable record date, which shall be not more than 60 nor less than 10 days
preceding the payment date for such dividends, as fixed by the Board of
Directors (the "Record Date"). The dividends on the Series A Shares shall be
payable only when, as and if declared by the Board of Directors out of funds
legally available therefor. The dividends shall, at the option of the
Corporation, either (1) be payable in cash; or (2) in shares of Common Stock
(the "Series A Payments-in-Kind") in accordance with Section 2 (b) below. In the
absence of an election by the Board of Directors within 10 days of each Dividend
Date to pay dividends in cash, the dividends shall be payable in shares of
Common Stock. The amount of dividends payable for any period that is shorter or
longer than 30 days shall be computed on the basis of a 360-day year of twelve
30-day months. All accrued but unpaid dividends shall accrue interest after each
Dividend Date at a rate of nine percent (9%) per annum (compounded on a
semi-annual basis) from each Dividend Date, computed on the basis of a 360-day
year of twelve 30-day months.
(b) Series A Payments-in-Kind shall be payable as of the Dividend Date
of each period for which the election is made, except that if such date is a
Non-Business Day then such Series A Payment-in-Kind shall be payable as of the
next Business Day to holders of record as they appear on the stock books of the
Company on the applicable Record Date. Each Series A Payment-in-Kind shall be
equal in amount to that number of shares of Common Stock obtained by dividing
the aggregate cash dividends payable with respect to the Series A Shares on any
such Dividend Date by the "Conversion Price" (as defined below) in effect on the
Dividend Date rounded to the closest whole share of Common Stock. Certificates
representing the shares of Common Stock issuable in payment of any Series A
Payment-in-Kind shall be delivered to each holder entitled to receive such
Series A Payment-in-Kind (in appropriate denominations) on the Dividend Date. If
a Series A Payment-in-Kind is not made in compliance with the terms hereof, the
Corporation shall be obligated to pay the cash dividends under the procedures in
the previous paragraph.
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(c) The holders of Series A Shares shall not be entitled to receive any
dividends or other distributions except as provided in this Certificate of
Designation of Series A Shares.
Section 3. Voting Rights.
Except as provided by applicable law, the holders of the Series A
Shares shall have no voting rights.
Section 4. Liquidation, Dissolution, Winding Up or Certain Mergers or
Consolidations.
If the Company shall adopt a plan of liquidation or of dissolution, or
commence a voluntary case under the federal bankruptcy laws or any other
applicable state or federal bankruptcy, insolvency or similar law, or consent to
the entry of an order for relief in any involuntary case under such law or to
the appointment of a receiver, liquidator, assignee, custodian, trustee or
sequestrator (or similar official) of the Company or of any substantial part of
its property, or make an assignment for the benefit of its creditors, or admit
in writing its inability to pay its debts generally as they become due and on
account of such event the Company shall liquidate, dissolve or wind up, or upon
any other liquidation, dissolution or winding up of the Company, or engage in a
merger, plan of reorganization or consolidation in which the Company is not the
surviving entity, then and in that event, no distribution shall be made to the
holders of shares of capital stock, unless, prior thereto, the holders of the
Series A Shares shall have first received an amount in cash or equivalent value
in securities or other consideration equal to the Liquidation Preference
thereof. If upon any liquidation, dissolution, winding up, merger, plan of
reorganization or consolidation, the amount so payable or distributable does not
equal or exceed the Liquidation Preference of the Series A Shares, then, and in
that event, the amount of cash so payable, and amount of securities or other
consideration so distributable, shall be shared ratably among the holders of the
Series A Shares. For the purposes hereof, the term "Liquidation Preference"
shall mean $100 per share with respect to each of the Series A Shares, plus any
and all accrued unpaid dividends thereon.
Section 5. Conversion.
(a) Right To Convert:
(i) Subject to the provisions for adjustment hereinafter set
forth and the limitation of the number of shares of Common Stock issuable upon
conversion set forth Section 5(a)(ii) below, commencing upon issuance, each
Series A Share shall be convertible in the manner hereinafter set forth into
fully paid and nonassessable shares of Common Stock, at the option of the holder
thereof, at any time at the principal office of the Company or any transfer
agent for the Series A Shares, into the number of fully paid and nonassessable
shares of Common Stock which results from dividing the "Conversion Price" (as
defined below) into the Liquidation Preference. The "Conversion Price" shall be
equal to the lower of (1) the "Initial Conversion Price" (as defined below) and
(2) 78% of the "Market Price" (as defined below) of the Common Stock as of a
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"Conversion Date" (as defined below). Upon conversion, all accrued or declared
but unpaid dividends (including any interest accrued thereon calculated as of
the Conversion Date (as defined below)) on the Series A Shares being converted
shall either be paid in cash, to the extent permitted by applicable law or, at
the option of the Company in shares of Common Stock. The market price per share
of Common Stock (the "Market Price") shall be the average of the closing bid
prices per share of Common Stock during the five (5) trading days immediately
preceding a "Conversion Date", as such closing bid prices are reported on the
OTC Electronic Bulletin Board; provided, however, if there is no closing bid
price reported on any day during such five (5) day period, in lieu of the
closing bid price for such day, the last sales price per share as reported on
the OTC Electronic Bulletin Board for such day shall be utilized in such
calculation and provided further, if there is no sale reported for any such day,
the fair market value of a share of Common Stock on such day as determined in
good faith by the Board of Directors of the Company, or in the event the Common
Stock is listed on NASDAQ or a stock exchange, the Market Price shall be the
average of the closing bid prices per share of Common Stock during the five (5)
trading days immediately preceding a "Conversion Date" on NASDAQ or such
exchange, as reported in the Wall Street Journal. The "Initial Conversion Price"
of the Series A Shares shall be equal to 110% of the closing bid price of the
Common Stock as reported on the OTC Electronic Bulletin Board on the trading day
prior to the "Series A Initial Issuance Date" (as defined below). The conversion
date (the "Conversion Date") shall be any date on which a notice of conversion
executed by Holder setting forth the number of Series A Shares being converted
is received via facsimile or hard copy by the Corporation at its principal
executive offices.
(ii) Notwithstanding anything contained herein to the
contrary, in no event (except while there is outstanding a tender offer for any
or all of the shares of the Company's Common Stock) shall any holder of any
Series A Shares be entitled to convert Series A Shares, or shall the Company
have the obligation to issue shares upon such conversion or make a Series A
Payment-in-Kind, to the extent that, after such conversion or payment the sum of
(A) the number of shares of Common Stock beneficially owned by such holder and
its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of the
Series A Shares or unexercised portion of any warrants or other securities
convertible into shares of Common Stock of the Company beneficially owned by
such holder), and (B) the number of shares of Common Stock issuable upon the
conversion of the Series A Shares with respect to which the determination of
this proviso is being made, would result in beneficial ownership by such holder
and its affiliates of more than 9.99% of the outstanding shares of Common Stock
(after taking into account the shares to be issued to such Holder upon such
conversion). For purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), except as
otherwise provided in clause (A) of such sentence.
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(b) Adjustments to Conversion Price:
(i) The following definitions shall apply for purposes of this
Section:
(A) "Options" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(B) "Convertible Securities" shall mean any evidences
of indebtedness, shares or other securities convertible into or exchangeable for
Common Stock.
(C) "Additional Shares of Common Stock" shall mean
all shares of Common Stock issued (or, pursuant to Section 5(b)(iii), deemed to
be issued) by the Company after the Series A Original Issue Date (as defined
below), other than shares of Common Stock issued or issuable:
(i) upon conversion of Series A Shares;
(ii) in a transaction described in Section
5(b)(vi);
(iii) pursuant to a stock grant, option plan
or purchase plan, other employee stock incentive program or agreement approved
by the Board of Directors;
(iv) pursuant to the terms of any stock
grant, option, warrant, employment agreement or other written obligation,
agreement or commitment to which the Company was a party as of the Series A
Original Issue Date (as defined below) and which was disclosed in the Company's
filings with the Securities and Exchange Commission; or
(v) by way of dividend or other distribution
on shares of Common Stock excluded from the definition of Additional Shares of
Common Stock by the foregoing clauses (i), (ii), (iii) or (iv).
(D) "Series A Original Issue Date" shall mean the
date on which the first Series A Share was issued.
(ii) No Adjustment of Conversion Price: No adjustment in the
Conversion Price shall be made in respect of the issuance of Additional Shares
of Common Stock unless the consideration per share for an Additional Share of
Common Stock issued or deemed to be issued by the Company is issued for
consideration less than the "Effective Conversion Price" in effect on the date
of such issuance. The effective conversion price (the "Effective Conversion
Price") on any date shall be equal to that number obtained by multiplying the
Conversion Price in effect on such date by .67.
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(iii) Deemed Issue of Additional Shares of Common Stock:
(A) Options and Convertible Securities: In the event
the Company at any time or from time to time after the Series A Original Issue
Date shall issue any Options or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities entitled to
receive any such Options or Convertible Securities, then the maximum number of
shares of Common Stock issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor, the exercise of such
Options and conversion or exchange of such Convertible Securities shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 5(b)(v) hereof) of such Additional Shares of
Common Stock would be less than the Effective Conversion Price in effect on the
date of and immediately prior to such issue, or such record date, as the case
may be, and provided further that in any such case in which Additional Shares of
Common Stock are deemed to be issued:
(i) except as provided in Section
5(b)(iii)(A)(ii) hereof, no further adjustment in the Conversion Price shall be
made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(ii) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any change in the consideration payable to the Company, or change in the number
of shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof (other than under or by reason of provisions designed to protect against
dilution), the Conversion Price computed upon the original issue thereof (or
upon the occurrence of a record date with respect thereto) and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities; and
(iii) no readjustment pursuant to clause
(ii) above shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (1) the Conversion Price on the original adjustment
date or (2) the Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date.
(iv) Adjustment of Conversion Rate Upon Issuance of Additional
Shares of Common Stock: In the event the Company shall issue Additional Shares
of Common Stock without consideration or for a consideration per share less than
the Effective Conversion Price in effect on the date of and immediately prior to
such issue, then and in each such event the Conversion Price shall be reduced to
a price (calculated to the nearest cent) determined by multiplying such
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of shares
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of Common Stock which the aggregate consideration received by the Company for
the total number of Additional Shares of Common Stock so issued would purchase
at the Effective Conversion Price; and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such issue
plus the number of such Additional Shares of Common Stock so issued.
(v) Determination of Consideration. For purposes of this
Section, the consideration received by the Company for the issuance of any
Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property: Such consideration shall:
(i) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Company;
(ii) insofar as it consists of property
other than cash, be computed at the fair value thereof at the time of such
issue, as determined by the Board of Directors in the good faith exercise of its
reasonable business judgment; and
(iii) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other assets
of the Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (i) and (ii) above,
as determined by the Board of Directors in the good faith exercise of its
reasonable business judgment.
(B) Options and Convertible Securities. The
consideration per share received by the Company for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 5(b)(iii)(A), relating to
Options and Convertible Securities, shall be determined by dividing
(i) the total amount, if any, received or
receivable by the Company as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Company upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of Options
for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by
(ii) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
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(vi) Other Adjustments.
(A) Subdivisions, Combinations, or Consolidations of
Common Stock: In the event the outstanding shares of Common Stock shall be
subdivided, combined or consolidated, by stock split, stock dividend,
combination or like event, into a greater or lesser number of shares of Common
Stock, the Conversion Price in effect immediately prior to such subdivision,
combination, consolidation or stock dividend shall, concurrently with the
effectiveness of such subdivision, combination or consolidation, be
proportionately adjusted.
(B) Reclassifications: In the case, at any time after
the date hereof, of any capital reorganization or any reclassification of the
stock of the Company (other than as a result of a stock dividend or subdivision,
split-up or combination of shares), or the consolidation or merger of the
Company with or into another person (other than a consolidation or Merger (i) in
which the Company is the continuing entity and which does not result in any
change in the Common Stock or (ii) which is treated as a liquidation pursuant to
Section 4 hereof), the Series A Shares shall, after such reorganization,
reclassification, consolidation or merger be convertible into the kind and
number of shares of stock or other securities or property of the Company or
otherwise to which such holder would have been entitled if immediately prior to
such reorganization, reclassification, consolidation or merger such holder had
converted its Series A Shares into Common Stock. The provisions of this Section
5(b)(vi) shall similarly apply to successive reorganizations, reclassifications,
consolidations or mergers.
(c) Fractional Shares. In lieu of any fractional shares to which the
holder of a Series A Share would otherwise be entitled upon conversion, the
Company shall pay cash equal to such fraction multiplied by the fair market
value of one share of Common Stock as determined by the Board of Directors in
the good faith exercise of its reasonable business judgment.
(d) Miscellaneous:
(i) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest one hundredth (1/100) of a share, as the
case may be.
(ii) The holders of at least 50% of the outstanding Series A
Shares shall have the right to challenge any determination by the Board
of Directors of fair market value pursuant to this Section 5, in which
case such determination of fair market value shall be made by an
independent appraiser selected jointly by the Board of Directors and
the challenging parties, the cost of such appraisal to be borne equally
by the Company and the challenging parties.
(iii) No adjustment in the Conversion Price need be made if
such adjustment would result in a change in such Conversion Price of
less than $0.01. Any adjustment of less than $0.01 which is not made
shall be carried forward and shall be made at the time of and together
with any subsequent adjustment which, on a cumulative basis, amounts to
an adjustment of $0.01 or more in the Conversion Rate.
(e) No Impairment. The Company will not, through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities
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or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 5 and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of the Series A Shares against impairment.
(f) Reservation of Stock Issuable Upon Conversion. The Company shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock, solely for the purpose of effecting the conversion of the
Series A Shares, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding Series A Shares.
If at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding Series
A Shares, the Company will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose.
Section 6. Reports as to Adjustments.
Whenever the Conversion Price or the type of securities, cash or other
property into which the Series A Shares may be converted is adjusted as provided
in Section 5 hereof, the Company shall promptly mail to the holders of record of
the outstanding Series A Shares at their respective addresses as the same shall
appear in the Company's stock records, a notice stating that the Conversion
Price has been adjusted and setting forth the new number of shares of Common
Stock (or describing the new stock, securities, cash or other property) into
which each Series A Share is convertible as a result of such adjustment, a brief
statement of the facts requiring such adjustment and the computation thereof and
when such adjustment became effective.
Section 7. Redemption.
(a) All or any portion of the Series A Shares may be redeemed upon
payment in cash or other immediately available funds of $100 per Series A Share,
plus accrued and unpaid dividends thereon through the "Redemption Date" (as
defined below) (the "Redemption Price"), at any time by the Company at its sole
discretion upon thirty (30) days' written notice to the holders of the Series A
Shares provided that: (i) the Company's shares of Common Stock shall be eligible
for quotation and trading on the OTC Electronic Bulletin Board, on a national
securities exchange, the NASDAQ National Market System or the NASDAQ SmallCap
Market on the "Redemption Date" (as defined below); and (ii) the shares of
Common Stock issuable upon conversion of the Series A Shares shall be subject to
an effective registration statement permitting their resale under the Securities
Act of 1933, as amended. In the event that the Company redeems less than all of
the outstanding Series A Shares it shall redeem such shares pro rata among all
holders of the Series A Shares.
(b) Any notice of redemption ("Redemption Notice") given by the Company
with respect to the Series A Shares shall be delivered by mail, first class
postage prepaid, to each holder of record (at the close of business on the
business day preceding the day on which notice is given) of the Series A Shares,
at the address last shown on the records of the Company for
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such holder or given by the holder to the Company, for the purpose of notifying
such holder of the redemption to be effected. The Redemption Notice shall
specify a date (the "Redemption Date") not earlier than 30 days after the
mailing of the Redemption Notice on which the Series A Shares then outstanding
shall be redeemed and the place at which payment may be obtained. The Redemption
Notice shall call upon each holder of Series A Shares to either (i) surrender to
the Company, in the manner and at the place designated, such holder's
certificate or certificates representing the Series A Shares to be redeemed or
(ii) convert the Series A Shares into Common Stock prior to the Redemption Date
in accordance with the provisions of Section 5 above. If the Company elects to
redeem shares pursuant to this Section 7 and defaults or fails to perform its
redemption obligations pursuant to this Section 7 in connection therewith, the
holders of the Series A Shares shall then have the absolute right to convert
such Series A Shares into Common Stock in accordance with the provisions of
Section 5.
(c) On the Redemption Date, the Company shall pay by cash or wire
transfer of immediately available funds to an escrow agent (the "Escrow Agent")
an amount equal to the aggregate Redemption Price for all Series A Shares
subject to such redemption. the Escrow Agent shall distribute to each person
whose name appears on the certificate or certificates of the Series A Shares
that (i) shall not have been converted pursuant to Section 5 hereof and (ii)
shall have been surrendered to the Escrow Agent in the manner and at the place
designated in the Redemption Notice, the Redemption Price, and thereupon each
surrendered certificate shall be canceled.
(d) From and after the Redemption Date, unless there shall have been a
default in payment of the Redemption Price, all rights of the holders of the
Series A Shares subject to the Redemption Notice (except the right to receive
the Redemption Price subsequent to the Redemption Date upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Company or be
deemed to be outstanding for any purpose whatsoever.
Section 8. Reacquired Shares.
Any Series A Shares converted, purchased or otherwise acquired by the
Company in any manner whatsoever shall be retired and canceled promptly after
the acquisition thereof, and, if necessary to provide for the lawful purchase of
such shares, the capital represented by such shares shall be reduced in
accordance with the Minnesota Business Corporation Act. All such shares shall
upon their cancellation become authorized but unissued shares of Preferred
Stock, $.01 par value, of the Company and may be reissued as part of another
series of Preferred Stock, $.01 par value, of the Company.
Section 9. Filing.
This Certificate of Designation shall be filed with the Secretary of
State of the State of Minnesota in accordance with the Minnesota Business
Corporation Act.
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I certify that I am authorized to execute this statement and I further
certify that I understand that by signing this statement, I am subject to the
penalties of perjury as set forth in Section 609.48 as if I had signed this
statement under oath.
SAC TECHNOLOGIES, INC.
/s/ Barry M. Wendt
----------------------------------------
Barry M. Wendt, Chief Executive Officer
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EXHIBIT NO. 10.23
AMENDMENT NO. 1
TO THE SAC TECHNOLOGIES, INC.
1996 STOCK OPTION PLAN
This Amendment No. 1 to the SAC Technologies, Inc. 1996 Stock Option
Plan (the "Plan") is made and effective as of this 31st day of August, 1999.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings ascribed thereto in the Plan.
RECITALS
WHEREAS, Section 3 of the Plan provides for the Plan to be administered
by a committee of "disinterested persons" within the meaning of Rule 16b-3 under
the Exchange Act or by a committee consisting solely of members of the Board of
Directors who are such "disinterested persons;" and
WHEREAS, Section 12 of the Plan provides for the Board of Directors of
the Company to amend the Plan in order to conform to any change in applicable
law or regulation; and
WHEREAS, since the adoption of the Plan Rule 16b-3 under the Exchange
Act has been amended to alter the approval provisions necessary in order for
options issued to directors, executive officers and certain beneficial owners to
be exempt from Section 16(b) of the Exchange Act.
NOW, THEREFORE, the Board of Directors hereby amends the Plan as set
forth below:
1. Definitions. Section 2.12 is hereby amended to provide in its
entirety as follows:
"Non-employee Director" for the purpose of Section 7 only,
means any member of the Board of Directors who is not an
employee of the Company or any Subsidiary."
2. Plan Administration. Section 3.1 is hereby amended to provided in
its entirety as follows:
"The Plan shall be administered by the full Board or a
committee of such Board comprised of two or more Non-Employee
Directors within the meaning of Rule 16b-3(a)(3) promulgated
under the Exchange Act. As used in this Plan, the term
"Committee" will refer to the Board or to such a committee, if
established."
3. Full Force and Effect. All other provisions in the Plan shall remain
in full force and effect.
EXHIBIT 10.24
SAC TECHNOLOGIES, INC.
1999 STOCK OPTION PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS. The name of the
plan is the SAC Technologies, Inc. 1999 Stock Option Plan (the "Plan"). The
purpose of the Plan is to encourage and enable the officers, employees,
directors and consultants of SAC Technologies, Inc. or any Subsidiary (the
"Company") upon whose judgment, initiative and efforts the Company largely
depends for the successful conduct of its business to acquire a proprietary
interest in the Company. It is anticipated that providing such persons with a
direct stake in the Company's welfare will assure a closer identification of
their interests with those of the Company, thereby stimulating their efforts on
the Company's behalf and strengthening their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options and Non-Qualified
Stock Options.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Effective Date" means the date on which the Plan is approved by the
Board of Directors of the Company.
"Fair Market Value" of the Stock on any given date means (i) if the
Stock is admitted to quotation on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") or OTC Bulletin Board, the Fair Market
Value on any given date shall be the average of the highest bid and lowest asked
prices of the Stock reported for such date or, if no bid and asked prices were
reported for such date, for the last day preceding such date for which such
prices were reported, or (ii) if the Stock is admitted to trading on a United
States securities exchange or the NASDAQ National Market System, the Fair Market
Value on any date shall be the closing price reported for the Stock on such
exchange or system for such date or, if no sales were reported for such date,
for the last day preceding such date for which a sale was reported; and (iii) if
the Fair Market Value cannot be determined on the basis previously set forth in
this definition on the date that Fair Market Value is to be determined, the
Board shall in good faith determine the Fair Market Value of the Stock on such
date.
<PAGE>
"Incentive Stock Option" means any Stock Option designated and
qualified as an "incentive stock option" as defined in Section 422 of the Code.
"Independent Director" means a member of the Board who is not an
employee or officer of the Company or any Subsidiary.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Option" or "Stock Option" means any Option to purchase shares of Stock
granted pursuant to Section 6.
"Stock" means the Common Stock, par value $.01 per share, of the
Company, subject to adjustments pursuant to Section 9.
"Subsidiary" means any corporation or other entity (other than the
Company) in any unbroken chain of corporations or other entities, beginning with
the Company, if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50% or more of the economic interest or the total combined voting
power of all classes of stock or other interests in one of the other
corporations or entities in the chain.
SECTION 2. ADMINISTRATION. The Plan shall be administered by the full
Board of Directors of the Company or a committee of such Board of Directors
comprised of two or more "Non-Employee Directors" within the meaning of Rule
16b-3(a)(3) promulgated under the Act (the "Plan Administrator"). Subject to the
provisions of the Plan, the Plan Administrator is authorized to:
(a) construe the Plan and any Award under the Plan;
(b) select the directors, officers, employees and
consultants of the Company and its Subsidiaries to
whom Awards may be granted;
(c) determine the number of shares of Stock to be covered
by any Award;
(d) determine and modify from time to time the terms and
conditions, including restrictions, of any Award and
to approve the form of written instrument evidencing
Awards;
(e) accelerate at any time the exercisability or vesting
of all or any portion of any Award and/or to include
provisions in awards providing for such acceleration;
(f) impose limitations on Awards, including limitations
on transfer and repurchase provisions;
- 2 -
<PAGE>
(g) extend the exercise period within which Stock Options
may be exercised; and
(h) determine at any time whether, to what extent, and
under what circumstances Stock and other amounts
payable with respect to an Award shall be deferred
either automatically or at the election of the
participant and whether and to what extent the
Company shall pay or credit amounts constituting
interest (at rates determined by the Plan
Administrator) or dividends or deemed dividends on
such deferrals.
The determination of the Plan Administrator on any such matters shall be
conclusive.
SECTION 3. ELIGIBILITY. Directors, officers, employees and consultants
of the Company or its Subsidiaries who, in the opinion of the Plan
Administrator, are mainly responsible for the continued growth and development
and future financial success of the business shall be eligible to participate in
the Plan. In addition, Independent Directors are eligible to receive an
automatic grant of Stock Options pursuant to Section 7 hereof.
SECTION 4. SHARES SUBJECT TO THE PLAN. The number of shares of Stock
which may be issued pursuant to the Plan shall 2,000,000. For purposes of the
foregoing limitation, the shares of Stock underlying any Awards which are
forfeited, canceled, reacquired by the Company, satisfied without the issuance
of Stock or otherwise terminated (other than by exercise) shall be added back to
the number of shares of Stock available for issuance under the Plan.
Notwithstanding the foregoing, Stock Options with respect to no more than
300,000 shares of Stock may be granted to any one individual participant during
any one calendar year period.
SECTION 5. STOCK OPTIONS. Subject to Section 15 hereof, Options granted
pursuant to the Plan may be either Options which are Incentive Stock Options or
Non-Qualified Stock Options. Notwithstanding the forgoing, Incentive Stock
Options may only be granted upon the Plan being approved by the shareholders of
the Company. Incentive Stock Options and Non-Qualified Stock Options shall be
granted separately hereunder. The Plan Administrator, shall determine whether
and to what extent Options shall be granted under the Plan and whether such
Options granted shall be Incentive Stock Options or Non-Qualified Stock Options;
provide, however, that: (a) Incentive Stock Options may be granted only to
employees of the Company or any Subsidiary that is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code; and (b) No Incentive Stock
Option may be granted following the tenth anniversary of the effective date of
the Plan. The provisions of the Plan and any stock Option agreement pursuant to
which Incentive Stock Options shall be issued shall be construed in a manner
consistent with Section 422 of the Code (or any successor provision) and rules
and regulations promulgated thereunder.
SECTION 6. TERMS OF OPTIONS. Each Option granted under the Plan shall
be evidenced by an agreement between the Company and the person to whom such
Option is granted and shall be subject to the following terms and conditions:
- 3 -
<PAGE>
(a) Subject to adjustment as provided in Section 9 of
this Plan, the price at which each share covered by
an Option may be purchased shall be determined in
each case by the Plan Administrator; provided,
however, that such price shall not (i) in the case of
an Incentive Stock Option, be less than the Fair
Market Value of the underlying Stock at the time the
Option is granted; or (ii) in the case of a
Non-Qualified Stock Option, less than 85% of the Fair
Market Value of the underlying Stock at the time the
Option is granted. If an optionee owns (or is deemed
to own under applicable provisions of the Code and
rules and regulations promulgated thereunder) more
than ten percent (10%) of the combined voting power
of all classes of the stock of the Company and an
Option granted to such optionee is intended to
qualify as an Incentive Stock Option, the Option
price shall be no less than 110% of the Fair Market
Value of the Common Stock covered by the Option on
the date the Option is granted.
(b) The aggregate Fair Market Value of shares of Stock
with respect to which Incentive Stock Options are
first exercisable by the optionee in any calendar
year (under all plans of the Company) shall not
exceed the limitations, if any, imposed by Section
422(d) of the Code (or any successor provision). If
any Option designated as an Incentive Stock Option,
either alone or in conjunction with any other Option
or Options, exceeds the foregoing limitation, the
portion of such Option in excess of such limitation
shall automatically be reclassified (in whole share
increments and without fractional share portions) as
a Non-Qualified Stock Option, with later granted
Options being so reclassified first.
(c) No Option shall be transferable by the participant
without the permission of the Company otherwise than
by will or by the laws of descent and distribution or
pursuant to a domestic relations order. After the
death of the participant, the Option may be
transferred to the Company upon such terms and
conditions, if any, as the Plan Administrator and the
personal representative or other person entitled to
exercise the Option may agree within the period
specified in subsection 6(d)(iii) hereof.
(d) An Option may be exercised in whole at any time, or
in part from time to time, within such period or
periods (not to exceed ten years from the granting of
the Option in the case of an Incentive Stock Option)
as may be determined by the Plan Administrator and
set forth in the agreement (such period or periods
being hereinafter referred to as the "Option
Period"), provided that, unless the agreement
provides otherwise:
(i) If a participant who is an employee of the
Company shall cease to be employed by the
Company, all Options to which the employee
is then entitled to exercise may be
exercised only within three months after the
termination of employment and within the
Option Period or, if such termination was
due to disability or retirement
- 4 -
<PAGE>
(as hereinafter defined), within one year
after termination of employment and within
the Option Period. Notwithstanding the
foregoing: (a) in the event that any
termination of employment shall be for Cause
(as defined herein) during the Option
Period, then any and all Options held by
such participant shall forthwith terminate;
and(b) the Plan Administrator may, in its
sole discretion, extend the Option Period of
any Option for up to three years from the
date of termination of employment regardless
of the original Option Period. For purposes
of the Plan, retirement shall mean the
termination of employment with the Company,
other than for Cause, at any time after the
age 65.
For purposes of this Plan, the term "Cause"
shall mean (a) with respect to an individual
who is party to a written agreement with the
Company which contains a definition of
"cause" or "for cause" or words of similar
import for purposes of termination of
employment thereunder by the Company,
"cause" or "for cause" as defined in such
agreement; (b) in all other cases (I) the
willful commission by an employee of a
criminal or other act that causes
substantial economic damage to the Company
or substantial injury to the business
reputation of the Company; (II) the
commission of an act of fraud in the
performance of such person's duties to or on
behalf of the Company; or (III) the
continuing willful failure of a person to
perform the duties of such person to the
Company (other than a failure to perform
duties resulting from such person's
incapacity due to illness) after written
notice thereof (specifying the particulars
thereof in reasonable detail) and a
reasonable opportunity to cure such failure
are given to the person by the Board of
Directors of the Company or the Plan
Administrator. For purposes of the Plan, no
act, or failure to act, on the part of any
person shall be considered "willful" unless
done or omitted to be done by the person
other than in good faith and without
reasonable belief that the person's action
or omission was in the best interest of the
Company.
If a participant who is a director of the
Company shall cease to serve as a director
of the Company, any Options then exercisable
by such director may be exercised only
within three months after the cessation of
service and within the Option Period unless
such cessation was due to disability, in
which case such optionee may exercise such
Option within one year after cessation of
service and within the Option Period.
Notwithstanding the foregoing: (a) if any
cessation of service as a director was the
result of removal for Cause during the
Option Period, any Options held by such
participant shall forthwith terminate; and
(b) the Plan
- 5 -
<PAGE>
Administrator may in its sole discretion
extend the Option Period of any Option for
up to three years from the date of cessation
of service regardless of the original Option
Period;
(ii) If the participant shall die during the
Option Period, any Options then exercisable
may be exercised only within one year after
the participant's death and within the
Option Period and only by the participant's
personal representative or persons entitled
thereto under the participant's will or the
laws of descent and distribution;
(iii) The Option may not be exercised for more
shares (subject to adjustment as provided in
Section 9) after the termination of the
participant's employment, cessation of
service as a director or the participant's
death, as the case may be, than the
participant was entitled to purchase
thereunder at the time of the termination of
the participant's employment or the
participant's death; and
(iv) If a participant owns (or is deemed to own
under applicable provisions of the Code and
regulations promulgated thereunder) more
than 10% of the combined voting power of all
classes of stock of the Company (or any
parent or subsidiary corporation of the
Company) and an Option granted to such
participant is intended to qualify as an
Incentive Stock Option, the Option by its
terms may not be exercisable after the
expiration of five years from the date such
Option is granted.
(e) The Option exercise price of each share purchased
pursuant to an Option shall be paid in full at the
time of each exercise (the "Payment Date") of the
Option (i) in cash; (ii) by delivering to the Company
a notice of exercise with an irrevocable direction to
a broker-dealer registered under the Act to sell a
sufficient portion of the shares and deliver the sale
proceeds directly to the Company to pay the exercise
price; (iii) in the discretion of the Plan
Administrator, through the delivery to the Company of
previously-owned shares of Common Stock having an
aggregate Fair Market Value equal to the Option
exercise price of the shares being purchased pursuant
to the exercise of the Option; provided, however,
that shares of Common Stock delivered in payment of
the Option price must have been held by the
participant for at least six (6) months in order to
be utilized to pay the Option price; (iv) in the
discretion of the Plan Administrator, through an
election to have shares of Common Stock otherwise
issuable to the optionee withheld to pay the exercise
price of such Option; or (v) in the discretion of the
Plan Administrator, through any combination of the
payment procedures set forth in subsections (i)-(iv)
of this Section 7(e).
- 6 -
<PAGE>
(f) Nothing contained in the Plan nor in any Award
agreement shall confer upon any participant any right
with respect to the continuance of employment by the
Company nor interfere in any way with the right of
the Company to terminate his employment or change his
compensation at any time.
(g) The Plan Administrator may include such other terms
and conditions not inconsistent with the foregoing as
the Plan Administrator shall approve. Without
limiting the generality of the foregoing sentence,
the Plan Administrator shall be authorized to
determine that Options shall be exercisable in one or
more installments during the term of the Option,
subject to the attainment of performance goals and
objectives and the right to exercise may be
cumulative as determined by the Plan Administrator.
SECTION 7. INDEPENDENT DIRECTOR OPTIONS. Anything to the contrary
notwithstanding, each Independent Director who is first elected or appointed to
serve as a director shall automatically be granted Non-Qualified Stock Options
to purchase 50,000 shares of Stock. The Option exercise price for Options
granted to Independent Directors under the Plan will be equal the Fair Market
Value of the Stock on the date of grant. Options granted to Independent
Directors under the foregoing provisions will be granted on the date that such
Independent Director is first elected or appointed to serve as a director and
will vest in equal annual installments over five years commencing on the
anniversary of the date of grant and will expire ten years after grant, subject
to earlier termination if the optionee ceases to serve as a director. Five years
after the initial grant of an option to an Independent Director, and every fifth
year thereafter, Independent Directors shall automatically be granted additional
Options to purchase 50,000 shares of Stock on the same terms described in this
Section 7 upon the reelection of the Independent Director to the Board or to
office.
SECTION 8. TAX WITHHOLDING.
(a) Whenever shares are to be issued or cash is to be
paid under the Plan, the Company shall have the right
to require the participant to remit to the Company an
amount sufficient to satisfy federal, state and local
tax withholding requirements prior to the delivery of
any certificate for shares or any proceeds; provided,
however, that in the case of a participant who
receives an Award of shares under the Plan which is
not fully vested, the participant shall remit such
amount on the first business day following the Tax
Date. The "Tax Date" for purposes of this Section 8
shall be the date on which the amount of tax to be
withheld is determined. If a participant makes a
disposition of shares acquired upon the exercise of
an Incentive Stock Option within either two years
after the Option was granted or one year after its
exercise by the participant, the participant shall
promptly notify the Company and the Company shall
have the right to require the participant to pay to
the Company an amount sufficient to satisfy federal,
state and local tax withholding requirements.
- 7 -
<PAGE>
(b) A participant who is obligated to pay the Company an
amount required to be withheld under applicable tax
withholding requirements may pay such amount (i) in
cash; (ii) in the discretion of the Plan
Administrator, through the delivery to the Company of
previously-owned shares of Common Stock having an
aggregate Fair Market Value on the Tax Date equal to
the tax obligation provided that the previously owned
shares delivered in satisfaction of the withholding
obligations must have been held by the participant
for at least six (6) months; or (iii) in the
discretion of the Plan Administrator, through a
combination of the procedures set forth in
subsections (i) and (ii) of this Section 8(b).
(c) A participant who is obligated to pay to the Company
an amount required to be withheld under applicable
tax withholding requirements in connection with
either the exercise of a Non-Qualified Stock Option,
or the receipt of a Restricted Stock Award, Stock
Award or Performance Share Award under the Plan may,
in the discretion of the Plan Administrator, elect to
satisfy this withholding obligation, in whole or in
part, by requesting that the Company withhold shares
of stock otherwise issuable to the participant having
a Fair Market Value on the Tax Date equal to the
amount of the tax required to be withheld; provided,
however, that shares may be withheld by the Company
only if such withheld shares have vested. Any
fractional amount shall be paid to the Company by the
participant in cash or shall be withheld from the
participant's next regular paycheck.
(d) An election by a participant to have shares of stock
withheld to satisfy federal, state and local tax
withholding requirements pursuant to Section 8(c)
must be in writing and delivered to the Company prior
to the Tax Date.
SECTION 9. ADJUSTMENT OF NUMBER AND PRICE OF SHARES.
Any other provision of the Plan notwithstanding:
(a) If, through or as a result of any merger,
consolidation, sale of all or substantially all of
the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend,
stock split, reverse stock split or other similar
transaction, the outstanding shares of Stock are
increased or decreased or are exchanged for a
different number or kind of shares or other
securities of the Company, or additional shares or
new or different shares or other securities of the
Company or other non-cash assets are distributed with
respect to such shares of Stock or other securities,
the Plan Administrator shall make an appropriate or
proportionate adjustment in (i) the number of Stock
Options that can be granted to any one individual
participant, (ii) the number and kind of shares or
other securities subject to any then outstanding
Awards under the
- 8 -
<PAGE>
Plan, and (iii) the price for each share subject to
any then outstanding Stock Options under the Plan,
without changing the aggregate exercise price (i.e.,
the exercise price multiplied by the number of
shares) as to which such Stock Options remain
exercisable. The adjustment by the Plan Administrator
shall be final, binding and conclusive.
(b) In the event that, by reason of a corporate merger,
consolidation, acquisition of property or stock,
separation, reorganization or liquidation, the Board
of Directors shall authorize the issuance or
assumption of a stock option or stock options in a
transaction to which Section 424(a) of the Code
applies, then, notwithstanding any other provision of
the Plan, the Plan Administrator may grant an Option
or Options upon such terms and conditions as it may
deem appropriate for the purpose of assumption of the
old option, or substitution of a new Option for the
old option, in conformity with the provisions of Code
Section 424(a) and the rules and regulations
thereunder, as they may be amended from time to time.
(c) No adjustment or substitution provided for in this
Section 9 shall require the Company to issue or to
sell a fractional share under any stock Option
agreement or share award agreement and the total
adjustment or substitution with respect to each stock
Option and share award agreement shall be limited
accordingly.
SECTION 10. CHANGE IN CONTROL.
(a) For purposes of this Section 10, a "Change in
Control" of the Company shall mean the following:
(i) the sale, lease, exchange or other transfer,
directly or indirectly, of substantially all
of the assets of the Company (in one
transaction or in a series of related
transactions) to a person or entity that is
not controlled by the Company;
(ii) the approval by the stockholders of the
Company of any plan or proposal for the
liquidation or dissolution of the Company;
(iii) a merger or consolidation to which the
Company is a party if the stockholders of
the Company immediately prior to the
effective date of such merger or
consolidation have "beneficial ownership"
(as defined in Rule 13d-3 under the Act),
immediately following the effective date of
such merger or consolidation, of securities
of the surviving corporation representing
50% or less of the combined voting power of
the surviving corporation's then outstanding
securities ordinarily having the right to
vote at elections of directors;
- 9 -
<PAGE>
(iv) any person becomes after the effective date
of the Plan the "beneficial owner" (as
defined in Rule 13d-3 under the Act),
directly or indirectly, of 50% or more of
the combined voting power of the Company's
outstanding securities ordinarily having the
right to vote at elections of directors;
(v) the Incumbent Directors cease for any reason
to constitute at least a majority of the
Board; or
(vi) a change in control of the Company of a
nature that would be required to be reported
pursuant to Section 13 or 15(d) of the Act,
whether or not the Company is then subject
to such reporting requirements.
(b) For purposes of this Section 10, "Incumbent
Directors" of the Company means any individuals who
are members of the Board on the Effective Date of the
Plan and any individual who subsequently becomes a
member of the Board whose election, or nomination for
election by the Company's shareholders, was approved
by a vote of at least a majority of the Incumbent
Directors (either by specific vote or by approval of
the Company's proxy statement in which such
individual is named as a nominee for director without
objection to such nomination).
(c) Without limiting the authority of the Plan
Administrator under Section 3 of the Plan, in the
event of a Change in Control of the Company, all
Options shall automatically become fully vested and
immediately exercisable in full and shall be deemed
to have attained such status immediately prior to the
Change in Control. Each holder of an Option granted
hereunder shall be given at least 15 days prior
written notice of a Change in Control and shall be
permitted to exercise any Options during this 15 day
period (including those Options vesting as a result
of the provisions of this Section). In the event of a
Change in Control, any Options which are neither
assumed or substituted for in connection with the
Change in Control nor exercised as of the date of the
Change in Control shall terminate and cease to be
outstanding effective as of the date of the Change in
Control, unless otherwise provided by the Board.
(d) Notwithstanding anything in Section 10 of the Plan to
the contrary, if, with respect to a Participant, the
acceleration of the vesting of an Option as provided
in Section 10 (which acceleration could be deemed a
"payment" within the meaning of Section 280G(b)(2) of
the Code), together with any other payments which
such Participant has the right to receive from the
Company or any corporation that is a member of an
"affiliated group" (as defined in Section 1504(a) of
the Code without regard to Section 1504(b) of the
Code) of which the Company is a member, would
constitute a "parachute payment" (as defined in
Section 280G(b)(2) of the Code), then
- 10 -
<PAGE>
the payments to such Participant pursuant to Section
9.3 or 9.4 will be reduced to the largest amount as
will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of
the Code; provided, however, that if such Participant
is subject to a separate agreement with the Company
or a Subsidiary that specifically provides that
payments attributable to one or more forms of
employee stock incentives or to payments made in lieu
of employee stock incentives will not reduce any
other payments under such agreement, even if it would
constitute an excess parachute payment, or provides
that the Participant will have the discretion to
determine which payments will be reduced in order to
avoid an excess parachute payment, then the
limitations of this Section 10 will to that extent,
not apply.
SECTION 11. AMENDMENT AND DISCONTINUANCE. The Board may alter, amend,
suspend or discontinue the Plan, provided that no such action shall deprive any
person without such person's consent of any rights theretofore granted pursuant
hereto.
SECTION 12. COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Notwithstanding
any provision of the Plan or the terms of any agreement entered into pursuant to
the Plan, the Company shall not be required to issue any shares hereunder prior
to registration of the shares subject to the Plan under the Securities Act of
1933 or the Act, if such registration shall be necessary, or before compliance
by the Company or any participant with any other provisions of either of those
acts or of regulations or rulings of the Securities and Exchange Commission
thereunder, or before compliance with other federal and state laws and
regulations and rulings thereunder, including the rules any applicable exchange
or of the NASDAQ Stock Market. The Company shall use its best efforts to effect
such registrations and to comply with such laws, regulations and rulings
forthwith upon advice by its counsel that any such registration or compliance is
necessary.
SECTION 13. COMPLIANCE WITH SECTION 16. With respect to persons subject
to Section 16 of the Act, transactions under this Plan are intended to comply
with all applicable conditions of Rule 16b-3 (or its successor rule and shall be
construed to the fullest extent possible in a manner consistent with this intent
). To the extent that any Award fails to so comply, it shall be deemed to be
modified to the extent permitted by law and to the extent deemed advisable by
the Plan Administrator in order to comply with Rule 16b-3.
SECTION 14. PARTICIPATION BY FOREIGN NATIONALS. The Plan Administrator
may, in order to fulfill the purposes of the Plan and without amending the Plan,
modify grants to foreign nationals or United States citizens employed abroad in
order to recognize differences in local law, tax policy or custom.
SECTION 15. EFFECTIVE DATE OF PLAN; STOCKHOLDER APPROVAL. The Plan
became effective on August 31, 1999, the date of approval and adoption of the
Plan by the Board. Notwithstanding anything contained herein to the contrary,
any Option granted hereunder which is intended to quality as an Incentive Stock
Option shall not be treated for any purpose as an Incentive Stock Option unless
this Plan is approved by the Company's stockholders within twelve (12) months of
the Effective Date. In the event that the Company's stockholders do not approve
the Plan within twelve
- 11 -
<PAGE>
(12) months of the Effective Date, any Option granted hereunder which was
intended to qualify as an Incentive Stock Option shall be deemed to be a
Non-Qualified Option.
IN WITNESS WHEREOF, the undersigned officer of the Company certifies
that the foregoing SAC Technologies, Inc. 1999 Stock Option Plan was duly
adopted by the Board of Directors of the Company on the 31st day of August 1999.
/s/ Barry M. Wendt
----------------------------------------
Barry M. Wendt
Chief Executive Officer
- 12 -
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, 1999, appearing in the registration
statement on Form S-3 (file no. 333-61523) and 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 May 3, 1999 and
October 7, 1997, respectively.
/s/ Divine, Scherzer & Brody, Ltd.
Minneapolis, Minnesota
March 21, 2000
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<PERIOD-END> DEC-31-1999
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<INVENTORY> 32,500
<CURRENT-ASSETS> 190,103
<PP&E> 242,913
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<CURRENT-LIABILITIES> 932,832
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0
131
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<TOTAL-LIABILITY-AND-EQUITY> 360,724
<SALES> 57,970
<TOTAL-REVENUES> 157,970
<CGS> 452,593
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<OTHER-EXPENSES> 3,008,158
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