SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 0-28238
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Delaware 54-1521616
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
22570 Markey Court, Dulles, Virginia 20166
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Issuer's telephone number: 703-444-7931
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Class A Warrants
(Title of Class)
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
--- ---
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 registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $1,154,970.
The aggregate market value of the voting stock held by non-affiliates as of
March 31, 1998 was approximately $980,000 based on the average bid and asked
prices of such stock.
The number of shares outstanding of issuer's Common Stock, $.001 par value,
as of March 31, 1998 was 1,114,201.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
Transitional Small Business Disclosure Format (check one)
Yes No X
--- ---
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS
GENERAL
Guardian Technologies International, Inc. (referred to hereinafter as the
Company) was originally incorporated in 1989 in the Commonwealth of Virginia,
and commenced full production of its products in December, 1990. In 1996, the
Company was reincorporated in the State of Delaware. The Company manufactures
its products under its own label at its facility in Dulles, Virginia. The
Company currently employs 30 people.
OPERATIONS
The Company manufactures and distributes ballistic protective equipment,
including equipment commonly referred to as body armor.
The Company's product lines include four basic types of ballistic
protective vests, ballistic protective shields, K-9 ballistic protective vests,
aircraft ballistic protective equipment, and assorted other ballistic protective
devices, such as ballistic protective blankets and seat cover liners.
The Company's four main product lines of ballistic protective vests are
manufactured in six styles, each providing varying degrees of protection and
certified under guidelines established by the National Institute of Justice (the
"NIJ"). All of the Company's body armor products are certified under the NIJ's
Standard 0101.03 for Police Armor.
PRODUCTS
The Company's life-saving products are manufactured primarily with
AlliedSignal's High Performance Materials which are Spectra(R) 1000 woven
fabric, and non-woven composite ballistic materials Spectra Shield(R), Spectra
Flex(TM), Gold Shield(TM) and Gold Flex(TM). Based on studies and testing
performed at H.P. White Laboratory, Inc., an independent testing laboratory,
tests prepared by AlliedSignal and the Company's own test experience, the
Company believes that protective vests and equipment manufactured with
AlliedSignal High Performance Materials provide, pound for pound, greater
ballistic protection and reduced blunt trauma to the wearer, at higher
projectile velocities and with longer durability than similar equipment made
with other forms of ballistic resistant materials.
The Company has been assigned rights to U.S. patents numbered 5,327,811;
5,448,938; and 5,377,577 for, respectively, a Lightweight Ballistic Protective
Device, a Removable Ballistic Resistant Armor Seat Cover and Floor Mat, and a
Ballistic Shield. These patents include related production techniques. The
Company also acquired the rights to manufacture and distribute two other
patented products: a two-panel set of thin, lightweight rigid bullet-resistant
armor for police patrol bicycles, and a prisoner restraint device for improved
security when transporting a prisoner. For the latter device, the Company was
granted the trademark MAXI-MITT(TM).
MANUFACTURING
The Company manufactures substantially all of its products. The Company
manufactures its products under its own label at its facility in Dulles,
Virginia.
<PAGE>
RESEARCH AND DEVELOPMENT
The Company concluded research and development during 1996 on a new line of
ballistic protective vests marketed as the Thin Blue Line (TBL). The TBL vests,
made with AlliedSignal's newly developed High Performance Materials, Gold
Flex(TM) and Gold Shield(TM), are light, flexible and cost less to produce. The
TBL products are more competitively priced than Guardian's other four lines and
should be attractive to the price conscious consumer.
Also in 1996, the Company introduced a two-panel set of thin and very
lightweight rigid armor which can be easily installed on police patrol bicycles.
The introduction of this product followed the introductions of a newly designed
ballistic-protective vest for police dogs and a restraint device used when
prisoners are being transported.
The Company did not initiate any new R&D efforts during 1997.
RAW MATERIALS, SOURCES AND AVAILABILITY
The Company is dependent upon a single supplier for the majority of its raw
materials. These materials are available only from AlliedSignal, which holds the
patent for the unidirectional fiber/resin process incorporating Spectra(R) ultra
high molecular weight polyethylene fibers or aramid fibers. AlliedSignal also
controls the proprietary thermoplastic process used to manufacture its Shield
and Flex materials.
CUSTOMERS
The Company has set a goal of a 50% increase in sales over the total sales
obtained in 1997. To achieve this goal, the Company will focus on increasing
foreign sales efforts and overall sales to U.S. government agencies. As of March
31, 1998, the Company has completed production on $350,000 in orders which were
in backlog at December 31, 1997. Additionally, the Company is currently working
on a sales order of $330,000 (not included in backlog at December 31, 1997)
which is expected to be completed during the second quarter of 1998.
In 1997, 4% of Guardian's total sales were made to foreign police and
military organizations. The Company is pursuing opportunities in several nations
of the Pacific Rim, in Central and South America, in Eastern and Central Europe,
and the Middle East.
Government contract work and sales to U.S. military organizations
represented 7% of total sales in 1997. The Company intends to team with
manufacturers of compatible armor products and/or materials to obtain contracts
by bringing together technical expertise, sales and marketing efforts and
production capabilities.
The Company's relationship with Government Micro-Resources, Inc. (GMR), a
supplier to the General Services Administration (GSA) - the federal government's
principal procurement channel - ended in mid-1996 when GMR's contract with GSA
was terminated. The Company established a new contract with GSA which enables
the Company to sell all its products directly through GSA. The new four-year
contract was signed and became effective on June 1, 1997.
In 1996, the Company's planned expansion of its regional domestic law
enforcement distribution network through dealer sales did not achieve the
expected goals. Only a limited number of dealers provided the high standard of
customer service which the Company expects. Therefore, the Company modified the
sales plan in order to emphasize a larger effort in direct Company sales backed
with strong customer service while continuing to strongly support sales
generated by selected dealers. The Company's sales representatives are making
intensive efforts to make direct contact with key procurement personnel in small
and medium size law enforcement agencies as well as responding to agency and
department solicitations for bids and proposals.
The Company maintains ties to two large police fraternal organizations
which resulted in sales throughout 1996 and 1997.
<PAGE>
MARKETING AND DISTRIBUTION
The Company's products are marketed directly by the Company and through
selected local dealers of police equipment to local, state, and federal
agencies, private security companies, and private individuals with legitimate
security needs. Marketing methods include personal sales presentations,
advertising in magazines and periodicals aimed at the law enforcement
profession, direct mail information dissemination, participation by the Company
sales personnel at selected trade shows and conferences.
The Company entered the Internet universe with its own home page
(www.guardiantech.com) and E-Mail address ([email protected]) which are
developing into resources for marketing its products in the United States and
around the world.
The Company also subscribes to two other marketing services: BidNet and
FACNet. BidNet tracks bids and solicitations for proposals from local and state
jurisdictions throughout the United States. FACNet provides information on
federal procurements and is a required on-line service for GSA contract
suppliers seeking to sell to the U.S. Department of Defense (DOD). In order to
respond to DOD solicitation opportunities, the Company seeks out manufacturers
of compatible products and/or materials with which the Company can match its
technical expertise, sales and marketing efforts and production capabilities.
BACKLOG
At December 31, 1997, the Company's estimated backlog of sales was
$350,000. A year earlier, at December 31, 1996, the Company's estimated backlog
of sales was $80,000. The increase in backlog at December 31, 1997 was due to a
significant sale under the Company's contract with the General Services
Administration (GSA) of approximately $466,000 of which $302,000 was completed
during 1997 and $164,000 remained in backlog at December 31, 1997.
COMPETITION
The ballistic protective equipment business is highly competitive. In the
domestic law enforcement, federal government and military markets, the Company
has at least five major competitors. The Company believes that the principal
elements of competition in the sale of ballistic protective vests are 1)
materials used in construction, 2) style and design of the vest, and 3) price.
In the law enforcement and military markets, the Company frequently bids for
orders in response to invitations for bidding which set forth product
performance specifications. Although the Company's products are priced slightly
higher than the competition's products, the Company believes its higher prices
are justified by better craftsmanship, higher ballistic capability of materials,
more body area coverage, and a longer warranty. In international markets, the
Company's competition consists of several American competitors and a few
international companies.
ITEM 2 DESCRIPTION OF PROPERTY
Throughout 1996, the Company's executive offices and manufacturing
facilities were located at 45472 Holiday Drive, Sterling, Virginia. The Company
occupied approximately 12,000 square feet at this location pursuant to a seven
(7) month extension to its original lease. The original lease and lease
extension, which expired in June, 1996, had a base rent of approximately $14,000
per month. From July through December, 1996, the Company occupied the premises
on a month to month basis at the rental rate of approximately $17,000 per month
while the Company's new facility was under construction.
The Company vacated the leased premises to occupy its new facility at 22570
Markey Court, Dulles, Virginia on January 23, 1997. The total cost for the
33,741 square foot facility at December 31, 1997 was $2,762,119 composed of
$237,339 for land and $2,524,780 in building costs. At December 31, 1997
management had leased approximately 24% of the building to other tenants. At
February 1, 1998, an additional 32% was leased.
<PAGE>
ITEM 3 LEGAL PROCEEDINGS
There are no material legal proceedings in which the Company is involved.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 8, 1997, the Annual Meeting of Shareholders was held. At the
meeting, the following items were submitted for shareholder approval:
1. To elect four directors to serve on the Board of Directors until the
next annual meeting of shareholders or until successors are duly
elected and qualified.
With respect to the election of directors, the following votes were cast:
For Withheld
------- --------
Stephen G. Calandrella 823,400 2,422
Herbert M. Jacobi 823,400 2,422
John C. Power 823,400 2,422
Hugh G. Sawyer 823,400 2,422
Oliver L. North, Joseph F. Fernandez and Travis Y. Green continued as
directors of the Company as their terms were not up for re-election at this
meeting.
2. To approve the Board of Directors' selection of Thompson, Greenspon &
Co., P.C., as the Company's independent public accountants to audit the
consolidated financial statements of the Company for the fiscal year
ending December 31, 1997.
With respect to the selection of Thompson, Greenspon & Co., P.C. as the
Company's independent public accountants, the following votes were cast:
For 824,906
Against 249
Abstain 0
3. To adopt and approve the Company's 1997 Incentive Stock Option Plan,
pursuant to which 300,000 shares of Common Stock will be reserved for
issuance to all persons in the service of the Company or a subsidiary
of the Company and the members of the Board of Directors of the Company
who are not otherwise employees.
With respect to the adoption and approval of the Company's 1997 Incentive
Stock Option Plan, the following votes were cast:
For 626,750
Against 10,104
Abstain 3,376
<PAGE>
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded on the NASDAQ Stock Market under
the symbol GRDN. The prices listed below are the high and low sales for common
shares since the initial public offering on May 14, 1996.
Price
--------------------
Quarter Ended Low High
------------- --------- ---------
6/30/96 $17.25 $38.25
9/30/96 $ 2.8125 $19.50
12/31/96 $ 1.21875 $ 4.40625
3/31/97 $ 0.84375 $ 2.53125
6/30/97 $ 0.875 $ 2.625
9/30/97 $ 1.375 $ 4.00
12/31/97 $ 2.50 $ 3.375
The common stock purchase warrants of the Company are traded on the NASDAQ
Stock Market under the symbol GRDNW. The prices listed below are the high and
low sales prices for common share warrants since the initial public offering on
May 14, 1996.
Price
---------------------
Quarter Ended Low High
------------- --------- ---------
6/30/96 $12.75 $34.50
9/30/96 $ 0.9375 $15.75
12/31/96 $ 0.1875 $ 2.90625
3/31/97 $ 0.09375 $ 0.750
6/30/97 $ 0.0625 $ 0.250
9/30/97 $ 0.03125 $ 0.46875
12/31/97 $ 0.250 $ 0.375
There have been no dividends declared since inception.
The Company did not sell any equity securities during the year ended
December 31, 1997.
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and related notes thereto.
OVERVIEW
As disclosed in the Company's independent auditors report on the financial
statements as of and for the years ended December 31, 1997 and 1996 (and further
discussed in Note 2 to the financial statements) the Company has suffered
continued losses from operations since inception that raise substantial doubt
about its ability to continue as a going concern. In an effort to reverse this
trend and achieve profitability management has taken, or intends on taking the
following actions:
1.) Maximize facility utilization by leasing out all non-essential space
in the Company's Dulles, Virginia building to third parties. As
discussed in footnote 8 of the financial statements, the Company has
now leased approximately 18,800 square feet (representing all
available space) to 4 third party tenants. These leases carry terms of
from five to seven years and provide estimated annual rental income of
$196,500 including base rent, operating expenses and annual
escalation. The rental income on the facility will be sufficient to
service the related mortgage placed on the facility (see below and
also footnote 16 of the financial statements).
2.) Reduce interest costs by refinancing existing debt. As disclosed in
footnote 16 of the financial statements, the Company has accepted a
commitment from a commercial entity to provide $1,900,000 in the form
of a mortgage. Subsequent to the audit date, on March 25, 1998, the
Company closed the above referenced loan in the amount of $1,900,000.
The loan provides for monthly payments of principal and interest of
$15,306, including interest at 7.5 percent per annum. The loan is
being amortized over a twenty year period with a ten year balloon and
is collateralized by a first deed of trust on the Company's office and
manufacturing facility located in Dulles, Virginia as well as an
assignment of all tenant occupancy leases. Further, if the loan is
prepaid in full before the end of the fifth year of the loan, the
Company will be subject to certain prepayment premiums computed as a
percent of the unpaid principal balance. The purpose of the loan was
to refinance an outstanding note payable of $900,000 as of December
31, 1997 bearing interest at 15 percent per annum. The interest
savings related to this portion of the financing arrangement is
approximately $67,500 per year. In addition, the loan will provide
approximately $1,000,000 of excess funding which will be available for
working capital purposes.
3.) Reduce or eliminate the use of all outside consultants.
4.) Initiate head-count reductions across all administrative and sales
departments.
5.) Perform time and motion studies to determine if excess labor capacity
exists in the manufacturing function. Knowledge of this will allow
management to take necessary corrective action.
6.) Perform an assessment of non-critical manufacturing functions to
determine if it would be cost-effective to out-source certain
functions.
7.) Initiate discussions with primary suppliers of raw materials in an
effort to achieve larger discounts on the Company's purchases as well
as establish "just-in-time" inventory status to generate greater
inventory turnover.
<PAGE>
8.) Establish manufacturing cost accounting controls to capture labor and
material costs more effectively through the implementation of a
job-order system. This will allow the Company to better determine the
profitability of each of its products which will in turn provide
management with information to better price the Company's products.
9.) Focus sales efforts primarily on large quantity, more "standard fit"
orders which create manufacturing efficiencies. Management has
determined that small, custom orders are less profitable due to
"start-up" and "shut down" of production efforts and has shifted the
Company's focus accordingly. In addition, when a smaller order is
accepted, a surcharge has been added to the pricing to offset the
manufacturing inefficiency created by the order.
10.) Pursuit of "funded" development efforts to continue to provide state
of the art products without using internal funds for such efforts.
1l.) Utilize the specific expertise of senior management in the fields of
law enforcement, security and protective devices to pursue
opportunities for providing consulting services to private industry
and government agencies.
For these reasons, management believes that no adjustments or
reclassifications of recorded assets and liabilities is necessary at this
time. There can be no assurances, however, that the Company will be
successful in these plans.
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales for 1997 were $1,154,970 compared to $1,475,577 in 1996, a decrease of
$320,607 or 21.7%. The decrease in sales is attributable to a decrease in sales
to foreign governments and agencies (from $314,850 or 21% of sales in 1996 to
$42,059 or 4% of sales in 1996), a decrease of $272,791.
The Company sustained a gross loss in 1997 of $(82,135) compared to a gross
profit of $156,834 in 1996. The reduction in gross margin for the year ended
December 31, 1997 as compared to 1996 resulted from lower sales volume,
production inefficiencies attributed to a large number of small orders and the
disposition of approximately $33,000 of obsolete inventory.
Total operating expenses were $779,822 for 1997 compared to $1,202,237 for 1996.
General and administrative costs decreased $277,322 from $799,077 in 1996 to
$521,755 in 1997. This decrease was primarily attributable to decreases in
professional fees of $125,000 and salary decreases for officers of $85,000.
Selling expenses decreased $145,093 from $403,160 in 1996 to $258,067 in 1997.
This decrease was due to an $85,000 decrease in sales consultants and a $40,000
decrease in sales commissions attributable to lower sales volume. Advertising,
conference and exhibit costs decreased by $11,000.
The 1997 non-operating financing income for the Company decreased from income of
$91,719 in 1996 to expense of $100,303 in 1997. The net financing income in 1996
resulted because the proceeds from the May, 1996 public offering were invested
in US Government agency debt securities. These securities served as collateral
for a line of credit with a broker. The Company used the line of credit
borrowings to pay off outstanding loans, finance the construction of its
production and headquarters facility and to provide for working capital needs.
Additionally, on February 7, 1997, the Company executed a note for $900,000 with
a commercial entity. Interest at 15 percent, annual rate, is due monthly. The
note is secured by a first deed of trust on the office and manufacturing
facility in Dulles, Virginia. The net financing expense in 1997 resulted from an
excess of the interest costs from the line of credit borrowings and from the
$900,000 note over the interest earned in securities. Interest capitalized in
connection with the construction of the new facility amounted to $21,509 for
1996 and $19,000 in 1997.
Rental income increased from nil in 1996 to $101,150 in 1997 as the Company was
able to lease excess space in its new facility. The net loss for 1997 was
$861,110 compared to $953,684 for 1996.
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales for 1996 were $1,475,577 compared to $838,121 in 1995, an increase of
$637,456 or 76%. The increase in sales is attributable to an increase in sales
to foreign governments and agencies (from nil in 1995 to $314,850 or 21% of
sales in 1996), and a $345,600 sale to the US Government under a subcontract
which amounted to 23% of sales, while maintaining domestic sales at their
previous levels.
The Company's 1996 gross profit was $156,836 or 10.8% of sales compared to $844
in 1995. The improvement in the Company's gross profit margin for the year ended
December 31, 1996 as compared to 1995 resulted from production efficiencies
achieved on large orders and volume discounts on purchases of raw materials in
bulk quantities. The Company's gross profit margin for the year ended December
31, 1995 was adversely affected by the Company's inability to purchase raw
materials in bulk and decreased direct sales which have a higher gross margin
than sales through dealer/distributors. However, cost of goods sold increased
57.5% from $837,277 in 1995 to $1,318,741 in 1996, primarily due to increased
direct labor costs as the number of employees increased during the first nine
months of the year and an increase in indirect costs.
Total operating expenses were $1,202,237 for 1996 compared to $486,326 for 1995.
General and administrative costs increased $426,887 from $372,190 in 1995 to
$799,077 in 1996. This increase was primarily attributable to increases in
professional fees of $93,000, fees of $26,000 related to maintenance of public
company status, insurance premiums of $11,000, consulting fees of $146,000, and
salary increases for officers in accordance with employment agreements. Selling
expenses increased from $114,136 in 1995 to $403,160 in 1996. This increase was
due to reorganization of the sales function, additional salesmen which resulted
in a $32,000 increase in sales salaries, $146,000 in sales consulting fees, and
a $36,000 increase in commissions. Advertising costs and conference and exhibits
costs increased by $60,000. The Company has terminated certain consulting
agreements and expects advertising and other promotional costs to decrease
during 1997.
The 1996 non-operating interest income for the Company increased significantly
over the 1995 total because proceeds from the May, 1996 public offering are
invested in US Government agency debt securities. These securities serve as
collateral for a line of credit with a broker. The Company has used the line of
credit borrowings to pay off outstanding loans, finance the construction of its
production and headquarters facility and to provide for working capital needs.
Interest capitalized in connection with the construction of the new facility
amounted to $21,509 for 1996. The net loss for 1996 was $953,684 compared to
$512,716 for 1995.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997 the Company had total assets of $3,729,872 compared to
total assets of $6,068,588 as of December 31, 1996, a decrease in assets of
$2,338,716. Total liabilities decreased significantly from $2,917,955 as of
December 31, 1996 to $1,451,084 as of December 31, 1997. Total stockholders'
equity decreased $871,845 to $2,278,788 as of December 31, 1997.
Total current assets as of December 31, 1997 were $890,309 and consisted of cash
and equivalents of $109,461, net accounts receivable of $269,425, inventory of
$452,335 and prepaids of $59,088. Total current liabilities as of December 31,
1997 were $523,936 comprised primarily of trade accounts payable and accrued
expenses of $377,180, customer deposits of $85,087 and the current portion of
notes payable of $61,669. Working capital as of December 31, 1997 was $366,373
representing a decrease in working capital for the period of $208,337. Total
current assets decreased $2,513,540 during the twelve month period ended
December 31, 1997 primarily due to the liquidation of $2,501,753 in securities
available for sale. Proceeds from the sale of the securities were used to pay
down a line of credit of $1,850,554, reduce accounts payable of approximately
$530,009 and to partially offset the Company's operating loss for the year.
As of December 31, 1997 the Company reported total assets of $3,729,872
including net property and equipment of $2,788,378 (comprised primarily of costs
associated with the Company's acquisition of land and the subsequent
construction of executive offices and a manufacturing facility thereon), net
intangibles (certification costs for the Company's protective products) of
$24,975 and deposits of $26,210.
Total liabilities as of December 31, 1997 of $1,451,084 include, in addition to
current liabilities of $523,936 discussed above, the long term portion of notes
payable of $927,148. The long term portion of notes payable is comprised of
$900,000 in long term debt received from a commercial entity bearing interest at
15% per annum and $27,148 associated with an insurance premium finance
agreement. Long term debt as of December 31, 1996 was $88,816 comprised entirely
of debt associated with this finance agreement.
As of December 31, 1997 the Company reported stockholders equity of $2,278,788.
This represents a decrease of $871,845 from December 31, 1996 stockholders
equity. The decrease is attributable primarily to the Company's net loss for the
year of $(861,110).
FORWARD-LOOKING STATEMENTS
The Company believes that this report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are subject
to certain risks and uncertainties. Forward-looking statements represent the
Company's expectations or beliefs concerning future events, including the
following: any statements regarding future sales and gross profit percentages,
any statements regarding the continuation of historical trends, any statements
regarding the sufficiency of the Company's cash balances and cash generated from
operating and financing activities for the Company's future liquidity and
capital resource needs, any statements regarding the effect of regulatory
changes, the success of development and enhancement of the Company's products,
the adequacy of the Company's facilities, potential acquisitions, and any
statements regarding the future of the industry and the various parts of the
markets in which the Company conducts its business. The Company cautions that
any forward-looking statements made by the Company in this report or in other
announcements made by the Company are further qualified by important factors
that could cause actual results to differ materially from those in the
forward-looking statements.
<PAGE>
ITEM 7 FINANCIAL STATEMENTS
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
FINANCIAL REPORT
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT ON THE
FINANCIAL STATEMENTS 14
FINANCIAL STATEMENTS
Balance Sheets 15
Statements of Operations 17
Statements of Stockholders' Equity 18
Statements of Cash Flows 19
Notes to Financial Statements 21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Guardian Technologies International, Inc.
Dulles, Virginia
We have audited the accompanying balance sheets of Guardian Technologies
International, Inc. as of December 31, 1997 and 1996, and the related statements
of operations, stockholders' equity, and cash flows for the years then ended.
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 audits 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 that 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 Guardian Technologies
International, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered continued losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
THOMPSON, GREENSPON & CO., P.C.
Fairfax, Virginia
March 3, 1998
- 14 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 109,461 $ 119,703
Trade accounts receivable 269,425 60,998
Accrued interest receivable - 60,448
Inventories 452,335 585,582
Prepaid assets and other 59,088 75,365
Securities available for sale - 2,501,753
----------- -----------
Total Current Assets 890,309 3,403,849
----------- -----------
PROPERTY AND EQUIPMENT
Land 237,339 237,339
Building 2,524,780 -
Office furniture and equipment 118,763 85,213
Manufacturing equipment 74,494 63,477
Leasehold improvements - 115,394
Construction in progress - 2,306,527
----------- -----------
Total Cost 2,955,376 2,807,950
Less accumulated depreciation (166,998) (197,778)
----------- -----------
Net Property and Equipment 2,788,378 2,610,172
----------- -----------
OTHER ASSETS
Deposits 26,210 26,697
Certification costs, net of amortization 24,975 27,870
----------- -----------
Total Other Assets 51,185 54,567
----------- -----------
TOTAL ASSETS $ 3,729,872 $ 6,068,588
=========== ===========
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
- 15 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(continued)
1997 1996
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 337,615 $ 867,624
Line of credit payable - 1,850,554
Current portion of notes payable 61,669 57,016
Accrued expenses 39,565 49,946
Customer deposits 85,087 3,999
----------- -----------
Total Current Liabilities 523,936 2,829,139
LONG TERM PORTION OF NOTES PAYABLE 927,148 88,816
----------- -----------
Total Liabilities 1,451,084 2,917,955
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $0.20 par value, 1,000,000 shares
authorized; no shares issued and outstanding in
1997 and 1996 - -
Common stock, par value $0.001, 15,000,000 shares
authorized; 1,114,201 shares issued and outstanding
in 1997 and 1996 1,114 1,114
Additional paid-in capital 4,107,424 4,140,503
Less notes receivable for purchase of common stock - (33,080)
Net unrealized gain on securities available for sale - 10,736
Accumulated deficit since December 7, 1995
(termination of S corporation status in which
a deficit of $2,320,227 was applied against
additional paid-in capital) (1,829,750) (968,640)
----------- -----------
Total Stockholders' Equity 2,278,788 3,150,633
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,729,872 $ 6,068,588
=========== ===========
- 16 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
SALES $ 1,154,970 $ 1,475,577
COST OF GOODS SOLD 1,237,105 1,318,743
----------- -----------
Gross (Loss) Profit (82,135) 156,834
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES 521,755 799,077
SELLING EXPENSES 258,067 403,160
----------- -----------
779,822 1,202,237
----------- -----------
Operating Loss (861,957) (1,045,403)
RENTAL INCOME 101,150 -
FINANCING (EXPENSE) INCOME (100,303) 91,719
----------- -----------
NET LOSS $ (861,110) $ (953,684)
=========== ===========
NET LOSS PER COMMON SHARE $ (.77) $ (.96)
=========== ===========
NET LOSS PER DILUTIVE SHARE $ (.77) $ (.96)
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING 1,114,201 994,565
=========== ===========
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
- 17 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Net
Unrealized Gain
Additional on Securities
Common Paid-in Notes Available Accumulated
Shares Stock Capital Receivable for Sale Deficit Total
---------- -------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995, as reported 2,364,983 $ 2,365 $ 457,390 $ (33,080) $ - $ (14,956) $ 411,719
Effect of reverse stock split - 1 for 3 (1,576,615) (1,577) 1,577 - - - -
---------- -------- ---------- ---------- ----------- ----------- ----------
Balance, December 31, 1995, as restated 788,368 788 458,967 (33,080) - (14,956) 411,719
Sale of common stock and warrants,
adjusted for split 325,833 326 3,594,287 - - - 3,594,613
Contributed services - - 37,500 - - - 37,500
Stock options issued in exchange for
other services - - 49,750 - - - 49,750
Net change in unrealized gains on securities
available for sale, net of taxes of $2,500 - - - - 10,736 - 10,736
Net loss - - - - - (953,684) (953,684)
---------- -------- ---------- ---------- ----------- ----------- ----------
Balance, December 31, 1996 1,114,201 $ 1,114 $4,140,504 $ (33,080) $ 10,736 $ (968,640) $3,150,634
========== ======== ========== ========== =========== =========== ==========
Balance, December 31, 1996, as reported 3,342,483 $ 3,343 $4,138,275 $ (33,080) $ 10,736 $ (968,640) $3,150,634
Effect of reverse stock split - 1 for 3 (2,228,282) (2,229) 2,229 - - - -
---------- -------- ---------- ---------- ----------- ----------- ----------
Balance, December 31, 1996, as restated 1,114,201 1,114 4,140,504 (33,080) 10,736 (968,640) 3,150,634
Net change in unrealized gain on
securities available for sale - - - - (10,736) - (10,736)
Cancellation of common stock subscriptions - - (33,080) 33,080 - - -
Net loss - - - - - (861,110) (861,110)
---------- -------- ---------- ---------- ----------- ----------- ----------
Balance, December 31, 1997 1,114,201 $ 1,114 $4,107,424 $ - $ - $(1,829,750) $2,278,788
========== ======== ========== ========== =========== =========== ==========
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
- 18 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 1,118,436 $ 1,460,751
Cash paid to suppliers and employees (2,307,986) (1,986,184)
Interest received 157,641 47,802
Interest paid (211,681) (43,085)
----------- -----------
Net Cash Used in Operating Activities (1,243,590) (520,716)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for construction in progress (199,253) (2,285,018)
Purchase of property and equipment (44,567) (66,940)
Purchase of land - (237,339)
Proceeds from called securities - 500,754
Proceeds from sale of securities available for sale 3,512,311 -
Purchase of securities available for sale (1,022,758) (2,991,771)
Investment in certification costs (5,303) (39,608)
Decrease (increase) in deposits 487 (22,672)
----------- -----------
Net Cash Provided (Used) by Investing
Activities 2,240,917 (5,142,594)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of borrowings (1,907,569) (163,459)
Proceeds from borrowings 900,000 1,993,804
Principal payments on related party borrowings - (101,200)
Proceeds from issuance of common stock and warrants - 3,677,561
----------- -----------
Net Cash (Used) Provided by Financing
Activities (1,007,569) 5,406,706
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (10,242) (256,604)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 119,703 376,307
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 109,461 $ 119,703
=========== ===========
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
- 19 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(continued)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH USED
IN OPERATING ACTIVITIES
Net loss $ (861,110) $ (953,684)
Interest capitalized in connection with construction
in progress (19,000) (21,509)
Noncash (income) expenses included in net loss
Depreciation and amortization 92,812 47,555
Contributed services - 37,500
Stock options issued in exchange for consulting
services - 49,750
Realized loss on securities available for sale 1,464 -
Change in assets and liabilities
(Increase) decrease in accounts receivable (208,427) 39,246
(Increase) decrease in accrued interest receivable 60,448 (60,448)
(Increase) decrease in inventories 133,247 (348,559)
(Increase) decrease in prepaid expenses 16,277 (2,654)
Increase (decrease) in accounts payable and
accrued expenses (540,389) 746,159
Increase (decrease) customer deposits 81,088 (54,072)
----------- -----------
Net Cash Used in Operating Activities $(1,243,590) $ (520,716)
=========== ===========
SUPPLEMENTAL DISCLOSURE OF INVESTING AND
FINANCING ACTIVITIES
Purchase of prepaid insurance by installment
note payable $ - $ 43,750
=========== ===========
Cancellation of common stock subscriptions $ 33,080 $ -
=========== ===========
Increase in common stock and additional
paid-in capital $ - $ 4,986,228
Public and private offering costs paid in cash - (280,743)
Public and private offering costs deducted from
proceeds - (1,027,924)
Noncash - prepaid fees for public offering - (82,948)
----------- -----------
Net Proceeds from Issuance of
Common Stock and Warrants $ - $ 3,594,613
=========== ===========
Net Unrealized Gain on Securities Available for Sale $ - $ 10,736
=========== ===========
</TABLE>
- 20 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Guardian Technologies International, Inc. (the Company) was incorporated
in Virginia on October 30, 1989 and commenced full production in December,
1990. The Company manufactures and distributes soft armor products,
primarily superior quality ballistic protective vests, for law enforcement
officers, armed forces personnel, and other legitimate individuals or
groups requiring protective equipment.
In February, 1996, the Company was reincorporated in the State of Delaware
under the name of Guardian Technologies International, Inc. and was
authorized to issue 15,000,000 shares of common stock, $.001 par value,
and 1,000,000 shares of preferred stock, $.20 par value. Thereafter,
pursuant to approval of the Company stockholders at a special stockholders
meeting, a Plan of Agreement and Merger between Guardian Technologies
International, Inc., the Virginia corporation and Guardian Technologies
International, Inc., the Delaware corporation was executed and filed with
2,364,983 shares of common stock of the Delaware corporation issued in a
share for share exchange for the 2,364,983 shares of the Virginia
corporation then outstanding.
Effective May 23, 1997, the Board of Directors authorized a one-for-three
reverse stock split for the Company's common shares and Class A warrants,
thereby decreasing the number of issued and outstanding common shares to
1,114,201 and reducing issued and outstanding purchase warrants to
814,417. All references in the accompanying financial statements and notes
to financial statements to the number of common shares and per-share
amounts for 1996 have been restated to reflect the reverse stock split.
METHOD OF ACCOUNTING
The financial statements are presented on the accrual basis of accounting.
REVENUE RECOGNITION
Manufacturing revenue is recognized upon shipment of product. Rental
income is recorded as earned in connection with tenant lease agreements at
the Company's office and manufacturing facility.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenue and expenses during
the reporting period. Due to their prospective nature, actual results
could differ from those estimates.
- 21 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
FINANCIAL INSTRUMENTS
The estimated fair value of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses and other liabilities
approximate their carrying amounts in the financial statements.
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the fair value of long-term
debt is $1,021,000.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of trade accounts receivable and
cash. The Company grants credit terms in the normal course of business to
its customers, who are primarily dealers or municipal, state and Federal
law enforcement agencies, and who are located throughout the United
States. As part of its ongoing procedures, the Company monitors the credit
worthiness of its customers.
The Company maintains cash in commercial banks in accounts which are
insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000
per customer and in uninsured accounts. The Company has amounts on deposit
with banks which at times exceed the $100,000 insured threshold. The cash
amount presented on the balance sheet reflects the actual amounts on
deposit with banks reduced for outstanding checks and increased for
deposits in transit. There were no uninsured bank balances at December 31,
1997 or 1996.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include demand deposits and all highly liquid debt instruments with
original maturities of three months or less.
ACCOUNTS RECEIVABLE
It is the practice of management to write off receivables in the year
amounts are determined to be uncollectible. No allowance for doubtful
accounts is reflected in these financial statements since management
believes all accounts to be fully collectible. There was no bad debt
expense in 1997 or 1996.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined on a first-in, first-out basis for raw materials and work in
progress. Finished goods are stated at standard cost.
SECURITIES AVAILABLE FOR SALE
Securities to be held for indefinite periods of time are classified as
securities available for sale. Unrealized gains and losses are excluded
from earnings and shown as a separate component of stockholders' equity,
net of applicable income taxes. The investments are recorded at fair
value.
- 22 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their
estimated useful lives. Leasehold improvements are amortized over their
useful lives or the related lease period, whichever is shorter. The
Company uses the straight-line and accelerated methods of depreciation,
respectively, for financial statement and income tax reporting purposes.
A summary of the estimated useful lives follows:
Building 40 years
Office furniture and equipment 5 - 7 years
Manufacturing equipment 7 - 8 years
Leasehold improvements 2 - 7 years
Expenditures for maintenance and repairs which do not materially extend
the useful lives of property and equipment are charged to earnings. When
property or equipment is sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the respective accounts
with the resulting gain or loss reflected in earnings.
Long-lived assets and identifiable intangibles of the Company are reviewed
for impairment should events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. At December 31, 1997
and 1996, there were no impaired assets.
Depreciation expense for the years ended December 31, 1997 and 1996 was
$84,614 and $17,318, respectively. There was no amortization of leasehold
improvements in 1997. Amortization expense was $8,312 for 1996.
CERTIFICATION COSTS
The Company has capitalized certain costs associated with certification of
its products. Certification costs are carried at cost less accumulated
amortization. Amortization is taken on the straight-line basis over five
years. Amortization expense for the years ended December 31, 1997 and 1996
was $8,198 and $10,760, respectively.
CONTRIBUTED SERVICES
During 1996, the Company recognized as additional paid-in-capital the
value of uncompensated services provided by the President and the Chief
Executive Officer.
ADVERTISING COSTS
The Company charges advertising costs to expense as incurred. Advertising
expense was $47,476 for 1997 and $52,199 for 1996.
- 23 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
The Company utilizes the liability method for accounting for income taxes.
The liability method accounts for deferred income taxes by applying
enacted statutory rates in effect at the balance sheet date to differences
between financial statement amounts and tax bases of assets and
liabilities. The resulting deferred income tax liabilities are adjusted to
reflect changes in tax laws and rates. Temporary differences consist of
the difference in financial statement and income tax bases for property
and equipment. Deferred income taxes related to an asset or liability are
classified as current or noncurrent based on the classification of the
related asset or liability.
Prior to December 7, 1995, the Company, with the consent of its
stockholders, had elected S corporation status under Section 1372 of the
Internal Revenue Code and similar sections of the state income tax laws.
On December 7, 1995, Guardian Technologies International, Inc. terminated
its S corporation election and became subject to corporate income taxes.
NET LOSS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128 which establishes standards for computing and presenting
earnings per share (EPS) for entities with publicly held common stock. The
standard requires presentation of two categories of earnings per share,
basic EPS and diluted EPS. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the year. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the Company. The 1996 net loss per common share information has been
restated to account for the provisions of SFAS 128.
The financial statements and related footnotes provide information that
considers the effect of the one-for-three reverse stock split on all years
presented.
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ---------------------------------
Net Per-Share Net Per-Share
Loss Shares Amount Loss Shares Amount
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS and
Diluted EPS
Loss available
to common
stockholders $ (861,110) 1,114,201 $ (0.77) $ (953,684) 994,565 $ (0.96)
======== =========
</TABLE>
- 24 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
NET LOSS PER COMMON SHARE (continued)
Options to purchase 33,333 of common shares at $1.32 per share were
outstanding in 1997 and 1996. The assumed conversion of the options would
be antidilutive due to the loss from continuing operations and therefore,
is excluded from the computation of diluted EPS for 1997. The options
expire on January 2, 2000.
Common stock purchase warrants of 814,417 with an exercise price of $15.00
per share were outstanding in 1997 and 1996. The assumed conversion of the
warrants would be antidilutive due to the loss from continued operations
and therefore is excluded from the computation of diluted EPS for 1997 and
1996.
ACCOUNTING PRONOUNCEMENTS
In June, 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income". Comprehensive income,
as defined by the statement, includes all changes in stockholders' equity
exclusive of transactions with owners. The statement is effective for
financial statements for periods beginning after December 15, 1997.
Also in June, 1997, FASB Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" was issued. This statement
establishes standards for the reporting of financial and descriptive
information by public business enterprises regarding its operating
segments and also provides standards for related disclosures about
products and services, geographic areas, and major customers. The
statement is effective for financial statements for periods beginning
after December 15, 1997.
Management does not anticipate the adoption of FASB Statements No. 130 or
No. 131 will have a material effect on the financial statements.
2. GOING CONCERN CONSIDERATIONS
The Company has incurred losses of approximately $4,150,000 since
inception. These continuing losses, a decline in sales during 1997, high
production costs and gross margin declining from 10 percent in 1996 to nil
in 1997 raise doubt about the Company's ability to continue as a going
concern. Its continued existence is dependent upon its ability to achieve
profitable operations by increasing sales while controlling production and
other costs.
To achieve profitable operations, management intends to continue and
expand cost reduction measures instituted in early 1997 by initiating head
count reductions in administrative and sales departments, reducing or
eliminating the use of outside consultants, and improving manufacturing
cost and inventory controls. Cost reduction efforts in 1997 have resulted
in a decrease in general and administrative expenses of about 35 percent.
- 25 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
2. GOING CONCERN CONSIDERATIONS (continued)
The Company will focus sales efforts primarily on large quantity
standardized orders which will create manufacturing efficiencies. The
backlog of sales orders at December 31, 1997 is approximately $350,000.
The Company is pursuing "funded" development efforts to continue to
provide state of the art products. In addition, the Company intends to
utilize the specific expertise of senior management in fields of law
enforcement, security and protective devices by pursuing opportunities to
provide consulting services to private industry and government agencies.
As discussed in Note 16, the Company has accepted a commitment from a
commercial entity to provide $1,900,000 in the form of a mortgage. The
mortgage will bear interest at the rate of 7.5 percent per annum, will be
amortized over 20 years with a 10 year balloon and will require monthly
principal and interest payments of approximately $15,300. Proceeds from
the refinancing will be used to repay an existing note payable with a
balance of $900,000 at December 31, 1997, which bears interest at the rate
of 15 percent per annum, and to provide additional working capital.
Commencing February 1, 1998, the Company will have full occupancy of all
leasable space in the facility in Dulles, Virginia. Annual base rent under
the leases is approximately $196,500, including common area maintenance
charges. Tenant leases also provide for 2 to 3.5 percent annual increases
in base rent.
For these reasons, management believes that no adjustments or
reclassifications of recorded assets and liabilities is necessary at this
time.
3. SECURITIES AVAILABLE FOR SALE
All securities available for sale were called or sold by the Company in
1997. Securities available for sale as shown in the balance sheet at
December 31, 1996, are as follows:
Gross Gross Approximate
Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
U.S. Government and
agency securities $2,491,017 $10,736 $ - $2,501,753
========== ======= ====== ==========
Securities available for sale with carrying amount of $2,501,753 at
December 31, 1996, were pledged as collateral on a line of credit.
4. INVENTORIES
Inventories consist of the following:
1997 1996
--------- --------
Raw materials $ 352,410 $ 266,925
Work in process 7,497 7,695
Finished goods 92,428 140,984
Raw materials in transit - 169,978
--------- ---------
$ 452,335 $ 585,582
========= =========
- 26 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
5. CONSTRUCTION IN PROGRESS
During 1996, the Company entered into various contracts for the design and
construction of a manufacturing and office facility on a parcel of
unimproved land that was purchased in May, 1996 for $237,339. The total
cost of the building was $2.5 million. Interest incurred during
construction has been capitalized as part of the building. The capitalized
interest was $19,000 for 1997 and $21,509 for 1996.
The Company commenced occupancy of the facility on January 31, 1997.
6. LINES OF CREDIT
The Company has a $100,000 line of credit arrangement with a bank, through
December 31, 1998. Interest is at 2 percent in excess of the bank's base
lending rate. No principal was outstanding as of December 31, 1997 and
1996. The line of credit is guaranteed by an officer, director and
stockholder of the Company. Borrowings and repayments were $40,000 in 1997
and $75,000 in 1996.
In 1996, the Company entered into a line of credit agreement with a
securities broker which allowed it to borrow against U.S. Government and
agency securities available for sale (Note 3). The borrowings were charged
interest at the broker's interest rate and were payable on demand. The
interest rate at December 31, 1996 was 7.5 percent, payable monthly. At
December 31, 1996, a total of $1,850,554 had been drawn against the
securities. In 1997, an additional $290,000 was drawn under the line of
credit. At December 31, 1997, all borrowings under the line of credit
agreement had been paid from the sale of the securities.
7. NOTES PAYABLE
On February 7, 1997, the Company executed a one year note for $900,000
with a commercial entity. Interest at a 15 percent annual rate is due
monthly. The note is secured by a first deed of trust on the office and
manufacturing facility in Dulles, Virginia. In April, 1997, the agreement
was modified to include additional funds of $650,000 (up to a maximum of
$900,000 when the building was fully leased). In addition, the due date
was extended to February 7, 1999 when the original principal of $900,000
plus any borrowings under the credit facility are due and payable. See
Note 16.
Also included in notes payable is an insurance premium finance agreement
totalling $88,817. The agreement matures in May, 1999 and calls for
monthly payments of principal and interest of $5,539 with interest at 8
percent.
The following is a schedule of future principal payments as of December
31, 1997.
Year ending December 31,:
------------------------
1998 $ 61,669
1999 927,148
---------
$ 988,817
=========
- 27 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
8. LEASE COMMITMENTS
The Company has executed lease agreements with three tenants, effective
February 1, 1997 and one tenant effective February 1, 1998, for
approximately 18,800 square feet of office space in the Company's facility
located in Dulles, Virginia. The leases are from five to seven years,
provide for monthly payments of base rent and operating expenses, and
include a 2 to 3.5 percent increase in base rent annually.
At December 31, 1997, future minimum lease payments receivable are as
follows:
1998 $174,679
1999 186,943
2000 193,322
2001 199,947
2002 and thereafter 192,205
--------
$947,096
========
The Company leased office and warehouse space under two month-to-month
agreements prior to occupying its new facility on January 31, 1997.
In connection with these agreements, the Company sub-leased office space
to other parties on a month-to-month basis. Office rental expense of
$12,058 and $136,299 for the years ended December 31, 1997 and 1996,
respectively, are net of sublease rental income of $3,463 and $36,162,
respectively.
9. INCOME TAXES
There was no provision for income taxes for the years ended December 31,
1997 or 1996 due to net operating losses, and because deferred tax assets
were offset by a valuation allowance.
The deferred tax asset for the years ended December 31, are comprised of
the following items:
1997 1996
--------- ---------
Deferred tax assets:
Net operating loss carryforward $(703,000) $(352,000)
Property and equipment 63,000 (25,000)
Accrued expenses (3,000) (6,000)
--------- ---------
Gross deferred tax assets (643,000) (383,000)
Deferred tax liability:
Net unrealized gain on securities
available for sale - 5,000
Less: deferred tax asset valuation
allowance 643,000 378,000
--------- ---------
Net deferred tax asset $ - $ -
========= =========
- 28 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
9. INCOME TAXES (continued)
A reconciliation between the amount of reported Federal income tax benefit
and the amount computed by multiplying the applicable statutory Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- --------------------------
<S> <C> <C> <C> <C>
Computed expected tax benefit $(292,780) (34.00)% $ (324,250) (34.00)%
(Increase) decrease in tax
benefit resulting from:
State tax benefit (51,670) (6.00) (57,250) (6.00)
Other 79,450 9.25 16,500 1.45
--------- ------- ---------- -------
(265,000) (30.75) (365,000) (38.55)
--------- ------- ---------- -------
Allowance to reduce tax benefit
to net realizable value:
Beginning of year $(378,000) (43.90) $ (13,000) (1.40)
End of year 643,000 74.65 378,000 39.55
--------- ------- ---------- -------
265,000 30.75 365,000 38.55
--------- ------- ---------- -------
Income tax benefit $ - 0.00% $ - 0.00%
========= ======= ========== =======
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $1,850,000 available under provisions of the Internal
Revenue Code to be applied against future taxable income. These
carryforwards are subject to annual limitations on utilization and expire
on December 31, 2016.
10. MAJOR CUSTOMERS
The Company sells its products primarily to authorized dealers for resale
to municipal, county and state law enforcement agencies throughout the
United States. Approximately 4 percent of sales in 1997 and 21 percent of
sales in 1996 were to foreign governments and agencies.
Percentage of sales to major domestic customers at December 31, are as
follows:
1997 1996
---- ----
U.S. Government Agency 26% 0%
Municipal law enforcement agency 11% 9%
U.S. Government subcontract 7% 23%
11. MAJOR SUPPLIER CONCENTRATION
The ballistic resistant products of the Company are primarily manufactured
with the raw materials Spectra 1000 woven fabric and Spectra Shield. These
two products are manufactured and distributed only by Allied-Signal, Inc.
As of December 31, 1997 and 1996, Guardian Technologies International,
Inc., owed $129,444 and $276,765, respectively, to Allied-Signal, Inc.
- 29 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
12. CONTRIBUTED CAPITAL
There were no outstanding shares of preferred stock in 1997 or 1996.
In May, 1996, the Company completed an initial public offering of 325,833
shares of common stock at $15.30 per share with 325,833 common stock
purchase warrants. The warrant entitles the holder to purchase one share
of common stock at an exercise price of $15.00 during the five year period
following the effective date of the offering. At December 31, 1997 and
1996, no warrants had been exercised. The offering also registered 244,278
additional shares of common stock, 488,523 warrants and 488,523 shares of
common stock underlying the warrants by existing stockholders. No proceeds
from the resale of these shares will be received by the Company. Total net
proceeds from the offering were $3,594,613 after deducting commissions,
fees and other costs of the sale.
There were 814,356 warrants, with an exercise price of $15.00 per share,
outstanding at December 31, 1997 and 1996.
On February 20, 1995, the stockholders of the Company approved an
amendment of the articles of incorporation to increase the authorized
shares of common stock to 5,000,000 shares and to authorize 1,000,000
shares of preferred stock. The amendment was filed on March 22, 1996 with
the State Corporation Commission of Virginia.
In 1995, the Company sold 64,863 shares to investors at $.51 per share,
accepting notes receivable of $33,080. The notes were due April 16, 1996,
with interest at the rate of 9 percent. The notes receivable of $33,080
were canceled in 1997.
13. STOCK PRICES SINCE INITIAL PUBLIC OFFERING
The common stock of the Company is traded on the NASDAQ Stock Market under
the symbol GRDN. The prices listed below are the high and low sales prices
for common shares since the initial public offering on May 14, 1996.
Price
----------------------
Quarter Ended Low High
------------ --------- ---------
6/30/96 $17.25 $38.25
9/30/96 $ 2.8125 $19.50
12/31/96 $ 1.21875 $ 4.40625
3/31/97 $ 0.84375 $ 2.53125
6/30/97 $ 0.875 $ 2.625
9/30/97 $ 1.375 $ 4.00
12/31/97 $ 2.50 $ 3.375
- 30 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
13. STOCK PRICES SINCE INITIAL PUBLIC OFFERING (continued)
The common stock purchase warrants of the Company are traded on the NASDAQ
Stock Market under the symbol GRDNW. The prices listed below are the high
and low sales prices for common share warrants since the initial public
offering on May 14, 1996.
Price
--------------------
Quarter Ended Low High
------------- --------- ---------
6/30/96 $12.75 $34.50
9/30/96 $ 0.9375 $15.75
12/31/96 $ 0.1875 $ 2.90625
3/31/97 $ 0.09375 $ 0.750
6/30/97 $ 0.0625 $ 0.250
9/30/97 $ 0.03125 $ 0.46875
12/31/97 $ 0.250 $ 0.375
14. STOCK COMPENSATION
On December 8, 1997, the stockholders approved a stock option plan
authorizing options for 300,000 shares of the Company's common stock.
Under the terms of the plan, the exercise price of non-qualified options
will be the lesser of the book value per share of the common stock as of
the end of the Company's fiscal year immediately preceding the date of
such grant or 50 percent of the fair market value per share of the common
stock on the date of such grant. For incentive stock options, the exercise
price shall not be less than fair market value per share at the date of
such grant. Options shall expire on the date specified by the Board but
not more than ten years from the date of grant for non-qualified and
incentive stock options. At December 31, 1997, there were no options
granted under the stock plan. See Note 16.
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
SFAS 123 establishes standards of financial accounting and reporting for
stock-based compensation plans including stock option plans, stock
purchase plans and other arrangements by which employees or other related
parties receive shares of stock or equity instruments based on the market
value of an entity's stock. The Company has elected to account for
employee stock plans using the intrinsic value method.
On November 14, 1996, the Company granted an option to purchase 33,333
shares at an exercise price of $1.32 per share, to a consultant providing
advisory services to the Company. At that date, the market price was
$2.82. The option is exercisable at any time after January 2, 1997, and on
or before January 2, 2000. Consulting expense of $49,750 has been
recognized in the year ending December 31, 1996.
The fair value of the Company's stock options used is the estimated
present value at grant date using the Black Scholes pricing model with the
following assumptions for 1996: a risk free interest rate of 5.58 percent,
no estimated dividend yield, an expected volatility of 24 percent and an
expected holding period of three years.
- 31 -
<PAGE>
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
15. EMPLOYMENT AGREEMENTS
Effective January 1, 1997, the Compensation Committee of the Board of
Directors reduced the base salary of the Vice President to $77,900 and the
base salary of the President to $21,150 for 1997, only. The officers'
employment agreements permit the Board to increase, but not decrease, the
base salaries of the officers during the remaining four year terms of the
contracts. The Board or Compensation Committee, in their sole discretion,
may award bonuses to the officers. The amended agreements include
provisions for additional compensation payable to the officers in the
event of termination of employment without cause, or upon change of
control of the Company.
16. SUBSEQUENT EVENTS
REFINANCE OF NOTE PAYABLE
On March 3, 1998, the Company accepted a commitment letter from a
commercial entity to obtain a loan of $1,900,000 to refinance an
outstanding note payable of $900,000 as of December 31, 1997. The
commitment letter, which is valid until April 20, 1998, calls for a ten
year term and 20 year amortization schedule and is to be collateralized by
a first deed of trust on the office and manufacturing facility in Dulles,
Virginia, as well as assignment of all tenant occupancy leases. The
commitment also provides for monthly payments of principal and interest of
$15,306, including interest at 7.5 percent per annum, with the remaining
principal due at maturity. If the loan is prepaid in full before the first
five years of the loan, the Company will be subject to certain prepayment
premiums computed as a percent of the unpaid balance.
STOCK COMPENSATION
On January 28, 1998, at a special meeting of the Board of Directors,
options to purchase common stock were granted to officers and employees of
the Company with an exercise price of $2.50. Also at the meeting, common
stock options were granted to directors of the Company. All options
granted expire January 28, 2000. Compensation expense for the directors'
options granted using the Black Scholes pricing model is approximately
$36,500 with the following assumptions: a risk-free interest rate of 5.63
percent, no estimated dividend yield, an expected volatility of 36 percent
and an expected holding period of two years. No compensation expense is
recognized for the employee options granted, which are valued using the
intrinsic value method. However, for disclosure purposes, compensation
expense would be $36,500 for the employee common stock options.
- 32 -
<PAGE>
ITEM 8 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are listed in the table
below and brief summaries of their business experience and certain other
information with respect to them are set forth thereafter.
NAME AGE POSITION
Oliver L. North........... 54 Chairman of the Board, President and Secretary
Joseph F. Fernandez....... 61 Director, Vice President and Treasurer
Travis Y Green............ 42 Director
Herbert M. Jacobi......... 53 Director
Hugh Sawyer............... 46 Director
John C. Power............. 35 Director
Stephen G. Calandrella.... 38 Director
The Company's Articles of Incorporation authorize three (3) classes of
Directors which classes serve for varying terms. The Articles also grant to the
sitting Directors the authority to fill any vacancies on the Board and/or to
appoint members to the Board to fill any vacancies resulting from an increase in
the authorized number of Directors. As at the date hereof, there are seven (7)
directors, four (4) of whom have been appointed by the original Directors.
Messrs. North and Fernandez' terms as Directors are for a three (3) year period,
Mr. Green for a two (2) year period and the appointees for a one (1) year
period.
Oliver L. North has served as Chairman of the Board, President and
Secretary from inception. He graduated from the United States Naval Academy in
June 1968 and served in the United States Marine Corps for twenty-two years. His
service included a tour of duty in Vietnam where he earned a Silver Star for
heroism, a Bronze Star with a "V" for valor, and two Purple Hearts for wounds in
action. From 1981 through 1986, he served as a member of President Ronald
Reagan's National Security Council staff and became Deputy Director of
Political-Military Affairs. In this capacity, he helped plan the liberation of
Grenada, the capture of terrorists who hijacked the cruise ship Achille Lauro,
and the U.S. raid on Quaddafi's terrorist training camps in Libya. He retired
from the Marine Corps in 1988.
In March, 1988, Mr. North was indicted on charges arising out of the
so-called Iran-Contra affair. Four of the charges were dismissed prior to trial.
On May 4, 1989 Mr. North was acquitted on nine counts and convicted on three in
the United States District Court in Washington, D.C. The convictions were
appealed to the United States Court of Appeals for the District of Columbia
Circuit. On July 20, 1990, the Court of Appeals vacated all the convictions,
reversed one conviction outright, and sent the case back to the District Court.
The Independent Counsel who had brought the case then declined to continue
further prosecution and all remaining charges were dismissed. There are no
outstanding criminal charges or convictions against Mr. North today.
<PAGE>
Joseph F. Fernandez has served as Vice President, Treasurer and Director
since inception. Mr. Fernandez began his career as a Police Officer with
Miami/Dade County Police Department and served in this position for eight years.
In 1967, he was employed by the U.S. Central Intelligence Agency. In this
capacity, he served in both foreign and domestic posts dealing with highly
sensitive national security issues and intelligence operations. As a Senior
Operations Officer in the Clandestine Services, he directly supervised CIA units
of up to 35 persons in day-to-day operational assignments and planned,
distributed and accounted for budgets in excess of $8 million.
On June 22, 1988, Mr. Fernandez was indicted on five criminal counts
arising out of the so-called Iran-Contra Affair. These indictments were
dismissed without prejudice on October 13, 1988. On April 4, 1989, Mr. Fernandez
was re-indicted in a different venue on four criminal counts arising out of the
Iran-Contra Affair. This indictment was dismissed with prejudice on November 24,
1989. The Independent Counsel lodged an appeal in the U.S. Court of Appeals. In
September, 1990, that Court upheld the dismissal of the indictment, and on
October 5, 1990, the mandate of the Court of Appeals was issued thereby making
final the dismissal of all charges against Mr. Fernandez. There are no
outstanding criminal charges or convictions against Mr. Fernandez today.
Travis Y Green has been a Director since inception. He holds a Masters in
International Business Studies from the University of South Carolina, and he
graduated with a Bachelors Degree in Business Administration from Emory
University. Mr. Green was an Account Executive at Dresdner Bank AG, in New York
in 1978, and continued his financial career at the Wall Street firm of Brown
Brothers Harriman & Co. for 10 years from 1982 through 1992. In 1993, he
established the investment banking firm of Green, Morris & Associates in
Atlanta, Georgia where he serves as President.
Herbert M. Jacobi has been an attorney in private practice in New York, New
York since 1967.
Hugh Sawyer has served as President of National Linen Service, a $500
million in sales subsidiary of National Service Industry, based in Atlanta,
Georgia since early 1996. He was formerly president of Wells Fargo Armored
Services Division of Borg Warner.
John C. Power has served as President and Chief Executive Officer of
Redwood MicroCap Fund, Inc. ("MicroCap") since February, 1992. MicroCap is
registered as an Investment Company under the Investment Company Act of 1940, as
amended (the "40 Act"), but is attempting to de-register from the 40 Act.
MicroCap has majority and/or wholly-owned subsidiaries engaged in oil and gas
exploration, production and management and radio broadcasting. Since November
1996, Mr. Power has been the Managing Member of Northern Lights Broadcasting,
L.L.C., a limited liability company engaged in the acquisition and development
of radio stations in Montana and North Dakota. Since November 1996, Mr. Power
has also been President of Power Surge, Inc. Mr. Power has also served as
president of Power Curve, Inc., a private investment and consulting firm since
1986, and as an officer and director of Signature Wines of Napa Valley, Inc.
from September, 1995 to June 1996. From March, 1994 to September, 1995, Mr.
Power served as a general partner of Signature Wines, a California general
partnership, a predecessor entity of Signature Wines of Napa Valley, Inc. Mr.
Power served as a director of BioSource International, Inc. (NASDAQ:BIOI) from
August, 1993 to December, 1994, of Optimax Industries, Inc. (NASDAQ:OPMX) from
April 1993 to March 1995, and of AirSoft Corporation, a manufacturer of network
communications software and systems, from 1993 to June 1996. Mr. Power received
his formal education at Occidental College and at the University of California
at Davis.
<PAGE>
Stephen G. Calandrella has been President and a Director of The Rockies
Fund, Inc. since February, 1991, and Chief Executive Officer since January 30,
1994. Mr. Calandrella has previously served as a Director of Kelly Motors,
Ltd., Good Times Restaurants, Inc., Southshore Corp., and Cogenco International,
Inc. Mr. Calandrella also served as a Director for Combined Penny Stock Fund,
Inc. and Redwood MicroCap Fund, Inc., both of which are closed-end investment
companies registered under the Investment Fund Act of 1940. Mr. Calandrella
currently serves as a member of the Board of Directors of several publicly held
companies. Mr. Calandrella has also engaged in financing and consulting
activities for development stage companies which consist of advising public and
private companies on capital formation methods, enhancing shareholder
valuations, mergers, acquisitions and corporate restructurings as well as
arranging for bridge loans and equity purchases.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16 (a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors and persons who own more than ten
percent of the Common Stock (collectively, "Reporting Persons") to file initial
reports of ownership and changes of ownership of the Common Stock with the SEC
and the NASDAQ Stock Market. Reporting Persons are required to furnish the
Company with copies of all forms that they file under Section 16(a). The Company
is not aware of any failure on the part of any Reporting Persons to timely file
reports required pursuant to Section 16(a).
ITEM 10 EXECUTIVE COMPENSATION
The following table sets forth the executive compensation and distribution
paid to each executive officer of the Company during the years ended December
31.
EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------- ----------------------------------
Name Year Restricted Restricted
Principal Ended Other Stock Options LTIF All other
Other Position December Salary Bonus Compensation Awards SARA Payouts Compensations
- ----------------------- -------- ------- ----- ------------ ------ ---- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oliver L. North 1997 $ 16,014 -- -- -- -- -- (1)
President and
Secretary 1996 $113,740 -- -- -- -- -- (1)
Joseph F. Fernandez 1997 $ 72,849 -- -- -- -- -- (1)
Vice President
and Treasurer 1996 $117,074 -- -- -- -- -- (1)
</TABLE>
(1) Contributed services for Oliver L. North and Joseph F. Fernandez for 1997
and 1996 that were recorded as additional paid-in capital were nil and
$37,500, respectively, for both years. No shares were issued in exchange
for the contributed services.
<PAGE>
EMPLOYMENT CONTRACTS
Oliver L. North and Joseph F. Fernandez executed employment contracts with
the Company effective May 31, 1996. The contracts are for a four (4) year term
with compensation at a rate of $150,000 for the first year of the term, subject
to increases as determined by the Board of Directors, plus fringe benefits
including health insurance.
Effective January 1, 1997, the employment agreements of the President and Vice
President were amended to reduce the base salaries payable to each to $77,900
for 1997, only. Subsequently, the Compensation Committee reduced the base salary
of the President to $21,150 for 1997 only. The agreements permit the Board to
increase, but not decrease, the base salaries of the officers during the
remaining terms of the contracts. The Board or Compensation Committee, in their
sole discretion, may award bonuses to the officers. The amended agreements
include provisions for additional compensation payable to the officers in the
event of termination of employment without cause, or upon change of control of
the Company.
Oliver L. North, President, devotes approximately three (3) hours per day
to a radio program of which he is the host during which program Mr. North is not
at the Company's offices. Nonetheless, the Company believes that Mr. North
devotes a full business day to the Company's affairs.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 31, 1998
with respect to the beneficial ownership of shares of Common Stock by (i) each
stockholder known by the Company to be the beneficial owner of more than five
percent (5%) of the outstanding shares of Common Stock; (ii) each director of
the Company; (iii) each executive officer named in the Summary Compensation
Table appearing below under "Executive Compensation", and (iv) all executive
officers and directors as a group. Except as indicated in the footnotes to the
table, persons named in the table have sole voting and investment power with
respect to all shares of Common Stock which they respectively own beneficially.
Name and Address Number of Shares Percent
of Beneficial Owner Beneficially Owned* of Class*
--------------------------------------------------- ---------
Oliver L. North (1) 157,990 14.2%
Rt. 1, Box 560
Bluemont, VA 20135
Joseph F. Fernandez (2) 94,350 8.5%
9542 Whitecedar Court
Vienna, VA 22180
Travis Y. Green 3,700 0.3%
Lenox Towers, Suite 625
3400 Peachtree Road NE
Atlanta, GA 30326
John C. Power (3) 103,100 9.3%
Redwood MicroCap Fund, Inc.
7518 Elbow Bend Road
Carefree, AZ 85377
Stephen G. Calandrella (4) 400,366 32.0%
Rockies Fund
4465 Northpark Drive, Suite 400
Colorado Springs, CO 80907
Herbert M. Jacobi 0 0.0%
8 West 38th Street
New York, NY 10018
Hugh E. Sawyer 1,000 0.1%
3800 Falls Landing Drive
Alpharetta, GA 30202
<PAGE>
Name and Address Number of Shares Percent
of Beneficial Owner Beneficially Owned* of Class*
------------------- -------------------- -----------
All Events Consulting Inc.(5) 150,000 12.4%
7 Hampton Street
Hauppauge, NY 11787
Helmsley Finance Ltd.(6) 100,001 8.5%
39 Dan St. Jersey
Channel Island
JFU 8 UA
Michael Iovino(7) 60,000 5.2%
2530 4th Avenue
East Meadow, NY 11554
John Magliocco (8) 75,000 6.4%
14 Applegreen Drive
Westbury, NY 11568
M.D. Iabbah (9) 75,000 6.4%
708 Greenwich St
Apt 5C, New York
NY 10014
All Officers and Directors
as a Group (7 persons) 760,506 60.8%
* Under applicable rules of the Securities and Exchange
Commission (the "SEC"), a person is deemed to be the beneficial owner
of share of Common Stock if, among other things, he or she directly
or indirectly has or shares voting power or investment power with
respect to such shares. A person is also considered to beneficially
own shares of Common Stock which he or she does not actually own but
has the right to acquire presently or within the next sixty (60)
days, by exercise of warrants or otherwise. The percentage of
ownership was determined by assuming that all Warrants held by this
securityholder have been exercised and that Warrants held by other
securityholders have not been exercised.
(1) All of the shares of Mr. North have been donated to various trusts created
for the benefit of Mr. North's family. Though Mr. North is not one of the
beneficiaries of such trusts, he continues to maintain voting control over
all shares.
(2) All of the shares of Mr. Fernandez have been gifted to Mr. Fernandez'
children, however, Mr. Fernandez continues to retain voting control over
all shares.
(3) Redwood MicroCap Fund, Inc. a company registered under the Investment
Company Act of 1940 purchased 103,200 shares of Common Stock in March,
1997. John C. Power, President of the Fund, was appointed to the Board of
Directors of the Company on March 4, 1997.
(4) The Rockies Fund, Inc., a company registered under the Investment Company
Act of 1940, purchased in a series of transactions in February and March,
1997, 103,867 shares of Common Stock and 137,000 Common Stock purchase
Warrants. Stephen G. Calandrella, President of the Fund, was appointed to
the Board of Directors of the Company on March 4, 1997.
(5) All Events Consulting, Inc. ("All Events") is a company engaged in the
promotion of events. Vincent Caruso is the principal beneficial owner of
the Company. All Events is the beneficial owner of 50,000 shares of Common
Stock and 100,000 Warrants, each to purchase one share of Common Stock.
<PAGE>
(6) Helmsley Finance Limited ("Helmsley") is a British Virgin Island company
engaged in providing financial investment services. Charles HNE Wilson is
the principal beneficial owner of Helmsley. Helmsley is the beneficial
owner of 33,334 shares of Common Stock and 66,667 Warrants, each to
purchase one share of Common Stock.
(7) Michael Iovino is the beneficial owner of 20,000 shares of Common Stock and
40,000 Warrants, each to purchase one share of Common Stock.
(8) John Magliocco is the beneficial owner of 25,000 shares of Common Stock and
50,000 Warrants, each to purchase one share of Common Stock.
(9) M.D. Iabba is the beneficial owner of 25,000 shares of Common Stock and
50,000 Warrants, each to purchase one share of Common Stock.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- ---------------------------------------------
3.1 Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 Form of Common Stock Certificate.*
4.2 Form of Warrant.*
10.1 Employment Agreement between the Company and
Oliver L. North.**
10.2 Employment Agreement between the Company and
Joseph F. Fernandez.**
10.3 Revolving Line of Credit Agreement dated
December 7, 1995 among the Company, Creditanstalt
Corporate Finance, Inc., and Oliver L. North, as
Guarantor.**
10.4 Promissory Note dated December 7, 1995 from the Company to
Creditanstalt Corporate Finance, Inc.**
10.5 Guaranty dated December 7, 1995 from Oliver L. North to
Creditanstalt Corporate Finance, Inc.**
<PAGE>
10.6 Amendment dated November 26, 1996 relating to Revolving Loan of Credit
Agreement among the Company, Creditanstalt Corporate Finance, Inc. and
Oliver L. North, as Guarantor.**
10.7 Margin Agreement dated June 24, 1996 between the Company and Pershing,
Division of Donaldson, Lufkin & Jenrette Securities Corporation.**
10.8 Promissory Note dated February 7, 1997 from the Company to Dashco, Inc.**
10.9 Deed of Trust between the Company and Marc A. Busman and Rosalyn R.
Busman, Trustees.**
10.10 Deed of Lease dated January 23, 1997 between the Company, as Landlord,
and Freedom Alliance, as Tenant.**
10.11 Letter re: Line of Credit facility between the Company and Adler
Financial Group.**
10.12 Letter re: Loan commitment between the Company and The Baltimore Life
Insurance Company/Life of Maryland, Inc.
11 Statement re: Computation of Per Share Earnings.
23 Consent of Thompson, Greenspon & Co., P.C.
27 Financial Data Schedule
- --------------------------------
* Filed as an Exhibit to the Company's Registration Statement on Form SB-2
dated March 22, 1996 (Reg. No. 333-2712-NY) and incorporated herein by
reference.
** Filed as an Exhibit to the Company's 1996 Form 10-KSB dated April 15, 1997
and incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
(Registrant)
Date: March 31, 1998 By: /s/ Joseph F. Fernandez
---------------------------
Joseph F. Fernandez
Vice President
In accordance with the Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Oliver L. North Date: March 31, 1998
---------------------------------------
Oliver L. North
President (Principal Executive
Officer) and Director
By: /s/ Joseph F. Fernandez Date: March 31, 1998
---------------------------------------
Joseph F. Fernandez
Vice President and Treasurer
(Principal Accounting and Financial
Officer) and Director
By: /s/ Travis Y. Green Date: March 31, 1998
---------------------------------------
Travis Y. Green
Director
By: /s/ Herbert M. Jacobi Date: March 31, 1998
---------------------------------------
Herbert M. Jacobi
Director
By: /s/ Hugh E. Sawyer Date: March 31, 1998
--------------------------------------
Hugh E. Sawyer
Director
By: /s/ John C. Power Date: March 31, 1998
---------------------------------------
John C. Power
Director
By: /s/ Stephen G. Calandrella Date: March 31, 1998
--------------------------------------
Stephen G. Calandrella
Director
<PAGE>
Exhibit 10.12
STATEMENT RE: LOAN COMMITMENT
GUARDIAN TECHNOLOGIES
INTERNATI0NAL
The Life-Saving Company
March 3, 1998
Baltimore Life Insurance Co./Life of Maryland, Inc.
10075 Red Run Boulevard
P.O. Box 1050
Owings Mills, Maryland 21117-6050
Re: 33,715 Ft. Office/Industrial Building
Dulles, Virginia
Guardian Technologies, Intl., Inc., Borrower
Gentlemen:
This letter serves as an amendment to the commitment letter dated
February 23, 1998, In regard to the above captioned matter
("Commitment"). It is agreed by the parties that this letter shall
become an integral part of the Commitment and shall modify certain
terms as provided below.
1. Page 4 of Commitment, Item 9 - Notwithstanding anything to the
contrary, the parties agree that the loan documents shall contain a
provision that Lender shall provide the Borrower with written notice of
non-monetary defaults and provide a ten (1O) day grace period for
monetary defaults and a thirty (30) day grace period for nonmonetary
defaults.
2. Page 4 of Commitment, Item C(2) - Notwithstanding anything to the
contrary, Lender's approval shall not be necessary for any individual
lease that represents less than twenty percent (20'/o) of the net
rentable square footage of the building or twenty percent (20%) of the
annual rental income.
3. Page 8 of Commitment, Item D - The parties acknowledge that the cost
for the retention of local counsel is included in the estimated
$6,000.00 legal fees provided on page 10, item C(2) of the Commitment.
4. Page 8 of Commitment, Item G(l) - Notwithstanding anything to the
contrary, the Lender shall not exercise it's option to apply the
insurance proceeds to reduce the Loan, provided that the insurance
proceeds are $500,000.00 or less.
5. Pages 9 and 10 of the Commitment, Item A(2) - Notwithstanding
anything to the contrary, the parties agree that in the event the Loan
is not closed due to Lender's fault, the Borrower shall not be
obligated to pay such fees and expenses.
<PAGE>
Baltimore Life Insurance Co./Life of Maryland, Inc.
Page 2
6. Page 3 of the Commitment, Item H(l) - Notwithstanding anything to
the contrary, the parties agree that the time period for providing a
sworn itemized statement of gross annual income and expenditures, as
well as audited financial statements of Guardian Technologies
International, Inc. shall be extended to no later than ninety (90)days
after the end of its fiscal year. This amendment shall be reflected in
the loan documents.
7. All other terms and conditions of the Commitment shall remain
unchanged.
Very truly yours,
GUARDIAN TECHNOLOGIES
INTERNATIONAL, INC.
ACCEPTED:
GUARDIAN TECHNOLOGIES
INTERNATIONAL
(SEAL) Date:
THE BALTIMORE LIFE INSURANCE
COMPANY/LIFE OF MARYLAND, INC.
By: (SEAL) Date:
William D. Ward, CFA, FLMI
Vice President
Investments
<PAGE>
BALTIMORE LIFE
LIFE OF MARYLAND
February 23, 1998
Guardian Technologies International, Inc,
c/o Elizabeth A. Kraft
Smithy Braedon
1150 Connecticut Avenue, N.W., Suite 300
Washington, D.C. 20036
RE: 33,715 Ft.2 Office/Industrial Building
Dulles, Virginia
Guardian Technologies Intl., Inc., Borrower
Gentlemen:
Your application of December 12, 1997 for a first mortgage loan secured by
property described in Section 11 has been approved by The Baltimore Life
Insurance Company and Life of Maryland, Inc., either or both of which shall be
the "Lender." Upon your returning an executed copy of this letter, constituting
an acceptance hereof, to the Lender by the Commitment Acceptance Deadline of
March 2, 1998, the Lender will make a first mortgage loan ("Loan") to the above
named "Borrower" (and no other) subject to the following provisions, terms, and
conditions:
SECTION 1. LOAN TERMS AND CONDITIONS:
A. AMOUNT: $1,900,000
B. INTEREST RATE: 7.5% per annum
C. TERM OF LOAN: 1O years
D. REPAYMENT: Amortization shall be on a 20-year basis. The Loan is to be
repaid in 120 monthly installments; the first 119 shall be in the amount
of $15,306.27 each, including principal and interest, commencing the first
day of the second month following funding of the Loan to the Borrower,
and the final payment shall be for the unpaid balance of principal,
estimated to be $1,289,473, plus interest thereon. Interest for the period
from date of disbursement of the Loan to the first day of the next
succeeding month will be due and payable upon disbursement.
<PAGE>
E. PREPAYMENT: The Borrower is given the privilege of prepaying the Loan in
full after the first five Loan years on any interest payment date,
provided the Borrower has given the Lender sixty days' prior written
notice of Borrower's intention to so prepay the Loan. Such prepayment,
however, shall be accompanied by a prepayment premium computed as a
percent of the unpaid principal balance of the Loan. If the Loan is
prepaid during the sixth Loan year, said prepayment premium shall be at the
rate of 5%, which premium shall reduce at the rate of 1% per year to 2% in
the ninth year. (Loan year shall be calculated from the first day of the
first month succeeding funding of the Loan to Borrower.) No prepayment
premium shall be required thereafter. Except as above provided, Borrower
agrees that the Loan may not be otherwise prepaid.
F. ESCROW DEPOSITS: The Borrower shall pay concurrently with each installment
of principal and interest payable on the Note a deposit in an amount as
in the Lender's discretion will enable the Lender to pay (out of monies
so paid to the Lender) at least thirty days before due all taxes,
assessments, hazard insurance premiums, and similar charges affecting the
Security. At closing a deposit will be made in an amount sufficient to cover
the necessary accrued tax and insurance expenses. No interest or other
compensation shall be paid by Lender to Borrower on the funds so held and
accumulated, and Lender shall in no way act as Borrower's agent for the
payment of said items.
G. NON-ALIENATION: The property cannot be sold subject to this Loan without
Lender's written approval. The Loan documents will provide that upon
Lender's review of and written approval of the prospective purchaser, terms
of the sale, and sale price itself, and upon receipt of payment of I% of the
then outstanding loan balance, the Lender will permit the property to be
sold subject to the Loan. In reviewing the prospective purchaser, Lender
shall specifically judge its experience in development and management of
office/industrial space in the greater Washington, D.C. market and its
financial condition. Beyond that, no successive owner shall have any right
or privilege to transfer the ownership of the property subject to the Loan.
If the property is sold without the consent of Baltimore Life prior to the
fifth Loan year, the Loan must be prepaid at the greater of either the
prepayment penalty (5% if during the closed period) or a "makewhole
premium." The make-whole premium is determined as follows:
1. At the time of notification of a pending sale, Lender will select a U.S.
Treasury "primary" issue with a similar weighted average maturity as this
Loan. In the event there is no market activity involving the primary
issue at the time of notification, Lender will choose a comparable
Treasury bond, note, or bill ("secondary" issue) which Lender deems to be
similar to the primary issue's characteristics (i.e., rate, remaining
time to maturity, yield). The yield on the selected issue published two
weeks prior to the date of prepayment shall determine the "reinvestment
yield."
2. The "present value of the mortgage" is determined by discounting all
payments of principal and interest required under the Note at the
reinvestment yield for the number of months remaining from the date of
impending prepayment to the maturity date.
Page 2 of 12
<PAGE>
3. The amount by which the present value of the mortgage exceeds the amount
of principal and interest required to repay the Loan without penalty is
the differential. If the differential is positive, it represents the
make-whole premium. If the differential is zero or negative, the
makewhole premium is zero.
H. COVENANTS BY BORROWER: In addition to the foregoing Loan terms and the
standard mortgage covenants, the Security documents must provide the
following covenants by the Borrower:
1. That a sworn itemized statement of gross annual income and expenditures
reflecting in detail the operations of the Security will be famished each
year by the Borrower to the Lender within sixty days after the end of the
Borrower's federal tax year. Upon default, Lender will have unrestricted
right, at Borrower's expense, to require full audit of Borrower's books.
Lender reserves the right to request the use of a standard format. If the
Borrower fails to comply with this covenant, Lender may, at Borrower's
expense, commission a real estate appraiser to reappraise the property.
Also, audited financial statements of Guardian Technologies
International, Inc. shall be submitted within sixty days after the end of
its fiscal year.
2. That no adverse material changes in the terms of the leases referred to
in this Commitment will be made without the consent of the Lender, and
that rent will be collected only as it accrues, and not in advance
thereof.
3. That condemnation awards not used to restore the property, if any, are to
be applied to reduce the mortgage loan balance at the option of the
Mortgagee.
4. That secondary liens will not be attached to the Security.
5. That no operating equipment or other personal property in which Lender
has a security interest will be sold, assigned, or encumbered except
under written authority from the Lender or unless disposed of in the
ordinary course of business and replaced by items of at least comparable
quality and value, free and clear of all liens or title retention
devices.
6. That there will be maintained in effect upon the Security insurance
against loss or damage by such hazards by such insurers in such amounts
of such types and containing such provisions as Lender may specify.
7. That the Borrower will comply with any and all federal, state, or local
legislation, rules, and regulations relating to environmental protection,
including, but not limited to, the Comprehensive Environmental Response,
Compensation, and Liability Act of 19000 ("CERCLA"), as amended by the
Superfund Amendments and Reauthorization Act of 1986, and such other
legislation, rules, and regulations as are in, or may come into, effect
and apply to the Borrower, the Lender, the transactions contemplated
hereby, or the collateral or any occupancy
Page 3 of 12
<PAGE>
users thereof, whether as lessees, tenants, licensees, or otherwise.
8. That the Borrower shall comply with all requirements of the ADA
(Americans with Disabilities Act) as they apply and shall indemnify and
hold Lender harmless against any and all claims, costs, or expenses
relating to the requirements of the Act.
9. That if any sum required under the terms of the Note or Deed of
Trust/Mortgage is not received within ten days from its due date by the
Lender, a late charge of 5% of the total payment must be paid to the
Lender.
10. That if the Loan be accelerated either because of default or because of
maturity of the debt, or if the Lender shall have expended its funds in
the protection or perfection of the Loan security, then, in the event of
acceleration, the entire unpaid principal balance (and in event of
Lender's advancing funds, those funds advanced) shall be subject to and
shall earn the Default Rate of Interest, which is 12.5%.
SECTION II. SECURITY FOR THE LOAN:
A. REAL PROPERTY: The Loan is to be secured by a first and valid lien on the
entire fee simple interest and rights appurtenant thereto in certain real
estate located at 22570 Markey Court, Dulles, Virginia, containing 2.02
acres of land together with improvements to include a two-level
office/industrial building constructed of masonry and steel containing
33,715 square feet of leasable area, together with all other improvements
now thereon or hereafter erected thereon, which Security is more fully
described in the appraisal dated January 30,1998, by Thomas E. Reed, SRA,
hereinafter the "Appraisal." Final legal description of the encumbered
property shall be satisfactory to Lender.
B. PERSONAL PROPERTY AND FIXTURES: Lender shall require a first lien on all
personal property or fixtures which are owned by the Borrower and are used
in the operation and enjoyment of the Security, which items of personal
property and fixtures may now or hereafter be installed or infixed in the
Security.
C. LEASES:
1. The Lender will be given a general assignment of all rents, issues, and
profits issuing from the property.
2. The Lender is to be given specific assignment of the occupancy leases,
which are to be approved by Lender and so acknowledged in writing.
Approval shall be conditioned upon:
a. The leases becoming operative;
b. Satisfactory ratification of the leases by the tenants;
c. Assignment of all leases to Lender;
Page 4 of 12
<PAGE>
d. Unconditional subordination of all leasing commissions to the Lender's
position;
e. All leases being arm's length leases;
f. All leases containing landlord/tenant obligations as are reflected in
the Appraisal.
g. Each lease being inferior or superior, at Lender's option, to the lien
of the Loan. Non-disturbance, subordination and attornment agreements
shall be required of all tenants as applicable.
Tenant Square Feet Annual Rent Expiration
D. A. Bryant, P.C. 4,774 $ 62,157 1/31/04
North American Enterprises 160 2,259 1/01/04
Freedom Alliance 2,954 37,457 1/31/04
Software AG (Upper Level) 1,189 16,646 1/31/03
Software AG (Lower Level) 9,746 58,476 1/31/03
D. LIABILITY FOR THE DEBT: The Loan will be made with full liability for the
debt. Furthermore, the Borrower/Indemnitor shall indemnify and hold Lender
harmless from any and all liability or costs arising from the application or
violation of any or all federal, state, or local legislation, rules, or
regulations relating to environmental protection, including, but not limited
to, Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 (CERCLA), as amended by the Superfund Amendments and Reauthorization
Act of 1986, and as well shall indemnify and hold Lender harmless from any
liability or costs arising from regulations or violation of regulations of
the Americans with Disabilities Act.
Moreover, in the event of Loan default so declared by Lender, the
Borrower/Indemnitor shall indemnify and hold Lender harmless from all costs
or liability arising from:
1. The commission, without limitation, of fraud or misrepresentation made in
connection with the application for or the closing of the Loan or the
modification of the Loan.
2. Misappropriation or misapplication of funds associated with or generated
by the property or failure to apply the funds in accordance with the
provision of the Loan documents, including, but not limited to, lease
security deposits and prepaid rents, casualty insurance proceeds,
condemnation awards, judgments, settlements, or bankruptcy claims for
unpaid rent and gross revenues from the property not applied to the
payment of expenses of owning and operating the property, including real
estate taxes, debt service, and other expenditures required by the Loan
documents.
3. Loss in connection with the property to the extent not covered by
insurance policies required by the Loan documents.
4. Waste in connection with the property.
Page 5 of 12
<PAGE>
5. Removal from the property of any personal property in violation of the
Loan documents.
6. Forfeiture of the property or any part thereof or interest therein under
any applicable law.
7. Payment by holder of any recording, transfer, gains, or any other
transaction specific taxes, fees, or charges assessed in connection with
making, modifying, or foreclosing the Loan, bankruptcy proceedings
affecting the Loan, or the delivery of a deed in lieu of foreclosure or
equivalent and holder's attorneys' fees incurred in connection with the
enforcement of holder's rights, remedies, or recourse under the Loan
documents after default.
8. Terminations, cancellations, or adverse material modifications of any
lease for the property or space within the property without the prior
written consent of holder as provided pursuant to the Deed of Trust.
9. Transfers of the property or interest therein or creation of any liens
against the property in violation of the provisions of the Deed of Trust.
SECTION 111. FUNDING CONDITIONS: Loan closing shall be scheduled after the
following conditions have been met or the requirements therefor waived by
Lender, at its sole option, in writing. Unless Borrower expressly undertakes, at
Borrower's sole cost and expense, the performances herein required AND until
Borrower fully complies, to Lender's satisfaction, with all conditions hereof,
Lender shall have no obligation to fund. Time is of the essence in the
satisfaction of the requirements hereof.
A. CERTIFICATION OF COMPLIANCE WITH LAWS AND REGULATIONS: The Lender will
require certificates from the appropriate authorities reciting that the
improvements comply with all building laws and codes and that the property
conforms to zoning requirements. In connection with this requirement.
certificates of occupancy for each tenant or copies thereof will suffice as
to compliance with building laws and codes. The required engineer's survey
can contain the zoning certification.
B. ARCHITECTURAL/ENGINEER'S REPORTS: Receipt by Lender of a satisfactory:
1. ASTM Industry Level, Phase I Environmental Site Assessment, to include a
Historic Review, Regulatory Review, Site Inspection, and a Report of
Findings.
2. ADA Compliance Survey.
3. Architect/Engineer's report prepared by a licensed and insured
architect/engineer stating that after appropriate inspection he/she finds
the condition of the improvements, including the roof and structural
members, to be sound; that the mechanical and electrical systems are in
good working order; and all improvements have been properly maintained.
Any and all deferred maintenance shall be recorded in the report.
Page 6 of 12
<PAGE>
C. SURVEY: Receipt by Lender of an engineer's survey, certified by a registered
surveyor, showing no statement of facts objectionable to Lender, and
certifying that the surveyor is covered by errors and omissions insurance.
Such survey shall contain the following information:
1. The legal description must appear on the face of the survey. All courses
and distances referred to in the legal description of the property and
all appurtenant easements benefiting the property as shown on the title
report or title policy must be shown.
2. Location of all rights of way, any water courses, drains, sewers, utility
easements, driveways, or roads crossing the property and all other
Schedule B Title Policy exceptions, all by liber and folio number. If a
Schedule B Title exception is not locatable, a marginal statement to that
effect should be shown.
3. Names of streets with the statement as to whether same have been
dedicated and accepted for public maintenance, and, if so, by what state,
political subdivision, or agency. Widths of streets and places of access
from the property should also be shown.
4. Location of nearest public sewer, storm sewer, and water; and, in
addition, location of nearest gas and electricity.
5. All buildings and other improvements on the property must be shown with
the dimensions in relation to lot and building lines. If deed
restrictions, recorded plats, or zoning ordinances require a building or
other improvements to be set back specified distances from street or
property line, the survey must show measured distances from said building
or other improvements to said line.
6. Show acreage, together with total square footage, of on-site paved
parking area and drives and the total number of parking spaces,
specifying those designated for handicapped use.
7. If survey comprises several parcels, show interior lines and facts
sufficient to insure contiguity. All parcels should be shown on one
sheet.
8. Show whether property lies in an area having flood or mudslide hazard
under Flood Disaster Protection Act of 1973.
9. All surveys must show the political subdivision and such other notations
as will accurately describe the property surveyed. The Certificate must
be dated as of the date the survey was made and signed and sealed by the
surveyor. The Certificate shall state as follows: "I hereby certify to
Lender that: the survey was actually made on the ground and is correct;
that all rights of way, building restriction lines, easements, and other
matters of record have, to the extent capable of being shown, been
delineated hereon; that the lines were established by a transit tape
survey; and that, except as shown hereon (i) there are no encroachments
of a building or other improvements
Page 7 of 12
<PAGE>
either way across property lines, and (ii) all setbacks are in conformity
with current zoning laws and regulations."
D. DOCUMENTATION. Delivery and assignment to Lender of executed Note and
Security Documents, to include: First Mortgage/Deed of Trust on the
security, Security Agreement and Financing Statements, Assignment of Rents,
Indemnification Agreements and other Loan documents required herein, all to
be in form and content satisfactory to Lender in its sole discretion.
At Borrower's expense, Lender shall retain local counsel who will draft the
necessary Security Documents and close the Loan on behalf of Lender, and
represent Lender at closing of the Loan.
The Lender shall require the opinion of Borrower's counsel as to the
validity and sufficiency of each and every document evidencing the Loan and
the Security therefor or incident thereto. Such opinion shall be at the
expense of Borrower.
E. MORTGAGEE TITLE INSURANCE: Issuance and delivery to Lender of a mortgagee's
policy of title insurance (ALTA Standard Loan Policy - 1992) by a title
insurance company acceptable to Lender, in an amount equal to the Loan,
showing good title to the land and improvements and related easements, if
any, in the Borrower, and the Mortgage/Deed of Trust to be a first lien
thereon with only such exceptions in the coverage as are expressly approved
by Lender. The policy shall include an endorsement eliminating the usury
coverage exception. In the event the Loan is advanced at more than one
closing, the title policy will be extended each time to cover the additional
advances to be made.
F. PERSONAL PROPERTY: Delivery to Lender evidence of full payment for personal
property in which Lender has a security interest.
G. INSURANCE: The Borrower shall have furnished the following insurance
coverage:
1. Fire insurance with extended coverage and vandalism and malicious
mischief endorsements, with standard form of mortgagee clause in favor of
the Lender in form and amount satisfactory to Lender, Coverage must be on
a replacement cost basis, and if co-insurance is a part of the coverage,
the amount of the policy must satisfy the co-insurance requirements
regardless of the amount of the Loan. In the event of an insured loss,
the Lender may, at its option, apply said loss proceeds to reduction of
the Loan, or release said funds to restore the Security. If said loss
proceeds are used for restoration, Lender shall hold said proceeds in
escrow until the required restoration has been completed to Lender's
satisfaction, and then to be released when and if the Loan and/or leases
are not in default. The above policy or policies must contain a waiver of
subrogation of the debt under a standard mortgagee clause.
2. Liability insurance in amounts satisfactory to Lender, but in no event
less than required by the terms of the lease, if any.
3. Rental insurance providing for payment of rent for a period of not less
than six months after the
Page 8 of 12
<PAGE>
date of damage or destruction of the premises, if same are leased.
4. Such other insurance as shall be required by provisions of the leases, if
any.
All insurance policies shall provide for not less than ten days' prior
written notice to Lender of any cancellation or amendment of such insurance.
All insurance shall be in form and with companies satisfactory to Lender.
Original policies shall be submitted to Lender for examination not less than
thirty days prior to closing.
H. REAL ESTATE TAX ASSESSMENT: The Borrower shall have furnished a copy of the
most recent real estate tax assessment notice for the real estate securing
this Loan.
I. COMMERCIAL LOAN: Borrower warrants to Lender that the Loan is for the
purpose of business or commercial investment, and Borrower further warrants
that all Loan proceeds aforesaid shall be used for said commercial
investment purpose.
J. AUTHORITY OF BORROWER: Receipt by Lender of such certificates and other
documents as Lender may require to show Borrower's corporate authority with
respect to the transaction contemplated by this Commitment, including: (1)
Articles of Incorporation and Amendments thereto and By-Laws; (2) Resolution
of the Board of Directors; (3) an original Certificate of Good Standing
issued by the Secretary of State in which the Corporation is domiciled.
SECTION IV. CONDITIONS OF THE COMMITMENT: The validity of this Commitment is
subject to the following conditions. It is understood and agreed that time is
of the essence as to compliance with all conditions hereof.
A. ACCEPTANCE:
1. This Commitment must be accepted by the Borrower/Indemnitor and returned
to Lender, along with any fees required by Section IV-C, by the
Commitment Acceptance Deadline.
2. Your acceptance of this Commitment shall constitute your unconditional
agreement to pay all fees, expenses, and charges with respect to the Loan
or its making or transfer to Lender, or in any way connected therewith,
including, without limiting the generality thereto, the fees and expenses
of local counsel (should local counsel be employed), counsel, title
insurance, survey costs, environmental assessments, ADA surveys,
appraisal fees, recording and filing fees, mortgage taxes, documentary
stamp taxes, transfer taxes, and any other taxes, fees, and expenses
payable in connection with this transaction. Lender shall not be required
to pay any premium or other charge or any brokerage fee or commission or
similar compensation in connection with this transaction; and by
Borrower's acceptance of this Commitment, Borrower agrees to defend,
indemnify, and hold Lender harmless against and from any and all claims
for any fees, charges, commissions, taxes, and compensation in connection
with the Loan or its making or transfer
Page 9 of 12
<PAGE>
to Lender, or in any way connected therewith. This provision shall apply
whether or not the Loan is ever closed.
B. EXPIRATION: The date of this Commitment is February 23, 1998. The Expiration
Date of this Commitment is April 20, 1998. This Commitment requires that the
Loan herein committed be closed and put to record prior to the expiration
date. Unless a written extension agreement is executed by the Lender and
Borrower, Lender's obligations herein shall no longer exist after this
Commitment Expiration Date.
C. FEES:
1. Lender Fee: Lender acknowledges receipt of $19,000, which fee is in
consideration of Lender having processed the application, underwritten
the Loan, obtained Finance Committee approval, issued this Commitment
letter, and reserving and locking the rate on the funds hereby committed.
This fee is fully earned by Lender.
Upon funding of the Loan anticipated by the Commitment, pursuant to the
terms of this Commitment, the Lender will refund $9,500 of the
application/commitment fee to you.
The parties of this transaction agree that the monies so paid do not
provide an option to the Borrower of not completing the Loan transaction.
It is understood and agreed that such monies are not intended to
represent monetary damages to the Lender caused by failure on the part of
the Borrower to complete the Loan transaction. Lender specifically
reserves any and all rights it may have, in law or in equity, including,
but not limited to, specific performance.
2. Attorneys' Fees: By accepting our Commitment letter, the borrower agrees
to pay the legal fee of the Lender's counsel in connection with this
transaction, whether or not the transaction closes. The legal fee of
Lender's counsel is estimated to be $6,000, plus expenses incurred in
connection with the transaction, including, without limitation, search
fees, recording and filing fees, courier services, telecopier, telephone
and photocopying charges, and postage. This fee is based upon the
experience of Venable, Baetjer and Howard with respect to the time spent
representing a lending institution in transactions of this type. The fee
is subject to change if the time spent on problems encountered exceed
those customarily encountered in transactions of this type. A deposit of
the estimated legal fee was received with the application letter.
D. ASSIGNMENT: Neither this Commitment nor the Loan proceeds shall be
transferable or assignable without prior written consent of the Lender, and
without such consent there shall be no right to designate a payee of such
Loan proceeds. Any attempted transfer or assignment without such consent
shall be void.
E. VOIDANCE OF THE COMMITMENT: Lender retains the option to terminate this
Commitment at any time, and its obligation herein shall terminate in the
event any one of the following shall occur:
Page 10 of 12
<PAGE>
1. The Borrower, Indemnitor(s), or any lessee consents to a liquidation or
composition agreement or arrangement, or in the event any bankruptcy,
reorganization, or insolvency proceedings are instituted by or against
any such person or entity.
2. A misrepresentation of the facts upon which this Commitment is based has
occurred, to include, but not limited to, the income and expenses of the
real property, the physical characteristics of the improvements, the
financial condition of the Borrower, and the occupancy leases.
3. The Security, or portion thereof, shall have been damaged and not
repaired to Lender's satisfaction, taken in condemnation, or other
similar proceedings, or in the event any such proceedings be pending.
4. Any default has occurred or be continuing in the performance of any
obligation in the instruments evidencing or securing any loan relating to
the proposed Security.
5. The property is in an area that has been identified by the Secretary of
Housing and Urban Development as having special flood or mudslide
hazards.
6. The Phase I Environmental Site Assessment indicates that the site
contains or is threatened by any hazardous materials.
F. VALIDATION OF THE COMMITMENT: This Commitment shall not become valid or
effective unless signed by Lender, Borrower, and Indenmitor and returned to
Lender along with any fee required by IV-C hereof prior to the Commitment
Acceptance Deadline.
G. MODIFICATION: This Commitment cannot be changed, discharged, or terminated,
but only by an instrument in writing signed by the party against whom
enforcement of any change, discharge, or termination is sought.
SECTION V. MISCELLANEOUS:
A. This Commitment letter constitutes the sole, final, and entire agreement and
understanding of the parties hereto, and they shall not be bound by any
terms, conditions, statements, or representations, oral or written, not
contained herein. This Commitment supersedes all prior and contemporaneous
agreements, understandings, negotiations, and discussions, whether written
or oral. Nothing in this Commitment is intended or shall be construed to
confer upon or give any person, other than the parties hereto and their
successors and assigns, any rights or remedies under or by reason of this
Commitment. This Commitment may be executed in any number of counterparts,
each of which shall be deemed an original, all of which taken together shall
be deemed to be a single agreement.
B. This Commitment shall be governed by and construed in accordance with the
laws of the State of Maryland.
Page 11 of 12
<PAGE>
C. No exercise or waiver, in whole or in part, of any right or remedy provided
for in this Commitment shall operate as a waiver of any other right or
remedy, except as otherwise herein provided. No delay on the part of any
party in the exercise of any right or remedy shall operate as a waiver
thereof.
D. Whenever any determination is to be made or action is to be taken on a date
specified in this Commitment, if such date shall fall upon a Saturday,
Sunday, or a state or federal legal holiday, the date for such determination
or action shall be extended to the first business day immediately
thereafter.
E. Unless the context otherwise requires, whenever used in this Commitment, the
singular shall include the plural, the plural shall include the singular,
and the masculine gender shall include the neuter or feminine gender and
vice versa.
F. All covenants of the parties hereto requiring performance after the closing
date hereunder shall not merge into the Loan documents, but shall survive
the execution and delivery thereof.
G. Time shall be of the essence in the performance of this Commitment.
Very truly yours,
THE BALTIMORE LIFE INSURANCE COMPANY/
LIFE OF MARYLAND, INC.
By: William D. Ward, Vice President - Investments
ACCEPTED
BORROWER-
GUARDIAN TECHNOlOGIES INTERNATIONAL, INC.
BY:_____________________________ Dated:
INDENMITOR:
GUARDIAN TECHNOLOGIES INTERNATIONAL, INC.
By:______________________________ Dated:
Page 12 of 12
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- ---------------------------------------------
3.1 Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 Form of Common Stock Certificate.*
4.2 Form of Warrant.*
10.1 Employment Agreement between the Company and
Oliver L. North.**
10.2 Employment Agreement between the Company and of
Joseph F. Fernandez.**
10.3 Revolving Line of Credit Agreement dated December 7, 1995
among the Company, Creditanstalt Corporate Finance, Inc.,
and Oliver L. North, as Guarantor.**
10.4 Promissory Note dated December 7, 1995 from the Company to
Creditanstalt Corporate Finance, Inc.**
10.5 Guaranty dated December 7, 1995 from Oliver L. North to
Creditanstalt Corporate Finance, Inc.**
10.6 Amendment dated November 26, 1996 relating to Revolving
Loan of Credit Agreement among the Company,
Creditanstalt Corporate Finance, Inc. and
Oliver L. North, as Guarantor.**
10.7 Margin Agreement dated June 24, 1996 between the Company
and Pershing, Division of Donaldson, Lufkin & Jenrette
Securities Corporation.**
10.8 Promissory Note dated February 7, 1997 from the Company
to Dashco, Inc.**
10.9 Deed of Trust between the Company and Marc A. Busman and
Rosalyn R. Busman, Trustees**
10.10 Deed of Lease dated January 23, 1997 between the Company,
as Landlord, and Freedom Alliance, as Tenant.**
10.11 Letter re: Line of Credit facility between the Company
and Adler Financial Group.**
10.12 Letter re: Loan Commitment between the Company and
The Baltimore Life Insurance Company/Life of Maryland,Inc.
11 Statement re: Computation of Per Share Earnings.
23 Consent of Thompson, Greenspon & Co., P.C.
27 Financial Data Schedule
- --------------------------------
* Filed as an Exhibit to the Company's Registration Statement on Form SB-2
dated March 22, 1996 (Reg. No. 333-2712-NY) and incorporated herein by
reference.
** Filed as an Exhibit to the Company's 1996 Form 10-KSB dated April 15, 1997
and incorporated herein by reference.
<PAGE>
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
1997 1996
--------- ---------
Primary Earnings Per Share
Net Income ($861,110) ($953,684)
Shares:
Weighted Average Common
Shares Outstanding 1,114,201 994,565
Effect of Shares Issuable Upon Exercise
of Warrants 0 0
Effect of Shares Issuable Upon Exercise
of Options 0 0
Adjusted Common Shares and Equivalents 1,114,201 994,565
Earnings Per Share - Primary ($0.77) ($0.96)
Fully Diluted Earnings per Share:
Net Income ($861,110) ($953,684)
Shares:
Weighted Average Common
Shares Outstanding 1,114,201 994,565
Effect of Shares Issuable Upon
Exercise of Warrants 0 0
Effect of Shares Issuable Upon Exercise
of Options 0 0
Adjusted Common Shares and Equivalents 1,114,201 994,565
Earnings Per Share - Fully Diluted ($0.77) ($0.96)
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Guardian Technologies International, Inc.
Sterling, Virginia
We hereby consent to the use in the Annual Report Form 10 KSB of Guardian
Technologies International, Inc., of our report, dated March 3, 1998.
THOMPSON, GREENSPON & CO., P.C.
Fairfax, Virginia
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 109,461
<SECURITIES> 0
<RECEIVABLES> 269,425
<ALLOWANCES> 0
<INVENTORY> 452,335
<CURRENT-ASSETS> 890,309
<PP&E> 2,955,376
<DEPRECIATION> 166,998
<TOTAL-ASSETS> 3,729,872
<CURRENT-LIABILITIES> 523,936
<BONDS> 0
0
0
<COMMON> 1,114
<OTHER-SE> 2,277,674
<TOTAL-LIABILITY-AND-EQUITY> 3,729,872
<SALES> 1,154,970
<TOTAL-REVENUES> 1,154,970
<CGS> 1,237,105
<TOTAL-COSTS> 2,016,927
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100,303
<INCOME-PRETAX> (861,110)
<INCOME-TAX> 0
<INCOME-CONTINUING> (861,110)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (861,110)
<EPS-PRIMARY> (.77)
<EPS-DILUTED> (.77)
</TABLE>
