U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended September 30, 2000
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number 1-13463
-----------------------------------
SAC TECHNOLOGIES, INC.
----------------------
(Exact name of small business Issuer as specified in its charter)
MINNESOTA 41-1741861
--------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1285 Corporate Center Drive, Suite # 175, Eagan, MN 55121
---------------------------------------------------------
(Address of principal executive offices)
(651) 687-0414
--------------
(Issuer's telephone number)
----------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes _X_ No___
Shares of the Registrant's Common Stock, par value $.01 per share,
outstanding as of November 10, 2000: 9,966,724.
<PAGE>
SAC TECHNOLOGIES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance sheets as of December 31, 1999 and September 30, 2000........3
Statements of operations for the three months ended
September 30, 1999 and 2000, nine months ended September
30, 1999 and 2000, and January 7, 1993 (date of inception)
through September 30, 2000.....................................4
Statements of cash flows for the nine months ended September
30, 1999 and 2000, and January 7, 1993 (date of inception)
through September 30, 2000.................................... 5
Notes to interim financial statements................................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................9
PART II. OTHER INFORMATION
Item 1 - Legal proceedings.............................................15
Item 2 - Changes in Securities and Use of Proceeds.....................15
Item 3 - Defaults Upon Senior Securities...............................15
Item 4 - Submission of Matters to a Vote of Security Holders...........15
Item 5 - Other Events..................................................15
Item 6 - Exhibits and Reports on Form 8-K..............................16
2
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 101,152 $ 24,568
Accounts receivable, less allowance
for doubtful receivables 13,331 7,100
Inventories 32,500 31,850
Prepaid expenses 43,120 29,262
------------ ------------
Total current assets 190,103 92,780
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST,
less accumulated depreciation 79,257 43,771
OTHER ASSETS (note 4) 91,364 44,952
------------ ------------
$ 360,724 $ 181,503
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Note Payable (note 2) $ 150,000 $ 850,000
Current Maturities of Convertible Debentures -- 791,840
Accounts payable 341,035 381,036
Accrued liabilities (note 5) 441,797 909,949
------------ ------------
Total current liabilities 932,832 2,932,825
Convertible debentures, less discount
of $46,246 and $16,160, less
current maturities (note 6) 1,111,754 --
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT) (notes 6 and 7)
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, 13,125 and 19,875, respectively 131 199
Common stock - authorized, 20,000,000 shares
of $.01 par value; issued and outstanding,
9,106,257 and 9,658,273 shares, respectively 91,063 96,583
Additional contributed capital 11,473,269 12,782,365
Deficit accumulated during the development stage (13,248,325) (15,630,469)
------------ ------------
(1,683,862) (2,751,322)
------------ ------------
$ 360,724 $ 181,503
============ ============
</TABLE>
See accompanying notes to interim financial statements.
3
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
January 7,
1993 (date
of inception)
Three months Nine months through
ended September 30, ended September 30, September 30,
----------------------------- ----------------------------- ------------
1999 2000 1999 2000 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues
Product sales $ 1,987 $ 1,690 $ 41,512 $ 1,690 $ 579,074
Licensing fees -- -- 100,000 -- 100,000
Reimbursed research
and development -- -- -- -- 284,506
Technical support
and other services -- -- -- -- 429,885
------------ ------------ ------------ ------------ ------------
1,987 1,690 141,512 1,690 1,393,465
Costs and other expenses
Cost of product sales 162,808 650 275,510 650 1,737,545
Cost of technical support
and other services -- -- -- -- 237,317
Selling, general
and administrative 670,794 524,541 1,738.827 1,400,389 9,660,191
Research, development
and engineering 241,951 313,859 711,737 884,226 4,606,174
------------ ------------ ------------ ------------ ------------
1,075,553 839,050 2,726,074 2,285,265 16,241,227
------------ ------------ ------------ ------------ ------------
Operating loss (1,073,566) (837,360) (2,584,562) (2,283,575) (14,847,762)
Other income (expense)
Interest income and other 2,598 51 108,146 (716) 508,420
Interest expense (29,789) (37,482) (294,693) (97,852) (968,029)
------------ ------------ ------------ ------------ ------------
(27,191) (37,431) (186,547) (98,568) (459,609)
------------ ------------ ------------ ------------ ------------
NET LOSS (1,100,757) (874,791) (2,771,109) (2,382,143) (15,307,371)
Other comprehensive income
Unrealized gain (loss)
On available -for- sale
securities (800,000) -- 100,000 -- --
------------ ------------ ------------ ------------ ------------
Comprehensive loss $ (1,900,757) $ (874,791) $ (2,671,109) $ (2,382,143) $(15,307,371)
============ ============ ============ ============ ============
Loss applicable to
Common shareholders
Net loss above $ (1,100,757) $ (874,791) $ (2,771,109) $ (2,382,143) $(15,307,371)
Series A convertible preferred
stock dividend
and accretion (311,568) (44,900) (311,568) (259,900) (601,500)
------------ ------------ ------------ ------------ ------------
Loss applicable to common
stockholders $ (1,412,325) $ (919,691) $ (3,082,677) $ (2,642,043) $(15,908,871)
============ ============ ============ ============ ============
Basic and diluted loss
Per common share $ (.13) $ (.09) $ (.34) $ (.25) $ (2.52)
Series A convertible preferred
Stock dividend and accretion (.03) (.01) (.04) (.03) (.10)
------------ ------------ ------------ ------------ ------------
Loss per
Common share $ (.16) $ (.10) $ (.38) $ (.28) $ (2.62)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding 8,640,600 9,598,143 8,089,936 9,476,895 6,062,621
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to interim financial statements
4
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
January 7,
1993 (date
of inception)
Nine Months through
ended September 30, September 30,
----------------------------- -------------
1999 2000 2000
------------ ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents
Cash flows from operating activities
Net loss $ (2,771,109) $ (2,382,143) $(15,307,371)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation 39,002 35,486 199,142
Amortization 491,173 72,273 1,152,192
Allowance for uncollectible
receivables 58,500 -- --
Write-down of inventory 105,000 -- 883,515
Write-down of deferred
financing costs -- -- 132,977
Gain on sale of
Inter-Con/PC stock -- -- (190,000)
Non-cash option and
warrant issuances 164,000 531,165 1,316,915
Other -- -- (18,490)
Change in assets and liabilities:
Accounts receivable (102,415) 6,231 (7,100)
Inventories 107,510 650 (915,365)
Prepaid expenses 55,014 13,858 (29,262)
Accounts payable (109,063) 40,000 381,036
Accrued liabilities 68,422 468,151 920,907
Deferred revenue 60,000 -- --
------------ ------------ ------------
937,143 1,167,814 3,826,467
------------ ------------ ------------
Net cash used in operating activities (1,833,966) (1,214,329) (11,480,904)
Cash flows from investing activities
Capital expenditures (4,875) -- (242,913)
Security deposits (15,000) 5,896 (16,123)
Proceeds from sales
of Inter-Con/PC stock -- -- 190,000
Patents and trademarks -- (1,670) (6,204)
------------ ------------ ------------
Net cash provided by (used in)
investing activities (19,875) 4,226 (75,240)
Cash flows from
financing activities
Net proceeds under
short-term borrowing
agreements -- 700,000 908,000
Issuance of convertible
debentures -- -- 1,775,000
Issuance of warrants and
convertible debentures discount -- -- 884,000
Deferred financing costs -- -- (312,977)
Exercise of stock options 28,500 -- 190,799
Sales of common and
preferred stock 872,539 433,519 8,273,890
Redemption of common
Stock issuance of
convertible debentures -- -- (138,000)
------------ ------------ ------------
Net cash provided by
financing activities 901,039 1,133,519 11,580,712
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents (952,802) (76,584) 24,568
Cash and cash equivalents,
at beginning of period 1,063,616 101,152 --
------------ ------------ ------------
Cash and cash equivalents,
at end of period $ 110,814 $ 24,568 $ 24,568
============ ============ ============
</TABLE>
See accompanying notes to interim financial statements.
5
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1999, and September 30, 2000 (Unaudited)
1. Unaudited Statements
The accompanying unaudited interim financial statements have been
prepared by SAC Technologies, Inc. (the "Company") in accordance with
generally accepted accounting principles, pursuant to the rules and
regulations of the Securities and Exchange Commission. Pursuant to such
rules and regulations, certain financial information and footnote
disclosures normally included in the financial statements have been
condensed or omitted.
In the opinion of management, the accompanying unaudited interim
financial statements contain all necessary adjustments, consisting only
of those of a recurring nature, and disclosures to present fairly the
financial position and the results of its operations and cash flows for
the periods presented. It is suggested that these interim financial
statements are read in conjunction with the financial statements and
the related notes thereto included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1999.
2. Liquidity and Capital Resource Matters
Broad commercial acceptance of the Company's products by customers and
end users is critical to the Company's success and ability to generate
revenues. The Company has limited sales to date, and has accumulated
losses since inception of $15,307,371 of which $874,791 was incurred
during the quarter ended September 30, 2000. The Company believes
operating losses will continue for the foreseeable future.
On March 31, 2000, the Company obtained a short term loan from the
Shaar Fund Ltd. (the "Fund") in the amount of $300,000. The loan bears
Interest at a rate of 10% per annum and was due on June 30, 2000. The
Fund waived the event of default and extended the maturity date until
the earlier of December 31, 2000 or the Company completing a private
equity financing resulting in gross proceeds of $1,250,000.
Between May 24 and November 8, 2000 the Company obtained short term
loans from the Fund in the aggregate principal amount of $900,000. The
loans bear interest at the rate of 10% per annum and are due on the
earlier of December 31, 2000, or the Company completing a private
equity financing resulting in gross proceeds of at least $1,250,000.
As of the date of this filing the Company has minimal cash resources
and is in need of substantial additional capital to maintain operations
beyond the end of the fourth quarter of 2000. The Company is seeking to
obtain additional financing through the issuance of debt or equity
securities of the Company on a negotiated private placement basis with
institutional and accredited investors. In this regard, the Company has
been engaged in discussions with certain investors, including the Fund
regarding an equity investment of between $1.25 and $3.6 million. In
connection with this proposed financing, the Company and the Fund have
discussed amending certain provisions of the outstanding debentures and
preferred stock as well as a waiver of the penalty associated with the
Fund's registration rights regarding the shares issuable upon
conversion of the preferred shares described below. However, as of the
date of this filing, the Company has not reached any definitive
agreement with any such investor regarding the specific terms of an
investment in the Company.
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
$2,000,000 to $3,000,000 to support its operations through the next
twelve months.
3. Loss Per Common Share
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 earnings per share are calculated by
dividing the net loss attributable to common stockholders by the
weighted average common shares, and when dilutive, by including
options, warrants and convertible securities outstanding using the
treasury stock method. There was no difference between basic and
diluted loss per share for all periods presented, because the impact of
including options, warrants and convertible securities would be
antidilutive.
6
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1999, and September 30, 2000 (Unaudited)
4. Other Assets
December 31, September 30,
1999 2000
---- ----
Deferred financing costs, less accumulated
amortization $64,811 $22,624
Security deposits 22,019 16,123
Patents 4,534 6,205
------- -------
$91,364 $44,952
======= =======
5. Accrued Liabilities
December 31, September 30,
1999 2000
---- ----
Compensation $136,044 $ 76,237
Interest 151,430 219,196
Shaar Fund Penalty 132,500 584,750
Other 21,823 29,766
-------- --------
$441,797 $909,949
======== ========
6. Convertible Debentures
During February 2000, the Fund converted $300,000 of convertible
debentures into 445,633 shares of common stock. In August 2000, the
Fund converted $50,000 of convertible debentures into 106,383 shares
of common stock and in October 2000, the Fund converted $200,000 of
convertible debenture into 308,451 shares of common stock. The balance
outstanding under the convertible debentures is due June 2001.
7
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1999, and September 30, 2000 (Unaudited)
7. Stockholders Equity
The following summarizes option activity since December 31, 1999:
<TABLE>
<CAPTION>
Number of Shares
---------------------------------------------------------------------------------------------------------------
Date of
Grant
Exercise
Or 1996 1999 Non-Plan
Expiration Plan Plan Options Warrants Total
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 470,325 885,548 1,038,000 998,466 3,392,339
Granted 100,000 480,000 517,500 1,097,500
Exercised -- -- -- -- --
Canceled (310,945) (618,879) (407,000) -- (1,336,824)
---------- ---------- ---------- ---------- ----------
Balance, September 30, 2000 159,380 366,669 1,111,000 1,515,966 3,153,015
========== ========== ========== ========== ==========
Available for grant,
September 30, 2000 497,620 1,733,331 -- -- 2,230,951
========== ========== ========== ========== ==========
</TABLE>
Series A Convertible Preferred Stock
On March 17, 2000 the Company completed a private placement of $675,000
face amount of its Series A Convertible Preferred Stock and a 5-year
warrant to purchase 67,500 shares of Common Stock exercisable at $1.196
per share to the Fund. The Company received net proceeds of $185,000
after giving effect to a 33% discount ($225,000) to the face amount of
the preferred stock, offering costs of $15,000 and the repayment of
$250,000 in notes outstanding to the Fund. On July 9, 1999, the Company
issued $1,312,500 face amount of its Series A Convertible Preferred
Stock realizing gross proceeds of $875,000.
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.
As of September 30, 2000, dividends in arrears totaled approximately
$175,000. 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 the date of
issuance 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).
In connection with these financings, 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 issued to the Fund. As of the date of this
filing the Company has not filed the registration statement, has
accrued a penalty of $584,750, and as of September 30, 2000 the Fund
has not demanded payment of these amounts.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT
The information contained in this Report on Form 10-QSB and in other
public statements by the Company and Company officers include or may
contain certain forward-looking statements. When used in this Report or
in such statements, the words "estimate," "project," "intends,"
"expects," "believes" and similar expressions are intended to identify
forward-looking statements regarding events and financial trends which
may affect the Company's future operating results and financial
position. Such statements are not guarantees of future performance and
are subject to risks and uncertainties that could cause the Company's
actual results and financial position to differ materially from those
included within the forward-looking statements. Such factors are
described in detail in the Company's Annual Report on Form 10-KSB 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.
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 readers. During the last two fiscal years, the Company has
pursued an OEM licensing program and more 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.
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 filing, 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. During February 1999, the
Company signed a 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, and $62,500 has been reserved for, with a minimum
annual pre-purchase (non-refundable) royalty of $50,000 payable through
November 1999, which has not been collected or recorded as of the date
of this filing. The Company is obligated to deliver physical product
specifications under the agreement. As of the date of this filing, this
is the only license agreement to which the Company is a party.
9
<PAGE>
The Company will continue to 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.
Recognizing the exponential growth in electronic commerce and related
security concerns, during 2000 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 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. On July 10, 2000, the Company purchased from Aultimate
Technology Marketing, Inc., an Internet Web-based Authentication Server
software application that was developed to work with SAC's SACcat
Biometric Technology. 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 this 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, 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 no longer pursuing the joint marketing and
development of technologies with these companies including 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.
Re-structure of Business Relationship with Jasper Consulting, Inc.
On August 12, 2000 the Company entered into a mutual general release
and a Definitive Agreement with Jasper Consulting, Inc. These
agreements include the following material provisions; 1) all previous
agreements between the parties and associated rights or obligations
relative to such agreements were terminated: 2) all debt existing
between the parties was discharged; 3) all rights to FIDS Technology
were assigned to Jasper Consulting, Inc.; 4) all rights to Vector
Segment Technology ("VST"), STBS and Optic technology were assigned to
SAC Technologies, Inc.; 5) a mutual general release of any and all past
claims; 6) an obligations to enter into license agreement regarding,
VST within 120 days; and 7) the dismissal with prejudice of the
outstanding litigation between the parties. To the extent the
agreements vest the Company with sole ownership of VST, STBS and Optic
Technology and permit the Company to sell or license its products and
technologies in any market without payment of any fees or royalties to
Jasper, the Company believes it is now better situated to commence the
commercial distribution of its products and technologies.
10
<PAGE>
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED THREE AND NINE MONTHS
ENDED TO SEPTEMBER 30, 1999
Revenues
The Company is a development stage corporation. Accordingly, the
Company does not have significant sales revenue. During the nine months
ended September 30, 1999, the Company recognized the sale of certain
licensing rights for $100,000.
11
<PAGE>
Costs and Other Expenses
The Company is a development stage corporation. Accordingly, the
Company does not have significant product sales nor significant costs
of products sold. The Company's limited product sales have been at
negative gross margins. These negative gross margins were attributable
to costs associated with the production of a limited amount of units.
The Company intends to manufacture products on a special order basis
and continues to explore means to reduce its current product costs,
including purchasing certain imaging technology to replace some of its
current optics components. No assurance can be given that the above
objective 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 decreased $146,253 to
$524,541 during the three months ended September 30, 2000 as compared
to $670,794 for the corresponding period in 1999. Of the decrease,
$54,908 was due to a decrease in salaries and wages for sales and
administrative personnel, $83,660 was due to a one-time receivable
write-off in 1999, $209,429 was due to a reduction in selling expenses
as the Company focused on the OEM licensing and Web based marketing
model, and $66,000 was due to a one-time employee settlement in 1999.
These amounts were offset by an increase of $109,365 in administrative
consulting services and $216,000 for recording a Shaar Fund
registration penalty. Selling, general and administrative expenses
decreased $338,438 to $1,400,389 during the nine months ended September
30, 2000 as compared to $1,738,827 for the corresponding period in
1999. Of the decrease, $249,221 was due to a decrease in salaries and
wages, $168,889 was due to a reduction in selling expenses, $83,660 was
due to a one-time write-off of a receivable in 1999, $142,608 was due
to a decrease in operating expenses, $169,335 was due to a decrease in
professional services, and $66,000 was due to a one time employee
settlement. These amounts were offset by an increase of $313,700 in
administrative consulting services and an increase of $452,250 for
recording the Shaar registration penalty.
In May 1999, the Company began to implement a cost reduction plan. The
plan called for reductions in the areas of salaries, personnel and
facility space requirements. The Company continues to review other
areas within the organization to further reduce costs.
Research, development, and engineering expenses increased $71,908 to
$313,859 During the three months ended September 30, 2000 as compared
to $241,951 for the corresponding period in 1999. Of the increase,
$17,997 was due to additional development personnel, and $123,432 was
due to an increase in software sub-contracting costs. This increase was
offset by the $73,428 write-off in 1999 of certain technology developed
with Pinnacle. Research and development expenses increased $172,489 to
$884,221 during the nine months ended September 30, 2000 as compared to
$711,737 for the corresponding period in 1999. Of the increase $196,000
was due to a one-time purchase of ATM's Active-X development tools and
ATM's E-Printz, and $130,158 was due to an increase in software
sub-contracting costs. This increase was offset by a decrease of
$154,464 in salaries and wages. The increase in software subcontracting
costs during 2000 relates to the development of the Web authentication
solution.
Interest income and other income (expense) decreased $108,862 to ($716)
during the nine months ended September 30, 2000 as compared to $108,146
for the corresponding period in 1999, $90,000 relates to the gain on
sale of 600,000 shares of common stock of Inter-Con P/c during the nine
months ended September 30, 1999.
Interest expense increased $7,693 to $37,482 during the three months
ended September 30, 2000 as compared to $29,789 during the three months
ended September 30, 1999 due to the increase in short term notes
payable to the Fund. Interest decreased $196,841 to $97,852 during the
nine months ended September 30, 2000 as compared to $294,693 during the
nine months ended September 30, 1999 due to non-cash charges during
1999 for the intrinsic value of the beneficial conversion feature of
the Convertible Debentures.
12
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LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the nine months ended
September 30, 2000 was $1,214,329 compared to $1,833,966 during the
same period in 1999. The primary use of cash for both years was to
fund the net loss. Net cash provided by investing activities for the
first nine months of 2000 was $4,226 compared to a net use of cash of
419,875 for the prior period. Net cash provided by financing activities
during the first nine months of 2000 was $1,133,519 compared to
$901,039 in the prior period and was principally from cash received
from net short term borrowing activities of $700,000 in 2000 and the
sale of preferred stock.
Working capital deficit increased 2,097,316 during the nine months
ended September 30, 2000 to ($2,840,045) as compared to ($742,729) as
of December 31, 1999.
The Company's capital needs have been principally met through proceeds
from the sale of debt and equity securities.
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 and principal stockholder of the Company
(the "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 filing, $1,892,000 principal amount of
Convertible Debentures has been converted into an aggregate of
2,429,857 shares of Common Stock. The Convertible Debenture agreement
contains certain anti 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.
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 Fund. The Company realized net proceeds of $800,539 from
the sale of these securities. On March 17, 2000 the Company completed a
private placement of 6,750 shares of its Series A Convertible Preferred
Stock and 5-year warrants to purchase 67,500 shares of common stock
with the Fund. The Company realized net proceeds of $185,000 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 the date of issuance 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 was
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 by no later than on or about June 1, 2000 and to have such
13
<PAGE>
registration statement declared effective by no later than August 14,
2000. As of the date of this filing, the Company has not filed the
registration statement, has accrued a penalty of $584,750 payable to
the Fund. The Fund has not demanded payment of these amounts. As of
September 30, 2000, cumulative undeclared dividends were $175,000.
On March 31, 2000, the Company obtained a short term loan from the Fund
in the amount of $300,000. The loan bears interest at a rate of 10% per
annum and was due on June 30, 2000. The Fund waived the event of
default and extended the maturity date until the earlier of December
31, 2000, or the Company completing a private equity financing
resulting in gross proceeds of $1,250,000.
Between May 24 and November 8, 2000, the Company obtained short term
loans from the Fund in the aggregate principal amount of $900,000. The
loans bear interest at the rate of 10% per annum and are due on the
earlier of December 31, 2000, or the Company completing a private
equity financing resulting in gross proceeds of at least $1,250,000.
As of the date of this filing the Company has minimal cash resources
and is in need of substantial additional capital to maintain operations
beyond the fourth 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, including the Fund,
regarding an equity investment of between $1.25 and $3.6 million. In
connection with this proposed financing, the Company and the Fund have
discussed amending certain provisions of the outstanding debentures and
preferred stock as well as a waiver of the penalty associated with the
Fund's registration rights regarding the shares issuable upon
conversion of the preferred shares described above. However, as of the
date of this filing, the Company has not reached any definitive
agreement with any such investor regarding the specific terms of an
investment in the Company.
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
$2,000,000 to $3,000,000 to support its operations through the next
twelve months.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
1. During the three months ended November 30, 2000, the Company granted
non-plan options to Bruce Nordin, an executive management consultant,
to purchase 140,000 shares of common stock with strike prices equal to
the closing market price of the Company's common stock on the dates of
grant. The options, immediately exercisable, 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.
2. On September 29, 2000, the Company granted options to purchase
100,000 shares of Common Stock at an exercise price of $1.00 to Barrs
Lewis, an administrative consultant. The options are immediately
exercisable, 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.
3. On October 13, 2000 the Company issued 308,451 shares of restricted
common stock to the Fund in consideration of the conversion of
$200,000 of principal amount due under the Debentures. The shares 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of the date of this Report, the Company has cumulative undeclared
dividends on its Series A 9% Convertible Preferred stock in the amount
of $175,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER EVENTS
On November 13, 2000, the Company entered into a two (2) year
employment agreement with Jeffry Brown to serve as the President of the
Company. Mr. Brown has served as a director of the Company since
November 23, 1999. The employment agreement provides for an annual base
salary of $144,000, an annual discretionary bonus equal to up to 50% of
Mr. Brown's base salary and standard and customary benefits, including
the right to participate in any and all options or other employee
incentive plans of the Company. The agreement also contains standard
and customary work made for hire, confidentiality, non-compete and
non-solicitation provisions which prohibit Mr. Brown from engaging in
certain activities during the term of the agreement and for the one
year period thereafter. The Agreement may be terminated by the Company
at any time with or without cause. If the agreement is terminated
without cause, the Company is obligated to continue Mr. Brown's salary
for a period of nine (9) months and options to purchase up to 150,003
shares of Common Stock shall immediately vest and become exercisable.
In recognition of the nearly full time attention Mr. Brown has provided
the Company in recent months, the agreement also provides for a $24,000
signing bonus.
In connection with the employment agreement, the Company granted
options to Mr. Brown to purchase 580,000 shares of common stock at an
exercise price of $.6875 per share, the closing market price on the
date of grant. Options to purchase 180,000 shares vested upon issuance
and the remainder vest in equal monthly installments over the next two
years. 300,000 of the options were issued under the Company's 1999
Stock Incentive Plan.
15
<PAGE>
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit No. Exhibit
----------- -------
10.25 Employment Agreement dated November 13, 2000
by and between the Registrant and Jeffry R.
Brown
10.26 Option To Purchase 280,000 shares of Common
Stock issued to Jeffry R. Brown
10.27 Non Qualified Stock Option Agreement Under the
Registrant's 1999 Stock Option Plan to
purchase 300,000 shares of Common Stock issued
to Jeffry R. Brown
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
16
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: November 14, 2000 SAC Technologies, Inc.
/s/ Barry Wendt
--------------
Barry Wendt, Chief Executive Officer
/s/ Gary Wendt
--------------
Gary Wendt, Chief Financial Officer
17
<PAGE>
Exhibit No. Exhibit
----------- -------
10.25 Employment Agreement dated November 13, 2000
by and between the Registrant and Jeffry R.
Brown
10.26 Option To Purchase 280,000 shares of Common
Stock issued to Jeffry R. Brown
10.27 Non Qualified Stock Option Agreement Under the
Registrant's 1999 Stock Option Plan to
purchase 300,000 shares of Common Stock issued
to Jeffry R. Brown
27 Financial Data Schedule
